Gold: $1106.20 up $9.00 (comex closing time)
Silver 14.24 up 20 cents
In the access market 5:15 pm
Tomorrow is options expiry on the comex. This Friday is options expiry on LBMA and on the OTC. Thus expect another whack job on gold and silver for the rest of this week starting tomorrow.
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 198.60 tonnes for a loss of 104 tonnes over that period.
In silver, the open interest fell by 2,159 contracts down to 155,155. In ounces, the OI is still represented by .776 billion oz or 111% 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 fell by 8,111 contracts to 399,827 contracts as gold was down $1.90 with Friday’s trading.
Today both the gold comex and the silver comex are in severe stress with gold in backwardation up to August.
We had another huge change, a deposit of 2.08 tonnes of gold inventory into the GLD, / thus the inventory rests tonight at 664.17 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 in inventory and thus/Inventory rests at 311.606 million oz.
First, here is an outline of what will be discussed tonight:
1. Today, we had the open interest in silver fall by 2,159 contracts down to 155,155 despite the fact that silver was down by only 4 cents with respect to Friday’s trading. The total OI for gold fell by 8,111 contracts to 399.827 contracts as gold was down $1.90 in price from Friday’s level.
2 a) Gold trading overnight, Goldcore
3. ASIAN AFFAIRS
i)Late SUNDAY night,MONDAY morning: Shanghai up / Hang Sang up. The Nikkei closed mildly in the green as did all of Asia . Chinese yuan up a touch and yet they still desire further devaluation throughout this year. Oil lost a dollar, falling to 31 dollars per barrel for WTI and Brent. Stocks in Europe so far are all in the red. Offshore yuan trades at 6.6077 yuan to the dollar vs 6.5779 for onshore yuan. huge volatility is the Chinese markets screams of credit problems; a leaked document suggests that China will not use the lowering of the RRR reserves but instead provide direct yuan injections into the market
ii) This is huge: China warns that 400,000 steel workers are about to lose their jobs.
i) Calais in total lockdown as refugees try to board a ferry heading to England:
ii) In Germany, many woman molested in swimming poos. The situation is becoming increasing dire
iii) Let’s check in on Spain and as of today, they still do not have a government. If the left leaning anti austerity Podemos forms a coalition government with the other left parties, then the EU may be in trouble as they seek to remove itself from the Euro:
iv) a)We highlighted to you on Friday, the huge exposure to non performing loans in Italy.
RUSSIAN AND MIDDLE EASTERN AFFAIRS
i) At least 20 dead and 200 people are hospitalized after reports of a USA lab leak of a deadly flu virus:
i) A very important commentary from David Stockman today. He puts everything into proper perspective: we are at peak debt and no amount of QE will help the global stagnation. He is very concerned with China in that they have over 30 trillion in total debt (sovereign, corporate and personal) with a probable non performing bad debt of 20%. He lands into Ray Dalio for talking into his book:
ii)Ray Dalio of Bridgewater Hedge fund, talks his book as he wants the USA to do more QE to save the system. He also claims that QE will not help anyway:( zero hedge)
iii)Bad loans continue to pile up in Alberta as the state oil lender ATB seems to be having considerable trouble:
( zero hedge)
the very large Sandridge oil company is near bankruptcy with 4 billion uSA in debt. It has about 7 months worth of cash but if it waits the complete 7 months then it will lose the right to chapter 11 and go straight into chapter 7
(courtesy zero hedge)
iii) Security conditions threaten Iraqi oil production
(Kool,OIl Price .com)
i) Von Greyerz expects more QE as well as continuing negative interest rates which will lead to hyperinflation:
( Von Greyerz/Kingworldnews)
ii)China needs gold to rig the currency markets
( Chris Powell/GATA)
iii) Chris Powell comments on the fact that the IMF has crippled Suriname
( Chris Powell/GATA)
Ambrose Evans Pritchard on the huge stress in China’s banking system
(courtesy Ambrose Evans Pritchard/UKTelegraph/GATA
v) This is a laugh! The Indian government has been only able to receive 9/10 of a tonne of gold with its paper scheme.
( Times of India)
USA STORIES WHICH WILL INFLUENCE THE PRICE OF GOLD/SILVER
i) Puerto Rico energy company’s restructuring deal has fallen apart leaving Puerto Rico with the possibility of power blackouts:
( zero hedge)
ii) Wow!! the Dallas Fed just realized its manufacturing index and it crashed to -34.7. It is near 6 year lows and it seems to signal depression in the state of Texas;
iii) This is how WalMart operates: they lower prices to drive out the competition and if they do not get the rate of return expected, they close that store and leave small communities with no store at all:
iv) This ought to be good for the USA economy and our algo players:
vi) Let’s close with this discussion with Michael Pento and Greg Hunter(courtesy Greg Hunter/USAWatchdog/Michael Pento/)
Let us head over to the comex:
The total gold comex open interest fell to 399,827 for a loss of 8111 contracts as gold was down $1.90 in price with respect to Friday’s trading. For the past two years, we have strangely witnessed two interesting developments with respect to the gold open interest: 1) total gold comex collapse in OI as we enter an active delivery month, and 2) a continual drop in the amount of gold standing in an active month. Today, both scenarios held in spades. We are now in the non active January contract which saw it’s OI fall by 1 contract to 183. We had 1 notice filed on Friday, so we lost 2 contracts or an additional 200 oz will not stand for delivery in this non active delivery month of January. The next big active delivery month is February and here the OI fell by a monstrous 22,222 contracts down to 145,830. First day notice is Friday, Jan 29.2016. The estimated volume today (which is just comex sales during regular business hours of 8:20 until 1:30 pm est) was 226,365 which is poor considering the huge number of rollovers.. The confirmed volume yesterday (which includes the volume during regular business hours + access market sales the previous day was also poor at 197,107 contracts. The comex is deeply into backwardation up until October and very close to backwardation into December.
December contract month:
INITIAL standings for January
|Withdrawals from Dealers Inventory in oz||nil|
|Withdrawals from Customer Inventory in oz nil||16,075.000 oz
|Deposits to the Dealer Inventory in oz||nil|
|Deposits to the Customer Inventory, in oz||nil|
|No of oz served (contracts) today||0 contract
|No of oz to be served (notices)||183 contracts(18,300 oz)|
|Total monthly oz gold served (contracts) so far this month||13 contracts (1300 oz)|
|Total accumulative withdrawals of gold from the Dealers inventory this month||nil|
|Total accumulative withdrawal of gold from the Customer inventory this month||72,606.2 oz|
Total customer deposits nil oz
we had 1 adjustment.
From the Brinks vault:
100.01 oz was removed from the dealer and this landed into the customer account of Brinks
Here are the number of oz held by JPMorgan:
January INITIAL standings/
|Withdrawals from Dealers Inventory||nil|
|Withdrawals from Customer Inventory||1,229,343.012 oz
|Deposits to the Dealer Inventory||nil|
|Deposits to the Customer Inventory||2,054.807.05 oz
|No of oz served today (contracts)||0 contracts
|No of oz to be served (notices)||23 contracts (115,000 oz)|
|Total monthly oz silver served (contracts)||99 contracts (495,000 oz)|
|Total accumulative withdrawal of silver from the Dealers inventory this month||nil oz|
|Total accumulative withdrawal of silver from the Customer inventory this month||4,697,930.5 oz|
Today, we had 0 deposits into the dealer account:
total dealer deposit;nil oz
we had 0 dealer withdrawals:
total dealer withdrawals: nil
we had 4 customer deposits:
i) Into Brinks: 599,949.57 oz
ii) Into CNT: 593,633.600 oz
iii) Into Delaware; 260,469.010 oz
iv) Into Scotia: 600,754.87 oz
total customer deposits: 1,229,343.012 oz
total withdrawals from customer account 1,229,343.012 oz
we had 2 adjustments:
i) Out of Brinks:
9946.35 oz was adjusted out of the dealer and this landed into the customer account of Brinks
ii) Out of Scotia: 4980.0000 oz ??? was adjusted out of the dealer and this landed into the customer account of Scotia
And now the Gold inventory at the GLD:
Jan 25./a huge deposit of 2.08 tonnes of gold into the GLD/inventory rests at 664.17 tonnes
most likely the addition is a paper deposit and not real physical
Jan 22/no change in gold inventory at the GLD/Inventory rests at 662.09 tonnes
Jan 21.2016: a huge deposit of 4.17 tonnes/Inventory rests at 662.09 tonnes
most likely the addition is a paper deposit and not real physical
jan 20/ no change in inventory at hte GLD/Inventory rests at 657.92 tonnes
Jan 19/no change in inventory at the GLD/Inventory rests at 657.92 tonnes
jan 15.2016/a huge deposit of 3.86 tonnes of inventory at the GLD/Inventory rests at 657.92 tonnes
I doubt that this is real gold/probably a paper gold addition.
Jan 14/ no changes into inventory at the GLD/Inventory rests at 654.06 tonnes.
JAN 13.2016/another huge deposit of 2.38 tonnes in gold inventory at the GLD/Inventory rests at 654.06 tonnes
JAN 12/no change in inventory at the GLD/Inventory rests at 651.68 tonnes
JAN 11./another 2.09 tonnes of gold addition (deposit) to the GLD/Inventory rests at 651.68 tonnes.again, I doubt that the gold added was physical.
jan 8/another huge addition of 4.46 tonnes of gold into GLD/Inventory rests at 649.59 tonnes
- I highly doubt that the gold added was physical. Gold is severely in backwardation in London and thus almost impossible to source in two days almost 9 tonnes of gold.
Jan 7/a huge addition of 4.16 tonnes of gold into GLD/Inventory rests at 645.13 tonnes
Jan 6/2016/we had a withdrawal of 1.6 tonnes of gold from the GLD/Inventory rests at 640.97 tonnes/
Jan 5/2016: since my last report we had a total of 3.57 tonnes of gold withdrawal from the GLD/Inventory rests at 642.37 tonnes
Jan 25.2016: inventory rests at 664.17 tonnes
And now your overnight trading in gold, MONDAY MORNING and also physical stories that may interest you:
Gold Price May Lead Gold Mining Stocks – Latest Research
Dr Brian Lucey and Dr Fergal O’Connor have just published some interesting research on the correlations of the gold price and gold mining indices.
In ‘Are Gold Bugs Coherent?’, the academics use wavelet models to surface the relationship between gold miners stock prices and the price of gold. Specifically, they examine the relationship between the gold price and the NYSE ARCA Gold Bugs index of gold miner share prices over a 17 year period using wavelet analysis.
They find that
“that there is little relationship in the short run but some significant and long standing long run relationships and that gold prices appear to lead gold miner stock prices.”
There is now a large body of academic research which shows that gold is a safe haven asset and a hedging instrument and can play a “useful role in reducing a portfolio’s risk.”
This has again been seen in recent weeks with gold having risen by more than 4% year to date, while leading stock indices such as the S&P 500 are down by more than 7%.
The research entitled ‘Are Gold Bugs Coherent?’ can be accessed here
LBMA Gold Prices
25 Jan: USD 1,103.70, EUR 1,020.29 and GBP 773.96 per ounce
22 Jan: USD 1,097.65, EUR 1,012.55 and GBP 769.63 per ounce
21 Jan: USD 1,096.80, EUR 1,006.98 and GBP 774.99 per ounce
20 Jan: USD 1,093.20, EUR 999.73 and GBP 771.08 per ounce
19 Jan: USD 1,087.00, EUR 999.77 and GBP 759.79 per ounce
Gold Logs Weekly Gain; US Mint Bullion Sales Strong – Coin News
European Stocks Halt Rebound as Energy, Commodity Producers Fall – Bloomberg
Gold Is Back in Fashion After a $15 Trillion Global Selloff – Bloomberg
Asia stocks edge up after Wall Street gains on crude surge – Reuters
LME Said in Talks With Banks to List London Gold Contracts – Bloomberg
Davos Depression: Soros Predicts Devastating Deflation, Repeat of 2008 – Max Keiser
Desperate in Davos: policymakers struggle for answers – Reuters
China’s banking stress looms like Banquo’s Ghost in Davos – Telegraph
CEOs gloomy about 2016 as world drowns in $200 trillion in debt – Sydney Morning Herald
“Owning gold” would have saved a lot of “financial destruction” – Gold Seek
Breaking Gold and Silver News Today – Click here
Von Greyerz expects more QE as well as continuing negative interest rates which will lead to hyperinflation:
(courtesy Von Greyerz/Kingworldnews)
Von Greyerz expects more QE, negative rates, hyperinflation
Submitted by cpowell on Sun, 2016-01-24 21:37. Section: Daily Dispatches
4:35p ET Sunday, January 24, 2016
Dear Friend of GATA and Gold:
Swiss gold fund manager Egon von Greyerz, interviewed by King World News, says central bank economic forecasts are always wrong, a deflationary depression has begun, central banks will respond with more “quantitative easing” and negative interest rates, currencies will plunge, and hyperinflation will explode. Von Greyerz’s interview is excerpted at KWN here:
CHRIS POWELL, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.
China needs gold to rig the currency markets
(courtesy Chris Powell/GATA)
Currency reset is more likely than China to goose the gold price
Submitted by cpowell on Sun, 2016-01-24 17:14. Section: Daily Dispatches
12:21p ET Sunday, January 24, 2016
Dear Friend of GATA and Gold:
GATA’s friend R.B. sends a note that may be paraphrased this way:
“I know there’s little chance GATA would ever say ‘uncle,’ but I’m sure that no followers of GATA would mind if you said simply, ‘Wake us up when the Chinese take control of the price of gold.’ For that seems to be the only counter to all the price suppression happening these days. There seems to be little hope that price suppression will be stopped by any supply-and-demand imbalances, world events, and market and currency problems. Western governments have the gold market locked down tight. China seems to be the only way out.”
For whatever it’s worth, your secretary/treasurer does not see China as any particular friend of gold. Rather, China almost certainly wants to have enough gold only so that it can start rigging the currency markets just as the United States long has been doing, gold being the prerequisite for currency market rigging.
Gold’s necessity for currency market rigging was explained in detail at a meeting at the U.S. State Department with Secretary of State Henry Kissinger in April 1974, the transcript of which, maintained at the State Department’s archive, often has been publicized by GATA and presumably has come to the attention of other governments:
As other countries recognize their exploitation by the currency market rigging done by the imperial powers, they will add to their gold holdings and thus increase the pressure on the world’s gold supply even as the world faces the catastrophic debt deflation that is inherent in a debt-based monetary system, as the burden of compound interest outpaces economic productivity. This catastrophic debt deflation is already well underway, with central banks — particularly the U.S. Federal Reserve and the European Central Bank — frantically monetizing debt all over the place and using futures market derivatives to prevent the escape of money from financial assets into commodities, resulting in hyperinflation.
These circumstances are likely to result eventually in an official, overnight upward revaluation of gold, a resetting of the international currency system, as the Scottish economist Peter Millar wrote a decade ago:
Such resets have happened before going back to ancient times. The Bible calls it a jubilee. The modern objective is to devalue debt and enable a new round of debt-based money creation as well as another round of monetary metals price suppression at a more sustainable level.
Your secretary/treasurer thinks there is a reasonably good chance that at least the younger ones among us will live to see such a day.
Even so, any such reset will not guarantee profits for gold holders. For governments can tax away any particular capital gains or even try to outlaw private ownership of monetary gold. The latter was attempted not only by the United States from 1933 to 1974 but also by Nazi Germany throughout occupied Europe during World War II.
No one can be sure how desperate governments will become to sustain their power over people by controlling all forms of money. But this struggle is for all the marbles — for control of the planet. It’s a struggle between tyranny and individual liberty, between parasitism and the progress facilitated by free markets, which is why GATA sticks with it.
Your secretary/treasurer’s advice, given entirely as a mere layman and high school graduate, remains to get all the monetary metal you can, find a safe planet to keep it on, and, when you do find one, call me.
CHRIS POWELL, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.
Chris Powell comments on the fact that the IMF has crippled Suriname
(courtesy Chris Powell/GATA)
Having helped cripple Suriname, IMF swoops down to mortgage the country
Submitted by cpowell on Sat, 2016-01-23 21:39. Section: Daily Dispatches
4:51p ET Saturday, January 23, 2016
Dear Friend of GATA and Gold:
Having helped to cripple the economy of the gold- and commodity-producing South American country of Suriname, the International Monetary Fund is on the way there to put a mortgage on the little multi-racial democracy’s vastly undervalued natural resources.
The IMF and Suriname’s government announced the mission this week. Appended are the IMF’s press release and a ham-handed English translation of a news report in De Ware Tijd (The True Times), the country’s largest newspaper, based in the capital city, Paramaribo. (As Suriname is the former Dutch Guyana, Dutch remains the official language.)
Suriname’s economy is built on gold and bauxite mining and oil extraction and exploration — Iamgold, Newmont, and Alcoa have operations there — and the recent collapse of commodity prices has almost wiped out the country’s foreign exchange reserves.
But the spectacular hypocrisy here is that the IMF itself is a primary perpetrator of Suriname’s problem, as the IMF long has been a crucial part of the gold price suppression scheme of Western central banks. The IMF’s participation in the scheme was disclosed three years ago by GATA’s publication of the agency’s secret March 1999 staff report, which described how the agency was allowing its member central banks to conceal their gold swaps and leases to facilitate their secret interventions in the gold and currency markets:
GATA appeals to Suriname’s government and all Surinamese journalists and patriots to question the forthcoming IMF delegation about the agency’s culpability in gold price suppression.
No developing country deserves better than Suriname, whose people, Wikipedia notes, “are among the most diverse in the world, spanning a multitude of ethnic, religious, and linguistic groups.” People get along there virtually without regard for differences that routinely plunge other countries into chronic political and social turmoil and even civil war. The Reporters Without Borders organization ranks Suriname 29th among 180 nations judged for freedom of the press — 20 spots above the United States:
But like so many other developing countries, Suriname is a rich country insisting on being poor, a country that, while bravely independent, has not yet fully shaken off centuries of imperialism.
Suriname doesn’t need charity and international debt. It needs a free and transparent market for its primary natural resource, gold — the world’s natural money and reserve currency.
CHRIS POWELL, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.
Ambrose Evans Pritchard on the huge stress in China’s banking system
(courtesy Ambrose Evans Pritchard/UKTelegraph/GATA)
Ambrose Evans-Pritchard: China’s banking stress looms like Banquo’s Ghost in Davos
Submitted by cpowell on Sat, 2016-01-23 20:41. Section: Daily Dispatches
By Ambrose Evans-Pritchard
The Telegraph, London
Saturday, January 23, 2016
Bad debts in the Chinese banking system are four or five times higher than officially admitted and pose a mounting risk to the country’s financial stability, the world’s leading expert on debt has warned.
The expert, Harvard professor Ken Rogoff, said China is the last big domino to fall as the global “debt supercycle” unwinds. This is likely to expose the sheer scale of malinvestment that has built up during the country’s $26 trillion credit bubble.
Prof Rogoff said the official 1.5 percent rate of non-performing loans held by banks is fictitious. “People believe that as much as they believe the GDP data,” he told the World Economic Forum in Davos, Switzerland.
The real figure is between 6 and 8 percent. He warned that unexpected problems can come “jumping out of the woodwork” once a debt denouement unfolds in earnest.
Banks are disguising the damage by rolling over bad loans and pretending all is well, with the collusion of regulators, but this draws out the agony and ultimately furs up the financial arteries.
Ray Dalio, founder of Bridgewater, said the worry is that credit in China is still growing faster than the economy even at this late stage, storing up greater problems down the road. The efficiency of credit has collapsed. It now takes four yuan of extra debt to generate a single yuan of economic growth, compared to a ratio of almost one to one a decade ago. …
… For the remainder of the report:
This is a laugh! The Indian government has been only able to receive 9/10 of a tonne of gold with its paper scheme.
(courtesy Times of India)
Indian government’s gold scheme paperizes 9/10ths of a tonne of gold
Submitted by cpowell on Sat, 2016-01-23 20:28. Section: Daily Dispatches
Just 22,999 more to go.
* * *
By the Indo-Asian News Service
via The Times of India, Mumbai
Saturday, January 23, 2016
NEW DELHI — The central government has mobilised more than 900 kilograms of gold [nine-tenths of a metric tonne] under its gold monetisation scheme, a senior official said on Saturday.
“Gold Monetisation Scheme: More than 900 kgs gold mobilised so far. Scheme making steady progress. Expected to pick up in coming months,” tweeted Shaktikanta Das, secretary economic affairs in the Finance Ministry.
The central government had launched the gold monetisation scheme on November 5, 2015, to convert jewellery and other yellow metal assets into interest-bearing deposits.
According to the World Gold Council, an estimated 22,000-23,000 tonnes of gold is lying idle with households and institutions in India. The annual imports amount to around 850-1,000 tonnes valued at $35-$45 billion.
From the silverdoctors website, the ever popular Grant Williams:
(courtesy silverdoctors.com/Grant Williams)
Global Debt Problem Can’t Be Fixed – Grant Williams
TND Editor’s Spotlight: Wall St. For Main St.
Jason Burack of Wall St for Main St interviewed returning guest, Grant Williams. Grant writes the popular investing newsletter, Things That Make You Go Hmmm. He also co-founded the new investor education company Real Vision TV. Grant has over 30 years experience working in the financial industry.
During this 30+ minute interview, Jason asks Grant how bad things are in the global economy. No bubble is left verboten – and there are a heck of a lot a bubbles in the global financial system (…and many areas in the private sector, sovereign, etc.). Add to the potential mix what I call “hyper-hypothecation” and derivatives overhang and we’ve reached a level where systemic risk has never been higher.
While Grant does caution that the U.S. dollar may very well see another move higher before its ultimate, eventual date with America’s turn ’round the currency war merry-go-round, Grant is unequivocal on gold as a physical asset. There’s only so much true, physical gold and when even just a small percentage of the conventional finance community on Wall Street and London get wind that paper claims to gold they have might not be as “solid gold” as first believed, price upside will likely be one for the record books.
Grant’s analysis on the dollar and global macro conditions is outstanding and very perceptive.
We’re living in a time when central bankers and those that work within that circle seem concerned. Take for example William White, the former chief economist of the Bank for International Settlements (BIS). He is talking about jubilee as something that might be necessary (link). When’s the last time you heard anyone that runs with that pack – at the high level that he formerly served – say the sort of blunt exposition Mr. White discloses in that truly “must read” Ambrose Evans-Pritchard article GATA’s Chis Powell kindly spotlighted? I can’t think of any example. Can you? — Eric Dubin, Managing Editor, The News Doctors.
# # # #
Oil Slides Dragging Global Stocks, US Futures Lower, After Saudi Aramco Supply Comments
After the biggest two-day surge in oil in seven years, early in the overnight session both Brent and WTI continued their run for a third day, entering a bull market, 20% up from recent lows hit just last week (yet still 15% down on the year) when Saudi Arabia spoiled the momentum party after the world’s biggest crude exporter said it’s keeping up investments in energy projects while diesel consumption in China dropped for a fourth consecutive month, signaling an industrial slowdown.
WTI reversed course and futures dropped as much as 4.1% in New York when Saudi Aramco Chairman Khalid Al-Falih announced his company hasn’t reduced its investment capacity amid lower crude prices, suggesting that oil will remain oversupplied for the foreseeable future. As a result, West Texas Intermediate for March delivery dropped as much as $1.33 to $30.86 a barrel on the NYMEX and was at $31.14 at pixel time after rising as high as $32.74 earlier. “The Saudi news surely would give a little bit of a worry that production would remain strong,” Daniel Ang, an investment analyst at Phillip Futures, said by phone from Singapore. “The main reason for oil losing steam still comes from the fact that oil markets are currently in oversupply.”
Khalid al-Falih, the chairman of Saudi state oil giant Aramco, addresses the 10th Global Competitiveness Forum on Monday. He said that a moderate oil price would be reached before long. Photo: Agence France-Presse/Getty Images
Elsewhere, diesel use in China dropped 5.6% in December compared with a year earlier and gasoline consumption grew at the slowest pace in more than two years, confirming it is not just growing supply but slowing demand – something the DOE confirmed last week – that is the culprit for record oil stockpiles. “The China demand figures is a stark reminder that consumption growth may not be stellar in 2016,” Bjarne Schieldrop, Oslo-based chief commodities analyst at SEB AB, said by phone. “Prices needs to stay weak for some time at least in order to keep excess production out and help rebalance the market later.”
Since algos continue to track every risk tick-for-tick with oil, as seen by the Bloomberg chartbelow showing the near record correlation between equities and oil, global stocks and US equity index futures initially rose only to slide following the Saudi Aramco comments, as stocks and the currencies of exporters were dragged down, while havens, including gold and the Japanese yen, rallied.
“The correlation between oil prices and equities has turned positive,” former Goldmanite Erik Nielsen, chief global economist at UniCredit Bank AG, wrote in a report to clients on Sunday. It’s “wrong, and therefore temporary,” he wrote. “When oil prices drop, it reduces the transfer of income and wealth from oil-consuming countries, like Europe, to oil-producing regions, like the Middle East and Russia. Since the ‘winners’ in Europe have lower savings ratios than the ‘losers’ this is all good for growth.”
For now, of course, it is Nielsen who is wrong as the latest snapshot of global risk confirms:
- S&P 500 futures down 0.3% to 1893
- Stoxx 600 down 0.1% to 338
- MSCI Asia Pacific up 1.2% to 120
- US 10-yr yield down 2bps to 2.03%
- Dollar Index down 0.15% to 99.42
- WTI Crude futures down 2.1% to $31.50
- Brent Futures down 1.6% to $31.66
- Gold spot up 0.5% to $1,104
- Silver spot up 0.9% to $14.16
Flipping quickly through regional markets, we start in Asia where equity markets traded higher in a continuation of the gains seen late last week amid prospects of central bank easing and a rebound in the energy complex . The ASX 200 (+1.8%) and Hang Seng (+1.4%) were led higher after crude posted its largest 2-day gain in 7yrs to climb back above USD 32/bbl. Shanghai Comp (+0.6%) was further bolstered by reports that the PBoC are planning as much as CNY 800bIn of mid-term liquidity support, while the Nikkei 225 (+0.9%) surpassed the 17000 level after shrugging off weak Japanese trade figures, underpinned by a weaker JPY. 10yr JGBs traded higher despite the firm risk on tone in the region, supported by hopes of further central bank easing while the BoJ were also in the market for 5yr-10yr government debt.
Elsewhere in Japan, BoJ Governor Kuroda said Japan’s underlying price trend currently looks solid and reiterated that the BoJ will not hesitate on further easing if needed to reach its price target, but could not comment on whether BoJ will ease this week or not.
Top Asian News
- Mirae Asset Buy $2 Billion Stake in Daewoo Securities: Mirae Asset agreed to buy a 43% stake in Daewoo Securities for 2.39t won ($2b), will create South Korea’s largest brokerage by assets
- PBOC’s Year of Monkey Challenge Opens With Calming Money Markets: 7-day repos done at 4.5% last week, highest since June
- Hong Kong Scores Record in Survey of Priciest Home Markets: Sydney ranked second priciest, followed by Vancouver
- J.C. Flowers to Buy Chi-X Exchange Business in Australia, Japan: Head of Japan unit aiming for 5% to 10% market share
- INCJ Fund Says Sharp Needs Just $2.5 Billion to Revive Growth: Fund CEO says no agreement has been reached on rescue
In Europe equities have been choppy this morning, despite initially following Asia’s lead and opening in positive territory (EuroStoxx -0.10%). Equity indices are mixed as North American participants come to their desks, as the risk tone for markets is somewhat uncertain. Total SA and BP Plc lost more than 1 percent on Monday, while Rio Tinto Group also dropped 1 percent after oil weighed in early trading after Aramco’s comments.
Banca Monte dei Paschi di Siena SpA advanced for a third day, taking its surge in the period to a record 50 percent. Greece’s ASE Index climbed 1.5 percent after Standard & Poor’s upgraded the country to B- from CCC+, with a stable outlook.
Bunds have failed to benefit from lingering uncertainty in markets, trading in only very mild positive territory. Prices have been weighed upon by this week’s upcoming supply, with around EUR 11 bIn (equiv. to 77K Bund futures) expected this week.
Top European News
- VW Given Deadline to Come Clean by Second-Biggest Shareholder: Given three months by the prime minister of Lower Saxony, its 2nd-biggest shareholder, to provide a full account of the roots of the diesel-emissions scandal
- Rabobank Said to Hold Talks for $4.9b Leasing Unit Sale: Is in preliminary talks with banks, institutional investors and private-equity firms that may bid for its leasing unit, De Lage Landen, in a sale that may fetch as much as EU4.5b
- Russian Economy Shrinks Most Since 2009 as Oil Prices Plunge: GDP drops 3.7% in 2015 after growth of 0.6 percent in 2014, less than 3.8% fall seen in survey
- Airbus Jets, French Cars on Shopping List as Iran’s Rouhani visits Europe
- Portuguese Consensus Candidate Sousa Wins Presidential Election: Marcelo Rebelo de Sousa will become president after winning more than 50% of 1st-round vote Sunday, avoiding runoff
- Kingfisher Shares Drop on Cost to Implement Strategy Revamp: 5-year plan to boost profit will come at a cost to short- term earnings
- Google Agrees to Pay $185m in U.K. Tax Settlement: Google will adopt a new approach for U.K. taxes, and the settlement covers taxes going back to 2005
- Timid Inflation Pickup First Clue for Draghi Pondering Stimulus: Inflation picked up to 0.4% in Jan. from 0.2% the previous month, according to a Bloomberg Survey before data due Friday
- Anglo Platinum Sees $740 Million Loss on Mine Write-Offs: To report a bigger-than-expected loss after reported impairments and write-offs amounting to 14b rand
In FX, the yen halted a two-day decline after Bank of Japan Governor Haruhiko Kuroda showed little appetite for an immediate expansion of stimulus as the central bank prepares to set policy this week.
Japan’s currency has gained versus all its 16 major counterparts since the start of the year as a China-led stock selloff and a tumble in oil prices spurred demand for haven assets. Hedge funds and other large speculators raised net bullish yen positions to the highest in almost four years last week. The BOJ is scheduled to meet Jan. 28-29 and announce its monetary-policy decision on Jan. 29.
Kuroda said in an interview on Jan. 22 in Davos, Switzerland, that “we don’t think the current market situation has been affecting corporate behavior unduly.”
The Canadian dollar and Mexico’s peso declined with the ruble as currencies of commodity producers fell with crude. South Korea’s won strengthened 0.5 percent before data forecast to show South Korea’s economic growth quickened.
In commodities, West Texas Intermediate dropped as much as 4.1 percent. Saudi Arabian Oil Co. is maintaining investment in oil and natural gas projects as it studies options to sell shares in its parent company and refining and chemical operations, Chairman Khalid Al-Falih said Monday. The state-run producer, known as Saudi Aramco, can sustain low oil prices for “a long, long time,” he told reporters in Riyadh.
Aramco, which supplies all of Saudi Arabia’s crude, pumped 10.25 million barrels a day in December, adding to a global supply glut as the Organization of Petroleum Exporting Countries effectively abandoned production limits to defend market share.
Gold advanced as investors weighed the prospects of the metal as a haven. Bullion for immediate delivery rose 0.5 percent to $1,103.78 an ounce, according to Bloomberg generic pricing. The metal climbed 0.8 percent last week as turmoil in global stocks renewed interest in the metal as a store of value. Copper in London added 0.2 percent to $4,451 a metric ton, while nickel dropped 0.6 percent to $8,650 a ton.
On the US calendar today the only event today is the Dallas Fed manufacturing activity update for January, which is estimated at -14, up from a prior -20.1.
Global Top News:
- Johnson Controls Said in Talks to Merge With Tyco International: Johnson is continuing with its plan to spin off its automotive-seating operations, said people familiar; terms weren’t immediately available
- Twitter Loses Product, Engineering Chiefs in Major Shake-Up: Losing four members of its executive leadership team, including its product and engineering chiefs; will this week add 2 new board members to help guide it through a turnaround, according to a person familiar with the matter
- New York Gets Back on Track After Storm, Washington Slower: Stock, bond, and commodities markets in New York are planning to operate on regular schedules Monday, spokeswomen said; Federal offices in Washington will be closed on Monday, the Office of Personnel Management said
- German Business Sentiment Falls as Market Woes Cloud Outlook: Ifo institute’s business climate index dropped to 107.3 from a revised 108.6 in Dec.
- AT&T Sees $2.2b Pretax Gain on Pension, Benefit Changes: Gains were partially reduced by returns on assets that fell short of AT&T’s estimates
- Apple’s Growth Seen Slowing as IPhone Demand Wanes: Earnings due tomorrow; Apple Executive Leading Electric-Car Project Said to Depart
- Federal Realty Investment Trust to Replace Broadcom in S&P 500
- VMware Said to Cut About 900 Jobs in Restructuring: The job reductions may be announced on Tuesday when the company reports quarterly earnings or a day earlier
- U.S. IPO Market on Track for Slowest Month Since Recession: Zero listings so far this month as volatility shakes stocks
- ‘Revenant’ Climbs to Box-Office Lead After Oscar Nominations: Collected $16m in U.S. and Canadian theaters, Rentrak said
- Goldman’s Cohn Says Sell Treasuries; Morgan Stanley Is Bullish: Goldman Sachs President Gary Cohn says Treasury yields will probably rise, just as Morgan Stanley predicts the opposite
- Puerto Rico Electric Maintains Talks After Debt Plan Expires: Puerto Rico’s main electricity provider and its bondholders are continuing negotiations even after a plan to restructure nearly $9b of debt terminated Friday
- SandRidge Said to Explore Debt Restructuring Options: Reuters: Has been in talks with investment banks, law firms about hiring restructuring advisers
- Greenlight Capital to Get SunEdison Board Seat, WSJ Reports: Greenlight likely to pick director from outside firm, WSJ said
- Yahoo Said to Speed Up Stock Option Vesting: Business Insider: Co. to accelerate stock option grants to begin vesting after 1 mo. rather than 1 yr in attempt to stem departures
- Samsung Bioepis Delays Nasdaq IPO, The Bell Reported: Co., which had aimed to list shrs on Nasdaq in 1H, “indefinitely” delays IPO plan, The Bell reported in a story available to subscribers on Jan. 22
- Ford to Exit All Operations in Japan, Indonesia This Yr: Reuters
- Hilton Says New Tru Hotels May Become Company’s Biggest Brand
Bulletin Headline Summary from RanSquawk and Bloomberg
- Oil has sold off in European trade, following comments from Saudi Aramco’s Chairman that they will continue to sustain investments in the wake of lower oil prices
- European equities are mixed, with last week’s Draghi-effect no longer at the forefront. FX is taking a breather after a tumultuous start to the year
- Looking ahead at the calendar today, highlights include speeches from ECB’s Lautenschlager and ECB’s Draghi as well as earnings from McDonalds, Kimberly-Clark and Halliburton
- Treasuries rally overnight led by long-end as world equity markets mixed; week offers Fed rate decision on Wednesday and $90b UST note auctions beginning tomorrow with $26b 2Y.
- Federal Reserve Chair Yellen and her colleagues have so far found themselves wrong-footed by the stronger dollar after they raised interest rates last month for the first time since 2006
- ECB’s Draghi is about to receive his first major clue of 2016 on Friday as to whether the euro area needs more stimulus with inflation still only a fraction of the goal of just under 2% — a target the ECB president hasn’t met in nearly three years
- BOJ Governor Kuroda spoke at Davos ahead of what could be an agonizing decision about whether to add to the central bank’s record asset-purchase program
- The PBOC is adding administrative orders to its toolbox to calm money markets amid record capital outflows and a surge in cash demand, ordering some banks to cancel repurchase agreements at interest rates it deemed excessive
- German business confidence fell for a second month in January in a sign that companies in Europe’s largest economy are increasingly worried about slowing global growth
- Russia’s economy, facing renewed pressure from plunges in energy prices and the ruble, contracted the most since 2009 last year on oil’s decline and sanctions over the conflict in Ukraine that curbed access to international financing
- In today’s bond market, there’s plenty of hand-wringing about liquidity, or rather, the lack of it. But it’s become so pervasive that even in the market for U.S. Treasuries buyers are gravitating to the newest, easiest-to-sell debt
- $28.825b IG corporates priced last week along with $1.3b HY. BofAML Corporate Master Index OAS 2bp lower Friday at +196 to end week 7bp wider; 2015 range 180/129. High Yield Master II OAS tightened 26bp to +787 to end week 2bp tighter; 2015 range 733/438
- Sovereign 10Y bond yields mostly steady except for Greece will widen 19bp. Asian stocsk rally, European stocks mixed; U.S. equity-index futures drop. Crude oil drops, copper and gold higher
Jim Reid completes the overnight wrap
The market’s allergic reaction so far in 2016 has eased for now and we’re actually only 2% off a bull market in Oil (based on the March WTI contract) after an 18% rally since the lows near Wednesday’s close. That included a 9% surge on Friday alone and while the prospects for further central bank stimulus and a general bounce off the recent record lows are playing their part, some comments out of Saudi Arabia suggesting that $30 oil is irrational as well as the prospect of those extreme winter conditions in the US over the weekend were also to partly to blame.
In fact, as much as last week felt horrible for large parts of it it’s worth pointing out that the S&P500, DAX, CAC, FTSE and Oil were up +1.41%, +2.30%, +3.01%, +1.65% and +5.92% respectively on the week. Elsewhere crossover was 15bps tighter and CDX IG 6bps tighter. US HY energy spreads finished the week 20bps wider but that included a 101bp move wider on Wednesday alone, with spreads actually 80bps tighter in the last two days of the week. Although we continue to think the global financial system is fundamentally broken and the global economy is in a secular stagnation funk we do think that the cycle has a few quarters of life left in it yet even if recent events have made us much more nervous that the next downturn could come a year earlier than we’ve been thinking for some time. When inflation is this low central banks can still play a part keeping the plates spinning and when oil is this low the consumer can offset the severe structural issues for a while.
Indeed on the former, Draghi’s assertion on Thursday that more was likely to be done in March proved that Central Banks can still have influence even though many in the market have given up on them. It’s another big week on this front with the FOMC (Wednesday) and the BoJ meeting on Friday to anticipate. It feels unlikely they will be negative events for the market even if there is no actual hard signs of a Fed relent or fresh stimulus this month from Kuroda. As a minimum we should hear hints of more dovish soundbites relative to their last meetings.
Following on from a strong performance across most Middle Eastern bourses over the weekend on the back of that rally in Oil, the momentum has continued into the Asia session this morning where there have been broad based gains across most of the region. The Nikkei (+0.59%), Hang Seng (+1.37%), Shanghai Comp (+0.59%), Kospi (+0.80%) and ASX (+1.84%) are all currently up as we go to print, with oil markets generally up another 1% this morning. The iTraxx Asia is a couple of basis points tighter while US equity index futures are flat.
The early data this week has come out of Japan where the notable takeaway has been a slightly softer than expected export number for December (-8% yoy vs. -7% expected). Imports were also less than expected last month (-18% yoy vs. -16.4% expected) which has helped to swing the trade balance back to a surplus. The Yen has been trading between gains and losses post the data although some of the focus this morning has been on BoJ Governor Kuroda’s comments from the weekend in Davos where the Governor has appeared to keep his cards close to his chest, saying that ‘at this stage, we don’t think the current market situation has been affecting corporate behavior unduly’, but that ‘the market is the market, and markets could affect the real economy – so we carefully watch’.
Quickly recapping the news and price action from Friday. The direction across the bulk of the markets was pretty much one-way and owed to that biggest daily gain for Oil since August last year. Equities closed strongly, the S&P 500 (+2.03%), Dow (+1.33%), Stoxx 600 (+3.00%), DAX (+1.99%) finishing with strong gains. US credit was a notable outperformer (CDX IG 4.5bps tighter) relative to Europe (Main 1bp tighter) most probably reflecting the exposure to energy, while US Treasury yields crept higher for the second consecutive day, the benchmark 10y yield up a couple of basis points to 2.053%.
As well as the obvious focus on Central Banks this week, as you’ll see in the week ahead earnings season is set to kick up a gear in the US with a number of the bellwether tech names set to report. The only notable report from Friday was a mixed set of quarterly numbers from General Electric, with a beat in earnings but falling well short of revenue expectations after an unsurprisingly weak quarter for the oil and gas segment. All told with 73 S&P 500 companies having reported, we’ve seen a healthy 78% beat earnings expectations but just 48% beat consensus estimates at the top line. Regular readers will recognize that this follows a recent trend. Q1, Q2 and Q3 2015 earnings beats amounted to 73%, 75% and 74% respectively based on Bloomberg data, while sales beats failed to break 50% during any of the quarters (48%, 49% and 44% respectively). So its early days but a similar pattern is already emerging. A lot of the big Oil names are still to report and will likely be the main focus for analysts. Speaking of which, Friday saw Moody’s place 120 energy issuers credit ratings on review for downgrade, a large proportion of which are based in North America in what was the rating agency’s largest warning sign of potential downgrades since the financial crisis.
In terms of the macro, the US economic data was fairly unexciting on the whole on Friday. Existing home sales were up a much better than expected +14.7% mom in December (vs. +9.2% expected). The Conference Board’s leading index for last month declined -0.2% mom as expected, although the flash January manufacturing PMI rose unexpectedly by 1.5pts to 52.7 (vs. 51.0 expected).
Meanwhile, the latest set of European flash PMI’s for January were a little more disappointing than the market had hoped. The Euro area composite declined 0.8pts this month to 53.5 and below expectations of 54.1. Both the manufacturing (-0.9pts to 52.3; 53.0 expected) and services (-0.6pts to 53.6; 54.2 expected) components fell, while regionally the decline was led by Germany where the composite was down 1pt to 54.5 (vs. 55.1 expected). France’s composite actually rose 0.4pts to 50.5 (vs. 50.3 expected) while our European economics expect that the weakness in the Euro area services PMI was also likely driven by the periphery, although we have to wait until the final PMI’s to assess this fully. At face value the data still points to quite strong growth of +0.4% qoq for the Euro area, although it’s still worth highlighting the disappointment of hard data relative to surveys in Q4 so caution is warranted.
Elsewhere, in the UK we saw December retail sales come in softer than expected last month at -0.9% mom (vs. -0.3% expected) excluding autos fuel sales and -1.0% mom (vs. -0.3% expected) including. Staying with the UK, on Friday our UK Chief Economist George Buckley highlighted that he has now pushed back his call for a BoE rate hike from May to November this year. George notes that the previous forecast was becoming more difficult to justify in light of inflation expected to rise more slowly than previously thought, wage growth disappointing, the economy showing signs of slowing and global growth/financial markets looking fragile.
Let us begin:
Late SUNDAY night,MONDAY morning: Shanghai up / Hang Sang up. The Nikkei closed mildly in the green as did all of Asia . Chinese yuan up a touch and yet they still desire further devaluation throughout this year. Oil lost a dollar, falling to 31 dollars per barrel for WTI and Brent. Stocks in Europe so far are all in the red. Offshore yuan trades at 6.6077 yuan to the dollar vs 6.5779 for onshore yuan. huge volatility is the Chinese markets screams of credit problems; a leaked document suggests that China will not use the lowering of the RRR reserves but instead provide direct yuan injections into the market (see below)
(courtesy zero hedge)
Leaked Document Reveals Why China Will Not Unleash Any Major Monetary Stimulus
In a world in which every nation is now part of the race to debase their currency, or as the Brazilian finance minister first dubbed it in 2010, a “global currency war”, the first and foremost imperative on every central bank’s agenda is to devalue its currency faster than its net exporting peers. But not too fast: indeed, there is a problem, when the threat of devaluation becomes too great and the risk resulting from a flood of capital outflow surpasses than that from the economic contraction that would persist should the currency not devalue fast enough.
This is precisely what is happening in China, where as we reported two weeks ago, the nation has, over the past 18 months, seen $1 trillion in capital quietly exiting the otherwise closed system which has terrified the Politburo that even its $3.5 trillion in foreign reserves (of which about $1.5 trillion are said to be liquid) won’t be enough if the capital outflow accelerates.
This has in turn put the Chinese central bank in a very uncomfortable position: while the PBOC desperately needs to boost monetary stimulus to facilitate debt creation in a nation where company have to issue new debt just to pay their interest, or as Minsky called it, the endgame…
… any further stimulus will also lead to even greater currency debasement and devaluation, more capital outflows, more FX reserve spending, and ultimately the perception that Beijing is panicking and those $35 trillion in Chinese bank assets are about to the NPLed into oblivion as the rollover of bad debt becomes impossible.
This was confirmed earlier today when the South China Morning Post reported that according to a leaked document “the People’s Bank of China is reluctant to further reduce the required reserve ratio (or RRR) for fear of such a move resulting in the weakening of the yuan.”
The information, reportedly leaked from minutes of Tuesday’s meeting between the central bank and commercial lenders, was shared widely after it was published on major mainland online portals including Sina.com and Netease.com.
As a reminder, the RRR along with the core interest rate, are the two “shotgun” methods that China’s central bank has to easy (or tighten) monetary conditions. As such, every time Chinese economic indicators take another leg down, every one in the sellside screams for more PBOC stimulus, mostly in the form of a RRR cut.
However, that now appears won’t be happening. SCMP explains why the PBOC is suddenly reluctant to ease aggressively over fears such a move can unleash another torrent of capital outflows:
The memo sheds light on the challenge the PBOC faces in trying to achieve two conflicting goals. It has to ease monetary supply to raise liquidity to boost the ailing economy. But it also has to stop the yuan from weakening too much, which could happen in the case of increased liquidity.
According to the memo, Zhang Xiaohui, an assistant central bank governor in charge of monetary policy, told commercial bankers that the PBOC had to be very careful in maintaining the renminbi’s exchange rate stability when managing liquidity.
A key lesson for the central bank was the aftermath of its move in late October to cut interest rates and the reserve ratio. The move greatly loosened liquidity conditions and “increased yuan depreciation expectations and added pressure on the yuan to weaken”, Zhang said.
The PBOC had to balance ensuring sufficient liquidity in the banking system and managing the stability of the yuan exchange rate, the official said.
“A too-loose liquidity situation may result in relatively big pressure on the yuan exchange rate,” Zhang was quoted as saying. “A cut in the required reserve ratio would be too strong a signal [to send to the market], and we can use other tools to provide the market with liquidity.”
Instead of the shotgun approach, the PBOC will therefore be expected to increase liquidity in the economy through open-market operations that were less drastic than cutting the reserve ratio, the memo said.
Indeed, we observed just that last week when the PBOC injected a whopping 400 billionyuan into the banking system – the most in three years – in an overnight operation using 7 and 28-day reverse repos, the same operations it was aggressively relying on in 2011 until 2013, when it resumed RRR and rate cuts once again, only to see a surge in capital outflows starting in mid-2014.
Furthermore, since the Lunar New Year period which falls in early February this year, is when cash demand peaks, it is likely that over the coming week the the PBOC will release an extra 1.6 trillion yuan, nearly a quarter trillion dollars, into the banking system to help banks cope with the increased cash demand.
However, and liquidity junkies expecting a flood of short-term funding may be disappointed: Zhang said banks had lent out money too rapidly in the first half of the month – over 1.7 trillion yuan – and that they had to slow down their lending process. The SCMP quotes Yi Gang, a vice-governor of the PBOC, who again warned banks not to repeat their mistake in the 2009 lending spree, during which many loans turned bad when they could not be collected back, according to the memo.
Of course, if China’s growth contracts any further, and if the central bank is indeed precluded from RRR and interest rate cuts, then a lending spree is precisely what banks will engage in.
Meanwhile, the biggest threat facing China remains its porous capital controls, which despite a max quote of $50,000 in annual outflows, has seen hundreds of billions in funding exit the “closed” capital account system, which in retrospect is not only not closed but very much open.
The central bank was determined to keep the yuan stable, Yi said. “The personal annual quota of $50,000 has not changed. Some individual bank clients are sending messages to their clients, encouraging dollar buying … If you spread false information to cause panic, relevant authorities will come after you,” he said.
As we said in September, when bitcoin was trading 40% lower than its current price, the big question is whether the Chinese population (which has over $20 trillion on deposit in the local banks) has realized that one of the best means of circumventing capital controls is with the digital currency, which however provides a window of opportunity which may not last too long, now that the PBOC is contemplating rolling out its own “digital currency.”
Of course, since the particular “currency” will be nothing like bitcoin, and every transaction will be logged, absolutely nobody will use it voluntarily unless China does what it does so well, and threatens with arrest, bodily harm or worse, anyone who keeps using bitcoin in lieu of the government-mandated currency. Based on history, such an escalation would only make the “forbidden” alternative even more attractive.
The PBOC’s news division did not respond to requests for confirmation of the leaked memo.
China Warns “Social Stability Threatened” As 400,000 Steel Workers Are About To Lose Their Jobs
In late September, we were stunned to read (and report) that in the first mega-layoff in recent Chinese history, the Harbin-based Heilongjiang Longmay Mining Holding Group, or Longmay Group for short, the biggest met coal miner in northeast China had taken a page straight out of Jean-Baptiste Emanuel Zorg’s playbook and fired 100,000 workers overnight, 40% of its entire 240,000 workforce.
For us this was the sign that China’s long awaited “hard landing” had finally arrived, because as China’s paper of record, China Daily, added then: “now, many migrant workers struggle to find their footing in a downshifting economy. As factories run out of money and construction projects turn idle across China, there has been a rise in the last thing Beijing wants to see: unrest.”
We added that “if there is one thing China’s politburo simply can not afford right now, is to layer public unrest and civil violence on top of an economy which is already in “hard-landing” move. Forget black – this would be the bloody swan that nobody could “possibly have seen coming” and concluded that as for the future of China’s unskilled labor industries, the Fifth Element’s Jean-Baptiste Emanuel Zorg has a good idea of what’s coming.
Fast forward to today when, if not a full million, Xinhua reports that as part of China’s proposed excess capacity production curtailments the country’s steel production slash will translate into the loss of jobs for up to 400,000 workers, estimated Li Xinchuang, head of China Metallurgical Industry Planning and Research Institute. Li said more people will be affected in the upstream and downstream industries. According to some estimates just like every banker job in New York “feeds” up to three downstream jobs, so in China every worker in the steel industry helps support between 2 to 3 additional job.sWhich means, 400,000 primary layoffs would mean a total job loss number anywhere between 1.2 and 1.6 million jobs!
As a reminder, previously China had announced that it would cut steel production capacity by 100 to 150 million tonnes, while coal production will be reduced by “a relatively large amount,” according to a statement released Sunday by the State Council. We have yet to get an estimate of how many coal jobs will be lost.
The reason we were, and remain, skeptical about China ever following through on this production curtailment is precisely the massive layoffs that will result: layoffs which would enflame an already tenuous employment situation because as we showed recently, the number of worker strikes in China has gone parabolic in the past year, soaring to a record high over 2,700 in 2015, more than double the previous year’s total.
Li confirmed this very disturbing trend when he told Xinhua that “large-scale redundancies in the steel sector could threaten social stability.”
Which brings us to the most important topic facing China: how it will respond to the imminent labor market crisis as millions of workers are laid off either voluntarily, or as a result of bankruptcies of their employers: this, as we said in November, was the biggest risk facing China.
One avenue China is actively pursuing realizing it is years behind the curve, is the ad hoc implementation of an unemployment “safety net” – a form of unemployment benefits like those which recently laid off Americans are entitled to for extended periods of time while they try to find a new job. This will not be easy as China has absolutely no practical plan how to implement this.
According to Xinhua, “China will raise funds to help workers reestablish themselves should they lose their jobs when coal and steel firms close amid campaigns to cut overcapacity.”
A large number of coal workers are expected to be affected by future capacity cut, although the State Council did not specify the scale.
To deal with looming redundancies, an “industrial restructuring fund” was initiated on Jan. 1, pooling money from factories across the nation based on their power consumption.
Brokerage Shenwan Hongyuan Securities estimates that the fund could draw in 46.8 billion yuan (7.2 billion U.S. dollars) a year.
“As required by the State Council, related departments are formulating rules on the use of the industrial restructuring fund,” said Jiang Zhimin, vice head of China National Coal Association.
“As far as I’m concerned, the bulk of the fund will be allocated to redundant workers,” said Jiang. The fund will be partly used to compensate laid-off workers, according to Sunday’s State Council statement.
Demonstrating just how “serious” this proposal is, the State Council called on enterprises to think outside the box and find ways to reduce redundancies and compensate laid-off workers.
We give this track about a 1% chance of manifesting in something practical.
In a separate proposal, the government is also encouraging redundant workers to start their own businesses, with tax breaks and other preferential policies.
Alas, the creation of millions of new profitable businesses (because unprofitable startups only thrive in Silicon Valley) is far, far more difficult than it sounds in some Beijing spreadsheet.
A previous round of economic restructuring in the 1990s, when China was transforming from a planned economy to a market economy, saw tens of millions of people losing their jobs, particularly those employed by state-owned enterprises.
Although many redundant workers started businesses, the rising unemployment created social problems. In the current round of economic restructuring, inviable and non-competitive “zombie enterprises” are being targeted by the government, as oversupply has hammered steel prices below the cost of cabbages and beaten coal price to a multi-year low.
This time, Xinhua says that the government will pay more attention to those who lose their jobs. The reason is simple: a few million angry, unemployed workers and China will have precisely the working class insurrection it has been preparing for since 2014.
Xinhua concludes by saying that the leadership attaches great importance to job creation amid the economic slowdown, which is ironic because economic slowdowns are always accompanies by mass layoffs. There is some hope for spin yet: “now a low unemployment rate provides room for the capacity glut reduction…. Surveyed unemployment rate in major Chinese cities was around 5.1 percent in 2015, which remained at a low level, compared with an average of 6.8 percent for the 34-member Organization for Economic Cooperation and Development (OECD) last July.”
The problem, of course, is that just like every other economic indicator in China, this one too is utterly wrong and dramatically inaccurrate, and is simply meant to goalseek what a few politicans demand be shown so they get a few approving nods from the Politburo.
Just how disconnected from reality China’s official unemployment rate is, both now and one year from today, will ultimately determine how violent the social upheaval will be when – as part of its hard-landing – China proceeds to lay off (tens of) millions of low-skilled workers leading to the inevitable violent response.
Update: 35 ppl arrested, including 24 refugees after storming ferry at Calais port Via @BFMTV
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Coinciding with UK’s Labor leader Jeremy Corbyn’s arrival at the French refugee camps, Sky News reports the port of Calais has been temporarily closed as 100s of migrants stormed on to a ship in the hope of reaching the UK. About 50 migrants are thought to have made their way on to a P&O-operated vessel called Spirit of Britain, and police are at the scene and have reportedly deployed water cannons to break up the crowds of protesters.
DFDS Seaways tweeted: “The Port of Calais has been temporarily closed due to a migrant invasion, as soon as they are cleared the Port will re-open.”
The shut-down follows a protest march in support of the migrants that was reportedly attended by 2,000 people.
Authorities in France said a group of 500 people illegally forced their way through barriers and police lines, 150 migrants were able to get into the cordoned-off area.
A statement from the Port of Dover said: “The Port of Calais is currently experiencing migrant activity which has caused disruption to ferry services. Therefore services to and from Calais via the Port of Dover are affected.”
The latest incident coincides with Jeremy Corybn’s visit to the migrant camps in Calais and Dunkirk where thousands of people are sleeping rough – his first foreign trip as Labour leader.
He said the conditions would be a “disgrace anywhere” – and that thousands of people were living in a “sea of mud”.
“Bowels Emptied! Women Molested!” German Media Reveals “Monstrous” CCTV Footage Of Refugee Pool Mayham
Europeans are struggling to come to terms with the wave of Mid-East refugees that have inundated the bloc over the course of the last 12 months.
The challenge, for those inclined to believe that German Chancellor Angela Merkel’s multicultural utopia is feasible, is to adopt an open minded approach to the prospect of integrating millions of Muslim asylum seekers into a largely Christian society while retaining a healthy level of skepticism with regard to the prospect of unifying two vastly divergent cultures.
Even those who are predisposed to being patient with the integration process are beginning to question the wisdom behind Berlin’s open-door policy.
Interestingly, it wasn’t the murder of 130 people in Paris that served as the catalyst for what amounts to a wholesale shift in sentiment towards migrants. While there was certainly a public outcry in the wake of the Paris attacks, the backlash coalesced after New Year’s Eve, when scores of women were reportedly assaulted by men of “Arab origin.”
Since then, voters have moved to express their discontent with the bloc’s handling of the refugee crisis by taking to the streets in what on many occasions have turned out to be violent protests.
The official response has been mixed. Germany has endeavored to keep the faith (as it were) by preserving the “yes we can” narrative in public, but in private, many German politicians claim the country is on the verge of closing its borders. Austria has apparently had enough, has suspended Schengen, and is now requiring refugees to learn German or risk losing access to welfare. The country has also developed a pictographic flyer designed to coach migrants on what types of behaviors are acceptable in polite Western European society.
Switzerland has adopted the Austrian flyer and Germany has developed its own cartoons the government hopes will to clear up any “confusion” about how asylum seekers should act once settled in Europe.
A particularly sensitive issue is pool etiquette. If you believe the media, refugees are having a particularly difficult time figuring out how to behave when swimming in public. The controversy led one small German town near Cologne (the site of the New Year’s Eve assaults) to ban adult male asylum seekers from swimming.
Well, despite the best efforts of European cartoonists, some refugees apparently didn’t get the message about proper pool behavior because according to “reports,” some asylum seekers were caught on closed circuit TV doing some rather lewd things at the Johannisbad baths in Zwickau. Below, find the story from Bild, which we present without further comment because frankly, there’s not much we can add here.
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From “In The Swimming Pool, Bowels Emptied! Women Molested!”, originally published in Bild and Google translated for your amusement
According bathrooms GmbH have masturbated refugees when visiting swimming baths in pools and emptied their bowels in the water. They are women in sauna harassed and have tried to storm the ladies’ locker!
All this is evident from a letter from clerk’s office manager Rainer Kallweit to his superior departmental head Bernd Meyer. In the letter dated 19 January (Image exists) summarizes Kallweit a report of the security that service the city’s baths GmbH. The city administration has towards BILD confirm their authenticity letter!
Kallweit reports of a memorandum from the Johannisbad. It states inter alia: “An asylum seeker has masturbated in the hot tub and ejaculated into the basin. This is also recorded on the surveillance camera “And further:”. The lifeguards threw him out. The asylee came with his, cronies’ but again purely to get his cell phone.Together, visitors have ‘in the hot tub a hooting, Selfie’ done. “
“The users of this contaminated pool by there got rid of one’s own intestinal contents. Native people have immediately leave the bathroom. “
The memo continues: “Furthermore, the lifeguards have to protect women and girls from the asylum. Young men wanted to forcibly penetrate into the dressing of women and girls. These actions could previously be blocked.”
Spain’s Election Quagmire: What Wall Street Thinks
When last we checked in on Spain, the country was struggling to make sense of largely inconclusive elections held in late December.
Mariano Rajoy’s PP managed to secure the most seats in parliament, but when the electoral smoke cleared it was apparent that Spanish voters were no longer content with the political status quo.
The combined vote share of PP and PSOE sank to its lowest level since the eighties as Podemos and Citizens capitalized on widespread disaffection with Rajoy’s handling of the economy (among other things) to capture 69 and 40 seats respectively. Here’s a look at the official results:
Fast forward one month and the country is struggling to form a government.
On Friday, Rajoy delayed a confidence vote saying he didn’t have “the support that is needed” to move ahead after Socialist leader Pedro Sanchez indicated PSOE would seek to form a “progressive” government with Pablo Iglesias’ Podemos, which many equate with Syriza in Greece. “We made a serious offer for a government and Rajoy has taken a step back,” Iglesias said last week. “Change is possible [and] I hope the socialists will rise to the challenge,” he added.
As Reuters notes, “the Spanish constitution sets no deadline for a prime ministerial investiture vote to take place, but once a candidate seeks the confidence of parliament a two-month deadline for the formation of a government comes into effect.” If a government isn’t in place within two months, new national elections are held.
“An early election in the short or medium term seems the most likely outcome,” Deutsche Bank said, the day after last month’s vote.
Whether or not PSOE will ultimately be willing to align with Podemos remains to be seen, but if the coalition does indeed come to fruition, it would be bad news for Berlin and the eurocrats in Brussels. A leftist government would move quickly to roll back austerity (or “fauxsterity” as we call it, given that the country’s debt-to-GDP has actually risen since the debt crisis) and adopt fiscal policies that bear little resemblance to what Wolfgang Schaueble would consider prudent.
In other words: what happened in Portugal is about to happen in Spain. Brussels’ preferred PM is about to be ousted by a coalition of leftist parties, and that, in turn, suggests that the idea of fiscal retrenchment will be thrown out, along with anything that even looks like austerity. That could trigger a showdown between Madrid and Brussels over Spain’s intention to adhere to EU deficit targets. The threat of Catalonia moving ahead with an independence bid only complicates things, as secession would add some 25 percentage points to Spain’s debt-to-GDP ratio (as a reminder, Podemos would vote to allow a secession referendum to move forward).
Below, find some commentary from various sellside desks on where things are headed in Spain and what it means for markets.
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Following a round of meetings with the King of Spain, the leader of the Podemos party, Pablo Iglesias (radical left), has made a formal offer to the PSOE party (centre-left) to form a left-coalition government. Iglesias delivered the message to the King, who in turn informed the leader of PSOE. Both parties together have a total of 159 votes (90+69 respectively). It is likely, we believe, that the conservative nationalist Basque party, PNV, which has six MPs, and the radical left IU with two MPs would also join the coalition, taking the total to 167 MPs. This would still leave the coalition needing nine MPs to achieve an absolute majority in the 350-seat parliament. Therefore, it would need some MPs from other parties to abstain in the parliamentary vote.
We don’t rule out other parties, such as PP and Ciudadanos, submitting proposals in the coming days, so a PSOE-Podemos led government is not a certainty. We are still of the view that a coalition government is more likely than holding new general elections in Q2 16.
A PSOE-Podemos coalition: a mild negative for markets
We think that a PSOE-Podemos outcome would be a mild negative for markets for two main reasons. First, it would be a minority government, unlikely to find much support from the other groups. Second, in the past Podemos has put forward a series of reforms that would entail rolling back various reforms enacted by the previous government. While PSOE will limit the potential tail risks on the policy side, depending on the final outcome of the policy agenda agreed between PSOE and Podemos and the negotiations with nationalist parties, there could be some risks of non-growth-friendly policy changes.
Overall, as the left-coalition would lack an absolute majority, we think that the scope for any material policy change that does not have wide parliamentary support is very limited. Therefore, we strongly believe that the downside policy risks are limited. As Spain has experienced four years of important reforms, mainly the restructuring of the banking system, a new fiscal compact to control regional deficits and some notable labour market reforms, we would caution against an overly gloomy outlook for Spain. Nonetheless, the political uncertainty and the presence of some radical left members in a government would justify comparatively wider sovereign spreads, for example, versus Italy.
1) The King will continue to hold discussions with the parties to hear which ones will offer some likelihood of a parliamentary approval vote. There is no specific deadline for these talks, even if it is in the interest of all involved parties to minimise the period of uncertainty. We think PP will get the first chance to form a government. After the King’s approval, PP will need to submit its government proposal to a parliamentary vote. From the time of this vote, the parliament has up to two months to nominate a government. Failure to do so would automatically lead to elections in Q2 16.
2) If PP does not secure an absolute majority of MPs in the parliamentary vote (ie, at least 176 votes), which appears most likely, in our opinion, then two days later there would be a second vote in which a simple majority would suffice for PP to form a government.
3) If PP fails to win sufficient support, the King would need to decide which party gets the mandate to try to form government. The would most likely be PSOE, the second most-voted party. PSOE will need to follow a similar procedure to the one described above for PP.
4) If this process, which can last up to two months after the first vote, does not result in a government being nominated, it would mean new general elections eight weeks later in April/May 2016.
The socialist PSOE remains the kingmaker for any possible government in Spain, following the inconclusive December 20 elections. By declining the King’s appointment, we reckon Mr. Rajoy may have tried to gain some time for finding potential support from the socialists. Rajoy’s move shifts the focus to the socialist leader Sánchez, who now has to prove his ability to assemble an alternative and credible government coalition. We believe that failure to secure such a left-wing alliance is likely to eventually push PSOE to allow a PP-led minority administration. According to Spain’s Constitution, a new round of elections would take place if no candidate is elected in Congress after two months of the first parliamentary vote to elect a PM.
We reckon at the margin, Iglesias’ comments make a left-wing alliance more likely, although by no means certain. To secure such a left-wing alliance, Mr. Sánchez would not only need support from both Podemos and United Left (jointly adding to 161 seats, i.e. 15 seats short of an absolute majority), but also a commitment from other regional parties (including the Basque and Catalan pro-independence parties) to at least abstain in the parliamentary vote to form a government. Furthermore, Mr. Sánchez would also need to tame tensions from regional factions within his own party who oppose joining forces with the far-left Podemos. In our view, A left-wing PSOE/Podemos/IU government would probably represent a significant shift in Spain’s fiscal policy towards more loosening, with Podemos calling for an end to fiscal austerity and no particular commitment to the Stability and Growth Pact targets.
According to a poll by Metroscopia for daily El Pais, 49% of respondents would prefer a broad government coalition between PP, PSOE, and C’s, while 36% would prefer a left-wing alliance between PSOE, Podemos, IU, and other regional parties. A separate poll conducted by GAD3showed that the centre-right PP would obtained 30.1% of support if new elections take place today, up from 28.7% in the December 20 elections, and accounting for 131 MPs (vs. 123 MPs currently). Support for the socialist PSOE would fall to 21.3% (projected at 89 MPs) from 22.0% in December 20 (90 MPs), for Podemos 20.0% (65 MPs) from 20.7% (69 MPs), and for Citizens 13.4% (38 MPs) from 13.9% (40 MPs). Separately, the EU Commission is due to publish a report on Spain in February warning over the rising risks on confidence levels from the ongoing political instability, daily El Pais reports citing unidentified sources.
From JP Morgan
At first blush, these developments seem to increase significantly the likelihood of a left government. If it transpires, this would be important for Spain. A left government would aim to reverse some of the fiscal consolidation and structural reforms implemented in recent years. This will likely lead to a conflict with the European Commission. The macro consequences are hard to gauge, but uncertainty and conflict are likely to weigh on economic performance.
At this stage, it is likely that the King will ask PSOE leader Sanchez to try to form a new government. And the most touted option is exactly a left coalition with Podemos. Podemos may be willing to drop the demand for a Catalan referendum, which is a red line for PSOE. But a PSOE-Podemos coalition would still need the support of the Basque and Catalan nationalist parties. While this would not be easy to achieve, it is possible and would likely have dire consequences in terms of governability (for details see below). However, we note that the opening from Iglesias should be primarily read as a tactical move to put pressure on PSOE, implicitly making it responsible for any failure to clinch a deal leading to a left government. The reaction from PSOE – which has rebuked Iglesias’ words as an unacceptable ultimatum – confirms this interpretation.
If the constraints surrounding a left government prove unsurmountable, PSOE leader Sanchez may try to form a moderate coalition with Ciudadanos (which in turn would hinge on PP abstention). Failing both options, a last resort alternative would be a centrist platform – i.e. a PP government in cooperation with Ciudadanos and with abstention from PSOE.
In our view, though, the chances of a new election have now risen as well. This is because the political climate has become even more conflictual, with both PP and PSOE struggling to entertain constructive talks and more engaged in the self-preservation of the incumbent leaderships. A new election would not necessarily change the current parliamentary configuration, but it could be the catalyst needed to foster a more conciliatory approach. The Constitution allows two months for government building following the first parliamentary vote on forming a new government; otherwise an election is called. In light of this exceptionally high level of uncertainty, we now expect a deterioration in the high frequency economic indicators.
Below, we briefly recap the constraints faced by a left government, in order to provide the reader with a set of key issues to monitor.
First of all, the birth of a left government involves two separate dimensions in Spain: the ability to forge a deal between the center-left PSOE and the extreme left Podemos on the one hand and the need to strike a compromise respectful of national unity with the nationalist parties on the other hand.
There are several conditions that would need to be fulfilled to see a left government in Spain. A deal between PSOE and Podemos is a necessary condition. We believe this is possible, but it would be very costly for PSOE, who would risk being marginalised by its radical coalition partner. As mentioned, Iglesias’ openings contain a strong tactical element, as an attempt to put pressure on PSOE, but they add nothing about the specifics of a viable government agreement. While Sanchez is very keen on forging a deal, several senior leaders in PSOE are very sceptical of an agreement with Podemos but have so far been cautious in voicing their opposition. It is possible that this will limit their room to manoeuvre, and we will discover more at the end of the month when a crucial PSOE summit is planned.
In conclusion, we believe much will depend on the cost-benefit analysis that the PSOE leaders will do and whether they will give the green light to an agreement that risks undermining the long-term survival of the party. Furthermore, at the time of forging a left coalition with help from the pro-independence camp, we think the PSOE leaders will have to face the pressure stemming from a predictable major backlash from the business and international community, together with higher market pressure and a likely deterioration in the high frequency economic indicators.
Overall, we acknowledge that the risks are shifting in favour of a left government compared to our earlier analysis. In the end, it is possible that PSOE will decide that the prospects of the party are fairly grim whatever choice is taken and will favour getting to power as the least costly alternative. In that case, we remark that the coexistence between PSOE and the extreme left Podemos will be challenging in itself. This obviously regards the Catalan issue but it applies more generally to the economic policy domain (including the 0.8% of GDP budget adjustment requested by the Commission).
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We wonder if the ratings agencies will immediately pull a Poland and move to downgrade Spain in the event an “undesirable” government takes power and ruffles Berlin’s feathers.
Which Italian Banks Are Most Exposed To Soaring NPLs: Citi Crunches The Numbers
With European markets increasingly jittery on Italian bank concerns, now that after 7 years of build up those staggering Italian non-performing loans were finally noticed by traders, resulting in speculation that the creation of an Italian bad bank is imminent, overnight Citi’s Azzurra Guelfi released a note trying to qualify just how exposed Italian banks are to rising bad loans, and quantify which banks have the most exposure.
As Citi writes, “Italian banks’ share prices have been volatile YTD, given the market’s renewed fears over asset quality and potential developments on a possible bad bank creation. Asset quality is a central discussion point for investors on Italian banks. Italian banks have challenging asset quality metrics compared with European peers, but some of the difference can be explained by lack of state-driven clean-up in the past, NPL mix, longer recovery time, high level of collateral (eg lower coverage), capital effect, etc. The resolution of 4 smaller Italian banks has increased questions about system asset quality and M&A.”
In other words, while the rest of Europe, and especially Spain, was proactive in sweeping as much of the NPL exposure under the rug (where it still remains), Italy has been far less prompt in addressing this issue which is suddenly plaguing its banking sector leading to dramatic losses for stocks of local banks.
So here is Citi’s take on the severity of the problem:
Total gross NPLs in Italy has increased by c160% since 2009 and now represents c18% of loans (vs c8% in 2009). Gross Sofferenze (eg the worst category of NPLs) are c60% of this or c€200bn. While new inflows of NPLs have decreased, there have been limited disposals, possibly due to pricing difference. Banks suffer in multiple ways due to the high stock of NPLs (profitability, capital, funding, lending, etc). The government implemented reforms last summer to improve recovery procedures (Government Proposes NPL Measures),but there is limited evidence so far of the benefit.
Next, Citi attempts to quantify what the hit to the banks’ bottom line would be if NPL levels were to be normalized to 2009, or base-case, levels:
While at this stage it is difficult to estimate what the final solution could be, we run some sensitivity analysis on banks’ Sofferenze. As of 3Q 2015, for our universe, Gross Sofferenze were c11% of banks’ loans. We simulate that the ratio will decrease back to 2009 level (c5%).
What Citi concludes is the following: ISP and MDBI are the less affected Italian banks, while BP/BPER and UCI have the most at risk.
We run 3 scenarios based on different coverage levels for the
disposals (70%, 75% and 80%) and calculate the potential impact of the
additional provisions on TBV and capital. Our central scenario (c75% coverage or 25% net book value) shows an average 7% negative impact to TBV. MDBI and ISP are the banks less impacted, while BP and BPER are the most affected. BP and UCI seem more vulnerable on capital metrics, based on the simulated impact on current capital level. The analysis is simplified as we cannot fully assess the different quality of the NPL books with available information, as there are differences given collateral value, NPLs vintage, sector/geo breakdown and provisioning of the portfolio. We also simulate the potential impact of the potential guarantee cost, on average c3/9% on 2016E net profit.
More details on the various scenarios:
Our scenario analysis is based on the assumption that post government potential intervention, the ratio Sofferenze on loans will come back to the 2009 level. This is the starting point of our analysis and if this were significantly different from the final outcome post potential disposal, the end results would be different from our scenario analysis. We use 2009 as it could be a normalized year before the level of NPLs started to increase significantly in the system.
Also, our analysis only focused on Sofferenze; if any actions were taken also on other NPL categories (eg unlikely to pay), the impact could be different.
For Unicredit, given the group’s large international presence, and the fact that c80% of group NPLs relate to Italy (c12% in core unit and c65% of total are in non-core), we have run simulation only on potential developments in the non-core operation (all Italy related). As for non-core divisions we do not have data since 2008, we have simulated that the stock of Sofferenze will decrease by 85% from current level. This is a higher level than peers (c65% average simulated decrease) but in our view it is coherent with the status of non-core NPLs unit. All Non-core Sofferenze simulated impacts are then related to the group data for capital, TBV, loans, etc.
We have run 3 different scenarios depending on the potential coverage ratio (range from 70% to 80%) that could be required to transfer the Sofferenze to the private buyer or the special purpose vehicle (in case of securitization). The lower the required coverage ratio, the lower the potential additional provisions needed to transfer the assets, the smaller the impact on both tangible book value and capital ratio.
Our analysis is based on static data as of 3Q 2015, excluding further potential NPLs increase or disposals, as well as no additional actions on coverage or capital generation/consumption. Only for the guarantee costs simulation have we used our 2016 forecasted earnings.
Intesa is the bank least affected (aside MDBI), while BP and BPER the most. Capital wise, BP and UCI seem the most sensitive to this, given that both BPM and BPER have the potential benefit from the migration to IRB in coming quarters. We have included Mediobanca in the analysis for completeness, but given the small amount of Sofferenze, the peculiar business mix of the bank and the different loan book composition/concentration, the potential impact is minimal. On the other side, Mediobanca could benefit from additional revenues in advisory for structuring the potential single bank bad bank/securitization.
Our simulation is on 4 main levels:
Additional provisions needed to reach the potential required coverage ratio:
Impact on group tangible book value of the additional provisions required ( net of tax effect):
Impact on group capital ratio of the additional provisions required (net of tax effect), also considering the potential shortfall already deducted from capital (proforma the percentage decrease of Sofferenze, mainly an offsetting factor for UBI):
Potential effect of the cost of the guarantees on 2016 P&L:
Citi’s conclusion: “We would encourage banks to increase disclosure on the NPLs portfolio, in order to provide the market with additional information.” That, however, may be the worst possible outcome for a European banking regime which ever since “whatever it takes” if not before, has been shrouded in secrecy and bailed out with billions in front- and back-door debt monetizations courtesy of the ECB.
This is perhaps most evident when looking at the recent plunge in Italian bank stocks, which after staging an aggresive comeback last week on hopes of a backstopped “bad banks” are once again on the back foot as questions about full exposure and hits to both the balance sheet and income statement grow louder.
then this: Montee de Paschi di Siena is witnessing massive bank runs:
Italy bank runs could be the ‘Northern Rock’ signal of global financial meltdown
20 Dead, 200 Hospitalized After Reports US Lab “Leaks” Deadly Virus In Ukraine
Amid the so-called “ceasefire” in Ukraine, yet ongoing shelling in many regions, the Donbass news agency reports that more than 20 Ukrainian solders have died and over 200 soldiers are hospitalized after an apparent leak of a deadly virus called “California Flu” from a US lab near the city of Kharkov.
More than 20 Ukrainian soldiers have died and over 200 soldiers are hospitalized in a short period of time because of new and deadly virus, which is immune to all medicines. Donetsk People’s Republic intelligence has reported that Californian Flu is leaked from the same place where research of this virus has been carried out.
The laboratory is located near the city of Kharkov and its base for US military experts.
Information from threatening epidemic is announced by Vice-Commander of Donetsk Army, Eduard Basurin.
Leak of deadly virus in Ukrainian side was published first time on 12.1.2016:
“According to the medical personnel of the AFU units (Ukrainian troops) there were recorded mass diseases among the Ukrainian military personnel in the field.Physicians recorded the unknown virus as a result of which the infected get the high fever which cannot be subdues by any medicines, and in two days there comes the fatal outcome.Thus far from the virus there have died more than twenty servicemen, what is carefully shielded by the commandment of the AFU from the publicity”, said Basurin in daily MoD situation report.
Outbreak of deadly virus continues and Friday 22.1.2016 Vice-Commander told new information from epidemic:
“We keep registering new facts of growing the epidemics of acute respiratory infections among the Ukrainian military.
Just since the beginning of this week more than 200 Ukrainian military have been taken to civil and military hospitals of Kharkov and Dnepropetrovsk. It is important to repeat that the DPR intelligence previously reported the research being carried out in a private laboratory in the locality Shelkostantsiya, 30 km away from the city of Kharkov, and involving US military experts. According to our information, it is there where the deadly Californian flu strain leaked from,” Basurin said.
It appears it is not just military that is affected, as Radio Free Europe reportsa flu epidemic is sweeping through the eastern Ukrainian city of Kramatorsk — and the conflict smoldering nearby is making the situation even worse. Doctors are unable to identify the exact strain of the virus,because the laboratory they need is across the front lines in separatist-controlled Donetsk
This week brought another reason to get out of the casino, and to sell it short if you can tolerate some volatility.
On Friday the Japanese stock market ripped 6% higher and the European bourses were up 5% because their respective central bankers emitted some hints of more easing just ahead. Even the US market managed to find green for the week.
Apparently, the day traders and robo-machines think BTFD still works. But they are going to be sorely disappointed——just as they have been for nearly 700 days running.
Like the bloody trenches of World War I, the movement back and forth in “no man’s land” on the chart above has been pointless. At some juncture in the not too distant future, the stock averages are going to break this trading range, and plunge back down to earth.
In the meantime, you can’t blame the punters for trying. This week they succumbed once again to the BTFD delusion undoubtedly because the “moar money” chorus grew ever louder as Friday approached.
That baleful refrain was led this time around by no less than the posse of oligarchs and apparatchiks assembled at Davos. Thus, when Mario Draghi, the world’s most ludicrous monetary dunce, let on that there were “no limits” on how much fraudulent credit could be emitted by the ECB’s printing press, he surely spoke a frightening truism.
Yet the world largest asset gather, Larry Fink, founder of $3 trillion Black Rock, gushed with an endorsement of what was pure monetary crack pottery:
“We’ve seen over the last few years you have to trust in Mario,” Laurence Fink, chief executive officer of BlackRock Inc., said in Davos. “The market should never, as we have seen now, the market should not doubt Mario.”
That’s right. You can’t make this baloney up. As Jeffery Snider shows in a nearby post, the massive ECB exercise in QE, which has already emitted some $700 billion in printing press airballs, has had no impact at all on its ostensible targets. Namely, the generation of a burst of private borrowing in order to stimulate spending and inflation.
In fact, European bank lending has been on the flat-line for 7 years and neither the ECB’s massive LTRO of 2012 or the QE explosion during 2015 has changed this trend. That’s because Europe is at “peak debt” and has been so ever since the original single currency borrowing binge peaked in 2008 (bottom panel).
Surely, Larry Fink knows that QE has been a failure in Europe, the US and everywhere else it has been tried. To wit, when the household and business sectors are at “peak debt” central bank money printing amounts to pushing credit on a credit string. It does nothing except inflate the value of existing financial assets and provides cheap carry trade funding for speculators.
That is actually the point, of course. Contemporary central bankers function like a team of monetary wranglers, herding the retail cattle toward the asset gathers. And the latter always and everywhere manage to scalp a fee from investor portfolios being inflated by central bank action. It’s the modus operandi of our regime of bubble finance.
So the Larry Fink’s of the world have become cynical advocates for monetary policies that any half-wit can see amount to gibberish. Here is what the ECB said a year ago when it launched into it $1.4 trillion QE program:
The Governing Council took this decision in a situation in which most indicators of actual and expected inflation in the euro area had drifted towards their historical lows. As potential second-round effects on wage and price-setting threatened to adversely affect medium-term price developments, this situationrequired a forceful monetary policy response.
Asset purchases provide monetary stimulus to the economy in a context where key ECB interest rates are at their lower bound. They further ease monetary and financial conditions, making access to finance cheaper for firms and households.This tends to support investment and consumption, and ultimately contributes to a return of inflation rates towards 2%. [emphasis added]
Needless to say, the first paragraph above is errant nonsense. The idea that Europe was suffering from a dearth of inflation is essentially Keynesian newspeak. What these monetary cranks were talking about as requiring a “forceful monetary policy response” was the tiny area of relatively benign consumer inflation shown in the circle.
Even then, the 26-year average rate of consumer inflation shown above was 2.1%. By contrast, the slight relief experienced by wage earners and savers in recent months is entirely due to the great oil and commodity deflation now washing through the world economy.
Yet since the Eurozone produces virtually no fossil energy or industrial raw materials (even most of the coal is produced in Poland which is not in the euro area), it’s a wonderful thing; it results in higher real wages and more real output and wealth.
In fact, after years of deteriorating terms of trade with the rest of the world due to the China driven commodity bubble, the pendulum is swinging favorably in Europe’s direction. But its self-serving monetary central planners and financial class have managed to turn an unequivocal good into an entirely contrived problem——as in the specious claim that “potential second-round effects on wage and price-setting threatened to adversely affect medium-term price developments”.
That is gibberish. So what if stronger real wages and better purchasing power on global commodity markets result in a lower trend of nominal wages and prices in Europe. For 200 years until about 2009, most economists thought that was a very good thing.
And virtually none of them believed in “inflation targeting”, let alone a magic threshold of 2%. That was the half-baked theory of Ben Bernanke and a small posse of second rate academics like Frederic Mishkin of Columbia Business School, who published indecipherable papers in Ben’s forgettable books.
Simply put, there is no logic or empirical evidence whatsoever that supports the idea that 2.00% consumer inflation is better for economic growth and improvements in real productivity and living standards than is 1.22% or 0.02% consumer inflation.
This is just a postulate made-up from wholecloth that justifies massive central bank intrusion in the financial system and constant efforts to falsify and inflate the prices of financial assets. Since the annual Davos confab has increasingly become the equivalent of an asset gathers ball, it is not uprising that it has become a loud lobby in favor of moar central bank monetary fraud.
Nor were the BOJ and ECB the only source of renewed hope for monetary ease. Davos based whispers that the Fed’s expected March raise would be taken off the table quickly flooded the canyons of Wall Street. In no time flat the dip buyers were back in force.
But let me pick out Ray Dalio for special mention in the roll call of shame. The founder of the $200 billion Bridgewater complex of hedge funds was talking his book like there was no tomorrow on the sidelines at Davos, assuring the world’s punters that Q4 is just around the corner:
“I think a move to a quantitative easing would bolster psychology,” he told CBBC’s “Squawk Box: at the so-called World Economic Forum at Davos…..This will be a negative for the economy, this market movement. The Fed should remain flexible. It’s shouldn’t be so wedded to a path……. “The risks are asymmetric on the downside, because asset prices are comparatively high at the same time there’s not an ability to ease,” he said. “That asymmetric risk exists all around the world. So every country in the world needs an easier monetary policy.”
You can listen to the whole interview if you can manage your blood pressure, but it amounts to this. Dalio’s $80 billion “All Weather” portfolio is in deep trouble because his fabled “risk parity trade” is in danger of puking big time.
So he urges the central banks to plunge into another fit of destructive money printing, and thereby keep tens of millions of ordinary savers and retirees impaled on the economic torture racks of ZIRP. Worse still, without a trace of compunction or embarrassment he urges the retail sheep back to the stock market slaughter for the bald faced reason that he needs to nix the VIX.
Let me explain. Dalio ended up a billionaire not because he created a lot of economic value added or societal wealth gains as did Bill Gates, Steve Jobs, Sam Walton or even Jeff Bezos. The latter’s stock is way over-valued, but the immense gains he has delivered to tens of millions of consumers cannot be gainsaid.
By contrast, Dalio did little more than stumble on a Wall Street gambling formula that would be absolutely bogus without the perverted “wealth effects” policies of today’s Keynesian central bankers.The turbo-charging effect of Wall Street’s fast money traders and robo-machines piling on for the ride only makes Dalio’s rent scalping even more lucrative.
They call the underlying dynamic “risk-on/risk-off” on bubblevision, but it amounts to this. In a rigged financial market in which stock and bond prices are continuously rising over time owing to systematic falsification of financial asset prices by the central banks, you can make tons of money being long. Yet there is even more megatons of windfall gains to be harvested if you add Dalio’s secret sauce, as I explained in a post a few months ago:
Indeed, never in all of history have a few ten thousand punters made so many trillions in return for so little economic value added. But what Dalio did in this context was to invent an even more efficient machine to strip-mine the Fed’s monumental largesse.
To wit, Bridgewater’s computers buy more stocks on the “rips”, when equity volatility is falling and prices are rising; and then on the “dips” they rotate funds into more bonds when equity volatility is rising and the herd is retreating to the safe haven of treasuries and other fixed income securities, thereby causing the price of the latter to rise.
In short, there is a payday in every type of short-run financial weather because Bridgewater’s computers are monetary sump pumps; they constantly purge volatility from the portfolio.
But here’s the thing. The “risk parity trade” could never exist in an honest free market.
You couldn’t create algorithms to safely pump out volatility and milk the market on alternating strokes because the regularity of the waves on which it is based are not natural; they are the handiwork a central bank that has been taken hostage by the casino gamblers.
Nor is “hostage” too strong a word. In the days of Paul Volcker and William McChesney Martin anybody who even speculated about 80 months of ZIRP would have been assigned to the William Jennings Bryan school of monetary crankery.
The occasion for these musings was the August market swoon, which was triggered by the initial financial shock waves from the fracturing Red Ponzi of China. This caused something to happen which violated the rules generated by the 29-year regime of Bubble Finance inaugurated by Alan Greenspan in October 1987 when the stock market plunged on Black Monday.
To wit, when stock prices fell by 12% during late August to the 1870 low on the S&P 500, bond prices did not surge owing to risk-off clamoring by the market herd. Accordingly, Bridgewater’s risk party portfolio became swamped with too much volatility on both the bond and equity side of Dalio’s big boat. So the algorithmic sump pumps went into over-time dumping stocks in order to drain the ship.
Consequently, Bridgewater wiped out its entire profits for the year in a few days during August. This spasmodic stock selling, in turn, pushed the casino’s plain vanilla momo chasers and robo-machines into the drink in the process. Needless to say, the capsizing Big Boats in the casino were soon firing at each other in public, but also lining-up for a full court press at the Eccles Building.
Here’s the reason. In an honest financial market in which debt is priced by the willingness of savers to forego current use of their money, there could be no “risk parity” trade because the price of stocks and bonds would not be inversely correlated. Indeed, the price of government bonds and blue chips corporates would fluctuate only modestly over time owing to secular changes in the propensity to save, but they would absolutely not vary inversely to the stock average on a short and mid-term basis.
The graph below, therefore, is a pure product of central bank driven bubble finance. The stock index rose by 11X on a trend basis over the last three decades even as national income (GDP) rose by only 3X. That yawning gap was due to the Fed’s massive financial repression which subsidized the flow of speculative capital into the stock markets.
At the same time, the yield on the 10-year treasury note dropped from 9% to 2%, meaning that the price of the risk free benchmark bond surged by order of magnitude over the period.
So risk parity really worked only because in two stroke engine fashion it deftly moved short-term trading positions back and forth along the rising trend lines of the stock and bond markets, while minimizing the setbacks owing to occasional downward price corrections in both markets.
The rub, of course, is that in an a classic world of independent economies and central banks, even Dalio’s two stroke engine would not work. That’s because in response to the egregious money printing of the Bubble Finance era—-the Fed’s balance sheet rose from $200 billion to $4.5 trillion or 22X during the last three decades—-the US dollar’s exchange rate would have collapsed, causing a surge of domestic inflation and a 1970s style crash of bond prices.
So enter the Red Ponzi of China and the linked and derivative mercantilist central banking policies of its EM supply chain and the petro-states which, on the margin, literally fueled the world’s explosive growth between 1992 and 2014
As it happened, however, in the last few months the long reign of the global money printers has begun to sprout fractures. Over on the other side of the earth in China what had become a 20-year long $4 trillion cumulative “bid” for US treasuries and other DM fixed income securities has gone serious “offers”.
This will prove to be one of the great financial pivots of history. During the course of their stupendous inflation of China’s $28 trillion Credit Ponzi, the red suzerains of Beijing bought treasuries hand over fist and thereby kept their price rising and the volatility of the world bond market falling.
To be sure, this wasn’t charity for America’s debt besotted shoppers and governments. It was done in order to peg the RMB exchange rate and thereby keep its mercantilist export machine humming and the people grateful to their beneficent communist party rulers.
But at length it became too much of a good thing because every time the Peoples Bank Of China (PBOC) bought Uncle Sam’s debt it similtaneously expanded the internal banking system and supply of RMB credit. Moreover, after Beijing launched its madcap infrastructure building campaign in response to the the 2008 financial crisis the phony construction and investment boom which ensued attracted increasing waves of hot money from abroad, thereby inflating the domestic Chinese economy to a fever pitch.
In fact, the PBOC was forced to let the RMB slowly rise against the dollar to keep its banking system from becoming a financial runaway. But the steadily rising RMB drastically accelerated the inflow of foreign capital and speculative funds into the Chinese economy, thereby filling the vaults of the PBOC to the brim at more than $4 trillion early this year compared to a few hundred billion at the turn of the century.
But these weren’t monetary reserves in any meaningful or historic sense of the term; they were the fruits of an utterly stupid mercantilist trade policy and the conversion of a naïve old man, and survivor of Mao’s depredations, to the view that communist party power could be better administered from the end of a printing press than from the barrel of a gun.
But Mr. Deng merely unleashed a Credit Monster that sucked in capital and resources from all over the globe into a domestic whirlpool of digging, building, borrowing, investing and speculation that was inherently unstable and incendiary. It was only a matter of time before this edifice of economic madness began to wobble and sway and to eventually buckle entirely.
That time came in 2015—-roughly 30 years after Mr. Deng proclaimed it is glorious to be rich. So saying, he did not have a clue that a credit swollen simulacrum of capitalism run by communist apparatchiks was a doomsday machine.
In any event, what is happening in China now amounts to the end of the risk parity trade. Because China’s state economic prison is not escape proof, it is now experiencing massive, unrelenting capital flight. That means that is will be forced to sell dollar and euro bonds and thereby choke its own banking system and domestic economy.
As we pointed out in a post earlier this week, China’s faltering industrial economy was more than evident in the 10% decline in freight volume it recorded during 2015——an outcome its has not experienced since Mr. Deng’s proclamation.
But this means its oil consumption will soon stop growing, and actually already has once you set aside its purchases for the strategic reserves’, which are now full.
Needless to say, sinking global oil demand from China and the EM means that oil prices will remain trapped in the $20s and the petro states will be forced to dump growing portions of their $7 trillion in sovereign wealth funds, driving both stock and bond markets lower.
That’s why Ray Dalio is so very afraid. It is only a matter of time before the risk parity machines and their imitators and confederates trigger a selling crescendo like that of October 1987.
But this time there can be no central bank rescue. The latter have already shot their wad—–expanding their collective balance sheet from $2 trillion in the mid-1990s to $21 trillion today.
But since the global economy has had its artificial boom and CapEx frenzy already, years of deflationary liquidation and correction lie ahead. Money printing has failed. Any effort by the central banks to double down on another $20 trillion of bond purchases would blow the world’s financial casinos sky high.
At the end of the day, the asset gathers will profoundly regret what they are clamoring for.
Ray Dalio talks his book as he wants the USA to do more QE to save the system. He also claims that QE will not help anyway:
(courtesy zero hedge)
Ray Dalio Admits QE Won’t Work, But Asks For More Anyway
While not as dire as his Davos forecast, in which he warned that “if assets remain correlated and things continue to move in the “wrong” direction, “there’ll be a depression”, earlier today Ray Dalio released a new Op-Ed in the FT in which the manager of the world’s largest hedge fund (excluding Apple’s Breitburn of course), once again implores the Fed and other central banks to stop tightening and boost global easing.
The reason for this is what while Dalio admits the U.S. business cycle, now in its seventh year, reflects a need to tighten monetary conditions and hike rates, the bigger threat is the long-term debt supercycle, as according to Dalio we are “near the end of the expansion phase of a long-term debt cycle, which typically lasts about 50 to 75 years.”
The irony of Dalio’s Op-Ed admits that QE has reached its limits…
What I am contending is that there are limits to spending growth financed by a combination of debt and money. When these limits are reached, it marks the end of the upward phase of the long-term debt cycle. In 1935, this scenario was dubbed “pushing on a string”.This scenario reflects the reduced ability of the world’s reserve currency central banks to be effective at easing when both interest can’t be lowered and risk premia are too low to have quantitative easing be effective.
* * *
[Now] the expected returns of bonds (and most asset classes) are relatively low in relation to the expected returns of cash.
As a result, it is difficult to push the prices of these assets up and it is easy to have them fall. And when they fall, there is a negative impact on economic growth.
When this configuration exists — and it is also the case that debt and debt service costs are high in relation to income, so that debt levels cannot be increased without reducing spending — stimulating demand is more difficult, and restraining demand is easier, than is normally the case.
… he urges the Fed and its peers to do more:
It is because of the long-term debt cycle dynamics that we are seeing global weakness and deflationary pressures that warrant global easing rather than tightening.
At such times the risks are asymmetric on the downside and it behoves central banks to err on the side of waiting until they see the whites of the eyes of inflation before tightening.
Since the dollar is the world’s most important currency, the Fed is the most important central bank for the world as well as the central bank for Americans, and as the risks are asymmetric on the downside, it is best for the world and for the US for the Fed not to tighten.
It is “best for the US”, or best for the world’s biggest hedge fund?
All of this, of course, has previously duly explained in the latest Matt King letter, in which he observes that we have now entered a liquidationist regime where thanks to EM selling of reserve assets, the global markets are collectively seeing asset prices decline while liquidity exits. However, unlike Dalio, King has the intellectual honesty to admit that the centrally-planned farce is effectively over, and that any can-kicking will only make the final rout that much more destructive.
For Dalio, whose career is to manage assets while piggybacking on a 75 year supercycle of central bank generosity, continued asset declines are a career killer and he knows it.
So what explains Dalio’s disingenuous appeal to central banks? This: “Hedge fund billionaire Ray Dalio’s key All Weather Fund, which aims to perform well in both good and bad markets, suffered annual losses for the second time in three years in 2015. The All Weather Fund returned -7% in 2015.”
Bad loans continue to pile up in Alberta as the state oil lender ATB seems to be having considerable trouble:
(courtesy zero hedge)
Bad Loans Pile Up In Alberta, As Oil Bust Weighs On State Lender
s regular readers are no doubt acutely aware, Alberta is in trouble.
The province is at the heart of Canada’s dying oil patch and crude’s inexorable decline has had adevastating economic impact.
30% of provincial revenue is derived from resources and as crude collapsed, so did oil and gas investment. O&G spending plunged by more than a third in 2015 and as provincial authorities wrote in their latest fiscal update, “weakness in the oil and gas sector has spread to other sectors of the economy.”
As the layoffs piled up, so too did the social consequences of the bust. Food bank usage rose, property crime soared, and suicide rates spiked.
The recent rally notwithstanding, the outlook for oil prices is grim. Overnight, Saudi Aramco Chairman Khalid Al-Falih announced his company hasn’t reduced its investment capacity which suggests they’ll be no abrupt about face on the supply side from Riyadh and Iran is set to ramp production by 1,000,000 barrels per day by the end of the year.
In Canada, WCS is sitting just a dollar above the marginal cost of production and Stephen Poloz didn’t do drillers any favors by eschewing a rate cut last week.
Just in case you needed another reason to fear for the worst in Alberta, Moody’s and DBRS are becoming increasingly concerned about crown corporation ATB Financial. “Alberta’s debt situation was under the microscope last week, with [the] two rating agencies taking a look at the province’s fiscal situation and economy and not liking what they saw,” CBC reports.
Part of the problem is ATB, whose loan book has doubled since the crisis. “ATB has always been a curious creature,” CBC goes on to say, adding that the lender was “created in the depths of the Great Depression, when other banks stopped offering credit in the province, its mandate has always been partly about community building.”
Yes, “community building,” which in Alberta involves lending to O&G operations.
In short, the bank’s mandate effectively means it isn’t allowed to pull back on lending when things get dicey and now, some worry its exposure to souring energy bets could end up imperiling Alberta’s finances. Here’s more from CBC:
ATB said that in the last quarter of 2015, when oil prices were still falling and jobs were being shed every day, it increased its loans to small and medium-sized businesses by nearly 30 per cent.
While access to credit is clearly good for businesses, it does lend extra risk to the province in a time when the economy is faltering.
ATB’s provision for loan losses increased by 500 per cent in the past year. It wrote off $30 million in bad energy loans in the most recent quarter.
All lenders to the energy sector in Alberta are facing the same pressures, but ATB is not diversified geographically.
It can’t lend in B.C. to offset risk in Alberta, which is another reason why Moody’s is watching the situation.
Until 2011, ATB typically had more deposits on its books than loans outstanding, but that changed as it’s worked more aggressively to gain market share.
“We are still looking at energy exposure as a mainstay of our business. Are we spending a bit more time? Are we sensitizing things carefully? Absolutely. And that’s what we should be doing. We are not a lender of last resort, but we are here to stay the course,” said Edgelow.
As of 2015, it had $37 billion outstanding in loans and $30 billion on deposit. In the fall budget, the province increased the size of ATB’s credit line by $1.5 billion so that it didn’t have to pull back on lending.
ATB’s deposits are all backed by the province.
In other words, here is a state-backed lender that’s essentially required to double down on its exposure to energy loans at the absolute worst time imaginable and there’s already a $7 billion gap between loans and deposits.
Of course continuing to finance the O&G sector means ATB is effectively contributing to the very same supply glut that caused oil to collapse in the first place.
One wonders what happens in the event the bank suddenly has to take a massive writedown on its energy book. Actually one doesn’t wonder. One knows what will happen: Alberta will have to bail the bank out, setting up a ridiculous scenario wherein provincial authorities will be forced to inject capital to cover losses on loans they forced the lender to make.
Perhaps ATB’s board should revisit the spectacular collapse of the GSEs in the US for a refresher on what happens when things go horribly awry at state-sponsored entities tasked with preserving the “dream.”
Kyle Bass Warns Of “A Lot More Pain To Come” Before This Is Over
Having recently explained his “greatest investment opportunity for the next 3 to 5 years,” Kyle Bass expands on his China discussions…
“Given our views on credit contraction in Asia, and in China in particular, let’s say they are going to go through a banking loss cycle like we went through during the Great Financial Crisis, there’s one thing that is going to happen: China is going to have to dramatically devalue its currency.”
…to focus on Emerging Markets more broadly and specifically The BRICs.
As Benzinga summed up, Bass Warns
“we still have three tough innings to go, maybe four,” he warning that emerging markets will “see a lot more pain before things are okay.”
Plenty more smoke and mirrors to be destroyed yet…
Bass talks Emerging Markets with Wall Street Week’s Gary Kaminsky…
“You look at Brazil, and the [carwash] scandal goes all the way to the President…It is a complete disaster with corruption,” he said. Bass believes that until the country roots out its corruption, the country “will keep going south.”
Russia faces issues related to “Putin’s global chess moves” and international sanctions.
Bass, meanwhile, called India a “semi-bright spot” in the grouping of countries, but didn’t delve deeper.
China, lastly, is “the big one,” according to the hedge fund manager. Bass cited the country’s non-performing loan growth as the key issue to watch.
“China many years ago attached its currency to the dollar: they hitched their wagon to our star very smartly because back then our goal was to depreciate our dollar through inflation. So we issued debt to the rest of the world to depreciate the dollar. And so now the real problem is China has hitched their wagon to our star, and their currency has effectively appreciated about 60% versus the rest of the world since 2005 and it’s killing them… China’s effective exchange rate moving up versus the rest of the world made their goods and services a little bit more expensive each year and now that labor arbitrage is gone. And if that labor arbitrage is gone, and the banking system has expanded 400% in 7 years without a nonperforming loan cycle, my view is we are going to see a non-performing loan cycle.”
This Is What The Death Of A Nation Looks Like: Venezuela Prepares For 720% Hyperinflation
For citizens of Nicolas Maduro’s socialist paradise the news is terrible, and getting worse with every passing day.
Yesterday, we reported that one year after our November 2014 forecast, Barclays has decided that Venezuela is now past the “point of no return”, and a bankruptcy in 2016 will be “difficult to avoid.” But while some may have thought that this dramatic impact, while welcome by the rest of OPEC and oil bulls around the globe, would only impact the government, the reality is that this latest hit means a total disintegration of the economy and will take the country’s already staggering hyperinflation to previously unprecedented levels.
According to the latest IMF estimate, Venezuela’s consumer inflation, already the world’s highest, will triple this year to a level above all estimates from economists surveyed by Bloomberg.
This is because the IMF, which until recently had predicted “only” 204% inflation for Venezuela, already higher than the 140% consensus, revised its numbers and now sees a mindblowing 750% hyperinflation in 2016: this means that the average price of products and services will increase over eight times over the span of the next 12 months.
Bloomberg reports that inflation will surge to 720 percent in 2016 from 275 percent last year, according to a note published by the IMF’s Western Hemisphere Director, Alejandro Werner. That’s nearly quadruple the median 184 percent estimate from 12 economists surveyed by Bloomberg, and exceeding the highest forecast of 700 percent from Nomura Securities.
Venezuela’s central bank published economic statistics Jan. 15 for the first time in a year, confirming that inflation had reached triple digits and closed the third quarter at 141.5 percent on an annual basis. As of December 2014, the last time data was released, inflation was 68.5 percent.
It has gotten so surreal, that the local central bank accused websites that track the dollar’s street value of “destroying prices” and installing a “savage” form of capitalism in the country, adding that 60 percent of inflation was the result of currency manipulation.
Whatever the cause, the reality is that real inflation is even worse, and when charted, this is what the death of a sovereign nation looks as follows (this does not assume a sovereign bankruptcy; when that happens the hyperinflation will really take off):
And when described with words:
Spiking prices and widespread shortages for even staples have driven discontent in Venezuela. That helped spur the opposition to gain control of Congress for the first time in a decade as President Nicolas Maduro attempts to turn the tide of what he has deemed an “economic emergency.”
“A lack of hard currency has led to scarcity of intermediate goods and to widespread shortages of essential goods — including food — exacting a tragic toll,” Werner said. “Prices continue to spiral out of control.”
Actually, the hard currency exists, because while locals may not have access to dollars, they certainly could have converted their now totally worthless currency into gold, thus not only preserving but boosting their purchasing power relative to the local stock market which, as we showed previously, has also generated negative returns relative to the rampaging hyperinflation.
According to Bloomberg, Venezuela’s economy will shrink 8% this year following a 10% contraction last year, according to the IMF. While these forecasts are more pessimistic than economists’ median estimates for a contraction of 4.1%, in reality the Venezuela economy no longer exists, with all transactions now taking place in the gray or black markets, and the government apparatus effectively operating in a vacuum.
Which, as we noted yesterday, is good news for oil bulls: once the now inevitable sovereign bankruptcy hits, the resulting chaos and collapse in oil production in the political and power vacuum which may last for years, will serve as just the supply drop buffer the world oil market so desperately needs.
But while that may be good news for oil traders, there is no good news in any of the above for the long-suffering citizens of this “socialist paradise” which any minute now will be downgraded to its fair value of “socialist hell.”
your early morning currency/gold and silver pricing/Asian and European bourse movements/ and interest rate settings/MONDAY morning 7:00 am
Euro/USA 1.0816 up .0027
USA/JAPAN YEN 118.41 down .355
GBP/USA 1.4245 down .0005
USA/CAN 1.4187 up .0070
Early this MONDAY morning in Europe, the Euro rose by 27 basis points, trading now just above the important 1.08 level rising to 1.0816; Europe is still reacting to deflation, announcements of massive stimulation (QE), a proxy middle east war, and the ramifications of a default at the Austrian Hypo bank, an imminent default of Greece, Glencore, Nysmark and the Ukraine, along with rising peripheral bond yield further stimulation as the EU is moving more into NIRP and the threat of continuing USA tightening by raising their interest rate / Last night the Chinese yuan was up in value (onshore). The USA/CNY down in rate at closing last night: 6.5779 / (yuan up 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 36 basis points and trading now well below that all important 120 level to 118.41 yen to the dollar.
The pound was down this morning by 5 basis point as it now trades just above the 1.42 level at 1.4245.
The Canadian dollar is now trading down 70 in basis points to 1.4187 to the dollar.
Last night, Asian bourses were mildly higher, but European bourses were trending southbound.
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 MONDAY morning: closed up 152.38 or 0.90%
Trading from Europe and Asia:
1. Europe stocks all in the red
2/ Asian bourses all in the green/ Chinese bourses: Hang Sang green (massive bubble forming) ,Shanghai in the green after central bank intervention (massive bubble bursting), Australia in the green: /Nikkei (Japan)green/India’s Sensex in the green /
Gold very early morning trading: $1106.50
Early MONDAY morning USA 10 year bond yield: 2,03% !!! down 2 in basis points from last night in basis points from FRIDAY night and it is trading BELOW resistance at 2.27-2.32%. The 30 yr bond yield rises to 2.80 down 3 in basis points. ( still policy error)
USA dollar index early MONDAY morning: 99.42 down 14 cents from FRIDAY’s close.(Now below resistance at a DXY of 100)
This ends early morning numbers MONDAY MORNING
Energy Creditors Lucky To Recover 15 Cents On The Dollar In Bankruptcy
This past Wednesday, we reported that in the latest twist of the energy sector collapse, liquidating oil and gas producers, and specifically their creditors, got a nasty lesson in trough cycle asset values when in one after another bankruptcy “stalking horse” aka 363 auction,they were not only unable to cover the outstanding debt (both secured and unsecured) through asset sales, but barely able to cover a tiny fraction of it.
“A lot of people got into this business and didn’t really understand the ups and downs of price cycles,” said Becky Roof, a managing director for turnaround and restructuring with the consulting firm AlixPartners. “They’re getting a very bad dose of reality right now.”
Becky is right as the following bankruptcy liquidation sales tabulated by Bloombergdemonstrate:
- Dune went belly up owing $144.2 million. Its assets sold for $20 million.
- In May, American Eagle Energy Corp. filed for bankruptcy with debts of $215 million. Its properties sold for $45 million in October.
- BPZ Resources Inc. owed $275.2 million. Its assets fetched about $9 million.
- Endeavour International Corp. went into bankruptcy owing $1.63 billion. The company sold some assets for $9.65 million and handed over the rest to lenders.
- ERG Resources LLC opened an auction with a minimum bid of $250 million. Response? No takers.
Then earlier today we learned that as part of its 363 Asset Sale, the 3rd largest bankruptcy of 2015 after Samson Energy and Sabine Oil, that of Quicksilver, the estate was only able to collect $245 million in cash proceeds from BlueStone Natural Resources. With $2.35 billion in debt, Quicksilver was one of the first casualties of the energy bust when it filed on March 17, 2015. Today’s news means that the recovery for its creditors is a paltry 10 cents on every dollar of total debt, most of which will go to partially satisfy secured claims.
The problem as the chart below shows is that these bankruptcy auctions confirm recoveries on existing debt will be paltry, and based on our limited dataset, average to roughly 15 cents on total debt exposure, which includes both secured and unsecured debt.
The good news is that our data set won’t remain limited for long. Here are several charts from Haynes and Boone showing why all those bankruptcy lawyers and financial advisors who were sitting back twiddling their thumbs for so many years, are now fully back in business.
First, the cumulative North American E&P bankruptcy filings, with some of the most notable filers for any given month:
Next, the cumulative debt that was gone “under” in the past year: some $17.2 billion:
Finally, the full list of all 2015 bankruptcies as of January 6.
In other words, the energy bankruptcy party is only just starting.
As a reminder, there are currently over 60 companies accounting for $325 billion in debt which are cash flow negative, a number which is about to surge as oil price hedges expire, unless of course oil manages to soar from here. If only 10% of these companies file in 2016, that would mean a doubling of the total amount of defaulted debt in 2015, and a shock to the entire US banking system which despite what it would like you to believe, it very much exposed to the next big default wave.
It’s only downhill from there.
the very large Sandridge is near bankruptcy with 4 billion uSA in debt. It has about 7 months worth of cash but if it waits the complete 7 months then it will lose the right to chapter 11 and go straight into chapter 7
(courtesy zero hedge0
SandRidge Nears Bankruptcy: Would Be Second Largest Shale Chapter 11 In Past Year
As we said two days ago when looking at the paltry recoveries on their total debt that bankrupt energy debtors are generating in liquidation and bankruptcy asset sales, “the energy bankruptcy party is only just starting.” And sure enough, overnight we learned that another company is preparing to throw in the towel following a Reuters report that SandRidge Energy – a shale oil and gas producer in the Mid-Continent region of the U.S. – is exploring debt restructuring options, “as the heavily indebted U.S. oil and gas exploration and production company struggles with the fallout from plunging energy prices.”
In reviewing the company’s options, Reuters writes that one choice is a pre-packaged bankruptcy. However, a decision on a way forward is not imminent and that the company has access to enough cash to continue doing business for at least several more months under its current structure. Other avenues SandRidge could pursue would include a debt exchange or filing for bankruptcy protection without any agreement with its creditors.
What this really means is that having struggled to come to a prepackaged bankruptcy agreement for the past few weeks with its various stakeholders (Debtwire reported on Jan. 13 that Sandridge hired Houlihan Lokey to craft a restructuring plan), the company will likely have no choice but to file a “freefall” Chapter 11 and let a bankruptcy judge decide the fate of its $4 billion in debt.
According to Reuters, the vast majority of the company’s debt is in the form of bonds owned by a plethora of mutual funds, hedge funds, and other institutional investors. They do not yet have a single representative who could be reached for comment. They will soon, and shortly thereafter the official creditor committee will become very familiar with recovery matrices that see it getting as much as 15 cents on each dollar it gave to the soon to be bankrupt energy company.
A little bit of history on SandRidge, “which made risky bets in the Mississippi Lime formation in northern Oklahoma and southern Kansas, is particularly vulnerable.”
For months, SandRidge has been caught in a bind, having just enough money to pay interest on its debt, but not enough to drill new wells or replace older ones.
Mississippi Lime wells typically do not produce as much oil as some other shale formations, and the rock also contains a lot of water, which is costly to haul away.
After an initially encouraging exploration phase, the shale play has not delivered the low cost production gains that SandRidge and Wall Street analysts expected.
About 40 energy companies entered bankruptcy in 2015 and more are expected in the next few months as oil prices have dropped by 75 percent since mid-2014.
Oklahoma-based SandRidge was founded in 2006 by former CEO Tom Ward, a previous executive and co-founder of natural gas giant Chesapeake Energy Corp. Perhaps that explains why just as troubled Chesapeake may follow SandRidge into bankruptcy shortly.
Ward was ousted by SandRidge’s board in 2013 after some of SandRidge’s largest investors alleged governance lapses and strategic missteps, including transactions SandRidge had made with entities controlled by the Ward family. His exit package from the firm was worth around $90 million. A request for comment at Ward’s new Oklahoma City-based company, Tapstone Energy, was not immediately returned.
More notably, SandRidge attracted the ire of Oklahoma regulators over its use of wells to dispose of wastewater, an activity that is believed to trigger earthquakes. Last week, the company agreed to shut seven wells in the state and reduce the amount of wastewater injected into roughly 40 others.
For now, the biggest threat facing the company especially as it enters a protracted reorganization and potential bankruptcy, will be to raise cash so it can avoid a liquidation. To do that SandRidge has put its headquarters in Oklahoma City up for sale in May, but has yet to find a buyer. In April, it laid off at least 130 employees, or 20 percent of its workforce based there, public records show. It has also previously used a distressed debt exchange with creditors to lighten its debt load. Had it only waited a little longer, it could have bought its bonds back even cheaper: its Jan. 15 2020 notes at below 5 cents on the dollar.
SandRidge had $790 million in cash and access to undrawn credit facilities that gave it access to capital totaling $1.9 billion, chief financial officer Julian Bott said on the company’s latest quarterly earnings call on Nov. 5. This has given the company breathing room of several more months to decide on a way forward, as well as scope to pursue another debt exchange.
Of course, if it waits the full seven months in desperate hopes that oil rebounds and it doesn’t, instead of a Chapter 11 Sandridge may not pass go and proceed straight to a Chapter 7.
To be sure, a SandRidge bankruptcy will hardly come as a surprise: as of earlier this month, SandRidge’s shares are no longer listed on the New York Stock Exchange, and trade on the OTC Pink marketplace instead with a market capitalization of around $30 million.
Finally, assuming $4 billion in debt SandRidge does file, that would make it the second largest bankruptcy since the default wave started in earnes last year, putting it behind only Samson Resources with its $4.3 billion, and ahead of both Sabine Oil and QuickSilver.
Security Woes Threaten OPEC’s Second Largest Producer
Iraq has been one of the key contributors to the uptick in OPEC oil production over the past year and a half. Despite the fact that the country’s crude oil output has continuously been plagued by security concerns and faltering payments to international oil companies from both the Kurdish regional government (KRG) and Baghdad and an ongoing row over oil export rights, it has still managed to ramp up production to record levels.
Iraq’s consistent and record oil output last year is, by and large, contributable to the production in the south of the country. According to a January 16. Reuters report, exports from its southern region have been running at 3.297 million barrels per day (bpd) so far in January, representing around 75 percent of the country’s total production.
Iraq’s South Oil Co.’s Deputy Director Salah Mahdi told Reuters in an interview that Iraq’s southern oil exports have been running smooth over the last year and in spite of recent tribal violence in the region, he expects the company’s drilling and export activities to continue undisturbed in 2016.
Figure 1: Iraqi oil output in 2015 in thousands of barrels per day
(Click to enlarge)
The above chart gives a good view of the production increases of Iraqi oil in 2015. The latest OPEC Monthly Oil Report shows a slight decline in Iraq’s production output in December 2015.
OPEC has Iraq’s oil production at 4,309 mmbpd in December and estimates its rig count at 51.
No reason to worry about Iraq’s oil future it seems… or is there?
As mentioned, the lion share of Iraq’s oil is produced by Iraq’s South Oil Co. around its main export facility, in the province of Basra. The chart below shows the oil deposits in Iraq and all the yellow spots are either giant or supergiant oil fields.
Figure 2: Iraq’s oil deposits and (super) giant oilfields
(Click to enlarge)
Image source: Harvard world map
Even though the oil production around Basra is relatively far away from the ISIS controlled areas in Iraq and Syria, it was the same Iraqi government which was unable to prevent the fall of Mosul, Iraq’s second city, and Ramadi, which has supposedly been liberated from ISIS, although the city is far from safe yet.
As coalition and Russian airstrikes continue to bomb ISIS positions in Syria and Iraq, the terror group is likely to continue to lose territory and influence but if we have learned anything it is that this is could be a long and protracted process. See chart 3 below for the ISIS controlled and contested areas in Iraq and Syria.
Figure 3: ISIS controlled and contested areas in the Middle East
(Click to enlarge)
Image Source: ISW
As the fight against ISIS continues in the north and west of Iraq, Shiite tribal violence has noticeably increased in Iraq’s Basra province after the withdrawal of security forces. The vacuum has given plenty opportunity for tribal militias and criminal gangs to take a hold of the province’ main connecting roads with robberies, kidnappings and hijackings as a result. Last October, the South Iraq Oil Co. itself became victim of the violence as gunmen stole $500,000 in salaries from the company.
Although significant damage to oil assets has so far not been reported, most of the uproar has been dangerously close to the major – 200,000+ bpd – Qurna and Majnoon oilfields in which Shell and ExxonMobil are operating.
Recently, the Baghdad government has seen some success in suppressing the violence after moving in a complete army division and an intelligence unit in order to secure oil assets and bring down tensions in the oil rich city. Many however doubt the effectiveness of this military operation as local tribal clans as well as the local population resent the Baghdad government, with which they do not wish to share their oil profits.
This tension and resentment should be a concern for the Baghdad government as it relies for around 95 percent on oil exports. Government revenues are down sharply with the fall in oil prices – oil prices are down about 70 percent since 2014 and already down 30 percent since the beginning of this year. Not to mention the discount Iraq is forced to give on its crude as competition has grown fierce over the last months.
Is it pump or drown for Iraq in 2016?
Iraq’s total oil output currently stands at around 4.3 million barrels per day. The important question is if Iraq can keep up these production levels in the current oil price environment.
Iraq has recently reached out to some of the world’s oil majors in an attempt to secure investment for its southern oil fields as some of its legacy oil fields are in decline. The Iraqi oil ministry and the Iraqi South Oil Co. are wooing ExxonMobil and PetroChina for a multi-billion dollar enhanced recovery project to boost production in some of the declining oil fields. The before mentioned Qurna West and Majnoon oilfields are also set to be revived using enhanced oil recovery techniques.
But as oil majors are massively scrapping new projects and have simultaneously cut their capital expenditure, not only are megaprojects and offshore projects being shunned but also oil projects that carry a high political or security risk may end up being left out.
Royal Dutch Shell has already announced that it will suspend new investment in further development of the Majnoon field and ExxonMobil has not shown itself too eager to take part in the multi-billion dollar development of Iraq’s southern oil fields.
In spite of its deteriorating security situation in the south and the decreasing interest to invest in its new oil developments, one should note that Iraq, together with Iran and Saudi Arabia still have some of the lowest breakeven costs to extract a barrel of crude on a global scale (see below chart).
Figure 4: Breakeven cost estimate per barrel of crude oil
(Click to enlarge)
Source: Alliance Bernstein, October 2014
The question if OPEC’s second largest member can continue to ramp up its oil production significantly in 2016 will depend first and foremost on the Iraqi government’s ability to reimburse international oil drillers who invest in oil projects (Iraq uses a sort of unique model to reimburse international oil companies that invest in its oil projects).
September 30th of last year, the Iraqi government had to ask international oil companies to scale down investments in order to be able to secure revenue payments to these companies in 2016 as it foresaw lower revenues due the drop in oil prices. It is most likely that this message has impacted the willingness and ability of the bigger foreign oil companies to invest and further develop Iraq’s southern oil fields.
Secondly and equally important, Iraq’s ability to provide a secure environment for its oil producing personnel and assets will determine how success these investment become. Lastly, a possible OPEC decision to stage a production cut, in which Iraq would have to participate, could alter output levels.
Considering all of this, it seems unlikely that Iraq will see any meaningful gains in production in 2016.
Portuguese 10 year bond yield: 3.04% up 11 in basis points from FRIDAY
Let’s close with this discussion with Michael Pento and Greg Hunter
(courtesy Greg Hunter/USAWatchdog/Michael Pento/)
Well that about does it for tonight
I will see you tomorrow night