Gold: $1,238.20 down 0.50 (comex closing time)
Silver 15.16 down 13 cents
In the access market 5:15 pm
We are now entering the last week of the month and you all know that it means with respect to keeping the price of gold/silver in check until March 1
for the Comex: Wednesday Feb 24 expired
for OTC and LBMA: Monday, Feb 29.
Generally the bankers get their way during options expiry week. Yesterday lease rates went dramatically lower on silver and gold. That told me that today, the bankers would try and raid. During last night and early this morning, they used every “paper” muscle they could but instead they came up against huge physical demand and lo and behold gold basically finished unchanged. Today was a huge victory for us in gold. The bankers will regroup and again try and raid tomorrow or on Monday.
At the gold comex today, we had a GOOD delivery day, registering 54 notices for 5400 ounces. Silver saw 0 notices for nil oz.
Several months ago the comex had 303 tonnes of total gold. Today, the total inventory rests at 210.99 tonnes for a loss of 92 tonnes over that period.
In silver, the open interest fell by 1441 contracts down to 173256. In ounces, the OI is still represented by .866 billion oz or 124% of annual global silver production (ex Russia ex China).
In silver we had 0 notices served upon for nil oz.
In gold, the total comex gold OI rose by a large 7,649 contracts to 452,839 contracts as the price of gold was up $16.40 with yesterday’s trading.(at comex closing)
We had another huge deposit of gold into inventory at the GLD, to the tune of 7.33 tonnes / thus the inventory rests tonight at 760.32 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 tune of and thus the Inventory rests at 311.618 million oz
First, here is an outline of what will be discussed tonight:
1. Today, we had the open interest in silver fell by 1441 contracts down to 173,256 despite the fact that the price of silver was up 5 cents with yesterday’s trading. It seems that the commercials are loathe to supply the necessary short paper. The total OI for gold rose by 7549 contracts to 452,839 contracts as gold rose by $16.40 in price from yesterday’s level. The commercials were not afraid to supply the paper gold comex paper.
2 a) Gold trading overnight, Goldcore
3. ASIAN AFFAIRS
i)Late WEDNESDAY night/ THURSDAY morning: Shanghai closed DOWN BADLY BY 187.65 POINTS OR 6.41% / Hang Sang closed DOWN by 303.70 points or 1.58% . The Nikkei closed UP 224.55 or 1.41%. Australia’s all ordinaires was UP 0.13%. Chinese yuan (ONSHORE) closed UP at 6.5315. Oil GAINED to 32.07 dollars per barrel for WTI and 34.14 for Brent. Stocks in Europe so far deeply in the GREEN . Offshore yuan trades 6.53715 yuan to the dollar vs 6.5315 for onshore yuan/
ii)Just take a look at the huge unrealized losses from the yen carry traders who bought Japanese stocks: it is massive!!
( zero hedge)
iii)Foxconn decides to ax the deal to purchase troubled Japanese tv screen maker Sharp:
i)This is big news: North Dakota’s largest oil producer, Whiting petroleum suspends all fracking activity and they will be followed by Continental Resources. Thus Saudi Arabia is winning:
( zero hedge)
ii) Genscape reports that the USA is close to capacity in the oil storage/down goes oil
i) Quite a story!! The Dutch central bank is now considering whether to give Koos Jansen the bar list of gold held by the Central Bank of the Netherlands including bar codes, bar stamps and when the bar was manufactured:
ii) Koos states that the comex can deliver gold off comex (I am verifying this)
USA STORIES WHICH WILL INFLUENCE THE PRICE OF GOLD/SILVER
i)Kansas City Fed: “The worst business conditions in the Mid West since the 1980’s”:
Let us head over to the comex:
The total gold comex open interest rose to 452,839 for a gain of 7549 contracts as the price of gold was up $16.40 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 69 contracts down to 68. We had 30 notices filed on yesterday, so we lost 39 contracts or an additional 3900 oz will not stand for delivery. The next non active delivery month of March saw its OI fall by 176 contracts down to 1026. After March, the active delivery month of April saw it’s OI rise by 2,645 contracts up to 311,437. The estimated volume today (which is just comex sales during regular business hours of 8:20 until 1:30 pm est) was 205,853 which is fair. The confirmed volume yesterday (which includes the volume during regular business hours + access market sales the previous day was good at 291,747 contracts. The comex is in backwardation until March.
Feb contract month:
INITIAL standings for FEBRUARY
|Withdrawals from Dealers Inventory in oz||nil|
|Withdrawals from Customer Inventory in oz nil||nil
|Deposits to the Dealer Inventory in oz||nil|
|Deposits to the Customer Inventory, in oz|| 14,306.75 oz
Scotia: 445 kilobars)
|No of oz served (contracts) today||54 contracts
|No of oz to be served (notices)||14 contracts (1,400 oz )|
|Total monthly oz gold served (contracts) so far this month||2551 contracts (255100 oz)|
|Total accumulative withdrawals of gold from the Dealers inventory this month||nil|
|Total accumulative withdrawal of gold from the Customer inventory this month||532,238.5 oz|
we had 1 adjustment
Out of Scotia
3,956.920 oz leaves the customer account and this enters the dealer side of Scotia
FEBRUARY FINAL standings/
|Withdrawals from Dealers Inventory||nil|
|Withdrawals from Customer Inventory|| 607,451.595 oz
|Deposits to the Dealer Inventory||nil|
|Deposits to the Customer Inventory||1,205,753.405 oz
|No of oz served today (contracts)||0 contracts nil oz|
|No of oz to be served (notices)||0 contract (nil oz)|
|Total monthly oz silver served (contracts)||166 contracts (830,000 oz)|
|Total accumulative withdrawal of silver from the Dealers inventory this month||nil oz|
|Total accumulative withdrawal of silver from the Customer inventory this month||17,988,223.7 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 2 customer deposits:
i) Into CNT: 2007.770 oz
ii) Into JPM: 1,203,745.635 oz
total customer deposits: 1,205,753.405 oz
total withdrawals from customer account 607,451.595 oz
we had 0 adjustments
And now the Gold inventory at the GLD:
Feb 25./we had a huge deposit of 7.33 tonnes of gold into the GLD/Inventory rests at 760.32 tonnes. No doubt that this is a paper gold deposit/not real as the price of gold hardly moved on that huge amount of deposit.
FEB 24/no change in gold inventory at the GLD/Inventory rests at 752.29 tonnes
FEB 23./another huge addition of 19.3 tonnes of gold into its inventory/Inventory rests at 752.29 tonnes. Again how could they accumulate this quantity of gold with backwardation in London/this vehicle is nothing but a fraud
Feb 22/A huge addition of 19.33 tonnes of gold to its inventory/Inventory rests at 732.96 tonnes/ How could this happen: a huge addition of gold coupled with a huge downfall of 20 dollars in gold.
FEB 19/a huge deposit of 2.68 tonnes of gold into the GLD/Inventory rests at 713.63 tonnes
fEB 18/no change in gold inventory at the GLD/Inventory rests at 710.95 tonnes
fEB 17/no change in gold inventory at the GLD/Inventory rests at 710.95 tonnes
Feb 16.a huge withdrawal of 5.06 tonnes from the GLD/the loss was probably a paper loss/inventory at 710.95 tonnes
fEB 12/ a huge deposit of 11.98 tonnes/inventory rests at 716.01 tonnes. With gold in severe backwardation in London, I really believe that the gold added was paper gold and not real physical/
Feb 11/no change in inventory/inventory rests at 702.03 tonnes
Feb 25.2016: inventory rests at 760.32 tonnes
And now your overnight trading in gold, THURSDAY MORNING and also physical stories that may interest you:
Dutch Central Bank Considers To Relocate Gold Vault And Publish Gold Bar List
According to a press release the management team of the Dutch central bank has requested to investigate relocating the banknotes and gold vault that is currently located in the basement of bank’s headquarter at the Frederiksplein in Amsterdam.
In the press release we can read the reason for the investigation to relocate the vault flows from preparations to renovate the building that dates from 1968. While planning the renovation the subject to relocate the vault was brought up as the burdens for securing the metal is currently felt by all employees and visitors at the central bank’s headquarter. Storing 189.9 tonnes of gold at the Frederiksplein encompasses high security standards for all employees working in the building while nearly none of them have anything to do with the vault. In addition, whenever large batches of banknotes are transported to or from the vault the security measures can be complex in the center of Amsterdam. From this discomfort it’s considered to relocate the vault.
In November 2014 De Nederlandsche Bank (DNB) disclosed to have repatriated 122.5 tonnes from the Federal Reserve Bank Of New York (FRBNY), which brought the total amount of gold stored in Amsterdam to 189.9 tonnes and left an equal amount (189.9 tonnes) in New York. In London at the Bank Of England DNB has stored 110.3 tonnes and in Ottawa, Canada, 122.5 tonnes are stored. In total Dutch official gold reserves stand at 612.5 tonnes.
From my perspective the official reason presented to relocate the gold can be legitimate, but it can be a decoy as well. After studying film footage shot in the DNB gold vault from October 2010, January 2012 and March 2014, all from before the repatriation in November 2014, we must conclude the vault compartment we can see is sufficiently large to hold 67.4 tonnes, but would be very tight to hold 189.9 tonnes. Surely there are other compartments in the vault, as we can see in the videos, though I’m not sure if all areas have been designed to carry exceptional large tonnages of gold. The soil in Amsterdam is known for largely consisting of clay, as opposed to the bedrock in Manhattan, this can be problematic for storing gold. There is a possibility the vault in Amsterdam is not suited to store 189.9 tonnes of gold, or more if DNB would ever decide to repatriate additional gold from the US, UK or Canada.
When I called DNB today I was directed to a spokesman, Martijn Pols, whom I asked when a final decision would be made on the vault relocation and whether they have any new locations in mind. I was told the Dutch central bank will come to a final conclusion by the end of this year and no new locations are on table as of yet. While talking to this gentleman I also took the opportunity to ask about the gold bar list.
On 26 September 2015 I visited a conference in Rotterdam, the Netherlands, called Reinvent Money. One of the speakers was Jacob De Haan from DNB’s Economics and Research Division – you can watch his presentation by clicking here. In his presentation De Haan repeatedly talked about the importance of transparency in central banking. These statements raised my eyebrows, as I’ve submitted a FOIA request at DNB in 2013 to ask for all correspondence between DNB and other central banks in the past 45 years with respect to its monetary gold, which was not honoured. From my experience DNB was anything but transparent.
After the presentation I approached De Haan and asked, if transparency is so important to DNB, why it has never published its gold bar list – an act of transparency that could be accomplished within minutes. De Haan offered me he would look into that. He gave me his email address and we agreed to stay in touch.
The next day I send De Haan an extensive email explicating my request at DNB to publish the gold bar list of the Dutch official gold reserves in excel format. I wrote him it wouldn’t take DNB any effort, as I assumed the bar list is already in their possession. De Haan never replied to me over email, so I called his office in December 2015 to ask what the status was of my request. De Haan’s secretary answered my inquiry was not rejected but still being processed.
Today, when I asked DNB’s spokesman over the phone about the bar list he answered the subject is still being discussed internal, he even confirmed De Haan was involved in this matter. Currently DNB is considering to release the document while carefully weighing al pros and cons, I was told. In the conversation Pols stated DNB knows the German central bank released a bar list in October 2015 and there was a wish in Amsterdam to mutually harmonize this policy. I added that if DNB would go ahead with its list their action would only be credible if the list would be complete, including all refinery brands, refinery bar numbers and year of manufacturing, in contrast to the incomplete list the Germans published. Pols was aware of the format the Germans had chosen and took note of my comment. An ensuing question from my side what’s holding back DNB in releasing the list could not be clearly answered.
E-mail Koos Jansen on: firstname.lastname@example.org
Koos states that the comex can deliver gold off comex (I am verifying this)
(courtesy Koos Jansen)
Koos Jansen: Comex gold futures contracts can be settled off exchange
9:56a ET Thursday, February 25, 2016
Dear Friend of GATA and Gold:
Gold researcher and GATA consultant Koos Jansen notes today that Comex gold futures contracts do not have to be settled by delivery of gold deposited with a Comex member warehouse, but also can be settled with gold anywhere in the world that purportedly is considered equivalent to the gold in the contract.
Of course this would seem to diminish the relevance of Comex gold inventories, whose weekly totals lately have been followed more closely. And if, in a pinch, central bank gold can be rolled quickly into a Comex warehouse somewhere, Comex inventories may be even less of an indicator of market direction. That is why the primary determinant of the gold price is always central bank intervention in the market — which is exactly what mainstream financial news organizations and respectable market analysts refuse to investigate.
Jansen’s report is headlined “COMEX Gold Futures Can Be Settled Directly with Eligible Inventory” and it’s posted at Bullion Star here:
CHRIS POWELL, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.
And now your overnight WEDNESDAY NIGHT/ THURSDAY MORNING trades in bourses, currencies and interest rate from Asia and Europe
1 Chinese yuan vs USA dollar/yuan UP to 6.5315 / Shanghai bourse DEEPLY IN THE RED RESCUE: / HANG SANG CLOSED DOWN 303.70 POINTS OR 1.58%
2 Nikkei closed UP 224.55 OR 1.41%
3. Europe stocks all in the GREEN /USA dollar index DOWN to 97.32/Euro UP to 1.1042
3b Japan 10 year bond yield: FALLS TO -.069% AND YES YOU READ THAT RIGHT !!!!(Japan buying 100% of bond issuance)/Japanese yen vs usa cross now at 112.53
3c Nikkei now well below 17,000
3d USA/Yen rate now well below the important 120 barrier this morning
3e WTI:: 32.07 and Brent: 34.14
3f Gold DOWN /Yen DOWN
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 FALLS to 0.155% German bunds in negative yields from 8 years out
Greece sees its 2 year rate RISE to 12.43%/:
3j Greek 10 year bond yield RISE to : 10.76% (yield curve deeply inverted)
3k Gold at $1237.00/silver $15.21 (7:15 am est)
3l USA vs Russian rouble; (Russian rouble DOWN 2/100 in roubles/dollar) 75.78
3m oil into the 32 dollar handle for WTI and 34 handle for Brent/
3n Higher foreign deposits out of China sees huge risk of outflows and a currency depreciation (already upon us). This can spell financial disaster for the rest of the world/China forced to do QE!! as it lowers its yuan value to the dollar/expect a huge devaluation imminently from POBC.
JAPAN ON JAN 29.2016 INITIATES NIRP
30 SNB (Swiss National Bank) still intervening again in the markets driving down the SF. It is not working: USA/SF this morning 0.9899 as the Swiss Franc is still rising against most currencies. Euro vs SF is 1.0929 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 STARTS ITS CAMPAIGN AS TO WHETHER EXIT THE EU.
3r the 8 year German bund now in negative territory with the 10 year FALLS to + .155%
/German 8 year rate negative%!!!
3s The Greece ELA NOW at 71.4 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 1.73% early this morning. Thirty year rate at 2.60% /POLICY ERROR)
5. Details Ransquawk, Bloomberg, Deutsche bank/Jim Reid.
(courtesy Jim Reid/Bloomberg/Deutsche bank/zero hedge)
Now It’s China’s Turn To Crash: Shanghai Plunges 6.4% Overnight
After a burst of volatility in the developed market over the past month, one odd outlier was China, where after a surge of gut-wrenching moves in both its currency and equity markets (recall that it was China’s troubles with marketwide circuit breakers at the start of January that may have catalyzed the global volatility wave), Chinese stocks remained relatively quiet and resilient, levitating quietly day after day. That all changed overnight when the Shanghai Composite plunged by 6.4% with the drop accelerating into the close. This was the biggest drop in over a month and was big enough to almost wipe out the entire 10% rebound from the January lows in one session.
There was confusion about what catalyzed the selling with several theories proposed.
According to one, the catalyst was a jump in money market rates: the overnight repo rate jumped as much as 33 bps which led to a tightening in financial conditions. The cash squeeze was caused by banks’ reserve submission and corp. tax payments for 2015 due this week: Commerzbank economist Zhou Hao
“Market confidence is very weak so an increase in money-market rates triggered a sell-off today,” said Wu Kan, a fund manager at JK Life Insurance Co. in Shanghai. “Technically speaking, the rebound has reached its target and a new round of declines is resuming. The valuations of smaller companies are still too high and that’s the basic reason behind the plunge. I am not too sure that the government will step in to buy stocks now.” Judging by the final result, he was right.
A second theory speculated that losses accelerated after regulators banned Zhongrong Life from adding to its equity investments, according to Castor Pang, head of research at Core-Pacific Yamaichi Hong Kong. “Zhongrong Life can’t add to holdings as its solvency ratios fall into criteria of insolvent insurers”, China’s Insurance Regulatory Commission said.
This is a problem because “the government is trying to make sure all insurance companies need to meet potential demand for claims from clients and keep liquidity ample,” says Pang. “But almost all insurers which heavily bought shares last year when the Shanghai Composite was at high levels” are facing problems. As a result, the latest black swan to appears in China in the form of Zhongrong Life’s situation, is fueling concern further selling pressure in stock market: Pang
“A big jump in Shanghai turnover implies investors turned risk averse and want to dump holdings en masse,” Pang says. “Investors are scared of further declines. The government may try to step in to calm investors’ nerves. It may help moderate losses but can’t reverse the trend.”
A third, far less credible theory postulated that stocks were tumbling on concerns that there may be negative news from the G-20 tomorrow. Since that would be patently impossible as the G-20’s only concern is to stabilize markets we would discount this idea.
Whatever the reason, it appears that Chinese stocks were just waiting for a catalyst to dump and they got it: “The market is in a quite fragile state when everyone scrambles for an exit,” said Central China Securities Co.’s Shanghai-based strategist Zhang Gang, who accurately predicted last year’s June selloff. “None of the news in the market is sufficient enough to trigger such a slump.”
* * *
Elsewhere in the world, the sentiment was initially of the risk-off variety, with treasuries rallying gold rose and crude oil falling after the Chinese rout. U.S. stock-index futures were little changed, while European equities advanced as banks rebounded.
As Bloomberg writes, global equities have swung between gains and losses in the past week as investors tried to get a handle on the world economy’s prospects. So far they are failing, and yet it is only massive short squeeze that manage to provide support under the increasingly jittery market. Crude’s gyrations and concern that China can’t regain momentum have dominated financial markets this year, spurring central banks to ponder further stimulus. U.S. Treasury Secretary Jacob Lew said Group-of-20 finance ministers wouldn’t deliver an “emergency response” to the market turmoil when they meet this week as we aren’t in a crisis environment.
“The conversation has shifted from an accelerating economy to one possibly falling into recession,” said Kully Samra, who manages U.K. clients for Charles Schwab Corp. in London. “Our outlook for the year is still good, but what happens over the next few days in the stock market depends on how much those worries intensify.”
At last check, S&P 500 futures were up 0.1%, to 1933, before data that is forecast to show durable goods orders expanded in January, while initial jobless claims increased in February.
Europe’s Stoxx 600 benchmark gauge of European equities added 1.4% before the Euronext broke as reported previously, a gain that has since jumped to 1.8% as the market remains broken: go figure. Lloyds rallied as much as 11 percent after raising its dividend, introducing a special payout and indicating it may have reached the end of charges for wrongly sold payment protection insurance that cost it 4 billion pounds ($5.58 billion) last year.
* * *
Looking at regional markets, Asian equity markets traded mixed, having shrugged off the positive lead from Wall St where gains in oil prices post-DoE spurred risk-on sentiment, with renewed Chinese concerns leading to the downbeat tone in the region. Nikkei 225 (+1.4%) traded in positive territory supported by JPY weakness. Elsewhere, ASX 200 (+0.1%) traded range-bound amid a mixed bag of earnings reports. While the Shanghai Comp (-6.4%) underperformed amid profit-taking and increasing money market rates with the overnight Shibor up 2.45%, subsequently signalling at tighter liquidity. Alongside this, a total of CNY 960b1n of reverse repurchase agreements are due to mature this week, again further squeezing liquidity. Finally, 10yr JGBs fell amid gains in riskier assets in Japan, while the latest securities transactions figures also showed foreign purchases of Japanese debt nearly halved. However, prices pulled off their worst levels following the 2yr note auction where the auction average yield declined to its lowest on record.
European equities are in the green (Euro Stoxx: +1.4%) paring some of yesterday’s gains after benefitting from the positive close and Wall St. and a spate of earnings this morning. Europe shrugged off the significant losses seen in China, to see financials and energy names outperform. Both these sectors were among the worst performers yesterday, so while much of the move could be put down to profit taking, financials have also benefitted from significant gains Lloyds (+9.0%) in the wake of their earnings, while energy names continue to see upside in tandem with WTI’s move higher during US hours.
In FX it has been a tight session in early London today, the pound halted its steepest decline in more than six years as data confirmed that the U.K. economy gained momentum at the end of last year. Australia’s dollar weakened for a third day, dropping 0.1 percent to 71.89 U.S. cents, after a government report showed businesses’ annual investment plans fell to the lowest level in nine years.
The sharp reversal in Wall Street adds to the conflicting signals in FX. Oil also turned sharply higher on what was a marginal miss in the DoE Crude build, so all points to a short squeeze in risk (in general), spelling some USD weakness against all currencies with the exception of the JPY. Early selling in USD/CAD saw us dip under 1.3700 as locals decided to cut their longs established at the lows. GBP continues to grind lower against the EUR, but Cable looks to be finding some support below 1.3900 for now. Larger EUR/USD support seen down in the 1.0950 area, but for now, pre 1.1000 is finding some bids coming in. USD/JPY has been very quiet around 112.00, with S&P futures more or less flat to give little away in the US session ahead.
In commodities, WTI crude initiall declined modestly on the day after gaining 0.9 percent on Wednesday following a massive API and a modest DOE inventory build; it has since regained all of its losses and was at last check green on the day. Stockpiles of gasoline in the U.S. fell 2.24 million barrels to 256.5 million, according to the Energy Information Administration, as demand climbed on pump prices near a seven-year low. American crude inventories, however, rose by 3.5 million barrels to an 86-year high of 507.6 million last week.
U.S. natural gas slipped for a third day, extending a decline from a two-month low, amid forecasts for a warmer weather. Futures for March delivery, which expire Thursday, fall as much as 2 percent to $1.742 a million British thermal units on the New York Mercantile Exchange.
Gold extended its biggest monthly advance in four years, on speculation that U.S. interest rates remaining lower for longer.
On today’s US calendar we have Initial (Exp 262K) and Continuing (Exp 2.273MM) jobless claims, as well as the latest durable goods report, the FHFA House Purchase Index, the latest Bloomberg Consumer Comfort report, and the Kansas Fed report. Speaking will be Fed’s Lockhart and SF Fed’s John Williams
Bulletin Headline Summary from Bloomberg and RanSquawk
- Shanghai Comp. slumped over 6% to post its largest loss in over a month amid increasing money market rates, consequently signalling tighter liquidity, alongside a bout of profit-taking.
- European equities shrugged off the losses in China to pare some of yesterday’s losses with strong earnings from Lloyds bolstering financial names.
- Looking ahead, highlights income US weekly jobs data, Durable Goods Orders, Fed’s Lockhart and Williams and ECB’s Linde.
- Treasuries higher in overnight trading as Chinese equities and oil slide lower; today’s data includes durable goods orders, and Treasury concludes this week’s auctions with sales of $28b 7Y notes, WI yield 1.50%, compares with 1.759% awarded in January.
- China’s stocks tumbled the most in a month as surging money- market rates signaled tighter liquidity and the offshore yuan declined for a fifth day. The Shanghai Composite Index sank 6.4% at the close
- China will allow domestic banks to issue up to 50 billion yuan ($7.7 billion) of asset-backed securities based on their non-performing loans, the first quota for such sales since 2008
- Lloyds Banking Group Plc surged after the lender increased its dividend payout and indicated it may have reached the end of charges for wrongly sold payment protection insurance that cost it £4 billion ($5.6 billion) last year
- Europe’s biggest banks face a stress test this year that will have no pass mark to identify capital shortfalls, a break from previous practice, because banks have emerged from the financial crisis, the European Banking Authority said
- Euro-area consumer prices rose 0.3%, less than the 0.4% initially estimated in January, increasing the pressure on the European Central Bank to take steps to sustain the region’s recovery
- The U.S. government has urged some of the nation’s largest banks to refrain from helping Russia sell bonds, according to people with knowledge of the situation, as helping the nation obtain foreign funding risks undermining sanctions
- Amid conversations about central bank policy and algorithmic trading, it was concerns about diminishing liquidity that dominated discussions this week at the TradeTech FX conference in Miami
- No IG corporates priced yesterday (YTD volume $256.9b) and no HY priced (YTD volume $11.375b)
Sovereign 10Y bond yields mostly steady; European, Asian markets rise (except China); U.S. equity-index futures little changed. Crude oil falls, copper and gold rise
DB’s Jim Reid concludes the overnight wrap
Yesterday felt pretty bad in the European session again (Stoxx 600 -2.30%) but a turnaround in Oil actually helped lift the mood by the time the US closed (S&P 500 +0.44% after being as much as -1.60% at the earlier lows). Despite that positive momentum for risk emanating from the US session last night, it’s been a bit of a mixed follow up in Asia this morning. With the Yen a bit weaker, the Nikkei is leading the way with a +1.09% gain, while the ASX is currently +0.26%. However as we head into the midday break it’s a big selloff in China which has rippled through other markets (despite there being a lack of newsflow) with the Shanghai Comp (-3.61%) and Shenzhen (-4.76%) both a steep leg lower. That’s taken the Hang Seng (-1.21%) and Kospi (-0.08%) with them, while Oil markets have retraced a touch.
Meanwhile the CNY fix was set little changed this morning. With the G20 Finance Ministers Meeting kicking off tomorrow in Shanghai expect a lot of focus not just on global growth and negative rate concerns, but also on the transparency of the PBoC’s FX policy. It’s far too early for coordinated fiscal policy to gain much traction but it’ll be interesting if there’s any chatter on this.
A lot of the volatility yesterday was centered on oil. It had initially continued the downward trajectory it had been on from Tuesday afternoon in what’s been a fairly wild week so far, touching a low yesterday of $30.56/bbl on the new contract which was nearing a 4% drop on the day (and nearly 9% off Tuesday’s high) before a sharp reversal sparked by the latest inventory data saw it bounce off the lows to close up +0.88% on the day and back above $32/bbl. Despite the latest EIA data showing crude stockpiles building on their 86-year high, much of the commentary was focusing on the larger than expected decline in Gasoline stockpiles last week which fell 2.2m barrels while demand for Gasoline and other refined products were up. That helped Gasoline futures climb over +4.5% yesterday. Credit markets were subject to similar swings in sentiment. In Europe we saw Main and Crossover finish 3bps and 13bps wider respectively with financials also under pressure. CDX IG initially opened up a sharp 4bps wider before paring all of that move to finish 1bp tighter on the day.
Moving on. We’d previously highlighted last week that the various US economic surprise indices that we monitor had been trending up in the last couple of weeks. Well over the last two days we’ve seen them hit of a bit of a wall as after Tuesday’s much softer than expected consumer confidence print, yesterday’s flash February services PMI dipped unexpectedly into contractionary territory (49.8 vs. 53.5 expected, -3.5pts from January) for the first time since October 2013 and just the second time since 2009. The reaction to this was fairly mixed. Some pointed towards this as being evidence of the much talked about weakness in the manufacturing sector now leaking into the larger services component, while others pointed towards the poor winter weather in January being a major factor as well as highlighting the still supportive employment sub-component in the data (-0.1pts to 54.2). In any case it’s another reason to keep a close eye on the ISM services data this time next week. It could be a pivotal release.
Away from this, US new home sales for January also disappointed yesterday, declining 9.2% mom last month (vs. -4.4% expected) although the trend in sales has continued to remain fairly positive of late. Treasury yields were once again subject to another big high to low range (11bps) before they eventually settled up a couple of basis points on the day at 1.749%.
Closer to home, in the UK we saw CBI reported sales fall 6pts to 10, while French consumer confidence was a little softer than expected at 95 (vs. 97 expected), falling a couple of points from January. Moves in core European rates markets reflected the largely risk off tone with 10y Bunds finishing 3bps lower at 0.152% and extending the recent lows to levels only lower in the mad frenzy around April last year. Remember yields closed as low as 7.5bps then, so we’re getting close. Speaking of levels, Sterling continues to get hit hard with the $1.40 level showing little resistance as the Pound smashed through it during the Asia session yesterday and edged lower as the day went on, eventually closing -0.68% at $1.393 (and -0.63% vs. the Euro) which is where its hovering this morning.
Over at the Fed, yesterday we heard from Dallas Fed President Kaplan who again reiterated his need to remain patient while leaving all options on the table in saying that he has no predetermined timetable in mind for the policy rate path. Kaplan also made special mention of the possibility of Brexit, noting that it is another potential tail risk that the Fed needs to keep a close eye on.
Meanwhile, Richmond Fed President Lacker was a bit more upbeat, saying that much of the recent decrease in market measures of inflation expectations ‘could represent a decline’ in risk premium, while his 10y expected inflation estimate forecast is ‘consistent with a belief that inflation will move back to the Fed’s target’. Finally, overnight the St Louis Fed President, Bullard, has become the latest Fed official to voice his opposition against negative rates in the US.
Looking at today’s calendar, the early data out of Europe this morning will be the preliminary reading on UK Q4 GDP along with the associated trade components. Shortly following this we’ll get the final revision to the July CPI data for the Euro area and Germany. It’ll also be worth keeping an eye on the Euro area money and credit aggregates data ahead of the ECB meeting next month. The highlight this afternoon in the US will be the preliminary readings for durable and capital goods orders (headlines for both expected to be +2.9% mom and +1.0% mom respectively). Away from this we’ll see the latest initial jobless claims reading, the FHFA house price index for December and finally the Kansas City Fed manufacturing activity print. Fedspeak wise we’ll hear from Lockhart (at 1.15pm GMT) who is due to give opening remarks at a banking conference, while this evening Williams (at 5.00pm GMT) is due to speak.
Let us begin
Late WEDNESDAY night/ THURSDAY morning: Shanghai closed DOWN BADLY BY 187.65 POINTS OR 6.41% / Hang Sang closed DOWN by 303.70 points or 1.58% . The Nikkei closed UP 224.55 or 1.41%. Australia’s all ordinaires was UP 0.13%. Chinese yuan (ONSHORE) closed UP at 6.5315. Oil GAINED to 32.07 dollars per barrel for WTI and 34.14 for Brent. Stocks in Europe so far deeply in the GREEN . Offshore yuan trades 6.53715 yuan to the dollar vs 6.5315 for onshore yuan/
Just take a look at the huge unrealized losses from the yen carry traders who bought Japanese stocks: it is massive!!
(courtesy zero hedge)
Japanese ‘Margin’ Traders Suffer Biggest Losses “Since Lehman”
Mrs Watanabe has a major problem.
Following Kuroda’s regime shift to NIRP (and the ensuing collapse of Japanese stocks and USDJPY)…
The herded masses of leverage speculators – who bought on the back of China-like promises and Peter-Pan(ic) hopes from the government that everything will be awesome – are suffering the largest unrealized losses since Lehman.
Let’s hope Kuroda can do something before the unrealized becomes ‘realized’ and waterfalls through the real economy (and the world’s collateral chains).
Foxconn Ices Sharp Deal After Seeing How Bad The Books Are
For a minute, Sharp was saved.
The 100-year-old maker of LCD screens was once a consumer electronics powerhouse but has stumbled in the face of fierce price competition and ill-advised investments in advanced production plants. Earlier this month, Sharp reported a net loss of $208 million for for its fiscal Q3, bringing the nine month loss to nearly a billion as the company continues to lose market share to Samsung, LG, and other Asian competitors.
Foxconn founder Terry Gou sees Sharp’s dire straits as an opportunity for Hon Hai Precision to solidify its position and pricing power with Apple, which is seen adopting OLED screens for iPhones by 2018. Sharp hopes to become a global OLED supplier.
“The OLED sector is virtually a monopoly right now,” Lisa Li, vice president of Sigma Intell says, referencing Samsung’s iron grip on the space. “This must be something Apple is pretty concerned about.”
“An iPhone’s most expensive component is its touch screen display, making up more than 20% of manufacturing costs, which is why Mr. Gou is eager to supply them,” WSJ writes. “Sharp is one of three suppliers of iPhone screens.”
“It’s widely understood that Hon Hai wants to consolidate Sharp in order to secure its dominant position in Apple’s supply chain; the combined group could provide EMS services as well as displays, touch panels, camera modules, metal casings, FPCBs and connectors,” BNP remarked, in a note out last week.
Gou has had his eyes on Sharp since 2012, when a deal for Foxconn to take a 10% stake fell apart due in part to Sharp’s abysmal operating performance.
Foxconn’s latest overture would have seen Sharp issue shares worth something like $4.3 billion which Hon Hai would buy, giving the Taiwanese contract manufacturer a 66% stake in the Japanese company. As Bloomberg notes, “Foxconn would also put down a 100 billion yen deposit that Sharp can keep if the sale, which is contingent on shareholder approval, doesn’t go through.”
There were already all kinds of questions swirling around about whether Foxconn was thinking too much about Apple and too little about how it planned to turn around the loss-making machine that Sharp has become. Now, it looks like Hon Hai may have gotten cold feet after realizing what bad shape the Japanese company is actually in.
Just hours after Sharp’s board agreed to a takeover – which WSJ notes marked something of a coup as “Japan has been reluctant to let a major domestic company go into foreign hands, and many people had argued that the 103-year-old Sharp should go to a Japanese buyer” –Foxconn put the deal on ice by releasing the following rather amusing statement:
We acknowledge receipt of a notice today from Sharp’s Board choosing us as their preferred partner. After receiving new material information from Sharp yesterday morning, we have accordingly informed Sharp last night [before their board meeting on 2/25] that we will have to postpone any signing of a Definitive Agreement until we have arrived at a satisfactory understanding and resolution of the situation.
Yes, Hon Hai needs to “arrive at a satisfactory understanding of new material information,” which, according to sources means Foxconn got a look at Sharp’s contingent liabilities and didn’t like what it saw.
Specifically, Sharp sent over a 100-item list that adds up to ¥350 billion, just “slightly” more than the ¥17.2 billion in such items spelled out in the company’s 2015 annual report. As WSJ goes on to detail, the list includes everything from costs tied to buying raw materials for solar cells to EU antitrust litigation to North American civil suits.
If that sounds like a lot of potential headaches to you, you’re apparently on the same page as Gou. Sharp had no immediate comment.
Foxconn reportedly hopes to clear the matter up as soon as possible, but perhaps shareholders should hope they don’t. Sharp said today it was looking to allocate some of the funds from Foxconn’s investment to things like robots and “auto-related cameras.” How Foxconn intends to run this company while simultaneously operating its own business is still largely a mystery. “Foxconn doesn’t have any experience in any of Sharp’s businesses,” Jefferies analyst Atul Goyal says. “In fact, it creates large conflicts of interest with this acquisition.”
Of course the biggest “conflict of interest” here may be the “conflict” that occurs when you merge an unprofitable company with a profitable one and that may indeed be part of the reason why Foxconn is thinking twice.
We close with a bit more commentary from BNP (who just downgraded Hon Hai) on the proposed deal.
There’s a historical context involved here. In 2012, Hon Hai first offered to invest in Sharp but the talks stumbled after the Sharp management’s fear of losing IP control as well as the concerns over leakage of key technology outside of Japan. Hon Hai has been widely regarded as a company that has focused on vertical integration in supply chain and aggressive in expanding its business beyond the assembly of consumer electronics products, by adding a wider bunch of components to its services. Hence, the market‘s view is largely that by acquiring Sharp, one of the world’s leading players of displays in electronics components, Hon Hai could gain more business from Apple and other customers including some Chinese companies. In our view, Hon Hai is targeting Sharp’s IP and advanced technologies in both small and large size display (LTPS and IGZO), which will likely further enhance Hon Hai’s competitive advantage and bargaining power. Yet, the market is currently speculating that Apple is likely to adopt AMOLED in future product, compared to its Korean peers-Samsung and LGD, Sharp’s AMOLED development is much slower. We concerned about Sharp’s position in Apple’s display supply chain in this increasingly tough competitive environment for small LCDs. Aside from panel, Sharp is currently a major supplier for Apple’s camera module. However, we are witnessing competition from Sony, Cowell or even ASE continues to rise. Additionally, we think there is limited upside for Hon Hai to further gain shares in Apple’s camera module business.
It would take time for Hon Hai to turn Sharp around and the restructuring process may be challenging, in our view. Hon Hai currently trade at c9x of our 2016 EPS estimate and c1x 2016 PBR. We foresee no share price upside catalyst in the following months due to its muted sales outlook and uncertainties around the proposed Sharp deal. We also think its 5% dividend yield may not be sustainable due to its aggressive M&A strategy. We view the porposed transaction will take time to monetize the potential synergies while the Sharp deal appears to be counter-intuitive to Hon Hai’s financial position and financial performance in short-to-mid-term. Given our earnings cuts on muted demand outlook and potential risk on Sharp deal, we downgrade Hon Hai to Hold from Buy with a new TP of TWD74 (from TWD92), based on 8.5x PE, the historical mid-to-low end range (down from 10x PE, the historical mid-range) as the uncertainties around the Sharp deal will likely drive a de-rating of the stock, in our view.
The WSJ’s Modest Proposal: The Bank Of Japan Should Buy Oil
We have joked about it in the past: with equities around the globe all correlating tick for tick with the price of oil (supposedly “lower oil is good for the economy”, just don’t tell that to the stock market), instead of doing piecemeal interventions and monetizing stocks, something which as even Citigroup has noted no longer works, what central banks should do instead is monetize the source of all market problems: oil itself.
We first joked last January that the ECB should do it…
… that the Fed should do it…
… and that Canada, arguably the one developed nation most impacted by plunging oil, should certainly do it.
Key word, however, in all of the above is “joked.” After all, by now most traders, and even the Davos billionaires, not only admit, but agree they have all had enough with central bank market rigging and manipulation.
Which is why we were almost surprised when none other than the WSJ proposed that, because “central banks have gone down the rabbit hole… starting with record low interest rates, then purchases of government bonds and mortgage bonds, ultra-accommodative policy progressed in Japan to buying real-estate investment trusts and equity funds” and because “in the looking-glass world of modern central banking, almost nothing is taboo, with even the abolition of cash discussed seriously by top monetary wonks” that it is time to make precisely this joke part of actual monetary policy.
The WSJ’s modest proposal: “the Bank of Japan should print money to buy oil. It sounds beyond nonsense. But with central bankers believing six impossible things before breakfast, it no longer seems inconceivable, which is informative in itself.”
The WSJ “explains”:
Consider the BOJ’s problem. The central bank is creating ¥80 trillion ($700 billion) a year to buy mainly government bonds, one of the biggest programs of money printing in history. It already owns almost a third of the bond market, nearly 2% of equities and about half of exchange-traded funds by value.
Nonetheless, Japanese inflation remains quiescent. The yen has been strengthening despite the negative rates introduced last month, making it even harder to push prices up toward the BOJ’s 2% target.
The logic behind the proposal is… fragile.
Because the BOJ keeps digging itself into an ever deeper hole, and because “negative rates have unpleasant side-effects, hurting banks, while bond supply may be limited” and because Japan’s QE is running out of bonds to monetize (something we have warned about since 2013), “over the next three years only ¥236 trillion of bonds could be available to buy because banks and insurance companies are reluctant to sell many of their holdings—making it hard to ramp up purchases further… HSBC says that in a worst-case scenario the BOJ would have trouble filling its monthly purchases later on this year”, it is time to throw something, anything at the wall, and hope it sticks.
To be sure, the WSJ admits there are even more idiotic ideas available “such as direct financing of government spending, or abolishing bank notes so interest rates can go deeply negative. None is politically palatable.”
But, it adds, “compared with these, creating money to buy oil has several big advantages.”
First, it allows the BOJ directly to weaken the currency without dangerous diplomatic repercussions. Oil is denominated in dollars, so yen have to be sold to finance the purchase. But the U.S. could hardly object to Japan importing more oil.
Second, purchases by the BOJ would push up the price of crude. Japanese consumers may not see that as a good thing, but investors are fixated on the oil price as a measure of whether to take risk or not. Crude has this year become central to everything from equities to government bonds and currencies, as traders take their cue from the oil price—with the safe-haven yen tending to strengthen when oil falls, as it did again on Tuesday. This market effect gives oil purchases additional power in weakening the yen, compared with buying bonds, and could be particularly powerful.
Third, Japan imports almost all its oil and has fewer days’ reserves than the average importer. Building new oil storage would support investment, too.
Fourth, it is easy to argue that now is a good time to buy oil, with the price down to a quarter of its 2008 peak. (Although Brent crude at $33 a barrel on Tuesday was not far below the 30-year median of $38 a barrel, adjusted for inflation.)
To be sure the proposal is idiotic on more than one level: as the WSJ admits, “there just isn’t enough oil in the world to help the BOJ print money on the scale it wants for very long. Oil is a big market; the extra supply expected from Iran is worth about $8 billion a year. But $1 billion is no longer the unit of account for central banking. While the total oil market is worth roughly $1.2 trillion a year, Japan can buy only a fraction of that—though of course the higher it pushes the oil price, the more it can spend.”
Picture that: a world which is running out of assets for central banks to buy with money they create out of thin aire.
Still, we are glad that the WSJ closes on a somewhat so(m)ber tone:
HSBC Chief Economist Stephen King says, the BOJ might eventually move from debating what else it can buy to asking whether these unconventional policies work at all.
And while we can’t help but laugh at all of the above, simply because it confirms the epic failure of central planning intervention, something we have railed against since March 2009, we agree with the following: “We have come to the point in Japanese monetary policy—and soon perhaps in the West—where it is hard to tell sense from nonsense.”
Indeed we have.
And It’s Gone: Chinese CFO Corzines 1 Billion Yuan From His Own Company
At the end of 2015 we wrote about what may have been the most amusing incident of Chinese corporate fraud in recent years, one in which China Animal Healthcare, whose stock was suspended nearly a year prior and which, was just waiting for its delayed audited financials to be released so its stock can resume trading. The problem, as a subsequent public filing revealed, is that a truck loaded with four years’ worth of its original financial documents was on its way to Beijing however, while the truck driver was taking a lunch break, the truck was stolen. One week later the truck was found… but the four years of financial documents were gone.
As a result, the company will never file its audited financials, the stock will never resume trading, the management team will never go to prison for what was clearly massive corporate fraud, and the story will quietly be buried under the rug with management quietly getting a get out of jail card after the government likely provides a partial or full bailout to all investors, whether bond or stock.
And so on, until the next major fraud.
Presenting Dongyue Group Limited, a Chinese company specialized in chemical production and engaged in the “manufacture, distribution and sale of refrigerants, polymers, organic silicone and dichloromethane, polyvinyl chloride and liquid alkali and others.” What the company does is not important.
What is important is that just like China Animal Healthcare, Donguye has been halted for trading as of February 1, and also like the prior fraud, it has announced that it too will be unable to file its 2005 annual results on time.
However, there we no public documents stolen from random trucks in this case. Donyue’s “explanation” is most entertaining.
Here is what the company said in its filing:
The Company conducted an internal audit in mid-September 2015, through which it found approximately RMB978.2 million which was booked under the line item “other receivables” (the “Receivables”) and which belongs to the wealth management business of the Group. During the course of the internal audit, it was found that certain interest accrued on such funds had not been received.
The plot thickens:
In addition, the Company found that the balance of two deposits with an amount of RMB200 million and RMB300 million respectively which were both deposited into a bank in the PRC (the “Long-term Deposit”) remained unchanged over a long period of time. The Company therefore inquired a former employee of the Company (who was then the PRC financial controller of the Company) about such situations. Such former employee explained that the Receivables and the two Long-term Deposits were bank wealth management.
Financial controller is another word for CFO while “wealth management” is the catchphrase for “we put the money in a black hole with hopes of generating double digit returns.” At which point the company got nervous:
On 2 November 2015 (an account closing day of the Group), upon enquiries with the bank, the Company was informed that the balance of the two Long-term Deposits was zero.
Oops: the money was gone, all gone. So what did the company do knowing that the money its CFO had put in some local bank was never actually there?
The Company immediately reported the suspected incident to the local public security authority in the PRC (the “Public Security Authority”) on the same date. The Public Security Authority has launched an investigation of the reported incident accordingly. On 29 January 2016 (after trading hours), the Company was informed by the Public Security Authority that it had made an application for arresting a former employee of the Company (the “Suspect”) for suspected misappropriation of funds of approximately RMB500 million belonging to the Group (the “Suspected Misappropriation”).
In other words, it took the company and local authorities to realize what was obvious from day one: the CFO had corzined the money.
As it turns out the CFO was corzined the entire “other receivable” amount:
The Public Security Authority has also been investigating the Suspect for suspected unauthorised use or potential misappropriation of funds of approximately RMB978.2 million under the Receivables (the “Suspected Potential Misappropriation”). As at the date of this announcement, such funds and the relevant interest have not been repaid. The facts and evidence are being investigated and verified by the Public Security Authority. The Company was further informed by the Public Security Authority on 2 February 2016 that the approval for arresting the Suspect had been granted by the prosecutorial authority on the same date.
Where the plot really thickens is that while the controller was no longer in his position as of November 3…
The Suspect had been the PRC financial controller of the Company before all his powers and functions of office were dismissed on 3 November 2015 by the Company.
… it took until January 29 to terminate him:
The Suspect had ceased to be employed by the Company since 29 January 2016 due to his suspected criminal charge.
Did he work alone? Of course not:
The investigation is currently underway and the Company is proactively cooperating with the Public Security Authority. There are another two employees of the Group who are being investigated by the Public Security Authority. They are staff of the finance department of the Group and have ceased their duties in the financial department, pending investigations by the Public Security Authority. As at the date of this announcement, to the best knowledge of the Company, no other person other than the Suspect have been detained or arrested for the Suspected Misappropriation and the Suspected Potential Misappropriation.
Of course not, because the most likely explanation is that the controller, the “two employees” and everyone else in the company had been in on the scheme from day one. However, since a scapegoat was required, the CFO drew the short stick.
And now its time to cover asses:
The Company has set up an independent committee and such committee will appoint an independent forensic expert to perform an independent review and/or investigation to circumstances of the Suspected Misappropriation and Suspected Potential Misappropriation and other related matters.
The directors of the Company (the “Board”) confirms that, as at the date of this announcement, the production, supply and sale activities of the Group remain normal and are not affected by this incident. On a preliminary review based on information currently available, the Board considers that the Suspected Misappropriation and the Suspected Potential Misappropriation do not have an immediate material impact on the production, supply and sale activities of the Group but will be assessing the situation on an on-going basis. The Board is currently assessing the impact of the Suspected Misappropriation and the Suspected Potential Misappropriation on the financial position of the Group. This announcement is prepared based on information currently known to the Company only and the Board will continue to inquire the development of the investigation on the Suspected Misappropriation and the Suspected Potential Misappropriation. The Board will update the shareholders and potential investors with respect to any further material developments concerning the investigation as and when appropriate.
Something tells us that the definition of an “independent committee” and “expert” will be vastly different from the generally accepted one. But most importantly, as of this moment, the company is in a state of suspended animation:
In light of the Suspected Misappropriation and the Suspected Potential Misappropriation and the fact that the related investigation is under process, the Board expects that there may be delay in the publication of the 2015 Annual Results.
At the request of the Company, trading in the shares of the Company on the Stock Exchange was halted with effect from 9:00am on 1 February 2016 pending the release of this announcement. Application has been made to the Stock Exchange for the resumption of trading in the shares of the Company with effect from 9:00 a.m. on 25 February 2016.
To summarize: no annual report, most likely ever again, no more stock trading, the senior management hiding behind an independent committee, meanwhile the CFO is long gone, lying on a beach with 1 billion yuan collecting 0.20% percent. And that is how you do fraud.
As for shareholders? The company added one final insult to monetary injury with the following bolded, all caps disclaimer in the press release:
SHAREHOLDERS OF THE COMPANY AND POTENTIAL INVESTORS ARE ADVISED TO EXERCISE CAUTION WHEN DEALING IN THE SHARES OF THE COMPANY
According To Morgan Stanley This Is The Biggest Threat To Deutsche Bank’s Survival
Two weeks ago, on one of the slides in a Morgan Stanley presentation, we found something which we thought was quite disturbing. According to the bank’s head of EMEA research Huw van Steenis, while in Davos, he sat “next to someone in policy circles who argued that we should move quickly to a cashless economy so that we could introduce negative rates well below 1% – as they were concerned that Larry Summers’ secular stagnation was indeed playing out and we would be stuck with negative rates for a decade in Europe. They felt below (1.5)% depositors would start to hoard notes, leading to yet further complexities for monetary policy.”
As it turns out, just like Deutsche Bank – which first warned about the dire consequences of NIRP to Europe’s banks – Morgan Stanley is likewise “concerned” and for good reason.
With the ECB set to unveil its next set of unconventional measures during its next meeting on March 10 among which almost certainly even more negative rates (for the simple reason that a vast amount of monetizable govt bonds are trading with a yield below the ECB’s deposit rate floor and are ineligible for purchase) the ECB may cut said rates anywhere between 10bps, 20bps, or even more (thereby sending those same bond yields plunging ever further into negative territory).
As Morgan Stanley warns that any substantial rate cut by the ECB will only make matters worse. As it says, “Beyond a 10-20bp ECB Deposit Rate Cut, We Believe Impacts on Earnings Could Be Exponential.”
Which brings us the the punchline: according to Morgan Stanley, a fellow bank, the biggest threat to its largest European competitor, Deutsche Bank is not its unquantified commodity loan exposures, nor its just as opaque exposure to China, nor its massive derivatives book, not even its culture of rampant corruption and crime which have resulted in constant top management changes over the past several years, but the deflationary challenges to profitability – specifically, “Risks to Trading/Markets Revenues and Due to Negative Rates” imposed by none other than the European Central Bank!
In other words, according to Morgan Stanley the biggest threat to the profibatility, viability and outright existence of the most leveraged commercial bank in the world, is none other than ECB president Mario Draghi…
… who will almost certainly unveil even more negative rates in two weeks time, and in doing so will unleash another round of selling in European bank securities, which will further tighten financial conditions, which may force even more “desperate” ECB intervention and so forth in a feedback loop, for the simple reason that Draghi appears to not realize that just like Kuroda, he himself is the cause of asset volatility and European bank instability.
Which, incidentally, is precisely what Bundesbank president (and ECB member) Jens Wiedmann warned against. As WSJ reports, Weidmann expressed reservations Wednesday about further expansionary monetary policy to combat very low rates of inflation in the currency bloc.
According to prepared remarks to present the annual report of the Deutsche Bundesbank, which he heads, Mr. Weidmann said “it would be dangerous to simply ignore” the longer-term risks and side effects of loosening already highly accommodative policy.
As the WSJ writes, “the comments from perhaps the ECB’s most outspoken critic of very accommodative policy provide further evidence that ECB head Mario Draghi may have a tough time garnering unanimity for any effort to further expand the central bank’s accommodative monetary policy.”
Still, Draghi may well get his wishes: after all, despite the ongoing conflict between the two central bankers, so far Draghi has gotten absolutely everything he has gotten, from QE to NIRP, over Weidmann’s loud objections. The WSJ further adds that the ECB is expected to cut its deposit rate further into negative territory beyond the minus 0.3% where it sits now, as well as expanding its bond buying program beyond the EUR60 billion a month of mostly government bonds that it has purchased since last March.
The two are linked: for the ECB to expand QE – now that the NIRP genie has been released – it will have to cut rates or else it will run into liquidity limitations and an inability to procure the desire bonds.
Worse, due to the central bank’s voting rotation system, Mr. Weidmann won’t have a vote at the March meeting.
On a separate topic, Weidmann also criticized efforts to abolish the EUR500 bank note and presented a 22-page report defending the use of cash, pushing back against proposals that German policy makers worry could be used to cut interest rates more deeply in the euro area.
Specifically, Weidmann warned that abolishing the EUR500 note could damage citizens’ confidence in the single currency. “If we tell citizens the bank notes they currently hold are not valid, that would impact trust,” Mr. Weidmann said.
Weidmann also ridiculed the “fantasy” that cash might be abolished altogether to make it easier for central banks to cut interest rates further. “In my view this would be the false, disproportionate answer to the challenges,” he said.
Well, that’s what many said about the ECB’s QE, which many years ago was, correctly, seen as monetary financing and thus banned by Article 123. Everyone knows that happened next.
But going back to NIRP, the question then becomes: is Mario Draghi really so naive and confused not to realize that the more negative and Net Interest Margin crushing rates and conditions he unrolls, the worse Deutsche Bank’s (and all other European banks’) fate will be.
And then this question in turn is transformed into a more sinister one: since Draghi most certainly does understand that impact on bank profitability from excessively negative rates (as virtually every bank from DB to MS to BofA has warned in recent weeks), is he engaging in this escalation of negative rates with an intent to harm Deutsche Bank on purpose?
Because should Draghi cut rates on March 10 and send DB’s stock price to fresh record low, and its CDS to all time highs, the comparisons to Lehman will get every louder, at which point the self-fulfilling prophecy may become a reality.
And not just due to those two factors. Recall that in the bankruptcy of Lehman it was a former Goldmanite who ultimately decided to pull the plug on the bank – US Treasury Secretary Hank Paulson. By doing so, he unleashed the biggest bailout of the banking system in history, and what may have been the most lucrative period of all time for Goldman bankers as well as the greatest wealth transfer in human history.
That period is ending, so it may be time for another wholesale, global bailout. Just one thing is missing: the “next Lehman” sacrificial lamb whose failure will be the catalyst for the next mega bailout of everyone else who will survive. And since this bailout will involve the paradropping (both metaphorical and literal) of trillions in paper or digital money, central banks may just get the inflation they so desire.
As for the former Goldmanite pulling the switch this time, well we already know who it is:Mario Draghi.
A “Furious” Greece Recalls Austrian Ambassador: “We Will Not Be A Warehouse Of Souls”
For Greece, Europe’s worsening refugee crisis amounts to an “insult to injury” scenario.
Just six months after Angela Merkel and the Brussels cabal put Athens through round after round of “mental waterboarding” on the way to granting the country a third bailout and preventing Greece from marking a messy exit from the common currency, Alexis Tsipras now finds himself on the front lines of a mass Mid-East migration to Western Europe.
To be sure, it’s not as though those who are (figuratively and literally) washing up on Greece’s shores are keen on settling in the socialist paradise that at times last summer took on the trappings of a Third World country. Rather, Greece is a transit point for those fleeing war to Europe and Athens obviously has limited resources with which to work when it comes to controlling the situation. Greece has been
Now, a day after Austria held a meeting with Balkan nations on how to control the migrant flow without inviting Greece, Athens is recalling its minister. “The numerous splits in Europe over immigration policy were evident on Wednesday when Austria organised a meeting of interior and foreign ministers of several Balkan states in Vienna,” The Guardian writes. “The Austrians snubbed the Germans and did not invite the Greeks, provoking a furious reaction from Athens.”
“A very large number here will attempt to discuss how to address a humanitarian crisis in Greece that they themselves intend to create,” the Greek migration minister, Yannis Mouzalas told reporters on Thursday. “Greece will not accept unilateral actions. Greece can also carry out unilateral actions. Greece will not accept becoming Europe’s Lebanon, a warehouse of souls, even if this were to be done with major [EU] funding.”
First came the suspension of Schengen, next came referendums on migrant quotas, and now we have the chilling of diplomatic ties. This is a slippery slope to open hostilities and make no mistake, Greece is in no mood to give anyone Brussels the benefit of the doubt.
* * *
Full statement from Greek Foreign Ministry
By decision of Foreign Minister Nikos Kotzias, Greece’s Ambassador to Vienna, Ms. Aliferi, is being called to Athens for consultations aimed at safeguarding the friendly relations between the states and peoples of Greece and Austria.
It is clear that the major problems of the European Union cannot be confronted via thoughts, attitudes and extra-institutional initiatives that have their roots in the 19th century, and nor can the decisions of the heads of state be supplanted by directives from police directors. The latter is a major problem for democracy. It points to the need for the European Union to be protected from various parties who are ignorant of history.
Unilateral initiatives for resolving the refugee crisis, along with violations of international lawand the European acquis by member states of the EU, are practices that can undermine the foundations and process of European integration.
Responsibility for dealing with the migration and refugee crisis cannot weigh on one country alone.Common sense dictates that effective handling of this complex problem should be governed by the principles of solidarity and fair burden sharing. Greece is working in such a direction.
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Greek Prime Minister Alexis Tsipras threatens to block all EU refugee decisions if Greece will be left to deal with the crisis alone. Commenting on Austria’s initiative to hold a West Balkan Conference on Migration, Tsipras described it as “unacceptable”.
PM Tsipras said he will block all decisions at an upcoming EU migration summit with Turkey on March 7th 2016, if his country has to deal with the refugee crisis alone.
Tsipras said that from now on Greece “will not assent to agreements” unless all its EU partners are forced to participate in the relocation and resettlement of refugees.
“Greece will not agree to deals if a mandatory allocation of burdens and responsibilities among member countries is not secured,” he added.
“We will not accept turning the country into a permanent warehouse of souls with Europe continuing to function as if nothing is happening,” Tsipras told the Greek parliament on Wednesday.
Tsipras said it was unfair that EU partners had dumped the burden of the migrants on Greece, a country already reeling from an economic crisis.
“We did and will continue to do everything we can to provide warmth, essential help and security to uprooted, hounded people,” he said, adding that Greece would not accept a situation where other EU member states could do as they pleased.
“We will not tolerate that a number of countries will be building fences and walls at the borders without accepting even a single refugee” Alexis Tsipras said, adding that Greece would demand the mandatory participation of EU countries in the relocation of refugees.
Migration Minister Yannis Mouzalas said this morning that Greece will not allow “unilateral actions” and that it will not “turn into …Lebanon.”
Do-Over Election Looms In Spain, As Dueling Leftists Can’t Decide Who’s A Better Socialist
Back In December, Spain held what turned out to be inconclusive elections.
To be sure, voters were clearly sick of the status quo. The country’s three decade old political duopoly was broken when PP and PSOE garnered their lowest combined share of the vote since the eighties.
Mariano Rajoy’s PP still won the most seats, but fell short of a majority and with a grand coalition comprised of PP and PSOE largely out of the question, the quest to build consensus and form a government has been stuck in the mud for two months.
Late last month, Rajoy delayed a confidence vote after failing to secure the support he felt he needed to lead and eventually, the PP chief threw in the towel altogether.
Now, it’s up to Socialist leader Pedro Sanchez to win the support of lawmakers who will vote for or against his program next week.
Podemos – the anti-austerity party led by firebrand Pablo Iglesias – put the entire effort in jeopardy on Wednesday by suspending negotiations with PSOE after Sanchez announced he would seek to create an alliance with Ciudadanos (the fourth place finisher in the December vote).
“It wasn’t easy for the Socialist party and Ciudadanos — which have different projects — to be able to put what unites them… above what separates them,” Ciudadanos chief Albert Rivera said yesterday.
“Sanchez and Rivera shook hands to applause after signing the agreement, which centres on what a new government led by the Socialists would look like,” AFP reports. “It includes proposals for major judicial reforms, including changing the constitution to modify rules governing lawmakers’ immunity from prosecution [and] social reforms such as bringing back Spain’s prized universal healthcare system, which has suffered from major spending cuts over the past years of austerity.”
Without the support of Podemos, the PSOE/Ciudadanos bid to form a government will likely fail.
Iglesias was willing to accept a deputy PM role in a government led by Podemos and the Socialists, but wants nothing to do with Ciudadanos. Meanwhile, PSOE is leary of Podemos if no other reason that Iglesias clearly has designs on making his party the ascendant leftist force in Spanish politics in the years to come. Making him deputy PM would bolster that effort.
(Iglesias poses for a picture while inexplicably peeking from around a tree)
“Podemos leaders want the Socialists to ditch Ciudadanos in favour of a hard left coalition government, and insist they have no intention of allowing Mr Sánchez to govern on the basis of a deal with the pro-business centrists,” FT notes. “Lurking behind that stance is a strategic consideration: Podemos was founded to replace the Socialists as the leading voice of the Spanish left, not to serve as the party’s coalition appendix.”
The Times goes on to note that Sanchez has seen his popular support rise over the course of the fraught coalition building process. That means he may be able to convince Podemos to through their support behind his program rather than explain to voters why the anti-austerity party shunned a fellow leftist party and effectively sided with Mariano Rajoy, whos austerity policies Iglesias has pledged to roll back.
March 5 is the deadline. If a government isn’t formed by then, Spain will have to head back to the polls where PSOE would be playing from a position of strength.
As for the possibility that Iglesias will ultimately fold and support Sanchez, the PSOE’s effort is “doomed to failure,” Podemos promises.
“They’re lying and they know it,” a PSOE spokesman retorted.
So more political turmoil ahead in the periphery, turmoil which has the potential to rattle markets. But perhaps the most important thing to note about everything said above is this: a leftist-led government is now a virtual certainty. It’s only a matter of what form it will take. That means the religious adherence to Berlin-style fiscal rectitude is going to come to a rather unceremonious end sooner or later. That, in turn, means the relative calm shown in the following chart may well give way to carnage by the end of the year.
Because if this is what “austerity” looks like…
…then we’d hate to see what happens under an “anti-austerity” platform.
“We Are Heading Into Anarchy”: Official Says EU Will “Completely Break Down In 10 Days”
Norwegian PM Erna Solberg doesn’t want to have to skirt her country’s responsibilities under the Geneva Convention and she doesn’t want to trample over human rights either, but she will if she has to.
“It is a force majeure proposals which we will have in the event that it all breaks down,” Solberg said, in an interview with Berlingske, describing new measures she believes Norway may have to take if Sweden buckles under the weight of the refugee influx which saw some 163,000 asylum seekers inundate the country last year.
Solberg is effectively prepared to turn everyone away and go into lockdown mode should everything fall apart completely, causing Europe to descend into some kind of lawless, Hobbesian, free-for-all.
If that sounds far-fetched or hyperbolic consider that on Thursday, EU migration commissioner Dimitris Avramopoulos warned that the bloc has just 10 days to implement a plan that will bring about “tangible and clear results on the ground” or else “the whole system will completely break down.”
Avramopoulos also cautioned that a humanitarian crisis in Greece and in the Balkans is “very near.” Moves by countries to adopt ad hoc, state-specific measures to stem the flow are exacerbating the problem, the commissioner contends.
“We cannot continue to deal through unilateral, bilateral or trilateral actions; the first negative effects and impacts are already visible,” he said. “We have a shared responsibility –- all of us -– towards our neighbouring states, both EU and non-EU, but also towards those desperate people.”
By “the negative effects,” of unilateral actions, Avramopoulos is likely referring to the bottlenecks that are leaving thousands stranded in the Balkans. The chokepoints are being pressured by a series of border fences that have been erected over the past six months and the problem is exacerbated by stepped up border checks. In short: we’re witnessing the death of the bloc’s beloved Schengen.
“Seven European states have already reinstated border controls within the cherished but creaking Schengen free-travel zone, putting huge strain on Greece, which can no longer wave the tide of arrivals from Turkey onward through the Balkans,” Reuters writes. Earlier today, Athens recalled its Austrian ambassador. “Greece will not accept unilateral actions. Greece can also carry out unilateral actions,” migration minister, Yannis Mouzalas told reporters on Thursday. “Greece will not accept becoming Europe’s Lebanon, a warehouse of souls, even if this were to be done with major [EU] funding.”
On March 7, officials will attend a summit with Turkey where buy in from Ankara is critical if there’s to be meaningful reduction in the flow of asylum seekers to Western Europe. Leaked documents recently showed President Erdogan is essentially attempting to blackmail Europe. “We can open the doors to Greece and Bulgaria at any time. We can put them on busses,” he was quoted as saying, during a conversation with European Commissioner Jean Claude Juncker and President of the European Council Donald Tusk on 16th November 2015 during the G20 Summit in Antalya.
In addition to the seven states that have already reinstated border checks, more countries have promised to follow suit unless Erdogan and Tsipras can figure out a way to make progress in defending the bloc’s external border.
Officials fear the onset of spring will embolden still more migrants to make the journey as warmer weather will thaw the Balkan route. On Wednesday, Hungarian PM Viktor Orban called for a referendum on the propsed quota system that Brusells hoped would help distribute and place refugees. It’s only a matter of time before other countries conduct similar plebiscites.
Perhaps Jean Asselborn, Luxembourg’s foreign minister put it best: “The outlook is gloomy … We have no policy any more. We are heading into anarchy.”
Looks like Erna Solberg was right after all.
John Kerry Threatens US Banks Over Russia Bond Sale
Russia wants to sell some bonds and President Obama isn’t happy about it.
Moscow is looking to issue “at least” $3 billion of foreign bonds in what amounts to the country’s first international issuance since the West imposed sanctions on The Kremlin in 2014 after the annexation of Crimea and Russia’s alleged role in “destabilizing” Ukraine (because it was very “stable” before).
Since the sanctions were imposed, relations between Moscow and Washington have only gotten more contentious and when Russia began flying combat missions from Latakia on September 30, it was trotted out as evidence that Vladimir Putin is indeed determined to reassert Russian influence by sheer force.
Meanwhile, the Russian economy is in trouble. Granted, Russia isn’t Brazil and Moscow isn’t running a double-digit budget deficit like Riyadh, but times are most assuredly tough. The ruble has plunged through 75 and will probably see the mid-80s if oil spends too much time in the 20s, inflation is running high, and collapsing crude threatens to weaken Moscow’s fiscal position.
All of that is just fine with Washington and its European allies who attribute a large part of the malaise to sanctions even though slumping crude probably plays a larger role.
It’s against this backdrop that Russia is set to sell $3 billion in debt and officials in the State Department and the Treasury are out warning US banks not to underwrite the deal. “The U.S. government has warned some top U.S. banks not to bid on a potentially lucrative but politically risky Russian bond deal, saying it would undermine international sanctions on Moscow,” WSJ reports, adding that “the rules don’t explicitly prohibit banks from pursuing the business, but U.S. State Department officials hold the view that helping finance Russia would run counter to American foreign policy.”
Russia has invited BofA, Citi, Goldman, JPMorgan, and Morgan Stanley to bid on the business, but Washington’s threats have left the Street in a rather tenuous position. In response to banks’ inquiries as to whether they are allowed to participate, John Kerry’s State Department said this: “It is essential that private companies—in the U.S., EU and around the world—understand that Russia will remain a high-risk market so long as its actions to destabilize Ukraine continue. [There will be] reputational risks of returning to business as usual with Russia.”
“Business as usual” was tens of billions in sovereign issuance and hundreds of millions in investment banking business for US financial institutions.
By warning of “reputational risks” it certainly appears as though Washington is threatening to ostracize banks that help to arrange deals for the Russian government. Here’s Moscow’s sharp-tongued foreign ministry spokeswoman Maria Zakharova: “The US is trying to intimidate banks on our bonds.”
The worry, apparently, is that The Kremlin will channel the funds to companies currently under sanctions meaning banks “could run the risk of inadvertently violating the sanctions in spirit.” We’re not entirely sure the best way to promote global security is to forcibly compel banks to help freeze the Russians out of international debt markets at a time when the fate of international peace is effectively in Russian hands thanks to Putin’s intervention in Syria.
We’re also not entirely sure why the federal government feels like it has the right to dictate with whom private enterprises can do business. Besides, if John Kerry is really interested in curtailing the financial activities of nefarious actors, he should be warning the Russians not to do business with Wall Street – the bankers are much more dangerous than Vladimir Putin.
Dear Janet, Mario, & Haruhiko – It’s Time For The ‘C’ Word
As policy errors pile up – just as they did in 2007/8 – around the world, we thought the following three charts might warrant the use of the most important word in modern central banking… “Contained”
Haruhiko, You Are Here…
Mario, You Are Here…
And Janet, You Are Here…
It does make one wonder, with all this carnage and so little action, whether “coordinated” inaction is the post-Davos decision – Don’t just do something, stand there and jawbone!!
With the goal being a big enough catastrophe to warrant unleashing the war on cash, then NIRP, then the unlimited money drop… because as we stand, no matter what crazy policy has been imagined by the Keynesian “seers” – inflationary (well deflationary now) expectations have collapsed.
Your early morning currency/gold and silver pricing/Asian and European bourse movements/ and interest rate settings/THURSDAY morning 7:00 am
Euro/USA 1.1042 up .0028
USA/JAPAN YEN 112.53 UP .466 (Abe’s new negative interest rate (NIRP)a total bust
GBP/USA 1.3983 UP .0056 (threat of Brexit)
USA/CAN 1.3626 DOWN.0075
Early THIS THURSDAY morning in Europe, the Euro ROSE by 28 basis points, trading now well above the important 1.08 level falling to 1.1034; 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 down in value (onshore) The USA/CNY up in rate at closing last night: 6.5360 / (yuan down 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 SOUTHBOUND trajectory as IT settled DOWN in Japan by 47 basis points and trading now well BELOW that all important 120 level to 112.06 yen to the dollar. NIRP POLICY IS A COMPLETE FAILURE AND ALL OF OUR YEN CARRY TRADERS HAVE BEEN BLOWN UP
The pound was UP this morning by 56 basis points as it now trades just below the 1.40 level at 1.3983 on fears of a BREXIT.
The Canadian dollar is now trading UP 75 in basis points to 1.3626 to the dollar.
Last night, Chinese bourses were mainly MIXED/Japan NIKKEI CLOSED UP 224.55 POINTS OR 1.41%, HANG SANG DOWN 303.70 SHANGHAI DOWN 187.65 OR 6.41%/ AUSTRALIA IS HIGHER / ALL EUROPEAN BOURSES ARE 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 HAS BLOWN up/and now NIRP)
3. Short Swiss franc/long assets blew up ( Eastern European housing/Nikkei etc.
These massive carry trades are terribly offside as they are being unwound. It is causing global deflation ( we are at debt saturation already) as the world reacts to lack of demand and a scarcity of debt collateral. Bourses around the globe are reacting in kind to these events as well as the potential for a GREXIT>
The NIKKEI: this THURSDAY morning: closed UP 224.55 OR 1.41%
Trading from Europe and Asia:
1. Europe stocks all in the GREEN
2/ CHINESE BOURSES IN THE RED/ : Hang Sang closed DOWN 303.70 POINTS OR 1.58% ,Shanghai DEEPLY IN THE RED BY OVER 6% Australia BOURSE IN THE RED: /Nikkei (Japan)GREEN/India’s Sensex in the RED /
Gold very early morning trading: $1233.00
Early THURSDAY morning USA 10 year bond yield: 1.73% !!! UP 1 in basis points from last night in basis points from WEDNESDAY night and it is trading WELL BELOW resistance at 2.27-2.32%. The 30 yr bond yield falls to 2.60 UP 3 in basis points from WEDNESDAY night.
USA dollar index early THURSDAY morning: 97.32 DOWN 11 cents from WEDNESDAY’s close.(Now below resistance at a DXY of 100)
This ends early morning numbers THURSDAY MORNING
This is big news: North Dakota’s largest oil producer, Whiting petroleum suspends all fracking activity and they will be followed by Continental Resources. Thus Saudi Arabia is winning:
(courtesy zero hedge)
In Biggest Victory For Saudi Arabia, North Dakota’s Largest Oil Producer Suspends All Fracking
Yesterday, during his speech at CERAWeek in Houston, Saudi oil minister Ali al-Naimi made it explicitly clear that Saudi Arabia would not cut production, instead saying that it is high-cost producers that would need to either “lower costs, borrow cash or liquidate” adding that there is “no need for cuts as marginal barrel will get out of the market.” He was right.
Today his wish is slowly coming true after news that North Dakota’s largest producer, Whiting Petroleum,would suspend all fracking, and that Continental Resources has effectively done the same after reporting that it no longer has any fracking crews working in the Bakken shale.
As Reuters reports, Whiting said it would “suspend all fracking and spend 80 percent less this year, the biggest cutback to date by a major U.S. shale company reacting to the plunge in crude prices.”
It was also confirmation that the Saudi plan to put high-cost producers on ice is working, if only temporarily.
After sliding 5.6% to $3.72, Whiting stock jumped 8% to over $4 per share in after-hours trading as investors cheered the decision to preserve capital, even if it means generating far less revenue.
Whiting’s cut is one of the largest so far this year in an energy industry crippled by oil prices at 10-year lows. The cuts will have a big impact in North Dakota, where Whiting is the largest producer.
The Denver-based company said it would stop fracking and completing wells as of April 1. Most of its $500 million budget will be spent to mothball drilling and fracking operations in the first half of the year. After June, Whiting said it plans to spend only $160 million, mostly on maintenance.
Rival producers Hess Corp and Continental Resources Inc have also slashed their budgets for the year, though neither has cut as much as Whiting.
As noted above, during its earnings report, Continental said that in 2016, the Bakken drilling program will continue to focus on high rate-of-return areas in McKenzie and Mountrail counties, targeting wells with an average EUR of 900,000 Boe per well. Based on the higher EUR and a lower targeted completed well cost of $6.7 million per well, the Company expects capital efficiency to increase 17% and finding cost to decrease 15% in 2016.
Given its plans to defer most Bakken completions in 2016, Continental expects to increase its Bakken DUC inventory to approximately 195 gross operated DUCs at year-end 2016. However, Continental also said that while the Company currently has four operated drilling rigs in the North Dakota Bakken and plans to maintain this level through year end, it noted that it currently has no fracking crews deployed in the Bakken, which led some, including Bloomberg to believe, that Continental too has halted Bakken shale fracking.
One thing is certain: the cuts will drag down production and likely reverberate in the economy of North Dakota, the second-largest U.S. oil producing state after Texas, which currently pumps 1.1 million barrels per day. It means that after the 250,000 oil workers already laid off (according to Credit Suisse estimates), tens of thousands of new pink slips to highly paid workers are about to be handed out.
And another thing: as of this moment, Saudi’s oil minister is taking a victory lap in his Lamborghini – after all his plan to push the price of oil so low that marginal oil producers have no choice but to mothball production is starting to bear fruit.
There is just one problem. Whiting Chief Executive Officer Jim Volker said that “we believe this conservative strategy should help us to maintain our liquidity position and leave us well positioned to capitalize on a rebound in oil prices.”
In other words, the moment oil prices rebound even modestly, and according to many the new breakeven shale prices are as low at $40-$50/barrel, the Whitings and Continentals will immediately resume production, forcing Saudi Arabia to go back to square one, boosting supply even higher, and repeat the entire charade from scratch.
And so on.
Oil Tumbles Amid Storage Concerns As Genscape Reports Cushing Build
What goes up on nothing but a short-squeeze, must come down on fundamentals. Following yesterday’s DOE report of a nother build at Cushing (which followed API’s report of another build at Cushing), Genscape has just reported another large build at Cushing (+503k barrels)… the storage wars are back.
And the result…
As we detailed previously, Genscape joins the ever louder chorus that the US is approaching the capacity tipping point:
Further, Genscape adds that when looking specifically at Cushing, the storage facility is virtually operationally full (or at 80%) with just 4-5 more months at current inventory build left until the choke point is breached, and as we have reported previously, storage requests for specific grades being denied however the silver lining is that there is a lot of open pipeline space from Cushing to gulf coast (their full presentation can be watched here).
* * *
For those interested, the Genscape presentation can be watched in its entirety below
NatGas Tumbles To 16-Year Lows
More “unequivocally good” news. On the heels of a smaller than expected drawdown in natural gas inventories (-117 vs -135bcf), Nattie futures have tumbled to their lowest intraday level since 1999…
And while the oil market is “glutted,” some are arguing the NatGas market is even more so…
OilPrice.com’s Nick Cunningham warns, while the glut in oil is expected to continue for the next year or so before balancing in late 2016, the pain for liquefied natural gas (LNG) could be just beginning…
Building LNG export terminals is a long-term proposition. It can take years to develop a greenfield project, bringing a lump of new capacity online long after the project was initially planned, exposing developers to the possibility that market conditions could change in the interim. It is not unlike a conventional oil project, such as an offshore well, which also can take years (as opposed to a much shorter lead time for shale drilling).
But there is a major difference between oil and LNG: the market for LNG is much smaller and less liquid (no pun intended). In other words, a handful of new LNG export terminals can significantly alter the supply/demand balance.
That is exactly what is currently unfolding. Several years ago, spot prices in Asia for LNG spiked, particularly following Fukushima nuclear meltdown. Japan’s demand for LNG skyrocketed. At the same time, the shale gas revolution was unfolding in the U.S., and rock bottom prices opened up a window of opportunity to ship American gas to Asia. But it wasn’t just the U.S. – LNG export terminals proliferated around the world, particularly in Australia.
There were so many projects planned at the same time, and the first batch started to come online this year, with many more nearing completion in 2016 and 2017.
The rush of new supply is hitting the market all at the same time. Not only would such a rush in supply have pushed down prices on their own, the timing is actually really unfortunate for LNG exporters. Economies in East Asia are slowing, leaving a shortfall in demand. Japan, the largest LNG importer, is seeing its economy stagnate. China’s growth has slowed significantly.
As a result, JKM spot prices – the LNG marker for East Asia – are trading at $7.28 per million Btu (MMBtu) for December delivery, down nearly two-thirds from early 2014 prices.
Many LNG exporters have their cargoes signed up under long-term contracts on fixed prices. But usually not all of a given supplier’s capacity has secured buyers. The leftovers are sold on the spot market. With prices so low, spot sales are garnering much lower revenue.
Next year may be worse than this year, and 2017 could be yet even worse. “From having been an import basin, Asia will next year be going to have excess supplies and worse so in 2017,” David Hewitt of Credit Suisse told Reuters.
New export terminals will add 14 to 15 million tonnes of annual LNG capacity (mtpa) to the spot market over the next year. But that extra supply is running into a wall of stagnating demand. Japan’s LNG imports dropped by 12.8 percent in November, year-on-year. South Korea’s level of imports are at their lowest levels in six years.
Credit Suisse’s David Hewitt says that spot prices could drop to $5/MMBtu over the next few months, and even dip to an “eye-watering low” of $4/MMBtu at some point in 2016.
Again, oil markets are expected to see the supply overhang come into balance on a much shorter time horizon, perhaps by late 2016 or 2017. But the LNG market, with a much smaller demand base around the world, has much bigger problems. New regasification terminals will add new demand for LNG over the next few years, and demand is expected to jump by 50 mtpa by 2020. That is a substantial increase in expected consumption. The problem? New supplies will add 120 mtpa in LNG export capacity over the same timeframe, dwarfing even the most bullish cases for demand.
The excess supplies are beginning to change the LNG trade. The spot market is growing dramatically, as extra cargoes are resold to willing buyers. This is undermining long-term contracts, and also starting to change the practice of linking prices to crude oil prices. Singapore is launching an LNG futures market, which will accelerate these forces and bring more transparency to the trade. The market is becoming more liquid, offering more opportunities for buyers, at lower prices. That is great for the LNG consumer.
But the glut, set to worsen next year and the year after that, is terrible for gas producers or LNG exporters.
Halliburton Cuts 5,000 Jobs, 8% Of Workforce
It turns out oilfield services isn’t a good place to be during epic crude downturns.
Halliburton – which cut thousands upon thousands of jobs in 2015 – is back it, announcing an additional 5,000 layoffs on Thursdsay. The cuts amount to 8% of the company’s remaining workforce. We say “remaining” because as CNN notes, “the latest pink slips bring Halliburton’s job cut tally to between 26,000 to 27,000 since employee headcount peaked in 2014.”
The company will also look to sell assets (because everyone wants the kind of assets Halliburton owns with oil at $30) and is projecting $1.6 billion in capex this year.
“We regret having to make this decision but unfortunately we are faced with the difficult reality that reductions are necessary to work through this challenging market environment,” Emily Mir, a spokeswoman, said Thursday in an e-mailed statement. “We thank all impacted employees for their many contributions to Halliburton.”
Revenue plunged 42% in Q4 the company said last month hit, of course, by the ongoing oil rout. “Let me sum it up,” CEO Dave Lesar said on the call, “2016 is shaping up to be one tough slog through the mud.”
For 5,000 now jobless workers, this year will be a “tough slog through the mud” as well.
On the bright side, the stock is ripping:
U.S. Unable To Halt ISIS March Towards Libyan Oil
The Islamic State (ISIS) is taking on recruits faster than anyone can keep up with, and it’s heading towards Libya’s oil crescent, eyeing billions of barrels that a country at war with itself cannot protect – even with U.S. air strikes.
In mid-December, the United Nations brokered a power-sharing agreement between Libya’s rival factions, but there is no chance of implementing this. That means there is no chance that the Libyan government can fight back the advance of ISIS. Things are about to get messy, and U.S. air strikes will put only a small dent in a big problem.
According to U.S. intelligence figures, there are an estimated 6,000 ISIS fighters now in Libya, headquartered in the town of Sirte, as Oilprice.com has reported in the past. From here, they control hundreds of miles of coastline. There is nothing in Sirte they want; this is simply a strategic base.
ISIS fighters have also been tracked down to Benghazi, but here they have not solidified control yet. Still, Benghazi is an important recruitment venue. More specifically, this is where it can combine forces with it radical brethren in the form of Ansar al-Sharia and other radical factions. Benghazi is where ISIS gets bigger. And its pace of recruitment is faster than anything we’ve ever seen before. It absorbs new radical factions wherever it goes. The more successful its attacks and territory grabs, the more successful its recruiting becomes. In Libya, the former prowess of Ansar al-Sharia has quickly waned. ISIS is more brutal, and more decisive. It’s either join or be killed.
ISIS’ ability to launch attacks is not limited to Sirte, which is just the staging ground, or even to Benghazi. It can attack pretty much anywhere using hit-and-runs and suicide bombings.
So what is it after? There is a multipronged strategy here. The first is to get closer to Europe. The second is to get closer to Africa. The third is to get closer to more oil revenues to fill quickly depleting coffers in Syria and northern Iraq.
The ISIS Oil Picture in Libya
There is no oil in Sirte, but ISIS was able to take control of this area because no one was really paying attention. The tribes here are loyal to Gaddafi, but they took a backseat to Ansar al-Sharia, which in turn took a backseat to ISIS when it arrived.
ISIS has largely been allowed to run amuck in and around Sirte because the raging civil war that pits two rival Libyan governments against each other has left the country incapable of fighting off the ISIS advance. But now ISIS is targeting Libyan oil installations—and this is what invites U.S. air strikes.
Last month, ISIS attacked Es Sider and Ras Lanuf, which lie east of Sirte and beyond its area of control. Es Sider is an oil port, and Libya’s largest export terminal, with a capacity to export nearly 450,000 barrels per day. Ras Lanuf is a refining area. Ras Lanuf has storage tanks, and the tank attacked by ISIS was holding about 400,000 barrels of oil. The attack on Ras Lanuf was captured on video.
Both Es Sider and Ras Lanuf have been closed since December 2014—victims of the civil war that is largely a battle for control over the country’s oil wealth. They are perilously located right between ISIS-controlled Sirte and Benghazi in the east.
But ISIS has farther-reaching oil plans in Libya. It’s going after the producing fields in the southern desert.
(Click to enlarge)
In a video, ISIS made it clear that it had no plans to stop at Es Sider and Ras Lanuf: “Today Es Sider port and Ras Lanuf and tomorrow the port of Brega and after the ports of Tobruk, Es Serir, Jallo, and al-Kufra.”
When it gets a foothold in the southern desert’s oil crescent, this will be the point of no return.
ISIS has already secured the route to the “oil crescent”, which encompasses all the producing fields in the southern desert. It’s done this by taking control of the desert town of Nufaliya, which is about 50 kilometers from Es Sider.
At stake here is Libya’s 48 billion barrels of estimated reserves—the largest in Africa. The civil war alone has shut down over three-quarters of Libya’s production, which might be good for the current oil supply glut, but it’s very bad for Libya and regional stability.
US air strikes won’t likely be enough. ISIS has already cleared a path to the oil crescent, and without a functioning, unified government in Libya, there is no chance of heading them off effectively. Air strikes are but a bandage on a gaping wound.
Portuguese 10 year bond yield: 3.33% down 14 in basis points from WEDNESDAY (and the European stock market rises???)
“Broken” Bond Market Sparks Farcical Oil & Stock Buying Scramble
Extremely not suitable for work… It just seemed like one of those days…
This was yesterday…
And this is today…
Everything was fine, treading water… weaknes after weak data and oil lower… AND THEN NY Fed cancelled the 7Y auction and all hell broke loose…
Unleashing another epic short squeeze…
Another spell of ovenight weakness in futures that was gobbled up at the EU open and US open…Futures were ramped to the highs on Monday, and ran those stops
Today’s ramp took the S&P 500 back above 50-day moving-average for the first time in 2016… to the highest since January 8th
Year-to-Date, Small Caps are back out of correction and Trannies are now down by less than 2%…
VIX tumbled back below 20 towards 2016 lows…
Financial stocks were bid… but bonds closed wider…
FX markets were relatively calm again with slight weakness in the USD Index, strength in commodity currencies and cable stopped its free-fall…
Bond yields & Stocks decoupled, but the Auction cancellation sparked a surge in both…
Treasury yields crashed into the 7Y Auction… which was then cancelled… which sent yields soaring… only to fade notably into the close…
Notice anything odd about this chart? Gold ended higher on the day (despite some earlier thumpings for PMs), copper crumbled (as China fell), but crude just did it’s full retard thing…
And finally, we go back to the beginning, the “technical issues” enabled a farcical spike in WTI today.. just like yesterday…
Bonus Chart: First things last- China stocks suffered the worst loss since Black Monday week overnight…
Treasury Yields Are Crashing (Again)
It appears yesterday’s “capitulation” lows in Treasury yields… weren’t.
As the 7Y Auction looms, bond yields are tumbling…
And stocks are ignoring them…
Business Is “Worst Since The 80s Recession” – Kansas City Fed Survey Crashes To 7-Year Lows
The Kansas City Fed Composite Index has not been positive for 13 months and February’s below expectations print of -12 is the worst since April 2009.
The Fed unleashed QE3 the last time KC Fed dipped… and this time is dramatically worse…
Both MoM and YoY, every single component of the KC Fed survey is down, and down hard withemployment-related indicators collapsing.
Finally we let the respondents speak for themselves…
“Business is off at levels not seen since the recession of the early 1980’s.”
“We are starting off to a very slow year. Shipments are down 22% compared to last year. Margins are decreasing. We don’t know how our competitors keep lowering prices, asthis is not good for the long haul.”
But still we hear day after day that there is no recession in sight?
February 25, 2016 — 8:30 AM EST
The number of Americans filing applications for unemployment benefits rose last week from a three-month low, in part reflecting the typical swings during holiday periods.
Jobless claims increased by 10,000 to 272,000 in the week ended Feb. 20, a report from the Labor Department showed on Thursday in Washington. The median forecast of 46 economists surveyed by Bloomberg called for 270,000. The average over the past four weeks was the lowest so far this year.
Since Feb. 15 was Presidents’ Day, the jump may be more indicative of volatility associated with staff adjustments around a holiday, rather than weakness in the labor market. The struggles of the energy industry may also push up jobless claims in coming months, though growth in consumer spending means business will need to keep adding workers.
“Claims will remain pretty low,” Sarah House, an economist at Wells Fargo Securities LLC in Charlotte, North Carolina, said before the report. “The level of layoffs is remarkably low. It’s consistent with an improving labor market.”
Another report showed orders for capital goods rebounded in January, rising by the most since June 2014, signaling a pause in the manufacturing slump, according to figures from the Commerce Department.
No states estimated data for jobless claims last week and there was nothing unusual in the figures, according to the Labor Department.
Economists’ estimates in the Bloomberg survey for weekly claims ranged from 257,000 to 285,000. The previous week’s figure was unrevised at 262,000.
The four-week moving average, a less volatile measure than the weekly claims numbers, decreased to 272,000 last week, the lowest since mid-December, from 273,250.
The number of people continuing to receive jobless benefits fell by 19,000 to 2.25 million in the week ended Feb. 13. The unemployment rate among people eligible for benefits held at 1.7 percent. These data are reported with a one-week lag.
Since early March, claims have been below the 300,000 level that economists say is typically consistent with an improving job market.
The national payrolls report, due March 4 from the Labor Department, may show employers took on close to 200,000 workers this month after a 151,000 gain in January, according to the median forecast in a Bloomberg survey. The unemployment rate probably held at 4.9 percent, matching the lowest since 2008.
Initial jobless claims reflect weekly firings, and a sustained low level of applications has typically coincided with faster job gains. Many layoffs may also reflect company- or industry-specific causes, such as cost- cutting or business restructuring, rather than underlying labor market trends.
I’m trying to free your mind. But I can only show you the door. You’re the one who has to walk through it. – The Matrix
The overnight computerized stock market futures trading systems mysteriously “broke” once again as the futures were heading south (see this and this). This glaringly overt intervention reeks unmistakably of desperation.
Corners of the global economy – and specifically the U.S. – are collapsing behind the smoke and mirror cloak of ebullience emanating from a sharp bear market dead-cat stock market bounce and from absurdly manipulated data reports on employment and housing.
I was looking at a daily graph of AIG earlier today and comparing it to a couple other insurance company stock charts (Allstate and Progressive). Contrary to other insurancestocks, AIG has not participated at all in this stock market bounce. In fact, it’s been hitting new 52-week lows almost everyday since early February.
The same problems that caused a temporary systemic collapse in 2008 are back in full force again. Only they are much larger and much more insidious because rules were changed in a way that enabled the big financial firms to better disguise their Ponzi schemes. AIG is the born-again poster-child of this evolving financialized nuclear melt-down. I was chatting with a colleague earlier who told me that a contact of his at the Company said that everyone who stayed on at AIG after 2008 are now being let go. Something ominous is going on there…
The Kansas City Fed survey reported today that its index has dropped to 7-year lows. Yes, the Government reported today a bounce in durable goods, but it was driven by a huge order for aircraft parts from the Dept of Defense (great, we’re preparing for war in the Middle East). Here’s what the real economy looks like:
While the Government insults our collective intelligence with tall tales of 5% unemployment and Janet Reno lobbies the public on the view the economy is improving, the actual numbers coming from Main Steet show an economy slipping into recession. Treasury yields continue to compress. This is not the signal that it’s time to take out a 100% mortgage from a private lender and overpay for a crappy house, it’s the unmistakable onset of economic collapse.
Today both Dominos Pizza (12%) up and Lending Tree (up 22%) spiked up after “beating” their earnings. Here’s what was missed in the reporting: Dominos trades at 16x EBITDA and Lending Tree trades at 25x EBITDA. This is sheer insanity. Oh, by the way, TREE’s trailing EBIDTA is “adjusted,” which means EBITDA after the financial Kreskins at the Company add back all of the recurring “non-recurring” expenses.
It’s incomprehensible the way the market can ignore the bad news piling up. JP Morgan admitted earlier this week that it is woefully under-reserved against defaulting energy loans it was unable to unload onto the market. Bloomberg News featured a story today which reports that “the biggest wave of oil defaults looms as the bust intensifies” – LINK. I think this is already becoming a hidden problem in the financial system and it explains why we seeing financial firms like AIG (credit default swap issuer) and DB (lender to defaulting energy companies) not participating in this bear market bounce.
We know that the middle class is running out of money – “more subprime borrowers are falling behind on their auto loans” and “Retail Apocalypse: Major US Chains Closing 6,000 Stores Nationwide” – but Restoration Hardware yesterday told us that upscale shoppers have stopped spending money now as well.
The “Minsky Moment” occurs when too much borrowed money has fueled too much asset valuation speculation. The market will no longer absorb increasing levels of debt and the current borrowers can no longer support what’s already been borrowed. A severe collapse in asset values ensues.
In early 2015 the Government allowed Fannie Mae and Freddie Mac to offer 3% down payment mortgages. This is because the system had run out of borrowers capable of taking down a 5% mortgage. Later in the year the Government began offering a zero-percent down payment program. Private, non-Government pools of capital are offering reconstituted versions of the type of mortgages which led the collapse in 2008. The mortgage market is now searching for the last non-mortgaged stragglers who can still fog a mirror and are willing to overpay for a chance at the American dream.
Currently we are seeing the Minsky Moment swarm the energy market and begin to engulf the auto loan market. Soon it will start creeping into the housing mortgage market. The gerbil is almost dead but it’s still making the wheel spins albeit slowly. Not surprisingly the stock market is looking at the gerbil as it dies and interpreting any sign of life as a reason to party on…
Well that about does it for tonight
I will see you tomorrow night
Don’t get too down tomorrow if they raid as this is their usual modus operandi
all the best