Gold: $1089.90 down $1.60 (comex closing time)
Silver $14.11 up 23 cents
In the access market 5:15 pm
Gold $1087.20
Silver: $14,01
At the gold comex today, we had a poor delivery day, registering 2 notices for 200 ounces.Silver saw 11 notices for 55,000 oz.
Several months ago the comex had 303 tonnes of total gold. Today, the total inventory rests at 199.15 tonnes for a loss of 104 tonnes over that period.
In silver, the open interest fell by 3,535 contracts down to 162,351. In ounces, the OI is still represented by .811 billion oz or 115% of annual global silver production (ex Russia ex China).
In silver we had 11 notices served upon for 55,000 oz.
In gold, the total comex gold OI fell by 3,401 contracts to 410,748 contracts despite the fact that gold was up $17.60 with Friday’s trading.
Today both the gold comex and the silver comex are in severe stress with gold in backwardation up to August.
We had no changes into inventory at the GLD, / 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 a huge change to inventory, a massive withdrawal of 2.762 million ox/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 fall by 3535 contracts down to 162,351 despite the fact that silver was up by 14 cents with respect to Friday’s trading. The total OI for gold fell by 3,535 contracts to 410,748 contracts despite gold being up $17.60 in priceon Friday
(report Harvey)
2 a) Gold trading overnight, Goldcore
(Mark OByrne)
3. ASIAN AFFAIRS
vi) The following is a terrific article by Jack Rasmus of Global Research as he describes the upcoming financial crisis as China implodes.
iii) Italian banks are now in trouble as the authorities have banned short selling on banks.
iii)The Baltic Dry Index continues to plummet reflecting a complete collapse of global trade( zero hedge/Baltic Dry Index)
ii) On Saturday:
iii) Surprisingly the Dallas Fed responds to zero hedge’s assertion that reserve members met with banker lenders that have huge exposure to the oil and gas sector price meltdown:
The Dallas Fed response: no meeting took place!!
Now zero hedge asks follow up questions that they must answer!
( zero hedge)
iv)Never thought I would see this: we now have negative oil prices in North Dakota at 50 cents as Koch brothers charge oil companies for low grade oil:
Monday morning
( zero hedge)
v)
iii) gold miners have now stated that we have reached peak production/ expect losses from this time forward
(Wilson/London’s Financial Times/GATA)
iv) Gold demand from India continues to rise. Last year net imports were around 900 tonnes:
(Business standard, New Delhi/GATA)
v)An excellent commentary from James Turk as he talks about the huge rise in USA debt levels.
( James Turk/Kingworldnews/GATA)
vi) Bill Holter’s delivers two commentaries:
i) Peddling Fiction …?
and
ii)Someone is lying”
(Bill Holter/Holter Sinclair collaboration)
iii)Citibank is hiding all of its exposure to oil:
iv)Bank of America reports that earnings rose to 3.3 billion dollars in 4th Q. However energy exposure rises to 21 billion dollars.
v)Treasuries held at the Fed lowered by 47 billion dollars in the first two weeks of 2016.
vi)The following will explain the dilemma we are in now:(courtesy Christoph Gisiger/Finanz Und Wirschaft/zero hedge)
Let us head over to the comex:
And now your overnight trading in gold, TUESDAY MORNING and also physical stories that may interest you:
Mike Tyson – Sage Financial Advisor
In a crisis, it helps to have good counsel. Consider the following sage advice from investment strategist and financial advisor Mike Tyson:
“Everyone has a plan ‘til they get punched in the mouth.”
Or as German military strategist Helmuth von Moltke the Elder put it, somewhat more formally:
“No battle plan ever survives contact with the enemy.”
The enemy has been quick to show himself this year, in the form of a bear market, at least for stocks.
…
Conclusion
So the pragmatic response to this month’s volatility – if any is indeed required at all – is as follows:
1) Diversify by asset type.
2) Limit or eliminate exposure to emerging market debt. Raise cash rather than cling to a benchmark with no conviction (and no obvious value).
3) Concentrate any debt exposure to bonds issued by creditors, not debtors.
4) Limit equity exposure to high quality and inexpensive markets offering a ‘margin of safety’. (Most of the US market does not qualify in this regard.) Russell Napier recommends Japanese equities, currency hedged, and so do we. And in a bear market, you don’t want to own expensive growth, you want to own defensive value.
5) Complement traditional investments with alternatives. We would advocate systematic trend-following funds (which can profit in bear markets just as they did in 2008), and gold – the one form of currency that comes with no counterparty risk because it is the one asset that is no-one’s liability.
6) Limit your exposure to mainstream financial media, and especially to economists employed by commercial banks.
Full article by Tim Price on SovereignMan.com
India offers gold bonds at discount in hope of boosting sales
Submitted by cpowell on Mon, 2016-01-18 18:26. Section: Daily Dispatches
India’s Gold Bonds Seen Luring Investors in Search of Safe Haven
By Rejendra Jadhav and Suvashree Choudhury
Reuters
Monday, January 18, 2016
MUMBAI — The second tranche of India’s sovereign gold bonds, whose sale began today, is likely to draw good response from investors, as they are priced below market rates for the metal and sharemarket turmoil spurs investors to diversify holdings.
India plans to sell 150 billion rupees ($2.22 billion) in gold bonds in the fiscal year ending March 31 as it seeks to wean investors off physical gold and contain the outflow of foreign exchange spent on imports.
The price of gold has risen 4 percent so far in 2016, while India’s benchmark has fallen nearly 7 percent.
“Given the correction in the stock market, interest is shifting in favor of gold,” said Harish Galipelli, head of commodities and currencies at Inditrade Derivatives and Commodities. “Investors are looking for safe-haven assets. This tranche will receive better response than the first tranche.”
The Reserve Bank of India has fixed the issue price of the bonds, which will be sold until Friday, at 26,000 rupees per 10 grams, below the current market rate of nearly 26,050 rupees.
The bonds, linked to the price of bullion, carry an annual interest of 2.75 percent and allow consumers to invest in “paper” gold rather than physical gold.
The first tranche debuted last November to lukewarm response, as it was priced nearly 5 percent above the market. At the time, the stock market also promised better returns, with the price of gold falling in anticipation of a U.S. rate hike.
“Given that currently risk appetite is weak and bank interest rates are also falling, demand for gold bonds in the second tranche might be better,” said Siddhartha Sanyal, an India economist at Barclays. …
… For the remainder of the report:
http://www.reuters.com/article/india-gold-bonds-idUSKCN0UW18B
end
(courtesy Koos Jansen/GATA)
Are SGE Withdrawals Gone?
Did the Shanghai Gold Exchange (SGE) just ceased publishing the weekly amount of gold withdrawn from the vaults? If so, the SGE has chosen to add another layer of secrecy over the Chinese gold market. As, SGE withdrawals provide a unique metric for Chinese wholesale gold demand.
This started on 11 January 2016 when the SGE released the “Announcement on Clarification of Some Terms in Delivery-related Data Reports”. In the announcement the SGE states it will be publishing more detailed data regarding the “delivery amount”, “delivery ratio” and “load-out volume” in future Market Data Weekly Reports. From the SGE:
All members,
With a view to distributing market data regarding physical deliveries in a more comprehensively way and helping market participants interpret delivery-related data and reports more accurately, the Shanghai Gold Exchange (the “Exchange”) has adjusted some terms in the Delivery Reports which are included in Market Data Weekly Reports and Market Data Monthly Reports. The adjustments shall be effective as of Jan. 1st 2016 and are clarified as follows:
The term “delivery amount” refers to the sum of the trading volume of physical products and the contract delivery volume of deferred products. The term “delivery ratio” refers to the proportion of delivery amount to the total trading volume of both physical and deferred contracts.
The term “load-out volume” refers to the total volume of standard physical bullions withdrawn from SGE-certified vaults by members and customers.
The terms “accumulative delivery amount”, “accumulative trading volume” and “accumulative load-out volume” respectively refer to the sum of delivery amount, trading volume and load-out volume from the beginning of the year to the statistical time point. The term “accumulative delivery ratio” refers to the proportion of accumulative delivery amount to the accumulative trading volume.
Delivery-related data of silver products are added into the reports.
First let’s get our nomenclature straight. The “delivery amount” refers to the amount of gold within SGE designated vaults that changes ownership. Ownership of gold can change by trades in physical products – Au50g, Au100g, Au99.95, Au99.99, Au99.5, iAu100g, iAu99.99, iAu99.5 – or through deferred products – Au(T+D), mAu(T+D), Au(T+N1), Au(T+N2). Physical products cannot be traded on margin and are always delivered immediately (T+0), while deferred products can be compared to futures (derivatives), implying not all deferred volume is delivered. Hence, the SGE writes [brackets added by me]:
The term “delivery amount” refers to the sum of the trading volume of physical products [which is always delivered] and the contract delivery volume of deferred products [the number of deferred contracts that holders submit for delivery]”.
The term “delivery ratio” reflects the relationship between the “delivery amount” and the total trading volume of physical and deferred products.
The term “load-out volume” can be exchanged with “withdrawals”, a term we’ve often used on these pages for the total amount of gold withdrawn from SGE designated vaults. Previously I’ve written “deliveries” and “withdrawals” are two very separate terms that must not be commingled.
The “accumulative …” terms all speak for itself.
In the announcement the SGE promised to add more detailed data, not publish less data. However, in the first Market Data Weekly Report of 2016 we can see the following table:
Surprisingly, the “load-out volume” is not published! This means the SGE has not published “SGE withdrawals” for the first week of 2016. If this is just a one week mistake due to the new way of publishing remains to be seen. Hopefully, the SGE will resume publishing SGE withdrawals next week.
In addition, the “delivery amount” seems to match what was delivered only through deferred products in week 1 (this amount can be tracked in the daily reports). So that would be mistake number two! Let’s hope the gentleman that writes the Market Data Weekly Reports had an off day and will publish the “load-out volume” and “delivery amount” as promised in the announcement from next week on.
PS The “trading volume” in the table seems to capture all physical and deferred products traded on the SGE and Shanghai International Gold Exchange (SGEI). It does not capture any OTC trades that are settled at the SGE or SGEI.
Koos Jansen
E-mail Koos Jansen on: koos.jansen@bullionstar.com
end
(courtesy James Wilson/London’s Financial Times)
Gold miners say output has peaked as losses reshape the industry
Submitted by cpowell on Sun, 2016-01-17 17:22. Section: Daily Dispatches
By James Wilson
Financial Times, London
Sunday, January 17, 2016
http://www.ft.com/intl/cms/s/0/d3c226aa-bb9b-11e5-b151-8e15c9a029fb.html
Gold output has peaked in this commodities cycle, according to mining industry leaders and analysts who say few big projects will reach the point of production amid falling prices.
The lack of new assets and declining output at existing mines is expected to curb gold supply, a glimmer of hope for surviving producers of the precious metal in an industry coming to terms with a rush of investment when prices were far higher.
Kelvin Dushnisky, president of Barrick Gold, the world’s largest gold miner by annual output, said: “Falling grades and production levels, a lack of new discoveries, and extended project development timelines are bullish for the medium and long-term gold price outlook.”
Gold has been one of the commodities hit by the worst environment for mining in more than a decade. The price has declined more than 40 per cent from its 2011 peak, to a level where many gold miners struggle to recoup the costs of extraction.
This year some had expected gold to be under pressure from higher interest rates in the US, after the Federal Reserve began to tighten monetary policy last month.
However, the gold price has risen 2.7 per cent so far in 2016, while stock markets around the world have tumbled. A controversial investment with a variety of competing theories for what determines the price, gold has provided comfort for investors who see the inert metal as a haven amid economic and political turmoil.
Miners hope limits to fresh gold supply will increase the chances of longer-term recovery.
“It is fruitless to try to predict demand dynamics for gold. I always put my faith in a recovery driven by reduction in supply and I believe we will see the first signs of impending recovery in the second half of this year,” said Vitaly Nesis, chief executive of Polymetal, a UK-listed gold miner.
According to Thomson Reuters’ GFMS metals research team, global production of gold is expected to fall 3 per cent this year, ending a seven-year period of rising output. GFMS expects gold mine production in 2015 to have risen 1 per cent to a record 3,155 tonnes.
The end of the gold bull market has prompted some miners to abandon growth projects, while ore grades across the industry have been falling as mines become depleted. The strike rate in finding significant deposits has also declined and most mining companies are struggling to attract investment to develop projects.
Mr Nesis said: “The fourth quarter last year was in my opinion the peak quarter for fresh global mine supply. … I think supply will drop by 15 to 20 per cent over the next three to four years.”
Nick Holland, chief executive of Gold Fields, a South Africa-based gold miner, said the industry had abandoned a previous fixation on rising output.
“We were all talking about how production was going to increase every year. I think those days are probably gone. … You are not going to see massive production increases in the industry,” Mr Holland said.
Ross Strachan, precious metals demand manager at GFMS, said the expected output fall this year would occur “as the contribution from projects that had been commissioned in previous years fades and the pipeline for new projects is limited given the current stressed financial climate.”
end
Gold demand from India continues to rise. Last year net imports were around 900 tonnes:
(Business standard, New Delhi/GATA)
Indian gold demand rises sharply as price falls
Submitted by cpowell on Sat, 2016-01-16 21:17. Section: Daily Dispatches
India’s Gold Import Bill Up 12%, Reaches $35 Billion in 2015
By Rajesh Bhayani
Business Standard, New Delhi
Saturday, January 16, 2016
MUMBAI — India’s gold import in December 2015 is estimated to have crossed 100 tonnes following sharp increase in demand for gold during the first and last weeks of the month, when prices fell sharply both in domestic and international markets. With 105 tonnes of estimated imports in December, India’s total gross import in 2015 has crossed 900 tonnes, a jump of 25 percent over 2014.
In value terms, it is nearly 12 percent higher at $34.980 billion, as December’s import bill is estimated around $3.7 billion. India imported $31.17 billion worth gold in 2014.
Sudheesh Nambiath, lead analyst with GFMS Thomson Reuters, said, “Gold demand increased in December when prices were at the lowest level this year, and as retailers increased their inventory to optimum levels, our estimate for December import is 107 tonnes.”
Looking at annual figures, just over 700 tonnes were net imports as the balance were duty-free imports (for re-export after value addition).
Despite the sharp spurt in imports, the import bill has just gone up only 12 percent because of a fall in gold prices in the international market. Average international gold prices fell by 8 percent, while the price oscillated in a $246 range, a nearly 20-percent decline from the annual high. …
… For the remainder of the report:
http://www.business-standard.com/article/markets/india-gold-import-bill-…
end
An excellent commentary from James Turk as he talks about the huge rise in USA debt levels.
(courtesy James Turk/Kingworldnews/GATA))
Rising rates risk debt disaster for U.S. government, Turk tells KWN
Submitted by cpowell on Tue, 2016-01-19 00:49. Section: Daily Dispatches
7:48p ET Monday, January 18, 2016
Dear Friend of GATA and Gold:
GoldMoney founder James Turk, a consultant to GATA, tells King World News today that the Federal Reserve’s raising interest rates will risk a debt disaster for the U.S. government, which in turn will undermine confidence in the U.S. dollar, which, he says, is not immune to the similar dangers facing other currencies. An excerpt from Turk’s interview is posted at the KWN blog here:
http://kingworldnews.com/worldwide-crash-gaining-momentum-but-the-real-t…
CHRIS POWELL, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.
CPowell@GATA.org
end
Two commentaries tonight: from Bill Holter
The first:
(courtesy Holter-Sinclair collaboration)
Peddling Fiction …?
One must ask the question(s), how can the Fed really do this as accounting firms must sign off on any audits or official financial reports? Do the accounting firms also get “special waivers” to lie or as our fearless leader says “peddle fiction”? Also, how can the Fed really do this with a straight face? Did they really believe the markets would not sniff this out?
Before continuing, please read the response from Zerohedgehttp://www.zerohedge.com/news/2016-01-18/fed-responds-zero-hedge-here-are-some-follow-questions .
First, I am not a lawyer but ZH’s response sounds very much like a legal response and speaks to “discovery”. This in itself is quite interesting as it is about the closest thing to “audit the Fed” as we have gotten to this point. For the Dallas Fed to respond in a public tweet was in my opinion a VERY BAD idea. I say this for several reasons, first, we now know for a fact the Fed reads what ZH posts. Secondly and more importantly, since we now know this for fact …the Fed is now caught in a trap of their own making. Since they read ZH posts, how can they ignore these latest questions. LOGICAL questions I might add! And, if they do respond …there will surely be MORE QUESTIONS!
As for the title, someone IS lying and it does not take a rocket scientist to tell “who” it is. Either the Dallas Fed did not give their banks guidance to hide nonperforming loans or the banks decided to do this on their own. If the banks did this on their own, then they and their auditors cooked the books and will face consequences. How do we know this? Oil has gone from $110 to under $30 and while banks have been lending into the energy patch. It was recently estimated that around $250 billion in debt has been lent to companies who are now net cash flow negative and unprofitable with $30 oil, there WILL BE bankruptcies! There is just no way that loan loss reserves are not needed as we are looking at a huge “bubble” inflated and now bursting.
Going one step further, we will certainly see some lawsuits against banks for not adding to loss reserves and properly accounting for the debacle. Do you think in the court of law and during the true discovery process we won’t find out “why” these banks are hiding the truth? What then? If it turns out they ‘fess up and put the blame on orders from the Fed, what happens to Fed credibility? On the other hand, if the banks do burden the blame …between the very real loan losses and judgments against them …will they even continue to be solvent or even exist?
I don’t want to make this piece too long but the point “someone is lying” is a very important one. The Federal Reserve as I have recently written has lied themselves into a corner by citing BLS statistics as their reason for raising rates. In the real world there was ZERO reason to tighten and plenty of reasons to ease which is why we heard on Friday about “negative interest rates”. This is very similar to a young child who lied and must continue to lie to cover up past lies. The lies become so big, so prevalent and so illogical that the little kid becomes “frenzied” when even he knows he is caught. How long before the Fed becomes frenzied?Standing watch in disbelief!
And now your overnight TUESDAY morning trades in bourses, currencies and interest rate from Asia and Europe:
Equities Soar, Oil Back Over $30 On Hopes For More Stimulus Following Disturbing Chinese Data
Only the most intellectually dishonest can claim that last night’s Chinese economic data deluge was anything but miserable. As we showed last night, everything missed:
- Industrial Production +5.9% (MISS vs +6.0% YoY expectations)
- Retail Sales +11.1% (MISS vs +11.3% YoY expectations)
- Fixed Asset Investment +10.0% (MISS vs +10.2% YoY expectations),
- Q4 GDP growth +6.8% (MISS vs +6.9% YoY expectations).
Even as the real full year GDP of 6.9% was in line, it was still the lowest since 1990…
… while the nominal Q4 GDP was well below 6% when excluding the 0.9% deflator, suggesting unadjusted Chinese growth just had its worst quarter in the 21st century.
MarketNews’ take confirmed as much: “a closer look under the hood shows a more troubling picture. Industrial output growth in December slid back to below 6% after a surprise acceleration in November, fixed-asset investment growth continued its slow grind lower, coming in at 10% for the Jan-Dec period, the weakest pace since 2000. The overhang of unsold real estate persists and although sales are improving in first-tier cities, the government’s own data show that floor space under construction rose just 1.3% in 2015. While that’s an improvement from a record low of -3.6% in the Jan-Aug y/y period, the lack of growth in investment will continue to be a significant drag on the economy this year given the sector’s importance to other industries including steel, cement and household goods.”
Official data on the source of funding for fixed-asset investment show that funds from the state budget rose 15.6% in 2015, slowing from 21.4% for the Jan-Nov 2015 period, and little higher than the 14.1% for full-year 2014, which indicates some moderation at the end of the year. Lending weakened further as a source of investment funding, dropping 5.8% for the full year, compared with a decline of 4.3% in the first 11 months. This doesn’t bode well for a significant pickup in investment growth in 2016.
Real average disposable income growth weakened to 7.4% y/y last year from 8% in the previous year, hardly a boost for consumption. So there are few reasons to take heart from the headline 2015 GDP number even though it was in line with Premier Li Keqiang’s target.
Other estimates of China’s GDP were even worse, with Oxford Economics calculating only 6.3% growth in 2015 and 6.1% y/y in Q4, while Capital Economics estimated China grew only 4.5% in Q4.
So if bad news was bad news, both commodities (read oil) and US equity futures should be tumbling right now… but just the opposite is happening and in fact both Brent and WTI have already jumped over $30 this morning.
This happens even as the IEA said this morning that global oil markets could “drown in oversupply,” sending prices even lower as demand growth slows and Iran revives exports with the end of sanctions, according to the International Energy Agency.
The IEA trimmed 2016 estimates for global oil demand as China’s economic expansion weakens and raised forecasts for supplies outside the Organization of Petroleum Exporting Countries. While non-OPEC supply is set to drop 600,000 barrels a day in 2016, Iran’s comeback could fill that gap by the middle of the year. As a result, world markets may be left with a surplus of 1.5 million barrels a day in the first half.
So why are both commodities, global stocks and futures soaring?
Simple: the following Bloomberg headline summarizes it: “Brent Rallies More Than $1 asChina GDP Spurs Stimulus Bets,” and where Brent goes, so goes risk, and the S&P.
It wasn’t just speculation: confirming that China is getting more actively involved in “risk management” was the following headline moments ago, showing that the PBOC injected over 400 billion yuan into Chinese banks so far this week.
- CHINA PBOC: CNY82 BLN IN 1Y MLF; CNY328 BLN IN 3-MONTH MLF
- CHINA PBOC INJECTS CNY410 BLN VIA MLF TO BANKS
And then, the National Team arrived: the Shanghai Composite Index rallied 3.2 percent, the most since November, with Reorient Financial Markets Ltd. saying government-led funds may have entered to bolster the market.
Which means one thing: bad news is good news again, if only for a few days or until thepreviously noted “oversold” bounce takes place. In fact the only underperforming asset today, for the second day in a row, were Italian banks and the FTSE MIB index in general, as a result of many financials being halted from trading after reports the ECB are looking to investigate banks non-performing loans.
Here is a quick snapshot of where global risk indexes could be found this morning.
- S&P 500 futures up 1.7% to 1907
- Stoxx 600 up 1.9% to 335
- FTSE 100 up 1.7% to 5879
- DAX up 1.8% to 9694
- German 10Yr yield up 1bp to 0.55%
- Italian 10Yr yield up less than 1bp to 1.57%
- Spanish 10Yr yield down 2bps to 1.73%
- MSCI Asia Pacific up 0.9% to 120
- Nikkei 225 up 0.5% to 17048
- Hang Seng up 2.1% to 19636
- Shanghai Composite up 3.2% to 3008
- US 10-yr yield up 2bps to 2.06%
- Dollar Index up 0.21% to 99.17
- WTI Crude futures up 1.3% to $29.80
- Brent Futures up 3.9% to $29.65
- Gold spot down 0.2% to $1,087
- Silver spot up 0.7% to $14.05
Here is how the realization that China’s terrible economic data is really great for risk assets, starting in Asia, where equity markets traded mostly higher in what was a volatile session following the release of key data from China which saw 2015 GDP at its slowest annual growth in 25 years. Shanghai Comp. (+3.2%), rose back above the 3,000 level after being initially weighed by the miss on GDP, Industrial Production and Retail Sales figures. However, sentiment then reversed as the weak data stoked expectations for further easing measures, while the PBoC also offered funds via medium term lending facilities in tenors of 3-months and 1-year, with the latter being offered for the 1st time in history. This comes after some turmoil seen yesterday, were the PBoC implemented a reserve requirement ratio to some banks involved in the CNH market.
Top Asian News
- Yuan Bears Stick to Their Guns After PBOC Attacks on All Fronts: Rabobank sees drop to 7.6 in 2016, Natixis predicts 6.95.
- Biggest Leveraged ETF Takes in $1.5 Billion as Japan Stocks Sink: Next Funds Nikkei 225 Leveraged Index ETF took in 177.4b this year.
- SoftBank Plunges to Lowest Since Sprint Buy as Doubts Mount: Shares fell yesterday to lowest level since buying Sprint in 2013 amid mounting pessimism that billionaire Masayoshi Son can turn around the money-losing U.S. carrier.
- Cnooc to Cut Spending, Output Amid Crude’s Plunge Below $30: Co. to decrease capex to “no more than” CNY60b ($9.1b) this year from a target of as much as CNY80b for 2015.
- Ex-Goldman Macro Trader Lim Reopens $1.1 Billion Hedge Fund: Leland Lim’s Guard macro hedge fund returned 8.1% in 2015.
- Mukesh Ambani’s Reliance Jio to Raise $2.2 Billion in Share Sale: Jio’s rights offering will involve issuing 15b shrs.
- YouTube Access Restored in Pakistan After 3-Year Blackout: Site was forbidden to prevent people from watching a film branded as anti-Islam.
- Chevron Signs Second China LNG Deal as Gorgon Output Nears: Co. plans to supply upto 500kt/y of LNG to unit of ENN Energy Holdings from Gorgon project.
European equities kicked off to a positive start, despite another set of disappointing data from China. Headline GDP (Q4 Y/Y 6.8% vs. Exp. 6.9% Prey. 6.9%) and Industrial production (Y/Y 5.9% vs. Exp. 6.0% Prey. 6.2%) figures missed on expectations . An uptick in sentiment has also been helped by the announcement PBoC have moved to provide funds via medium term lending facilities in tenors of 3-months and 1-year, with the latter being offered for the 1st time in history. The energy sector benefits from Brent and WTI futures trading firmly above the USD 29.00 level, and out performs its counterparts in Europe. The FTSE MIB remains the laggard for the second consecutive day, with many financials halted from trading, with reports the ECB are looking to investigate banks non-performing loans. The underperformance in Italian financials has also led to an uptick in Bunds, as investors seek a safe haven.
European Top News
- Credit Agricole Confirms Plan to Sell Bank Stakes; Shares Surge: Co. confirmed it’s exploring sale of stakes in more than three dozen regional banks.
- Paschi, UniCredit Among Banks Pressed for Loan Data by ECB: Banks among Italian lenders asked to submit data on their NPLs as ECB toughens scrutiny of region’s credit quality.
- Adidas Says Henkel’s Rorsted to Succeed Hainer as CEO: Rorsted, 53, will join Adidas board on Aug. 1, take over as CEO 2 months later.
- U.K. December Inflation Edges Up on Fuel Costs, Air Fares: Prices rose an annual 0.2%, most since Jan., following a 0.1% gain in Nov.
- Norway’s Top Tech Fund Snaps Up Apple Again After Stock Rout: DNB Nordic Technology, which has beaten its peers 7 of 10 past years, according to data compiled by Bloomberg, bought a “little bit” in Apple last Tues. after exiting stake in spring 2015.
- HBO Plans to Take On Netflix in Spain With Streaming Service: By end-2016, residents in Spain will have access to an HBO streaming service for first time.
- Hollywood Studios Fight Back as EU Attacks Content Curbs: Studios including 20th Century Fox, Sky Plc are seeking to stave off possible EU fines as bloc’s antitrust chief considers curbs on where they sell content.
- Priciest Stockholm Homes Slip Amid Signs Tipping Point Reached: After rising 17% over the past year, prices in central Stockholm fell 1% in 3 months through Dec.
In FX, the yen dropped 0.5 percent to 117.92 per dollar as investors unwound demand for the currency as a haven from turmoil in China. It has strengthened 2 percent this month.
South Africa’s rand led gains in the currencies of commodity producing nations, rising for first time in three days. It climbed 1.6 percent, leading a gauge of 20 emerging-market currencies 0.4 percent higher on Tuesday. Australia’s currency gained 1.1 percent. Russia’s ruble strengthened 1.3 percent to 78.31 against the dollar.
Turkey’s lira gained 0.4 percent before a central bank meeting. Two-year note yields were little changed at 11.11 percent. Policy markers will keep interest rates unchanged, according to the median estimate in Bloomberg surveys of economists.
The Hong Kong dollar slipped 0.1 percent to 7.8059 per dollar, the weakest since September 2011. The currency was near the mid-point of the HK$7.75-HK$7.85 trading range that’s existed for more than a decade.
In commodities, the Bloomberg Commodity Index rose 1.2 percent, after closing at the lowest level since at least 1991 on Friday. Brent crude climbed as much as 3.9 percent to $29.67 a barrel, paring its decline this year to 21 percent.
The International Energy Agency, adviser to 28 advanced economies, said Tuesday that global oil markets could “drown in oversupply,” sending prices even lower as demand growth slows and Iran revives exports.
Copper gained 1.4 percent as stock markets jumped in China, the world’s biggest metals consumer. Former Federal Reserve Chair Ben Bernanke said China was making “good progress” with financial reforms.
Corn climbed to the highest in almost four weeks as drought threatened to hurt African crops.
Looking at the day ahead, the lone release in the US is the NAHB housing market index print. Earnings wise the focus today looks set to be on the banks with Bank of America and Morgan Stanley reporting at the open, while IBM is due to report post the closing bell
Overnight Bulletin Summary From RanSquawk and Bloomberg
- The steady risk mood in FX continues into todays session, lifting the correlated currencies but cautiously so as yet
- European equities (Euro Stoxx 2.0%) kicked off to a positive start, despite another set of disappointing data from China, where GDP and IP missed expectations
- Today’s highlights include comments from BoE’s Carney and ECB’s Nowotny
- Treasuries decline to open the week; 10Y yields holding near lowest since October after rallying as much as ~24bp since start of year amid equity rout, growth concerns.
- The IMF cut its world growth outlook, as the commodities slump and political gridlock push Brazil deeper into recession, plunging oil prices hobble Mideast crude producers, and the rising dollar curbs U.S. prospects
- Banca Monte dei Paschi di Siena SpA, UniCredit SpA and Banca Popolare dell’Emilia Romagna SC were among Italian lenders asked to submit data on their non-performing loans as the ECB toughens scrutiny of the region’s credit quality
- Merkel’s is poised for a week of refugee politicking after mass sexual assaults on New Year’s Eve increased pressure on her to impose border restrictions, a demand championed by lawmakers in her party bloc who plan to hand her a letter of protest today
- China’s industrial production, retail sales and fixed-asset investment all slowed in December, capping the weakest quarter of growth since the 2009 global recession, as the Communist leadership grapples with a transition to consumer- led expansion
- Chinese stocks rallied as the weaker-than-estimated data fueled speculation of increased stimulus and industrial shares rallied on prospects of state-fund buying
- For Chinese consumers, the benefit of oil’s crash stops at $40/bbl because the retail price of fuels such as gasoline won’t be cut in line with crude as long as it trades below that level, according to the country’s top economic planner
- China’s securities regulator denied a Reuters report that its Chairman Xiao Gang offered to resign
- Germany’s ZEW index of investor expectations fell to 10.2 in January (est 8) from 16.1 in December
- Sovereign bond yields higher. Asian stocks and European stocks gain; equity-index futures advance. Crude oil and copper rally, gold falls
Top Global News
- China GDP Slows to Weakest Since 2009 on Manufacturing Slide: 4Q GDP grows 6.8% y/y vs est. 6.9%.
- IEA Says Oil Rout Could Deepen as Market ‘Drowns’ in Oversupply: Global oil markets could “drown in oversupply,” sending prices even lower as demand growth slows with Iran ramping up exports after sanctions.
- Benefits of Iran Sanctions Relief to Bypass Most U.S. Firms: Actions taken Saturday in Vienna leave in place number of U.S. restrictions on commercial dealings with Iran.
- Suncor to Buy Canadian Oil Sands After Raising Offer by 12%: Co. raised its all-stock offer by 12% to C$4.2b ($2.9b), winning approval from management team that had rejected earlier approaches.
- Woolworths, Lowe’s Exit Unprofitable Home-Improvements Unit: Cos. exiting their unprofitable Australian home-improvements venture after failed 6-year attempt to take on market leader Bunnings Ltd.
- U.S. Court Backs Apple Motion in Patent Case Against Samsung: Court ordered Samsung to stop using software in the U.S. that helps mobile phones infringe on those patents.
- General Motors Salvages Ride-Hailing Company Sidecar for Parts: Automaker acquired technology, most assets of ride- hailing pioneer Sidecar Technologies.
- Facebook’s WhatsApp Drops Subscription Fee, Tests New B2C Tools: messaging service to drop annual $0.99 subscription fee; to test ways to monetize its nearly 1b customers by allowing businesses to communicate with users.
- Amazon Veers Into Labor Law Fight Zone for Hurried Deliveries: Co.’s push into ultra-fast delivery has landed it in court with drivers claiming they’re being exploited.
- Qualcomm Seeks JV Shortcut to Server Sales in China: Co. trying to break Intel’s dominance of chip sales for server computers, is forming a JV in China.
- Bank of Montreal Enters Robo-Advising Ahead of Other Lenders: Co. starts signing up customers for its automated low-fee investment-advice platform this week.
- Trump Says He’ll Get Apple to Manufacture Products in U.S.: “We’re gonna get Apple to start building their damn computers and things in this country instead of in other countries.”
- Clinton, Sanders Fight for Title of Obama’s Heir in S.C.: Clinton tightened her embrace of Barack Obama on Sunday as Sanders tried to tie her to Wall Street in final debate before Feb. 1 Iowa caucus.
- World’s Richest Down $305b as Markets Extend Global Rout: 400 richest people have lost $305b from their combined net worth this month. Richest 1% Now Wealthier Than the Rest of World: Oxfam
- ‘Ride Along 2’ Topples ‘Star Wars’ in Holiday-Weekend Box Office: Film knocked latest “Star Wars” movie from top box office spot over Martin Luther King Jr. holiday weekend.
DB’s Jim Reid completes the overnight wrap
There’s only one place to start this morning and that’s in China where there’s been some significant data to digest including the much anticipated growth numbers. Q4 GDP has printed at 6.8% yoy, below market expectations of 6.9% and down one-tenth from Q3. It is also the lowest print since Q1 2009 and at the bottom end of most economists’ estimates (16 of 43 surveyed expected 6.8% or below). That means GDP growth for full year 2015 was 6.9% (which was in line with consensus estimates) which the government will argue is in line with their estimate of ‘about 7%’. There’s no doubt that Q4 came in a bit softer than hoped however with the Q4 qoq print of 1.6% missing expectations by two tenths.
The monthly activity indicators were also generally disappointing. Industrial production slowed to 5.9% yoy (vs. 6.0% expected) last month, down from 6.2% in November. Fixed asset investment slowed to 10.0% yoy (vs. 10.2% expected) and a decline of two-tenths from the previous month. Finally retail sales grew 11.1% yoy in Dec (vs. 11.3% expected), also seen as disappointing having been 11.2% in November.
It’s hard to know what to make of the price action since the data. The Shanghai Comp had been trading with a mildly positive tone into the numbers (+0.7%) only to then wipe out all of those gains in the 30 minutes post the data. The interesting move has come since though with the index now up +2.54% post the midday break with little obvious news flow to drive the surge. It could be hope of fresh stimulus, intervention or just positioning. The CSI 300 (+2.68%) and Shenzhen (+2.89%) are up similar amounts while there’s been some wild moves for the Hang Seng also but that’s currently sitting with a +1.43% gain. Keep a close eye on moves into the close and after we go to print. Moves have been a bit more subdued for the Nikkei and Kospi, with both posting modest gains of close to half a percent. China sensitive currencies including the Aussie Dollar were also sharply lower post the data but have rallied back to trade higher on the day. Credit indices have gained meanwhile with the Asia iTraxx currently 4bps tighter. US equity futures are also pointing towards a reasonable start, trading with gains of close to 1% while Brent Oil is up nearly 2%.
Moving on. With US markets closed yesterday and investors in a bit of a wait and see mode for this morning’s China data there wasn’t a whole lot more newsflow over the past 24 hours. Despite volumes being lower than normal, it was still another broadly weaker day for risk assets in Europe however as Brent extended its move further below $29/bbl after falling -1.35% (although in fairness pared much larger moves lower during the Monday Asia session when it tumbled below $28) with the overall fallout from the lifting of the Iran sanctions over the weekend perhaps less severe than expected. Instead it was the weakness in European banks which had a more damaging effect yesterday (more on that shortly). The Stoxx 600 closed -0.36% by the end of play for its third consecutive down day and eighth in eleven sessions so far this year, with the YTD loss now creeping past 10%. Weakness was led by the peripheral bourses though with the Spanish IBEX closing -0.87% and the Italian FTSE MIB down a steep -2.65%. Credit indices finished slightly weaker also with Main (+1.5bps) and Crossover (+3.5bps) a touch wider, although the underperformance clearly coming from the financials with the sub-fins index yesterday closing +8bps wider.
As highlighted the big moves yesterday came in financials and specifically Italian banks. Monte dei Paschi (-14.76%), Banca Popolare (-8.73%) and UBI (-7.28%) saw the steepest drops following news that the ECB’s central oversight arm, the Single Supervisory Mechanism, is set to carry a deep dive on the banking system, scrutinizing non-performing loans and bad debts in particular. The moves yesterday were enough to see Italian market regulator Consob impose a short selling ban on Monte dei Paschi while unsurprisingly subordinated and junior debt in Italian lenders came under big pressure, with Monte’s 2020 sub notes yesterday declining 10pts post the news. On top of the Novo Banco issues, the recent news is bringing peripheral bank headlines and concerns about asset quality back to the forefront.
In terms of the rest of the price action yesterday, rates markets were fairly benign with little change in yields across most of the core sovereign markets, while Portugal (+3.2bps) continues to be the notable underperformer. The data calendar was quiet. UK house prices nudged up 0.5% mom this month while Italy reported a slightly narrower than expected trade surplus. Meanwhile the slightly calmer day for Oil, all things considered, help precious metals post some decent gains with Copper, Zinc and Nickel up 1%-2%.
Of some interest were the relatively contrasting comments from ECB officials meanwhile. The ECB’s Villeroy sounded more upbeat when commenting that the European recovery is on track and stimulus measures put in place by the ECB are bearing fruit. Governing Council member Rimsevics warned however that ‘I am concerned that people are a bit too relaxed’ about a slowdown in China and the knock on effect that this may have on Europe.
Looking at the day ahead, the calendar kicks up a gear today and we start this morning in Germany where we will receive the final read for December CPI. Shortly following this will be the December inflation dump out of the UK with the CPI/RPI/PPI docket. The final revision to Euro area CPI for December follows this (no change expected at +0.2% yoy at the headline and +0.9% yoy at the core) before we get the January ZEW survey reading out of Germany. In the US this afternoon the lone release is the NAHB housing market index print. Earnings wise the focus today looks set to be on the banks with Bank of America and Morgan Stanley reporting at the open, while IBM is due to report post the closing bell
i)Late SUNDAY night,MONDAY morning: Shanghai up on manipulation / 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 lower, falling below 30 dollars per barrel and clinging to the 28 dollar level. Stocks in Europe all in the red. Offshore yuan trades at 6.5877 yuan to the dollar vs 6.5785 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 Sunday night:
Japanese Stocks Enter Bear Market, Credit Risk Surges To 20-Month Highs
“It’s difficult to see the fall stopping today,” warned one Japanese equity strategist and rightly so as Japan’s broad TOPIX idnex just entered a bear markets (down 20% from the August 2015 highs). With the Nikkei well below 17,000, Kuroda is due to speak at the Diet today as Japanese corporate bond risk surges to 20-month highs.
TOPIX enters Bear Market
And now the Nikkei:
- *JAPAN’S NIKKEI 225 EXTENDS DECLINE FROM JUNE HIGH TO 20%
And Japanese corporate bond risk is surging – up 3.5bps to 87bps – the highest in 20 months…
Get back to work Mr. Kuroda!!
- *JAPAN’S PARLIAMENT CONFIRMED KURODA’S APPEARANCE
We just have one quick question – how does the government explain to its citizenry that forcing GPIF to go all-in Japanese stocks and corporate credit was a terrible idea and their retirement funds are FUBAR?
end
China Stocks, Credit Risk Worsen Despite “Short-Squeezed” Yuan Strength
On the heels of new reserve ratio regulations and the biggest strengthening in the Yuan fix in 4 weeks, offshore Yuan has strengthened notably (despite Chinese default/devaluation risk surging in the CDS markets). Chinese stocks are weaker in the early going but corporate bond yields continue to slide to new record lows as the “last bubble standing” stands ignorant of the risks around it.
PBOC fixed the Yuan 0.07% stronger – the biggest gain in 4 weeks…
- *PBOC STRENGTHENS YUAN FIXING BY 0.07%, MOST SINCE DEC. 21
Offshore Yuan is rallying in early trading, because as Bloomberg notes,
*PBOC TO IMPOSE RESERVE RATIO ON OFFSHORE BANK YUAN ACCOUNTS
*PBOC SAYS RULE DOESN’T APPLY TO FOREIGN CENTRAL BANKS
*PBOC SAYS RULE WON’T AFFECT DOMESTIC YUAN LIQUIDITY
*PBOC SAYS WILL USE MONETARY TOOLS TO MAINTAIN LIQUIDITY
PBOC will impose a required reserve ratio on offshore participant banks with yuan deposits in the mainland, according to people familiar with the matter.
Raising reserve requirement is meant to increase cost of funding and discourage speculative short yuan trades, says Fiona Lim, Singapore-based senior FX analyst at Maybank
This has converged the Onshore-offshore Yuan spread once again…
Chinese sovereign default/devaluation risk surges…
And stocks weaken:
- *CHINA’S CSI 300 INDEX SET TO OPEN DOWN 1.6% TO 3,068.23
- *CHINA SHANGHAI COMPOSITE SET TO OPEN DOWN 1.8% TO 2,847.54
But the money continues to flow aimlessly into the “last bubble standing” as we detailed previously with record low corporate bond yields in China (despite a collapse in creditworthiness fundamentals and huge supply).
But analysts are starting to worry:
“2016 is a year when we will see systemic risks emerge in China’s credit market,” said Ji Weijie, credit analyst in Beijing at China Securities Co., the top arranger of bond offerings from state-owned and listed firms.
“There may be a chain reaction as more companies are likely to fail in a slowing economy and related firms could go down too.”
Charts: Bloomberg
Japan’s Nikkei Closes Below 17,000 As Hong Kong Money-Markets ‘Break’ Again
With Hong Kong Dollar spot little changed (but pressing the weaker end of its peg band) and 12-month forwards suggesting notable weakness/depegging to come, it appears that the Hong Kong interbank lending debacle is far from over. While overnight money appears stable, 1-week Yuan HIBOR is up 370bps at 11.90%, and 1-month and 3-Month HKD HIBOR just snapped higher ( to Jan 2013 highs and July 2010 highs respectively). It appears comments from Hong Kong Monetray Authority’s Norman Chan that it’s just a matter of time before outflow of funds lead to the local currency hitting the low end of the peg sparked heavy medium-term demand for liquidity. Offshore Yuan is crepping back weaker (as is crude) after an early bounce.
*YUAN 1-WEEK HIBOR RISES 370 BPS TO 11.90%
And while the levels are not as exciting the relative spike is notable in HK interbank markets.
*HONG KONG 3-MONTH HIBOR RISES TO HIGHEST SINCE JUL. 2010
*HONG KONG 1-MONTH HIBOR RISES TO HIGHEST SINCE JAN. 2013
But for now spot is stable (albeit at the weak-end of the peg band)…
After an early bounce, crude is retumbling as stress hits HKD…
Offshore Yuan is giving up more short squeeze gains…
And Japan’s Nikkei 225 closes below 17,000 for the first time since September…
end
Monday afternoon, the following happened:
China’s Top Stock Regulator Gives Up On “Immature” Market, Hands In Resgination
Earlier this month, China tried to implement a circuit breaker designed to guard against the turmoil that’s been reverberating through the country’s equity markets since an unwind in a half dozen backdoor margin lending channels triggered an ugly meltdown last summer.
Although the CSRC launched a concerted effort to prop up the market by creating the so-called “national team” which bought nearly CNY2 trillion in shares from June through the end of the year, Beijing has been unable to restore a sense of normalcy.
The inability to stabilize mainland equity prices partly stems from the fact that 80% of the market is comprised of retail investors who are keen on selling any rips in a futile attempt to recover some of the $5 trillion that’s been wiped off the SHCOMP and the Shenzhen in the ongoing rout. Rampant uncertainty surrounding the country’s new FX regime hasn’t helped matters.
Going into the new year, China had tried everything to stop the bleeding up to and including arresting those suspected of contributing to the selloff even when the actions of the accused were perfectly legal. In a kind of Hail Mary maneuver, CSRC chief Xiao Gang dreamed up a circuit breaker which went into effect on January 4. The mechanism halted trading on the SHCOMP and the Shenzhen for the remainder of the trading day in the event the CSI300 fell 7%.
Put simply: the effort was a miserable failure. Apparently, it didn’t occur to anyone in Beijing that by halting trading for the entire day, the selling pressure would only build and spillover into the next session, creating an endless string of limit down halts as investors panic sell at the open. The circuit breaker was abandoned after just three days.
The fiasco was humiliating for CSRC chief Xiao Gang who on Saturday said elevated volatility in China is the result of an “immature market, inexperienced investors, an imperfect trading system and inappropriate supervision mechanisms.” Now, apparently at a loss for how to right the ship, Xiao is ready to throw in the towel. “Xiao Gang, the embattled head of China’s securities regulator, has offered to resign,” Reuters reported on Monday, citing unnamed sources close to the Party.
“The (Communist Party) central (leadership) is extremely unhappy with Xiao Gang. It is certain he will change jobs,” one source said.
“Xiao Gang handed in his resignation last week,” a “financial industry source” confirmed.
Xiao’s term as chairman doesn’t technically end until 2018, but we can’t exactly blame him for wanting to duck out early. As noted above, the CSRC’s efforts to keep the equity dream alive for the hordes of everyday Chinese who plowed their life savings into the market have been nothing short of unprecedented and at times bordered on the comically absurd. At one point for instance, the regulator simply halted trading in 75% of listed shares indefinitely. In another now famous boondoggle, Beijing arrested a journalist for printing a story that moved futures in the “wrong” direction.
It seems likely that Xiao has run out of ideas. It’s also possible that he fears for his freedom. After all, CSRC officials were among those arrested last year. Indeed, vice chairman Yao Gang came under investigation for graft shortly after a series of brutal selloffs in China rocked global markets in late August.
While Reuters says there are three candidates short-listed to replace Xiao, it’s not clear that i) anyone wants the job, or ii) that the Party will be willing to suffer further reputational damage by admitting that the country’s top securities regulator has effectively given up on the market.
So essentially, the Politburo would probably like nothing more than to have Xiao’s head delivered on a silver platter (figuratively speaking we hope), but the optics around his exit would likely mean even more selling by the country’s millions of semi-literate, newly-minted, over leveraged daytraders who would see the CSRC chief’s ouster as still more proof of that the Chinese stock market is, in the words of one 48-year-old bank accountant from Kunshan, “a mess.”
The CSRC said rumors of Xiao’s resignation are unfounded.
“This information does not conform to the facts,” the agency said, in a characteristically hilarious statement.
We shall see. In the meantime, anyone who’s interested in trying their hand at corralling the most unruly equity market on the planet is encouraged to update their CV and send it to Xi. But be forewarned, this is one job where failure could land you in a Chinese prison for the rest of your days.
end
Now for last night’s trading from China
i)Late MONDAY night,TUESDAY morning: Shanghai up on manipulation / Hang Sang rises. The Nikkei closed in the green as did all of Asia . Chinese yuan constant and yet they still desire further devaluation throughout this year. Oil is much higher,stimulating bourses around the globe. Stocks in Europe all in the green. Offshore yuan trades at 6.5936 yuan to the dollar vs 6.5785 for onshore yuan. The POBC adds 400 billion yuan into the banking system . Hong Kong dollar suffers another decline
Chinese news from last night:
Yuan Slides After Quadruple Whammy China Data Miss: GDP Both Matches And Misses
Following China’s growth slowing to 1999 levels in Q3 (but beating expectations with the mirage of a mysteriously large drop in the deflator), all eyes were on tonight’s data, most notably the deflator (especially following the trade data debacle from last week). The quadriga struck at 2100ET with Industrial Production +5.9% (MISS vs +6.0% YoY expectations),Retail Sales +11.1% (MISS vs +11.3% YoY expectations), Fixed Asset Investment +10.0% (MISS vs +10.2% YoY expectations), and then the big kahuna Q4 GDP growth +6.8% (MISS vs +6.9% YoY expectations). China, US equities were higher going in but faded quickly on the miss only to be rescued higher again. Offshore Yuan is fading.
Someone leaked it 5 minutes early:
- CHINA 2015 REAL GDP +6.9% VS 2014 +7.3%; EXP. 6.9%
And while the full year real GDP print was indeed inline with the 6.9% consensus, it was the Q4 number that was disappointing missing the 6.9% expectation by 0.1%
- CHINA 4Q GDP GROWS 6.8% FROM YEAR EARLIER; EST. 6.9%
As Bloomberg notes this was only the first time that China’s quarterly GDP has missed the forecast since early 2013.
Industrial Production
- *CHINA DEC. INDUSTRIAL OUTPUT RISES 5.9% ON YEAR; EST. 6.0%
Retail Sales
- *CHINA DEC. RETAIL SALES RISE 11.1% ON YEAR; EST. 11.3%
Fixed Asset Investment
- *CHINA 2015 FIXED-ASSET INVESTMENT RISES 10% Y/Y; EST. 10.2%
Dow futures were rallying confidently into the numbers (on the back suddeny JPY weakness following Kuroda’s appearance in The Diet)… but started to fade on the quadruple whammy miss only to be rescued back higher again… and now fading…
Offshore Yuan is extending losses but only marginally.
Gold bid, crude slid…
And just in case you question any of this:
- *CHINA STATS BUREAU HEAD SAYS 6.9% GROWTH NOT LOW
- *CHINA’S GDP CALCULATION IS BASED ON SOLID DATA: NBS WANG
-
CHINA NBS: OUR GDP NUMBER IS REAL AND CAN BE TRUSTED
Think about that for a second – The world’s 2nd largest economy has to come out publicly and say no seriously this was good data, you can trust it, seriously, we mean it!
end
TUESDAY MORNING: HONG KONG DOLLAR CRASHES
to almost 7.83 to the dollar.
Hong Kong Dollar Plunges To Weakest Since Aug 2007
Modest overnight weakness in the Hong Kong Dollar has accelerated notably as the US session starts with USDHKD down 150 pips in the last hour, plunging to its weakest against the dollar since Aug 2007…
12 month forwards have been leading this collapse and still indicate HKD dropping to 7.8650, once again testing the weak-end of the HKDUSD peg band.
(courtesy Jack Rasmus/Global Research)
China, The Locus of the Next Financial Crisis? Imploding Stock Markets, Slowing Real Economy
What’s happening in China? Is it becoming the locus of the next financial crisis? Some well positioned capitalists are beginning to suggest so, including no less than that guru of global hedge fund and financial speculators, George Soros. The Bank of Central Banks, the Bank of International Settlements (BIS) in Geneva, is saying the same; so too are a growing list of research departments of major global banks ,like UBS and Societe General in Europe.
China today is facing a convergence of several major forces that threaten not only to drive its economy and financial system into further and faster contraction and instability, but threaten as well to destabilize the rest of the global economy, especially emerging markets.
Instability #1: Imploding Stock Markets
In early January 2016, China’s main stock markets, the Shanghai and Schenzen, fell steeply to levels that required the government to suspend trading, i.e. to shut them down. Since December 22, 2015, in just two weeks, China stock markets have contracted by more than 20 percent, in what is a third ‘leg down’ since China’s markets began first imploding last June 12, 2015.
Initially having risen by 120 percent to bubble levels in 2014-2015, China’s markets contracted -32 percent by early July. Intervention by its central bank and government thereafter briefly stabilized prices. China then devalued its currency, the Yuan, in late August and the markets fell a second time, by -42 percent. After a short recovery last fall, a third and most recent collapse of 20 percent in early January 2016 has resulted in stock values falling about -50 percent from their previous May-June 2015 highs.
After three intervention efforts requiring US$500 billion by China’s central bank and government over the past six months to stabilize the stock implosion, it has become clear that China authorities cannot prevent the markets from imploding still further. Analysts predict China’s stock index will fall to 2000 from its current 2900, and its June 2015 highs of more than 5000. That’s about a -65 percent fall, which is roughly equivalent to the collapse of U.S. stocks in 2008-09.
That kind of stock market collapse suggests China may be beginning to experience a financial crisis roughly equivalent to the U.S. financial crash of 2008-09. Stock market crashes of such dimensions are signs of either actual, or impending, near-depression conditions.
Instability #2: Currency Decline & Capital Flight
With a stock market collapse underway, wealthy Chinese investors, speculators, and China’s more than 6,000 estimated shadow banks (there were no shadow banks in 2008), are all desperately selling stock. Stock sales in Yuan are then being converted to dollars and other global currencies. The money is then sent out of China to invest abroad. Estimates of capital flight from China last year in 2015 are estimated at around US$1 trillion.
To try to stem the outflow, China authorities have been intervening in global currency markets to try to keep currency values from falling precipitously. More than US$100 billion was used to prop up the currency in December 2015 alone. But like the US$500 billion spent the past six months to intervene to stop the stock price collapse, China central bank and government attempts to prop up China’s currency have proved equally ineffective at stemming the decline in its currency, which has already devalued since last summer by 6 percent to the dollar, as pressure continues to build for still more devaluation.
Unable to prevent both its stock market implosion and further devaluations, the impression globally is growing that China is progressively losing control of growing economic instability.
The stock selling and collapse is feeding the currency devaluation and vice-versa. Investors and speculators are selling stock converting Yuan to dollars and driving down the currency’s value; in turn the declining currency is encouraging investors to sell stocks in a currency that is falling in value. In other words, a mutual downward spiral is underway.
Instability #3: Slowing Real Economy
Behind the stock-currency spiral is China’s real economy that is slowing faster than China official statistics indicate. China’s real economy, measured in GDP, is slowing far more rapidly than the government’s estimated 6.9 percent. Independent sources looking at rail and freight traffic, electricity usage, manufacturing output, and other such indicators, suggest China’s growth rate may in fact average around 5 percent. Some estimates are suggesting as low as 3 percent annual growth today. Its manufacturing sector has contracted every month throughout 2015. Export growth is negative. Industrial production and real investment growth rates are half of what they were in 2014. Prices for industrial goods are deflating and for consumer goods and services rapidly disinflating.
China’s slowing real economy means corporate profit declines and even defaults, which encourages investors to dump and sell stocks; stock and currency translates by various channels into further corporate profits decline. The problem is particularly acute among state owned and old ‘industrial’ enterprises, which have become massively indebted since 2009 and increasingly unable to secure financing even to continue production operations.
Thus these three elements—slowing real economy, stock implosion, and currency devaluation—are now feeding back upon and exacerbating each other. The downward spiral is intensifying.
Overlaid on all the three elements are the slowing global economy and slowing demand for China exports, the global currency wars intensified by recent Europe and Japan QE programs which will expand still further in 2016, and spreading recessions in emerging markets, barely growing or stagnating economies in Europe and Japan, and the concurrent collapse of global oil prices, now at US$29 a barrel and in some places, like Canada, as low as US$15.
In other words, growing fragility in the global economy outside China makes the global economy today more sensitive to growing instability within China itself, and vice-versa. China and the global economy are feeding off each other negatively as well: China destabilizing the rest of the global economy and that destabilization negatively impacting China as well.
Instability #4: Corporate Debt and Non-Performing Loans
This China-global interaction is taking place, moreover, on a tinderbox of debt in China, as well as globally. Total global debt, mostly business debt, has increased by no less than US$50 trillion since 2009. China’s total debt represents no less than half of that US$50 trillion, having risen from US$7.4 trillion in 2007 to more than US$30 trillion today. Moreover, even more ominous, about US$2.5 trillion of its US$19 trillion corporate debt represents non-performing business loans in China today.
As stock markets and currency declines, as old industrial companies slide deeper into trouble and can’t raise money capital, and as revenue from exports slows for China, it means China corporations (and local governments) will face increasing difficulty making payments on the massive debt that has accumulated since 2007. Defaults are inevitable, which in turn will make both China’s real and financial economy even more unstable.
In short, a bust in coming in China and it will spill over to the rest of the global economy with serious consequences—first for emerging markets and thereafter inevitably as well for advanced economies like the US, Europe and Japan.
China government and state banks will have to bail out the over-indebted private sector. The government has massive reserves of US$3 trillion with which to do so. But it has already spent approximately US$1 trillion dollars thus far to support stocks and its currency. How much more will it commit to bail out its falling stock market, to halt the decline of its currency and capital flight, and eventually to bail out defaulting corporations and local governments as well? And what happens to China, and the global economy, should it even balk at doing so?
The next major global financial crisis will most likely not occur in the U.S. or other advanced economies of Europe and Japan. It will originate in emerging market economies, precipitated by instability events in China. China may be able to weather the crisis, given its huge reserves. But other emerging markets, many already in recession, will find it far more difficult to do so. As China and emerging market economies enter a deeper crisis in 2016-17, the U.S, Europe and Japan, already essentially stagnating, will not prove immune as well.
Jack Rasmus is author of the just published book, ‘Systemic Fragility in the Global Economy’, available from his blog, jackrasmus.com, and website,http://www.kyklosproductions.com, as well as from Amazon.
Glencore’s “Investment Grade” Bonds Just Took Out September Crash Lows: Downgrade To Junk Imminent
In early 2014, when not a cloud was visible on the Commodity/Copper/China sky, we predicted that the best way to trade the upcoming Commodity/Copper/China Collapse is by going long Glencore CDS, the equivalent of shorting Glencore bonds (and implicitly stock).
Back then the CDS was at 170bps.
Less than two years later, going long Glencore CDS may have been the best risk/return commodity trade in the world, as over the weekend GLEN CDS blew out to new post-crisis highs of 1,128 bps, nearly 7 times wider than the 170bps from March 2014, but more troubling is that Glencore’s 2021 bonds just hit a 5 year low, taking out the September crash levels, and trading at about 64 cents on the dollar. These are currently rated “investment grade” by the less than credible rating agencies.
However, following the recent junking of Noble Group which has sent its stock price to 12 year lows and which hints that a bankruptcy is now virtually inevitable, we expect Glencore to be junked any day now, with the ensuing cascade of margin and collateral calls testing just how “systematically unimportant” the world’s largest commodity traders really are, because remember: the world’s favorite finance “expert” for Wall Street hire, Craig Pirrong, recently concluded that “Commodity trading firms are not a source of systemic risk.”
We’ll find out soon enough.
end
Wow@!! this is a change: Hollande now admits his socialist policies have failed and he now declares that France is in a state of emergency:
(courtesy zerohedge)
Francois Hollande Admits Socialist Policies Failed, Declares “Economic State Of Emergency”
Remember when showing ‘progress’ in Europe was as simple as pointing to your high stock market or low bond yields to “prove” everything is awesome.
Since 2012, when Mr Hollande came to power, more than 600,000 people have joined the ranks of the unemployed at a time when joblessness has decreased in most of the other large European economies.
Well for Francois Hollande, the days of hiding behing manipulated data are over and the open kimono reveals a nation whose stability is wracked by record unemployment. In a desperate-for-re-election speech today, The FT reports that socialist leader Hollande admitted his policies needed reform and that France is an economic “state of emergency.”
In a turn towards pro-business policies (sacre bleu!), Hollande prescribed new measures which involve the creation of 500,000 vocational training schemes, additional subsidies for small companies and a programme to boost apprenticeships.
With 15 months before the presidential election, the sense of urgency is also political for the socialist leader, who has tied his decision to run for a second mandate to his ability to curb unemployment significantly this year.
“We have to act so that growth becomes more robust and job creation more abundant,” Mr Hollande said in an address to unions and business leaders. “Our country has been facing structural unemployment for too long and it needs to reform.”
Under the plan, which takes effect immediately, companies with fewer than 250 workers will receive a €2,000 payout for hiring youths and unemployed people for contracts lasting more than six months at salaries below 1.3 times the minimum wage. After two years, the subsidy will become permanent in the form of a decrease in social security charges. The tax breaks previously announced will become permanent beyond 2017, he said.
The new measures, which will cost about €2bn, are seen as aimed at this political goal. Conveniently, offering 400 hours of training to thousands of jobless people would also reduce nominal unemployment before the presidential run.
“The new measures are old recipes,” says Nicolas Lecaussin, head of Institute for Research in Economic and Fiscal Issues, a liberal think-tank. “Training schemes are controlled by unions and efforts to boost apprenticeships have failed repeatedly over the years. As always when presidential elections loom, we’re entering a phase of public spending increases.”
But Mr Hollande denied any political manoeuvring and insisted the plan would be funded by spending cuts.
* * *
So he faces problems at the elections – amid record high youth unemployment and an increasingly disenfranchised citizenry – thanks to the failures of his socialist party’s policies… So – use more “taxpayer money” to pay firms to hire people temporarily (no matter what the ‘real’ demand) in order to reduce the unemployment rate so the optics look good for re-election! Vive La France!
Italian Banks Collapse, Short Sales Banned As Loan Loss Fears Mount
Italian bank stocks are crashing (with BMPS down 40% year-to-date) as Reuters reports that investors are growing increasingly nervous about how the sector will cope with lower interest rates and a 200 billion euro ($218 billion) pile of loans that are unlikely to be repaid. The broad banking sector is down 4% with stocks suspended, and in light of this bloodbath, Italian regulators have decided in their wisdom, to ban short-selling of some bank stocks (which has driven hedgers into the CDS market, spking BMPS credit risk).
Italy’s banking index was down over 4 percent with shares in several lenders, including the country’s biggest retail bank Intesa Sanpaolo and the third biggest lender Banca Monte dei Paschi di Siena,suspended from trading after heavy losses.
Bloodbath for Italian financials in 2016…
But don’t worry:
- *MONTE PASCHI CEO CONFIRMS FINANCIAL STABILITY OF BANK
- *MONTE PASCHI CEO: STOCK DECLINE NOT JUSTIFIED BY FUNDAMENTALS
Investors are growing increasingly nervous about how the sector will cope with lower interest rates and a 200 billion euro ($218 billion) pile of loans that are unlikely to be repaid.
Those concerns are trumping expectations about a wave of consolidation set to sweep the sector, with cooperative banks under pressure to merge following a government reform to reduce the number of lenders.
JP Morgan said this month Italian banks should be avoided because low rates are expected to put pressure on revenues more than in other countries and credit problems limit a recovery in provisions.
Traders have suggested exiting investments that have been particularly favoured, such as Popolare di Milano and Intesa, as the stocks have reached key supports.
“I think upside on cooperative banks this year is much more limited,” said a London-based equity sales person.
Short interest in Popolare di Milano soared 50 percent to 1.1 percent in the last month, and it rose 10 percent to 3.9 percent for UBI, according to Markit data.
And now, Italian regulators have re-enforced a short-selling ban (because that has always worked so well in the past)…
Consob adopts a temporary ban on short selling on Banca MPS shares.The ban shall apply immediately and shall last until Tuesday 19 January 2016 end of day.
Consob decided to temporary prohibit short sales of the share Banca MPS (ISIN code IT0005092165).
The ban will apply immediately and will be enforce for the entire trading session of tomorrow, Tuesday 19 January 2016, on the MTA market of Borsa Italiana.
The prohibition was adopted pursuant to Article 23 of the EU Regulation on short selling, considering the price change recorded by the share on 18 January 2016 (in excess of 10%).
The prohibition applies to short sales backed by stock lending. This extended the scope of the prohibition of naked short selling, already in force for all shares from 1st November 2012 by virtue of the EU Regulation on short selling.
And so hedgers have shifted to other markets – spiking default risk across the entire group, soaring back towards pre-“whatever it takes” levels…
Get back to work Mr Draghi.
Iran Sanctions Lifted As Nuclear Deal Implemented, US Hostages Freed
Just days after two US Navy boats and ten sailors were seized at Farsi Island ahead of President Obama’s state-of-the-union address and just days before Tehran will see international sanctions lifted as part of the “historic” nuclear accord, four US hostages have been freed in a prisoner swap between Washington and Tehran.
Among the detainees is Washington Post reporter Jason Rezaian who was famously held for spying after being convicted in a shadowy trial last year and faced up to 20 years in an Iranian prison.
According to FARS, Iran also freed Marine veteran Amir Hekmati and Christian pastor Saeed Abedini, who had been held on a variety of charges.
“All four are duel U.S.-Iranian citizens, according to the semiofficial Mehr and Fars news agencies,” WaPo notes, adding that “news of the exchange came as world leaders converged [in Vienna] on Saturday in anticipation of the end of international sanctions against Iran in exchange for significantly curtailing its nuclear program.”
Foreign Minister Mohammad Javad Zarif was brimming with optimism when he arrived [in Vienna] earlier in the day and met with Federica Mogherini, the European Union’s foreign policy chief,” WaPo says.
“This is a good day for the Iranian people . . . and for the world,” Zarif proclaimed. “What is going to happen today is proof . . . that major problems in the world could be tackled through dialogue, not threats, pressures and sanctions.”
“International sanctions on Iran will be lifted on Saturday when the United Nations nuclear agency declares Tehran has complied with an agreement to scale back its nuclear program,” Reuters writes, adding that “‘implementation day’ of the nuclear deal agreed last year marks the biggest re-entry of a former pariah state onto the global economic stage since the end of the Cold War, and a turning point in the hostility between Iran and the United States that has shaped the Middle East since 1979.”
The IAEA is reportedly set to issue a report that confirms Iran has complied with its commitments under the agreement struck last summer. That report will trigger the lifting of sanctions and the return of Iran to the world stage. A joint statement is expected later today.
This comes as US lawmakers push for fresh sanctions on Tehran in connection with two ballistic missile tests the Iranians carried out in October and November, and just weeks after an “incident” in the Strait of Hormuz saw the IRGC conduct a live-fire rocket test within 1,500 yards of a US aircraft carrier.
The deal has ruffled more than a few feathers in Riyadh, where the P5+1 agreement has stoked fears that America’s rapprochement with the Iranians marks a shift in US Mid-East policy that could endanger the regional balance of power at a time when relations between the Sunni and Shiite powers have deteriorated markedly. As an aside, Zarif is trolling the Saudis on Twitter as we speak:
Summing up Saturday’s proceedings in Vienna:
* * *
From FARS
“Based on an approval of the Supreme National Security Council (SNSC) and the general interests of the Islamic Republic, four Iranian prisoners with dual-nationality were freed today within the framework of a prisoner swap deal,” the office of Tehran prosecutor said.
Jason Rezaian, Amir Hekmat, Saeed Abedini and a fourth American-Iranian national who were jailed in Iran on various charges in recent years have all been released.
According o the swap deal, the US has also freed 6 Iranian-Americans who were held for sanctions-related charges..
A senior Iranian legislator citing an IRGC report on Rezaian’s case said in October that he has been imprisoned for his attempts to help the US Senate to advance its regime change plots in Iran.
In late July 2014, Iran confirmed that four journalists, including Washington Post correspondent Jason Rezaian, had been arrested and were being held for questioning.
Rezaian’s wife Yeganeh Salehi, a correspondent for the United Arab Emirates-based newspaper, the National, was also arrested at that time, but she and two others were released later.
According to the Constitution, the Judiciary is independent from the government in Iran.
Some reports earlier this year had spoken of a potential prisoner swap between Iran and US following the Vienna nuclear deal in July.
Iran Unleashes Oil Flood, Will Quintuple Crude Revenue In 2016
On Saturday, Iran marked what President Hassan Rouhani called a “golden page” in the country’s history when the IAEA ruled that Tehran had stuck to its commitments under last year’s nuclear accord.
Moments after the ruling was handed down, the US and the EU each lifted nuclear-related financial and economic sanctions on the “pariah state,” much to the chagrin of Israel and Tehran’s regional rivals who view the West’s rapprochement with the Iranians with deep suspicion.
“Everybody is happy except the Zionists, the warmongers who are fuelling sectarian war among the Islamic nation, and the hardliners in the U.S. congress,” Rouhani said, referring directly to Israel, the Saudis, and GOP lawmakers in the US.
In addition to the never-ending feud with the Israelis, Tehran is embroiled in a worsening conflict with Riyadh triggered by Saudi Arabia’s execution of prominent Shiite cleric Nimr al-Nimr and subsequent attacks on the Saudi embassy and consulate in Iran. The argument has raised the specter of an all-out conflict between the Sunni and Shiite powers and stoked sectarian discord across the region.
With sanctions lifted, Iran will now have access to some $100 billion in frozen funds and will be able to increase its oil revenue exponentially even as prices remain suppressed.
It’s easy to see why the Saudis and other Gulf Sunni monarchies are nervous. Iran plans to immediately boost output by 500,000 b/d with an additional 500,000 b/d coming online by year end. “The oil ministry, by ordering companies to boost production and oil terminals to be ready, kicked off today the plan to increase Iran’s crude exports by 500,000 barrels,” the official Islamic Republic News Agency reported on Sunday, citing Amir Hossein Zamaninia, deputy oil minister for commerce and international affairs.
“Iran could haul in more than five times as much cash from oil sales by year-end as the lifting of economic sanctions frees the OPEC member to boost crude exports and attract foreign investment needed to rebuild its energy industry,” Bloomberg reports, adding that “the lifting of sanctions means Iran can immediately boost oil revenue to about $2.35 billion a month, based on the country’s estimated current output of 2.7 million barrels a day and oil at $29 a barrel.”
Even if oil hovers between $30 and $35 a barrel, Iran will be pulling in some $3 billion a month by summer and nearly $4 billion a month by December.
“Iran’s aging oil fields may present some challenges to the pace at
which it can physically raise production,” Deutsche Bank wrote last year, as prior to the signing of the accord. Here’s a bit more color:
Changes to Iran’s sustainable production capacity in the medium term will likely depend partly on the speed and extent to which international oil companies (IOCs) invest in the development of Iran’s oil resources. Currently, 38% of Iran’s oil production originates from three large fields and associated areas which began production decades ago (Gachsaran 1934, Ahwaz 1959, Marun 1965). Of the original resource contained in these three “super-giant” fields, only 23% remains now.
Further development drilling will likely be required in order to maintain production, and secondary techniques such as CO2 or associated gas injection may be required to improve the recovery rate and counteract falling reservoir pressure. Prospects for higher production would be improved by IOC participation. However, foreign investment has lagged not only because of sanctions, but also because of the government’s buyback agreements which are considered unattractive.
On Sunday, Rouhani said the country needs between $30 and $50 billion in foreign investment in order for the country to hit its 8% growth target for the year. “Untapped potential in many industries indicates that domestic demand cannot solely push the economy toward eight per cent growth,” he said. “Attracting foreign investment will be the best way of using the opportunity of sanctions relief to boost the economy and security.”
But according to Israel, it’s all a charade. On Saturday, The Times of Israel said that according to an unnamed “source in Jerusalem”, the first thing Iran will do is send money to Hezbollah. “The implementation of the agreement would have a direct impact on the region, as terror groups Hezbollah and Hamas — both recipients of Iranian largesse — found themselves in possession of new and modern weaponry,” The Times wrote. A statement from PM Netanyahu’s office reads: “Even after the signing of the nuclear agreement, Iran has not abandoned its aspirations to acquire nuclear weapons, and continues to act to destabilize the Middle East and spread terrorism throughout the world while violating its international commitments.”
We wonder whether Netanyahu would say the same thing about the Riyadh, where “acting to destabilize the Mid-East and spread terror throughout the world” is an explicit foreign policy aim.
In any event, Iran just got a $100 billion windfall and will be around $2 billion richer each month by the end of the year. The return of Iranian supply Iran “will have an immediate impact in the spot market” Robin Mills, CEO of consultant Qamar Energy, told Bloomberg by phone. “Putting oil in the market is going to push it down.” “Iran’s additional crude shipments have the potential to further depress prices, perhaps to as low as $25 a barrel,” Nomura’s Gordon Kwan added on Sunday.
As for what effect a richer, more prosperous Iran will have on regional stability, we’d suggest that anything that serves to counter Saudi influence is probably conducive to a more secure environment. Besides, things can’t get much worse in the Mid-East, so it’s hard to see the downside.
Mid-East Massacre: Qatar Crashes, Saudi Stocks Plunge Most Since Black Monday
Broad middle-east and african stock markets crashed over 5%, erasing any gains back to November 2008 as the carnage from last week continues. From Kuwait (-4.3%) to Qatar (-8%) it was a bloodbath as Saudi Arabia Tadawul Index plunged 5.4% – the most since Black Monday (now down over 50% from their 2014 highs). These losses are far in excess of US ‘catch-up’ moves and suggest a dark cloud over Asia this evening.
It’s been a bloodbath in the Middle-East since the year began…
Africa/Middle-East Stocks crashed 5%…
Saudi Arabia’s Tadawul Index is down 5.4% on the day – the worst since August’s collapse and has lost over 50% since its exuberant peak in 2014…
Kuwait down over 4% to 2009 lows…
But Qatar was carnaged… (down over 8%)
Makes you wonder where all that hot-money from The Fed flowed eh?
Wall Street Reacts To The Lifting Of Iran Oil Sanctions
As was triumphantly announced over the weekend by both parties (making one wonder who actually benefited), after years of U.S. sanctions, Iran is now free to export as much of its oil as it wants after the International Atomic Energy Agency said the country had curbed its ability to develop a nuclear weapon leads to lifting of international sanctions. And while the end of sanctions also opens the door to foreign investors into country’s oil sector, most importantly it allows the country to flood the world with its oil. As a result the first thing the Iran oil ministry did today was to issue a notification order to boost oil production by 500k b/d.
Below, courtesy of Bloomberg, is a summary of the world’s, and Wall Street’s reactions, to the lifting of the Iran oil embargo.
IRAN SAYS:
- Iran beginning efforts to boost oil production, exports after removal of sanctions; targets increase in shipments of 500k b/d w/in mos.: Amir Hossein Zamaninia, deputy oil minister for commerce and international affairs
- Iran already selling more oil after sanctions lifted; ~1,000 lines of credit have been opened for banks, says President Hassan Rouhani
INTERNATIONAL RESPONSE:
- Iran deal paves way to closer energy cooperation w/ EU, will send 1st technical assessment mission on energy to Iran at the beginning of Feb., says EU Energy Commissioner Miguel Arias
- Potential areas for cooperation incl. nuclear energy, oil, gas, renewables, energy efficiency, electricity market
- Israel will monitor Iran for nuclear deal violations, says PM Benjamin Netanyahu
FOREIGN INVESTORS:
- Shell interested in developing Iran’s “energy potential,” monitoring developments w/ regard to settling outstanding debt to NICO “as soon as we are lawfully able to do so”
- Shell denies executives currently in Tehran for mtgs
- ABN Amro says Shell, Iran relationship “has been very good,” puts co. in position to be “prime partner” for Iran with lifting of sanctions; lifting of sanctions has neutral overall impact
TANKER NEWS:
- Iran oil tankers set sail under Lloyds insurance, Shana cites Ali-Akbar Safaei, MD of National Iranian Tanker Co.
- Iran oil tanker fleet yet to signal Europe as sanctions lifted: Bloomberg ship tracking
- Clarksons Platou says Iran return to mkts may boost VLCC rates by $10k-$15k/d; boosting exports to 1m b/d could lift fleet utilization of ~90% by 1 ppt
ANALYST VIEWS:
Morgan Stanley (analysts incl. Adam Longson)
- Iran oil output to rise ~600k b/d in 1H16, longer-term picture murkier given uncertain investment environment
Commerzbank head of commodities research Eugen Weinberg
- Prices to probably show “knee-jerk” reaction, dropping Monday before recovering to >$30/bbl later in wk
- “There is a real oversupply in the market, but I think that’s already reflected correctly in the price”
Qamar Energy CEO Robin Mills
- Iran oil “will have an immediate impact in the spot market”; “putting oil in the market is going to push it down”
- Iran can boost production, sales of ~600k b/d w/in 6 mos; can add 600k-800k b/d of output this yr
IHS analyst Victor Shum
- “Aggressive” increase in Iran crude exports could lead to “open market-share battle” w/ Saudi Arabia
- Nomura Holdings analyst Gordon Kwan
- Oil may drop to $25/bbl Monday on Iran sanctions relief as “additional crude shipments have the potential to further depress prices”
JBC Energy
- Iran crude exports seen increasing 450k b/d over 2016, w/ 185k b/d coming from floating storage; production will rise “by only 255k b/d over 2016 to 3.2m b/d”
- Expects “substantial increase” in exports in short term as Iran ships crude stored on tankers; does not think this sustainable; sees 14m bbl of crude, 35m bbl of condensate stored in tankers
Source: Bloomberg
The “Putin Is Isolated” Meme Officially Dies As Japan Calls For Closer Ties With Russia
One of the great ironies of the Obama administration’s foreign policy record is the extent to which Washington started 2009 with designs on normalizing frosty relations with Russia and started 2015 with the worst US-Russo dynamic since the Cold War.
To be sure, not all of that was Washington’s fault – but most of it was.
Of course the international community probably should have curbed its enthusiasm early on, given that the entire effort got off to a rather inauspicious start when then-Secretary of State Hillary Clinton presented Sergei Lavrov with a big red button that was supposed to say “reset” (a nod to the “resetting” of relations between Washington and Moscow) but which actually said “overcharged” in Russian.
(“overcharged“)
Six years, one annexed Crimea, a raft of economic sanctions, and one Ukrainian civil war later, and we’re back to Soviet-era politics.
Part and parcel of Washington’s PR and foreign policy strategy over the last three or so years has been to perpetuate the idea that Vladimir Putin is “isolated” on the world stage. This, along with subtle reminders in the media and on the silver screen that America needs to preserve a healthy bit of Russophobia if it is to be safe, has worked domestically, but not internationally.
Russia has strengthened ties with China, kicked off the BRICs bank, cemented an alliance with Iran (another “isolated” state), and worked to de-dollarize everything from oil markets to cross-border financial transactions.
Moscow’s dramatic entry into the Syrian conflict and Russia’s common sense approach to ending the years-long affair has resonated with the likes of France and everyone else who understands that the way to fight terror is to kill the terrorists, not arm them.
Indeed, The Kremlin’s successful attempt to wake the world up to the fact that Washington and its regional allies are actually exacerbating the war in Syria by arming rebel groups with questionable motives has gone a long way towards forcing the international community to rethink who the “good” superpower really is.
Now, in what may be the best evidence yet that the “Putin is isolated” meme is officially dead, none other than US ally Japan is ready to “bring Putin in from the cold.”
“Japanese prime minister Shinzo Abe is pressing for President Vladimir Putin to be brought in from the cold, saying Russian help is crucial to tackling multiple crises in the Middle East,”FT writes, adding that “Mr Abe said he was willing to go to Moscow as this year’s chair of the Group of Seven advanced economies, or to invite the Russian president to Tokyo.” Here’s more:
Pointing to tension between Saudi Arabia and Iran, the war in Syria, and the threat of radical Islamism, Mr Abe said: “We need the constructive engagement of Russia.”
The former G8 excluded Russia following its annexation of Crimea and military support for separatist rebels in eastern Ukraine. But while Japan has joined in sweeping economic sanctions, Mr Abe made clear he wants to work with Mr Putin.
“As chair of the G7, I need to seek solutions regarding the stability of the region as well as the whole world,” he said, noting Japan’s ongoing territorial dispute with Russia over the Kuril Islands. “I believe appropriate dialogue with Russia, appropriate dialogue with president Putin is very important.”
As the only Asian nation in the club of rich democracies, Japan prizes its G7 membership, and Mr Abe is determined to make the most of the Ise-Shima summit he will host in May.
This is the kind of talk that will get you blacklisted in Washington and we wonder how long it will be before Abe gets a courtesy call from the Obama to remind Tokyo of the grave “threat” Putin poses to global peace and security.
Or maybe The White House will take a step back and ponder whether decades of foreign policy blunders combined with a misplaced (and highly off-putting) sense of exceptionalism have now left America as the “isolated” superpower.
Tenge Crashes As Low Oil Prices Take Dramatic Toll On Kazakh Economy
With the lifting of Iran sanctions, the Tenge has crashed 5% to record lows at 377/USD (extending the currencies collapse since the USD-peg was scrapped in August).
Furthermore, as Eurasianet’s Joanna Lillis reportsoil production is entering a new year of decline this year in Kazakhstan – a dismal omen for a country so heavily reliant on energy exports.
Energy Minister Vladimir Shkolnik said on January 15 in remarks quoted by the Novosti-Kazakhstan news agency that Kazakhstan expects to pump 77 million tons of oil in 2016, 3.1 percent down on the 79.5 million tons produced last year.
The fall is down to the gradual depletion of the country’s oil fields, most of which have been under development for decades. As the fields dry up, recovering the remaining crude becomes more expensive, and with oil prices now hovering obstinately at $30, drawing Kazakhstan’s deposits is becoming costly.
And this latest government forecast may be too optimistic.
Shkolnik said in September that Kazakhstan would slash its oil output forecast for 2016 to 73 million tons if the oil price hit $30, as it has done this week. He said 77 million tons would be the target if oil stood at $40 per barrel.
The decline has been in train for several years already.
Oil output dropped 1.2 per cent in 2014, to 80.8 million tons, and 1.6 percent last year, to 79.5 million tons.
But it is the disastrously low prices that are taking the toll on the economy. The government announced on January 15 that gross domestic product grew by 1.2 percent last year – a significant slowdown on the previous year’s 4.3 percent.
The government is to meet on January 19 to discuss cuts to this year’s budget in the face of the economic slump.
Kazakhstan is also contending with a cataclysmic currency collapse that has seen the tenge plunge to record lows against the dollar. Now worth 377 to the dollar, the tenge has lost over 50 percent of its value since the central bank stopped propping it up in mid-August.
The authorities are now pinning many of their hopes on one project — the giant offshore Kashagan oil field. Kashagan, which is more than a decade behind schedule, is scheduled to come back onstream at the end of this year – although Shkolnik’s superstitious wording suggested less than full confidence.
“Fingers crossed, we will launch the Kashagan project this year, and it will from next year start making its contribution to the overall extraction plan,” he said optimistically.
Kashagan was briefly launched in fall 2013, but halted production after two weeks when a pipeline leak was discovered, necessitating a major redesign taking more than three years.
Finally, as The FT reports, Tatiana Orlova at Royal Bank of Scotland says the tenge could hit 400 to the dollar if oil slides to $20 per barrel “which, given current oil market dynamics, seems quite likely in the next 3 months.”
She warns that the National Bank of Kazakhstan (NBK) lacks the resources to provide any meaningful support to the currency:
In Kazakhstan, the NBK is pursuing a “dirty” float. It has admitted recently that it intervened in the FX market in December (Interfax).
We note that in the current year, NBK’s firepower is practically limited to the amount of the annual transfer to the budget from the National Fund, which is set at 2.3tn tenge ($6.3bn) in the 2016 republican budget.
Although NBK’s gross FX reserves appear stable at $28bn, we note that there is hardly room for intervention as they include gold worth $7.4bn, FX-denominated deposits of commercial banks and the FX leg of the FX swap operations with local banks (~$4.3bn as of the end of November, according to the NBK).
“Stocks Slump After Saudis Threaten Nukes Against “Nefarious” Iran
Earlier this month, a black swan landed in the Mid-East when Saudi Arabia executed prominent Shiite cleric Nimr al-Nimr along with 46 other “terrorists.”
Most of those executed were not Shiites but that didn’t matter. Al-Nimr was a key voice among Saudi Arabia’s dissident Shiite minority and his death reverberated across the Shiite community, sparking mass protests from Bahrain to Pakistan.
Al-Nimr was executed on a Saturday. By Sunday evening the Saudi embassy in Tehran was ransacked and burned and Riyadh had cut diplomatic ties Iran. The other Gulf monarchies followed suit and by the end of the following week, the stage was set for widespread sectarian strife.
As we wrote in the aftermath of al-Nimr’s execution, the ordeal couldn’t have come at a worse time for the Obama administration. With the countdown to Implementation Day for the nuclear deal under two weeks, the last thing The White House needed was to be thrust into the middle of a dispute between a traditional ally (the Saudis) and a new “friend” (the Iranians).
The Sunni world (not to mention the Israelis) already feared that the lifting of international sanctions against Iran and the attendant cash windfall would strengthen Tehran just as the Ayatollah looks to preserve and expand the so-called Shiite crescent by consolidating his influence in Iraq and bolstering the Assad government in Syria. The money, some critics say, will invariably be channeled to Hezbollah and Iran’s Shiite militias which effectively function as Iraq’s only effective security force. Additionally, the nuclear deal’s opponents wonder if Iran will plow its newfound wealth into the country’s famous ballistic missile program, which is alive and well as demonstrated by the test-firing of the Emad in October.
And so, with the Saudis already wary of America’s rapprochement with the Iranians and with Riyadh struggling to come to terms with how its staunch ally in Washington could seriously ponder taking steps to effectively wire Iran $100 billion while freeing up an extra $2 billion per month in oil revenue, the Sunni and Shiite powers nearly came to blows on the eve of the Nuclear Deal’s implementation.
The Saudis, like the Israelis, believe that the Obama administration’s claims regarding Iran’s nuclear ambitions and capabilities are largely dubious. “Even after the signing of the nuclear agreement, Iran has not abandoned its aspirations to acquire nuclear weapons,” Israeli PM Benjamin Netanyahu said, in a statement following the accord’s implementation on Saturday.
On Tuesday, we got the first sign that Obama’s counterintuitive nightmare is set to come true as Saudi Arabia indicated it will pursue a nuclear weapon if Riyadh believes the Iranians are up to anything “nefarious.”
“Saudi Foreign Minister says his country will not rule out seeking nuclear weapon if Iran gets one,” Reuters reported this afternoon, citing an interview with Adel bin Ahmed Al-Jubeir. “The lifting of Iran sanctions will have a negative impact if Iran uses proceeds for ‘nefarious activities,'” Al-Jubeir continued, before adding that U.S. involvement is key to regional and world stability.
While it’s not entirely clear what “nefarious activities” Al-Jubeir was referring to, pretty much anything Tehran does is viewed as “nefarious” by Riyadh, which means you can expect plenty more nuclear sabre rattling in the near future as Obama looks on at the Mid-East nuclear arms race he inadvertently set in motion.
Today, nuclear war is apparently bad for stocks:
We close with an excerpt from a New York Times op-ed penned by Al-Jubeir:
While Iran claims its top foreign policy priority is friendship, its behavior shows the opposite is true. Iran is the single-most-belligerent-actor in the region, and its actions display both a commitment to regional hegemony and a deeply held view that conciliatory gestures signal weakness either on Iran’s part or on the part of its adversaries.
Saudi Arabia will not allow Iran to undermine our security or the security of our allies. We will push back against attempts to do so.
end
IMF Slashes Global Growth Outlook Again, Warning “Of Great Challenges” In Year Ahead
Three months ago, we noted that if there’s anything the IMF is good at, it’s cutting global growth forecasts, something the Fund did for the fourth time in twelve months in October.
Of course the IMF wasn’t alone in adopting an increasingly dour outlook for global growth and trade. The WTO, the ADB, and the OECD all suggested that worldwide commerce was effectively grinding to a halt last year. “It’s almost like the timing belt on the global growth engine is a bit off or the cylinders are not firing as they should,” WTO chief economist Robert Koopman remarked, late last summer.
Well, things haven’t gotten any better since then. The downturn in key emerging markets like Brazil and Russia has intensified and China’s hard landing is upon us (remember, even if you believe the NBS’ “official” GDP data, China’s deflator has now been negative in three of the last four quarters which certainly suggests the books are being cooked, so to speak). Meanwhile, there are worrying signs that America’s double-adjusted “recovery” has stalled out altogether as freight volumes fell Y/Y for the first time in three years in November, a month in which Class 8 truck sales collapsed 59% Y/Y and 36% M/M.
And then there is of the course the Baltic Dry which is, well, flatlining, having fallen below 400 last week.
Now, in the latest sign that sluggish global growth and trade have become endemic and structural rather than fleeting and cyclical, the IMF has once again cut its global growth forecasts, citing a year of “great challenges.”
“This coming year is going to be a year of great challenges and policymakers should be thinking about short-term resilience and the ways they can bolster it, but also about the longer-term growth prospects,” Maurice Obstfeld, IMF Economic Counsellor and Director of Research, said in the Fund’s latest world economic outlook.
The strong dollar is weighing on the US manufacturing sector, while emerging markets are “now confronting a new reality of lower growth,” the Fund says, adding that “the risks are tilted to the downside.”
What risks, you ask? These risks:
- A sharper-than-expected slowdown in China, which could bring more international spillovers through trade, commodity prices, and waning confidence.
- A further appreciation of the dollar and tighter global financing conditions which could raise vulnerabilities in emerging markets, possibly creating adverse effects on corporate balance sheets and raising funding challenges for those with high dollar exposures.
- A sudden bout of global risk aversion, regardless of the trigger, could lead to sharp further depreciations and possible financial strains in vulnerable emerging market economies.
- An escalation of ongoing geopolitical tensions in a number of regions, which could affect confidence and disrupt global trade, financial flows, and tourism. New economic or political shocks in countries currently in economic distress which could also derail the projected pickup in activity.
- Commodity markets pose two-sided risks. On the downside, further declines in commodity prices would worsen the outlook for already-fragile commodity producers, and widening yields on energy sector debt threaten a broader tightening of credit conditions.
- On the upside, the recent decline in oil prices may provide a stronger boost to demand in oil importers, including through consumers’ possible perception that prices will remain lower for longer.
“All in all, there is a lot of uncertainty out there, and I think that contributes to the volatility,” said Obstfeld. “We may be in for a bumpy ride this year, especially in the emerging and developing world.”
Yes, we “may”, especially considering the fact that all of the “risks” the IMF outlines aren’t really “risks” but rather realities. That is, we’re already seeing a sharper-than-expected slowdown in China, a soaring dollar, a sudden bout of global risk aversion, and escalating geopolitical tensions.
In any event, here are the latest projections from the Fund which include a downward revision of 0.2% for both the US and the world, and a sharply lower outlook for depression-stricken Brazil.
And here’s a slick infographic the Fund put together for those who aren’t inclined to read their reports:
And here’s the updated hockey stick graph which depicts the extent to which the Fund has become a serial downward-revisor:
The bottom line is the same as it’s been for quite some time: expect these revisions to continue until either the entire world slips into recession, or central bankers learn to print trade.
end
Canada Set To Unleash Negative Rates As Oil Patch Dies, Depression Deepens
This Wednesday, the Bank of Canada has a decision to make.
Canada’s oil “dream” is dying thanks to the inexorable slide in crude prices and as the IEA made clearearlier today, the pain is set to persist for the foreseeable future as the world “drowns in oversupply.”
“Lower for longer” has hit the country’s oil patch hard. We’ve spent quite a bit of time documenting the plight of Alberta, where job cuts tied to crude’s slide have led directly to rising suicide rates, soaring property crime, and increased food bank usage (not to mention booming business for repo men).
Adding insult to injury for Canadians is the plunging loonie. Because the country imports most of its fresh fruits and vegetables, the weak currency has triggered a sharp increase in the price of many items in the grocery aisle as documented in a hilarious series of tweets by incredulous Canadian shoppers.
The question for the Bank of Canada is this: is the risk of an even weaker loonie worth taking if a rate cut has the potential to head off the myriad risks facing the economy?
We’ll find out what the BOC thinks tomorrow, but in the meantime, analysts have weighed in. JP Morgan’s Daniel Hui says CAD needs to fall further lest producers should simply close up shop. “[W]ith West Canada Select (WCS) now sitting just a dollar above the average per-barrel operational cost of $20 (Canadian), the risk is that any further decline will cause a whole new host of spilloversincluding potential shutdown and retrenchment of energy extraction and exports (with its attendant growth and balance of payment effects) or the potential of highly leveraged companies running operational losses, and the more contagious financial impact that might have in Canada, with broader spillovers.”
None of those outcomes are particularly palatable. If the loonie continues to plunge however, it would act as a kind of shock absorber (producers’ costs are predominantly in CAD terms whereas the crude they sell is obviously denominated in USD), keeping CAD-denominated prices above the marginal cost of production.
“One of the few scenarios that would keep bitumen producers above marginal cost amid a further decline in global energy prices, is for CAD to depreciate substantially and at a much higher beta to oil price than has been the case in the past 18 months,” Hui adds, driving the point home.
But this is a Catch-22. The BOC can cut and drive the loonie even lower thus allowing zombie producers to keep pumping and thus prevent still more oil patch job losses, but a falling CAD may have undesirable knock-on effects, like reduced consumer spending, for instance. Additionally, if uneconomic producers keep drilling and pumping, they’re just digging their own grave by contributing to an already oversupplied global market.
In short: there’s no “right” answer. “Economists are united in one view, that new plunges in oil prices, in the Canadian dollar, and weaker global financial conditions, make the Bank of Canada’s policy interest rate decision Wednesday a very close call,” MNI writes.
“We now are looking for a rate cut next week,” Bank of Montreal Chief Economist Douglas Porter told Market News. “We believe that the balance of weight has slightly tipped in favor of them going” for a rate cut, he added, pointing out that the market is pricing in a 50-50 chance of a BOC action this week.
Royal Bank of Canada assistant chief economist Paul Ferley, doesn’t agree. “We think that Governor (Stephen) Poloz will maintain his confidence that growth in exports will counter weakening business investment and he will hold the rate steady,” he says.
Perhaps, but as we noted early last month, the BOC has already hinted that Europe’s not-so-grand experiment in the Keynesian Twilight Zone known as NIRP may be about to cross the pond. “The effective lower bound for policy rates is around -0.5%,” governor Stephen Poloz said in December, setting the stage for negative rates in Canada.
For their part, IceCap Asset Management says NIRP is a virtual certainty for the BOC. Here’s IceCap’s straightforward, bullet point roadmap for Canadian monetary policy:
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Canadian economy to be in recession in 2016
-
Bank of Canada will be at 0% interest rates in 2016
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Bank of Canada will be at NEGATIVE interest rates in later 2016
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Bank of Canada will be PRINTING MONEY in later 2016
Ahead of Wednesday’s decision, Barclays is out with a preview and sure enough, NIRP makes a cameo.
“The BoC would need to cut at least 50bp this year to partially counteract the continued slide in crude oil prices,” the bank begins, adding that although the price of Western Canadian Select (WCS) has fallen by half since the publication of the BoC’s last Monetary Policy Report, “this has been only partially offset by the 8% nominal multilateral depreciation of the CAD.”
To fully offset the effect on GDP, Barclays says “the BoC would need to cut policy rates by at least 50bp in 2016.”
Yes, by “at least” 50bps, and that’s assuming oil prices don’t plunge further.
Of course 50bps puts the BOC at zero, so when Barclays says “at least”, they mean NIRP is likely on the way. To wit:
The central bank has room to act even if rates hit zero. A 50bp cut in 2016 would bring the overnight rate to zero. The experience of countries like Switzerland, Sweden, Denmark and the euro area has taught central banks that zero is not the lower bound. The BoC estimates that the effective lower bound for Canada could be around -50bp, giving room for further cuts if needed. Without the immediate worry of hitting the effective lower bound, the central bank might be more willing to ease sooner rather than later.
There you have it. Of course it’s difficult to see how 100bps of theoretical policy flexibility will be enough to keep the shut-ins from starting in the oil patch especially considering there’s only a CAD1 cushion above the marginal cost of production and considering the outlook for oil prices is particularly bleak now that 500,000 b/d of new Iranian supply are coming to market.
As for what the BOC does in the event Poloz hits the lower bound of -0.50% and the loonie still needs to weaken to offset the ill effects of declining crude, we’ll leave you with one indelible image that should serve as a harbinger of what’s to come…
end
The Baltic Dry Index continues to plummet reflecting a complete collapse of global trade
(courtesy zero hedge/Baltic Dry Index)
What If The Imploding Baltic Dry Index Does Reflect Global Trade After All
Earlier today, the Baltic Dry Index hit a new all time low.
This is not new: we have been tracking the collapse of the Baltic Dry – aside for the occasional dead cat bounce – to all time lows, a proxy of global shipping and thus trade, for the past 7 years.
To be sure, for staunch goalseeking Keynesian the collapse in Baltic Dry rates had little to do with actual demand for this services, and everything to do with the alleged supply of drybulk shipping, which was the stated reason for the collapse in costs.
In other words, “trade was fine.”
Well, maybe not as the following chart from Capital Economics shows:
Correlation may not be causation, but it sure is troubling. Which begs the question: as the baltic dry index continues to plumb new record lows, how long until central banks realize that for all their omnipotence and all their attempts to restore growth, inflation and the “wealth effect” they never mastered the only thing worth printing in a globalized world: printing trade?
(courtesy Bloomberg)
Brazil Analysts Forecast 7% Inflation in 2016 as Real Drops
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Central bank to raise key rate this week, economists predict
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Real seen weakening for two straight years to 4.3/dlr in 2017
Brazil’s consumer prices will rise 7 percent this year as the currency continues to depreciate, increasing pressure on the central bank to resume monetary tightening this week.
Economists surveyed by the central bank raised their 2016 inflation forecast for the third straight week and expect consumer price increases to exceed the 6.5 percent upper limit of the target range for a second straight year.
Finance Minister Nelson Barbosa wasn’t much more optimistic, telling reporters in Brasilia that the government expects inflation to slow more than 3 basis points in 2016. Brazil’s benchmark IPCA consumer price index hit 10.67 percent in 2015 — the highest in 12 years even as the economy faces its deepest recession in more than two decades.
Part of that pressure stemmed from the impact of weaker currency on prices of imported goods. Analysts surveyed by the central bank forecast the real, which lost the most among all major currencies last year, to further devalue to 4.25 per U.S. dollar by the end of this year and to 4.3 per dollar by end-2017. The real gained 0.4 percent to 4.03 per dollar at 4:35 p.m. local time.
The survey released on Monday marks the first time since June that economists’ 2017 currency forecast is weaker than that of this year.
With inflation seen above target again in 2016, the central bank is expected to resume this week a cycle of rate increases that could deepen the recession. Policy makers will increase the benchmark interest rate to 14.75 percent from 14.25 percent on Wednesday, according to the median estimate in a Bloomberg survey of 38 economists.
The central bank survey shows that inflation is expected to reach 5.4 percent in 2017 — above the target range’s 4.5 percent mid-point, and up from analysts’ previous 5.2 percent forecast.
Latin America’s largest economy will shrink 2.99 percent in 2016, according to the survey.
your early morning currency/gold and silver pricing/Asian and European bourse movements/ and interest rate settings/MONDAY morning 7:00 am
Euro/USA 1.0886 down .0020
USA/JAPAN YEN 117.39 up 0.612
GBP/USA 1.4288 up 0035
USA/CAN 1.4504 down .0030
Early this Monday morning in Europe, the Euro fell by 20 basis points, trading now just above the important 1.08 level rising to 1.0886; 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 down in rate at closing last night: 6.5785 / (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 southbound trajectory as settled down again in Japan by 61 basis points and trading now well below that all important 120 level to 117.37 yen to the dollar.
The pound was up this morning by 35 basis point as it now trades just below the 1.44 level at 1.4288.
The Canadian dollar is now trading up 30 in basis points to 1.4504 to the dollar.
We are seeing that the 3 major global carry trades are being unwound. The BIGGY is the first one;
1. the total dollar global short is 9 trillion USA and as such we are now witnessing a sea of red blood on the streets as derivatives blow up with the massive rise in the rise in the dollar against all paper currencies and especially with the fall of the yuan carry trade. The emerging market which house close to 50% of the 9 trillion dollar short is feeling the massive pain as their debt is quite unmanageable.
2, the Nikkei average vs gold carry trade (blowing up 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 MONDAY morning: closed down 191.54 or 1.12%
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 green after central bank intervention (massive bubble bursting), Australia in the red: /Nikkei (Japan)red/India’s Sensex in the red /
Gold very early morning trading: $1090.00
silver:$13.90
Early MONDAY morning USA 10 year bond yield: 2.03% !!! down 0 basis points from last night in basis points from FRIDAY night and it is trading BELOW resistance at 2.27-2.32%. The 30 yr bond yield rises to 2.82 down 0 in basis points. ( still policy error)
USA dollar index early MONDAY morning: 99.07 up 15 cents from FRIDAY’s close. ( Now below resistance at a DXY of 100)
This ends early morning numbers MONDAY MORNING
And now your TUESDAY early morning numbers:
your early morning currency/gold and silver pricing/Asian and European bourse movements/ and interest rate settings/TUESDAY morning 7:00 am
Euro/USA 1.0874 down .0018
USA/JAPAN YEN 117.91 up 0.509
GBP/USA 1.4257 up ,0045
USA/CAN 1.4462 down .0082
Early this Tuesday morning in Europe, the Euro fell by 18 basis points, trading now just above the important 1.08 level falling to 1.0874; Europe is still reacting to deflation, announcements of massive stimulation (QE), a proxy middle east war, and the ramifications of a default at the Austrian Hypo bank, an imminent default of Greece, Glencore, Nysmark and the Ukraine, along with rising peripheral bond yield further stimulation as the EU is moving more into NIRP,and the threat of continuing USA tightening by raising their interest rate / Last night the Chinese yuan was up in value (onshore). The USA/CNY constant in rate at closing last night: 6.5785 / (yuan constant 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 southbound trajectory as settled down again in Japan by 51 basis points and trading now well below that all important 120 level to 117.91 yen to the dollar.
The pound was up this morning by 5 basis points as it now trades just below the 1.43 level at 1.4357.
The Canadian dollar is now trading up 82 in basis points to 1.4462 to the dollar.(as crude oil rose into the 29 dollar column)
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 TUESDAY morning: closed up 92.80 or 0.55%
Trading from Europe and Asia:
1. Europe stocks all in the green
2/ Asian bourses mixed/ Chinese bourses: Hang Sang green (massive bubble forming) ,Shanghai in the green after central bank intervention (massive bubble bursting), Australia in the green: /Nikkei (Japan)green/India’s Sensex in the green /
Gold very early morning trading: $1085.00
silver:$14.04
Early TUESDAY morning USA 10 year bond yield: 2.08% !!! up 5 basis points from last night in basis points from FRIDAY night and it is trading BELOW resistance at 2.27-2.32%. The 30 yr bond yield rises to 2.85 up 3 in basis points. ( still policy error)
USA dollar index early TUESDAY morning: 99.19 up 10 cents from FRIDAY’s close. ( Now below resistance at a DXY of 100)
This ends early morning numbers TUESDAY MORNING
OIL MARKETS
On Saturday, the globe lifted sanctions against Iran as crude oil plummeted below 29.00 per barrel. The low oil price is causing considerable damage. We have many commentaries on the fallout of the low oil price:
First Saturday
London’s Financial Times
(courtesy London’s Financial Times)
and special thanks to Robert H for sending this to us;
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Exclusive: Dallas Fed Quietly Suspends Energy Mark-To-Market On Default Contagion Fears
Earlier this week, before first JPM and then Wells Fargo revealed that not all is well when it comes to bank energy loan exposure, a small Tulsa-based lender, BOK Financial, said that its fourth-quarter earnings would miss analysts’ expectations because its loan-loss provisions would be higher than expected as a result of a single unidentified energy-industry borrower. This is what the bank said:
“A single borrower reported steeper than expected production declines and higher lease operating expenses, leading to an impairment on the loan. In addition, as we noted at the start of the commodities downturn in late 2014, we expected credit migration in the energy portfolio throughout the cycle and an increased risk of loss if commodity prices did not recover to a normalized level within one year. As we are now into the second year of the downturn, during the fourth quarter we continued to see credit grade migration and increased impairment in our energy portfolio. The combination of factors necessitated a higher level of provision expense.”
Another bank, this time the far larger Regions Financial, said its fourth-quarter charge-offs jumped $18 million from the prior quarter to $78 million, largely because of problems with a single unspecified energy borrower. More than one-quarter of Regions’ energy loans were classified as “criticized” at the end of the fourth quarter.
It didn’t stop there and and as the WSJ added, “It’s starting to spread” according to William Demchak, chief executive of PNC Financial Services Group Inc. on a conference call after the bank’s earnings were announced. Credit issues from low energy prices are affecting “anybody who was in the game as the oil boom started,” he said. PNC said charge-offs rose in the fourth quarter from the prior quarter but didn’t specify whether that was due to issues in its relatively small $2.6 billion oil-and-gas portfolio.
Then, on Friday, U.S. Bancorp disclosed the specific level of reserves it holds against its $3.2 billion energy portfolio for the first time. “The reason we did that is that oil is under $30” said Andrew Cecere, the bank’s chief operating officer. What else will Bancorp disclose if oil drops below $20… or $10?
It wasn’t just the small or regional banks either: as we first reported, on Thursday JPMorgan did something it hasn’t done in 22 quarters: its net loan loss reserve increased as a result of a jump in energy loss reserves. On the earnings call, Jamie Dimon said that while he is not worried about big oil companies, his bank has started to increase provisions against smaller energy firms.
Then yesterday it was the turn of the one bank everyone had been waiting for, the one which according to many has the greatest exposure toward energy: Wells Fargo. To be sure, in order not to spook its investors, among whom most famously one Warren Buffett can be found, for Wells it was mostly “roses”, although even Wells had no choice but to set aside $831 million for bad loans in the period, almost double the amount a year ago and the largest since the first quarter of 2013.
What was laughable is that the losses included $118 million from the bank’s oil and gas portfolio, an increase of $90 million from the third quarter. Why laughable? Because that $90 million in higher oil-and-gas loan losses was on a total of $17 billion in oil and gas loans, suggesting the bank has seen a roughly 0.5% impairment across its loan book in the past quarter.
How could this be? Needless to say, this struck us as very suspicious because it clearly suggests that something is going on for Wells (and all of its other peer banks), to rep and warrant a pristine balance sheet, at least until a “digital” moment arrives when just like BOK Financial, banks can no longer hide the accruing losses and has to charge them off, leading to a stock price collapse.
Which brings us to the focus of this post: earlier this week, before the start of bank earnings season, before BOK’s startling announcement, we reported we had heard of a rumor that Dallas Fed members had met with banks in Houston and explicitly “told them not to force energy bankruptcies” and to demand asset sales instead.
We can now make it official, because moments ago we got confirmation from a second source who reports that according to an energy analyst who had recently met Houston funds to give his 1H16e update, one of his clients indicated that his firm was invited to a lunch attended by the Dallas Fed, which had previously instructed lenders to open up their entire loan books for Fed oversight; the Fed was shocked by with it had found in the non-public facing records. The lunch was also confirmed by employees at a reputable Swiss investment bank operating in Houston.
This is what took place: the Dallas Fed met with the banks a week ago and effectively suspended mark-to-market on energy debts and as a result no impairments are being written down. Furthermore, as we reported earlier this week, the Fed indicated “under the table” that banks were to work with the energy companies on delivering without a markdown on worry that a backstop, or bail-in, was needed after reviewing loan losses which would exceed the current tier 1 capital tranches.
In other words, the Fed has advised banks to cover up major energy-related losses.
Why the reason for such unprecedented measures by the Dallas Fed? Our source notes that having run the numbers, it looks like at least 18% of some banks commercial loan book are impaired, and that’s based on just applying the 3Q marks for public debt to their syndicate sums.
In other words, the ridiculously low increase in loss provisions by the likes of Wells and JPM suggest two things: i) the real losses are vastly higher, and ii) it is the Fed’s involvement that is pressuring banks to not disclose the true state of their energy “books.”
Naturally, once this becomes public, the Fed risks a stampeded out of energy exposure because for the Fed to intervene in such a dramatic fashion it suggests that the US energy industry is on the verge of a subprime-like blow up.
Putting this all together, a source who wishes to remain anonymous, adds that equity has been levitating only because energy funds are confident the syndicates will remain in size to meet net working capital deficits. Which is a big gamble considering that as we firsstshowed ten days ago, over the past several weeks banks have already quietly reduced their credit facility exposure to at least 25 deeply distressed (and soon to be even deeper distressed) names.
However, the big wildcard here is the Fed: what we do not know is whether as part of the Fed’s latest “intervention”, it has also promised to backstop bank loan losses. Keep in mind that according to Wolfe Research and many other prominent investors, as many as one-third of American oil-and-gas producers face bankruptcy and restructuring by mid-2017 unless oil rebounds dramatically from current levels.
However, the reflexivity paradox embedded in this problem was laid out yesterday by Goldman who explained that oil could well soar from here but only if massive excess supply is first taken out of the market, aka the “inflection phase.“ In other words, for oil prices to surge, there would have to be a default wave across the US shale space, which would mean massive energy loan book losses, which may or may not mean another Fed-funded bailout of US and international banks with exposure to shale.
What does it all mean? Here is the conclusion courtesy of our source:
If revolvers are not being marked anymore, then it’s basically early days of subprime when mbs payback schedules started to fall behind.My question for bank eps is if you issued terms in 2013 (2012 reserves) at 110/bbl, and redetermined that revolver in 2014 at 86, how can you be still in compliance with that same rating and estimate in 2016 (knowing 2015 ffo and shutins have led to mechanically 40pc ffo decreases year over year and at least 20pc rebooting of pud and pdnp to 2p via suspended or cancelled programs). At what point in next 12 months does interest payments to that syndicate start to unmask the fact that tranch is never being recovered, which I think is what pva and mhr was all about.
Beyond just the immediate cash flow and stock price implications and fears that the situation with US energy is much more serious if it merits such an intimate involvement by the Fed, a far bigger question is why is the Fed once again in the a la carte bank bailout game, and how does it once again select which banks should mark their energy books to market (and suffer major losses), and which ones are allowed to squeeze by with fabricated marks and no impairment at all? Wasn’t the purpose behind Yellen’s rate hike to burst a bubble? Or is the Fed less than “macroprudential” when it realizes that pulling away the curtain on of the biggest bubbles it has created would result in another major financial crisis?
The Dallas Fed, whose new president Robert Steven Kaplan previously worked at Goldman Sachs for 22 years rising to the rank of vice chairman of investment banking, has not responded to our request for a comment as of this writing.
end
Surprisingly the Dallas Fed responds to zero hedge’s assertion that reserve members met with banker lenders that have huge exposure to the oil and gas sector price meltdown:
The Dallas Fed response: no meeting took place!!
Now zero hedge asks follow up questions that they must answer!
(courtesy zero hedge)
The Fed Responds To Zero Hedge: Here Are Some Follow Up Questions
Over the weekend, we gave the Dallas Fed a chance to respond to a Zero Hedge story corroborated by at least two independent sources, in which we reported that Federal Reserve members had met with bank lenders with extensive exposure to the US oil and gas sector and, after parsing through the complete bank books, had advised banks to i) not urge creditor counterparties into default, ii) urge asset sales instead, and iii) ultimately suspend mark to market in egregious instances.
Moments ago the Dallas Fed, whose president since September 2015 is Robert Steven Kaplan, a former Goldman Sachs career banker who after 22 years at the bank rose to the rank of vice chairman of its investment bank group – an odd background for a regional Fed president – took the time away from its holiday schedule to respond to Zero Hedge.
This is what it said.
We thank the Dallas Fed for their prompt attention to this important matter. After all, as one of our sources commented, “If revolvers are not being marked anymore, then it’s
basically early days of subprime when mbs payback schedules started to
fall behind.” Surely there is nothing that can grab the public’s attention more than a rerun of the mortgage crisis, especially if confirmed by the highest institution.
As such we understand the Dallas Fed’s desire to avoid a public reaction and preserve semantic neutrality by refuting “such guidance.”
That said, we fully stand by our story, and now that we have engaged the Dallas Fed we would like to ask several very important follow up questions, to probe deeper into a matter that is of significant public interest as well as to clear up any potential confusion as to just what “guidance” the Fed is referring to.
- Has the Dallas Fed, or any other members of the Federal Reserve System, met with U.S. bank management teams in recent weeks/months and if so what was the purpose of such meetings?
- Has the Dallas Fed, or any other members of the Federal Reserve System, requested that banks present their internal energy loan books and energy loan marks for Fed inspection in recent weeks/months?
- Has the Dallas Fed, or any other members of the Federal Reserve System, discussed options facing financial lenders, and other creditors, who have distressed credit exposure including but not limited to:
- avoiding defaults on distressed debtor counterparties?
- encouraging asset sales for distressed debtor counterparties?
- advising banks to avoid the proper marking of loan exposure to market?
- advising banks to mark loan exposure to a model framework, one created either by the creditors themselves or one presented by members of the Federal Reserve network?
- avoiding the presentation of public filings with loan exposure marked to market values of counterparty debt?
- Was the Dallas Fed, or any other members of the Federal Reserve System, consulted when during its January 15, 2015 earnings review Citigroup refused to disclose to the public the full extent of its reserves related to its oil and gas loan exposure, as quoted from CFO John Gerspach:
“while we are taking what we believe to be the appropriate reserves for that, I’m just not prepared to give you a specific number right now as far as the amount of reserves that we have on that particular book of business. That’s just not something that we’ve traditionally done in the past.”
- Furthermore, if the Dallas Fed, or any other members of the Federal Reserve system, were not consulted when Citigroup made the decision to withhold such relevant information on potential energy loan losses, does the Federal Reserve System believe that Citigroup is in compliance with its public disclosure requirements by withholding such information?
- Finally, if the Dallas Fed does not issue “such” guidance to banks, what guidance does the Dallas Fed issue to banks?
Since the Fed is an entity tasked with serving the public, and since it took the opportunity to reply in broad terms to our previous article, we are confident that Mr. Kaplan and his subordinates will promptly address these follow up concerns.
Never thought I would see this: we now have negative oil prices in North Dakota at 50 cents as Koch brothers charge oil companies for low grade oil:
Monday morning
(courtesy zero hedge)
Negative Oil Prices Arrive: Koch Brothers’ Refinery “Pays” -$0.50 For North Dakota Crude
Do you have some extra space in your garage or attic? Or perhaps you own an oil tanker you aren’t currently using. Or maybe you have a storage unit that’s got a little extra room next to an old mattress and box springs.
If so, you may want to call up oil producers in North Dakota and ask if they’d care to send you some free oil, because the crude glut is now so acute that the Koch brothers are actually charging $0.50/bbl to take low grade oil at their Flint Hills Resources refining arm.
North Dakota Sour is a high-sulfur grade of crude and “is a small portion of the state’s production, with less than 15,000 barrels a day coming out of the ground,” Bloomberg notes, citing John Auers, executive vice president at Turner Mason & Co. in Dallas. “The output has been dwarfed by low-sulfur crude from the Bakken shale formation in the western part of the state, which has grown to 1.1 million barrels a day in the past 10 years.”
High-sulfur grades are more expensive to refine and thus fetch lower prices at market. As Bloomberg goes on to note, “Enbridge stopped allowing high-sulfur crudes on its pipeline out of North Dakota in 2011, forcing North Dakota Sour producers to rely on more expensive transport such as trucks and trains [and] the price for Canadian bitumen — the thick, sticky substance at the center of the heated debate over TransCanada Corp.’s Keystone XL pipeline — fell to $8.35 last week, down from as much as $80 less than two years ago.”
So there you have it. The global deflationary supply glut has now reached the point that the market is effectively forcing producers to pay to give their oil away or else see it sit in bloated storage facilities until Riyadh decides enough is enough and until the world comes to terms with the return of Iranian supply. In other words, for some US producers the business isn’t just loss making, it’s an exercise in sadomasochistic futility.
Meanwhile, MLP Plains All American is quoting Colorado Southeastern, Nebraska Intermediate, Eastern Kansas Common Special, and Oklahoma Sour at just $16.50/bbl, $16.00/bbl, $12.20/bbl, and $13.50/bbl, respectively.
The message for the Wells Fargos and Citis of the world: you’re going to need a bigger loan loss reserve.
It’s no wonder the Dallas Fed suspended mark-to-market on energy debts – there’s no market to mark to.
“The Oil Market Could Drown In Oversupply,” IEA Warns
On Monday, we noted with some incredulity that North Dakota Sour – a high-sulfur grade of crude – was briefly going for -$0.50 at the Koch brothers’ Flint Hills Resources refining arm.
That’s not a misprint. If you had yourself some North Dakota Sour, you’d have to pay a refinery to take it off your hands. Your product was worth less than nothing.
We use the past tense there because once Bloomberg broke the story, Flint Hills quickly replaced the negative number with a positive one – you can now get $1.50.
Negative oil prices – even if they merely reflect the increased cost of transporting certain grades – underscore just how acute the downturn has become in the face of a global deflationary supply glut created by the Saudis, perpetuated by ZIRP, and exacerbated by the incipient threat of Iran’s return to market.
Now, with crude having dipped below $30 (today’s rebound notwithstanding) the question on everyone’s mind is simply this: can oil continue to move lower? According to the IEA, the answer is “an emphatic yes.”
In its latest oil market report, the agency warns that the world could “drown in oversupply” with the return of Iranian crude. “If Iran can move quickly to offer its oil under attractive terms, there may be more ‘pricing in’ to come,” the agency’s monthly report says. “While the pace of stock building eases in the second half of the year as supply from non-OPEC producers falls, unless something changes, the oil market could drown in over- supply.”
To be sure, the IEA isn’t convinced the Iranians will be able to meet their own targets for production increases. While Tehran is aiming for an immediate increase of 500,000 b/d, the IEA says the number is more likely to be in the neighborhood of 300,000 b/d in Q1 and 600,000 b/d my mid-year. Iran is shooting for a 1 million b/d increase by year end. Still, that’s enough additional production to offset falling supply from non-OPEC producers.
The current downturn is attributable to “weak market fundamentals, expectations for and lifting of Iranian sanctions, stronger USD after Fed rate hike, weak economic numbers, and turmoil in financial markets”, the agency continues, adding that Saudi Arabia’s move to cut subsidies is likely to weigh on domestic demand. Here are the summary bullets courtesy ofBloomberg who notes that “with OPEC supply potentially expanding and demand growth slowing, global inventories could accumulate by a further 285 million in 2016 after swelling by 1 billion barrels last year”:
- Rout may deepen as mkt drowns in supply, Iran returns
- Yes, Iran’s return can help drive price lower, IEA says
- Iran’s return intensifying battle for Europe mkt
- OPEC Dec. output drops 90k b/d, led by Saudis, Iraq: IEA
- Tank tops to be tested; China to add 145m bbls capacity
- Floating storage crude diminishes slowly; bottlenecks ease
- Warm winter weighed on OECD demand in 4Q
- Europe refinery margins seen rebounding in Jan.
- Saudi subsidy cut to damp kingdom’s oil demand
- IEA revises 2016 world oil demand fcast to 95.7m b/d from 95.8m b/d in monthly oil report; 2015 world demand revised to 94.5m from 94.6m b/d
- Demand growth to slow to 1.2m b/d in 2016 vs 1.7m b/d in 2015
- Non-OPEC supply seen falling 600k b/d in 2016
- Est. for call on OPEC crude, incl. Indonesia, revised down 300k b/d to 31.7 m b/d
- OPEC production in Dec. fell by 90k b/d to 32.28m b/d
- Iran return to intl mkt may add 300k b/d by end 1Q
Despite some optimism around Chinese oil demand (which apparently is all the market needs to fuel a 5% Brent rally), the demand growth story is “faltering,” to quote Goldman. Here’s a look across markets:
Meanwhile, supply is resilient:
And inventories are overflowing:
So despite today’s China-driven relief rally, the fundamentals suggest a sustained move higher is essentially out of the question and from a medium-term perspective, any impact on prices from a slowdown in non-OPEC supply will be immediately offset by stepped up Iranian production.
Ultimately then, the Wells Fargos and Citis of the world are going to need a lot of rope when it comes to how long they can avoid marking their energy loan books to market because the rebound they need to avoid dramatic hikes in loan loss reserves isn’t coming any time soon.
As for the Saudis, check back in 11 months to find out whether Riyadh’s 13% budget deficit forecast turns out to have been far too optimistic.
WTI Crude Plunges Back Below $30, Drags Stocks Lower
So crappy China growth and increased Iran supply prompted a stop-run surge in crude oil overnight as “bad news is good news” stimulus hopes lifted all boats. But that is over now as Iran cuts oil prices to Europe, reigniting the price wars…
Who could have seen that coming?
Portuguese 10 year bond yield: 2.77% up 3 in basis points from FRIDAY
New York equity performances plus other indicators for today:
Stocks Stumble Into Green As China Stimulus Headline Trumps Collapsing Crude
- Summing up the day on CNBC in 19 seconds…Crude (and USDJPY to a lesser extent) was the driver today as overnight stimulus hope from China’s crap data was toppled by Iran’s double-whammy of increased production and price cuts to Europe…
Your day in equity markets explained… China crap data (sell), that’s great news – moar stimulus (buy), but Iran just cut prices of crude to Europe (sell), and now the Saudis have threatened to use nukes against Iran (sell more)… but then – spurious headline saved the world – CHINA SHOULD CUT RESERVE RATIO, RAISE DEFICIT: SEC. JOURNALAll fundamentals…
The China headline ramped S&P Futs perfectly to VWAP…
Cash indices all gave up their post-China gains before the spurious China headline appeared (just a reminder – the last few RRR cuts have been utter failures)
FANGs ramped the open – tumbled all the way into the red – then were rescued by Chinese headlines…
Energy stocks were hammered but the bounce rescued financials
It appears concerns about energy loan transparency are weighing on regional banks…
Tumbling to the lowest since Oct 2013…
Energy credit risk continues to surge to record highs…
Investment Grade credit is still worrisome…
BUT – ex-Energy credit risk is surging also and following a worrisom contagion pattern…
Treasury yields ended the day modestly higher whipsawing intraday… with 10Y getting close to 2.00%
The USD Index ended the day unchanged, holding yesterday’s gains…
Crude and Copper loved the crap China data and ripped higher on stimulus dreams only to dump it all back once US equities opened. Gold was flat whilke Silver rallied…
Charts: Bloomberg
Bonus Chart: BofA sees S&P 500 pricing in a 50% chance of recession
Bonus Bonus Chart: Earnings expectations are rolling over again!! (h/t @Not_Jim_Cramer)
Average:
JPMorgan cuts Q4 GDP down to .1%
We already noted the cycle-low Q4 GDP forecast by the Atlanta Fed, which in a release which came out just as the crashing US equity market closed revised the last quarter GDP to just 0.6%, which delay however according to the same Atlanta Fed was due to “nothing more nefarious than technical difficulties.”
Curiously, JPM had no problems with the 15 second exercise of plugging in raw data into the GDP “beancount” model. And, according to chief economist Michael Feroli, in the 4th quarter, the same quarter in which Yellen finally felt confident enough to declare the US economy strong enough to withstand a rate hike and a tightening cycle, US growth ground to a halt and as a result JPMorgan just cut its Q4 GDP forecast from 1.0% to 0.1%.
If JPM is right, and if the US economy effectively did not grow in the fourth quarter, this would make it the worst GDP print since Q1 of 2014, and tied for the third worst quarter since 2009, which incidentally was our kneejerk assessment after yesterday’s latest round of abysmal economic data.
The cherry on top: JPM also cut its Q1 2016 GDP forecast from 2.25% to 2.00%. Expect many more downward revisions to forward GDP in the coming weeks.
Below is a chart of what US GDP looks like if JPM’s forecast proves to be accurate:
Here is JPM explaining why “Q4 GDP growth is still positive, but barely”
We are lowering our tracking of real annualized GDP growth in Q4 from 1.0% to 0.1%. Two reports out today contributed to this downgraded assessment. First, retail sales in December came in rather shockingly weak, which was accompanied by modest downward revisions to October and November retail sales. Second, the business inventories report for November suggest a fairly aggressive push by business to reduce the pace of stockbuilding last quarter. We now see inventories subtracting 1.2%-points from growth last quarter, offset by a disappointing but not disastrous 1.3% increase in real final sales.
We are also lowering some our outlook for Q1 GDP growth from 2.25% to 2.0%. While the inventory situation should turn to being roughly neutral for growth, the quarterly arithmetic on consumer spending got a little more challenging after this morning’s retail sales figure, which implies flat real consumer spending in December. We now see real consumer spending in Q1 at 2.5%, versus 3.0% previously. We are leaving unrevised our outlook for 2.25% growth over the remaining three quarters of the year. We will discuss in a separate email the policy outlook, which in any event is currently being swayed more by the inflation data than the growth data.
end
as indicated above, Wells Fargo states that they have a 17 billion exposure to energy:
(Wells Fargo/zero hedge)
Wells Fargo Is Bad, But Citi Is Worse
Earlier we reported that Wells Fargo may have an energy problem because as CFO John Shrewsbury revealed, of the $17 billion in energy exposure, “most of it” was junk rated.
But, while one can speculate what the terminal cumulative losses, cumulative defaults and loss severities on this loan book will be, at least Wells was honest enough to reveal its energy-related loan loss estimate: it was $1.2 billion, or 7% of total – as Mike Mayo pointed out, one of the highest on the street. Whether it is high, or low, is anyone’s guess, but at least Wells disclosed it.
Citi did not.
Yes, the bank did disclose its holdings to the oil and gas sector at $21 billion funded and $58 billion which included unfunded (watch that unfunded exposure collapsing and shrinking the available pool of shale company liquidity in the coming weeks), and it did announce that it “built roughly $300 million of energy-related loan loss reserves this quarter”, but paradoxically one thing it did not disclose was its total reserves to energy.
Note the following perplexing exchange between analyst Mike Mayo and Citi CFO John Gerspach:
<Q – Mike Mayo>: Can we move to energy, though? I don’t want you being the only bank not disclosing reserves to energy – oil and gas loans. I mean, I think most others have disclosed that who have reported so far. And I mean, your stock’s down 7%. The whole market is down a whole lot, but I don’t – even if it’s a low number, it can’t hurt too much more from here. And so can you – how much in oil and gas loans do you have, and what are the reserves taken against that? I know you were asked this already, but I’m going back for a second try.
<A – John C. Gerspach>: When you take a look at the overall portfolio, Mike, we’ve reduced the amount of exposure. Our funded exposure to energy-related companies this quarter is down 4%. It’s about $20.5 billion. The overall exposure also came down about 4%. The overall exposure now is about $58 billion, that includes unfunded. When you take a look at the composition of the funded portfolio, about 68% of that portfolio would be investment grade. That’s up from the 65% that we would have had at the end of the third quarter. And the unfunded book is about 87% investment grade. So while we are taking what we believe to be the appropriate reserves for that, I’m just not prepared to give you a specific number right now as far as the amount of reserves that we have on that particular book of business. That’s just not something that we’ve traditionally done in the past.
And yet all other reporting banks have done it not only in the past, but this quarter as well.
One wonders just how much of Gerspach’s decision was dictated by the Fed’s under the table suggestion to avoid mark to market in energy entirely, and thus to stop marking its loan book. To be sure, without knowing the total amount of reserves to oil are, one simply can’t do any calculations on Citi’s total energy book, even if the once already bailed out bank so eagerly provided the incremental addition to this reserve. As if that number is in any way helpful.
Finally, we eagerly await for someone from the Dallas Fed to contact us and to comment on our article from yesterday that the “Dallas Fed Quietly Suspends Energy Mark-To-Market On Default Contagion Fears.” Because with megabanks such as Citi refusing to disclose energy losses, the longer the Fed remains mute on just what it knows that nobody else does, the more concerned the market will be that the subprime crisis is quietly playing out under its nose all over again.
But one thing is certain: the panic can begin in earnest when Janet Yellen says, at the next Fed press conference, that “energy is contained.”
BofA Reports $21.3 Billion In Energy Exposure; Beats On EPS Despite Revenue Miss, Sliding Sales And Trading
In the aftermath of Citi and JPM’s earnings last week, the only thing investors wanted to know about when it came to the just released Bank of America earnings moments ago, was the bank’s energy exposure, and we’ll get to that in a second, but first here are the housekeeping items.
Bank of America reported Q4 EPS of $0.28, or $0.29 ex-DVA, a modest improvement from a year ago, and above the 0.27 expected, driven by ongoing expense reduction in the form of fewer lawsuits and fewer employees. However, GAAP revenue of $19.5 (not the non-GAAP revenue of $19.8 proudly featured), missed expectations of $19.8 billion, on continued deterioration in Sales and Trading revenues.
The expense reduction was driven by “progress made on LAS cost initiatives, while benefits from optimization efforts across the franchise were largely offset by investments in the business” as well as the bank’s neverending reduction in force: “FTE headcount was down 5% from 4Q14, as continued progress in LAS and other reductions in support staff and infrastructure more than offset increases in client-facing professionals.”
BofA did warn however, that compared to 4Q15, 1Q16 expenses are expected to be impacted by the following items:
- Annual retirement-eligible incentive compensation costs, which are expected to be approximately $1.0B
- Seasonally elevated payroll tax costs, which are expected to be higher by approximately $0.3B
- Revenue-related expenses associated with seasonally higher sales and trading results
Then again, if the recent trend is any indication, the “seasonally higher sales and trading results” may not be there: here is a chart of BofA’s revenue line item in this most important revenue stream:
The decline in revenue appears to be a function of continued contraction in the bank’s VaR, as more traders are hunkering down in light of the central bank cross currents observed over the past year, also leading to a notable drop in BofA’s average trading-related assets, which printed at multi-year lows of just $416BN in Q4, down $40BN from a year ago.
Here is BofA’s explanation on the full breakdown of its global banking operation:
- Lower IB fees versus 4Q14 were mostly offset by a gain on an equity investment in 4Q15
- FICC revenue increased $0.3B, or 20%, from 4Q14, reflecting improvement across most products, notably in rates and credit-related products
- Equities revenue decreased 3% from 4Q14, reflecting lower client activity
Unlike other banks, BofA did not cut trader pay as aggressively: Noninterest expense increased $0.2B versus 4Q14, due primarily to higher revenue-related expenses.
Finally, the last key “legacy” item was the Bank’s Net Interest Margin. Here there was little notable to report of, as adjusted Net Interest Yield rose fom 2.10% to 2.16%, representing $10.0 billion in Income, up from $9.7 billion the prior quarter, “driven by commercial loan growth and higher investment securities balances.”
But what about the future: after all the jump in NIM is why the Fed is hiking rates? Here BofA is certainly hopeful, and says the following:
We remain well positioned for NII to benefit as rates move higher:
- +100 bps parallel shift in interest rate yield curve is estimated to benefit NII by $4.3B over the next 12 months
- Asset sensitivity has decreased since prior quarter, driven primarily by increases in long-end rates and higher securities balances
Good luck with that 100 bps parallel shift: for now the curve is not only shifting in the – not + direction, but it continues to flatten with every passing day. Oddly enough, there was no comment on that.
* * *
And as for the data we’ve all been waiting for, first a quick snapshot of BofA’s overall Asset quality trends, we find that net charge offs jumped by $1.1 billion, a 0.51% ratio, the highest since Q1 of 2014 and an increase of $0.2B from 3Q15, “driven by an increase in commercial charge-offs related to the energy sector.” Here we go.
However, despite an increase in energy charge-offs, BofA kepts its provision for credit losses unchanged at 0.8% BN where it has been for the past year.
Finally, the full disclosure, as little as it may be, on the bank’s commercial portfolio where all of its energy exposure is to be found, revealed that commercial net charge-offs increased $75MM compared to 3Q15, driven by losses in Energy, while the Allowance increased $144MM from 3Q15, driven by energy-related exposures and higher loan growth across the portfolio.” The total allowance at Dec. 31 was $4.849 billion.
What was the total loan loss provision related to energy? We don’t know. As for the question if this was was enough, we will let readers decide when they consider that BofA revealed its “Utilized Energy exposure of $21.3B ($1B traded products)”, down $2.6 billion from a year ago. BofA also notes that the “higher risk sub-sectors of Oil Field Services and Exploration & Production comprise 39% of utilized energy exposure.” We suppose this is a euphemism for junk bond exposure.
BofA also revealed that reservable criticized exposure increased $2.9B compared to 3Q15, driven by a $2.6B increase in Energy: a rather sizable jump.
And then this unexpected whopper: “Energy reservable criticized exposure was $4.7B at 4Q15; increased from 3Q15 due primarily to a downgrade of one large single-name credit supported by a sovereign.”
Finally, BofA said that total commercial NPLs increased $110MM from 3Q15, to $1.2 billion driven mostly by increases in Energy. It is unclear of this $1.2 billion precisely how much is attributed to Energy.
We hope to learn more during the Bank of America conference call beginning shortly.
Foreign Central Banks Furiously Dump US Treasuries: Record $47 Billion Sold In First Two Weeks Of 2016
It’s not just stocks have a terrible start to the year, in fact the worst start in history: so is the amount of US Treasuries held in custody at the Fed, a direct proxy for the holdings of foreign central banks, reserve managers and sovereign wealth funds who park owned TSYs at the NY Fed for convenience.
According to the latest Fed data, after a drop of $12 billion in the first week of the year, another $34.5 billion in Treasuries held in custody was sold in the week ended January 13, bringing the total to just $2.962 trillion, below the previous recent low recorded in early November, and at levels not seen since April 2015.
Indicatively since April, total US Treasury holdings have increased by $570 billion, meanwhile not a single incremental dollar has ended up in the Fed’s custody account.
As shown in the chart below, the drop recorded in the latest period is the single largest weekly drop recorded since China commenced liquidating its Treasury holdings in mid 2014.
Adding up the flows from the first two weeks of the year reveals the worst and most custody holdings “outflowing” start to the year in history.
The size of the liquidation promptly got the rate community’s attention.
On Friday afternoon, MarketNews cited Louis Crandall, chief economist at Wrightson ICAP, who said “we have seen declines of more than $20 billion (in such Treasury custody holdings) on each of the first two weeks of this year. While accounts are volatile from week to week, that is certainly consistent with increasing intervention activity” from foreign central banks needing money to intervene either in the foreign exchange market or in the stock market, he said.
“There is no way of knowing” exactly what such central banks sold, he added. “But it could just as easily have been liquidation of coupon securities.”
As MNI further writes, most observers saw China selling as behind the drop in Treasuries holdings at the Fed. “Circumstantially, that’s the conclusion that people would jump to,” said Crandall.
Some said it is not just China: Aaron Kohli, analyst at BMO Capital Markets, was less inclined to point to China. “It’s definitely a drop, but keep in mind, every foreign central bank is in there,” he said.
One other observer said that the decline “should be foreign central bank selling” as opposed to routine rolling of maturing securities. “Those are very chunky numbers. We did not even get such large sales back in August 2015 when we knew there was such selling” in Treasuries to get money to fund buying of China stocks, he said.
Others, however, disagree: “That kind of size could only be China,” said the observer. But he added that at the margin, other Asian central banks could have been selling Treasuries to raise dollars for foreign exchange or stock market intervention.
One trader said China “must be selling, along with others. Look at the Hong Kong dollar, also down big. It is a game of musical chairs, and everyone is devaluing at once. The U.S. dollar strength is apparent.”
* * *
One trader who has put all this together, and has linked it to the abnormal moves in the Treasury swap market is Ice Farm Capital’s Michael Green.
As he puts it, “those who chose to seek protection in rates are only experiencing middling success due to the continued inversion of swap spreads which have traded to record highs.”
Now this has been repeatedly noted in the press as irrational – why would US government bonds be trading at a risk premium to swap spreads which carry bank counterparty risk? I would suggest there is one very simple reason:
His conclusion is that “swap spreads appear to be blowing out because foreign holders of treasuries, namely China, are selling them at a record pace to defend their currencies. Currency levels are under attack in China, Saudi Arabia and now Hong Kong. The specter of 1997-1998 is again haunting the markets.”
As Green frames it, “the key question is “How long can this go on for?” Consensus is clearly that China, in particular, has a deep pool of reserves with which to defend their currency; I am less convinced. Having seen some contrarian work on the subject, my belief is that China is a paper tiger – with very little reserves left to defend their currency. Perhaps as little as three months given their current burn rate.”
If accurate (and Green’s calculation excludes the hundreds of billions China may need to leave on its books if its NPL credit cycle finally hits as Kyle Bass is currently anticipating) then the coming months could see an unprecedented shock out of China which having spent hundreds of billions to slow a record capital outflow, has no choice but to let its currency finally float freely, leading to the biggest capital exodus in recorded history.
end
The following will explain the dilemma we are in now:
(courtesy Christoph Gisiger/Finanz Und Wirschaft/zero hedge)
Art Cashin: This Is “What You Get Before You Slip Into A Crisis”
Via Christoph Gisiger of Finanz Und Wirtschaft,
Wall Street veteran Art Cashin warns that bankruptcies in the US oil industry could cause severe stress in the financial system. He believes the rate hike of the Federal Reserve was a mistake.
Around the globe financial markets are in turmoil. Alarming news out of China and the crash in the oil market is causing angst among investors everywhere. In the United States, the S&P 500 is down more than 8% since the beginning of the year. Art Cashin, director of floor operations for UBS at the New York Stock Exchange, thinks that the rate hike of the Federal Reserve is one of the main reasons for the sell-off in the stock market. The highly respected Wall Street veteran fears that America will fall into a recession if the Fed doesn’t change its course and lowers interest rates back to zero.
Mr. Cashin, the pressure on the financial markets is rising. How’s the mood on the trading floor of the New York Stock Exchange?
The mood is both concerning and frustrated. On Friday, we traded temporarily lower than we got during the August spike down. That is never a good indication and it is troublesome. Here in the US, there was some concern that the markets will be closed for a holiday on Monday whereas the exchanges in Europe and in Asia are going to be open. So a lot of investors were worried about the exposure they will have for this extra day.
You’re working on the floor of the stock exchange for almost six decades. During that time you have seen many difficult moments. How severe is the situation right now?
It is very similar to what you get before you slip into a crisis. Also, it’s earnings season and because of that many corporate buybacks have to be paused during this period. That removes an important potential support for the market. Over the last year, companies buying back their own stock have put more money into the market than all of the public has.The cessation of those buybacks is probably a reason why we’re seeing the rather sharp selling that has occurred.
A main source of concern is the sharp drop in oil prices. Both, WTI and Brent, closed below $30 on Friday. Why is this causing so much havoc on Wall Street?
Investors are concerned that many of the small and domestic producers here in the United States have money owned in the high yield market. So if oil prices continue to go lower they’re afraid that up to two thirds of those fracking companies may go into bankruptcy. They fear that through financial contagion those bankruptcies would then begin to spread into other areas of the financial markets.
Are there already signs of contagion?
Several market participants have been asked to put up more collateral to prepare for bad loans. Also, on Wednesday there were both rumors and indications that there was a good deal of forced selling going on. There were rumors that it could have been either a hedge fund or a sovereign wealth fund, maybe investors who are exposed to the oil prices.It could have been Saudi Arabia or Norway. Forced selling and margin calls are very hard to deal with because such an investor basically has no latitude. Positions must be sold at any price and that’s very difficult for the market.
Also, there is alarming news coming out of China. What’s the problem here?
On Friday, before trading started in New York, Chinese equity markets were down another 3,5% already overnight – and that is despite the best efforts of the Chinese government and the central bank to keep prices from destabilizing.
Then again, the US economy seems hardly to be related to China.
China is the second biggest economy in the world. The US may not sell much to China. But many of our economic partners like the countries in Europe do have big markets with China. There are other aspects to the China problem, too: The Chinese currency is relatively pegged to the US dollar.
What’s the problem with that?
When the Fed began raising interest rates and the dollar strengthened it made the Chinese currency go higher which put China at a disadvantage. So the Chinese began to try to find ways to slightly weaken their currency and that is disruptive throughout all the other currencies in the emerging markets and the small Asian economies. Back in 1997 when Thai baht broke everybody thought that won’t mean too much since the US doesn’t deal too much with Thailand. But in fact what happened was it rapidly spread through the financial industry and a great deal of money was lost. So investors are worried of seeing something like that happening again.
So you think the rate hike of the Federal Reserve is one of the main sources for all the turmoil?
The Chinese currency isn’t the only one that is under some stress. For instance, the Saudi Arabian currency is also partially pegged to the dollar. So you’re seeing many other nations beginning to suffer somewhat in reaction to the Fed move to begin raising rates.
The appreciation of the dollar is also putting pressure on the export sector in the United States. Manufacturing has slowed down significantly over the last months.
In its hundred year history the Fed had never before raised rates with the ISM index for the manufacturing sector below fifty which is showing that the manufacturing sector is in somewhat of a recession. I think the Fed basically painted itself into a corner. In September, because of the turmoil in the international markets, they were afraid to raise rates and they said: »We didn’t want to move with the markets destabilized.» Because of that they found some critics here in the US who said: »Hey, you’re the central bank of the United States and not the central bank of the world. Therefore, do worry about us and do what you think our economy requires. Don’t pay attention to other economies.» So when the December meeting came the Fed talked itself into a corner with no chance to change.
On the other hand, many economists are seeing encouraging signs in the US labor market. In December payroll employment rose by over 290’000 and beat expectations handily.
When you look closer into the numbers you see that 280’000 of those jobs were seasonal adjustments. In other words it wasn’t physical people standing there, it was an assumption by the Bureau of Labor Statistics. They said it was December and the weather normally is cold so they had to add on some people. And If you went over to the household survey you saw that 35% of the new jobs were people under the age of nineteen. In fact, only 3% of the jobs went to people in the prime category between the ages of 25 and 55. So the vast majority of the new jobs went to people under 24 and over 55. To me, that looked liked holiday hiring: people who make deliveries, wrap packages etc. These are not long lasting jobs. That’s why I think the next couple of payroll numbers will not show that kind of strength.
So was it a policy mistake to raise rates?
Yes, I thinks so. I believe we may be back at zero percent interest rates before we see one percent interest rates. I think the Fed will wind up having to do that to try to avoid a recession. Before they moved Christine Lagarde, the head of the IMF, told them they shouldn’t move. Larry Summers, the former secretary of the Treasury, told them they shouldn’t move. The Bank of International Settlements told them they shouldn’t move. But they insisted upon it and I think part of the turmoil that we are seeing now is indirectly connected with the Fed’s decision to go ahead.
But on the day the Fed raised rates for the first time since the financial crisis many investors applauded and stock prices rallied. Why has the mood soured?
The rate hike had to work its way through the system. Investors had to see what would happen to the Chinese currency and how the Chinese central bank and the Chinese government respond to what happened to their currency. Not a lot of people guessed that immediately when they saw that the Fed raised the rate. It’s now working through the system and it’s contributing to the turmoil that we’re experiencing.
Looking ahead, what’s going to happen next?
The bumpy ride is probably not over yet. I would remain very careful. I think efforts have to be made to stabilize the oil price. Investors have to review their risk exposure. So make sure you’re on guard.
IBM Revenues Drop For 15 Consecutive Quarters, EPS “Beats” On Lower Tax Rate
With its stock in a relentless slide over the past 3 years, and hitting a new 5 years low earlier today, many had hoped that it can’t get much worse for the one tech investment made in recent years by Warren Buffett. The wait for news was over moments ago when IBM released Q4 operating EPS, which at $4.84 beat sharply lowered expectations of a $4.81, and a 17% drop from a year ago. GAAP EPS was $4.59.
On the surface a good beat. And yet something odd emerges when looking at not only the 8.5% drop in top line revenue, but also the 51.7% gross margin (non-GAAP margin of 52.7%) a drop from 53.3% as gross profit decline by 11.3%: the company’s tax rate.
It appears that IBM once again “beat” the GAAP EPS by using the oldest trick in the accounting book: a sharply lower effective tax rate.
While IBM had used 22.3% for its tax rate a year ago, it decided to use a far lower effective tax rate in the current quarter, only 12.5%. The non-GAAP tax rate was also sharply lower. This is what the company said:
IBM’s tax rate from continuing operations was 12.5 percent, down 9.7 points year over year; the operating (non-GAAP) tax rate was 14.7 percent, down 7.1 points compared to the year-ago period driven by current period discrete items.
So using a 12.5% tax rate, the company’s GAAP PES was $4.59. If, instead, IBM had used the same tax rate as a year ago, its EPS would have been about 52 cents lower, ot 4.07, resulting in non-GAAP EPS of $4.33, a big miss to expectations.
And then there was the top line: at $22.1 billion, while matching estimates, this was yet another consecutive drop in Y/Y revenues. In fact, as shown in the chart below, IBM has now seen its revenues drop for 15 consecutive quarters.
The stock, after spiking initially on the algo kneejerk reaction to the beat, has since dropped to a new multi year low.
Well that about does it for tonight
I will see you tomorrow evening.
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