Gold: $1,234.20 up $7.30 (comex closing time)
Silver 15.46 up 25 cents
In the access market 5:15 pm
Tomorrow is the FOMC report and we always see huge volatility on this report. The April report for March generally sees a lower plug for seasonal adjustments so we might see a better atmosphere for gold and silver. Also options expiry is over so we may have a good day in our precious metals.
Let us have a look at the data for today.
At the gold comex today, we had a poor delivery day, registering 58 notices for 5800 ounces on first notice day for gold,and for silver we had 2 notices for 10,000 oz for the active March delivery month.
Several months ago the comex had 303 tonnes of total gold. Today, the total inventory rests at 213.10 tonnes for a loss of 90 tonnes over that period.
In silver, the open interest ROSE by 1556 contracts UP to 176,801 despite the fact that the silver price was down 9 cents with respect to yesterday’s trading . In ounces, the OI is still represented by .884 billion oz or 126% of annual global silver production (ex Russia ex China).
In silver we had 2 notices served upon for 10,000 oz.
In gold, the total comex gold OI was obliterated as the complex fell by 10,057 contracts down to 470,384 contracts as the price of gold was DOWN $8.90 with yesterday’s trading.(at comex closing).
We had a small change in the GLD, a withdrawal of 1.19 tonnes from the GLD/ thus the inventory rests tonight at 819.28 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 tonight and thus the Inventory rests at 330.389 million oz.
First, here is an outline of what will be discussed tonight:
1. Today, we had the open interest in silver rose by 1556 contracts up to 176,801 despite the fact that the price of silver was DOWN 9 cents with yesterday’s trading.Investors flocked into silver on the dovish Yellen speech where she indicated that she is reticent to raise rates. The total OI for gold fell by a whopping 10057 contracts, which is the custom lately, to 470,384 contracts as gold was down $8.90 in price from yesterday’s level and we are now entering a new active delivery month.
2 a) Gold trading overnight, Goldcore
2b COT report/
3. ASIAN AFFAIRS
.i)Late WEDNESDAY night/ THURSDAY morning: Shanghai closed UP BY 3.27 POINTS OR 0.11% , / Hang Sang closed DOWN 26.69 POINTS OR 0.13% / The Nikkei closed DOWN 120.29 POINTS OR 0.71% . Australia’s all ordinaires was CLOSED UP 1.46%. Chinese yuan (ONSHORE) closed UP at 6.4570. Oil FELL to 38.22 dollars per barrel for WTI and 40.77 for Brent. Stocks in Europe ALL IN THE RED . Offshore yuan trades 6.4611 yuan to the dollar vs 6.4570 for onshore yuan. Japanese INDUSTRIAL PRODUCTION plunges the most in almost 5 years as negative interest rates ARE KILLING BUSINESS. China continues to send it’s positive response to Janet Yellen’s dovish message of keeping USA interest rates on hold. China, after March 20 had caused its yuan to fall badly in value after 3 USA Fed governors were trying to jawbone Yellen into raising rates. She won out against them. Now the shorts are crushed (see below/report on China)
REPORT ON JAPAN
REPORT ON CHINA
ii)POBC responds to Yellen by raising yuan value and slams shorters
iii)S and P revises China’s credit outlook to negative on growth as they have considerable concerns of its huge 35 trillion USA debt loans:
iv)Guosen Securities, China’s eighth largest investment bank has defaulted on a loan payment in Hong Kong. This is the first offshore default by a state owned firm. It now seems that China has changed her mind and will now allow firms to default. They have been paying off defaulting entities with new loans up to now.
v)The POBC created a subsidiary called Buttonwood and this entity is buying directly Chinese stocks and supporting their price
i)Tomorrow is the first day that the ECB will begin its purchases of corporate bonds. This will cause corporate bond yields to fall in similar fashion to sovereign yields as traders front run the ECB. Eventually, this will lead to a scarcity of corporate bonds and this will force the ECB to monetize junk bonds or just about anything it can get its hands on:
( zero hedge/ a must read.)
ii)For two months in a row, the EU experienced deflation of a drop of .1% in March after a drop of -.2% in February. If they removed food and energy, inflation was more modest. However it is still well below its 2% target and these bozos will continue with negative rates trying to drive up inflation:
iii)Huge protests in France today protesting the governments new labour reforms”
5.RUSSIAN AND MIDDLE EASTERN AFFAIRS
i)This should be interesting: Turkey arrests the shooter of that Russian parachuting out of his downed plane.
What is Erdogan up to? Is he trying to cozy up to Putin?
(courtesy zero hedge)
ii)The tourism industry brings in 32 billion USA annually into Sweden, and this does not include food, entertainment and transportation. This is now gone as there is now no more hotel beds to house the tourists as the refugee centers have taken them all.
Brazil now has a fiscal deficit of 10.7% of GDP. It has a primary deficit of 2.1% (primary deficit excludes interest payments). The country’s interest bill is a whopping 8.6% of GDP.NBC has sold 1 billion dollars worth of ads for the summer games. Good luck trying to get refunds from this bankrupt country:
( zero hedge)
i)Gold has best start in Q one in 42 years:
(courtesy zero hedge)
ii)North West Territorial Mint not refunding 100 to 200 customers of its orders for silver and gold:
(courtesy Chanel K5 News/Seattle)
iii)Copper continues to fall amid huge Chinese inventories of the metal:
This will put tremendous pressure of Glencore and friends.
( zero hedge)
The Canadian banks are totally under reserved for losses in oil and gas. This will be the next shoe to fall:
( zero hedge)
9. USA STORIES WHICH WILL INFLUENCE THE PRICE OF GOLD/SILVER
i)Huge increase in initial and continual jobless claims
(courtesy BLS/zero hedge)
ii)Chicago’s national mfg PMI bounces back to 53.6 but remains lower than January’s 55.5
iii)The market is now more confused than ever as dovish Chicago Fed Evans goes from hawkish to dovish and then back to hawkish in just two weeks.
iv)Bloomberg’s consumer comfort index falls again as the consumer is just not as exuberant as the Fed would like it to be
v)Now it is JPM to shave 1/2% off first half GDP
Let us head over to the comex:
The total gold comex open interest was obliterated down to 470,384 for a loss of 10,057 contracts as the price of gold was down $8.90 in price with respect to yesterday’s trading. We are now entering the active delivery month of April. 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. We certainly witnessed the first part and thus we will see how the month progresses on part 2. In the active delivery month of April, we witnessed it’s OI fall by a humongous 22,721 contracts down to 6,850 contracts, much higher than usual . The next non active contract month of May saw its OI rise by 24 contracts up to 2609. The estimated volume today (which is just comex sales during regular business hours of 8:20 until 1:30 pm est) was poor at 138,077. . The confirmed volume yesterday (which includes the volume during regular business hours + access market sales the previous day was fair at 239,258 contracts. The comex is not in backwardation. . The options for the comex was over on Tuesday. However we still have LBMA options and OTC options which expired today.
Today we had 58 notices filed for 5800 oz in gold.
April contract month:
INITIAL standings for APRIL
|Withdrawals from Dealers Inventory in oz||nil|
|Withdrawals from Customer Inventory in oz nil||39,993.635 oz
|Deposits to the Dealer Inventory in oz||1699.93 OZ
|Deposits to the Customer Inventory, in oz||39,993.635 oz
|No of oz served (contracts) today||58 contracts
|No of oz to be served (notices)||6792 contracts 679,200 oz/|
|Total monthly oz gold served (contracts) so far this month||58 contracts (5800 oz)|
|Total accumulative withdrawals of gold from the Dealers inventory this month||nil|
|Total accumulative withdrawal of gold from the Customer inventory this month||39,993.635 oz|
Today we had 1 dealer deposit
Into Brinks: 1699.930 oz
Total dealer deposits; 1699.93 oz
Today we had 0 dealer withdrawals:
total dealer withdrawals: nil oz
Today we had 1 customer deposit:
Into Scotia: 39,993.635 oz
total customer deposits: 39,993.635 oz
Today we had 1 customer withdrawals:
i) Out of HSBC: 39,993.635 oz (most likely a settlement of a delivery)
total customer withdrawals; 39,993.635 oz
Today we had 1 adjustment:
Out of Brinks: 100.00 oz of gold removed from the dealer and this landed into the customer of brinks This would be a delivery (.
APRIL INITIAL standings
|Withdrawals from Dealers Inventory||nil|
|Withdrawals from Customer Inventory||600,157.300 OZ. SCOTIA|
|Deposits to the Dealer Inventory||nil|
|Deposits to the Customer Inventory||6962.58 oz
|No of oz served today (contracts)||2 contracts 10,000 oz|
|No of oz to be served (notices)||234 contracts)
|Total monthly oz silver served (contracts)||2 contracts (10,000 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||600,157.300 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 1 customer deposits
i) Into Delaware: 6962.580 oz
total customer deposits: 6962.580 oz
We had 1 customer withdrawals:
i) Out of Scotia:
total customer withdrawals: 600,157.300 oz
we had 0 adjustments
And now the Gold inventory at the GLD
MARCH 31/a small withdrawal of 1.19 tonnes/inventory rests tonight at 819.28 tonnes
MARCH 30/no changes in inventory/inventory rests tonight at 820,47 tonnes
March 29/a withdrawal of 3.27 tonnes of gold from the GLD/Inventory rests at 820.47 tonnes. (No doubt we will see a rise in gold inventory with tomorrow’s reading)
March 28/no change in inventory at the GLD/Inventory rests at 823.74 tonnes
March 24.2016: a deposit of 2.08 tonnes of gold into its inventory/and this after a big drubbing these past two days??/Inventory rests at 823.74 tones
March 23/no changes at the GLD today despite the gold drubbing. Inventory rests at 821.66 tonnes
March 22./no changes in inventory at the GLD/Inventory rests at 821.66 tonnes
MARCH 21/another big deposit of 2.68 tonnes/inventory rests tonight at 821.66 tonnes
(and this was done with gold down $10.00 today!!)
March 18.I GIVE UP!! WITH GOLD DOWN TODAY, THE CROOKS OVER AT GLD ADDED ANOTHER IDENTICAL 11.89 TONNES OF PAPER GOLD INTO THEIR INVENTORY.
INVENTORY RESTS THIS WEEKEND AT 818.98 TONNES. IF I WAS A SHAREHOLDER OF THIS ENTITY I WOULD BE VERY WORRIED.
March 17/we had a whopper of a deposit tonight: 11.89 tonnes/with London in backwardation this is nothing but a paper addition/inventory rests tonight at 807.09 tonnes
March 16.2016:/we had a deposit of 2.09 + 2.97(last in the evening) tonnes of gold into the GLD/Inventory rests at 795.20 tonnes
March 15/ no changes in gold inventory at the GLD/Inventory rests at 790.14 tonnes
March 31.2016: inventory rests at 819.28 tonnes
And now your overnight trading in gold, WEDNESDAY MORNING and also physical stories that may interest you:
By Mark O’Byrne
‘$5 Million Coin’ Now On Sale – One of Largest, Purest and Rarest Gold Coins In World
GoldCore have begun the process of selling one of the largest, the purest and rarest gold coins in the world – the first ‘million dollar coin’ which at today’s market prices is valued at $5.36 million (USD), €4.85 million (EUR) and £3.8 million (GBP).
There are only five of these majestic bullion coins, weighing 100 kilos or 3,215 troy ounces each in existence today. They were first minted by The Royal Canadian Mint in 2007. One of these beautiful, ‘collector item’ and 99.999% pure gold coins has become available for sale and GoldCore have secured exclusive rights in the UK and Ireland for the sale of the rare coin.
The coins were minted by the world renowned Royal Canadian Mint, which operates world-class refineries, as well as minting Canadian bullion coin products including the popular Canadian Maple Leaf gold and silver bullion coins (0.9999 pure or 24 karat).
- Face Value: $1,000,000
- Composition: 99999 fine gold
- Weight (troy oz): 3,215
- Weight (kg): 100
- Coins in Existence Worldwide: 5
- Coins Currently for Sale Worldwide: 1
Her Majesty Queen Elizabeth II portrait on the obverse side is a work by celebrated Canadian portrait artist Susanna Blunt. The reverse features an elegant hand-polished maple leaf design by Royal Canadian Mint artist and engraver Stan Witten.
The 100 kg, 99.999% pure gold bullion coin with a $1 million legal tender face value was originally conceived as a unique showpiece. This incredible coin combines craftsmanship and artistry with the unprecedented technical achievement of 99.999% purity in gold bullion.
- Incredibly Rare Gold Coin
- Purest Gold in the World
- One of Largest Gold Coins in the World
- Own a Piece of History
There were only five made – all of which are in private hands. It is a collector’s item and commands a premium both for its gold bullion content but also for being incredibly rare.
A piece of history – the Royal Canadian Mint’s unique, pristine and beautiful ‘100 Kilo’ gold coin – one of the largest, the purest and rarest gold coins in the world.
Gold Prices (LBMA)
31 Mar: USD 1,233.60, EUR 1,085.50 and GBP 857.62 per ounce
30 Mar: USD 1,238.20, EUR 1,094.12 and GBP 860.23 per ounce
29 Mar: USD 1,216.45, EUR 1,087.71 and GBP 853.04 per ounce
24 Mar: USD 1,216.45, EUR 1,088.75 and GBP 861.89 per ounce
23 Mar: USD 1,232.20, EUR 1,101.76 and GBP 870.03 per ounce
Silver Prices (LBMA)
31 Mar: USD 15.38, EUR 13.52 and GBP 10.68 per ounce
30 Mar: USD 15.38, EUR 13.58 and GBP 10.68 per ounce
29 Mar: USD 15.06, EUR 13.44 and GBP 10.56 per ounce
24 Mar: USD 15.28, EUR 13.70 and GBP 10.82 per ounce
23 Mar: USD 15.58, EUR 13.92 and GBP 10.99 per ounce
Gold News and Commentary
World’s first ‘million dollar coin’ to go on sale (Independent)
Rare gold coin up for sale (RTE Business)
Irish gold brokers win rights to market sale of ‘million dollar coin’ (Irish Times)
Irish company is selling one of the world’s first million dollar coins (Newstalk)
Gold rises on dovish Fed; poised for best quarter in nearly 30 yrs (Reuters)
One Of Largest Gold Coin Goes On Sale (Business Plus)
Central banks ‘running out of time’ to reflate economies: Bill Gross (Independent)
Silver Bulls Are Buying-The-Dip As ETFs Gain Most Since 2013 (Zero Hedge)
Rickards: Gold’s Role as Diversification Better Understood Outside the West(WallStForMainSt via YouTube)
Read More Here
‘7 Real Risks To Your Gold Ownership’ – Must Read Gold Guide Here
Please share our website with friends, family and colleagues who you think may benefit from it.
Gold has best start in Q one in 42 years:
(courtesy zero hedge)
Gold Soars 16% In Q1 – Best Start To A Year In 42 Years
Gold’s 16.1% surge in Q1 2016 ias the best start to a year since 1974. Overall, this is thebest quarter since Q3 1986 and is the best performing major commodity of the year.
Gold rallied this year as it cemented its status as a store of value amid financial market turbulence and concern about the global economy, which led to speculation that the Federal Reserve would pause on tightening monetary policy in the U.S. Having seen BlackRock’s gold ETF halted due to inability to meet physical demand, it appears pet rocks and barbarous relics are ‘worth’ something after all.
Gold rallied this year as it cemented its status as a store of value amid financial market turbulence and concern about the global economy, which led to speculation that the Federal Reserve would pause on tightening monetary policy in the U.S.
A gauge of the U.S. currency headed for the biggest quarterly loss since 2010 after Fed Chair Janet Yellen said Tuesday the central bank will act “cautiously” as it looks to withdraw stimulus. Investor holdings in exchange-traded products have expanded by about 300 metric tons this quarter, the most since March 2009.
“The dovish remarks by Yellen earlier this week which reinforced the Fed’s stance to proceed gradually and cautiously with rate hikes this year have weighed on the U.S. dollar index, which is a positive for gold,”Vyanne Lai, an economist at National Australia Bank Ltd., said by e-mail. “Investment demand for gold appears to be holding up.”
The precious metal was the best performing asset in Q1…
Having gone through a “golden cross”…
Gold now has to breakout from its longer-term channel…
Finally for the skeptics that cannot comprehend why anyone would buy gold (instead of AAPL or AMZN or TWTR), consider this (from Kyle Bass):
“buying gold is just buying a put against the idiocy of the political cycle. It’s that simple.”
And from what we have seen the world’s political and economic leaders are about as “idiotic” as it gets.
North West Territorial Mint not refunding 100 to 200 customers of its orders for silver and gold:
(courtesy Chanel 5 News/Seattle)
FEDERAL WAY, WASH. – The owner of a large gold and silver mint based in Federal Way admits he owes money to 100 to 200 customers all over the country.
Ross Hansen, owner of Northwest Territorial Mint, says he has not delivered products or refunded money to those customers even when they demanded it.
Northwest Territorial Mint is one of the largest private gold and silver mints in the country.
One of those unhappy customers is Kelly Clifton, who runs a small ministry in Sultan.
Clifton ordered $6,000 worth of gold bullion in February from a small inheritance. A few weeks later, while still waiting for the gold, she says she asked for a refund. The company gave her half, she says.
“The rest of it, we were told, we may get or we may not get,” said Clifton.
Other customers have similar complaints.
Hansen told KING 5 he is not selling products or refunding money because he lost a $38 million defamation lawsuit in Nevada.
According to Hansen, a judge ordered him not to refund money.
Hansen is scheduled to appear in court in King County on Friday related to the case.
Northwest Territorial Mint has been in trouble with officials before. In 2008, the Washington Attorney General ordered the company to deliver products it sold.
(© 2016 KING)
Copper continues to fall amid huge Chinese inventories of the metal: More trouble for Glencore and friends.
(courtesy zero hedge)
Copper Continues To Crumble Amid Record China Inventories
Having bounced miraculously off the early January lows – despite no significant fundamental shift – scrambling all the weay up to its 200-day moving-average, copper prices have been tumbling for the last 7 days, the longest losing streak since early Jan. “Worries over Chinese demand is still weighing on the market,” warns one analyst and rightly so as, just like the oil complex, copper inventories (in China) just hit a record high.
Is fading now as stockpiles soar…
Rising supply of late-cycle commodities, including copper and aluminum, together with uncertain Chinese demand may continue to weigh on metal prices this year,according to Bloomberg Intelligence analyst Zhu Yi. Copper inventories tracked by the Shanghai Futures Exchange are at a record.
“Worries over Chinese demand is still weighing on the market,” Robin Bhar, an analyst at Societe Generale SA in London, said by phone.
Of course much of this ‘inventory’ is collateral for China’s crazy CCFDs enabling smaller players to get loans and stay alive considerably longer than they should. If any liquidation occurs of these zombies then prices will accelerate lower as CCFDs are unwound.
Your early THURSDAY morning currency, Asian stock market results, important USA/Asian currency crosses, gold/silver pricing overnight along with the price of oil Major stories overnight
1 Chinese yuan vs USA dollar/yuan up to 6.4570 / Shanghai bourse IN THE GREEN, UP 3.21 OR 0.11%/: / HANG SANG CLOSED down 26.69 or .13%
2 Nikkei closed down 120.29 or down 0.71% (STILL REACTING TOPOOR INDUSTRIAL PRODUCTION/POOR RETAIL SALES)
3. Europe stocks opened ALL in the RED /USA dollar index down to 94.51/Euro up to 1.1378
3b Japan 10 year bond yield: FALLS TO -.043% !!!!(Japan buying 100% of bond issuance)/Japanese yen vs usa cross now at 112.30
3c Nikkei now JUST BELOW 17,000
3d USA/Yen rate now well below the important 120 barrier this morning
3e WTI:: 38.44 and Brent: 40.32
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 RISES to 0.147% German bunds in negative yields from 8 years out
Greece sees its 2 year rate FALL to 9.75%/:
3j Greek 10 year bond yield FALL to : 8.63% (YIELD CURVE NOW INVERTED)
3k Gold at $1235.15/silver $15.40 (7:15 am est)
3l USA vs Russian rouble; (Russian rouble UP 1 AND 32/100 in roubles/dollar) 66.97
3m oil into the 38 dollar handle for WTI and 39 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. THIS MORNING THEY SIGNAL THEY MAY END NIRP
30 SNB (Swiss National Bank) still intervening again in the markets driving down the SF. It is not working: USA/SF this morning .9600 as the Swiss Franc is still rising against most currencies. Euro vs SF is 1.0931 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 RISES to + .147%
/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 1.82% early this morning. Thirty year rate at 2.64% /POLICY ERROR)
5. Details Ransquawk, Bloomberg, Deutsche bank/Jim Reid.
(courtesy Jim Reid/Bloomberg/Deutsche bank/zero hedge)
On Final Day Of Extremely Volatile Quarter, Futures Trade Modestly Lower
On the last day of an extremely volatile first quarter, following the latest torrid push higher in risk assets over the past two days following Yellen’s dovish Tuesday comments, today has seen a modest pull back in risk, whether because the market is massively overbought, because someone finally looked at what record multiple expansion that has taken place in Q1 as earnings are set to collapse by nearly 10%, or simply due to fears that tomorrow’s payrolls number will show an abnormal amount of minimum wage waiters and bartenders added.
Whatever the reason, stocks slipped and have unwound some of the March rebound that had the MSCI All-Country World Index on the brink of erasing its losses for 2016. Crude oil retreated with base metals. As Bloomberg notes, the Stoxx Europe 600 Index fell for the first time in three days, declining with shares in Tokyo and Hong Kong. Crude slid back to $38 a barrel after OPEC reported that March output rose to 32.52MM b/d from 32.44MM b/d in February, making a mockery of any “production freeze.”
As a reminder, this is where we stood as of last night: by the close of play yesterday the S&P 500 (+0.44%) had extended its winning streak to three consecutive sessions and in the process reached the highest level since December 29th. In fact yesterday’s move means the index has rallied over 14% off the intraday low midway through last month and is just 3% off the 2015 high set back in May.
S&P 500 futures fell 0.1 percent, suggesting US stocks could snap a three-day winning streak that pushed the measure to its highest level this year. Among the key events today, investors will look to today’s initial jobless claims report for indications of the health of the labor market before Friday’s key non-farm payroll data.
After beating U.S. equities last year by the most in a decade, European stocks are now trailing them by the most since 2003. This quarter, analysts have slashed profit estimates, now forecasting declines for the year. Fund managers have withdrawn money for seven straight weeks, the longest streak since 2014, according to a Bank of America Corp. note last week.
The strong EUR and Europe’s NIRP have also meant that while the broader market has not suffered too much, European banking stocks are a different matter entirely.
The MSCI Asia Pacific Index pared gains to 0.1 percent, and is poised for an 8.2 percent jump in March. The Topix index fell 0.7 percent in Tokyo.
As reported before, we close off the quarter with the Bloomberg Dollar Spot Index headed for its worst month since 2010 and Treasury yields were on course for their largest quarterly drop since 2012 after Federal Reserve Chair Janet Yellen reiterated that weaker global growth called for a gradual approach to raising rates. Copper and zinc pared their first quarterly increases since 2014, while gold headed for its biggest three-month gain since 1986.
European stocks are heading for their first monthly gain since November, although progress hasn’t been sufficient to avoid a third quarterly drop in four. Global equities are up more than 7 percent in March, their first increase since October, but are still down 0.3 percent for the first three months of 2016.
“A lot of the recent rebound has been down to the Fed back-tracking on rate hikes,” Mark Lister, head of private wealth research at Craigs Investment Partners in Wellington, which manages about $7.2 billion, said by phone. “We’ve seen a big rally but there are still some genuine worries out there. Markets had been overpricing some of the risks, whereas now they’re probably underpricing them.”
Futures now show no chance of the U.S. central bank altering monetary policy at its April meeting and only 20 percent odds of a rate increase in June.
- S&P 500 futures down 0.1% to 2054
- Stoxx Europe 600 down 0.8% to 338.3
- MSCI Asia Pacific up 0.2% to 129.02
- US 10Yr yield down 2 bps to 1.81%
- Dollar index down 0.2% to 94.67
- WTI oil futures down 1.2% to $37.87/bbl
- Gold spot up 0.7% to $1233.37/oz
Top Global News:
- Google Objects to Oracle’s $8.8 Billion Claim for Java Trial
- BlackRock Is Said to Plan About 400 Job Cuts as Growth Slows
- Mallinckrodt Said to Work With Bank to Seek Nuclear Unit Bidders
- Oil Declines as Rising U.S. Crude Stockpiles Expand Global Glut
- Chinese Stocks in Hong Kong Enter Bull Market; Shanghai Rebounds
- IBM Said to Buy Cloud Consulting Co. for About $200m: Re/code
- U.K. GDP Grows More Than Estimated; Current-Account Gap Widens
- German Unemployment Unchanged as Refugees Bolster Labor Force
- Bidder for Mideast KFC Operator Said to Get $1.5 Billion Funding
- Buffett’s Energy Unit Sees Tax Benefits Double to $1.8 Billion
- World’s Biggest Shipping Company Pours Billions Into Market Rout
- Twitter Insiders Pitched Standalone Messaging App Idea: Re/code
- FDA Eases Rules for Abortion Pill, Making Access Simpler
- Westinghouse Sees India Reactor Deal Signed in June: Reuters
- U.S. May Let Govts, Banks Use USD for Business With Iran: AP
- Eurazeo to Buy Brands From Mondelez for EU250m, Les Echos Says
- Tesla to unveil Model 3 at 8:30pm PT in Calif; Tesla Model 3 Electric Car Seen Getting 225 Miles Per Charge
- Medivation Said to Work With Advisers to Defend Against Takeover
Looking at regional markets, Asia stocks traded indecisive amid fiscal year-end and as the recent dovish-Fed euphoria began to wane. ASX 200 (+1.29%) took the impetus from Wall St.’s gains as commodity names outperformed led by strength in blue chips BHP Billiton and Rio Tinto, while Nikkei 225 (-0.7%) saw choppy trade with price-action subdued by a firmer JPY and fiscal-end rebalancing. Elsewhere, Shanghai Comp (+0.1 %) also fluctuated between gains and losses following several large named earnings including big-4 banks ICBC and Bank of China which both surpassed estimates but announced a reduction in dividend pay-outs amid sluggish profit growth, while the PBoC also upped their liquidity injection. S&P revised China sovereign rating outlook to AA- negative from AA- stable.
Asia Top News
- A $2 Billion Fund Says Good Riddance as ‘Dumb Money’ Flees Japan
- Barclays’s Japan Chief Nakai to Resign Later in Year, Memos Say
- Chief of Malaysia’s Embattled 1MDB Says My Job Is Done Here
- Najib’s Brother Disbursed Funds Before Malaysian Polls, WSJ Says
- Guosen Securities Unit Said in Default Event on Dim Sum Debt
- The Giant of Southeast Asian Markets Is Getting Trounced in IPOs
In Europe, Yellen inspired sentiment entered a pause mode today as market participants took an opportunity to book profits ahead of the release of the latest US jobs report due out on Friday. As a result, the more defensive sectors outperformed, with energy and materials names under pressure amid lower energy prices. S&P’s move to revise Chinese sovereign rating outlook to negative from stable and firmer than expected EU CPI data only underpinned the cautious sentiment, while an upward revision to UK GDP report also failed to result in any meaningful upside in EU based equity indices.
In FX, much to Draghi’s embarrassment, the stand-out performer this morning has been the EUR, with the lead spot rate pushing up towards the highs to suggest a move on the Feb highs at 1.1375. This is pushing the USD index back to the lows, after some early weakness in the commodity currencies suggested a modest turnaround was in the making — perhaps justified ahead of US payrolls Friday. EUR/GBP buying month end saw the cross rate through .7900, pushing Cable lows around 1.4325, but after some steady support at the lows, an upward revision in Q4 GDP gave the Pound a fresh bid. Strong offers ahead of 1.4400, while a resilient EUR (vs GBP) will always win out these days.
Any JPY strength on Japanese fiscal year end has yet to materialise, but yesterday’s highs remain intact, with USD/JPY holding steady above 112.00. EUR/JPY buoyant, and looking to better the 127.81 high from Tuesday. Limited impact from the S&P outlook change on China from stable to negative. CNH and CNY both at lows on the week.
Bloomberg’s dollar gauge, which tracks the greenback against 10 major peers, slipped 0.1 percent, for a fourth day of declines. The index has lost 3.9 percent this month, its steepest drop since September 2010.
“The dollar is overvalued, particularly against the major currencies, euro and yen,” said Steven Saywell, BNP Paribas SA’s global head of foreign-exchange strategy in London, in an interview on Bloomberg TV.
In commodities, West Texas Intermediate crude declined 1.3 percent to $37.83 a barrel, dropping for the fifth time in six days as the increase in U.S. stockpiles reinforced concern over a global glut in the commodity. Brent lost 0.5 percent to $39.07. Both are still heading for their first quarterly increases since 2015.Inventories expanded for a seventh week to 534.8 million barrels, according to a report from the Energy Information Administration Wednesday, while imports and production dropped. Ecuador and Venezuela will support a cut to output at a meeting between major exporters in Doha next month, Ecuador’s Oil Minister Carlos Pareja said in a post on the ministry’s Twitter account.
Gold for immediate delivery added 0.7 percent to $1,233.73 an ounce, after sliding 1.4 percent last session. Silver has managed to stay above the upward trendline on the daily chart maintaining its higher lows, currently above USD 15.24 with the next support level down at USD 15.06, while gold is still on course for its best quarter in 25 years due to safe-haven demand. Elsewhere, copper declined for a 5th consecutive day while iron ore prices fell over 1.5% alongside broad-based weakness across the commodities complex.
On the calendar today we get the Chicago PMI print for March (expected to improve over 3pts to 50.7) given the improvement in several regional PMI series, and of course ahead of tomorrow’s ISM manufacturing print. Away from this there’s more employment market data with last week’s initial jobless claims data. As well as the data, the latest Fedspeak is due to come from NY Fed President Dudley (due at 10pm BST), while Chicago Fed President Evans will speak again this afternoon (2.45pm BST).
Bulletin Headline Summary from RanSquawk and Bloomberg
- Caution prevailed ahead of NFP release due on Friday, with defensive sectors outperforming in early European trade
- Brexit concerns and month-end EUR/GBP demand failed to weigh on GBP, with GBP/USD advancing to 1.4400 level following better than expected UK GDP report
- Going forward, the focus will be on the release of the latest US Challenger Jobs and Chicago PM! reports ahead of NFP tomorrow
- Treasuries little changed, global equities drop and commodities mixed in overnight trading; today’s economic data includes jobless claims, ISM Milwaukee and Chicago PMI.
- Standard & Poor’s has cut the outlook for China’s credit rating to negative from stable, saying the nation’s economic rebalancing is likely to proceed more slowly than the ratings firm had expected. The nation’s credit rating is AA-
- The nation’s largest state-controlled lenders cut their dividend payouts for last year amid rising bad loans, underscoring what Bank of China Ltd.’s president described as a “new normal” of low profit growth for the lenders
- Euro-area inflation fell 0.1% from a year earlier after a 0.2% drop in February, in data released on the eve of the European Central Bank’s first day of expanded debt purchasing to fight deflation
- German joblessness was unchanged in March, snapping a run of five consecutive declines, in a sign that Europe’s largest economy may be struggling to absorb a wave of refugees
- Wall Street is used to getting the opportunity to influence bank rules before they are unveiled. Now financial firms are getting the chance to argue that a key capital requirement should be softened even after it was supposed to be finished
- Recession worries and central-bank stimulus in Europe and Japan have given fresh life to a three-decade-long rally in global debt. Bonds worldwide are off to the best annual start since at least 1996. They’ve earned about 3.2% this quarter and added $2.1 trillion of market value
- $4.7b IG credit priced yesterday, weekly volume to $15.8b, March $160.605b, YTD $454.855b; $5.225b HY priced yesterday, WTD 6 deals $7.8b, MTD 28 deals for $21.66b, YTD 53 deals for $36.52b
- Sovereign 10Y bond yields mixed; European and Asian equity markets lower; U.S. equity-index futures drop. WTI crude oil and copper drop, gold moves higher
DB’s Jim Reid concludes the overnight wrap
For the most part the past 24 hours or so markets have seen a continuation of the decent performance for risk assets ignited in the wake of Yellen’s cautious comments. Yesterday, despite the usually dovish Chicago Fed President Evans offering his view that he still expects two rate hikes this year, futures markets continued to push the probability of a tightening lower and we’re now down to just a 20% probability of a hike in June based on pricing this morning (from 38% pre-Yellen) and 54% by December (from 73%). With one eye on the other big event of the week – that being tomorrow’s payrolls number – yesterday’s ADP employment change reading was fairly supportive after printing a tad ahead of expectations at 200k (vs. 195k expected) which has the early chatter looking for a similar 2-handle NFP number.
By the close of play yesterday the S&P 500 (+0.44%) had extended its winning streak to three consecutive sessions and in the process reached the highest level since December 29th. In fact yesterday’s move means the index has rallied over 14% off the intraday low midway through last month and is in fact just 3% off the 2015 high set back in May. It was US credit indices which were the relative outperformer yesterday though with CDX IG eventually finishing 4bps tighter on the day with the index closing back in again on the YTD tights made earlier this month. Cash markets had a decent day too with US HY spreads finishing 8bps tighter. The US Dollar continues to struggle post Yellen and despite attempting to rebound on yesterday’s employment data (and Evans’ comments to some degree), the Dollar index still closed with a -0.34% loss to take its post-Yellen move lower to -1.14%. Emerging market currencies were the main beneficiary of that move while in rates markets 2y Treasury yields dipped another 3bps lower yesterday to 0.759% which means the bonds are now nearly 21bps lower in yield since the FOMC meeting of two weeks or so ago. The curve did however steepen with 10y and 30y yields up 2bps and 5bps respectively.
This morning, while trading has been a bit choppy the bulk of bourses have followed Wall Street’s lead and are posting gains. The CSI 300 (+0.32%), Shanghai Comp (+0.36%), Nikkei (+0.44%) and ASX (+1.35%) in particular are all currently up, while the Hang Seng (-0.17%) and Kospi (-0.55%) are lagging a bit. A leg lower for WTI (-1.23%) perhaps contributing to some of that. Asia credit is flat but the Aus iTraxx has rallied to the tune of nearly 4bps. Meanwhile, reports of further corporate bond defaults in China are also gaining some attention. On Tuesday Dongbei Special Steel announced that it had missed a principal and interest repayment, notable given its status as state-owned. This follows the news of a creditor committee being set up to help restructure Bohai Steel’s debt load, while this morning the FT is reporting that a unit of Guosen Securities (China’s 8th largest IB) is said to have technically defaulted on a HK traded-RMB bond. All this a reminder that default risk and idiosyncratic stories in China seems to be on the rise this year and the broader economic slowdown is certainly not helping what has been generally viewed as an overleveraged corporate sector in China.
Back to those comments from the Fed’s Evans yesterday. Despite mentioning that he expects the US economy to be strong enough to justify raising rates twice this year, Evans did come across as a little more cautious with regards to his views on inflation saying specifically that he was a ‘bit uneasy’ on hitting the 2% target. The Fed President also said that ‘it is too early to tell whether the recent firmer readings in the inflation data will last or prove to be temporary volatility and reverse in coming months’, while also signaling that is important for the Fed to take the recent decline in inflation expectations, as perceived by the market, seriously.
Playing catch up, European equities had a strong session yesterday with the Stoxx 600 in particular gaining +1.30% to trim further its YTD loss (which has now dipped under 7% although at one stage was as much as -17% on the year at the February lows). It was actually energy sensitive names which had driven much of that performance after Oil at one stage rallied close to 4% and to a shade under $40/bbl (boosted seemingly by the weaker USD). That move was completely eliminated come the close of play in the US however as the market digested more bearish US crude inventory numbers and its proving hard to ignore the fact that inventories are still near record highs. Interestingly Gold was in reversal mode yesterday after tumbling -1.38% which in turn has taken it into negative territory for the month. That said the precious metal is still on course to close out the quarter with a gain of 15% or so as things stand.
European credit indices had a decent session also with the iTraxx Crossover and Main closing 12bps and 4bps tighter respectively. The primary market in Europe is still yet to get going post the holiday break but one deal which caught the eye earlier this week was that of French corporate Sanofi who managed to get a 3-year bond deal away at a yield of just 5bps and a coupon of 0%. It’s clearly not the first zero-coupon bond we’ve seen but what’s telling is that in the past such zero-coupon bonds have typically priced with a large discount and so offering a more tempting yield. Clearly this is not the case here and perhaps won’t be the last such is the influence of the latest ECB measures (including of course buying corporate bonds). An incredible stat that stood out is Bloomberg reporting that about €14bn of corporate bonds are now trading with a negative yield.
Before we take a look at the day ahead, wrapping up the data yesterday in Europe the main release of note was a better than expected inflation report out of Germany. The March CPI number came in at +0.8% mom (vs. +0.6% expected) which had the effect of lifting the YoY rate up three-tenths to +0.3%. Much of the commentary suggesting that this helps support upside risks to today’s wider Euro area inflation report. With regards to the remainder of the data, the Euro area confidence indicators for this month were a bit of a mixed bag. The headline economic confidence reading fell 0.9pts to 103.0 (vs. 103.8 expected) which is the lowest print since February last year. Industrial confidence was little changed, services confidence dipped but the business climate indicator was a smidgen higher.
Taking a look at today’s calendar, this morning in Europe the early data comes from Germany where we will see the February retail sales numbers. This is quickly followed by the first print for the March CPI report in France, along with consumer spending numbers while Italy and Spain will also report their latest inflation numbers. The Euro area CPI report for March follows this where current expectations are for a modest one-tenth improvement in the headline rate to -0.1% yoy. In the UK we’ll get the final reading of Q4 GDP (expected to stay unchanged at +0.5% qoq) along with the February money and credit aggregate data. Turning to the US, expect there to be a fair bit of attention paid to the Chicago PMI print for March (expected to improve over 3pts to 50.7) given the improvement in several regional PMI series, and of course ahead of tomorrow’s ISM manufacturing print. Away from this there’s more employment market data with last week’s initial jobless claims data. As well as the data, the latest Fedspeak is due to come from NY Fed President Dudley
(due at 10pm BST), while Chicago Fed President Evans will speak again this afternoon (2.45pm BST).
i)Late WEDNESDAY night/ THURSDAY morning: Shanghai closed UP BY 3.27 POINTS OR 0.11% , / Hang Sang closed DOWN 26.69 POINTS OR 0.13% / The Nikkei closed DOWN 120.29 POINTS OR 0.71% . Australia’s all ordinaires was CLOSED UP 1.46%. Chinese yuan (ONSHORE) closed UP at 6.4570. Oil FELL to 38.22 dollars per barrel for WTI and 40.77 for Brent. Stocks in Europe ALL IN THE RED . Offshore yuan trades 6.4611 yuan to the dollar vs 6.4570 for onshore yuan. Japanese INDUSTRIAL PRODUCTION plunges the most in almost 5 years as negative interest rates ARE KILLING BUSINESS. China continues to send it’s positive response to Janet Yellen’s dovish message of keeping USA interest rates on hold. China, after March 20 had caused its yuan to fall badly in value after 3 USA Fed governors were trying to jawbone Yellen into raising rates. She won out against them. Now the shorts are crushed (see below/report on China)
FIRST: report on Japan
SECOND: report on China
POBC slams the shorters of yuan (like Kyle Bass et al)
(courtesy zero hedge)
PBOC Slams Yuan Shorts Again – Strengthens Currency Most Since 2005
It appears the messaging from The People’s Bank Of China to The Fed was heard loud and understood. Having exercised its will to weaken the Yuan (implying turmoil is possible), Janet Yellen delivered the dovish goods and so China ‘allowed’ the Yuan to rally back. In a double-whammy for everyone involved the biggest 3-day strengthening of the Yuan fix since 2005 also pushed Yuan forwards back to their richest relative to spot since Aug 2014– once again showing their might against the dastardly speculative shorts.
As we warned previously, it appeared a ‘message’ was being sent to The Fed via Yuan weakness – first ahead of The FOMC meeting and then, as several hawks got vocal, ahead of Janet’s speech. Her uber-dovishness was rewarded as China ‘allowed’ the Yuan to rise and thus the USDollar to weaken…
And since Janet delivered, PBOC has strengthened the Yuan Fix by the most since 2005!!
Crushing shorts as Yuan forwards collapse back to their ‘richest’ relative to spot since Aug 2014…
And just like Keyser Soze, they were gone. So while the old mantra of “Don’t fight The Fed” may apply to some, it most certainly does not apply to The PBOC…
S&P Revises China’s Credit Outlook To Negative On Growth, Debt Concerns – Full Text
Ripley’s believe it or not world continues. Earlier today, Hong Kong’s Hang Seng market entered a bull market, rising 20% from its February lows, just as Hong Kong retail sales plunged 20.6%, the bigest drop since 1999…
… and then moments ago, in a move that pushed the Chinese Yuan stronger at least initially, S&P revised its Chinese outlook to negative, saying the economic rebalancing is likely to proceed more slowly than had expected over next 5 years and warning about China’s debt load.
Among the report highlights:
- The economic and financial risks to the Chinese govt’s creditworthiness are gradually increasing and could lead to a downgrade this year or next
- Forecasts China’s economic growth over next 3 years will remain at or above 6% annually, but government and corporate leverage ratios are likely to deteriorate, and the investment rate could be well above what S&P calculates to be sustainable levels of 30%-35% of GDP
- These trends could weaken the Chinese economy’s resilience to shocks, limit the govt’s policy options, and increase the likelihood of a sharper decline in trend growth rate
- May downgrade if China looks to be increasing credit at a significantly faster rate than the nominal GDP growth in a bid to stabilize growth at or above 6.5%, such that the investment ratio is above 40%
- The negative outlook also partly reflects S&P’s opinion that the pace and depth of State Owned Enterprise reform may be insufficient to attenuate the risks of credit-fueled growth
- China’s monetary policy is largely credible and effective, as demonstrated by its track record of low inflation and its pursuit of financial sector reform
- The nation’s credit rating is AA- with a negative outlook, S&P said in a statement
S&P Revises China Outlook To Negative; Afrms ‘AA-/A-1+’ Rtgs
- Following China’s legislative meetings in March 2016, we believe the country’s reform agenda is on track.
- However, we are revising the rating outlook on China to negative from stable because economic rebalancing is likely to proceed more slowly than we had expected.
- We are also affirming our ‘AA-/A-1+’ sovereign credit ratings and ‘cnAAA/cnA-1+’ Greater China regional scale ratings on China.
On March 31, 2016, Standard & Poor’s Ratings Services revised the outlook on the People’s Republic of China to negative from stable. At the same time, we affirmed our ‘AA-‘ long-term and ‘A-1+’ short-term sovereign credit ratings on China. We also affirmed the ‘cnAAA’ long-term and ‘cnA-1+’ short-term Greater China regional scale ratings on China. Our transfer and convertibility risk assessment on China is ‘AA-‘.
The negative outlook reflects our view of gradually increasing economic and financial risks to the government’s creditworthiness, which could result in a downgrade this year or next.
A downgrade could ensue if we see a higher likelihood that China will seek to stabilize growth at or above 6.5% by increasing credit at a significantly faster rate than the nominal GDP growth, such that the investment ratio is above 40%. Such trends could weaken the Chinese economy’s resilience to shocks, limit the government’s policy options, and increase the likelihood of a sharper decline in the trend growth rate.
The ratings could stabilize at this level if the central government adopts policies to moderate credit growth at levels more in line with nominal GDP growth, accompanied by signs that rebalancing will progress more quickly than we currently expect. This could allow the investment ratio to come down to levels that we believe to be more sustainable.
We would also see a higher likelihood that credit metrics will stabilize at the current rating level if the government continues to implement reforms that lead to much greater reliance on market-based macroeconomic management tools. Better transparency, improved information availability, deeper liberalization of the financial market, and greater official use of renminbi for reserve management would support such reforms.
China Sees First Offshore Default By State-Owned Firm In Two Decades
“[It] contains exaggerations.”
That’s what Guosen Securities (China’s eighth-largest investment bank) had to say when asked about FT’s assertion that the investment bank’s Hong Kong affiliate has defaulted on a dim sum bond. Apparently, an affiliated SPV issued the debt back in 2014 and according to Bank of New York Mellon (the offering’s trustee), Guosen HK is in violation of some part of the bond’s keepwell agreement.
One of the provisions “is not in full force and effect, which constitutes an Event of Default”, reads a document seen by FT, who notes that this would mark “the first debt breach by a state-owned enterprise in China’s offshore market in nearly two decades.”
“The technical default by Guosen’s Hong Kong affiliate puts at risk a Rmb38m ($5.9m) coupon payment due April 24 on Rmb1.2bn in dim sum bonds sold in 2014,” FT continues. “Missing that payment would set a precedent for the offshore units of Chinese SOEs, whose creditors widely assume the onshore parent will always stand behind its affiliates.”
Needless to say, this comes at a particularly sensitive time. Defaults in China have been mounting over the past 12 months as the decelerating economy conspires with the country’s massive debt burden to push all but the healthiest companies towards the precipice. SOEs are especially problematic and how Beijing handles a sweeping effort to restructure insolvent state-owned firms will ultimately determine whether investors’ previously unshakable faith in China’s unwillingness to allow SOE defaults was misplaced.
“After years in which investors reliably assumed that China’s government would not permit any corporate default, missed payments have become more common in both the onshore and offshore bond markets, but SOE defaults remain rare,” FT goes on to note, before adding that “neither an SOE nor any Chinese financial institution has defaulted since the collapse of Guangdong International Trust and Investment in 1999.”
On a technical level at least, that appears to have changed this month.
“The keepwell deed says that the onshore parent company and the unit will undertake to have a consolidated net worth of at least $1 at all times and ‘have sufficient liquidity to ensure timely payment’ on any amounts payable on the securities, according to the offering circular,”Bloomberg wrote today.
Although keepwells on dim sum bonds were a notoriously shaky setup from the very beginning, investors still viewed the agreements as tantamount to guarantees – that, frankly, was “dim” dumb (if you will). “Given the strategic importance of the guarantor to the parent, we believe Guosen Securities (onshore) will try its best to ensure the guarantor’s (offshore) liquidity to service its outstanding bond and compliance to the bond’s terms and conditions,” Ross Lee, credit analyst at Bank of China Hong Kong Ltd., said in a report out earlier this week.
In any event, Guosen has released a statement that reads like any other denial you’d expect out of China when something bad happens. “Guosen Securities (Overseas) says the keepwell deed attached to the 1.2b yuan 6.4% bonds due 2017 continues to be in full force and effect.”
Or, as the CSRC said in January when asked about reports that then-chief Xiao Gang tried to resign:”this information does not conform to the facts.”
We’ll see, on April 24 when the coupon comes due, what the “facts” here really are. “As trustee, BNY Mellon has received a clarification notice from Guosen which has been distributed to bondholders,” BNY Mellon would later say. “That notice seeks to correct statements set out in earlier communications from Guosen.”
We can only hope that no one at Guosen decides to go the way of Dongbei Special Steel Group Chairman Yang Hua who hung himself just days before the company was set to miss a principal and interest payment.
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Bonus: Moody’s on dim sum keepwells, ca. 2014
Moody’s Investors Service says that the over $12 billion of bonds issued by the offshore subsidiaries of China-incorporated companies and supported by keepwell deeds require careful consideration on a case-by-case basis.
“Bonds with keepwell agreements used to enhance their credit quality carry different risks that need to be individually assessed because of their considerable structural complexity,” says Gary Lau, a Managing Director for Moody’s Corporate Finance Group.
“Keepwell deeds are not guarantees and are subject to much greater legal and regulatory uncertainty than compared to guarantees. In particular, capital control laws in China heighten the risk that timely payments will not be made, even if keepwell deeds exist,” adds Lau.
“As a result, a one-size-fits-all approach to analyzing such structures does not offer sufficient insights to risk.”
Moody’s analysis of keepwell agreements in China is contained in its just-released report titled “Chinese Corporates: FAQs on Credit-Support Structures in China Using Keepwell Agreements: An Update”.
“Treating all keepwell structures as having similar effect, for example, by automatically rating debt at or near the support provider’s rating is certainly a simpler approach than our careful analysis of each transaction,” says Lau.
“However, such an approach does not properly reflect the structural and other risks involved and therefore does not provide adequate insights to investors,” adds Lau.
“Consequently, our analysis focuses on understanding the standalone credit profile of the debt issuer, the benefits of the credit-support structure and the economic and other incentives of the support provider to ensure full and timely payment to bondholders if required.”
Nonetheless, Moody’s report says because keepwell agreements are an important signal of a parent’s willingness to provide support to its offshore subsidiary, the debt issuer’s rating is likely to be higher than it would be if its parent company did not provide a keepwell deed.
Moody’s has provided ratings to bonds supported by keepwell deeds from 11 China-related issuers, totaling $12.5 billion. Of the 11, 10 have been rated one notch below the ultimate parent and support provider .
“The Buttonwood SPV”: The Striking Details Of How China’s Central Bank Is Directly Buying Stocks
In the latest revelation of just how far China, and its central bank, are willing to go to prop up its ailing local stock market, on Thursday the official Shanghai Securities News reported that China’s foreign exchange regulator has bought mainland stocks worth over 27 billion yuan ($4.18 billion) via three low-profile investment firms it controls.
According to Reuters, Buttonwood Investment Platform Ltd, 100 percent owned by the State Administration of Foreign Exchange or SAFE (which in turn is directly controlled by the central bank, the People’s Bank Of China) and Buttonwood’s two fully-owned subsidiaries, have bought shares in a total of 13 listed companies, the newspaper reported, citing top 10 shareholder lists in the companies latest earnings reports.
The name of this special purpose entity refers to the Buttonwood Agreement, which took place on May 17, 1792, and started the New York Stock Exchange. This agreement was signed by 24 stockbrokers outside of 68 Wall Street New York under a buttonwood tree.
As Shanghai Securities News reported, the investments are part of SAFE’s strategy to diversify investment channels for the country’s massive foreign exchange reserves. Recent earnings filings show Buttonwood is among the top 10 shareholders of Bank of China, Bank of Communications, Shanghai Pudong Development Bank , Everbright Securities and Industrial and Commercial Bank of China.
In other words, the PBOC is now directly (as opposed to previously, when its interventions were indirect at best) propping up the stock market itself. The government also uses Central Huijin Investment Ltd, and China Securities Finance Corp, the state margin lender, to buy A shares. This makes China the second prominent central bank to be directly involved in stock purchases after the BOJ which has been buying ETFs and REITs for years, and the SNB of course, which as is well-known has an equity portfolio worth nearly $100 billion.
The Chinese official publication adds that Buttonwood was the vehicle SAFE used to invest in China’s Silk Road Fund, which was launched in December 2014, according to the fund’s official website. Buttonwood is a new platform China’s government uses to buy domestic shares, according to Shanghai Securities News.
Why is this above a big surprise? After all, in the aftermath of last year’s stock market crash it is well known that the government has been propping up the stock market. As Bank of America explains “it is a big surprise to us that SAFE bought stocks directly in 4Q. This broke at least two conventions for central banks: 1) central banks do not normally buy stocks directly (as they are supposed to manage their balance sheet conservatively); and 2) FX reserves, presumably what SAFE had used to buy A-shares, should not be used to purchase domestic assets.”
As BofA’s David Cui further explains, “by now, the three main government bodies that run the economy, the financial system or regulate the market all have a direct stake in the market, literally” and warns that “while many may view this as supportive of the market, we believe that allowing “referees” to become “players” is a slippery slope that could do damage to the market in the long run.”
Then again, if every other central banks is doing it…
Here is David Cui’s full note:
SAFE’s A-share purchase, a step in the wrong direction
- SAFE became a top 10 shareholder in at least 10 A-share companies in 4Q, a big surprise to us.
- By now, policy makers (PBoC, MoF and CSRC) all own stocks via vehicles controlled by them. Policies could become compromised.
- PBoC’s direct buying is particularly worrying, as its action has monetary implications (albeit on small scale at this stage).
Many government arms now have stakes in A-shares, literally
Shanghai Securities News reported today that SAFE (under PBoC), through its three investment arms, became a top 10 shareholder in at least 10 A-share companies in 4Q15. On March 29, Securities Times reported that Huijin (a subsidiary of CIC, which is under the State Council and has a close tie to the MoF) was among the top 10 shareholders in five ETFs at the end of 2015. We also know that CSFC (under CSRC) bought heavily in the market last year (Government A-share stabilization program: the price may be too heavy, Nov 13). So, by now, the three main government bodies that run the economy, the financial system or regulate the market all have a direct stake in the market, literally. While many may view this as supportive of the market, we believe that allowing “referees” to become “players” is a slippery slope that could do damage to the market in the long run.
What and how much SAFE has bought
The 10 stocks identified by the paper belong to a broad spectrum of sectors: banks, brokers, port operators, telecom, machinery, defense, and a local government investment holding company. SAFE’s stakes in these ten companies are worth some Rmb27bn. We don’t know how much in total SAFE has spent, as many A-share companies are yet to report. In addition, if SAFE’s stake is less than 5% or not big enough for it to be among the top 10 shareholders, companies are not obliged to disclose it. That said, the size of the purchases appears moderate so far.
Why SAFE’s buying is particularly problematic
The moderate size notwithstanding, it is a big surprise to us that SAFE bought stocks directly in 4Q. This broke at least two conventions for central banks: 1) central banks do not normally buy stocks directly (as they are supposed to manage their balance sheet conservatively); and 2) FX reserves, presumably what SAFE had used to buy A-shares, should not be used to purchase domestic assets. When the FX reserves were created, the equivalent amount of local currency was already issued on the back of the FX; using FX to buy domestic assets means that more local currency is created with the same FX backing.
A more transparent way to handle this, and with the same result, is for PBoC to simply expand its balance sheet and take on these stocks without going through SAFE. PBoC’s loaning to CSFC and brokers to buy stocks was controversial enough, buying stocks directly is a step further, in our view. It is difficult for us to gauge the reasons behind SAFE’s move. But this cannot be enhancing public confidence in the PBoC and, by extension, in RMB, in our view (What may trigger financial instability, Jan 3).
Macro policies may become compromised
Macro policies should be about healthy economic growth, which underpins the attractiveness of a country’s stock market in the long term. Many of the government’s A-share market interventions, including its direct stock buying, are undermining China’s growth prospects, in our opinion, due to unnecessarily fast money growth and potentially crowding out of private investment, among other things. Now that the key macro policy makers own stocks themselves, there is a risk that their policies may become more pro-market than necessary, in our view (especially if their market positions continue to expand).
* * *
Now if only we knew how much crude oil the PBOC – which is now clearly coordinating with the Fed in global plunge prevention – was also buying, all our questions for the past quarter would have been answered.
Tomorrow is the first day that the ECB will begin its purchases of corporate bonds. This will cause corporate bond yields to fall in similar fashion to sovereign yields as traders front run the ECB. Eventually, this will lead to a scarcity of corporate bonds and this will force the ECB to monetize junk bonds or just about anything it can get its hands on:
(courtesy zero hedge/ a must read.)
European Peripheral Corporate Bond Yields Tumble To Record Lows Ahead Of Draghi’s Monetization
On the day Mario Draghi announced that the ECB would launch a historic corporate bond monetization program, the first of its kind, we said that we expect bond yields to tumble imminently as the market frontruns the ECB’s open-market purchases of corporate bonds and soaks up all available supply in the market. Not even we expected what would happen next though.
As the WSJ writes, four years after ECB President Mario Draghi‘s famous “whatever it takes” speech sparked a decline in the cost of servicing sovereign debt in the Eurozone’s shattered periphery, the same is now seems to be happening for corporate bond issuers in those countries.
It references the Bank of America Merrill Lynch’s nonfinancial bond index for the Eurozone periphery which includes countries like Italy, Spain, Portugal and Ireland (which earlier today issued a 100 Year bond courtesy of the very same ECB), and which touched its lowest yield to maturity ever on Tuesday, at 0.76%.
Once again, Draghi has worked his verbal magic unleashing a buying spree before the ECB has bought even one single bond, all because other buyers are now completely price indiscriminate and fully aware they have the ECB’s backstop.
Perhaps the recent record low yields are a warning: the previous record low yield for the index was 0.78%, which was reached just before the so called bund tantrum of Spring 2015, when credit across Europe sold off, and yields jumped.
However, back then, the buying impetus was driven by the ECB’s sovereign QE program when, unlike now, there was no explicit backstop to corporate bond risk. There is now.
The WSJ also points out that yields on other classes of debt have also declined, but not to the levels recorded in the early months of last year.
Financial companies, whose bonds the ECB will not buy, are still a little way from their lows. In March last year, the yield to maturity of the Bank of America Merrill Lynch index for financial companies in the periphery fell to 1.12%, and it’s now at 1.35%.
The index for non-financial companies in the eurozone but outside the periphery also has a higher average yield than it did in April 2015.
This “arbitrage” will be fixed: once ravenous yield chasers run out out of peripheral bonds to buy and the market becomes dangerously illiquid – as we also warned will happen – buying activity will shift to corporate bonds in the core. At that point, once all yields are at record low yields, if not negative, the ECB will proceed to monetize financial bonds as well.
The WSJ’s conclusion:
Since the ECB’s bond buying program is designed to spur lending by reducing the cost to corporations, record low yields are good news: for now, at least.
We disagree: what the chart above shows is yet another asset class that is now completely dislocated from its fundamentals, just like European sovereign bonds, which are trading not on their underlying merit but because the ECB has to buy them. The same is happening in the corporate financial space. And, once the corporate non-financial market ends up broken and there is no more supply, the ECB will be forced to expand its bond buying universe again, launching the monetization of junk bonds, convertibles and ultimately equities.
At that point, no news and no fundamentals news will matter any more, and the only driver of “markets” will be whether the ECB’s credibility is intact, which in turn will make it a political issue as will the “valuation” of the markets.
And then, one day, when for whatever reason the ECB’s mandate to monetize everything is taken away (whether as a result of German revulsion or the political collapse of the Eurozone) prices will once again find their fundamental “fair value.” One thing that is certain: it will be far, far lower than where it is with the explicit backing of central banks to buy anything and everything.
Europe Remains Stuck In Deflation For Second Month
The last time Europe had at least two consecutive months of deflation was in late 2014/early 2015 when the ECB launched its sovereign QE, and when prices staged a modest rebound into the rest of the year. One year later, it’s more of the same, and as Eurostat revealed earlier today, after a headline price drop of -0.2% in February, March prices declined once more, this time by -0.1% in line with expectations, driven by a -8.7% plunge in energy prices.
The good news for the ECB, which earlier this month unleashed the first instance of corporate bond QE, is that if stripping out “volatile food and energy prices”, core inflation accelerated in what Reuters dubbed mildly positive news for the European Central Bank as it struggles to revive anemic price growth.
As shown below, core inflation, a figure closely watched to gauge underlying trends, picked up to 0.9% from 0.8%, also in line with its recent trend and with expectations, alleviating some fears that low energy prices are feeding into the cost of other goods and services.
According to Reuters, the core inflation tick-up, presaged by surprisingly high German figures on Wednesday, is the latest in a string of slightly positive data for the 19-nation currency bloc, indicating that the euro zone’s tepid domestic recovery remains on track despite headwinds from abroad.
The ECB especially fears these so-called second-round deflationary effects from falling crude prices as they could lead to low price growth becoming entrenched.
Still, inflation remains far below the ECB’s target of nearly 2 percent and is not expected to return to target over the next three years. This indicates the central bank will have to keep rates exceptionally low and keep the door open to even more stimulus.
Indeed, according to its most recent drastically lowered forecast, the ECB expects inflation to average just 0.1 percent this year before a pickup in 2017.
In the end, it will all depend on what oil prices do from here: crude oil prices have fallen by two-thirds over the past two years and futures point to a slow rise for the rest of the decade, keeping a lid on price growth.
What is curious is that in recent months euro zone lending has picked up, at least according to ECB data, and last month it grew at its fastest pace since late 2011, while M2 has been surging: this has yet to translate into substantially higher prices.
Dozens Arrested, Tear Gas Deployed As French Labor Reform Protests Turn Violent
In a stark reminder of the entrenched problems facing the French economy, today police used tear gas to disperse thousands of angry activists across the nation, who are protesting new labor reforms. French rail and air traffic suffered serious disruption on Thursday after transport staff stopped work and took to the streets along with high-school students to challenge plans for a pro-business loosening of the country’s protective labor laws.
In Paris the protest started in Place de la Nation, the same place where previous anti-labor rallies took place. The demonstrators threw bottles with flammable liquid and stones at police officers. Video footage relayed on social media showed some hooded youths jumping on cars and taunting police. CGT chief Martinez played down reports of a dozen arrests, saying there was often a bit of trouble caused by “some people who have nothing to do with the issue”.
“Everyone hates the police,” the protesters were
shouting. At least two protesters have been beaten by police officers in
the city of Lille, according to photo reporter Julien Pitinome, who tweeted a picture of the incident.
In the city of Nantes demonstrators tried to storm the town hall and smash windows.
According to Reuters, the day of protest, the fourth in a month, “has been billed by local media as a make-or-break test of strength for President Francois Hollande, plagued by low popularity and a jobless rate stuck stubbornly above 10 percent as mid-2017 elections loom” and where anti-Euro frontrunner Marine Le Pen looms large.
What is notable about today’s protest is that among the most vocal protesters were secondary-level school pupils who were mobilized in Paris and dozens of other cities for protest marches alongside those called by labor unions.
At issue is a proposed overhaul of France’s labor code, a set of regulations bosses claim deters recruitment. Critics say the reforms will lead to worse working conditions and more sackings. The reforms, due to be debated in parliament next week, would give employers more flexibility to agree in-house deals with employees on working time.
Students are rallying against labor law reforms recently proposed by Labor Minister Myriam El Khomri. The French authorities are desperately trying to battle high unemployment in the country, and have suggested cutting overtime pay for work beyond 35 hours.
In the proposed reforms, employers would pay only 10% of overtime bonus, instead of the current 25%.
According to RT, the protests were partially organized by a Facebook community called ‘Loi travail: non, merci’ (Labor reform: No, thanks). Arguing that the reforms concern all French citizens, the group has started a petition, which has so far been signed by over one million people.
Hollande has said the reforms would help employees have more job stability. “We must also give companies the opportunity to recruit more, to give job security to young people throughout their lives, and to provide flexibility for companies,” he said.
More than 260 protests are taking place in France, the Local reported.
The protests come a day after Hollande, who has said he will not run for re-election if he fails to make a dent in the jobless rate, abandoned another piece of legislation – plans to strip convicted terrorists of French citizenship. That climbdown was forced on him by other lawmakers, many of them in his own camp. “When you admit you got it wrong once, it’s possible to say you got it wrong twice … we’re optimistic. The government needs to say it got it wrong,” said Philippe Martinez, head of the large CGT union.
Hollande’s government, desperate to deliver on his so far elusive commitment to reduce high unemployment, watered down its reform proposal shortly before it was unveiled this month by ditching a clause that would have capped severance pay awards.
Economists fault the French system for creating a divide between people with open-ended work contracts and first-timers condemned to move from one short-term job to another because of employer reluctance to commit to long-term contracts.
RUSSIAN AND MIDDLE EASTERN AFFAIRS
This should be interesting: Turkey arrests the shooter of that Russian parachuting out of his downed plane.
What is Erdogan up to? Is he trying to cozy up to Putin?
(courtesy zero hedge)
Turkey Arrests Shooter Of Parachuting Russian Pilot
It was the most scandalous story of November 24: moments after Turkish forces had taken down a Russian fighter jet for allegedly violating Turkish airspace, Turkmen rebels in the region executed one of the parachuting pilots while he was descending to earth. As CNN Turk’s Foreign Editor tweeted at the time, Turkmen rebels said: “We hit at the two pilots after they parachuted.” This was a war crime.
Now, over four months later, Alparslan Celik, the man suspected of shooting a Russian pilot as he parachuted from a downed jet over Syria, has finally been arrested by Turkish police in the city of Izmir and is being questioned, Hurriyet newspaper reports.
According to Bloomberg, Celik was detained while at a restaurant in the city on Turkey’s Aegean coast; 14 others also detained.
Celik was fighting with anti-Assad regime Turkmen militants in Syria.
Footage of the incident showed a man, believed to be Celik, shooting and killing one of the Russian pilots after he ejected from the jet as he was parachuting to the ground.
Why now? Is Erdogan trying a gentle pivot to Russia now that his western allies are sending increasingly more troubing signals about their support of his presidency.
It remains to be seen if he will be extradited to Russia.
“There Are No More Hotel Beds At All”: Sweden’s Tourism Industry Collapses As Resorts Become Refugee Centers
“Whichever way we slice the data, the growth in working age population stands out as a key driver of economic growth for most countries. A healthy dependency ratio, a skilled workforce, together with strong institutions and an absence of major resource imbalances is usually the formula for country-level success. But with most DMs weighed down by ageing populations, a key question is this – can people inflows counter challenging demographics? The short answer is yes.”
That’s what Goldman said last autumn as Europe’s refugee crisis began to spiral out of control. We’re not sure if it had occurred to the bank just how large the people flows into Western Europe would end up being because the implication in the excerpted passage above is that the influx of people may actually be a good thing economically speaking if it ameliorates negative demographic shifts.
Of course Goldman may be proven right in the long-run, but in the short-term the mass migration is straining Western Europe’s resources and now looks set to drive up the unemployment rate in Germany.
“German joblessness was unchanged in March, snapping a run of five consecutive declines, in a sign that Europe’s largest economy may be struggling to absorb a wave of refugees,” Bloomberg wrote, earlier today, adding that “Germany admitted more than 1 million migrants in 2015 alone [which] increased the pool of potential workers.”
A new report from Berlin’s labor agency suggests that it will likely be years before the country experiences any benefit from the migration wave. “It can be expected that the labor supply will expand because of migration and the number of unemployed refugees will rise,” as it will take time for migrants to master the language and obtain the qualifications they’ll need to join the labor force.
Meanwhile, in Sweden, the toursim industry is being choked off by the migrant flows. According to SvD Naringsliv, the Swedish Migration Board’s move to transform tourist facilities into asylum centers means they’ll be no more room for vacationers – literally.
(Astrid Lindgren is running short on accommodations – its guest house and hostel will house refugees this summer)
“In some municipalities, there will be no hotel beds at all,” Lena Larsson, CEO at Smaland Tourism said. Here’s more (Google translated):
For example, expected the large visiting goal Astrid Lindgren stand without quality accommodation when both the guest house and hostel continues to be asylum facilities in the summer.
The players in the tourism industry looks understood the seriousness of the background of the war in Syria, but several highlights that the consequences of the Migration Board’s procurement for the tourism industry in Sweden “must be clarified.”
It is so big changes to Visit Småland now has to scan the entire range. It is very uncertain how it will be this summer, says Lena Karlsson.
Another example can be found on the west coast. There, says Lars-Eric Fields, president of Södra Bohuslän tourism, the impact on summer tourism is likely to be so big that you have to take stock of the range of partners throughout western Sweden. According Fields also affected touristic prime locations, which Socialite House “Batellet” on the island of Marstrand and city hotel in Lysekil which are both refugee accommodations in the summer.
Another sample can be collected by Vänern. Where does the Migration Board’s shops to tourist nights in the spa town Lundsbrunn replaced by 870 asylum places, which admittedly can quickly raise the plant’s own turnover to about SEK 100 million per year, but which also affects the district’s normal tourism. Clearly, fewer tourist beds provide less surface for ancillary tourism – for example from Tarnaby mountain village reported that the chairlift can no longer be operated for lack of tourist beds.
The situation is thus similar in many areas. Oland Tourism says, however, that all cabin accommodation falls away in the summer, as Boda Baden, Mölltorp and Littorinabyn.
Uncertainty about the summer tourism is also noticeable in the Swedish Tourist Association where 15 hostels during the winter has served as places of asylum, including Farosund. Now in the end requires the STF decision from the franchisees if they remain in the tourism or remain
Immigration Service asylum accommodation. One who decided Maria Karlsson, who owns the hostel in Skåne Hammenhög where the resort now count to five asylum accommodation.
So there you have it, folks. An industry that brings in around $32 billion per year (and that doesn’t count the $12 billion tourists spend on food, entertainment, and transportation) is about to disappear entirely thanks to the housing needs of Mid-East migrants.
If you want to get a good idea of just how important tourism is to Sweden’s economy, have a look at the following graph which shows employment growth in tourism versus the overall labor market trend:
And here is the final insult: Sweden’s toursim industry employs around 160,000 people. The number of refugees Sweden took in from the Mid-East in 2015 was… drumroll… 160,000.
Brazil now has a fiscal deficit of 10.7% of GDP. It has a primary deficit of 2.1% (primary deficit excludes interest payments). The country’s interest bill is a whopping 8.6% of GDP.NBC has sold 1 billion dollars worth of ads for the summer games. Good luck trying to get refunds from this bankrupt country:
(courtesy zero hedge)
Brazil Posts Largest Budget Deficit Ever As Rousseff Cries “Coup,” Olympic Ad Sales Top $1 Billion
On Tuesday, embattled Brazilian President Dilma Rousseff was dealt a bitter blow when PMDB – the party of VP Michel Temer and House Speaker Eduardo Cunha – officially left the coalition government.
“Dialogue, I regret to say, has been exhausted,” Tourism Minister Henrique Eduardo Alves, a PMDB leader and former speaker of the lower house of Congress, said on Monday as he resigned from Rousseff’s cabinet.
To let the market tell it, a complete political meltdown is great news. As we showed yesterday and as we’ve discussed on a number of occasions this month, the more precarious things get politically in Brazil, the harder the BRL and Brazilian risk assets rally. Why? Because the assumption is that when it comes to the country’s floundering economy,anything is preferable to the current arrangement. With output in free fall, inflation running in the double digits, and unemployment marking an inexorable rise, it’s difficult to imagine how things could possible get any worse.
Indeed, the prospect that Rousseff and Lula will be sent packing has created so much upward pressure on the BRL that the central bank has begun selling reverse swaps to keep a lid on the currency lest its rapid appreciation should end up short circuiting a much needed economic adjustment.
Meanwhile, Brazilian stocks have soared this year amid the turmoil. Of course this state of affairs simply isn’t sustainable. As Craig Botham, an emerging markets economist at Schroder Investment Management put it, “you don’t invest in a place where you don’t know who’s in charge.“
Right. And you also don’t invest in a place where the economic fundamentals get worse by the day.
Just this morning, for instance, we got the latest read on the fiscal deficit and it was, for lack of a better word, a disaster. The budget gap was the largest on record and came in wildly above expectations. Long story short, the primary deficit printed at 2.1% in February, up from 1.75% the previous month. “While revenues are falling sharply due to the economic situation, at a rate of 12 to 13 percent (a year), expenses continue to grow,” Tulio Maciel, head of the central bank’s economic research department told reporters on Wednesday.
Meanwhile, debt-to-GDP continues to rise. Here’s Goldman with the full breakdown of today’s dismal data:
The overall public sector fiscal deficit (primary surplus minus interest payments) remained broadly stable at a very large 10.8% of GDP in February, substantially above the 6.6% deficit recorded a year ago. The 12-month net interest bill dropped to 8.6% of GDP in February compared to 9.1% of GDP in January. The consolidated public sector primary fiscal deficit climbed to 2.1% of GDP from 1.75% of GDP the month before.
Gross general government debt worsened to 67.6% of GDP in February, up from 67.4% of GDP in February and 57.2% of GDP at end-2014.
A deep, permanent, structural fiscal adjustment remains front-and-center on the policy agenda to restore both domestic and external balance. In our assessment, at the end of the fiscal consolidation process Brazil needs to end up with a primary surplus of 3.0% to 3.5% of GDP. This would be the level of primary surplus that would put gross public debt on a clear declining trajectory, something that is required forBrazil to rebuild fiscal buffers and regain room to use fiscal policy counter-cyclically, whenever needed and appropriate.
Ultimately, a weaker BRL and a deep structural fiscal adjustment are key pillars to restore domestic (i.e., lower inflation) and external balance (i.e., to promote and consolidate the adjustment of the current account). However, given the very modest scope and slow pace of fiscal consolidation, and its far-from-ideal quality,the burden of current account adjustment will likely continue to fall disproportionately on monetary policy and the BRL.
Now obviously, there’s a long, long way to go for Brazil to get back to primary surplus at all, let alone push the black ink up to 3% of GDP. The idea that this is going to turn around the second Rousseff leaves the Presidential palace is laughable at best. And speaking of laughable, have a look at this rather amusing bit from Citi:
- Rousseff impeachment won’t sustain Brazil rally
- As the likelihood of President Dilma Rousseff’s impeachment increases “investors will take a step back.
- “It might be the case of buying the rumor and selling the fact.”
In other words: investors might suddenly wake up to the fact that an intractable political crisis is most assuredly not risk positive.
Meanwhile, Rousseff is back on the tape likening the impeachment proceedings to a coup. “Presidents must be chosen in free elections,” she proclaimed on Wednesday. Countdown to impeachment: around 45 days.
Finally, it’s worth noting that according to the latest figures, NBC has sold $1 billion in national ads for the Summer Olympics in Rio. “We’ve surpassed the $1 billion mark four months ahead of (the 2012 Summer Games in) London,” Seth Winter, NBC Sports’ executive vice president of advertising sales, said in a statement.
$1 billion. That’s a lot of refunds, Seth.
The Canadian banks are totally under reserved for losses in oil and gas. This will be the next shoe to fall:
(courtesy zero hedge)
For Canada’s Banks This Is “The Next Shoe To Drop”, And Why It Will Drop This Spring
Roughly around the time the market troughed in early February, we asked “After The European Bank Bloodbath, Is Canada Next?” The reason for this question was simple: we said that “when compared to US banks’ (artificially low) reserves for oil and gas exposure, Canadian banks are…not.”
Stated otherwise, we warned that the biggest threat facing Canada’s banking sector is how woefully underreserved it is to future oil and gas loan losses.
We added that unlike their US peers, “Canadian banks like to wait for impairment events to book PCLs rather than build reserves, in effect throwing the entire process of reserving for future losses out of the window.”
We then cited an RBC analysis according to which a 7% loss reserve would be sufficient to offset loan losses in what is shaping up as the biggest commodity crash in history. We disagreed:
We wish we could be as confident as RBC that this is sufficient, however we are clearly concerned that if and when Canada’s banks finally begin to write down their assets and flow the impariments though the income statement, that things could go from bad to worse very quickly, and not necessarily because Canada’s banks are under or over provisioned, but for a far simpler reason – once the market focuses on Canadian energy exposure, it will realize just how little information is freely available, and if European banks are any indication, it will sell first and ask questions much later if at all.
However, indeed assuming a worst case scenario, one in which the banks will have to “eat” the losses and suffer impairments, then the question emerges just how much capital do these banks truly have, which in turn goes back full circle to our post from the summer of 2011 which led to much gnashing of teeth at the Globe and Mail.
We wonder what its reaction will be this time, and even more so, what its reaction will be if the market decides that when it comes to “the next domino to fall”, it was indeed Canada which courtesy of a generous global central bank regime which flooded the world with excess liquidity, and which China is now actively soaking up, allowed Canada’s banks to quietly skirt under the radar for many years; a radar that has finally registered a ping.
And while we still await for the G&M to note this ping, here is Canada’s Financial Post,confirming everything we said almost a month ago, and explaining what the “next shoe to drop” for Canadian banks will be. The Post’s answer: “Relatively low oil loan provisions.”
Here are the FP’s details which are already well known to our readers.
Canadian banks are taking lower provisions for oil and gas related credit losses than their U.S. counterparts, prompting observers to dig into the reasons behind the trend.
Reserves related to oil and gas loans held by U.S. banks are four to five times higher than those held by the Canadian banks, according to analysts at TD Securities, who believe accounting treatments and interpretations are, at least in part, behind the striking difference.
In a note Tuesday, the TD analysts led by Mario Mendonca said loan quality within the portfolios could also be another reason, with historical loss trends suggesting Canadian banks are more conservative lenders. Still, they said there is more to than that, including how aggressive each country’s regulators are, and interpretations under two different accounting regimes: U.S. Generally Accepted Accounting Principles (GAAP), and IFRS.
A close reading “reveals what we view as a material difference in loss recognition,” the analysts wrote.
It appears Canadian banks are… different.
Under U.S. GAAP, they said, a loan is impaired when it is probable a credit will be unable to collect on all amounts due, based on current information and events.IFRS accounting considers a loan impaired based on “objective evidence” surrounding a financial asset or group of financial assets.
“We believe that either there is a very significant difference in the two accounting regimes or the standards are being interpreted in very different ways,” the TD analysts wrote.
In addition, they said U.S. banks are more likely than their Canadian counterparts to use a special form of provisioning known as a collective allowance because there is a greater acceptance in the United States of releasing these reserves in the future if conditions improve.
Like, in the case of a global financial system bailout. Of course, nothing prevents Canadian banks to release these reserves too. The problem is that one has to take them first, and doing so would soak up so much capital it may expose the bank’s balance sheet as a hollow sham.
That said, now that everyone is finally pointing the finger at their gaping reserve holes, Canadian banks have begun to increase provisions for credit losses, reflecting the early impact of low oil prices.
It is too late.
The TD analysts said they expect “the next shoe to drop” in Canada when second-quarter results are posted this spring. “Despite the recent move in oil, futures are flat year-to-date and prices are still down materially since the fall 2015 determinations,” they wrote. “This should result in further pressures on borrowing bases and the potential for covenant breaches.”
Combined with expected “prodding” from the Office of the Superintendent of Financial Institutions (OSFI), Canada’s key bank regulator, “we expect impairments and credit losses to climb,” the analysts said.
All of this could have been avoided if Canada’s banks did not try to be just a little “too clever.” Instead, now they have a bleak future to look forward to, one where, in just a few months, the European bank bloodbath will shift over, as we first warned nearly two months ago, to Canada, something which both the mainstream media and “respected” analysts now admit.
Your early morning currency/gold and silver pricing/Asian and European bourse movements/ and interest rate settings/THURSDAY morning 7:00 am
Euro/USA 1.1378 up .0045 ( STILL REACTING TO USA FAILED POLICY)
USA/JAPAN YEN 112.30 DOWN 0.073 (Abe’s new negative interest rate (NIRP)a total bust/SIGNALS U TURN WITH INCREASED NEGATIVITY IN NIRP)
GBP/USA 1.4412 UP .0041 (STILL THREAT OF BREXIT)
USA/CAN 1.2933 DOWN.0042
Early THIS THURSDAY morning in Europe, the Euro ROSE by 45 basis points, trading now WELL above the important 1.08 level RISING to 1.1102; 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 NOW THE USA’S NON tightening by FAILING TO RAISE THEIR INTEREST RATE / Last night the Chinese yuan was UP in value (onshore) The USA/CNY DOWN in rate at closing last night: 6.4570 / (yuan UP / RESPONDS IN KIND TO THE USA’S YELLEN’S MESSAGE NOT TO RAISE RATES / SO CHINA WILL NOT DEVALUE ITS CURRENCY
In Japan Abe went BESERK with NEW ARROWS FOR HIS Abenomics WITH THIS TIME INITIATING NIRP . The yen now trades in a SOUTHBOUND trajectory RAMP as IT settled DOWN in Japan by 7 basis points and trading now well BELOW that all important 120 level to 112.27 yen to the dollar. NIRP POLICY IS A COMPLETE FAILURE AND ALL OF OUR YEN CARRY TRADERS HAVE BEEN BLOWN UP/SIGNALS TO THE MARKET THAT THEY MAY DO A U TURN ON NIRP AND INCREASE NEGATIVITY
The pound was UP this morning by 41 basis points as it now trades JUST ABOVE the 1.44 level at 1.4412.
The Canadian dollar is now trading UP 42 in basis points to 1.2933 to the dollar.
Last night, Chinese bourses AND JAPAN were MIXED/Japan NIKKEI CLOSED DOWN 120.29 OR 0.71%HANG SANG DOWN 26.69 OR 0.13% SHANGHAI UP 3.27 OR 0.11% / AUSTRALIA IS HIGHER BY 1.46% / ALL EUROPEAN BOURSES ARE STRONGLY IN THE RED, as they start their morning/.
We are seeing that the 3 major global carry trades are being unwound. The BIGGY is the first one;
1. the total dollar global short is 9 trillion USA and as such we are now witnessing a sea of red blood on the streets as derivatives blow up with the massive rise in the rise in the dollar against all paper currencies and especially with the fall of the yuan carry trade. The emerging market which house close to 50% of the 9 trillion dollar short is feeling the massive pain as their debt is quite unmanageable.
2, the Nikkei average vs gold carry trade (blowing up and the yen carry trade HAS BLOWN up/and now NIRP)
3. Short Swiss franc/long assets blew up ( Eastern European housing/Nikkei etc.
These massive carry trades are terribly offside as they are being unwound. It is causing global deflation ( we are at debt saturation already) as the world reacts to lack of demand and a scarcity of debt collateral. Bourses around the globe are reacting in kind to these events as well as the potential for a GREXIT>
The NIKKEI: this THURSDAY morning: closed DOWN 120.29 OR 0.71%
Trading from Europe and Asia:
1. Europe stocks ALL IN THE GREEN AS THEY START THEIR DAY
2/ CHINESE BOURSES GREEN/ : Hang Sang CLOSED IN THE RED. ,Shanghai SLIGHTLY IN THE GREEN/ Australia BOURSE IN THE GREEN: /Nikkei (Japan)CLOSED/IN THE RED/India’s Sensex in the GREEN /
Gold very early morning trading: $1235.60
Early THURSDAY morning USA 10 year bond yield: 1.82% !!! PAR in basis points from WEDNESDAY night in basis points and it is trading WELL BELOW resistance at 2.27-2.32%. The 30 yr bond yield FALLS to 2.64 DOWN 1 in basis points from WEDNESDAY night.
USA dollar index early THURSDAY morning: 94.51 DOWN 32 cents from WEDNESDAY’s close.(Now below resistance at a DXY of 100.)
This ends early morning numbers THURSDAY MORNING
And now your closing THURSDAY NUMBERS
Portuguese 10 year bond yield: 2.94% PAR in basis points from WEDNESDAY
JAPANESE BOND YIELD: -.029% DOWN 6 in basis points from WEDNESDAY
SPANISH 10 YR BOND YIELD:1.44% UP 1 IN basis points from WEDNESDAY
ITALIAN 10 YR BOND YIELD: 1.22 UP 1 basis points from WEDNESDAY
the Italian 10 yr bond yield is trading 22 points lower than Spain.
GERMAN 10 YR BOND YIELD: .153% (PAR IN BASIS POINT ON THE DAY)
IMPORTANT CURRENCY CLOSES FOR THURSDAY
Closing currency crosses for THURSDAY night/USA dollar index/USA 10 yr bond: 2:30 pm
Euro/USA 1.1388 UP .0056 (Euro UP 56 basis points/still represents to DRAGHI A COMPLETE POLICY FAILURE/reacting to dovish YELLEN
USA/Japan: 112.50 UP 0.121 (Yen UP 12 basis points) and a major disappointment to our yen carry traders and Kuroda’s NIRP. They stated that NIRP would continue.
Great Britain/USA 1.4376 UP .0001 Pound UP 1 basis points/(LESS Brexit concern.)
USA/Canada: 1.2964 down .0.0012 (Canadian dollar UP 12 basis points DESPITE THE FACT THAT oil HARDLY MOVED (WTI = $38.31)
This afternoon, the Euro was UP by 56 basis point to trade at 1.1388 as the markets REACT TO YELLEN’S DOVISHNESS
The Yen FELL to 112.50 for a LOSS of 12 basis pints as NIRP is a big failure for the Japanese central bank/also all our yen carry traders are being fried.
The pound was UP 1 basis points, trading at 1.4376 (LESS BREXIT CONCERNS)
The Canadian dollar ROSE by 12 basis points to 1.29764, despite the fact that the price of oil was CONSTANT today (as WTI finished at $38.32 per barrel)
the 10 yr Japanese bond yield closed at -.029% DOWN 6 BASIS points in yield
Your closing 10 yr USA bond yield: DOWN 3 basis point from WEDNESDAY at 1.79% //trading well below the resistance level of 2.27-2.32%) HUGE policy error
USA 30 yr bond yield: 2.61 DOWN 4 in basis points on the day and will be worrisome as China/Emerging countries continues to liquidate USA treasuries ( HUGE POLICY ERROR)
Your closing USA dollar index, 94.57 DOWN 26 cents on the day at 2:30 pm
Your closing bourses for Europe and the Dow along with the USA dollar index closing and interest rates for THURSDAY
London: CLOSED DOWN 28.27 POINTS OR 0.46%
German Dax :CLOSED DOWN 81.10 OR 0.81%
Paris Cac CLOSED DOWN 59.36 OR 1.34%
Spain IBEX CLOSED DOWN 147.10 OR 1.66%
Italian MIB: CLOSED DOWN 258.44 OR 1.41%
The Dow was down 51.37 points or 0.18%
Nasdaq up 0.55 points or 0.47%
WTI Oil price; 38.35 at 2:30 pm;
Brent Oil: 40.25
USA dollar vs Russian Rouble dollar index: 67.05 (Rouble is UP 1 AND 23 /100 roubles per dollar from yesterday)AS the price of Brent and WTI OIL SLIGHTLY ROSE
This ends the stock indices, oil price, currency crosses and interest rate closes for today
Closing Price for Oil, 5 pm/and 10 year USA interest rate:
WTI CRUDE OIL PRICE 5 PM: $38.11
USA 10 YR BOND YIELD: 1.768% (and the Dow rises by 100 points???)
USA DOLLAR INDEX:94.65 down 18 cents on the day
And now your more important USA stories which will influence the price of gold/silver
Trading Today in Graph form:
Q1 2016: Gold Glows Amid The Greatest Stock Market Comeback In The History Of Investing
The market ended red today…
But The Dow and The S&P ended Q1 in the green after a yuuge drop…
In fact this was the greatest comeback in the history of stocks… (Q1 2016’s 11.3% drawdown is the biggest on record for a quarter that ended green)
While US stocks managed to scramble back into the green for Q1, European stocks (and especially banks) ended down hard despite Draghi’s unleashing more buying…
But the Aug-Dec analog remains in place as we just dipped and ripped…
And breadth is playing the same unimpressed game as it did in Oct 2015…
This looks familiar…
But Gold (and Silver) are the biggest winners in Q1…
While stocks had a huge bounce their Q1 performance was meh, except Trannies
- Dow Transports +5.9% – Best quarter since Q4 2014
- HYG (High Yield bonds) +1.4% – Best Quarter since Q1 2014
- Energy Sector +2.7% – Best quarter since Q2 2014
- Treaasury Bond Index +2.95% – Best quarter since Q2 2012
- Gold +16.1% – Best quarter since Q3 1986
- USD Index -4.1% – Worst quarter since Q3 2010
- Copper +2.4% – Best quarter since Q2 2014
Utes were the best sector in Q1 but Financials and Healthcare (biotechs) were battered…
Treasury yields end the quarter lower with the belly down a stunning 55bps and 30Y -40bps… not exactly what The Fed had in mind in Dec…
Having held steady for January, The USD Index tumbled in feb and further in march led by JPY strength, Cable was weakest in Q1 of the majors…
Crude remains red for the year in Q1 despite the USD plunge but copper managed to creep into the green. Gold and Silver soared…
* * * * *
March was an epic month of extremes…
- S&P +6.99% in March – 2nd best month since Oct 2011
- Financial Stocks +6.6% – Best month since March 2012
- USD Index -3.7% in March – 2nd worst month since Sept 2010
- WTI +14.1% in March – 2nd best month since Oct 2011
- Treasury Index -0.1% in March – worst month since Nov 2015
- Gold -0.4% in March – worst month since Nov 2015
- HYG +2.2% in March – 2nd best month since June 2012
March equity performance is stunningly similar across all indices, with Trannies fading off their highs…
With Energy and Financials soaring…
Treasury yields end the month on a tear with 2Y lower and the rest of the curve modestly higher (despite the soaring stock market)…
The USDollar Index had a tough time in March. led by AUD strength (and JPY ended flat)..
Crude was the biggest winner in March (but fading as the short-squeeze ended) with gold unchanged…
* * *
On the week so far…
While on the topic of VIX, we note that VXX shares outstanding has been soaring (since TVIX stalled amid 6 month highs NAV premiums)…
Treasury yields are collapsing into month-end…
The US Dollar index continued its slide today…
Copper and Crude slid today despite weaker USD but PMs were bid into month-end…
Crude soared 60% off its mid-Feb lows and is back in the green for the quarter. This was driven by the biggest surge in net spec longs (as shorts covered) since 2011. The last time this happened… oil fell 35% in the following 4 months…
Bonus Chart: S&P is over 70 points rich to The Fed balance sheet currently…
Huge increase in initial and continual jobless claims
(courtesy BLS/zero hedge)
Jobless Claims Surge Most In 2 Years As Challenger Warns Of “Significant” Jump In Retail, Computer Layoffs
With both ISM Manufacturing and Services employment indices collapsing, endless headlines of layoffs,Challenger-Grey noting Q1 as the worst since 2009, and NFIB small business hiring weak, it is no surprise that initial jobless claims is finally waking up. For the 3rd week in a row – the longest streak since July 2015. The last 3 weeks have seen a 9.1% surge in jobless claims – the biggest such rise since April 2014.
And finally, as Challenger-Grey notes,
Through the first quarter of 2016, employers announced 184,920 job cuts, up 31.8 percent from the 140,241 cuts tracked the first three months of 2015.
The first quarter saw 75.9 percent more job cuts than in the final quarter of 2015, when 105,079 job cuts were recorded.
US companies announced the most 1Q layoffs since 2009 as oil-related cuts continue to inflate numbers, according to data from Challenger Gray.
Citing John Challenger, MarketTalk adds that announcements “have increased significantly” in retail and computers, adding, “While it may be too early to sound the alarm bells, the upward trend outside of the energy sector is somewhat worrisome.” Overall announced layoffs by Challenger Gray’s count have been 185K this quarter, versus 140K a year earlier.
It’s the worst start to a year since 2009, when in the wake of the financial crisis companies announced plans that 1Q to cut 562K jobs.
Chicago PMI Bounces Back But Remains Below January Highs (Thanks To Warm Weather)
Following its demise into contraction in February, Chicago PMI jumped back to 53.6 (expansion) in March which is better than expected but remains below January’s 55.5 highs. The last 12 months have seen quite unprecedented noise in this economic barometer and MNI reports respondents saying the recovery is“slow and steady… fuelled by warmer weather.”
As MNI reports, The Chicago Business Barometer increased 6.0 points to 53.6 in March, the best since January, led by sharp bouncebacks in Production and Employment.
Four of the five Barometer components increased in March, with only Supplier Deliveries declining on the month. March’s positive outturn, though, left the three month trend of the Barometer at the highest for just over a year and the Q1 2016 average at the highest since Q4 2014.
Production bounced back to the highest since January, reversing half of February’s drop. Employment finally moved back into expansion after spending five months in contraction area, and rose to the highest level since April 2015. New Orders expanded at a faster pace and, like Production, increased to the highest since January. Also on a positive note, Backlogs contracted at the slowest pace since January 2015.
Improvement in March was telegraphed as slow and steady, fuelled by milder weather, new product demand, as well as a shift in focus towards warm weather products. Some businesses reported plans for a strong end of March into early April. However, a few purchasers expected the level of New Orders to taper in April. Other panellists cited “uncertainty surrounding the election” as reason for the added caution, with some businesses cooling plans for non-essential or large capital expenditure plans.
A special question posed in the March Chicago Business Survey showed most respondents were optimistic orders would increase over the coming three months, with 44% saying they would be higher, compared with 13.5% who thought they would be lower. Panellists, though, were less confident this year as compared with outturns of 55.6% and 8.9% respectively when the same question was asked in March 2015.
Those expecting a higher pace of ordering in Q2 2016 said milder weather and favourable seasonal factors would boost business. More importantly, purchasers reported that capital expenditures are starting to be released and work being scheduled.
Employment finally moved back into expansion after spending five months in contraction area,and rose to the highest level since April 2015
Chicago Fed’s Evans Goes From Hawkish To Dovish And Back To Hawkish Again In Under 2 Weeks
Just one week ago, when the US dollar was surging when one after another Fed president were making hawkish statements (who can forget Bullard’s forecast that a rate hike may occur as soon as April), one of the speeches which surprised the market the most, was that by Chicago Fed’s permadove Chuck Evans, who on March 22 said that the Federal Reserve is on track for “gentle, gradual” rate hikes unless economic data comes in a lot stronger than expected or inflation picks up faster than anticipated, a top Fed official said on Tuesday.
“My projection would have two more this year on the basis of the outlook,” Chicago Fed President Charles Evans told reporters after his talk to the City Club of Chicago. “I couldn’t tell you which meeting that would be without having a firmer idea of what the data are doing.”
“Fundamentals are good for the economy,” he said during his speech. He noted, however, that past recoveries saw GDP growth of 3.5 percent.
“Currently, given my assessment, two rate increases is not at all unreasonable,” Evans said after his speech. “My projection would have two more this year on the basis of the outlook.”
And then, everything mysteriously changed less than two weeks later, when in the aftermath of Yellen’s superdovish speech, Evans talked back all of his hawkish commentary: cited by Reuters, Evans said that the Federal Reserve “should have more clarity by the end of the summer whether recent strength in U.S. inflation data is a lasting reality or merely a temporary blip due to winter-related irregularities in the surveys, a top Fed official said on Wednesday.”
“If we see the monthly numbers continue to come in more strongly and they begin to pile up I think you’d have to take that seriously. If it’s a residual seasonalities story we ought to see it waning at some point,” said Chicago Fed President Charles Evans.
Compare the above headline to this one:
But wait, it’s not over, because as we draft this, Evans is once again talking live, and making the following statements, which suggest the hawkish Evans from March 18 may be back:
- “My assessment of appropriate monetary policy is that given the economy and what we’re looking at, it would be two rate hikes this year,” says Chicago Fed President Charles Evans.
- “Any improvement in the outlook would give rise to a stronger funds rate path”
- “I guess I would sort of say one in the middle of the year, one at the end of the year”
- Fed move doesn’t have to come at an FOMC meeting when Chair Janet Yellen is holding a press conference, “but my goodness the chair does a good job explaining” our decision
Yes, such a good job even Liesman is asking her if the Fed has lost all credibility.
As a reminder, the Fed Funds futures now imply a negligible chance of a June rate hikes, with at most one rate hike by the end of the year, so Evans saying 2 hikes means hawkishness is back.
Dear Janet, You Have A Problem – The Fed Policy ‘Death Cross’
“Stock whisperer” Janet Yellen has a major problem. Despite the world’s central banks’ coordinated easing-driven surge in stocks off the mid-Feb lows, consumer comfort in America has collapsed to its lowest since Dec 2015. The “wealth creation” engine is not transmitting to animal spirits and exuberance among average joes… despite Jim Cramer’s exposition that “Yellen is speaking for the common person.”
The Fed policy Death Cross…
When extreme monetary experimentation fails.
Gartman Throws In The Bearish Towel: “Don’t Fight The Fed”
Yesterday, when we wrote that “Gartman remains bearish of stocks” we cited the “commodity king” as follows:
… we are still going to err bearishly of stocks and certainly we shall not err bullishly of them. We are, in our retirement account here at TGL long of gold in EUR and Yen related terms; we are long of a small position in the corn ETF and we are long of the bond market ETF, which tends to be a bearishly construed position. As of the close of trading yesterday we are +8.2% for the year-to-date, compared to the loss thus far this year of our International Index of 3.0% and compared to the small gain by the S&P of 0.5%… a gain that many shall tout as evidence of a great bull run. We shall not.
On the other hand, we said that “we shall expect another ~1% rise in the market.” We were close.
In any case, after having flipflopped two weeks ago when Gartman against went bearish “of stocks” on March 16, by buying the VIX as stocks were about to take out their 2016 highs, Gartman has finally thrown in the towel. From his latest letter:
SHARE PRICES HAVE CONTINUED THEIR RUSH SKYWARD following Dr. Yellen’s “All-Clear” signal to the investment world Tuesday when she spoke to the Economics Club of New York, telling the world that it was she and no one else at the Fed who was in charge of monetary policy and said, without equivocation that the Fed under here aegis will not be tightening monetary policy any time soon. This is, it seems, the best of all equity investment worlds where economic growth is slow but steady; where inflationary pressures… at least in the eyes and mind of the “authority”… is not problematic and shall not be, and where monetary policy shall be accommodative.
We may not agree with what Dr. Yellen is proposing… and what she will pursue… or why she is proposing and pursuing it… but it is not our duty to argue and then to take positions openly at odds with her, for as the great, departed and greatly missed Mr. Marty Zweig always said, “Don’t fight the Fed.” It is our duty, instead, to understand that the Fed’s “margin account” is far larger than is ours; that it is effectively unlimited and that as the equally great Lord Keynes said, “The market can remain irrational far longer than we can remain solvent.” We may think Dr. Yellen’s actions are irrational; we may see them in the end as being disastrous; we may fully expect them to come to naught and very probably they shall, but taking positions in opposition them and to her shall cause us to lose both mental and real capital. It is a fight we may win eventually, but eventually can be a very, very, very long while off into the future.
To this end, we note then that our International Index has gained 79 more points, or 0.9% since yesterday, but even so it remains down for the year-to-date by 2.1%. Stocks here in the US, however, as measured by the S&P are actually higher by 1.0% while we here at TGL, in our retirement fund, are up 6.7%, with our “out-performance” relative to global and domestic stocks narrowing rather sharply yesterday. We enter today’s markets long of gold in EUR and Yen related terms; long of the long end of the US bond market via the 20 year bond ETF; long of small position in an oil E&P producers and long of another small position in the corn ETF.We have no actual net long or short position in equities, however.
The rally may be on its last legs.
JPM “Shaves” First Half GDP By 0.5% Due To Weaker Durable Goods And Consumer Spending
Remember when 2016 was the year when the US economy was finally supposed to take off on “above trend” growth? Make that 2017.
Here is JPM’s chief economist Michael Feroli doing what banks are so good at doing: cutting their own US GDP growth forecasts.
Shave and a haircut, first half
We are shaving about a half percentage point off of our estimate for first half US real GDP growth. We estimate Q1 GDP increased at a 1.2% annualized pace (down from 2.0%), and we project Q2 GDP growth at 2.0% (down from 2.25% prior). The downward revision to Q1 follows a string of softer source data, starting with the February durable goods report and punctuated by the downward revision to January real consumer spending.
The downward revision to Q2 owes to slightly lower expectations for consumer spending — thanks to the rebound in gasoline prices and the corresponding hit to real disposable income — as well as to somewhat weaker momentum on capital spending.
If our tracking of Q1 GDP is correct, it would be the second consecutive quarter of growth close to potential, which we estimate at 1.4%. (Though labor markets would suggest we’ve just had two consecutive quarters of above-trend growth: the Q1 unemployment rate will likely be 0.3%-point below the Q3 average, and the employment-to-population ratio will be 0.4%-point above the Q3 figure). Even so, growth in the quarter about to end has generally disappointed expectations set at the beginning of the year.
Consumption growth in Q1 appears to have slowed to a 1.9% growth rate, which would be the slowest since the weather-impacted Q1 of last year, which came in at 1.8%. Moreover, the saving rate looks to have moved up from 5.0% in Q4 to 5.4% in Q1, which would be the first increase in a year (though we caution that prior increases in the saving rate over the past year have been revised away, a caveat to keep in mind when looking at the Q1 increase). The Q1 consumption disappointment is primarily due to a weak January outcome. Since then financial conditions have recovered, and most measures of consumer sentiment have held steady at fairly healthy levels. So we are inclined to see the disappointment in consumer spending in Q1 as fairly modest in magnitude and part of the inherent quarterly volatility. We look for a very modest firming in consumption over the remainder of the year to growth in the low- to mid-2’s. Our relatively unfazed assessment of household behavior is also supported by recent solid trends in residential investment — a spending category which likely posted its second consecutive double-digit quarter in Q1. Looking ahead we expect some cooling in housing, albeit to still-above trend growth.
Developments in capital spending have been a little more concerning. Business fixed investment spending likely contracted in Q1, the second straight down quarter. Even excluding the energy sector — which accounted for almost all of the slowing in cap-ex prior to Q4 — business investment spending looks roughly flat in Q4 and Q1. We look for total capital spending growth to be subdued in Q2, with modest gains thereafter. Cap-ex in the energy sector took 0.5%-point off of top-line GDP growth last year, and should be a notable drag again in Q1 and, to a lesser extent, Q2. The second-half fading of this drag — as energy cap-ex dwindles to bare bones levels — is an important reason why we see overall GDP growth getting a little better later this year. Business inventory investment has made only slow progress reverting to more sustainable levels. Recent inventory sentiment measures suggest firms are no longer in a hurry to destock, but a more rapid normalization of stockbuilding is a downside risk to our near-term growth outlook.
Real government spending had a hiccup in Q4 and Q1, though has generally been trending higher, particularly at the state and local level. We expect that trend to reassert itself, accompanied by a little lift to federal spending as the impulse from last year’s bipartisan budget bill kicks in. The foreign sector has been a drag, as net exports subtracted 0.5%-point from GDP last year. Some relief may be on the way in the form of a recently weaker dollar. Even so, the effects of currency movements on trade tend to exhibit quite long lags, and past dollar strength implies a drag from trade this year of around 0.3%-point (down a little from the 0.5% number pencilled in earlier in the year).
Our inflation outlook has been little-changed recently, and we continue to look for core PCE to modestly accelerate to 1.9% by year-end, which would imply about 0.15% average monthly increases over the remainder of the year. While we think a fair bit of the speed-up in core inflation the last two months was transitory in nature, the recent dollar weakness gives us some added confidence that price pressures should continue to modestly firm.
We continue to look for the next Fed move in July. Even though GDP growth has been disappointing, labor market performance has (thus far) been quite strong and core inflation has looked a little better lately. Global developments have also been more supportive recently (i.e. the dollar has continued to weaken). We believe these trends are supportive of a move around mid-year, which we also believe is consistent with the most recent dots and communications associated with those dots.
Something Did Break After All: Repo Rate Soars Most Since September 2008
Back on December 31, the day which was the first quarter and year-end after the Fed’s first rate hike cycle in nearly a decade, we pointed out something unexpected – the Fed’s rate hike corridor had just been broken when the Fed Funds rate traded as low as 0.12%, far below the mandated minimum of 0.25%.
SMRA confirmed as much, and added that “the fed funds rate has dropped to 0.12% this morning, down from 0.47% yesterday. The fed funds rate has dropped at month-end for all of 2015, with some of the larger of these moves occurring at quarter end, like today. It appears that these drops will still occur even after the fed rate hike, and possibly that the will be even more extreme, since today’s drop was about 23 basis points, as opposed to previous declines this year, which were usually between 5 and 10 basis points.”
It was unclear what had caused this dramatic breach of the Fed’s corridor, but we had some ideas:
the fact that there is this kind of major discontinuity in the Fed’s rate hike process, throws a huge wrench in the credibilty of the Fed tightening effort.
After all, if banks can steamroll with impunity the Reverse Repo 0.25% floor to park hundreds of billions, or trillions, in liquidity, then the Fed’s entire [liquidity soaking] experiment will be worth nothing. Keep in mind, the rate hike process only works if banks don’t get a chance to revert to an old standby liquidity regime on the last day of any quarter, in the process getting all the benefits of ZIRP even as the Fed parades just how tight financial conditions are getting.
Just imagine what would happen on December 31, 2016 if the Fed Funds rate plunged from 1.25% to 0.12% overnight? That would suggest that while the Fed may have drained liquidity for 99% of the quarter, on the one day it matters – the day when the bank’s balance sheet snapshot is formalized for 10-Q and 10-K purposes, ZIRP regime has returned.
Which is why today, March 31, another quarter and (and the Japanese fiscal year end) we were paying particular close attention to the funding markets, both on the fed funds and the general collateral repo side.
On the fed funds, and reverse repo, side, things we relatively normal: the Fed’s reverse repo spiked from $127.1 billion (from 59 counterparties) to $303.8 billion (from 99) overnight. A lot, but we’ve seen more (and certainly below the expanded ceiling of $2 trillion) and largely to be expected as banks rush to make their balance sheets appear pretty for the regulators, with lots and lots of securities rented from the Fed for 1 day. Fed Funds dipped to 0.25% and briefly slid below it but nothing worth writing home about.
But while FF was “fine”, something did break in the general collateral repo market.
Here is Wedbush’ Scott Skyrm with a rather scary chart and an attempt at an explanation:
Highest Repo Rate Since The Financial Crisis
An afternoon sell-off in GC pushed overnight rates (on quarter-end) as high as 1.75% and the market ended closed at 1.75%. Drumroll please! The 1.75% rate was the highest GC Repo trade since September, 2008. Naturally, there’s was a tightening December which moved rates higher overall. But today, are higher rates a function of the Repo market returing to normal? Or is it a sign of declining liquidity on quarter-end?
And the chart:
What is causing this liquidity scramble we don’t know, but such a historic move is most certainly worrying, especially for a Fed that wants to telegraph that all is well with its rate hiking process, and there are no structural liquidity issues with the banks.
Alas, as the chart above clearly shows, not only are there issues, but something clearly has broken in the US market’s repo funding plumbing.
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