Germans Warned To ‘Stockpile’ Cash In Case Of ‘War’

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Stocks Creep Higher As Dollar Resumes Falling, Oil Slides For Second Day

While the summer doldrums continue, with little market-moving newsflow overnight and zombified volumes, US futures crept higher and European shares rose after EU PMIs printed modestly better than expected, while a return to dollar weakness pushed emerging markets higher, even if it failed to boost oil which as we noted last night was downgraded by Goldman on various fundamental reasons.

Commodity producers led gains in European equities and S&P 500 futures crept higher suggesting a green open. Even as markets swing between gains and losses, volatility across asset classes remained subdued, with a measure for U.S. stocks near a two-year low. Top news stories include: Bayer, Monsanto said to move closer to deal as talks advance, Google said to recruit web stars, Hulu for virtual reality push, Wal-Mart reviews Welspun records after target pulls sheets.

Perhaps the top story of the day is the ongoing dollar softness, which has promptly faded any residual Fischer/Dudley/Williams hawkishness and is back to Friday’s lows. The US currency slid against all except two of its 16 major peers as market participants raise doubts that Yellen will build upon recent hawkish comments by Fed officials at her Jackson Hole speech this Friday. Cited by Bloomberg, traders in Europe and Lonaon said that real money names for once seem to share this view, as they have been actively selling the dollar this week.  A report by a Fed staffer suggested that the Fed may have to unleash up to $4 trillion in QE if the US economy were to encounter a sharp recession.

As investors turn their attention to this week’s main event, Yellen’s speech at an annual symposium in Jackson Hole, Wyoming, on Aug. 26, they are skeptical whether she will endorse comments from other Fed officials in the past week. The dollar capped its biggest two-day gain in a month on Monday as fed fund futures showed traders increased bets for an increase this year above 50 percent.  There are “fluid expectations for Yellen’s Jackson Hole speech,” said Peter Rosenstreich, head of market strategy at Swissquote Bank SA, in Gland, Switzerland. “Hawkish comments last week and rally in yield caused traders to question their expectations for no hike in September. The data is improving but it’s still at a very soft level and there’s really no need for the Fed to tighten prematurely at this point.”

EUROPEAN PMI

The euro-area economy maintained its momentum in August, with growth showing little sign of being curtailed by fallout from the U.K.’s Brexit vote as a composite Purchasing Managers Index for the 19-nation region posting its strongest expansion in seven months, rising for a second month to 53.3 from 53.2 in July. That was the best reading in seven months. The increase was driven by an improvement in services, while manufacturing activity slipped.

• Eurozone Aug. Flash Composite PMI 53.3; Est. 53.1

• Eurozone Aug. Flash Services PMI 53.1; Est. 52.8
• Eurozone Aug. Flash Manufacturing PMI 51.8; Est. 52
• Germany Aug. Flash Composite PMI 54.4; Est 55.1
• France Aug. Flash Composite PMI 51.6 Vs 50.1; Est 50.4

“The PMIs suggest that growth still is more robust in the service sector than in manufacturing – a phenomenon that can be observed in many regions and that goes hand in hand with slow growth of global goods trade,” said Holger Sandte, chief European analyst at Nordea Markets in Copenhagen.

As a result, European shares advanced as commodity producers rebounded on higher metals prices while all 19 Stoxx 600 sectors rise with basic resources, retail outperforming and health care, oil & gas underperforming. 86% of Stoxx 600 members gain, 12% decline. “We’ve had a decent rebound, largely driven by the basic- resource sector and some decent data,” said Michael Hewson, a market analyst at CMC Markets in London. “Yesterday we saw a bit of a selloff, largely as a result of a decline in oil prices. Now we’re seeing some light buying on the back of some decent results from the housebuilding sector here in the U.K. and some fairly decent PMI data. There’s nothing really that came out this morning that would suggest that the rally we’ve seen thus far is under threat.”

In Asia, South Korea, Australia and Shanghai .SSEC all gained, while Japan’s Nikkei .N225 went the other way, easing 0.6 percent as the yen ground higher on the dollar. A survey of Japanese manufacturing activity for August showed output rose for the first time in six months, but the improvement was marginal and investors fixed their focus on the Fed instead.

10-year U.S. Treasury yields ticked up to 1.55 percent after falling 4 basis points overnight. German Bund yields nudged up as well along with the rest of the euro zone and UK Gilts. Fed fund futures imply around a 24 percent chance of an easing in September, rising to around 50 percent by December. A quarter-point hike is not fully priced in until September 2017.

In commodity markets, oil remained under pressure after shedding 3 percent on Monday amid worries about burgeoning Chinese fuel exports, more Iraqi and Nigerian crude shipments and a rising U.S. oil rig count. Brent crude lost 25 cents to $48.96 a barrel. It hit a two-month high of $51.22 on Friday. U.S. crude futures fell 36 cents to $47.07, after the September contract expired on Monday at $47.05.

Market Snapshot

• S&P 500 futures up 0.3% to 2187
• Stoxx 600 up 0.7% to 343
• FTSE 100 up 0.5% to 6863
• DAX up 0.8% to 10577
• German 10Yr yield up 1bp to -0.08%
• Italian 10Yr yield up 3bps to 1.14%
• Spanish 10Yr yield up 2bps to 0.95%
• S&P GSCI Index down 0.8% to 361.4
• MSCI Asia Pacific up less than 0.1% to 139
• Nikkei 225 down 0.6% to 16497
• Hang Seng up less than 0.1% to 22999
• Shanghai Composite up 0.2% to 3090
• S&P/ASX 200 up 0.7% to 5554
• US 10-yr yield up 2bps to 1.56%
• Dollar Index down 0.12% to 94.41
• WTI Crude futures down 1.3% to $46.79
• Brent Futures down 1.2% to $48.56
• Gold spot up less than 0.1% to $1,339
• Silver spot up 0.6% to $19.03

Global Headlines

• Bayer, Monsanto Said to Move Closer to Deal as Talks Advance: Companies said on track to reach agreement in next two weeks. CEOs said to meet several times, price differences narrowing
• Google Said to Recruit Web Stars, Hulu for Virtual Reality Push: Company to release Daydream virtual reality service in weeks. Google said to back games, short films with YouTube celebs
• VW Resolves Standoff With Supplier After All-Night Negotiations: Six plants in Germany suspended production as parts withheld. Supplier’s unprecedented reaction affected 27,700 VW workers
• The Giant of Tokyo’s Stock Market Reveals Its Investment Secrets: Japan pension fund is top owner of MUFG, Honda, many more
• China’s Best Bank Called a ‘Mirage’ Built on Murky Shadow Loans: Case of Bank of Tangshan highlights opaque financial risks across nation
• World Bank Said to Be Planning SDR Bond Sale Next Week in China: Notes are set to price on Aug. 31, people familiar say
• Wal-Mart Reviews Welspun Records After Target Pulls Sheets: Retailer says it’s looking at Welspun certification records. Stock slumps 36% in two days; market value below $1b

Looking at regional markets, Asian stocks trade mixed following the subdued lead from the US in which the energy sector was the laggard after crude prices fell around 3%. Nikkei 225 (-0.6%) was weighed on by a firmer JPY as USD/JPY approached 100.00 to the downside, although the index rebounded off its worst levels and briefly turned positive with movements in the currency the main catalyst for price-action. ASX 200 (+0.7%) outperformed with advances in the financial sector spearheading the index to near 1% gains. Chinese markets were mixed with the Shanghai Comp (+0.2%) led higher on talk of reduced costs for businesses, while the Hang Seng (flat) was flat following some lacklustre earnings reports. 10yr JGBs traded higher amid a lack of risk-appetite in Japan, while today’s 20yr auction also provided support after the tail in price narrowed and bid to cover increased from the prior month. Japanese Manufacturing PM! (Aug) M/M 49.6 (Prey. 49.3), 6th consecutive month of contraction. (Newswires) PBoC set CNY mid-point at 6.6586 (Prey. 6.6652) and injected CNY 100bIn via 7-day reverse repos. (Newswires)

Top Asian News

• The Giant of Tokyo’s Stock Market Reveals Its Investment Secrets: Japan pension fund is top owner of MUFG, Honda, many more
• China’s Best Bank Called a ‘Mirage’ Built on Murky Shadow Loans: Case of Bank of Tangshan highlights opaque financial risks across nation
• World Bank Said to Be Planning SDR Bond Sale Next Week in China: Notes are set to price on Aug. 31, people familiar say
• China Telecom Profit Beats Estimates on Increase in Subscribers: Co. added about 32m 4G subscribers in 1H
• Doosan Bobcat Said to Gauge Korea IPO Demand in Early September: Korea Exchange said last week it approved co.’s share sale

EUropean equities have spent the session in the green (Euro Stoxx 50: +0.7%), with housing names among the best performers in the wake of Persimmon’s earnings (+3.7%), while material names also outperform, to pare some of yesterday’s losses. Separately on a stock specific note, automakers have been stealing the headlines, with Volkswagen (+2.3%) moving to session highs after making a deal with suppliers to end the recent suspension of production, while Renault (-1.6%) are among the worst performers after members of a state enquiry suggested a French government report omitted significant details of how Co.’s diesel cars were able to emit fewer emissions in official testing. Elsewhere, fixed income markets have seen another muted session of trade, with Bund futures continuing to hover around 167.50 and remain flat on the day, while the highlight may come later in the session in the form of the US 2-year note auction.

Top European News

• VW Resolves Standoff With Supplier After All-Night Negotiations: Six plants in Germany suspended production as parts withheld. Supplier’s unprecedented reaction affected 27,700 VW workers
• Schneider Said to Weigh Sale of Agriculture Data Service DTN: French company said to speak with potential sale advisers. Euromoney, others have previously shown interest in the unit
• UniCredit Jumps as PZU CEO Reported to Discuss Pekao Takeover: PZU CEO Krupinski will fly to Milan for talks, Dziennik says. UniCredit has been seeking to sell assets to boost capital

In FX, the Bloomberg Dollar Spot Index lost 0.1 percent as of 6 a.m. in New York, after jumping 0.6 percent over the previous two trading days. South Korea’s won led gains among the 16 major currencies, jumping 1 percent versus the greenback. The yen appreciated 0.1 percent to 100.22 per dollar. “The U.S. dollar may have pulled back on hopes that the Jackson Hole symposium may focus on lower-for-longer type of policy rather than the need to imminently tighten policy,” said Vishnu Varathan, a senior economist at Mizuho Bank Ltd. in Singapore. “But in the run-up to Jackson Hole we do expect markets to be hyper-sensitive on U.S. policy hints, real or perceived, and so the U.S. dollar and U.S. yields will be volatile.” The New Zealand dollar surged as much as 1 percent after central bank Governor Graeme Wheeler said that while he intends to lower interest rates further to revive inflation, a series of rapid cuts is not justified. The South African rand was the next biggest gainer, appreciating 0.4 percent.

The commodity complex remains in focus, with WTI and Brent futures residing in close proximity to USD 47 and USD 49 respectively after the downside seen during yesterday’s session. Separately, the precious metals complex benefitted from the aforementioned USD softness early in the session, but the likes of gold and silver have failed to sustain these gains and now trade relatively flat on the session. Goldman Sachs maintained its USD 45-50/bbl estimate for Brent crude through to summer next year and added that an OPEC freeze and the USD is not sufficient to support oil further. GS added that an OPEC freeze with some non-OPEC nations could be self-defeating because it would mean that prices could rise and enable other producers to ramp up supply.

Bulletin Headline Summary From RanSquawk and Bloomberg

• European equities enter the North American crossover in positive territory in what has been a quiet session once again and Eurozone PMIs dissipating some fears of a post-Brexit slowdown
• USD has been a key focus in FX markets as participants continue to question how committed Fed Chair Yellen will be at the Jackson hole speech on Friday
• Looking ahead, highlights include Turkish & Hungarian Interest Rate Decisions, US manufacturing PMIs, New Home Sales, APIs, ECB’s Coeure, Fed Discount Minutes and a US 2yr Note Auction
• Treasuries slip overnight, though remain in ranges, amid higher equities after Markit eurozone composite PMI rose for a second month to 53.3 from 53.2 in July; Treasury to sell $26b 2Y notes at 1pm ET, WI 0.765% vs 0.760% last month.
• The Fed is facing two big questions related to interest rates — one short-term and one long-term — and it’s important to understand that policy makers approach them separately
• Companies across Japan have a new name in their top 10 shareholder lists: the world’s largest pension fund as the $1.3t GPIF is top owner of Mitsubishi UFJ Financial Group Inc., Honda Motor Co. and at least 119 other Tokyo-listed firms
• As China’s sovereign bond yields tumble to decade-lows, investors are piling into the most defensive part of the stock market in search of returns
• China will further open its economic borders to investors from abroad in a move intended to counter sliding confidence in the outlook for the world’s second-largest economy
• Negotiations between Bayer AG and Monsanto Co. are advancing toward a deal after the companies made progress on issues including the purchase price and termination fee, people familiar with the matter said

DB’s Jim Reid concludes the overnight wrap

August this year is proving to be very different to last year where risk assets were being routed following the fallout from the shock PBoC devaluation. In fact glancing back to the EMR on this day last year the Shanghai Comp was in the midst of a huge three-day slump in which the index capitulated 19%. Twelve months on and markets have rarely been this quiet. A little bit of to and fro from Fed speakers has at least caused some excitement but in general markets have had very little to feed off since earnings season wrapped up.

The main story over the last 24 hours has probably been the abrupt end to the recent rally for Oil with WTI (-3.46%) ending its run of seven consecutive daily gains. It barely caused a dent in US equity markets though with the S&P 500 ending -0.06% despite energy stocks coming under pressure. In fact the S&P 500 has now gone 31 consecutive sessions with daily moves up or down of less than 1% and in that time has traded in just a 61pt range.

Today we get the August flash PMI’s in Europe which should give markets something to focus on however. This will give us another important post-Brexit indicator which so far have been pretty resilient. Remember that the Euro area composite PMI actually edged up 0.1pts to 53.2 in July. Market expectations today is for the composite to stay pretty much unchanged (consensus forecast is 53.1) with the same said for both the manufacturing and services surveys. We’ll also get the readings for Germany and France with the manufacturing survey data for the UK, Spain and Italy coming next week and services data the week after.

Also out today is more data in the UK with the August CBI industrial trends orders and selling prices survey. Current market expectations are for the industrial orders data to deteriorate further. Later this afternoon we’ll also get the latest Euro area consumer confidence reading. So all that to look forward to today.

This morning in Asia it’s been yet another mixed start in markets. In Japan the Nikkei (+0.05%) and Topix (+0.04%) are little changed despite the Nikkei manufacturing PMI for Japan improving 0.3pts to 49.6 this month in the flash reading. The Hang Seng (-0.30%) is lower however while there have been gains for the Shanghai Comp (+0.47%), Kospi (+0.20%) and ASX (+0.84%). Sovereign bond markets are generally stronger while in FX Markets most emerging market currencies are up slightly. The other data out in Asia this morning came in China where the MNI business indicator for August fell 1.2pts to 54.3.
Moving on. Following on from the Fed Vice-Chair Fischer’s comments over the weekend, the initial reaction in the US Dollar was to rally with the index up as much as half a percent as we went to print yesterday. However that rally faded as the day progressed with the index eventually finishing unchanged. Treasuries followed a similar path. 2y and 10y yields were up as much as +3.2bps and +2.0bps respectively, but then unwound and actually rallied into the close, finishing -0.8bps and -3.6bps lower respectively.

The probability of a Fed rate hike by December ended up unchanged at 51% although pricing for September did actually nudge up slightly to 24% from 22%. It was the move in Oil which probably got the most attention though with that decline for WTI the largest since August 1st. The fingers of blame were pointed at increased expectations of more supply out of Iraq and also the news that a cease-fire was declared in the Niger Delta region, although this was also being met with some caution. Meanwhile metal markets were also a touch softer yesterday which weighed on commodity names in Europe. The Stoxx 600 closed +0.09% after initially climbing +0.90%.

With little in the way of economic data yesterday there was some focus on the informal European leaders meeting between Merkel, Hollande, and Renzi, intended to show their commitment to the EU post Brexit. According to the FT the leaders discussed forgoing a common plan to bolster Europe’s economy and also security, while the talks were also supposedly seen as a show of support for Renzi from Merkel ahead of the upcoming constitutional reform referendum in Italy.

Staying in Europe the latest ECB CSPP numbers were out yesterday. Impressively, given that it covers mid-August, they upped their purchases from a €250mn daily run rate the week before to €321mn this past week. The average daily number since the program started in June is around €350mn with July and Augusts’ purchases probably healthier than most would have expected given the holiday season. At this rate the €17.8bn total purchased so far is only within 2-3 weeks of exceeding the total ABS purchases of €20.3bn made since that program started in November 2014.

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ASIA MARKETS

i)Late  MONDAY night/TUESDAY morning: Shanghai closed UP 4.91 POINTS OR 0.16%/ /Hang Sang closed UP 1.02 points or 0.01%. The Nikkei closed DOWN 100.83 POINTS OR 0.61% Australia’s all ordinaires  CLOSED UP 0.70% Chinese yuan (ONSHORE) closed UP at 6.6430/Oil FELL to 47.06 dollars per barrel for WTI and 48.76 for Brent. Stocks in Europe: in the RED . Offshore yuan trades  6.6537 yuan to the dollar vs 6.6430 for onshore yuan.THE SPREAD BETWEEN ONSHORE AND OFFSHORE NARROWS SLIGHTLY AS  MORE USA DOLLARS ATTEMPTS  LEAVE CHINA’S SHORES  

FIRST  REPORT ON JAPAN  SOUTH KOREA AND CHINA

a) JAPAN ISSUES

We have been highlighted the following to you on several occasions.  Now from CLSA: the Bank of Japan has basically nationalized the Japanese stock market.

(courtesy CLSA/zero hedge)

CLSA: “The Bank Of Japan Has Nationalized The Japanese Stock Market”

Following the recent announcement by the BOJ that it would double its ETF purchases to ¥6 trillion, or $58 billion, up from the current ¥3.3 trillion, which is the equivalent to the Fed purchasing $580 billion in ETFs over the next two years, we noted that according to a Bloomberg analysis this would make the Bank of Japan the top shareholder of 55 companies by the end of 2017.

It should, therefore, come as no surprise that as CLSA’s NIcholas Smith wrote in a research report, the “BOJ is nationalizing the stock market” because that is precisely what it is doing with every incremental intervention in the stock market.

Of note in Smith’s note, first reported by CNBC, is that the BOJ’s purchases are focused largely on funds tracking the Nikkei 225 index, estimating that more than half of the BOJ’s ETF buying was likely in Nikkei-tied funds.”That was particularly distorting because that gauge was “a Flintstones index from an abacus age,” due to its arbitrary inclusions.” He noted that Uniqlo owner Fast Retailing had the largest weighting in the index, but that was primarily due to its high share price after avoiding any stock splits since April 2002. He estimated that BOJ buying of Nikkei-tied ETFs worked out to more than 16 percent of the stock’s free float each year. By comparison, Toyota Motor had the biggest market capitalization of any Japan stock, but was only ranked 15th by weight in the Nikkei index.

“If it seems strange that the BOJ is hamstringing the price discovery mechanism of the Japanese stock market by partially nationalizing it, it is all the stranger that it chooses to do so by substantially skewing its buying towards such a distorting index. The arbitrary decisions of the Nikkei committee get to choose the destination of trillions of yen of BOJ – and hence government – money.”

Smith then laments an issue that has especially plagued bond buyers in Europe over the past few months: the CLSA analyst expects that as long as the BOJ continued to buy ETFs, the Japanese market’s performance would become increasingly a function of liquidity in the central bank’s buying basket. Considering that the BOJ will have to intervene far more aggressively in both the bond and stock market in the coming months to push the Yen weaker, liquidity is only set to get worse.

CLSA wasn’t the only one to lament the nationalization of the Japanese market. In a Friday note, Deutsche Bank said that the BOJ’s purchases of Japan real-estate investment trusts (J-REITs) had also lost market-based “price discovery.”

Quoted by CNBC, they said that on August 18, the BOJ purchased around 1.2 billion yen worth of J-REITs for a total of around 61.2 billion yen worth so far this year and 330 billion yen worth since October of 2010. Last week’s BOJ action caused the TSE REIT index to drop sharply in the morning session then surge later in the afternoon, the report said.  Because the J-REIT market is so small, the BOJ’s purchases have an even stronger tendency to distort the market than the central bank’s ETF purchases, Deutsche Bank said.

“While real estate majors are trading at more than 30 percent discounts to net asset value, their price levels are exactly opposite those of J-REITs, which are at premiums of above 30 percent,” Deutsche Bank said, noting that both sectors should be tied to Japan’s real-estate market.

“The elimination of the price discovery function leads to lost buying opportunities for investors and ultimately weakens the investment appetite,” the report said, calling it a “serious error” by the BOJ.

Finally, Reuters summarizes these widespread fears of central bank incursion into the stock market, warning that the “Bank of Japan’s near doubling of its purchases of Tokyo shares is causing investors to worry the central bank will dominate financial markets, which could lead to price distortions as it continues to grease the economy.”

The BOJ’s buying spree will make it harder for investors to sift good companies from bad, and raises a host of other problems including misallocating capital, making equities trading more speculative and reducing incentives for companies to meet shareholder needs, analysts say.

More than three years of massive monetary stimulus has already resulted in the central bank cornering the Japanese government bond (JGB) market and distorting interest rates.

“The increased BOJ purchasing provides a very favorable demand environment for listed equities,” said Michael Kretschmer, chief investment officer at Pelargos Capital in the Hague. “Nevertheless, in the long run we strongly doubt these type of monetary gimmicks aimed at price setting of risk assets can have a sustained positive impact on economic growth.”

In retrospect, what the BOJ is doing is not new: it is merely the latest act of desperation in a process that stretches over 30 years:

Some liken the increased purchases by the BOJ – the only central bank in the world that buys stocks at the moment – to failed government efforts over more than two decades to prop up the market by pressing government-related financial institutions to buy after the bursting of the late-1980s asset bubble.

Actually, one can add the SNB to the list of banks that are open about their stock purchases. As for central banks, such as the Fed which transacts in the equity market via a very “close” relationship between NY Fed and Citadel, they are for now ignored.

As for Japan, “the market is driven completely by the BOJ’s buying rather than views on each companies’ earnings,” said a fund manager at a Japanese asset management firm.

This means that fundamental data and news are now completely ignored: all that matters – as has been the case for years in the US – is central bank intervention, either direct or indirect.

Some worry the stock market could start to resemble the bond market, where the BOJ’s purchases – about 110-120 trillion yen annually – have made traders fixate on its bond buying and pay scant attention to economic data.

The BOJ’s tactics “could weaken the market’s function in the long run,” said Keita Matsumoto, head of investor sales at Citigroup Global Markets Japan. “I’m worried that could lead to a ‘JGB-ification’ of stocks.”

Yet what is obvious to all but the BOJ is that the good times will not last, and is why some are already casting glances at the exit signs: “The rise in share prices may seem desirable but it causes harm as well,” said Shingo Ide, chief equity strategist at NLI Research Institute. “Even if companies need to improve their management, shareholders may not take them seriously if share prices are not falling.”

The endgame, when it strikes, will hardly be a surprise: a quick historical lesson of what happens when the government nationalizes all capital markets, if one can even call them that, look at what happened with the USSR. For now, however, the money printers are spinning and “one has to dance.”

Finally, one can probably absolve Kuroda of his sins – after all he is merely following orders of bankers from the private sector (recall that the BOJ launched NIPR following “peer pressure” at Davos) – by admitting that what the BOJ is doing is no different from the creeping capital markets nationalization that all other central banks around the globe have unleashed. Their redemption? They are doing it “for the people.”

 

end

 

Here is another casualty of the higher Libor and its increasing costs to foreign banks. We showed (below) that the higher libor costs make buying of USA bonds impossible because their higher costs negates the deal.  Now we see that Japanese banks are having trouble locating scarce dollars in the money markets and that will have a devastating effect on their profitability

(courtesy zero hedge)

 

The First Victims Of The Libor Surge Have Emerged… In Japan

When we last looked at the blowout in US short-term funding rates, most notably Libor, which has been broadly attributed to regulatory reasons ahead of the October 14 money fund reform deadline, we pointed out that with trillions in debt tracking Libor, it was only a matter of time before something snapped.

Since then Libor has slowed down its dramatic ascent, so far plateauing in the low 0.8% range, however, the materially “tighter financial conditions” have remained.

 

Yet while many have been looking for clues in the US banking sector about financial stress, they have been so far unsuccessful. The reason for that, as IFR reports, is that they were looking in the wrong place.

Instead, it is not US but Japanese megabanks who have emerged as the biggest victims of a worsening squeeze in the US $1 trillion commercial paper market, “as high swap costs leave them with few satisfactory alternatives for dollar funding.”

As we reported a month ago, investors have pulled billions out of prime money-market funds ahead of new Securities and Exchange Commission (SEC) regulations aimed at preventing a repeat of the liquidity crisis following the collapse of Lehman Brothers in 2008. In anticipation, investors have slashed their allocations to prime funds, the main buyers of commercial paper and certificates of deposit from corporations, including Japanese lenders.

So far US banks have escaped largely unscathed, but the higher funding costs and shrunken market are hitting Japanese banks particularly hard, IFR reports, as they have been sourcing as much as a third of their U.S. dollar liquidity in the short-term U.S. market. Citigroup estimates Japanese banks have about $125 billion to $150 billion of CP and CDs maturing before the end of September.

Adding Libor surging insult, to profit-draining NIRP injury (recall that Japanese banks have seen their profits shrink as a result of the BOJ’s recent implementation of negative rates), rising U.S. dollar funding rates pose a further threat to profitability at Japanese banks. Corporate clients are also at risk, as lenders look to pass on the higher costs.

To be sure, some Japanese lenders have been trying to pre-empt the blow from reforms and the Libor blow out. Sumitomo Mitsui Financial Group cut its global CP and CD funding by $7 billion in the year to June, while a $28 billion jump in deposits outpaced a $19 billion increase in lending globally, according to Deutsche Bank. As a result, its loan-to-deposit ratio shrank from 149.6 percent in March 2015 to 135.5 percent at end-June. Mitsubishi UFJ also saw its ratio fall to 115.1 percent from 117.8 percent in March 2015 on the back of a rise in deposits.

In the short term, however, Japanese lenders will be unable to raise enough from deposits to replace the U.S. money markets. Prime money-market funds slashed their holdings of Japanese securities to $115 billion at the end of July, down 25% from $153 billion two months ago, according to ICI. Previously second to only the U.S. by country of issuer, Japan has now fallen to third behind France.

Being increasingly locked out of money markets means that beyond paying up subsantially for U.S. dollars, Japanese banks have few options. Leverage requirements mean global banks are reluctant to provide repos, while foreign-exchange swaps would be a more expensive way to access U.S. dollar funding, said Koichi Sugisaki, a rates strategist at Morgan Stanley MUFG Securities. Three-month CP and CDs now cost roughly 80bp-90bp on an annual basis, but three-month FX forwards have also become more expensive at around 1.5 percent per year, he said.

The surge in Libor, which has also resulted in a spike in the cross-currency basis, has also meant that Japanese buyers are increasingly shying away from US Treasuries which when fully FX hedged no longer generate a notably yield pick up as we reported earlier.

FX hedging costs are at their highest since the financial crisis. The three-month JPY/USD forward is now at -39 pips, the lowest since December 2008. The more negative the reading, the more expensive it is for Japanese issuers to swap yen to U.S. dollars. It also means that the shortage of dollars, from a Japanese perspective, has never been greater.

Rising Libor rates could push FX swap rates out further by the end of this year, Sugisaki estimated. “An increase of the cost of funding in CP and CDs would be definitely negative for the banks,” he said. “For the Japanese banks, it’s going to be very tough.”

One option for Japanese banks is to access US dollar bond funding, by directly selling short-dated, US-denominated bonds, which could provide Japanese banks with some respite from short-term dollar funding pressure. “Japanese banks could consider issuing short-end bonds from the operating bank level in the future to meet short-term liquidity needs as an alternative to CP/CDs,” said Masanori Kato, head of debt capital markets for J.P. Morgan in Tokyo. “Short-term notes would be a possible alternative avenue, and demand would be there for it as Japanese banks are seen as a safer haven due to Brexit concerns.”

He suggested that, although it was difficult to say whether issuing U.S. dollar bonds could be cheaper than using FX forwards, the possibility remained that U.S. dollar bond funding might become more  competitive. Some high-rated European banks have already taken this approach, finding that two-year or three-year bonds offer similar funding costs to CP.

However, as IFR notes, this option will have to be tested first, as Japanese banks have rarely issued U.S. dollar bonds at tenors of less than three years.

The strain on short-term funding is not expected to end soon, with Citigroup estimating that three-month Libor could rise another 5bp-10bp before October 14.

In the absence of cost-effective alternatives, Japanese banks will have to continue issuing CPs at a higher cost, pressuring their profit margins, leading to an even greater shortage of US dollars, higher Libor rates, and so on, until the Libor spike spills over across the Pacific and claims its first US and European banking victims.

b) REPORT ON CHINA

China has spooked its market as they seem to wish to withdraw from conventional QE and instead go their less powerful 14 repos:  bond yields spike as there will be nobody to buy their bonds:

(courtesy zero hedge)

China Has Its First Taste Of “VaR Shock” As PBOC 14 Day Repo Sparks Treasury Dump

Chinese Treasury futures tumbled overnight, posting their sharpest fall in three months, after the local market was spooked when the PBOC surprised bondholder by hinting it could avoid broad easing and instead may bring back a far less powerful tool. Overnight, the People’s Bank of China asked banks about demand for 14-day reverse bond repurchase agreements for the first time since February, suggesting it may be expanding its strategy of using targeted, short-term injections rather than cutting interest rates or banks’ reserve requirements (RRR).

As a result, and confirming once again that fundamentals are dead even in China where only liquidity injections matter just like across the entire “developed” market, the price of Chinese 10- Y treasury futures tumlbed 0.38%. This was also China’s first glimpse of what a VaR shock in government bonds will look like once yields spike from recent record lows.

A senior trader at a major Chinese state-owned bank in Shanghai, cited by Reuters, said that “the market interprets the move as another sign that the central bank won’t cut interest rates and RRR for now as it injects more short-term money into the banking system.”  He added that the PBOC announcement “is likely to set a floor for the fall of the yields of government bond futures, and thus investors sold the futures on the news.”

The People’s Bank of China (PBOC) has relied on issuance of seven-day reverse repos in daily open market operations this year, injecting cash on a regular basis to manage short-term money supply. The adjustment may imply the PBOC is preparing to extend the tenor of its short-term money management strategy.

While many have been expecting the PBOC to ease anew, with both housing data and the broader economy once again rolling over while trade data remains subdued, the PBOC has not cut RRR since March, and has not cut long-term guidance interest rates since October.

Still, while the economy urgently needs more easing, if only judged by the recent collapse in Chinese yields, the PBOC knows that more aggressive monetary policy easing will put unwanted additional pressure on the yuan currency, which is near six-year lows, and risk more capital outflows.

However, now that it has tipped its hand, a new risk emerges: VaR shock, something China has not experienced yet.

While that has yet to manifest itself, as Reuters adds, policymakers have clearly grown more concerned recently about the risks of prolonged, debt-fuelled stimulus, and appear to have turned their focus to more government spending instead.

Money markets were mixed after the PBOC’s move, with the volume weighted average of the 14-day repo down just two basis points (bps) to 2.7 percent and the seven-day weighted average rate up six bps at 2.40 percent.  Although the 14-day repo rate has been moving higher in recent days, the weighted average remains far below its recent peak of 2.82 percent in late July.

With the central bank conducting seven-day reverse repos on a nearly daily basis, the benchmark seven-day rate has remained steady for most of 2016, but the 14-day has been more volatile.

So far in 2016, the PBOC has injected a net 654.3 billion yuan ($98.44 billion) through open markets year to date by the week ending Aug 20. It has also injected funds through medium-term lending facilities which allow it to channel money to more vulnerable sectors such as agricultural firms or small businesses.

Finally, China has also injected trillions in bank debt, both in the form of conventional loans and shadow debt, neither of which have merely slowed down the decline.

EUROPEAN AFFAIRS

Last week we reported on the scarcity of Great Britain bonds (GILTS).  Today there was a rush to purchase anything with a yield and thus scarcity is back in this arena

(courtesy zero hedge)

Gilts Spike After Cover Ratio In Today’s 15Y+ POMO Tumbles, BOE Buys All Bonds At Premium

While last week the UK bond market breathed a sigh of relief when the BOE found more than enough willing sellers into its longest-maturity, 15Y+ repurchase, or POMO, operation, following the uncovered operation two weeks ago, today concerns have returned anew when moments ago the BOE reported that its GBP1.170 billion repurchase operation was covered “only” 1.54x (with GBP 1.799 billion in offers), down nearly by half from last week’s 2.93x, and suggesting that supply of longer-dated gilts may once again be getting scarce.

Just as importantly, the BOE bought all bonds at premium, with highest price paid at 141p and 151p. Most bonds were previously bought at a discount of 7p-45p, with just three issues bought at a premium of 1p-9p

In response, the yield on the 30Y gilt immediately tumbled as investors once again rushed into the longest dated bond as fears of a bond shortage have once again reemerged.

end

 

Shear lunacy…now Mario is buying private placement debt.  They are purchasing debt equivalent to 1 trillion euros per year.  It ends in March 2017:

(courtesy Mish Shedlock)

Madness In Mario-World: European Companies Issue Debt Simply Because The ECB Will Buy That Debt

Submitted by Michael Shedlock via MishTalk.com,

Debt Seller’s Paradise

Things are so absurd in the Eurozone that the ECB is buying private placement debt with little regard for safety.In turn, private equity companies issue debt simply because they know in advance the ECB will buy it.

It’s a startling example of how the market is adapting to extremes of monetary policy, and it’s a safe conclusion the experiment will not end well.

For now, it’s a Seller’s Paradise as Companies Build Bonds for European Central Bank to Buy.

The European Central Bank’s corporate-bond-buying program has stirred so much action in credit markets that some investment banks and companies are creating new debt especially for the central bank to buy.

In two instances, the ECB has bought bonds directly from European companies through so-called private placements, in which debt is sold to a tight circle of buyers without the formality of a wider auction.

Now, they are all but inviting private actors to concoct specific things for them to buy so they can continue pumping money into the financial system.

The furious central-bank buying has been a relief to companies and governments that can now borrow at rock-bottom interest rates. But it has also spurred criticism that the extreme policies are killing the returns available to other investors, such as pension funds, and loading up the economy and financial system with potentially overpriced debt.

The ECB was late to the central-bank party—it began quantitative easing only in 2015, years after the U.S., the U.K. and Japan—but it has embraced bond-buying with fervor. In March, it boosted its purchases to €80 billion ($90.6 billion) a month from €60 billion and surprised investors by saying it would soon add corporate bonds to its shopping list.

It had already bought so many government bonds that it was running out of things to purchase.

Private placements are private debt sales not open to the broader market, typically relying on a handful of investors that want to buy a company’s bonds. “Typically there won’t be a prospectus, there won’t be any transparency, there won’t be a press release. It’s all done discreetly,” said Apostolos Gkoutzinis, head of European capital markets at law firm Shearman & Sterling LLP.

The ECB executes bond purchases through the eurozone’s national central banks, which function like branches.

The Bank of Spain holds some of a €500 million private placement issued by Spanish oil company Repsol SA on July 1, and some of a €200 million deal from Spanish power utility Iberdrola SA sold on June 10, two days after the ECB program got under way.

Both deals were solely arranged by Morgan Stanley and are the only private placements issued since the start of the ECB’s corporate buying program to have been bought by national central banks, according to the Journal analysis. Morgan Stanley declined to comment.

“We’re all looking at the data,” said the head of credit trading at a major European bank. “They’re only one new customer—but it’s a big one.”

And banks are rushing to serve it. Credit Suisse Group AG reshuffled its sales coverage of national central banks in recent weeks when the trading desk realized it wasn’t doing enough business with the new largest buyer in town, according to a person familiar with the matter.

ECB Effect

The ECB only announces what it will buy, not how much of it. Yet, that has spawned a guessing game driving yields lower and lower.

As soon as the ECB does buy an issue, the interest rate on those bonds collapse. And now we see private placement of debt, specifically designed with the ECB in mind.

QE is supposed to spur lending and investment. In practice, it’s killing pension plans while fostering bond bubbles.

As long as the companies do not default, the ECB can simply hold the debt to term, just as the Fed is doing now. Meanwhile, the bubbles continue to inflate.

end

 

RUSSIAN AND MIDDLE EASTERN AFFAIRS

An excellent commentary, with the subject that the new Russia-China- Iran alliance totally pushed the USA out of much middle east influence..

(courtesy Darius Shahtamasebi/AntiMedia.org)

New Russia-China-Iran Alliance Could Push US Out Of Much Of The Middle East

Submitted by Darius Shahtamasebi via TheAntiMedia.org,

When the current Syrian conflict first erupted in 2011 – and then enflamed in 2012 – a small minority of the American public probably wondered why President Obama was not intervening to help the Syrian people as he had done in Libya (they were likely completely unaware the president had already been interfering heavily in Syria since the conflict began). However, some pundits speculated that Obama would eventually intervene directly, and that this intervention would be the beginning of the end of the American empire as we know it.

What started out as a seemingly hollow prediction has become as true a statement as any. First, American involvement began with funding, arming, and training violent rebels to try to overthrow the Syrian government. Then came attempts to misrepresent so-called “intelligence” to justify military intervention against Assad in 2013. And finally, like a dream come true, Washington was then able to capitalize  on the growth of ISIS in Syria, a growth predicted by their own security establishment in 2012, which then became an excuse to start bombing Syrian territory in 2014. By interfering so forcibly in the affairs of Syria, the U.S. has forced a number of countries  — notably Iran, China and Russia — to step up and strike back at U.S. efforts to destabilize the region.

Since the beginning of the conflict, Iran has been heavily involved due to the fact Syria is an important ally to the Islamic republic, bound by a mutual defense agreement. Much to the anger of the U.S., just this week, Iran allowed Russia to strike Syrian territory from its Hamadan air base. Iran is supplying ground troops, advisement, and high level training to Syrian pro-Assad forces. They are also providing a credit line, and Iranian involvement is growing in tandem with the two nuclear powers also working in defense of the Syrian regime.

Russia has a history of being involved in Syria, but following its direct military intervention last year, they have shown they can set up their own no fly zone within the country at any moment(note that the Russian intervention is arguably legitimate given that they have received authority from the Assad regime to do so). Despite this, they have continued to extend a hand to Washington to achieve their stated goals of defeating ISIS together.

China has sided with Russia and Syria for some time now, using its veto power at the U.N Security Council level to block resolutions on Syria – after Russia and China were completely dupedby the Security Council resolution on Libya in 2011. China has warned the U.S. against attacking Syria and Iran, and now, they have officially stated they are looking to join the fight on the side of the Syrian government, further complicating the issue from Washington’s standpoint.

Unless the U.S. wants to confront these players directly, it has no choice but to accept that they have lost a war they directly and indirectly started through covert CIA operations that began in 2011 (and as some would argue, well before that). This isn’t a loss in the Iraq or Vietnam sense — which are arguably victories in the eyes of the elite class. Rather, the Syrian war is an operation that has left them with less influence in the region than when the Syrian crisis began (cue picture of John Kerry dining with Bashar al-Assad in Damascus in 2009).

It will be back to the drawing board for Washington, whose only real move is to continue arming and funding fanatical jihadists or encourage Saudi Arabia and Turkey to deliver on their threat to send ground troops into Syria. This will only delay the inevitable, however, and eventually they will have to either admit they have completely lost influence in the Shia-Crescent region of the Middle East — which has, in turn, been snatched up by Russia and China — or directly confront these nuclear powers in an all-out war.

Or they can just wait until Hillary is elected president.

GLOBAL ISSUES

A must read…the lunacy of QE and why this will bring the whole house of cards down

(courtesy David Stockman/ContraCorner)

Bubbles In Bond Land——A Central Bank Made Mania, Part 1

by David Stockman • August 22, 2016

NOTE TO READERS

I am in the throes of finishing a book on the upheaval represented by the Trump candidacy and movement. It is an exploration of how 30 years of Bubble Finance policies at the Fed, feckless interventions abroad and mushrooming Big government and debt at home have brought America to its current ruinous condition.

It also delves into the good and bad of the Trump campaign and platform and outlines a more consistent way forward based on free markets, fiscal rectitude, sound money, constitutional liberty, non-intervention abroad, minimalist government at home and decentralized political rule.

In order to complete the manuscript on a timely basis, I will not be doing daily posts for the next week or two. Instead, I will post excerpts from the book that crystalize its key themes and which also relate to the on-going gong show in the presidential campaigns and in the financial and economic arenas. Another of these is included below.

I am also working with my partners at Agora Financial on a new version of Contra Corner. More information on that will be coming later this month.

…..Sometimes an apt juxtaposition is worth a thousand words, and here’s one that surely fits the bill.

Last year Japan lost another 272,000 of its population as it marched resolutely toward its destiny as the world’s first bankrupt old age colony. At the same time, the return on Japan’s 40-year bond during the first six months of 2016 has been an astonishing 48%.

That’s right!

We aren’t talking Tesla, the biotech index or Facebook. To the contrary, like the rest of the Japanese yield curve, this bond has no yield and no prospect of repayment.

But that doesn’t matter because it’s not really a sovereign bond anymore.These Japanese government’s bonds (JGBs) have actually morphed into risk free gambling chips.

Front-running speculators are scooping up whatever odds and sots of JGB’s that remain on the market and are selling them to the Bank of Japan (BOJ) at higher and higher and higher prices.

At the same time, these punters face virtually no risk. The BOJ already owns 426 trillion yen of JGB’s, which is nearly half of the outstandings. And that’s saying something, given that Japan has more than one quadrillion yen of government debt which amounts to 230% of GDP.

Moreover, it is scarfing up the rest at a rate of 80 trillion yen per year under current policy, while giving every indication of sharply stepping-up its purchase rate as it segues to outright helicopter money.

It can therefore be well and truly said that the BOJ is the ultimate roach motel. At length, virtually every scrap of Japan’s gargantuan public debt will go marching into its vaults never to return, and at “whatever it takes” in terms of bond prices to meet the BOJ’s lunatic quotas.

The Big Fat Bid Of The World’s Central Banks

Surely, BOJ Governor Kuroda will go down in history as the most foolish central banker of all-time. But in the interim the man is contributing—-along with Draghi, Yellen and the rest of the central bankers’ guild—-to absolute mayhem in the global fixed income market.

The effect of their massive bond purchases or so-called QE policies has been to radically inflate sovereign bond prices. The Big Fat Bid of central bankers in the benchmark government securities sector, in turn, has caused drastic mispricing to migrate into the balance of the fixed income spectrum via spread pricing off the benchmarks, and from there into markets for converts, equities and everything else.

Above all else, the QE driven falsification of bond prices means that central banks have supplanted real money savers as the marginal source of demand in the government bond markets. But by their very ideology and function, central bankers are rigidly and even fiercely price inelastic.

For example, the madman Draghi will pay any price—-absolutely any price—–to acquire his $90 billion per month QE quota. He sets the price on the margin, and at present that happens to be a yield no lower than negative 0.4% for a Eurozone government security of any maturity. Presumably that would include a 500-year bond if the Portuguese were alert enough to issue one.

Needless to say, no rational saver anywhere on the planet would “invest” in the German 10-year bund at its recent negative20 bps of yield. The operational word here is “saver” as distinguished from the hordes of leveraged speculators (on repo) who are more than happy to buy radically over-priced German bunds today.

After all, they know the madmen at the ECB stand ready to buy them back at an even higher price tomorrow.

Yet when you replace savers with central bankers at the very heart of the financial price discovery process in the benchmark bond markets, the system eventually goes tilt. You go upside down.

The Fiscal Equivalent Of A Unicorn—–“Scarcity” In Sovereign Debt Markets

That condition was aptly described in a recent Wall Street Journal piece about a new development in sovereign debt markets which absolutely defies human nature and the fundamental dynamics of modern welfare state democracies.

To wit, modern governments can seemingly never issue enough debt. This is due to the cost of their massive entitlement constituencies, special interest racketeers of every stripe and the prevalence of Keynesian-style rationalizations for not extracting from taxpayers the full measure of what politicians are inclined to spend.

Notwithstanding that endemic condition, however, there is now a rapidly growing “scarcity” of government debt—-the equivalent of a fiscal unicorn. As the WSJ noted:

A buying spree by central banks is reducing the availability of government debt for other buyers and intensifying the bidding wars that break out when investors get jittery, driving prices higher and yields lower. The yield on the benchmark 10-year Treasury note hit a record low Wednesday.

“The scarcity factor is there but it really becomes palpable during periods of stress when yields immediately collapse,’’ he said. ”You may be shut out of the bond market just when you need it the most.’’

Owing to this utterly insensible “scarcity”, central banks and speculators together have driven the yield on nearly $13 trillion of government debt—or nearly 30% of total outstandings on the planet—into the subzero zone. This includes more than $1 trillion each of German and French government debt and nearly $8 trillion of Japanese government debt.

Nor is that the extent of the subzero lunacy. The Swiss yield curve is negative all the way out to 48 years, where recently the bond actually traded at -0.0082%.

So we do mean that the systematic falsification of financial prices is the sum and substance of what contemporary central banks do.

Forty years from now, for example, Japan’s retirement colony will be bigger than its labor force, and its fiscal and monetary system will have crashed long before. Yet the 10-year JCB traded at negative 27 bps recently while the 40-year bond yielded a scant 6 basis points!

When it comes to government debt, therefore, it can be well and truly said that “price discovery” is dead and gone. Japan is only the leading edge, but the trend is absolutely clear. The price of  sovereign debt is where central banks peg it, not even remotely where real money savers and investors would buy it.

Still, that’s only half the story, and not even the most destructive part. The truth of the matter is that the overwhelming share of government debt is no longer owned by real money savers at all. It is owned by central banks, sovereign wealth funds and leveraged speculators.

As to the latter, do not mistake the repo-style funding deployed by speculators with genuine savings. To the contrary, their purchasing power comes purely from credit (repo) extracted from the value of bond collateral, which, in turn, is being driven ever higher by the Big Fat Bid of central banks.

What this means is that real money savings—– which must have a positive nominal yield—-are being driven to the far end of the sovereign yield curve in search of returns, but most especially ever deeper into the corporate credit risk zone in quest of the same.

The Pure Lunacy Of Mario Draghi

Nowhere is the irrational stampede for yield more evident than in the European bond markets. After $90 billion per month of QE purchases by the ECB, European bond markets have been reduced to a heap of raging  financial market lunacy.

It seems that Ireland has now broken into the negative interest rate club, investment grade multinationals are flocking to issue 1% debt on the euro-bond markets and, if yield is your thing, you can get all of 3.50% on the Merrill Lynch euro junk bond index.

That’s right. You can stick your head into a veritable financial meat grinder and what you get for the hazard is essentially pocket change after inflation and taxes.

Remember, the average maturity for junk bonds is in the range of 7-8 years. During the last ten years Europe’s CPI averaged 2.0% and even during the last three deflationary years the CPI ex-energy averaged 1.2%.

So unless you think oil prices are going down forever or that the money printers of the world have abolished inflation once and for all, the real after-tax return on euro junk has now been reduced to something less than a whole number. It might be wondered, therefore, whether the reckless stretch for “yield” has come down to return free risk?

Well, no it hasn’t. Yield is apparently for desperate bond managers and other suckers.

In fact, among the speculators who wear big boy pants the bond markets are all about capital gains and playing momo games. It’s why euro junk debt—-along with every other kind of sovereign and investment grade debt—-is soaring. In a word, bond prices are going up because bond prices are going up. It’s an utterly irrational speculative mania that would do the Dutch tulip bulb punters proud.

In the days shortly before Draghi issued his “whatever it takes” ukase, for instance, the Merrill Lynch euro high yield index was trading at 11.5%. So speculators who bought the index then have made a cool 230% gain if they were old-fashioned enough to actually buy the bonds with cash.

And they are laughing all the way to their estates in the South of France if their friendly prime broker had arranged to hock them in the repo market even before payment was due. In that case, they’re in the 1000% club and just plain giddy.

Does Mario Draghi have a clue that he is destroying price discovery completely? Do the purported adults who run the ECB not see that the entire $20 trillion European bond market is flying blind without any heed to honest price signals and risk considerations at all?

Worse still, do they have an inkling that the soaring price of debt securities has absolutely nothing to do with their macroeconomic mumbo jumbo about “deflation” and “low-flation”?  Or that they are in the midst of a financial mania, not a ” weak rate environment” due to the allegedly “slack” demand for credit in the business and household sectors?

In fact, European financial markets are being stampeded by a herd of front runners who listen to Draghi reassure them on a regular basis that come hell or high water, the ECB will buy every qualifying bond in sight at a rate of $90 billion per month until March 2017. Full stop.

Never before has an agency of the state so baldy promised speculators literally trillions in windfall gains by the simple act of buying today what Draghi promises he will be buying tomorrow.

And that will be some tomorrow. As more and more sovereign debt sinks into the netherworld of negative yield and falls below the ECB’s floor (-0.4%), there will be less supply eligible for purchase from among the outstanding debt of each nation in the ECB’s capital key.

This is price fixing with a vengeance. It is no wonder that repo rates recently have plunged into negative territory.

But here’s the thing. The geniuses at the ECB are not cornering the market; they are being cornered by the speculators who are recklessly front-running the central bank with their trigger finger on the sell button.

Everything in the European fixed income market—sovereign and corporate—– is now so wildly over-priced and disconnected from reality that the clueless fools in Frankfurt dare not stop. They dare not even evince a nuance of a doubt.

So this is a house of cards like no other. Greece remains a hair from the ejection seat, yet everything is priced as if there is no “redenomination” risk.

Likewise, with the European economies still dead in the water, and notwithstanding some short-term data squiggles in the sub-basement of historic trends, the debt of Europe’s mostly bankrupt states is priced as if there is no credit risk anywhere on the continent outside of Greece.

Well then,  just consider three fundamentals that scream out danger ahead. Namely, public debt ratios continue to rise, GDP continues to flat-line, and the Eurozone superstate in Brussels continues to kick the can and bury its member states in bailout commitments that would instantly result in political insurrection in Germany, France and every other major European polity were they ever to be called……

 

END

 

Good question:  just what are central banks terrified about…

(courtesy Phoenix Capital)

 

Central Banks Are Terrified… But of What?

by Phoenix Capital…

Aug 23, 2016 8:36 AM

A quick question for the “recovery” enthusiasts…

If the recovery is real and as strong as the “data” suggests… why are Central Banks engaged in the most aggressive stimulus in history?

Consider Europe.

According to the official data, the EU’s Services and Manufacturing PMI’s were 53.1 and 51.8 in August. Both were significantly above 50 (which represents contraction)…

Moreover, the EU’s inflation rate has risen over 0.4% in four months, rising from -0.2% in April to 0.2% today.

And yet, despite this data, the ECB continues to hold interest rates at -0.4% while also spending  €80 billion per month in QE (the equivalent of $90 billion). At this pace, the ECB will spend nearly €1 TRILLION IN QE PER YEAR.

Put another way, the ECB is engaged in the most aggressive monetary policy in its history (even more aggressive than at the heart of the 2012 EU banking crisis) at a time when the EU economy, according to official data, is well above contraction.

Then there’s Japan.

According to the official data, the Japanese economy has “bounced back” and avoided recession, posting a growth rate of 0.5% in 1Q16.

Granted, this is not great, but it’s much better than the -0.4% growth rate for 4Q15.

On top of this, while Japan’s August Manufacturing PMI was 49.3 (just below contraction levels) it has been rising for the last three months from the low of sub-48 back in May. That same month Services PMI broke above contraction levels to 50.4.

Despite this, the Bank of Japan maintains interest rates at -0.1% and is currently spending nearly $800 billion per year buying assets. Astoundingly, the BoJ is actually buying all of Japan’s new Government debt issuance per year.

It is also is a top 5 shareholder for 81 of the 225 companies trading on the Nikkei 225. And it owns 60% of the Japan’s ETFs.

Put another way, like the ECB in Europe, the BoJ is engaged in the single most aggressive monetary policy in its history… at a time when, according to the data, Japan is NOT even in a recession.

Looking at this, it is obvious that something is very wrong. Either the data is inaccurate, or Central Banks know something we don’t. After all, they’re behaving as if they’re absolutely terrified at a time when the data is claiming their economies aren’t even in contraction!!!

Just what are they scared of?

We firmly believe the markets are preparing to enter another Crisis. With over 30% of global bonds posting negative yields, the financial system is a powder keg ready to blow.

The Bond Bubble is THE bubble. And with over $555 trillion in derivatives trading based on bond yields, this bubble is over 10 times the size of the one that nearly took down the system in 2008.

We are already preparing our clients for this with a 21-page investment report titled the Stock Market Crash Survival Guide.

In it, we outline the coming crash will unfold…which investments will perform best… and how to take out “crash” insurance trades that will pay out huge returns during a market collapse.

We are giving away just 1,000 copies of this report for FREE to the public.

To pick up yours, swing by:

https://www.phoenixcapitalmarketing.com/stockmarketcrash.html

Best Regards

Graham Summers

Phoenix Capital Research

 

end

 

EMERGING MARKETS

VENEZUELA: 

 

The authorities now are banning lines from forming outside bakeries

(courtesy Fisher/Reason.com/Hit & Run blog)

 

Venezuela’s Latest Response To Food Shortages: Ban Lines Outside Bakeries

Submitted by Anthony Fisher via Reason.com’s Hit & Run blog,

The tragedy of Venezuela continues unabated, but that doesn’t mean the government of President Nicolás Maduro has stopped trying to fix problems like the devastating scarcity of food which has led to malnutrition, riots, food truck hijackings, vigilante lynchings of petty thieves, and thestarvation of zoo animals.

No, Maduro hasn’t admitted the failure of Chavismo — the brand of Bolivarian socialism imposed on the oil-rich country by his late predecessor Hugo Chavez — instead, Venezuela’s embattled leader has launched a war on “anxiety.”

The National Superintendency of Fair Prices has reportedly instituted a policy of fining bakeries that allow lines to stretch out their front doors, according to PanAmPost. The head of this particular bureaucracy, William Contreras, claims the lines aren’t a true indicator of a severe shortage of bread, but rather, a political “strategy of generating anxiety.”

Contreras claims there is no shortage of raw materials to make bread, but seems to not understand that bakeries just bake bread, they don’t process the different kinds of wheat used to make the flour that’s then used to make bread.

But this is indicative of the magical thinking of Venezuela’s socialist government: the breakdown of the economy couldn’t possibly because of failed economic policy, and scarcity must be the result of a greater conspiracy.

Contreras was also quoted by El Tiempo as saying the long lines represented “fairly clear political intentions and purposes” such as “destabilizing the economy and break[ing] the morale of the people.” This is in keeping with Maduro’s deflection of the blame he deserves for destroying Venezuela’s economy, which he puts at the feet of U.S.-backed agitators engaging in “economic war” by keeping things like toilet paper off supermarket shelves.

Even in a time of crisis when infants are dying in electricity-deprived hospitals, Maduro insisted on putting on a brave face and keeping with his government’s practice of lavishly asinine spendingby dropping over $400,000 on a week of celebrating the 90th birthday of the president of anotherimpoverished Latin socialist nation — Fidel Castro.

This whole battle over both the cause and greater meaning of long lines at bakeries must come as a shock to former presidential candidate and noted democratic socialist Bernie Sanders, who once argued that bread lines in socialist or communist countries were a “good thing” because they proved that everyone is suffering equally.

Meanwhile, a major rally by the Venezuelan opposition which is calling for Maduro’s recall is scheduled in Caracas for September 1. 80 percent of the Venezuelan people reportedly want Maduro to be removed from office.

 

END

OIL ISSUES

Oil moves higher on false algo rumour of an Iran support to prop up oil market. It was denied by Iran but oil still rebounds higher

(courtesy zero hedge)

Crude Explodes Higher After Iran ‘Reportedly’ “May Support Actions To Prop Up Oil Market”; Ignores Iran Denial

Another day, another strategically timed headline meant to trigger an HFT algo momentum ignition spike, and sure enough oil explodes higher, even though as Goldman explained yesterday, even an OPEC freeze will do nothing for actual production.

This hit from Reuters, which once again relies on “anonymous sources” to generate the primary source of Reuters revenue: FX volatility, in this case in the CAD.

• IRAN SENDING POSITIVE SIGNALS THAT IT MAY SUPPORT JOINT ACTION TO PROP UP OIL MARKET – SOURCES IN OPEC, OIL INDUSTRY

Iran is sending positive signals that it may support joint action to prop up the oil market, Reuters says, citing unidentified people in OPEC and the oil industry.

Iran appears to be more willing to reach an understanding with other oil producers, though it has not decided whether to join a new effort, Reuters says, citing unidentified people.

“Negotiations are ongoing. I see positive signs coming from OPEC ’majors’,” Reuters says, citing an unidentified senior person in the industry familiar with the discussions, referring to Riyadh and Tehran

and then this happened:

Yuuuge volume too, which suggest that this is just the latest headline triggered squeeze.

Which was met with what appears like an official ‘denial’ headline shortly thereafter… but by then momentum had been ignited…

Which should not be a surprise, as Bloomberg notes, Iran is unlikely to support an oil output freeze even when its production reaches pre-sanctions level, while other OPEC countries continue to boost supply, writes Bloomberg oil strategist Julian Lee.

• Iran to continue to raise output as much as it can even after it regains pre-sanctions level of ~4m b/d: Lee
• Country produced 3.55m b/d in July: Bloomberg survey
• Iran targeting 4m b/d as soon as late Sept.
• Output from fields bordering Iraq seen rising to 290k b/d by March 2017 from 220k now
• Iran won’t restrict output growth while watching neighboring Iraq, rival Saudi Arabia raise supply
• Iraq produced 4.36m b/d in July, close to record 4.51m seen in Jan., accord. to Bloomberg survey
• Country quickly to boost exports by ~150k b/d after agreement on resuming shipments from Kirkuk fields
• Iraq’s Halfaya field to double output by mid-2018: state-run Missan Oil
• Exxon, Petrochina in talks to develop 2 fields in south Iraq: deputy oil minister; ministry seeks to boost combined production from both fields to 550k b/d from 70k b/d

Still what really matters is algorothmic momentum ignition and the appearance that all is well.

 

end

 

Then it slides back to earth after the biggest inventory build in the last 4 months

(courtesy zero hedge)

WTI Slides After Biggest Inventory Build In 4 Months

Amid the volatility of crude prices, inventory levels, and headline hockey; API printed a surprisingly large 4.464mm crude build (against expectations of a 850k draw). Having spiked early in the day on Iran rumors (and failed to fall on denials), WTI kneejerked lower after the API data showed the biggest crude build in over 4 months (and a bigger than expected build at Cushing).

API

• Crude +4.464mm (-850k exp)
• Cushing +417k (+200k exp)
• Gasoline -2.2mm (-1.7mm exp)
• Distillates -834k

Biggest build in crude in over 4 months… (4th weekly draw in gasoline)

 

The initial reaction was a kneejerk lower.. but not much…

 

 

So to summarize, Goldman points out that even if the agree a freeze, it will be self-defeating, Iraq wants to up its output, Nigeria is set to increase supply, and Iran officials denied the unconfirmed rumors of its support for a freeze. As Michael Loewen, commodities strategist at Scotiabank, noted“It’s speculation. It’s more OPEC jawboning.”

 

Charts: Bloomberg

end

Your early morning currency/gold and silver pricing/Asian and European bourse movements/ and interest rate settings/TUESDAY morning 7:00 am

Euro/USA   1.1341 UP .0024 (STILL  REACTING TO BREXIT/REACTING TO BRITISH CUT IN INTEREST RATE TO .25%

USA/JAPAN YEN 100.10  DOWN .163(Abe’s new negative interest rate (NIRP), a total DISASTER/SIGNALS U TURN WITH INCREASED NEGATIVITY IN NIRP/JAPAN OUT OF WEAPONS TO FIGHT ECONOMIC DISASTER/KURODA:  HELICOPTER MONEY  ON THE TABLE BUT DISAPPOINTS WITH STIMULUS

GBP/USA 1.3181 UP .0050 

USA/CAN 1.2900 DOWN .0040

Early THIS TUESDAY morning in Europe, the Euro ROSE by 24 basis points, trading now well above the important 1.08 level FALLING to 1.1381; Europe is still reacting to Gr Britain BREXIT,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 Shanghai composite CLOSED UP 4.91 POINTS OR 0.16%    / Hang Sang CLOSED UP 1.02 POINTS OR 0.01%     /AUSTRALIA IS HIGHER BY .70% / EUROPEAN BOURSES ALL  IN THE GREEN

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 ( NIKKEI 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 TUESDAY morning CLOSED DOWN 100.83 POINTS OR 0.61%  

Trading from Europe and Asia:
1. Europe stocks ALL IN THE GREEN

2/ CHINESE BOURSES / : Hang Sang CLOSED UP 1.02 POINTS OR 0.01%  ,Shanghai CLOSED UP 4.91  POINTS OR 0.16%    / Australia BOURSE IN THE GREEN: /Nikkei (Japan)CLOSED IN THE RED   /INDIA’S SENSEX IN THE  GREEN 

Gold very early morning trading: $1340.50

silver:$18.99

Early TUESDAY morning USA 10 year bond yield: 1.556% !!! UP 1  in basis points from MONDAY night in basis points and it is trading WELL BELOW resistance at 2.27-2.32%. The 30 yr bond yield RISES SLIGHTLY to 2.242 UP 1 in basis points from MONDAY night. 

USA dollar index early TUESDAY morning: 94.35 DOWN 19 CENTS from MONDAY’s close.

This ends early morning numbers TUESDAY MORNING

 

END

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And now your closing TUESDAY NUMBERS

Portuguese 10 year bond yield:  3.01% DOWN 2 in basis points from MONDAY  (does not buy the rally)

JAPANESE BOND YIELD: -0.08% DOWN 2 in   basis points from MONDAY

SPANISH 10 YR BOND YIELD:0.935% PAR IN basis points from MONDAY (this is totally nuts!!/

ITALIAN 10 YR BOND YIELD: 1.12  UP 2 in basis points from MONDAY 

the Italian 10 yr bond yield is trading 17 points HIGHER than Spain.

GERMAN 10 YR BOND YIELD: -0.095% DOWN  1/2 IN  BASIS POINTS ON THE DAY

 

END

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IMPORTANT CURRENCY CLOSES FOR TUESDAY

Closing currency crosses for TUESDAY night/USA DOLLAR INDEX/USA 10 YR BOND YIELD/3:30 PM

 

Euro/USA 1.1309 DOWN .0008 (Euro DOWN 8 basis points/ represents to DRAGHI A COMPLETE POLICY FAILURE/

USA/Japan: 100.16 DOWN .108(Yen UP 11 basis points/

Great Britain/USA 1 .3198 UP 0.0066 ( Pound UP 66 basis points/BREXIT DECISION AFFIRMATIVE/QE TO START AGAIN/UK DOWNGRADED/NEW PRIME MINISTER T. MAY/GR BRITAIN LOWERS INTEREST RATES/

USA/Canada 1.2910 DOWN 0.0030 (Canadian dollar UP 30 basis points AS OIL ROSE(WTI AT $48.09). Canada keeps rate at 0.5% and does not cut!

xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx

This afternoon, the Euro was DOWN by 8 basis points to trade at 1.1309

The Yen ROSE to 100.16 for a GAIN of 11 basis points as NIRP is STILL a big failure for the Japanese central bank/HELICOPTER MONEY IS NOW DELAYED 

The POUND was UP 66 basis points, trading at 1.3198 AS PRIME MINISTER THERESA MAY TAKES OFFICE/CARNEY CUTS INTEREST RATE TO ONLY  .25%

The Canadian dollar ROSE by 30 basis points to 1.2910, WITH WTI OIL AT:  $48.00

CANADIAN RATES WERE NOT CUT

The USA/Yuan closed at 6.63378

the 10 yr Japanese bond yield closed at -.08% DOWN 2 IN  points / yield/

Your closing 10 yr USA bond yield:UP 1 IN basis points from MONDAY at 1.549% //trading well below the resistance level of 2.27-2.32%)

USA 30 yr bond yield: 2.234 DOWN 1/5 in basis points on the day /

BANKS NEED THE LONGER BOND HIGHER IN YIELD: INSTEAD THE SPREAD LESSENS.

Your closing USA dollar index, 94.50  DOWN 4 CENTS  ON THE DAY/4 PM 

Your closing bourses for Europe and the Dow along with the USA dollar index closing and interest rates for TUESDAY

London:  CLOSED UP 39.97 OR 0.59%
German Dax :CLOSED UP 98.53 OR  0.94%
Paris Cac  CLOSED UP 31.51  OR 0.72%
Spain IBEX CLOSED UP 112.90 OR 1.33%
Italian MIB: CLOSED UP 408.91 POINTS OR 2.50%

The Dow was up 17.88 points or 0.10%

NASDAQ up   15,48 points or 0.30%
WTI Oil price; 47.05 at 4:30 pm;

Brent Oil: 49.16

USA DOLLAR VS RUSSIAN ROUBLE CROSS:  64.43 (ROUBLE UP  37/100 ROUBLES PER DOLLAR FROM FRIDAY) 

TODAY THE GERMAN YIELD FALLS TO -0.095%  FOR THE 10 YR BOND

END

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:47.64

BRENT: 49.55

USA 10 YR BOND YIELD: 1.546% 

USA DOLLAR INDEX: 94.57 DOWN 1 cents

The British pound at 5 pm: Great Britain Pound/USA: 1.31947 UP .0064 or 64 basis pts.

German 10 yr bond yield at 5 pm: -0.095%

END

And now your more important USA stories which will influence the price of gold/silver

Trading Today in Graph form;  VERY IMPORTANT FOR YOU TO VIEW ALL THE CHARTS TODAY

Stocks Spike To Record Highs, Close Not “Off The Lows”

US and European manufacturing PMIs disappointed (but don’t tell the mainstream media), European consumer confidence tumbled, Richmond Fed business survey crashed… but New Home Sales managed a completely normal 6 standard deviation beat...

 

and so stocks rallied…

 

While not as obvious as yesterday’s malarkey, today’s market action had an odd pattern to it – the on-the-hour selling pressure… (note the overnight mini flashs crashes in VIX – which seemed to provide a day session marker)

 

As Realized Vol has collapsed to its lowest since 1994…

 

Stocks gapped higher at the open thanks to pre-market exuberance in futures, with S&P banging new record highs during the day… but – apart from Small Caps – stocks drifted lower from the gap open…

 

Small Caps spiked on yet another short-squeeze…

 

Homebuilders were the best performers…

 

Trannies and The Dow fell back to red on the week…

 

Elon Musk managed to overpromise and underdeliver again…

 

Treasury yields whipsawed up, down, and up to end the day basically unchanged but lower/flatter on the week… Notice solid 2Y auction suggests no hope for a hike from Yellen

 

The USD Index also ended the day unchanged – reversing early weakness during the US day session – even as Cable surged back over 1.32…

 

Copper lost ground on the day but PMs managed to hold unchanged as Crude spiked on denied Iran rumors… Interesting that Crude ripped up to recouple with silver and stayed there…

 

Oil prices spiked on anonymous sourced comments on Iran… then refused to drop when Iran flatly denied them…

 

Seems like crude algos were playing catch up to stocks today…

 

Charts: Bloomberg

Bonus Chart: Stocks are at their richest to the Fed Balance Sheet…

end

 

Early trading today:

figure out who is right and who is wrong!

S& P up! gold up! and yield on 30 yr down  (bond prices up?)

(courtesy zero hedge)

What’s Wrong With This Picture? (Again)

Stocks at the high of the day, Treasury yields at the low of the day, gold at the high of the day… someone is wrong or the ‘QE trade’ is back…

Buy everything stupid!

More safe-haven buying…

Even crude is sliding. But VIX is extremely noisy with 3 mini flash crashes overnight…

• Crude

 end

The bond market, this afternoon delivered its potential verdict on Yellen’sJackson Hole address this Friday with yields falling to .76% on the two year note. The bond market is expecting nothing but dovishness:

(courtesy zero hedge)

Bond Market Gives Its Verdict On Yellen’s Jackson Hole Speech With Stellar 2 Year Auction

If today’s 2 Year auction was supposed to telegraph what the bond market thinks of Janet Yellen’s Jackson Hole statement, then the message is clear: there won’t even be a sliver of hawkishness, because while the When Issued market was expecting the note to price at 0.771%, it stopped through the When Issued by 1.1bps, printing at 0.76%, which incidentally is where the July 2 Year auction priced as well, only that particular auction tailed by 1.2 bps.

The internals were strong, with the Bid to Cover jumping from last month’s multi year low of 2.52 to a far more stable 2.831, the second highest since February. Dealers took down 29%, the lowest since July 2014, offset by an unexpcted surge in Direct bids which were allotted 25.2% of the final paper, up solidly from last month’s 10.3%. This meant Indirects were left holding 45.8% of the paper.

And while foreign central banks were somewhat leery to bid today, the key message from this auction is that 3 days ahead of Janet Yellen’s speech on Friday, the bond market is convinced: there won’t even be a trace of hawkishness when the Fed Chair speaks on Friday.

The USA flash manufacturing PMI for August printed a very disappointing 52.1.This is a preliminary number but it does not bode well for the USA economy:

(courtesy zero hedge/FlashPMI)

US Manufacturing Flashes “Warning Light” As New Orders, Employment Tumble

Following the eurozone’s disappointing drift lower in Manufacturing PMI (and weakness in German Services),August’s US preliminary manufacturing PMI printed a disasppointing 52.1 (against expectations of 52.6). Weakness in Employment (lowest in 4 months) and New Orders underpin the drop from 52.9 to 52.1 as the 2 month hope-fueled bounce has faded…

Renaissance over…

Commenting on the flash PMI data, Chris Williamson, Chief Business Economist at IHS Markit said:

“The August drop in the PMI is a disappointment but less worrying when looked at in the context of July’s better than expected reading. Taking the July and August readings together suggests that manufacturing is enjoying its best growth so far this year in the third quarter, and should help drive stronger GDP growth.

“With August seeing the largest rise in exports for almost two years, the improved trade performance should also help drive faster economic growth.

“However, a slowdown in overall order book growth is a warning light that domestic demand has waned in August, and the pull-back in hiring suggests manufacturers have become increasingly cautious about the outlook. Inflationary pressures have meanwhile eased.

“Policymakers will therefore be pleased to see signs that the economy may have picked up speed in the third quarter, but the Fed looks unlikely to tighten policy again until the upturn has stronger foundations, suggesting any interest rate rise looks unlikely before December.”

Charts: Bloomberg

 

 

 

end

 

Wow! what a huge downward move:  the Richmond mfg Fed survey collapses the most on record:  + 10 to – 11.

(courtesy zero hedge)

Richmond Fed Manufacuring Survey Collapses By Most On Record

Following flash PMI’s drop, another early August indicator has collapsed as Richmond Fed’s manufacturing survey plunges to -11 (lowest since Jan 2013) missing expectations of +6. The plunge from July’s +10 to August’s -11 is the largest on record – back to 1993.

Biggest drop on record…

Weakness was across the board with new orders crashing from +15 to -20, order backlogs and capacity utlization crashing, and average workweek slumping. The only thing stopping this from being a monumental crash was hope that sent future shipment expectations from +19 to +41 – the highest in a year.

 

end

New rules coming will cause problems for our derivative players as they will need to increase their margins.  The major problem of course is the lack of collateral caused by bankers soaking up everything.  This is going to hurt the bankers quite a bit…

another important read…

(Bloomberg/Sabrush)

Banks Sprint to Meet $493 Trillion Swaps Market Margin Rules

Silla Brush Sabrush

• Rules could require more than 700 billion euros in collateral
• U.S., Japan start start Sept. 1; Hong Kong, Singapore delay

The world’s largest banks are racing to meet a U.S. and Japanese deadline next month when billions of dollars in new collateral requirements will begin to hit the over-the-counter derivatives market, even as new regulatory fault lines emerge.

Firms are testing systems for exchanging collateral for the trades, signing new legal documents and pursuing regulatory approval for models that could help blunt the cost of compliance, according to lawyers, executives and consultants helping firms meet one of the biggest changes in decades to the swaps market. The rules are taking effect in the U.S. and Japan on Sept. 1, while the European Union, Singapore, Hong Kong and Australia have announced delays.

The hundreds of pages of restrictions are the result of years of deliberation by regulators around the world after the financial crisis when risk built up directly between traders. Global regulators estimate that the rules could eventually require more than 700 billion euros ($790 billion) in cash, government bonds and other forms of collateral to protect against the threat that the default of one trader spreads risk to others and potentially throughout the financial system.

“This has been on the horizon for a while, but it was always going to be a challenging timetable and it’s just going to go right to the wire,” Deepak Sitlani, a London-based partner at Linklaters LLP law firm, said in an interview.

Global Deadline

In the U.S. to Japan, swap-dealing divisions of banks including JPMorgan Chase & Co., Morgan Stanley and Citigroup Inc., will have to start complying with the requirements on Sept. 1. In Europe, regulators said they couldn’t meet next month’s global deadline and intend for the rules to take effect early next year, threatening to fracture the market.

Regulators in Singapore and Australia said in statements on Monday that they will take more time to impose the requirements. Singapore said the decision would help avoid unintended disruptions to financial markets and takes into account cross-border coordination issues and the level of industry preparedness. The Hong Kong Monetary Authority also decided to delay “due to recent developments in other major jurisdictions,” a spokesperson said by e-mail. The three jurisdictions didn’t set new deadlines.

The Bank for International Settlements puts the size of the over-the-counter derivatives market at $493 trillion as of the end of last year. U.S. regulators said firms would eventually need about $315 billion in initial margin to meet the requirements. Buyers and sellers of swaps in the EU market may need at least 200 billion euros, the bloc’s regulators said this year.

‘Complex Work’

The actual cost of financing collateral would be smaller, though the U.S. Federal Reserve has said it could still cost banks billions of dollars. The rules take effect for big banks first and will be phased in for smaller firms. Banks and their clients must exchange variation margin to offset risks during the life of a transaction starting on March 1.

“Final regulations from domestic regulators emerged relatively late in the day, in some cases less than six months before the scheduled Sept. 1 start date,” said Scott O’Malia, chief executive of the International Swaps and Derivatives Association. “Given much of the detailed preparation and implementation couldn’t begin until final rules were published, this has meant a huge amount of complex work has had to be done in a very compressed time frame.”One of the banks’ top priorities ahead of the deadline is to get approval to use a framework developed by ISDA, the industry’s main trade group, for calculating margin requirements instead of the one-size-fits-all method set by regulators. Banks would be able to adjust ISDA’s system, known as the standard initial margin model, to fit their specific situation.

‘Significant Multiples’

ISDA has said that it is essential for banks to be able to use models because the amounts of margin required under the regulators’ method are too onerous. The Fed in its final rule said it expected banks to be able to rely on models and that the amount of margin would be $315 billion rather than the $3.6 trillion the industry estimated based on the regulatory method.

“You could easily be talking about the standardized numbers coming out as being very significant multiples of the SIMM results,” according to Nicholas Newport, managing director in London at InteDelta, a consulting firm that’s working with banks on the requirements.

In the U.S., bank regulators must approve some models before they can be used, while the industry-funded National Futures Association is in charge of reviewing other models. NFA said its reviews could take 90 days and include an on-site exam. The NFA doesn’t plan to disclose its decisions, though firms could tell each other if they’ve won approval.

Law Firms

ISDA is drafting standard legal documents for banks to comply with the rules. The rules have forced banks to have legal relationships with counterparties, set up accounts at custody banks where collateral can be deposited and seek opinions from law firms about contractual standards in countries around the world, lawyers said.

Many banks have multiple divisions that are registered in the U.S., each of which needs to set up new arrangements. European and Asian banks also have units that are registered in the U.S. and may also need to meet the requirement even if their parent companies are headquartered abroad.

“Even between just two dealers, you could have a number of legal entity pairings that require an IM arrangement,” Sitlani said, referring to initial margin. “Multiply that out by the number of dealers subject to the rules and you quickly get to a lot of new agreements that need to be signed up.”

AcadiaSoft Inc., a Norwell, Massachusetts-based company owned and backed by the industry runs a system that is designed to help firms automate the process of managing collateral. Thirty financial entities are participating in the system and 700 people across the firms have been working on the project since the beginning of the year, said Chris Walsh, AcadiaSoft’s chief executive.

“The infrastructure is in place,” Walsh said in an interview. “But there is still a lot of on-boarding and testing.”

 

end

 

Another very important commentary.  I have been pointing out to you for the past several months the continueal decline in foreign demand for USA government bonds.  The latest TIC report shows aggressive foreign selling.  The big question is why? The answer lies in the cost to hedge the USA dollar.  Even though the USA has a good positive yield compared to anybody else at sovereign AAA, it is the cost to hedge that kills the trade (buy USA short EU eg.)  If investors want yield that must do so unhedged and with a USA policy to tighten that is not a very good idea

a must read…

(courtesy zero hedge)

“It’s Gone” – Why Foreign Demand For US Treasuries Has Disappeared

Last week’s TIC data confirmed something the Fed’s Treasury custody account has indicated for the past several months: foreign demand for US government bonds has not only tumbled, but there has been aggressive selling.

So much so, in fact, that in the past 12 months foreign central banks have sold a gargantuan $335 billion in US Treasuries (and $242 billion when looking at all foreign transactions including private).

But how is this possible: after all the yield differential between US government bonds and the rest of the DM complex is approaching record wides.

It turns out that the answer lies in the ongoing blow out of the cross-currency basis, i.e., the implicit global dollar shortage, something we highlighted several months ago, and which has only gotten worse in the months since, following the spike in dollar hedging costs and short-term funding costs (see Libor).

The collapse in demand for US paper as a result of the blow out in swap spreads is the topic of this morning’s FX Daily by Deutsche Bank’s George Saravelos who notes in a note titled “It’s Gone” that “a remarkable hunt for yield has taken place over the last few years. Foreigners have fled negative rates and flocked to US fixed income to take advantage of positive rates. Currency hedging these purchases has been a popular strategy: investors buy long-end bonds and use short-dated forwards to eliminate the FX risk.”

However, apropos to the current basis spread environment, something significant has happened in recent months:buying 10-yr US treasuries is no longer profitable. It is not only Europeans or Japanese, there now isn’t any global fixed income investor that can make decent money by buying hedged USTs.

Even more remarkably, the reason behind this lack of return isn’t that long-end yields have compressed: the rate differential between the US and the rest of the world has stayed quite stable. Instead, it is diverging central bank policy (Fed hike vs cuts elsewhere) and the widening in cross-currency basis (which is the cost of hedging using a forward over and above that implied by covered interest rate parity; the drivers are regulatory tightening, differing investor liquidity and hedging preferences, as well as bank credit risk) that now makes it very costly for investors to hedge.

Deutsche Bank draws three conclusions from these simple observations.

• First, it is hard to see the relentless foreign buying of hedged US fixed income continuing at the same pace. Unless other bond yields decline deep into negative territory (they are already zero), there may be limits to how much more UST yields can compress.
• Second, the rise in forward costs is bullish USD. If investors want to pick up AAA yield, they will have to do so unhedged, which will generate demand for dollars. If they don’t want FX risk, investors will have to buy higher-yielding corporate bonds or other riskier US assets.
• Finally, cross-currency basis and the US short-end may prove material drivers of global capital flows going forward. On the one hand, the widening in cross-currency basis is essentially a “tax” on hedging costs distorting global capital flows. On the other hand, a Fed tightening will make FX hedging even more expensive, counter-intuitively forcing investors to increase, rather than reduce, FX, credit or duration risk.

Keep an eye on the Fed’s weekly custody holdings of Treasuries for the most current data if basis hedging is pushing even more foreigners out of the world’s most liquid fixed income security.

end

 

The Fed admits that another 4 trillion uSA will be needed to offset another economic shock or in other words, the doubling of the Fed’s balance sheet.

It would be a mess…

(courtesy zerohedge)

Fed Admits Another $4 Trillion In QE Will Be Needed To Offset An “Economic Shock”

In a Fed Staff working paper released over the weekend titled “Gauging the Ability of the FOMC to Respond to Future Recessions” and penned by deputy director of the division of research and statistics at the Fed, the author concludes that “simulations of the FRB/US model of a severe recession suggest that large-scale asset purchases and forward guidance about the future path of the federal funds rate should be able to provide enough additional accommodation to fully compensate for a more limited [ability] to cut short-term interest rates in most, but probably not all, circumstances.”

So far so good, however, there are some notable problems with the paper’s assumptions, as Citi head of G10 FX, Steven Englander, observes.

He writes that the paper’s basic framework is to take the standard US economic model used by the Fed, give it a negative shock big enough to push the unemployment rate up by 5 percentage points (big but not unprecedented over the last 50 years) and deploying the Fed’s policy rate, QE and forward guidance tools to see if they are adequate to get the economy back on track. Negative rates and helicopter money are not used.

The two simulations assume:

1. the economy is in equilibrium initially with inflation at 2%, r* at 1%, so equilibrium nominal fed funds is 3%
2. the economy is in equilibrium initially with inflation at 2%, r* at zero (secular stagnation) and equilibrium nominal fed funds at 2%

He compares three policy approaches. The first assumes a linear world where fed funds can go into negative territory but there is no breakdown in the structure of economic relationships. It is probably not a realistic view of policy ineffectiveness at negative rates, but it is mean to be a baseline. The second just takes fed funds down to zero and keeps it there long enough for unemployment to return to baseline.

The third takes fed funds down to zero and augments it with additional USD2trn of QE and forward guidance. A variation on the third policy response function doubles the amount of QE in the second simulation.

In other words, the Fed is already factoring in a scenario in which a shock to the economy leads to additional QE of either $2 trillion, or in a worst case scenario, $4 trillion, effectively doubling the current size of the Fed’s balance sheet.

He continues his critique of the Fed’s argument as follows:

In the simulations. QE and forward guidance take 10yr yields down 225-300 bps depending on the starting point for fed funds and whether you do $2 trillion or $4 trillion for QE. But that is not going to work very well if by design fed funds and 10yr yields can’t go below zero. And if expected rates are already low then forward guidance does not have much room. Fed official will gave to keep a straight face while saying they we will keep rates at zero … forever.

What makes it work is that QE and committing to low rates for longer gets the long rate down quickly and this compensates for the inability to take short rates down as far as you would want. In the unconstrained model, the maximum drop in short rates is almost 9 percentage points, almost twice as much as in the constrained model, but the QE/forward guidance  lower takes (and keeps) long rates 75bps lower than when the Fed takes rates to zero and stops. When the Fed is starting from 3% fed funds, the combo can almost entirely offset the zero constraint, but only if the full $4 trillion QE is brought to bear. Starting from 2%, QE of $2 trillion is not enough to get long rates down far or fast enough to offset the shock.

All of which brings Englander to the following stunning conclusion:

I would have rewritten the conclusion as: “large-scale asset purchases and forward guidance about the future path of the federal funds rate have almost no ability to offset a shock in current circumstances, but down the road may be able to provide enough additional accommodation to fully compensate for a more limited [ability] to cut short-term interest rates in some, but not all and maybe even not most, circumstances.” The italics and colors show my changes.

Just as troubling, Englander admits that the nuanced read of the Fed paper admits it is effectively powerless to withstand a sharp recession: “The key policy issues and what drives the paper’s conclusions and my variant is the starting point. Were we to have a recession today or a year (or even two years) from now, it is very unlikely that the Fed weapons have anywhere near the potency that the paper describes. The FOMC had an end-2018 median fed funds rate of 2.4% at the June meeting and my guess is that it is lower now. Markets don’t price in even 100bps in fed funds till the end of 2019 (taking Eurodollar rates and subtracting 40bs or so.) That said, a 5% shock to the unemployment rate is pretty extreme, if the Fed is not stepping on the brakes hard or world not falling apart for other reasons.”

How much room does the Fed have? Very little:

In the simulation is looks as if it takes about 160-180bps of fed funds reductions (peak response) to offset an 1% UR shock, so right now they could offset maybe an 0.20% shock to the UR with the rates room that they have.

But most troubling of all, is just how critical starting conditions are for further easing; considering monetary conditions right now are unprecedented, it means the Fed has its work cut out for it:

The problem the paper outs in relief is that the effectiveness of rate cuts/QE/rate guidance goes up with the starting point of rates – so the combined policy tools are much more effective if the fed funds rate is 3% than if it is 2% and certainly a lot more than if it is 40bps. There is a good reason the paper does not examine the options for fighting recessions under current conditions. The drop in fed funds also takes 10 year yields down, and roughly 30-40bps in 10s for every 100 bps in fed funds,  so if you are starting with fed funds at 40bps and 10yr yields at 160bps, rates policy/QE/forward guidance are not going to do much. Short rates, long rates and rate expectations have nowhere to go, unless you bring negative rates into the discussion, which does not occur.

And, as noted above, not less than $4 trillion in QE would be enough to “get long rates down far or fast enough to offset the shock.”

What are the implications for the Fed, and thus to the market, as a result of the paper? It depends on whetyher one is a hawk or a dove:

To the doves fast growth and higher inflation inoculates the Fed and the economy from policy ineffectiveness at the zero bound so it is a very dovish outcome. Insofar as having 2.5% or 3% inflation makes policy more effective in a downturn there is a case for loosening the target, or not admitting to loosen but reacting to an overshoot anyway.

Hawks may argue that there is a case for raising rates faster, not slower, but the argument has to be made carefully. Assume that the next recession comes in a year from a source not related to Fed policy – the EU falling apart or a major geopolitical event. If fed funds is at 100bps, for example, they may have a meeting or two to stimulate by taking policy rates down while laying the ground for the much bigger stimulus from fiscal or helicopter money that would  be needed. If fed funds are very low, investors, households and firms may lose confidence when they recognize that policy has nowhere to go. But this logic depends crucially on this confidence effect which may or may not exist. Hawks can at any point argue that the risks of the zero bound are overstated or that easy Fed policy makes the next recession more likely by making a financial crisis more likely at some point, but that is outside the scope of the paper.

Incidentally, all of the above is a long-winded way of saying the Fed hiked rates, only to be forced it will have to not only cut them, as Japan did 7 months after its ill-fated August 2000 rate hike as we cautioned last August…

 

… but that when the US economy slides into the next sharp recession, no less than $4 trillion in QE will be needed to stabilize the economy, bringing the Fed’s total holdings of government bonds to well over 30%. And with that in mind, we look forward to what “upside rate hike surprises” Yellen has in store for the market this coming Friday, especially if the politically-tasked Bureau of Labor Services continues to surprise to the upside with fresh record numbers of minimum-wage restaurant workers and bartenders.

 

END

A very good paper by Michael Snyder as he describes how Obamacare has killed the middle class:

(courtesy Michael Snyder/Economic Collapse blog)

As Predicted, Obamacare Is Absolutely Killing The Middle Class

submitted by Michael Snyder via The Economic Collapse blog,

The critics of Obamacare have been proven right.  The Obama administration promised that health insurance premiums would go down.  Instead, they have absolutely skyrocketed.  The Obama administration promised that Obamacare would not kill jobs.  Instead, firms are hiring fewer workers because of suffocating health care costs.  As you will see below, even the Federal Reserve is admitting this.  The Obama administration also promised that the big health insurance companies would love the new Obamacare plans and would eagerly compete with one another to win customers in the new health insurance marketplaces.  Instead, many of the big health insurance companies are now dropping Obamacare plans altogether.

We witnessed the latest stunning example of this phenomenon just a few days ago.  It turns out that Aetna has been losing hundreds of millions of dollars on plans sold through the health exchanges, and now they plan to pull out of the program almost entirely…

Earlier this week, Aetna, which covers about 900,000 people through the health exchanges created under Obamacare, announced that it would dramatically reduce its presence those exchanges. Instead of expanding into five new states this year, as the insurer had previouslyplanned, the company said that it would drop out of 11 of the 15 states in which it currently sells under the law.

Aetna’s decision follows similar moves from other insurers: UnitedHealth announced in April that it would cease selling plans on most exchanges. Shortly after, Humana pulled out of two states, Virginia and Alabama. Morethan a dozen of the nonprofit health insurance cooperatives set up under the law—health insurance carriers created using government-back loans in order to spur competition—have failed entirely. While some insurers are entering the exchanges, even more are leaving.

Another one of “the big five”, UnitedHealth, is going to lose more than half a billion dollars on Obamacare plans.  So just a few months ago they also announced that they would be dramatically scaling back their participation in the program.

Because of the ridiculous costs, health insurance companies are either going to have to abandon the exchanges completely or they will have to raise rates substantially.

Needless to say, the people that are going to ultimately feel the pain from all of this are consumers…

Customers who are now forced to obtain insurance or pay a hefty fine that grows more costly over time are being left in a difficult position. Americans are essentially stuck between a rock and hard place, either losing coverage entirely, or having to cough up money for a plan they can’t afford.

“Something has to give,” said Larry Levitt, a healthcare law expert at the Kaiser Family Foundation. “Either insurers will drop out or insurers will raise premiums.“

On the low end of the spectrum, tens of millions of poor Americans benefit from government programs that provide health care at little or no cost.

On the other end of the spectrum, the very wealthy can afford to pay the ridiculously high health insurance premiums that we are seeing under Obamacare.

So what this means is that the people that are being hurt the most by Obamacare are those that belong to the middle class.

As I mentioned above, employers are now hiring less workers because of Obamacare, and that is very bad news for the middle class.  One recent study conducted by the Federal Reserve Bank of New York discovered that nearly one out of every five firms is “employing fewer workers” because of this insidious law…

According to a new survey by the Federal Reserve Bank of New York, 20.9% of manufacturing firms in the state said they were employing fewer workers because of the Affordable Care Act, the healthcare law known as Obamacare, while 16.8% of respondents in the service sector said the same.

And middle class Americans that have to pay for their own health insurance are being hit with much higher bills these days.  According to one recent study, it is being projected that the average Obamacare premium will go up 24 percent in 2016…

Now, courtesy of a new study by independent analyst Charles Gaba – who has crunched the numbers for insurers participating in the ACA exchanges in all 50 states – we can also calculate what the average Obamacare premium increase across the entire US will be: using proposed and approved rate increase requests, the average Obamacare premium is expected to surge by a whopping 24% this year.

Even NBC News, which is about as pro-Obama as you can get, is reporting on the crippling premium increases that are devastating the middle class…

Millions of people who pay the full cost of their health insurance will face the sting of rising premiums next year, with no financial help from government subsidies.

Renewal notices bearing the bad news will go out this fall, just as the presidential election is in the home stretch.

“I don’t know if I could swallow another 30 or 40 percent without severely cutting into other things I’m trying to do, like retirement savings or reducing debt,” said Bob Byrnes, of Blaine, Minnesota, a Twin Cities suburb. His monthly premium of $524 is already about 50 percent more than he was paying in 2015, and he has a higher deductible.

All over the nation people are getting hit like this.

Personally, my health insurance company wanted to nearly double the rate I was paying when Obamacare fully kicked in.  So I searched around and found another plan that was only about a 30 percent increase, but at least it wasn’t nearly double what I had been paying before.

But when the time came to renew that plan, they wanted to jump my premium up another 50 percent per month.

Those of us that are in the middle are being crushed by Obamacare.  We aren’t poor enough to qualify for government assistance, and we aren’t wealthy enough for these ridiculous health insurance premiums not to matter.

Just about everything that Barack Obama promised us about Obamacare has turned out to be a lie.

So where is the accountability?

This is one of the big reasons why nearly one out of every five U.S. adults lives with their parents or their grandparents these days.  Many young adults cannot afford the basics of life such as health insurance, and so they have got to find a way to cut back expenses somewhere.  If that means moving back in with Mom and Dad, that is what some of them are going to do.

I am astounded that our system of health care has become so messed up.  But this is just more evidence of how our society is falling apart in thousands of different ways, and I am not optimistic that things will be turned around any time soon.

 

end

 

Well that about does it for tonight

I will see you tomorrow night

Harvey