Gold: $1194.500 down $3.00 (comex closing time)
Silver 15.27 down 17 cents
In the access market 5:15 pm
Today, was testimony by Yellen on the state of the uSA economy (Humphrey-Hawkins) and they always whack gold and silver while she is speaking. The bankers did not disappoint us today as they tried in earnest to whack our precious metals. It was in vain as gold and silver took the punches and then rebounded to close at 1197.50 in the access market.
At the gold comex today, we had a good delivery day, registering 872 notices for 87,200 ounces. Silver saw 4 notices for 20,000 oz.
Several months ago the comex had 303 tonnes of total gold. Today, the total inventory rests at 204.24 tonnes for a loss of 99 tonnes over that period.
In silver, the open interest fell by a huge 4776 contracts down to 164,664. In ounces, the OI is still represented by .822 billion oz or 117% of annual global silver production (ex Russia ex China).
In silver we had 4 notices served upon for 200,000 oz.
In gold, the total comex gold OI fell by 3,206 contracts to 410,833 contracts as gold was up $0.80 with yesterday’s trading.
We had another change in gold inventory at the GLD, this time a withdrawal of 1.49 tonnes / thus the inventory rests tonight at 702.03 tonnes. The appetite for gold coming from China is depleting not only gold from the LBMA and GLD but also the comex is bleeding gold. Our 670 tonnes of rock bottom inventory in GLD gold has been broken. It looks to me that China has taken the last amounts of physical gold from the GLD. I guess the only place left for China to receive physical gold, after they deplete the GLD will be the FRBNY and the comex. In silver,/we had no changes in inventory, 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 fall by 4,776 contracts down to 164,664 despite the fact that silver was up 3 cents with yesterday’s trading. The total OI for gold fell by 3,206 contracts to 410,833 contracts despite gold being up $0.80 in price from yesterday’s level.
2 a) Gold trading overnight, Goldcore
b) Gold trading from NY”
3. ASIAN AFFAIRS
i) Late TUESDAY night/ WEDNESDAY morning: Shanghai closed for the Chinese New Year (all week) / Hang Sang closed . The Nikkei DOWN another 372.05 points or 2.31% .The Asian stock markets that were open were all down. Chinese yuan (ONSHORE) closed 6.5710 and yet they still desire further devaluation throughout this year. Oil GAINED to 28.60 dollars per barrel for WTI and 30.93 for Brent. Stocks in Europe so far all in the green . Offshore yuan trades where it finished on Friday at 6.5600 yuan to the dollar vs 6.5710 for onshore yuan/
We will provide a summary of events from Japan and Australia last night:
(courtesy zero hedge)
ii)Outflows from Chinese citizens and corporates continue at an alarming rate. In January a huge 110 billion left the nation as citizens try and beat the headwinds of a devaluation:
iii) central banks are losing control:
i)David Stockman does not trust Deutsche bank. He states that when it is crunch time, they lie!!
ii) A large increase in European exposure to oil will have a devastating effect on their banks:
iii) JPMorgan scares the daylights out of investors: they state that the ECB can cut rates to -4.5%; the bank of Japan to -3.45% and the Fed to -1.3% as these central banks can charge banks with their huge reserves in order to stimulate the economy:
iv) Looks like Europe is going to suspend Schengen for two years:
v) Deutsche bank’s stock rises today on news of ECB QE, the false premise that the ECB will purchase bank stocks and the fact that Deutsche bank will purchase bank debt
vi) What a joke! John Mack, former CEO states that we should not worry about Deutche bank because it will be bailed out by the German Government
( zero hedge)
iii)As the Maersk earnings indicate, the world finances are in turmoil. The world is expecting no inflation but an avalache of deflation: which is what Japan is going through right now!!
( zero hedge)
i)Oil drops below 28 dollars on the disappointment in Yellen’s testimony this morning;
( zero hedge)
ii)According to BP and they should know: “Every oil storage tank will be full in a few months”. That should bring crude down in price to the low 20’s or high teens:
( BP//zero hedge)
iii) Two events: an unexpected crude draw down helps oil but a huge Cushing build up for the 13th straight week, causes oil to fall back down
i)Ronan Manly explains the failure of the London’s silver fix
ii)Strange event!! Six members of the LBMA resign!( Reuters/GATA)
iii) Robert Appel discusses the two camps with respect to financial writers on gold. Those that believe gold is manipulated and the other camp that refuses to talk about it
iv) So what else is new?: EU probes the suspected rigging of 1.5 trillion debt markets
(London’s Financial times/GATA)
v)Central bank injection of money is failing/ gold strengthens as the bankers are losing control
( John Embry/Kingworldnews/GATA)
USA STORIES WHICH WILL INFLUENCE GOLD/SILVER
i)Yellen’s Humphrey Hawkins testimony to Congress is not as dovish as hoped. The USA/Yen cross drops (Yen rises) on the disappointing news. The Dow is barely up as USA markets open:
( zero hedge)
ii)Goldman Sachs take on today’s testimony: additional hikes remain the FOMC base line:
iii) The markets are unhappy that Yellen states that NIRP if implemented in the uSA is still a legal question! Down went the Dow!!
( zero hedge)
Let us head over to the comex:
The total gold comex open interest fell to 410,833 for a loss of 3206 contracts despite the fact that the price of gold was up $0.80 in price with respect to yesterday’s trading. For the past two years, we have strangely witnessed two interesting developments with respect to the gold open interest: 1) total gold comex collapse in OI as we enter an active delivery month, and 2) a continual drop in the amount of gold standing in an active month. Today, both scenarios were in order. In February the OI fell by 359 contracts down to 2,057. We had only 14 notices filed on yesterday, so we lost 345 contracts or an additional 34,500 oz will stand for delivery as they were cash settled.. The next non active delivery month of March saw its OI rise by 264 contracts up to 1821. After March, the active delivery month of April saw it’s OI fall by 2442 contracts down to 293,593. The estimated volume today (which is just comex sales during regular business hours of 8:20 until 1:30 pm est) was 157,790 which is poor. The confirmed volume yesterday (which includes the volume during regular business hours + access market sales the previous day was poor at 180,997 contracts. The comex is in backwardation until June.
Feb contract month:
INITIAL standings for FEBRUARY
|Withdrawals from Dealers Inventory in oz||nil|
|Withdrawals from Customer Inventory in oz nil||192.90 oz
|Deposits to the Dealer Inventory in oz||4,000 oz Brinks???|
|Deposits to the Customer Inventory, in oz||nil|
|No of oz served (contracts) today||872 contracts(87,200 oz)|
|No of oz to be served (notices)||1185 contracts (118,500 oz )|
|Total monthly oz gold served (contracts) so far this month||1718 contracts (171,800 oz)|
|Total accumulative withdrawals of gold from the Dealers inventory this month||nil|
|Total accumulative withdrawal of gold from the Customer inventory this month||503,410.8 oz|
we had 1 adjustment.
i) Out of Scotia:
9,645.000 oz was adjusted out of the customer and this landed into the dealer of Scotia
Here are the number of oz held by JPMorgan:
FEBRUARY INITIAL standings/
|Withdrawals from Dealers Inventory||nil|
|Withdrawals from Customer Inventory||nil oz|
|Deposits to the Dealer Inventory||nil|
|Deposits to the Customer Inventory||667.566.47 oz,
|No of oz served today (contracts)||4 contracts 20,000 oz|
|No of oz to be served (notices)||16 contracts (700,000 oz)|
|Total monthly oz silver served (contracts)||120 contracts 600,000|
|Total accumulative withdrawal of silver from the Dealers inventory this month||nil oz|
|Total accumulative withdrawal of silver from the Customer inventory this month||5,841,355.4 oz|
Today, we had 0 deposits into the dealer account:
total dealer deposit;nil oz
we had 0 dealer withdrawals:
total dealer withdrawals: nil
we had 4 customer deposits:
i) Into CNT: 2024.56 oz
ii) Into Delaware: 1001.100 oz
iii) Into HSBC: 85,810.500 oz
iv) Into Scotia: 578,730.310 oz
total customer deposits: 667,566.470 oz
total withdrawals from customer account nil oz
we had 0 adjustments:
And now the Gold inventory at the GLD:
Feb 10/ a withdrawal of 1.49 tonnes of gold from the GLD/Inventory rests at 702.03 tonnes
Feb 9./a huge addition of 5.06 tonnes of gold into the GLD/Inventory rests at 703.52 tonnes/ (no doubt that this addition is paper gold/not physical/
Feb 8/no change in inventory/inventory rests at 698.46 tonnes
FEB 5/another massive 4.84 tonnes added to the GLD/Inventory rests at 698.46 tonnes/this is a paper gold addition and this vehicle is nothing but a fraud. There is no metal behind it.
FEB 4/another massive 8.03 tonnes added to the GLD/Inventory rests at 693.62 tonnes.
in a little over a week we have had 29.43 tonnes added to the GLD. Judging from the backwardation of gold in London, it would be impossible to bring that quantity into the GLD. No doubt that the entry is a “paper” gold deposit.
Feb 3.2016: a massive 4.16 tonnes deposit of gold at the GLD/Inventory rests at 685.59 tonnes.. In a little over a week, we have had 21.42 tonnes enter the GLD. Without a doubt that this entry is paper gold. It would be impossible to find 21 tonnes of physical gold and load the GLD.
Feb 2.2016: no changes in inventory at the GLD/inventory rests at 681.43 tonnes
Feb 1/a massive deposit of 12.20 tonnes of gold inventory/Inventory rests at 681.43
JAN 29/2016/no change in gold inventory at the GLD/Inventory rests at 669.23 tonnes
jAN 28/no changes in gold inventory at the GLD/Inventory rests at 669.23
jan 27/another huge addition of 5.06 tonnes of gold to GLD/Inventory rests at 669.23 tonnes /most likely the addition is a paper deposit and not real physical,especially with gold in backwardation in both London and the comex.
Jan 26.no change in gold inventory at the GLD/Inventory rests at 664.17 tonnes
Feb 10.2016: inventory rests at 702.03 tonnes
And now your overnight trading in gold, WEDNESDAY MORNING and also physical stories that may interest you:
Mutual Funds, ETFs at Risk of a Run Warns David Stockman
In one of his starkest warnings yet, Former White House Budget Director (Office of Management and Budget, OMB), David Stockman has warned that banks and the global financial system remain vulnerable and there is likely to be another global financial crisis which will be worse than the first involving “a run on mutual funds and ETFs.”
Stockman warns in a Bloomberg interview that Deutsche Bank
“has a $2 trillion balance sheet and they have a net tangible equity of $66 billion. So that is 3% – “they are leveraged 30 to 1 in terms of net tangible equity.”
“What is whirling around in that $2 trillion nobody knows but I do think that the banks have unloaded the worst of their stuff and today it is in mutual funds and ETFs, today it is in non bank financial institutions, like all these companies that have come up over night to make auto loans by selling junk bonds as a form of capital.”
This is reminiscent of the first financial crisis and the financial collapse wrought on the world with the subprime mortgage fraud as beautifully illustrated in the must see movie ‘The Big Short’.
Regarding how ‘mom and pop’ investors and pension owners are vulnerable, Stockman says
“The dangers of a run are far more serious now than it was with banks then. Back then, main street banks did not have to mark to market most of their assets and there never was a run on mainstreet banks, it was only on a few hedge funds …
This time you are going to have a run of $5 trillion or $6 trillion of mutual funds. This time you are going to have a run on the ETFs. There were only $1 trillion of ETFs in existence in 2008. There is over $3 trillion now and they are an accelerator mechanism.“
When everyone sells their ETFs, the managers have to go out and liquidate assets by selling the underlyings. The underlying assets are not nearly as liquid as the offer that anytime you want to sell your ETF there is a bid. Anytime you want to sell your mutual fund share, there is a bid … and I will tell you what … that is where the collision is going to come in the market.”
In another must watch Bloomberg interview, the respected Stockman warned that Deutsche Bank is in difficulty and the CEO is likely lying:
“In my experience is that when the crunch comes, bank CEOs lie.”
Stockman reminded us of the deceit and denial that emanated from Morgan Stanley, Bear Stearns and Lehman Brothers before their collapse:
“I don’t trust Deutsche Bank. I don’t trust what they’re saying. And there’s reason why the banks are being sold all across the world… because people are realizing once again that we don’t know what’s there [on bank balance sheets].”
GoldCore Note: Banks, economists, brokers, financial advisers and other experts did not see the first crisis coming in 2008 and they are not seeing it now.
A handful of people are warning about the risks and again they are largely being ignored. Investors and savers will again bear the brunt for the inability to look at the reality of the financial and economic challenges confronting us today.
Diversification remains the key to weathering the second global financial crisis.
LBMA Gold Prices
10 Feb: USD 1,183.40, EUR 1,052.29 and GBP 816.56 per ounce
9 Feb: USD 1,188.90, EUR 1,061.90 and GBP 822.31 per ounce
8 Feb: USD 1,173.40, EUR 1,050.16 and GBP 810.44 per ounce
5 Feb: USD 1,158.50, EUR 1,035.58 and GBP 797.40 per ounce
4 Feb: USD 1,146.25, EUR 1,027.29 and GBP 782.16 per ounce
Gold and Silver News and Commentary – Click here
Ronan Manly: January smash in London silver fix arose from broken promises
Submitted by cpowell on Tue, 2016-02-09 13:05. Section: Daily Dispatches
8a ET Tuesday, February 9, 2016
Dear Friend of GATA and Gold:
Gold researcher Ronan Manly shows today that last month’s strange smash in the new London silver price fix, which disagreed so sharply with simultaneous spot and futures prices, resulted from the failure of the fix’s managers to keep a promise made 18 months earlier to arrange wider participation in the fix and central clearing of trades based on the fix. Manly’s analysis is headlined “The LBMA Silver Price — Broken Promises on Wider Participation and Central Clearing” and it’s posted at Bullion Star here:
CHRIS POWELL, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.
Six London Metal Exchange members resign, including Rio Tinto
Submitted by cpowell on Tue, 2016-02-09 15:00. Section: Daily Dispatches
Friday, February 5, 2016
LONDON — Half a dozen of the lowest-ranking members on the London Metal Exchange with no trading rights, including global miner Rio Tinto, have resigned, the LME said on Friday.
A members’ notice announcing the resignations of category 5 members gave no reason behind the moves, although one of the companies has upgraded its membership. A spokeswoman declined to comment. …
… For the remainder of the report:
Robert Appel: The gold price secret Wall Street doesn’t want to talk about
Submitted by cpowell on Tue, 2016-02-09 22:32. Section: Daily Dispatches
5:30p ET Tuesday, February 9, 2016
Dear Friend of GATA and Gold:
In commentary published this week by Profit Confidential, Robert Appel writes that “the entire universe of gold writers and commentators has broken into two distinct camps — those who accept gold price manipulation and those who won’t touch that topic with a 10-foot pole.” Appel adds that last Friday’s $20 smash in gold and the monetary metal’s quick recovery were evidence that the manipulation camp is right. His analysis is headlined “The Gold Price Secret Wall Street Doesn’t Want to Talk About” and it’s posted at Profit Confidential’s Internet site here:
CHRIS POWELL, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.
EU probes suspected rigging of $1.5-trillion debt market
Submitted by cpowell on Wed, 2016-02-10 00:56. Section: Daily Dispatches
Financial Times, London
Tuesday, February 9, 2016
BRUSSELS, Belgium — European regulators have opened a preliminary cartel investigation into possible manipulation of the $1.5 trillion government-sponsored bond market, in the latest efforts to root out rigging involving financial traders.
The European Commission’s early-stage inquiry comes amid revelations that the US Department of Justice and the UK’s Financial Conduct Authority are also investigating the market.
The investigations are part of a campaign by antitrust regulators to root out collusion in financial markets following revelations that groups of traders worked together to manipulate Libor, a key rate that underpins the price of loans around the world. Further allegations followed that traders colluded to rig foreign exchange markets. …
… For the remainder of the report:
Central bank injection of money is failing/ gold strengthens as the bankers are losing control
(courtesy John Embry/Kingworldnews/GATA)
Gold strengthens as central bank money injections fail, Embry says
10:22a ET Wednesday, February 10, 2016
Dear Friend of GATA and Gold:
Sprott Asset Management’s John Embry tells King World News today that money injections by central banks are having less effect on the markets, that the gold price is showing strength, and that gold mining shares have never been as undervalued. An excerpt from the interview is posted at KWN here:
CHRIS POWELL, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.
And now your overnight WEDNESDAY morning trades in bourses, currencies and interest rate from Asia and Europe:
1 Chinese yuan vs USA dollar/yuan FLAT to 6.5710 / Shanghai bourse: CLOSED/CHINA’S NEW YEAR ALL WEEK / hang CLOSED
2 Nikkei closed down 372.05 or down 2.31%
3. Europe stocks all in the GREEN /USA dollar index up to 96.11/Euro down to 1.1258
3b Japan 10 year bond yield: rises TO +.01 !!!!(Japan buying 100% of bond issuance)/Japanese yen vs usa cross now at 114.95
3c Nikkei now well below 18,000
3d USA/Yen rate now well below the important 120 barrier this morning
3e WTI:: 28.54 and Brent: 30.93
3f Gold down /Yen UP
3g Japan is to buy the equivalent of 108 billion uSA dollars worth of bond per month or $1.3 trillion. Japan’s GDP equals 5 trillion usa.
Japan to buy 100% of all new Japanese debt and by 2018 they will have 25% of all Japanese debt. Fifty percent of Japanese budget financed with debt.
3h Oil up for WTI and up for Brent this morning
3i European bond buying continues to push yields lower on all fronts in the EMU. German 10 yr bund rises to 0.243% German bunds in negative yields from 8 years out
Greece sees its 2 year rate rise to 14.58%/:
3j Greek 10 year bond yield rise to : 10.58% (yield curve deeply inverted)
3k Gold at $1183.40/silver $15.16 (7:45 am est)
3l USA vs Russian rouble; (Russian rouble up 94/100 in roubles/dollar) 78.75
3m oil into the 28 dollar handle for WTI and 30 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 0.9728 as the Swiss Franc is still rising against most currencies. Euro vs SF is 1.0960 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 8 year German bund now in negative territory with the 10 year rises to + .243%/German 8 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 1.76% early this morning. Thirty year rate at 2.58% /POLICY ERROR)
5. Details Ransquawk, Bloomberg, Deutsche bank/Jim Reid.
(courtesy Jim Reid/Bloomberg/Deutsche bank/zero hedge)
European Banks Soar On Rumor ECB May Monetize Bank Stocks; Japan Crash Continues
While algos patiently await the only thing that matters for US stocks today which is Janet Yellen’s testimony before Congress. expected to be released at 8:30 am (and previewed here), the rest of the world this morning is a hot mess of schizophrenic highs and lows.
One look at Asia this morning and it was more of the same: another deja vu session for Japan where the relentless surge in the Yen pressured the Nikkei lower by another 2.3%, pushing it down to 15713, to the lowest close since October 2014. The MSCI Asia index was likewise down 1.4% with all 10 sectors falling.
Europe, however, was a different story entirely: following yesterday’s late afternoon FT “trial balloon” that Deutsche Bank would part with much needed liquidity to repurchase bonds in the open market (perhaps to indicate how unconcerned it is about the future), the German bank was up already over 4% in the premarket, and then proceeded to absolutely explode, soaring as much as 15% higher, up 13.15% at last check in Frankfurt, on what is likely a combination of short covering and a rumor which hit about an hour ago, when a German newsletter reported that the ECB could buy bank stocks as part of its QE.
We would be very surprised if in a world in which central bankers are being openly called out by markets that their bags of tricks are empty, the ECB were to actually do that, but we doubt the ECB has any intention of actually buying bank stocks: if anything, intention is far simpler – to slow down the relentless selling in Europe’s most systematically important bank, which between the FT trial balloon and today’s rumor, it has achieved… for now.
Also as a result, following 8 brutal days of carnage which sent European stocks to the lowest level since October 2013,Europe is solidly in the green, with the Stoxx up 2.3% the same as the Dax, however nothing compares to the European banking sector which as shown in the chart from Mark Barton below, is quite literally all green: not a single bank in Europe is in the red this morning.
We expect that today’s volatile European bank euphoria will be brief if not validated by concerted actions, because while central banks have the luxury of jawboning, commercial banks are actually burning through funds – rapidly at that – and don’t have the luxury of hoping for the best while doing nothing.
Which brings us back to Yellen’s testimony, which Jim Reid previews as follows: “Yellen can give the market hope today that the committee is acknowledging the worrying signs from both financial markets and the global economy and take a step closer to a cleaner dovish stance. That would certainly help if for no other reason than it would halt the dollar bull market (notwithstanding the recent sell-off) which has caused problems with commodities, EM, China and encouraged shrinking global dollar liquidity. However we won’t get such a turnaround in one speech. If it happens it’s likely to be a multi month story.”
Alternatively, she can just as easily send stocks reeling with one word out of place.
We will find out shortly which word she picks. For the time being, here is where markets stand right now.
- S&P 500 futures up 1.0% to 1867
- Stoxx 600 up 2.3% to 316.4
- FTSE 100 up 1.3% to 5708
- DAX up 2.4% to 9091
- German 10Yr yield up 3bps to 0.26%
- Italian 10Yr yield down 8bps to 1.6%
- Spanish 10Yr yield down 7bps to 1.69%
- MSCI Asia Pacific down 1.4% to 117
- Nikkei 225 down 2.3% to 15713
- S&P/ASX 200 down 1.2% to 4776
- US 10-yr yield up 3bps to 1.76%
- Dollar Index up 0.15% to 96.21
- WTI Crude futures up 1.8% to $28.45
- Brent Futures up 1.7% to $30.84
- Gold spot down 0.5% to $1,184
- Silver spot down 0.7% to $15.14
Top Global News
- New Hampshire Bucks the Establishment to Back Trump and Sanders: Biggest loser of the night was Hillary Clinton, who won the state in 2008; Clinton’s Loss to Sanders Exposes Weakness of Message—and Messenger; Christie Reevaluates Bid After Poor New Hampshire Showing
- Deutsche Bank Said in Early Stages of Mulling Bond Buyback: Shares gain most in more than 4 years
- U.S., Russia Make Syria Cease-Fire Push as Assad Regains Ground: Kerry, Lavrov among 17 diplomats to hold talks in Munich
- Renzi Says EU Can Dodge Titanic Disaster Following Italy’s Lead: EU leaders like band playing as doomed liner sank, Renzi says in interview
- How Low Can Central Banks Go? JPMorgan Reckons Way, Way Lower: Says ECB could cut to -4.5% and Fed to -1.3%
- Oil Snaps 4-Day Losing Streak as Crude Producers Cut Spending: Rebounds from lowest close in almost three weeks
- Goldman Sachs Abandons Five of Six ‘Top Trade’ Calls for 2016: Closes bet on dollar strength versus euro, yen
- KKR-Backed US Foods Files for Initial Public Offering: co. filed initial prospectus Tuesday with offering size of $100m
- BTG Said to Plan Granting Equity to Traders at Commodities Unit: Deal aimed at keeping staff as bank recovers from CEO arrest
- Disney Shares Sink as Lower ESPN Profit Overshadows ‘Star Wars’: Programming costs, subscriber losses, dollar hit sports network
- Google’s Self-Driving Car Software Seen as Driver by U.S. Agency: NHTSA interpretation contrasts with California’s push-back
- FTSE 100 Profits Shrink by GBP29b in 2015, Seen Falling Further: U.K. profits set to drop further 5.3% in 2016, Bloomberg data shows
- Kim Purges North Korea’s Military Chief of Staff, Yonhap Says: Ri Yong Gil executed early this month on corruption charges
Looking at regional markets reveals two different worlds: in Asia, the plummet equities saw no respite as they extended on yesterday’s losses following the lacklustre close on Wall St, alongside concerns over the banking sector. As such, Nikkei 225 (-2.3%) continued to take a hammering, subsequently paring the entirety of its gains since the BoJ QQE expansion in Oct’14 amid the persistent JPY strength, coupled with weakness in Tech heavyweight KDDI (-7.4%) after their earnings. ASX 200 (-1.2%) showed no signs of a resurgence having entered into a bear market territory with pressure coming from energy names. Despite the risk off sentiment, JGBs slipped in Asian trade with touted profit taking after yesterday’s stellar gains, whilst 20yr JGBs continued the recent record-breaking strike as yields fell to 0.075%.
Top Asian News:
- Nissan Profit Beats Estimates as Rogue Paces U.S. Sales Rise: U.S. sales of the Rogue crossover surged 44% last year
- Coal Trader Seeing Rebound Hunts for Bargains in Troubled Mines: Javelin Global Commodities Holdings, run by ex- Goldman traders sees recovery in 2017
- Yen Gains Sideline Kuroda as Volatility Sweeps Rates Shock Aside: Options protecting against yen gains cost most in over 5 yrs
- Behind China’s $720 Million Bet on British Tech Startups: Cocoon Networks plans London incubator for tech, biotech
In Europe, on the other hand, it has been a surge from the beginning on the back of the soaring banking sector were as noted earlier, not a single bank is red today following speculation the ECB may monetize bank shares in the next QE. Sure enough, after the heavy selling seen in yesterday’s trade, this morning sees equities reside in positive territory to pare back some of the recent losses (Euro Stoxx: +2.8%). Banking names remain in focus, with Deutsche Bank (+12.7%) outperforming today after source reports suggesting the bank is considering a bond buyback. The latest Deutsche Bank news has seen a broad based recovery in credit metrics in Europe, with the exception of Credit Suisse CDS rates, which are actually higher this morning. Gains in equities have been capped by the energy sector, with energy names lagging as a result of the continued subdued oil prices, with WTI Mar’16 futures remaining firmly below USD 29.00/bbl despite a smaller than anticipated build.
European Top News:
- Opera to Be Sold to Chinese Tech Companies for $1.2b: 71 kroner/shr cash tender offer at 46% premium to latest close
- Maersk Profit Plunges as Oil, Container Units Both Suffer: reports 2015 net income $791m vs $5.02b in 2014; est. $3.7b
- Heineken, Carlsberg Forecast Profit Gains as Asia Sales Rise: Vietnam, Southeast Asia growth offsetting weak China, Russia
- Hermes Says 2016 Sales Growth May Fall Short of Mid-Term Target: Cites global economic, geopolitical, monetary uncertainties
- James Bond, Star Wars Studio Pinewood Puts Itself Up for Sale: Rothschild hired to conduct a strategic review of company
- Telenor Earnings Fall Short Amid Norway Wireless Competition: Margin forecast for 2016 also trails analysts’ estimates
- Daimler Sees $384 Million Expense for Takata Air-Bag Recall: xpense cuts net income to EU8.7b for 2015
- ARM 4Q Sales Beat Ests., Sees 2016 Revenue ‘Broadly In Line’: says enters 2016 with robust opportunity pipeline for licensing
In FX, a banking sector recovery has led to the near term relief in global stocks to lend a period of calm. The familiar FX correlations have followed through as a result, though USD/JPY looks to be lagging, but this is down to the dovish expectations of Fed Chair Yellen’s semi-annual testimony due later today. 115.00+ is proving a struggle, so positive risk sentiment preferred through Ccy/USD elsewhere, with AUD and NZD notable gainers. GBP brushed off the weak Q4 manufacturing numbers, as the ONS stated this would have less than a 0.1 % impact on GDP. Cable struggling on a 1.4500 handle, but supported for now. EUR crosses have come right back down again — including GBP — and this has pulled EUR/USD back into the mid 1.1200’s, which is also in line with the risk scenario at present. CAD well contained as Oil prices stabilise post API last night.
In commodities, WTI and Crude have steadily risen in the European session as a result of more comments from Iran about cooperating with Saudi Arabia regarding oil output. Furthermore, the latest API crude oil inventory report produced a build of 2.4mln which was below expectations of a 3.6mln build and below today’s DoE expected build of 2.85m1n.
Overnight gold traded range bound failing to benefit from further risk off sentiment in Asia. The yellow metal has enjoyed its best start to the year since 1980, but could be set to drop according to some analysts, as Chinese purchases that ramped up prior to the Lunar New Year, slow down. This comes after a rather bearish note from Goldman Sachs yesterday, who said they see prices falling to USD 1,000 by year end, citing fed rate hikes. In the short term at least, prices will be dictated by the fed, given Chair Yeliens semi-annual testimony later on today. The market has priced in a dovish testimony, with some saying she will er on the side of 2 rate hikes this year. Should she surprise to the hawkish side we could see dovish USD bets unwinding and this will ultimately drive the price gold.
Elsewhere in the metals complex, copper, which also received a bearish note from Goldman yesterday, has declined an is one of the worst performers on the LME, following the news that Freepoort McMoRan have been granted new permits from Indonesia. The company’s Grasberg mine in the country is the world second largest on terms of capacity, consequently the markets expect the glut to swell further. LME zinc outperforms, continuing to benefit from a bullish note by Goldman.
On today’s US calendar, the only thing that will matter will be Yellen’s semi-annual testimony to the House Financial Services Panel delivered at 10:00 however her speech will be out at 8:30 am. We’ll also hear from the Fed’s Williams later this evening (due at 6.30pm GMT). Earnings wise we’ve got 18 S&P 500 companies set to report including Cisco and Time Warner.
Bulletin Headline Summary from Bloomberg and RanSquawk
- Deutsche Bank (+12.7%) are outperforming today after source reports suggesting the bank is considering a bond buyback
- The banking sector recovery has led to the near term relief in global stocks and consequently lent a period of calm to FX markets
- Looking ahead, the standout event through the rest of the session will be any comments from Fed’s Yellen at her semi-annual testimony to congress. Participants will also be looking out for the latest OPEC reports and DoE crude oil inventories as well as comments from ECB’s Praet and Hansson
- Treasuries lower in overnight trading as European equities rally, led by bank stocks, ahead of Yellen’s testimony before House Financial Services Committee at 10am ET, remarks to be released at 8:30am; Treasury to sell $23b U.S. 10Y notes, WI 1.765% vs 2.09% in Jan.
- Deutsche Bank shares jumped the most in more than four years as Germany’s biggest bank is considering a bond buyback to help ease concerns about its funds, according to a person with knowledge of the matter
- Financial firms will have an additional year to comply with MiFID II, the overhaul of European Union market rules covering everything from derivatives trading to bond pricing. The deadline has been moved forward to Jan. 3, 2018
- 699 officers and directors of American companies purchased their own stock in the last 30 days compared with 828 who sold, the most bullish ratio in more than four years, according to data compiled by The Washington Service and Bloomberg
- The cost of insuring the bonds of State Bank of India is surging before the nation’s largest lender reports quarterly earnings on Thursday amid concern over worsening asset quality
- U.K. industrial production plunged 1.1% m/m in December, more than economists forecast, capping its worst quarterly performance in almost three years, the Office for National Statistics said in London on Wednesday
- Italian industrial production unexpectedly plunged in December, down 0.7% m/m, signaling that the recovery in the euro region’s third-biggest economy probably slowed in the last quarter of 2015 and might struggle to continue in coming months
- Recent U.S. labor-market data shows persistent hiring, near- record job openings, and growing confidence among workers that they can quit their jobs with the prospect of easily finding another one
- No IG corporates (YTD volume $181.575b) and no HY (YTD volume $9.275b) priced yesterday
US Event Calendar
- 7:00am: MBA Mortgage Applications, Feb. 5 (prior -2.6%)
- 2:00pm: Monthly Budget Statement, Jan., est. $47.5b (prior -$17.5b)
- 8:30am: Yellen’s prepared remarks to House committee released
- 10:00am: Fed’s Yellen testifies to House committee
- 1:00pm: U.S. to sell $23b 10Y notes
- 1:30pm: Fed’s Williams speaks in Los Angeles
DB’s Jim Reid concludes the overnight wrap
Can Yellen help create peace today in a market in full battle mode? She is set to deliver her semi-annual testimony to the House Financial Services Committee today at 3.00pm GMT (although her prepared remarks may be released earlier) before answering questions from lawmakers. It’s likely that much of what she says today will be repeated in her speech tomorrow at the same time to the Senate, with only the Q&A sessions different.
We clearly have long thought that any rate rise in this cycle is a policy error given our growth and financial system concerns but the Fed are probably nowhere near to acknowledging that they are now on hold for an indefinite period. Yellen can however give the market hope today that the committee is acknowledging the worrying signs from both financial markets and the global economy and take a step closer to a cleaner dovish stance. That would certainly help if for no other reason than it would halt the dollar bull market (notwithstanding the recent sell-off) which has caused problems with commodities, EM, China and encouraged shrinking global dollar liquidity. However we won’t get such a turnaround in one speech. If it happens it’s likely to be a multi month story.
Meanwhile European banks continue to feel the full force of the latest leg of this sell-off with the Stoxx 600 closing down -1.58% yesterday and to the lowest level since October 2013. Peripheral banks were the hardest hit and that saw equity markets in Italy, Spain and Greece tumble -3.21%, -2.39% and -2.89% respectively. In fairness yet another sharp leg down for Oil (WTI closing -5.89% at $27.94/bbl) also more than played its part. Interestingly it was a much better day for European credit markets. With much of the commentary suggesting that Monday’s moves were overdone yesterday we saw the iTraxx senior and sub indices tighten 5bps and 7.5bps respectively. That helped Main close 2bps tighter and Crossover finish more or less unchanged.
Whilst the profitability outlook for European financials remains highly uncertain, a personal view is that the credit risk has been exaggerated in recent days. The ECB still has numerous facilities that banks can use to prevent liquidity concerns. Having said this even if the market is wrong on this, a mistaken sell-off can lead to self fulfilling problems in a sector like financials. If stress continues then as a minimum bank lending that has recently helped European growth could easily suffer which in turn would weaken the operating environment for banks – and all because of a sell-off that was sentiment driven. Banks are often a confidence play and there isn’t much of it around at the moment. One wonders what the ECB could possibly do at their March 10th meeting to enhance such an elusive commodity. At some point soon the market will start discussing this as surely it’s not in the ECB’s interest to see such destabilising focus on what are transmitters of their policy through the economy.
Volatility was the name of the game again for US equity markets yesterday. After trading as much as 1% lower in early trading and then as high as +0.7% in late trading the index eventually finished more or less unchanged (-0.07%) although the tone for the most part felt distinctly negative with the VIX up again (+2%) and closing above 20 for the seventh consecutive session. US credit indices staged a similar roundabout performance while US Treasury yields extended their march lower. 10y Treasuries eventually closed 2.2bps lower at 1.727% but did in fact dip as low as 1.680% which was close to the testing the low print we made around this time last year (1.665%).
It’s a familiar start for markets in Asia (for those open) this morning. Equity bourses in Japan have extended yesterday’s steep losses with the Nikkei and Topix both down close to 3.5%. In Australia the ASX is currently -1.17% although it has pared earlier steep losses but still sits on the verge of dipping into bear market territory. US equity futures are down close to half a percent despite an early 2% bounce for WTI to back above $28/bbl. Much like European markets yesterday its credit markets which are outperforming. The iTraxx Australia is currently 2bps tighter and iTraxx Japan 3bps tighter.
Meanwhile, over in the US the New Hampshire primary results have started filtering through this morning. According to FT, in the Democrat race and with 60% of the ballots currently counted for Sanders has a 59%-39% lead over Clinton (who has since conceded victory in the state), while in the Republican race Trump has secured 34% of the overall vote and is leading with Ohio Governor, John Kasich, coming in second place with 16% with Cruz (12%), Rubio and Bush (both 11%) closely behind. Eyebrows may be raised at the success of these two extreme candidates yesterday but there is still a long way to go.
As expected the data out of the US JOLTS job opening report yesterday shone a positive light on the US labour market. Job openings rose a better than expected 261k in December to 5.61m (vs. 5.41m expected) and to the second highest level on record. In the details the quits rate nudged up one-tenth to 2.1% and to the highest since April 2008. The hiring rate was unchanged at 3.7%. Meanwhile the NFIB small business optimism print was down 1.3pts to 93.9 (vs. 94.5 expected) and wholesale inventories (-0.1% mom vs. -0.2% expected) and trade sales (-0.3% mom vs. -0.4% expected) were down a little less than expected in December. With markets getting smacked from all angles, just to confuse matters the Atlanta Fed upgraded their Q1 GDP forecast again yesterday following the wholesale trade report. They now forecast GDP growth of 2.5% (up from 2.2%).
The other notable dataflow yesterday was out of Germany where the most significant was an unexpected drop in industrial production in December (-1.2% mom vs. +0.5% expected and the biggest monthly decline since August 2014), which has helped to push the YoY rate now down to -2.2% from +0.1%. Also underperforming relative to expectations was the latest trade data where exports in particular slid -1.6% mom in December (relative to expectations for a +0.5% gain). A bigger than expected decline in imports however did see the trade surplus shrink. As our colleagues in Europe pointed out, the latest data clearly poses downside risks ahead for Friday’s Q4 GDP release. That said, turnover data, new orders and capacity utilization data does suggest that December data somewhat overstates the weakness and that the Q1 outlook for production is not threatened. Still, growth looks ever further tilted towards domestic demand.
In terms of the day ahead, this morning in Europe the main releases of note are the next slug of industrial production reports where we’ll get the readings for the UK, France and Italy. Datawise in the US this afternoon we’ll get the January Monthly Budget Statement but expect that to be secondary to Fed Chair Yellen’s semi-annual testimony to the House Financial Services Panel at 3.00pm GMT. We’ll also hear from the Fed’s Williams later this evening (due at 6.30pm GMT). Earnings wise we’ve got 18 S&P 500 companies set to report including Cisco and Time Warner.
Let us begin:
Late TUESDAY night/ WEDNESDAY morning: Shanghai closed for the Chinese New Year (all week) / Hang Sang closed . The Nikkei DOWN another 372.05 points or 2.31% .The Asian stock markets that were open were all down. Chinese yuan (ONSHORE) closed 6.5710 and yet they still desire further devaluation throughout this year. Oil GAINED to 28.60 dollars per barrel for WTI and 30.93 for Brent. Stocks in Europe so far all in the green . Offshore yuan trades where it finished on Friday at 6.5600 yuan to the dollar vs 6.5710 for onshore yuan/
below is a summary of events from Japan and Australia last night:
(courtesy zero hedge)
Carnage Continues – Japanese Stocks Crash (Again) As Australia Enters Bear Market
Shortly after we detailed the scale of carnage in Japan – a mysterious massive panic-seller of Yen appeared… as Kuroda heads for Parliament…
But it’s not holding…
Another night, another utter bloodbath in AsiaPac. Japanese markets are plunging (NKY down 600 from US session close) along with USDJPY as Kuroda readies himself to face parliament (and Abe says he “trusts Governor Kuroda.”) Once again banks leading the pain. Australia is also in trouble, after admissions of cooked data sent stocks lower pushing the ASX 200 into bear market territory.
Kuroda has utterly failed to inspire the non-deflation that they believe threatens the world…
And markets know it… NKY is down 2200 points from post-NIRP highs
Japan is unable to hold any gains…
Then there was this…
- *ABE: TRUSTS BOJ GOVERNOR KURODA
Which sounds like it is begging for a big “but…”
And Australia enters bear market (down 20%) territory…
February 10, 2016 1:44 am
Outflows from China top $110bn in JanuaryChinese companies and residents sent more than $110bn out of the country in January alone, according to new estimates, as they continued to evade tightening capital controls amid another round of market turmoil.Shawn Donnan in Washington
Surging capital outflows from China have become a source of growing concern around the world and left Beijing scrambling to support its currency. Recently-released data showed the country’s foreign exchange reserves falling to their lowest level in almost four years in January.
In the first significant attempt to digest the capital flight amid January’s market turmoil in China, the Institute for International Finance estimated that $113bn had been sent out of the country in the month.
That was more than in any month bar two in 2015, when it estimated a total of $637bn left China, down slightly from the estimate of $676bn it released last month. It also marked the 22nd month in a row of net outflows.
The IIF is a Washington-based industry group that represents banks and insurers around the world. Its estimates are based on extrapolations from official Chinese data and it cautioned that its January figures amounted to only “an approximation of the magnitude of capital flows”.
But the IIF’s figures shine light on the extent of capital flight as they endeavour to capture funds leaving the country through unofficial channels, such as over-invoicing for exports and other methods used to circumvent official capital controls.
The group’s economists said that, based on recently-released official reserve data, they estimated that the Chinese government had spent $90bn intervening to prop up its currency, the renminbi, in January.
Those interventions by the People’s Bank of China represented more than a quarter of the $342bn it spent in all of last year in response to outflows, the IIF said.
“I Don’t Trust Deutsche Bank” David Stockman Unleashes Truth Bomb: “When The Crunch Comes, Bank CEOs Lie”
Following this morning’s proclamation by Deutsche Bank co-CEO John Cryan that Germany’s largest bank is “rock solid,” David Stockman exposed the ugly truth that everyone appears to have forgotten from just 7 years ago…
“in my experience is that when the crunch comes, bank CEOs lie”
Stockman details the Morgan Stanley, BofA, Lehman, and Bear Stearns bullshit that occurred before exclaiming…
“I don’t trust Deutsche Bank. I don’t trust what they’re saying. And there’s reason why the banks are being sold all across the world… because people are realizing once again that we don’t know what’s there [on bank balance sheets].”
Worth considering before tomorrow’s European open…
(courtesy zero hedge)
What’s Dragging Down European Banks: Oil And Commodity Exposure As High As 160% Of Tangible Book
Yesterday, when looking at the exposure of the Canadian banking sector to energy, we found something disturbing: according to an RBC analysis, local banks were woefully underreserved.
Yet while clearly overly optimistic about the severity and the duration of the commodity crunch, at least Canada’s banks do provide some information, which however is more than can be said about most European banks. As Morgan Stanley writes, “Europeans have not typically disclosed reserve levels against energy exposure, making comparison to US banks challenging. Moreover, quality of books can vary meaningfully. For example, we note that Wells Fargo has raised reserves against its US$17 billion substantially non-investment grade book, while BNP and Cred Ag have indicated a significant skew (75% and 90%, respectively) to IG within energy books. Equally we note that US mid-cap banks typically have a greater skew to higher-risk support services (~20-25%) compared to Europeans (~5-10%) and to E&P/upstream (~65% versus Europeans ~10-20%).”
Morgan Stanley then proceeds to make some assumptions about how rising reserves would impact European bank income statements as reserve builds flow through the P&L: in some cases the hit to EPS would be .
A ~2% reserve build in 2016 would impact EPS by 6-27%, we estimate:We believe noticeable differences exist between US and EU banks’ portfolios in terms of seniority and type of exposure. As such, applying the assumption of a ~2% further build in energy reserves in 2016, versus ~4% assumed for large US banks, we estimate that EPS would decline by 6-27% for European-exposed names (ex-UBS), with Standard Chartered, Barclays, Credit Agricole, Natixis and DNB most exposed.
Marking to market of high yield and lower DCM/credit trading is also likely to be an issue (and we forecast FICC down ~5% in 2016):We previously showed that CS had the biggest percentage of earnings from HY and already had the worst of peers YoY FICC in 3Q, which we fear could continue to drag, despite a vigorous focus on restructuring.
A matrix of boosting reserves would look as follows on bank EPS:
But the biggest apparent threat for European banks, at least according to MS calulcations, is the following: while in the US even a modest 2% reserve on loans equates to just 10% of Tangible Book value…
… in Europe a long overdue reserve build of 3-10% for the most exposed banks, would immediately soak up anywhere between 60 and a whopping 160% of tangible book!
Which means just one thing: as oil stays “lower for longer”, and as many more European banks are forced to first reserve and then charge off their existing oil and gas exposure, expect much more diluation. Which, incidentlaly also explains why European bank stocks have been plunging since the beginning of the year as existing equity investors dump ahead of inevitable capital raises.
And while that answers some of the “gross exposure to oil and commodities” question, another outstanding question is what is the net exposure to China. As a reminder, this is what Deutsche Bank’s credit analyst Dominic Konstam said in his explicit defense of what needs to be done to stop the European bloodletting:
The exposure issue has been downplayed but make no mistake banks are heavily exposed to Asia/MidEast and while 10% writedown might be worst case for China but too high for the whole, it is what investors shd and do worry about — whole wd include the contagion to banking hubs in Sing/HKong
Ironically, it is Deutsche Bank that has been hit the hardest as the full exposure answer, either at the German bank or elsewhere, remains elusive; it is also what has cost European banks billions (and counting) in market cap in just the past 6 weeks.
JPM’s Striking Forecast: ECB Could Cut Rates To -4.5%; BOJ To -3.45%; Fed To -1.3%
One week ago, in the aftermath of Japan joining the NIRP club, we wondered how low Kuroda could cut rates if he was so inclined. The answer was surprising: according to a Nomura analysis the lower bound was limited by gold storage costs. This is what the Japanese bank, whose profit was recently slammed by Japan’s ultra low rates, said:
“theoretically, negative interest rates’ lower bound depends partly on the cost of holding cash in the form of physical currency. When people hold cash out of aversion to negative interest rates, they risk losses due to theft and the like. The cost of avoiding this risk could be a key determinant of negative interest rates’ lower bound, but it is hard to directly quantify. As a proxy for the cost of holding physical currency, we estimated the cost of storing gold based on gold futures prices. This cost has averaged an annualized 2.4% over the past 20 years, though it has varied widely over this timeframe.”
Which, in conjunction with Kuroda’s promises that “Japan will cut negative rates further if needed”, raised flags: once the global race to debase accelerates, and every other NIRP bank joins in, will global rates be ultimately cut so low as to make a “gold standard” an implicit alternative to a world drowning in NIRP?
According to a just released report by JPMorgan, the answer is even scarier. In the analysis published late on Tuesday by JPM’s Malcolm Barr and Bruce Kasman, negative rates could go far lower than not only prevailing negative rates, but well below gold storage costs as well.
JPM justifies this by suggesting that the solution to a NIRP world where bank net interest margins are crushed by subzero rates, is a tiered system as already deployed by the Bank of Japan and in some places of Europe, whereby only a portion of reserves are subjected to negative rates.
Which leads to the shocker: JPM estimates that if the ECB just focused on reserves equivalent to 2% of gross domestic product it could slice the rate it charges on bank deposits to -4.5%.Alternatively, if the ECB were to concentrate on 25% of reserves, it would be able to cut as low as -4.64%. That compares with minus 0.3% today and the minus 0.7% JPMorgan says it could reach by the middle of this year as reported yesterday.
In Japan, JPM calculates that the BOJ could go as low as -3.45% while Sweden’s is likely -3.27%.
Finally, if and when the Fed joins the monetary twilight race, it could cut to -1.3% and the Bank of England to -2.69%.
As Bloomberg adds, easing the fall is that the JPMorgan economists bet that banks are unlikely to be able to pass on the cost of the policy to borrowers, reducing potential repercussions. They also see limited pressure on bank profits or for a need to stash cash. On the other hand, DB has suggested that it is time to pass on NIRP to depositors in the most aggressive forms possible.
While Barr and Kasman still expect policy makers to tread carefully, such analysis may temper the recent fear of investors that after seven years of interest rates around zero and bumper bond-buying, central banks are now out of ammunition. Indeed, a fuller embrace of negative rates could “produce significant reductions in market rates,” said the economists.
“It appears to us there is a lot of room for central banks to probe how low rates can go,” they said. “While there are substantial constraints on policymakers, we believe it would be a mistake to underestimate their capacity to act and innovate.”
Here are the key observations by JPM:
- Sluggish growth and low inflation is building the case for further DM monetary policy stimulus. With term premia and forward rate expectations compressed, the benefits of additional QE and forward guidance is likely to be limited.
- The alternative of negative interest rate policy (NIRP) has been viewed as constrained as banks, corporates and households can increase holdings of zero-yielding physical currency when rates move negative.
- Innovations by central banks in Europe and Japan have enabled central banks to push policy rates well below zero. Using a tiered deposit scheme, deposit rates have fallen as low as -0.75% in Europe with no significant signs of a move into cash.
- Our analysis suggests that the use of these schemes could allow for considerably lower policy rates without undue pressure on bank profitability or creating a powerful incentive to move into cash.
- Calibrations based on Swiss experience suggest that with modest changes to the reserve regime, the policy rate in the Euro area could, in principle, go as low as -4.5%.
- Estimated bounds for the US (-1.3%) and UK (-2.5%) are higher, reflecting their larger bank reserve to asset ratios. We believe this bound is not binding and that rates could fall further in both cases.
- To date, markets price only a small probability of sustained NIRP of -0.75% or lower in the G4. This suggests that a strong signal that policymakers are willing to actively use NIRP could produce significant reductions in market interest rates.
- The actual transmission of NIRP is likely to be muted as we expect household deposit rates to remain sticky around zero which will limit pass-through of NIRP through the retail banking sector.
- Central banks are also likely to move cautiously into NIRP as they are sensitive to the uncertain consequences of these policies on local markets. This suggests their response to weakness may prove slower than in the past.
- Having put in place a three tiered deposit system and facing a significant inflation undershoot, the Bank of Japan is expected to lower its deposit rate to -0.5% alongside additional QQE this year.
Recall that JPM yesterday set the bogey on the one event that could prompt Yellen to go NIRP: a recession. Here is the latest take by JPMorgan on this:
With IOER at 0.5% and the Fed maintaining concerns about US money markets, the US is not close to considering NIRP. However, if recession risks were realized, the need for substantial additional policy support would likely push the Fed towards NIRP.
In other words, once the Fed makes up its mind, all that will be needed is for economic “data” to turn even more severely southward thus giving Yelen the required political cover to join the final lap of the global race to debase.
Finally, here is the summary table of where to look for the real negative lower bound.
The End Is Nigh For Europe As Officials Mull 2 Year Schengen “Suspension”
Well, no one can say the writing wasn’t on the wall.
With Europe at a complete and total loss as to how to deal with the bloc’s worst refugee crisis since World War II, countries have increasingly adopted their own, ad hoc “solutions” which include razor wire anti-migrant fences in Hungary and the suspension of Schengen in Austria, where the backlash against asylum seekers is growing more palpable by the day.
An ill-fated quota system devised by Berlin and Brussels proved more divisive than it did helpful and the wave of alleged sexual assaults that swept through the region on New Year’s Eve threatens to derail the settlement effort altogther.
“We have until March, the summer maybe, for a European solution,” one unnamed German official told Retuers last month. “Then Schengen goes down the drain.”
“There is a big risk that Germany closes,” another official said, suggesting that Angela Merkel may eventually bow to the domestic political pressure and reverse the country’s open-door policy. “From there, no Schengen … There is a risk that February could start a countdown to the end.”
Well sure enough, reports now indicate that European officials are prepared to suspend Schengen for a period of 2 years. From Reuters:
- EU ENVOYS AGREE TO MOVE STEP CLOSER TO SUSPENDING SCHENGEN FOR TWO YEARS – SOURCE
Like a stock halted limit down on the Shenzhen, there’s a very good chance that once suspended, Schengen will never again be open for “trading”.
Deutsche Bank Spikes Most In 5 Years (Just Like Lehman Did)
Rumors of ECB monetization (which would be highly problematic in the new “bail-in” world) and old news of the emergency debt-buyback plan have sparked an epic ramp in Deutsche Bank’s stock this morning (+11% – the most since Oct 2011). This extreme volatility is, however, eerily reminiscent of 2007/8 when headline hockey sparked pumps and dumps on a daily basis in Lehman stock… until it was all over.
“Deutsche Bank is fixed”?
Or is it?
Things are already fading…
We suspect every bounce will be met by opportunistic selling as an inverted CDS curve has seldom if ever reverted back to life.
John Mack: Don’t Worry About Deutsche Bank, It Will Be Bailed Out By The Government
When it comes to government bail outs of insolvent banks few are as qualified to opine as John Mack who was CEO of Morgan Stanley when the bank, along with all other U.S. TBTF banks, was bailed out with a multi-trillion rescue package in the aftermath of the Lehman failure. Which is why it was illuminating, if not surprising, that during an interview with Bloomberg TV discussing the future of Deutsche Bank, John Mack said that “there’s no question in my mind, it is absolutely good for every penny.” In other words, “Deutsche Bank is fine.”
Why is he so confident? According to Mack, “this idea that I heard yesterday, the possibility of not making their interest payments, it’s just absurd. The government will not let that happen.”
Said otherwise, it will be bailed out. One wonders if Germany’s citizens were polled before John came up with this conclusion.
This is what else he said:
While German regulators at this point shouldn’t ban short-selling as U.S. authorities did in the 2008 financial crisis, the German central bank should make a statement in support of the lender, Mack said. Deutsche Bank shares jumped the most in almost seven years Wednesday, paring a decline that had exceeded 40 percent this year.
“People overreact,” Mack said. “The bank’s name is Deutsche Bank. It’s the German bank. Politically, they will stand up, if they need a safety net, and give it to them.”
Which was to be expected: after all DB had a gross notional derivative exposure of roughly $60 trillion as of 2014, several times greater than the GDP of Europe, and a net balance sheet which is a large portion of German GDP.
This is also why last thing Germany, Europe, or the world’s central bankers will allow, is DB to fail, and it has never been a question whether or not they will try to, but whether and how they can save it. And, if a political bailout is unfeasible in the current climate, whether instead of a bailout, would Deutsche Bank be the first major European bank to rely on Europe’s new “bail in” regime to stuff depositors for any capital shortfalls.
Still, without focusing on the specifics, a government (or ECB) backstop is precisely what the market is contemplating today as noted earlier, and as manifested in the stock which has soared the most in 5 years, just as Lehman did in its turbulent final days.
Mack’s full interview is below.
Lagarde Heaps Pressure on Ukraine in Warning of Bailout Halt
- It’s `vital’ that country’s leaders act now, IMF chief says
- Government bonds at highest since 2015 debt restructuring
Pressure on Ukraine’s government, already showing cracks over anti-graft efforts and the war with pro-Russian separatists, was ratcheted up further as the International Monetary Fund warned that the nation’s $17.5 billion bailout risks being halted without progress on reform.
Christine Lagarde, the fund’s managing director, said Wednesday in a statement that it’s “hard to see” how the rescue program can continue successfully without a “substantial new effort” to overhaul governance and combat corruption. Government bonds, at risk from a debt dispute with Russia that Germany’s seeking to mediate, sank after Lagarde’s remarks, the harshest to date on the prospects for Ukraine’s rescue loan.
The political crisis facing President Petro Poroshenko and his team is worsening as discontent at stalled reforms builds among Ukrainians who fomented a pro-democracy revolution in 2014 and ally nations who’ve pledged billions in financial aid. Frustration within the ruling coalition, which is also still tackling a pro-Russian insurgency in the nation’s east, boiled over last week when reform-minded Economy Minister Aivaras Abromavicius quit, alleging officials from Poroshenko’s party were corrupt.
“Ukraine needs Western support to stabilize and reform the country from within,” said Joerg Forbrig, senior program director at the German Marshall Fund of the U.S. in Berlin. “The leadership in Kiev is now at risk of forfeiting this support. Its infighting and opposition to true reforms will reconfirm the skepticism many in the West have.”
Ukrainian government debt reversed earlier gains after Lagarde’s comments, with the yield on notes maturing in 2023 jumping 10 basis points to 10.99 percent, the highest level since new bonds were issued in November as part of a $15 billion restructuring. Ukrainian dollar debt has handed investors an 8.2 percent loss this month, the most among 61 countries in the Bloomberg Emerging-Market Sovereign Bond Index.
Lagarde warned Ukraine, whose Orange Revolution more than a decade ago was hijacked by infighting, of “a return to the pattern of failed economic policies that’s plagued its recent history,” according to the statement. She called it “vital” that Ukraine’s leadership “acts now to put the country back on a promising path of reform.”
Ukraine must show the world that it’s helping itself, Prime Minister Arseniy Yatsenyuk said in a statement, calling the current political crisis “a chance for us.” Svyatoslav Tsegolko, a spokesman for Poroshenko, didn’t answer calls to his mobile phone.
Poroshenko has promised personnel changes in the government that could come as early as next week, when Yatsenyuk reports to parliament on his cabinet’s performance. While the ruling coalition is holding meetings to discuss the new cabinet, there’s no agreement as yet, with some parties lobbying for the premier to lose his job.
Stamping out corruption is key to the continued flow of financial aid as Ukraine’s economy recovers from an 18-month recession. Growth this year will be 1.1 percent, the central bank predicted last month, cutting its previous forecast by more than half.
The government received $6.7 billion from the IMF last year, while a third tranche of $1.7 billion has been delayed since October over holdups in passing this year’s budget. Freezing that disbursement put related bilateral assistance on hold, including a $1 billion U.S. loan guarantee and 600 million euros ($675 million) from the European Union.
The resignation of Abromavicius, 40, a Lithuanian-born former fund manager brought in to modernize the Economy Ministry, sparked statements of concern from Group of Seven nations and the IMF. Ukraine’s efforts to stamp out corruption brought scant progress last year, according to Transparency International. The nation of 43 million people ranked 130th of 168 countries in the Berlin-based watchdog’s Corruption Perceptions Index, level with Iran and Cameroon.
Corruption isn’t the only issue concerning Ukraine’s allies.
Germany is asking Ukraine to make a new offer to resolve a dispute with Russia over a $3 billion bond default after President Vladimir Putin’s government rejected a proposal put forward last month.
Envoys from Germany and France visited Kiev in January to urge Ukraine to push ahead with constitutional changes as part of an accord sealed in 2015 to bring peace to its easternmost regions. Ukraine, backed by the U.S. and the EU over the almost two-year-old conflict, says Russia is failing to meet its own peace commitments under the deal.
Saudi Arabia and Turkey are preparing to invade Syria. If they do, then Russia and Iran will certainly enter the fray and that may begin World War III
(courtesy zero hedge)
John Kerry Makes Last Ditch Effort To Avert World War III As Saudis, Turks Prepare For Syria Invasion
Tomorrow, John Kerry will meet Sergei Lavrov and several of his other counterparts from Europe and the Mid-East in Munich in a last ditch effort to revive Syrian peace talks, which fell apart amid an intense Russian air assault on rebel positions in Aleppo.
For all intents and purposes, the rebels are surrounded. Initially, it appeared that the “moderate” opposition might be able to persist and bog down the Russians and the Iranians with the help of supplies from the US, Turkey, and Saudi Arabia. Those hopes faded over the past two weeks when Hezbollah advanced on Aleppo and ultimately encircled the city, cutting the rebels off from key supply lines and triggering a mass civilian exodus.
The talks in the Bavarian capital come at what is perhaps the most crucial point in the conflict to date. With the opposition on the ropes, it’s do or die time for Riyadh, Ankara, Doha, and the UAE. Either the Gulf monarchies send in ground troops to shore up the rebels or Hezbollah and the IRGC will overrun them in a matter of weeks – or perhaps even days.
Of course the opposition’s Sunni benefactors can’t exactly say they’re going into Syria to fight Iran and the Russians. Any ground incursion will be justified by the need to “fight ISIS” even though the Islamic State presence in Aleppo is markedly less pronounced than in other besieged urban centers like Raqqa and Deir ez-Zor. Indeed, the effort is so transparent that even the mainstream media has been forced to acknowledge it. Here’s FT, for instance:
Saudi Arabia is discussing plans to deploy ground troops with regional allies, including Turkey, for a safe zone in Syria, in a last-ditch effort to keep alive a rebellion at risk of collapse as a Russian-backed offensive by Syrian regime forces encroaches on the northern province of Aleppo.
Although western officials have dismissed the plans as lacking credibility, they are a sign of the desperation that many of Syria’s opposition backers feel towards what looks like an increasingly bleak outcome in the war. Two people familiar with Saudi plans told the Financial Times that high-ranking Gulf officials are in Riyadh meeting Turkish officials to discuss options for deploying ground troops to head a coalition of fighters inside Syria.
Aleppo city, Syria’s former business hub, is the last significant urban centre controlled by the rebels. Its countryside, on the northern border with Turkey, is their lifeline.
President Bashar al-Assad’s forces, bolstered by Iranian-funded Shia militias, advanced last week into opposition-held territory in Aleppo’s northern countryside under the cover of Russian air strikes. The violence prompted thousands of civilians to flee, exacerbating the already vast humanitarian crisis.
Publicly, Saudi Arabia, the UAE and Bahrain are calling for troops to be deployed as part of the US-led international coalition already ranged against Isis. This comes after Washington singled out Arab countries for not doing more to fight the Islamist group. But regional observers say the moves are cover for an intervention to help the Syrian rebels.
Of course the most absurd aspect of the “fight ISIS” narrative is that the force which is most effective at combatting Islamic State – the YPG- is under attack by Turkey. That would be the same Turkey who, like everyone else, is using ISIS to justify its intervention in Syria. “Are you our side or the side of the terrorist PYD and PKK organization?” President Recep Tayyip Erdogan asked, in a speech in Ankara to provincial officials on Wednesday. He went on to say the US has caused “a sea of blood” in Turkey by supporting the YPG in Syria. “Ankara summoned the U.S. ambassador to express its displeasure after State Department spokesman John Kirby said on Monday the United States did not regard the PYD as a terrorist organization,” Reuters notes.
As for the opposition in Aleppo, the rebels are literally begging the US to intervene. “I believe he can really stop these attacks by the Russians,” Spokesman Salim al-Muslat told Reuters, referring to President Obama. If he is willing to save our children it is really the time now to say ‘no’ to these strikes in Syria. I believe he can do it but it is really strange for us that we don’t hear this from him.”
Actually it’s not at all strange. John Kerry can’t simply “ask” Sergei Lavrov to stop the bombing in Aleppo. As he told aid workers in London over the weekend, the US can’t exactly “go to war with Russia,” which is what would be required to compel the Kremlin to halt airstrikes on rebel positions.
The French are also skeptical of America’s ability to halt the Russian and Iranian offensive. “There are the ambiguities including among the actors of the coalition … I’m not going to repeat what I’ve said before about the main pilot of the coalition,” French Foreign Minister Laurent Fabius said. “But we don’t have the feeling that there is a very strong commitment that is there.”
Again though, it’s not a matter of “commitment.” It’s a matter of whether or not the US wants to challenge Russia and Iran militarily because as should be abundantly clear by now, this has nothing at all to do with ISIS and everything to do with what’s about to happen at Aleppo. “It’s seen as the heart of what’s left of the rebel movement in terms of holding a major city without being infested by Islamic State,” Julian Barnes-Dacey, a senior policy fellow at the European Council on Foreign Relations told Bloomberg. “If Assad can get that, then it’s hard to imagine the opposition surviving.”
Precisely. Which was the plan from the beginning. It’s not that Russia and Iran don’t want to fight Islamic State. They do. But unlike Washington and its regional allies, Moscow has never pretended that the fight in Syria is strictly about ISIS. Rather, the conflict is about putting down an insurgency that threatens to plunge yet another Mid-East country into failed state status and it’s also about drawing a line in the sand when it comes to the West’s persistent meddling in the affairs of sovereign states. The most effective way to turn the tide and end the insurgency is to recapture the country’s urban centers first, and Aleppo is crucial to that plan. Once it’s secured, they’ll be a push east to liberate Raqqa and relegate ISIS to the annals of jihadist history.
We suppose the most important thing to understand here is this: Saudi Arabia, Turkey, and the UAE are mulling sending ground troops to fight the Russians and Iranians who are attempting to put an end to an insurgency that’s cost the lives of hundreds of thousands of Syrians. That campaign has most assuredly aggravated the violence in the short-term, but it’s an effort to restore a sense of normalcy to a country that’s seen nothing but chaos for nearly six years. Rather than let Moscow and Hezbollah finish the job, the US and its regional Sunni allies would rather send in ground troops to prop up the rebels. So please tell us: who are the bad guys and who are the good guys here?
“Jingle Mail” Makes Comeback In Canada As Underwater Borrowers Mail Keys Back To Banks
We’ve spilled quite a bit of digital ink documenting the trials and travails of Alberta, the heart of Canada’s dying oil patch and ground zero for the pain inflicted by 14 months of crude carnage.
At the risk of beating a dead (or at least a “dying”) horse, you’re reminded that violent crime is soaring in the province, suicide rates are up by a third as is food bank usage, and as for unemployment, well, Alberta lost 19,600 jobs last year – the most in 34 years.
While it’s not entirely clear where things go from here, it’s a good bet that the situation will deteriorate further given that, at last check, WCS was trading just CAD1 above the marginal cost of production. In other words: Canada’s producers aren’t profitable and thanks to the plunging loonie, the BoC doesn’t look particularly likely to help them.
That means more job losses are in the cards and the prospects for the increasingly profitablerepo business look better than ever. We’ve also documented the soaring cost of homes in Canada, on the way to noting that just about the last thing you want to have is a collapsing economy, a propery bubble, and record high household debt.
That’s a recipe for disaster and sure enough, we’re starting to see the first signs that the market is beginning to crack as Albertans begin mailing the keys to their underwater homes back to the bank. “A combination of high debt and lost jobs make [jingle mail attractive] in a province going through a significant economic reckoning,” CBC writes. “It’s enough of a concern that the federal government is watching the Alberta market closely.”
As they should be. The wave of job losses occasioned by the rout in oil markets has put already leveraged households in a tough spot. Now, the pressure is apparently more than many homeowners can bear.
“People [are] saying that we can’t make a go of it and mail the keys to the bank,” Don Campbell, senior analyst with the Real Estate Investment Network told CBC. “In the big cities, not so much because the average sale prices haven’t really dropped much, we haven’t seen the pain yet. But Calgary is getting pretty tight.”
Yes, it’s “getting pretty tight” in Alberta and that’s problem for banks. Here’s why (again from CBC):
Alberta is the only Canadian province to broadly offer non-recourse residential mortgages. Those are loans with at least a 20 per cent down payment and thus are not insured by the Canada Mortgage and Housing Corporation (CMHC).
If you walk away, you lose your home, but otherwise have no personal liability. Elsewhere in Canada, your lender can take you to court and seize other assets, such as RRSPs, vehicles, and even garnishee your wages.
Jingle mail was an enormous problem in Alberta in the 1980s, when mortgage rates were hovering around 20 per cent and people began leaving the province to find work elsewhere. It made a rough housing market even worse when banks were forced to sell off abandoned homes at a discount. It also played a role in the U.S. housing crash.
In the mid-eighties, around a half million people left Alberta to find work in other parts of the country and were able to walk away from their mortgages with virtually no personal consequences, not even to their credit rating.
That’s the scenario that the Finance Department is worried about now.
“These non-recourse mortgages could create incentives for some homeowners facing an income shock to pursue a strategic default and thus place further downward pressure on prices,” read one of the reports obtained by CBC News.
In other words, if you’re an Albertan O&G worker who was just laid off thanks to Saudi Arabia’s war of attrition with the US shale complex, you can simply walk away from your mortgage with no consequences.
Obviously, that’s bad news for Canada’s banks and underscores the following assessment we presented just three weeks ago: “…as Canada’s depression worsens, expect overburdened households to simply fold up under the pressure. That’s when the dominos start to fall in earnest as a cascade of foreclosures bursts the nation’s housing bubble once and for all and asthe world discovers how exposed Canada’s banks are to the country’s levered up families.”
“I had four higher end sales last month, all four transactions, the values were off 20% to get a buyer to the table, in order to get a deal to stick,” Joel Semmens, a realtor in Calgary with Re/Max said.
The heart of our city is hollowing out.
Gone are thousands of downtown white collar office jobs, as oil and gas companies cut employees and slash entire departments.
To a Calgary eye, cranes symbolize good times. A darkened office floor is an economic black eye.
I think it’s tough for people to come to work every day and see empty office space. For a lot of people, particularly young people, they haven’t been through such a dramatic recession before.
I would say the more seasoned people have probably a little bit more tolerance for it, because they have seen it before. Calgary had significant growth in the late 70’s, from a downtown office space perspective. In some ways, it was almost harder in the 80’s, because all of a sudden you have extra capacity added on in a rapid rate and then contracted very quickly. This is definitely different than 2009 where office space was threatening to be as high as it was today.
The big buzz word these days is “diversification.” Do you think we’re capable of diversifying to the point of making up for the jobs lost, if not short term, then in the long term? If so, in what sectors?
In terms of occupancy of these buildings, do you think they may sit for vacant for years on end?
I think is going to be slower absorption that it has been, in the last five years, but I think there’s no need to panic at the stage.
Right. There’s no need to panic.
The world’s largest shipping company Maersk has its profit plunge by 84% on total collapsing global trade as well as sinking crude oil prices. This should give you a good snapshot of what is going on with respect to trade throughout the globe!!
Profit At World’s Largest Shipping Company Plunges On Collapsing Global Trade, Sinking Crude Prices
Back in November, Nils Smedegaard Andersen, CEO of Maersk, the world’s largest shipping company, gave the world a reality check when it comes to global growth and trade.
“The world’s economy is growing at a slower pace than the International Monetary Fund and other large forecasters are predicting” Andersen told Bloomberg. “We believe that global growth is slowing down [and that] trade is currently significantly weaker than it normally would be under the growth forecasts we see.”
That amounted to a harsh indictment of the IMF’s “built in optimism bias” (to quote HSBC), a bias which leads the Fund to perpetually revise down its estimates for global growth once it’s no longer possible to deny reality. “We conduct a string of our own macro-economic forecasts and we see less growth – particularly in developing nations, but perhaps also in Europe,” Andersen added. “Also for 2016, we’re a little bit more pessimistic than most forecasters.”
His comments came on the heels of a quarter in which Maersk’s profits fell 61% Y/Y. On Wednesday, we got the latest numbers out of the shipping behemoth and the picture is most assuredly not pretty.
For 2015, profits fell a whopping 84% to $791 million from $5.02 billion in 2014. Analysts were looking for a profit of $3.7 billion.
For Q4, the net loss came in at $2.51 billion, far worse than the Street expected. Shares of Maersk fell sharply in repsonse.
Not helping matters was Maersk’s oil unit, which took a $2.5 billion impairment charge. “Given our expectation that the oil price will remain at a low level for a longer period, we have impaired the value of a number of Maersk Oil’s assets,” Andersen said. The company needs $45-55 a barrel to break even. Obviously, we’re a long way from that.
The outlook for Maersk Line – the company’s golden goose and the world’s largest container operator – racked up $182 million in red ink last quarter and the outlook for 2016 isn’t pretty either. The company now sees demand for seaborne container transportation rising a meager 1-3% for the year. “Freight rates in 2015 averaged a monthly $620 a container on the key Asia to Europe trade route, with the break even level at more than $1,000,” WSJ notes. “In February the cost of moving a container from Shanghai to Rotterdam fell to $431, according to the Shanghai Containerised Index, barely covering fuel costs.”
“Guidance,” Citi wrote in a note this morning, “implies no respite for 2016”:
“2016 guidance for an underlying net profit significantly below 2015 (US$3.1bn) vs. US$3.4bn consensus. Maersk Line significantly below 2015 (US$1.3bn); Maersk Oil a negative underlying result (breakeven at an oil price US$45-US$55); APMT flat and lower in other divisions. Heavy CAPEX continues at c.US$7bn. We expect consensus to reflect guidance.”
“Maersk Line expects an underlying result significantly below last year as a consequence of the significantly lower freight rates going into 2016 and the continued low growth with expected global demand for seaborne container transportation to increase by 1-3%,” the company said in its annual report out Wednesday.
Here’s a look at how swings in crude and freight rates affect the company’s bottom line:
Addressing the global deflationary supply glut, the company said it’s being “severely impacted by a widening supply-demand gap”. “The demand for transportation of goods was significantly lower than expected, especially in the emerging markets as well as the Group’s key Europe trades, where the impact was further accelerated by de-stocking of the high inventory levels,” Maersk noted. “In 2015, global economic conditions remained unpredictable and our businesses and long-term assets were significantly impacted by large short-term volatility.”
Right. So as we’ve said on too many occasions to count, global growth and trade has simply flatlined and one look at the Baltic Dry certainly seems to suggest that there’s no “recovery” anywhere on the horizon. Indeed we learned last month that in November, US freight volumessuffered their first Y/Y decline since 2012 and before that, the recession.
So once again, central bankers had better learn how to print trade or else it will be time to start “liquidating” excess inventory. And we mean “liquidating” in the most literal sense of the word…
As the Maersk earnings indicate, the world finances are in turmoil. The world is expecting no inflation but an avalache of deflation: which is what Japan is going through right now!!
(courtesy zero hedge)
Inflation Expectations Around The Globe Just Hit Record Lows
Having seen what monetary-policy failure looks like in Japan.. and in the US, we now turn our attention to the world. Amid NIRP temptations, growth fears, and faltering faith in central banker control, market-implied inflation expectations have collapsed to record lows. Worse still, even The Fed’s own survey of consumer’s inflation expectations has slumped to record lows.
Inflation expectations are collapsing… (US and Europe at record lows – worse than the lows in the middle of the last crisis)…
As Bloomberg adds, while ECB policy makers have reiterated in recent weeks that they are committed to their mandate of boosting annual inflation rates to just under 2 percent,consumer-price growth is currently only about one-fifth of that level.
And The Fed is no better as all the money-printing, jawboning, and promises have left consumer expectations of inflation at record lows…
And finally – what we all have to look forward to… Japanese policy projects the impotence of the current efforts in US and Europe… it does not end well…
Your early morning currency/gold and silver pricing/Asian and European bourse movements/ and interest rate settings/WEDNESDAY morning 7:00 am
Euro/USA 1.1258 down .0030
USA/JAPAN YEN 114.94 down 0.240 (Abe’s new negative interest rate (NIRP) not working
GBP/USA 1.4528 up .0068
USA/CAN 1.3837 down .0046
Early this WEDNESDAY morning in Europe, the Euro fell by 30 basis points, trading now well above the important 1.08 level rising to 1.1121; 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 flat in value (onshore) due to lunar holiday. The USA/CNY flat in rate at closing last night: 6.5710 / (yuan flat 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 24 basis points and trading now well BELOW that all important 120 level to 114.94 yen to the dollar. NIRP POLICY IS A COMPLETE FAILURE
The pound was down this morning by 1 basis point as it now trades just above the 1.44 level at 1.4432.
The Canadian dollar is now trading up 48 in basis points to 1.3880 to the dollar.
Last night, Chinese bourses were closed/Japan down badly as was Australia. All European bourses were in the green 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 WEDNESDAY morning: closed down 372.05 or 2.31%
Trading from Europe and Asia:
1. Europe stocks all in the green
2/ Asian bourses mixed/ Chinese bourses: Hang Sang closed ,Shanghai in the closed Australia in the red: /Nikkei (Japan)red/India’s Sensex in the red /
Gold very early morning trading: $1183.60
Early WEDNESDAY morning USA 10 year bond yield: 1.76% !!! up 3 in basis points from last night in basis points from TUESDAY night and it is trading BELOW resistance at 2.27-2.32%. The 30 yr bond yield falls to 2.58 up 3 in basis points from TUESDAY night. ( still policy error)
USA dollar index early WEDNESDAY morning: 96.11 up 6 cents from TUESDAY’s close.(Now below resistance at a DXY of 100)
This ends early morning numbers WEDNESDAY MORNING
Oil drops below 28 dollars on the disappointment in Yellen’s testimony this morning;
(courtesy zero hedge)
According to BP and they should know: “Every oil storage tank will be full in a few months”. That should bring crude down in price to the low 20’s or high teens:
(courtesy BP//zero hedge)
BP’s Stunning Warning: “Every Oil Storage Tank Will Be Full In A Few Months”
It was just last week when we said that Cushing may be about to overflow in the face of an acute crude oil supply glut.
“Even the highly adaptive US storage system appears to be reaching its limits,” we wrote, before plotting Cushing capacity versus inventory levels. We also took a look at the EIA’s latest take on the subject and showed you the following chart which depicts how much higher inventory levels are today versus their five-year averages.
Finally, we went on to present two alarm bells that offer the best evidence yet that inventories are reaching nosebleed levels: 1) some counterparties are experiencing delays in delivering crude due to unspecified “terminalling and pump” issues (basically, it’s hard to move barrels around at this point because there’s so much oil sitting in storage); 2) the cash roll is negative.
On Wednesday, BP CEO Robert Dudley – who earlier this month reported the worst annual loss in company history – is out warning that storage tanks will be completely full by the end of H1. “We are very bearish for the first half of the year,” Dudley said at the IP Week conference in London Wednesday. “In the second half, every tank and swimming pool in the world is going to fill and fundamentals are going to kick in,” he added. “The market will start balancing in the second half of this year.”
Maybe. Or maybe excess supply will simply be dumped on the market once all the “swimming pools” are full.
If that happens, don’t be surprised to see crude crash into the teens as attempts to clear and dump excess inventory spread like wildfire across the market.
Earlier this week, the IEA called any respite for crude prices “a false dawn.” Here’s why (via The Guardian):
- a deal between Opec and other oil producing countries to cut production is unlikely
- with Iran increasing production in preparation for the lifting of sanctions, Opec’s production could rise as strongly this year as in 2015
- there is little prospect falling prices encouraging a pick-up in the rate of demand for oil
- the US dollar is likely to remain strong, limiting the scope for falls in the cost of imported oil
- the predicted large fall in US shale production is taking a long time to materialise
So buckle up, because the collapse in the world’s most financialized of commodities has further to go, and once the entire US shale space goes bankrupt, it will emerge debtless only to start drilling and pumping anew prompting the Saudis to continue to ratchet up the pressure in an endless deflationary merry-go-round. We close with a quote from the IEA:
“We suggest that the surplus of supply over demand in the early part of 2016 is even greater than we said in last month’s oil market report. If these numbers prove to be accurate, and with the market already awash in oil, it is very hard to see how oil prices can rise significantly in the short term. In these conditions the short-term risk to the downside has increased.”
Oil Pumps’n’Dumps After Unexpected Crude Inventory Draw And Cushing Build For 13th Week
Following last night’s across the board build in inventories from API, DOE reported a surprising 750k drawdown (much less than the 3.2mm build expected). However, across the rest of the complex – inventories rose: Cushing +523 build (13th week in a row), Gasoline +1.26mm build, and Distillates +1.28mm build (first in 4 weeks). Having tumbled early on from Yellen’s undovishness, crude spiked on the headline draw (back above $29) but is struggling to hold gains.
- Crude +2.4mm
- Cushing +715k
- Gasoline +3.1mm
- Crude -754k
- Cushing +523k
- Gasoline +1.26mm
- Distillates +1.28mm
Following Yellen’s disappointment this morning, Crude had dumped, then it pumped on th eheadline DOE data only to wake up to the builds in products and Cushing…
WTI Crude Plunges To New Cycle Lows As Energy Credit Risk Hits Record Highs
The on-the-run WTI crude futures price just plunged to $27.27 (for the March contract) which is a new cycle low for black gold (below March’s previous “This is the low” lows in January.) It should not be entirely surprising since US Energy credit risk has spiked once again to new record highs.
Oil hits new cycle lows…
As even investment grade emergy credit risk spikes to record highs…
The real swarm of bankruptcies has yet to begin but CHK will be the first biggest test.
Could Gasoline Drop Below $1 Per Gallon?
Retail gasoline prices have dipped below $2 per gallon across the United States. But gas might drop below $1 per gallon soon in some places of the country.
Aside from the financial crisis, when gasoline prices dropped below $2 per gallon for just a few months, retail gasoline prices have not been below $2 since 2004. Gas prices are at their lowest levels in many years.
But things could soon get even crazier. GasBuddy says that gasoline supplies are rising in the Midwest, which could result in localized gluts for product, pushing prices down to $1 per gallon or even lower. With access to heavily discounted Canadian crude, Midwest refiners are churning out cheaper and cheaper gasoline. “That could trigger fire sales—very quick and low price sales,” Patrick DeHaan of GasBuddy told the WSJ. There is a “strong possibility” that refiners, trying to offload excess winter fuel blends, could discount prices down to 99 cents per gallon for a brief period of time.
Oklahoma appears to be enjoying the cheapest gasoline in the country. According to GasBuddy’s website, the cheapest gas right now can be found in Oklahoma City, where one station was selling gas for $1.09 per gallon on February 9. A 7-Eleven in Norman, OK sold gas for $1.10 per gallon on the same day.
(Click to enlarge)
Nationwide, retail gasoline sold for $1.87 for the week ending on February 8. For now, sub-$1 gasoline is unlikely outside of some local areas, such as Oklahoma and the Midwest. But if oil prices drop to $20 per barrel, which is something that Goldman Sachs is not ruling out, $1 gasoline could become a lot more common.
Portuguese 10 year bond yield: 3.71% up 4 in basis points from TUESDAY
Credit Craters As “Not Dovish Enough” Yellen Sinks Stocks
Damn It, Janet!
Yellen’s testimony Wed. “was not dovish relative to market expectations,” and didn’t take March off table, Morgan Stanley strategists Matthew Hornbach, Chirag Mirani, Guneet Dhingra write in note.
She “qualified most of the downside risks to the economic outlook with a positive spin,” while implying that tighter financial conditions need to persist in order for Fed’s economic outlook to change
Risk mkts will struggle in absence of “positive catalysts” until Fed makes clear that “gradual” could mean only 1-2 hikes in 2016
In summary, as Rick Santelli exclaimed, Janet Yellen admitted (by her comments on NIRP legality) that there is no Plan B.. and if there was we don’t even know if it possible…
An undovish and NIRP-confused Yellen sparked the risk-off pain…
Futures show the early exuberance ran stops to Monday’s ledge (Friday’s close)…
On the day, Nasdaq outperformed as The Dow underperformed…Note the sell-off stopped right as Europe closed once again and then accelerated into the US close…
FANG stocks managed a small bounce but TSLA tumbled – now down over 40% YTD…
Much of the early exuberance in stocks was based on rumors in Europe of ECB monetizing DB equity and its emergency bond buyback plan… but as is all too clear, even the sheep in stock-land were not really buying that… all technical – algos ran stops to fill the gap then yumbled (from +15% to +6%)…
US financial stocks managed some early gains (up 2%) on the heels of European gains BUT US financial credit risk pushed another 3bps wider to 166bps – highest sicne 2012…
And by the close US Financials were back in the red…
One more thing while we are on banks and systemic risk – The Libor-OIS spread has surged in recent weeks suggesting significant funding stress in European and US money markets… probably transitory, right?
Treasury yields ended the day marginally lower (led by the long-end) but roundtripped from notable early selling…. 30Y Yield hits 2.51% – lowest close sicne April 1st 2015
With the yield curve collapsing to lows from 2007…
FX markets were very volatile with Yellen’s comments sparking a surge and purge in the USD – ending the day unch but down 1% on the week…
But USDJPY was the biggest loser as carry traders flushed it back to a 113 handle, erasing all of the “devaluation” gains since QQE2 was unleashed…
And for those hoping for intervention – here’s what happened after last night’s “intervention”…
Finally with a flat USD, gold and silver flatlined today as crude and copper presed lower…
Which pushed WTI to new multi-year cycle lows…
And at the same time, energy credit risk is spiking higher…
Today the 10 yr bond yield/2 yr bond yield plunges to the flattest since 2007. Generally means financial trouble for the USA:
(courtesy zero hedge)
Treasury Yield Curve Plunges To Flattest Since 2007, Financials Follow
For the first time since 2007, the spread between 2Y and 10Y US treasury yields has to 100bps. While not inverted, which the status quo maintains means there cannot be a recession, the bond market is flashing ominous signs for both the economy and the US financial system…
The curve has collapsed since The Fed hiked rates…
And financials have begun to catch down to that reality…
Yellen’s Humphrey Hawkins testimony to Congress is not as dovish as hoped. The USA/Yen cross drops (Yen rises) on the disappointing news. The Dow is barely up as USA markets open:
(courtesy zero hedge)
Yellen Hints At Slowing Economy, Dropping Stocks, Accommodative Fed, But Does Not Go “Full Dove”
With world markets begging for moar, Janet Yellen’s prepared Humphrey-Hawkins Testimony was a disappointment:
- *YELLEN: FED EXPECTS ECONOMY TO WARRANT ONLY GRADUAL RATE RISES (everything is fine)
- *YELLEN: JOB, WAGE GAINS SHOULD SUPPORT INCOMES AND SPENDING (everything is awesome)
- *FED REPORT: LEVERAGE RISKS IN FINANCIAL SECTOR `REMAIN LOW’ (so don’t worry about banks)
- *YELLEN: FINANCIAL STRAINS COULD WEIGH ON OUTLOOK IF PERSISTENT (so, there’s chance)
The bottom line this is simply a rerhash of the Jan FOMC Statement and does not offer enouigh dovishness for the market.
As we detailed last night, Citi’s chief FX strategist Englander hinted at what would be Yellen’s “Draghi Moment”:
The dovish surprise is if she explicitly removes March from the hiking calendar(which would be Draghi-esque in front running the FOMC), broadly hints at a delay or expresses concern on downside risk to long term inflation or structural stagnation. The intention would be to show US households, business and investors that the Fed has their back.
This is not what she offered, and markets are disappointed. In fact, the most dovish Yellen went was to mention stocks and tightening financial conditions:
Yellen also admitted once more that the Fed’s engaged in policy error:
Financial conditions in the United States have recently become less supportive of growth, with declines in broad measures of equity prices, higher borrowing rates for riskier borrowers, and a further appreciation of the dollar… In the fourth quarter of last year, growth in the gross domestic product is reported to have slowed more sharply, to an annual rate of just 3/4 percent; again, growth was held back by weak net exports as well as by a negative contribution from inventory investment
- *YELLEN: U.S. FINANCIAL CONDITIONS HAVE BECOME LESS SUPPORTIVE
- *YELLEN: LOWER OIL, LONG-TERM BORROWING COSTS PROVIDE OFFSET
- *YELLEN: GLOBAL ECONOMIC GROWTH SHOULD PICK UP OVER TIME
- *YELLEN: RECENT INDICATORS DON’T SUGGEST SHARP SLOWDOWN IN CHINA
- *YELLEN: YUAN DROP MAKES CHINA FX POLICY, OUTLOOK MORE UNCERTAIN
- *FED: SOME LEVERAGED LOANS STILL SHORT OF SUPERVISOR STANDARDS
And finally some hope:
- *YELLEN: `MONETARY POLICY IS BY NO MEANS ON A PRESET COURSE’
However, this is offset by the ongoing undercurrent of optimism:
the Committee expects that with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace in coming years and that labor market indicators will continue to strengthen
And here is why Yellen is trapped:
- WTI CRUDE ERASES GAINS AS FED’S YELLEN WARNS OF GROWTH RISKS
In other words, assets fall on admission the economy is slowing, and assets would certainly fall if the Fed continues its hiking cycle without relent.
Indeed, if one had to summarize Yellen’s message to the S&P, it would probably look as follows: “you haven’t dropped enough for the Fed to change course.”
And now we look forward to the Q&A in over an hour.
* * *
Full statement (pdf link):
Goldman’s Take: “Additional Hikes Remain FOMC Baseline”
This is probably not what the bulls wanted to hear. Moments ago Goldman released its take on Yellen’s testimony set to begin momentarily, and contrary from a dovish take the bank which has spawned more central bankers in world history than any other, said that her prepared remarks “suggest additional hikes remain FOMC baseline ”
Goldman’s full take:
Fed Chair Yellen’s Prepared Remarks Suggest Additional Hikes Remain FOMC Baseline
BOTTOM LINE: Chair Yellen’s prepared remarks to the House Financial Services Committee contained little new information on the monetary policy outlook, and were roughly in line with comments made by Vice Chair Fischer and New York Fed President Dudley over the past couple weeks. She continued to highlight the FOMC’s expectation for “gradual” increases in the federal funds rate.
1. Regarding recent turmoil in financial markets, Chair Yellen acknowledged that “Financial conditions in the United States have recently become less supportive of growth”, and that “if they prove persistent, could weigh on the outlook for economic activity and the labor market”. However, she also mentioned that “Declines in longer-term interest rates and oil prices provide some offset”.
2. There was little new information regarding the monetary policy and economic outlooks. In terms of monetary policy, she continued to note that “The FOMC anticipates that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate.” Although Chair Yellen recognized that economic activity in the fourth quarter of last year “is reported to have slowed more sharply”, she also continued emphasizing that “labor market conditions have improved substantially” although “there is still room for further sustainable improvement”.
3. Chair Yellen recognized the potential for negative spillovers from international developments, noting that “Foreign economic developments, in particular, pose risks to U.S. economic growth.” She also attributed recent market volatility to foreign developments, highlighting that “declines in the foreign exchange value of the renminbi have intensified uncertainty about China’s exchange rate policy and the prospects for its economy. This uncertainty led to increased volatility in global financial markets and, against the background of persistent weakness abroad, exacerbated concerns about the outlook for global growth”.
4. Chair Yellen acknowledged the recent declines in measures of inflation expectations, but we did not detect a broader shift in Fed officials’ assessment of these developments. Regarding survey based measures, she noted that they are “at the low end of their recent ranges; overall, however, they have been reasonably stable”. In terms of the recent declines in breakevens, Yellen noted that “market-based measures of inflation compensation have moved down to historically low levels.” However, she continued to emphasize her belief that most of these declines reflect “changes in risk and liquidity premiums over the past year and a half”.
Market Unhappy About Yellen’s “Is NIRP Legal” Confusion
Just as we detailed last week, and it appears Rep. Hensarling has been reading, when pressed on The Fed’s legal authority to take interest rates negative, Janet Yellen gushed that “Fed authority for negative rates is still a question.” This appears to have been taken as bad news by the market (cutting off the potential easing paths of the future in a world of NIRP), and stocks, crude, USDJPY have all tumbled.
Furthermore, she sounded a littl hawkish:
- *YELLEN: I DON’T EXPECT THE FOMC WILL FACE RATE-CUT OPTION SOON
- YELLEN: I DON’T THINK IT WILL BE NECESSARY TO CUT RATES
The reaction – more disappointment…
S&P Downgrades Banks With Highest Energy Exposure; Expects “Sharp Increase” In Non-Performing Assets
Moments ago S&P continued its downgrade cycle, this time taking the axe to the regional banks with the highest energy exposure due to “expectations for higher loan losses.” Specifically, its lowered its long-term issuer credit ratings on four U.S. regional banks by one notch: BOK Financial Corp., Comerica Inc., Cullen/Frost Bankers Inc., and Texas Capital Bancshares. The outlooks on these banks are negative.
It also revised the outlook on BBVA Compass Bancshares to negative from stable and affirmed the ‘BBB+/A-2’ issuer credit ratings.
We assume the non-regional mega banks are insulated from such actions because they are the primary beneficiaries of the Fed’s generous $2.5 trillion in excess reserves which will allow banks to mask as much of O&G portfolio deterioration as is necessary to “weather the cycle.”
What is notable is that among the S&P non-sugarcoated comments are some true fire and brimstone gems, which suggest that the big picture for banks with substantial energy exposure is about to get far worse. Here is what S&P said:
These rating actions follow a review of U.S. regional banks with large energy loan portfolios as a percentage of both total loans and Tier 1 capital. Since we revised our outlooks to negative on five regional banks in January 2015, energy prices have declined by more than one-third and the asset quality of energy loan portfolios has deteriorated materially, albeit from fairly benign levels. Throughout 2015, criticized and classified assets climbed significantly, and in the fourth quarter, several regional banks with large energy loan portfolios reported increases in loan loss provisions and energy loss reserves to varying degrees, and, in certain cases, nonperforming assets (NPAs) also rose.
Given further declines in energy prices in recent months, less hedging activity by borrowers, and potentially more difficulty for borrowers to cure (i.e., resolve) borrowing base deficiencies through capital raises or asset sales, we think troubled debt restructurings and NPAs in the energy sector will increase, possibly sharply, in coming quarters. We also think banks will increasingly emphasize the potential loss content among rising levels of NPAs that we expect to see throughout 2016. In addition, we think regulatory scrutiny of energy loan portfolios will increase in 2016, including during the upcoming Shared National Credit (SNC) exams (two will be conducted in 2016) and the annual stress tests regulators mandate, which may encourage the use of higher loss assumptions.
Many banks have been lowering their energy price assumptions (“price decks”) for exploration and production (E&P) loans throughout 2015, resulting in reduced borrowing bases (the value of a borrower’s reserves against which banks typically lend). In the next semiannual borrowing-base determination this spring, we expect that borrowing bases will decline further, mainly because of lower energy prices (i.e., valuations) and possibly lower reserve replacement,which could lead to more borrower deficiencies (i.e., loan balances that are greater than the borrowing base). Although banks typically allow borrowers as long as six months to resolve a deficiency, we think many borrowers will have fewer options to cure through debt capital issuances or asset sales and dispositions, which were more common last year. Specifically, the cost of capital has increased for many borrowers, and private equity firms may be less willing to commit additional capital to resolve deficiencies. In addition, E&P borrowers may have unsecured debt in addition to their reserve-based loans, which could pressure their overall finances and push them into default or bankruptcy.
Equally as important, we think the performance of indirect credit exposures in local energy-focused markets could deteriorate somewhat over the next two years. Although deterioration has not yet been meaningful, we still think the energy price slump could hurt commercial real estate (CRE) in these local markets, such as Houston or smaller cities in Texas, throughout 2016 and 2017. However, we recognize that lower energy prices could have a broad-based positive impact on U.S. consumers and corporations where energy is a significant input cost. We are also wary of strategies that some banks may execute to aggressively grow their loan portfolios in other loan segments, such as CRE, in order to offset contraction in their energy loan portfolios.
Although we expect that banks will likely continue to increase their loan loss provisions and reserves within their energy loan portfolios over the next several quarters, we consider that currently low NPAs, solid preprovision earnings generation, and, in some cases, high risk-adjusted capital (RAC) ratios offer the banks a cushion to absorb higher loan loss provisions. This was a key factor in our decision to limit our rating actions to one notch at this point.
In our analysis of these companies, we evaluate the potential impact of certain adverse scenarios, based on default and net loan loss assumptions for different types of energy lending. For example, we expect that E&P reserve-based lending will have lower net loss rates than energy services lending because of conservative advance rates on reserve collateral. We will continue to consider the array of possible assumptions regarding energy loan default and net loss rates, as the cycle develops. At this time, however, we do not believe that these banks’ loan loss provisions would exceed preprovision earnings under most foreseeable scenarios, and, thus, our rating actions following this review were limited to a one-notch downgrade.
The following table presents a few of the key metrics we are tracking and lists the banks that are included in today’s actions, as well as others we believe have above-average exposure to energy.
Is that the end of it? Not even close. Expect much more pain – initially among the regional lenders, many of whom have been given explicit instructions to extend and pretnd as long as possible by the Dallas Fed as reported exclusively here before – before we reach a true bottom in bank exposure.
Finally, for the full list, here is a breakdown from Raymond James laying out the US banks, both regional and national, with the highest exposure to energy: while some of these were just downgraded, this was for a reason: expect much more negative surprises from these lenders in the coming months as more shale stop servicing their debts.