Gold: $1091.50 up $17.60 (comex closing time)
Silver $13.88 up 14 cents
In the access market 5:15 pm
Gold $1088.90
Silver: $13,91
At the gold comex today, we had a poor delivery day, registering 0 notices for nil ounces.Silver saw 70 notices for 350,000 oz.
Several months ago the comex had 303 tonnes of total gold. Today, the total inventory rests at 199.20 tonnes for a loss of 104 tonnes over that period.
In silver, the open interest rose by 1003 contracts up to 165,886. In ounces, the OI is still represented by .829 billion oz or 118% of annual global silver production (ex Russia ex China).
In silver we had 70 notices served upon for 350,000 oz.
In gold, the total comex gold OI rose by 12,691 contracts to 414,149 contracts despite the fact that gold was down $13.60 in yesterday’s trading.
Today both the gold comex and the silver comex are in severe stress.
We had another huge change into inventory at the GLD, a deposit of 3.86 tonnes of gold / thus the inventory rests tonight at 657.92 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 to inventory/Inventory rests at 316.368 million oz.
First, here is an outline of what will be discussed tonight:
1. Today, we had the open interest in silver rise by 1003 contracts up to 165,886 despite the fact that silver was down by 40 cents with respect to yesterday’s trading. The total OI for gold rose by 12,691 contracts to 414,149 contracts despite gold being down $13.60 in price yesterday
(report Harvey)
2 a) Gold trading overnight, Goldcore
(Mark OByrne)
2b) COT report
(Harvey)
3. ASIAN AFFAIRS
4. EUROPEAN AFFAIRS
i) today, the European stock markets entered a bear market down 21% since April highs:
( zero hedge)
ii) As relations with Poland vanish, out comes S and P to lower the credit rating from A- down to BBB+
5. RUSSIAN AND MIDDLE EASTERN AFFAIRS
A great commentary on the faltering Saudi Arabian economy:
( Tom Kool/OilPrice.com)
6. GLOBAL ISSUES
i) Alberta is bearing the brunt of the huge downfall in oil:
( zero hedge)
ii) Now we witness USA freight volumes fall for the first time in 3 years.
Also for the first time ever, the Baltic Dry Index falls below 400
(courtesy zero hedge)
iii) From 2011 , the gain in stock value globally is 30 trillion dollars. The total loss 15 trillion dollars and we got a long way to go
iv) And now Norway in deep trouble:( zero hedge)
7. EMERGING MARKETS
Rouseff will not rule out a rescue for state owned Petrobras:
( Bloomberg)
8 OIL MARKETS
( zero hedge)
ii) Rig count only drops by just one:
9. PHYSICAL MARKETS
i) Keith Barron writes on hyperinflation occurring on major luxury goods such as diamonds, rubies, gold coins, painting etc
ii)The Austrian School is getting more credibility(courtesy Alasdair Macleod)
iii)The following is big news: the world’s largest miners are booking massive writedowns:
a) Freeport McMoran is booking 7.2 billion
b) BHP Billiton is booking 13 billion
due to losses in copper and oil.
( zero hedge)
iv)Bron Suchecki reports on the German repatriation confirming what I have been reporting to you
( Bron Suchecki/Perth Mint)
10 USA STORIES WHICH WILL AFFECT THE PRICE OF GOLD/SILVER
i) Early trading from NY as the Dow falters badly, USA 10 yr treasuries fall below 2% and oil falls below 30.00 dollars
(zero hedge)
ii) Weak Empire or New York Mfg index
(zero hedge)
iii) Poor industrial report
(zero hedge)
iv) The biggest component of GDP calculations saw retail sales plummet to negative .1% from an upward revised .4% in November.
v) The following is a huge story as WalMart is to fire 16,000 people as it closes 269 stores globally.
vi) Three weeks ago they were talking about 4 rate hikes. Now the New York Fed president states that if the economy weakens further, they would consider negative interest rates:
vii) Inventories to sales move from 1.34 to 1.38/the highest ratio since the last crisis signifying recession:
viii) Dave Kranzler reports in on the data from the USA today:( Dave Kranzler/IRD)
ix)After the market closed, the Atlanta Fed reveals its best guess estimate for 4th quarter GDP at only .6%. Judging from what is going on in the USA market it is probably way to high
( Atlanta Fed/zero hedge)
x) Paul Brodsky is one smart cookie:
( Paul Brodsky)
xi) Week end wrap up with Greg Hunter
(Greg Hunter/USAWatchdog)
Let us head over to the comex:
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My goodness:
Our large specs who have been long in gold added 5123 contracts to their long side
Our large specs who have been short in gold covered an amazing 13,035 contracts from their short side as they realize the game is up
Our commercials:
Those commercials who have been long in gold pitched a rather high 5453 contracts from their long side.
Those commercials who have been short in gold added a huge 18,857 contracts to their short side and the criminal game continues
our small specs:
those small specs who have been long in gold added 393 contracts to their long side
those smalls specs who have been short in gold covered 2221 contracts from their short side.
Conclusions: the bankers resume their criminal activity after a short rest period!
they went net short by 24,310 contracts.
And now for our silver COT:
Please note the difference between silver and gold
| Silver COT Report: Futures | |||||
| Large Speculators | Commercial | ||||
| Long | Short | Spreading | Long | Short | |
| 71,255 | 48,772 | 19,696 | 50,690 | 81,252 | |
| 1,476 | 619 | -2,476 | -1,990 | -227 | |
| Traders | |||||
| 90 | 57 | 41 | 35 | 38 | |
| Small Speculators | Open Interest | Total | |||
| Long | Short | 166,172 | Long | Short | |
| 24,531 | 16,452 | 141,641 | 149,720 | ||
| 1,642 | 736 | -1,348 | -2,990 | -2,084 | |
| non reportable positions | Positions as of: | 142 | 125 | ||
| Tuesday, January 12, 2016 | |||||
Our large specs;
Those large specs who have been long in silver added 1476 contracts to their long side
Those large specs who have been short in silver added 619 contracts to their short side
Our commercials:
Those commercials that have been long in silver pitched 1990 contracts from their long side
Those commercials that have been short in silver covered ??? 227 contracts from their short side
.
Our small specs;
Those small specs who have been long in silver added 1642 contracts to their long side
Those small specs who have been short in silver added 736 contracts to their short side.
Conclusions;
It looks to me like our commercials are trapped: they cannot escape their huge shortfall in silver.
end
And now your overnight trading in gold and also physical stories that may interest you:
Gold Bullion Retains “Key Role Of A Major Diversifier” – Dr Gurdgiev
– 2015 and start 2016 “worrying” for markets
– Gold’s long term performance strong in all currencies (see table)
– “Improved performance in market for gold coins”
– “Demand for U.S. Mint issued gold coins rose 45.6% y/y in weight terms”
– “2015 the third busiest year over the last ten years”
– Gold has key role of a major diversifier in portfolios
2015 was a troubling year for the financial markets. Across currencies, commodities, equities and fixed income, full year performance was lacklustre in terms of aggregate returns and worrying in terms of risk metrics. Market volatility at the outset of 2016 suggests we are likely to see more volatility in 2016.
| GLOBAL CURRENCIES | 1 YEAR | 3 YEAR | 5 YEAR | 10 YEAR |
| US dollar | -11.1 | -36.7 | -23.2 | +109.4 |
| Euro | +0.8 | -23.8 | -6.7 | +128.4 |
| Pound sterling | -7.3 | -31.9 | -20.0 | +144.2 |
| Japanese yen | -9.2 | -7.6 | +12.2 | +115.0 |
| Swiss franc | -9.2 | -31.7 | -21.2 | +59.9 |
| Indian rupee | -5.5 | -22.8 | +13.4 | +205.5 |
| Turkish lira | +13.4 | +3.6 | +47.8 | +352.8 |
| Saudi riyal | -11.2 | -36.7 | -23.1 | +109.5 |
| Indonesian rupiah | -0.9 | -8.9 | +18.1 | +194.8 |
| Korean won | -5.5 | -31.0 | -21.3 | +139.9 |
| Russian ruble | +8.7 | +43.6 | +73.6 | +407.4 |
| South African rand | +15.8 | +9.7 | +68.0 | +392.9 |
| Chinese renmimbi | -7.4 | -34.6 | -25.5 | +67.2 |
| Canadian dollar | +5.5 | -12.5 | +4.2 | +146.9 |
| Australian dollar | +1.4 | -8.4 | +5.1 | +115.3 |
| Gold’s Performance in 15 Currencies Over Long Term Changes in Gold Spot Prices (Percent) Source: True Economics and GoldCore |
||||
In contrast, gold performed relatively well, compared to other commodities, coming out of 2015 with negative returns more mild than those for silver, wheat, copper, and oil (both Brent and WTI). About the only major commodity that outperformed gold in 2015 was corn, with price downside in corn controlled by poor supply due to inclement environmental factors.
In dollar terms, gold was down 10.4% y/y through December 31, 2015, with last month decline of 0.3% m/m being comparable to the performance of the Barclays US Aggregate Bond Index. This ranked gold in dollar terms as 5th worst performing asset class across 21 broader class indices in yearly terms and 7th best performing in terms of December 2015 performance.
In simple terms, gold played reasonably well its historical function as a hedge against emerging markets bonds, emerging markets equities and broad commodities indices, as well as oil.
In addition, gold continued to act as a hedge against key currencies. As the result, as shown in the table below, gold performed strongly in terms of currencies that experienced significant devaluations against the USD, JPY and Euro, while suffering against core advanced economies’ currencies, with exception of AUD and CAD.
Gold’s defensive positioning was further confirmed by its resilience to volatility. As chart above indicates, gold price volatility (based on 26 weeks rolling standard deviations) continued to decline over 2015 compared to previous years. This stands contrasted with rising volatility in a range of other asset markets, especially in fixed income, and with improving performance over the course of the year – as contrasted by the global equity markets that witnessed some 48 national stock markets indices falling into a bear market over the course of the year.
Through December 31, 2015, ex-US Emerging Markets bonds were down 5.5% y/y, repeating negative returns over 1, 3 and 5 year horizons, while ex-US corporate bonds were down 9.8%. High yield corporate bonds (ex-US) fell 9.3% while US high yield paper was down 5%. In equity markets, MSCI EAFE (index covering Advanced Economies equities ex-US) was down 0.8%, with negative returns accelerating in 4Q 2015, while Russell 3000 (broadly based US equity index) was up only 0.5% y/y, albeit down 2.1% in December compared to November. Similarly, S&P 500 managed to end the year on a weakly positive note, rising 1.4% y/y, while falling 1.6% m/m in December.
In line with other asset classes, Bloomberg Commodity index covering broad range of global commodities was down massive 24.7% y/y, with December monthly fall-off measuring 3.1%. The Index is now down 17.3% over the last 3 years and 13.5% over the last 5 years. While index components were generally in the red across all commodities, crude oil (WTI) was the general underperformer within the commodities class, falling 30.6% y/y in 2015 and down 26.1% over the 3 years through December 2015, as well as down 16.2% over the last 5 years.
The theme of defensive positioning of gold holdings in diversified portfolios was reinforced by improved performance in the markets for gold coins.
The above was driven primarily by robust demand in the advanced economies where gold coins serve as traditional store of wealth functions for longer term savers and as a vehicle for inter-generational wealth transfers by retail investors (see What Gold Coins Sales Tell Us ).
Chart below shows full year demand for American Eagle and Buffalo Gold coins. Over 2015, demand for U.S. Mint issued gold coins rose 45.6% y/y in weight terms, making 2015 the third busiest year over the last ten years. Average coin sold in 2015 contained 0.5 oz of gold, representing the lowest average since the series for Buffalo coins became available in 2006. This signals more prominent role in the market for U.S. Mint coins from smaller retail investors – a sign of continued interest by savers in Gold coins.
Hence, overall, gold prices evolution over 2015 closely tracked both global macroeconomic and markets trends, allowing gold to retain some of its core defensive and hedging properties vis-à-vis global currencies and fixed income, as well as oil and a range of other commodities.
Declining volatility trend, present from 2012 on is further reinforcing the argument that gold retains a key role of a major diversifier in well-structured retail investment and pension portfolios, despite continued pressures on spot prices.
by Dr Constantin Gurdgiev
Sources:
Seeking Alpha: Major Asset Classes: December 2015 Performance Review
Reuters: 2016 Insights: Gold and Silver
True Economics
Precious Metal Prices
15 Jan LBMA Gold Prices: USD 1,081.80, EUR 991.38 and GBP 753.17 per ounce
14 Jan LBMA Gold Prices: USD 1,090.75, EUR 998.03 and GBP 759.10 per ounce
13 Jan LBMA Gold Prices: USD 1,081.80, EUR 1,000.00 and GBP 749.04 per ounce
12 Jan LBMA Gold Prices: USD 1,094.95, EUR 1,008.76 and GBP 756.92 per ounce
11 Jan LBMA Gold Prices: USD 1,104.70, EUR 1,014.08 and GBP 758.18 per ounce
8 Jan LBMA Gold Prices: USD 1,097.45, EUR 1,009.86 and GBP 750.67 per ounce
Breaking Gold News and Commentary Today – Click here
Keith Barron: Hyperinflation, yes, but not where we expected
Submitted by cpowell on Thu, 2016-01-14 18:25. Section: Daily Dispatches
1:25p ET Thursday, January 14, 2015
Dear Friend of GATA and Gold:
Mining entrepreneur Keith Barron notes this week that asset hyperinflation is everywhere except in the monetary metals, circumstances he attributes to manipulation of those markets by central banks and their agent bullion banks. Barron’s commentary is headlined “Hyperinflation, Yes, But Not Where We Expected” and it’s posted at his Internet site, Straight Talk on Mining, here:
http://straighttalkonmining.com/hyperinflation-yes-but-not-where-we-expe…
CHRIS POWELL, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.
CPowell@GATA.org
end
The Austrian School is getting more credibility
(courtesy Alasdair Macleod)
Alasdair Macleod: Austrians get (some) mainstream credibility
Submitted by cpowell on Thu, 2016-01-14 16:20. Section: Daily Dispatches
By Alasdair Macleod
GoldMoney.com, St. Helier, Jersey, Channel Islands
Thursday, January 14, 2016
Well, well: Who would have believed it?
First the Bank for International Settlements comes out with a paper that links credit booms to the boom-bust business cycle. Then Britain’s Adam Smith Institute publishes a paper by Anthony Evans that recommends that the Bank of England should ditch its powers over monetary policy and move toward free banking.
Admittedly, the BIS paper hides its argument behind a mixture of statistical and mathematical analysis and seems unaware of Austrian business cycle theory, there being no mention of it, or even of Hayek. Is this ignorance, or a reluctance to be associated with loony free-marketeers? Not being a conspiracy theorist, I suspect ignorance.
The Adam Smith Institute’s paper is not so shy, and includes both “sound money” and “Austrian” in the title, though the first comment on the Internet version of the press release says talking about “Austrian” proposals is unhelpful. So prejudice against Austrian economics is still unfortunately alive and well, even though its conclusions are becoming less so. The Adam Smith Institute actually does some very good work debunking the mainstream neo-classical economics prevalent today, and is to be congratulated for publishing Evans’s paper. …
… For the remainder of the commentary:
https://www.goldmoney.com/our-research/goldmoney-insights/austrians-get-…
end
The following is big news: the world’s largest miners are booking massive writedowns:
i) Freeport McMoran is booking 7.2 billion
ii) BHP Billiton is booking 13 billion
due to losses in copper and oil.
(courtesy zero hedge)
World’s Largest Miner Books Massive $7.2 Billion Writedown On US Shale “Assets”
Late last month, Freeport McMoRan co-founder and executive chairman James R. Moffett was shown the door.
Moffett, known as the “last of the old-time wildcatters”, was a legend in the industry but made a fatal mistake in 2013: he paid $2.1 billion for McMoRan Exploration Co (an oil-and-gas company the parent company had separated from in the 1990s), and $6.9 billion for Plains Plains Exploration & Production.
As WSJ put it, “the deals in part were a bet that oil prices would remain high.”
Well, they didn’t, and the gamble ended up increasing the combined entity’s debt fivefold and Carl Icahn is now pushing Freeport to dump the “high cost” assets.
Freeport wasn’t the only mining giant to make an ill-timed bet on US oil and gas assets. BHP Billiton, the world’s largest miner, spent $20 billion buying US assets in 2011, making it the largest overseas investor in US shale. Now, as “lower for longer” turns to “lower for longer-er”, the company is set to take a huge writedown on its US onshore portfolio.
How huge, you ask? $7.2 billion huge (or $4.9 billion after taxes) on assets the company was carrying at just over $20 billion. The company now values its US assets at $16 billion. “While we have made significant progress, the dramatic fall in prices has led to the disappointing write down announced today,” CEO Andrew Mackenzie said. “However, we remain confident in the long-term outlook and the quality of our acreage. We are well positioned to respond to a recovery.”
Mackenzie went on to say the company would cut the number of rigs operating in the US from 26 to just 5 by the end of the quarter.
“In addition to the purchase costs, BHP has committed more than $15bn of capital investment [to the US assets]”, FT notes, underscoring just how expensive a bet this truly was. “The impairments announced on Friday mean BHP has now written off almost $13bn on the deals.”
As noted above, the new carrying value is $16 billion, but that includes a $4 billion deferred tax liability, so it could be more like $12 billion and that $12 billion is itself above some sellside estimates of NAV. Amusingly, UBS values the assets at $8 billion – and that assumes “long-term” WTI at $65/bbl. “There’s a risk of further write downs on possible revisions to BHP’s long term oil prices,” the bank writes, dryly. BofA meanwhile, values the US onshore operation at $12.8 assuming long-term WTI at a whopping $75/bbl.
Here’s a look at how the writedowns affect BofA’s estimates in the new year and beyond:
Anyway, next on the chopping block: the dividend.
“In what’s probably a protracted period of lower commodity prices, there’s this writedown and probably other writedowns to come elsewhere in the portfolio,” Tim Schroeders, a Melbourne-based portfolio manager at Pengana Capital Ltd., told Bloomberg by phone. “They are getting close to having to come clean on the progressive dividend.”
“At the moment, the biggest concern they have is can they fund their dividend, can they fund their capex plans?”, Citi adds.
And while the likes of Melbourne-based IG Ltd. analyst Angus Nicholson say that “all things considered, it’s probably a bigger writedown than many had expected,” other don’t agree. “Yeah well, considering you’ve got a book value of $20 billion and you haven’t reported an operating EBIT gain in the last two years, I think they’ve been lucky to get away with such a modest amount and I think that’s because the forward curve is still pointing to a snapback in crude prices,” Rob Brierley Patersons SEC Head of Research told CNBC in an interview. “If that [snapback] doesn’t occur, I think they’ll be having the same discussions with their auditors in July,” he added.
Yes, they probably will, because with 500 million b/d of new Iranian supply set to hit the market, with the Saudis raiding the welfare state to ensure the prolongation of the kingdom’s war of attrition with US shale, and with Russia and Iraq both pumping at record levels, the fundamentals for crude are simply abysmal.
Additionally, expect the downturn in other commodities the company pulls out of the ground to continue unabated amid the global deflationary supply glut and China’s acute overcapacity problem.
And then there is of course the Samarco fiasco where a tailings dam at an operation jointly owned with Brazil’s Vale collapsed sending a river of toxic mud into nearby villages. That mud has now reached the ocean and no one knows what BHP’s liability will ultimately end up being.
So, in addition to the “discussions” Brierley says the company will likely be having in the not-so-distant future with the auditors, one wonders if BHP, like the two dozen US shale companies we highlighted earlier this month, will also be having a “discussion” with the company’s bankers regarding the size of its credit facility.
But don’t worry, Citi, Morgan, and probably several others have recently upgraded the shares because all of the above apparently bodes well going forward.
We’ll close with the following bit from Bloomberg which is just further evidence of the fact that when it comes to US shale, it’s all starting to unravel:
Tokyo Gas Co said on Friday it expects to book 10.6 billion yen ($90 million) in impairment losses on its Texas shale gas development project in the October-December quarter, reflecting the recent steep declines in oil and gas prices. The company, Japan’s biggest city gas supplier, said it was reassessing earnings projections for the business year ending March and would announce them as soon as that becomes available.
END
Bron Suchecki reports on the German repatriation confirming what I have been reporting to you
(courtesy Bron Suchecki/Perth Mint)
Three years ago tomorrow (16 January 2013), Deutsche Bundesbank announced that they would be repatriating 300 tonnes of gold from New York and 374 tonnes from Paris by 2020, which was a revision of their October 2012 promise they would transfer 150 tonnes from New York by 2015. So how have they progressed and are they meeting their schedule?
In January last year I did an analysis of the state of the German repatriation. At that time Deutsche Bundesbank said they had “transferred 120 tonnes of gold to Frankfurt am Main from storage locations abroad: 35 tonnes from Paris and 85 tonnes from New York”, which, when added to the 32t and 5t (respectively) transferred in 2013 means they had transferred 157 tonnes in total by December 2014.
Based on data accumulated each month from the US Federal Reserve by Nick Laird of Sharelynx, the Fed’s custodial gold holdings have reduced by 125 tonnes from January to November 2015. I am fairly confident that all of these are German repatriations as there hasn’t been any announcements of other central banks withdrawing metal from the Federal Reserve’s vaults in New York. In addition, the amounts delivered each month are similar to those that occurred in 2014, as the chart below shows.
To-date, Germany looks to have returned 215 tonnes, which is well over their initial promise of 150 tonnes. In this chart I forecast that based on the monthly rate of 2015 withdrawals, Germany should have repatriated all of their planned 300 tonnes by September 2016, putting them over three years ahead of the “by 2020” target.
It seems what Carl-Ludwig Thiele, Member of the Executive Board of the Deutsche Bundesbank, said in thisinterview with Handelsblatt in February 2014 was true: “the Americans have never stonewalled or hindered us in any way. On the contrary, their cooperation has been most constructive in every respect”.
By the end of this year Germany would have around 1,237 tonnes in New York, which would be 37% of their total gold reserves. But why stop there? If the US Federal Reserve and Germany have demonstrated that they can move around 130 tonnes a year, then continuing on at that rate for the remaining 3 years and 3 months would result in another 422 tonnes back on German soil with 814 tonnes left in New York (24%), surely enough, along with 400 or so tonnes in London, “so that, when push comes to shove, we can have it available as a reserve asset as soon as possible” (Carl-Ludwig Thiele in October 2012)?
As to the Paris repatriations, we don’t have any independent indication of what they have delivered during 2015. With a 374 tonne target, and only 67 tonnes confirmed returned as at December 2014, Germany will have to move at least 61.5 tonnes a year from 2015 through to 2019 to meet the target. Anything less than that will raise questions, particularly considering that it would have to be easier to ship gold from Paris to Frankfurt than from New York.
Based on the dates of the previous repatriation updates, here and here, we should have our answer some time next week.
end
And now your overnight FRIDAY morning trades in bourses, currencies and interest rate from Asia and Europe:
1 Chinese yuan vs USA dollar/yuan rises to 6.5840 / Shanghai bourse: in the red/ hang sang: red
2 Nikkei closed down 93.84 or .54%
3. Europe stocks down /USA dollar index down to 98.92/Euro up to 1.0901
3b Japan 10 year bond yield: falls to .221 !!!!(Japan buying 100% of bond issuance)/Japanese yen vs usa cross now at 118.18
3c Nikkei now well below 18,000
3d USA/Yen rate now well below the important 120 barrier this morning
3e WTI:: 29.74 and Brent: 29.84
3f Gold up /Yen up
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 up for WTI and up for Brent this morning
3i European bond buying continues to push yields lower on all fronts in the EMU. German 10 yr bund falls to .564% German bunds in negative yields from 6 years out
Greece sees its 2 year rate rise to 9.57%/: still expect continual bank runs on Greek banks
3j Greek 10 year bond yield rise to : 8.74% (yield curve inverted)
3k Gold at $1083.40/silver $13.85 (7:45 am est)
3l USA vs Russian rouble; (Russian rouble down 1 and 60/100 in roubles/dollar) 77.65
3m oil into the 29 dollar handle for WTI and 29 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 1.0048 as the Swiss Franc is still rising against most currencies. Euro vs SF is 1.0953 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 6 year German bund now in negative territory with the 10 year falls to + .566%/German 6 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 2.05% early this morning. Thirty year rate at 2.85% /POLICY ERROR
Overnight rate: 0.22% (policy error)
5. Details Ransquawk, Bloomberg, Deutsche bank/Jim Reid.
(courtesy Jim Reid/Bloomberg/Deutsche bank/zero hedge)
Global Risk Off: China Reenters Bear Market, Oil Tumbles Under $30; Global Stocks, US Futures Gutted
“We’re gonna need a bigger Bullard”
– overheard on a trading desk this morning.
Yesterday, when looking at the market’s “Bullard 2.0” moment, which was a carbon copy of the market’s kneejerk surge higher response to Bullard’s “QE4” comments from October 17, 2014 (at least until just a few minutes prior to yesterday’s market close when suddenly selling pressure appeared), we said that either the S&P would soar – as it did in 2014 – hitting all time highs just a few months later, or the “Fed is now shooting VWAP blanks.” Judging by what has happened since, in what may come as a very unpleasant surprise to the “the market is very oversold” bulls, it appears to have been the latter.
It all started with China overnight, where shortly after the disappointing news that new bank loan creation in December rose by 597.8 billion yuan, well below the 700 billion expected (however offset by a surge in aggregate financing of 1.82 trillion yuan; far above the estimated 1.15t yuan driven entirely by new corporate bond issuance right into the world’s biggest bond bubble), the Shanghai Composite started sliding and did not stop until it dropped to just about 2,900, down 3.55% on the session, and officially entering its second bear market of the past year. The Chinese stock gauge is the world’s worst-performing global equity benchmark to start 2016, and the Composite has now fallen to levels last seen in 2014, wiping out all gains from China’s unprecedented state-rescue campaign.
In addition to the new loan disappointment, adding negative pressure to stocks was a report that some banks in Shanghai have stopped accepting shares of smaller listed companies as collateral for loans.
Then there was oil, which after flirting with $30 for the past two days, finally broke the psychological support barrier with gusto, and both WTI and Brent have tumbled by about 5% and 4% respectively at last check, and substantially below $30, driven first by rising fears of the imminent landfall of millions of barrels of Iran oil the moment the sanctions are officially lifted as soon as Monday…
… and then about 3 hours ago a new report by Goldman reiterated supply fears, when it once again hinted at $20 oil, although adding that was not its baseline forecast yet, and that it was keeping its $40 oil price target:
While the surplus in oil continues to pressure oil timespreads wider and reversed the WTI-Brent spread as European surpluses are moved to the US Gulf Coast where spare storage exists, we still aren’t adopting the $20/bbl scenario as our baseline forecast since balances have not deteriorated further following our mid-December update. Barring a supply or demand/weather shock that shifts the balance by more than 340,000 b/d we don’t see the oil market hitting storage capacity constraints, which is why we are maintain our $40/bbl WTI price forecast for 1H16.
The market read between the lines and is already trading as if $20 oil is here. As a result,
Norway sees a crisis in its industry, energy firms are laying off workers and currency markets from commodity-producing countries are in turmoil. The slump is also denting the outlook for inflation around the world, causing traders to curb bets on how far the Federal Reserve will raise interest rates this year.
Also not helping oil was another bout of strength in the US dollar, even as doubts grow about the Federal Reserve’s ability to raise interest rates four times in 2016. According to Bloomberg, the gauge tracking the performance of the dollar against 10 of its leading global peers is heading for a third weekly gain, the longest stretch since July. As a result the Bloomberg Dollar Spot index just hit a new record high…
… and while the dollar surges, the all important Yen carry trade is getting unwound pushing the USDJPY down 100 pips overnight, and slamming US equity futures which were down over 30 points at last check, or down 1.6% to 1884. Elsewhere, stocks fell around the world and bonds gained as the outlook for inflation soured while a measure of credit risk for investment-grade companies in Europe climbed for an eighth day.
The Stoxx Europe 600 Index retreated 1.4%, heading for a weekly drop of 1.5 percent. Europe’s benchmark has tumbled 19 percent since an April high, inching closer to the common definition of a bear market. Shares are trading at 14.2 times estimated earnings, the lowest in about a year. The Euro Stoxx 50 Index entered a bear market this week.
A measure of commodity producers posted the biggest drop of the 19 industry groups on the Stoxx 600. BHP Billiton Ltd. fell 5.9 percent after saying it expects a $4.9 billion impairment charge on onshore U.S. assets. Energy companies slid, with Total SA and Royal Dutch Shell Plc leading declines.
Looking at markets around the globe, Asian stocks shrugged off the firm gains from the “Bullard Bounce” with sentiment dampened by the resumption of crude weakness as oil prices retreated back below the USD 31/bbl level. Consequently, the ASX 200 (-0.3%) and Nikkei 225 (-0.5%) slid into negative territory as the drop in oil weighed on sentiment.
Chinese bourses traded lower with the Shanghai Comp. (-3.6%) below the psychologically key 3,000 level alongside continued China woes and the longest stretch of margin debt declines in 4 months. 10yr JGBs traded higher amid weakness in Asian equities with the paper also supported by the better than prior enhanced liquidity auction.
In Europe, once again the energy complex dictated price action across asset classes so far this morning, with Brent and WTI both slipping below the key USD 30/bbl level, following on from further dampened mood amid disappointing data and the Shanghai Composite entering bear market territory. While also of note, The Times noted that the UN could lift sanctions next week which could see Iran further flood the market with oil. The oil move guided equities lower (Euro Stoxx: -1.0%), with the risk off sentiment filtering through to upside in Bunds, gold and JPY.
In FX, amid the fresh downturn in risk sentiment, there is one standout move to highlight this morning; the USD/CAD ramp through 1.4400 and 1.4500. In what took a matter of minutes, the 130 tick rally took out exotic limits at both levels, with the larger 1.4500’s seen to be the underlying reason for such a sharp move, which had little news/data behind it.
Russia’s ruble and South Africa’s rand fell at least 1 percent, leading a gauge of emerging-market currencies down 0.2 percent, capping its third weekly decline. Over the five day period, the ruble slid 3.1 percent and the rand lost 1.8 percent.
The Hong Kong dollar fell 0.14 percent to HK$7.7926 per dollar, taking its two-day drop to 0.4 percent, the most since October 1992. The global foreign-exchange situation is complicated and it’s possible the currency will decline to the weaker side of the peg, the city’s Financial Secretary John Tsang told reporters. The existing exchange-rate system limits declines to HK$7.85 and caps gains at HK$7.75.
Australia’s dollar led declines in the currencies of raw-material producing nations, dropping as much as 1.5 percent to the weakest level since April 2009. The Canadian dollar fell for an 11th straight day in its longest run of losses on record. New Zealand’s kiwi slumped 1.1 percent.
The yen appreciated against all its 16 major peers as turmoil in markets boosted demand for havens. The euro also gained, while the Bloomberg Dollar Spot Index, which tracks the U.S. currency versus 10 major counterparts, rose for a sixth day.
Finally in commodities, WTI and Brent are below USD 30/bbl, with analysts noting that the UN are expected to approve the removal of Iranian trade sanctions as soon as Monday, which could see millions of extra barrels of oil exported from Iran as soon as next week. Goldman Sachs noted that while USD 20/bbl is a possibility although it is not yet their base scenario after many have quoted this forecast in the current commodity climate. As we head into the North American crossover, WTI futures continue to tick lower breaking below the USD 29.50 level.
Gold rebounded overnight alongside a pull-back in USD and weakness in riskier assets and continues to trade in positive territory this morning after the Shanghai comp closed down 3.6% and European stock indices once again reside in a seas of red. However, precious metal still remains on course for its largest weekly loss since November, with prices continuing to retrace off the recent low of 1071.10.
Elsewhere, copper prices remain under pressure this morning and a note from Codelco overnight saying they will maintain production at 1.8mln tonnes a year, will do nothing to support prices in today’s trade.
The most important data release today will be the US retail sales print for December where current expectations are for a -0.1% monthly decline at the headline reflecting the decline in auto sales while ex auto is expected to come in at +0.2%. As always the retail control component will be closely followed too. Also out will be PPI, empire manufacturing, industrial and manufacturing production, business inventories and finally the preliminary University of Michigan consumer sentiment print. It’ll be interesting to see if the big selloff in equity markets so far this year impacts the latter data. There’s more important Fedspeak for us to keep a watch for too with Dudley (due at 9.00am EDT) and Williams (due at 11.10am) both scheduled. Earnings season continues with Citigroup and Wells Fargo the notable reporters in the bank space.
Bulletin Headline Summary From Bloomberg and RanSquawk
- Amid the fresh downturn in risk sentiment, there is one standout move to highlight this morning; the USD/CAD ramp through 1.4400 and 1.4500
- WTI and Brent are below USD 30/bbl, with analysts noting that the UN are expected to approve the removal of Iranian trade sanctions as soon as Monday
- Highlights today include US retail sales, PPI final demand, empire manufacturing, industrial production, business inventories and University of Michigan sentiment as well as Fed’s Dudley, Williams and Kaplan
- Treasuries gain as global stocks plunge led by China, crude at 12-year low; 10Y has gained every day this year but one, yield falling to 2.05% from 2.269% on New Year’s Eve.
- Chinese shares fell into a bear market for the second time in seven months, wiping out gains from an unprecedented state rescue amid waning confidence in the government’s ability to manage the country’s markets and economy
- China’s broadest measure of new credit surged the most since June as companies increase borrowing on the corporate bond market, underscoring a shift away from reliance on state- backed banks for funding.
- With oil dropping below $30 a barrel, producers in western Europe’s biggest crude exporting nation are now considerably worse off than they were in the darkest hours of 2008
- Norway’s oil “industry is in a crisis now, we can’t deny that,” Bente Nyland, director general of the Norwegian Petroleum Directorate, told Bloomberg
- Analyst earnings estimate cuts outnumbered upward revisions by the most since 2009 last week, according to monthly data from a Citigroup Inc. index
- As a growth scare fuels turbulence in global markets, investors are cutting wagers on how high the Fed will raise policy rate this year
- The Swiss National Bank considered replacing a cap on the franc against the euro with a link to a basket of currencies, an option policy makers already entertained when they introduced the ceiling in 2011
- Donald Trump has not just survived six GOP debates but started to shine; last night he added substance to his trademark charisma to defend his own attacks on China, embrace criticism that he’s appealing to voters’ anger, and fend off incoming fire from rivals across the debate stage
- There’s a reason Hillary Clinton and Bernie Sanders continually bash the financial industry: “Anti-Wall Street” and “socialist” are each chosen by more than 40% of those planning to attend their party’s Iowa caucuses as words or phrases that describe them well
- Sovereign bond yields lower. Asian stocks and European stocks plunge again; equity-index futures lower with SPX down by nearly 2%. Crude oil falls, Brent and WTI both below $30/bbl; copper lower, gold higher
DB’s Jim Reid completes the overnight wrap
At long last markets yesterday saw a little thawing from their 2016 mini ice age as a much sought after relief rally swept though the bulk of the US session. As we’ll see below Asia hasn’t been able to sustain the momentum but at least the US managed to hold its gains last night. A wobbly start aside, Oil rising back above $31/bbl helped the S&P 500 (+1.67%) gather some momentum and move back to unchanged on the week which will be a welcome sight given the start to the year. With volatility rife, it’s amazing to see that the index has had a 159pt trading range already this year which is 60% of the range we had for the whole of 2015. Prior to this it had looked like we might be in for another rough day after heavy falls across Europe. The Stoxx 600 at one stage was -3% down intraday before paring a decent chunk of the losses into the close, eventually finishing the session -1.51%.
While the moves in Oil (WTI +2.36%) helped energy stocks (+4.47%) lead the gains, all sectors closed in positive territory yesterday. Fedspeak also played its part though particularly with a usually hawkish St Louis Fed President Bullard changing tune and sounding a lot more dovish after firing warning signs about inflation expectations – more on that shortly. Meanwhile JP Morgan set an early tone for bank results after reporting a beat in both earnings and revenues. However there were some less than encouraging signs in the details of Intel’s post-close quarterly results along with some downbeat comments from the CFO which got analysts worried about a cloudier outlook ahead for the tech giant.
Despite a reasonable start, some of the momentum seems to have been lost in Asia this morning with bourses generally trading lower as the session has wore on. The Nikkei (-0.68%), Hang Seng (-1.15%), Kospi (-1.11%), ASX (-0.34 %) are all down having started off positively although the sharper moves lower have been centered on Chinese equities where the Shanghai Comp has tumbled -2.96% as we type to finish the week on a down note. Some of that will reflect a pullback in Oil markets with WTI and Brent both back below $31/bbl this morning. Credit indices are generally a couple of basis points wider in Asia now.
Meanwhile there’ve been no surprises from the PBoC in the last day of the week after the CNY fix was once again left unchanged. There has been some Chinese data for us to digest however with the most significant being a material uplift in aggregate financing last month (CNY 1.82tn vs. 1.15tn,
expected) suggesting a big rise in new credit. New Yuan loans were lower than expected (CNY 598bn vs. CNY 700bn expected) while M1 and M2 money supply grew 15.2% (vs. 15.5% expected) and 13.3% (vs. 13.6% expected) respectively.
Back to the newsflow yesterday and those comments from the Fed’s Bullard. Seen as a more hawkish member of the Fed, the official added to other dovish commentary in recent days, saying that ‘with renewed declines in crude oil prices in recent weeks, the associated decline in market-based inflation expectations measures is becoming worrisome’. Bullard noted that while Central Bankers tend to ‘look through’ the changes in the price of oil, ‘one circumstance where one may be concerned is when inflation expectations themselves begin to change due to the changes in crude oil prices’. He went on to more or less rule out a January rate move before saying that no decision on March can be made until we ‘get more information and see how things play out’. The probability of a March hike has fallen from as much 52% at the start of the year to just 33% now. Next week’s US CPI report will be a big focus for markets given the slide in Oil and recent commentary.
From one Central Bank to another. Given the high market expectations leading into their December meeting, it didn’t come as too much of a surprise to us to hear that some ECB officials had ‘expressed a preference for a 20bp cut in the deposit facility rate’ in yesterdays minutes. The text highlighted that policy action was widely seen as warranted and a ‘reassessment could made in the future’ about increasing the size of monthly purchases. Interestingly and potentially highlighting a bit of a split on the board, it was noted in the text that ‘going beyond the ultimately agreed 10bp cut would, in the view of some members, raise issues about increase side effects over time’. The minutes went on to say that these issues concern the profitability of banks and other financial institutions whereby banks could try to recoup possible losses by increasing lending margins and so leading to a tightening instead of a further easing in financing conditions. Food for thought.
It was another quiet day for data on the whole again yesterday. In Germany we saw 2015 GDP growth come in at +1.7% yoy which was as expected and slightly better than 2014 (+1.6%). In the UK we saw the BoE keep rates unchanged once again after an 8-1 majority vote. The minutes highlighted that the falls in energy prices will ‘mean that the increase in inflation is now expected to be slightly more gradual in the near term than forecast in the committee’s November Inflation Report’, although the comments were somewhat balanced out with the reference to potentially being positive for consumer spending. It’ll be interesting to see if some of the commentary from the minutes are setting up for lower forecasts in next month’s report out of the BoE which may well get Economists revising their rate hike expectations again. Meanwhile, yesterday afternoon in the US saw the initial jobless claim print come in a touch higher than expected at 284k (vs. 275k expected), a rise of 7k versus the prior week. Claims have been on a bit of an upward trend now since the lows in October last year. Wrapping up, yesterday’s import price index reading of -1.2% mom came in more or less in line with the consensus.
i)Early last night
Last night, THURSDAY night, FRIDAY morning: Shanghai down / Hang Sang falls. The Nikkei closed in the red as did all of Asia . Chinese yuan up a touch and yet they still desire further devaluation throughout this year. Oil is well down, falling below 30 dollars per barrel and clinging to the 29 dollar level. Stocks in Europe all in the red. Offshore yuan trades at 6.6140 yuan to the dollar vs 6.582900 for onshore yuan. The POBC tries to soaks up off shore yuan to no avail as massive dumping occurred in Hong Kong . Hong Kong dollar suffers a decline, a first in many years.
Asia trading throughout the night:
Dow Dumps 250Pts, Nikkei Plunges 500Pts After China Credit Concerns, Kuroda Comment
It appears the world is ganging up on The Fed as following China’s recent clear and present threat should the USD strengthen, BoJ’s Kuroda warned that further QQE might threaten the bank’s finances – implicitly demanding moar from Yellen because he knows he’s out of bullets. Add to that the surge in China credit which merely extends the life of already zombified firms, thus spreading more deflationary stress to the world and stocks from China (SHCOMP -3%) to US (Dow -280 points from Bullard Bounce highs) are tumbling.
China’s broadest measure of new credit surged the most since June as companies increase borrowing on the corporate bond market, underscoring a shift away from reliance on state-backed banks for funding.
Aggregate financing rose to 1.82 trillion yuan ($276 billion) in December, according to a report from the People’s Bank of China on Friday, compared with the median forecast of 1.15 trillion yuan in a Bloomberg survey.
The data shows companies are turning to alternative sources for credit given banks’ reluctance to lend. It also adds to signs the economy is stabilizing, not slumping as its falling currency and plunging stock market seem to suggest.
“For the whole year of 2015, the biggest increment in aggregate financing came from the corporate financing via bond and stock markets,” said Zhou Hao, an economist at Commerzbank AG in Singapore.
“It appears to us commercial banks have few incentives to provide loans directly to corporates, especially due to credit concerns over SMEs, but turn to capital markets to finance the corporate indirectly. This hints an ongoing structural change in China’s financing system.”
In fact, as we noted previously,the bigger than expected increase in aggregate financing shows Chinese companies taking advantage of lower (bubble) bond yields to raise funds as commercial banks have refrained from providing loans to domestic companies because of the slow economic growth outlook.
Despite the massive supply, yields have collapsed…
As both “strong”
And “weak” balance sheet firms…
…take advantage of the credit bubble. However, there is one less than silver-lining:
Going by the official numbers, which are widely regarded as understated, bad loans rose to a seven-year high of 1.2 trillion yuan as of the end of September. In a sign of write-offs to come, policy makers are aiming for a clean-up of “zombie companies” that rely on government subsidies and bank loans to keep operating.
While that credit impulse would normally be seen as a positive in the new normal, it appears there has been a clear shift in recognition that enabling already-zombified companies to live longer merely exacerbates the over-invested, over-produced, mal-invested deflationary spiral that is rapidly spreading across the world.
Then Kuroda piled on, noting:
- *KURODA: NO PLANS AT THE MOMENT TO ADD TO MONETARY EASING
- *KURODA: JAPAN’S POTENTIAL GROWTH RATE IS AT OR BELOW 0.5%
- *KURODA: QQE POLICY HAS A RISK FOR BOJ’S FINANCES
Which sounds an aweful lot like a demand that The Fed step back up to the plate and “ease” the world’s pain (or at least “un-tighten.”)
And crushed Japanese Stocks… (Nikkei down over 500 points from the US session close)
And the result of that is an almost total reversal of all Fed’s Bullard’s good work during the US session. (Dow down over 250 points from Bullard’s Bounce peaks)
So for now, Bullard appears to be firing blanks and “good” news is bad news once again.
Chinese stocks head for their longest weekly losing streak since October…
…and still the worst start to a year ever…
END
Chinese firms are now sourcing alternate means of finance as banks are now reluctant to lend. Markets in China plummeted as there are concerns about soaring bad loans, something that we have pointed out to you on many occasions
(courtesy zero hedge)
China Bank Lending Slows Dramatically, Confirming Concerns About Soaring Bad Loans
In the latest Chinese domestic financing report released by the PBOC last night, there were two divergent themes: on one hand bank loans grew far less than the expected 700Bn yuan, and at 598Bn this was the second lowest monthly increase in the past year, only higher than October’s 514bn; on the other hand total social financing soared to 1.82 trillion yuan, smashing forecasts of a 1.15 trillion increase, and the highest since June.
As noted last night, this may have been the catalyst that spooked the markets, because as Bloomberg confirms, “the data shows companies are turning to alternative sources for credit given banks’ reluctance to lend.”
The history of new loan creation:
And total social financing showing the offset to declining loan formation coming courtesy of the local bond market:
And while this time Chinese companies are not turning to the shadow banking system, they are clearly taking advantage of the “last bubble standing“, that of Chinese bond issuance.
While bond buyers will ultimately face the unwind of that particular bubble, what is concerning is the banks’ reluctance to slow lending:
Banks have been reluctant to dole out more loans, fearful of their souring books.New yuan loans slowed to 597.8 billion yuan in December, trailing the 700 billion yuan median forecast. M2 money supply growth was 13.3 percent from a year earlier, compared to the median estimate for 13.6 percent.”
The lower-than-expected new loans suggest that credit demand remained weak, and commercial banks were still reluctant to lend due to rising credit risks,” economists at Australia and New Zealand Banking Group Ltd. led by Liu Li-Gang, head of greater China economics, wrote in a note.
Going by the official numbers, which are widely regarded as understated, bad loans rose to a seven-year high of 1.2 trillion yuan as of the end of September. In a sign of write-offs to come, policy makers are aiming for a clean-up of “zombie companies” that rely on government subsidies and bank loans to keep operating.
As we have been reporting over the past month, the biggest problem for China is that the real NPL percentage is much higher than the reported one, and today’s admission by Chinese banks that they are unwilling to lend only validates concerns about soaring NPLs.
Here is the full breakdown of bank loans.
As for the total social financing print, it was driven as noted above, by a dramatic surge in corporate bonds.
“For the whole year of 2015, the biggest increment in aggregate financing came from the corporate financing via bond and stock markets,” said Zhou Hao, an economist at Commerzbank AG in Singapore. “It appears to us commercial banks have few incentives to provide loans directly to corporates, especially due to credit concerns over SMEs, but turn to capital markets to finance the corporate indirectly. This hints an ongoing structural change in China’s financing system.”
In summary, what is taking place in China is that banks are aggressively pushing off new credit creation from their books and giving it to the broader market to “risk” its balance sheet. Of course, whil clearly bearish as banks know the financial environment best, this was clearly spun as bullish “The rising bond issuance is due to lower barriers for companies to enter the market and falling interest rates, Wang Tao, chief China economist at UBS Group AG in Hong Kong said. “This helps cut the financing costs for companies,” Wang said.
Judging by the market’s reaction, which pulled the Composite below 3,000 and into a second bear market overnight, the spin did not work.
Could China’s Housing Bubble Bring Down The Global Economy?
Submitted by Charles Hugh-Smith of OfTwoMinds blog,
Who’s going to buy the tens of millions of empty flats held as investments?
I’ve been writing a lot about China recently because it’s becoming increasingly clear that China’s economy is slowing and the authority’s “fixes” are not turning it around. That means the engine that pulled the global economy out of the 2009 recession has stalled.
Many people see China’s slowdown as the source of the next global recession, but few seem to realize the extreme vulnerability of China’s vast housing market and the many knock-on consequences of that market grinding to a halt.
I’ve just completed a comprehensive review of China’s housing market, and now realize it’s much worse than the consensus understands.
The consensus view is: Sure, China’s housing prices are falling modestly outside of Beijing and Shanghai, but since Chinese households buy homes with cash or large down payments, this decline won’t trigger a banking crisis like America’s housing bubble did in 2008.
The problem isn’t a banking crisis; it’s a loss of household wealth, the reversal of the wealth effect and the decimation of local government budgets and the construction sector.
China is uniquely dependent on housing and real estate development. This makes it uniquely vulnerable to any slowdown in construction and sales of new housing.
About 15% of China’s GDP is housing-related. This is extraordinarily high. In the 2003-08 housing bubble, housing’s share of U.S. GDP barely cracked 5%.
Of even greater concern, local governments in China depend on land development sales for roughly 2/3 of their revenues. (These are not fee simple sales of land, but the sale of leasehold rights, as all land in China is owned by the state.)
There is no substitute source of revenue waiting in the wings should land sales and housing development grind to a halt. Local governments will lose 2/3 of their operating revenues, and there is no other source they can tap to replace this lost revenue.
Since China authorized private ownership of housing in the late 1990s, homeowners in China have only experienced rising prices and thus rising household wealth–at least until very recently, when prices dipped as the government tightened lending standards and imposed some restrictions on the purchase of flats as investments.
Though it’s difficult to quantify the “wealth effect” the rapid rise in housing valuations supported, it’s widely acknowledged that upper-middle class household spending has increased as a direct result of housing’s wealth effect.
Though few dare acknowledge it, prices in desirable first-tier cities urban cores are completely unaffordable to average households. Average flats in Beijing now cost 22X annual household income — roughly six times the income-price ratio that is sustainable (3 or 4 X income = affordable cost of a house).
Far too many observers use housing prices and sales in Beijing and Shanghai–a mere 3.5% of China’s population and housing stock–as the basis of entire nation’s housing market. This is akin to judging America’s housing market on prices and sales in Manhattan.
So while sales are soaring in Beijing, they’re falling 26% in the 2nd, 3rd and 4th tier cities.
Though it is widely known that China’s household wealth is concentrated in housing, the extent and consequences of this concentration are rarely discussed.
Much has been made of the $3+ trillion losses households have suffered as China’s stock market bubble collapsed. But given the relatively insignificant role financial assets play in household wealth, these losses are modest compared to the far larger loss of household wealth that will occur as housing deflates from bubble heights.
Many people claim the estimated 65 million empty flats held as investments by the middle and upper classes in China will be sold to new buyers in due time. But these complacent analysts overlook the grim reality that the vast majority of urban workers make around $6,000 to $10,000 annually, and a $200,000 flat is permanently out of reach.
They also overlook the extreme concentration of wealth that goes into every purchase of a small flat byt households that really can’t afford the cost: the entire extended family’s wealth is often poured into the flat, and money borrowed from friends and relatives or even loan sharks.
The other problem few Western analysts consider is the impaired nature of much of China’s housing stock. Millions of units constructed in the early 2000s were hastily built and are now degraded. Newer buildings are not maintained, either, and there is a strong cultural preference for new homes, not existing units. (The government doesn’t even keep track of resales/sales of existing homes; whatever minimal data is available comes from private brokerages).
In other words–who’s going to buy the tens of millions of empty flats held as investments? What is the market value of flats nobody wants to buy or cannot afford to buy?
China has a demographic problem as well. The generation now entering the work force is much smaller than the generation that bought two or three flats for investment. There simply aren’t enough wage earners entering the home-buying years to soak up this vast and growing inventory of empty homes.
China’s stated intent is to move from a fixed-investment/export dependent economy to a consumer economy. But if we consider what happens when housing slows or even grinds to a halt, we realize the impact on incomes, wealth and consumption will be extraordinarily negative, not just for China but for every nation that sells China vehicles and other consumer goods.
EUROPEAN AFFAIRS
today, the European stock markets entered a bear market down 21% since April highs:
(courtesy zero hedge)
European Stocks Enter Bear Market
When “whatever it takes” meets “get me out now!”…
Europe’s broadest Stoxx 600 Index is down 21% sicne the April 2015 highs…
A Q€-driven Bear Market has begun.
S&P Enters The Latest European Scandal: Downgrades Poland From A- To BBB+
Over the past week, Poland’s relations with Europe have gone from cordial to abysmal, when first Poland’s new Eurosceptic government compared the EU and Merkel to Nazis, with Polish weekly Wprost releasing the following cover saying “they want to supervise Poland again”…
… only for Brussels to retaliate and launch an “unprecedented” review of Polish media laws, a move which Poland angrily responded is far beyond the EU’s domain.
Well, as so often happens, whenever there is a political spat in Europe, the rating agencies are quickly involved (thing S&P and Moody’s downgrades and upgrades of Greece depending on how well the vassal nation is “behaving”), and moments ago S&P downgraded Poland from A- to BBB+ outlook negative,precisely due to Poland’s new media law which has been the topic of so much consternation over the past week.
In other words, S&P is now nothing more than a lackey for Brussels, threatening to send Polish yields higher if Poland does not fall in line.
From the report:
Poland Foreign Currency Rating Lowered To ‘BBB+’ On Weakening Institutions; Outlook Negative
OVERVIEW
- Since winning the election in October 2015, Poland’s new government has initiated various legislative measures that we consider weaken the independence and effectiveness of key institutions, as reflected in our institutional assessment.
- We have therefore lowered our long-term foreign currency sovereign credit rating on Poland to ‘BBB+’ from ‘A-‘ and our long- and short-term term local currency sovereign credit ratings to ‘A-/A-2’ from ‘A/A-1’.
- The negative outlook reflects our view that there is at least a one-in-three likelihood that we could lower the ratings within the next 24 months if monetary policy credibility is undermined or if public finances deteriorate beyond our current expectations.
RATING ACTION
On Jan. 15, 2016, Standard & Poor’s Ratings Services lowered its long-term foreign currency sovereign credit rating on the Republic of Poland to ‘BBB+’ from ‘A-‘ and its long- and short-term local currency sovereign credit ratingsto ‘A-/A-2’ from ‘A/A-1’. The short-term foreign currency sovereign credit rating was affirmed at ‘A-2’. The outlook is negative.
We also revised our transfer and convertibility (T&C) assessment on Poland to ‘A’ from ‘AA-‘ (a T&C assessment reflects our view of the likelihood of the sovereign restricting nonsovereign access to foreign currency needed for debt service).
RATIONALE
The downgrade reflects our view that Poland’s system of institutional checks and balances has been eroded significantly as the independence and effectiveness of key institutions, such as the constitutional court and publicbroadcasting, is being weakened by various legislative measures initiated since the October 2015 election. Poland’s new ruling party Law and Justice (PiS), which holds an absolute majority in the parliament (Sejm) and the senate, has set out to make fundamental changes to Poland’s institutions. For example, the constitutional court’s ability to work efficiently and independently will likely be undermined, in our view, by changes to the court’s composition and decision-making process. The government’s new media law, as another example, gives the government extensive powers to appoint and control the directors and supervisory boards of public broadcasters. A third law terminates contracts of all current senior, career civil servants and removes a constraint regarding previous party membership, therefore enabling the new government to change the structure of the civil service. In our view, these measures erode the strength of Poland’s institutions and go beyond what we had anticipated regarding policy changes from the general election.
The revision of the T&C assessment to ‘A’, two notches above the foreign currency rating on Poland, reflects our expectation that the Polish government’s overall policy inclination will be more interventionist, which could ultimately also impact the foreign exchange market.
The change in the rating outlook to negative reflects our view that there is potential for further erosion of the independence, credibility, and effectiveness of key institutions, especially the National Bank of Poland (NBP). Moreover, we no longer expect Poland’s fiscal metrics will improve as we previously forecast. We also foresee some reversals in Poland’s sound macroeconomic management of the past years, for instance by targeting certain sectors with new taxes.
The ratings remain supported by Poland’s relatively moderate external financing needs and strong growth potential. The economy benefits from a floating exchange rate regime and domestic capital markets that permit the government to finance itself in local currency at long-dated maturities. The ratings are constrained by Poland’s still low income levels compared with its Western European peers, especially in light of recent Polish zloty (PLN) depreciation and long-term challenges to public finances, primarily stemming from the pension system.
Since winning the Oct. 25, 2015, parliamentary election, Poland’s new government, led by PiS with an absolute majority, has introduced a number of legislative initiatives. A law that changes the decision-making process of theconstitutional court, which in our view would undermine its ability to work effectively and make decisions in a timely fashion, was signed into law by President Andrzej Duda before year-end 2015. Similarly, a law that moves the power to appoint the management and supervisory board of public broadcasters to the Treasury Ministry significantly weakens the independence of these institutions and has the potential to make them political instruments, in our view.
While PiS’ absolute majority has removed pre-election concerns about increased political instability resulting from fragile coalition arrangements, we expect significant friction will persist between PiS and the opposition. In addition, we see a risk of internal tensions within PiS between more conservative and moderate forces, especially given the growing public discontent about these new measures. Similarly, taxes on banks, insurers, and large retailers seem to be more focused on sectors that are predominantly foreign owned, thereby raising questions about Poland’s attitude toward growth-driving foreign direct investment. Moreover, pronouncements about, for instance, the refugee crisis, may heighten tensions between Poland and many Western-European EU states.
We have upwardly revised our fiscal deficit forecast for 2016 to 3.2% because we consider that various spending-side measures, either planned or announced, are not fully offset by revenue-side measures or expenditure cuts. These measures include a reversal of the previous pension reform so that the retirement age for women will again be lowered to 60 and for men to 65, higher childcare benefits through the Family 500+ program, a higher tax-free allowance and minimum wage, and free medicines for the elderly. Proposals on the revenue side are so far are limited to a 0.44% tax on bank and insurance company assets and a yet-to-be-decided retail turnover tax. In addition, the PiS-led government has decided to amend the expenditure-stabilizing rule, only recently introduced, by substituting actual inflation rates with the 2.5% NBP target, in turn increasing potential expenditure levels. Lastly, the government has decided to amend the 2015 budget to give itself more spending flexibility in 2016, for instance by booking the proceeds of the October LTE (long-term evolution) cell phone network auction (PLN9 billion or 0.5% of 2016 GDP) in 2016 rather than in 2015. Moreover, we do not expect revenue-side measures will be sufficient to compensate for higher spending, and view the macroeconomic assumptions underpinning the 2016 budget as too optimistic. We therefore expect that larger fiscal deficits than we initially forecast will persist in the coming years.
Nonetheless, we expect general government debt will remain broadly stable at about 51% of GDP through to 2018. At the same time, lower debt resulting from last year’s pension change and low interest rates continue to contain the government’s interest burden, which decreased to 4.6% of general government revenues in 2015. In an environment of changed risk perception and continued political uncertainty, we expect this trend will reverse and push interest costs back up to 5% of general government revenues by 2018. The share of foreign currency debt in total government debt remains somewhat high at 34%, as does the proportion of debt held by nonresidents at 56%. However, the relatively high share of long-term oriented nonresident investors, for instance foreign central banks and public institutions that own around 23% of domestic securities, reduces the risk of sudden large sales of Polish government bonds, in our view.
After a further acceleration over 2015, we expect real GDP growth in Poland will remain strong and average 3.3% over 2016-2018. Stronger domestic demand resulting from income-boosting government policies and a continued recovery in the eurozone, Poland’s main trading partner, bode well for robust economic expansion. Stronger wage growth and subdued inflation will likely continue to boost real incomes further, while a potentially looser monetary policy stance could also help contain household and corporate borrowing costs.
Additional long-term challenges to the Polish economy could arise if the economy fails to move from a growth model relying on cheap labor and labor-intensive industries to higher-value-added and more innovative industries. In that sense, a reform of the loss-making, primarily state-owned coal mining sector might become an important factor, although such reform seems less likely under the PiS government. Similarly, the 2014 change to the pension system, such as the dismantling of its defined contribution pillar, raises questions about the long-term sustainability of the Polish pension system, which will likely be pressured by the government’s decision to revert to a lower retirement age.
We expect the current account deficit will gradually widen over our forecast horizon. Lower import prices and strong exports have helped narrow the deficit, but we expect the import component of Polish exports will remain high and net exports will stay negative. Nevertheless, we think Poland’s demonstrated ability to draw on EU funds, and a revival in foreign direct investment, should comfortably finance most of these deficits, despite perpetually high net errors and omissions. However, with tensions between Poland and the EU on the rise, access to EU structural funds may become more difficult. Nonetheless, Poland benefits from some important buffers that we expect will help keep external borrowing costs down. These include a flexible exchange rate regime, which helps the NBP pursue an independent monetary policy, and a flexible credit line with the International Monetary Fund, which was reduced in January 2016 to $18 billion and is expected to be phased out over the coming years.
We anticipate a very gradual reduction of Poland’s external debt because the current account deficit will be funded largely through non-debt inflows. We forecast narrow net external debt (external debt net of reserves, plus financial sector assets) will decline to 52%of current account receipts (CARs)in 2019 from about 57% in 2015. Nevertheless, with net external liabilities at 125% of CARs in 2015, a prolonged deterioration of external sentiment or increased volatility on global financial markets could weaken Poland’s ability
to finance its net external liabilities. Our base case is that gross external financing needs will remain fairly constant at approximately 86% of CARs and usable reserves until 2018.
While the financial sector is generally profitable and predominantly (63%) deposit funded, and we classify it in group ‘5’ of our Banking Industry Country Risk Assessment (see “Banking Industry Country Risk Assessment: Poland,” published June 30, 2015, on RatingsDirect), we nevertheless believe it may experience a period of heightened stress. We expect three factors will affect banks in Poland in 2016. The introduction of a banking sector tax of 0.44% on assets is going through the parliamentary process, while a decision on a conversion of about 570,000 Swiss-franc-denominated mortgage loans (into zloty) has yet to be made. In addition, the government is requiring Polish banks to step up their contributions to the deposit guarantee fund following the bankruptcy of a small lender, SK Bank. Although the issue of a conversion of Swiss franc mortgage loans had moved out of focus since the elections, the President unveiled a proposal on Jan. 15, 2016. While the exact consequences of this proposal for the financial sector remain uncertain, we expect certain institutions will come under more stress. Lastly, PiS will have significant power to shape the future path of monetary policy because the Polish president, parliament, and senate can nominate a total of nine new monetary policy council members, including the governor of the NBP, in 2016.
OUTLOOK
The negative outlook reflects our view that there is at least a one-in-three possibility that we could lower our ratings on Poland in the next 24 months.
We could lower the ratings if we perceived a further weakening in the independence, credibility, and effectiveness of key institutions, most importantly the NBP. In addition, we could lower the ratings if public finances deteriorated beyond our current baseline scenario as the revenue and expenditure balance becomes more negative.
On the other hand, a reversal of the government’s efforts to change and control Poland’s key institutions, as well as sustained strong external performance, leading to further reductions in net external debt could lead us to revise the outlook to stable.
* * *
The immediate response:
- POLISH FINANCE MINISTRY TO COMMENT ON S&P DECISION TONIGHT
We can’t wait.
RUSSIAN AND MIDDLE EASTERN AFFAIRS
A great commentary on the faltering Saudi Arabian economy:
(courtesy Tom Kool/OilPrice.com)
Saudi Arabia: A Weak Kingdom On Its Knees?
Submitted by Tom Kool via OilPrice.com,
The great Kingdom of Saudi Arabia – the long-time dictator of crude oil prices for the world – is struggling on all fronts.
The Saudis are losing their proxy wars in both Syria and Yemen; their OPEC leadership is under threat; they are not winning the crude oil price war; and its long-running alliance with the West is in question.
From Saudi Arabia’s perspective, Iran seems to be gaining ground everywhere. Saudi Arabia has several weaknesses that help explain the current anxiety emanating from Riyadh.
1. Saudi Arabia losing its leadership in the OPEC
Saudi Arabia has been the default leader of OPEC; however, despite Saudi insistence to the contrary, the U.S. shale boom, increased Russian oil production, and a very resolute Iran are challenging this leadership.
The result is that Saudi Arabia now finds itself powerless in supporting oil prices. Instead of the much-needed production cuts, during the 4 December 2015 meeting, the OPEC nations refused to adhere to any ceiling, which has been the practice for years.
2. Burning through reserves—fast
(Click to enlarge)
Source: www.tradingeconomics.com
Iran is waiting for the lifting of sanctions, expected sometime in 2016, to pump more oil to improve its economy, whereas the Saudi’s are losing they are burning through their cash reserves quickly. The above chart speaks for itself, depicting the kind of damage low oil prices are inflicting on Saudi reserves. By the most optimistic opinion, Saudi Arabia can survive low oil prices only for four years.
3. Iran has assumed a very significant leadership role among Shia Arabs
Both Iran and Saudi Arabia are currently locked in a bitter proxy war on two fronts: Syria and Yemen.
Iran has the support of Hezbollah in Lebanon, along with support from the majority of Shiites in Iraq. More to the point, Iran has even managed to grow its Shiite support base among Sunni-ruled nations. The execution of Shia Sheikh Nimr Al-Nimr by the Saudis is an indirect acceptance of the growing influence of Iran among the suppressed 15 percent Shiite population in Saudi Arabia. This shows that the Saudi leadership is feeling threatened on their own soil.
4. Saudi Arabia cannot defeat Iran in a direct war
Iran is a much larger nation than Saudi Arabia by population and has held its own in numerous long wars. By comparison, the Saudis have an army that is inexperienced, led by loyalists of the Royal family who occupy plum postings. These are not the war-hardened generals of Iran.
While Saudi Arabia has a nice arsenal with the latest weaponry, the kingdom is heavily dependent on the West for its use and maintenance. Its indecisive and ineffective handling of three conflict fronts—Iraq, Syria, and Yemen—give us no confidence in its ability to take on Iran.
5. Saudi Arabia knows it won’t have U.S. support for a direct war with Iran
The painfully misguided wars in Iraq and Afghanistan are enough to deter the current U.S. administration from entering into full-fledged war in the Syrian and Yemen theaters. Washington’s non-committal stance, along with efforts to broker a deal with Iran, should serve as very loud signals to Saudi Arabia. The message to the kingdom is this: Don’t go to war with the hope that that U.S. will support you. And without the West, Saudi Arabia knows it stands no chance of winning a war against Iran. The royal family will probably not take the risk of losing power by indulging in such a war.
These relationships are anything but clear, and everything about balance. So the U.S. will continue to sell weapons to Saudi Arabia to allow it to maintain a bit of balance—with the latest deal approved in October—and Washington and Tehran will continue to play cat and mouse as they near a nuclear deal and a removal of sanctions. This is best illustrated by the recent detainment and then quick release of U.S. sailors for an incursion into Iranian waters, and the statement and then denial by Iran that it had completely closed off a key nuclear reactor that would have sealed the nuclear deal.
The Saudis are in a state of panic all around – from its OPEC status and dwindling reserves to its proxy wars that absolutely cannot turn into full-fledged wars and its growing friendlessness. The fact that oil fell briefly below $30 a barrel on Tuesday for the first time in 12 years won’t have helped.
At the end of the day, Saudi Arabia has overextended itself, and overestimated its prowess and it does not have the clout that it once had to be able to do this effectively.
If you’re wondering whether there will be an all-out war between Saudi Arabia and Iran, it’s unlikely. At this point, the Saudis are likely to continue the proxy war and hope that the Iranians do something foolish to upset the nuclear deal with the West. Until then, Saudi Arabia will make a lot of noise and attempt subversive activities, but nothing more.
GLOBAL ISSUES
Alberta is bearing the brunt of the huge downfall in oil:
(courtesy zero hedge)
Alberta Freezes Government Salaries As Canada’s Oil Patch Enters Second Year Of Recession
On Wednesday, we documented the astonishing prices beleaguered Canadians are now forced to pay for groceries thanks to the plunging loonie.
Oil’s inexorable decline has the Canadian dollar in a veritable tailspin and because Canada imports the vast majority of its fresh food, prices on everything from cucumbers to cauliflower are on the rise, tightening the screws an already weary shoppers.
Soaring food prices are but the latest slap in the face for Canadians and especially for Albertans who have been hit the hardest by 13 months of crude carnage. Resources account for a third of provincial revenue and with oil and gas investment expected to have fallen over 30% in 2015, Alberta’s economy has is expected to contract for the foreseeable future.
The economic malaise has had a number of nasty side effects including soaring property crime in Calgary, rising food bank usage, and sharply higher suicide rates.
With the outlook for oil prices not expected to improve in the near-term, ATB now says the province faces two long years of recession. “The pain is going to be concentrated in the first half of the year. But we don’t really see any ending in sight to a downturn at least until the end of the year. So we are calling for another contraction,” ATB’s Chief Economist Todd Hirsch says in The Alberta Economic Outlook Q1 2016 report.
“This low price environment continues to discourage new investment and spending and has weighed down employment — not only in the oilpatch, but throughout most sectors of the province,” Hirsch continues. “This downturn is longer in duration certainly than 2009 was which was a very quick downturn but very short-lived. This one is going to linger on longer.“
Indeed. Here are some charts from the report which underscore the magnitude of the sharp reversal in fortunes.
It’s against this backdrop that we get the latest sign of the times in Alberta where Finance Minister Joe Ceci has just announced a two-year wage freeze for non-union government employees.
“The move will freeze the salaries — and movement within salary grids — for roughly 7,000 senior officials, managers and other non-unionized government employees at 2015 levels until at least April 2018,” As the Calgary Herald reports. “The freeze means senior government officials, including trade representatives, board chairs and deputy ministers, won’t get a scheduled 2.5-per-cent salary hike this April put in place by the former Progressive Conservative government.”
“This is not a decision we made lightly,” Ceci told the press. “The Alberta Public Service is made up of hard working and dedicated women and men who do valuable work each and every day in the service of Albertans. However, to maintain stability and protect jobs within the public service, we must deal with the economic realities we’re facing.”
As The Herald goes on to note, “the NDP government posted a record $6.1 -billion deficit in its fall budget released last October and, for the first time in two decades, is set to take on more debt to pay for operational spending.”
“During a time of massive private sector job losses, Albertans want the government to reduce spending while protecting front-line services” Wildrose Leader Brian Jean said, praising the decision.
Right. But don’t expect jobless Albertans to be overly sympathetic to the plight of the government employees subject to the salary freeze. The senior workers affected will all still make between $110,246 and $286,977.
Stay positive Canada…
end
And now Norway in deep trouble:
(courtesy zero hedge)
Norway Pushes Panic Button: “We’re In A Crisis Now, We Can’t Deny That”
We’ve spent quite a bit of time documenting Norway’s precarious balancing act in the face of slumping crude prices.
On the one hand, falling crude puts pressure on the krone which essentially allows the Norges Bank to compete in the regional currency wars without resorting to the same type of deeply negative rates as the ECB, the Riksbank, the Nationalbank, and the SNB. In short, a falling krone preserves export competitiveness in a world gone Keynesian crazy.
At the same time, falling crude puts enormous pressure on the country’s economy, which is heavily dependent on oil production
Additionally, collapsing crude revenue means the country will soon be forced to drawdown its $830 billion sovereign wealth fund (the largest in the world) to plug the various budget leaks caused by “lower for longer.”
Now, Norway has declared that its oil industry has entered a “crisis.”
“[The] industry is in a crisis now, we can’t deny that,” Bente Nyland, director general of the Norwegian Petroleum Directorate, told Bloomberg who reminds us that “Norway depends on oil and gas for about one-fifth of its economic output and nationwide, the petroleum industry has cut almost 30,000 jobs.”
The government last year announced plans to boost spending on the way to shoring up the flagging economy and officials says those measures – which are part of the reason why Norway will pull money from the SWF – should be sufficient to offset the pain from lower crude prices. “Finance Minister Siv Jensen says budget proposals put forward last year already contain ‘a lot of expansion’ and will help stem job losses,” Bloomberg continues, before noting that “the question is how quickly the economic adjustment brought on by a weaker krone will manifest itself.”
Yes, that is the question. Of course that’s partly a function of how monetary policy plays out for Norway’s trade partners. Like Europe for instance. And Sweden, which is Norway’s fifth largest export destination.
As a reminder, the Riksbank is effectively beholden to the ECB. If Draghi eases, so too must Stefan Ingves. This means that when it comes to whether a weaker krone helps Norway’s non-oil industries, it’s essentially a matter of whether the depreciation in the krone tied to falling crude is enough to offset any upward pressure on the currency tied to further easing by the ECB.
Of course that leads us to an absurd paradox: the lower oil goes, the stronger the disinflationary impulse in Europe and the more deflation Europe has, the more Draghi eases. In other words, the idea that falling crude prices will help support the krone is to a certain extent self-defeating in the current monetary policy regime.
In short, while we’ve seen some NOK weakness over the past 12 months, the currency “just can’t get weak enough,” to quote Bloomberg.
And because Norway’s debt-to-GDP ratio is just 29%, QE isn’t possible.
In the end then, you can expect the highlighted number in the following screengrab from the Norges Bank’s webpage to go markedly lower if Mario Draghi decides he isn’t done playing Krugman:
By the way, if the rest of 2016 ends up looking anything like the first two weeks, Norway can go ahead and forget about squeezing a respectable return out of its SWF this year. The less it returns, the less able it will be to offset the money being pulled out to shore up the budget and provide fiscal stimulus.
Now we witness USA freight volumes fall for the first time in 3 years.
Also for the first time ever, the Baltic Dry Index falls below 400
(courtesy zero hedge)
US Freight Volumes Fall For First Time In 3 Years As Baltic Dry Crashes Under 400
It was just two weeks ago when we highlighted a Morgan Stanley note which showed that US trucking has not been this bad since 2009. That revelation came on the heels of an abysmal November for Class 8 sales.
Trucking, apparently, is just another casualty of slumping trade, falling commodity prices, and mediocre, double-adjusted economic “growth.”
On Friday we get the latest sign that trade is grinding to a halt.
“Freight volumes in the United States have fallen year on year for the first time since 2012 and before that the recession of 2009,” Reuters reports, citing the Bureau of Transportation Statistics. “The total volume of freight moved by road, rail, pipeline, inland waterways and air cargo in November 2015 was 1.1 percent lower than in the corresponding month a year earlier.”
Here’s Reuters with the laundry list of concerns:
- Coal shipments to power producers have fallen as a result of cheaper natural gas and stricter environmental regulations.
- Exports of manufactured products and basic commodities are down thanks to a stronger dollar which has made U.S. producers less competitive in global markets.
- Farmers have delayed shipping some grains, especially corn and soy beans, in the hope that prices will recover in future.
- Manufacturers, wholesalers and retailers have cut new orders as they struggle to reverse excess inventories built up as a result of over-ordering in 2014 and early 2015.
- Freight shipments related to oil, gas and mining have tumbled as the plunge in commodity prices forces a widespread slowdown in drilling and quarrying.
Meanwhile, on the high seas:
Quick central planners, someone figure out how to print trade…
end
(courtesy zero hedge)
Here’s A Chart You Won’t See On CNBC
What goes up, comes down considerably faster…
For global stocks, Bloomberg notes, the way down ($15 trillion lost in 7 months) has been much easier than the climb up ($30 trillion added in 4 years).
With markets from Asia to Europe entering bear markets this month, stocks worldwide have lost more than $14 trillion, or 20 percent, in value from a record last June amid worries over global growth and deepening oil declines. The pace of the drop has been so fast that it has already unraveled about half of the rally since a low in 2011.
Source: Bloomberg
EMERGING MARKETS
Rouseff will not rule out a rescue for state owned Petrobras:
(courtesy Bloomberg)
Brazil’s Rousseff Says She Won’t Rule Out Petrobras Rescue
-
Rousseff was responding to question on possible capitalization
-
In December, CEO Bendine had dismissed share sale possibility
Brazilian President Dilma Rousseff said her administration would be willing to evaluate government assistance to support state oil company Petroleo Brasileiro SA if conditions in the energy market deteriorate.
“We won’t rule out that it could be necessary to evaluate,” Rousseff said Friday in Brasilia, responding to a reporter’s question about a possible capitalization of the company. “It’s not just the Brazilian government that won’t rule it out; no government would rule it out.”
But at a separate event in Rio de Janeiro hours later, Petrobras Chief Financial Officer Ivan Monteiro told reporters that the company isn’t weighing a share sale, nor is it considering asking for any kind of government rescue.
Petrobras is already trying to sell assets as it confronts an ongoing corruption scandal, the collapse of oil prices and a massive debt burden. Earlier this week, it cut spending plans and reduced estimates for its production growth.
Despite Rousseff’s cautious show of support, a source on her economic team said the Treasury didn’t have cash readily available for such a capitalization. In order to provide assistance, it would probably need to assume more debt, increase taxes or print money, according to the person, who asked not to be named discussing private policy considerations.
Rising Debt
Those options might not be palatable for several reasons: the country’s rising debt load has already prompted a series of downgrades in the past year; additional tax hikes would hit hard in an economy reeling from recession; and printing reais would risk stoking inflation that’s running at a 10.79-percent clip, well above the central bank’s target.
One option recently under consideration was the use of hybrid debt-equity securities to inject money into the company without immediately diluting shareholders, according to a Dec. 10 interview with Petrobras Chief Executive Officer Aldemir Bendine, who added that the idea was in an early stage.
UBS Group AG analysts including Lilyanna Yang wrote Jan. 13 that there were “high risks” of a Petrobras equity offering, although a share sale wasn’t likely to occur in 2016.
The fallout for investors would depend on the structure of the deal, according to a Jan. 11 research note from Credit Suisse Group AG’s Andre Natal and Regis Cardoso. The government could possibly pursue a structure that dilutes itself rather than minority shareholders, according to the analysts.
Rousseff’s press office declined to comment on the statements about the Treasury. The finance ministry press office didn’t respond to an e-mail and phone call seeking comment.
In her remarks to reporters, Rousseff reiterated her confidence in Petrobras’s deep-water oil fields in the region known as the pre-salt. She said it’s an “extremely advantageous” asset that is still viable even with the price of oil hovering around $30 a barrel. She said auctioning pre-salt fields in these oil-market conditions would be like “giving away” 30-year exploration rights.
Petrobras preferred shares fell 8.1 percent to 5.23 reais at 4:43 p.m. in Sao Paulo Friday, as Brent prices fell to the lowest in almost 12 years.
“The government is always concerned with Petrobras, especially when exogenous factors put the company in this situation,” Rousseff said.
your early morning currency/gold and silver pricing/Asian and European bourse movements/ and interest rate settings/FRIDAY morning 7:00 am
Euro/USA 1.0901 up .0044
USA/JAPAN YEN 117.39 down 0.830
GBP/USA 1.4345 down .0078
USA/CAN 1.4490 up .0147
Early this morning in Europe, the Euro rose by 44 basis points, trading now just above the important 1.08 level rising to 1.0901; 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 last night tumbling bourses and the threat of continuing USA tightening by raising their interest rate / Last night the Chinese yuan was up in value (onshore). The USA/CNY up in rate at closing last night: 6.5829 / (yuan up but still undergoing massive devaluation/ which will cause deflation to spread throughout the globe)
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 northbound trajectory as settled up again in Japan by 83 basis points and trading now well below that all important 120 level to 117.39 yen to the dollar.
The pound was down this morning by 78 basis point as it now trades just above the 1.443 level at 1.4345.
The Canadian dollar is now trading down 147 in basis points to 1.4490 to the dollar.(as though oil prices retreated badly today)
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 and the yen carry trade also blowing up)
3. Short Swiss franc/long assets (European housing/Nikkei etc. This has partly blown up (see Hypo bank failure).(blew up)
These massive carry trades are terribly offside as they are being unwound. It is causing global deflation ( we are at debt saturation already) as the world reacts to lack of demand and a scarcity of debt collateral. Bourses around the globe are reacting in kind to these events as well as the potential for a GREXIT>
The NIKKEI: this FRIDAY morning: closed down 93.84 or 0.54%
Trading from Europe and Asia:
1. Europe stocks all in the red
2/ Asian bourses mixed/ Chinese bourses: Hang Sang red (massive bubble forming) ,Shanghai in the red (massive bubble bursting), Australia in the red: /Nikkei (Japan)red/India’s Sensex in the red /
Gold very early morning trading: $1081.90
silver:$13.80
Early FRIDAY morning USA 10 year bond yield: 2.05% !!! down 5 basis points from last night in basis points from THURSDAY night and it is trading BELOW resistance at 2.27-2.32%. The 30 yr bond yield rises to 2.85 down 4 in basis points. ( still policy error)
USA dollar index early FRIDAY morning: 98.92 down 15 cents from THURSDAY’s close. ( Now below resistance at a DXY of 100)
This ends early morning numbers FRIDAY MORNING
OIL MARKETS
Early this morning, Crude oil crashes below 30 dollars. The USA/Yen falls badly (yen is well bid) causing bourses around the globe to collapse.
(courtesy zero hedge)
Bullard Bounce Erased As Crude Crashes Back Below $30
Dow futures are now over 400 points off the Bullard Bounce highs as it appears The Fed’s ability to convince the world it will save it once again is fading. Thanks to deflation-inspiring credit growth in China (yes, you read that right) and Kuroda’s implied “we are done for now” comments, growth scares have spread across every asset class with crude and copper clubbed, bonds bid, and stocks tumbling…
JPY is heavily bid as carry trades unwind (JPYUSD futures)
Bullard Bounce dead…
And crude has collapsed below $30…
Oil Extends Losses As Oil Rig Count Drops By Just 1
While gas rigs fell 13 last week, oil rigs dropped just 1 to 515. Crude’s initial reaction was to extend losses…
Rig count continues to track a lagged crude price perfectly…
Portuguese 10 year bond yield: 2.74% up 7 in basis points from THURSDAY
The Nasdaq: up 47. 93 or 1.03%
New York equity performances plus other indicators for today:
Black Friday
Unleash hell…
And this…
Worst Start To A Year… Ever!
It’s ugly in ‘Murica…
Of course – it’s not just US, China has collapsed this year…(Worst start to a year ever)
Japan was a shitshow..
And Europe is in a bear market having erased all of the Q€ gains… (Worst start to a year ever)
The day in stocks…
- *NASDAQ COMPOSITE INDEX SINKS 2.7% TO LOWEST IN 14 MONTHS
- *S&P 500 FALLS 2.2% TO LOWEST LEVEL SINCE AUG. 25
But that level was heavily defended…
The week in stocks… worst 3-week drop in S&P, Dow, Trannies, Small Caps, and Nasdaq since Aug 2011
2016 in stocks…
Since The Fed rate-hike in stocks…
Since The Fed across asset-classes…
Since the end of QE3 in stocks…
It’s a bloodbath in FANGs and Biotechs…
FANTAsy stocks are really ugly year-to-date (cap-weighted FANGs are down 12% YTD, Biotechs -17%)
Surprise – Equity markets catch down to on balance volume…
Financials bloodbathery fell to catch down to credit…
On the week, credit remains the leader…
But credit signals more pain to come… in stocks…
Especially in the most credit-sensitive small caps…
And VIX…
With Energy credit risk at its highest on record…
Carnage Continues, Energy Yields Set Record High
(Bloomberg) — WTI oil has dropped to a new 12y low, falling below $30/bbl, triggering a broad sell-off across asset classes, with equities dropping 2.6%, HY ETFs falling 1.6% (lowest levels since 9/09), HYCDX slipping 1.1% and cash bonds falling across sectors led by oil companies in the Energy sector.
The BofAML U.S. HY Energy index YTW set a new historical high last night closing at 17.43%, surpassing the 17.048% close on 12/5/2008 during the height of the financial crisis
As of Wednesday’s close, the BofAML U.S. HY Energy index option adjusted spread to Tsys closed at +1,501, eclipsing the previous wide level seen at the height of the crisis of +1,494 on 12/5/2008
Energy bonds were roiled led by Sanchez Energy which plummeted 32% intraday followed by EP Energy (-15%), Whiting Petroleum (-13%), and Oasis Petroleum (-11%)
As Energy, Materials, and Financials lead the collapse in stocks since The Fed rate-hike…
Treasury yields collapsed this week (with the curve flat)…
And the USD Index gave up some of its gains to end the week up 0.3%… USDJPY dropped 0.25% on the week
- *RUSSIAN RUBLE WEAKENS 2% TO 77.603 PER DOLLAR, RECORD-LOW CLOSE
Commodities were a mess with Gold and silver best (unch to modestly lower) while copper and crude were clubbed…
Crude closed below $30 for the first time since September 2003…
Charts: Bloomberg
Bonus Chart: Rate-Hike Odds have plunged…
Early this morning!!
Huge policy error as the 10 year is now under 2%, the Dow is plummeting and oil is below 30.00 dollars. Rate hike in March now under 25% chance:
(courtesy zero hedge)
Dow Down 500 Points From Bullard Bounce, 10Y Under 2.00%, Oil Below $30 As Rate-Hike Odds Collapse
Since The Fed unleashed its liquidity-withdrawing, confidence-inspiring, inflation-creating, growth-related rate-hike, things have gone a little bit pear-shaped for the policy-makers-in-chief. Gold has soared, stocks have plunged, but perhaps most ominously, bond yields have collapsed as policy-error (or naked bathers) are exposed. 10Y yields are down a stunning 33bps from The Fed decision, breaking back belowthe crucial 2.00% for the first time since October. The odds of a March rate hike are now under 25%!!
And now the next hike is most likely not to occur until October…
Error?
As 10Y yields crash below 2.00%…
And The Dow is down 500 points from Bullard Bounce highs…
As Gold and Silver surge…
Charts: Bloomberg
wow!! the all important USA manufacturing index (Empire index) falters from -4.6 down to a hugely negative -19.7, the largest lmiss on record. The last time we witnessed these levels was the aftermath to the Lehman bankruptcy!!
(courtesy Empire manufacturing index/zero hedge)
Empire Fed Crashes At Fastest Pace “Since Lehman”
Against hope-strewn expectations of a bounce from -4.6 to -4,Empire Fed printed a disastrous -19.37 – the largest miss on record. New orders collapsed, shipments plunged, and employees and workweek continue to contract. Forward-looking employment expectations also plunged. The last time Empire Fed crashed to these levels was the immediate aftermath of the Lehman bankuptcy and the global financial crisis and the peak of the recession in 2001… but we are sure this is just transitory.
Not “off the lows”
Storm in a teacup?
US Consumers Tap Out: Retail Sales End Weakest Year Since 2009 As Control Group Tumbles
Several days ago, Bank Of America was “confused” why retail spending refuses to pick up, although it hoped that this would be a one time aberation and that the official government data would disprove what it was seeing in its card data. Well, that did not happen after the headline retail sales printed moments ago at -0.1% in December, falling from an upward revised 0.4%.
As Bloomberg summarizes, sales at U.S. retailers declined in December to wrap the weakest year since 2009, raising concern about the momentum in consumer spending heading into 2016.
This is where Janet Yellen decided to hike:
The 0.1 percent drop matched the median forecast of 84 economists surveyed by Bloomberg and followed a 0.4 percent gain in November, Commerce Department figures showed Friday in Washington. For all of 2015, purchases climbed 2.1 percent, the smallest advance of the current economic expansion.
But BofA’s confusion should at least be resolved when looking at the core data, which was a big disappointment, as the Retail Sales ex auto was down 0.1% in December, below the 0.2% expected. Putting this miss in context, 66 out of 69 economists thought December retail sales ex autos would’ve been higher than actual.
But the biggest disappointment was the GDP-feeding control group which tumbled by 0.3%, a mirror image of the expected increase of 0.3%, and down from the revised 0.5% in November.
And just like that US retail sales put the wrap on the weakest year since 2009 as the manufacturing recession is now officially starting to spread to the service sector.
“It’s a disappointing finish, especially in light of the low oil prices,” Thomas Costerg, a senior U.S. economist at Standard Chartered Bank in New York, said before the report. “We need better wage growth.”
But that would mean hiring less minimum wage, part-time workers, which in turn would mean a sharp collapse in the only thing that the US economy “has going” for it.
So much for those “gas savings” prompting Americans to spend, spend, spend…
More details from the WSJ:
December’s sales slump was broad-based, as consumers spent less on general merchandise, clothing and accessories, groceries and gasoline.
Excluding motor vehicles, sales were down 0.1% in December, and excluding gasoline, sales were unchanged. Excluding both categories, sales were still flat last month.
Consumer spending is a key driver of the U.S. economy, representing more than two-thirds of economic output. Household consumption has helped the economy grow in recent quarters despite a stronger dollar and weak demand overseas, which have weighed on U.S. exporters.
Retail sales data, which are a key gauge for overall consumer spending, can be volatile from month to month. Sales growth has decelerated over the past year, reflecting declines in sales on gasoline, electronics and appliances, and department stores. Overall sales were up just 2.1%, a marked slowdown from the previous year’s 3.9% annual gain.
Slumping oil prices have also held down the sales figure over the past year, as consumers spent less at gas stations thanks to lower gasoline prices. In December, sales at gas stations fell 1.1%, and were down 19.4% from a year earlier.
Friday’s report also showed consumers stepped up spending at furniture stores, building supply and garden centers, bars and restaurants and online retailers.
Other recent data has suggested Americans may be starting to open their wallets as their incomes continue to pick up.
The slowdown, including electronics stores, clothing merchants and grocers, indicates Americans probably preferred to sock away the savings from cheaper fuel instead of splurging during the holiday season. The full table breakdown shows the widespread damage across every category:
WalMart To Fire 16,000 As It Closes 269 Stores Globally
The last 12 months have not been kind to WalMart.
When the world’s largest retailer bowed to pressure to raise wages for its lowest-paid employees, the living wage crowd cheered. In short order, it became apparent that the reverberations from the $1.5 billion endeavor would spell trouble for the company.
When a series of ill-fated efforts to squeeze the supply chain failed to plug the gap, the company resorted to store closures (or “plumbing” as WalMart calls it), job cuts in Bentonville, and reduced hours.
Finally, in October, WalMart threw in the towel and cut guidance. Its shares plunged.
Now, we learn the retailer is set to close nearly 300 stores, affecting some 16,000 employees worldwide.
- WAL-MART TO CLOSE 269 STORES
- WAL-MART SAYS 10,000 ASSOCIATES AFFECTED IN U.S.
- WAL-MART SEES ABOUT 16,000 ASSOCIATES AFFECTED
- WAL-MART SEES FINAL EFFECT 20C-22C ON EPS CONT OPS
- WAL-MART EXITS WAL-MART EXPRESS PILOT
This time around, “plumbing” was not cited as a factor.
Behold: the effect of an across the board minimum wage hike…
* * *
Full PR
Wal-Mart Stores, Inc. (WMT: NYSE) today announced plans to close 269 stores in the U.S. and globally.
In October 2015, the company said an active review of the portfolio was underway to ensure assets were aligned with strategy. Today’s action follows a thorough review of Walmart’s nearly 11,600 worldwide stores that took into account a number of factors, including financial performance as well as strategic alignment with long-term plans. In total, the impacted stores represent less than 1 percent of both global square footage and revenue.
“Actively managing our portfolio of assets is essential to maintaining a healthy business,” said Doug McMillon, president and CEO, Wal-Mart Stores, Inc. “Closing stores is never an easy decision, but it is necessary to keep the company strong and positioned for the future. It’s important to remember that we’ll open well more than 300 stores around the world next year. So we are committed to growing, but we are being disciplined about it.”
Store Closings/Openings
As part of today’s action, the company will close 154 locations in the U.S., including the company’s 102 smallest format stores, Walmart Express, which had been in pilot since 2011. Walmart instead will focus on strengthening Supercenters, optimizing Neighborhood Markets, growing the e-commerce business and expanding Pickup services for customers. Also covered in the closures are 23 Neighborhood Markets, 12 Supercenters, seven stores in Puerto Rico, six discount centers, and four Sam’s Clubs.
Internationally, the company is following a disciplined strategy of actively managing its portfolio. Consistent with this strategy, the company is closing 115 stores outside the United States. This includes 60 recently-closed, loss-making stores in Brazil, which represents only 5 percent of sales in that market. The company has already been able to relocate many affected associates in Brazil to other stores. The remaining 55 stores are primarily small, loss-making stores in other Latin American markets. Walmart will disclose more detail about those actions, including the number of stores per market, after completing local associate and community outreach.
Walmart will continue to invest in its future, with plans to open stores worldwide in the coming fiscal year. Domestically, Walmart intends to open 50 to 60 Supercenters and 85 to 95 Neighborhood Markets in Fiscal 2017, which begins Feb. 1. In the same period, Sam’s Club plans to open in seven to 10 new locations. Internationally, Walmart intends to open between 200 and 240 stores during the coming year.
Financial Impact
The financial impact of these closures is estimated to be approximately $0.20 to $0.22 of diluted earnings per share from continuing operations, with approximately $0.19 to $0.20 expected to impact the fourth quarter of fiscal 2016. The remainder of the impact will fall into the first half of fiscal 2017. Approximately 75 percent of the impact relates to U.S. closings and the remaining portion involves Walmart International, with a large majority of the international impact relating to the closures in Brazil. Walmart will report its fiscal 2016 fourth-quarter and full-year results on Feb. 18. The estimated financial impact is not included in the company’s fiscal 2016 fourth quarter and full year earnings guidance.
Store Associates and Transition Assistance
In total, approximately 16,000 associates will be impacted by the decision, about 10,000 of them in the U.S. More than 95 percent of the closed stores in the U.S. are within 10 miles on average of another Walmart, and the hope is that these associates will be placed in nearby locations. Where that isn’t possible, the company will provide 60 days of pay and, if eligible, severance, as well as resume and interview skills training. Whether with Walmart or elsewhere, the company’s objective is to help all associates find their next job opportunity.
“The decision to close stores is difficult and we care about the associates who will be impacted,” McMillon said. “We invested considerable time assessing our stores and clubs and don’t take this lightly. We are supporting those impacted with extra pay and support, and we will take all appropriate steps to ensure they are treated well.”
Walmart will continue to serve the shopping needs of U.S. customers in the markets affected by today’s announcement through other Walmart locations and online at www.walmart.com. Customers can find the nearest Walmart store through the store locator function on the company’s website. A list of U.S. stores that are closing will be available today on the company’s website at approximately 11 a.m. CST.
Welcome To The Recession: Industrial Production Crashes Most In 8 Years
There comes a time when you just have to admit you were wrong… You were wrong. Industrial Production plunged 1.8% year-over-year – the fastest pace of collapse since May 2008 and a level that has never not produced a recession.
MoM IP dropped 0.4% (double the 0.2% drop expected) as Capacity Utilization plunged to 76.5% (the lowest sicne July 2013) as Manufacturing hovers at its weakest growth YoY since Feb 2014.
Does that look transitory in any way?
Here It Comes: New York Fed President Says “If Economy Weakens Further, Would Consider Negative Rates”
Remember when the Fed’s dots – less than a month ago – suggested there would be 4 rate hikes in 2016? Ah, the memories. Well, you can not only forget that (now that the market is estimating the next rate hike will come in October if ever), but it appears that the Fed will follow Kocherlakota’s advice after all and not only cut rates (the possibility of a January rate cut now is 10%), but will pass go, and collect negative rates:
- DUDLEY: IF ECONOMY WEAKENED, WOULD CONSIDER NEGATIVE RATES
After today’s atrocious, recessionary data, one can be certain that the Fed is furiously considering negative rates.
Recession Imminent As Business Inventories-To-Sales At Cycle Highs
Just as Wholesale inventories-to-sales ratios flash recessionary signals so Business inventrories-to-sales point to US heading towards an inventory-dump recession. At 1.38x, the ratio is the highest since the last crisis as both sales and inventories fell Mom but year-over-year, sales tumble (-1.4% YoY) and inventories rise (1.6% YoY).
And the breakdown shows the drop in sales and inventories (but no reduction in the overhang)
end
Dave Kranzler reports in on the data from the USA today:
(courtesy Dave Kranzler/IRD)
U.S. Economic Collapse Becoming More Evident
It’s days like today that will keep the muppets invested as we keep going down. – Jim Quinn of The Burning Platform in reference to Thursday’s stock market moon-shot
Well, I was wrong. I was predicting that the Census Bureau would engineer a miraculously positive retail sales report for December. As it turns out, the CB is admitting to a .1% drop in retail sales for the month. The question begs, then, just how bad were the real numbers? They also are purporting that November retail sales rose .4% instead of the .2% originally reported. Unfortunately for the Government, all of the privately produced retail sales metrics during November showed large declines in retail sales during the month. No, Virginia, the impressive percentage gains in online sales do no offset the decline in brick/mortar sales – online sales activity is about 7% of total retail sales. The Consumer is tapped out which means the U.S. economy is tapped out. But we should blame China, right?
In addition, the NY Fed general business conditions index registered a stunning collapse to
-19.5 (vs. -4 expected). This is the lowest reading on this index since the Great Financial CrisisCollapse in 2008/2009. This graph shows both the Philly Fed and NY Fed economic activity index readings. Does this at all look like the economy that Obama told us the other night is doing fine? (Source: Bloomberg News)
NY Fed President Bill Dudley was out today announcing that negative interest rates would be considered if the economy continues to slide. Negative interest rates are another form of QE. QE is a politically/socially correct term for money printing. “Money printing” is the code for “BAIL OUT THE BANK AGAIN.”
The price of oil is collapsing. I predicted in the fall of 2014 that the price of oil would hit the $20’s. The price of oil is collapsing because collapsing economic activity globally, especially in the United States, is causing a collapse in demand. For get “Dr. Copper.” The real barometer of economic health is oil. Copper is used in a lot of manufacturing applications, but oil/energy is used to mine and refine copper and to manufacture and deliver copper-based products. Oil is the root indicator of economic activity. Oil is the real “Dr. Copper.” Everything else is a derivative of oil. Think about that for a moment…
After the market closed, the Atlanta Fed reveals its best guess estimate for 4th quarter GDP at only .6%. Judging from what is going on in the USA market it is probably way to high
(courtesy Atlanta Fed/zero hedge)
Atlanta Fed Waits Until The Close To Reveal 0.6% Q4 GDP Estimate
With less than half an hour until the close, we asked the Atlanta Fed – the most accurate predictor of GDP – which was scheduled to post an update of its Q4 GDP NowCast following today’s ugly economic data, if it was was planning on releasing its latest Q4 GDP estimate before or after the close, something it usually does just before noon.
And, with moments before the close, the economists in charge of the sacred GDP excel model, finally did what they were supposed to do hours later, and revised Q4 GDP growth to just 0.6%, a number which some – such as Barclays – would say is too high in light of the economic drop the US economy has experienced in the past month.
Here is the argument:
The GDPNow model forecast for real GDP growth (seasonally adjusted annual rate) in the fourth quarter of 2015 is 0.6 percent on January 15, down from 0.8 percent on January 8. The forecast for fourth quarter real consumer spending growth fell from 2.0 percent to 1.7 percent after this morning’s retail sales report from the U.S. Census Bureau and the industrial production release from the Federal Reserve.
As a reminder 0.6% is how much the US economy “grew” by in the revised Q1 2015 quarter when the “harsh weather” was blamed for unleashing hell on US GDP. Whose fault will it be this time?
Worse, it means that Yellen raised rates in a quarter in which the US economy may well end up contracting in nominal terms.
Finally, perhaps the fact that the Atlanta Fed waited as long as it did, is confirmation that bad news for the economy is now bad news for stocks, at least until the Fed does fold and either cut or launch more QE.
end
Paul Brodsky is one smart cookie:
Pay attention to what he is suggesting:
(courtesy Paul Brodsky)
What If There Is No “Fed Put” – Paul Brodsky Thinks Yellen Will Not Bailout Markets This Time
Earlier today, Art Cashin summarized most (very desperate) traders’ thoughts when he said that as a result of today’s market crash, “the Fed will try anything” to prop up the wealth effect it had so carefully engineered with seven years of central planning in the aftermath of the financial crisis. Perhaps the only question left is “where is the put”, or where on the S&P 500 is the Fed’s breaking point beyond which Yellen will have no choice but to make a statement, or take action, in support of the market.
Yet one person who is far less sanguine abou the latest in a long series of central bank bailouts of the stock market is Macro-Allocation’s Paul Brodsky, who believes that instead of the Fed Put, the time of the Fed Call has come.
Here’s why:
The Fed Put Call
Investors are blaming Fed rate hikes, and hence a strong dollar, for weakening global output, commodity prices, and global equity prices so far in 2016.
The Fed knows exactly what it’s doing.
Equity returns are certainly dismal thus far in 2016. Through January 14 at 14:00PM EST, the MSCI World Index had declined by 8.6%. Accordingly, “the markets” had begun to doubt the Fed’s resolve to hike rates four times in 2016. Fed funds futures implied the December Fed Funds rate at 0.70%, up only 34 basis points from the current rate (0.36%). This implies the market is betting the Fed will hike once or twice more.
Clearly, investors see the equity markets as the leading indicator of Fed policy.We disagree. The Fed no longer works implicitly for equity investors (i.e., “the Fed Put”); it is primarily working for the U.S. banking system by stabilizing and increasing its deposit base, and for the state by providing an incentive across the world to invest in Treasury debt. By raising rates, it increases the exchange value of the U.S. dollar.
We have argued that global output growth would have to naturally decline given the extraordinary leverage already built into the global economy, leaving observers to acknowledge in 2016 that recession is near. We have argued further that the Fed is very aware of an imminent global slowdown, and that a logical strategy in such an environment would be for it to import global capital by keeping the dollar un-challenged as a store of value (see King Dollar).
We would like to reiterate and refine our view: despite increasing discomfort among equity investors, we think the Fed will remain resolute in its effort to maintain or increase the interest rate differential between U.S. and foreign sovereign rates.
The one thing that would change the Fed’s current policy would be if global growth shows signs of increasing – not decreasing.
If the world economy were to strengthen then the Fed’s incentive to keep the dollar strong would fade.
Investors should consider this meaningful shift in policy when deciding how to allocate across asset classes. As we noted in The Pain Trade last year, falling long-term Treasury yields are the last thing speculative (i.e., levered) investors expect. Following this week’s auctions, it may be time for them to cover shorts.
His conclusion: “Global equity markets are suffering so far in 2016 because the Fed’s primary policy has shifted from protecting asset prices to protecting the exchange value of the dollar. Buy USDs and Treasuries”
If he is right, watch out below, especially if hints such as this one by San Fran Fed president John Williams, who famously admitted several days ago the Fed was wrong about the “benefits” from crashing out, are an indicator of broader Fed thinking:
- WILLIAMS DOESN’T SEE SIGNS ASSET VALUES DEPRESSED, BELOW NORMAL
With the WSJ adding that “Market Volatility Unlikely to Deter Rate Rises Over Next Few Years” – hardly what the abovementioned desperate traders wanted to hear…
Let us wrap up with week with Greg Hunter of USAWatchdog
Obama’s State of Delusion, FBI Widens Hillary Email Probe, Iran Detains US Sailors
By Greg Hunter’s USAWatchdog.com (WNW 222 1.15.16)
President Obama’s State of the Union should be renamed to the State of Delusion after he said,“Anyone claiming that America’s economy is in decline is peddling fiction.” This is so off base and delusional I simply do not know where to start. There are so many metrics that prove the President wrong. The Labor Participation Rate stands at around 94 million, a record. The Baltic Dry Index has plunged to record lows, and the stock market is off to the worst start—ever. There is one headline after another that confirm the problems with the stock market are real. So is the fear the economy is sinking, and there is nothing the Fed can do about it.
The FBI probe into Hillary Clinton’s email scandal is widening, according to FOX News. This is a huge story, folks, and yet most of the mainstream media (MSM) is choosing not to cover it, even though Mrs. Clinton is being asked about it on the campaign trail. Once again, the MSM is choosing to destroy its own business to shield a Democrat. In this case, a front-runner for president. The only reason a real news organization would ignore a legitimate story is that it does not fit their politics. As Marco Rubio said month ago, the MSM is the “Ultimate Super PAC for Democrats.” This means the MSM that ignores a story about a front-runner and expanding FBI probe is not a news organization. It’s a propaganda arm for Democrats.
Iran released 10 U.S. sailors that it said drifted into their waters in the Persian Gulf. There is an investigation, and Pentagon officials would only say the two Navy boats in question made a“navigational mistake.” The boats were reportedly off course by 50 miles. According to Iranian news services, Iran locked its missiles onto French and U.S. aircraft carriers when they started to do maneuvers after the incident first happened. In published reports, Iran warned of war breaking out if things escalated. No telling what really happened, but one thing is for sure, the Iranians made a propaganda spectacle out of the incident. You can add it to the list of ballistic missile tests and shooting a missile near a U.S. aircraft carrier a few weeks ago in the Persian Gulf.
Join Greg Hunter as he talks about these stories and more in the Weekly News Wrap-Up.
end
Harvey
harveyorganblog.com 
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