Gold: $1141.50 down $5.70 (comex closing time)
Silver $15.57 up 3 cents
In the access market 5:15 pm
for the Comex gold and silver: OPTIONS EXPIRED Oct 27.
for the LBMA contracts: OPTIONS EXPIRED today
for OTC contracts:OPTIONS EXPIRED today
First, here is an outline of what will be discussed tonight:
At the gold comex today, we had a very poor delivery day, registering 6 notices for 600 ounces. Silver saw 3 notices for 15,000 oz. Both for first day notice.
Several months ago the comex had 303 tonnes of total gold. Today, the total inventory rests at 208.42 tonnes for a loss of 95 tonnes over that period.
In silver, the open interest fell by only 3655 contracts despite silver being down 74 cents in yesterday’s trading. The total silver OI now rests at 172,385 contracts In ounces, the OI is still represented by .861 billion oz or 123% of annual global silver production (ex Russia ex China).
In silver we had 3 notices served upon for 15,000 oz.
In gold, the total comex gold OI fell by a whopping 11,725 to 458,800 contracts as those who play the comex gold/silver are very silly and can never win against the antics of our criminal bankers. We had 6 notices filed for 600 oz today.
We had a huge withdrawal in gold inventory at the GLD to the tune of 2.08 tonnes / thus the inventory rests tonight at 692.26 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,a big withdrawal of 1.001 million oz in silver inventory / Inventory rests at 314.533 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 a smaller than expected 3,655 contracts down to 172,385 as silver was down 74 cents with respect to yesterday’s trading. The total OI for gold fell by 11,725 contracts to 455,800 contracts as gold was down $28.50 yesterday. As I stated yesterday:
“With huge OI increases no wonder we witnessed a massive raid by the bankers as they try and cover their non backed shorts.”
2.Gold trading overnight, Goldcore
3. COT report
9 USA stories/Trading of equities NY
i) Savings of Americans rise as income and spending falter last month
ii) U. of Michigan consumer confidence level falters badly last month. Remember the consumer is 70% of USA GDP
(U. of Michigan Consumer Confidence/zerohedge)
iii) David Stockman rips apart the GDP number of 1.6%. He believes it is closer to flatline
iv)Employee compensation falters to levels not seen since Sept 2013;
v) Chicago PMI does a 7 sigma advance. Strange number
(Chicago PMI/zero hedge)
10. Physical stories
i)Venezuela’s gold drops 19% in weight from January through to May. They will probably lose all of it by Dec 2015
ii) GoldSeek radio interviews Bill Murphy of GATA
iii) Bill Holter delivers a terrific commentary on events of the past two days, namely the GOP debate, Obama and his fight in the middle east plus other goodies. His paper is entitled: “Does it Really Matter?”
(Bill Holter/Holter-Sinclair collaboration)
iv Blatant silver manipulation
v) Lawrence Williams on gold imports into India
Let us head over to the comex:
October contract month:
INITIAL standings for November/First day notice
|Withdrawals from Dealers Inventory in oz||nil|
|Withdrawals from Customer Inventory in oz nil|| nil
|Deposits to the Dealer Inventory in oz||nil|
|Deposits to the Customer Inventory, in oz||nil|
|No of oz served (contracts) today||6 contracts
|No of oz to be served (notices)||357 contracts
|Total monthly oz gold served (contracts) so far this month||6 contracts
|Total accumulative withdrawals of gold from the Dealers inventory this month||nil|
|Total accumulative withdrawal of gold from the Customer inventory this month||nil|
Total customer deposits nil oz
we had 0 adjustment:
November initial standings/First day notice
|Withdrawals from Dealers Inventory||nil|
|Withdrawals from Customer Inventory||63,861.699 oz
|Deposits to the Dealer Inventory||nil|
|Deposits to the Customer Inventory||56,742.760 oz
|No of oz served (contracts)||3 contracts (15,000 oz)|
|No of oz to be served (notices)||26 contracts
|Total monthly oz silver served (contracts)||3 contracts (15,000 oz)|
|Total accumulative withdrawal of silver from the Dealers inventory this month||nil oz|
|Total accumulative withdrawal of silver from the Customer inventory this month||63,861.699 oz|
Today, we had 0 deposit into the dealer account:
total dealer deposit; nil oz
total customer deposits: 56.742.760 oz
total withdrawals from customer: 63,861.699 oz
And now SLV
Oct 30.no change in silver inventory at the SLV/Inventory rests at 314.532 million oz
Oct 29/a big withdrawal of 1.001 million oz from the SLV/Inventory rests at 314.532 million oz
Oct 28.2015: no change in silver inventory at the SLV//inventory rests at 315.533 million oz.
Oct 27/no change in silver inventory at the SLV/Inventory rests at 315.533 million oz/
Oct 26/no change in silver inventory at the SLV/Inventory rests at 315.533 million oz/
Oct 23./no change in silver inventory at the SLV/Inventory rests at 315.533 million oz
Oct 22./no change in silver inventory at the SLV/Inventory rests at 315.533 million oz
Oct 21:a we had a small addition in silver ETF inventory of 381,000 oz/inventory rests tonight at 315.533 million oz
Oct 20.2015/ no change in silver ETF/Inventory rests at 315.152 million oz
Oct 19.2016: no change in silver ETF/Inventory rests at 315.152 million oz
Oct 16/no change in silver ETF/inventory rests tonight at 315.152 million oz
Oct 15./no change in silver ETF inventory/rests tonight at 315.152
Oct 14/no change in silver ETF/silver inventory/rests tonight at 315.152 million oz
oct 13/no change in silver ETF /silver inventory/rests tonight at 315.152 million oz
:oct 12/ no change in the silver ETF/silver inventory rests tonight at 315.152 million oz
Press Release OCT 6.2015
Sprott Increases Offer for Central GoldTrust and Silver Bullion Trust
Offering an Additional Premium of US$0.10 per GTU Unit payable in Sprott Physical Gold Trust Units
and US$0.025 per SBT Unit payable in Sprott Physical Silver Trust Units
When Announced on April 23, 2015, Offers Represented a Premium of US$3.06 per GTU Unit and US$0.91 per SBT Unit for Unitholders Based on Trading Value and the NAV to NAV Exchange Ratio
Premiums as of October 5, 2015 (including the Increased Consideration) are US$1.14 per GTU Unit and US$0.61 per SBT Unit
Notice of Extension and Variation to be Filed Shortly
Offers Will Now Expire on October 30, 2015 –Unitholders Urged to Tender Now
TORONTO, Oct. 6, 2015 (GLOBE NEWSWIRE) — Sprott Asset Management LP (“Sprott” or “Sprott Asset Management”), together with Sprott Physical Gold Trust (NYSE:PHYS) (TSX:PHY.U) and Sprott Physical Silver Trust (NYSE:PSLV) (TSX:PHS.U) (together the “Sprott Physical Trusts”), today announced that it has increased the consideration payable to unitholders in connection with its offers to acquire all of the outstanding units of Central GoldTrust (“GTU”) (TSX:GTU.UN) (TSX:GTU.U) (NYSEMKT:GTU) and Silver Bullion Trust (“SBT”) (TSX:SBT.UN) (TSX:SBT.U) (the “Sprott offers”).
Unitholders will now receive an additional premium of US$0.10 per GTU unit payable in Sprott Physical Gold Trust units and US$0.025 per SBT unit payable in Sprott Physical Silver Trust units (the “Premium Consideration”), in addition to the units of Sprott Physical Gold Trust and units of Sprott Physical Silver Trust, respectively, being offered on a net asset value (NAV) to NAV exchange basis. Based on trading values and the NAV to NAV Exchange Ratio (as such term is defined in the Sprott offers) at the time Sprott announced its intention to make the Sprott offers on April 23, 2015, the offers reflected a premium of US$3.06 per GTU unit and US$0.91 per SBT unit. The premium as of October 5, 2015, based on trading values, the NAV to NAV Exchange Ratio and the Premium Consideration, represents US$1.14 per GTU unit and US$0.61 per SBT unit, respectively. In connection with this increase in consideration, the expiry time for each Sprott offer is extended to 5:00 p.m. (Toronto time) on October 30, 2015.
“Central GoldTrust and Silver Bullion Trust unitholders have been burdened for too long by a group of trustees committed to protecting the interests of the Spicer family. It is only through the public spotlight that the variety of undisclosed fees paid to supposedly independent trustees has forced public disclosures and hollow justifications. Sprott’s offers to unitholders are compelling and momentum is building as we continue to show the clear advantages of the offers. The response of the GTU and SBT trustees has been to penalize unitholders with the burden of paying for costly lawsuits and expensive advisors to protect the Spicer family and the fees they receive. We are accordingly increasing our offer to compensate unitholders for this abuse of trust, and encourage them to take advantage of this opportunity to exchange their units for an immediate premium, and trade a management committed to entrenchment to one committed to their best interests,” said John Wilson, Chief Executive Officer of Sprott Asset Management.
Added Wilson, “We have provided extensions to the offers so that no unitholders are left without this opportunity to exit an underperforming investment and enter into a high quality security that functions as intended, reflecting the value of the bullion held in the trust. Sprott appreciates the support of GTU and SBT unitholders to date and currently anticipates these extensions will be the final extensions to the Sprott offers.”
As of 5:00 p.m. (Toronto time) on October 5, 2015, there were 8,194,265 GTU units (42.46% of all outstanding GTU units) and 2,055,574 SBT units (37.60% of all outstanding SBT units) tendered into the respective Sprott offers. Total units tendered as of October 5, 2015, do not include pending units which are typically received on the date of expiration.
GTU and SBT unitholders who have questions regarding the Sprott offers, are encouraged to contact Sprott Unitholders’ Service Agent, Kingsdale Shareholder Services, at 1-888-518-6805 (toll free in North America) or at 1-416-867-2272 (outside of North America) or by e-mail firstname.lastname@example.org.
|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, October 27, 2015|
|Silver COT Report: Futures|
|Small Speculators||Open Interest||Total|
|non reportable positions||Positions as of:||148||120|
|Tuesday, October 27, 2015|
Gold Up 3% In October and Enters “Seasonal Sweet Spot”
– Gold down 1.3% this week on Fed “noise”
– Gold up 3% in October on robust demand
– Stronger gains in euros, Swiss francs, Japanese yen
– October poor month for gold seasonally
– November, December, January and February the “seasonal sweet spot”
– Confirmation of surging demand for bullion in Germany, India and China in Q3
Gold is headed for a 1.3% fall this week after the Fed’s latest suggestion that they may increase interest rates in December or in the New Year. However, for the month of October gold is 3.1% higher from $1,115/oz to $1,150/oz and has seen even larger gains in other currencies.
Gold’s Seasonal Performance – U.S. Global Investors (1969-2010)
This strong performance in October comes despite October being traditionally a weak month for gold. This bodes well as we enter the “seasonal sweet spot” for gold.
Seasonally, while October is a weak month for gold, the months of November, December, January and February are positive months for gold. October often sees declines in the gold price followed by strong gains in November, December, January and February (see table above and chart below).
Today sees the end of October trading. November is, after September, one of the strongest months to own gold. This is seen in various data showing gold’s monthly performance over long time frames – 1975 to 2015 and indeed more recent time frames – 2000 to 2015.
Autumn and winter is the seasonally strong period for the precious metals.
This is believed to be due to robust physical demand internationally and especially in India for weddings and festivals. More recently, the emergence of China as the largest gold buyer in the world and their massive gold buying into year end as jewellers and bullion dealers stock up for Chinese New Year has reinforced and exacerbated this long seen trend.
It may also be related to traders being aware of the seasonals and therefore leading to self fulfilling price gains or price falls in certain months.
The fundamentals including the current macroeconomic, systemic, geopolitical and monetary conditions are positive for gold. These fundamentals in conjunction with the strong seasonals suggest higher gold prices are likely in the coming months.
Given the bullish fundamentals and the fact that gold already looks oversold with very poor sentiment today, any further weakness is likely to be short term.
Bullion buyers expect higher prices due to a combination of geopolitical, macroeconomic and monetary risk.
Geopolitical risk remains high given increasing chaos in much of the Middle East and rising tensions between NATO and Russia. The Middle East is increasingly volatile and we appear to on the brink of a war in the region. This comes at a time of deep tensions with an increasingly assertive Russia.
Given the confluence of still elevated geopolitical, systemic and monetary risks, we are bullish as we enter the seasonal ‘sweet spot’ for gold in the November, December, January and February time frame prior to Indian festivals and Chinese New Year demand.
Gold looks quite strong and appears to have bottomed during the summer – this is especially the case in euros, pounds and even more so in currencies such as the New Zealand dollar and the Australian dollar.
The technicals have improved too and these allied with the strong fundamentals – of an uncertain global economy, volatile and vulnerable stock markets and robust global demand for gold, particularly from China, India and Germany – are positive.
This week came confirmation that contrary to the widely held belief that gold demand is subdued it is actually very robust and indeed surging in key markets. Surging demand for coins and bars and a rise in buying by central banks pushed physical gold demand up 7% in the third quarter.
Demand for gold coins and bars jumped by 26% year-on-year in the last quarter, GFMS analysts at Thomson Reuters reported in the Q3 update of their Gold Survey 2015. Retail investment surged in top consumers India, China and Germany, with buying rising 30 percent, 26 percent and 19 percent respectively. Those three markets alone accounted for an additional 26 tonnes of bullion buying.
Despite the ongoing Federal Reserve “noise” to the contrary, ultra loose monetary policies are set to continue for the foreseeable future which is highly supportive of gold and will lead to continued demand for bullion internationally.
We continue to believe our long held view that these conditions will lead to new real, inflation adjusted record highs for gold over $2,400/oz in the coming years.
Today’s Gold Prices: USD 1147.75, EUR 1042.70 and GBP 748.04 per ounce
Yesterday’s Gold Prices: USD 1159.00, EUR 1057.38 and GBP 759.28 per ounce.
Gold was down again yesterday, losing $11.00 during the day to close at $1145.80. Silver was down $0.39 yesterday closing at $15.60. Platinum lost $10 to $988. Gold is 1.3% higher for the week but 3% higher for the month (see chart above).
Special Offer This Month Expires Today
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To avail of these excellent premiums while gold prices remain depressed, please call our bullion team on the numbers below
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I highlighted the dire situation of Venezuela’s gold holdings to you yesterday. Now we see Reuters reports that from Jan to May their gold holdings dropped by 19%. We also speculate by the end of 2015, their entire gold holdings will be sold.
Venezuela’s gold holdings drop 19% from Jan.-May
Submitted by cpowell on Thu, 2015-10-29 23:54. Section: Daily Dispatches
By Brian Ellsworth
Thursday, October 29, 2015
Venezuelan central bank gold holdings declined in value by 19 percent between January and May, according to its financial statements, likely reflecting gold swap operations and lower bullion prices.
The OPEC nation, struggling with stagflation due to low oil prices and a collapsing state-led economic model, holds a considerable portion of its monetary reserves in gold.
Reuters in March reported that the central bank was in talks with Wall Street to monetize about $1.5 billion of gold in reserves, an operation the bank did not confirm at the time. …
… For the remainder of the report:
GoldSeek Radio interviews GATA chairman from New Orleans conference
Submitted by cpowell on Fri, 2015-10-30 00:29. Section: Daily Dispatches
7:28p CT Thursday, October 29, 2015
Dear Friend of GATA and Gold:
GATA Chairman Bill Murphy was interviewed this week by GoldSeek Radio’s Chris Waltzek from the New Orleans Investment Conference, discussing whether fundamental and technical analysis will ever work in the monetary metals markets. Murphy says it’s all a matter of whether and when central banks exhaust the metal available to them for price suppression. The interview is 12 minutes long and can be heard at GoldSeek here:
CHRIS POWELL, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.
(courtesy Dave Kranzler/IRD)
The morning of the FOMC announcement on Wednesday (Oct 28) gold was up $14 overnight, close to $1080 and the cartel’s dreaded 200 day moving average. The “premise” was that the market was expecting another rate hike deferral.
A friend called me that morning and I told him to not get excited because when the FOMC policy decision hits the tape, they will annihilate gold and push the S&P 500 up toward 2100. I was only 10 pts off on the S&P call, as the S&P 500 closed at 2090, up an absurd 24 points. Gold was taken to the cleaners:
What’s incredible is not one mainstream media analyst or reporter questions this market action. If the premise behind the gold sell-off was a “hawkish” FOMC statement and the threat of a rate hike in December (yawn), then the exact same premise should have cause a big sell-off in stocks. Since when does the threat of tighter monetary policy not hit the stock market?
Just to recount the play-by-play in gold, the moment the FOMC announcement hit the tape, the Comex computer system was bombarded with sell orders. At this point in the trading day, the ONLY gold/silver market open is the Comex computer Globex system. In the first 30 minutes 29.6k contracts were unloaded – 2.6 million paper ounces. In the entire hour after the announcement 50.5k contracts were unloaded – 5.1 million ounces. Note that the Comex is showing around 200k ounces to be available for delivery.
The blatant, unfettered manipulation and intervention in the gold and silver market is sponsored by the Fed and the U.S. Treasury, executed by the big bullion banks and fully endorsed by the CFTC.
Dan Norcini vomited up a theory that the hit on Wednesday was a product of long side (hedge fund) liquidation. That view proved to be utter scatological regurgitation from an analyst who’s analysis and views have gone completely off the rails. As it turns out, open interest increased by over 4,000 contracts on Wednesday. So much for that “long liquidation” idiocy.
The manipulation of the gold and silver market is a nothing but a product of complete systemic corruption. The only way that the Fed and the politicians can claim that the economy is “fine” and QE “worked” is to make sure that the one piece of obvious evidence which would say otherwise is kept highly restrained.
I’ve told colleagues for years that the only way the elitists will let the Comex default, causing gold and silver to launch in price toward Pluto, is when they know they can longer support their fraud.
If I’m wrong, how else to do explain the fact that the front-running candidate to be the next President of the United States is openly a criminal and traitor who should be devoting her entire resource base toward defending herself from being throw in jail forever? This person, by the way, issues a statement today giving the U.S. economy an “A.”
On a positive note, I do believe that this country is in its 9th inning and there will be no extra innings in this game. Gold and silver do appear to be back in an uptrend, with a lot of pressure from the part of the world that demands physical delivery.
(courtesy Dave Kranzler/IRD)
All we need now to pound the final death-nail into Glenron’s stock is for Cramer to issue an “all’s clear, time to load up on Glencore stock” call on Mad Money.
Down 4% on no meaningful fundamental news:
Glencore has announced that it plans on “liquidating” some of its inventory in order to pay down its debt. Again, this article referenced Glencore’s debt load as $30 billion. But as I demonstrated with a graphic from Glencore’s financials, the Company has $50 billion in debt outstanding:
The $30 billion debt number is the number that Wall Street pimps and the financial media want market to believe, even though this number assumes that Glencore can sell its inventory at current market prices. Well, I’m hearing a lot of “noise” about this, let’s see it happen. If I were running a commodities hedge fund I would be shorting copper, zinc and iron ore futures ahead of this alleged inventory liquidation.
I think this report out of China is likely what spooked the markets and triggered the sell-off in Glencore stock – Steel demand evaporating at unprecedented speed:
On Wednesday, the deputy head of the China Iron and Steel Association warned that demand for the ferrous metal was waning fast. “China’s steel demand evaporated at unprecedented speed as the nation’s economic growth slowed. As demand quickly contracted, steel mills are lowering prices in competition to get contracts,” Zhu Jimin, deputy head of the China Iron & Steel Association, said on Wednesday at a briefing in Beijing.
Glencore is a commodities-based debt and derivatives roach motel. I would not be surprised if a lot of funds/banks with long-side exposure to Glencore credit default swaps – as in, Deutsche Bank – start shorting the crap out of Glencore stock to try and hedge their leveraged exposure to Glencore.
And with the global economy – including the United States – quickly sliding into a nasty recession, I can’t wait to see what kind of nonsense spews out from December’s FOMC zoo gathering to justify another rate-hike deferral.
Indian gold demand so far
(courtesy Lawrie Williams/Sharp Pixley)
What really matters?
My original thought for a writing was the hilarious action following yesterday’s Fed meeting and to comment on last night’s debate. Something far more “real” has arisen in the last 24 hours of far more importance, before getting to that, let’s look at the Fed’s “hawkish” statement first.
Janet Yellen and crew would have you believe they “will”… “might” raise interest rates in December. They say this because the Fed (as all central banks have) has lost credibility and are forced to jawbone as this is their only “policy option” left. They absolutely CANNOT raise interest rates as the rest of the world is easing in futile attempts to reflate declining economic activity. The U.S. economy is in reality declining, John Crudele does a great job of picking the latest GDP report apart http://nypost.com/2015/10/29/the-commerce-departments-gdp-numbers-dont-make-any-sense/ . I cannot believe the e-mails I’ve recently received on this topic with people petrified the Fed can raise rates …which will supposedly hurt gold?
Another topic illustrating just how fake our lives are, were the debates last night. Fed cheerleaders from CNBC absolutely disgraced themselves with the questions they asked and how they conducted themselves. The questioning was asinine only to be followed by disrespectfully interrupting answers and talking over responses. CNBC “journalists” pulled their pants down and showed they do have an agenda and are not “above” anything …including reporting impossible economic numbers with a straight face. Surprisingly (to the idiots at CNBC), none of the candidates took the bait to attack each other, instead they turned on the moderators. Can you imagine ANY of these questions being asked at a Democratic “love fest” debate?
For the most part, the Republicans at least told the truth that we as a people really do have big problems. Several heartfelt responses received applause, then Ted Cruz mentioned a gold standard …and Rand Paul spoke of auditing the Fed to an eerie silence of nothing but crickets. Many of the proposals last night were quite good, unfortunately they will not prevent the coming re set. I believe much of what we heard can and should be implemented once the system liquidates and reopens, nothing will prevent the liquidation phase.
Before getting to the “reality”, let me say something so there are no misconceptions of who I am. I am neither Republican nor Democrat. I am fiscally conservative and have a few social issues I could be considered left leaning. When I vote (it no longer matters who you vote for, only “who” counts the votes), I vote for the person and their ideas, not “the party”. In fact, when all is said and done on a grand scale, Republicans and Democrats are “owned” by the same powers and their policies seem to reach the same end though from slightly different roads.
1 Chinese yuan vs USA dollar/yuan rises hugely , this time at 6.3208 Shanghai bourse: in the red, hang sang:red
2 Nikkei up 147.39 or .98%
3. Europe stocks all in the red /USA dollar index down to 96.97/Euro up to 1.1009
3b Japan 10 year bond yield: falls to .304% !!!!(Japan buying 100% of bond issuance)/Japanese yen vs usa cross now at 120.37
3c Nikkei now just above 18,000
3d USA/Yen rate now just above the important 120 barrier this morning
3e WTI: 46.26 and Brent: 49.18
3f Gold up /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 up for WTI and up for Brent this morning
3i European bond buying continues to push yields lower on all fronts in the EMU. German 10 yr bund rises to .530 per cent. German bunds in negative yields from 6 years out
Greece sees its 2 year rate rises to 8.48%/: still expect continual bank runs on Greek banks
3j Greek 10 year bond yield rises to : 7.96% (yield curve inverted)
3k Gold at $1147.25 /silver $15.59 (8:00 am est)
3l USA vs Russian rouble; (Russian rouble up 3/10 in roubles/dollar) 64.07
3m oil into the 46 dollar handle for WTI and 49 handle for Brent/ China purchases huge supplies from Saudi Arabia
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 .9884 as the Swiss Franc is still rising against most currencies. Euro vs SF is 1.0881 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 on criminal charges/
3r the 6 year German bund now in negative territory with the 10 year rises to +.530%/German 6 year rate negative%!!!
3s The ELA lowers to 82.4 billion euros,
The bank withdrawals were causing massive hardship to the Greek bank. the Greek referendum voted overwhelming “NO”. Next step for Greece will be the recapitalization of the banks and that will be difficult.
4. USA 10 year treasury bond at 2.15% early this morning. Thirty year rate below 3% at 2.94% / yield curve flatten/foreshadowing recession.
5. Details Ransquawk, Bloomberg, Deutsche bank/Jim Reid.
(courtesy Jim Reid/Bloomberg/Deutsche bank/zero hedge)
Futures Fade Overnight Ramp After BOJ Disappoints, Attention Returns To Hawkish Fed
Back in September we explained why, contrary to both conventional wisdom and the BOJ’s endless protests to the contrary, neither the BOJ nor the ECB have any interest in boosting QE at this – or any other point – simply because with every incremental bond they buy, the time when the two central banks run out of monetizable debt comes closer. Since then the ECB has jawboned that it may boost QE (but it has not done so), and overnight as reported previously, the BOJ likewise did not expand QE despite many, including Goldman Sachs, expecting it would do just that.
As DB summarizes, the BoJ’s decision came despite another fall in prices in Japan. Headline inflation slowed two-tenths in September to 0.0% yoy (as expected) and to the lowest level now since May 2013. The core (ex fresh-food) stayed at -0.1% yoy and the core-core (ex food and energy) rose one-tenth to +0.9% yoy. CPI excluding fresh food and energy, the focus for the BoJ, rose to +1.2% yoy which was faster than the +1.1% in August.
Sure enough, Kuroda promptly repeated the party line, when during a press briefing after the BOJ decision in to cut its inflation forecast while keeping policy unchanged, he said “as I’ve said many times, we aim to achieve the 2% price goal as soon as possible, and I’ve repeatedly said that we are ready to adjust monetary policy, even with additional easing and such, without hesitation if needed. As for the means, I don’t think there’s a limit at all.”
Alas, as last night’s credibility-denting action showed, there is. However, in order to prevent a plunge in the USDJPY which may have unleashed a tumble in stocks on the last end of the best month for the S&P500 (at least in point terms), promptly after the BOJ’s disappointing announcement there was a conveniently planned reported at the BOJ’s favorite Nikkei news outlet, that Japan govt may consider boosting the extra budget size from the >3 trillion yen currently being mulled if GDP figures to be announced on Nov. 16 show the economy needs shoring up, Nikkei reports.
This news supposedly led to a surge in the USDJPY, which in turn sent the Nikkei from red on the day to a +0.8% green close, while pushing US equities higher. However, it did not take long for this ruse to be faded, and both Nikkei futures and the USDJPY...
… not to mention S&P futures have faded the entire move higher overnight, and were now largely unchanged as attention once again returns to concerns that a hawkish Fed may indeed hike rates in December, and that contrary to the Wednesday’s market reaction, this will not be good at all for risk.
Meanwhile in China, the 5th 5 Year Plenum concluded, and saw the SHCOMP dip ever so slightly, with China A and H retreated 1.1%/2.1% (as of Thu) this week, dragged by Financials and Utilities, after rebounding 12%/13% from their respective Sep lows. More interesting was news about looser capital controls which led to the biggest jump in the Onshore Renminbi since 2005. More on that shortly.
In any case, absent some cataclysmic news, today will be as we previewed previously, the biggest monthly point gain in the S&P500, and the biggest percentage jump in European stocks since July 2009…
…. on what has been another month of atrocious global economic data, and where the following WSJ headline summarizes what has happened on every day in the past quarter best.
A summary of key overnight events: Bank of Japan lowers 2016 core CPI forecast, pushes back forecast time period to reach 2% target; leaves monetary policy unchanged. Hong Kong dollar peg intervention rises to biggest since 2009, Chinese stocks head for first monthly gain since May. U.S. avoids debt default as Congress passes budget measure.
Looking closer at regional markets, Asian stocks traded mostly higher after recovering from the initial disappointment of the BoJ standing pat on monetary base as widely expected, while there were also reports Japan is said to mull an additional JPY 3 trl budget. At the same time, the BoJ pushed back its 2% CPI target to H2 FY 2016 in their semi-annual outlook.
This saw the Nikkei 225 (+0.8%) break 19,000 to the upside, while the ASX 200 (-0.3%) underperformed weighed by financials as ANZ Bank continued its declines. Shanghai Comp. (-0.1 %) resided in mild positive territory with gains capped due to weak earnings from large banks and petrol names. 10yr JGBs tracked its US counterparts lower with the failure of the BoJ to act also keeping the paper in negative territory.
Stocks in Europe failed to hold onto the best levels of the session and heading into the North American open, stocks are seen somewhat mixed, with the Spanish IBEX underperforming following earnings by BBVA (-3.8%) and IAG (-4.35%) pre-market. At the same time, the somewhat cautious sentiment in part stemming from the fact that the BoJ refrained from further policy easing, together with month-end extension related flow supported the bid tone by Bunds.
In terms of US related commentary, US has avoided a default on its debt as a result of Congress passing a budget while PIMCO said it increased holdings of government debt and that it sees the Fed likely moving towards a hike in December.
In the commodity space, there was little in terms of energy related news, though both WTI and Brent crude futures pared some of overnight losses to trade near the unchanged mark.
In FX, the JPY traded firmer across the board, with vols collapsing following the aforementioned news, while NZD extended on its yesterday’s gains after China scrapped its one-child policy which in turn supported dairy-related names, with additional support seen after New Zealand ANZ Business Confidence (10.5 vs. Prey. -18.9) rose for the 1st time in 5-months. Also of note, upside by EUR/GBP amid the usual month-end related flow was capped by looming redemptions out of Italy and Spain next week (combined around EUR 44.3bIn).
- S&P 500 futures up 0.1% to 2084.5, Euro Stoxx 50 down 0.1%
- Equities: Nikkei 225 (+0.8%), IBEX (-0.6%), FTSE 100 little changed, CAC 40 up 0.4%, DAX up 0.3%, IBEX 35 down
-0.6%, FTSE MIB up 0.3%
- Bonds: German 10yr yield down -2bps to 0.52%, Greek 10yr yield down -11bps to 7.85%, Portugal 10yr yield down -2bps to 2.48%, Italian 10yr yield down -3bps to 1.45%,
- Commodities: LME 3m Nickel (-1.8%), WTI Futures (-0.9%)
- FX: Yen spot (+0.4%), Euro (+0.3%)
- Vstoxx Index falls -3.2% to 20.37
- U.S. Chicago purchasing manager, Michigan confidence, ISM Milwaukee, employment cost index, personal income, personal spending due later.
Bulletin Headline Summary from RanSquawk and Bloomberg:
- Cautious sentiment dominated the price action in early European trade, with Bunds better bid on the back of month-end related flow
- JPY traded firmer across the board after the BoJ refrained from announcing further easing, though the central bank also pushed back its 2% CPI target, while reports of additional JPY 3trl budget supported the domestic index
- Going forward, market participants will get to digest the release of the latest US employment cost index, PCE, Chicago PM! and University of Michigan survey
- Treasuries rise overnight after U.S. Congress passed a two-year budget deal that reduces the chance of a government shutdown.
- The Bank of Japan declined to step up its monetary stimulus Friday even as it postponed its time-frame for reaching a 2% inflation target for the second time this year
- Euro-area consumer prices halted a decline in October as the ECB stepped up preparations for more stimulus
- Nick Kounis, head of macro research at ABN Amro Bank NV, is recommending Federal Reserve Chair Janet Yellen and her key counterparts unite to deliver a globally coordinated increase in inflation targets
- Credit Suisse’s decision to stop making a market in government bonds across Europe may be the tremor that presages an earthquake for investors
- U.S. and Swiss authorities are investigating Credit Suisse’s relationships with FIFA officials named in a U.S. criminal indictment, the lender said
- Spanish economic growth slowed in the third quarter, indicating the recovery may have peaked after the fastest expansion in eight years. Output increased 0.8% q/q compared with 1% in 2Q
- $19.5b IG, $4.7b HY priced yesterday. BofAML Corporate Master Index OAS narrows 1bp to +165, YTD range 180/129. High Yield Master II OAS narrows 4bp to +593, YTD range 683/438
- Sovereign 10Y bond yields mixed, with Greek 10Y yield 12bp lower. Asian and European stocks mostly lower; U.S. equity- index futures rise. Crude oil and copper fall, gold gains
DB’s Jim Reid completes the overnight wrap
Over the past week we’ve had a dovish surprise from the ECB, a surprise rate cut from China and a hawkish surprise from the Fed. Completing the big four, this morning the BoJ has refrained from action voting by a majority (8-1) to keep the current pace of annual asset purchases as is at ¥80tn. The BoJ’s semi-annual outlook is set to be released after we go to print at 6am London time, while Governor Kuroda is due to speak at 6.30am so we should have a better idea as to what this means for any potential policy change further down the line.
The BoJ’s decision came despite another fall in prices in Japan. Headline inflation slowed two-tenths in September to 0.0% yoy (as expected) and to the lowest level now since May 2013. The core (ex fresh-food) stayed at -0.1% yoy and the core-core (ex food and energy) rose one-tenth to +0.9% yoy. Our colleagues in Japan estimate that the CPI excluding fresh food and energy, the focus for the BoJ, rose to +1.2% yoy which was faster than the +1.1% in August. As well as this, we also got wind of the latest employment numbers where the jobless held steady at 3.4%, in-line with the market.
The next big macro event is on Sunday where we’ll get the official Chinese October manufacturing and non-manufacturing PMI numbers which will keep markets busy first thing Monday morning. If the house view on China growth stabilisation is right it would be helpful to see the first signs of it here.
Back to the market reaction following the BoJ, the Yen did initially rally +0.6% following the news to touch 120.3, only to retreat back to 121.2 now and pretty much flat on the day. 10y JGB yields are a couple of basis points higher, while the Nikkei did fall as low as -0.8%, but has reversed course and is currently +1.09% as we go to print. Elsewhere this morning, it’s fairly mixed although moves are modest. The Shanghai Comp (+0.44%) is higher, while the Kospi (-0.10%), Hang Seng (-0.06%) and ASX (-0.52%) have fallen a touch.
Staying in Asia, yesterday our Chief China Economist Zhiwei Zhang published a note highlighting the key takeaways from the Plenum which concluded yesterday. Summarising, Zhiwei noted in particular that: 1) innovation will play a critical role in the growth strategy over the next five years; 2) the one-child policy will be further loosened; 3) price liberalization will pick up speed; 4) the social safety net will be strengthened; 5) further policy easing may be coming to boost growth in the short term. There was no mention of growth targets just yet and we may have to wait a couple of weeks to hear the official outcome, but as we highlighted yesterday a strong hint was made by the Chinese Premier that targeted annual growth may be downgraded to closer to 6.5%.
Markets yesterday were characterized by another weak session for government bonds as they further digested the hawkish snippets from the FOMC on Wednesday. 10y Treasury yields were up another 7.2bps to settle at 2.173%, a two-day move higher of 13.6bps now to the highest close since September 21st. A lot of the pressure was on the longer end of the curve however where 30y yields rose 8bps. Part of this blame is being attributed to a bumper session for US IG issuance with 10 new deals said to have priced totalling nearly $20bn of issuance in the busiest day this month – likely a reflection of issuers waiting on the sidelines for the Fed meeting to pass. Yesterday’s primary issuance included a big slug from Microsoft which priced $13bn across 7 tranches (including $5bn for maturities of at least 20years), the seventh biggest offering in the US this year.
US credit was actually the relative underperformer yesterday with CDX IG 1.2bps wider with US equities pretty much flat to a smidgen lower (S&P 500 -0.04%, DOW -0.13%) in what was a fairly benign day of price action in equity markets particularly considering the volatile moves post-FOMC on Wednesday night into the close. In fact, of the 210 trading days in the US so far this year, yesterday’s 9.9pt range in the S&P 500 was the 20th smallest this year and is well below the average range of closer to 22pts so far in 2015. For further context the average intraday points range was around 33pts in September.
Much of the focus leading into yesterday was on the US Q3 GDP report. The 1.5% saar print was a tad below expectations of 1.6% and a sharp decline from the 3.9% we saw last quarter. The big drag came from inventories which subtracted 144bps from Q3 output. That meant final sales came in at 3.0%, down from 3.9% last quarter. Personal consumption rose 3.2% (vs. 3.3% expected) during the quarter having risen 3.6% previously. Meanwhile the core PCE deflator, the Fed’s preferred inflation metric, was up just 1.3% in the quarter and from four quarters earlier.
One of the interesting parts of the GDP report was that nominal GDP slipped to a YoY rate of 2.9% in Q3 – the joint second lowest of this 5 year + recovery. Regular readers will remember our analysis from earlier this year that suggested that in the 118 Fed rate hikes since the 1950s, only twice have the central bank raised rates with nominal GDP below 4.5% YoY and both these were quarterly statistical anomalies with the following quarter seeing double digit YoY nominal growth. So if the Fed does raise before YE it’s fair to say they’ve never raised with nominal growth consistently this low. This is one of the problems they face and why the risks are high that it would be a policy error.
Meanwhile, the remaining data in the US was mixed. Initial jobless claims were up 1k last week to 260k (vs. 265k) although the four-week average has now dropped to the lowest level since December 1973 at 259k. Elsewhere, pending home sales data for September was soft, with sales down -2.3% mom last month (vs. +1.0% expected) for the second consecutive monthly decline.
It was a similar story for markets in Europe yesterday too. The Stoxx 600 (-0.03%) finished pretty much unchanged at the close, while govvie bond yields surged higher having previously declined for much of the week on the back of the dovish ECB. 10y Bunds (+9.2bps) closed back above 0.50% again yesterday while the periphery was up anywhere from 7bps to 12bps. Much of the move coincided with the rise in Treasury yields also some slightly better than expected German CPI data helping at the margin. The October flash reading of 0.0% mom bettering expectations for a negative reading and helping to support a lift in the YoY rate to +0.3% from 0.0% last month and the joint-highest since June. Meanwhile German unemployment held steady at 4.6% while in the UK we saw September mortgage approvals decline surprisingly to 68.8k (vs. 72.4k expected). Elsewhere, Euro area consumer confidence was up in October, rising 0.3pts to 105.9 after expectations for a drop to 105.1.
Finally, earnings yesterday in the US were a bit of a mixed bag. 49 S&P 500 companies reported yesterday with 38 (78%) beating consensus EPS expectations but just 15 (31%) coming in ahead of revenue estimates. That compares with the overall trend so far, after 321 reporters, of 76% and 44% respectively – so a weak day for revenue numbers in particular yesterday continuing a trend of weak revenues this quarter.
Moving to the day ahead now. There’s more inflation data for us to keep an eye on this morning when we get the October Euro area reading where expectations are for the headline to nudge up one-tenth to 0.0% yoy and the core to stay unchanged at +0.9% yoy. We’ll also get Italy’s CPI data, along with German retail sales and French consumer spending data. In the US this afternoon the highlight looks set to be the Q3 employment cost index, while the September PCE deflator and core readings will also be closely watched. Personal income and real spending data, the Chicago PMI and the final October University of Michigan consumer sentiment read rounds off a busy day for data. There’s also Fedspeak for us to focus on with Williams due to speak around 2pm London time and George shortly after. As usual earnings season will warrant much attention with 21 S&P 500 companies due to report, with the big oil producers – Chevron and Exxon Mobil – the highlights. In Europe 17 Stoxx 600 companies are due to report, including RBS, BNP Paribas and AB Inbev.
AsiaPac Calm Before BoJ Storm, Japanese Household Spending ‘Unexpectedly’ Drops As China Releveraging Continues
As all eyes, ears, and noses anxiously await the scantest of dovishness from Kuroda and The BoJ tonight (despite numerous hints that they will not unleash moar for now), the data that was just delivered may have helped the bad-news-is-good-news case. Most notablyJapanese household spending dropped 0.4% YoY (with tax hike issues out of the way) missing expectations by a mile as the ‘deflationary’ mindset remains mired in Japanese heads. AsiaPac stocks are hovering at the week’s lows unable to mount any bid as China fixed the Yuan notably stronger and instigated a new central pricing plan for pork prices (which suggests concerns about inflation domestically). Once again Chinese margin debt reaches a new 8-week high as ‘stability’ has prompted releveraging among the farmers and grandmas.
Japanese household spending dropped.. again… way more than expected...
So, while expectations have been set that traders should not expect too much excitement tonight, Bloomberg lays out some of Kuroda’s options…
The governor said earlier this year there were “many options” available for more stimulus and that the central bank may need to get creative in the case of any further expansion.
The easy road would be more government bond purchases, though more radical ideas such as buying stocks or debt from local governments have been suggested by economists.
Japanese Government Bonds
Purchases of Japanese government bonds are already the mainstay of Kuroda’sstimulus program. The BOJ is snapping them up so that its holdings increase at an annual pace of 80 trillion yen ($664 billion) to expand the size of the monetary base and encourage a decline in real interest rates. Boosting JGBs is something it turned to in October 2014. Eleven economists in the latest Bloomberg survey point to another increase in JGB purchases.
While Kuroda has indicated there’s still plenty of room to buy more JGBs, traders in the bond market complain that liquidity is drying up. BNP Paribas SA has estimated the central bank will hold 43 percent of outstanding government bonds at the end of 2016, up from 28.5 percent through the end of June. Another possibility is changing the average maturity of bonds bought from the current 7-10 years to options including 9-12 years.
Commercial Paper and Corporate Bonds
Kuroda’s target is to hold CP and corporate bond purchases at 2.2 trillion yen and 3.2 trillion yen a year, respectively. Unlike other parts of the current stimulus program, this was left unchanged during the surprise boost in October last year. The BOJ moved into this market after the financial crisis that followed the collapse of Lehman Brothers Holdings Inc. in 2008. Stepping up purchases again could raise the question of fairness in choosing which companies’ bonds and CP to buy.
Exchange-Traded Funds and J-REITs
The BOJ is purchasing ETFs at an annual rate of 3 trillion yen, and Japanese real estate investment trusts at a pace of 90 billion yen a year. Economists at Nomura Securities have suggested the BOJ could load up on ETFs — boosting purchases to 6 trillion yen a year — and then pare its bond buying. This could propel the Japanese stock market from a slump in August and extend a recent rally to set new highs.
Purchases of J-REITs have buoyed this key market, helping breathe life back into the property industry. But the BOJ’s strict investment criteria could see it run out of securities to buy over the next year as it tripled the pace of purchases in October 2014. A boost here may require the central bank to dive into securities rated lower than AA.
Local Government Debt
This would be one of the more creative solutions to boosting stimulus. Several economists have suggested this idea as a fresh way to help adjust the composition of asset purchases. DBS Research said the BOJ could consider increasing the amount of “risky assets” to be purchased, including ETFs and J-REITs and incorporating new choices like local government bonds. This option has the advantage of helping revitalize regional economies but risks debates over favoritism if some areas benefit more than others.
While this unconventional idea would raise issues of fairness, Credit Agricole has floated it as a possibility. Purchasing a composite of stocks based on a gauge like the JPX Nikkei Index 400 amounting to as much as 10 trillion yen a year could be used to raise the annual pace of monetary base expansion to 90 trillion yen, according to Credit Agricole’s Kazuhiko Ogata.
Cutting Interest Rates
Economists at Mizuho Research and Mitsubishi UFJ Securities predict the BOJ will cut the interest rate it pays private banks on excess reserves that they hold at the central bank when it next boosts stimulus.
The BOJ wasn’t considering lowering the rate from the current 0.1 percent, though the option hadn’t been taken permanently off the table either, people familiar with discussions at the bank said in May. Kuroda said more recently that the BOJ wasn’t considering a reserve rate cut for the time being.
Some economists say the BOJ could even implement a negative-interest rate policy, as has been seen in Europe.
Raising the Inflation Target
Consumer prices as measured by the BOJ’s main gauge stood at -0.1 percent in August, and no economists in the Bloomberg survey expect it to reach its 2 percent goal in the six months through September 2016, Kuroda’s latest time frame.
To reignite inflation expectations, the governor and his colleagues could aim to overshoot the target and establish a longer time frame. One option, says JPMorgan Chase & Co. economist Masaaki Kanno, is to target 3 percent inflation and push out the horizon to 2018.
Long-Term Bond Yield Target
Ryutaro Kono, an economist at BNP Paribas Securities in Tokyo, has said it’s possible that the BOJ will set a target for long-term bond yields, aiming to drive rates lower. Since the BOJ began unprecedented asset purchases in April 2013, the benchmark 10-year JGB yield has swung between 1 percent and 0.195 percent. It was at 0.3 percent on Tuesday in Tokyo.
Perhaps the most interesting (and terrifyingly tyrannical) suggestion now is that Kuroda is going to start accumulating a controlling stake in individual companies and then once he has that, demanding wage hikes and capex. As Bloomberg puts it, “if the macro didn’t work, maybe you do it on a super micro level.”
In other words, they’re going to make Abenomics a success by decree.
* * *
For now, 121.00 seems like the tractor beam and NKYis not having any of USDJPY’s US session excitement…
AsiaPac stocks have been limping lower all week and early gains tonight are fading…
Then China stepped in with a significant Yuan strengthening:
- *CHINA RAISES YUAN FIXING BY 0.16% TO 6.3495/USD
And more importantly, is inflation creeping in?
- *CHINA REVISES LIVE PIG PRICE CONTROL PLAN
- *CHINA TO PREVENT OVERLY RISE, FALL IN LIVE PIG PRICES
- *CHINA NDRC REVISES LIVE PIG PRICES CONTROL MEASURES
And margin debt keep screeping back up…
- *SHANGHAI MARGIN DEBT BALANCE RISES TO EIGHT-WEEK HIGH
- *CHINA SHANGHAI COMPOSITE SET TO OPEN DOWN 0.2% TO 3,380.28
- *CHINA’S CSI 300 INDEX SET TO OPEN DOWN 0.1% TO 3,530.22
So now we wait… Get back to work Mr Kuroda.
Yuan Soars Most In A Decade As China Moves To Relax Capital Controls
Just two days ago, we took another look at the various means by which Chinese citizens circumvent Beijing’s capital controls. As a reminder, Chinese are only allowed to move up to $50,000 from the country in any given year, presenting a problem for anyone trying to dodge an export-boosting, double-digit deval or for anyone just trying to smuggle a few million out to buy an overpriced penthouse in Manhattan.
Previously, you could use your UnionPay card to “buy” a Rolex in a back alley in Macau, but Chinese authorities finally tired of that charade and cracked down on the UnionPay end-around last year. Thankfully, there’s “Mr. Chen” and his “yellow loafers”, tea, and Snickers bars. In short, as long as you know the right shady go-between, you too can pay Chen 3% to move your money to Hong Kong, where it will be out of Beijing’s reach and free to go where it pleases.
As we’ve noted on any number occasions, capital controls are to some extent counterintuitive. That is, the stricter the capital controls, the more people want to move their money out of the country. Here’s how we put it last month: “What better way to spark a capital exodus than with very vocal, and very effective capital controls. Just look at Greece.”
Indeed, China will likely need to completely liberalize the capital account in the coming years in order to pacify the IMF which is poised to throw Beijing a bone and grant its RMB SDR bid. Inclusion could lead to some $500 billion in reserve demand.
That helps to explain why overnight, the yuan soared the most in a decade after China moved to loosen capital controls with a trial program in the Shanghai free trade zone that would allow domestic individuals to directly buy overseas assets. The move marks another step towards capital account convertibility, thus bolstering Beijing’s bid for yuan internationalization. The result:
Put simply: when you stop telling people they can’t move their money around, there’s a good chance they’ll stop moving their money around and that means reduced capital flight and in turn, a stronger yuan. Here’sBloomberg:
China’s central bank said Friday that it will consider a trial program in the Shanghai free trade zone allowing domestic individuals to directly buy overseas assets. The nation may dismantle capital controls by 2020, people familiar with the matter said last week, as President Xi Jinping’s government seeks to open up mainland markets to international investors and elevate the yuan’s status on the global stage.
“These policy initiatives are another important step toward complete capital account liberalization,” Zhou Hao, a senior economist at Commerzbank AG in Singapore, wrote in a note. “Clearly, it shows that China could accelerate financial market reform.”
The PBOC first mentioned the so-called Qualified Domestic Individual Investor program for direct overseas investments in a January 2013 statement. An existing program allows individuals to buy securities abroad through asset managers and funds.
Friday’s statement on the Shanghai FTZ, which was issued jointly with several government departments, suggests regulators aren’t far from implementation, said Becky Liu, senior Asia rates strategist at Standard Chartered in Hong Kong.
“This maps out the overall framework of not only FTZ developments, but also the overall direction of China’s capital-account opening in the coming quarters,” Liu said.
Meanwhile, the PBoC looks to have intervened offshore in an effort to close the spread between the onshore and offshore yuan. The gap has widened of late after largely disappearing in September, which telegraphs the market’s expectations for further yuan weakness.
The Chinese currency also got a boost from suspected intervention in the offshore market as authorities seek to align the exchange rate with prices in Shanghai, a move seen as increasing the odds of an endorsement from the International Monetary Fund. The yuan gained 0.62 percent to 6.3175 a dollar in onshore trading and added 0.39 percent in Hong Kong.
The question, it would seem, is whether loosening capital controls and thereby increasing the chances that the yuan will become further embedded in global trade and investment will be enough to offset to impulse to move money out of the country. As Citi’s head of emerging market economics in London David Lubin put it earlier this week, “SDR inclusion makes the RMB, by definition, a ‘reserve asset’, and this should catalyse capital inflows to China, but by how much, it’s hard to say. And since China should expect to see gross capital outflows for the foreseeable future, it’s not even clear that SDR inclusion will lead to a net capital inflow to China.”
No, it’s not, because between an imploding economy, expectations that Beijing is ultimately targeting a 20% devaluation in order to boost said imploding economy, and speculation that the banking system is sitting on trillions in NPLs (as we’ve documented extensively, the headline figures for sour loans are likely understated to the point of absurdity), more and more locals are likely to visit “Mr. Chen” in the months and years ahead. Or they’ll just opt for the easiest way to move money out of the country of all…
The Ghost Cities Finally Died: For China’s Steel Industry “The Outlook Is The Worst Ever Amid Unprecedented Losses”
It’s almost difficult to believe, but just 8 years ago, in 2007 and right before the world was swept in the worst financial crisis in history, China had only $7.4 trillion in debt, or 158% in consolidated debt/GDP. Since then this debt has risen to over $30 trillion (specifically $28.2 trillion as of Q2, 2014) representing a staggering 300% debt/GDP.
Here is the summary breakdown from McKinsey.
This means that China was responsible for more than a third of all the $57 trillion debt created since 2007, making a mockery of the QE unleashed by all the DM central banks – something we first noted about two years before the famous McKinsey report went to print.
However, it was precisely this credit expansion that not only allowed China to completely ignore the global depression of 2008/2009 but to build lots and lots of ghost cities such as these.
To be sure, many noticed but everyone kept quiet: after all, to build these cities China not only had to create trillions in debt, it had to import a hundreds of billions worth of commodities form places such as Brazil and Australia.
Then, in the late summer and fall of 2014 something happened: for whatever reason, as we noticed one year ago, the most unregulated aspect of China’s financial system, its shadow banks, not only stopped lending money but actually went into reverse, thus putting a lid on China’s Total Social Financing expansion, which had been the world’s “under the radar” growth dynamo for so many years.
At that moment not only did China’s ghost cities officially die, but it meant an imminent collapse for China’s feeder commodity economies such as the above mentioned China and Brazil.
In the US this phenomenon was given a very simpler name by the brilliant economists: “snow.”
And since China’s domestic demand, not only from “ghost cities” but all other fixed investment was a function of pervasive credit, suddenly China’s commodity industry in general, and steel industry in particular, entered a state of shocked stasis.
To get a sense of how bad it is, look no further than China’s steel industry. It is here that, as Bloomberg reports, “demand is collapsing along with prices,”and “banks are tightening lending and losses are stacking up, the deputy head of the China Iron & Steel Association said on Wednesday.”
“Production cuts are slower than the contraction in demand, therefore oversupply is worsening,” said Zhu at a quarterly briefing in Beijing by the main producers’ group. “Although China has cut interest rates many times recently, steel mills said their funding costs have actually gone up.”
Meet the deflationary commodity cycle in all its glory:
China’s mills — which produce about half of worldwide output — are battling against oversupply and sinking prices as local consumption shrinks for the first time in a generation amid a property-led slowdown. The fallout from the steelmakers’ struggles is hurting iron ore prices and boosting trade tensions as mills seek to sell their surplus overseas. Shanghai Baosteel Group Corp. forecast last week that China’s steel production may eventually shrink 20 percent, matching the experience seen in the U.S. and elsewhere.
“China’s steel demand evaporated at unprecedented speed as the nation’s economic growth slowed,” Zhu said. “As demand quickly contracted, steel mills are lowering prices in competition to get contracts.”
Actually no, it has nothing to do with China’s fabricated economic growth and it was everything to do with the unbridled credit expansion that amounted to over $3 trillion per year. That credit expansion, which has not yet been halted, is no longer making its way to the sectors in the economy, such as the abovementioned steel mills, that need it most.
As we reported a month ago, at current commodity prices, over half the debtors in China’s commodity space are generating so little cash, they can’t even cover their interest payment. They are, therefore, utterly insolvent, and the broader Chinese bond market is well aware of this – this is the reason why suddenly credit funding has collapsed.
But wait, it gets worse: because if the PBOC had made interest rates not artificially low (yesterday China’s 10 Year bond was yielding just about 3%), eventually demand would appear, however nobody wants to lend these companies at rates approaching those suggested by the market.
“Financing remains an acute problem as banks strictly restricted lending to the steel sector,” Zhu Jimin said. “Many mills found their loans difficult to extend or were asked to pay higher interest.”
And yet in an environment of plunging interest, nobody wants to be seen as paying a huge premium above market: such an admission of defeat would be quickly perceived as a signal of an imminent default.
And this is how China’s steel (and commodity in general) sector has suddenly found itself paralyzed without access to funding, and with collapsing end demand. As a result its only option is to do more of what got it there in the first place: produce ever more in hopes of offsetting tumbling prices with surging volume, thus accelerating the deflationary spiral that much more until ultimatly steel may be literally handed away for free.
For now, however, China’s steel mills are praying this inevitably outcome can be somehow avoided.
Medium- and large-sized mills incurred losses of 28.1 billion yuan ($4.4 billion) in the first nine months of this year, according to a statement from CISA. Steel demand in China shrank 8.7 percent in September on-year, it said.
Signs of corporate difficulties are mounting. Producer Angang Steel Co. warned this month it expects to swing to a loss in the third quarter on lower product prices and foreign-exchange losses. The company’s Hong Kong stock has lost more than half its value this year. Last week, Sinosteel Co., a state-owned steel trader, failed to pay interest due on bonds maturing in 2017.
Crude steel output in the country fell 2.1 percent to 608.9 million tons in the first nine months of this year, while exports jumped 27 percent to 83.1 million tons, official data show. Steel rebar futures in Shanghai sank to a record on Wednesday as local iron ore prices fell to a three-month low.
The conclusion, even though from Bloomberg, is quite terrifying: “China’s mills face some of their worst conditions ever and the vast majority are losing money, Citigroup Inc. said in September. The outlook is the worst ever amid unprecedented losses, Macquarie Group Ltd. said this month.”
China’s steel production may contract by a fifth should the country’s path follow the Europe, the U.S. and Japan, Shanghai Baosteel Group Chairman Xu Lejiang told reporters in Shanghai last week. The company is China’s second-largest mill by output.”
Considering China’s version of Glencore “Sinosteel”effectively went insolvent one week ago (followed by what may or may not have been a government bailout), the fallout is just starting.
The cherry on top is that China itself is now trapped: it simply can’t afford to let anyone default, as one bankruptcy would cascade across the entire bond market and wipe out countless corporations leaving millions of angry Chinese workers unemployed, and is therefore forced to keep bailing out insolvent companies over and over. By doing so, it is adding even more deflationary capacity and even more production into the market, which leads to even lower prices, and even greater bailouts!
In short: this is a deflationary toxic spiral, because while that $30 trillion in inflationary debt led to easy growth and much wealth and prosperity on the way up when prices were soaring and monetary transmission mechanisms were not clogged up, now that China has hit hit a 300% debt/GDP and the direction of the arrow is in reverse, all the growth and all the expansion of the past 7 years will be promptly unwound as mean reversion demands payment.
But perhaps most importantly, as we first reported last week citing BofA’s David Cui, we now have an ETA when this whole Chinese debt house of cards, some $30 trillion of it, bursts with consequences that will be so devastating not only China but the entire world, as the one catalyst that pulled the Developed Markets out of depression will be, poetically enough, the same one that pushed it right back in.
On the current trajectory, we doubt the market can stay stable beyond a few quarters, especially if some SOE and/or LGFV bonds indeed default.
Finally for those who would rather frontrun this runaway train when it slides off the tracks, here – again – is a list of the Chinese bonds that will almost surely default first.
China Warns U.S. It Risks Sparking A War If It Doesn’t Stop “Provocative Acts”
Imagine two children on a beach. One has built a sandcastle. The other kicks it over. They get into a fight.
That’s exactly what’s going on in The South China Sea right now between Beijing and Washington.
Earlier this week, the US sent a guided missile destroyer on a “let’s see if we can get shot” mission in the South Pacific. The idea, as regular readers are no doubt aware, was to use “freedom of navigation” as an excuse to sail within 12 nautical miles of China’s man-made islands in the Spratlys.
Those islands represent the construction of some 3,000 acres of new sovereign territory on which Beijing has built everything from airstrips to cement factories to lighthouses. Washington’s regional allies all but swear that the PLA is planning an imminent invasion and Beijing swears the islands are a largely innocent construction project. These competing accounts underscore the extent to which no one is telling the whole truth.
Caught in the middle, Big Brother decided it was time to show the world that despite being kicked out of the Mid-East and being bullied by Beijing, no one really wants to go to war with Washington and so, America’s Nobel Peace Prize winning President sent a warship to Subi Reef.
And then, nothing happened.
The USS Lassen wasn’t fired upon or surrounded which was good news for anyone who doesn’t wish to live through World War III.
But while cooler heads prevailed in Beijing, the suggestion that the US (and possibly Australia) are set to make these “patrols” a regular occurrence has riled China and on a teleconference between naval commanders, Admiral Wu Shengli told US chief of naval operations Admiral John Richardson that this needs to stop now unless the US wants to go to war. Here’s Reuters with the story:
China’s naval commander told his U.S. counterpart that a minor incident could spark war in the South China Sea if the United States did not stop its “provocative acts” in the disputed waterway, the Chinese navy said on Friday.
Admiral Wu Shengli made the comments to U.S. chief of naval operations Admiral John Richardson during a video teleconference on Thursday, according to a Chinese naval statement.
The two officers held talks after a U.S. warship sailed within 12 nautical miles of one of Beijing’s man-made islands in the contested Spratly archipelago on Tuesday.
China has rebuked Washington over the patrol, the most significant U.S. challenge yet to territorial limits China effectively claims around its seven artificial islands in one of the world’s busiest sea lanes.
“If the United States continues with these kinds of dangerous, provocative acts, there could well be a seriously pressing situation between frontline forces from both sides on the sea and in the air, or even a minor incident that sparks war,” the statement paraphrased Wu as saying.
“(I) hope the U.S. side cherishes the good situation between the Chinese and U.S. navies that has not come easily and avoids these kinds of incidents from happening again,” Wu said.
The problem is that the US has no choice but to “continue with these kinds of dangerous, provocative acts,” because if it doesn’t, The Philippines and other regional allies will lose all faith in Washington’s supposed omnipotence and invincibility and while we imagine The White House secretly thinks this “is not the time for courage” (to borrow an epic Gartman-ism), courageous the US must now be lest Beijing and Moscow should swiftly banish US hegemony to the annals of history.
Europe’s Next Refugee Crisis: Thousands Of Migrants Freezing To Death
“It cannot be that, in the Europe of 2015, people are left to fend for themselves, sleeping in fields.”
That’s a quote from European Commission President Jean-Claude Juncker and he’s referring to the EU’s effort to create makeshift “holding camps” along the Balkan route to Germany designed to house some 100,000 asylum seekers as they make their way north. Eastern Europe is struggling with the influx of refugees from the Mid-East and while Hungary has simply decided to close its borders, other states in the region are attempting to strike some sort of middle ground between relenting and allowing migrants to turn the countryside into a superhighway to Germany and implementing a Viktor Orban-style crackdown that lacks any semblance of humanity (say what you will about a country’s right to protect its borders and cultural heritage, but using tear gas and water cannons in conjunction with an attempt to ignite an ultra-nationalist, religious fervor amongst the populace is dangerous at best and outright irresponsible at worst).
While the effort is admirable – we suppose – it may nonetheless backfire. That is, while it’s certainly not ideal to have hundreds of thousands of people sleeping in the middle of fields and building campfires out of flammable garbage, these ad hoc way stations will almost invariably become overcrowded, unsafe refugee internment camps and they’ll likely be easy targets for vociferous anti-migrant protests or worse.
That said, there really are no viable alternatives which is frightening considering we’re now headed into winter. Put simply, the “Schengen” concept is rapidly falling apart and unless Europe figures something out soon (and by “soon” we mean in the next couple of weeks) migrants could start to freeze to death. Here’s The Telegraph:
Migrants crossing the Balkans will begin freezing to death as winter approaches, the head of European Union has said, as leaders warned the continent was “falling apart” trying to deal with the biggest refugee crisis since the Second World War.
Jean-Claude Juncker, the president of the European Commission, said a solution was urgently needed or thousands of refugee families facing winter temperature on the hillsides and freezing river-banks of Eastern Europe, would die.
“Every day counts,” he said. “Otherwise we will soon see families in cold rivers in the Balkans perish miserably.”
Miro Cerar, the Slovenian prime minister, said the EU was days from collapse as his country buckled under an “unbearable” influx of migrants.
“If we do not deliver some immediate and concrete actions on the ground in the next few days and weeks I believe the EU and Europe as a whole will start falling apart,” he said.
Poorly dressed and under-fed, there are mounting fears they will fall victim to rougher seas and the Balkan winter that can reach minus 15C as they attempt to reach Germany and Sweden.
Aid agencies and human rights groups have also weighed in on the crisis. “As winter looms, the sight of thousands of refugees sleeping rough as they make their way through Europe represents a damning indictment of the EU’s failure to offer a coordinated response to the refugee crisis,” said John Dalhuisen of Amnesty International.
If you thought the firestorm surrounding the images of drowned toddler Aylan Kurdi was bad, just wait until the pictures of frozen migrant children start to surface on social media.
In many ways, Europe is damned if they do, damned if they don’t. If refugee families are left to freeze in the Balkans because a confederacy of supposedly advanced nations couldn’t figure out how to cope with the influx of asylum seekers from the war-torn Mid-East, the history books will be replete with references and images to migrant families freezing to death trying to get to Germany. Then again, if the whole of the EU adopts an open door policy and something goes wrong – or even if nothing goes wrong and the people flows simply serve to change the character of European society forever – the bloc will likely be blamed for not taking a more measured approach.
Meanwhile, note the bolded passage from The Telegraph article excerpted above: “…the Balkan winter that can reach minus 15C as they attempt to reach Germany and Sweden.” Well, if you though anti-migrant sentiment was on the rise in Germany (see the latest PEGIDA rally), just have a look at Sweden where as yet unidentified groups are literally torching refugee shelters. Here’s The Telegraph again:
Sweden’s migration authorities on Wednesday moved to hide the locations of buildings earmarked for housing refugees, after attackers set more a dozen prospective refugee centres on fire in a matter of months.
Mikael Ribbenvik, chief operative officer at the Swedish Migration Agency, made the decision after the thirteenth centre, a home for unaccompanied refugee children in the city of Lund, was set alight on Monday.
“We have decided today that where asylum centres are located will from now on be classified information,” Johanna Uhr, a spokeswoman for the agency, told The Telegraph. “We will no longer be sending out any lists of locations.”
The populist Sweden Democrat party has been harshly criticised for last week publishing a map listing the addresses of all asylum centres in and around the city of Lund.
“I find it hard to see that this is anything other than an incitement to commit hate crimes,” Veronica Palm, a Social Democrat MP, told Expressen newspaper.
And so sadly, the choice appears to be between bullets, bombs, and sword-wielding jihadists in Syria and freezing to death in the Balkans or else being burned alive in Sweden – and that’s assuming you don’t die at sea in transit.
The reports from Sweden underscore our point that Europe’s plan to establish makeshift “holding camps” is likely a bad idea. Anti-migrant sentiment is running high among Europeans predisposed to nationalistic ideals and while the facilities torched in Sweden were apparently empty, the migrant camps along the Balkan route won’t be. That said, the alternative is to force asylum seekers to sleep out in the cold and risk going down in history as a union of advanced economies that couldn’t even manage to cooperate enough to keep tens of thousands of people from freezing to death.
Of course the tragic irony is that whatever fate should befall the legions of refugees seeking asylum in Western Europe, it will all be blamed on brutal Mid-East dictators and while autocratic regimes should unquestionably be held to account for their role in creating disaffection among the citizenry, at some point the West needs to wake up and come to terms with the fact that playing Mid-East kingmaker everywhere and always has tragic consequences. Europe’s refugee crisis is just the latest example.
Obama, Kerry Throw In The Towel: US Prepared To Accept Assad Regime In Syria
John Kerry is back in Vienna today as Washington and its regional allies attempt to forge some kind of face-saving deal that won’t result in absolute humiliation with regard to the conflict in Syria.
Kerry held talks last week with his “friends” from Russia, Turkey, and Saudi Arabia in an effort to begin working towards a diplomatic solution. Washington’s top diplomat pledged to keep the lines of communication open and in a notable shift, this week’s talks include Iran. Washington and Riyadh had previously refused to consent to Tehran’s participation but given the fact that Iranian soldiers and Iran-backed militias are doing most of the fighting on the ground, excluding them ultimately became impossible.
As we reported late last month in “US Syria Strategy Officially Unravels: Kerry Admits Timetable For Assad Exit Is Completely Unknown”, Washington has been forced to completely abandon its hardline stance on the ouster of Bashar al-Assad. What was once an unequivocal “Assad must go” policy had by late September morphed into an admission that the timetable for regime change in Syria is now completely indeterminate thanks to Russia and Iran’s stepped up efforts to rout rebels and militants on the way to bolstering government forces.
Now, even the Western media have been forced to admit that Moscow and Tehran have effectively compelled the US to abandon the idea that Syria will soon be governed by a Western puppet. Here’s WSJ:
The Obama administration entered a crucial round of international talks on Syria’s war prepared to accept a deal that leaves President Bashar al-Assad in place for several months or more during the transition to a new government.
The U.S. shift on the dictator’s future caps months of backtracking on the most significant obstacle to a resolution of the Syrian conflict. While U.S. officials once argued Mr. Assad couldn’t take part in a political transition, they have gradually eased that stance, eventually signaling he wouldn’t have to step down immediately. Now they are planning to negotiate the question of his future in talks being held Friday in Vienna.
The White House hasn’t publicly set a time frame for Mr. Assad’s departure to give U.S. negotiators room to maneuver in the Vienna talks, officials said.
Well, no. The White House “hasn’t publicly set a time frame for Mr. Assad’s departure” because Mr. Assad isn’t likely to depart unless Moscow decides that’s the best course. Anyway, back to WSJ:
in advance of negotiations, administration officials discussed a resolution with U.S. allies, including Turkey, that would allow Mr. Assad to remain in place after a cease-fire in the 4½-year conflict.
The resolution the U.S. is seeking would include a cease-fire and would “not prejudge the Assad question,” a senior administration official said.
The approach reflects new realities imposed in Syria by Russia and Iran, which have intensified military operations to bolster Mr. Assad. It also follows recent challenges faced by the American-led fight against Islamic State.
Russia and Iran are taking part in Friday’s conference, along with Mr. Assad’s Arab adversaries. In all, the meeting brings together more than a dozen European and Middle Eastern foreign ministers. The inclusion of Iran represents a change after the U.S. and Saudi Arabia blocked Tehran’s participation previously.
Russia and Iran have demanded Mr. Assad retain power. America’s Arab allies are demanding a clear timeline for when Mr. Assad would step down, U.S. and Arab officials said.
So once again, say what you will about Assad, but the reality is this: Washington, Riyadh, Ankara, and Doha are “demanding” that the West be able to dictate who runs a sovereign country while Moscow and Tehran are insisting that it isn’t up to the West.
But thanks to the fact that the US is fighting via proxies while Russia and Iran are involved directly, Washington has no bargaining power (something else we were keen on emphasizing as soon as Russia began flying sorties from Latakia):
Secretary of State John Kerry, who arrived in Vienna on Thursday, intensified discussions in recent weeks with Mr. Assad’s biggest opponents, including Saudi Arabia, Turkey and Qatar, to try to gain their support for a diplomatic resolution that would allow the Syrian dictator to stay in power during a transition, these officials said.
The U.S. wields limited influence on the battlefield, making it critical for Washington to persuade those three countries and others to join in the effort because of the power they exercise over the rebel groups they support.
Yes, the “rebel groups they support”, rebel groups otherwise known as Sunni extremists who The White House wants you to believe are to varying degrees “moderate” with al-Nusra (i.e. al-Qaeda) on the “moderate” end of the “stark raving mad” continuum, and ISIS on the “extreme” end. But as we outlined in “‘Proxy’ War No More: Qatar Threatens Military Intervention In Syria Alongside “Saudi, Turkish Brothers,” Washington’s regional allies aren’t yet ready to throw in the towel and it could well be that rather than concede to the preservation of Iran’s “Shiite crescent,” Saudi Arabia and Qatar will turn Syria into Yemen with a sequel to Operation “Decisive Storm”:
The U.S. diplomacy is placing the Arab states and Turkey in a bind, as many of them have provided significant arms and funding to the largely Sunni rebel forces seeking to overthrow Mr. Assad.
Saudi Arabia, in particular, has publicly criticized Russia’s military intervention in Syria, arguing it could strengthen Mr. Assad and Shiite-dominated Iran, his closest Middle East ally.
The critical question now is whether the US is about to lose control of its “friends” in the region. That is, Washington is once again dabbling in the Sunni-Shiite divide and that is a dangerous game to play. It could well be that even if The White House elects to call it a day on the Assad ouster plans, Saudi Arabia and Qatar will decide to go it alone in order to keep Tehran from cementing its regional influence.
If that happens, Washington will have to choose between supporting Riyadh and avoiding a war between NATO and the Russians.
In other words, if you thought The South China Sea episode was a gut check for the Pentagon, “you ain’t seen nothin’ yet.”
Obama Set To Announce US Boots On The Ground In Syria, Russia Threatens Deployment “Unacceptable”
When the US media began airing helmet cam footage of Delta Force executing a prison break at an ISIS compound last week we suggested that Washington was making an effort to prepare the American public for more boots on the ground in Iraq and the possibility of ground troops in Syria.
The catalyst: Russia and Iran. Put simply, the US has been embarrassed by Moscow and Tehran’s coordinated effort to rout the Sunni extremists backed by Riyadh, Doha, and Ankara operating in Iraq and Syria and now, as Baghdad and Kabul threaten to turn to The Kremlin for help in the face of American ineptitude, the Pentagon is desperate to show that the US can still be effective at fighting terrorism.
So while John Kerry wanders around (hopefully not on a bike) in Vienna in a futile effort to get Saudi Arabia and Turkey to sit at the same table and talk rationally with Russia and Iran, the US military is contemplating how to insert itself into the battle without sparking a world war.
For its part, Baghdad has informed the Western media that it neither wants nor needs US help fighting ISIS (that’s what all the Iran-backed militias are for) and so instead, The White House may be on the verge of sending spec ops to Syria.
- OBAMA ADMIN. MAY ANNOUNCE SPECIAL OPS FORCES IN SYRIA:CNBC/RTRS
The United States will send 20 to 30 special operations forces to Syria to serve as military advisers in the fight against Islamic State, a U.S. official said.
The additional U.S. troops will operate in a limited “advise and assist” capacity, without changing President Barack Obama’s overall mission to combat the militant group, a separate U.S. official said.
Of course the entire idea of “advise and assist” is a joke in the first place. Here’s WaPo:
Depicting the U.S. mission in Iraq became an even more delicate activity last week after a joint raid in the Iraqi city of Hawijah, which freed about 70 Islamic State hostages and left a U.S. Delta Force soldier dead. The death of Master Sgt. Joshua L. Wheeler was the first time a U.S. servicemember had been killed in a firefight there since U.S. troops returned to Iraq last year.
Briefing reporters hours after the raid took place, Pentagon press secretary Peter Cook said that “U.S. forces are not in a combat role in Iraq.” He said a team of elite U.S. soldiers had provided transport and support for the Iraqi Kurdish commandos. But the Americans were not intending to take part in the raid itself, he said. That changed when a firefight erupted and Wheeler jumped in to help. Later that day, Cook said that Wheeler’s death was the first combat casualty there since 2011.
On Monday, asked about operations in Iraq, White House press secretary Josh Earnest declined to characterize the operations there as combat. He said the “train, advise and assist” mission differed from “the long-term, sustained ground combat operations” that took place after the 2003 invasion. Over 160,000 U.S. troops were stationed in Iraq at the peak of that war.
But on Wednesday, Col. Steve Warren, a U.S. military spokesman in Baghdad, described the mission in blunt terms. “We’re in combat,” he said, speaking via video feed to reporters at the Pentagon. “That’s why we all carry guns. That’s why we all get combat patches when we leave here. That’s why we all receive imminent danger pay. So, of course it’s combat.”
This comes just hours after Moscow reminded the world that if you haven’t received an official invitation from Bashar al-Assad, you are not welcome to come to the party. Here’s Reuters, citing Tass:
Russia’s deputy foreign minister Sergei Ryabkov said on Friday that no country could use military force in Syria without first securing the agreement of the Syrian government, the TASS news agency reported.
TASS said Ryabkov was responding to a question about the prospect of the United States launching a ground operation in Syria.
“The question of using military force in any form without the agreement of Damascus is for us unacceptable,” it quoted him as saying.
Make no mistake, this will be a disaster.
If US spec ops are placed with the YPG, it will run afoul of Washington’s coordination with Turkey just two days before an election that revolves around Erdogan’s attempt to paint the Kurds as a threat to national security.
If the Pentagon embeds US troops with the Free Syrian Army, well then they’ll be engaging Hezbollah and the Quds directly.
Of course no matter where Obama decides to place the troops, they’ll be at risk of getting hit by Russian airstrikes and the consequences of that speak for themselves…
S and P downgrades Saudi Arabia on slumping crude and their huge fiscal deficit:
(courtesy zero hedge)
S&P Downgrades Saudi Arabia On Slumping Crude, Ballooning Fiscal Deficit
Over the course of the last several months, the consequences for Saudi Arabia of deliberately keeping crude prices suppressed in an effort to, i) bankrupt uneconomic producers in the US, and ii) pressure Moscow into giving up Bashar al-Assad have begun to make themselves abundantly clear.
Not only has the kingdom been forced into liquidating its SAMA reserves…
… but the pressure from simultaneously maintaining the riyal peg and preserving the standard of living for everyday Saudis has driven Riyadh back into the debt market in an effort to offset some of the pressure on the country’s vast store of USD-denominated petrodollar assets (see second pane below).
Meanwhile, the war in Yemen is also weighing on the budget and now, the Saudis are staring down a fiscal deficit that amounts to some 20% of GDP and the first current account deficit in years.
All of the above have caused to market to lose faith in Riyadh’s ability to keep the situation under control and now, S&P has downgraded the kingdom to AA- negative citing “lower for longer” crude and the attendant ballooning fiscal deficits.
* * *
We expect the Kingdom of Saudi Arabia’s (Saudi Arabia’s) general government fiscal deficit will increase to 16% of GDP in 2015, from 1.5% in 2014, primarily reflecting the sharp drop in oil prices. Hydrocarbons account for about 80% of Saudi Arabia’s fiscal revenues.
Absent a rebound in oil prices, we now expect general government deficits of 10% of GDP in 2016, 8% in 2017, and 5% in 2018, based on planned fiscal consolidation measures.
We are therefore lowering our foreign- and local-currency sovereign credit ratings on Saudi Arabia to ‘A+/A-1’ from ‘AA-/A-1+’.
Standard & Poor’s is converting its issuer credit rating on Saudi Arabia to “unsolicited” following termination by Saudi Arabia of its rating agreement with Standard & Poor’s.
The outlook remains negative, reflecting the challenge of reversing the marked deterioration in Saudi Arabia’s fiscal balance. We could lower the ratings within the next two years if the government did not achieve a sizable and sustained reduction in the general government deficit or its liquid fiscal financial assets fell below 100% of GDP.
* * *
Of course this will only get worse should Riyadh decide to launch a sequel to “Operation Decisive Storm” in Syria and indeed, the IMF recently warned that absent higher oil prices, the Saudis could literally go broke in the space of five years:
Sharply lower oil prices have significantly affected the fiscal prospects of oil exporters across MENA and the CCA.1 The Brent oil price is projected to average $53 a barrel in 2015, down from almost $110 a barrel in the first half of last year. Exporters’ fiscal balances have turned from sizable surpluses to large deficits, with MENA and CCA export revenues dropping by $360 billion and $45 billion, respectively, this year alone.
For oil exporters, the main policy issue is fiscal adjustment and rebuilding buffers over the medium term. The Brent oil price is projected to recover only modestly to about $66 a barrel by the end of the decade, with MENA and CCA export receipts remaining $345 billion and $30 billion, respectively, below the 2014 level, even in 2020. In the absence of adjustment, fiscal balances will remain in deep deficit in most countries, with public debt ratios rising rapidly (red lines in Figure 4.2).
Even under the IMF baseline scenario, however, public debt ratios will continue to rise in many GCC and CCA exporters (blue lines in Figure 4.2). In a number of countries, mediumterm fiscal balances will fall well short of the levels needed to ensure that an adequate portion of the income from exhaustible oil and gas reserves is saved for future generations (Figure 4.3). Bahrain, Oman, and Saudi Arabia have medium-term fiscal gaps of some 15–25 percentage points of non-oil GDP, while conflict-torn Libya has a gap of more than 50 percent of non-oil GDP.
The large and sustained drop in oil prices has increased fiscal vulnerabilities in MENA and CCA oil-exporting countries. The issue of fiscal space has become critical as oil exporters decide how quickly to adjust their fiscal policies to the new reality of persistently lower oil prices. This box considers several alternative measures of fiscal space. A good starting point is the size of governments’ financial assets—commonly referred to as “fiscal buffers.” In general, countries with larger buffers can afford to maintain fiscal deficits further into the future, so as to reduce the impact of lower oil prices on growth. On current trends, however, all non-GCC MENA oil exporters are already projected to run out of liquid financial assets in the next three years (see Chapter 1). In, contrast, CCA oil exporters have at least 15 years’ worth of available financial savings,1 while GCC countries are split evenly between countries with relatively large buffers (Kuwait, Qatar, and the United Arab Emirates—more than 20 years remaining) and countries with relatively smaller buffers (Bahrain, Oman, and Saudi Arabia—less than five years).
As a refresher, here’s BofAML’s sensitivity analysis which shows how long Riyadh’s SAMA reserves will last under various scenarios for crude prices and debt issuance:
One important takeaway from the above is that if the Saudis were to burn through their reserves it would represent a nearly $700 billion global liquidity drain as Riyadh dumps its USD-denominated assets. That would amount to a complete reversal of the petrodollar virtuous circle that’s underwritten decades of dollar dominance and which has served to underpin the global economic order for as far back as most market participants can remember.
And while it’s by no means a foregone conclusion that oil prices will remain “lower for longer” as the Saudis are to a certain extent the masters of their own destiny in that regard, one thing worth noting is that not only is Iranian supply set to come back online, but Tehran seems determined to supplant Riyadh as regional power broker. Both of those eventualities will have very real consequences for crude prices and thus for the future of The House of Saud.
So enjoy it while it lasts King Salman…
Euro/USA 1.1009 up .0020
USA/JAPAN YEN 120.37 down .662
GBP/USA 1.5348 up .0029
USA/CAN 1.3143 down .0017
Early this morning in Europe, the Euro rose slightly by 20 basis points, trading now just above the 1.10 level rising to 1.1009; Europe is still reacting to deflation, announcements of massive stimulation (QE), a proxy middle east war, and the ramifications of a default at the Austrian Hypo bank, an imminent default of Greece, Glencore,and now Nysmark and the Ukraine, along with rising peripheral bond yields, and the unsuccessful ramping of the USA/yen cross to just above the 120 dollar/yen cross. Last night the Chinese yuan r0se hugely in value (onshore). The USA/CNY rate at closing last night: 6.3208 down .00344 (yuan up which will cause massive dollars to leave China)
In Japan Abe went all in with Abenomics with another round of QE purchasing 80 trillion yen from 70 trillion on Oct 31/2014. The yen now trades in a slight northbound trajectory as settled up again in Japan by 66 basis points and trading now just above the all important 120 level to 120.37 yen to the dollar.
The pound was up this morning by 29 basis points as it now trades just above the 1.53 level at 1.5348.
The Canadian dollar is now trading up 17 basis points to 1.3143 to the dollar.
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.
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: closed up 147.39 or .78%
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 in the red (massive bubble ready to burst), Australia in the red: /Nikkei (Japan)green/India’s Sensex in the red/
Gold very early morning trading: $1148.00
Early Friday morning USA 10 year bond yield: 2.15% !!! down 2 in basis points from Tuesday night and it is trading well below resistance at 2.27-2.32%. The 30 yr bond yield falls to 2.94 down 2 in basis points.
USA dollar index early Friday morning: 96.97 cents down 24 cents from Thursday’s close. (Resistance will be at a DXY of 100)
This ends early morning numbers Friday morning
The Shale Massacre: Chevron Fires Another 7,000 After Laying Off 1,500 Three Months Ago
Back in January, in the aftermath of the first plunge in commodity prices, and oil in particular, oil major Chevron had the unsavory distinction of being the first US oil giant to admit cash flow “constraints” when it was forced to scrap its buyback. And since oil’s dead cat bounce fizzled just around the summer before resuming is slide, it was inevitable that Chevron would proceed with trimming even more cash outflows.
It did so for the first time in July, when as we reported at the time, Chevron would layoff 1,500 jobs globally, saying that “the cost reductions due to cuts in the corporate center are expected to total $1 billion with additional cost savings expected across the company.”
And even though Chevron said in July that its cost-cutting initiatives would be “completed by mid-November of 2015” it decided to surprise everyone moments ago when on its earnings call it announced it would not only slash its capex by another 25%, but will shortly distribute another 7,000 pink slips.The reason: another terrible quarter in which the $2 billion in earnings were a 73% plunge from a year earlier.
From the company’s press release:
“Third quarter earnings were down substantially from a year ago,” said Chairman and CEO John Watson. “While downstream earnings remained strong, lower overall earnings reflected weaker market prices for both crude oil and natural gas, which depressed upstream profitability. We are focused on improving results by changing outcomes within our control. Operating and administrative expenses are 7 percent lower than last year, and we expect further reductions in the quarters ahead.”
“We expect capital and exploratory expenditures for 2016 to be $25-28 billion, roughly 25 percent lower than this year’s budget,” Watson continued. “We expect further reductions in spending for 2017 and 2018, to the $20 to $24 billion range, depending on business conditions at the time. With the lower investment, we anticipate reducing our employee workforce by 6–7,000.”
The good news: shareholders have nothing to worry about: the dividend of $1.07 per share is safe and sound, even though nearly 10,000 people have lost their jobs at Chevron so far this year.
And while the US department of labor magically continues to report week after week that initial jobless claims have literally never been lower, don’t tell that to US workers across the shale patch and especially in Texas where as the accurate report of what is really going on from Challenger Gray shows, it is nothing short of another great recession.
One Chart That Explains The Stupidity Of Congress’ SPR Plan
Buy high, sell low. The definition of stupid.
That’s what Congress is considering as it eyes selling oil from the U.S. Strategic Petroleum Reserve (SPR) to pay for certain projects in its latest spending plan.
The last time the U.S. bought oil for the SPR in 2000 through 2005, oil prices were rising (Figure 1). Now Congress wants to sell oil when prices are the lowest in a decade and continuing to fall.
Figure 1. U.S. Strategic Petroleum Reserve stocks and WTI crude oil price in October 2015 dollars per barrel. (Click Image To Enlarge)
Source: EIA, U.S. Bureau of Labor Statistics, Federal Reserve Board of St. Louis & Labyrinth Consulting Services, Inc.
Members of Congress who routinely tell us that they are good at business need to look at the chart above and explain why we should believe them.
Selling oil from the Strategic Petroleum Reserve now is a terrible idea.
WTI Extends Gains After US Oil Rig Count Plunges For 9th Week
With inventories building, production limping lower, and prices tumbling (and spiking), Baker Hughes reported a 12 rig drop in the total rig count to 775 rigs (the 10th week without a rise in total rig count). However, the oil rig count tumbled 16 to 578, the 2nd biggest weekly decline in 6 months to its lowest since June 2010.
- *U.S. TOTAL RIG COUNT DOWN 12 TO 775 , BAKER HUGHES SAYS
- *U.S. OIL RIG COUNT DOWN 16 TO 578, BAKER HUGHES SAYS
Extending Crude’s gains…
USA/Chinese Yuan: 6.318 down .0372 on the day (yuan up)
New York equity performances for today:
Macro Dump, Earnings Slump & Hawkish-Fed Pump Spark 4th Best October For Stocks Since 1929
Why we rallied… (BTFD short squeeze)
Because… (the central banks conditioned traders)
How it will end… (The markets are at 2:00 in this clip)
* * *
Before we start… This!
October – Just For Fun
Everything is awesome around the world (except Ukraine and Venezuela)…
- This is the 4th biggest October S&P rally since 1929!!
- Best overall month for the S&P since October 2011
- Nasdaq’s best month since September 2010
In The US, Nasdaq the big winner and Trannies underperformed (weak close today)…
With Materials, Energy, and Tech the huge winners…
Leaving stocks the most overbought since Nov 2014…
And then there’s Valeant…
The Dow still did not quite make it back to green for 2015… even as The S&P surge back into the green (and Nasdaq nears cycle highs once again)
While October was a big month for stocks, it was less exciting across the other asset classes…
Treasury yields tumbled initially on poor payrolls.. then yields went nowhere for 3 weeks til The FOMC…
The US Dollar managed some modest gains (once again driven by China rate cuts, ECB and FOMC moves)
Silver surged over 7% on the month as copper slid over 1% amid China growth concerns. Crude and Gold (after the former’s meltup) were equally higher on the month…
* * *
So back to this week…
The Dow actually closed lower of 4 of the 5 days this week, but the melt-up after The FOMC turned hawkish-er saved stocks for the week..
And stocks have given all of the fomc gains back…
Although today was weak..with an ugly close…
Most mind-blowingly, “Most Shorted” was notably weak post-FOMC and stunningly roundtripped to perfectly unchanged on the month – after the massive squeeze post-payrolls…
Since The FOMC Statement…Gold is the loser, stocks gave back gains, with only crude higher…
Something remains majorly broken in The VIX Complex…
Treasury yields pushed on higher this week with the long-end outperforming overall (after yesterday’s ugliness which was rumored to be dominated by rate-locks on heavy issuance)…
The USDollar drifted lower again today, giving up all of its Hawkish FOMC gains…
And it seems US equities are catching on to what FX markets think…
Commodities generally drifted lower on the week, apart from crude…
Crude ripped higher on the latter half of the week – running stops above last week’s highs before fading…
Saving rates rise as spending falters on top of income growth faltering.
Republicans Declare War On CNBC: Suspend NBC Relationship Over CNBC’s “Downright Offensive” Questions
Nearly a year after CNBC said it would no longer rely on Nielsen to measure its daytime audience (due to thecollapse in viewership we had previously profiled), it has managed to do it again, only this time slamming not the financial cheerleading cable network but its Comcast affiliate, NBC News, whom its just cost hundreds of millions in advertising revenues after moments ago Republican National Committee Chairman Reince Preibus announced he was suspending the partnership with NBC News for the Republican primary debate at the University of Houston on February 26, 2016.
The full letter from RNC Chairman Reince Priebus to NBC News
Mr. Andrew Lack
Chairman, NBC News
30 Rockefeller Plaza
New York, New York 10112
Dear Mr. Lack,
I write to inform you that pending further discussion between the Republican National Committee (RNC) and our presidential campaigns, we are suspending the partnership with NBC News for the Republican primary debate at the University of Houston on February 26, 2016. The RNC’s sole role in the primary debate process is to ensure that our candidates are given a full and fair opportunity to lay out their vision for America’s future.We simply cannot continue with NBC without full consultation with our campaigns.
The CNBC network is one of your media properties, and its handling of the debate was conducted in bad faith. We understand that NBC does not exercise full editorial control over CNBC’s journalistic approach. However, the network is an arm of your organization, and we need to ensure there is not a repeat performance.
CNBC billed the debate as one that would focus on “the key issues that matter to all voters—job growth, taxes, technology, retirement and the health of our national economy.” That was not the case. Before the debate, the candidates were promised an opening question on economic or financial matters. That was not the case. Candidates were promised that speaking time would be carefully monitored to ensure fairness. That was not the case. Questions were inaccurate or downright offensive. The first question directed to one of our candidates asked if he was running a comic book version of a presidential campaign, hardly in the spirit of how the debate was billed.
While debates are meant to include tough questions and contrast candidates’ visions and policies for the future of America, CNBC’s moderators engaged in a series of “gotcha” questions, petty and mean-spirited in tone, and designed to embarrass our candidates. What took place Wednesday night was not an attempt to give the American people a greater understanding of our candidates’ policies and ideas.
I have tremendous respect for the First Amendment and freedom of the press. However, I also expect the media to host a substantive debate on consequential issues important to Americans. CNBC did not.
While we are suspending our partnership with NBC News and its properties, we still fully intend to have a debate on that day, and will ensure that National Review remains part of it.
I will be working with our candidates to discuss how to move forward and will be in touch.
Chairman, Republican National Committee
Let us close this week, with Greg Hunter’s wrap up of the week’s events;
(courtesy Greg Hunter/USAWatchdog)
see you on Monday