Gold: $1099.10 down $8.00 (comex closing time)
Silver $14.08 down 8 cents
In the access market 5:15 pm
Gold $1101.20
Silver: $14,16
At the gold comex today, we had a poor delivery day, registering 0 notices for nil ounces.Silver saw 0 notices for nil oz.
Several months ago the comex had 303 tonnes of total gold. Today, the total inventory rests at 199.13 tonnes for a loss of 104 tonnes over that period.
In silver, the open interest fell by 2,668 contracts down to 156,853. In ounces, the OI is still represented by .784 billion oz or 112% of annual global silver production (ex Russia ex China).
In silver we had 0 notices served upon for nil oz.
In gold, the total comex gold OI rose by 7,627 contracts to 416,462 contracts despite the fact that gold was up $17.20 with yesterday’s trading.
Today both the gold comex and the silver comex are in severe stress with gold in backwardation up to August.
We had a huge change into inventory at the GLD, a mammoth deposit of 4.17 tonnes / thus the inventory rests tonight at 662.09 tonnes. The appetite for gold coming from China is depleting not only gold from the LBMA and GLD but also the comex is bleeding gold. Our 670 tonnes of rock bottom inventory in GLD gold has been broken. It looks to me that China has taken the last amounts of physical gold from the GLD. I guess the only place left for China to receive physical gold, after they deplete the GLD will be the FRBNY and the comex. In silver,/we had no change to inventory/Inventory rests at 313.606 million oz.
First, here is an outline of what will be discussed tonight:
1. Today, we had the open interest in silver fall by 2668 contracts down to 156,853 despite the fact that silver was up by 4 cents with respect to yesterday’s trading. The total OI for gold rose by 7,627 contracts to 416,462 contracts as gold was up $17.20 in price yesterday
(report Harvey)
2 a) Gold trading overnight, Goldcore
(Mark OByrne)
3. ASIAN AFFAIRS
iii) Shanghai and all over Asian bourses fall badly on collapsing off shore yuan
(zero hedge)
ii) Stocks and futures surge. The Euro tumbles after Draghi initiates another bazooka. They will reconsider policy in March:( zero hedge)
iii) George Soros interview on the downward plight of Europe
(George Soros/zero hedge)
iv) Dutch two yr bond yields touch an all time low of negative 42 basis points
(zero hedge)
v)We now get the full details on Deutsche Bank’s poor performance in 2015, losing 7 billion euros for the year!
( zero hedge)
iii)Just take a look at the graphs provided. Last week Barclay’s OIL ETN traded at a stunning 36% premium to its NAV. The premium just imploded and as such a lot of people are going to get hurt
( zero hedge)
iv)Oil company, Schlumberger, announces a huge buyback of stock but they have to use debt to finance the share purchase. How do they accomplish this? Simple: they fire 10,000 poor souls.
(courtesy zero hedge)
ii)Despite its turmoil due to falling oil, Russia still added 21.8 tonnes of official gold to its arsenal:
( Lawrie Williams/Sharp’s Pixley)
iii) And now our resident expert on Chinese gold affairs:
(courtesy Koos Jansen)
10 USA STORIES WHICH WILL INFLUENCE THE PRICE OF SILVER/GOLD
i)Initial jobless claims rise again. Generally once we witness a bottoming of jobless claims with a counter vailing rise in the next few weeks, generally this signals recession:
( zero hedge)
ii)Philly Fed index slightly improves but still in negative territory:
Let us head over to the comex:
And now your overnight trading in gold, WEDNESDAY MORNING and also physical stories that may interest you:
US Mint Sees “Astounding” Demand For Silver Coins
The U.S. Mint is seeing “astounding” demand for gold and particularly silver coins as noted by Frank Holmes of U.S. Funds writing in Gold Seek today.
In his excellent weekly SWOT analysis – strengths, weaknesses, opportunities and threats – of the precious metal markets, Holmes notes that:
Over the past five days investors bought 26.8 metric tonnes of bullion through exchange-traded products backed by the metal, according to Bloomberg, the most since January 2015 as seen in the chart below. In addition, Reuters says gold and silver demand is off the charts; the U.S. Mint sold nearly as much gold on the first day of 2016 as in all of January 2015, with silver sales equally as astounding.
Read the Full Article –
SWOT Analysis: U.S. Mint Reports Astounding Gold and Silver Demand
Precious Metal Prices
21 Jan LBMA Gold Prices: USD 1,096.80, EUR 1,006.98 and GBP 774.99 per ounce
20 Jan LBMA Gold Prices: USD 1,093.20, EUR 999.73 and GBP 771.08 per ounce
19 Jan LBMA Gold Prices: USD 1,087.00, EUR 999.77 and GBP 759.79 per ounce
18 Jan LBMA Gold Prices: USD 1,090.45, EUR 1,001.06 and GBP 763.67 per ounce
15 Jan LBMA Gold Prices: USD 1,081.80, EUR 991.38 and GBP 753.17 per ounce
Breaking Gold and Silver News Today – Click here
GoldCore continue to believe that silver is set to outperform most assets and even gold and believe that $100 per ounce will be achieved in the coming years.
Silver Britannia (1 oz)
More importantly, legal tender silver bullion coins – like Silver Britannias (CGT Free), Nuggets, Eagles, Maples, 90% and 40% Silver bags are great forms of insurance against currency debasement and financial collapse.
We continue to have very competitive prices – some of the most competitive in the U.S. and the world.
Call us today to order – 01 6325010 – or buy silver coins online here
Fears of global liquidity crunch haunt Davos elites
Submitted by cpowell on Wed, 2016-01-20 20:05. Section: Daily Dispatches
By Ambrose Evans-Pritchard
The Telegraph, London
Wednesday, January 20, 2016
The International Monetary Fund is increasingly alarmed by signs that market liquidity is drying up and may trigger an even more violent global sell-off if investors rush for the exits at the same time.
Zhu Min, the IMF’s deputy director, said the stock market rout of the last three weeks is just a foretaste of what may happen as the US Federal Reserve continues to raise interest rates this year, pushing up borrowing costs across the planet.
He warned that investors and wealth funds have clustered together in crowded positions. Asset markets have become dangerously correlated, amplifying the effects of any shift in mood.
“The key issue is that liquidity could drop dramatically, and that scares everyone,” he told a panel at the World Economic Forum in Davos.
“If everybody is moving together we don’t have any liquidity at all. We have to be ready to act very fast,” he said. …
… For the remainder of the report:
http://www.telegraph.co.uk/finance/economics/12110415/Fears-of-global-li…
end
Despite its turmoil due to falling oil, Russia still added 21.8 tonnes of official gold to its arsenal:
(courtesy Lawrie Williams/Sharp’s Pixley)
LAWRIE WILLIAMS:Russia buying more gold than China. 21.8 tonnes in Dec.
21
With an increase of 21.8 tonnes in its gold reserves in December, Russia continues to build its central bank bullion holdings – largely through buying in its most of its own domestic production. Russia was the world’s third largest gold producer (after China and Australia) in 2014 in producing 266.2 tonnes – only 6 tonnes less than Australia. It will be interesting to see whether it will have hit the No. 2 spot in 2015 when the full year figures are made available. As in Australia, Russian gold miners have benefited from the domestic currency’s fall against the U.S. dollar. The gold price has actually risen in the Russian ruble, despite falling in the U.S. dollar, which makes the economics of gold mining there rather more favourable given most of the input costs are incurred in rubles, while income comes in in U.S. dollars.
The December increase in the Russian central bank’s gold reserves brings the rise year on year to 208 tonnes. Over the past six months, Russia has added 139.6 tonnes to its reserves as against 103.9 tonnes by China (the latter has only been reporting its month by month figures since July). As noted in a recent article on lawrieongold (China and Russia between them account for close to 90% of all announced central bank gold purchases – See: Central bank gold purchases holding up – but only 3 significant regular buyers). Both have an intent to build up their gold reserves believing they will consolidate their positions in any new global financial order which may develop over the next few years.
With China’s somewhat erratic reporting history with respect to its gold reserves, many believe its holdings are rather higher than it has been reporting to the IMF. From the latest IMF figures, China’s gold reserves totalled 1,722.5 tonnes – the world’s 5th largest, but hugely behind World No. 1 – the U.S. – which has been reporting an unchanged total of 8,133.5 tonnes for many years. Russia comes in at No.6 among world gold holders with the latest IMF reported figure of 1,370.6 tonnes. Both of the Chinese and Russian figures were reported prior to announcements of December increases.
There is a view that China, in particular, has a long term aim of increasing its gold reserves to at least match those of the U.S. and given that its current reported reserve level is so far behind that of the U.S. many analysts believe its true gold holdings continue to be substantailly understated by holding a major part of them in some other government account which is not reported to the IMF.
Be that as it may, Russia and China are, in reality, the only regular truly significant monthly announced purchasers of gold and between them are accumulating the yellow metal at around a combined 400-500 tonnes a year. It is generally anticipated that given their governments’ views on the place of gold as a global financial instrument they will continue raising their reserves at a similar rate in 2016
end
Ronan Manly on Deutsche bank exiting London gold and its huge vault.
| Ronan Manly: As Deutsche Bank exits London gold, Chinese bank enters |  |
Submitted by cpowell on 11:19AM ET Thursday, January 21, 2016. Section: Daily Dispatches
2:18p ET Thursday, January 21, 2016
Dear Friend of GATA and Gold:
Gold researcher Ronan Manly today examines Deutsche Bank’s withdrawal from the London gold market, the potential sale of its spanking-new London gold vault to a Chinese government-controlled bank, and the possibility that the Chinese bank will be admitted to the secretive cabal that works with the Bank of England to manipulate the London market. Manly’s report is posted at Bullion Star here:
https://www.bullionstar.com/blogs/ronan-manly/g4s-london- gold-vault-2-0-…
CHRIS POWELL, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.
CPowell@GATa.org
end
And now our resident expert on Chinese gold affairs:
(courtesy Koos Jansen)
In China Everyone Can Buy Gold At The SGE
The Shanghai Gold Exchange launched a smartphone app for customers to trade gold.
It’s advised to have read The Chinese Gold Market Essentials Guide before you continue.
The main reason there is such a large discrepancy between Chinese gold demand as disclosed by the World Gold Council (WGC) and the amount of gold withdrawn from the vaults of the Shanghai Gold Exchange (SGE), the latter being a measure for Chinese wholesale gold demand, is because of direct purchases by individual and institutional clients at the SGE. Whilst the WGC, and many other consultancy firms, measure Chinese gold demand strictly by how much gold is sold through retail channels, the reality is that in China every citizen can open an SGE account and buy gold directly in the wholesale market (the SGE). Such direct purchases at the SGE are not captured in retail demand.
As we all know many wealthy Chinese invest in gold. In the knowledge these people all have direct access to the wholesale market, we can ask ourselves, why would any of them buy gold at retail level? Naturally, Chinese women prefer to buy gold in the form of jewelry because that’s an investment they can flaunt with. But if gold is not bought to flaunt with rational investors would always prefer to pay the lowest price for the gold content. That is, at the SGE.
A Chinese investor that wants to invest, for example, 100,000 RMB in gold will likely open an SGE account through which he can exchange his fiat money for physical metal. At the SGE the investor is granted to pay the lowest price. His purchase at the SGE , however, would then not be counted in retail demand.
My estimate is that half of the gold withdrawn from the vaults of the SGE is bought by wholesale customers that process the metal into gold products, like jewelry, that are eventually sold to the private sector. The other half of the gold withdrawn from the vaults is purchased directly by the private sector (individual and institutional clients). Have a look at the next chart:
Currently the SGE has almost 10,000 institutional and over 8.3 million individual clients. If those 8.3 million clients all buy 100 grams of gold a year that would be 830 tonnes of gold. Of course we don’t know how much all the individual and institutional clients buy every year, though, the total number of institutional and individual clients can easily explain the huge volumes of gold withdrawn from the vaults on a yearly basis. In 2015 no less than 2,596 tonnes of gold were withdrawn from the SGE vaults – in comparison 2,860 tonnes were globally mined.
Previously I’ve written how easy it is for Chinese citizens to open an SGE account and start trading. As of December last year people with an SGE account can also trade gold on their smartphone (Android or iOS) through the Yijintong app that provides access to the SGE trading system. Within a couple of weeks from now “SGE Gold Accounts” can also be opened through this application. Below I’ve displayed a couple of screenshots from Yijintong:
The announcement by the SGE regarding the launch of the new mobile trading software was published on 10 December 2015. BullionStar decided to translate the article as it once again exposes what the Chinese gold market is all about. For an orderly, healthy and strong development of the Chinese gold market all enterprises and citizens have direct access to the central SGE trading system overseen by the PBOC. Accordingly, everyone in China can buy gold directly at the SGE and thus Chinese gold demand measured at retail level is anything but complete.
Next is the translation of the article, at the end you can find the QR code for downloading the software yourself.
State-level Gold Market Transaction Terminal “Yijintong” Was Formally Released
December 10, 2015
With the increasing growth of residents’ wealth in recent years, gold and silver investment has become a trend. However, numerous precious metals transaction platforms and software of varying quality have brought many risks to vast investors on the way to wealth. In order to guarantee investors’ legal rights and guide the healthy development of gold market, “Yijintong”, an authoritative and professional transaction terminal integrating market, transaction and online account opening has emerged.
“Yijintong” breaks a cocoon after painstaking efforts for half a year
In December 2015, the Shanghai Gold Exchange “Yijintong” app was formally released and has entered into the trial operation stage. It is the first professional mobile terminal of state-level gold market jointly researched and developed by the Gold Exchange and all its members after half a year. The first batch of online members include China Bank, Industrial Bank, Shanghai Pudong Development Bank, China Everbright Bank, Ping An Bank, Postal Savings Bank, Ningbo Bank and Haitong Securities. Members who agent personal business in exchanges such as the Agricultural Bank of China, China Securities, China Construction Bank, Bank of Communications, China Minsheng Banking Corp will join the system in succession.
“Yijintong” has comprehensive functions and advanced systems, which are compatible with various Android and iOS operating systems. Right now, it possesses market, transaction, search and information functions, so investors can conduct transactions via mobile phones after opening an account online. In early 2016, Yijintong will also be supporting mobile phone online account opening function. After that, new users will be able to establish Shanghai Gold Exchange’s “Gold Account” business on their mobile phones directly, and avoid the step of visiting stores. It has brought convenience for personal investors to participate in gold and silver transactions.
Authoritative, convenient and comprehensive “Gold Splendor”
Shanghai Gold Exchange has always been dedicated to the healthy and orderly development of the Chinese gold market under the guidance of the Central Bank [the PBOC] leaders for years. It strives to serve entity industry and members in order to offer an open, fair and transparent transaction platform for investors. Now, it has gradually formed to an abundant market system of domestic and overseas markets integrating bidding (spot and derivatives), asking, leasing and financing. Up until November 2015 the Gold Exchange counted 246 members globally, 183 domestic members and 63 international members, next to almost 10,000 institutional and over 8.3 million individual clients.
As the first domestic professional mobile terminal released by the state-level gold market, “Yijintong” has attracted the market attention after it was released owing to its identity of “being jointly released by the Shanghai Gold Exchange and members”. The gold market and investors have welcomed its authoritative information and fair and transparent transaction functions.
While taking functional practicability and user experience into consideration, Yijintong has taken the lead in realizing rapid declaration via mobile phones, real-time account search and internal reference of professional investment, helped investors sell or buy gold, open or close transactions, as well as utilized professional data and information to better grasp the investment opportunities on the precious gold market. One thing to point out is that the Gold Exchange and members jointly released the system. Investors can access to transactions through “Yijintong” without changing the existing business structure, agency relations and risk responsibility system of the Gold Exchange, members and investors.
Investors can log into Yijintong through mobile phones to conduct daily and nightly market transactions and search, utilizing all-day mobile phone services for gold and silver transactions, allowing Yijintong to become a mobile phone gold and silver investment edge tool that integrates functions and practicability, which also helps investors to do well in both work and financial management.
Download methods: iOS and Android mobile phone users can scan the QR code and open it in the browser to download and install directly.
Koos Jansen
E-mail Koos Jansen on: koos.jansen@bullionstar.com
And now your overnight THURSDAY morning trades in bourses, currencies and interest rate from Asia and Europe:
1 Chinese yuan vs USA dollar/yuan RISES to 6.5628 / Shanghai bourse: in the RED/ hang sang: RED
2 Nikkei closed down 393.98 or 2.43%
3. Europe stocks MILDLY IN THE GREEN /USA dollar index up to 99.06/Euro UP to 1.0911
3b Japan 10 year bond yield: rises to .233 !!!!(Japan buying 100% of bond issuance)/Japanese yen vs usa cross now at 116.80
3c Nikkei now well below 18,000
3d USA/Yen rate now well below the important 120 barrier this morning
3e WTI:: 28.00 and Brent: 27.63
3f Gold down /Yen up
3g Japan is to buy the equivalent of 108 billion uSA dollars worth of bond per month or $1.3 trillion. Japan’s GDP equals 5 trillion usa.
Japan to buy 100% of all new Japanese debt and by 2018 they will have 25% of all Japanese debt. Fifty percent of Japanese budget financed with debt.
3h Oil down for WTI and down for Brent this morning
3i European bond buying continues to push yields lower on all fronts in the EMU. German 10 yr bund falls to .495% German bunds in negative yields from 6 years out
Greece sees its 2 year rate rise to 15.57%/: still expect continual bank runs on Greek banks
3j Greek 10 year bond yield rise to : 9.82% (yield curve deeply inverted)
3k Gold at $1101.50/silver $14.05 (7:45 am est)
3l USA vs Russian rouble; (Russian rouble down 3 and 1/100 in roubles/dollar) 84.44
3m oil into the 28 dollar handle for WTI and 27 handle for Brent/
3n Higher foreign deposits out of China sees huge risk of outflows and a currency depreciation (already upon us). This can spell financial disaster for the rest of the world/China forced to do QE!! as it lowers its yuan value to the dollar.
30 SNB (Swiss National Bank) still intervening again in the markets driving down the SF. It is not working: USA/SF this morning 1.0053 as the Swiss Franc is still rising against most currencies. Euro vs SF is 1.0960well above the floor set by the Swiss Finance Minister. Thomas Jordan, chief of the Swiss National Bank continues to purchase euros trying to lower value of the Swiss Franc.
3p Britain’s serious fraud squad investigating the Bank of England on criminal charges/arrests 10 traders for Euribor manipulation
3r the 6 year German bund now in negative territory with the 10 year falls to + .495%/German 6 year rate negative%!!!
3s The ELA at 75.8 billion euros,
The bank withdrawals were causing massive hardship to the Greek bank. the Greek referendum voted overwhelming “NO”. Next step for Greece will be the recapitalization of the banks and that will be difficult.
4. USA 10 year treasury bond at 1.97% early this morning. Thirty year rate at 2.74% /POLICY ERROR)
5. Details Ransquawk, Bloomberg, Deutsche bank/Jim Reid.
(courtesy Jim Reid/Bloomberg/Deutsche bank/zero hedge)
US Equity Futures Fail To Sustain Bounce; Resume Slide On Oil Fears
Things are looking increasingly shaky for central planners around the globe.
After yesterday’s dramatic rout in US equities, which was saved toward the end of trading by a “dash for trash” short squeeze in which several repo desks unleashed forced buy-ins on some of the most shorted companies pushing the Dow Jones 450 points off its lows, China followed up with its own latest intervention spin when it injected a whopping CNY400 billion or $60 billion in liquidity into the financial system, the most in 3 years. This helped push stocks well into three green in early trading, however once the realization spread that this may be taking place in lieu of the much anticipated RRR or rate cut, the Shanghai Composite which first rose just shy of 3,000, subsequently tumbled closing at the lows, down -3.2% at 2,880.
A comparable revulsion in sentiment emerged in Japan where the Nikkei likewise roared higher in early trading, only to plunge at the close, down nearly 400 points, or 2.4%, ending just above 16,000 a new 15 month low. The Nikkei surged more than 300 points in early afternoon trading as investors took heart from a rise in U.S. stock index futures, brokers said. But the rally rapidly lost steam and slipped into negative territory later, with large-cap issues encountering selling from investors in oil-producing countries amid tumbling crude oil prices, they said. The market was also dragged down by a flurry of index futures-led selling, they added.
But once again, the key driver of risk around the globe was oil, which after initially staging a modest rebound after yesterday’s NYMEX close after having been down as much as 7%, has since drifted lower once again not helped by the latest far greater than expected API inventory build and certainly not by comments such as this one by BP CEO Bob Dudley who said markets are facing a “flood of oil.” So important is every up and (mostly) downtick in oil, that even the ECB’s statement due out shortly and Draghi’s press conference to follow, both so important in early December when a Draghi’s build up to a massive bazooka unveiled a tiny water pistol, have taken on a secondary importance today with most expecting nothing of substance from the former Goldman employee.
So where are we now: the Stoxx Europe 600 Index is up 0.4% while S&P futures, which first soared in early trading, subsequently tumbled as much as 1% to trade about 0.4% lower as of last check. To be sure, as Bloomberg comments, “volatility has coursed through financial markets in 2016 and at least 40 equity markets around the world with a total value of $27 trillion are now in bear territory as turmoil in China shows no signs of abating and the selloff in crude oil deepens.”
Investors seeking reassurance will look to President Mario Draghi’s briefing after the ECB’s interest rate announcement for indications of how the central bank will react to the equity slump and oil’s damping effect on inflation.
“There’s no reason to be overweight equities, but the ECB could have a reassuring impact today,” said Francois Savary, the chief investment officer of Prime Partners SA, a Geneva-based investment manager. “Markets need to hear that the bias of monetary policy remains accommodative. We’ll get no lasting rebound without some fundamental news that really shifts sentiment.”
They will likely not get it today from Draghi, who after last month’s debacle, will likely be far more muted in what he promises, says or does.
More details on where we stand now:
- S&P 500 futures down 0.4% to 1848
- Stoxx 600 up 0.4% to 323
- FTSE 100 up 0.4% to 5695
- DAX up 0.4% to 9432
- German 10Yr yield up less than 1bp to 0.48%
- Italian 10Yr yield down 2bps to 1.63%
- Spanish 10Yr yield down 3bps to 1.75%
- S&P GSCI Index up 0.2% to 272.2
- MSCI Asia Pacific down 1.7% to 115
- Nikkei 225 down 2.4% to 16017
- Hang Seng down 1.8% to 18542
- Shanghai Composite down 3.2% to 2880
- S&P/ASX 200 up 0.5% to 4864
- US 10-yr yield up less than 1bp to 1.99%
- Dollar Index down 0.02% to 99.08
- WTI Crude futures up 0.1% to $28.39
- Brent Futures up 0.1% to $27.91
- Gold spot down 0.3% to $1,098
- Silver spot down 0.6% to $14.07
Looking at regional markets in more detail, we start in Asia, where equity markets saw choppy trade, with an initial recovery in the commodities complex providing support before most of the major indices fell back into the red ahead of the close, while the PBoC also injected the largest amount of liquidity into the inter-bank market in 3 years and PBoC’s chief economist states that cash injections could be used as a substitute for a RRR cut. However, sentiment then reversed in late trade as crude failed to sustain a rebound.
Nikkei 225 (+2.4%) initially gained as Japanese exporters were underpinned by a weaker JPY but then shrugged off gains in late trade, while the ASX 200 (+0.5%) was led by gains in basic materials after several large mining names reported firm quarterly results. Elsewhere, Chinese markets also fluctuated between gains and losses, with the Shanghai Comp (-3.2%) initially recovering after the PBoC conducted a CNY 400bIn open market operation injection, before paring as sentiment soured in late trade.
The MSCI Emerging Markets Index slid 0.7 percent, poised for the lowest close since May 2009. The gauge is down 13 percent this year and trades at 10.1 times its 12-month projected earnings, the least since March 2014. Hong Kong’s Hang Seng China Enterprises Index sank 1.8. The Shanghai Composite lost 3.2 percent to the lowest since Dec. 2014. The gauges have both fallen more than 18 percent this year.
Top Asian News:
- Hang Seng Index Sinks Below Net Assets for First Time Since 1998: Hang Seng Index fell 1.8% at close, sending its price-to-book ratio below one.
- PBOC Injects Most Cash in Three Years in Open-Market Operations: China adds 400b yuan using 7-, 28-day reverse repos.
- ’Too Early’ for Further BOJ Stimulus, Abe Aide Shibayama Says: Japan should confer with other nations’ financial authorities.
- With Modi Handcuffed, Few Dozen Judges Shape India Policy: Supreme Court’s speedy moves contrast with parliament gridlock.
European equities have had a choppy session, are relatively flat in terms of recent volatility and trade in mild positive territory. Most European equity indices broke the trend of Asia and opened in positive territory, swinging between gains and losses.
The Stoxx 600 added 0.5 percent at 10:49 a.m. in London, after rising as much as 1.2 percent and falling 0.2 percent. Commodity producers led gains.
Italian banks led lenders higher, with Banca Popolare dell’Emilia Romagna SC rising 3.7 percent and Banca Monte dei Paschi di Siena SpA jumping 26 percent, after Prime Minister Matteo Renzi said the domestic banking system is more solid than people think. Monte dei Paschi jumped 25 percent, after losing almost half of its value over the past three days, as European Union officials signaled they’re ready to speed up the process of setting up an Italian bad bank.
Deutsche Bank AG slid 7.3 percent after Germany’s biggest lender forecast a loss for the fourth quarter after setting aside more money for litigation and restructuring costs. As the chart below shows, for the DAX it is all about staying at or just above the long-term support. A drop below this means much more turbulence ahead.
Elsewhere in Europe the FTSE MIB (+0.35%) has managed to stop the rot, after underperforming for the last 2 sessions, after various officials have offered supportive comments. In spite of the looming risk event in the form of the ECB policy meeting Bunds trade flat, also shrugging off EUR 13.6bIn in supply from French and Spanish bonds.
Top European News
- Deutsche Bank Sees Quarterly Loss on Legal, Overhaul Costs: ~EU1.2b were earmarked for litigation, EU800m for restructuring/severance costs, mainly in private, business clients division.
- Barclays’ Staley Said to Cut 1,000 Jobs, About a Quarter in Asia: Bank to exit several Asian countries, keep prime brokerage.
- Pearson to Eliminate 4,000 Jobs as Forecast Trails Ests.: Cuts are equivalent to 10% of workforce; majority will be completed by mid-2016.
- Remy Cointreau Sales Beat Estimates on China, U.S. Demand: Sales rose 3.2% on organic basis in 4Q after 1H 2015 decline.
- UniCredit Offers to Buy Back EU1.8b of Junior Bonds: Bank offered to repurchase bonds, maturing from 2019 to 2022, at par or justaccording to statement on Thursday.
- Glaxo Chief Says Consumer Health Unit Can Exist on Its Own: Consumer health unit could be “conceptually thought about on its own,” CEO Andrew Witty said as he considers investors’ demands to break up co.
- Goldman Backs Group Campaigning for U.K. to Stay in EU: Contribution made to Britain Stronger in Europe group is latest sign that banking industry is battling Brexit.; JPMorgan Said Near Donation to Campaign to Keep U.K. in EU: Sky
- Sapa Sees Aluminum-Sales ‘Bump’ in Race to Make Cars Lighter: Co. expects “significant bump” in sales to North American automakers.
In FX, a steadier morning though not without significant incident. The RUB has taken some of the limelight this morning, falling to fresh record lows again and prompting Kremlin spokesmen to dismiss talk of a crash. Weak Oil clearly behind this, sending the MXN to new lows also, but the CAD has been much better behaved, trading a relatively tight range close to 1.4500. Large stops through 1.4430 now widely acknowledged. USD/JPY still on the back foot, but has tested through 117.00 again. Stocks the main driver still, but intervention fears now give the pair an upside ‘skew’. All range bound elsewhere — EUR/USD still struggling inside broader 1.0800-1.1000 range.
In all important commodities, WTI and Brent have had a choppy session and reside just above and below the USD 28.00 handle respectively, and trade relativley flat on the day, a reprieve from the choppy price action of late. Given the price action of late, Algeria’s energy minister has said that non OPEC members need a consensus to stabilize oil. Iraq also supports an OPEC meeting to boost price, providing a deal can be reached. However, they also say a non OPEC deal on output cut is required to boost prices, which is a sticking point with several OPEC members.
Base metals trade in negative territory but relatively flat in terms of recent volatility, as markets focus seems to be on the bleak outlook . The show of strength in the base metals at the start of the week has been depleted and prices have fallen as they retest support levels. Gold has broken below the USD 1,100oz level in recent trade, having benefitted from safe haven bids throughout Asia and the early European morning. According to Barclays, Venezuela’s reckoning looms and says time may have run out, adding that a credit event may be hard to avoid as the oil price keeps sinking. However, according to four OPEC delegates, an emergency meeting is unlikely to occur as a result of Venezuela’s request.
Onto the day ahead where this morning we turn to the aforementioned ECB meeting shortly after midday while Euro area consumer confidence data will be out shortly after. Over in the US this afternoon the main data of note is the Philly Fed business outlook print for January where current expectations are for a near 5pt improvement from December (albeit still at a lowly -5.2). Also due will be the latest initial jobless claims print. Earnings wise 19 S&P 500 companies are due to report today with the highlights being Verizon and Schlumberger – the latter being the first of the big oil names.
Bulletin Headline News from Bloomberg and RanSquawk
- European equities have had a choppy session, are relatively flat in terms of recent volatility and trade in mild positive territory
- A steadier morning in FX, though not without significant incident. The RUB has taken some of the limelight this morning, to fresh record lows again and prompting Kremlin spokesmen to dismiss talk of a crash
- Highlights today include the ECB rate decision, US weekly jobs data, Philly Fed and DoE crude oil inventories
- Treasuries slightly higher in overnight trading as European stocks rally ahead of ECB meeting, Draghi press conference; Asian stocks slide despite PBOC turning on “the liquidity firehouse.”
- Investment managers are warning that markets probably have further to fall as China’s growth slows, oil prices plunge and central bankers lack tools to prop up economies
- “Regulation has made the world more dangerous” as financial regulators failed banks before the financial crisis then stifled the industry’s recovery in Europe, according to Blackstone Group LP CEO Steve Schwarzman
- Brent oil extended its decline from the lowest close in more than 12 years as rising U.S. crude stockpiles added to a swelling global glut. Inventories rose by 4.6m barrels last week while official U.S. government figures Thursday are forecast to show a second weekly advance
-
- Italy’s banks are groaning under a pile of soured debt run up as the economy shriveled after the financial crisis; Banca Monte dei Paschi di Siena SpA, UniCredit SpA and Banca Popolare dell’Emilia Romagna SC were among lenders asked to submit data on their non-performing loans
- Banca Monte dei Paschi di Siena SpA rebounded in Milan trading, after losing almost half of its value over the past three days, as European Union officials signaled they’re ready to speed up the process of setting up an Italian bad bank
- Christine Lagarde picked up nominations from across Europe for a second term as leader of the IMF as part of a selection process that member nations intend to complete by early March
- Goldman Sachs donated hundreds of thousands of pounds to the campaign to keep the U.K. inside the European Union, to a person familiar with the matter
- Sovereign 10Y bond yields slightly lower, led by Hong Kong. Asian stocks drop, European stocks rally; U.S. equity-index futures fall. Crude oil drops, copper steady, gold falls
Top Global News
- Foxconn Group Said to Offer About $5.1b for Japan’s Sharp: Japan’s INCJ also reported to be interested in Sharp deal. Sharp Said to Favor INCJ’s Plan vs Higher Foxconn Offer
- Macy’s Buyout Would Be a Miracle on 34th Street: Investors: 30 years after $3.6b LBO, activist investors are betting Macy’s will again become takeover target.
- Carlyle, Staples Meet Resistance as Credit Strains Surface: Investors who agreed to lend money to fund Staples’s $6.3b purchase of Office Depot are now trying to negotiate better terms on financing.
- Sports Authority Said to Struggle to Cut Debt as Default Looms: Co. skipped an interest payment last week on its $343m of 2018 subordinated debt; has been talking to bondholders about haircut on those notes in exchange for other securities.
- Tesla Sues German Parts Maker Over ‘Sagging’ Door on Model X: Co. said it seeks to avoid “a series of unreasonable demands” by Hoerbiger Automotive Comfort Systems LLC, including payment for breach of contract.
- Coal Miner ‘On Everybody’s List’ as Next Bankruptcy Victim: investors are wondering if biggest coal co., Peabody Energy Corp., could be next.
- Schlumberger Seen as Only Oil Servicer Standing as Margins Slump: Co. may be only one of its peers that turned 4Q profit in North America.
- Blizzard Expected to Bury Washington in Up to Two Feet of Snow: Friday blizzard expected to dump 1-2 feet of snow on Washington, as lesser amounts are forecast for New York City.
- Lagarde, Panelists Say China Transition Challenge Manageable: In comments echoed by fellow panelists Ray Dalio, Gary Cohn, Lagarde said China’s policy makers have shown “unbelievable determination” to deliver past reforms.
- Favorite Hedge Fund Holdings Are Among 2016’s Worst Stocks: Of 100 worst-performing cos. larger than $1b as of Jan. 19, more than half are at least 10% owned by hedge funds; 17 are at least 25% owned by such funds.
DB’s Jim Reid concludes the overnight wrap
This morning markets in Asia had appeared to be feeding off that late surge into the US close with gains of over 1% following a similar gain for Oil. However a retracement back to unchanged for WTI has seen equity bourses in particular dip lower. The Nikkei (-1.08%), Hang Seng (-1.18%), Shanghai Comp (-1.05%) and Kospi (-0.26%) have all reversed course as we to print while US equity index futures are pointing towards a small loss. There’s been a strong rally in credit indices though with iTraxx Asia and Australia indices 6bps and 3bps tighter respectively. Meanwhile, ahead of the Chinese New Year early next month the PBoC has moved to shore up liquidity by injecting 110bn yuan of 7-day reverse repos and 290bn yuan of 28-day contracts, the most in three years.
I was casually looking at the equity market correction in a longer-term context yesterday and it reminded me that after extreme periods of overvaluation through history you often get multi decade periods of markets going sideways albeit with huge cyclical swings. For example the FTSE, CAC and IBEX are now at levels first hit on the upside in 1998. Looking at the Nikkei it first hit current levels in 1986 and the Italian market has been in the doldrums for decades too. Obviously with dividends more positive returns are still possible even in this long super cycle of stagnation but as a long-term historian of markets it’s nice to see the old rules of over valuation taking decades to iron out still apply. Clearly this is irrelevant for market timing but absolutely applies to long-term trends which makes our annual long-term study the easiest document we write. For completeness we should say that the S&P 500 is up 85% since 1998 (albeit only 30% above its 2000 peak) and the DAX up 110%. They are rare DM winners over the period. Just for reference though the S&P 500 has traditionally paid lower dividends so the out-performance is notably less extreme when that’s factored in.
With today a fairly quiet one for economic data, the focus looks set to be on the ECB meeting shortly after midday. We share the view of our European economists in that we expect neither a change in policy nor a clear signal of further easing. We do however think that the Council will highlight its capacity to act, the ‘open-ended’ nature of its policies and the flexibility around the asset purchase programme. Our colleagues take the view that the ECB will be reactive in addressing the risks to its inflation mandate and will wait for more visibility on the three key fronts; China, the oil price shock and inflation expectations. Looking further ahead to March, while our colleagues’ baseline case remains for now that the ECB is done, clearly there is material risk of further easing and for this to happen the most important number will be the staff inflation forecast for 2018. From our side we can’t help thinking that the ECB will eventually be forced to do more but then again we’ve always felt the FED will eventually do QE4 so that shows our biases.
Moving on. It was hard to pinpoint an exact reason for that late swing in markets yesterday. Some pointed towards the expiry of the WTI Oil February futures contract yesterday as a reason (with the March contract trading higher) while some also highlighted the S&P dipping close to the key 1,800 technical level. In any case there was a similar swing in credit markets where CDX IG eventually completed a 5bp turnaround from the day’s wides to finish near enough unchanged on the day. Meanwhile US 10y Treasury yields dipped well below 2% for the first time since October, hitting an intraday low of 1.937% before closing out at 1.982% (still down 7.3bps on the day).
That in part also reflected a slightly softer US CPI print yesterday. The December headline reading of -0.1% mom came in a tad below expectations of no change, while the monthly core print (+0.1% mom vs. +0.2% expected) was also lower than hoped. More favorable base effects helped to lift the headline YoY rate to +0.7% (vs. +0.8% expected) from +0.5% while the core YoY rose one-tenth to +2.1% as expected. Meanwhile last month’s housing market indicators were mixed. Housing starts surprisingly dropped last month by -2.5% mom after expectations had been for a +2.3% gain. Building permits, while still soft, declined less than expected last month (-3.9% mom vs. -6.4% expected).
Prior to this, in Europe we saw German PPI come in slightly below market at -0.5% mom vs. -0.4% expected last month. There was slightly better news out of the UK however where the ILO unemployment rate declined one-tenth to 5.1% in the three months to November after the consensus had been set for no change. This reflected a decent bounce in the number employed, up by 267k in the period (vs. 235k expected).
On a slightly more positive note, yesterday’s US earnings were generally encouraging. Of the 7 to report, all 7 beat earnings expectations and 5 beat revenue expectations – although as we’ve highlighted previously that also reflects the now current low expectations in the market. The notable reporter was Goldman Sachs (which beat on both), the last of the big banks to report.
Onto the day ahead where this morning we kick things off in France with the latest January confidence indicators. That’s before we turn to the aforementioned ECB meeting shortly after midday while Euro area consumer confidence data will be out shortly after. Over in the US this afternoon the main data of note is the Philly Fed business outlook print for January where current expectations are for a near 5pt improvement from December (albeit still at a lowly -5.2). Also due will be the latest initial jobless claims print. Earnings wise 19 S&P 500 companies are due to report today with the highlights being Verizon and Schlumberger – the latter being the first of the big oil names.
end
Let us begin:
ASIAN AFFAIRS
Late WEDNESDAY night,THURSDAY morning: Shanghai down badly despite huge 60 billion usa equivalent injection / Hang Sang falls badly. The Nikkei closed deeply 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 a little lower, falling to 28 dollars per barrel. Stocks in Europe all in the green, waiting for Draghi’s report. Offshore yuan trades at 6.6092 yuan to the dollar vs 6.5628 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 continues to suffer a decline, and the peg is in jeopardy. Yesterday, the Saudis engage in currency controls to stop bets against the riyal:
PBOC Injects Massive $60 Billion Liquidity – Most In 3 Years
Offshore Yuan is sliding lower after its “US equity market saving” surge during the day session as PBOC fixes Yuan stable for the 10th day in a row. Despite the smoke and mirrors of stability however, they injected a colossal 400 billion Yuan into the financial system – the most in 3 years.
Offshore Yuan is sliding…
PBOC holds Yuan Fix stable for the 10th day with a very small weakening:
- *CHINA SETS YUAN REFERENCE RATE AT 6.5585 AGAINST U.S. DOLLAR
But injected a godzilla-size 400bn Yuan of liquidity
- *PBOC TO INJECT 110B YUAN WITH 7-DAY REVERSE REPOS: TRADER
- *PBOC TO INJECT 290B YUAN WITH 28-DAY REVERSE REPOS: TRADER
This is not normal new year liquidty injection at all…
*PBOC INJECTS MOST CASH IN THREE YEARS IN OPEN-MARKET OPERATIONS
Something is breaking and PBOC is desperate to fill the hole with centrally planned reverse repo.
END
At 11:30 pm last night:
Stocks, Crude Tumble As Offshore Yuan Sinks To Day Session Lows
From the close of the US day session, offshore Yuan began to weaken and despite the largest liquidity injection in 3 years, has tumbled almost 200 pips from the dead-cat-bounce highs, testing the lows once again. This in turn has weighed on crude and dropped Dow futures 140 points off the after-hours highs…
As Yuan tumbled so Crude and stocks lurched lower…
We have seen this pattern before… this morning…
What happens next?
ECB Keeps Rates Unchanged, Focus Turns To Draghi
Nobody was expecting a rate cut (and hopefully not a hike) from the ECB today, and that’s precisely what they got when moments ago the ECB announced it would keep its three key rates unchanged as follows:
- Marginal Lending Facility: 0.30%
- Deposit Facility: -0.30%
- Main Refinancing Rate: 0.05%
The full release:
At today’s meeting the Governing Council of the ECB decided that the interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will remain unchanged at 0.05%, 0.30% and -0.30% respectively.
The President of the ECB will comment on the considerations underlying these decisions at a press conference starting at 14:30 CET today.
The summary shown below:
Now attention turns to Draghi, but unlike on December 3, with far less excitement.
end
Stocks and futures surge. The Euro tumbles after Draghi initiates another bazooka. They will reconsider policy in March:
(courtesy zero hedge)
Stocks, Futures Surge, Euro Tumbles After Draghi Says ECB “Will Reconsider Policy Stance In March”
Back in September, Draghi set the stage for the unleashing of a December QE bazooka, something the market was fully convinced would take place on December 3 pushing the EUR lower by nearly 10 big figures. When it didn’t, and when Draghi unveiled a water pistol instead, the EUR soared, and European assets crashed.
Fast forward to today, when as we previewed earlier today, nobody was expecting much if anything from Draghi, to wit:
[DB] concludes that “the ECB will be reactive in addressing the risks to its inflation mandate and will wait for more visibility on the three key fronts.” In other words, nothing, which of course may be just the “reverse psychology” moment Draghi needs to actually surprise markets: if his massive build up was so disappointing last month, why not do the reverse today?
He did precisely that, when moments ago during the ECB press conference Draghi pulled a page straight from the September presser when he said that as a result of an “increase in downside risks” and a “significantly lower inflation outlook than in early December”, the ECB “will need to review” its monetary policy stance in March, blaming tumbling oil prices for the collapse in inflation expectations, and suggesting that the QE expansion which was supposed to take place in December, but didn’t, will now most likely take place in March.
Of course, the ECB’s inflation expectations hockeystick was visible to anyone who looked for more than 2 seconds as the central bank’s inflationary forecasts…
… which were based on $52 oil at the end of 2016, so only algos could be surprised that the ECB is far, far behind the curve.
And yet surprised they were, because just as Draghi once again started jawboning and hinting that the ECB is back to unveiling some bazooka which doesn’t really exist, the EUR crashed…
… sending the DAX and other European equity indexes surging…
… also pushing US equity back to their overnight highs.
And so the bogey has been set, with expectations once again rampant that the ECB will do much more in two months.
Will it actually do that, or will everyone be crushed like they were back in December? It may depend on oil, where if the steep decline continues, this time Draghi may have no choice but to actually follow through with his threats.
As for the market reaction: keep an eye on the duration of the risk bounce – if risk refuses to push higher from here, the market will have clearly decided to call the bluff on the ECB’s endless hollow promises and threats…
end
We now get the full details on Deutsche Ban’s poor performance, losing 7 billion euros.
(courtesy zero hedge)
“These Are Extremely Poor Results”: Deutsche Bank Reports Titanic $7 Billion Annual Loss
When it comes to picking a poster child for everything that’s wrong with Wall Street and the financial industry in general, it’s sometimes difficult to decide just who gets the blue ribbon for “most nefarious.”
Indeed, since 2008 we’ve learned that virtually every systemically important financial institution on the face of the planet has at one time or another engaged in some manner of chicanery be it the manipulation of the world’s most important benchmark rates, the peddling of worthless mortgage bonds, or the rigging of FX markets.
Having said all of that, Deutsche Bank may well qualify as the institution that “best” exemplifies the banking industry’s penchant for greed, corruption, and general malfeasance.
From rate rigging to book cooking to deplorable HR procedures, the German lender has it all and last summer, the bank showed co-CEOs Anshu Jain and Jürgen Fitschen the door amid shareholder pressure to reform the corporate culture and improve performance.
To be sure, new CEO John Cryan has his hands full.
The bank is saddled with mountainous legacy litigation and faces an uphill battle to streamline operations. Back in October, Cryan announced that Deutsche would cut 35,000 positions and exit 10 countries as part of a sweeping overhaul.
Oh, and Cryan also preannounced a massive loss and subsequently scrapped the dividend.
On Thursday, we got the latest bad news out of Deutsche as Cryan reported what he called “sobering” results for 2015. In short, the bank is staring down a net loss of €6.7 billion for the year, the first annual loss since 2008. The shares plunged.
Some €1.2 billion in litigation fees contributed to €2.1 billion in charges incurred during Q4, a quarter in which the securities trading unit underperformed.
“These are extremely poor results,” Citi’s Andrew Coombs said in a note, referencing the underlying (i.e. ex-litigation and restructuring) results which showed a pre-tax loss of €600 million for Q4.
“The miss is partly due to revenues of €6.6bn, which are 11% (€0.8bn) below consensus and down -16% yoy,” Coombs writes. “[But] this alone still fails to explain €0.7bn of the underlying miss,” he continues, adding that “it would appear that either investment spend has been front-loaded or alternatively (and far more likely in our view) that the bank has also been forced to book elevated credit losses during the quarter.”
Yes, “elevated credit losses.” Imagine that.
If we had to venture a guess, we’d say those losses are likely to mount going forward given the increasingly precarious environment for credit.
And don’t expect the bank’s legal woes to go away any time soon either. “We see further downside risk on litigation – we model another €3.6bn in 2016 – which is likely to necessitate a capital raise,” Citi goes on to warn.
“Overall, this development confirms our view that the task facing new management is very demanding. Litigation issues do not end with this mark down – we expect them to persist for a multi-year period,” Goldman adds.
Right, so what Citi and Goldman are trying to tell you is that this is an umitigated disaster and a dilutive capital raise is probably just around the corner because the bank apparently did so many things wrong that the litigation is likely to last forever – literally.
Citi cut its price target on Deutsche by a whopping €7 and cut 2015 EPS estimates by 17%.
We wonder if John Cryan is regretting the decision to try and clean up this truly epic mess.
* * *
Full PR from Deutsche Bank
Deutsche Bank (XETRA: DBKGn.DE/NYSE: DB) today announced that it expects to incur a number of charges that will contribute to an overall loss for the fourth quarter 2015:
– Expected litigation charges of approximately EUR 1.2 billion, the majority of which are not anticipated to be tax deductible. These provisions are preliminary and may be further changed by events before publication of the bank’s annual financial statements on March 11, 2016 – Restructuring and severance charges of EUR 0.8 billion. These charges are largely related to the Private & Business Clients (PBC) segment. PBC will also take a EUR 0.1 billion charge for the impairment of software
The bank expects to report full year 2015 revenues of EUR 33.5 billion. As a result of the above charges, the bank expects to report a full year 2015 loss before income taxes of approximately EUR 6.1 billion and a net loss of approximately EUR 6.7 billion. The full year results include previously disclosed impairments taken in the third quarter of EUR 5.8 billion of goodwill and intangibles, full year litigation provisions of approximately EUR 5.2 billion and restructuring and severance charges of approximately EUR 1.0 billion.
Challenging market conditions in the quarter contributed to a year-over-year decline in fourth quarter revenues, principally in Corporate Banking & Securities (CB&S). As a result of these revenue developments and the specific charges for the fourth quarter mentioned above, the bank expects to report revenues of EUR 6.6 billion, a loss before income taxes of approximately EUR 2.7 billion and a net loss of approximately EUR 2.1 billion for the fourth quarter.
Deutsche Bank currently expects to report a fully-loaded CRR/CRD4 Common Equity Tier 1 (CET1) ratio at the end of the fourth quarter of approximately 11%. The regulatory capital treatment of the bank’s Abbey Life business has changed in the fourth quarter, resulting in an approximate 10 basis point reduction in the CET 1 ratio. Additionally, the previously announced agreement to sell the bank’s 19.99% stake in Hua Xia Bank is expected to close in the second quarter 2016. This sale, on a pro-forma basis, would have improved Deutsche Bank’s Common Equity Tier 1 capital ratio (CRR/CRD 4 fully loaded) as of 31 December 2015 by approximately 50 to 60 basis points.
All of these amounts are estimates. Details of the preliminary fourth quarter and annual results will be disclosed on January 28, 2016.
end
George Soros: “Europe Is On The Verge Of Collapse”
Via The New York Review of Books,
The following is a revised version of an interview between George Soros and Gregor Peter Schmitz of the German magazine WirtschaftsWoche.
Gregor Peter Schmitz: When Time put German Chancellor Angela Merkel on its cover, it called her the “Chancellor of the Free World.” Do you think that is justified?
George Soros: Yes. As you know, I have been critical of the chancellor in the past and I remain very critical of her austerity policy. But after Russian President Vladimir Putin attacked Ukraine, she became the leader of the European Union and therefore, indirectly, of the Free World. Until then, she was a gifted politician who could read the mood of the public and cater to it. But in resisting Russian aggression, she became a leader who stuck her neck out in opposition to prevailing opinion.
She was perhaps even more farsighted when she recognized that the migration crisis had the potential to destroy the European Union, first by causing a breakdown of the Schengen system of open borders and, eventually, by undermining the common market. She took a bold initiative to change the attitude of the public. Unfortunately, the plan was not properly prepared. The crisis is far from resolved and her leadership position—not only in Europe but also in Germany and even in her own party—is under attack.
Schmitz: Merkel used to be very cautious and deliberate. People could trust her. But in the migration crisis, she acted impulsively and took a big risk. Her leadership style has changed and that makes people nervous.
Soros: That’s true, but I welcome the change. There is plenty to be nervous about. As she correctly predicted, the EU is on the verge of collapse. The Greek crisis taught the European authorities the art of muddling through one crisis after another. This practice is popularly known as kicking the can down the road, although it would be more accurate to describe it as kicking a ball uphill so that it keeps rolling back down. The EU now is confronted with not one but five or six crises at the same time.
Schmitz: To be specific, are you referring to Greece, Russia, Ukraine, the coming British referendum, and the migration crisis?
Soros: Yes. And you haven’t even mentioned the root cause of the migration crisis: the conflict in Syria. Nor have you mentioned the unfortunate effect that the terrorist attacks in Paris and elsewhere have had on European public opinion.
Merkel correctly foresaw the potential of the migration crisis to destroy the European Union. What was a prediction has become the reality. The European Union badly needs fixing. This is a fact but it is not irreversible. And the people who can stop Merkel’s dire prediction from coming true are actually the German people. I think the Germans, under the leadership of Merkel, have achieved a position of hegemony. But they achieved it very cheaply. Normally hegemons have to look out not only for their own interests, but also for the interests of those who are under their protection. Now it’s time for Germans to decide: Do they want to accept the responsibilities and the liabilities involved in being the dominant power in Europe?
Schmitz: Would you say that Merkel’s leadership in the refugee crisis is different from her leadership in the euro crisis? Do you think she’s more willing to become a benevolent hegemon?
Soros: That would be asking too much. I have no reason to change my critical views on her leadership in the euro crisis. Europe could have used the kind of leadership she is showing now much earlier. It is unfortunate that when Lehman Brothers went bankrupt in 2008, she was not willing to allow the rescue of the European banking system to be guaranteed on a Europe-wide basis because she felt that the prevailing German public opinion would be opposed to it. If she had tried to change public opinion instead of following it, the tragedy of the European Union could have been avoided.
Schmitz: But she wouldn’t have remained chancellor of Germany for ten years.
Soros: You are right. She was very good at satisfying the requirements and aspirations of a broad range of the German public. She had the support of both those who wanted to be good Europeans and those who wanted her to protect German national interest. That was no mean feat. She was reelected with an increased majority. But in the case of the migration issue, she did act on principle, and she was willing to risk her leadership position. She deserves the support of those who share her principles.
I take this very personally. I am a strong supporter of the values and principles of an open society because of my personal history, surviving the Holocaust as a Jew under the Nazi occupation of Hungary. And I believe that she shares those values because of her personal history, growing up under Communist rule in East Germany under the influence of her father, who was a pastor. That makes me her supporter although we disagree on a number of important issues.
Schmitz: You have been so involved in promoting the principles of open society and supporting democratic change in Eastern Europe. Why is there so much opposition and resentment toward refugees there?
Soros: Because the principles of an open society don’t have strong roots in that part of the world. Hungarian Prime Minister Viktor Orbán is promoting the principles of Hungarian and Christian identity. Combining national identity with religion is a powerful mix. And Orbán is not alone. The leader of the newly elected ruling party in Poland, Jaros?aw Kaczy?ski, is taking a similar approach. He is not as intelligent as Orbán, but he is a canny politician and he chose migration as the central issue of his campaign. Poland is one of the most ethnically and religiously homogeneous countries in Europe. A Muslim immigrant in Catholic Poland is the embodiment of the Other. Kaczy?ski was successful in painting him as the devil.
Schmitz: More broadly, how do you view the political situation in Poland and Hungary?
Soros: Although Kaczy?ski and Orbán are very different people, the regimes they intend to establish are very similar. As I have suggested, they seek to exploit a mix of ethnic and religious nationalism in order to perpetuate themselves in power. In a sense they are trying to reestablish the kind of sham democracy that prevailed in the period between the First and Second World Wars in Admiral Horthy’s Hungary and Marshal Pi?sudski’s Poland. Once in power, they are liable to capture some of the institutions of democracy that are and should be autonomous, whether the central bank or the constitutional court. Orbán has already done it; Kaczy?ski is only starting now. They will be difficult to remove.
In addition to all its other problems, Germany is going to have a Polish problem. In contrast to Hungary, Poland has been one of the most successful countries in Europe, both economically and politically. Germany needs Poland to protect it from Russia. Putin’s Russia and Kaczy?ski’s Poland are hostile to each other but they are even more hostile to the principles on which the European Union was founded.
Schmitz: What are those principles?
Soros: I have always looked at the EU as the embodiment of the principles of the open society. A quarter of a century ago, when I first became involved in the region, you had a moribund Soviet Union and an emerging European Union. And interestingly, both were adventures in international governance. The Soviet Union tried to unite proletarians of the world, and the EU tried to develop a model of regional integration based on the principles of an open society.
Schmitz: How does that compare with today?
Soros: The Soviet Union has been replaced by a resurgent Russia and the European Union has come to be dominated by the forces of nationalism. The open society that both Merkel and I believe in because of our personal histories, and that the reformers of the new Ukraine want to join because of their personal histories, does not really exist. The European Union was meant to be a voluntary association of equals but the euro crisis turned it into a relationship between debtors and creditors where the debtors have difficulties in meeting their obligations and the creditors set the conditions that the debtors have to meet. That relationship is neither voluntary nor equal. The migration crisis introduced other fissures. Therefore, the very survival of the EU is at risk.
Schmitz: That’s an interesting point, because I remember that you used to be very critical of Merkel two years ago for being too concerned with the interests of her voters and establishing a German hegemony on the cheap. Now, she has really changed course on the migration issue, and opened the door wide to Syrian refugees. That created a pull factor that in turn allowed the European authorities to develop an asylum policy with a generous target, up to a million refugees a year with the target open for several years. Refugees who are qualified to be admitted could be expected to stay where they are until their turn comes.
Soros: But we don’t have a European asylum policy. The European authorities need to accept responsibility for this. It has transformed this past year’s growing influx of refugees from a manageable problem into an acute political crisis. Each member state has selfishly focused on its own interests, often acting against the interests of others. This has precipitated panic among asylum seekers, the general public, and the authorities responsible for law and order. Asylum seekers have been the main victims. But you are right. Merkel deserves credit for making a European asylum policy possible.
The EU needs a comprehensive plan to respond to the crisis, one that reasserts effective governance over the flows of asylum seekers so that they take place in a safe, orderly way, and at a pace that reflects Europe’s capacity to absorb them. To be comprehensive, the plan has to extend beyond the borders of Europe. It is less disruptive and much less expensive for potential asylum seekers to stay in or close to their present location.
My foundation developed a six-point plan on this basis and announced it at exactly the same time as Orbán introduced his six-point plan, but the two plans were diametrically opposed to each other. Orbán’s plan was designed to protect the national borders against the asylum seekers; ours sought to protect the asylum seekers. We have been at odds ever since. Orbán accuses me of trying to destroy Hungary’s national culture by flooding the country with Muslim refugees. Paradoxically, our plan would keep qualified asylum seekers where they are currently located and provide facilities in those places; it is his policies that induce them to rush to Europe while the doors are still open.
Schmitz: Could you make your paradox a little clearer? Why would your plan prevent refugees from flooding Europe?
Soros: We advocate a common European asylum policy that would reassert control over the European rather than national borders and allow asylum seekers to reach Europe in a safe, orderly way, and at a pace that reflects the EU’s capacity to absorb them. Orbán advocates using the national borders to keep out migrants.
Schmitz: And who is winning the conflict?
Soros: In Hungary, he has won hands down. More disturbingly, he is also winning in Europe. He is challenging Merkel for the leadership of Europe. He launched his campaign at the party conference in September 2015 of the Christian Social Union of Bavaria (the sister party of Merkel’s Christian Democratic Union) and he did so in cahoots with Horst Seehofer, the German party chairman. And it is a very real challenge. It attacks the values and principles on which the European Union was founded. Orbán attacks them from the inside; Putin from the outside. Both of them are trying to reverse the subordination of national sovereignty to a supranational, European order.
Putin goes even further: he wants to replace the rule of law with the rule of force. They are harking back to a bygone age. Fortunately, Merkel has taken the challenge seriously. She is fighting back and I support her not only with words but also with deeds. My foundations do not engage only in advocacy; they seek to make a positive contribution on the ground. We established a foundation in Greece, Solidarity Now, in 2013. We could clearly foresee that Greece in its impoverished state would have difficulty taking care of the large number of refugees that are stuck there.
Schmitz: Where would the money for your plan come from?
Soros: It would be impossible for the EU to finance this expenditure out of its current budget. It could, however, raise these funds by issuing long-term bonds using its largely untapped AAA borrowing capacity. The burden of servicing the bonds could be equitably distributed between member states that accept refugees and those that refuse to do so or impose special restrictions. Needless to say, that is where I remain at odds with Chancellor Merkel.
Schmitz: You have retired from running your hedge fund and devote all your energies to your foundation. What are your major projects?
Soros: There are too many to enumerate. We seem to be involved in most of the burning political and social issues of the world. But I would single out the Institute for New Economic Thinking (INET) and the Central European University (CEU) because there is a revolution going on in the social sciences and I am deeply involved both personally and through my foundations. With the help of the natural sciences, mankind has gained control over the forces of nature but our ability to govern ourselves has not kept pace with the achievements of natural science. We have the capacity to destroy our civilization and we are well on the way to doing so.
Schmitz: You paint a bleak picture of our future.
Soros: But it is a biased view and deliberately so. Recognizing a problem is an invitation to do something about it. That is the main lesson I learned from the formative experience of my life, in 1944, when the Nazis occupied Hungary. I might not have survived if my father hadn’t secured false identification papers for his family (and many others). He taught me that it’s much better to face harsh reality than to close your eyes to it. Once you are aware of the dangers, your chances of survival are much better if you take some risks than if you meekly follow the crowd. That is why I trained myself to look at the dark side. It has served me well in the financial markets and it is guiding me now in my political philanthropy. As long as I can find a winning strategy, however tenuous, I don’t give up. In danger lies opportunity. It’s always darkest before dawn.
Schmitz: What’s your winning strategy for Greece?
Soros: Well, I don’t have one. Greece was mishandled from the beginning. When the Greek crisis originally surfaced toward the end of 2009, the EU, led by Germany, came to the rescue, but it charged punitive interest rates for the loans it offered. That is what made the Greek national debt unsustainable. And it repeated the same mistake in the recent negotiations. The EU wanted to punish Prime Minister Alexis Tsipras and especially his former finance minister Yanis Varoufakis at the same time as it had no choice but to avoid a Greek default. Consequently, the EU imposed conditions that will push Greece into deeper depression.
Schmitz: Is Greece an interesting country for private investors?
Soros: Not as long as it is part of the eurozone. With the euro, the country is unlikely ever to flourish because the exchange rate is too high for it to be competitive.
Schmitz: How concerned are you that in the middle of all these crises an important EU member state such as the UK is considering leaving the European Union?
Soros: Very. I am convinced that Britain should stay in Europe not only for economic but even more for political reasons. An EU without the UK would be a much weaker union.
Schmitz: But surveys show a British majority for a Brexit, or British exit from the EU.
Soros: The campaign for the Brexit has deliberately misled the public. Currently, Britain has the best of all possible deals with Europe. It has access to the common market where nearly half of UK exports go while it is not weighed down by the burden of having joined the eurozone.
Schmitz: Why is the British business community not more vocal about the disadvantages of a Brexit?
Soros: The managements of the multinational corporations that have built up their manufacturing capacity in Britain as a springboard into the common market are reluctant to say that they oppose a Brexit publicly because they don’t want to get embroiled in a political debate where their customers have divergent views. But ask them privately, as I did, and they will readily confirm it.
The Brexit campaign has tried to convince the British public that it is safer to stay out of the common market than to be part of it. The campaign had the field to itself because the government wanted to give the impression that it is holding out for the best deal.
Schmitz: For a long time, Europe—and the world—could count on China as a growth and credit engine.
Soros: China is still historically the most important country. It still has very large accumulated foreign currency reserves.
Schmitz: And that will shelter the country?
Soros: China is exhausting these reserves very rapidly. It also has an incredibly large reservoir of trust from the Chinese population: many people may not understand how the Chinese regime actually works, but they believe that a regime that has managed to overcome so many problems knows what it is doing. But the reservoir of trust is also being exhausted at a remarkably fast rate because the leadership has made many mistakes. President Xi Jinping can carry on with his current policies for another three years or so, but during that time, China will exert a negative influence on the rest of the world by reinforcing the deflationary tendencies that are already prevalent. China is responsible for a larger share of the world economy than ever before and the problems it faces have never been more intractable.
Schmitz: Can President Xi rise to the challenge?
Soros: There is a fundamental flaw in Xi’s approach. He has taken direct control of the economy and of security. If he were to succeed in a market-oriented solution it would be much better for the world and for China. But you cannot have a market solution without some political changes. You cannot fight corruption without independent media. And that’s one thing that Xi is not willing to allow. On that point he is closer to Putin’s Russia than to our ideal of an open society.
Schmitz: What is your assessment of the situation in Ukraine?
Soros: Ukraine has done something almost unbelievable in surviving for two years while facing so many enemies. But it needs a lot more support from outside because it’s exhausted.By putting Ukraine on a short financial leash, Europe is repeating the mistake it has made in Greece. The old Ukraine had much in common with the old Greece—it was dominated by oligarchs and the civil service was used by people who were exploiting their position rather than serving the people. But there’s a new Ukraine that wants to be the opposite of the old Ukraine. The Rada has recently passed a budget for 2016 that meets the conditions imposed by the IMF. Now is the time to hold out the prospect of the additional financial assistance that the new Ukraine needs to carry out radical reforms. That would enable the country not only to survive but to flourish and become an attractive investment destination. Turning the new Ukraine back into the old Ukraine would be a fatal mistake because the new Ukraine is one of the most valuable assets that Europe has, both for resisting Russian aggression and for recapturing the spirit of solidarity that characterized the European Union in its early days.
Schmitz: Many criticize US President Barack Obama for being too weak toward Russia.
Soros: Rightly so. Putin is a supreme tactician who entered the Syrian conflict because he saw an opportunity to improve Russia’s standing in the world. He was ready to keep pushing until he encountered serious resistance. President Obama should have challenged him earlier. If Obama had declared a no-fly zone over Syria when Russia started to supply military equipment on a large scale, Russia would have been obliged to respect it. But Obama was eager to avoid any chance of a direct military confrontation with Russia. So Russia installed antiaircraft missiles and the US had to share control of the skies over Syria with Russia. You could almost say that by shooting down a Russian fighter jet, Turkish president Recep Tayyip Erdo?an did Obama a favor. Putin had to recognize that his military adventure had run into serious opposition and he now seems ready for a political solution. That is promising.
There is also ISIS and the terrorist attacks that threaten to undermine the values and principles of our civilization. The terrorists want to convince Muslim youth that there is no alternative to terrorism, and if we listen to the likes of Donald Trump they will succeed.
Schmitz: I can’t help but ask. Do you know Trump?
Soros: Going back many years Donald Trump wanted me to be the lead tenant in one of his early buildings. He said: “I want you to come into the building. You name your price.” My answer was, “I’m afraid I can’t afford it.” And I turned him down.
end
Two year Dutch bond yields collapse to an all time low of negative 42 basis points:
(courtesy zero hedge)
Dutch Bond Yields Collapse To Record Lows At -42.5bps!
WTF Draghi!!
2Y Ducth bond yields are down 5bps from their morning highs to a mind-crushing -42.5bps!!
Broken money.
end
(courtesy zero hedge)
Russian Ruble Crashes To Record Lows In “Panic”: “Some Investors Are Selling At Any Price”
Late last month, we took a look at Russia’s economy and concluded that although the country has proven to be remarkably resilient in the face of collapsing crude prices, the outlook is darkening.
The ruble has fallen for three consecutive years and is now under immense pressure both from Western economic sanctions and from crude’s inexorable decline. “The wish to hedge potential risks from geopolitics and commodities may well push the ruble to 75,” Evgeny Koshelev, an analyst at Rosbank PJSC in Moscow, told Bloomberg by e-mail in December. “It will be interesting to see if there’s a reaction from the central bank, government and households to this weakening.”
Koshelev’s warning proved prescient. Oil prices continued to slide in the new year as uncertainty out of China, a dour outlook for global growth and trade (see the IMF’s latest cut to global growth forecasts), and the prospect of increased Iranian supply weighed on a market that was already “drowning” in oversupply, to quote the IEA.
Meanwhile, the geopolitical situation took a nasty turn for the worst earlier this month when Saudi Arabia irked the Shiite world with the execution of Sheikh Nimr al-Nimr, whose death adds fuel to the sectarian fires already burning in Syria, Iraq, and Yemen. Thanks to Moscow’s intervention on behalf of Bashar al-Assad, Russia is now inextricably bound up in the melee.
Against this backdrop, the ruble has collapsed to fresh record lows and on Thursday marked its steepest two-day decline in nine months, falling beyond 85 per USD.
“After the ruble crossed the psychological level of 80, traders sharply accelerated their selling,” Alexei Egorov, an analyst at Promsvyazbank in Moscow told Bloomberg. “The ruble is catching up with oil as investors review their view on Russian assets.”
The decline has analysts pondering The Kremlin’s next move. “Any form of interventions might be the least preferred option from the CBR perspective, given their preference of having as much FX reserves as possible,” ING’s chief Russia economist Dmitry Polevoy says, in a note. “And a rate hike might be politically difficult, even though we think the CBR will have room to choose without big pressure from the government officials, if needed to do so,” he adds, noting that procyclical measures and outright FX market intervention are both on the table at this point. This week’s decline “raises [the] stakes for the CBR, if today’s signs of FX market panic passes through to retail flows from households,” he goes on to warn.
“It’s falling faster than any other currency as we see panic selling in the ruble after it breached the 80 per USD level,” Bernard Berg, an emerging-markets strategist in London at Societe Generale told Bloomberg by e-mail. “Some investors are selling at any price,” he cautions, before predicting that the RUB could fall below 100 per USD if crude continues to slide.
Russian central bank Deputy Chairman Vasily Pozdyshev isn’t concerned. “There’s no systemic risk,” he told Rossiya 24 TV on Thursday.
Maybe not, but if the RUB stays in the mid-80s, inflation will likely be running at 8% or more by year end and you’re reminded that Russia’s 3% budget deficit target assumes $50 per barrel crude. If prices remain below $30, the Russian economy could contract by 5% or more this year and the deficit could balloon by at least 1.4%.
For now, Russia seems to be betting that the economy (not to mention the populace) can weather the storm, given that the country continues to contribute to the global deflationary supply glut by pumping at record levels.
Time will tell how long the Russian people are willing to stomach what’s shaping up to be a nasty bout of stagflation.
end
A major midsized Russian bank just had its licence revoked as they discovered a huge $2.3 billion hole in its accounts.
(courtesy Reuters)
end
The CEO warns that top line is down badly. He also warns that another 1,000 workers will have to be let go
(courtesy zero hedge)
Canadian Pacific Warns Of “Tremendous Pressure”, “Strong Headwinds” For Economy
One week ago, when we explained why “Things Just Went From Bad To Worse For U.S. Railroads,” we said that “the rail industry is about to be slammed with a dramatic repricing, one which is only the start and the longer oil prices remain at these depressed levels, the lower the rents will drop (think Baltic Dry but on land), until soon most rails will lose money on every trip and will follow the shale companies into a race to the bottom, where “they make up for its with volume.”
Today, none other than railroad titan Canadian Pacific (whose stock is down 4% despite the torrid surge higher in risk assets) confirmed that not only are things “worse”, but the bottom may have fallen out from what until recently was one of Warren Buffett’s favorite industries, after missing on both the top and bottom line, but especially during its conference call in which CEO Hunter Harrison admitted that he see “tremendous pressure” on the top line, and expects “challenging times” for revenue growth.
Then COO Keith Creel said that he expected volume in 2016 to be notably down from 2015, warns of strong headwinds for the US economy in the first half of 2016 and says CP is storing at least 600 locomotives in anticipation of better times.
Then the CFO also warned that compensation and benefit costs would be lower in the coming year.
Finally, the CEO warned that in addition to the already cut 7,000 jobs another 1,000 workers are about to “potentially” get pink slips.
Finally, and most ominously, CP warned that it sees delay in the Norfolk Southern deal timeline, and may change its strategy regarding the Norfolk Southern transaction.
We conclude with the warning issued by Bank of America one week ago:
Longest and deepest carload decline since 2009
We believe rail data may be signaling a warning for the broader economy. Carloads have declined more than 5% in each of the past 11 weeks on a year-over-year basis. While one-off volume declines occur occasionally, they are generally followed by a recovery shortly thereafter. The current period of substantial and sustained weakness, including last week’s -10.1% decline, has not occurred since 2009. In looking at carload data going back nearly 30 years, similar periods of weakness have occurred in only five other instances since 1985: (1) the majority of 1988, (2) the first half of 1991, (3) several weeks in early 1996, (4) late 2000 and early 2001, and (5) late 2008 and the majority of 2009. We exclude the period in 1996 from our analysis, as we consider it anomalous given that it overlapped with harsh winter conditions and was limited to January and early February of that year. Of the remaining instances, all either overlapped with a recession, or preceded a recession by a few quarters. The current period starting in October and continuing through the present has been accompanied by weak ISM results, with the purchasing managers index recently falling to 48.2 in December from 48.6 in November (a reading below 50 suggests contraction), and our proprietary BofAML Truck Shipper Indicator recently falling to its lowest level since 2012.
Weakness no longer limited to industrials or coal
For much of 2015, it was easy to dismiss weakness in carloads as being concentrated in industrial segments, and reflective of a secular shift away from coal. More recently, the softness has spread to other, more consumer-oriented segments. Intermodal carloads, which were up +1.0% and +3.6% in 1Q15 and 2Q15, respectively, posted a tepid +0.9% gain in 3Q15 and were down -1.7% in 4Q15. This follows the broader trend in 2015 of carloads accelerating to the downside through the year. Until recently, the difficult comparison year of 2014 was another reason to be dismissive of the decline percentages. Despite soft year-over-year results, absolute carloads remained above the 2010-2013 levels through the first 3 quarters of 2015. However, in 4Q15, volume is at its lowest level since 2010. BofAML Multi-Industrials analyst Andrew Obin recently noted that industrial weakness has not always been coupled with severe GDP declines, despite the high correlation between the two (86% correlation coefficient). However, as non-industrial segments post declining carload volumes,we are increasingly concerned with the breadth of the weakness.
We hope that after today’s CP call, others are too.
Venezuela Hits “Point of No Return” – 2016 Bankruptcy Is “Difficult To Avoid” According To Barclays
In November 2014, just after OPEC officially died with the 2014 Thanksgiving massacre which was the first oil-crushing catalyst that has led to crude’s relentless decline since Saudi Arabia officially broke off with the rest of the cartel, sending the black gold to a price of around $28 per barrel, we revealed who the first oil-exporting casualty of the crude carnage would be: the Latin American socialist paradise that is Venezuela.
Back then we said that the best way to bet on the OPEC cartel collapse, and the inevitable death of said socialist paradise as we know it, was to buy Venezuela CDS. Sure enough, anyone who has done so has generated massive returns since then.
More importantly, the wait for the long-overdue credit event is coming to an end.
As Barclays’ Alejandro Arreaza notes, Venezuela has officially reached the “point of no return” and writes that “the economic emergency decree and any measures that the government could take at this point may be too late. After two years of inaction and the recent decline in oil prices, a credit event in 2016 is becoming increasingly difficult to avoid, in our view.”
Here is why Barclays thinks that the first OPEC default is now just a matter of time:
Point of No Return
- The economic emergency decree and any measures that the government could take at this point may be too late. After two years of inaction and the recent decline in oil prices, a credit event in 2016 is becoming increasingly difficult to avoid, in our view.
- The figures released by the BCV show that foreign currency assets had reached USD35.5bn by the end of Q3 2015; however, we believe that they could have dropped further in Q4, to USD27.6bn, which is lower than our previous estimate of USD33bn.
- Considering current oil prices, any reasonable additional import cuts may be insufficient to cover the financing gap, in our view. At the oil price that the futures curve is pricing in (USD/b32), the government would need to use more than 90% of oil exports to make debt payments if we include market, bilateral, commercial, and Chinese Fund obligations.
- The authorities keep reiterating their willingness to pay. However, their position seems to indicate a lack of appreciation of the magnitude and roots of the critical situation that the Venezuelan economy is facing, which may increase the risk of a disorderly credit event.
- The government could still make the February payment using its available assets; however, they are insufficient to finance the gap of nearly USD30bn that Venezuela could face in 2016, considering our commodities team’s estimate of Brent at USD/b37, which is above what the oil future curve is pricing in (USD/b 32).
- Inaction has been costly for Venezuela. Although GDP growth figures were better than expected, they confirm that the country is in a severe recession, with an accumulated contraction of approximately 16% in the past two years, and considering the contraction that we expect in 2016, the country could lose almost one quarter of its GDP.
- Inflation had reached 141.5% by the end of Q3 2015, but is likely to have continued to accelerate in Q4, possibly exceeding 200% as we expected, showing the effects of monetization of the fiscal deficit.
Some more details, first on the lack of disposable assets to face the oil price collapse
After more than a year without publishing official data for the main economic indicators, the Central Bank of Venezuela (BCV) finally released the figures. The results are mixed. While activity indicators suggest that the economy’s contraction could have been smaller than we and the consensus expected, the external sector posted worse-than-expected results. The combination of lower-than-expected exports and higher-than-expected imports led to a larger-than-expected current account deficit. To finance this deficit, the public sector has been forced to liquidate more assets, which, in our view, leaves it with less than it would need to finance the deficit that it faces for 2016.
There have been important methodological changes in the way the official data are presented. In the case of the balance of payments, there is a reclassification of transactions that had previously been reported as capital outflows and seem to have been moved to imports of either goods or services. As a result, previous years’ current account balances have changed significantly (as a reference, the 2012 current account declined from USD11bn to just USD2.6bn). We believe that was mainly due to public sector trade transactions such as the “services” provided by Cuba under the energy agreements or imports of military equipment and capital goods from Russia, which previously were not considered imports. In addition, the exports show a balance for 2014/15 that is lower than PDVSA oil export figures suggest (circa 6% lower). A possible explanation for this could be that BCV figures are showing net exports, discounting crude imports. In the prices figures, there are important changes in weights of the different CPI components, particularly those that have increased the most (food). On several occasions, we contrasted official Venezuelan figures with other sources of information, but we have not found large inconsistencies. The differences have been explained mainly by accounting methods – for example, in oil exports, the type of crudes and products that are considered. Nonetheless, in the past, the market has been skeptical about the credibility of the official information, and these changes without a clear explanation increase the concerns.
BCV figures suggest that the government’s FX allocations to the private sector through the different mechanism (CENCOEX, SICAD, SIMADI) covered around half of the total private sector imports of goods and services. This could be an important factor when oil prices recover because it could give the government additional room, cutting FX allocations with a less than proportional effect in terms of imports. However, considering current oil prices, any reasonable import cut seems likely to be insufficient to cover the financing gap. Public sector external assets would have to decline below what we consider minimum operational levels.At the oil price that the futures curve is pricing in (USD/b32), the government would need to use more than 90% of the oil exports to make debt payments if we include market, bilateral, commercial, and Chinese Fund obligations (Figure 3). After two years of inaction, with depleting external assets and the recent decline in oil prices, a credit event in 2016 may be becoming hard to avoid, in our view.
In other words, a default is coming in 2016, which may explain Maduro’s increasingly more panicked pleas to OPEC to cut production, pleas which fall on deaf ears.
Who is to blame for the country’s imminent bankruptcy? Well, the government of course, although in all honesty Maduro’s regime has not done anything different from every other “developed” regime in the past 6 years, which instead of undertaking difficult fiscal reform and structural changes, merely kicked the can hoping things would get better.
They didn’t, and now Venezuela has to pay the piper.
Inaction has been costly
In addition to the weaker external position of the country, the rest of the economic indicators show a strong deterioration. The government has avoided an orthodox adjustment and has preferred to implement quantitative restrictions. The results indicate that the authorities’ inaction in tackling the large distortions in the economy has been costly for the country. Although GDP growth figures were better than expected, they confirmed that Venezuela is in a severe recession. GDP fell 4.5% in the first three-quarters of the year, but considering its trend and tightening of controls by the government, the whole-year contraction could have been 5.8%, with an accumulated contraction of approximately 16% in the past two years, and considering the contraction expected in 2016, it could lose almost one quarter of its GDP.
Inflation had reached 141.5% by the end of Q3 2015, but it is likely to have continued to accelerate in Q4, possibly exceeding 200% as we expect, showing the effects of monetization of the fiscal deficit.
Although these inflation figures are historical, we believe they underestimate real inflation. In fact, since June 2014, the central bank has modified the method used to calculate the inflation rate, changing the weights of different goods and services that make up the consumer price index. Curiously, the new weighting system reduced the effect on general inflation of some groups such as food, alcoholic beverages, restaurants, and hotels, characterized by a higher inflation rate than the average, and increased the weights of rents and telecommunications groups, characterized by lower inflation rates associated with strict price controls or a heavy market share by state companies.
As a consequence of these reforms, the official inflation rate was 68.5% in 2014, instead of 76% using the previous method. In 2015, the gap from using the different methods is even larger. Consider the inflation number on a year-on-year basis for all sectors, inflation would have been187.9% instead of 141.5%. For the first nine months of 2015, using the new weights, the BCV indicated that inflation reached 108.7%, but with the old weights, inflation would have been at 144.1%. Following this trend, we expect that the official inflation rate could close 2015 at 210.4%, more than double the highest rate in Venezuelan history, but using the previous weights, inflation could have been 290.7%. Such high inflation has a strong detrimental effect not only on real salaries, but also on income distribution, as the lowest income part of the population tends to have fewer alternatives to protect against inflation. This could increase social and political risks, making the current equilibrium increasingly unstable.
Translation: first default, then revolution.
Which is good news for those who buy CDS. Our only hope for those who have held so far is that the counterparty you will have to novate with will still be around once the sparks fly, because once this first OPEC member goes bankrupt, things will start moving very fast.
your early morning currency/gold and silver pricing/Asian and European bourse movements/ and interest rate settings/THURSDAY morning 7:00 am
Euro/USA 1.0911 up .0027
USA/JAPAN YEN 116.80 down .393
GBP/USA 1.4107 down .0088
USA/CAN 1.4482 up .0013
Early this THURSDAY morning in Europe, the Euro rose by 27 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 Asian 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: 6.5628 / (yuan down but will still undergo massive devaluation/ which will cause deflation to spread throughout the globe)
In Japan Abe went all in with Abenomics with another round of QE purchasing 80 trillion yen from 70 trillion on Oct 31/2014. The yen now trades in a northbound trajectory as settled up again in Japan by 39 basis points and trading now well below that all important 120 level to 116.80 yen to the dollar.
The pound was down this morning by 88 basis point as it now trades just below the 1.42 level at 1.4107.
The Canadian dollar is now trading down 13 in basis points to 1.4482 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 blew up ( Eastern European housing/Nikkei etc.
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 THURSDAY morning: closed down 398.93 or 2.43%
Trading from Europe and Asia:
1. Europe stocks all in the green
2/ Asian bourses all in the red/ Chinese bourses: Hang Sang red (massive bubble forming) ,Shanghai in the red 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: $1100.50
silver:$14.05
Early THURSDAY morning USA 10 year bond yield: 1.97% !!! par in basis points from last night in basis points from WEDNESDAY night and it is trading BELOW resistance at 2.27-2.32%. The 30 yr bond yield rises to 2.74 down 1 in basis points. ( still policy error)
USA dollar index early THURSDAY morning: 99.06 up 2 cents from WEDNESDAY’s close.(Now below resistance at a DXY of 100)
This ends early morning numbers THURSDAY MORNING
OIL MARKETS
Crude inventories rise 3.98 million barrels
Gasoline inventories rise 4.6 million barrels.
Cushing Oklahoma builds at 12 week highs.
Crude Dips’n’Rips Despite DOE Reporting Largest 3-Week Gasoline Inventory Build In History
WTI Crude has ramped into this morning’s DOE data back to the scene of the crime from last night’s API ugly data dump. With API reporting a build that doubled expectations, DOE reports a 3.6mm build but worse still yet another major (4.6mm barrel) build in gasoline stocks for the largest 3-week build in history. Crude initially tumbled but the algos took over and ramped to yesterday’s highs…running stops (but how long will that last?)
- *CRUDE OIL INVENTORIES ROSE 3.98 MLN BARRELS, EIA SAYS
- *GASOLINE INVENTORIES ROSE 4.56 MLN BARRELS, EIA SAYS
The data breaks down as follows…
- Crude +2.2m estimate (BBG users est 3.75mm) vs +4.6m API
- Cushing crude +400k estimate vs +63k API
- Gasoline +1.9m estimate vs +4.7m API
- Distillates +800k estimate vs +1.5m API
As the following chart shows, Gasoline and Crude saw major builds and Cushing the 12th weekly build in a row…
And as inventories surge (and production rises), demand collapses…
The reaction in crude is clear – after the algos ramped to run stos at the API ledge from last night… but the algos then took over again and ramped us…Don’t hold your breath!
And credit risk signals today’s bounce is overdone…
WTI Crude Spikes Above $30 – Back To Post-Iran Ledge
The machines are in control. On the day when inventories surge, demand tumbles, production surges, and credit risk spikes, “traders” are panic-buying crude oil with both hands and feet… except they just ran the stops to the post-Iran open…
Let’s see if it holds…
end
Just take a look at the graphs below. Last week Barclay’s OIL ETN traded at a stunning 36% premium to its NAV. The premium just imploded and as such a lot of people are going to get hurt
(courtesy zero hedge)
Is Something Blowing Up In OIL?
A week ago we warned of some insane movements and mysterious bid in OIL (the Barclays iPath oil tracking ETN) as it traded a stunning 36% rich to its underlying NAV. Well with oil resurgent today, as contracts roll, something just imploded in OIL…
As Barrons noted, the sharp performance divergence stems from the ETN’s massive price premium over the value of the index it tracks.
Pravit Chintawongvanich, head derivatives strategist at Macro Risk Advisors, notes that OIL’s premium rose sharply in recent days and accelerated to 48% by Wednesday’s close. He told Barron’s that institutional traders noticed the extreme premium and are now betting against OIL on the premise that the unusually large premium will revert to normal.Trading volume in OIL was already more than triple the average over the past month on Thursday with three hours left in the trading day.
Even after today’s drop, OIL is still at a roughly 20% premium to its underlying index.
Chintawongvanich says that it’s not too late for investors who own OIL to ditch it for USO:“You don’t want to be stuck holding the bag when this drops to NAV.”
* * *
Simply put – retail moms and pops who piled into OIL without thinking about NAV or technical flows just got f##ked!
As we concluded previously, The current situation is eerily reminiscent to the heyday of the mortgage market in 2007, when mortgage defaults started to pick up, and yet the credit default swaps that tracked them continued to decline, bringing losses to those brave enough to trade against the crowd.
end
Oil company,Schlumberger, announces a huge buyback of stock but they have to use debt to finance the share purchase. How do they accomplish this? Simple: they fire 10,000 poor souls.
(courtesy zero hedge)
Portuguese 10 year bond yield: 2.93% up 16 in basis points from WEDNESDAY
New York equity performances plus other indicators for today:
“Is That It?”- Global Jawbone & Crude Pump Fails To Ignite Equity Exuberance
BoJ Jawboning, ECB jawboning, PBOC rumors, and an artificial ETN-driven crude ramp… and we end up with this?
And despite the largest liquidity injection in 3 years, Chinese stcoks tumbled…
Seems like the central planners are losing their grip…
The Short Squeeze-driven rally is over – “Most Shorted” stocks extended their squeeze from yesterday thanks to Draghi into the European close and then everything started to fade…
Stocks managed to hold yesterday’s bounce gains but traded in a very rangebound (admittdly wide) manner all day…
But were unable to hold green for the week…
As a reminder for 2016, things are still ugly…
Credit was not buying the bounce in the afternoon…
Much of today’s strength was on the basis of crude’s surge (despite surging inventories, rising production, and dropping demand), but Energy credit markets were not impressed…
And something is seriously broken in the oil ETF complex…
VIX futures (barely) broke its closing backwardation streak (Front month vs 2nd month)- which is what VIX ETPs are focused on…
Making it the 8th longest streak in history…
And the 3rd longest streak of spot-front-second month backwardation in history (h/t @RussellRhoads)
Lots of talk today that everything is awesome and the lows are in and that none of this is systemic… so why is bank counterparty risk soaring?
Treasury Yields continued their see-saw pattern ending the day steeper (30Y +5bps, 2Y unch) and 10Y pushed back above 2.00%
FX markets were volatile, as Draghi’s jawboning spiked the USD (dumped EUR), but that was entirely unwound the close leaving USD Index just in the green for the week..Commodity currecies rallied notably…
Draghi impotence exposed…
Commodities were very mixed with PMs flat as crude and copper gained…
Crude was crazy today… but we suspect this was pure algos, runing stops to Iran…(and roll-related chaos on the ETN complex)
Charts: Bloomberg
Initial jobless claims rise again. Generally once we witness a bottoming of jobless claims with a counter vailing rise in the next few weeks, generally this signals recession:
(courtesy zero hedge)
Initial Jobless Claims Surge To 6-Month Highs
The last 4 months have seen a notable change in the jobless claims regime. After ratcheting lower week after week for 5 years, initial jobless claims have risen from 42 year lows at 243k in October to 293k today.The first time we reached these levels was July 2014 and claims are rising at the fastest rate since the financial crisis. Crucially for those who look at ‘record’ low jobless claims as a positive, history tells us that is the time to worry as recessions loom on the upswing.
Each time claims have bottomed like this, a recession has ensued…
Philly Fed Contracts For 5th Month In A Row As “Hope” Crashes To 3-Year Lows
Philly Fed improved from a dismal -10.2 to a just terrible -3.5 for the 5th consecutive month of contraction with the number of employees and average workweek both tumbling. Shipments increased but new orders remain in contraction as inventories dropped. The more troubling news is the total collapse in “hope” as the six-month-forward outlook collapsed to Nov 2012 lows…
The breakdown is less than impressive…
But the most worrisome print for animal spirits is the collapse in “hope”
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