Gold: $1157.60 up $16.30 (comex closing time)
Silver 14.84 up 12 cents
In the access market 5:15 pm
Gold $1155.60
Silver: $14.86
Tomorrow is the jobs report (Non Farm Payrolls), and you know that gold and silver trade with huge volatility on the release of the data.
At the gold comex today, we had a poor delivery day, registering 1 notice for 100 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 202.66 tonnes for a loss of 100 tonnes over that period.
In silver, the open interest rose by a gigantic 6,841 contracts up to 164,775. In ounces, the OI is still represented by .824 billion oz or 118% of annual global silver production (ex Russia ex China).
In silver we had 0 notices served upon for nil oz.
In gold, the total comex gold OI rose by a huge 6,982 contracts to 386,167 contracts as gold was up $13.00 with yesterday’s trading.
We had a huge change in gold inventory at the GLD, another deposit of 8.03 tonnes of gold / thus the inventory rests tonight at 693.62 tonnes. The appetite for gold coming from China is depleting not only gold from the LBMA and GLD but also the comex is bleeding gold. Our 670 tonnes of rock bottom inventory in GLD gold has been broken. It looks to me that China has taken the last amounts of physical gold from the GLD. I guess the only place left for China to receive physical gold, after they deplete the GLD will be the FRBNY and the comex. In silver,/we had a small change in inventory, a withdrawal of 381,000 oz and thus/Inventory rests at 308.999 million oz.
First, here is an outline of what will be discussed tonight:
1. Today, we had the open interest in silver rise by 6841 contracts up to 164,775 as silver was up 44 cents with respect to yesterday’s trading. The total OI for gold rose by 6942 contracts to 386,167 contracts as gold was up $13.00 in price from yesterday’s level.
(report Harvey)
2 a) Gold trading overnight, Goldcore
(Mark OByrne)
3. ASIAN AFFAIRS
iii) After a huge 800 basis point spread between offshore and onshore yuan, the POBC intervened last night to shorten the spread to 450 basis points in an attempt to hurt speculators like George Soros and Kyle Bass. My money will be on Soros and Bass:
iv) Sunday is the release of the USA dollar outflows in China. Consensus is around $120 billion.
We have two opposite scenarios as to what will happen with Chinese release of USA dollars outflow to defend the Yuan: Consensus is 120 billion.
i)Grim results for Swiss bank Credit Suisse as it posts a huge 5.8 billion dollars Q4 loss.
iii)European bank risk soars to 3 year highs as well as the USA banks. Big trouble ahead:( zero hedge)
iv) The Bank of England cuts its growth forecast. The Eurozone slashes inflation outlook as Draghi prepares another jawboning to deepen NIRP:
v) Take a look at Deutsche bank’s credit default swaps and their contingent convertible bonds. These bonds are convertible into equity first upon a bail in at the bank.
vi) Greeks unhappy with the government pension reform initiated a general strike and chaos ensued:
vii) S and P downgrades Glencore to one step above junk. A junk rating
ii) Looks like Saudi Arabia is not happy that Aleppo will fall. They are now ready to send ground troops into Syria which will throw the entire middle east into chaos:
Venezuela has only $10 billion in reserves, It earns only 8 billion in revenue and yet imports into the country total $37 billion. It is so hopelessly bust that it looks like we will have a disorderly bankruptcy which will cause harm to many:
(COURTESY London’s Financial times)
OIL MARKETS
iii)The shale cost on many counties is less than 30 dollars. Thus Saudi Arabia if their goal
iv) We now have the real reason for the huge volatility in the price of oil:
v)Obama proposes a 10 dollar per barrel tax on oil to fund government transportation investments.
That should help out with oil demand!
( zero hedge)
ii) Kuroda claims no limit to Japan’s easing. It sure looks like his gun is empty:
iii) Lars interviews Ronnie Stoeferle on gold;( Lars schall/Stoeferle/GATA)
iv) The biggy event of yesterday:
(Wigglesworth/London’s Financial times)
v)A very important commentary tonight from Bill Holter(Holter Sinclair collaboration)]
The piece is entitled:
“The Great Credit Unwind!”
iii)The following commentary is very important: the Fed released its senior officer loans report and it shows a tightening bias. This is the second straight quarter of tightening and this signals a default cycle is inevitable:
iv) USA factory orders tumble 2.9%, worse than expected. The all important inventories to sales ratio soars, and this is a pretty good indicator of a recession ahead of us:( zero hedge)
v)No doubt that GLD and SLV are two the ETF’s mentioned in the two anonymous whistleblowers to the SEC:
vii) Another important commentary!! Dave Kranzler and Mike Maloney have discovered that the Fed has withdrawn 19 billion from its capital account at the Fed and right now it is deficient by 75% of required funds. Kranzler believes that a major bank has an oil default problem and thus the urgent need of that $19 billion to fill a gaping hole:
And now your overnight trading in gold, THURSDAY MORNING and also physical stories that may interest you:
Gold Prices To 3 Month High As Investors Sell Risky Assets
Gold prices have continued to eke out further gains today. The very poor ISM data yesterday saw the dollar fall against all major currencies and particularly gold.
Bullion is seeing safe haven flows and gains due to increased concerns about the economic outlook. The narrative that the US economy is in recovery is coming into doubt. The weaker than expected ISM data showed a sharp slowdown in the services sector in the U.S. in January.
Gold in USD – 1 Month – GoldCore.com
This means that the Fed will be more likely to put interest rates on hold. Indeed, as we have long contended we believe that the Fed may in time have to decrease interest rates and may follow other leading central banks and have to adopt negative interest rates in the coming months.
Concerns about the global economy slowing down had seen falls in Asian and European share indices and this was the initial impetus for gold to go higher yesterday.
Stocks have come under pressure again in recent days as corporate earnings have disappointed and earning forecasts are being revised lower.
There are also increasing concerns about banks and bank shares have taken a hammering in recent days. Credit Suisse reported worse than expected fourth-quarter results that sent the bank’s shares to a 24-year low and Deutsche Bank shares have fallen 20 per cent since they issued a profit warning on January 20.
Gold has broken above the 200 day moving average which is bullish from a technical perspective. Were it to close above this level this week, it would suggest we may see further gains in February.
LBMA Gold Prices
4 Feb: USD 1,146.25, EUR 1,027.29 and GBP 782.16 per ounce
3 Feb: USD 1,130.00, EUR 1,034.04 and GBP 781.25 per ounce
2 Feb: USD 1,123.60, EUR 1,029.65 and GBP 780.01 per ounce
1 Feb: USD 1,122.00, EUR 1,032.86 and GBP 785.60 per ounce
29 Jan: USD 1,112.90, EUR 1,019.89 and GBP 776.84 per ounce
Gold and Silver News and Commentary
“Dollar weakness and the poor ISM number are the primary drivers this afternoon,” said GoldCore – Reuters via CNBC
“Increased concerns about the economic outlook” said GoldCore – Marketwatch
Click here
Yesterday’s v-shaped recovery is disappearing fast as the USD dumpage continues. Gold, Silver, and Treasuries are aggressively bid as stocks and credit plunge in the pre-market…
The USDollar is dumping…
Stocks are tumbling…
Bullion is best…
And Bonds are bid…
Japanese central banker claims omnipotence for devaluing currency
Submitted by cpowell on Wed, 2016-02-03 15:15. Section: Daily Dispatches
Go, Haruhiko, go!
* * *
‘No Limit’ to Japan Easing, Says Kuroda
By Robin Harding
Financial Times, London
Wednesday, February 3, 2016
TOYKO — Haruhiko Kuroda said there was “no limit” to monetary easing as he vowed to slash Japanese interest rates deeper into negative territory if necessary.
In his first speech since last week’s surprise cut in interest rates to minus 0.1 per cent, the Bank of Japan governor said there was more room to ease and that he would invent new tools rather than give up his goal of 2 per cent inflation.
“Going forward, if judged necessary, it is possible to cut the interest rate further from the current level of minus 0.1 per cent,” said Mr Kuroda, pointing to the Swiss National Bank at minus 0.75 per cent and the Riksbank at minus 1.1 per cent, as examples of what the BoJ could do.
The speech raises the chances of future monetary easing in Japan, signalling that Mr Kuroda is fully committed to negative interest rates despite ruling them out for months before a sudden change of heart.
In a paean to the magnificence of central banks — delivered despite the global weakness of inflation — he declared they were close to conquering the problem that interest rates cannot go below zero.
“The constraint of the ‘zero lower bound’ on a nominal interest rate, which was believed to be impossible to conquer, has been almost overcome by the wisdom and practice of central banks, including those of the Bank of Japan,” said Mr Kuroda.
“It is no exaggeration that [ours] is the most powerful monetary policy framework in the history of modern central banking,” he said. …
… For the remainder of the report:
http://www.ft.com/intl/cms/s/0/189c944a-ca38-11e5-be0b-b7ece4e953a0.html
end
Lars interviews Ronnie Stoeferle on gold;
(courtesy Lars schall/Stoeferle/GATA)
Gold figures heavily in Lars Schall’s tremendous interview with Ronnie Stoeferle
Submitted by cpowell on Thu, 2016-02-04 00:51. Section: Daily Dispatches
7:50p ET Wednesday, February 3, 2016
Dear Friend of GATA and Gold:
Writing for Matterhorn Asset Management’s Gold Switzerland Internet site, financial journalist Lars Schall has done a tremendous interview with fund manager Ronnie Stoeferle of Incrementum AG in Liechtenstein, covering, among other things, the increasingly positive prospects for gold, intervention by central banks against the gold price, gold’s continuing centrality in the world financial system, the importance of the gold-silver price ratio, China’s purposes for gold, the likelihood of more monetary debasement by central banks, and the perspective brought to the markets by the Austrian school of economics. The interview is 31 minutes long but there’s a transcript as well and both are posted at GoldSwitzerland here:
https://goldswitzerland.com/ronald-stoeferle-the-matterhorn-interview-ja…
CHRIS POWELL, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.
CPowell@GATA.org
end
The biggy event of yesterday:
(Wigglesworth/London’s Financial times)
NY Fed prez hints it’s one-and-done for interest rate hikes
Submitted by cpowell on Thu, 2016-02-04 00:57. Section: Daily Dispatches
Dudley Flags Tight Conditions Ahead of Fed Meeting
Sam Fleming and Robin Wigglesworth
Financial Times, London
Wednesday, February 3, 2016
Global financial conditions have tightened markedly since the Federal Reserve lifted interest rates in December and the central bank will have to take that into account if the situation persists into March, the president of the New York Fed has said.
The words from Bill Dudley came as financial markets ratcheted back expectations of rate rises further, with traders now expecting no move at all in 2016 — in sharp contrast to Fed policymakers’ last forecasts in December.
Mr Dudley said that the recent turmoil in financial markets could alter the outlook for growth and risks to the economy, adding that if the global economy were to hit a roadblock, triggering a further surge in the dollar, “it could have significant consequences back to the US.”
His comments in an interview with MNI are an acknowledgment of how sharply the backdrop has changed since the Fed boosted rates by a quarter point in December. …
… For the remainder of the report:
http://www.ft.com/intl/cms/s/0/5966a182-ca92-11e5-a8ef-ea66e967dd44.html
end
The actual article from London’s Financial times
|
A must see!!
(courtesy Greg Hunter/Hugo Salinas Price)
USA Watchdog’s Greg Hunter interviews Hugo Salinas Price on gold revaluation
Submitted by cpowell on Thu, 2016-02-04 01:55. Section: Daily Dispatches
8:54p ET Wednesday, February 3, 2016
Dear Friend of GATA and Gold:
Monetary metals advocate Hugo Salinas Price, president of the Mexican Civic Association for Silver, explains today in an interview with USA Watchdog’s Greg Hunter why he expects a worldwide depression caused by excessive debt and then an official revaluation of gold to devalue debt. The interview, 24 minutes long, is especially nice because it’s a video interview and you can see the two participants. It’s posted at USA Watchdog’s Internet site here:
http://usawatchdog.com/world-going-into-nasty-depression-hugo-salinas-pr…
CHRIS POWELL, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.
CPowell@GATA.org
end
A very important commentary tonight from Bill Holter
(Holter Sinclair collaboration)]
The Great Credit Unwind!
Dear CIGAs,
The action in nearly all markets worldwide changed on a dime since January 1st. I am not sure “what or why” the change coincided so closely with the calendar year but the rate hike by the Fed is the leading candidate. As for the real global economy, there is certainly evidence the weakness of late last year has deepened significantly. The pace of collapse has shifted gears as evidenced by trade, earnings and even central banks. Japan’s new policy of negative interest rates followed by new Fed trial balloons of same speak volumes about “stress”.
Another area of stress is change in the action on COMEX. I have documented over the past year several delivery months where there were more contracts standing than registered gold available for delivery. The current Feb. contract has gone past first notice day with 13.3 tons of gold standing for 4.5 tons of registered gold. A very good synopsis of this was done yesterday by Craig Hemke at TF Metals Connecting The Comex Dots I encourage you to read this as Craig documents the recent shell game with inventory.
It is important to understand there are huge changes going on at COMEX. First I need to correct something I wrote last week. I said “it doesn’t make sense for the shorts to not deliver on the first or second day of the delivery period and wait until the end of the month”. This is absolutely correct, but I wrote this in late Jan. … so the deliveries we saw were some FIFTY PLUS days after the delivery period began on Dec. 1st! Are they really allowed to wait 55 days to make a delivery? Just to make it clear, it make no sense whatsoever to not make a delivery on day one or two because the storage costs must be paid. I absolutely stand by the most obvious reason not to deliver is because the gold was not available. “Waiting” to deliver earns NOTHING and costs money, Wall Street does not work this way!
We are also seeing another VERY BIG change in this delivery month. While we saw very few “serves” early in delivery months in the last couple of years, this has changed. We saw 58 on Monday, 546 Tues., and 158 on Wednesday. It is my opinion we are now seeing serious rebellion in the queue! It has been contended which I firmly agree with, “cash settlement” with premium has been prevalent on the COMEX for quite some time. I now believe there are some standing and DEMANDING delivery and refusing cash. This I believe is evidenced by gold in backwardation all the way out to October. I won’t spend the time to explain again why here, but backwardation CANNOT exist in gold in a correctly functioning market and one where the rule of law actually exists.
No matter how big of an apologist you are, it cannot be argued that a situation where more gold standing for delivery than is claimed to exist is a “good” thing. This is a VERY dangerous situation of potential default and one where by hook or by crook has been avoided to this point. Is it this delivery month where delivery fails? I do not know. I do know we live in a world where China is importing every single gold ounce produced on the planet leaving nothing else leftover for the rest of the world. This situation can only last or continue as long as vaults have gold and the owners are willing to fill the deficit between supply and demand. I will say this, the global financial system will completely seize up and close for trading once gold delivery fails. This will only take 48 hours after a failure, and the ability to procure metal, sell stocks and bonds, or do anything else financial will not be an option.
Liquidity is drying up and no Ponzi scheme can survive without “new juice”! A very basic and core problem with no solution other than resetting, rebooting and revamping the system itself! We are living a global margin call that cannot be met. The system is clearly broken and you do not need to be a rocket scientist or even have higher than an 8th grade education to understand this. No matter what you look at, it is clear something is very very wrong. I have written I believed a force majeure will occur within the gold and silver complexes. I have written of “truth bombs” being dropped by Mr. Putin The Ultimate “Truth Bomb” – The East Knows The West Is Bankrupt and the Chinese holding a silver “Kill Switch” in China http://www.silverseek.com/article/kill-switch-13503?quicktabs_most_popular_tabs=0 . A financial failure larger than any and all past crashes will end in social unrest all over the world. When credit ceases and breaks down, it will be felt first and foremost in “distribution”. The distribution of everyday and necessary goods will be interrupted. Empty stomachs will fan the flames of angry mobs. Those who have lost the fruit from their life’s work will be more interested in their next meal versus wealth. I stand by everything I have written on these topics. The greatest credit unwind of all time is unfolding right now before your very eyes!
I am sure this article will fan the flames in “troll town”! Please attack the logic, do not say “it will never happen because it has not”. Do not point at the prices of gold and silver and say “see, you are wrong”. The manipulation of markets, all markets is so obvious even an idiot can see it with very dark sunglasses on! I expect we will see “gap” openings in nearly everything very shortly … Please do something, anything, to protect yourself and loved ones!
Standing watch,
Bill Holter
Holter-Sinclair collaboration
Comments welcome, bholter@hotmail.com
end
And now your overnight THURSDAY morning trades in bourses, currencies and interest rate from Asia and Europe:
1 Chinese yuan vs USA dollar/yuan RISES to 6.5743 / Shanghai bourse: in the GREEN by 1.52 % / hang sang: GREEN
2 Nikkei closed down 146.26 or.85%
3. Europe stocks mixed /USA dollar index DOWN to 96.61/Euro UP to 1.187
3b Japan 10 year bond yield: FALLS TO .057 !!!!(Japan buying 100% of bond issuance)/Japanese yen vs usa cross now at 117.55
3c Nikkei now well below 18,000
3d USA/Yen rate now well below the important 120 barrier this morning
3e WTI:: 32.47 and Brent: 34.71
3f Gold up /Yen UP
3g Japan is to buy the equivalent of 108 billion uSA dollars worth of bond per month or $1.3 trillion. Japan’s GDP equals 5 trillion usa.
Japan to buy 100% of all new Japanese debt and by 2018 they will have 25% of all Japanese debt. Fifty percent of Japanese budget financed with debt.
3h Oil UP for WTI and DOWN for Brent this morning
3i European bond buying continues to push yields lower on all fronts in the EMU. German 10 yr bund falls to 0.293% German bunds in negative yields from 7 years out
Greece sees its 2 year rate fall to 11.27%/:
3j Greek 10 year bond yield fall to : 9.35% (yield curve deeply inverted)
3k Gold at $1149.50/silver $14.83 (7:45 am est)
3l USA vs Russian rouble; (Russian rouble down 8/100 in roubles/dollar) 76.88
3m oil into the 32 dollar handle for WTI and 34 handle for Brent/
3n Higher foreign deposits out of China sees huge risk of outflows and a currency depreciation (already upon us). This can spell financial disaster for the rest of the world/China forced to do QE!! as it lowers its yuan value to the dollar/expect a huge devaluation imminently from POBC.
JAPAN ON JAN 29.2016 INITIATES NIRP
30 SNB (Swiss National Bank) still intervening again in the markets driving down the SF. It is not working: USA/SF this morning 0.9983 as the Swiss Franc is still rising against most currencies. Euro vs SF is 1.1117 well above the floor set by the Swiss Finance Minister. Thomas Jordan, chief of the Swiss National Bank continues to purchase euros trying to lower value of the Swiss Franc.
3p Britain’s serious fraud squad investigating the Bank of England on criminal charges/arrests 10 traders for Euribor manipulation
3r the 7 year German bund now in negative territory with the 10 year falls to + .293%/German 7 year rate negative%!!!
3s The Greece ELA at 71.5 billion euros,
The bank withdrawals were causing massive hardship to the Greek bank. the Greek referendum voted overwhelming “NO”. Next step for Greece will be the recapitalization of the banks and that will be difficult.
4. USA 10 year treasury bond at 1.896% early this morning. Thirty year rate at 2.72% /POLICY ERROR)
5. Details Ransquawk, Bloomberg, Deutsche bank/Jim Reid.
(courtesy Jim Reid/Bloomberg/Deutsche bank/zero hedge)
Futures Flat As Dollar Weakness Persists, Crude Rally Fizzles
After yesterday’s torrid, chaotic moves in the market, where an initial drop in stocks was quickly pared and led to a surge into the close after a weaker dollar on the heels of even more disappointing US data and Bill Dudley’s “serious consequences” speech sent oil soaring and put the “Fed Relent” scenario squarely back on the table, overnight we have seen more global equity strength on the back of a weaker dollar, even if said weakness hurt Kuroda’s post-NIRP world and the Nikkei erased virtually all losses since last Friday’s surprising negative rate announcement. Oil and metals also rose piggybacking on the continued dollar weakness as the word’s most crowded trade was suddenly shaken out.
“We’ve seen commodities across the board in a swift move higher, with the common denominator the weaker dollar,” said Robin Bhar, a London-based analyst at Societe Generale SA. “Everything from gold to oil has benefited. Dwindling expectations of higher rates are affecting markets across the board. Clearly the Fed may struggle to raise rates more than once or twice this year.”
Oil was largely unchanged after rebounding from its biggest drop in almost seven years. Futures were fractionally in the green at $32.36 a barrel after earlier climbing as much as 2.1%. Continuing the on again/off again “OPEC emergency meeting” theme, Venezuelan oil minister Eulogio Del Pino says 6 OPEC members are open to holding an emergency meeting if one is called. To be sure, Saudi Arabia will just say no, while those who are trying to discover which OPEC oil exporters will go bankrupt first, look no further than these 6 countries.
In other oily news, Shell reported its 4Q profit dropped 44% on tumbling crude prices. Elsewhere, Aramco cut its March Arab Light crude price to Asia by 20c, while leaving March Light crude pricing to U.S. unchanged.
“Seems to be the market is trying to settle into a $30-$35 range — it seems when we get to around $30 we see some verbal intervention come in with the reaction to buy more driving prices toward $35 before we run out of steam,” says Saxo Bank head of commodity strategy Ole Hansen. “Traders are coming back in today and seeing price levels they probably didn’t expect at this time yesterday.”
Looking forward, while the US docket has a lot of macro data and at least two central bank speakers on deck, the key tell will be how stocks respond to data: if bad news is once again good for stocks, one can bury the rate hike narrative and just sit back and await admission from Yellen that it has relented and that, as Goldman hinted last night, the number of rate cuts will be dropped from 4 to 3, 2, 1 or even 0 as the US economy stalls.
For now, here is where we stand:
- S&P 500 futures up 0.1% to 1910
- Stoxx 600 up 0.5% to 331
- FTSE 100 up 1.5% to 5922
- DAX up 0.7% to 9502
- German 10Yr yield up 4bps to 0.32%
- Italian 10Yr yield up 7bps to 1.51%
- Spanish 10Yr yield up 8bps to 1.63%
- MSCI Asia Pacific up 1% to 121
- Nikkei 225 down 0.9% to 17045
- Hang Seng up 1% to 19183
- Shanghai Composite up 1.5% to 2781
- S&P/ASX 200 up 2.1% to 4980
- US 10-yr yield up 2bps to 1.91%
- Dollar Index down 0.63% to 96.67
- WTI Crude futures up 0.9% to $32.57
- Brent Futures up 0.5% to $35.20
- Gold spot up 0.4% to $1,147
- Silver spot up 0.6% to $14.78
Looking at regional markets around the globe, we start in Asia where equities traded mostly in the green, bolstered by the turn around in energy stocks following WTI crude futures rising by over 8% in the US, while also drawing comfort from a late rally on Wall Street. As such, the ASX 200 (+2.1 %) had been underpinned by energy and material names, while the Shanghai Comp (+1.5%) was also led higher by the energy, in addition the PBoC strengthened the CNY by the most since December 4th. However, Nikkei 225 (-0.9%) bucked the trend as exporters felt the brunt from the recent strength in the JPY, subsequently erased the majority of its BoJ stimulus inspired gains. JGBs finished trade flat in what was quiet session for Japanese paper.
Asia Top News
- China Sets 6.5% to 7% Growth Target, First Range Since 1990s: NDRC chief says downward pressure on growth “relatively big”
- Sharp Soars on Report It’s Giving Preference to Foxconn Bid: Deal would hand Apple iPhone assembler surprise victory
- Sharp Says Bailout Talks to Continue With Both Foxconn, INCJ
- Sharp Reports Fifth Straight Loss as Bailout Talks Continue
- Toshiba Widens Loss Outlook Amid Accounting Scandal Fallout: Net loss is expected to be a record 710b yen ($6b) in FY ending March; compares with an earlier forecast for a 550b yen loss and 505.5b yen loss analyst est.
- Japan Tobacco Forecast Below Estimates Amid Stalling Sales: Sees FY oper profit forecast 566b yen vs est. 607.8b yen.
- China’s Catch-22 Signals Stronger Yuan Surprise to Goldman Sachs: Higher yuan fixings to drive rally in risk assets, Brooks says
- Citigroup Plans Sale of Yen Bonds After BOJ Minus Rate Policy: Would be first yen bond by major foreign issuer since BOJ move
- China’s Biggest Ponzi Scheme Shows Rot in Internet Financing: Regulator says 1,000 of China’s 3,600 P2P sites are “problematic”
Another choppy session for European equities, which have largely remained in positive territory since the open, but endured some volatility. The USD has been the main driver of price action over the past 24 hours which has continued it’s trend lower following dovish comments from the Fed and disappointing US data. Consequently an uptick has been seen in oil; WTI Mar’16 and Brent April’16 have taken USD 32.00 and USD 35.00 handles respectively, leading to an uptick in the energy sector which outperforms in Europe and bolsters indices.
European Top News
- EU Slashes 2015 Inflation Forecast to 0.5% as Growth Seen Slower: Cut its prediction for euro-area economic expansion to 1.7% of GDP this yr, down from a 1.8% forecast in Nov.
- EU Cuts U.K. Economic Outlook, Says Output Gap Has Closed: Sees GDP rising 2.1% in 2016 and 2017, down from the 2.4% and and 2.2% forecasts in Nov.
- Daimler Strikes Cautious Tone, Citing More Risks in Economy: Sees only slight gains in rev. and earnings this year, with the rate of increase in unit sales “rather lower” than in 2015
- Draghi Says Weak Global Inflation No Reason for ECB Inaction: Draghi said the fact that inflation is weak globally won’t stop ECB from adding stimulus for the euro area if needed
- ChemChina Said to Seek Jumbo Commitments on Syngenta Bridge Loan: Banks asked to contribute $5b each to acquisition loan
- Vodafone Service Revenue Shows Europe Rebound, Asian Growth: 3Q organic service rev. growth of 1.4% matches ests., reaffirms its earnings forecast for the full yr
- Beijing Enterprises to Buy EEW as China Acquisitions Ramp Up: Agreed to buy energy-from-waste company EEW from EQT Partners for EU1.44b
- AstraZeneca Sees 2016 Profit Dip as Crestor Gets Competition: 2016 sales to fall by low to mid single-digit percentage; core oper. profit per share will fall by a low to mid single-digit percentage from $4.26 last yr; 4Q core EPS 94c vs est. 94c
- Munich Re Jumps Most in Four Years After Dividend Beats Forecast: Proposes dividend of EU8.25 a share for 2015 vs Bloomberg div. forecast of EU8; 4Q earnings unchanged at EU700m
- Goldman Sees Pound Tumbling by as Much as 20% on ‘Brexit:’ Bank predicts decline to $1.15-$1.20 if U.K. leaves EU
- Osborne Hails EU Pact for Protecting London as Finance Capital
- Statoil Deepens Cuts to Maintain Dividends Amid Crude Slump: Statoil cuts investments to $13b, 35% lower than 2014; introduces scrip dividend, maintains 22c for quarter
- Biggest Danish Mortgage Bank Seeks IPO as Capital Woes Mount: Nykredit is seeking an IPO as looks for ways to generate enough funds to meet increasingly heavy capital requirements
In FX, it has been all about the dollar: the Bloomberg Dollar Spot Index, a gauge of the greenback against 10 major peers, retreated 0.4 percent after sliding as much as 1.9 percent last session.
Yesterday’s sharp turn in the USD set the tone for early European trade, with the constant questioning on whether the Fed should hike again finally taking its toll on the greenback. As stocks and Oil were in the red, USD/JPY took the brunt of the action, but with the inverse relationship with commodities lifting Oil, stocks soon followed. The yen gained 0.1 percent to 117.73 per dollar following a 1.7 percent surge, while the euro traded at $1.1118.
This has tempered losses here, attentions switching to the rest of the majors. EUR gains have extended towards 1.1200 now, while AUD and NZD tip 0.7200 and 0.6700 respectively, but CAD gains have really gathered momentum with Oil higher, with 1.3700 the latest big figure breach.
The won strengthened the most since October after falling every other day this week. The ringgit climbed 1.6 percent, buoyed by crude’s recovery given Malaysia is Asia’s only major net exporter of oil. A Bloomberg gauge of emerging-market currencies climbed 0.2 percent after rallying 1.2 percent on Wednesday.
The pound extended its biggest jump since October before the BOE’s interest-rate decision and economic forecasts. Cable gains may be seen to be a little audacious ahead of the BoE/QIR, but we have still managed to push new highs through the 1.4600’s. EUR/GBP back above 0.7600 though. EM also on the mend, BRL and TRY outperforming RUB, MXN and ZAR for now.
In commodities, WTI and Brent are rather flat on the session as markets take a breather following the dramatic price action in yesterday’s session. The OPEC saga takes a back seat for now and there is no more news on that front anyway. Instead the USD dictates price action in oil, with the risk event in that respect coming in tomorrow’s NFP report.
Gold remained near yesterday’s highs in European trade having posted the best day of gains in 2-weeks yesterday, to trade above USD 1140, a level which it has not taken since early November. This came after dovish comments from the Fed and disappointing US data including services and ISM non-manufacturing PMI’s which saw the USD soften.
The Bloomberg Commodity Index, which measures returns on raw materials, extended the previous session’s advance as it rallied 0.6 percent.
Statoil ASA, Norway’s biggest oil company, deepened investment cuts and offered to pay dividends in stock as a collapse in crude prices eroded earnings. The company said it plans to reduce capital expenditure to $13 billion this year from a revised $14.7 billion in 2015, after reporting a 63 percent drop in fourth-quarter profit on Thursday. Statoil boosted a target for 2016 cost savings to $2.5 billion from $1.7 billion.
Spot gold climbed for a fifth day, the longest run of gains in five months, as expectations of continued low U.S. interest rates seeped through the market. The metal soared to the highest in three months at $1,147.47 an ounce. Investors increased holdings in exchange traded funds for a 13th time, the longest run in three years.
Aluminum for delivery in three months climbed to the highest this year on the LME, reaching $1,543.50 a metric ton, and lead advanced for the eighth day in a row, the longest run since June 2014.
On today’s calendar, we get the first estimates of Q4 nonfarm productivity (expected to fall by 2% on the back of weak output growth) and unit labour costs (expected to gain 4.3%) data, along with the latest initial jobless claims data. December factory orders data follows this along with the final revisions to January durable and capital goods orders. It’s a busy day for earnings also with 33 S&P 500 companies due to report with ConocoPhillips a highlight in the energy sector.
Top Global News:
- Credit Suisse Plunges as Investment Bank Slump Deepens Losses: 4Q net loss CHF5.8b, hurt by a goodwill impairment of CHF3.8b; biggest qtrly loss since 2008 and below the CHF4.3b loss est. of 5 analysts in a Bloomberg survey
- Redstone Tough-Guy Era May Be Drawing to a Close in Hollywood: Sumner Redstone resigned as chairman of CBS; to be replaced by CEO Les Moonves; Redstone may relinquish the executive chairmanship of Viacom
- Delta Names Bastian CEO as Anderson Departs After Merger Success: CEO Richard Anderson, will step down later this year to make way for his longtime second-in-command, Ed Bastian
- China Eases Rules on Foreign Investor Quotas, Fund Withdrawals: Relaxed restrictions on the amount of money foreign investors can bring into China, curbs on when they can take funds out, QFII allocations no longer subject to $1b cap
- Cisco to Buy Jasper for $1.4 Billion, Adding IoT Management: Closely held company helps connect new devices to Internet
- Shell 4Q Profit Drops 44% as Crude Prices Tumble: 4Q CCS net ex-items $1.8bm matches est. $1.8b
- Yum Tops Profit Estimates After Taco Bell, KFC Sales Grow: 4Q adj. EPS 68c, est. 66c, rev. $3.95b, est. $4.03b; same- stores sales gained 4% at Taco Bell and 3% at KFC
- GoPro Forecasts Another Quarter of Disappointing Sales: Sees 1Q rev. $160m-$180m vs est. $287.3m, sees FY2016 rev. $1.35b-$1.5b vs est. $1.59b; Brian McGee to succeed Jack Lazar as CFO
- Allstate Quarterly Profit Declines 41% as Auto Claims Rise: 4Q oper. EPS $1.60 vs est. $1.35
- MetLife Profit Falls 45% on Private Equity, Hedge Fund Slump: 4Q oper. EPS $1.23, est. $1.36
- Weatherford Cutting 6,000 More Jobs as Oil Downturn Worsens: Plans to lay off an additional 6,000 workers, about 15% of its workforce; follows loss of 14,000 workers in earlier cutbacks
- Oil Seen ‘Lower for Longer’ by Morgan Stanley as Forecasts Cut: Now sees oil mostly falling through 2016, compared with a previous outlook for prices to rise each quarter
- Goldman Sachs With Pimco Warn Bond Gains Will Turn Into Losses: Goldman’s Hatzius sees 10-yr yield rising to 3% by yr-end
- Price Spike on $750 Pill Was Shkreli’s, Turing Tells House: Turing, Valeant set to testify at hearing on drug pricing
- Santorum Says He’s Suspending Campaign, Endorsing Rubio
- Jefferies Said to Cut Fixed-Income Staff Linked to Mortgages
- Super Bowl Tests Twitter’s Dominance in Ads Paired With Live TV
Bulletin Headline Summary from RanSquawk and Bloomberg:
- Another choppy session for European equities, which have largely remained in positive territory since the open, but endured some volatility.
- WTI and Brent are rather flat but holding yesterday’s gains, as markets take a breather following the dramatic price action yesterday
- Today’s highlights include BoE’s ‘Super Thursday’, US weekly job numbers, factory orders and challenger job cuts and comments from Fed’s Rosengren
- Treasuries lower overnight, led by long-end, as declining consensus for further Fed rate hikes this year pressures USD, helps rally oil, global equity markets.
- Federal Reserve officials Lael Brainard and William Dudley said policy makers need to take into account tighter financial conditions when they meet next month to decide whether to raise interest rates again
- Goldman Sachs and PIMCO say bonds are poised to fall and traders aren’t prepared for how far the Federal Reserve will raise interest rates
- The slowdown in emerging economies is posing a major threat to recovery in the euro area, the European Commission said as it trimmed its 2016 growth forecast and warned inflation would be much slower than expected, cut forecast to 0.5%
- Mario Draghi said the fact that inflation is weak globally won’t stop the European Central Bank from adding stimulus for the euro area if needed
- Credit Suisse posted the biggest quarterly loss in seven years as it wrote off goodwill and set aside provisions for litigation, while a drop in trading deepened losses in the securities unit. The shares slumped to the lowest since 1991
- Jefferies cut employees from its fixed-income unit this week, with a focus on staff handling products tied to mortgages, according to people with knowledge of the matter
- As Japan’s stocks sink, pension funds are loading up. Trust banks, which buy on behalf of retirement savings managers, added ¥271 billion ($2.3 billion) of equities last week, the most since March 2009 and a net ¥1.4 trillion in 10 straight weeks of buying
- Sovereign 10Y bond yields mostly higher, led by Greece (+9bp). Asian, European stocks higher; U.S. equity-index futures rise. Crude oil, gold, copper rally
DB’s Jim Reid completes the overnight wrap
Indeed after a 2-day 11% slump which was the largest in almost seven years, WTI oil rose 8.03% yesterday to close at $32.66/bbl. The move was the second largest one-day gain in the last five months. Interestingly the huge surge came despite more scary supply data after US crude inventories were said to have risen past the 500million barrel mark for the first time since 1982 based on weekly data (although based on monthly data you’ll have to go back to 1930 to find the last time we saw higher inventory levels). We had briefly thought that headlines on the wires suggesting that Venezuela, Iran and Russia had agreed to an emergency meeting with 3 other OPEC and non-OPEC members was the cause for yesterday’s rally, however the story never really gained traction after the initial leak.
Instead, much of yesterday’s move was attributed to a huge fall in the Dollar which came about after fears of a soft non-manufacturing ISM print were realized (53.5 vs. 55.1 expected, -2.3pts from December) with concerns about the employment component in particular. Some dovish comments from the Fed’s Dudley also played a role. More on that and the data later but in terms of the price action, the Dollar index finished -1.60% weaker which was the biggest daily fall since December 3rd, while the Greenback finished down 1.70% against the Euro which was also the weakest day since the ECB failed to meet high hopes two months ago.
Risk assets swung wildly in response. Despite the gains for Oil, the S&P 500 was down as much as -1.7% in early trading as financials dragged risk assets lower. The rebound kicked into gear with around two-hours in the session left as slowly but surely the energy sector began to reflect the huge gains for Oil, eventually culminating with the S&P 500 recording a +0.50% gain. The Dow was up a more impressive +1.13% by the close although the Nasdaq (-0.28%) failed to fully recover from earlier steep falls. US credit indices mirrored the moves with CDX IG trading as much as 4bps wider intraday, before finishing 1bp tighter by the end of play.
Meanwhile in the rates space we saw 10y Treasury yields fall as low as 1.792% intraday (24 hour high-to-low range of over 10bps) and the lowest in 12 months post the data, before then tracking the Oil move and retracing much of that to finish up 4bps on the day at 1.886%. It had been a much different tone during the European session where risk assets took another hammering (Stoxx 600 -1.54%) on the back of that financials weakness while European bond yields continued their move lower. In fact, 10y Bunds (currently 0.273%) are now under 3month Treasuries for the first time since October 2007 which is another of the interesting stats one can reel off about these heavily repressed government bond markets.
This morning in Asia we’ve seen Oil extend gains in early trading (WTI +0.81%) which is generally helping equity bourses trade higher as we go to print. There’s been little additional newsflow but it hasn’t stopped the Hang Seng (+1.36%), Shanghai Comp (+1.25%), Kospi (+1.34%) and ASX (+2.13%) all following the late US rebound and posting decent gains. The Nikkei (-0.68%) is bucking the overall trend and extending the post BoJ fallout there (it’s currently just +0.16% above where it was in the minutes prior to the negative rate announcement). US equity index futures are currently up half a percent, while in credit markets the Asia iTraxx has rallied back 5bps tighter.
Meanwhile, there’s some news out of China to report as yesterday various news agencies were reporting that the head of the National Development and Reform Commission has said that China’s growth target is set to be 6.5% to 7% this year. DB’s Chief China Economist, Zhiwei Zhang, pointed out that this is the first time China has set an annual growth target in a range rather than a specific number. The growth target for 2015 was 7%. In his mind the wide target range reflects the lack of consensus on growth potential in the policy circle. He highlights that some may believe growth faces severe pressure and a lower target is conducive to more sustainable growth. While others may think cutting the target in the first year of the new five year plan period makes it difficult to achieve the overall target, which is above 6.5% on average.
Back to yesterday’s data. A big focus of that ISM non-manufacturing data (which was the weakest since February 2014) was the aforementioned weakness in the employment component which tumbled 3.9pts to 52.1 and a 12-month low. This of course comes after the soft employment component in the manufacturing ISM. Yesterday’s data does however support our US Economists view of the non-manufacturing converging (by moving lower) to the manufacturing data with the gap now shrinking to 5.3pts from 7.8pts in December. Fears of a soft payroll print on Friday were unsurprisingly raised post the data, however some pointed towards a slightly better than expected ADP employment change reading (205k vs. 195k expected) last month. Elsewhere we saw the final US services PMI revised 0.5pts lower at 53.2.
In terms of that Fedspeak then, it was the cautious comments from NY Fed President Dudley, in an interview with MNI, which initially gained attention when he warned that financial conditions have tightened considerably and that should this remain in place by the time of the March meeting, then the Fed will need to take this into account. Dudley also commented on the weakening outlook for the global economy and acknowledged that the Fed committee is assessing the implications for the labour market and inflation, as well as the balance of risks to the outlook. Later on we heard from Governor Brainard who specifically referred to weakness in emerging markets as posing a risk to US growth. Clearly current market pricing (sub-50% for one rate hike this year) is in contrast to the Fed dot plots, but recent Fed comments have certainly weighed in with a much more dovish tone (Esther George aside).
Before we take a look at today’s calendar, the European data yesterday was firmly focused on the final revisions to the January PMI’s where in the end we saw no change to the Euro area services PMI at 53.6, and so down 0.6pts from December. The composite was revised up a very modest 0.1pts to 53.6 so as to be down 0.7pts from the prior month, albeit near the top of the recent range. Regionally we saw the composite print for Germany reaffirmed at 54.5, however France was revised down 0.3pts to 50.2. We also got the data for Italy where we saw the print fall 2.2pts to 53.8, while Spain was up a modest 0.1pts to 55.3. The UK was also up a solid 0.8pts to 56.1.
Onto today’s calendar now. It’s a quiet start to the day this morning in the European session with no data to report of before attention turns over to the BoE MPC meeting around midday where of course the focus will be on the Bank’s policy outlook assessment (minutes and inflation report will be released). This afternoon in the US we’re kickstarting with the first estimates of Q4 nonfarm productivity (expected to fall by 2% on the back of weak output growth) and unit labour costs (expected to gain 4.3%) data, along with the latest initial jobless claims data. December factory orders data follows this along with the final revisions to January durable and capital goods orders. Fedspeak wise we’ve got Rosengren due to speak shortly after this is out (7.15am GMT) followed by Kaplan (1.30pm GMT) this afternoon and then Loretta (10.00pm GMT) this evening. Also due this morning are comments from ECB President Draghi (8.00am), shortly followed by fellow ECB council member Knott. The IMF’s Lagarde is also due to speak on emerging and developed markets this afternoon at 3pm GMT. It’s a busy day for earnings also with 33 S&P 500 companies due to report with ConocoPhillips a highlight in the energy sector.
PBOC Strengthens Yuan By Most In 2 Months As Golden Week Looms
With just one more day of trading before China’s lunar new year and Sping Festival Golden Week holiday, it appears The PBOC wants to flex its intervention muscles. By strengthening the Yuan fix by 0.16% (the most in 2 months) to 1-month highs, it seems China is trying to send a message before it practically closes for a week…
Of course today’s USD collapse is not going to help their ‘devaluation’ case…
China will be practically closed from Feb 7th until re-opening on Monday Feb 15th and so one wonders if this is a last ditch attempt to dissipate speculators before they are left somewhat to their own devices for a week?
PBOC In Da House? Yuan Spikes To 3-Week Highs
Its deja vu all over again in the land of speculative Yuan shorts today. With Golden Week looming, it appears PBOC is stomping on the throat of speculative shorts in the offshore Yuan with another gross intervention. The last 2 days have seen “someone” panic-buying Yuan higher by a stunning 800 pips, smashing CNH back to 3-week highs when then PBOC last intervened in size…
Offshore Yuan spikes 800 pips to 3-week highs…
That’ll show you George Soros… or not – let’s see what happens next week when China is “closed.”
Hedge Funds Fight The PBOC: There Can Be Only Yuan
With every Tom, Dick, and Harry hedge fund manager now taking on The People’s Bank of China (in various ways), it is no surprise that the spread between offshore Yuan and onshore Yuan blew out to its widest in 3 weeks this morning.
They are not getting it all their way for now though.
Just as the last time the spread was this wide, The PBOC stepped in, so as we noted this morning, there was a clear and present short-squeezing danger in Yuan as The PBOC clearly intervened to snap the spread 450 pips tighter.As China opens tonight, selling pressure however is back on the Yuan…
The intervention is pretty clear…
But the battle continues, as Yuan is selling back off…
Bill Gross is right…
We have two opposite scenarios as to what will happen with Chinese release of USA dollars outflow to defend the Yuan: Consensus is 120 billion.
A Preview Of This Weekend’s Event That Could Unleash A “Vicious Bear Market Rally”
As noted earlier today, BofA’s chief credit strategist Michael Hartnett is anything but bullish: in his own words, he remains a seller “into strength in coming weeks/months of risk assets at least until a coordinated and aggressive global policy response (e.g. Shanghai Accord) begins to reverse the deterioration in global profit expectations and credit conditions.”
There is, however, one major catalyst that will take place over the weekend that could change Hartnett’s mind if only for the near term: one that could unleash a “vicious bear market rally” in his words.
As Hartnett writes, “US dollar unwind may ultimately be seen as an important inflection point for US monetary conditions…signal that “automatic stabilizers” finally coming into play; means relief for “humiliated” assets in EM, commodities, resources; markets begin to discount policy response; if China FX reserves data is better than expected, we think a bear market rally is likely to be vicious.”
As a reminder, here is why the world is so focused on China’s FX reserves, which have seen over $1 trillion in capital outflows since the summer of 2014 when China’s reserve liquidation problem began in earnest.
As a further reminder, it is the pace of Chinese capital outflows, the largest among the entire EM space, that has become the “Quantitative Tightening” counterpoint to the liquidity injections by such DM central banks as the ECB and the BOJ, and which according to many is the primary reason for the recent acute weakness across asset classes as Citi recently explained.
So what is the reported number due this coming Sunday, that could unleash a vicious rally?
It’s here that things get tricky.
According to consensus estimates, China will report that its total FX reserves declined to $3.2125 trillion from $3.33 trillion: a drop of $118 billion, or modestly higher than the massive December $108 billion outflow.
In other words, a reported number below, and certainly substantially below, $118 billion for the January outflow and it would be off to the races as a massive short squeeze will grip all the commodity and materials-linked sectors.
To be sure, BofA FX strategist Claudio Piron expects a far smaller print:
We forecast China FX reserve changes and estimate a USD37.5bn fall in January – (USD29.1bn decline adjusting for a negative FX valuation effect). Note that the standard error of the forecast is large at USD24.5bn, which would give us a downside of USD84.5bn fall. We caution that this is guidance and we attempt to be as transparent as possible so investors can gauge the odds in what is a key release for the markets. Note too this is based on onshore CNY FX volumes and our estimate maybe biased down as there are no real time volumes for offshore CNH.
So yes: if the number is a paltry $37.5 billion, it would mean that suddenly China’s outflows are “contained”, if only for the time being, and that the PBOC may have managed to quell the relentless exodus of domestic hot money abroad (whether it’s real or not is a different story).
However, just as a far smaller than expected number will be very bullish, so a far greater number will be very bearish. Which brings us to a post we wrote last week showing what may have been the main reason for the dramatic January market selloff. According to estimates by Goldman Sachs, not only have outflows not slowed down as dramatically as BofA believes, but they have in fact soared to an all time high $185 billion.
This is what Goldman said:
There has been around $USD 185bn of intervention (with the recent intervention predominantly taking place in the onshore market)” split roughly $143 billion on the domestic side and $42 billion on the offshore Yuan side.
Since then it only got worse: courtesy of Fasanara Capital we know that in the last few days, GS revised up the magnitude of the Chinese FX spot intervention to $197bn in January 2016, when adding a $12 billion valuation adjustment, lowering the total FX reserves to just $3.133 trillion!
As Fasanara accurately adds, “in case reserves drop more than consensus (as GS estimates) we could see further pressure on USDCNH and other Asian currencies, together with continued negative reaction by global markets.”
In other words, Fasanara lays out the opposite scenario to that of Harnett: one where if outflows surprise to the upside, what will follow is a vicious selloff.
* * *
So there is your bogey, one which will set the mood for risk over the next month: this weekend, China will announce its January reserve outflows which are expected to decline by about $120 billion. Should the number be far less (ostensibly closer to BofA’ estimate of $37.5 billion) expect a whopper of a bear market rally coupled with a huge short squeeze. If Goldman is right, however, with its record ~$200 billion in FX intervention and implied outflows, then all bets are off.
Luckily for China, its market will be closed next week due to Chinese New Year Holiday. Which means that it will be up to US and other global stock markets to cushion the surprise until China’s FX trading comes back online, and the result in this already illiquid market, could make or break many asset managers year in the span of a day.
Credit Suisse Plunges To 25 Year Lows After Posting Enormous $5.8 Billion Q4 Loss
Seven days ago, Deutsche Bank turned in what various sellside desks described as “horrible”, “grim” results for both Q4 and 2015 as a whole.
The bank posted its first annual net loss since the financial crisis, reporting red ink that totaled more than $7 billion as investment banking revenue fell plunged by some 30%.
On Thursday, we learn that Credit Suisse lost nearly $6 billion in the fourth quarter. The 2015 net loss came to nearly $3 billion.
Shares in the Swiss bank plunged 13% to their lowest levels since 1991 as Tidjane Thiam’s “turnaround” hit a rather large bump in the road.
The shares are down 32% this year alone.
The $5.8 billion quarterly loss is the largest since the crisis and it would certainly appear that the focus on wealth management (as opposed to investment banking) comes at a rather inopportune time, given the emphasis placed on AsiaPac where Thiam plans to double pretax income in just two years.
“The latest report is the first to reflect Credit Suisse’s new structure under Chief Executive Tidjane Thiam, who took over in July and announced his strategic plans for the bank in October,” WSJ writes. “Those plans include bolstering wealth management, particularly in regions such as Asia, while reducing the resources directed to its investment bank.”
Some of the loss was attributable to a CHF3.8 billion impairment charge tied to the costly 2000 acquisition of investment bank Donaldson, Lufkin & Jenrette for $11.5 billion which The Journal reminds us was “a price widely viewed at the time as expensive.
But even as the Street expected a rather disappointing performance, “these numbers are terrible,” to quote Dieter Hein, an analyst at AlphaValue based near Frankfurt who spoke to Bloomberg. “In the mid- to long-term, it’s right to focus on growth in Asia, but what bad timing given the current environment.”
Yes, “what bad timing.” And “what” horrific results across the board. Analysts were expecting things to be bad (consensus was for a CHF4.97 billion loss) but the CHF5.8 billion was far worse than most anticipated. Even excluding the goodwill write-down, as well as significant litigation and restructuring charges, the underlying pre-tax loss was “far worse” than consensus, Citi’s Andrew Coombs writes. “Underlying revenues are 7% below consensus…overall we view these as very poor results,” he said on Thursday.
Restructuring and litigation costs were CHF355 million and CHF564 million for Q4, respectively.
Investment banking was a nightmare as revenues fell 17% in 2015 due to “lower debt and equity underwriting” attributable to “volatility in capital markets.” “They’re the ones we control the least,” Thiam said of the Global Markets and Investment Banking & Capital Markets units. “We want to have an investment bank with stable earnings,” he added. Here’s what investment banking looked like in Q4:
And here’s a look at equity and fixed income trading:
“Revenue from fixed-income trading fell by more than two thirds — a much steeper decline than at Deutsche Bank or any of its U.S. peers,” Bloomberg notes. The culprits: widening HY spreads in the US, “subdued client activity” and of course, “significant mark-to-market losses.”
“Revenue at the units that house trading, advisory and underwriting businesses outside of Switzerland and Asia, slumped 35 percent to a combined $1.5 billion,” Bloomberg continues. “Excluding goodwill impairments and restructuring costs, the units posted a pre-tax loss of $761 million combined for the period, compared with a profit of $516 million a year earlier.”
Contrary to reports, the bank will not, Thiam says, be selling a portion of the investment banking business to Wells.
“The environment has deteriorated materially during the fourth quarter of 2015 and it is not clear when some of the current negative trends in financial markets and in the world economy may start to abate,” Thiam said, in an attempt to explain the results.
The bank will cut some 4,000 jobs in an effort to supercharge cost savings. Bonuses were cut by 11% last year. “We continue to believe that wealth management, supported by our investment banking capabilities, remains a uniquely attractive long-term opportunity,” Thiam continued, justifying the shift away from investment banking. The international wealth management unit lost CHF20 million in Q4 and saw net asset outflows of CHF4.2 billion during the period.
Here’s Citi’s Coombs summing things up outlook wise: “We do not believe the 2018 targets are achievable.”
No, probably not, because as Andreas Brun, an analyst at Zuercher Kantonalbank put it after the results: “Even to just get in the direction of their goals, they need the market as a tailwind, but at the moment they have rough winds blowing at them from all directions.”
Indeed.
* * *
Full press release (because you really have to read it to believe it)
END
Bloomberg reports on the lousy earnings of Credit Suisse and its forward guidance:
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Shares in Credit Suisse Group AG dropped to their lowest level since 1991 after the bank posted a loss of 5.8 billion Swiss francs ($5.8 billion) as it wrote off goodwill and set aside provisions for litigation. Chief Executive Officer Tidjane Thiam has said the global markets and investment banking divisions will probably struggle in 2016 as he speeds up implementation of his plan to shrink the bank. Shares, which were down 10.8 percent at 11:02 a.m. London time, have lost 32 percent so far this year. |
end
European bank risk soars to 3 year highs as well as the USA banks. Big trouble ahead:
(courtesy zero hedge)
European Bank Risk Soars To 3 Year Highs, US Risk Rising
We are going to need more “whatever it takes.” And with Draghi’s efforts to shove sovereign bonds down the throat of Europe’s banks, the sovereign-to-financial linkage is now systemically as worrisome as it has ever been…
Deutsche Bank’s CDS continues to push higher…smashing European bank risk to its highest since 2013…
Unicredit remains the most risky among EU banks…
And it is spreading to America…
“Recovery” Fable Unravels As BOE Cuts Growth Forecast, Eurozone Slashes Inflation Outlook
As you might have noticed, the “recovery” story is starting to fall apart.
Central banks across the globe are running out of excuses for why trillions upon trillions in global QE have been an abject failure when it comes to resuscitating global demand and trade.
Far from creating the type of robust “recovery” Ben Bernanke envisioned when he set the stage for what has become an eight-year-old foray into Keynesian insanity, round after round of monetary madness has only set the world on a race to some nightmarish Krugman “bottom” where the effective lower bound is breached only to see cash banned so PhD economists can strip citizens of their economic autonomy.
On Thursday we get the latest admissions from central bankers who are increasingly forced to admit that things aren’t going as (centrally) planned.
The Bank of England on Thursday cut its growth forecasts to 2.2% from 2.5% in its latest inflation report and also released minutes from its latest monetary policy meeting. Inflation will remain below 1% for the balance of the year, the bank says, and will not hit 2% until Q1 2018. Or as Haruhiko Kuroda would say: “We see signs that inflation is moving towards our target.”
Growth in 2017 was also revised lower to 2.4% from 2.7%. “The softer forecasts imply tougher times ahead for chancellor George Osborne’s deficit reduction plan,” FT writes. “Weaker growth would translate into lower tax receipts, making closing the gap between expenditure and revenues harder.”
In his letter to the chancellor, Mark Carney opened the door for MOAR. “Were these downside risks to materialise, market expectations of the future path of interest rates could adjust further to reflect an even more gradual and limited path for bank rate increases than is currently priced,” he said. “The committee could also decide to extend the asset purchase facility or to cut the bank rate further towards zero from its current level of 0.5 per cent.”
“[China’s economic rebalancing, more capital flows, tighter financial conditions, and increased market volatility] pose downside risks to growth in the United Kingdom via trade, financial and confidence channels,” Carney told a news conference,” Carney told reporters on Thursday. “The outlook for trade is particularly challenging with net exports expected to drag on UK growth over the forecast period.”
The newly released minutes show that Ian McCafferty, the only voting member arguing for a hike, abandoned his dissenting view to join his compatriots in a decision to remain on hold.
So, yeah. So much for that BOE rate hike.
Meanwhile, in the deflationary paradise that is the eurozone, the EU Commission has cut its 2016 growth forecast to 1.7% from 1.8% citing worsening performances from Germany, France, and Italy.
More worrisome was the inflation outlook. The commission slashed its outlook for inflation by half to just 0.5% this year.
“Europe’s moderate growth is facing increasing headwinds, from slower growth in emerging markets such as China, to weak global trade and geopolitical tensions in Europe’s neighborhood,” Commission Vice President Valdis Dombrovskis said in a statement.
“With the assumed path of energy prices, inflation should remain very low in the first half of this year,” Pierre Moscovici said in Brussels. “It should then rise slightly in the second half when the impact from the past sharp falls in oil prices abates.”
Sure it will. That’s of course assuming oil doesn’t continue to slide.
For his part, Mario Draghi blames a “conspiracy.” “There are forces in the global economy today that are conspiring to hold inflation down,” the former Goldmanite said in a speech in Frankfurt on Thursday. “Those forces might cause inflation to return more slowly to our objective,” he added.
That’s ok. Maybe the refugees will boost consumer spending.
Of course you shouldn’t expect any of this to derail policy makers in their lunatic quest to “fix” what’s holding back global growth and trade and what’s keeping inflation stuck in neutral. On that note we close with comments from the ECB’s Yves Mersch:
“I cannot tell you what we will be doing because this depends on 22 other colleagues who also have their opinion.”
“We have further possibilities, our toolbox is not exhausted, but I will not fuel any expectations by giving you comment one instrument rather than another one.”
DAX Plunges To 1 Year Lows As Deutsche Bank CoCos Crash, Italian Bank Stocks Slide
The collapse of Deutsche Bank continues to not just accelerate but to contagiously spread…
Deutsche Bank’s CDS continues to push higher…smashing European bank risk to its highest since 2013…
And now Deutsche Bank’s Contigent Capital securities are crashing – these are among the lowest securities on DB’s capital structure and are screaming that problems loom.
In English – CoCo bonds are contingent convertible bonds, and are converted into equity first in case of a bail-in.
Dragging the entire German market down – DAX down to 1-year lows…
As Bloomberg reports,
This focus on potential credit risk at some of the biggest banks is a shift from recent years, when they seemed resilient from a credit standpoint even as analysts raised doubts about their future profitability. After all, regulations that prompted them to cut costs and reduce risk-taking would probably make them better able to meet their debt obligations, at least in theory.
But that theory only goes so far, and not enough apparently to justify buying subordinated financial debt that could get wiped out in a worst-case scenario. Investors seem to be rapidly selling lower-ranked bank securities, particularly notes tied to European firms with significant exposure to commodities companies and borrowers in China.
Investors really don’t have a sense of just how much pain banks will feel from souring energy prices and the global growth slowdown. Many are not waiting around to find out.
It’s not just Germany though: moments ago Italian bank stocks slid to intraday lows following news that the government’s banking industry decree was reported to be postponed to next week, pushing BTP futures down 66 ticks at 138.79, lingering near session low of 138.55.
Meanwhile In Greece, Familiar Scenes Are Back: General Strike, Molotov Cocktails, Tear Gas
Greece was fixed for a few months, when the so-called “anti-austerity” government of PM Tsipras which came to power just over a year ago did what each on its predecessors did by kicking the can and trading off what little sovereignty Greece has left for promises of more cash from Europe, but it is broken once again.
Earlier today, services across Greece ground to a halt Thursday as workers joined in a massive general strike that cancelled flights, ferries and public transport, shut down schools, courts and pharmacies, and left public hospitals with emergency staff. Even the undertakers are striking.
Thursday’s general strike is the most significant the coalition government of Prime Minister Alexis Tsipras has faced since he initially came to power about a year ago. As an opposition party, Tsipras’ radical left Syriza party had led opposition to pension reforms, but he was forced into a dramatic policy U-turn last year when he faced the stark choice of signing up to a third bailout or the country being kicked out of the eurozone.
The strike comes as the government negotiates with Greece’s international debt inspectors, who returned to Athens this week to review progress on the country’s bailout obligations. The central Athens hotel where the inspectors were staying was heavily guarded by police.
As CBC reports, well over 20,000 supporters of a Communist party-backed union were marching through central Athens, while around 10,000 more people — including about 1,000 lawyers in suits and ties — were gathering for a separate demonstration. A heavy police presence was deployed in the capital, as previous protests have often degenerated into riots.
Unions are angry at pension reforms that are part of Greece’s third international bailout. The left-led government is trying to overhaul the country’s ailing pension system by increasing social security contributions to avoid pension cuts, but critics say the reforms will lead many to lose two-thirds of their income to contributions and taxes.
Opposition to the reform has been vociferous, uniting a disparate group of professions, including farmers, artists, taxi drivers, lawyers, doctors, engineers and seamen among others.
Demonstrations were also planned in Thessaloniki — where about 200 taxi drivers drove through the city centre honking their horns in protest Thursday — and other Greek cities.
Proving just how messed up things in Greece are, Syriza has even issued a statement backing Thursday’s strike: a strike aimed at Syriza!
The sentiment on the ground is back to square minus one: Athens pensioner Yannis Kouvalakis said Tsipras’ government “fooled” Greeks by promising to reverse austerity cuts.
“Because they are from the left, what happened? Was the situation saved? Things got worse. They’d said they’d give some money to pensioners or the unemployed, increase the minimum wage to 750 euros (per month),” he said. “They cut five euros from my pension … What can they give? Forget it.”
Ferries between Greece’s islands and the mainland remained tied up in port as part of the strike, while only limited public transport was operating in Athens for a few hours in the day and taxis also stayed off the streets. More than a dozen domestic flights were cancelled, while farmers maintained their blockades of highways that have forced motorists into lengthy detours.
State-run hospitals were functioning on emergency staff, while state schools, many shops and gas stations were shut.
Meanwhile, the mood earlier today reverted to one seen years ago, when violence among a small group of people, engaging in exchanges of Molotov cocktails and tear gas with riot police, was the daily norm.
Some visual examples:
As AP’s Derek Gatopoulos summarizes it best, “Doctor friend leaving general strike rally: “It felt more like a wake than a protest rally” ”
S&P Downgrades Glencore To Lowest Investment Grade Rating
The one catalyst many Glencore bears have been eagerly waiting for, is the downgrade of the troubled independent energy trader to junk status, a catalyst which as previously explained, will likely spring various, heretofore unknown margin calls and collateral “waterfalls” a la AIG.
Overnight, one of the two rating agencies, Standard and Poors, came one step closer to that fateful moment when it downgraded Glencore, however it decided to throw the company one last lifeline by keeping it at the very lowest investment grade rating, and instead of cutting it from BBB to single B or CCC where its CDS and bond yield implies the company should be trading, it kept it a BBB-.
This is what it said:
Glencore PLC Ratings Lowered To ‘BBB-/A-3’ On Price And Sector Review; Outlook Stable
- Standard & Poor’s Ratings Services has recently lowered its price assumptions for copper and other metals, reflecting the very challenging market outlook and the increased uncertainty about demand.
- These heightened operating risks, reported EBITDA declines, and increased volatility of earnings lead us to a more cautious assessment of global mining company Glencore PLC and its financial leverage.
- We are therefore lowering our long- and short-term corporate credit ratings on Glencore to ‘BBB-/A-3’ from ‘BBB/A-2’.
- The outlook is stable as we believe Glencore’s meaningful continuing free cash generation, strong liquidity, and active balance sheet deleveraging should mitigate downside risk.
Standard & Poor’s Ratings Services today said it has lowered its long- and short-term corporate credit ratings on global diversified mining and trading company Glencore PLC to ‘BBB-/A-3’ from ‘BBB/A-2’. The outlook is stable.
We also lowered the rating on the debt issued or guaranteed by Glencore and Glencore International AG to ‘BBB-‘ from ‘BBB’.
The downgrade reflects both our view of the material challenges the mining industry faces, with increased uncertainty about future operating performance in 2016 and 2017, as well as our assessment that Glencore’s 2015 financial profile was below our earlier expectations with funds from operations (FFO) to debt closer to 20%, notwithstanding material debt reduction. This compares to a range of 23%-28% which we previously saw as commensurate with the ‘BBB’ rating. The rating action follows a modest negative re-evaluation of both business and financial factors for Glencore, as reflected in our negative comparative rating assessments. We believe the ‘BBB-‘ rating has more sustainable headroom, particularly in the prevailing low price environment, and we anticipate significant further debt reduction in 2016.
We recently lowered our price assumption for most commodities, including some of the key commodities for Glencore, such as copper, zinc, and nickel (see “Standard & Poor’s Revises Its Price Assumptions For Metals On Continuing Price Weakness,” published on Jan. 22, 2016). This was after metal prices came under pressure because of fears of lower demand from China, combined with excess supply. We believe that commodity prices will remain very unsettled while the impact of China’s slowdown plays out. This environment results in reduced visibility of future profits for Glencore and its peers. For Glencore, in particular, this also has, and may continue to result in, greater reported earnings volatility than we had previously anticipated, even if we recognize the relative stability over time of trading profits compared with those from mining activities. Glencore’s EBITDA in the first half of 2015 was down 29%, broadly in line with BHP Billiton and Rio Tinto.
Nonetheless, under our revised base-case scenario, we project that Glencore’s FFO to debt is likely to recover to above 23%-25%, although this is dependent on our price, foreign exchange, and other assumptions including the company’s December 2015 guidance for lower unit costs and capital expenditure (capex). Critically, we foresee continued delivery of Glencore’s debt reduction plan in 2016 and, in our view, likely disposals in the near term, as well as forecast free cash flow from operations of $2 billion-$3 billion, supported by expected resilient trading profits.
Our forecast of reducing leverage is also underpinned by the debt reduction plan of more than $10 billion that Glencore has been delivering since September 2015. This included a $2.5 billion equity raise, cancellation of the 2016 dividend payments, the further release of working capital, and other steps including disposals.
Key assumptions in 2016 and 2017 include:
- Annual copper production of 1.4 million tonnes-1.6 million tonnes at prices of $2.1 per pound (/lb)-$2.2/lb;
- Annual zinc production of 1.1 million tonnes at prices of $0.7/lb-$0.8/lb;
- Marketing EBITDA of $2.7 billion;
- A moderate net working capital release of $0.5 billion-$1.0 billion;
- Capex of $3.5 billion-$4.0 billion;
- No dividends; and
- Disposals of $1 billion-$2 billion.
Under our baseline, these assumptions result in proportionately consolidated EBITDA of $7.0 billion-$8.0 billion in 2016 and just over $8.0 billion in 2017, compared to $13 billion in 2014. Consequently, we foresee FFO to debt improving to over 23%-25% in 2016 and possibly approaching 30% in 2017.
The stable outlook reflects our assessment that Glencore’s meaningful continuing free cash generation of over $2 billion, strong liquidity, and active balance sheet deleveraging should support the ratings, even in a modestly weaker commodity price environment than our base case assumes. We believe FFO to debt consistently over 20% is compatible with the ratings. We expect rating headroom to materially increase over the coming quarters, as we anticipate significant further debt reduction through disposals. Glencore is targeting disposals of at least $3.0 billion-$4.0 billion, which the company has been delivering since September 2015.
We see the potential for a negative rating action as low, given the expected continued deleveraging in 2016-2017, supported by management’s strong commitment to strengthening its credit metrics and decisive actions to date. Key risk factors would stem from a further prolonged fall in commodity prices, notably if economic developments in China worsened and absent material offsetting factors. A downgrade of Glencore would become likely if FFO to debt remained below 20%. As an example, we estimate that if copper prices averaged below about $1.8/lb over 2016 and 2017, it could be difficult for Glencore to maintain FFO to debt above 20% without compensating measures or factors such as foreign exchange.
Rating constraints could stem from a material acquisition, without comparable offsetting disposals, or a more fundamental adverse reassessment of the resilience of the business mix and profile compared with peers.
The likelihood of an upgrade could increase if we perceived a sustainable improvement in the mining operating environment and Glencore’s earnings performance is stable. We could consider a positive rating action if we anticipate that FFO to debt will remain comfortably above 23%, while seeing continued positive discretionary cash flow.
* * *
To summarize, this is what according to S&P, represents an investment grade rating:
And now we look forward to Moody’s to likewise downgrade Glencore, although we won’t be holding our breath: as a reminder, back in December Moody’s already downgraded GLEN to Baa3, the lowest IG rating there is: any more downgrades would automatically mean the start of any latent junk “waterfalls” that may be hidden deep in the company’s $100 billion in total liabilities.
end
Closing In: Russia, Iran, Assad “Encircle” Syria’s Largest City As Peace Talks Collapse In Geneva
Back in October, we previewed the “promised” battle for Aleppo, Syria’s largest city prior to the war.
By the time Russia began constructing an air base at Latakia, the city – which is immensely important both from a strategic and psychological perspective – was controlled by a hodgepodge of rebels and militants including al-Qaeda, the Free Syrian Army, and ISIS.
As we noted four months ago, if Russia and Hezbollah manage to recapture the city, it would effectively restore the Assad government in Syria even if the east of the country is still controlled by Islamic State.
In many ways, the city is emblematic of the wider conflict. Here are a few visuals which underscore the extent of the desolation and utter sorrow that plague this once thriving urban center.
And for anyone who might have missed it, here’s a look at nighttime light emissions in the city along with a few visuals from “a night in Aleppo“:
Despite the fact that the city – like many others across the country – has been reduced to a smoldering pile of rubble, it’s key to Russia and Iran’s plans to consolidate Assad’s power in the west of the country.
As noted above, if the SAA can retake Aleppo, Assad will have control of most of the country’s major urban centers, effectively restoring his grip on power.
So critical is the city, that when the SAA, Hezbollah, and a variety of Shiite militas were gearing up for the push north, Quds commander Qassem Soleimani himself showed up to rally the troops (he was later injured on the frontlines).
Fast forward four months and it appears that after a protracted fight, Russia and Hezbollah are indeed poised to recapture the city where militants are now surrounded. Critically, Russia and Iran have now cut off supply lines from Turkey.
“Backed by Russian firepower and Hezbollah militants, Syrian government troops have cut off rebel supply lines between the northern city of Aleppo and Turkey,” Bloomberg writes. “Taking Aleppo, Syria’s former commercial hub, would give Russia, Iran and Assad more bargaining power at any future settlement talks and more say in how the region will be redefined.”
Speaking of settlement talks, negotiations in Geneva brokered in part by John Kerry were suspended on Wednesday as a Saudi-backed rebel coalition voiced anger over Russia’s airstrikes near Aleppo. On Thursday, Kerry demanded that Moscow halt the offensive so peace talks could resume. Although America’s top diplomat swears his phone call with his Russian counterpart Sergei Lavrov was “robust” Lavrov said on Wednesday The Kremlin doesn’t see why the campaign against “the terrorists” should stop. “I can’t see any reason why we should halt our aerial operations until the terrorists shall be defeated”, Lavrov said, flatly.
“On the ground, nearly 40,000 people have fled an offensive this week by President Bashar al-Assad’s regime north of the city of Aleppo,” AFP said on Thursday, citing the Syrian Observatory for Human Rights (or in other words, “citing one guy in London”). “Assad’s forces also entered two Shiite villages that were under siege by rebels, prompting what state news agency SANA called ‘mass celebrations’ in the streets of Nubol and Zahraa.”
For their part, the Turks are of course blaming the Russians for the stalled peace talks.
“Russia continues to kill people in Syria. Could there be such a peace gathering? Could there be such peace talks?” President Tayyip Erdogan asked in a speech in Peru.”In an environment where children are still being killed, such attempts do not have any function apart from making things easier for the tyrant,” he said.
And trust us, Erdogan knows something about what makes “things easier for a tyrant.”
In any event, the urgency expressed by the US, Saudi Arabia, and Turkey shouldn’t be mistaken for some kind of benevolent regard for the lives are lost each and every day the war drags on. Rather,Washington, Riyadh, and Ankara know that if Aleppo falls, that’s it for the “moderate” opposition.
Sure there will still be elements of the FSA and other groups explicitly backed by the West and its regional allies, and they’ll undoubtedly wage a long war of attrition against the SAA. But once the urban centers are secured, Assad can begin the slow process of rebuilding his security apparatus and restablishing some semblance of normalcy in the country’s west.
As for eastern Syria, the fate of Raqqa and Der al-Zour still hangs in the balance.
Once the west is solidified, the question will be: can the US, France, and Britian swallow their pride and coordinate with Russia and Iran to oust Islamic State?
Or perhaps the more important question is this: what will Russia and Iran discover if they manage to liberate Raqqa before the West has time to bury the bodies (figuratively speaking) and burn all the evidence?
Saudi Arabia “Ready To Send Ground Troops To Syria”
Last month, when Saudi Arabia announced it would be heading (that’s heading, not beheading) a 34-nation “anti-terror coalition”, everyone who knows anything at all about the Mid-East and about the sectarian divide laughed hysterically.
Why? Because Saudi Arabia is without question the world’s number one state sponsor of terror. Riyadh would vehemently deny that charge but when your state religion is Wahhabism it’s a bit difficult to explain how it is that you’re not contributing to the rise of groups like al-Qaeda and ISIS.
Fortunately for the Saudis, they’ve got all the oil, which means the world looks the other way while the government racks up an abysmal human rights record and sticks to policies that look like they walked right out of the seventh century.
Here’s an excerpt from “Saudi Arabia: An ISIS That Has Made It,” by Kamel Daoud:
Black Daesh, white Daesh. The former slits throats, kills, stones, cuts off hands, destroys humanity’s common heritage and despises archaeology, women and non-Muslims. The latter is better dressed and neater but does the same things. The Islamic State; Saudi Arabia. In its struggle against terrorism, the West wages war on one, but shakes hands with the other. This is a mechanism of denial, and denial has a price: preserving the famous strategic alliance with Saudi Arabia at the risk of forgetting that the kingdom also relies on an alliance with a religious clergy that produces, legitimizes, spreads, preaches and defends Wahhabism, the ultra-puritanical form of Islam that Daesh feeds on.
And so, when the Saudis announced they were set to launch their own “war” on terror, we couldn’t help but chuckle at the sheer absurdity. “That’s right ladies and gentlemen, you no longer have anything to fear from Sunni extremists because the undisputed king of promoting Sunni extremism is on the case,” we quipped, incredulous.
We went on to ask the following obvious question: “Is this the precursor to Saudi, Qatari, UAE, and (more) Turkish boots on the ground in Syria and Iraq, just as Iraqi Shiite politician Hanan Fatlawi predicted?
“It certainly appears so,” we added.
Well not to put too fine a point on it, but we were exactly right, because just moments ago,a Saudi military spokesman told AP the kingdom is ready to send ground troops to Syria to fight Islamic State group if coalition leaders agree.
At this juncture, it’s difficult to find the words to express the sheer absurdity of what’s going on here. It’s one thing for the US to send in SpecOps to fight groups the CIA may have one time armed, but this is Saudi Arabia preparing to send in ground troops to fight groups the country, along with Turkey, is still arming.
We’re not saying the Saudis are openly delivering weapons to ISIS in crates with Riyadh’s return address stamped in the upper left hand corner of the lid, but the Saudis and Qatar are unquestionably aiding Sunni extremist elements in Syria and some of those very same Sunni extremists are, for lack of a better word, terrorists. The Saudis might as well just meet the militants ahead of time, hand them weapons, and then agree to meet back in an hour to fight.
If Riyadh sends in ground troops to Syria it will mean that Saudi forces will be fighting in the same country as Iranian forces and that, ladies and gentlemen, is bad news.
We wonder if it’s a coincidence that this comes just as Assad, Russia, and Iran encircle Aleppo, cutting off the opposition from their Sunni benefactor in Turkey. As we said earlier today with regard to the peace talks in Geneva, “the urgency expressed by the US, Saudi Arabia, and Turkey shouldn’t be mistaken for some kind of benevolent regard for the lives that are lost each and every day the war drags on. Rather, Washington, Riyadh, and Ankara know that if Aleppo falls, that’s it for the “moderate” opposition.” And that means Iran retains its ally in Damascus and thus its supply line to Hezbollah.
We’ll close by simply reminding you of the question we asked in December: “Did Saudi Arabia just clear the way for an invasion of Syria?”
World’s Biggest Containership “Hard Aground” As Baltic Dry Crashes Below 300 For First Time Ever
Before this year the lowest level The Baltic Dry Index had reached was 556 in August of 1986 and the highest was in June 2008 at a stunning 11,612. Today saw the freight index hit a new milestone however, crashing through the 300 barrier for the first time ever – at 298, this is almost 50% below the previous record low.
Commodities obviously are saying something very different from “the market”…
And as Dana Lyons notes, of course much of the input into the BDI comes from the price of raw materials. Considering the deflationary spiral in commodities, the drop in the BDI to all-time lows shouldn’t be a shock.
However, the depths that the index is now plumbing is quite alarming and suggests trouble in the global trade picture.
It would also suggest perhaps that the deflationary pressure is not just a supply issue. Consider every prior drop in the Baltic Dry Index down to the 500-600 level. Each time, the index immediately jumped as if latent demand was just waiting for those lower prices. That development has not yet occurred this time around, even as prices are reaching 45% below the previous record low.
The Baltic Dry Index has become a trendy thing to mention in recent years when discussing global market and economic conditions. The truth is, nobody really ever knows for sure what the broader message is behind the index’s behavior. That said, this recent plunge is making it quite difficult to conceive that it means anything positive in terms of the global economy and deflationary pressures.
And finally it’s not just commodities and the Baltic Dry that stalled, as gCaptain reports, one of the world’s biggest containerships is hard aground in Germany’s Elbe River leading to the port of Hamburg.
The vessel CSCL Indian Ocean ran aground Wednesday night following an apparent mechanical failure.
An attempt to refloat the ship at around noon local time was unsuccessful.
Germany’s Central Command for Maritime Emergencies (CCME) says it has been in touch with the ship owner and they are in the process of developing a salvage plan. A second attempt to refloat the ship is expected during high tide Thursday night.
An overflight of the area Thursday showed no signs of pollution. There were no injuries reported.
The Hong Kong-flagged ultra large container vessel (ULCV) CSCL Indian Ocean measures 399.6 meters long by 58.6 meters wide. The vessel belongs to China Shipping Container Lines, part of China Shipping Group. It is one of 5 CSCL ships with the capacity to carry a staggering 19,100 twenty foot containers.
The incident has caused minor impacts to ship traffic on the Elbe River.
CSCL Indian Ocean is part of a new breed of giant containerships designed to carry more than 18,000 TEUs and used to transport goods from Asia to northern Europe.
* * *
Quite an anology!!
END
EMERGING MARKETS
Venezuela has only $10 billion in reserves, It earns only 8 billion in revenue and yet imports into the country total $37 billion. It is so hopelessly bust that it looks like we will have a disorderly bankruptcy which will cause harm to many:
(COURTESY London’s Financial times)
It could be too late to avoid catastrophe in Venezuela
As markets brace themselves for the negative effects of the decline in oil prices, Venezuela will probably be the first big domino to fall.Domestically, the most likely scenario is an imminent economic collapse and a humanitarian crisis. Internationally, it will imply the largest and messiest emerging market sovereign default since the Argentine crisis of 2001. The situation is made worse by the inability of the political system, at present, to address the situation.
Why Venezuela? First, because while most other oil exporters used the boom to put some money aside, former president Hugo Chávez, who died in 2013, used it to quadruple the foreign debt. This allowed him to spend as if the average price of a barrel of oil was $197 in 2012, when in fact it was only $111. He also used it to maim the private sector through nationalisations and import controls. With the end of the boom, the country was put in a hopeless situation.
The year 2015 was an annus horribilis in Venezuela with a 10 per cent decline in gross domestic product, following a 4 per cent fall in 2014. Inflation reached over 200 per cent. The fiscal deficitballooned to 20 per cent of GDP, funded mainly by the printing press.
In the free market, the bolivar has lost 92 per cent of its value in the past 24 months, with the dollar costing 150 times the official rate: the largest exchange rate differential ever registered. Shortages and long queues in the shops have made daily life very difficult. No wonder the government lost the elections for the National Assembly in December.
As bad as these numbers are, 2016 looks dramatically worse. Imports, which had already been compressed by 20 per cent in 2015 to $37bn, would have to fall by over 40 per cent, even if the country stopped servicing its debt.
Why? If oil prices remain at January’s average levels, exports in 2016 will be less than $18bn, while servicing the debt will cost over $10bn. This leaves less than $8bn of current income to pay for imports, a fraction of the $37bn imported in 2015. Net reserves are less than $10bn and the country, trading as the riskiest in the world, has no access to financial markets.
In the meantime, the government has not announced any plans to address the domestic imbalances or the balance of payments problem. It has no strategy to seek the financial assistance of the international community. It has not even increased petrol prices from their current level, where $1 buys over 10,000 litres.
By contrast, the opposition, which now controls the National Assembly, is fighting to have its authority recognised by the other powers. It is in no position to lead an economic adjustment. Even the best and most stable government could not avoid a lousy performance in such circumstances. But in the middle of a political crisis, things are bound to get very messy indeed.
The fallout for Venezuela’s neighbours and the global economy will be substantial. Colombia has already felt the impact of the decision taken in September by Nicolás Maduro, Chávez’s successor as president, to close the border to avoid smuggling. Exporters to Venezuela are owed tens of billions of dollars of unpaid bills.
Under these conditions, a disorderly default, on a scale similar to the Argentine crisis, is almost inevitable. And it will not only be Venezuelans who get hurt.
Faced with this problem, neighbouring countries and the international community have remained surprisingly passive. They seem to have forgotten that the International Monetary Fund was created to avoid countries causing harm to others through their economic policies. Article IV of its founding charter, adopted in 1944, empowers the IMF to perform economic surveillance on member countries. The obligation to accept such monitoring is the corollary of the right of countries to be informed about what is happening elsewhere. But other countries cannot know what is happening in Venezuela now because the government has not let the IMF in since 2004, violating its obligations under Article IV.
To protect their economies from the coming mayhem, countries should start by exerting pressure to have IMF surveillance performed immediately, thus restoring their right (and that of Venezuelan civil society) to know what the current situation is.
It is probably too late to avoid a Venezuelan catastrophe altogether. But to reduce its length and intensity, the country needs to adopt a sound economic plan that can garner ample international financial support. This is unlikely to happen while Mr Maduro remains in power. But a transition will be facilitated by positive international signals of a willingness to support an alternative government that can formulate a credible path to recovery. This is no time to remain on the sidelines.
The writer is director of the Center for International Development at Harvard University
end
Your early morning currency/gold and silver pricing/Asian and European bourse movements/ and interest rate settings/THURSDAY morning 7:00 am
Euro/USA 1.1187 up .0094 (Draghi’s jawboning still not working)
USA/JAPAN YEN 117.55 down 0.623 (Abe’s new negative interest rate (NIRP) not working
GBP/USA 1.4604 up .0023
USA/CAN 1.3679 down .0116
Early this THURSDAY morning in Europe, the Euro rose by 94 basis points, trading now just above the important 1.08 level rising to 1.0916; 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: 6.5743 / (yuan up but will still undergo massive devaluation/ which will cause deflation to spread throughout the globe)
In Japan Abe went BESERK with NEW ARROWS FOR HIS Abenomics WITH THIS TIME INITIATING NIRP . The yen now trades in a northbound trajectory as IT settled UP in Japan again by 62 basis points and trading now well BELOW that all important 120 level to 117.55 yen to the dollar.
The pound was UP this morning by 23 basis point as it now trades just above the 1.46 level at 1.4604.
The Canadian dollar is now trading UP 117 in basis points to 1.3679 to the dollar.
Last night, Asian bourses were mixed with Shanghai up 0.52%. All European bourses were mixed as they start their morning.
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/and now NIRP)
3. Short Swiss franc/long assets blew up ( Eastern European housing/Nikkei etc.
These massive carry trades are terribly offside as they are being unwound. It is causing global deflation ( we are at debt saturation already) as the world reacts to lack of demand and a scarcity of debt collateral. Bourses around the globe are reacting in kind to these events as well as the potential for a GREXIT>
The NIKKEI: this THURSDAY morning: closed down 146.26 or 0.85%
Trading from Europe and Asia:
1. Europe stocks mixed
2/ Asian bourses mixed/ Chinese bourses: Hang Sang GREEN (massive bubble forming) ,Shanghai in the Green by 1.52% (massive bubble bursting), Australia in the green: /Nikkei (Japan)red/India’s Sensex in the GREEN /
Gold very early morning trading: $1146.65
silver:$14.75
Early THURSDAY morning USA 10 year bond yield: 1.896% !!! up 1 in basis points from last night in basis points from WEDNESDAY night and it is trading BELOW resistance at 2.27-2.32%. The 30 yr bond yield rises to 2.71 up 1 in basis points from WEDNESDAY night. ( still policy error)
USA dollar index early THURSDAY morning: 96.61 down 69 cents from WEDNESDAY’s close.(Now below resistance at a DXY of 100)
This ends early morning numbers THURSDAY MORNING
OIL MARKETS
ConocoPhillips reports and it is not pretty: they are cutting their dividend to 25 cents per share from 74 cents. They reported its biggest quarterly loss in almost 10 years with the drop in crude. The company’s warning to the world is dire: “we are going to have lower prices for longer”
Another energy giant, Weatherford axes 6,000 workers and 15% of all its workers:
(courtesy zero hedge)
ConocoPhillips Slashes Dividend, Warns Of “Lower Prices For Longer”; Weatherford Fires 15% Of All Workers
Another day, and another round of increasingly uglier news from the global energy sector.
Moments ago, energy giant ConocoPhillips announced it would cut the company’s quarterly dividend to 25 cents per share, compared with the previous quarterly dividend of 74 cents per share. This took place after reporting its biggest quarterly loss in almost a decade as independent oil producers feel the squeeze from the sharp decline in crude prices.
The company also lowered capital expenditures guidance to $6.4 billion from $7.7 billion and operating costs guidance to $7 billion from $7.7 billion.
The commentary from CEO Ryan Lance was dire: “While we don’t know how far commodity prices will fall, or the duration of the downturn, we believe it’s prudent to plan for lower prices for a longer period of time.”
“The actions we have announced will improve net cash flow by $4.4 billion in 2016. The decision to reduce the dividend was a difficult one. The dividend has been, and will continue to be, a top priority. We still intend to provide a competitive dividend, while significantly lowering the breakeven price for the company and substantially reducing the level of borrowing in 2016. Our actions also position us to deliver strong absolute and relative performance as prices recover.”
The company had previously emphasized it would prioritize maintaining the dividend while being more flexible with capital spending and the balance sheet.
As quoted by Bloomberg, “The pressure obviously built up on them,” said James Sullivan, an analyst at Alembic Global Advisors, who has an “overweight” rating on the share.. “The assumption a lot of us made was that the dividend is not sustainable.”
The stock was clearly surprised by the announcement, and was down over 5% in the premarket.
Elsewhere, another energy giant Weatherford International assured that next month’s Challenger report would also be ugly, when it announced plans to lay off an additional 6,000 workers, about 15 percent of its workforce, over the first half of this year to cope with the worst crude market downturn in 30 years.
The latest round of cuts brings to 20,000 the number of people who have been or will be let go by the world’s fourth-largest oilfield services supplier as oil prices tumbled by more than two thirds.
“We have geared the company, and will increasingly do so, for a prolonged period of very low activity,” Chief Executive Officer Bernard Duroc-Danner said Wednesday in an earnings statement. “We are ready for as protracted a downcycle as markets will dictate.”
It appears slowly but surely the realization is dawning on everyone: far lower prices are here to stay, and for a long period of time.
end
Yesterday it was chatter of 6 (non-Saudi) OPEC members agreeing to an emergency meeting (to do what exactly?) that ramped crude (despite dismal production, inventories, and demand data). Today it is talk of Turkey potentially invading Syria from the Russian defense minister…
“We have serious grounds to suspect intensive preparations by Turkey for a military invasion on the territory of the sovereign state of Syria,” Major General Igor Konashenkov, Defense Ministry spokesman, told journalists.
And crude is spiking back toward $33..
The Real Reason For Oil’s Crazy Volatility This Week
The volatility in crude oil trading has reached the highest levels since Lehman’s systemic crisis in 2008. Intraday swings of 5-10% are now de rigeur with OPEC and geopolitical headlines jockeying for narrative amid collapsing fundamentals.. but there is another, much bigger driver of this sudden chaos. As Reuters reports, the sudden liquidation of a $600 million triple-levered fund bet on falling prices wreaked havoc through the entire crude complex.
Intrday volatility in oil has been incredible to say the least…
But this week’s epic rips – in the face of dire data – was just “odd”…
Plenty of narratives were assigned but none made any sense. So what really happened?As Reuters reports,
Unknown investors in the VelocityShares 3x Inverse Crude Oil Exchange Traded Note (ETN) – which offers the ability to make a bearish bet on prices magnified threefold, with gut-churning ups and downs – bailed out early this week after jumping into the fund in January, ETN data show.
Some 1.8 million shares worth more than $602 million were redeemed on Tuesday, the largest outflow from the ETN in history, according to data from FactSet Research.
The selloff suggests that at least some big investors are betting that the worst of an 18-month oil market rout is over after U.S. prices fell to $26 a barrel last month for the first time since 2003. Trading activity has also jumped to the highest levels on record.
The DWTI note inversely tracks the S&P GSCI Crude Oil Index ER, which follows movements in the oil market. And because it offers investors three times the exposure, the impact on the underlying futures is magnified – as is the volatility in the ETN, whose price more than doubled in the first three weeks of January before halving again as oil futures rebounded.
The net asset value of the fund – one of a handful of exchange funds that allows investors to trade oil without the complexity of a futures exchange – fell from close to $1 billion to $417 million on Tuesday and to $322 million on Wednesday, according VelocityShares’ website.
As a result, the mass exodus likely forced the ETN’s issuer, Credit Suisse, to quickly buy back short positions as investors redeemed shares.
VelocityShares, a unit of Janus Capital Group, was unable to comment on the trading activity.
To unwind alone may have amounted to upwards of 40,000 futures contracts on Tuesday, according to estimates by analysts.
There is a day’s lag between when redemptions and creations are ordered and when they show up in share figures, according to Nadig, meaning that Tuesday’s flows were ordered on Monday, when oil reversed a three-day rally to close $2 a barrel lower.
On Wednesday, oil prices surged more than 8 percent to $32.28 a barrel, despite a seemingly bearish report from the U.S. Energy Information Administration showing nationwide crude inventories rose by 7.8 million barrels last week.
Volume in the March West Texas Intermediate futures contract surged on Wednesday to more than 777,000 lots traded, its second highest volume on record, according to data via ThomsonReuters’ Eikon. DWTI volume was also unusually heavy on Wednesday, with more than 1.9 million shares traded.
So that explains the sudden squeeze carnage yesterday…
And why today’s follow-through has failed as that unwind pressure disappears as DWTI’s NAV disappears.
end
Shale Shock: Another Leg Lower In Oil Coming After Many Producers Found To Have Far Lower Breakevens
One of the great unknowns facing the US shale industry, and threatening the recurring rumors of its imminent demise, is how it is possible that despite the collapsing number of oil wells, and despite the plunge in crude prices which supposedly are well below all-in shale production costs, does production not only refuse to decline, but in fact has been largely increasing in thepast 6 months, with just a modest decline in recent weeks.
The answer may come as a surprise not only to industry pundits, but certainly to Saudi Arabia, whose entire strategy has been to keep pressuring the price of oil low enough for long enoughto put as many “marginal producers” in the US shale space out of business as possible.
According to a report by the Bloomberg Intelligence analysts William Foiles and Andrew Cosgrove, Saudi Arabia may have its work cut out for it as it will be far harder to kill many U.S. E&Ps than analysts originally thought.
The reason: a break-even model for the Permian Basin and Eagle Ford showsthat oil production across five plays in Texas and New Mexico may remain profitable even when WTI prices fall below $30 a barrel, according to a 55-variable Bloomberg Intelligence model for horizontal oil wells.
The Eagle Ford’s DeWitt County has the lowest break-even, at $22.52, followed by Reeves County wells targeting the Wolfcamp Formation, at $23.40. The diversity of breakevens highlights the hazard posed by looking for a single number, even within a play.
These counties together produced about 551,000 barrels of liquids a day in October. Taking into account drilled but uncompleted wells boosts the number of potential survivors to 19. The wide range of break-evens undermines efforts to come up with a single threshold for U.S. shale producers.
The full list of breakevens by county is shown below:
To corroborate its model of break-even levels for oil producers in the Permian and Eagle Ford, Bloomberg used a Baker Hughes’ horizontal rig counts in the Spraberry play Permian and Eagle Ford. Howard County, Texas, has the lowest average break-even, at a WTI price of $29.19 a barrel. Its rig counts have doubled since oil prices began collapsing in mid-2014. In Midland County, at $30, rig counts are up 56%. Counts in Irion and Reagan counties, with two of the highest break-evens targeting the play, have fallen more than 70%.
None of this would be feasible if average breakeven prices were anywhere close to the $50-60 assumed by the consensus.
But where Bloomberg’s analysis gets outright disturbing, if only for Riyadh, is that once wells are completed, breakeven costs tumble to Saudi-like sub-$20 prices in some countries.
From Bloomberg:
Tapping drilled but uncompleted (DUC) horizontal oil wells drops break-even WTI oil prices to less than $20 a barrel in eight county-play combinations in the Permian and Eagle Ford. The analysis assumes that drilled wells are sunk costs and that drilling constitutes 30% of a well’s total cost. The 55-variable model shows that the impact of removing drilling expenses varies significantly by county and play, with break-even reductions ranging from $7.24 to $21.51, or 28% to 42%.
Bloomberg proceeds to crown DeWitt County, Texas, as the King of Shale due to its lowest breakevens across the land:
DeWitt County, Texas, has on average the lowest break-even WTI price for its oil production among 29 county-play combinations in Texas and New Mexico, at $22.73 a barrel, according to a Bloomberg Intelligence model. Shifts in drilling in the Eagle Ford may reflect differing cost levels. Dimmit County, with a break-even of $58.21, led the Eagle Ford in 1Q15 with 226 new horizontal oil wells, four times as many as DeWitt’s 56. Two quarters later, Dimmit’s new wells fell 71% to 65, while DeWitt’s surged 77%.
There is far more in the comprehensive analysis, but the punchline is simple: what many thought would be the “breaking” price point for virtually every shale play has just been lowered, and quite dramatically at that. It also means that algos and traders who had reflexively bought any dip below $30 on expectations this is close to the “sweet spot” and where the Saudis would relent, will have to drop their support levels by as much as a third!
Finally, it means that if Saudi Arabia truly means to put the marginal non-OPEC producers (read efficient U.S. shale) out of business, it will have to pump far more not less as many speculate, and worse, it will have to ramp up production very fast because as is well known by now, the Saudi Kingdom is itself hurting profusely as a result of low oil prices which are leading to budget crunches and domestic austerity such as soaring prices of gas and water.
Finally, since Saudi Arabia had expected that its FX reserve outflow would last only temporarily using $40-50 breakevens, it will have to sell many more US reserves (either TSYs or stocks) to fund the cash shortfall which will persist for far longer until oil catches down to the lowest cost US producers, which as of today’s close are at least $10/barrel lower.
In short: the oil price war is about to enter its far more vicious, and far more lethal phase, and while it is unclear who ultimately wins, whether it is Shale or the Saudis, the loser is clear: anyone who bought into bets of an imminent oil bounce.
That should help out with oil demand!
(courtesy zero hedge)
Portuguese 10 year bond yield: 3.03% up 10 in basis points from WEDNESDAY
New York equity performances plus other indicators for today:
Bonds & Bullion Best As Dollar Crashes To 4-Month Lows
The USD Index is down over 3% this week – the worst 4-day drop since China’s devaluation in August and plunging it back to 4-month lows…
Perhaps this is why? PBOC is actively intervening – selling USDs to support offshore Yuan…
Trannies were ecstatic… but the rest of the US equity market just could not get with the program…
VIX spikes broke the market and sparked rallies…
US Financial credit risk broke out to its highest since 2013…
Things are getting a little bit scary…
Investment Grade credit is starting to decouple from stocks…
Treaury yields fell once again (led by 5s to 10s) as we saw oveernifght selling (PBOC intervention) dominated by US session buying… 30Y below 2.70%
The Dollar was weaker today… with JPY now 3.5% stronger on the week as carry gets unwound…
Sold against all the majors…
Gold and Silver extended their gains…
Copper’s gains sparked chaotic panic buying in Materials stocks…
As crude roller-coastered…
Charts: Bloomberg
The all important Challenger Christmas Gray layoff report was grim: USA employers plan to layoff 75,114 poor souls.
(courtesy Challenger/Christmas,Gray)
Starting 2016 With A Bang: Challenger Reports Highest January Layoffs Since 2009
While we await the heavily massaged Initial Claims report from the DOL, moments ago we gotthe report of actual job layoff announcements tracked by Challenger Gray, and it was quite grim: in the first month of 2016, US-based employers reported 75,114 planned job cuts. Not only was this a 218% increase from the 23,622 in December, it was 42% higher than the same month a year ago, when employers announced 50,041 job cuts. According to Challenger, “heavy downsizing in the retail and energy sectors pushed monthly job cut announcements to their highest level since last summer.”
January represents the highest monthly tally since July 2015, when cuts reached 105,696. Most troubling, it was the largest January total since 241,749 job cuts were announced during the first month of 2009.
Despite relatively strong holiday sales to close out 2015, retailers led all other industries in January job cuts, announcing plans to cut 22,246 jobs from their payrolls. That was the highest retail total since January 2009, when retailers announced 53,968 planned layoffs.
Retail cuts were dominated by Walmart, which announced plans to close 269 stores worldwide, which is expected to impact 16,000 workers. Macys is also planning to close stores in 2016, a move that will affect 4,820 employees.
In addition to increased retail job cuts, January also saw the return of heavy job cuts in the energy sector. Overall, these firms announced plans to reduce headcounts by 20,246, up from 1,682 in December.
The January total for the energy sector was higher than month since the decline in oil prices began in late 2014. The previous high was January 2015, when 20,193 jobs in the sector were eliminated.
“The pace of downsizing in the energy sector ebbed in the second half of 2015, but the latest activity, which included more cuts from Halliburton and Schlumberger, is evidence the industry is far from concluding its cost-cutting initiatives. With oil prices expected to stay low for the foreseeable future, the potential for continued layoffs remains elevated,” said John A. Challenger, chief executive officer of Challenger, Gray & Christmas.
Since oil prices began their decline, Halliburton has announced 22,000 job cuts through multiple job-cut announcements. Schlumberger has also reported multiple layoff events since late 2014, with total job cuts exceeding 30,000. Baker Hughes has also announced multiple layoffs, totaling 16,000.
“Retail job cuts came on the heels of a relatively strong holiday sales, which increased by nearly 8.0 percent. However, a growing portion of the sales gains are occurring online. At Macy’s, for example, November and December sales at its brick-and-mortar stores fell by about 5.0 percent, while orders through its online entities were up 25 percent from a year earlier, according to reports,” said Challenger.
“This shift is making it necessary for retailers like Macy’s and Walmart to rethink their strategy; moving away from traditional stores and investing more into Internet sales. Unfortunately, this shift is resulting in widespread job cuts across the industry, even in times of good health,” said Challenger.
The layoffs were highest in Texas with over 27K layoffs, driven by energy, followed by Arkanas’s 16,100 as a result of Walmart’s terminations, Ohio with over 6,000 and Virginia with just shy of 4,000.
The cuts by industry as noted above, were focused in Retail and Energy:
Initial Jobless Claims Average Hovers 11-Month Highs
Since the beginning of 2014, Initial jobless claims and Challenger Job Cuts have decoupled as the former “trended” in its seasonally adjusted manner while the latter appeared to reflect a different reality. That all changed in October last year as the trend in claims began to turn. Last week’s jump to 285k dragged the less noisy 4-week average to 285k – the highest since March 2015 as initial claims begin to catch up to Challenger Job Cuts…
Continuing Claims’ rising trend is still in place with the 4-week average at its highest since September.
Charts: Bloomberg
How The Fed Unwittingly Confirmed A Recession And A Default Cycle Are Now Inevitable
While everyone was focused on the “front end” of central bank announcements in the form of Draghi jawboning, Yellen hemming and Kuroda panicking, something more troubling took place on Monday afternoon on the “back end”, when the FED released its latest quarterly senior loan officers survey.
What it showed was that in Q4, lending standards tightened for the second consecutive quarter.
This is problematic because as DB’s Jim Reid writes, two consecutive quarters of tightening standards “has never happened before without it signalling an eventual move into recession and a notable default cycle. Once we have 2 such quarters lending standards don’t net loosen again until the start of the next cycle.”
If there is any silver lining, it is that as DB points out, so far the tightening of standards are still only mild, especially relative to recessionary levels. So although it does continue to feel like we’re late cycle, it could still be a number of quarters for the full cycle to unravel.
In other words the countdown is on, not only for the Fed to admit policy error, which Bill Dudley hinted at yesterday, but also a countdown to the admission that the US is in a recession and the long overdue collapse in the world’s most crowded (if only until recently) trade, being long the US Dollar.
end
USA factory orders tumble 2.9%, worse than expected. The all important inventories to sales ratio soars, and this is a pretty good indicator of a recession ahead of us:
(courtesy zero hedge)
US Factory Orders Plunge As Inventories Ratio Soars To Recession Cycle Highs
With the Services economy now catching down to Manufacturing’s demise (in its lagged – not decoupled – manner), this morning’s news that US Factory Orders tumbled 2.9% in December (worse than expected and the biggest MoM drop since Dec 2014) offers little hope for any bounce anytime soon. This is the 14th monthly drop in YoY factory orders – something has not happened outside of a broad US economic recession. Even more concerning is the surge in inventories-to-shipments to cycle highs seen in 2000 and 2008.
And inventories soar to cycle highs…
Still the excuses pile up… weather… foreign not domestic… services will save us (oh wait!)
AAPL Tumbles As Market “Breaks” Again
Just as the market broke back into the red for the day, it broke…
- *BATS SYSTEM STATUS: “ALL BATS” ROUTING STRATEGY DISABLED
- *NYSE: NYSE ARCA OPTIONS CURRENTLY EXPERIENCING TECHNICAL ISSUES
Seriously!!
But… there is more..
- *NYSE ARCA CITES ISSUE AFFECTING SOME SYMBOLS IN A, P RANGES
- *NYSE ARCA OPTIONS: CERTAIN SYMBOLS WON’T PUBLISHED REST OF DAY
- *NYSE ARCA:2-MIN REFRESH MESSAGES WON’T BE PUBLISHED REST OF DAY
And AAPL is collapsing…
Did Something Blow A Hole In The Fed’s Balance Sheet?
The basis for this analysis is a video published today by Mike Maloney titled, Is A Financial Crisis Being Covered Up? My hats off to Mike for finding this data from the Fed because I would not have otherwise been looking for it. To help think about the analysis below, keep in mind that the Fed’s balance sheet is an aggregation of all of the Regional Fed balance sheets, which themselves are an aggregation of the banks that are members of each Regional Fed. (Click on image to enlarge)
On December 23, 2015 the Federal Reserve’s Capital Account plunged by 65% – $19 billion – when the Surplus Capital Account dropped by that amount. The Capital Account (CA) represents the capital required to be paid in (“Paid-In Capital) to the Fed when a bank becomes a member of the Federal Reserve system. Think of the CA as the “book value” of the Fed – assets minus liabilities. The Surplus Capital represents “retained earnings” and the Fed is required to maintain Surplus Capital equal to 100% of Paid-In Capital. This requirement is set by the Board of Governors. Currently, Fed interest earnings in excess of the required Surplus Capital and net of expenses is then transferred to the Treasury in the form of a dividend.
The 65% plunge in the Fed’s Total Capital Account, accounted for by the $19.4 billion drop in Surplus Capital, took the Surplus Capital account down to only 25% of Paid-In Capital (Total Capital minus Surplus Capital = Paid-In Capital). This points to a large scale financial crisis that had to be addressed by allowing some of the Fed member banks to withdraw an amount of Surplus Capital well in excess of the amount required by the Fed’s Board of Governors. Perhaps that might explain the Fed’s unscheduled “expedited, closed meeting” that took place on November 23.
Per the Financial Accounting Manual for the Federal Reserve Banks, the primary purpose of Surplus Capital is to provide a buffer against Paid-In Capital in the event of losses. And there’s the rub. Without having the benefit of even a modicum of Fed transparency, I would suggest that the $19 billion removed from the Surplus Capital account at the Fed was used to address collapsing energy-related loans (assets) sitting on the balance sheet of some of the big regional banks. On the assumption that these assets fall within the 10% reserve ratio requirement, it would suggest that some or several regional banks – and possibly one or two of the Too Big To Fail banks – have sustained at least $190 billion in losses in their energy-related loans. Or they are getting ready to take write-downs of that magnitude.
Interestingly, as I was getting ready to write up this analysis, a colleague with an energy industry contact in Canada called to tell me that he had just heard that CIBC is getting ready announce a big round of job cuts related to its energy banking business. The insider at CIBC also said that the big hits to the Canadian banking system are still coming.
I would suggest that this information can also be applied to domestic U.S. banks as well. We already know that the Dallas Fed has instructed its member banks to refrain from marking to market their energy loans and from pulling the plug on energy company borrowers who are in serious delinquency or technical default. We also know that Wells Fargo is somewhat admitting to sitting on an energy loan problem and that Citibank has an even bigger problem to which it is not admitting: Wells Fargo Bad, But Citi Is Worse.
It’s been estimated that funded (i.e. junk bonds + bank loans + funded revolver debt) is probably in the $500-750 billion area. Total including unfunded is over $1 trillion. More ominously, we have no possible way of knowing the size of the OTC derivative / credit default exposure connected to that $1 trillion. But we can safely say that it’s likely to be multiples in size of the actual debt in “nominal” amount, although every bank out there will claim to be hedged and thus the “net” is a small fraction of nominal. I would suggest that “net” becomes “nominal” when counter-parties begin to default. Just ask AIG and Goldman Sachs.
Given that there has never been a drop in the Fed’s Surplus Capital even remotely close to the 65% plunge that occurred the week of December 23, that sudden plunge in Surplus Capital at the Fed is somewhat shocking. But, given the probability that it is being used as an attempt to douse the lit fuse of a massive energy-related financial nuclear bomb in the form of defaulted energy loans and related derivatives, that drop in Fed capital is horrifying.
The BKX bank stock index has dropped 18% since December 23 vs. 7.5% for the S&P 500 in the same time period. While all eyes seem to be fixated on Deutsche Bank’s stock, it would seem to me that we should be focused on the financial meltdown occurring behind the Fed’s “curtain” that is clearly going on in the U.S. banking system based on the sudden plunge both in the credit quality of the Fed’s balance sheet and the recent cliff-dive in bank stocks.
The U.S. financial system is collapsing. This is evidenced by the extreme recent volatility in the S&P 500, as the Fed fights the inevitable stock market collapse, and in the recent run-up in the price of gold and silver. As a final thought to this analysis, I would suggest the possibility that the fraudulent silver price fix on the LBMA last week was a last gasp attempt by the big bullion banks to grab as much physical silver as they can, as cheaply as possible, before the price of gold and silver are reset by the market. How else can you explain the 40% move higher in the HUI gold mining stock index since January 19?
As Madoff Airs on TV, Two Anonymous Whistleblowers Are Pounding on the SEC’s Door Again
By Pam Martens and Russ Martens: February 4, 2016
Last night ABC began its two-part series on the Bernie Madoff fraud. Viewers will be reminded about how investment expert, Harry Markopolos, wrote detailed letters to the SEC for years, raising red flags that Bernie Madoff was running a Ponzi scheme – only to be ignored by the SEC as Madoff fleeced more and more victims out of their life savings.
Today, there are two equally erudite scribes who have jointly been flooding the SEC with explosive evidence that some Exchange Traded Funds (ETFs) that trade on U.S. stock exchanges and are sold to a gullible public, may be little more than toxic waste dumped there by Wall Street firms eager to rid themselves of illiquid securities.
The two anonymous authors have one thing going for them that Markopolos did not. They are represented by a former SEC attorney, Peter Chepucavage, who was also previously a managing director in charge of Nomura Securities’ legal, compliance and audit functions. We spoke to Chepucavage by phone yesterday. He confirmed that two of his clients authored the series of letters. Chepucavage said further that these clients have significant experience in trading ETFs and data collection involving ETFs.
Throughout their letters, the whistleblowers use the phrase ETP, for Exchange Traded Product, which includes both ETFs and ETNs, Exchange Traded Notes. In a letter that was logged in at the SEC on January 13, 2016, the whistleblowers compared some of these investments to the subprime mortgage products that fueled the 2008 crash, noting that regulators and economists were mostly blind to that escalating danger as well. The authors wrote:
“The vast majority of ETPs have very low levels of assets under management and illiquid trading volumes. Many of these have illiquid underlying assets and a large group of ETPs are based on derivatives that are not backed by physical assets such as stocks, bonds or commodities, but rather swaps or other types of complex contracts. Many of these products may have been designed to take what were originally illiquid assets from the books of operators, bundle them into an ETP to make them appear liquid and sell them off to unsuspecting investors. The data suggests this is evidenced by ETPs that are formed, have enough volume in the early stage of their existence to sell shares, but then barely trade again while still remaining listed for sale. This is reminiscent of the mortgage-backed securities bundles sold previous to the last financial crisis in 2008.”
The authors also note in this same letter that they have been presenting their evidence of “significant red flags” and “fundamental flaws” to the SEC since March 2015 and that the industry has not disputed the evidence. However, disclosures of these risks in the product offerings has not been forthcoming either.
To underscore to the regulators just how serious they are about cleaning up the ETP market, in a cover letter dated March 24, 2015, Chepucavage copied every member of the Financial Stability Oversight Council (F-SOC), the body created under the Dodd-Frank financial reform legislation to monitor financial stability in the U.S., including Federal Reserve Chair Janet Yellen, U.S. Treasury Secretary Jack Lew, and SEC Chair Mary Jo White.
The detailed March 24, 2015 letter from the whistleblowers pointed out that the very act of allowing some of these illiquid product offerings to be listed on U.S. stock exchanges is lending an air of legitimacy to them since stock exchanges in the U.S. are also mandated to police their own markets. The whistleblowers wrote:
“Whether it is realized or not, authorizations to trade exchange traded products by exchanges/self-regulatory organizations (‘SROs’) suggests legitimacy of the product to investors, which is evidenced by the growing interest in ETFs (supplemented through the massive ETF advertising campaigns to investors…)”
Another letter raised the issue that Wall Street On Parade wrote about on December 15, 2015 — the role of “Authorized Participants,” which are mainly the big Wall Street banks.
The whistleblowers noted:
“The market trading discussed herein… is being executed between investors and counterparties mostly consisting of Authorized Participants, market makers or clearing firms (which may be the same firms), which in many cases is not causing a net creation of shares (purchasing underlying assets) for certain important ETFs. In some ETPs, there is a conflict of interest between the investor and the contra parties in the secondary market.
“Anyone that has been critical of ETPs has been immediately attacked by the industry, without any factual data from the industry to support their positions. The strategy has simply been ‘attack the messenger,’ which does not address the underlying problems within ETPs.”
The most recent letter from the whistleblowers to the SEC came just nine days ago in advance of the SEC holding a February 2 meeting of its Equity Market Structure Advisory Committee to discuss the bizarre collapse in market prices in the opening minutes of stock market trading on August 24, 2015. In their latest letter, the whistleblowers detailed the role of Exchange Traded Products on that day, writing:
“Of the 1,278 individual circuit breaker trading halts in U.S. traded securities on August 24th, 83% were ETPs. This equated to the trading in 327 different ETPs being halted, with most of them being halted more than once.
“The halted ETPs were across various sectors and had different investment objectives. For example, there were ETPs halted that were based on broad indexes, financials, consumer staples, health care, small capitalization, large capitalization (including the S&P 500 Index), currencies and U.S. Treasury bonds. In addition to ETPs based on equities, some of the ETPs were inverse and/or leveraged, which include other derivative instruments as underlying holdings.
“This is not the first time many of these same ETPs have experienced problems. During the May 2010 Flash Crash there were 227 ETPs that had trades busted when the prices fluctuated greater than 60% (many collapsed to virtual zero). On August 24th, there were 81 of these same ETPs that triggered circuit breakers.
“The SPDR S&P 500 ETF (Symbol: SPY) and its sister ETF, the iShares S&P 500 ETF (Symbol: IVV), both tracking the same blue chip companies, deviated from each other. Trading in the IVV triggered two circuit breakers, while the SPY tracked the underlying S&P 500 Index from the opening bell. At the lowest, the SPY priced the S&P 500 Index at 1,829 and the IVV priced the same index at 1,480; a 349 point difference, which would have resulted in an approximate additional loss to all markets of $3.2 trillion based on the IVV’s price.
“This is similar to the 2010 Flash Crash, when the IVV became unhinged from the S&P 500 Index and the SPY, causing IVV trades to be busted, while the SPY traded without significant disruption.”
These two anonymous whistleblowers are not the only individuals that are calling attention to the threat to the markets posed by ETFs. While the whistleblowers are providing troves of statistical data and academic reasoning to the SEC, the hedge fund billionaire, Carl Icahn, appeared on CNBC last summer and compared what is happening in the junk bond ETF market to a party bus full of drinking revelers who are about to go over a cliff.
The Office of Financial Research (OFR), a unit of the U.S. Treasury which was created under the Dodd-Frank financial reform legislation to provide research to F-SOC on emerging risks in financial markets, included a special section on looming dangers in the ETF market in its 2015 Financial Stability Report. The section was titled: “The Potential Role of ETFs in Generating and Propagating Liquidity Stress.” The report raised an additional troubling aspect in regard to how little regulators actually know about what is going on behind the scenes of the ETF structure. The report notes the following:
“The high concentration of ETF market-making activity reinforces this risk; the top three dealers account for 50 percent of reported trading volume…We note a paucity of reliable data regarding ETF market-making activity, which prevents regulators from fully identifying potential vulnerabilities in this sector. At present, we rely on self-reported statistics that cover approximately half of all ETF trades and do not include ETF liquidity providers other than registered market makers. We point out that market maker concentration and identities of the most active market makers may shift across funds. Also, ETF trading outside exchanges is difficult to track and little data about this segment are available.”
The report goes on to highlight other breathtaking concerns:
“Some of the larger market makers in the ETF market also appear to gain access to liquidity by placing ETF shares as collateral in the repo market. This finding is based on the Securities and Exchange Commission’s (SEC’s) Form N-MFP data on money market fund portfolio holdings. (Incomplete collateral information limits our visibility on the financing of ETF shares in relation to other types of cash investors.) Consequently, a disruption in the dealer funding markets could affect a market maker’s ability to finance its inventory in ETF shares and decrease the amount of liquidity it provides to support ETF trading. In May 2015, the SEC released a proposal to collect more granular data from investment companies on their repo market activity, as well as ETF trading activity. This information may provide better visibility into the use of ETF shares as collateral in repo markets.”
The ETF market has now grown to $2.9 trillion, according to PwC. Should the SEC still be fumbling around in the dark? This time around, it’s going to be very hard for the SEC to say it had no way to anticipate what was coming.
end
OH!OH! Pacific Capital is liquidating!!
(courtesy zero hedge)
The Latest Hedge Fund Casualty: Standard Pacific Capital Is Liquidating
It has been at least a week without news of a prominent hedge fund liquidating, so when moments ago Reuters reported that once prominent hedge fund, SF-based Standard Pacific, which a decade ago managed over $5 billion, is the latest casualty of broken markets and has decided to shut down things once again reverted back to normal.
From Reuters:
Standard Pacific Capital, the stock-focused hedge fund firm led by Doug Dillard and Raj Venkatesan, is shutting down, according to a letter sent to investors seen by Reuters.
“After 21 rewarding years, Standard Pacific Capital has decided to return capital to investors across all of our strategies,” the letter said. “It has recently become clear to both of us that sometimes there is a logical conclusion to even a good thing. We decided that now is that time for Standard Pacific.”
It was not immediately clear what the final AUM of the stock-focused hedge fund firm led by Doug Dillard and Raj Venkatesan, was but what we do know is the fund’s latest 13-F holdingslisted 25 long equity names, amounting to a total of $100 million which will now be unwound.
We continue to expect many more marquee 2 and 20 collecting asset managers to call it a day in the coming weeks and months as nobody can even pretend this central bank dominated, HFT-rigged “market” makes any sense any more.
Bloodbathery.. it seems at full employment no one needs a new job… or wants to hire? LNKD is downover 20% in the after-hours following a drastic guidance cut. This crashes the stock to its lowest since July 2014…
- *LINKEDIN SEES 1Q ADJ. EPS ABOUT 55C, EST. 75C
- *LINKEDIN SEES YR ADJ EPS $3.05 – $3.20, EST. $3.77
- *LINKEDIN SEES 1Q REV. ABOUT $820M, EST. $867.1M
LinkedIn is providing guidance for the first quarter and full year 2016.
For the first quarter:
- Revenue of approximately $820 million, representing 29% percent growth.
- Adjusted EBITDA of approximately $190 million, a 23% margin.
- Non-GAAP EPS of approximately $0.55 cents per share.
For the full year:
- Revenue between $3.6 and $3.65 billion, a range of 20% to 22% year-over-year growth. This includes a 2% F/X headwind. It also incorporates removing $50 million in potential Bizo revenue contribution in 2016.
- Adjusted EBITDA between $950 and $975 million, a 27% margin at the midpoint.
- And non-GAAP EPS of approximately $3.05 to $3.20 per share.
And the result…
With Online job postings growth slightly decelerating in Q4, and January’s job cuts surging…
It would appear that growth is over…
We have a suggestion…
harveyorganblog.com 
[…] FEB 4/ANOTHER HUGE ADDITION OF 8.03 TONNES OF GOLD INTO GLD/GOLD RISES AGAIN UP $16.30 TO $1157.60/C… […]
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[…] by Harvey Organ Harvey Organ’s Blog […]
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Didn’t receive email for this issue. Hope it was just a one day glitch. Don’t want to miss any of the blog post.
Thanks
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