Gold: $1050.70 down $27.20 (comex closing time)
Silver $13.68 down 54 cents
In the access market 5:15 pm
At the gold comex today, we had a good delivery day, registering 183 notices for 18,300 ounces.Silver saw 3 notices for 15,000 oz.
Several months ago the comex had 303 tonnes of total gold. Today, the total inventory rests at 199.11 tonnes for a loss of 104 tonnes over that period.
In silver, the open interest fell by 3575 contracts even though silver was up in price by 48 cents with respect to Wednesday’s trading and thus we must have had some short covering. We have an extremely low price of silver and a very high OI coupled with backwardation in silver at the LBMA. (negative SIFO rates). The total silver OI now rests at 163,289 contracts. In ounces, the OI is still represented by .816 billion oz or 116% 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 rose by 2066 contracts to 393,010 contracts as gold was up $15.10 in price with respect to yesterday’s trading.
We had no changes in gold inventory at the GLD, / thus the inventory rests tonight at 634.63 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. Our 670 tonnes of rock bottom inventory in GLD gold has been broken. 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, after they deplete the GLD will be the FRBNY and the comex. In silver, we had no changes,in silver inventory at the SLV/Inventory rests at 323.509 million oz
First, here is an outline of what will be discussed tonight:
1. Today, we had the open interest in silver fall by 3575 contracts down to 163,289 despite the fact that silver was up in price to the tune of 48 cents with respect to yesterday’s trading. The total OI for gold rose by 2,066 contracts to 393,010 contracts as gold was up $15.10 in price
2 a) Gold trading overnight, Goldcore
a very important audio with Grant Williams of Hmmm fame
3. ASIAN AFFAIRS
Is someone out to get the IMF head, Lagarde?
(courtesy zero hedge)
i) Strange events last night
- ISIS militants attack Turkish soldiers in the North part of Iraq
- Vice President Biden calls on Turkey to withdraw its troops from Iraq.
(courtesy zero hedge)
ii) Putin threatens Turkey that if any of the jets fly in Syria, they will be shot down:
iv) Congress will certainly be angry at this violation by Iran of firing test missiles
v) Over in Turkey, the lawmaker who is supplying information as to the use of Sarin gas to iSIS by Erdogan and his friends has been charged with treason over the release of the documents!!
iii) Let us now head over to Brazil as see how this nation implodes. Today unemployment hits a 7 year high.
Plus updates on impeachment hearings:
ii) WTI falls as Goldman warns of 20 dollar oil:
(courtesy zero hedge/Goldman Sachs)
iii) Natural Gas is at all time lows. This would not doubt bring on many bankruptcies:
v) Seems that the market believes that the Fed has made a policy error:
vi) Late in the morning, the yield curve flattens indicating a policy failure by the Fed:
Let us head over to the comex:
The total gold comex open interest rose to 393,010 for a gain of 2066 contracts despite the fact that gold was up by $15.10 in price with respect to yesterday’s trading. For the past two years, we have strangely witnessed two interesting developments with respect to the gold open interest: 1) total gold comex collapse in OI as we enter an active delivery month, and 2) a continual drop in the amount of gold standing in an active month. Today, the latter scenario stopped as the outstanding OI in that front month finally rose. We are now in the big December contract which saw it’s OI fall by 264 contracts from 1569 down to 1305. We had 265 notices filed yesterday, so we gained a tiny 1 gold contracts or an additional 100 oz will stand for delivery in this active delivery month of December. The next contract month of January saw it’s OI fall by 26 contracts down to 621. The next big active delivery month is February and here the OI rose by 1067 contracts up to 279,355. The estimated volume today (which is just comex sales during regular business hours of 8:20 until 1:30 pm est) was 159,474 which is poor. The confirmed volume yesterday (which includes the volume during regular business hours + access market sales the previous day was also poor at 155,028 contracts. The comex was in backwardation in gold up to April
December contract month:
INITIAL standings for DECEMBER
|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||96,450.000 oz
|No of oz served (contracts) today||183 contracts
|No of oz to be served (notices)||1122 contracts
|Total monthly oz gold served (contracts) so far this month||944 contracts(94,400 oz)|
|Total accumulative withdrawals of gold from the Dealers inventory this month||nil|
|Total accumulative withdrawal of gold from the Customer inventory this month||189,048.5 oz|
Total customer deposits 96,450.000 oz
DECEMBER INITIAL standings/
|Withdrawals from Dealers Inventory||nil|
|Withdrawals from Customer Inventory||159,189.32 oz
|Deposits to the Dealer Inventory||nil|
|Deposits to the Customer Inventory||456,545.013 oz
|No of oz served today (contracts)||3 contracts
|No of oz to be served (notices)||312 contracts
|Total monthly oz silver served (contracts)||3602 contracts (18,010,000 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||5,088,316.6 oz|
Today, we had 0 deposit into the dealer account:
total dealer deposit; nil oz
we had no dealer withdrawals:
total dealer withdrawals: nil
we had 1 customer deposit:
i) Into Scotia:148,694.49 oz
total customer deposits: 148,694.49oz
total withdrawals from customer account: 456,545.013 oz
we had 1 adjustments:
Out of CNT:
we had 10,072.23 oz leave the customer account and this landed into the dealer account of CNT
And now the Gold inventory at the GLD:
DEC 17.no changes in gold inventory at the GLD/Inventory rests at 643.63 tonnes/
dec 16/no changes in gold inventory at the GLD/inventory rests at 643.63 tonnes.
Dec 15.2105/no changes in gold inventory at the GLD/Inventory rests at 643.63 tonnes
Dec 14.no change in gold inventory at the GLD/Inventory rests at 634.63 tonnes
DEC 11/no change in gold inventory at the GLD/inventory rests at 634.63 tonnes
Dec 10.2015/no change in gold inventory at the GLD/inventory rests at 634.63 tonnes
DEC 9/no change in gold inventory at the GLD/inventory rests at 634.63 tonnes
Dec 8/ no change in gold inventory at the GLD/inventory rests at 634.63 tonnes
Dec 7/another huge withdrawal of 4.23 tonnes of gold/inventory rests at 634.63 tonnes
Dec 4/no change in gold inventory at the GLD/Inventory rests this weekend at 638.80
And now your overnight trading in gold and also physical stories that may interest you:
Federal Reserve Rate Hike At ‘Precisely The Wrong Time’ – Faber
Marc Faber, the editor of the Gloom, Boom & Doom Report, warned yesterday that the Federal Reserve has raised rates at “precisely the wrong time.”
Speaking to CNBC just before the interest rate decision, Faber warned that it’s the wrong time because “the global economy has decelerated very badly, and many countries are already in recession, or going into recession.”
The rate hike separated the Fed from other major central banks – The ECB, Bank of England, PBOC, the Bank of Tokyo and elsewhere that are all battling deflation and desperately trying to stimulate some form of sustainable economic growth.
Yesterday’s hike still leaves U.S. monetary policy extremely loose, and Fed officials have signaled they will act cautiously from to nurture a very tenuous recovery indeed.
Faber said the outlook for American equities looks weak:
“I don’t think U.S. stocks are attractive by any measurement. They are expensive and earnings are going down, and if anything, eventually interest rates will be higher.”
Marc Faber is a strong advocate of owning physical gold and silver which he describes as being a way to become “your own central bank.” He believes an allocation and diversification into physical bullion will serve as vital financial insurance and that storing gold in Singapore is prudent as Singapore is the safest place to own bullion in the world today.
BREAKING GOLD NEWS and COMMENTARY TODAY – CLICK HERE
Today’s LBMA Gold Prices: USD 1065.85, EUR 982.71 and GBP 713.06 per ounce.
Yesterday’s LBMA Gold Prices: USD 1065.75, EUR 975.65 and GBP 710.33 per ounce.
Gold Bars At 2% Premium and Free Storage For Six Months On Orders Before December 31st
- 2016 looks set to be stormy – arguably it has never been a better time to buy gold
- Gold bars (1 oz, LBMA) at just 2% on orders placed prior to December 31st
- One of lowest premiums in market today for one ounce bullion coins and bars
- Currently sell gold bars (1 oz) at 3.75% so this is nearly 50% reduction in premium
- Free storage for six months – allocated and segregated storage of your bars in safest vaults in world
* This is a phone offer only
** A minimum order of 5 gold bars applies
*** Gold coins and bars are tax free – no stamp duty, VAT or sales tax
Call Us Today To Secure Your Allocation
- IRL +353 (0)1 632 5010
- UK +44 (0)203 086 9200
- US +1 (302) 635 1160
Wednesday morning before the Fed announcement, a reader sent me this:
“It is Janet Yellen’s turn to stoke the fire and evidently her news today of a rate increase has stoked the stock market fire to the tune of the Dow rising 138 points 10 minutes in. It has the feeling of being on the Texas coast holding a hurricane party waiting for a hurricane to hit. There are hundreds of people drinking and partying.” SO TRUE …and party they did! The rate hike was not even the biggest news of the day as you’ll see…and maybe they were all connected, we’ll get to that shortly.
Where do we go from here after a rate hike? First and foremost we need to see several things. First, can the Fed actually get rates to rise? The longer end of the Treasury curve actually went down so there was some flattening. Next, can they make the rate hike stick? We also need to watch to see the mechanics of the rate hike. The Fed will necessarily need to withdraw some (maybe up to $1 trillion) collateral from the system …a system already short of collateral. This will tighten liquidity in an already illiquid credit market.
No doubt the world as a whole is treading water at best and most probably contracting economically. The rate hike will only serve to put more pressure on the emerging markets in the form of a margin call. This margin call will also be issued across the board. I believe we now wait patiently to see where the stress is evidenced. It may take only a couple of days or a couple of weeks but stress and weakness is coming. Trade, growth and corporate profits and importantly “velocity” are all weak and declining, now the financial sector will need to deal with a withdrawal of liquidity equal to approximately what QE2 added.
We must ask the question, “how will the Fed respond to additional credit stress”? For the common man, the question will be what will the Fed do with a “16” or even “15” handle on the Dow? Will they reverse the rate hike? Or even go straight to another round of QE? By the way, the world collectively sold $55 billion worth of Treasuries in the latest TIC report for October. Where did those go? Did the Fed indirectly shovel these into a hidden corner? I still believe the rate hike …with a background of economic and financial weakness is a huge policy error and can only be “covered” for with some sort of false flag. When the collapse comes, it will be very fast and most probably completed with two turns of the globe.
Now, for the biggest story(s) of the day! Did anyone see what John Kerry had to say after his meeting with Mr. Lavrov and Mr. Putin? After four years of steadfastly demanding “regime change” and the ouster of Assad from Syria …now he can stay? http://www.businessinsider.com/john-kerry-regime-change-syria-bashar-assad-2015-12Not Not only that, Kerry called on Turkey to withdraw troops from Iraq http://www.zerohedge.com/news/2015-12-16/dramatic-reversal-us-vice-president-biden-calls-turkey-withdraw-its-troops-turkey . Another story that “snuck in” so to speak was the House budget bill …where Paul Ryan and company will pass a bill which includes raising the status of BRICS nations within the IMF http://www.rferl.org/content/us-congress-to-pass-imf-reforms-raising-status-of-russia-china-/27432701.html . (remember, “R” stands for Russia and the “C” stands for China.) So it looks like the U.S. has finally backed down at what has been contentious for five years or more?
These are very tough questions to answer as outsiders looking in but we can speculate. I have been saying for a while, I believe Mr. Putin et al have put together information regarding all sorts of fraud, theft and false flag operations from the U.S. and planned to “drop a truth bomb”. Did he show Mr. Kerry exactly what he has in the way of proof? Has the U.S. been blackmailed into “playing along”?
Comments welcome email@example.com
1 Chinese yuan vs USA dollar/yuan falls in value , this time to 6.4920/ Shanghai bourse: in the green , hang sang: green
2 Nikkei closed up 303.65 or 1.59%
3. Europe stocks all in the green /USA dollar index up to 98.90/Euro down to 1.0846
3b Japan 10 year bond yield: falls to .294 !!!!(Japan buying 100% of bond issuance)/Japanese yen vs usa cross now at 121.43
3c Nikkei now just above 18,000
3d USA/Yen rate now well above the important 120 barrier this morning
3e WTI: 35.46 and Brent: 37.56
3f Gold down /Yen down
3g Japan is to buy the equivalent of 108 billion uSA dollars worth of bond per month or $1.3 trillion. Japan’s GDP equals 5 trillion usa.
Japan to buy 100% of all new Japanese debt and by 2018 they will have 25% of all Japanese debt. Fifty percent of Japanese budget financed with debt.
3h Oil down for WTI and down for Brent this morning
3i European bond buying continues to push yields lower on all fronts in the EMU. German 10 yr bund rises to .646% German bunds in negative yields from 5 years out
Greece sees its 2 year rate fall sharply to 6.87%/: still expect continual bank runs on Greek banks
3j Greek 10 year bond yield falls to : 8.06% (yield curve upward sloping)
3k Gold at $1065.85/silver $14.08 (7:45 am est)
3l USA vs Russian rouble; (Russian rouble down 14/100 in roubles/dollar) 70.54
3m oil into the 35 dollar handle for WTI and 37 handle for Brent/
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 0.9970 as the Swiss Franc is still rising against most currencies. Euro vs SF is 1.0813 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/arrests 10 traders for Euribor manipulation
3r the 5 year German bund now in negative territory with the 10 year rises to + .646%/German 5 year rate negative%!!!
3s The ELA at 75.8 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 2.26% early this morning. Thirty year rate at 3% at 2.96% /
5. Details Ransquawk, Bloomberg, Deutsche bank/Jim Reid.
(courtesy Jim Reid/Bloomberg/Deutsche bank/zero hedge)
Global Stocks, Futures Continue Surge On Lingering Rate Hike Euphoria
Heading into the Fed’s first “dovish” rate hike in nearly a decade, the consensus was two-fold: as a result of relentless telegraphing of the Fed’s intentions, the hike is priced in, and it will be a “dovish” hike, with the Fed lowering its forecast for the number of hikes over the next year. Consensus was once again wrong on both accounts: first the rate hike was far more hawkish than most had expected (see previous post), and – judging by the surge in Asian, European stocks and US equity futures – the “market” simply is enamored with such hawkish hikes which will soon soak up trillions in liquidity from the financial system.
Whatever the reason, global stocks surged on Thursday as investors around the world reacted positively to the Federal Reserve’s decision to raise interest rates and the confidence in the U.S. economy that underpinned the move. European stocks moved higher in early trade, following sharp gains across Asian markets and a higher close on Wall Street in response to the widely expected move by the Fed to end a seven-year experiment with near-zero interest rates.
This is where we stand as of this moment::
- S&P up 0.3% at 2071
- Stoxx 600 up 2.2% to 368
- FTSE 100 up 1.4% to 6147
- DAX up 3% to 10783
- German 10Yr yield down 8bps to 0.6%
- Italian 10Yr yield down 7bps to 1.63%
- Spanish 10Yr yield down 6bps to 1.7%
- S&P GSCI Index down 0.6% to 305.8
- MSCI Asia Pacific up 1% to 131
- Nikkei 225 up 1.6% to 19354
- Hang Seng up 0.8% to 21872
- Shanghai Composite up 1.8% to 3580
- S&P/ASX 200 up 1.5% to 5102
“What we see today is basically a sigh of relief,” said Johan Javeus, chief strategist at SEB Group quoted by the WSJ “Equity markets are taking comfort in the fact that this is not the path of a rapid hiking cycle.”
“The messaging around the decision is about as positive as one could expect for investors: a positive economic assessment paired with fairly dovish central bank guidance,” said Eric Lascelles, chief economist at RBC Global Asset Management, in a note.
The U.S. dollar dropped when the Fed started tightening policy in 1994, 1999 & 2004. Some strategists believe this time will be different. The reason can be found in the Fed’s projections for where rates will be in the future. As in September, four hikes are penned for 2016. That’s two more than investors are pricing in, according to Fed fund futures. The thinking is: As the market catches up with the Fed, the dollar will rise. A Bloomberg gauge which tracks the greenback against 10 leading global currencies is gaining for a sixth day, the longest stretch in almost two months. The index has risen 9 percent in 2016, its third year of gains.
A closer look at Asian markets, shows stocks tracked the firm gains seen in US equities with the Nikkei 225 (+1.6%) outperforming as gains were further stoked by a weaker JPY relative to the USD, while the ASX 200 (+1.5%) was led by Utilities following reports that AGL Energy gave a 5 %yr contract to WorleyParsons. Chinese bourses completed the positive regional tone triggered by the Fed rate decision (Shanghai Composite: 1.8%). 10yr JGBs traded flat after paring earlier gains following the weaker than prior 20yr JGB auction.
Top Asian News
- Goldman Takes Ax to Iron Ore Outlook as Industry to Hibernate: Iron ore will average $38 a metric ton next year, $35 in both 2017, 2018, new forecasts are 13% to 14% lower than GS’s previous outlook
- Hong Kong Raises Base Rate for First Time Since 2006 After Fed: HK key rate raised to 0.75% from 0.5%, monetary authority had held its rate at record low since 2008, tracking Fed
- BOJ Is Finished Boosting Stimulus, in View of Half of Economists: Survey conducted before Fed rate hike, 48% of respondents said they don’t expect additional stimulus, up from 46% in Nov. survey
- This Fed Move Is Different as UBS Sees Pain in Emerging Markets: Firms incl. UBS, Citi say more pain is in store after the first U.S. rate increase in almost a decade as emerging markets haven’t fallen enough to reflect subdued growth
- Rajan’s Crackdown on $59 Billion Bad Loans Means India M&A Surge: Volume of deals in India will jump from 5-yr high
In a similar fashion to Asia, European focus has been firmly on the fallout of the Fed rate decision, with participants processing the rate lift off and its wider consequences. European equities (Euro Stoxx: 2.5%) took the lead from their US and Asia-Pacific counterparts to trade firmly in the green, benefitting from the FOMC assumption that the US economy is strong enough to handle higher interest rates. The financial sector leads the way higher, with the 25bps hike inspiring the sector, while defensive sectors such as also healthcare are also among the best performers. Gains have been capped by energy names, the laggard on a sector breakdown, with the industry weighed on by softness in the energy complex.
In line with equity markets, fixed income markets have been reacting to the FOMC decision throughout the European morning, with upside being seen Bunds and Gilts amid touted real money and leveraged buying, while the curve has flattened on the prospect of a shallower than previously anticipated rate cycle. Also of note, the EONIA fix continued to slip lower overnight to hit new record lows.
Top European News
- Putin Says Russian Economic Crisis Has Peaked Amid Oil Slump: Govt sees GDP growing by 0.7% next year
- UBS Buys Back $6.1 Billion of Debt, Bonds in Public Tender: Buys senior, subordinated debt to lower interest expenses
- Swiss Government Says Growth to Pick Up ‘Slowly’ Into 2017:
In FX, price action in the USD has been relatively muted so far today, with the greenback holding on to much of its overnight gains (USD Index: +0.2%), most notably against EUR and GBP, with 1.4922 appearing as a significant level of resistance in GBP/USD, with the pair moving back higher off this level heading into the release of better than expected UK retail sales release (Inc Auto Fuel M/M 1.70% vs. Exp. 0.60%).
Separately, today saw the Norges bank rate decision, where the central bank kept rates on hold at 0.75% despite outside bets to cut rates and as such, EUR/NOK saw downside in the wake of the release as these outside bets were unwound. While during Asia-Pacific hours, NZD/USD saw mild support following a better than expected New Zealand GDP release (Q/Q 0.90% vs. Exp. 0.80%) however failed to hold onto the gains amid the USD strength.
Today’s highlights come in the form of weekly US jobs data, Philadelphia Fed business outlook and EIA nat gas storage change.
The energy complex continues to feel the effects of yesterday’s DoE’s as well as FOMC inspired USD strength, with WTI heading into the North American crossover in close proximity to USD 35.00/bbl. Separately, nat gas prices reside in positive territory today in paring of recent mild weather inspired losses, which saw the commodity price reach its lowest level since 1999. This comes ahead of today’s EIA nat gas storage change, expected at -41 bcf (Prey. -76bcf).
In terms of the metals complex, gold saw pressure overnight following significant gains during yesterday’s morning as well as the Fed decision, which is seen to dampen demand for gold due to its inflationary-hedge status. Elsewhere, copper prices were also weaker on USD strength post-Fed lift-off, while iron ore prices gained alongside a continued rebound in steel prices as falling output in November suggests the oversupply could be easing.
Top Global News:
- China Southern Hands $10b Aircraft Order to Boeing: China Southern, unit Xiamen Air to buy combined 110 737 planes
- AstraZeneca to Buy Acerta for $4 Billion, Adding Cancer Drug: Acerta’s acalabrutinib shows promise against leukemia, lupus
- Scotiabank Said to Review $1.75b Thanachart Bank Holding: Scotiabank starts gauging interest in 49% stake in Thai lender
- Yellen Voices Economic Optimism as Fed Begins Gradual Tightening: Fed chair says ‘myth’ economic expansions must die of old age
- Blanchflower Says Fed Rate Hike Is ‘Fingers-Crossed Economics’
- AIG to Buy Back Another $3b of Stock Amid Icahn Pressure: CEO Hancock has repurchased $9.7b of stock this year
- Shaw Joins Canadian Wireless Fray With $1.2b Wind Deal: Cable company is major entrant in Canadian wireless industry
- Shale Drillers Are Now Free to Export U.S. Oil Into Global Glut: U.S. crude supplies at 85-year high after production boom
- ConocoPhillips, 28 Energy Producers Face Moody’s Rating Cuts: Moody’s reviews 29 U.S. oil and gas exploration, production cos.
- Apollo to Centerbridge Said to Weigh Bids to Buy Italian Banks: Sale of four banks may fetch more than EU1b
- Cerberus Said to Near Avon Stake Deal, to Pick New Chairman, WSJ Says: Near to pay $435m for ~17% stake in Avon Products, $170m for 80% of its North America business
Bulletin Headline Summary from RanSquawk and Bloomberg:
- European equities took the lead from their US and Asia-Pacific counterparts to trade firmly in the green in the wake of yesterday’s FOMC decision
- Price action in the USD has been relatively muted so far today, with the greenback holding on to much of its overnight gains
- Today’s highlights come in the form of weekly US jobs data, Philadelphia Fed business outlook and EIA nat gas storage change
- has scheduled three term RRP operations for this month, first on Dec. 18; yesterday Fed removed RRP cap, said about $2 trillion in USTs available for operations
- While it’s unlikely RRP usage will hit Fed’s new $2t limit, “this appears to be as close to unlimited as the Fed can make it,” Brean Capital’s Russ Certo wrote in note yday
- Even if he Fed lifts its benchmark to 1.5% a year from now, as JPMorgan predicts, the bank’s economists still see the rate for the key industrial economies undershooting 1% next December as the ECB and BOJ stay on hold
- Goldman took the ax to its iron ore forecasts, predicting the price will remain under $40 a ton for the next three years as China’s slowdown forces the global industry into a long period of hibernation
- Germany’s Ifo institute business climate index dropped to 108.7 from 109.0 in November. The median estimate in a Bloomberg survey of economists was for an unchanged reading
- Putin signaled that Russia is ready to shoot down any Turkish military aircraft that strays into Syrian airspace, saying Turkey’s downing of a Russian bomber in the region damaged relations between the two countries beyond repair
- No IG or HY deals yesterday. BofAML Corporate Master Index OAS tightens 1bp to +173, YTD range 180/129. High Yield Master II OAS tightens 11bp to +698 after reaching new YTD wide Tuesday; YTD low 438/733
- Sovereign 10Y bond yields lower. Asia, European stocks and U.S. equity- index futures rise. Crude oil mixed, gold and copper fall
US Event Calendar
- 8:30am: Current Account Balance, 3Q, est. -$118.5b (prior -$109.7b)
- 8:30am: Philadelphia Fed Business Outlook, Dec., est. 1 (prior 1.9)
- 8:30am: Initial Jobless Claims, Dec. 12, est. 275k (prior 282k); Continuing Claims, Dec. 5, est. 2.2m (prior 2.243m)
- 9:45am: Bloomberg Consumer Comfort, Dec. 13 (prior 40.1)
- 10:00am: Leading Index, Nov., est. 0.1% (prior 0.6%)
DB’s Jim Reid concludes the overnight wrap:
Markets certainly got a taste of the stratosphere after the news as we saw a decent rally across US equity and credit markets that has extended across Asia this morning. A very short-lived dip in the minute post liftoff aside, the S&P 500 rose strongly off its pre-hike levels to close up +1.45%, around a percent of which came post the news. In the credit space CDX IG finished around 1bp tighter, while CDX HY continued its strong run this week to close nearly 11bps tighter and the two big US HY ETF’s were up close to 1% again. The VIX sank 15% while looking across rates markets 10y Treasuries finished pretty much where they were in the moments prior to the hike around 2.296% (up +3bps on the day), while 2y yields broke past 1% for the first time since 2010. The US Dollar was up a smidgen versus the Euro and Yen but was down against the Aussie and Kiwi Dollar. Gold was up over 1%.
In fact for the first time in a while big swings in Oil markets, which have more than played their part in the direction of markets of late, were put to one side. It was impressive to see the rally in US equities and HY coming despite a steep -4.90% fall for WTI (back down below $36), which in turn more than wiped out the rebound that we had seen in the first two days this week. US HY energy spreads actually closed ‘just’ 2bps wider yesterday, so pretty resilient all things considered.
As we refresh our screens the rally has extended in the Asia session this morning. Gains are being led out of Japan were the Nikkei is up over 2%, while there’s decent gains also for the Hang Seng (+0.92%), Shanghai Comp (+1.49%) and ASX (+1.62%). There’s little change in Oil markets, while the same can be said for US equity market futures. Credit markets are off to a positive start in Asia too with markets generally a couple of basis points tighter. Meanwhile the only data has come out of Japan where the trade deficit came in a touch smaller than expected, primarily due to a higher than expected decline in imports last month.
So what to make of the FOMC statement, projections and Fed Chair Yellen’s press conference then. As expected the committee for the outlook for economic activity and the labour market as now being ‘balanced’, a change in rhetoric from the previous statement of ‘nearly balanced’. Much of the focus was on how the Fed was to determine the timing and size of future adjustments, although the statement continued to emphasize that ‘the committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate’ before then emphasizing the dependence on incoming data. It was also noted that the Fed expects to maintain the current size of its balance sheet ‘until normalization of the level of the federal funds rate is well under way’.
As was largely expected there weren’t particularly big changes to the Fed’s median forecasts relative to their September projections for real GDP growth, unemployment and inflation. 2016 GDP growth was revised up one-tenth (to 2.4%), while the 2017 and 2018 forecasts were left unchanged at 2.2% and 2.0%. The unemployment rate is expected to decline to 4.7% for the next three years, which is down from the previous 4.8% forecast. Meanwhile the core PCE inflation rate was revised down one-tenth for this year and next (to 1.3% and 1.6% respectively) but left unchanged for 2017 and 2018, the latter being the year when the Fed expects to hit its 2% target.
It was the revised dot plot projections that was most anticipated. While there had been some suggestion that the 2016 median dot could decline, it was kept unchanged at 1.375% or the equivalent of four 25bps hikes although it was noted that the central tendency range was revised lower. The 2017 median dot was nudged down 25bps to 2.375% while the 2018 median dot was down 12.5bps to 3.25%. The longer-term neutral rate was left unchanged at 3.5%. So while the path of the dots were tinkered with, it still concluded with the same terminal rate.
In the post-meeting press conference Yellen said that the decision ‘reflects our confidence in the US economy’ and that ‘we see an economy that is on the path of sustainable improvement’. She highlighted that while developments abroad still pose a risk, these ‘appear to have lessened since last summer’. Yellen also argued once again that the softness in inflation is transitory and that a delay in policy normalization would have meant policy would need to be tightened abruptly later.
In our view then it had a little for everyone and its hard to say with any conviction whether it favored the hawks or the doves more. With just two hikes priced in by the market next year, it’s likely there’ll be some disappointment from the doves that there was no change to the median 2016 dot. Then again some will be excited by the cuts to the 2017 and 2018 projections. The macro forecasts were a bit of a wash, if anything the most notable takeaway being a small downgrade to 2016 inflation. Meanwhile Fed Chair Yellen offered nothing particularly new, emphasizing moves will be gradual while also keeping her options open. We still don’t think the Fed will get anywhere close to the dots but that due to our late cycle view.
Away from the Fed it was actually a relatively busy day for data yesterday. It was a bit of a mixed bag in the US in particular. November housing starts (+10.5% mom vs. +6.6% expected) and building permits (+11.0% mom vs. -1.0% expected) came in well above expectations. November industrial production was softer than expected however at -0.6% mom (vs. -0.2% expected) while manufacturing production came in line at 0.0% mom. Capacity utilization nudged down to 77.0% (vs. 77.4% expected) from 75% and is now at its lowest level since 2013. Finally the flash December manufacturing PMI fell 1.5pts to 51.3 after expectations had been sitting at 52.6.
It was a fairly unexciting session in Europe where risk assets finished a smidgen firmer (Stoxx 600 +0.24%, Crossover 3bps tighter). In terms of themade reference to the risk data, the flash Euro area composite PMI was a tad softer this month at 54.0, a fall of 0.2pts from November after expectations had been for no change. The decline was driven by the services PMI (-0.3pts to 53.9) which reflect a 1pt fall for France’s services PMI, a likely reflection of the Paris attacks last month. The Euro area manufacturing PMI did however nudge up 0.3pts to 53.1. Our European economics colleagues noted that the composite reading for the Euro area this month points to solid growth of close to +0.5% qoq in Q4. Meanwhile the final Euro area CPI reading for November was revised up one-tenth to +0.2% yoy, while the core was left unchanged at +0.9% yoy. In the UK the data was a bit of a mixed bag. The unemployment rate ticked down one-tenth to 5.2% however there was a notable downtick in wage growth with total earnings growth ex bonuses falling to +2.0% yoy, from +2.5% previously.
Before we look at the day ahead, there’s also a bit of news to highlight out of South America this morning. Late last night Argentina announced that it was to lift the controls it had in place on the Argentinean Peso as of today in a bid to improve the currency’s competitiveness. Meanwhile in Brazil yesterday we learned that Fitch had followed S&P in downgrading the sovereign to high yield, having downgraded by one notch to BB+ (and maintaining a negative outlook). The move came sooner than expected to our EM colleagues and with Moody’s now the only agency rating the sovereign IG still, a downgrade appears only a matter of time.
As we move on from the Fed and look at the day ahead, the European session will kick off this morning with the December IFO survey out of Germany, followed closely by the UK retail sales numbers for November. The UK CBI total orders data for December is due out after this while we’ll also hear the latest monetary policy decision from the Norges Bank (no change expected). Across the pond this afternoon, the December Philly Fed business outlook is due, while last week’s initial jobless claims data is also expected. Later on we will also get the Conference Board leading index for November .
let us begin:
Last night, WEDNESDAY night, THURSDAY morning: Shanghai up , Hang Sang rise, Chinese yuan devalued again to 6.4920. Stocks in Asia up after the Fed decision to raise rates. Oil constant in the morning, then falters later in the day. Stocks in Europe are also up.
Here is the commentary on the weakening of the yuan for the 9th straight day.
(courtesy zero hedge)
China Weakens Yuan For 9th Consecutive Day, Longest Streak Since 2008
In the first two weeks of August 2008 (just a month before Lehman imploded), as tensions built in US financial markets, China weakened the Yuan for 10 straight days. Tonight, China just extended its streak of weakening the Yuan fix to 9 days (for an aggregate 1.4% devaluation, the largest such drop outside of August’s devaluation in history). This pushes the Yuan back to June 2011 levels.
Yuan fix at lowest since June 2011…
as CNYUSD has been in freefall since The IMF…
Why it “might” matter…
Now where have we seen that before…
And finally, this chart raised our eyebrows… as the now ‘vicious’ Petrodollar circle of death accelerates…
h/t Jeffrey Snider
Is someone out to get the IMF head, Lagarde?
(courtesy zero hedge)
The DSKing Of Christine Lagarde: Someone Wants To Eliminate The Head Of The IMF
It was over a year ago when we reported that a French court has put Christine Lagarde, head of the International Monetary Fund, under a formal probe for negligence in a corruption investigation involving famous financier Bernard Tapie, dating back to her days as finance minister.
Back then Lagarde said the decision was “without basis,” adding she would challenge it with a higher court. The investigation is part of a complex, drawn-out probe into the alleged misuse of state funds. The case stems from a decision in the 2008 to use arbitration to settle a dispute with business tycoon Bernard Tapie. The arbitration panel awarded €420 million to Mr. Tapie.
“The magistrates of the court of justice of the Republic have decided to place me under formal investigation,” Ms. Lagarde said in statement in August of 2014. “After three years of procedure, the sole surviving allegation is that through inadvertence or inattention I may have failed to intervene to block the arbitration that brought to an end the longstanding Tapie litigation,” she added.
We said that this development was hardly a shock: after two years ago the news hit that “IMF’s Lagarde Flat Raided Over French ‘Payout’ Probe” with her ascent to the head of the IMF also riddled with numerous allegations of impropriety involving the Tapie matter. However, a year ago, such outside interventions were below the radar, and certainly never escalated to anything formal or official.
We left it by wondering who and why had been angered by her policies over the past three years, and who could be her replacement, confident her days as IMF head were over: “as for Lagarde, we are confident she and Angelo Mozillo will have enough fake tanning tips to exchange during their long and worry-free retirement.”
Then, in a surprise to us, the Lagarde scandal did what it has done so well for the past 4 years: it went dormant again… until earlier today when in a surprising escalation, and one which is as financially motivated as it is political, a French court ordered the orange-skinned IMF head to finally face trial over her alleged role in the Tapie payout scandal.
Reuters reports that the case, which has roots dating back more than 20 years, will be heard by magistrates at the Cour de Justice de la Republique, which judges ministers for crimes in office, France’s prosecutor general said.
Lagarde, who is accused of alleged negligence over the Tapie affair while serving as France’s finance minister, said she would appeal against the decision, adding that she shared the prosecutors’ view there was no basis for any charge against her.
“Ms. Lagarde would like to reaffirm that she acted in the best interest of the French state and in full compliance with the law,” said a statement issued by her office.
But what is most unexpected about this outcome is that France’s top prosecutor had recommended in September that investigations against Lagarde in the case be dropped.
Her lawyer, Yves Repiquet, was stunned: “A decision like this is incomprehensible.”
“I sent her a text, she was really surprised and very disappointed,” he said, adding that his client was currently in Washington. Well, yes: who wouldn’t be surprised to learn they are not above the law.
The IMF’s executive board reaffirmed its confidence in Lagarde’s ability to effectively carry out her duties, IMF Communications Director Gerry Rice said in a statement.
Nonetheless, the fact that Lagarde is now going to trial despite the top prosecutor demanding that her trial be thrown out, shows that this is now a financial matter, one which very likely involves the IMF’s desire to see Greek debt haircuts, something which made Lagarde and company many enemies over the summer when it was the IMF’s policy recomomendations themselves which pushed the Greek anti-austerity movement over the edge and led to the ill-fated Greek referendum (everyone knows what happened then).
And while Europe may desperate want to give the impression it has moved in, it certainly has not forgotten, and now an unknown someone in the dark corridors of Brussels, or perhaps the C-suites of Wall Streets, is demaning a new and clean slate at the top of the world’s sovereign debt guarantor, one who has a more “pro-Brussels/anti-debt reduction” philosophy than Lagarde.
Of course, this wouldn’t be the first time that an IMF head has been “sacrificed” for the greater good: recall the impressive framing of Lagarde’s predecessor Dominique Strauss-Khan, who from frontrunning French presidential candidate, suffered a political and career trainwreck overnight when he allegedly raped a maid at a NYC hotel.
As for Lagarde, we are confident that after a kangaroo court lasting at least several weeks, she herself will submit her resignation, and while the ending may not be literally taken from “Kill Bill” despite the eerie similarities…
… her career at the IMF has entered its terminal countdown.
RUSSIAN AND MIDDLE EASTERN AFFAIRS
- ISIS militants attack Turkish soldiers in the North part of Iraq
- Vice President Biden calls on Turkey to withdraw its troops from Iraq.
(courtesy zero hedge)
In Dramatic Reversal, US Vice President Biden Calls On Turkey To Withdraw Its Troops From Iraq
It has been a strange two days for US foreign policy.
Earlier today we reported that in what amounts to a significant blow to the official US position over Syria, namely the multi-year demands to replace president Assad with a western puppet ruler, John Kerry on Tuesday accepted Russia’s long-standing demand that President Bashar Assad’s future be determined by his own people, as Washington and Moscow edged toward putting aside years of disagreement over how to end Syria’s civil war.”
“The United States and our partners are not seeking so-called regime change,” Kerry said, adding that the focus is no longer “on our differences about what can or cannot be done immediately about Assad.”
In a testament to the fact that mainstream media is beginning to understand just how weak America’s negotiating position has become, AP offered the following rather sarcastic assessment: “President Barack Obama first called on Assad to leave power in the summer of 2011, with “Assad must go” being a consistent rallying cry. Later, American officials allowed that he wouldn’t have to resign on “Day One” of a transition. Now, no one can say when Assad might step down.”
Kerry also called demands by the “moderate” opposition that Assad step down before peace negotiations begin an “obvious nonstarter.”
All of the above, some may say, makes the US presence in Syria, whether through CIA covert ops, commandos, or even the Islamic State, moot: after all, if the US has folded on an Assad regime change, then there is no longer any point in continuing the proxy war, which revolves around one key issue: regime change in Syria.
But then something even more surprising happened.
Earlier today, Islamic State militants launched an attack on a military camp in northern Iraq where Turkish troops have been stationed. According to officials and press reports, seven Kurdish peshmerga fighters were killed and four Turkish troops were injured in the bombardment and rushed to a hospital in Sirnak, a Turkish province bordering Iraq, according to Anadolu Agency. A Kurdish Rudaw news agency report suggested that two of the trainees at the camp were killed and six wounded.
Turkey’s general staff said in a statement that Katyusha projectiles fell into the camp around 3 pm local time. Turkish troops returned fire following the attack according to Turkish officials, who provided no further details. Additionally, according to a report by a Kurdish news website, the Slemani Times, over 70 Turkish soldiers went missing after the attack.
The attack on Turkish soldiers by the Islamic State takes place two weeks after the Turkish military deployed troops in northern Iraq without preclearance from Iraq in what has been seen by some as a military invasion of sovereign territory and has become a major stumbling block in relations between Ankara and Baghdad. While Turkey claims the troops had been deployed at the invitation of the Iraqi government, Baghdad denies this, describing Ankara’s actions as an “incursion.”
But while the attack on the Turkish soldiers by those they allegedly invaded Iraq to fight may be seen as oddly ironic, the real surprise is what followed shortly thereafter.
Moments ago, the office of the Vice President released a readout of a phone call Joe Biden had with Iraq’s PM Al-Abadi. The stunning part is that in a dramatic reversion of the NATO narrative on Turkey’s incursion in Iraq as justified, Biden just called on Turkey to withdraw from Iraq.
Here is the full readout of Vice President Biden’s Call With Iraq’s Prime Minister Haider Al-Abadi
The Vice President spoke with Iraqi Prime Minister Haider Al-Abadi yesterday following his December 14 call with Turkish Prime Minister Ahmet Davutoglu. The Vice President noted the recent deployment of Turkish forces into northern Iraq had occurred without the prior consent of the Iraqi government. Both leaders welcomed initial indications of the withdrawal of some Turkish forces and agreed this should continue, reiterating that any foreign forces can only be present in Iraq with the coordination and permission of the Iraqi government. The Vice President reaffirmed the United States’ commitment to Iraqi sovereignty and territorial integrity and called on Turkey to do the same by withdrawing any military forces from Iraqi territory that have not been authorized by the Iraqi government. The Vice President encouraged continued dialogue between Iraq and Turkey to address any outstanding grievances in the spirit of mutual cooperation. Both leaders reaffirmed their continued commitment to the fight against ISIL in Iraq.
So first the US backtracks on its core long-running demand that “Assad must go”, and now it has just turned its back on a key NATO-member ally and what is allegedly the biggest provider of funding and supplies (including Ford F250 pick up trucks) to the Islamic State, Turkey.
Perhaps if only Putin, Lavrov, and Kerry had more staring contests such as this one…
… in which the latter invariably blinks, the world’s geopolitical conflicts would be promptly resolved.
“Let Them Fly There Now”: Putin Threatens To Shoot Down Turkish Jets In Syria, Calls Erdogan An Ass Kisser
It’s been nearly a month since Turkey shot down a Russian Su-24 in what not only represented the most serious escalation to date in Syria’s five year conflict but also marked the first time a NATO member has engaged a Russian or Soviet aircraft in at least six decades.
The “incident” – which came several weeks after Ankara downed what certainly appeared to be a Russian drone – infuriated The Kremlin, setting off a war of words that culminated in a lengthy presentation by the Russian MoD which purported to prove that illicit Islamic State oil flows through Turkey. Both Putin and a number of other Russian officials have implicated Erdogan and his family in the trafficking of illegal crude and there’s speculation that Ankara’s brazen move to fire on the Russian warplane stemmed from Erdogan’s desire to “punish” Russia for disrupting what Deputy Minister of Defence Anatoly Antonov sarcastically called “a brilliant family business.”
As for the Russian foreign ministry, Sergei Lavrov canceled a planned trip to Turkey and Maria Zakharova went so far as to reference Turkey’s infamous political blogger Fuat Avni (a pseudonym) on the way to suggesting that Ankara had been planning to shoot down a Russian fighter jet for at least a month.
In an effort to ensure that the downing of a Russian warplane in Syria was a “one and done” event, Moscow deployed the Moskva off the coast of Latakia and sent in the S-400 air defense systems (which were rumored to have already been in place).
Those moves rattled the US and its partners who fear that a nervous Putin might “inadvertently” shoot down an American, French, or British warplane. Indeed Putin ratcheted up the rhetoric last week. While not detailing ‘who’ he was focused on, the President told a session of the Defense Ministry’s collegium that “I order to act extremely tough. Any targets that threaten Russian forces or our infrastructure on the ground should be immediately destroyed.”
Well, in case that wasn’t clear enough, Putin took it a step further on Thursday.
During his annual news conference in Moscow, the Russian President literally dared Erdogan to send Turkish F-16s into Syrian airspace.
As Bloomberg reports, “President Vladimir Putin signaled that Russia is ready to shoot down any Turkish military aircraft that strays into Syrian airspace.”
“Turkey constantly violated Syrian airspace in the past. Let them fly there now,” he said, pointing out that Russia’s most advanced air-defense system, the S-400, is covering all of Syria.
(in case the S-400s and the Moskva should prove insufficient, Putin always has the “hands on” option)
“This is the 11th press conference Putin will have with Russian and international journalists during the three terms he has served as head of state,” Sputnik notes. “These large press meetings, held once a year, usually last several hours. Almost 1,400 journalists have received accreditation for this year’s event.”
As for whether The Kremlin thinks the US was in any way involved in the downing of the Russian warplane, Putin said he wasn’t aware of any American involvement, but did suggest (literally) that Erdogan may have been trying to kiss Washington’s ass or, in Bloomberg’s more politically correct terminology, “Turkey may have been trying to curry favor with the largest member of NATO”.
Putin: “If someone in Turkey decided to kiss Americans on a certain body part, I don’t know whether it was right or not.”
Watch the full video below.
Congress Fumes As Experts Say Iran Violated UN Ban By Test-Firing Nuclear Capable Ballistic Missile
On October 11, Iran test-fired a new generation of surface-to-surface ballistic missiles capable of hitting Israel.
The Emad, as the long-range weapon is called, is a variant of Tehran’s Shahab-3, has a range of 1,700 kilometers, and is accurate to within 500 meters, according to Anthony Cordesman, a researcher at the Center for Strategic and International Studies. For those who might have missed it, here is the clip:
As we said at the time, the embarrassment for The White House in the wake of the “historic” nuclear accord continues as Iran will apparently continue to exploit any and all ambiguities to its advantage up to and including building new ballistic missle systems, an act which certainly goes against the spirit of the deal if not the letter.
As it turns out, the Emad launch may in fact have represented more than a symbolic violation of the July nuclear accord. As Reuters reports, “Iran violated a U.N. Security Council resolution in October by test-firing a missile capable of delivering a nuclear warhead,” a team of sanctions monitors says.
As we noted at the time of the launch, the test-fire didn’t technically violate the terms of the P5+1 nuclear deal, but a report from The Security Council’s Panel of Experts suggests that the Emad launch “is a violation by Iran of paragraph 9 of Security Council resolution 1929.”
This puts the Obama administration in a decisively precarious position. Congress is now calling for more sanctions but hitting Tehran with further punitive measures risks derailing the deal altogether. “If Washington failed to call for sanctions over the Emad launch, it would likely be perceived as weakness,” For his part, Democratic U.S. Senator Chris Coons (who supported the nuclear deal) said that in the absence of Security Council action, the US should impose direct sanctions on those responsible for the missile tests.
Indeed, attemps by the Security Council to expand the Iran blacklist would likely run into stiff opposition from Russia and China.
Ultimately, this is a dispute about nukes versus Tehran’s arsenal of missiles. As we documented extensively in “Inside Iran’s Secret Underground Missile Tunnels,” Iran has the largest ballistic missile cache in the Mid-East. Here’s a rundown courtesy of The US Institute of Peace:
- Shahab missiles: Since the late 1980s, Iran has purchased additional short- and medium-range missiles from foreign suppliers and adapted them to its strategic needs. The Shahabs, Persian for “meteors,” were long the core of Iran’s program. They use liquid fuel, which involves a time-consuming launch. They include:
- The Shahab-1 is based on the Scud-B. (The Scud series was originally developed by the Soviet Union). It has a range of about 300 kms or 185 miles
- The Shahab-2 is based on the Scud-C. It has a range of about 500 kms, or 310 miles. In mid-2010, Iran is widely estimated to have between 200 and 300 Shahab-1 and Shahab-2 missiles capable of reaching targets in neighboring countries.
- The Shahab-3 is based on the Nodong, which is a North Korean missile. It has a range of about 900 km or 560 miles. It has a nominal payload of 1,000 kg. A modified version of the Shahab-3, renamed the Ghadr-1, began flight tests in 2004. It theoretically extends Iran’s reach to about 1,600 km or 1,000 miles, which qualifies as a medium-range missile. But it carries a smaller, 750-kg warhead.
- Although the Ghadr-1 was built with key North Korean components, Defense Minister Ali Shamkhani boasted at the time, “Today, by relying on our defense industry capabilities, we have been able to increase our deterrent capacity against the military expansion of our enemies.”
- Sajjil missiles: Sajjil means “baked clay” in Persian. These are a class of medium-range missiles that use solid fuel, which offer many strategic advantages. They are less vulnerable to preemption because the launch requires shorter preparation – minutes rather than hours. Iran is the only country to have developed missiles of this range without first having developed nuclear weapons.
While Iran vigorously denies that its scientists have pursued a nuclear weapon, Tehran has made it abundantly clear that it will continue to pursue its missile program unimpeded. As Defense Minister Hossein Dehghan said on the heels of the Emad launch, “...we don’t ask anyone’s permission to enhance our defense power or missile capability and will firmly pursue our defense plans, particularly in the field of missiles.”
Although a new IAEA report clearly suggests that Iran pursued a nuclear bomb at least until 2003, the Agency’s Board of Governors passed a resolution on Tuesday to close its investigation into the history of Tehran’s nuclear program. “The decision by the Board of Governors will open a new chapter for cooperation between Iran and the agency,” Iran’s ambassador to the IAEA, Reza Najafi said on Tuesday.
Others aren’t so sure. “Iran’s cooperation was certainly not sufficient to close the overall PMD file,” Reuters quotes the Washington-based Institute for Science and International Security, as saying.
So ultimately, this is just a game of cat and mouse between Tehran and the Western powers – as clear cut as the question might seem (i.e. “are you developing a nuclear bomb or aren’t you?”), the Emad launch suggests that implementing the nuclear deal may prove to be nothing short of impossible. For instance, it’s nothing short of absurd that Congress is now debating whether to slap Iran with more sanctions in connection with the missile launch less than a month before existing sanctions are set to be lifted.
At the end of the day, perhaps the US should consider whether Washington’s relationship with Tehran needs to be fundamentally rexamined, and on that note, we close with what we said in October:
“…imposing crippling economic sanctions on countries in order to deter their defense buildup (Iran) or otherwise force them into acting in a way that fits your definition of being an internationally responsible country (Russia) is a fool’s errand to the extent that it only serves to aggravate the situation and perpetuates still more of the very same behavior you’re trying to deter in the first place. Need proof? See the video shown above.”
Treason! Lawmaker Discovers It’s Bad Idea To Accuse Erdogan Of Supplying Sarin Gas To ISIS
Two weeks ago, CHP lawmaker Eren Erdem said he, like Moscow, will soon provide proof of Turkish President Recep Tayyip Erdogan’s role in the smuggling of Islamic State oil. “I have been able to establish that there is a very high probability that Berat Albayrak is linked to the supply of oil by the Daesh terrorists,” Erdem said, referencing Erdogan’s son-in-law who just happens to be the country’s energy minister.
That wasn’t the first time Erdem has accused the Erdogan government of engaging in nefarious activities. Recall that back in October, Erdem and fellow CHP deputy Ali Seker claimed an investigation into Turkey’s role in a 2013 sarin gas attack that killed more than a thousand civilians in Syria was being obstructed.
“The MKE [Turkish Mechanical and Chemical Industry Corporation] is also an actor that is mentioned in the investigation file. Here is the indictment. All the details about how sarin was procured in Turkey and delivered to the terrorists, along with audio recordings, are inside the file,” Erdem said, at a press conference held on October 21.
“Wiretapped phone conversations reveal the process of procuring the gas at specific addresses as well as the process of procuring the rockets that would fire the capsules containing the toxic gas. However, despite such solid evidence there has been no arrest in the case. Thirteen individuals were arrested during the first stage of the investigation but were later released, refuting government claims that it is fighting terrorism,” he continued.
As Today’s Zaman reported at the time, “…over 1,300 people were killed in the sarin gas attack in Ghouta and several other neighborhoods near the Syrian capital of Damascus, with the West quickly blaming the regime of Bashar al-Assad and Russia claiming it was a ‘false flag’ operation aimed at making US military intervention in Syria possible.”
On the heels of Erdem’s allegations surrounding Erdogan’s role in Islamic State’s illicit oil smuggling business, the lawmaker said he intends “to carry this investigation through to the end,” to which we replied: “..we can only hope that, for the sake of exposing the truth, ‘the end’ doesn’t end up being a Turkish jail cell, or worse.”
Well sure enough, Erdem now faces “treason” charges. Here’s Today’s Zaman again:
The Ankara Chief Prosecutor’s Office has opened an investigation into Republican People’s Party (CHP) ?stanbul deputy Eren Erdem for “treason,” following his claims on the Russia Today (RT) TV station that radical groups used Turkey as a transit route for the shipment of sarin gas.
Turkish media reported on Wednesday that the Ankara Chief Prosecutor’s Office will send a summary of proceedings to the Ministry of Justice on Thursday. If the summary of proceedings is sent to Parliament, the process for stripping Erdem of his parliamentary immunity will begin. Erdem might be prosecuted over treason if Parliament votes in favor of the removal of his parliamentary immunity.
Cem Kucuk, a columnist at the pro-government Star daily, said on a program on Kanal 24 on Tuesday that Erdem’s appearance on RT and his claims regarding sarin gas were “treason.”Kucuk argued that Erdem’s immunity should be removed by Parliament for him to “pay for his deeds.”
For his part, Erdem repeated his contention that he’s the subject of a smear campaign. “The paramilitary organization Ottoman Hearths is sharing my address [on Twitter] and plans a raid [on my house]. I am being targeted with death threats because I am patriotically opposed to something that tramples on my country’s prestige,” he says.
The charges come just two days after Erdem gave the following interview to RT in which he says ISIS “received all necessary materials to produce deadly sarin gas via Turkey.” He insists there are grounds to believe a cover up is in the offing.
And so, just as Erdogan arrested Can Dundar, editor in chief of Cumhuriyet, and Erdem Gul, the newspaper’s capital correspondent in Ankara on charges of spying and aiding a terrorist organization after they published video depicting an MIT truck transporting weapons to Syria, and just as Ankara arrested the generals who stopped the truck, AKP will now try a member of the opposition for treason.
Just another day in Erdogan’s thriving, NATO-supported “democracy”.
Putin ‘Endorses’ “Absolute Leader” Trump As Colorful, Talented Guy
Following his annual press conference in Moscow, Russian President Vladimir Putin gave a qualified endorsement of Donald Trump’s candidacy for the Republican presidential nomination on Thursday, saying he hoped Trump’s election could improve Moscow’s relations with the United States…
“He’s a really brilliant and talented person, without any doubt. It’s not our job to judge his qualities, that’s a job for American voters, but he’s the absolute leader in the presidential race,” Putin said after his annual press conference in Moscow, according to the Interfax news wire.
“He says he wants to move on to a new, more substantial relationship, a deeper relationship with Russia, how can we not welcome that? Of course we welcome that,” Putin added.
At a Republican debate in September, as Buzzfeed reports, Trump said his victory would ensure an end to Russia’s frosty rapport with the U.S. under President Barack Obama.
“I would talk to him, I would get along with him,” he said. “I believe – and I may be wrong, in which case I’d probably have to take a different path – but I would get along with a lot of the world leaders that this country is not getting along with.”
“He does not like Obama at all. He doesn’t respect Obama at all. And I’m sure that Obama doesn’t like him very much,” Trump said of Putin in October. “But I think that I would probably get along with him very well. And I don’t think you’d be having the kind of problems that you’re having right now.”
* * *
Chess, Checkers, or Shoots-and-Ladders?
WTF Headline Of The Day: Saudi Millionaire Edition
Presented with no comment…
Coming To America?
Sweden is in shambles (as we detailed here and here), but the latest escalation in terrorist-related threats to the refugee-protecting nation. As The Express reports, Sweden is now on lockdown after crazed Islamic State (ISIS) jihadis sent letters to European civilians ordering them to convert to Islam within three days or face being decapitated in their own homes. The chilling letters pledged to then “bomb your rotten corpses afterwards.”
ISIS has posted letters threatening to decapitate people in Sweden
Bloodthirsty Daesh Islamists posted notes through the doors of dozens of random neighbours in several cities across Sweden, including the capital Stockholm, threatening to murder “non-believers” in a terrifying campaign of violence.
Intelligence officials confirmed they are investigating the horrifying threats – which were signed by “ISIS” – as a state of fear gripped the nation.The notes, written in Swedish, order people to convert to Islam or pay a religious tax, known as the jizya, warning that the police “will not save you from being murdered”.
The letter, posted on Facebook, features the flag of ISIS
It warns Swedes they must convert to Islam or face being beheaded
“In the name of Allah, the merciful, full of grace. You who are not believers will be decapitated in three days in your own house. We will bomb your rotten corpses afterwards.”You must choose between these three choices: 1. Convert to Islam. 2. Pay the jizya [religious tax] for protection. 3. Or else, you will be decapitated.“The police will not prevent or save you from you being murdered. (Death comes to all of you).”
Swedish police search a refugee shelter for ISIS terrorists
Mutar Muthanna Majid was held after police raided a refugee housing unit in Sweden
An image of the chilling message was posted on Facebook by one of the recipients.
Get ready for a 25 to 30% plunge in the value of the Argentinian peso tomorrow morning as controls are lifted:
USA reserves are at very lows levels!
(courtesy zero hedge)
Prepare For Peso Plunge: Argentina Lifts Currency Controls
Late last month, Argentina voted to throw out the Peronists. In what amounted to a sharp rebuke of Cristina Fernandez de Kirchner’s handling of the economy (among other things) Mauricio Macri defeated Daniel Scioli, Kirchner’s hand-picked successor, ushering in what the market hopes will be a new era for a country plagued by persistently high inflation and slumping growth.
First on Macri’s to-do list (and trust us, it’s a very long list), is reforming the exchange rate regime. As we recounted three weeks ago, The President-elect wants to unify the official and parallel exchange rates (~9.60 and 15.50 ARS/USD, respectively) and that will of course entail a substantial devaluation. Just how overvalued is the peso, you ask? “Grossly” so, Citi opined, following Macri’s election.
As we went on to detail, selling dollars to support the peso really isn’t an option anymore because, well, because there are no more dollars. Although Argentina’s official reserves sit at some $25 billion, net reserves (which factor in swaps with China, among other factors) are likely somewhere between $400 million and $2 billion, which for all intents and purposes means the country is out of dollars.
This rather precarious situation led central bank head Alejandro Vanoli to do two things last month, i) force banks to sell half their dollar assets, and ii) sell $17 billion of dollar futures. Earlier in November, police raided the central bank after Macri’s allies lodged a criminal complaint against Vanoli for violating the bank’s charter by basically turning it into a giant derivatives trading hedge fund.
Last week, Macri succeeded in forcing Vanoli’s resignation.
“Although certain sectors are trying to spread the idea that reserves are ‘at zero’, the reality indicates otherwise,” Vanoli wrote, in a letter to Kirchner. “If the president-elect decides to impose a violent devaluation it will be exclusively as a result of a political decision.”
“However, many economists warn that liquid reserves are dangerously low since they have been used to prop up the peso’s value against the dollar, which is valued at 9.7 pesos at the official exchange rate but commands about 15 pesos on the black market,” FT writes, adding that “Macri called for Mr Vanoli’s resignation at a press conference the day after his election victory, amid outrage at the bank governor’s attempt to prop up the official exchange rate by selling about $17bn of future dollar contracts at an artificially low rate that will cause serious losses for the central bank if the peso is devalued.”
With Vanoli gone, the path is clear for the deval. A key figure in the execution of Macri’s currency plan is former JP Morgan global head of FX research Alfonso Prat-Gay who will be Argentina’s finance minister under the new Presdent. Prat-Gay was president of the country’s central bank beginning in 2002. Over the course of Macri’s campaign, Prat-Gay voiced support for the idea of unifying the official and black market peso rates. “There are no reserves left, and the capital controls don’t make sense,” the new FinMin said in November.
“The program to unify the currency market is the first signal for the economy to start to normalize,” Prat-Gay told La Nacion last week. “We’re going to fulfill that promise as fast and as exhaustively as possible. If we can do it the 14th, we’ll do it the 14th, and if not, we’ll do it once we see the right conditions,” he added.
Well, the new FinMin might have missed that deadline, but not by much because Prat-Gay just made it official.
- ARGENTINA ENDS FX CONTROLS: FINANCE MINISTER PRAT-GAY
- ARGENTINA LIFTS CURRENCY CONTROLS AS VALUE OF PESO SEEN FALLING
The groundwork was set for the move earlier this week. As Bloomberg noted on Monday, Macri ordered financial institutions to “unwind their foreign-currency positions as part of an agreement with the futures exchanges under which they will rewrite the terms of some derivatives that would have handed holders a windfall profit.” In other words, the new President is looking to ensure that when the deval comes, the central bank won’t get hit too hard as a result of Vanoli’s adventures in dollar futures. Here’s more:
Federico Sturzenegger, the new central bank president, had to resolve the futures impasse before proceeding with lifting controls in order to reduce the bank’s liability stemming from the contracts, according to Rafael Di Giorno, a director at Proficio Investment in Buenos Aires.
“The government has to devalue as soon as possible since they need an inflow of dollars to rebuild reserves, especially from exporters,” Di Giorno said. “If they had devalued without fixing these contracts they would have faced a huge loss.”
And so, the stage is thus set for a new era in Argentina. For those interested in a case study of what happens after a dramatic devaluation, you now have front row seats for what is likely to be a 25-30% peso plunge. “It’s not a process devoid of risk but there’s also significant risk in doing this in several installments,” Goldman’s Alberto Ramos says.
Grab the popcorn.
And as expected, the Argentinian Peso collapses 29%:
(courtesy zero hedge)
Argentine Peso Collapses 29% After Government Lifts Currency Controls
For those interested in a case study of what happens after a dramatic devaluation, you now have front row seats for what is likely to be a 25-30% peso plunge. Grab the popcorn.
That’s what we said on Wednesday evening in “Prepare For Peso Plunge: Argentina Lifts Currency Controls,” after the country’s FinMin Alfonso Prat-Gay announced that, as promised, new President Mauricio Macri would move to unify the official and black market exchange rates in the face of depleted FX reserves and still sky high inflation.
Here’s what the gap looked like as of yesterday:
On Thursday, the move to a float sent the peso plunging by nearly 30%:
Now let’s just hope Macri’s move to negotiate new terms for the $17 billion derivatives book amassed by former central bank governor Vanoli is enough to keep the country from taking a massive hit on its dollar futures.
Let us now head over to Brazil as see how this nation implodes. Today unemployment hits a 7 year high.
Plus updates on impeachment hearings:
November Unemployment Hits Seven Year High In Brazil As Supreme Court Mulls Impeachment Bid
They will not achieve anything by attacking my record, which is known; I love my country and I’m honest. I will fight against the illegitimate interruption of my mandate using all the tools that the rule of law gives me,” embattled President Dilma Rousseff told a gathering of youth groups late Wednesday in Brasilia.
One of those “tools” was the Supreme Court and more specifically Judge Luiz Fachin who Rousseff appointed last June.
Earlier this month, Fachin suspended impeachment proceedings until December 16 after a controversial vote stacked the impeachment committee with Rousseff’s political rivals. As we reported at the time, the Supreme Court suspended Lower House Speaker Eduardo Cunha’s bid to oust the President pending a December 16 debate on the constitutional validity of the proceedings and an examination of a controversial vote that nearly caused a house session to “collapse into chaos,” as Reuters put it (as an aside, the court will decide on Cunha’s removal next year as there apparently isn’t enough time before the recess).
“The Communist Party of Brazil, a small party in Rousseff’s coalition, raised the constitutional issue in an injunction filed last week,” Reuters went on to report, adding that “the injunction said a 1950 law laying out impeachable crimes by a president was not compatible with Brazil’s 1985 constitution.”
The court said it was attempting “to avoid acts that could eventually be invalidated.”
Unfortunately for Rousseff, Fachin dropped the objection to the proceedings on Wednesday.“Judge Luiz Fachin’s unexpected recommendation must still be voted on by the full court, but it was a new setback for the unpopular Rousseff in her battle to block impeachment for allegedly breaching Brazil’s budget laws last year,” Reuters says, adding that “Fachin also argued before his fellow justices that the Senate does not have any authority to review the grounds for impeachment once the lower house votes to accept the charges by two-thirds of its members.”
A vote from the full court is due later today. If Fachin’s colleagues concur with his judgement, the Senate will not be able to block impeachment proceedings once the House votes to move forward.
Here’s a bit more color:
Rousseff is believed to have enough votes currently to block impeachment in the lower chamber – 171 of the 513 seats – though a growing rift with her main coalition ally, the fractious Brazilian Democratic Movement Party, threatens to reduce her narrow margin.
Rousseff’s position is stronger in the Senate, her last line of defense, but if the impeachment case drags on into next year public pressure on the Senate to remove her could grow due to the recession that is fueling inflation and unemployment.
Indeed. In fact, some observers argue that the longer it takes to impeach Rousseff, the better, because the economy is only set to deteriorate from here, meaning that by the time lawmakers actually get around to removing the President, the country’s depression deep recession will have eroded any semblance of support she might have had left. Fitch’s decision to cut the country to junk earlier this week underscores how precarious the situation truly is.
On Thursday we got the latest proof of what we said back in August – namely that Brazil’s economy is now a jobs destruction machine.
Although the unemployment rate for November came in below analyst expectations, at 7.5% it’s still up dramatically from just 4.8% a year ago. “The drop in November was seasonal, as companies and stores hire workers in advance of year-end holidays,” Flavio Serrano, senior economist at Haitong in Sao Paulo told Bloomberg by phone. “We don’t have to take this figure as quite so important, because it doesn’t change our minds in terms of the situation. Unemployment rate is likely to keep climbing over at least 2016.”
As Goldman’s Alberto Ramos points out, “this is, in fact, the highest unemployment reading for the month of November in seven years.” Here’s more color from Ramos:
Employment declined 3.7% yoy and real wages declined by a large 8.8% yoy. Hence, the real wage bill of the economy shrank by a very large 12.2% yoy in November; the largest decline since July 2003.
Employment plunged 7.2% yoy (-147K jobs) in the informal sector, and declined by an also large 4.6% yoy in the private formal sector (-540K jobs). On the other hand the ranks of self-employed rose 0.9% yoy (+41K individuals); this is likely a reflection of the fact that it may be increasingly difficult to find a salaried job and therefore workers are pushed into self-employment activities.
Employment plunged 8.8% yoy (-315K jobs) in the industrial sector and by 1.4% yoy (-25K) in the construction sector. Employment in commerce (-3.2% yoy) and in companies that provide services to corporates (-3.7% yoy) also declined at the margin. Furthermore, wages declined significantly across several sectors: industry (-12.5% yoy), construction (-11.9% yoy), commerce (-8.2% yoy), etc.
Meanwhile, Congress has approved the 2016 budget guidelines bill that targets a 0.5% primary surplus (wink, wink). That’s below the 0.7% surplus target favored by FinMin Joaquim Levy who, asReuters notes, has threatened to quit if the original target is not maintained.”
So once again, we’ll ask: “Who wants tickets to the summer games in Rio?!”
Here’s an in-depth summary from Bloomberg:
- Brazilian real remains under pressure as difficulty of finding a market-friendly candidate to replace finance minister Levy adds to political turmoil, Bloomberg strategist Davison Santana writes.
- Congress due to vote on new version of 2016 budget after sovereign downgrade by Fitch, while Supreme Court expected to resume hearing on Cunha’s fate and Rousseff’s impeachment
- BRL -0.56% at 3.9060 vs USD, trims gains seen yday afternoon after Fed decision
- Upper bound of previous trading range at 3.87 and yday’s low near 3.96, likely to serve as short-term references
- Folha reports that even as Rousseff seeks a businessman to replace Levy as FinMin, it may be very hard to find someone willing to take the post following Levy’s fate and amid an impeachment process
- Workers’ party said to prefer Planning Minister Barbosa as FinMin; Barbosa’s positions toward looser fiscal policy may not make him a market favorite, local trader says
- Congress may vote on fresh 2016 budget proposal today; lawmakers committee yday approved fiscal surplus target cut to 0.5% from 0.7%/GDP but removed proposed mechanism that allowed govt to discount investment to calculate the target
- Committee’s decision may have been influenced by yday’s cut of country’s credit rating by Fitch
- Attorney-general requests Supreme Court to remove Cunha from Lower House presidency and from his post as lawmaker, pointing out 11 facts that allegedly show Cunha has used his position for “own interests and illicit purposes”
- Decision on Cunha adds to Court’s agenda that may resume today hearing on impeachment process against Rousseff that started yday
- Court Minister Fachin voted yday in favor of continuation of proceedings as they currently are, denying all requests made by govt allies; 10 ministers still remaining to vote
Your early morning currency/gold and silver pricing/Asian and European bourse movements/ and interest rate settings/THURSDAY morning 7:00 am
Euro/USA 1.0846 down .0028
USA/JAPAN YEN 122.55 up .067
GBP/USA 1.4917 down .0056
USA/CAN 1.3831 up .0039
Early this morning in Europe, the Euro fell by 28 basis points, trading now just below the 1.09 level rising to 1.0846; 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, Nysmark and the Ukraine, along with rising peripheral bond yield, further stimulation as the EU is moving more into NIRP and the USA tightening by raising their interest rate Last night the Chinese yuan was down in value (onshore). The USA/CNY up in rate at closing last night: 6.4920 / (yuan down)
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 southbound trajectory as settled down again in Japan by 7 basis points and trading now further to that all important 120 level to 122.55 yen to the dollar.
The pound was down this morning by 56 basis points as it now trades just below the 1.50 level at 1.4917.
The Canadian dollar is now trading down 39 in basis points to 1.3831 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>
AND NOW WE AWAIT THE DECISION OF THE USA TO RAISE RATES AND THE DILEMMA THEY FACE. SOMEONE ELSE MUST DO QE TO REPLACE LOST LIQUIDITY (800 billion-1 trillion of liquidity must be withdrawn on the 1/4% rise in rates)
The NIKKEI: this THURSDAY morning: up 303.65 or 1.59%
Trading from Europe and Asia:
1. Europe stocks all in the green
2/ Asian bourses all in the green… Chinese bourses: Hang Sang green (massive bubble forming) ,Shanghai in the green / (massive bubble ready to burst), Australia in the green: /Nikkei (Japan) green/India’s Sensex in the green /
Gold very early morning trading: $1064.90
Early THURSDAY morning USA 10 year bond yield: 2.26% !!! down 1 in basis points from WEDNESDAY night and it is trading at resistance at 2.27-2.32%. The 30 yr bond yield falls to 2.96 down 1 in basis points.
USA dollar index early THURSDAY morning: 98.90 up 33 cents from WEDNESDAY’s close. ( Now below resistance at a DXY of 100)
This ends early morning numbers THURSDAY MORNING
OIL RELATED STORIES
Oil has no place to go!!
(courtesy zero hedge)
Something Strange Is Taking Place In The Middle Of The Atlantic Ocean
Early last month, we noted that something very strange was happening off the coast of Galveston, Texas.
As FT reported, “the amount of oil [now] at sea is at least double the levels of earlier this year and is equivalent to more than a day of global oil supply.” In short: the global deflationary crude supply glut is beginning to manifest itself in a flotilla of stationary supertankers, as millions of barrels of oil are simply stuck in the ocean as VLCCs wait to unload.
Ultimately, this led to nearly 40 crude tankers with a combined cargo capacity of 28.4 million barrels waiting to anchor near Galveston. Here’s what the logjam looked like:
In the latest sign that the world is simply running out of capacity when it comes to coping with an inexorable supply of commodities, three diesel tankers en route from the Gulf to Europe did something rather odd on Wednesday: they stopped, turned around in the middle of the ocean, and headed back the way they came!
“At least three 37,000 tonne tankers – Vendome Street, Atlantic Star and Atlantic Titan – have made U-turns in the Atlantic ocean in recent days and are now heading back west,” Reuters reported, citing its own tracking data.
The Vendome Street actually made it to within 800 miles of Portgual (so around 75% of the way there) before abruptly turning around. “Ship brokers said a turnaround so late in the journey would come at a cost to the charterer,” Reuters notes.
The problem: low prices, no storage capacity, and soft demand.
Here’s Reuters again:
“European diesel prices and refining margins have collapsed in recent days to six-year lows as the market has been overwhelmed by imports from huge refineries in the United States, Russia, Asia and the Middle East. At the same time, unusually mild temperatures in Europe and North America further limited demand for diesel and heating oil, ptting even more pressure on the market.
Gasoil stocks, which include diesel and heating oil, in the Amsterdam-Rotterdam-Antwerp storage hub climbed to a fresh record high last week.
And here are the stunning visuals via MarineTraffic.
As of now, it’s “unclear if the tankers will discharge their diesel cargoes in the Gulf Coast or await new orders,” but what you’re seeing is a supply glut so acute that tankers are literally just sailing around with nowhere to go as there are reportedly some 250,000 tonnes of diesel anchored off Europe and the Mediterranean looking for a home. On that note, we’ll close with the following quote from a trader who spoke to Reuters:
“The idea is to keep tankers on the water as long as you can and try to find a stronger market.”
WTI falls as Goldman warns of 20 dollar oil:
(courtesy zero hedge/Goldman Sachs)
WTI Slides As Goldman Warns $20 Oil Looms, Crude Storage “Too Full For Comfort”
Despite spoiradic algo-crazed ramps, crude oil prices continue to slide back towards a $34 handle (in Jan ’16 contract) this morning following a reiterated downbeat note from Goldman warning that storage levels are “too full for comfort,” that positioning is not as stretched short as some believe, and confirming that this will not end until prices near cash costs to force production cuts, likely around $20/bbl.
Positioning still not stretched short
The move lower was amplified by positioning, with short covering and new ETF long positions ahead of the OPEC meeting providing sufficient ammunition to push prices to new lows. This move was also likely exacerbated by a negative gamma effect around the large WTI Jan-16 $40/bbl strike option open interest. With Brent positioning still off its lows, continued weak oil fundamentals can still push prices lower. Beyond oil, it is also important to note that oil net speculative short positions have tracked dollar long positions closely this year…
OPEC and storage concerns weighing on oil prices
The decline in oil prices has resumed, driven by the aftermath of the OPEC meeting, renewed weakness in distillates and exacerbated by positioning. Although prices are now below our 3-mo $38/bbl WTI forecast, we still see high risks that prices may decline further, as storage continues to fill.
Tank tops not our base case, but too close for comfort
Our oil price forecast remains anchored by the view that high producer financial stress and shut funding markets near $40/bbl can halt the oil surplus by 4Q16, mainly through declining US production. Our base case remains that the global oil stock build will on aggregate remain shy of storage capacity, although the storage buffer has once again narrowed, to 340 kb/d on average for 2016. But this rebalancing is far from achieved:
(1) the US rig count and E&P guidance remain too high to achieve the required supply decline,
(2) we see risks to our OPEC production forecast of 32 mb/d next year as skewed to the upside (Iran),
(3) storage continues to fill with the odds of hitting storage constraints by the spring rising.
As a result, we reiterate our concern that “financial stress“ may prove too little too late to prevent the market from having to clear through “operational stress” with prices near cash costs to force production cuts, likely around $20/bbl.
“Just Wait For The Bankruptcies” – The Latest Market That “Is In Real Trouble”
Natural-gas fell to the lowest ever inflation-adjusted price in its history of NYMEX trading on Wednesday as extremely warm weather continues to limit demand. As we recently explained, the glut in nattie is worse than that facing the crude complex, and while the glut in oil is expected to continue for the next year or so before balancing in late 2016, the pain for liquefied natural gas (LNG) could be just beginning. As one trader warned “this market is in real trouble…just wait for the bankruptcies.”
As The Wall Street Journal reports, gas prices have been falling precipitously in recent weeks because of the combination of record-high stockpiles and a December that could be the worst for heating demand in history.
Prices have fallen 25% in just one month and have dropped 39% from their high in August. Wednesday settlement put gas below the inflation-adjusted low of $1.801 that had been in place since January 1992.
Gas did make a move up to small gains in after-hours trading, but many traders and brokers had little explanation for that rebound. The trader Marc Kerrest said he noticed prices and spreads moving higher for months far away, a sign front-month prices could follow. He closed out some of his bearish bets before settlement, he said.
“But in no way would I consider going [bullish on] gas just because of what it’s done,” in recent weeks, said Mr. Kerrest, who manages his own gas-focused fund, Cornice Trading LLC.
Warm weather in the U.S. caused by the El Niño weather phenomenon has sharply limited demand for the heating fuel this year. The natural-gas market is oversupplied, and some traders and analysts say the industry could run out of storage space for gas by mid-2016.
Production was so high and demand was so soft that storage levels likely shrank by just 41 billion cubic feet last week, according to the average forecast of 17 analysts, brokers and traders surveyed by The Wall Street Journal. That is only a third of their five-year average drawdown for the week. If the forecast is correct, stockpiles on Dec. 11 would have been 16% above levels from a year ago and 8.9% above the five-year average for the same week.
With weather so warm and prices already so low, there may be no lower price to which gas can fall to draw more demand, said Scott Shelton, broker at ICAP PLC. That means prices have to fall so far that producers stop working.
But many have been caught in a cycle of debt, forced to keep producing even at a loss just to bring new revenue in the door that they can use to pay the debt bills that piled up from using loans to fuel their growth during the drilling boom. It isn’t clear how far prices would have to fall to get them to stop, Mr. Shelton said.
“This market is in real trouble,” Mr. Shelton said. “Just wait for the bankruptcies.”
* * *
Finally, as we detailed in October, JPMorgan sees a buyer’s market in NG until 2020 with limited new long term contracts being signed and renewal of existing contracts post expiry likely to have more price diversification (i.e. more Henry hub component) and offtake/diversion flexibility. A recent trip to Asia identified 10 key themes reinforcing their bearish outlook on the LNG market for the rest of the decade.
Excess capacity forecast to grow to 20% by 2018…
#1: Asia LNG demand slowdown confirmed
All participants shared a cautious view on near-term demand trends, with Japan and South Korea likely flat to down and China gas demand growth having slowed this year. In Japan, population and economic trends are the main driver of lower electricity demandgrowth, with some nuclear facilities expected to restart that will initially lead to fuel switching away from burning oilproducts, then eventually coal and LNG, if enough reactors start back up(Tepco guided 1GW nuclear plant reduces LNG demand by 1.2mtpa). KOGAS believes LNG imports will decrease in South Korea next year owing to coal and other commodities beingcheaper and could seea stagnant demand period from FY17.
#2: Lower FY15 gas demand growth in China – potentially a one-off
Many participants in the Chinese natural gas market saw the collapse in gas demand growth this year as “an anomaly”, partly relatedto market uncertainty on pricing and frequency of change. Many industry contacts see mid to high single digit gas demand growth in the long term especially if the government is serious about environmental measures and penetration of gas into China’s energy mix –China has already been shutting coal power plants which were only commissioned in 2008. PetroChina sees gas demand growth at 2.6% this year at 184bcm in 2015, rising to 300bcm in 2020 (implying 10% pa). (Note: 1H15 PetroChina still makes a loss on pipeline gas of Rmb0.38/cm3 or c$2/mbtu vs a loss for LNG of Rmb1.8/cm3 or c$10/mbtu).
#3: LNG still at a cost disadvantage vs alternative fuels
Long-term demand from fuel switching remains a potentialoption, but cost competitiveness is still key for now. When it comes to the potential for fuel switching to natural gas, we came away feeling that this is likely to be a positive long term driver, although it may not happen as quickly more likely the next1-3 years. In Japan, one smaller customer is actually still investing ina new coal power plant. However, the companyacknowledged that this would likely be the last coal facility that itwould consider, as future regulatory changes could add to the cost. For now, coal remains highly competitive.
#4: Lack of customer desire for new contracts
On the supply side, there is a wall of new capacity of 75mptaFY14-17on its way, mostly from Australia and the US–which is over 3x the equivalent capacitygrowth FY11-14. Customers in Japan andKorea were still committed to signing agreements, noting the importance of long-term supply security with reliable suppliers. KOGAS does not plan to take on any new long-term contracts until 2020 and will re-negotiate some of its Qatar/Oman contracts which expire in early 2020s. JERA, a 50/50 Tepco/Chubu established to be a more globally competitive powergen and gas business, stated it would only sign LNG agreements from 2020+ as existing contracts expire (eg Qatar). However, there was a desirefrom Asia buyersto exercise destination flexibility clauses where possibleand should supply/demand balances change in the coming years.
#5: Large projects still expected to FID
Despite the near-term supply/demand and pricing situation, some suppliers appear to have not thrown in the towel on sanctioning new projects for the 2020+. JGC expects orders for large LNG projects e.g. Mozambique (floating/onshore);Tanzania with selection of contractors this year; Tangguh expansion with FEED being conducted with selection of EPC by year end as well as Lake Charles and is “strongly hoping” Shell/BG will go ahead with LNG Canada. Chiyoda is also not only doing FEED, but also EPC and hashigh confidence in the project as well. KOGAS isfinding it difficult to findbuyers for Mozambique, but re-iterated FID by year end or early 2016for the project. If these projects (eg West Coast Canada LNG) are sanctioned and approved by local governments (also still uncertain), this may delay the longer cycle recovery potential.
#6: Europe – the market of last resort
With near-term excess LNG supply, the question remains where spot cargoes will land. We believe that the US and Qatar could increasingly look to the European market as anoutlet valve, given geographic proximityand gas storage availability. While European gas prices have already been weak (UK National Balancing Point (NBP) index down 22% y/y), the economics of sending Henry Hublinked gas to Europe (Henry Hub * 115% + transport) remainsattractive and suggeststhat future upside to European spot prices could be capped and, at worst, more downside may be ahead with the risks that Gazprom responds to maintain market share.
#7: Increasing LNG pricing diversification
Asia LNG buyers clearly want to obtain more pricing flexibility within their LNG portfolios and most buyers suggested a gradual move away from JCC (Japanese Crude Cocktail) pricing. JERAexpects to increase the portion of non-JCC linked contracts. By 2020, JERAexpects10mtpa procured based on Henry hub for long term contracts (vs 25mtpa procured today with a third spot/short term). JERA also will select producers based on 1. Offtake volume, 2. Destination flexibility; 3. Supply availability, not only price. KOGAS also said its pricing strategy will take a flexible approach on existing contract expiry(eg 50% JCC/50% Henry hubmix). JAPEX has also noticed a change in customer pricing toward a mixed/hybrid structure.
#8: Eco-ships taking time
NYK seeslimited recovery in spot dayrates for LNG vessels in the next 1-2years, but as liquidity increases and more projects eventually get sanctioned there should be more opportunitiesin LNG shipping (the company expects to expand its 69 LNG fleet to 100+ by 2019). Most of the company’s current vessels are steam turbine. Under current technology, NYK suggested it is not easy to replace vessels to natural gas as infrastructure is notalways available tofill up at ports hence NYK will soon have its own LNG bunkering vessel in Europe. The company believes that while the eco-ship theme remains structural with more environmental measures being put in place for shippingfuel, the pace of natural gas substitution has been slowed a little with lower oil prices.
#9:Australian LNG projects around mid- to single-digit IRRs at current oil price
Despite most Australian LNG projects being at the upper end of the cost curve, many companies were guiding mid-to single-digit returns for these projects at current oil prices, which was a surpriseto us. KOGAS stated that if the oil price remains at $50/bl (using a 6% discount rate) the companyis not likely to take impairment on its Australian LNG projects (GLNG, Prelude). KOGAS see its Australia GLNG returns at c6% and Prelude at 7-8% at current oil prices (both previously around 9% in a higher oil outlook). INPEX guided only anIRR decrease by 1% from previous 1010% IRR at $70-100/bl for Ichthys. The company also stated anIRR at $60/bl would be below 9%, although project breakeven point is around $30-40/bl.
#10: Wait and see approach for FLNG and LNG FSRU
There was a cautious view on the outlook for FLNG and LNG FSRU with the market waiting to see if Petronas demonstrates FLNG works then more projects will start to be sanctioned and more small-cap players may join the market i.e. small LNG solutions vs mega projects. Shipbuilders such as DSME remain in “tough” negotiations with producerse.g. Eni for Mozambique. DSME know the costs for FLNG from Petronas FLNG (and know thelessons learnt, e.g higher than expected working volume, i.e man hours). However, DSME expects60 months from contract signing to delivery for FLNG (Eni or Anadarko Mozambique) and itsyard could cope with signing two contracts for two FLNG vessels. Keppel, which is half way through a conversion for Golar,is still talking to other producers about new contracts and believes vessel conversion is still economic at current oil prices. However, some E&C companies believe NOC’s do not like FLNG and prefer onshore LNG as there is no ownership if FLNG.
* * *
And to nail the coffin shut one more time, they add, Coal is still consistently cheaper than natural gas or oil products…
What The Market Chose To Ignore In Yesterday’s Fed Announcement
Yesterday, in a carbon-copy response to what happened in December 2013 when the Fed announced the Tapering of QE, stocks first sold off then, as if to validate the Fed’s decision as being accurate, saw a dramatic buying surge which pushed them to close just off the highs. With bonds and gold selling off while the dollar rebounded, the Fed could not have asked for – or engineered – a better reaction, while markets, as Bloomberg’s Richard Breslow points out, ‘chose to hear the parts of the statement and press conference that they wanted to.”
That was the easy part. The hard part now is how to ween the market away from the old narrative, the one which has pushed the S&P to record highs over the past 7 years on bad economic news, and to renormalize the market’s own “reaction function” to that of the Fed. The problem is that from day one there is a major discrepancy between the two: as previously observed, the Fed did not deliver the desired dovish hike, and kept its 2016 year-end fed funds rate unchanged at 1.4% suggesting 4 rate hikes in the coming year, and which as Breslow notes means “being less dovish than the meeting previews suggested is now a sign of bullishness on the economy.” This sets the Fed on a collision course with the market because “with the market pricing fewer hikes than the Fed suggests, someone is going to end up being wrong. If we do get four hikes next year, markets (read equities) will need to deal with a hawkish surprise. If the Fed is forced to backtrack, there goes the full-speed ahead theme.”
What this explicitly means is two things: bad economic news is no longer good for the market – after all the dominant paradigm now is one of strong dollar=strong economy=strong S&P (ignoring that the stronger the dollar, the worse the earnings recession sets up to be, the sharper the full economic recession), and that as Breslow concludes, the “Fed needs to focus on the real economy and get out of the QE mindset. I suspect that will be easier said than done.”
Finally, what yesterday’s hike also ignores is that as Jeffrey Gundlach explained recently, the economy is at a worse place than where it was the last time the Fed could have hiked, the industrial recession is now official, the earnings drop of the S&P500 is far more steep than it was 3 months ago, and China’s renewed devaluation is signaling that it is all uphill from here from the emerging markets.
Yes, the markets did not “freak out” yesterday (and they seem rather stable today), but once the post-rate hike “signaling” rush and euphoria wears off, the only answer is that the Fed did, as DB and BofA’s Michael Hartnett suggest (more on that shortly) a policy error and even the “markets”, having largely lost their discounting ability, will sooner or later reach that conclusion.
Here is the full comment by Bloomberg’s Richard Breslow:
Time for Plain Speak
Most of the initial post-FOMC conclusions (stress on the word initial) have focused on the positive market reaction. The S&P, after all, ended the day with big gains and other markets didn’t freak. That’s not a bad thing. The hope seems to be that it will be sufficient to see us through year end and then we’ll see what the new year brings. Asset markets chose to hear the parts of the statement and press conference that they wanted to.
Being less dovish than the meeting previews suggested is now a sign of bullishness on the economy. The dot plot having significantly more tightening than market pricing is okay because the word “gradual” seemed to work its way into each sentence. It really does feel like Chair Yellen worked her magic, because the misdirection was masterful
Beyond December, for the Fed to have pulled this off successfully, they will need to change the reaction function of the market to news – a response mechanism that has been codified and ossified for seven years. That will be the much harder task.
The dollar will have to be allowed to rise without Fed speakers channeling their inner Chamber of Commerce. Policy divergence should be sold as a sign of the U.S. functioning, finally, as the global growth engine.
To make the “I’m feeling good about the economy” message something more than a throw-away line, they need to kill the bad-news-is-good sickness. This will entail being a lot more straightforward about what gradual and data-dependent mean. Gradual to the market means how many rate hikes in 2016. To a room full of economists it means reaching a forecasted neutral rate three years from now.
This is really important because with the market pricing fewer hikes than the Fed suggests, someone is going to end up being wrong. If we do get four hikes next year, markets (read equities) will need to deal with a hawkish surprise. If the Fed is forced to backtrack, there goes the full-speed ahead theme.
The Fed needs to focus on the real economy and get out of the QE mindset. I suspect that will be easier said than done and those balance sheet reinvestments won’t be going away anytime soon
Investors Lose Faith – Slumping Stocks Give Up All Yellen Gains
It appears the “what the market missed” that we detailed earlier – This sets the Fed on a collision course with the market because “with the market pricing fewer hikes than the Fed suggests, someone is going to end up being wrong,” – is starting to filter out to the mainstream. Despite exuberant buying in FANGs, the broad market indices have retraced the post-Yellen exuberance as bond yields fade, hinting at the market’s growing realization that this could be a policy error.
Why are we selling off? Simple – Gartman!!
Of course, some idiots just can’t help themselves… NFLX +5% post-Fed!!??
Of course, with OPEX looming, the machines will do all in their power to defend key levels before tomorrow’s open… but after that… what happens next.
“That’s Not Supposed To Happen” – Yield Curve Slumps To Flattest In 9 Months
The Fed hiked… and the Treasury market threw up all over it, flattening the curve over 10bpsin the last 16 hours (to 9 month lows). The reaction screams “policy error” as rate cut odds for January remain above rate-hike odds. Financials – who will benefit greatly from this rate hike if all the talking heads are to be believed – appears not to have got the flattening curve joke yet.
Not exactly an overwhelming vote of confidence!!!
Smashing 2s30s back below 200bps to 9-month lows…
Financials remain bid (just like they were in August…)
It’s different this time.
And also Jim Grant of the interest rate observer believes we are going back to zero rates:
(courtesy Jim Grant/CNBC)
*Jim Grant: Rates will return to zero
So far only 106 billion usa of treasury collateral have been drained from 49 banks at the 25 basis points of cost.
If that is all that can be garnered that the system has a lot less excess liquidity that they thought. Actually if you remember what Bill Holter and David Stockman stated, it was this:
all of the excess reserves are not inert..they act as collateral in the shadow banking sector and a removal of 1 trillion dollas of collateral will have a devastating effect on the entire globe’s financial system
(courtesy zero hedge)
In First Post-Hike Reverse Repo, Fed Removes $105Bn Liquidity From 49 Banks
n what appears to be an orderly process, The NY Fed’s first Reverse Repo operation since The FOMC ‘raised’ rates accepted $105.185 billion of Treasury collateral from 49 banks at 25bps. This is being greeted as good news by many as no major disprutions appear to have occurred… aside from, of course, a 6bps plunge in long-end bond yields, 250 point drop in The Dow, and notable weakness in high-yield bonds. While some had feared up to $1 trillion would need to be withdrawn to achieve The Fed’s goals, the size of this initial RRP suggests there is considerably less excess liquidty in the system than many would believe… indicating a notably more fragile system than we are being led to believe.
As we noted previously, two weeks ago, we cited repo-market expert E.D. Skyrm who calculated that moving general collateral higher by 25bps would require the Fed draining up to $800 billion in liquidity: “In 2013 on my website, I calculated that QE2 moved Repo rates, on average, 2.7 basis points for every $100B in QE. So, one very rough estimate moved GC 8 basis points and the other 2.7 basis points per hundred billion. In order to move GC 25 basis points higher, in a very rough estimate, the Fed needs to drain between $310B and $800B in liquidity.”
That may be conservative.
According to Citigroup’s latest estimate, the liquidity drain could be substantially greater. Here is the take of Jabaz Mathai
There will be a separate document from the NY Fed with details around the operational aspects of the liftoff. Of primary interest will be the size of the overnight reverse repo facility that the Fed will put in place to pull short rates higher. We don’t think it will be unlimited, but a size large enough that will keep short rates from falling below the 25bp floor – and the size could be as high as $1tn.
Putting this liquidity drain in context, the entire QE2 injected “only” $600 billion in liquidity in the span of many months, suggesting that as of tomorrow, the Fed may drain as much as 166% of its entire second quantitative easing operation overnight.
Whether that liquidity is inert and can be easily released by banks, and more importantly, non-banks without resulting in any additional risk tremors is the first $640 billion question that the Fed is facing. The second, third and fourth? Assuming a linear relationship and another 3 rate hikes until the end of 2014, this means that by the time short term rates hit 1%, the Fed may have soaked up as much $4 trillion in liquidity. Here one thing is certain: a $1 trillion drain may not have a material impact when starting from a $2.6 trillion excess reserve base. $4 trillion, however, will leave a mark (the Fed’s entire balance sheet is $4.5 trillion) especially once the market starts to discount just how the rate hike plumbing takes place.
Martin Shkreli, “Hated”, “Price Gouging” Biotech Mogul Arrested For Securities Fraud
The “most hated man in America” just got arrested for securities fraud.
- SHKRELI, CEO REVILED FOR DRUG PRICE GOUGING, ARRESTED FOR FRAUD
- N.Y. LAWYER EVAN GREEBEL ARRESTED IN SHKRELI INVESTIGATION
“Pharmaceutical entrepreneur Martin Shkreli was arrested by the FBI on Thursday,” Reuters, whose reporters apparently witnessed the arrest, says.
Shkreli, the baby faced, former Jim Cramer protege and serial biotech mogul who famously raised the price of a toxoplasmosis drug by 5000% in September, igniting a media and political firestorm in the process, is accused of using Retrophin (a company he founded and ran until he was ousted by the board) as a kind of slush fund. As an aside, you’re reminded that Retrophin once raised the price of a drug used to treat a rare condition that causes reoccurring kidney stones from $1.50 a pill to $30.
Retrophin claims that after Shkreli’s hedge fund, MSMB Capital, went bust after a $7 million loss on a “disastrous” trade with Merrill Lynch four years ago, he used a series of complex transactions involving Retrophin to pay back MSMB’s investors.
“Retrophin sued Shkreli in August for misuse of company funds,” Bloomberg recounts. The company “claims he engineered numerous transactions between investors in MSMB and the biotechnology firm.”
Retrophin goes on to allege that “Shkreli paid some [MSMB] investors through fake consulting agreements and others through unauthorized appropriations of stock and cash”
At one point, Shkreli allegedly decided to reclassify a $900,000 investment MSMB made in Retrophin as a loan. So basically, he invested in himself and then decided later that he had actually loaned himself money and needed to pay himself back. Retrophin did indeed pay back the “borrowings” and Shkreli subsequently used the funds to “settle another unrelated legal dispute.”
As Bloomberg goes on to note, “The Securities and Exchange Commission, which according to court documents opened an investigation into Shkreli in 2012, is expected to file a parallel civil complaint against him, according to people familiar with the matter.”
While Shkreli is known for laughing in the face of criticism and ridicule, this one might be hard to shrug off. It’s at least possible he could end up banned from running a public company, meaning Turing and KaloBios would need to find new executives(maybe Joe Campbell’s short will pay off after all).
“Some of these companies seem to act more like hedge funds than traditional pharmaceutical companies,” said Senator Susan Collins, a Maine Republican who ran the recent hearing into the soaring cost of specialty drugs.
On the bright side for Shkreli, he’ll have plenty of time to listen to the one-of-a-kind Wu-Tang album he bought in May for $2 million if he ends up incarcerated.
Incidentally, we predicted this might happen way back in September when we said that while “we doubt the SEC will investigate his shorting activity of biotech indices – we are confident the young ‘hedge funder’ will have bigger headaches to deal with soon enough.”
And as for the ultimate punchline – drumroll – Shrekli had planned a meeting just two days ago with lawyers for incarcerated rapper “Bobby Shmurda” who Shrekli planned to bail out of jail. We’ll close with the following quote from Shkreli, who spoke to Vanity Fair:
“We’re actually in discussion to try to bail out Bobby Shmurda. Forget whether you think he’s guilty or not, the guy should not be sitting in jail right now. He deserves a fair trial. He deserves good lawyers. He doesn’t have good lawyers. His label is hanging him out to dry and so I have a conference call tomorrow morning with them (December 15). I’ll show up with $2 million bail money no fucking problem.”
Better save that $2 million in bail money Martin. You may need it for yourself.
see you tomorrow