Gold: $1,233.90 up 14.10 (comex closing time)
Silver 14.89 up 20 cents
In the access market 5:15 pm
for the Comex: Wednesday Feb 24 expired
for OTC and LBMA: today at midnight
At the gold comex today, we had a GOOD delivery day, registering 1 notice for 100 ounces for February. Thus the month of February ends up with 256,900 oz delivered upon for 7.99 tonnes of gold. Silver saw no more notices for February and surprisingly only 5 notices for 20,000 oz for the active March delivery month. They must have problems sourcing silver!
Several months ago the comex had 303 tonnes of total gold. Today, the total inventory rests at 211.05 tonnes for a loss of 92 tonnes over that period.
In silver, the open interest fell by 4,243 contracts down to 169,013. In ounces, the OI is still represented by .845 billion oz or 121% of annual global silver production (ex Russia ex China). Generally as we go into an active delivery month the liquidation is much bigger.
In silver we had 5 notice served upon for 25,000 oz.
In gold, the total comex gold OI fell by 3,587 contracts to 438,516 contracts as the price of gold was down $18.40 with Friday’s trading.(at comex closing)
We had another change in gold inventory at the GLD, a good sized deposit of 2.08 tonnes / thus the inventory rests tonight at 762.40 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 6,396 contracts down to 162,617 as the price of silver was down 48 cents with Friday’s trading. The total OI for gold fell by 3,587 contracts to 438,516 contracts as gold was down $18.40 in price from Friday’s level.
2 a) Gold trading overnight, Goldcore
2b) FRBNYgold report
3. ASIAN AFFAIRS
i)Late SUNDAY night/ MONDAY morning: Shanghai closed DOWN BY 79.23 POINTS OR 2.86% Hang Sang closed DOWN by 252.22 points or 1.30% . The Nikkei closed DOWN 161.65 or 1.00%. Australia’s all ordinaires was UP 0.02%. Chinese yuan (ONSHORE) closed DOWN at 6.5520. Oil LOST to 32.81 dollars per barrel for WTI and 35.56 for Brent. Stocks in Europe so far deeply in the RED . Offshore yuan trades 6.55180 yuan to the dollar vs 6.5520 for onshore yuan/
ii) NEWS FROM JAPAN OVERNIGHT:
Negative interest rates in Japan has a huge unintended consequence: banks are refusing to loan to one another. The fear is either counterparty risk or that they are already over burdened or both.
( zero hedge)
iii) NEWS FROM CHINA OVERNIGHT’
i) It seems that our crooks are controlling the oil and gold markets. Oil is being kept higher and gold/silver the opposite
( zero hedge)
ii)Those shale boys that left the arena will be back once oil reaches 40 dollars per barrel.
i) Last week we brought you the story that the Dutch central bank was renovating to store all of its gold coming back to Holland. It received 122.5 tonnes 18 months ago and that has caused the current facility much stain as outlined by Koos Jansen. I am sure that there is enough space in Holland to store its 600 plus tonnes. The story however gets interesting because perma bear ABN Amro which only this year stated that gold was headed to 900 dollars per tonne turned on a dime and is now predicting a price rise in gold.
What is going on in Holland?
( Secular Investor)
ii) what doorknobs: after blowing out all of its gold, it will be working hard to get back some of that gold through mining:
vi)India has imposed a gold sales tax on top of record import duty. Expect smuggling of gold into India to increase again
vii)Bill Holter points out to us something that is a very huge problem: Margin balances!!
( Bill Holter/Holter Sinclair collaboration)
USA MARKETS WHICH WILL HAVE AN INFLUENCE ON GOLD/SILVER
i) wow!! this is a big move: the all important Chicago PMI crashes from 55.6 down to 47.6 (contractionary)/as employment crashes to 7 yr lows:
( zero hedge)
ii) Pending home sales plunge!!
( zero hedge)
iii) The Dallas Mfg Fed index plunges to -31.9 as oil is certainly taking its toll in the lone star state:
( zero hedge)
Dallas Fed: the USA economy is in a freefall!
( Dallas Fed/zero hedge)
iv) Then we witnessed the collapse of the yield curve which should be a bell warning to S and P longs: a flattening of the curve always suggest a recession/depression starting!
( zero hedge)
Let us head over to the comex:
The total gold comex open interest fell to 438,516 for a loss of 3,587 contracts as the price of gold was down $18.40 in price with respect to Friday’s trading. For the past two years, we have strangely witnessed two interesting developments with respect to the gold open interest: 1) total gold comex collapse in OI as we enter an active delivery month or for that matter an inactive month, and 2) a continual drop in the amount of gold standing in an active month. Today, only the first scenario was in order and we must await for results from tomorrow’s OI readings but if history is any guide we will again witness obliteration in OI on both fronts . The front non active delivery month of March is now upon us and we saw its OI fall by 160 contracts down to 690. After March, the active delivery month of April saw it’s OI fall by 5.509 contracts down to 297,448. The estimated volume today (which is just comex sales during regular business hours of 8:20 until 1:30 pm est) was 192,242 which is fair. The confirmed volume yesterday (which includes the volume during regular business hours + access market sales the previous day was good at 228,696 contracts. The comex is not in backwardation.
March contract month:
INITIAL standings for MARCH
|Withdrawals from Dealers Inventory in oz||nil|
|Withdrawals from Customer Inventory in oz nil||321.50 ozManfra
|Deposits to the Dealer Inventory in oz||nil|
|Deposits to the Customer Inventory, in oz|| 2411.25 ozManfra
|No of oz served (contracts) today||20 contracts
|No of oz to be served (notices)||670 contracts
|Total monthly oz gold served (contracts) so far this month||20 contracts (2,000 oz)|
|Total accumulative withdrawals of gold from the Dealers inventory this month||nil|
|Total accumulative withdrawal of gold from the Customer inventory this month||321.50 oz|
we had 1 adjustment and it was a dilly
Out of Scotia
30,223.374 oz leaves the dealer account and this enters the customer side of Scotia
as an obvious settlement.
MARCH INITIAL standings/
|Withdrawals from Dealers Inventory||nil|
|Withdrawals from Customer Inventory|| 1,156,231.836 oz(CNT,Delaware
|Deposits to the Dealer Inventory||nil|
|Deposits to the Customer Inventory||1,211,029.965 oz
|No of oz served today (contracts)||5 contracts 25,000 oz|
|No of oz to be served (notices)||3799 contract (18,995,000 oz)|
|Total monthly oz silver served (contracts)||5 contracts (25,000 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||1,156,231.836 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: 3975.400 oz
ii) Into JPMorgan; 1,207,053.565 oz
total customer deposits: 1,211,028.965 oz
total withdrawals from customer account 1,156,231.836 oz
we had 0 adjustments
And now the Gold inventory at the GLD:
FEB 29/another deposit of 2.08 tonnes of gold into the GLD/Inventory rests at 762.40 tonnes
Feb 26./no change in gold inventory at the GLD/Inventory rests at 760.32 tonnes
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 29.2016: inventory rests at 762.40 tonnes
Federal Reserve Bank of NY gold report
It sure looks like Germany is not a happy camper tonight as the FRBNY reports at zero gold left the FRBNY last month:
Data for Dec Inventory at month end:.7995 million dollars worth of gold at $42.22 per oz
Data for January: inventory at month;s end: 7995 million worth of gold at $42.22 per oz
Total no of oz leaving New York shores: 0
.Germany has been receiving around 10 tonnes per month. They got zero last month
And now your overnight trading in gold, MONDAY MORNING and also physical stories that may interest you:
Irish Bonds Fall as Election Creates Political and Economic Uncertainty
Irish bonds fell today and the yield on ten-year Irish bonds rose to 0.908 pc, up from 0.891 pc in early trading this morning after a divisive general election and inconclusive result threw Irish politics into disarray and created considerable political and economic uncertainty.
The nation faces into a period of political instability after Prime Minister Enda Kenny’s coalition lost its majority in a general election according to Bloomberg.
Kenny’s government suffered massive losses in Friday’s vote, leaving an unprecedented grand alliance with traditional rival Fianna Fail as the only prospect for stable government. Kenny and Fianna Fail’s leadership ruled out a coalition before the election, though both took a less definitive line once the inconclusive outcome became clear.
The yield on Ireland’s 10-year bonds has fallen below 1 percent from 14.2 percent at the height of the financial crisis in 2011. Still, the spread between benchmark bonds and German securities of a similar maturity has increased to 76 basis points from 44 basis points six weeks ago, as uncertainty mounted over the election.
By late Sunday in Dublin, 146 of the 158 seats had been filled. Kenny’s Fine Gael had 46 seats, Fianna Fail had 42, with Sinn Fein taking 22. The Labour Party had 6, down from 37 in 2011. Seventy-nine seats are needed for a majority.
Read more on Bloomberg here
LBMA Gold Prices
29 Feb: USD 1,234.15, EUR 1,131.46 and GBP 890.95 per ounce
26 Feb: USD 1,231.00, EUR 1117.58 and GBP 878.87 per ounce
25 Feb: USD 1,235.40, EUR 1,121.41 and GBP 887.10 per ounce
24 Feb: USD 1,232.25, EUR 1,122.33 and GBP 885.52 per ounce
23 Feb: USD 1,218.75, EUR 1,106.62 and GBP 863.43 per ounce
Gold and Silver News and Commentary
Gold rises above $1,220, set for best month in four years – Reuters
Gold rebounds in Asia amid flight to safety – FX Street
Gold edges higher on Chinese demand – Bullion Desk
Gold’s Top Performer Adds to Hedging Reboot as Price Soars – Bloomberg
German regulator ends Deutsche Bank probes over fixing scandals – Reuters
Gold Becomes the Biggest Winner of 2016 – Bloomberg
Six Reasons To Buy Gold In 2016 – Value Walk
Silver Prices: This Will Continue to Lift Silver Prices Higher – Profit Confidential
‘The Bigger Short’ – Gold Rigging Story – GATA
Will Banks and IRAs Soon Charge You Instead of Paying You? – Mauldin Economics
Last week we brought you the story that the Dutch central bank was renovating to store all of its gold coming back to Holland. It received 122.5 tonnes 18 months ago and that has caused the current facility much stain as outlined by Koos Jansen. I am sure that there is enough space in Holland to store its 600 plus tonnes. The story however gets interesting because perma bear ABN Amro which only this year stated that gold was headed to 900 dollars per tonne turned on a dime and is now predicting a price rise in gold.
What is going on in Holland?
(courtesy Secular Investor)
Why Is The Dutch Central Bank Suddenly Moving Its Gold? And Why Is ABN Amro Becoming Bullish?
An interesting fact has hit the newswires earlier this week, as the Dutch Central Bankconfirmed it was looking to (temporarily?) move its gold reserves to another secure location. The DNB claims it has to renovate its vaults and thus needs to store the yellow metal elsewhere and that’s quite surprising as the central bank repatriated a large part of its gold reserves less than 18 months ago.
If this renovation has been scheduled a long time ago, why were the Netherlands so anxious to bring its gold back home? And why is the central bank using ‘renovations’ as the official reason even though some officials have indicated the DNB might be looking to permanently store the gold elsewhere?
Of course, as it’s a government institution, ‘poor planning’ always is a very valid excuse and even though it would make more sense to first think where the DNB would store the gold, politicians and commissioners appointed by the political system aren’t really known to make the best decisions. But there’s another possibility here. Officially, the Dutch central bank is no longer leasing its gold to commercial counterparties, but the possibility the central bank has been forced into a corner by the other central banks is not impossible.
The demand for physical gold is booming, and it’s a very big coincidence the Dutch Central Bank is considering to move its gold again during these volatile times. After all, we can’t imagine the bank will find a suitable place to store almost 200 tonnes of gold within the next few quarters or years so if the renovation of the bank is really necessary, where do you think the DNB will have to store its gold again? Yes, indeed, in the vaults of another foreign central bank.
This could indicate two things. First of all, it’s possible the DNB has been asked to do certain other market participants a favor by delivering physical gold upon their request as some parties on the futures-market might be unable to effectively deliver the gold their futures are representing. There obviously is no hard evidence to support this theory but even by looking at just the retail sales of the US Mint, the gold sales have more than doubled compared to last year. In the first 7 weeks of this year, the total amount of American Eagles minted and sold consisted of almost 200,000 ounces gold whereas the total demand for gold in January and February (full month) was less than 100,000 ounces in 2015 and just 120,000 ounces in 2014. So the demand for bullion is definitely there, both from retail and from central banks.
China still remains the largest net purchaser of gold as the country acquired 128 tonnes of the precious metal (4.1 million ounces) in just December and January so the total amount of physical gold available for other market parties is very low. In fact, we estimate China took delivery of a total amount of gold in 2015 equivalent to 40% of the annual world production and that should tell you a lot, as India also imported a total of 1,000 tonnes of the yellow metal. So, the total demand for physical gold from India and China combined is the equivalent of in excess of 70% of the total gold production in the world, and that’s massive.
Throw in the fact the total amount of registered gold at the COMEX (the gold that is available for physical delivery) has reached multi-year lows (see the previous image), and the decision of the Dutch Central Bank to think about ‘relocating’ the gold again is very intriguing.
On top of that, ABN Amro, which has been extremely bearish on the gold price, predicting we would see $800-900 soon has now completely changed its mind and is now predicting to see$1300 before the end of this year.
An acute outbreak of gold fever? Time will tell!
Secular Investor offers a fresh look at investing. We analyze long lasting cycles, coupled with a collection of strategic investments and concrete tips for different types of assets. The methods and strategies are transformed into the Gold & Silver Report and the Commodity Report.
Venezuela discovers that gold in the ground is money in the bank
Venezuela Sees Savior in Gold as Country Fights to Avoid Default
By Nathan Crooks and Noris Soto
Friday, February 26, 2016
Venezuela is planning to move fast with a new mining joint venture announced this week with Spokane, Washington-based Gold Reserve Inc. and will start extracting the precious metal within six months, according to central bank President Nelson Merentes.
The government will have a 55 percent to 60 percent stake in the new venture, while Gold Reserve and partners from the U.S., Germany, and Canada will control 40 percent to 45 percent, Merentes said Friday in an interview in his office in Caracas, adding that the consortium will be incorporated within a month.
“The venture involves the largest gold producer in the world and the largest copper producer,” Merentes said, declining to name the companies that will join the project with Gold Reserve. “There are already global banks, investment funds, and people with capital who want to invest. This agreement will bring liquidity to help the state meet its commitments.”
The joint venture resolves an arbitration dispute with Gold Reserve and will bring funds totaling $5 billion into the country that will help shore up international reserves that have declined with the price of oil, Merentes said. The investment and new gold production will diversify the country’s sources of foreign currency earnings and allow it to continue making payments on international debt, he added. …
… For the remainder of the report:
(courtesy London’s Financial times)
Fed governor Brainard warns rate rises may be at slower pace
By Sam Fleming
Financial Times, London
Friday, February 26, 2016
NEW YORK — Shocks from abroad may lead the Federal Reserve to lift short-term interest rates less than some observers have expected, a senior central banker said amid rising concerns about the pace of global economic growth.
Lael Brainard, a member of the Fed’s Board of Governors, said the tightening of financial conditions including the rise in the dollar had already delivered the equivalent of three quarter-point interest rate increases in the United States, as she argued the central bank needed to “nurture” the recovery by being “very cautious” with its guidance on rates. …
… For the remainder of the report:
German regulator ends Deutsche Bank probes over price fixing
By Arno Schuetze and Jonathan Gould
Thursday, February 25, 2016
FRANKFURT, Germany — Germany’s financial regulator will take no further action against Deutsche Bank over alleged interest rate rigging and precious metals price fixing, the country’s largest lender said on Thursday.
The watchdog, Bafin, has also drawn a line under a special audit into a derivatives trade with Italy’s Monte dei Paschi, Deutsche said in a statement.
Bafin confirmed it had closed the special audits but declined to comment on details.
“Bafin does not see the need to take further action against the bank or former and current members of the management board with respect to the closed special audits,” Deutsche said, adding the regulator cited changes it had already implemented or planned to redress shortcomings for its decision. …
… For the remainder of the report:
Daily Coin interviews Eric Sprott on monetary metals price suppression
8:38p ET Saturday, February 27, 2016
Dear Friend of GATA and Gold:
Rory Hall of the Daily Coin does a half-hour interview with Sprott Asset Management’s Eric Sprott, discussing gold and silver price suppression by central banks and investment banks, as well as the boost the monetary metals may get from plans to create a “cashless society.” The interview can be heard at the Daily Coin’s Internet site here:
CHRIS POWELL, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.
Chris Powell on the gold rigging market. No doubt a movie will eventually be out and a good title will be “the Bigger Short”
(courtesy Chris Powell/GATA)
The gold market rigging story could be called ‘The Bigger Short’
10p ET Sunday, February 28, 2016
Dear Friend of GATA and Gold:
Yesterday your secretary/treasurer went to a movie theater to see “The Big Short” (seemingly the first time he has been to the movies since going to “Babe the Pig” 20 years ago, for reasons you can probably figure out). “The Big Short” is an excellent movie, despite its constant gratuitous vulgarity and the unattractiveness of the nominal heroes.
You may know the movie’s outline: A few unorthodox money managers discover that the residential mortgage bond business has become a colossal fraud because investment banks have packaged good mortgages with bad ones and the regulatory agencies are looking the other way. The unorthodox money managers persuade some investment banks to create financial contracts for shorting their own mortgage bonds. Then they wait for the housing bubble to pop so they can collect stratospheric profits.
Except that it takes the seemingly inevitable takes a lot longer than it should. Even when mortgage defaults rise sharply, the market value of the bond shorts doesn’t rise. Someone seems to be interfering with the market, so the shorts try to persuade the bond-rating agencies and mainstream financial news organizations to do their jobs, and of course they won’t.
The similarities to GATA’s experience are obvious, perhaps most obvious in the movie scene where two of the unorthodox fund managers visit the headquarters of The Wall Street Journal at 1211 Avenue of the Americas in New York to pitch the story to a former college classmate who has become a reporter for the newspaper. The reporter declines to pursue the story, explaining that by doing so he would be putting himself, his family, and his job at risk to chase what he calls a mere “hunch.”
On May 3, 2011, your secretary/treasurer spent 45 minutes at 1211 Avenue of the Americas at an appointment with a Wall Street Journal reporter, delivering the major documents confirming the policy of gold price suppression that long has been followed by Western central banks and explaining what that policy meant. Three years earlier, on January 31, 2008, on the eve of the world financial crisis, GATA had spent $264,000 on a full-page advertisement in the newspaper warning that “surreptitious market manipulation by government is leading the world to disaster.” But nothing came of the ad or the appointment with the reporter. To this day The Wall Street Journal has refused to touch the story.
And while the Journal’s reporter did not confide in your secretary/treasurer that the gold price suppression story is too sensitive to pursue, on December 5, 2014, your secretary/treasurer had a similar appointment in London with a financial reporter for a major British news organization who was sympathetic but who volunteered that any reporter for a mainstream news organization who pursued the gold market rigging story probably would be fired instantly. This reporter thought he might be able to address the issue in a book someday.
Of course all this is simply the way of the world, the way it always has been and always will be, though at least what “The Big Short” depicts was documented by the 2010 award-winning, best-selling history written by Michael Lewis.
The same circumstances explain the failure to shut down Bernard Madoff’s investment fund Ponzi scheme until it had defrauded investors of billions. Madoff was exposed by another fund manager, Harry Markopolos, who titled his 2010 book on the scandal “No One Would Listen” since he repeatedly had supplied the U.S. Securities and Exchange Commission with the documentation of Madoff’s fraud and the agency didn’t take it seriously. Madoff was stopped only when, years later, his sons reported him to the Federal Bureau of Investigation.
Your secretary/treasurer recounts this simply to identify on the record some of the mainstream news organizations to which GATA has provided the documentation of the largely surreptitious rigging of the gold market by central banks, documentation that is both summarized and detailed here:
Some of these news organizations received GATA’s documentation as The Wall Street Journal did, in face-to-face meetings with your secretary/treasurer. Others received it by e-mail and confirmed its receipt. Some journalists for these news organizations have had substantial correspondence with your secretary/treasurer over the years, so they know the score. But they too have done nothing to pursue the story.
Besides The Wall Street Journal, these news organizations include The New York Times, the Washington Post, the Financial Times, the Associated Press, Reuters, Bloomberg News, Dow Jones Newswires, the Toronto Globe and Mail, the National Post in Toronto, the London Times, the London Telegraph, and CBS News.
This is not to say that GATA never has gotten any attention from mainstream news organizations. Of course just the other day GATA Chairman Bill Murphy was interviewed by CNBC Asia, as your secretary/treasurer was interviewed by CNBC Europe a year ago. (As with all major news organizations in North America, CNBC in New York remains out of the question for us.) In April your secretary/treasurer hopes to be speaking at financial conferences in Hong Kong and Singapore, cities that sometimes have been more receptive to GATA’s work.
We are in this for as long as our strength holds out, which of course may not be long enough to see it through to success. Indeed, the philosopher William James suggested a century ago that it was unusual for anyone challenging a large organization acting wrongfully to live to see his success, though the right tends to prevail eventually.
“I am against bigness and greatness in all their forms,” James wrote, “and with the invisible molecular moral forces that work from individual to individual, stealing in through the crannies of the world like so many soft rootlets, or like the capillary oozing of water, and yet rending the hardest monuments of man’s pride, if you give them time. The bigger the unit you deal with, the hollower, the more brutal, the more mendacious is the life displayed. So I am against all big organizations as such, national ones first and foremost; against all big successes and big results; and in favor of the eternal forces of truth that always work in the individual and immediately unsuccessful way, underdogs always, till history comes, after they are long dead, and puts them on top.”
But of course we would like to live long enough to see the restoration of free and transparent markets for the monetary metals and everything else, as well as the restoration of limited, accountable, and democratic government. And while these are the Valley Forge days for those who believe in such things and GATA has not asked for help lately, we would especially welcome it now, most of all from those who have not helped before:
Anyone who donates even $5 will have donated more than Newmont Mining has donated, the monetary metals mining industry generally being too scared to defend itself.
In any case there may be another pretty good book and movie in the gold market rigging story. Since it involves the creation by central banks of a vast imaginary supply of gold for price suppression and since this fraud jeopardizes not just one market but all markets, it could be called “The Bigger Short.”
CHRIS POWELL, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.
India has imposed a gold sales tax on top of record import duty. Expect smuggling of gold into India to increase again
India imposes gold sales tax on top of record import duty
India has reintroduced a local sales tax on gold jewellery after a gap of four years, on top of record import duty, in a move officials hope will dampen demand for the precious metal in the world’s second biggest consumer.
Successive governments in Asia’s third largest economy have struggled to curb Indian appetite for gold despite the imposition of a 10 percent import duty in 2013 and other restrictions introduced from time to time.
Annual imports of up to 1,000 tonnes of gold, accounting for about a quarter of India’s trade deficit, have also prompted the government to launch a scheme to mobilise a pool of more than 20,000 tonnes of the metal lying idle in homes and temples.
Finance Minister Arun Jaitley, presenting his third budget on Monday, announced an excise duty of 1 percent on gold and diamond jewellery. A report from his ministry on Friday said gold was under-taxed in the country, where the richest 20 percent account for roughly 80 percent of gold purchases.
Jewellers said the new duty will cut demand, which could eventually put a brake on the safe haven rally in global bullion prices.
“The excise duty will bring jewellers’ business to a standstill,” said Ketan Shroff, a spokesman for India Bullion and Jewellers Association, saying many of the nearly 10 million artisans working in the industry could lose their jobs.
The government imposed an excise duty in 2012 too, but was forced to roll it back after jewellers went on a strike.
This time trade bodies are planning to meet finance ministry officials to request scrapping the duty, said Praveenshankar Pandya, head of the Gem & Jewellery Export Promotion Council.
More curbs typically lead to more illegal trade. Unofficial gold transactions have been rising since India made it mandatory for customers to disclose their tax code for high-value purchases.
“For every tax, jewellers have to deal with different government agencies,” said Aditya Pethe, a director at Waman Hari Pethe Jewellers. “For a jeweller it is difficult to comply with excise duty rules.”
Jewellery sales in India fell in the last two months due to a price rally and as consumers delayed purchases hoping for a cut in import duty. This forced importers to offer a discount of up to $53 per ounce over global prices to clear their inventory.
But Jaitley surprised the market by maintaining the duty and instead raising the concessional countervailing duty on imports of gold dore bars, an alloy, to 8.75 percent from 8 percent.
Local gold prices jumped 1.4 percent after the move, while shares of major jewellers such as Gitanjali Gems and Titan Company fell.
“The discounts will come down gradually in the next few days since now there is clarity regarding the duty structure,” Waman Hari’s Pethe said.
($1 = 68.4650 Indian rupees)
(Editing by Krishna N. Das and David Clarke)
Bill Holter points out to us something that is a very huge problem: Margin balances!!
(courtesy Bill Holter/Holter Sinclair collaboration)
Contraction of credit…central bankers greatest fear!
Just a short comment on a VERY BIG problem! The below chart shows “margin” balance on the NYSE with an inverted chart of the S+P 500 laid over it.
Please notice the amount of credit being used to carry stocks now is significantly larger than it was at previous market tops in 2000 and 2007. Also, the amount of credit has begun to contract, this is a classic margin call being met …so far. The danger of course is as it always has been when margin builds like this. As the equity market pulls back, margin calls are issued and in some cases “forced sales” are done. This can, has in the past and most likely will occur and morph into a virtual loop where forced sales weaken prices, creating new margin calls and more forced sales in a negative feedback loop…otherwise known as a market panic.
It does need to be pointed out, there will be no “white knight” this time around as there are none left. The Fed rode in and save the markets in late 2008. It was discovered after the fact they lent $16 trillion all over the world. They have blown their balance sheet from some $600 billion in 2007 to a current $4.5 trillion. The Treasury had about $9 trillion of on books debt with a $14 trillion economy. Now the Treasury owes $19 trillion (the real number is multiples of this) supported by a $17 trillion economy (this amount is questionable).
My point is this, in the past when margin debt got to outsized levels it created “bubbles” as it has now. Once the margin debt begins to contract, this is when the waterfall action begins and this is exactly where we are today! Margin debt is contracting with the background of a financial system that is having liquidity problems. Top this off with central banks already all in, and sovereign treasury balance sheets bloated with more debt than the size of their underlying economic output.
Please spend a couple minutes and study the above chart. Governments can and do lie. Brokers can and do lie. Hard and fast statistics and the following results do not. The contraction of margin debt has commenced and markets are following like clock work. What follows this will be the greatest fear central bankers have always had, a general credit contraction. The problem of course is this credit contraction is coming during a time of unprecedented leverage in both gross and relative terms! The 1930’s saw much pain but neighbors helped neighbors in that episode. The morality and sense of union in the 1930’s is nearly gone, unfortunately almost extinct!
Comments welcome! firstname.lastname@example.org
1 Chinese yuan vs USA dollar/yuan DOWN to 6.5520 / Shanghai bourse IN THE RED DEEPLY BUT ALSO A RESCUE IN THE LAST HR: / HANG SANG CLOSED DOWN 252.22 POINTS OR 2.86%
2 Nikkei closed DOWN 161.65 OR 1.00%
3. Europe stocks all in the RED (EXCEPT SPAIN + ITALY) /USA dollar index UP to 98.15/Euro DOWN to 1.0883
3b Japan 10 year bond yield: RISES TO -.061% AND YES YOU READ THAT RIGHT !!!!(Japan buying 100% of bond issuance)/Japanese yen vs usa cross now at 112.80
3c Nikkei now well below 17,000
3d USA/Yen rate now well below the important 120 barrier this morning
3e WTI:: 32.81 and Brent: 35.56
3f Gold UP /Yen UP
3g Japan is to buy the equivalent of 108 billion uSA dollars worth of bond per month or $1.3 trillion. Japan’s GDP equals 5 trillion usa.
Japan to buy 100% of all new Japanese debt and by 2018 they will have 25% of all Japanese debt. Fifty percent of Japanese budget financed with debt.
3h Oil UP for WTI and 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 0.144% German bunds in negative yields from 8 years out
Greece sees its 2 year rate RISE to 10.28%/:
3j Greek 10 year bond yield RISE to : 11.73% (yield curve deeply inverted)
3k Gold at $1230.50/silver $14.79 (7:15 am est)
3l USA vs Russian rouble; (Russian rouble UP 39/100 in roubles/dollar) 75.93
3m oil into the 32 dollar handle for WTI and 35 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 1.0019 as the Swiss Franc is still rising against most currencies. Euro vs SF is 1.0904 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 + .144%
/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 1.74% early this morning. Thirty year rate at 2.62% /POLICY ERROR)
5. Details Ransquawk, Bloomberg, Deutsche bank/Jim Reid.
(courtesy Jim Reid/Bloomberg/Deutsche bank/zero hedge)
China’s Panicked RRR Cut Leads To Feeble Stock Rebound; Gold Resumes Climb
After the G-20 ended in a wave of global disappointment, leading to the biggest Yuan devaluation in 8 weeks, and sending Chinese stocks into a tailspin on concerns the PBOC has forsaken its stock market as well as speculation the housing bubble is now sucking up excess liquidity which in turn pushed global market deep in the red to start the week, it was the PBOC’s turn to scramble in a panicked reaction to sliding risk exactly one month after Japan unveiled its own desperation NIRP, and as reported before unexpectedly cut its Reserve Requirement Ratio by 0.5% to 17.0%, the first such cut in 2016 and the 5th since the start of 2015.
Since this move is an implicit liquidity injection, it was immediate negative for the offshore Yuan which tumbled…
… forcing cynical observers to ask if the PBOC “told” the G-20 about this major intervention in its currency just hours after it “promised” it would refrain from precisely such an action.
And while desperate central banks are now the norm, what is more troubling is that just like in the case of Japan’s negative rates announcement, so far China’s latest RRR cut has failed to prompt a substantial bounce in either US equity futures or the all important USDJPY carry trade, which at last check was unchanged with the E-mini was barely up from overnight lows and still red.
And if the PBOC is indeed powerless to provoke a risk on move, as we said last night it will be all up to Draghi and the ECB on March 10.
One asset classes that did not ignore the latest risk disappointment was gold which has again rebounded from recent lows around $1,200 and is headed for the biggest monthly advance in four years as a darkening global outlook spurred demand for haven assets. Bullion for immediate delivery added 0.9 percent to $1,234.09 an ounce. It’s up more than 10 percent in February, set for the biggest gain since January 2012.
Bulletin Headline Summary from RanSquawk
- PBoC’s shock decision to lower the RRR sees European stocks pull off worst levels, while soft EU CPI figures increased speculation of more stimulus from the ECB.
- AUD has been the main beneficiary from the latest PBoC action, while USD/JPY trades lower after a failed break above 114.00
- Looking ahead, participants will be placing a keen eye on the latest US Chicago PMI data and Pending Home Sales.
Where we stand now:
- S&P 500 futures down 0.2% to 1939
- Stoxx 600 down 0.6% to 330
- MSCI Asia Pacific down 0.4% to 119
- US 10-yr yield down 2bps to 1.74%
- Dollar Index up 0.03% to 98.18
- WTI Crude futures down 0.5% to $32.63
- Brent Futures up 0.7% to $35.35
- Gold spot up 0.9% to $1,233
- Silver spot up 0.7% to $14.80
Top Global News
- Valeant’s CEO to Return From Medical Leave; Guidance Withdrawn: CEO Pearson gives up board chairman role to Robert Ingram
- Foxconn, Sharp Said to Weigh Revising Terms of Approved Deal: Bankers, lawyers are going through a list of Sharp liabilities that could exceed 300b yen
- Boehringer Ingelheim, AbbVie Said in Cancer Partnership Talks: Multi-billion alliance could be announced as soon as this week
- Buffett Seeks More Takeovers, Likens Precision’s CEO to Da Vinci: Investments offer source of funds for “elephant” deals
- Nintendo Falls After Halving Profit Goal on Weak 3DS Sales: Sluggish handheld sales, yen cut earnings
- China Cuts Reserve Requirement Ratio by 0.5 Percentage Point: Says it seeks to maintain reasonable, ample liquidity in financial system
- SpaceX Scraps Another Attempt at Falcon 9 Rocket Launch: “Aborted on low thrust alarm,” according to Elon Musk tweet
- Google Parent Could Gain $3.5b If Intel Wins Tax Dispute: WSJ Says: Alphabet would benefit if Intel wins international tax dispute with IRS
- UTX Adds Goldman Sachs as Adviser Against Honeywell Bid, CNBC Says: UTX on Friday again spurned $90b Honeywell offer
- Hillary Clinton Wins S.C. Democratic Primary, Defeating Sanders: Clinton won state with electorate similar to upcoming contests
- Citigroup Faces Fraud Suit Claiming $1.1 Billion in Losses: Investors in Mexican oil services firm sue over loan schemes
- Lattice Semiconductor Mulls Sale Amid Chinese Interest: Reuters: Co. is working with Morgan Stanley to review interests
- Monsanto Next Logical Target for BASF, Baader-Helvea Says: Monsanto’s seed pipeline, weaker crop protection offering would fit very well with BASF portfolio
- ‘Spotlight’ Wins Oscar Upset in Ceremony Dominated by Race: Favorite ‘Revenant’ gets wins for DiCaprio, director Iñárritu
- ‘Gods of Egypt’ Is Year’s First Big Flop at U.S. Box Office: Lions Gate may not turn profit on $140 million movie
- Starbucks to Open Its First Store in Italy Early Next Year: Percassi will be the licensee for SBUX in the country.
Looking at overnight global market highlights, we start with China were as reported previously, the PBoC cuts the RRR by 50bps to 17.00% in a surprise announcement, however refrains from lowering the lending and deposit rate. Overnight Asian equities traded mixed, following last Friday’s lacklustre lead from Wall St., where US stocks finished in mild negative territory as firmer than expected US GDP data increased rate hike expectations. Nikkei 225 (-1.0%) was dictated by JPY, as the index reversed early firm advances as JPY strengthened during Asia trade. ASX 200 (+0.12%) finished with mild gains amid rising hopes for RBA easing later this year, while mainland China significantly underperformed with the Shanghai Comp (-2.8%) slumping after PBoC continued to weaken the currency. Shenzhen markets were also down nearly 5% on concerns that major reforms such as the Shenzhen-HK connect could be delayed. Prospects of liquidity outflows from the stock market into the recovering property sector and an expected 1.8MM job cuts in the coal and steel industries also weighed on sentiment. 10 year JGBs traded in minor positive territory with the BoJ in the market for JPY 1.26TN, although prices softened from highs in the second half of the session amid thin trade.
Top Asian News
- Telkom Seeks to Slash Workforce by Two-Fifths to Cut Costs: Company identifies about 6,250 positions for elimination
- ChemChina Seeks $35 Billion in Loans for Syngenta Takeover Deal: China Citic Bank to arrange a $15b loan facility; ChemChina to meet lenders this week on separate $20b loan
- Australia Rate-Cut Bets Rise on Stimulus Outlook, Weak Pay Gains: AU wage rises are smallest on record, jobs growth evaporates and firms plan to cut investment
- Yuan Fixings Enigma Returns as PBOC Reverts to Currency Basket: PBOC kept moves in its daily reference rates to a maximum 0.02% most days in the month up to Lunar New Year break
- Zheshang Bank Said to Delay Testing $1 Billion IPO Interest: Stock buyers reported difficulty transferring money out of mainland China
- Modi Budget Key to Breaking March Jinx for India Sovereign Bonds: Benchmark 10-yr yields have risen avg. 18 basis points in last 10 months of March
European equities pulled off worst levels on the back of the surprise action by the PBoC to cut the RRR by 50bps, coupled with the soft EU CPI readings which could force the hand of the ECB to act . Prior to this Eurostoxx had been treading water following the weakness in Chinese stocks amid prospects of liquidity outflows from the stock market. Additionally, financials have underperformed with large caps HSBC (-2.5%) and Standard Chartered (-4.2%) leading the losses, while the latter has been weighed on by concerns that the Shenzhen-HK connect could be delayed. Softness in EU bourses as well as rising ECB stimulus bets have seen bunds bid throughout the mornings to take out the earlier session highs and last Friday’s high around 166.14. Subsequently, bunds printed a fresh all time high (166.46) with yields in the 10-yr falling to the lowest since April.
Top European News
- Euro-Area Consumer Prices Fall Most in Year as ECB Mulls Easing: Inflation rate at minus 0.2% in February vs 0% forecast
- Gameloft Rejects Vivendi’s Valuation of $562 Million as Too Low: Guillemot family to fight Vivendi’s Bollore for control
- Manz Jumps After Deal to Sell 29.9% Stake to Shanghai Electric: Manz to sell new shares to investors to add Chinese partner
- Amazon Steps Up U.K. Grocery Advance With Morrison Supply Deal: To sell hundreds of WM Morrison Supermarkets products
- SNB Could Cut Exemption Limit If More Easing Needed, Jordan Says: Current threshold at 20 times minimum-reserve requirements
- Barclays Africa Shares Plummet as U.K. Parent Said to Mull Sale: Barclays Africa says it still sees growth on the continent
- Swiss Spared New EU Headache as Vote on Foreign Criminals Fails: Rejects initiative to deport foreigners convicted of crimes
In FX, it has been a tentative start to the week, though European trade was following on from an Asian session which saw USD/JPY turnaround sharply. After hitting a wall at 114.00, losses extended through 113.00, but found some support ahead of Friday’s lows before subsequent consolidation received a fresh boost after the PBoC announced it was to cut the RRR by 0.5%. Spot jumped through 113.00, with AUD also turning higher sharply, but topping out around .7165-70 before heading back to pre-announcement levels. At the same time, we also had the release of the EU inflation data, where the Fec core rate fell from 1.0% previously to 0.7%. EUR/USD had already been threatening a retest of the 1.0900 level, and managed to do so after the data. GBP still looking weak vs the USD, but earlier lows intact as yet. CNH and CNY above 6.5500, creeping higher but nothing to concern markets as yet.
Eurogroup chief Jeroen Dijsselbloem said in Shanghai on Saturday that “there was some concern that we would get into a situation of competitive devaluations” with regards to Japan. Japanese Prime Minister Shinzo Abe told parliament Monday he is not trying to influence foreign-exchange rates, and that an excessively strong yen has been corrected under his economic reform program, dubbed Abenomics. The currency was trading around 85 per dollar when Abe took office in December 2012.
China’s yuan declined 0.2 percent, retreating for a seventh day, as the central bank lowered the currency’s reference rate and stepped up efforts to cushion the economic slowdown with the cut in banks’ required reserve ratio.
In commodities, WTI and Brent crude futures have seen somewhat of a turnaround in the wake of the PBoC’s actions, consequently signalling rising global growth prospects in what has otherwise been a rather subdued start to the week in the energy complex. Oil headed for its fourth monthly decline in New York, the longest retreat in a year, as record U.S. crude stockpiles weighed on prices. West Texas Intermediate fell 0.3 percent to $32.67 a barrel, extending February’s decline to 2.9 percent. Brent crude added 0.5 percent to $35.28 for an increase of 1.6 percent this month.
Record-high stockpiles of U.S. natural gas for the time of year sent futures 4.8 percent lower to $1.706 per million British thermal units, extending a fourth weekly decline as mild winter limited the drawdown.
Copper erased a decline of as much as 1.3 percent after the China central bank stimulus, leaving it little changed at $4,706 a metric ton.
* * *
DB’s Jim Reid concludes the overnight wrap
tomorrow we’ll give a full performance review but with a day left the highlights are a US equity market that has just edged back into positive territory for February, leaving mainland Europe behind (generally down 2-7% still). US 10yr yields are nearly 20bp lower, with Bunds nearly 30bps lower in what is the standout move on the month! Meanwhile Oil is pretty much flat with Chinese equities wiping out monthly gains after a steep late month sell-off. Anyway, full review tomorrow.
The overall numbers mask a strong rebound in risk (and oil) since around Feb 11th, although bonds haven’t sold off much since. Although the dates don’t exactly coincide it’s worth highlighting that US data surprises troughed in early February after a poor run but are now at around their highest level since early December. So this has helped risk and helped US out-performance. Meanwhile European data surprises continue to plummet and to their lowest since 2013 in the comparable indices to the US data. Our own DB SIREN-Surprise index hit 2012 lows on Friday. So although markets have stabilised in the last 2-3 weeks, it’s clear that Europe seems to be losing momentum over a period where the banking industry is under pressure with the risks that this could spill over into the wider economy. As such the pressure is still on the ECB to deliver next week even if markets have stabilised. The question mark is whether a straight cut deeper into negative deposit rate territory would be counterproductive or not alongside amendments to QE. So they may need to be innovative as to how they ease policy further.
As we’ll see in the week ahead we have the all important global manufacturing PMIs/ISM on Tuesday and non-manufacturing equivalents on Thursday. The keys things to watch out for are any stabilising in global manufacturing and whether services continue to trend down towards them but whether a notable (albeit narrowing) gap can be maintained. Obviously services typically make up 80-90% of DM economies and whether this part of economies can withstand the various shocks thrown at it of late will be key to asset prices going forward.
Over the weekend we saw the latest G20 meeting conclude with nice sound bites but without much obvious substance. The group agreed to use “fiscal policy flexibility to strengthen growth, job creation and confidence” and reiterated that “monetary policy alone cannot lead to balanced growth”. However as an example of the issues, UK Chancellor Osbourne warned on Friday of imminent and renewed spending cuts in his budget in two weeks and there is no obvious sign of notable loosening of the fiscal spigots anywhere else. However it does seem the debate is slowly shifting back towards fiscal over monetary policy which in our opinion is healthy. It may take a recession to focus minds properly though.
The underwhelming G20 meeting is contributing to a soft start to the week in Asia with Chinese equities leading the way (Shanghai Comp -3.5%) with the Yuan edging lower for the 7th successive session. Comments on Friday from PBoC chief Zhou that there was room for more easing had led some to hope they would announce more stimulus over the weekend but this didn’t materialise. Elsewhere the Hang Seng is -1.2% and the Nikkei is -0.2%.
Looking back to Friday, we saw European equity markets ignore weak numbers out of Europe (see below) and ride a rally in mining and oil shares on the back of a recovery in the commodities complex. The STOXX and the FTSE300 closed up +1.53% and +1.72% respectively while the FTSE100 stocks posted gains of +1.38%, as markets ended the week in positive territory despite Wednesday’s slump. In bond markets, European yields continued to be firm as weak inflation data out of Europe further raised expectations for next week’s ECB meeting. German 10Y yields (+0.9bp) were largely flat on the day but yields were cumulatively tighter on the week. This signified the sixth consecutive weekly gain for 10yr bunds. iTraxx Senior (-9.1bp) and Sub (-25.1bp) spreads also tightened on Friday, ending the week -8bps and -25bps respectively. In the US the S&P 500 closed -0.19% after edging steadily lower all day from a bright open.
Staying with the US and adding to the recent positive surprises discussed above, economic data out of the US on Friday generally exceeded expectations, albeit with some caveats. Annualised Q4 GDP growth was revised up to +1.0% qoq (vs. +0.4% expected) from the previous estimate of +0.7% on the back of an upward adjustment to business inventories. Although positive, the growth mix encouraged the Atlanta Fed to lower its Q1 GDPNow forecast to 2.1% from 2.5% after the expected inventory component fell -0.6% offsetting a +0.2% increase in consumer spending. Back to Friday’s data, while personal consumption growth for January missed expectations (+2.0% vs. +2.2% expected), personal spending rose by the most in eight months (+0.5% vs. +0.3% expected vs. 0.0% previous) and the PCE Deflator returned to inflationary territory (+0.1% mom actual vs. +0.0% expected; -0.1% previous). Consumer sentiment for February (as measured by the UMichigan Sentiment indicator) also improved more than projected, as the index hit 91.7 (vs. 91.0 expected; 90.7 prior). A negative mark amid the positive data was the US advance goods trade balance for January which saw the trade deficit widen to -U$62.2bn (vs. -U$61.2bn expected; -U$61.5bn previous) on the back of weaker global economic activity.
European data on the other hand largely disappointed across the board and continued setting the stage for further ECB easing. First, the relatively good news: French Q4 GDP grew at +0.3% qoq (vs. +0.2% expected) as household spending rebounded faster than expected. Now for the bad news – and there’s lots of it. Germany and France both saw deflation with HICP numbers clocking in at -0.2% YoY (vs. 0.0% expected) and -0.1% YoY (vs. +0.1% expected) respectively. Euro Area economic confidence slumped to its lowest level since June (103.8 actual vs. 104.3 expected; 105.0 previous) while the business climate indicator (0.07 actual vs. 0.27 expected; 0.29 previous), industrial confidence (-4.4 actual vs. -3.6 expected; -3.2 previous) and services confidence (10.6 actual vs. 11.4 expected; 11.6 previous) all declined more than expected.
Kicking off proceedings this morning is the UK where we’ll get the January net consumer credit and mortgage approvals data. Shortly following that will be the February estimate for Euro area CPI (+0.1% mom expected) along with the same data out of Italy. This afternoon in the US there will be a lot of focus on the February Chicago PMI number, while the Dallas Fed manufacturing activity index and January pending home sales data will also be released.
Let us begin;
Late SUNDAY night/ MONDAY morning: Shanghai closed DOWN BY 79.23 POINTS OR 2.86% Hang Sang closed DOWN by 252.22 points or 1.30% . The Nikkei closed DOWN 161.65 or 1.00%. Australia’s all ordinaires was UP 0.02%. Chinese yuan (ONSHORE) closed DOWN at 6.5520. Oil LOST to 32.81 dollars per barrel for WTI and 35.56 for Brent. Stocks in Europe so far deeply in the RED . Offshore yuan trades 6.55180 yuan to the dollar vs 6.5520 for onshore yuan/
Negative interest rates in Japan has a huge unintended consequence: banks are refusing to loan to one another. The fear is either counterparty risk or that they are already over burdened or both.
(courtesy zero hedge)
Kuroda’s NIRP Backlash – Japanese Interbank Lending Crashes
Not only has the Yen strengthened and stocks collapsed since BoJ’s Kuroda descended into NIRP lunacy but, in a dramatic shift that threatens the entire transmission mechanism of negative-rate stimulus, Japanese banks (whether fearing counterparty risk or already over-burdened) have almost entirely stopped lending to one another. Confusion reigns everywhere in Japanese markets with short-term interest-rate swap spreads surging and bond market volatility spiking to 3 year highs (dragging gold with it).
As Bloomberg reports,
The outstanding balance of the interbank activity plunged 79 percent to a record low of 4.51 trillion yen ($40 billion) on Feb. 25 since Bank of Japan Governor Haruhiko Kuroda on Jan. 29 announced plans to charge interest on some lenders’ reserves at the monetary authority.
While Kuroda wants to lower the starting point of the yield curve to reduce borrowing costs and spur shift of funds into riskier assets, the interbank rate has fallen only about as far as minus 0.01 percent, above the minus 0.1 percent charged on some BOJ reserves. The swings on bond yields will make it harder for financial institutions to determine how much business risks they can take, weighing on lending in a weak economy even as they are penalized for keeping some of their money at the central bank.
It will take at least another month until the market finds a level where many dealings are settled, as financial institutions face uncertainty over how the new policy affects monthly fund flows, said Izuru Kato, the president of Totan Research Co. in Tokyo.
“Since past patterns don’t apply under the entirely new structure, financial institutions will take a conservative approach until the financing picture is nailed down,” Kato said. “If the funding estimate proves wrong, banks might lose by prematurely lending in negative rates. People are cautious and staying on the sidelines.”
All this chaos has sent risk premia surging everywhere you look in Japan:
Reflecting the confusion among traders about the unprecedented negative-rate policy, the one-month premium for one-year interest-rate swaps have surged, according to data compiled by Bloomberg.
“The swaption market is reacting to the heightening volatility because players don’t know where Libor will settle,” said Naoya Oshikubo, a rates strategist at Barclays Plc in Tokyo. “One reason behind this is the fact that unsecured overnight call rates and general collateral repo rates aren’t falling as intended by the BOJ.”
And as Japanese bond volatility surges, it seems demand for gold rises (as perhaps VaR restrictions of Japanese bank balance sheets force a rotation to relatively lower risk assets)…
And while the last week has seen a G20-Hope-fueled lull in the collapse,
“It is still uncertain how deep into the negative the overnight call rates will sink,” said Naomi Muguruma, a senior market economist at Mitsubishi UFJ Morgan Stanley Securities Co. in Tokyo. “It won’t settle until funding flows in the new scheme become clear. That may pressure volatility to stay high for government bonds.”
Simply put, “The focus will be how much money these institutions facing negative rates will lend out in the market,” or how little.
China Devalues Most In 8 Weeks, Offshore Yuan Slides To 3-Week Lows
Following USD strength last week, China has come back to work after the disappointment of the Shanghai non-accord and weakened the Yuan fix by 0.2% – the most since January 7th.
This move follows pressure from offshore Yuan weakness since traders returned from Golden Week – driving the onshore-offshore spread out to its widest since The PBOC stepped in and stomped the shorts.
After a few weeks of stability, it appears China is forced to let the Yuan slip back out to where its CDS (a market it is notr manipulating directly yet) implied it to be after shaking out some weak shorts at the end of January.
Stocks are opening modestly to the downside – following weakness in US from Friday
- *CHINA’S CSI 300 INDEX SET TO OPEN DOWN 0.3% TO 2,939.58
- *CHINA SHANGHAI COMPOSITE SET TO OPEN DOWN 0.4% TO 2,754.81
China Stocks Crash: Down More Than 4% To Fresh 15 Month Lows
It all started off well-enough: the USDJPY was modestly lower but nothing big, then the Yuan was fixed a little less modestly lower – well ok, it was the lowest fixing in 8 weeksconfirming China just couldn’t wait for the Shanghai summit to be over – and then suddenly the Chinese market realized what we said earlier in the weekend, namely that with the much anticipated G-20 meeting a complete dud, and with no major stimulus on the horizon, suddenly the trapdoor below Chinese stocks opened and the Shanghai Composite has started the new month tumbling over 4%.
With this latest plunge, Chinese stocks are now back to levels last seen in November 2014 when the Chinese “replacement” bubbles (out of shadow banking) was just getting started:
And just in case it wasn’t obvious:
- CHINA STOCKS’ TECHNICAL REBOUND IS OVER: HENGSHENG’S DAI MING
But perhaps even more important as the G-20 fiasco, Shenwan Hongyuan Group analyst Qian Qimin told Bloomberg that “the red hot property market may attract more and more fund inflows and investors worry this might divert liquidity from the stock market” which incidentally is precisely what we said earlier this afternoon when observing the latest iteration of the Chinese housing bubble:
To us, there is nothing surprising in this behavior: now that the Chinese stock market bubble has burst, the local population has to find a new asset class which to chase for the next few months, and for the time being that asset is housing.
It also means that Chinese stocks are done for the time being. It remains to be seen how the rest of the world will digest this unpleasant fact.
China Cuts Reserve Ratio One Day After G20
In the “uninspiring” communique delivered following the G20 in Shanghai, officials pledged to “consult closely” on FX markets.
Presumably that was a reference to China’s “surprise” August 11 deval and the PBoC’s move in December to adopt a trade weighted basket as a reference point for the RMB, a move that telegraphed lots of downside for the currency.
Well, we’re not sure whether there was any “close consulting” between the PBoC and its counterparts around the world on Monday, but China just announced another RRR cut (50 bps), the fifth such move since early last year.
To be sure, it’s not surprising that Beijing resorted to more easing. They’ve got all kinds of counter-cyclical breathing room compared to their DM counterparts. It is, however, somewhat surprising that they would move to ease just a day after the G20 when everyone in attendance pledged to avoid competitive currency devaluations on the way to acknowledging that “monetary policy alone cannot lead to balanced growth.”
Following the RRR cut, the offshore yuan fell further and swaps fell the most in nearly two months.
Recall what we said on Saturday: “… the great yuan devaluation will continue unabated as will the competitive easing.”
We’ll now get a chance to see what the half-life on PBoC easing is these days. Here’s what Chen Jiahe, a strategist at Cinda Securities, said in Shanghai: “There’s a big chance that A shares will open higher tomorrow morning after the RRR cut. The cut in banks’ reserve-requirement ratios will help offset the reduction in base money caused by a decline in funds outstanding for foreign-exchange reserves and ease liquidity conditions.The move will definitely lift stock market sentiment. Blue-chip stocks may get a boost tomorrow due to their high correlation to the economy.” That’s good, because Chinese equities just fell 3% overnight to start the week.
Summing things up nicely is this rather amusing tweet:
China’s Housing Bubble Is Back: Locals Wait In Line For Days To Flip Houses
Back in early 2014, we warned that the Chinese housing bubble has burst, promptly followed by official confirmation by China’s National Bureau of Statistics which showed that in the subsequent several months Chinese home prices and transactions plunged. Since then, however, China – whose economy has been on a steep downward spiral – has desperately scrambled to reflate this most important to its economy bubble, because as a reminder in China three quarters of all household assets are in Real Estate…
… despite first suffering the bursting of a shadow debt bubble and then its stock market doing the same.
Still, because in China where there is an excess $30 trillion in closed liquidity (due to China’s closed capital account and outbound capital controls) it has long meant that all that happens when one bubble bursts, is to create another asset bubble, which then bursts and the original bubble is again reflated.
Which is precisely what has happened to China’s housing where we can now officially say that the bubble is back…
… if only however in the first-tier cities. In fact, according to the latest data, the bubble among China’s top, or “Tier 1” cities has never been bigger entirely at the expense of all other cities.
According to the latest NBS new home price update, in November the first-tier plus Xiamen were 55% of the national price increase, with Shenzhen nabbing 22% of the total national increase the Investing in Chinese Stocks blog reports. In December, those numbers were 54% and 23%, almost no change. In January, the first tier and Xiamen accounted for 52% of the total increase, with Shenzhen alone accounting for 21%, rising 4% mom. In the past year, prices are up an average of 1% nationally. Shenzhen alone is 74% of the total increase yoy. The first-tier plus Xiamen accounted for 141% of the total increase, or without those 5, prices fell 0.4% yoy nationally across 65 cities.
But nowhere is the return of the Chinese housing bubble more obvious than in Beijing wherescalpers are charging up to ?3000 for service numbers at the government office where property transfers are recorded, due to long wait times in the wake of the recent transaction tax cuts launched by the government to spur the housing market.
Courtesy of the ICS blog, we get the following translation of what is taking place on the ground in China, where the current bubble du jou has sparked a veritable house-flipping mania:
Transaction Tax Cut Spurs Bubble Activity in Beijing: ?1000 For Reservation Number
The specific policies to Beijing, but later than 140 square meters of the only family housing, deed tax decreased from 3% to 1.5% of the total housing fund. It does not look great, but the effect was particularly evident.
…According to data center statistics, in the first week (February 14 to February 20) after the Spring Festival, Beijing new home net signed volume of only 1006 sets. The secondary residential net signed volume is as high as 6048 units, average daily turnover of 864 units, the highest trading volume since 2010.
From the price perspective, the average transaction price 41,490 yuan / square meter, compared with 2015 annual average price rose about 5%.
…The new policy to the owners and customers have brought mental changes, including the owners of more brewing prices. Xiao Gu said in Beijing many owners are selling the house for a house, he wants to buy a house prices, he will increase his selling price, eventually leading to a chain reaction.
This has resulted in some bubbly behavior: paying for a reservation number:
Now that the volume is large, the transfer of more people, so the reservation number is quite difficult. Due to the large number of people go through, on behalf of the reservation business is also booming. Taobao, enter the word Beijing transfer agent may be seized several shops in this business. In some shops turnover ranking, monthly volume of dozens, mostly ordinary numbers in the thousand or so, the price is even higher if expedited.
In a shop, the owner drying out a series of successful single theme, saying last week, supplied a total of 168 successful reservation number, each priced at 999 yuan, if you need a specified time the price increases by 499 yuan.
Online news says that there are already scalpers charging ?3000 for a number this week, ?1000 for next week.
IICS then lays out another example of the house-buying frenzy in Beijing, first described in Ifeng:
Last week I posted one example of bubble behavior in Beijing, as people paid up to ?1000 for a service ticket in order to avoid wait times at the property office.Transaction Tax Cut Spurs Bubble Activity in Beijing: ?1000 For Reservation Number
Now another example emerges as sellers are throwing out high opening prices. It begins with a sale in Daxing, an outer suburb of Beijing, which saw a property sell for ?47,000 per square meter, followed by news that Vanke had hiked prices on all its projects in Beijing; the company denied the report.
The latest news says ?3 million yuan is now the “opening price” for homes that are not too far outside the city. Analysts are more conservative in their estimates, projecting an increase of 5% to 10% in 2016, and say these high prices may be artificial. Still, even if that is true, it reflects an attempt by sellers to cash in on the current mood which increasingly bears the hallmarks of speculative fervor.After Spring Festival, prices in the East Fourth Ring increased ?4,000 to ?5,000 yuan per square meter, or about 10%. The average price hike in the city is about ?1,000 per sqm.
One property near Jinsong subway station (between Guomao and Panjiauan on the 10 line) sold for ?1.8 million before this year, now a similar property is listed for ?2.1 million. The transacted price will be closer to ?1.9 million according to analysts, reflecting the ?1,000 per sqm rise in price.
This behaviour is confusing to our friends from IICS:
I can understand someone wanting to pay to skip at the hospital, but waiting a few days to transfer a property? One reason someone might want to do this is if they fear rising prices. Chinese buyers and sellers will sometimes back out of a transaction if the market moves against them. In this case, if you bought a property before the tax was announced, the seller might try to claw back some of the tax savings. It may also be the case that, as in other situations, wealthier people would rather pay than wait.
To us, there is nothing surprising in this behavior: now that the Chinese stock market bubble has burst, the local population has to find a new asset class which to chase for the next few months, and for the time being that asset is housing; and since the politburo gets to boast that the Chinese economy is “improving” as a result of this scramble, no “macroproudential brakes” will be deployed before it is again too late, the bubble bursts, and all the excess money has to rotate into another bubble du jour. Unless, of course, by then China’s capital account has been fully liberalized and those $30 trillion in Chinese funds can finally chase global assets without the detriment of even a token capital control firewall.
After €670 Billion In QE, European Inflation Plunges To -0.2%: Lowest In One Year
A little under one year after the ECB launched its own QE of €60 Billion/month in bond purchases in early March 2015, a process which has resulted in the ECB monetizing over €670 billion in European – mostly German – sovereign paper, moments ago Eurostat reported European February inflation (even though the month is not over yet), and it was a shock, with headline inflation tumbling from +0.3% Y/Y in January to a depressing -0.2% in February, the worst print since January 2015. It was expected to drop to “only” 0.0%.
The decline is largely due to a big decrease in energy costs, which were 8 percent lower in the year to February against the previous month’s 5.4 percent drop. However, the core rate, which strips out the volatile items of energy, food, alcohol and tobacco, was weak too, falling to 0.7 percent from 1 percent. That shows how weak price pressures from such things as higher wages are in the eurozone economy.
And here comes the paradox: as the AP reports, this disturbing report will boost expectations that the European Central Bank will unveil another stimulus package at its next policy meeting on March 10.
So, since Europe’s annual inflation is now lower than the month it launched QE, the “only logical response” is to do even more: as AP wryly observes, “since the ECB aims for inflation just below 2 percent, February’s negative rate could mean it cuts interest rates further or expands its bond-buying program — inflation has been below target since February 2013.”
“Poorly anchored inflation expectations and the cooling economy will prompt the ECB to ease already-accommodative monetary policy,” said Tomas Holinka, economist at Moody’s Analytics. Ah yes, because it wasn’t ECB’s already accommodative policy that unleashed the global currency war which has resulted in global inflation expectations, and not to mention rates, plunging to record lows and pushing over $6 trillion in debt into negative rate territory.
Som more monetary humor:
When falling prices become entrenched they can weigh heavily on an economy, as Japan’s experience over the past quarter of a century can testify to. So-called deflation can become a vicious cycle and push prices down further. Falling prices could prompt consumers to delay purchases and businesses to shy away from investments.
By keeping interest rates low and pumping money into the economy via its bond-buying program worth over a trillion euros, the ECB is hoping to generate enough economic activity to get prices rising.
Instead, what will happen is that the ECB, after boosting its QE in ten days, will end up with even lower inflation in February of 2017.
Timo del Carpio, European economist at RBC Capital Markets, says those on the ECB’s policymaking body who have been at best reticent over a further stimulus, whether it be a further cut in the deposit rate or an expansion in the bond-buying program, will likely be concerned by the pronounced decline in the core inflation rate. “Against this backdrop, a ‘wait-and-see’ approach simply does not appear to be a viable policy option at this stage,” he said.
He’s right: what makes sense is to finally normalize the monetary idiocy gripping the world since 2009.
Will it happen? Of course not. Expectations of further action from the ECB weighed on the euro. Europe’s single currency was down 0.3 percent on the day at $1.09.
EU’s Evil Plan B: Cutting The Balkan Route Has Stranded 1000s Of Migrants In Greece
The closure of borders in the north of Greece has created chaos: thousands of refugees and migrants wandering from Athens to Idomeni without knowing where to sleep and what to eat, where to lay their kids and elderly to sleep.
FYROM, Croatia, Slovenia and Austria has closed their border today. Slovenia, Croatia and Serbia said on Friday they would each restrict the number of migrants allowed to enter their territories to 580 per day, while Austria already introduced a daily cap of 80 asylum-seekers and said it would only let 3,200 migrants pass through each day. However, FYROM’s borders remained close all day Friday, onloy 150 crossed on Thursday. Albania, that had earlier said to accept refugees, decided otherwise at the end of the day, after the West Ballkan Conference initiated by Austria. Prime Minister Eddi Rama said that his country will not accept any refugees.
Also the push-backs have started: Austria sent back 50 Syrians two days ago, they arrived in Idomeni , Greece a couple of hours ago. According to latest information, Serbia is going to push-back 1,000 people to FYROM and FYROM will forward them to Greece.
Refugees, asylum-seekers, migrants: all in one pot. End of story:
The Balkan Route is cut.
20,000-25,000 people are trapped in Greece.
Allegedly concerned that a humanitarian crisis may occur, the European Commission is working out a contingency plan to tackle the crisis and avoid the disaster.
“Senior European officials are embracing the so-far taboo idea of cutting off the migrant trail in Greece, a step that they acknowledge could create a humanitarian crisis in the country, says a report in the Wall Street Journal.
This so-called Plan B, floated until now only by Europe’s populist leaders, is a sign of rapidly waning confidence in other European Union policies to deal with the migration crisis—in particular in German Chancellor Angela Merkel’s game plan of relying mainly on Turkey to stem the human tide.”
Apparently the EU are looking into the EU-Turkey Leaders Summit scheduled for March 7th. I saw on TV, German Chancellor Angela Merkel saying that “results of NATO mission have to be awaited, first.” NATO’s sea-monitoring mission has been officially launched in the eastern Aegean today.
Should NATO’s mission fail and Turkey would show show much willingness for cooperation, refugees and migrants will be keep coming form Turkey to Greece. “And this has to be stopped” the EU officials think and they argue that bottling up the migrants in Greece would be more manageable than having them stranded in poorer, non-EU neighboring countries in the Balkans.
“Greece wouldn’t be the worst place to have a humanitarian crisis for a few months,” one EU official told WSJ, adding that the population there was much more refugee-friendly than those in the Balkans or Eastern Europe.”Four senior EU officials said that Greece, as an EU member state, could receive more bloc funding and other practical help to cope with the stranded migrants than its Balkan neighbors, where ethnic conflicts could flare up anytime. Once the message trickles through that migrants are stuck in Greece, the officials said the hope is that fewer people would attempt to come in the first place.”
Caught On Tape: 500 Syrians Storm Greek Border Fence With Homemade Battering Ram
Last week, EU migration commissioner Dimitris Avramopoulos delivered a rather unnerving assessment of the prospects for Angela Merkel’s multicultural utopia: if Turkey and Greece can’t come to some kind of agreement on how to secure Europe’s external border in the next week, the bloc will simply collapse under the weight of the refugee flow from the Mid-East.
That’s right ladies and gentlemen. At least one eurocrat thinks this entire experiment with passport-free borders is going to come to a rather unceremonious end in the next five days.
EU officials are set to meet with Turkey on March 7 to discuss possible remedies to the crisis, but the prospects for that meeting aren’t great.
Erdogan is far more interested in extracting cash from Brussels than he is in helping to stem the flow of refugees. Indeed, if you had to point to one man who has contributed the most to the exodus of civilians from Syria, you’d have to look at Erdogan, whose support for Sunni extremists and anti-Assad elements has plunged Syria into chaos.
Meanwhile, Brussels somehow expects beleaguered Greece – which is completely broke and has resorted to doubling taxes on farmers to meet Berlin’s budget demands – to control the flow of migrants into Western Europe. Last week, Athens recalled its ambassador to Austria after the country held a meeting on immigration with Balkan countries without inviting Greece. “Greece will not accept becoming Europe’s Lebanon, a warehouse of souls,” Greek migration minister, Yannis Mouzalas told reporters last Thursday.
Today, frustration with the bottleneck that’s been created by tighter border checks, anti-migrant fences, and the suspension of Schengen boiled over at the Macedonia-Greece border where hundreds of Syrians and Iraqis stormed a border fence at the small frontier town of Idomeni. “Hundreds who gathered at the razor-wire fence used metal poles to bring down a gate by digging beneath the barrier and pushing it up and out,'” The Guardian writes. Police used tear gas to beat back the crowd. “About 6,500 people – mostly Syrian and Iraqi – are stuck on the Greek side of the border. Some have been there for up to eight days with little food or shelter as Macedonia accepts only a trickle of people each day,” The Guardian adds.
Here’s the scene as captured on tape, followed by a bit more color from Reuters and from The New York Times:
Macedonian police fired tear gas to disperse hundreds of migrants and refugees who stormed the border from Greece on Monday, tearing down a gate as frustrations boiled over at restrictions imposed on people moving through the Balkans.
A Reuters witness said Macedonian police fired several rounds of tear gas into crowds who tore down the metal gate and onto a railway line where migrants sat refusing to move, demanding to cross into the country.
There were an estimated 8,000 people gathered at Idomeni, the small frontier community on Greece’s border with Macedonia. Most were Syrians and Iraqis.
From The Times:
Macedonia recently closed its border with Greece, a major stop on the migrant trail, to thousands of Afghans after reclassifying them as economic migrants rather than refugees, a move that denied them the right to apply for asylum.
That policy, which was effectively a response to an Austrian decision to put a daily cap on the number of people allowed into the country, left thousands of Afghans with nowhere to go. It also promoted fear among Syrians and Iraqis, who worried that they might also be unable to travel further north if similar restrictions were imposed.
The Balkans have served as the main passageway for migrants, most of whom hope to reach Germany, which has accepted far more asylum seekers than any other country. Germany’s warmer welcome has led to tensions with other European countries, and last week Austria and nine Balkan states agreed to put in place several measures to choke off the flow of refugees, effectively imposing their own response to the migrant crisis.
As a result, many migrants in Greece have effectively been trapped — they cannot move on, and they cannot return home — and officials in the country said they expected the problem to worsen.
“We estimate that we will have a number of people trapped in our country which will be between 50,000 and 70,000,” the minister for migration, Ioannis Mouzalas, told the Greek TV channel Mega, Reuters reported.
Ukraine Collapse Is Now Imminent
Two years have passed since Yanukovich was deposed and, as it turns out, another ruthless clan of oligarchs has taken power. No wonder then that Ukraine is heading for a new wave of violence and chaos. Oligarchs are fighting each other, the IMF is pulling out of the country, officials issue laws and regulations only to see them repealed within a day or two by others, and raided European companies are leaving the country after being robbed by the so-called pro-Brussels oligarchic elite.
It was evident from the beginning that the US and NATO-sponsored power transition was doomed to fail. Prime Minister Yatsenyuk made no secret on his personal website about his principal partners, NATO and Victor Pinchuk’s foundation. Victor Pinchuk is a link between the Ukraine corrupt oligarchic establishment and the Western political elite. In 2005, the BBC depicted him as a paragon of Ukraine’s kleptocracy:
“Ukraine’s largest steel mill has been bought by Mittal Steel for $4.8bn (£2.7bn) after an earlier sale was annulled amid corruption allegations.
The Kryvorizhstal mill was originally sold to the son-in-law (Mr. Pinchuck) of former President Leonid Kuchma for $800m.
It was one of the scandals that sparked the Orange Revolution and propelled President Viktor Yushchenko into power.”)
Directly after the power transition, European leaders understood that the situation in the Ukraine was unmanageable, which we know from a confidential telephone conversation between Minister Paet (Minister of Foreign Affairs of Estonia) and Mrs. Ashton (High Representative of the Union for Foreign Affairs and Security Policy) that became public. Both politicians understood that the Maidan protesters had no trust in the politicians who formed the new coalition. Mr Paet said, “there is now stronger and stronger understanding that behind snipers it was not Yanukovich, but it was somebody from the new coalition.” Their conversation makes it clear that both European politicians understood that, contrary to the official statements coming from Brussels, Europe has no solution for Ukraine’s problems and no trust in its new leaders.
Petro Poroshenko, one of the oligarchs, became the fifth president. In line with his predecessors, he had amassed an astonishing personal wealth by mixing politics and business on behalf of the Ukraine population. He started his career under the notorious President Kuchma and served as a minister under deposed President Victor Yanukovich. One can hardly imagine a more troubled new president for a country that has to reform itself and get rid of corruption.
In 2014 Brian Bonner, the Kyivpost chief editor, wrote: “Allowing prosecution of Kuchma (concerning the murder of a journalist) is acid test for whether Poroshenko will put national interests above his own.”. Asking Poroshenko to “kill” his close friend and crony, former President Kuchma and the father-in-law of the powerful Pinchuk is a dramatic plea by the chief editor aimed at forcing President Poroshenko to show whose side he takes. Poroshenko’s answer came quickly: he rewarded Kuchma with a top position in the Minsk negation team.
Within months after the power transition, investigative journalist Tetiana Chornovol, who lead an anti-graft body, quit, calling her time in the government “useless” because there was no political will to conduct “a full-scale war” on corruption.
In the two years that followed rumour of ongoing corruption has not ceased. For Poroshenko and his fellow oligarchs, the biggest threat is not Putin and the separatists in the East, but the pro-Ukraine militia that only on paper were merged with the Ukraine army.
The militia regards the Western-backed oligarchs as the second biggest threat to the Ukrainian nation. We believe the oligarchs are the primary cause of the rot in Ukraine’s government.
Meanwhile, the Brussels elite is trying to sell the Ukraine 2014 power grab and the resultant association treaty as a way to help Ukraine to overcome its political corruption.
The Dutch government wrote in its communique to its citizens: “This cooperation gives Ukraine a chance for a better future. The country wants to become a genuine democracy, without corruption and with a wealthy population. The European association treaty is the foundation for the national reforms.”
Maybe this is the intention of many naive European politicians, it is not the intention of the Ukrainian elite who under Poroshenko consolidate their power. The Swiss-based company Swissport, a leading airport service company, and its French investors learned this the hard way.
In 2012 the UK-based logistic website the “theloadstar” wrote:
“Swissport, the Swiss ground handler stands to lose some $8m in assets in the Ukraine while other foreign investors could shun Ukraine, following an attempt to forcibly strip the company of its majority stake in Swissport Ukraine.
In a move alleged to be ‘corporate raiding’, an increasingly common phenomenon in the country, 30% shareholder of Swissport Ukraine, Ukraine International Airlines (UIA), has claimed that Swissport International (SPI) violated its minority rights – a “baseless” allegation, according to the handler. During interim courtproceedings the judges were changed twice – at the very last minute – before the hearings.”
During the reign of Yanukovich, Kolomoisky (Poroshenko ally) try to strip Swissport from it assets. It did so by forcing the company to sell its multi-million majority stake for 400.000 Euro, using the corrupt Ukraine administration and the justice system. We cannot blame the company that it believed its problem was solved in 2014. The Washington and Brussels elite presented the new Kiev government as a tool in the fight against inherited Ukrainian corruption. During 2014 Swissport seems to have fought a successful battle against injustice. But at the end of 2014, the highest judicial body in Ukraine ruled that the company had to sell its multi-million investment to Kolomoisky for 400.000 dollars. The company said that it never received the 400.000 Euro from Mr. Kolomysky.
Ihor Kolomoiskyi is the oligarch President Poroshenko installed as governor of Dnepropetrovsk. That Kolomoisky enjoyed the full protection of Poroshenko became apparent as he was not prosecuted after he had orchestrated an armed raid on UkrTransNafta Ukraine state-owned oil firm. To spare President Poroshenko the embarrassment, Kolomoyskyi offered his resignation.
Ihor Kolomoiskyi is the founder of the Brussels-based European Jewish Parliament that served to increase his influence in Brussels. A worrisome sign that Ukraine’s political rot is spreading into the European Union.
Swissport raid and forceful eviction from Ukraine was an embarrassment for those who try to uphold the illusion Ukraine was in the process of becoming a genuine democracy free of corruption.
It could hardly be a surprise that a year after Kyivpost publication that Swissport had left Ukraine, Aivaras Abromavi?ius, Minister of Economics in Poroshenko’s cabinet and one of Washington’s principal allies in Kiev resigned.
After Abromavi?ius it was Deputy Prosecutor General that resigns due to unstoppable corruption. 15 February Deputy Prosecutor General Vitaliy Kasko wrote in his resignation letter:
“…This desire is based on the fact that the current leadership of the prosecutor’s office has once and for all turned it into a body where corruption dominates, and corrupt schemes are covered up. Any attempts to change this situation at the prosecutor’s office are immediately and demonstratively persecuted.
Lawlessness, not the law, rules here…..”
A day later General Prosecutor Victor Shokin, who analysts say, is an ally of President Poroshenko, has to quit. Viktor Shokin agrees to step down after President Poroshenko asked him to leave office Western leaders and reform-minded Ukrainian officials have long been calling for Shokin’s resignation.
At the same time, Ukraine headed for a standoff between its two most powerful politicians after Prime Minister Arseniy Yatsenyuk had defied President Petro Poroshenko’s call for his resignation and defeated a no-confidence motion in parliament.
The current chaos in Kiev makes it for the IMF extremely hard to keep Ukraine funded. Brazil’s IMF Director already in 2014 urged not to bend rules for Ukraine. Ukraine had failed the IMF twice before. There is now a sense of panic in Kiev, and so Ukraine leaders start to issue opposite orders. The Central Bank Governor’s ban on money exchange was repealed immediately by Yatsenyuk.
The situation of the population deteriorates rapidly as Ukraine’s currency devalues fast and bond yields spike. Companies start to understand that direct investment can disappear overnight as raided foreign companies are forced to leave the country. Protesters take over Hotels in Kyiv and return to Maidan to demand the resignation of the Ukraine rulers who came to power with the support of Washington and Brussels. Yatsenyuk now becomes a liability for its partner NATO.
It is a just matter of time before the Ukraine nationalistic militias will take power, resulting in a definite split of the country. Poroshenko can postpone the people final verdict by reviving the war in the east, but in the end, he can not escape the day of reconning.
Markets At Risk As “Tepid, Uninspiring” G20 Proves Investor Hopes Were “Pure Fantasy”
Anyone hoping this week’s G-20 meeting would yield some manner of “Shanghai Accord” to revive sluggish global growth, pull the global economy out of the deflationary doldrums and calm jittery markets that have seen harrowing bouts of volatility in the first two months of the year are disappointed on Saturday.
The joint communique issued by policymakers at the end of the two-day summit is bland and generic, with officials parroting vacuous promises to avoid competitive currency devaluations and maintain monetary policies aimed at supporting economic activity and price stability.
Officials pledged to “consult closely” on FX markets, a reference presumably to China’s “surprise” August 11 deval and the PBoC’s move in December to adopt a trade weighted basket as a reference point for the RMB, a move that telegraphed lots of downside for the currency.
The statement also “acknowledges” the fact that geopolitical risks abound and as Bloomberg noted this morning, “officials added a potential ‘Brexit’ to its long worry list in the communique.”
“That’s a win for Chancellor of the Exchequer George Osborne, who had sought to rally international finance chiefs behind the campaign to keep Britain in the European Union,”Bloomberg goes on to point out.
“Downside risks and vulnerabilities have risen,” due to volatile capital flows and slumping commodities but – and this was a critical passage – “monetary policy alone cannot lead to balanced growth.”
What?! We thought counter-cyclical Keynesian tinkering was the magic elixir. A cure-all that smooths business cycles and creates demand out of thin air. Now you’re telling us it “can’t lead to balanced growth” and implicitly that Paul Krugman is a snake oil salesman? This can’t be.
(Janet is not amused)
“The global recovery continues, but it remains uneven and falls short of our ambition for strong, sustainable and balanced growth,” the statment continues, in a rather dour assessment of the economic landscape. “While recognising these challenges, we nevertheless judge that the magnitude of recent market volatility has not reflected the underlying fundamentals of the global economy,” officials added.
Right. If markets were “reflecting the underlying fundamentals” of this global deflationary trainwreck, things would probably be even more volatile.
Predictably, everyone called on fiscal policy to save the day, in what amounts to a tacit admission that central banks have failed. “Countries will use fiscal policy flexibly to strengthen growth, job creation and confidence, while enhancing resilience and ensuring debt as a share of GDP is on a sustainable path,” the statement reads.
So countries will somehow adopt expansionary fiscal policies without resorting to deficit financing via debt sales. So, magic. Got it.
Long story short, there is no “Shanghai Accord” akin to the 1985 Plaza Accord between the United States, France, West Germany, Japan, and the United Kingdom, which agreed to weaken the USD to shore up America’s trade deficit and boost economic growth. All we have here is a generic statement and empty promises.
“Investor hopes of coordinated policy actions proved to be pure fantasy,” said TCW’s David Loevinger, a former China specialist at the U.S. Treasury. “It’s every country for themselves.”
Yes it is which means the great yuan devaluation will continue unabated as will the competitive easing.
This isn’t a good thing for markets. As Citi’s Steve Englander wrote yesterday, “they won’t save the world but probably convince investors that global policymakers are sufficiently on the same page to add to global confidence.”
Well guess what? They didn’t. We close with the likely read through for markets from Citi’s Brent Donnelly:
The G20 draft communiqué looks like it is out and it seems pretty tepid / uninspiring. So the relevant question now is whether or not this 160-handle rally in SPX (!) is partially attributable to shorts squaring up ahead of the G20 meeting. I would say the rally in the past two days has had extra momentum because of G20 and now shorts should be looking to reestablish—so I think stocks should trade weak from here into Monday.
Your early morning currency/gold and silver pricing/Asian and European bourse movements/ and interest rate settings/MONDAY morning 7:00 am
Euro/USA 1.0883 down .0046
USA/JAPAN YEN 112.97 DOWN .986 (Abe’s new negative interest rate (NIRP)a total bust
GBP/USA 1.3855 DOWN .0002 (threat of Brexit)
USA/CAN 1.3554 UP.0044
Early THIS MONDAY morning in Europe, the Euro FELL by 46 basis points, trading now JUST above the important 1.08 level falling to 1.0883; 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: 6.5520 / (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 NORTHBOUND trajectory as IT settled UP in Japan by 99 basis points and trading now well BELOW that all important 120 level to 112.97 yen to the dollar. NIRP POLICY IS A COMPLETE FAILURE AND ALL OF OUR YEN CARRY TRADERS HAVE BEEN BLOWN UP
The pound was DOWN this morning by 2 basis points as it now trades just below the 1.40 level at 1.3858 on fears of a BREXIT.
The Canadian dollar is now trading DOWN 44 in basis points to 1.3554 to the dollar.
Last night, Chinese bourses were DOWN/Japan NIKKEI CLOSED DOWN 161.65 POINTS OR 1.00%, HANG SANG DOWN 252.62 OR 1.30% SHANGHAI DOWN 79.23 OR 2.86% after being down over 4% but last hr rescue/ AUSTRALIA IS HIGHER / ALL EUROPEAN BOURSES ARE IN THE RED (EXCEPT SPAIN + ITALY) 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 MONDAY morning: closed DOWN 161.65 OR 1.00%
Trading from Europe and Asia:
1. Europe stocks all in the RED (EXCEPT SPAIN)
2/ CHINESE BOURSES IN THE RED/ : Hang Sang closed DOWN 252.22 POINTS OR 1.30% ,Shanghai IN THE RED Australia BOURSE IN THE GREEN: /Nikkei (Japan)RED/India’s Sensex in the RED /
Gold very early morning trading: $1230.50
Early MONDAY morning USA 10 year bond yield: 1.74% !!! DOWN 3 in basis points from last night in basis points from FRIDAY night and it is trading WELL BELOW resistance at 2.27-2.32%. The 30 yr bond yield falls to 2.62 DOWN 2 in basis points from FRIDAY night.
USA dollar index early MONDAY morning: 98.31 UP 15 cents from FRIDAY’s close.(Now below resistance at a DXY of 100)
This ends early morning numbers MONDAY MORNING
It seems that our crooks are controlling the oil and gold markets. Oil is being kept higher and gold/silver the opposite
(courtesy zero hedge)
Oil Dumps & Pumps Despite Massive Cushing Inventory Build
Nothing says buy-the-dip in crude oil like a massive inventory build in an already-near-peak-storage Cushing. Following a dive in prices after Genscape reported a massive Cushing build of approximately 1mm barrels, WTI has surged as algos keep the dream alive in stocks…
The Oil Price Ceiling Has Been Set: “Above $40 And We Start Pumping Again”
Last week we reported that in what has been Saudi Arabia’s biggest victory to date in its war against U.S. oil and gas producers, both Whiting Petroleum, which is North Dakota’s largest oil producer, and Continental Resources would indefinitely suspend fracking operations for the foreseeable future. The reason was simple: oil prices are too low to make incremental drilling and pumping profitable, and instead most shale companies are now entering hibernation, limiting cash outlays in the form of dividends and capex spending, in hopes of weathering the crude oil storm, which has already gone on far longer than even the most pessimistic mainstream pundits expected it would.
Which, of course, is the right response: as the saying goes the cure for low oil prices is low oil prices, and as more shale companies halt drilling, exploring and production, the 3 mmb/d oversupplied oil market will slowly return to equilibrium.
There is logically a flipside to that as well: as those companies which have recently mothballed operations either voluntarily or because they had to when they went bankrupt when oil was at $30, return to market the previously oversupplied market condition will promptly return as well, thereby pressuring oil lower yet again.
The question is at what “breakeven” price does it make sense for US shale companies to return. As Reuters reports, less than a year ago major shale firms were saying they needed oil above $60 a barrel to produce more; however in just one year this number has changed and quite drastically at that.
We hinted at this three weeks ago in an article which many readers had a hostile reaction to: specifically we warned of “Another Leg Lower In Oil Coming After Many Producers Found To Have Far Lower Breakevens.” As we reported then, “what many thought would be the “breaking” price point for virtually every shale play has just been lowered, and quite dramatically at that. It also means that algos and traders who had reflexively bought any dip below $30 on expectations this is close to the “sweet spot” and where the Saudis would relent, will have to drop their support levels by as much as a third.”
Today Reuters confirms that this assessment was stpo on with a report that some shale companies say they will settle for far less in deciding whether to crank up output after the worst oil price crash in a generation.
Among the companies which are prepared to flip the on switch at a moment’s notice are Continental Resources led by billionaire wildcatter Harold Hamm, which said it is prepared to increase capital spending if U.S. crude reaches the low- to mid-$40s range, allowing it to boost 2017 production by more than 10 percent, chief financial official John Hart said last week.
Then there is rival Whiting Petroleum which may have stopped fracking new wells, added it but would “consider completing some of these wells” if oil reached $40 to $45 a barrel, Chairman and CEO Jim Volker told analysts. Less than a year ago, when the company was still in spending mode, Volker said it might deploy more rigs if U.S. crude hit $70.”
EOG Chairman Bill Thomas did not say what price would spur EOG to boost output this year,but said it had a “premium inventory” of 3,200 well locations that can yield returns of 30 percent or more with oil at $40.
Apache Corp , forecasts its output will drop by as much as 11 percent this year, but said it would probably manage to match 2015 North American production if oil averaged $45 this year.
The reason for the plunging breakeven price? The same one we suggested on February 3: surging, rapid efficiency improvement which “have turned U.S. shale, initially seen by rivals as a marginal, high cost sector, into a major player – and a thorn in the side of big OPEC producers.”
To be sure, while many had expected low oil prices to curb output, virtually nobody had predicted that even a modest jump in oil ($40 is just $7 from here) would lead to a major portion of US shale going back on line.
The threat of a shale rebound is “putting a cap on oil prices,” said John Kilduff, partner at Again Capital LLC. “If there’s some bullish outlook for demand or the economy, they will try to get ahead of the curve and increase production even sooner.”
Which in turn will force the Saudis to immediately retaliate, breach all amusing “production freezes”, and double down their efforts to crush shale.
In fact, some producers have already began hedging future production, with prices for 2017 oil trading at near $45 a barrel, which could put a floor under any future production cuts.
Another risk factor for all those hoping the modest rebound in oil will persist is the record backlog of wells that have already been drilled but wait to get fractured to keep oil trapped in shale rocks flowing. There were 945 such wells in North Dakota compared to 585 in mid-2014, when prices peaked, according to the latest available data from the Department of Mineral Resources. Their numbers are growing as firms like Whiting keep drilling, but hold off with fracking.
Their latest comments highlight the industry’s remarkable resilience, but also serve as a warning to rivals and traders: a retreat in U.S. oil production that would help ease global oversupply and let prices recover may prove shorter than some may have expected.
Our observation three weeks ago was practically identical: since Saudi Arabia had expected that its FX reserve outflow would last only temporarily using $40-50 breakevens, it will have to sell many more US reserves (either TSYs or stocks) to fund the cash shortfall which will persist for far longer until oil catches down to the lowest cost US producers.
What this means is that for the Saudis to declare victory they will have to unleash a sharp downward oil spike that lasts long to put as many marginal producers out of business as possible.
As we said: “In short: the oil price war is about to enter its far more vicious, and far more lethal phase, and while it is unclear who ultimately wins, whether it is Shale or the Saudis, the loser is clear: anyone who bought into bets of an imminent oil bounce.”
But the real punchline has nothing to do with breakeven prices and efficiency and everything to do with balance sheets, because if and when the mass default wave finally hits and hundreds of U.S. corporations undergo debt-for-equity exchanges in which the bondholders end up with the equity keys, then the all-in production costs (AIPCs) will be drastically cut even lower as there will be no interest expense left to cover with operational cash flow proceeds.
As such, the stunning outcome may well be one in which U.S. shale turns Saudi’s “marginal producer” war on its head, and unleashes a massive oversupply spike, one which slowly at first then very fast, leads to the Saudi exhaustion of its FX reserves, until it is Saudi Arabia which itself is pushed out of the low-cost production bracket and is instead forced to deal with far less palatable outcomes such as social insurrection and revolution, as its already precarious welfare state fights for survival in a world in which government oil revenues have trickled to a halt.
What happens to the price of oil then is unclear, but what will need to happen before we get to that point is very clear: oil will have to trade far, far lower from its current price.
And even if it doesn’t, we now have the oil price ceiling bogey: any time a barrel of crude approaches $40, watch as the “marginal” producers do just that, and resume production on very short notice.
Mexico’s Oil Giant Posts Record $32 Billion Loss, Cuts Crude Price Forecast To $25
For a long time, the impact of the collapsing Petrodollar was concentrated almost entirely on African and Mid-east oil exporting nations, of which none has been impacted more perhaps that ground zero itself, Saudi Arabia, which has seen a record surge in its budget deficit as a result of collapsing oil revenue – the result of its ongoing war with the U.S. oil and gas sector and low cost “marginal” producers around the globe. Then slowly, the commodity woes spread to supposedly unshakable, developet nations, such as Norway and Canada, both of which are currently troubled by the impact of plunging crude prices on state revenues and downstream budgets.
Today, another country exposed just how troubled its energy sector has become when Mexico’s largest, state-owned company, Petroleos Mexicanos also known as Pemex, announced not only its 13th consecutive quarterly loss amounting to $9.3 billion, 44% bigger than the previous year, as revenue tumbled by 28% to $15.8 billion, but also a gargantuan $32 billion annual loss and at the same time announced it would slash capex spending to preserve cash and optionality for a future which suddenly looks very bleak.
In a budget report issued today, Pemex also pledged to meet the government’s request that it trim its 2016 budget by 100 billion pesos ($5.5 billion). Pemex will cut as much as $3.6 billion in spending by delaying projects, including expensive offshore wells, Jose Antonio Gonzalez Anaya, the company’s CEO, said in a conference call with investors. Pemex will pursue partners for any future deepwater development, Gonzalez Anaya said.
The report follows an announcement by the state of Mexico to cut back on its lifeline to the troubled oil giant when on February 17 it said it plans to cut 100 billion pesos ($5.5 billion) from the oil giant’s budget in a move aimed at stemming the depreciation of the peso and limiting inflation in Latin America’s second-largest economy amid the slump in international crude prices.
As Bloomberg reports, Pemex lost about $32 billion in all of 2015 as oil prices plunged and the company’s crude output fell for an 11th straight year, according to a financial report released Monday. Pemex hasn’t recorded a profit since 2012. The company had more than $87 billion in debt at the conclusion of the third quarter and owes an estimated $7 billion to service providers.
“These adjustments do not weaken Pemex, they strengthen it,” Gonzalez Anaya said on the call, but that promise sounded hollow especially after the CEO also said on the call that while the company is not facing a solvency crisis, it is facing short-term financial difficulties, prompting some to wonder just what skeleton will come out of the closet if the oil price remains as low as it has been. He also added that the company is now looking for alternative ways to fund refining operations. It is unclear what the non-alternative way is but we assume it has to do with issuing more debt, an avenue which may be closed for the time being.
But the scariest news not only for Mexico’s largest company, but for the energy sector in general, was Pemex’ announcement that it was slashing its oil price forecast by 50% from $50 to $25/bbl…
… a price which if realized will mean that all those who have been buying energy ETFs in hopes ot timing the oil bottom will end up with another round of big, fat, oily donuts, because unlike Pemex no U.S. shale company has the explicit backing of the US government. At least not yet.
The Cushing Spillover “Domino Effect” Has Arrived
A little over a week ago, before we described the increasingly more perilous situation facing US refiners, we summarized the oversupply threat facing the biggest U.S. commercial hub located in Cushing, OK as follows:
“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).
It is this capacity that is currently being filled because if looking at today’s DOE breakdown, while PADD 2 saw inventories rise by 2.25 million barrels to a new record high 155 million, the Midwest storage hub at Cushing was up only 36,000 – a divergence which confirms that Cushing is now routinely denying storage requests, something we noted first two weeks ago.”
Today, we return to this so critical (if not now then certainly in the next few months) hub with a blog post by Genscape which looks at the troubling domino effect of an operationally full Cushing (and by extensions PADD2), and how this is starting to spillover into PADD3, aka the Gulf Coast storage, where (storage) things are about to go from bad to much worse.
Cushing, OK, Storage Domino Effect Sends USGC Stocks Higher
U.S. Gulf Coast storage inventories have increased nearly 7mn bbls so far in 2016, and could continue to build as market participants seek storage there as an alternative to Cushing, OK, where stocks are near maximum capacity.
As of February 19, 2016, Gulf Coast stocks, including those in Houston, Beaumont-Nederland, TX, and Corpus Christi, TX, reached near 75mn bbls, only 739,000 bbls shy of the record high level reached in October 2015. On January 5, 2016, Cushing inventories surpassed a previous record high level by 125,000 bbls.
Due to extensive storage expansion, capacity utilization at Gulf Coast storage locations was lower the week ending February 19, 2016 at 58 percent compared with capacity utilization during the October 2015 high. At that time utilization was 62 percent. The inventory peak in October 2015 also followed a record-high at Cushing.
The 2015 stock high at Cushing, set April 14, was followed by inventory builds in the Gulf Coast and West Texas region. Of the Gulf Coast-monitored storage locations, stocks at Beaumont-Nederland were the first to hit a record high the week ending September 25, 2015, and other terminals followed.
Beaumont-Nederland inventories were also the first to hit record levels after Cushing inventories surpassed the previous high on January 5, 2016. Similar builds are likely to occur in other Gulf Coast storage locations, as they did in late 2015.
Lower waterborne crude loadings have also contributed to the recent increase in Gulf Coast stocks. As of February 19, 2016, Gulf Coast domestic waterborne loading volumes were 34 percent lower than the beginning of the year and 36 percent lower than 2015 average loading volumes. Additionally, less loadings have left the Gulf Coast. As of February 19, 2016, 80 percent of loadings were destined for other Gulf Coast ports, compared to 42 percent for the week ending January 1, 2016.
Since the crude export ban was lifted in December 2015, a handful of waterborne shipments have shipped from the Gulf Coast for destinations in Europe. However, these shipments are being displaced from preexisting destinations, such as refinery markets in eastern Canada. Therefore, total outgoing waterborne volumes from the Gulf Coast has not significantly increased since the ban was lifted.
The Cushing Spillover “Domino Effect” Has Arrived
Portuguese 10 year bond yield: 2.99% down 9 in basis points from FRIDAY (and the European stock market rises???)
Gold Leaps, Stocks Sleep As February Bounce Burns Out
So much excitment but by the end of the month…
Some high-/low-lights for February…
- China’s Shenzhen Composite Down 28.8% in 2 months – biggest drop since July 1994
- Dow Transports Up 6.75% in Feb – best month since Jan 2013
- Financial Stocks Down 2.3% in Feb – 3rd loss in a row for first time since 2011
- FANGs Down 4.5% in Feb – biggest drop since March 2014
- 10Y Treasury Yield Down 54bps in 2 months – biggest absolute drop since May 2012
- Treasury Curve (2s10s) Down 17% in Feb – 4th flattening in a row, biggest drop since Jan 2015 to Nov 2007 lows
- Gold Up 10.8% in Feb – best month since Jan 2012 (best 2 months since Aug 2011)
- Crude Oil (April WTI) Down 4.2% in Feb – 4th loss in a row for first time since Dec 2014
- USDJPY Down 7% in Feb – biggest monthly collapse since October 2008
- GBPUSD Down 9.8% in 4 months – biggest plunge since Dec 08 to lowest since Aug 1985
We’re gonna need another RRR cut…
S&P 1940.25 was all that mattered today (the line between a red or green close for Feb)
On the day, we reoundtripped from early exuberance on terrible data… NOT off the lows…
Leaving stocks practically unchanged (Nasdaq underperforming with The Dow eking out a small gain) except for Trannies’ huge surge…
Financials and Energy were among the weakest performers today with Utilities the only sector green on the day. But on the month Materials (QE hope?) dramatically outperformed as Energy and Financials slumped…
While financials ended the month lower (3rd month in a row for the first time since 2011), they rallied higher off the Dimon Bottom, decoupling again from yield curve reality…
FANGs bounce in the second half of Feb but only FB remains green for 2016…
VIX bounced to the tick off the 200DMA…
Treasury yields fell on the day (with notable bull flattening) but on the month, 2Y is basically unchanged as the out-ruve has plunged 12-20bps… Feb’s close at 1.74% is the lowest monthly close since Jan 2015
The USDollar Index ended the day unchanged (as JPY strength offset EUR weaknes)…
As despite rallying for almost 3 weeks, the USD ended -1.4% on the month…
As USDJPY implodes…
And Cable dropped for the 4th month in a row to its lowest close since Aug 1985…
Commodities all gained on the day (led by another rampfest in crude)…
But on the month Gold was the biggest winner (diverging from silver in recent weeks) with crude lower…
Just utter idiocy as algos ‘banged the close’ on NYMEX…
But gold completed its Golden cross into month-end…
wow!! this is a big move: the all important Chicago PMI crashes from 55.6 down to 47.6 (contractionary)/as employment crashes to 7 yr lows:
(courtesy zero hedge)
Chicago PMI Collapses From ‘Mysterious’ January Bounce As Employment Crashes To 7 Year Lows
Following the biggest beat on record in January jumping to 55.6, Chicago PMI collapsed in February to a stunning 47.6 – below the lowest estimate from economists. The entire report is a disaster with New orders tumbling, production sharply lower, and employment contracting for the 5th month in a row – to its lowest since March 2009. As one respondent warned, business was just “limping along at the moment with little promise in sight.”
From one-year high “HOPE” to near 7 year low “NOPE”…
As MNI reports,
Business was just “limping along at the moment with little promise in sight”, one purchaser commented in the report.
Other purchasers commented that area business was stifled by state budget hold ups and a lack of an expansion in backlogs while job losses continued, especially among the 50+ and over workers.
This was a 3 standard deviation miss, below the lowest of 38 economist estimates…
Pending home sales plunge!!
(courtesy zero hedge)
Pending Home Sales Plunge Most In 2 Years; Soaring Prices Blamed
Following strength in existing home sales and weakness in new home sales, pending home sales greatly disappointed. Against expectations of a 0.5% jump, pending home sales tumbled 2.5% in January – the biggest drop since Dec 2013. This is the 9th monthly miss in a row. While the weather was blamed a little, NAR’s Larry Yun pins the absence of first-time buyers on high prices driven b y “cash buyers and investors.”
The 9th monthly miss in pending home sales with the biggest monthly drop since Dec 2013.
The regional breakdown shows the plunge was widespread:
The PHSI in the Northeast declined 3.2 percent to 94.5 in January, but is still 10.9 percent above a year ago. In the Midwest the index fell 4.9 percent to 101.1 in January, but is still 1.4 percent above January 2015.
Pending home sales in the South inched up 0.3 percent to an index of 121.1 in January but remain 1.3 percent lower than last January. The index in the West decreased 4.5 percent in January to 96.5, but is still 0.4 percent above a year ago.
As NAR explains,
The Pending Home Sales Index, a forward-looking indicator based on contract signings, declined 2.5 percent to 106.0 in January from an upwardly revised 108.7 in December but is still 1.4 percent above January 2015 (104.5). Although the index has increased year-over-year for 17 consecutive months, last month’s annual gain was the second smallest (September 2014 at 1.2 percent) during the timeframe.
Lawrence Yun, NAR chief economist, says a myriad of reasons likely contributed to January contract signings subsiding in most of the country. “While January’s blizzard possibly caused some of the pullback in the Northeast, the recent acceleration in home prices and minimal inventory throughout the country appears to be the primary obstacle holding back would-be buyers,” he said. “Additionally, some buyers could be waiting for a hike in listings come springtime.”
Existing-home sales increased last month and were considerably higher than the start of 20152, but price growth quickened to 8.2 percent – the largest annual gain since April 2015 (8.5 percent).
While the hope is that appreciating home values will start to entice more homeowners to sell,Yun says supply and affordability conditions won’t meaningfully improve until homebuilders start ramping up production – especially of homes at lower price points.
And do not expect first-time home-buyers rto save the ‘recovery’…
“First-time buyers in high demand areas continue to encounter instances where their offer is trumped by cash buyers and investors”
“Without a much-needed boost in new and existing-homes for sale in their price range, their path to homeownership will remain an uphill climb.“
The Dallas Mfg Fed index plunges to -31.9 as oil is certainly taking its toll in the lone star state:
(courtesy zero hedge)
Dallas Fed Hovers Near ‘Lehman’ Levels Despite Surge In Hope
The diversified “we’re not just oil” economy continues to collapse. Missing expectations for the 17th month of the last 20, Dallas Fed printed -31.9, now in contraction for 14 straight months. While New Orders, Capacity Utilization, Inventories, Prices Paid, Prices Received, Wages, Employment, Hours Worked and CapEx all fell, but future expectations “hope” rose notably from -24.0 to -2.1 (but obviously still a negative expectation).
The breakdown shows weakness across the baord…
We leave it to Dallas Fed respondents to describe reality…
“Last October we lost about 40% of our volume due to customer internal consolidations because of the weak economy”
“Don’t know if it is the weather, uncertainty created by the presidential election, or just a slowdown in the world economy, but things are definitely slowing down”
“The low oil price is helping our cost side, but the decrease in oil jobs is concerning”
“We cannot figure out why it is so slow right now, other than we are indirectly impacted by the downturn in energy. We are four months into our fiscal year and arebehind 21 percent compared with last year on incoming orders, and last fiscal year was a down year!“
Dallas Fed: the USA economy is in a freefall!
(courtesy Dallas Fed/zero hedge_
“We Are In A Recession”: Acording To These Dallas Fed Respondents The U.S. Economy Is In Freefall
For those interested in hearing some horror stories from ground zero of America’s recession, look no further than Texas, where the best recap of sentiment on the ground comes straight from the Dallas Fed respondents, who have not been this depressed since the Global Financial Crisis.
Here are some key examples, starting with the one that summarizes it best:
- “We are in a recession. Oil prices are a symptom, not the cause.“
- Last October we lost about 40 percent of our volume due to customer internal consolidations because of the weak economy. Most of the loss was due to product sourcing out of China. Our U.S.-based customer closed U.S. plants’ processing units and are buying from China sources, so it has no need for us to package its products for export around the globe. We have been granted new business that will come on board in March and April 2016. This will make up for some of the losses.
- Don’t know if it is the weather, uncertainty created by the presidential election, or just a slowdown in the world economy, but things are definitely slowing down. Volumes are down and new orders are quiet. Low energy prices are the saving grace keeping margins good.
Fabricated Metal Product Manufacturing
- The refinery turnaround season has helped with new orders, but the general level of capital goods orders and prospects has decreased significantly. The summer season is the slowest, and we are expecting a very depressed market prior to the fall refinery turnaround season.
- Our backlog has declined (50 percent less than the same time last year). We are receiving a very high volume of requests for proposals, but either are not winning them or the projects are on hold. Pricing to obtain any work has decreased for the benefit of the owner/contractor.
- We’re seeing an uptick in trade training facilities and have been asked to accommodate intern students. We are willing to do this on a grant basis. Previously, training young people has been totally out of our pocket. The precision machining trade has been suffering for years as baby boomers have been retiring and no one is available to fill their positions. Advances in the machine trade help to compensate some, but new blood is sorely needed.
- We are experiencing a severe downturn in our business, as the oil and gas exploration and production segment has significantly reduced their capital budgets for 2016 based on declines in the WTI price.
- Sales bottomed out in February after weakening in January from fourth-quarter volumes. Feedback from customers indicates slower business conditions and a cautionary tightening of inventory levels.A key customer is moving additional production to China and to a large vertically integrated U.S. supplier, adversely impacting our sales after the first quarter. Additional staff reductions will be required.
- We are in a recession. Oil prices are a symptom, not the cause.
- Our overall forecast is level; however, we should be on an increased path for volume and pressuring our manufacturing capacity. Due to the low price of oil, there is a direct impact on the overall forecast of increased sales and manufacturing. Other segments of industries such as aerospace and general manufacturing seem static. The end result is we believe the economy overall is not positive.
- Low commodity prices within the energy industry are brutal. Further rounds of headcount reductions are being planned now after multiple waves of reductions in 2015. Trying to plan cash flow in this environment is nearly impossible, as producers continue to cut activity and demand steeper and steeper discounts on products and services. Failure rate of companies in the energy industry will start to ramp up materially in 2016.
- Customers are becoming more cautious about investing in expansion than they were this time a year ago.
- There is continued weakness in oil- and gas-related equipment manufacturing. We anticipate improvement in the second half of the year, but no change in wages.
- It’s a tough time in the oil patch. We plan on cutting 20 percent of staff this month after cutting 25 percent a year ago. We are not sure how we can sustain our skill sets with these dramatic troughs.
Transportation Equipment Manufacturing
- Our business is heavily tied to the health of the Texas economy. Depending on the fallout from the energy sector, our six-month projections may turn negative. If we are able to quickly move into an emerging market, even if the broader Texas outlook turns negative, this may act as a mitigating factor for our business. The coming year does represent the least confidence we’ve had in knowing where conditions were heading since 2010.
- Our business is seasonal, and we generally see an uptick in the spring. With the relatively mild winter this year we may be seeing the spring uptick early. So we remain cautious about our usual spring surge.
Printing and Related Support Activities
- We made heavy investments in new equipment and new capabilities over the last three years, and finally the nationwide salesforce is feeding this plant new business opportunities at a rate I’ve not seen in my 10 years here. Plus our largest customer went out to bid for the umpteenth time and for the first time, all of the competitors raised prices, and a bunch of business came back our way. I am more optimistic about the future for this plant than I’ve been in a while.
- Qualified candidates for machine operator positions are very difficult to fill. The lack of workers is limiting production in this manufacturing business.
- We cannot figure out why it is so slow right now, other than we are indirectly impacted by the downturn in energy. We are four months into our fiscal year and are behind 21 percent compared with last year on incoming orders, and last fiscal year was a down year!
Source: Dallas Fed
Then we witnessed the collapse of the yield curve which should be a bell warning to S and P longs: a flattening of the curve always suggest a recession/depression starting!
(courtesy zero hedge)
Treasury Yield Curve Collapses To Flattest Since Nov 2007
With the short-end underperforming today, the US Treasury yield curve is flattening once again. The spread between 2Y and 10Y yields has plunged to 93bps today – the lowest level since November 2007 – suggesting US financials have not seen the wost of it yet…
Which sends a long-term warning for US financials…
“The GOP Is On The Verge Of A Meltdown”: Senior Republicans Threaten To Vote For Hillary
With Donald Trump set for a yuuge victory in tomorrow’s Super Tuesday slugfest –oddsmakers see 80% chance of Trump being the nominee – tensions are mounting dramatically within the Republican establishment. As The FT reports, many mainstream Republicans believe Mr Trump would struggle to beat Hillary Clinton and are urgently rallying around their man Rubio with some senior Republicans saying privately that they might consider voting for Mrs Clinton if Mr Trump were to end up as their party nominee as one conservative commentator exclaimed “we are on the verge of a real meltdown in the Republican party.”
Trump’s lead in the polls over his GOP nominee ‘peers’ continues to grow…
As The FT reports, while Mr Rubio and Mr Trump ramp up their attacks on each other ahead of the March 1 primaries, Republican grandees and lawmakers are turning to the Florida senator as they become increasingly worried that the property tycoon could lock up the GOP presidential nomination within three weeks.
They fear that a victory for Mr Trump could fatally fracture the party and prevent them from winning the White House in November.
Many mainstream Republicans believe Mr Trump would struggle to beat Hillary Clinton, the clear Democratic frontrunner after her resounding victory over Bernie Sanders in South Carolina on Saturday, given the comments he has made about Hispanics, Muslims, women, disabled people and people who have criticised his campaign.
But, as the following chart shows, it’s far too close to call…
The FT goes on to note that Mr Trump on Sunday issued a thinly-veiled warning that he would consider running as an independent.
“The Republican Establishment has been pushing for lightweight Senator Marco Rubio to say anything to “hit” Trump. I signed the pledge-careful,” he tweeted, a reference to a pledge that all candidates signed to back the party’s eventual nominee.
As panic is setting in within The GOP…
“We are on the verge of a real meltdown in the Republican party,” Hugh Hewitt, the influential conservative radio talk-show host told ABC television on Sunday.
Some senior Republicans have said privately that they might consider voting for Mrs Clinton if Mr Trump were to end up as their party nominee. “You’ll see a lot of Republicans do that,” Christine Whitman, the former New Jersey governor who previously compared Mr Trump to Hitler, told the New Jersey Star-Ledger.
“We don’t want to. But I know I won’t vote for Trump.”
But none other than Rupert Murdoch chimed in at the craziness and infighting…
And now the neocons are declaring war on Trump (as The Intercept notes)…
Donald Trump’s runaway success in the GOP primaries so far is setting off alarm bells among neoconservatives who are worried he will not pursue the same bellicose foreign policy that has dominated Republican thinking for decades.
Neoconservative historian Robert Kagan — one of the prime intellectual backers of the Iraq war and an advocate for Syrian intervention — announced in the Washington Post last week that if Trump secures the nomination “the only choice will be to vote for Hillary Clinton.”
Max Boot, an unrepentant supporter of the Iraq war, wrote in the Weekly Standard that a “Trump presidency would represent the death knell of America as a great power,” citing, among other things, Trump’s objection to a large American troop presence in South Korea.
Trump has done much to trigger the scorn of neocon pundits. Hedenounced the Iraq war as a mistake based on Bush administration lies, just prior to scoring a sizable victory in the South Carolina GOP primary. In last week’s contentious GOP presidential debate, he defended the concept of neutrality in the Israeli-Palestinian conflict, which is utterly taboo on the neocon right. “It serves no purpose to say you have a good guy and a bad guy,” he said, pledging to take a neutral position in negotiating peace.
With Trump’s ascendancy, it’s possible that the parties will re-orient their views on war and peace, with Trump moving the GOP to a more dovish direction and Clinton moving the Democrats towards greater support for war.
This Is How The Great CLO 2.0 Collapse Will Play Out
Supply all but vanished in the wake of the crisis but staged a comeback starting in 2012 and by 2014, issuance was running at a $125 billion per year clip. As we noted last week, that’s roughly the equivalent of how much auto loan-backed paper came to market last year.
The problem is that stress on US O&G occasioned by the Saudi’s quest to bankrupt America’s oil patch is contributing to what certainly looks like a HY meltdown and that, in turn, has very real consequences for CLO collateral pools. In fact, 1.4% of assets held by US CLOs have either been downgraded or placed on credit watch negative this year, according to S&P.
New issue spreads are rising, issuance is collapsing, and both S&P and Moody’s recently downgraded several CLO 2.0 tranches for the first time ever.
Unless you think the acute stress in the HY market is set to abate – and trust us, it’s not – then you can bet that things are about to get very ugly, very quickly at least for junior CLO tranches.
For those curious to know how this debacle plays out, history offers a useful guide. As Morgan Stanley notes, first come the downgrades, then come the over collateralization triggers, and it’s all downhill from there.
“From late 2007, CLO equity investors suffered from a sharp decline in loan prices followed by a rapid increase of asset downgrades. The number of US CLOs failing junior OC triggers climbed and led to an increasing number of deals missing payments to equity tranches,” the bank wrote, in a note out Friday. “The proportion of deals cutting off payments to equity tranches peaked in 2Q 2009, right after the bottoming of loan prices and the peak of loan downgrades in 1Q 2009.”
This dynamic (i.e. declining loan prices, downgrades, and missed payments in the equity tranches) is likely to repeat itself this time around. Have a look at the following, which shows that just as the preponderance of CCC+ loans peaked, things quickly went to pieces and didn’t recover for years.
Here’s Morgan on where we stand and where we’re headed if history is any guide:
A decline in loan prices leading to a pickup in asset downgrades has already happened in the current US credit cycle, just in a more stretched fashion. US leveraged loans started a long selloff journey from 3Q 2014, when average BB/B loans bids were at 99.41 and average CCC loan index bids were at 97.23. By 4Q 2015, average bids of BB/B loans were at 95.30 and the average bids of CCC loans plunged to 80.28. About one year after loans started to sell off, in 4Q 2015, the downgrade/upgrade ratio of US loans started to increase to significantly above 1 and is currently standing at 2.29.
It is likely that US CLOs’ OC cushion will erode and/or breach the junior OC test as downgrades in loans accumulate. In our recent report, A CLOser Look at Asset Downgrades, January 29, 2016 , we introduced a framework to estimate the impact of loan issuers’ one-year rating migration on CLOs. Assuming that excess CCC assets in a CLO portfolio are carried at 60% of par value, and that defaulted assets are carried at 50% of par value, our framework projects that on average the junior OC cushion of US CLO 2.0 deals with a reinvestment period ending in 2017 or later will decline by 1.61% over the next 12 months, and 6.8% of these deals are projected to fail the junior-most OC test in 12 months.
As Morgan goes on to note, CLO tranche spreads generally lag movements in the underlying bonds:
“In the current US credit cycle, we have already observed considerable weakness in CLOs after loans started to sell off in later 2014,” Morgan observes. “The spreads of US CLO 2.0s BB and single-B (which are rare in CLO 1.0s) widened significantly in October 2014 as loan prices first started to fall, with the BB/B loan index bid starting to drop from par in March 2014. Following suit, US CLO new issue spreads widened. From September to October 2014, they moved from an average of 650bp to 700bp for BBs and from 775bp to 830bp for single-Bs.While in the first few months of 2015 there was a short rally in loans and CLOs, CLO mezzanine tranches capitulated quickly to the second, deeper dip in loan prices in 2H2015.”
So how bad are things going to get you ask? Well, probably really bad – to put it colloquially. “Both loans and CLOs have had severe peak-to-trough price losses and strong rebounds. Putting these into context, the peak-to-trough price decline of the BB/B US loan index was 38 points from par, and the peak-to- trough price declines of US CLO single-A’s, BBB’s, BB’s were 71.4 points (by 88%), 71 points (by 92%), and 64.9 points (by 96%) respectively,” Morgan warns, summing things up.
But for those who are inclined to take a glass-half-full approach (and that’s obviously us), the bright side is that CLO spreads will recover faster than the underlying loans: “…the glass-half- full view is that in percentage terms, the price recovery in CLO junior mezzanine tranches out of the credit cycle was asymmetrically higher than that of loan prices.”
So there you go BTFD-ers. If you can manage to pick a bottom in bad loan performance you can get an asymmetric risk-reward opportunity in CLO junior mezz. What could go wrong?
In any event, we’ll close with an amusing compare and contrast exercise.
Morgan Stanley, February 9: “We reiterate our view that the levels of distress in the US market may create ‘option-like’ payoffs in CLO equity in the secondary market, especially in deals by managers who are better ‘credit pickers'”.
Morgan Stanley, February 26: “If the current US credit cycle lasts longer than the 2008-09 cycle, we think more vintages of US CLOs are likely to miss payments to equity tranches, and it may take longer for managers to cure the failed coverage tests.”
Valeant Bond Price Pukes As Moody’s Threatens Downgrade Over Weak Performance
With CDS markets implying around a 40% probability of default, Moody’s has issued awarning over Valeant’s deleveraging prospects (and ability to deliver sustainable growth) putting $31 billion of biotech debt on watch for downgrade. VRX bonds are down dramatically on the day.. not the forst day back at work Pearson was hoping for.
As Moody’s writes, this rating action reflects concerns that Valeant’s underlying operating performance is weaker than Moody’s previous expectations, potentially impeding the company’s deleveraging plans, the agency said.
Valeant’s Ba3 Corporate Family Rating (under review for downgrade) reflects its good scale in the global pharmaceutical industry with annual revenue above $10 billion, its strong diversity, its high profit margins, and its good cash flow. The ratings are supported by low exposure to patent cliffs, and growth from successful products like Jublia (antifungal) and Xifaxan for irritable bowel syndrome. In addition, the ratings are supported by management’s commitment to reduce debt/EBITDA, using excess cash flow for debt repayment.
However, the ratings also reflect moderately high financial leverage (pro forma gross debt/EBITDA of 5.5x), and significant business challenges related to Valeant’s pricing strategy and aggressive acquisition appetite.
Valeant is confronting significant scrutiny on its pricing practices, including those on products acquired through acquisitions, and uncertainty related to government investigations. In late 2015, Valeant announced it was terminating its relationship with specialty pharmacy distributor Philidor, and Valeant is transitioning to a new distribution arrangement with Walgreens.
Company’s CFR Ba3 on review for downgrade affecting about $31 billion of rated debt
Bonds are reacting… 2025s down over 2.5pts on the day…
Over the weekend, our friend John Gavin at Probes Reporter revealed something disturbing to Valeant longs, namely that “New Data Now Confirms Valeant’s Undisclosed SEC Investigation.” This is what the report said:
Sunday Special UPDATE: Last week, on 23-Feb-2016, we published a report warning of the potential for a new and undisclosed SEC probe of Valeant. In a letter dated 22-Feb-2016, and just received by us on Saturday via US Mail, the SEC has now confirmed Valeant’s involvement in on-going enforcement proceedings that remain undisclosed as of this date. All we know about the SEC probe at this time is that it somehow pertains to the conduct, transactions, and/or disclosures of Valeant Pharmaceuticals.
The SEC’s letter now confirming on-going enforcement proceedings at Valeant has the same date as the press release put out by Valeant last week in which the company announced a restatement and delayed filings. (See, “Valeant Ad Hoc Committee has Made Substantial Progress in Its Review of Philidor and Related Accounting Matters”.) Despite the same date, the company remained silent on any new SEC investigation.
Updated Analysis and Opinion: We remain convinced that the now-confirmed SEC investigation of Valeant likely started last fall and absolutely should have been disclosed by now. Management may have their [strained] rationale for having not disclosed, but that matters little. The continued silence raises troubling questions about the overall quality of Valeant’s disclosures and the integrity of the management team that produces them
As it turns out, Gavin was right, and moments ago Valeant admitted as much:
- VALEANT SAYS IT IS UNDER INVESTIGATION BY SEC
As Bloomberg adds, the Probe said to be separate from Salix investigation, Valeant spokeswoman Laurie Little comments in probe.
Whatever the probe may be, the company’s few remaining shareholders – warned repeatedly that there is never more than just one cockroach – decided to get the hell out, and sent the stock plunged by as much as 20% to fresh multi-year lows.
More notably, Bill Ackman who is long 21.6 million shares, just lost over $200 million in an instant once the stock crashed by over $10 once the headline hit (in addition to all the other losses suffered by Valeant earlier today).
One wonders just how much more pain Pershing Square’s LPs can suffer before they send Ackman that final redemption request. Pershing Square reveals its latest weekly performance report tomorrow night. As of this moment we expect nothing less than a 25% drop.
We will leave you tonight with this terrific commentary on how there will be a physical run on cash. Why it has begun and why those who panic first wins:
(courtesy zero hedge)
The Global Run On Physical Cash Has Begun: Why It Pays To Panic First
Back in August 2012, when negative interest rates were still merely viewed as sheer monetary lunacy instead of pervasive global monetary reality that has pushed over $6 trillion in global bonds into negative yield territory, the NY Fed mused hypothetically about negative rates and wrote “Be Careful What You Wish For” saying that “if rates go negative, the U.S. Treasury Department’s Bureau of Engraving and Printing will likely be called upon to print a lot more currency as individuals and small businesses substitute cash for at least some of their bank balances.”
Well, maybe not… especially if physical currency is gradually phased out in favor of some digital currency “equivalent” as so many “erudite economists” have suggested recently, for the simple reason that in a world of negative rates, physical currency – just like physical gold – provides a convenient loophole to the financial repression of keeping one’s savings in digital format in a bank where the savings are taxed at -0.1%, or -1% or -10% per year by a central bank (and government) both of which hope to force consumers to spend instead of save.
For now cash is still legal, and NIRP – while a reality for the banks – has yet to be fully passed on to depositors.
The bigger problem is that in all countries that have launched NIRP, instead of forcing spending precisely the opposite has happened: as we showed last October, when Bank of America looked at savings patterns in European nations with NIRP, instead of facilitating spending, what has happened is precisely the opposite: “as the BIS have highlighted, ultra-low rates may perversely be driving a greater propensity for consumers to save as retirement income becomes more uncertain.”
Call it another massive error on behalf of Keynesian central planners who once again fail to appreciate the nuances of the common sense and the liquidity preference of ordinary consumers.
However, just because negative rates have not been passed on to savers yet or just because cash still has not been made illegal, that doesn’t mean it won’t be.
The question at this point is twofold: what happens after the savings of ordinary depositors in the bank officially taxed and/or cash becomes phased out, and more importantly, what happens just before.
In other words, will there be a run on physical cash?
The truth is that if society panics and there is a full blown rush out of existing electronic bank deposits and into physical currency to avoid negative rate taxation, only those who panic first will be safe. Why? Because of the “magic” of fractional reserve banking – there is simply not enough physical currency in circulation to satisfy all savers’ claims.
Here is HSBC’s Steven Major trying to explain the problem:
Based on the evidence so far, households have not rushed to withdraw cash and put it into a safe or, more significantly, pay for someone else to store it for them. This is because retail deposit rates have stayed at or above zero as banks have opted to not pass the lower market rates on.
The assumption that bank deposits can be rapidly converted into cash does not hold up, in our opinion. If everybody wanted to take their cash out of the bank at the same time, the system would soon run out as there are simply not enough notes in circulation. It would take a considerable time to print the currency needed to meet the demand. A central bank could enforce a negative rate for a considerable period of time under these conditions. For example, in the US, even if the production rate is doubled – and assuming the pace of retirement of old notes is unchanged and there is demand for USD3trn of new notes – printing would take 20-years.
To explain this, consider the demand for currency created if savers tried to remove cash from the US banking system. This demand could total anything between USD2.5trn (of excess reserves) and USD4.5trn (the Fed’s total balance sheet). Currently there is USD1.5trn of currency in circulation and the total annual production had a face value USD149bn in 2014, suggesting the 20 years it would take to print the cash.
Currency in circulation is small compared to the potential demand in a negative rate environment. As an example, the Fed’s assets are three times the currency in circulation and the Riksbank’s nearly ten times (see Table 1), but production capacity is limited.
While largely correct, Major is wrong about two critical things.
First, when estimating the potential demand for physical currency in circulation, one has to take into consideration not only the amount of total Fed reserves (or its entire balance sheet) but the entire fractional reserve banking system, and specifically the amount of paperless deposits parked at banks in the form of demand, checking, and savings account, or in other words, all the core components of M2. Not only that, but one must also consider the threat by increasingly more economists that large denomination bills may be outlawed, first in Europe with the €500 bill and then in the US with the $100 bill.
What a ban of Ben ($100 bill) would imply is that the total notional value of US currency in circulation would plunge from $1.35 trillion in the most recent week, to just $271 billion once the total $1.08 trillion value of $100 bills is eliminated. Putting this in context, there are as of this moment, $11.1 trillion in various forms of savings parked at banks as summarized in the chart below.
For the sake of simplicity, this analysis ignores what would happen globally in a comparable scenario in which paper currency in other developed markets is likewise “curbed” in part or in whole. Recall that for NIRP to truly work, paper currency has to be substantially eliminated everywhere it is implemented. We will analyze the impact of a global rush into paper currency in a subsequent post.
Still, what the chart above shows is that if, and when, a run on physical cash begins, there will be roughly $1 dollar in physical to satisfy $10 dollars in savers’ claims, a ratio which drops to 20 cents of “deliverable” cash if the $100 bill is taken out of circulation.
* * *
The second, and far more critical error Major makes, is the assumption that “households have not rushed to withdraw cash and put it into a safe.” As we explained previously, while this may have been true for a long time since 2014 when the first cases of NIRP were unveiled, that is no longer the case. Recall from “Safes Sell Out In Japan, 1,000 Franc Note Demand Soars As NIRP Triggers Cash Hoarding”
Now that the cash ban calls have gotten sufficiently loud to be heard by the generally clueless masses and now that the likes of Jose Canseco are shouting about negative rates, savers are beginning to pull their money out of the banks.
“Look no further than Japan’s hardware stores for a worrying new sign that consumers are hoarding cash–the opposite of what the Bank of Japan had hoped when it recently introduced negative interest rates,” WSJ wrote this morning. “Signs are emerging of higher demand for safes—a place where the interest rate on cash is always zero, no matter what the central bank does.”
“In response to negative interest rates, there are elderly people who’re thinking of keeping their money under a mattress,” one saleswoman at a Shimachu store in eastern Tokyo told The Journal, which also says at least one model costing $700 is sold out and won’t be available again for a month.
“According to the BOJ theory, they should have moved their funds into riskier but higher-earning assets. Instead, they moved into pure cash that earned nothing,” Richard Katz, author of The Oriental Economist newsletter wrote this month.
Meanwhile, in Switzerland, circulation of the 1,000 franc note soared 17% last year in the wake of the SNB’s move to NIRP.
“One consequence of the decision to cut the Swiss central bank’s deposit rate into negative territory in late 2014, and deepen the negative rate to -0.75% early last year, may have been to increase stockpiling,” WSJ reports. “Holding money in cash would protect it from the risk of Swiss banks at some point charging a broad range of customers to deposit money.”
“The connection between the increasing circulation of the big Swiss bill and the central bank policy is obvious,” Karsten Junius, chief economist at Bank J. Safra Sarasin said. Well yes, it is. Just as the connection between soaring safe sales in Japan and Haruhiko Kuroda’s NIRP push is readily apparent.
So once again, we see that when one experiments with policies that fly in the face of logic (like charging people to hold their money), there are very often unintended consqeuences and when you combine sluggish demand with NIRP in a monetary regime that still has physical banknotes, you get a run on cash. And on safes to store it in.
And then this from “Demand For Big Bills Soars As Japan Stuffs Safes With 10,000-Yen Notes“:
“Demand for 10,000-yen bills is steadily rising in Japan, even as the nation’s population falls and the use of credit cards and other forms of electronic payment increases,” Bloomberg writes. “While more cash might sound like a good thing, some economists are concerned that it shows Japanese households are squirreling away money at home instead of investing it or putting it into bank accounts — where it can make its way back into the financial system and be put to productive use.”
One safe maker who spoke to Bloomberg said safe shipments have doubled over the last six months. While part of the demand for safes is likely attributable to the country’s new “My Number” initiative, “the negative-rate policy is likely to intensify the preference of Japanese households to keep cash at home,” Hideo Kumano, an economist at Dai-ichi Life Research Institute said. “Overall, the trend of more cash at home reflects concern about the outlook for economy among households. This isn’t a good thing.”
No it isn’t, and not because of concern about the outlook for the Japanese economy: that had no chance long before Abe and Kuroda came on the scene, mostly as a result of Japan’s demographic spiral of doomed.
“It isn’t a good thing” because it confirms that the global run on physical cash – as much as the bankers of the world would like to keep it under wraps – has begun, and as the chart above shows, in a fractionally-reserved world in which there are $10 in savers’ claims for every $1 in physical currency, it quite literally pays to panic first, as the 9 out of 10 people who panic after the first one, will be stuck with nothing.
* * *
At the end of the day, what it all boils down to, is Exter’s inverted pyramid. As a reminder, this is how Elliott’s Paul Singer summarized the total notional value of all global asset classes:
- Over-the-Counter derivatives, notional amounts: $692 trillion at year-end 2014, per the BIS. For comparison, this figure was $72 trillion in 1998.
- Global real estate: $180 trillion, according to global real-estate services provider Savills.
- Global debt market, both securities and other forms of debt: $161 trillion at year-end 2014, per the Institute for International Finance’s Capital Markets Monitor. According to the Bank of International Settlements (BIS), debt securities make up $95 trillion of this total.
- Global equities: $64 trillion, per the World Federation of Exchanges.
- Global M1 money supply: $24 trillion at year-end 2013, per the World Bank.
- Gold: $6.8 trillion at year-end 2013, according to the Thompson Reuters GFMS Gold Survey.
Because once the banks’ physical cash runs out in a post-NIRP scramble, there is always – at least until it, too, is confiscated once again – gold.
Well that about does it for tonight
I will see you tomorrow night
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