Gold $1310.10 down $4.30
Silver 18.80 down 34 cents
THE DAILY GOLD FIX REPORT FROM SHANGHAI AND LONDON
The Shanghai fix is at 10:15 pm est and 2:15 am est
The fix for London is at 5:30 am est (first fix) and 10 am est (second fix)
Thus Shanghai’s second fix corresponds to 195 minutes before London’s first fix.
And now the fix recordings:
Shanghai morning fix Oct 3 (10:15 pm est last night): $ holiday
NY ACCESS PRICE: $
Shanghai afternoon fix: 2: 15 am est (second fix/early morning):$ holiday
NY ACCESS PRICE:
London Fix: Sept 30: 5:30 am est: $1327.90 (NY: same time: $1326.90: 5:30AM)
London Second fix Sept 16: 10 am est: $1322.50 (NY same time: $1323.00 , 10 AM)
It seems that Shanghai pricing is higher than the other two , (NY and London). The spread has been occurring on a regular basis and thus I expect to see arbitrage happening as investors buy the lower priced NY gold and sell to China at the higher price. This should drain the comex.
Also why would mining companies hand in their gold to the comex and receive constantly lower prices. They would be open to lawsuits if they knowingly continue to supply the comex despite the fact that they could be receiving higher prices in Shanghai.
For comex gold:
the total number of notices filed on 2nd day notice: 3005 for 300500 oz (9.347 tonnes)
for the Oct contract month: 11 notices for 55,000 oz.
Let us have a look at the data for today
I will update the comex inventory data much later tonight.
In silver, the total open interest ROSE by 846 contracts UP to 201,700 The open interest ROSE as the silver price was UP 3 cents in Friday’s trading .In ounces, the OI is still represented by just MORE THAN 1 BILLION oz i.e. 1.0004 BILLION TO BE EXACT or 144% of annual global silver production (ex Russia &ex China).
In silver for October we had 11 notices served upon for 55,000 oz
In gold, the total comex gold FELL by 4,423 contracts as the price of gold fell by $7.40 ON FRIDAY . The total gold OI stands at 561,336 contracts. The bankers have done a great job fleecing longs and as usual the entire gold comex OI obliterates
With respect to our two criminal funds, the GLD and the SLV:
LAST NIGHT WE HAD NO CHANGES OUT OF THE GLD//
Total gold inventory rests tonight at: 949.14 tonnes of gold
we had no changes at the SLV
THE SLV Inventory rests at: 362.909 million oz
First, here is an outline of what will be discussed tonight:
1. Today, we had the open interest in silver ROSE by 846 contracts UP to 201,700 as the price of silver rose by 3 cents with yesterday’s trading.The gold open interest FELL by 54,423 contracts DOWN to 561,336 as the price of gold fell $7.40 IN FRIDAY’S TRADING.
2.a) The Shanghai and London gold fix report
2 b) Gold/silver trading overnight Europe, Goldcore
and in NY: Bloomberg
Let us head over to the comex:
The total gold comex open interest FELL BY 4423 CONTRACTS to an OI level of 561.336 the as price of gold fell by $7.40 with FRIDAY’S trading.
The contract month of Sept is now off the board. The next delivery month is October and here the OI lost 2935 contracts down to 4458. We had 2470 notices filed on Friday so we lost 465 contracts or 46,500 oz will not stand AND no doubt that most of these were cash settled.
The next delivery month is November and here the OI fell by 20 contracts down to 2232 contracts. The next contract month and the biggest of the year is December and here this month showed an decrease of 3,533 contracts down to 437,423.
And now for the wild silver comex results. Total silver OI ROSE BY 846 contracts from 200,854 up to 201,700 as the price of silver ROSE to the tune of 3 cents yesterday. We are moving CLOSER TO the all time record high for silver open interest set on Wednesday August 3: (224,540). The next non active delivery month is October and here the OI fell by 235 contracts down to 202. We had 301 notices filed on Friday so we gained 66 contracts or 330,000 additional oz will stand for delivery.The November contract month saw its OI rise by 4 contracts up to 399. The next major delivery month is December and here it FELL BY 192 contracts DOWN to 170,873.
today we had 11 notices filed for silver: 55,000 oz
|Withdrawals from Dealers Inventory in oz||
|Withdrawals from Customer Inventory in oz nil||
|Deposits to the Dealer Inventory in oz||nil oz|
|Deposits to the Customer Inventory, in oz||
|No of oz served (contracts) today||
|No of oz to be served (notices)||
|Total monthly oz gold served (contracts) so far this month||
|Total accumulative withdrawals of gold from the Dealers inventory this month||oz|
|Total accumulative withdrawal of gold from the Customer inventory this month||96.45 oz|
Today, 0 notices were issued from JPMorgan dealer account and 0 notices were issued form their client or customer account. The total of all issuance by all participants equates to 3005 contract of which 225 notices were stopped (received) by jPMorgan dealer and 6 notice(s) was (were) stopped (received) by jPMorgan customer account.
|Withdrawals from Dealers Inventory||NIL|
|Withdrawals from Customer Inventory||
|Deposits to the Dealer Inventory||
|Deposits to the Customer Inventory||
|No of oz served today (contracts)||
|No of oz to be served (notices)||
|Total monthly oz silver served (contracts)||312 contracts (1,560,000 oz)|
|Total accumulative withdrawal of silver from the Dealers inventory this month||NIL oz|
|Total accumulative withdrawal of silver from the Customer inventory this month||420,010.27 oz|
NPV for Sprott and Central Fund of Canada
And now your overnight trading in gold,FRIDAY MORNING and also physical stories that may interest you:
GBP Gold Rises 1.3% as Sterling Slumps On ‘Hard Brexit’ Concerns, EU Contagion Risk
Sterling gold rose 1.3% today as sterling slumped again after the UK set a March deadline to start their ‘Brexit divorce’ proceedings from the European Union and on deepening nervousness regarding a ‘Hard Brexit’.
Theresa May’s bombshell deadline by which the UK will exit the EU given at her Conservative party conference, saw gold in sterling terms rise from £1,010/oz to £1,023/oz today and the pound hit a three-year low against the euro.
Sterling fell around 1 percent against the dollar to a seven-week low of $1.285 and a three-year low against the euro of 87.47 pence per euro.
Gold in sterling terms is now just 3.3% below the recent price highs of £1,057/oz seen in early July when gold surged in panic buying after the Brexit vote.
GBP gold is just 13% below the all time record nominal high in sterling terms of £1,161/oz, reached on August 24, 2011. Gold bottomed at £700/oz in July 2015 and has seen a series of higher lows and higher highs since then.
It is 46% higher from those lows and up 36% higher in sterling terms year to date. It is in a new bull market and price dips should be used to accumulate on weakness.
Gold is also being supported by concerns about Deutsche Bank, and whether Europe’s largest bank in the EU’s largest economy, is systemic, and potentially the EU’s ‘Lehman moment.’
Germany’s biggest lender and bank and the bank with the largest derivatives exposure is hoping to reach a settlement with the U.S. Justice Department before next month’s presidential election for mis-selling mortgage-backed securities. It faces a fine of up to $14 billion.
Deutsche shares aren’t trading in Germany today because of a public holiday, but they will be trading on the U.S. market. An unverified media report on Friday settled market jitters and increased risk appetite again. It suggested that Deutsche and the DOJ were close to agreeing a $5.4 billion settlement and lifted the stock 6 percent. The report remains unconfirmed.
Over the long term, gold has performed well for UK buyers and protected them from the risks manifest in recent years. Over 10 years, gold in GBP terms is up more than threefold or by 222% from £317/oz to £1,023/oz. An average annual performance of over 13% per annum.
Gold will continue to act as a hedge against currency depreciation for investors and savers in the UK and indeed for investors and savers in EU and other countries. Indeed, the increasing likelihood of a ‘Hard Brexit’ increases the risks posed to the EU itself and the risk of contagion – posed to both the political and the monetary union.
Gold and Silver Bullion – News and Commentary
Gold Prices (LBMA AM)
03 Oct: USD 1,318.65, GBP 1,023.40 & EUR 1,173.99 per ounce
30 Sep: USD 1,327.90, GBP 1,025.01 & EUR 1,187.67 per ounce
29 Sep: USD 1,320.85, GBP 1,016.92 & EUR 1,177.14 per ounce
28 Sep: USD 1,324.80, GBP 1,020.10 & EUR 1,181.06 per ounce
27 Sep: USD 1,335.85, GBP 1,031.01 & EUR 1,187.84 per ounce
26 Sep: USD 1,336.30, GBP 1,033.23 & EUR 1,188.91 per ounce
23 Sep: USD 1,335.90, GBP 1,027.17 & EUR 1,192.16 per ounce
Silver Prices (LBMA)
03 Oct: USD 19.18, GBP 14.89 & EUR 17.07 per ounce
30 Sep: USD 19.35, GBP 14.92 & EUR 17.33 per ounce
29 Sep: USD 19.01, GBP 14.61 & EUR 16.95 per ounce
28 Sep: USD 19.12, GBP 14.69 & EUR 17.05 per ounce
27 Sep: USD 19.42, GBP 14.99 & EUR 17.26 per ounce
26 Sep: USD 19.44, GBP 15.04 & EUR 17.29 per ounce
23 Sep: USD 19.82, GBP 15.28 & EUR 17.66 per ounce
Recent Market Updates
– Why Krugman, Roubini, Rogoff And Buffett Hate Gold
– ECB Refused “To Answer Questions” – Deutsche Bank “Systemic Threat” Is “Not ECB Fault”
– Euro “Might Start To Unravel” If Collapse Of Deutsche Bank
– Do You Really Own Your Gold?
– “Gold Will Likely Soar To A Record Within Five Years”
– Savings Guarantee? U.N. Warns Next Financial Crisis Imminent
– Gold Up 1.5%, Silver Surges 3% – Yellen Stays Ultra Loose At 0.25%
– Trump and Clinton Are “Positive For Gold” – $1,900/oz by End of Year
– Gold Bugs Rejoice – Central Banks Think You’re On To Something
– ‘Hard’ Brexit Looms For Ireland
– EU Bail In Rules Ignored By Italy – Mother Of All Systemic Threats and World War?
– Buy Gold – Bonds Are ‘Biggest Bubble In World’ – Billionaire Singer Warns
– Silver Bullion Market – “Most Bullish Story Ever Told?”
The yuan officially joins the IMF reserves on Oct 1
China’s yuan joins IMF reserves in first revision since 1999
Submitted by cpowell on Sun, 2016-10-02 14:04. Section: Daily Dispatches
By Robin Ganguly
Saturday, October 1, 2016
The yuan took on the mantle of a global reserve currency Saturday, a milestone that is seen breathing life into China’s bond markets by prompting estimated inflows of as much as $1 trillion over the next five years.
The currency’s entry into the International Monetary Fund’s Special Drawing Rights — alongside the dollar, euro, pound, and the yen — comes amid China’s efforts to boost its international usage and ambitions of providing an alternative to the dollar. Describing the inclusion as a “historic milestone,” IMF Managing Director Christine Lagarde said in a statement Friday that it reflects the progress that the Asian country has made in reforming its financial systems and liberalizing markets.
“SDR entry will pave the way for closer interaction between China’s capital market and that of the rest of the world,’ Tommy Xie, an economist at Oversea-Chinese Banking Corp. in Singapore, said on Saturday. “The first impact will be on the yuan, which the authorities are likely to keep stable for the next few weeks as any sudden volatility spike will damp the yuan’s image.” …
… For the remainder of the report:
Commentaries by Leeb and von Greyerz at King World News
Submitted by cpowell on Mon, 2016-10-03 00:49. Section: Daily Dispatches
8:51p ET Sunday, October 2, 2016
Dear Friend of GATA and Gold:
King World News this weekend has commentaries by fund manager Stephen Leeb, who cautions that China is seeking control of both the world financial system and the internet —
— and Swiss gold fund manager Egon von Greyerz, who mocks the chairman of the European Central Bank, the premier of China, the premier of Japan, and the chairwoman of the Federal Reserve:
CHRIS POWELL, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.
Deutsche Bank Charged By Italy For Market Manipulation, Creating False Accounts
For Deutsche Bank, when it rains, it pours, even when everyone tries to come to its rescue.
One day after its stock soared from all time lows, following what so far appears to have been a fabricated report sourced by AFP which relied on Twitter as a source that the DOJ would reduce its RMBS settlement ask with Deutsche Bank from $14 billion to below $6 billion (and which neither the DOJ nor Deutsche Bank have confirmed for obvious reasons), moments ago Bloomberg reported that six current and former managers of Deutsche Bank, including Michele Faissola, Michele Foresti and Ivor Dunbar, were charged in Milan for colluding to falsify the accounts of Italy’s third-biggest bank, Monte Paschi (which itself is so insolvent it is currently scrambling to finalize a private sector bailout) and manipulate the market. Two former executives at Nomura Holdings Inc. and five at Banca Monte dei Paschi di Siena were also charged.
The news comes in a time of heated relations between Italy and Germany, when the former has been pushing to get German “permission” for a state bailout of its insolvent banks only to be met by stiff resistance by the latter as Merkel and Schauble have demanded a bail-in of private investors instead, even as – ironically – it has been Deutsche Bank’s woeful financial state that has been in the Wall Street spotlight this past week.
In what appears to be another case of “Wells Fargo-esque” scapegoating of junior employees to keep senior execs off the hook, just weeks after Milan prosecutors shelved a probe against Monte Paschi’s former chairman and CEO for alleged market manipulation and false accounting as it “risked undermining investor sentiment”, a judge approved a request by Milan prosecutors to try the bankers on charges involving two separate derivative transactions arranged with Nomura and Deutsche Bank, said a lawyer involved in the case who was in the courtroom Saturday as the decision was announced Bloomberg reports.
Just as importantly, the firms are also named as defendants in the indictment, as the Italian law provides for a direct liability of legal entities for certain crimes committed by their representatives. Which means even more legal charges, fines and settlements are looking likely in DB’s future.
A trial is scheduled for Dec. 15.
As Bloomberg adds, Monte Paschi’s former executives Giuseppe Mussari, Antonio Vigni and Gianluca Baldassarri, and Nomura’s former bankers Sadeq Sayeed and Raffaele Ricci also will face trial for allegedly obstructing regulators after the investigation revealed that the 2009 deal, dubbed Alexandria, was designed to disguise losses from a previous investment.
The basis for the legal action are two deals conducted by Deutsche Bank and Nomura which took place at the height of the financial crisis, meant to mask Monte Paschi’s financial woes. Prosecutors have been reconstructing how Monte Paschi’s former managers misrepresented the lender’s finances in the years through the two deals signed with Deutsche Bank in 2008 and Nomura in 2009. The investigation revealed Monte Paschi arranged the transactions to hide billions in losses that led to false accounting between 2008 and 2012, according to a prosecutors’ statement released Jan. 14, when they completed the investigation.
The fraud first came to light in January 2013, when Bloomberg News reported that Monte Paschi used the transaction with Deutsche Bank, dubbed Santorini, to mask losses from an earlier derivative contract. The world’s oldest bank restated its accounts and has since been forced to tap investors to replenish capital amid a slump in its shares. It’s now attempting to convince investors to buy billions of bad loans before a fresh stock sale.
Zero Hedge previously posted an in depth look of the incestuous relationship between Deutsche Bank and Monte Paschi represented by the”Santorini” deal, which we repost below for those unfamiliar with the nuances of the deal which will likely see renewed media interest in the coming days.
* * *
An anatomy of how the crime developed:
(courtesy zero hedge)
At Deutsche Bank, the job title “risk manager” might be more appropriately characterized as “campaign manager.” That is, Deutsche Bank is no more concerned with the active mitigation of risk than the unscrupulous politician is with actively avoiding extra marital affairs. Like campaign mangers then, risk managers at Deutsche Bank must accept the fact that occasionally (or perhaps quite often) messes will be made and spin campaigns will need to be devised and deployed in order to keep public opinion from turning sour and in order to keep the few regulators who aren’t on the payroll from stirring up any trouble. In short, risk management at the firm seems to be more reactive than proactive and the combination of pliable mathematical models, questionable ethical standards, and a clueless public makes it possible for the firm’s quant spin doctors to disappear vast amounts of risk from the books without anyone getting wise.
Apparently however, even the mainstream media has gotten wise to the act. Recently, CNBC’s John Carney and DealBreaker’s Matt Levine observed that Deutsche Bank was able to report a higher Tier 1 capital ratio in its most recent quarter not by reducing the loans on its books or by increasing its earnings, but by changing the way it calculates its risk weighted assets. In other words, it manipulated its mathematical models to achieve more favorable results.
It is ironic that these commentators should be the ones calling out Deutsche Bank for crimes against mathematics. After all, a little over a month ago, these same two journalists (and many of their peers) trivialized the whistleblower claim filed against Deutsche Bank by a Mr. Eric Ben-Artzi, a PhD mathematician from the most prestigious school of applied mathematics in the country, NYU’s Courant Institute.
In any case, on January 17, Bloomberg reported that “Deutsche Bank designed a derivative for Banca Monte dei Paschi di Siena SpA at the height of the financial crisis that obscured losses at the world’s oldest lender before it sought a taxpayer bailout.” The Bloomberg story set-off a wave of investigations which ultimately revealed that the world’s oldest bank made a series of bad derivatives bets that will ultimately cost it three quarters of a billion euros. The Bank of Italy has since approved a 3.9 billion euro taxpayer-sponsored bailout. The story has taken several decisive (albeit hilarious) turns for worst over the past two weeks and the whole thing now reads like a lost chapter of The Da Vinci Code, complete with treacherous characters, scandalous deal-making, and a secret contract locked away “in a concealed safe in a 14th century Tuscan palace.”
As intriguing as all of that is, it is the Deutsche Bank connection which is of particular interest. The firm’s role in helping Monet Paschi conceal losses speaks to the depravity of Deutsche’s corporate culture and to the firm’s willingness to share its expertise in the art of obfuscation with its clients. Here is Bloomberg’s description of what happened:
Monte Paschi was facing a 367 million-euro loss on a… Deutsche Bank derivative linked to its stake in Intesa Sanpaolo SpA (ISP), Italy’s second-biggest bank, according to two documents drafted by executives at the German lender in November and December 2008…
Monte Paschi, which originally took the stake in one of Intesa’s predecessor companies more than a decade earlier, had entered into a swap with the German bank in 2002 to raise cash from the holding to bolster capital while retaining exposure to Intesa’s stock-price moves, the documents show.
Intesa shares fell more than 50 percent in the 11 months through November 2008, and the decline would have forced Monte Paschi to post a fair-value loss on the swap at the end of the quarter, threatening the bank’s capital and earnings, the derivatives specialists who examined the documents said.
“Monte Paschi was facing a loss on its equity position and may have needed to find a way around it,” Satyajit Das, a former Citigroup Inc. (C) banker and author of half a dozen books on risk management and derivatives, said after reviewing the files.
This is the first part of what would eventually become a multi-legged trade that spanned the better part of a decade. Although the mainstream media has done a decent job of describing the mechanics of the transaction, I wanted to know the details, so I contacted Bloomberg to see if they would be interested in sharing the 70 some odd pages of documents on which they based their original story. Not surprisingly, they informed me that they are not currently able to share the evidence. While they promised that I would be the first to know if the situation changed, I thought I might take a stab at explaining, in detail, what exactly went on between Deutsche and Monte Paschi in lieu of Bloomberg’s top-secret document stash.
I cannot, of course, be sure that this is entirely accurate without access to primary sources, but this should serve as a decent outline for those interested in learning how the largest bank in the world conspired with the oldest bank in the world to effectively hide hundreds of millions in losses from shareholders.
For our purposes, the story begins on page 310 of Monte Paschi’s 2002 annual report. Under “Acquisitions, Incorporations, and Sales,” the following passage appears:
Sale to Deutsche Bank AG London Branch of a 4.99-percent holding in San Paolo-IMI S.p.A. Along with this sale, the Bank invested EUR 329 million to purchase a 49-percent interest in the newly incorporated Santorini Investment Ltd. Partnership, a Scottish company that is 51- percent owned by Deutsche Bank AG. The aggregate price of the sale was EUR 785.4 million; the difference (EUR 425.3 million) between the sale price and the carrying value (EUR 1,210.7 million) was charged to the revaluation reserve set up in accordance with Law 342/2000. The residual amount was allocated to shareholders’ equity through a bonus share capital increaseauthorized by a resolution of the extraordinary shareholders’ meeting of 30 November 2002. (emphasis mine)
This is the genesis of the Deutsche Bank deal and while it may sound convoluted, the bank’s motives seem relatively clear in retrospect. First, consider the effect the transaction above had on Monte Paschi’s statement of shareholders’ equity:
First, the bank had to account for the 425 million-euro difference between the carrying value of its stake in San Paolo bank and the amount Deutsche Bank paid for those shares. This was effectively a loss, and as it turned out, Monte Paschi had held what it called an “extraordinary meeting” on November 30 of 2002 to get shareholder approval to use its entire 715 million-euro revaluation reserve (green arrow above) for an increase in the par value of the ordinary and savings shares and to absorb the loss on the sale of the San Paolo stake to Deutsche Bank (this is outlined on page 383 of the 2002 annual report).
Because revaluation reserves didn’t generally count towards Tier 1 capital, the bank was able to absorb the loss on the sale without affecting the area it was really concerned about: core capital. As an added benefit, Monte Paschi was able to use the remainder of the revaluation reserve (the 209 million left over after it absorbed the loss on the sale of the shares) to raise the par value of its own shares, resulting in an increase in its share capital (yellow arrow above). This of course, led to a concurrent increase in the bank’s Tier 1 capital ratio. Effectively then, Monte Paschi turned a 425 million euro loss on the sale of an equity stake into a .2% increase in its Tier 1 capital ratio (there were other components which contributed to the increase, but the point stands). This is likely what Bloomberg was referring to when it said Monte Paschi was seeking “to bolster capital” by using its equity stake in San Paolo.
As noted above, Monte Paschi and Deutsche set up “Santorini Investment Ltd” after the completion of the equity sale. This is where the “equity swap” referenced by Bloomberg comes into play. From what I can tell, this was some derivation of a “total return equity swap.” Here, the deal began with the sale of the San Paolo stake to Deutsche Bank. “Santorini Investment Ltd” (the ”partnership” Deutsche and Monte Paschi set up after the sale) was essentially a special purpose vehicle (SPV) through which the swap was effectuated.
Santorini was majority owned (51%) by Deutsche Bank – Monte Paschi controlled 49%. A portion of the cash from the original sale of the San Paolo stake to Deutsche was effectively used to finance Monte Paschi’s stake in Santorini. Through the SPV, Monte Paschi was able to retain exposure to the share price fluctuations of its San Paolo stake. Typically in such a deal, there is either a floating rate or a fixed rate of interest paid over the life of the swap to the entity to which the shares were sold (in this case Deutsche) based on the notional amount of the shares traded (so 785 million euros here). When the swap matures, the original seller of the shares (Monte Paschi here) will receive the difference between the price of the shares when the swap was originated and the price of the shares at maturity.
Obviously, if the shares rise over time the original seller makes a profit on the swap (minus any interest payments made along the way). Of course the stock could go up or down over the life of the transaction so there is a very real possibility that the original seller of the shares will have to make a payment at maturity in addition to the interest payments made along the way. Note also that if the stock drops over the course of the deal, the original seller may be forced to post collateral to the buyer of the shares. Through Santorini then, Monte Paschi appears to have entered into a total return equity swap with Deutsche Bank referencing the 4.99% stake in San Paolo. Monte Paschi paid Deutsche interest on the deal and was on the hook for margin calls in the event the value of San Paolo’s shares dropped. The following graphic is a simplified diagram of the swap based on an unrelated total return swap diagram originally posted on Sober Look:
It is important to remember that one of the pitfalls of entering into such an agreement is that the seller of the shares may initially have to recognize a capital loss on the sale. By using its revaluation reserve, Monte Paschi was able not only to effectively avoid this for the purposes of core capital, but was in fact able to boost its Tier 1 capital ratio while retaining exposure to the share price movements of the sold San Paolo stake through the swap deal with Deutsche.
The original term of the deal was 3 years but according to Monte Paschi’s 2004 annual report, the swap was extended to 2009:
“…with reference to the investments held in Santorini Investment Limited Partnership, the capital loss, due to the compliance with several accounting principle, is not deemed to be permanent in view of the assets underlying the financial contracts, which anyway increased in value in the last period; moreover, the contract was renewed for further 4 years (new expiry: 31 May 2009) while keeping the advance redemption right.”
On January 1 2007, San Paolo merged with Banka Intesa hence the following passage from the Bloomberg piece:
“Monte Paschi,… originally took the stake in one of Intesa’s predecessor companies… [and] entered into a swap with the [Deutsche] in 2002 to raise cash from [that]…while retaining exposure to Intesa’s stock-price moves.”
It appears then, that Monte Paschi effectively gained exposure to Intesa’s stock by default. Whatever the case, the collapse in the price of Intesa’s shares in 2008 resulted in a 367 million euro impairment to Monte Paschi’s Santorini investment. Desperate, the bank asked Deutsche Bank what could be done. Ultimately, it was determined that Deutsche and Monte Paschi would restructure Santorini and devise a replacement swap that would allow Monte Paschi to hide the losses on its original position.
The replacement swap will be the topic of a follow up piece. For now, consider that Deutsche Bank and Monte Paschi were able, via a stock purchase and a subsequent equity swap, to boost Monte Paschi’s 2002 Tier 1 capital (even though the stock purchase resulted in a nearly half billion euro capital loss for Monte Paschi), while ensuring that Monte Paschi retained exposure to the underlying shares. At the time, it undoubtedly seemed like a good idea – perhaps even a win-win situation. Of course, the near collapse of the worldwide financial system in 2008 would turn the deal into a nightmare for Monte Paschi, but as the Italian bank learned, when Deutsche Bank’s risk management department is involved, “losses” are just an illusion.
There are only 4 scenarios with respect to what is going to happen to Deutsche bank at this point:
i) raise capital through share offering or conversion of their CoCo bonds etc. However that would dilute the shareholders badly. The now have approximately 1.35 billion shares outstanding. A 14 billion settlement just for the mortgage fiasco will cost them over 1 billion shares and there are many more settlements in the wings.This would force their shares down in value and again a run would start.
ii)go to the ECB for bridge financing (again this would probably scare investors away from the stock)
iii) bail-out using taxpayer money (Merkel said no)
iv) bail in (all hell would break loose across the globe..
(courtesy zero hedge.
According To JPMorgan, This Is The Biggest Risk Facing Deutsche Bank At This Point
Deutsche Bank uncertainties were added to concerns about BoJ tapering spooking global equity markets over the past week. Widespread press reports about Deutsche Bank clients and counterparties reducing their financial exposure to the bank, including their derivatives exposures, alarmed market participants.
At the same time, JPMorgan warns, the amount borrowed by euro-area banks at the ECB’s USD auction this week spiked to $6.35bn raising fears about funding.
We need to wait for next week to see if this elevated dollar borrowing by euro area banks persists beyond quarter-end. But as JPMorgan’s Nikolaos Panigirtoglou warns,
In our opinion it is not so much funding issues but rather derivatives exposures that more likely to trouble markets going forward if Deutsche Bank concerns continue.
This is especially true if these concerns propagate into a confidence crisis inducing more rapid unwinding of derivative contracts.
As we have detailed previously, Deutsche has the world’s largest so-called derivatives book—its portfolio of financial contracts based on the value of other assets. As Forbes notes, it peaked at over $75 trillion, about 20 times German GDP, but had shrunk to around $46 trillion by the end of last year. That’s around 12% of the total notional value of derivatives outstanding worldwide ($384 trillion), according to the Bank for International Settlements.
As a reminder, if the liquidity run forces DB to start unwinding or being forced to novate derivatives, it could get ugly.
JPMorgan bank analysts confirm the size of DB’s book, and note that BIS data provide an alternative but indirect way to gauge the size of derivatives exposures. According to BIS data the exposure of foreign banks to German counterparties via derivatives contracts stood at $312bn as of Q1 2016.
This is significantly lower than the $408bn reported for Q1 2015, suggesting that foreign banks have cut their derivatives exposures to German counterparties significantly over the past year.
But at $312bn this exposure is still large even if Deutsche Bank accounts for a fraction of this.
* * *
As we have noted previously, Deutsche Bank has around EUR 560 billion in deposits (for now) and so theoretically they do not have a funding issue.
But as we have seen numerous times in Deutsche’s history above (and obviously in many other banks), when the runs start, they seldom end peacefully (and funding sources disappear very quickly). Which perhaps explains this from Germany’s financial regulator…
The head of Germany’s financial regulator warned on Saturday of “negative perceptions that could lead to downward spirals on the markets”, at the end of a week that saw Deutsche Bank shares battered by a crisis of confidence.
In an interview with the Frankfurter Allgemeine Sonntagszeitung newspaper due to be published on Sunday, the head of Bafin, Felix Hufeld, declined to comment specifically on Deutsche Bank, Germany’s biggest bank.
But he said: “I warn people not to let themselves be drawn into a kind of downward spiral of negative perception. Not every nervous market reaction is backed by objective facts.”
Roughly translated as “Don’t panic, we have everything contained.” Now where have we heard that before?
One thing is clear: Friday’s desperate rumor-driven ramp saved some of that deposit base as going out at record lows into a long-weekend would not have been confidence-inspiring for the deposit base.
But, as JPMorgan makes clear – and we have reiterated numerous times, it’s the derivatives that matter and as the chart below shows, counterparties were piling into protection en masse – even as speculators bid up the stock on a quiet Friday afternoon.
Remember how many times investors were told that Lehman had no liquidity or funding problems?
However, as noted previously, Lehman failed as a result of its corporate counterparties suffocating the bank by rapidly pulling out their liquidity lines. Lehman, however, was lucky in that it didn’t have retail depositors: it’s death would have likely come far faster as the capital panic was not limited to institutions but also included a retail depositor bank run.
This is where Deutsche Bank is very different from Lehman, and far riskier, because if the institutional panic spreads to the depositor base, which as the table below shows amounts to some €566 billion in total, and €307 billion in retail deposits…
… then all bets are off.
Which is why it is so critical for Angela Merkel to halt the plunging stock price, an indicator DB’s retail clients, simplistically (and not erroneously) now equate with the bank’s viability, and the lower the price drops, the faster they will pull their deposits, the quicker DB’s liquidity hits zero, the faster the self-fulfilling prophecy of Deutsche Bank’s death is confirmed.
Which ultimately means that DB really has four options: raise capital (sell equity, convert CoCos, which may results in an even bigger drop in the stock price due to dilution or concerns the liquidity raise may not be sufficient), approach the ECB for a liquidity bridge (this may also backfire as counterparties scramble to flee a central bank-backstopped institution), appeal for a state bailout (Merkel has so far said “Nein”) or implement a bail-in, eliminating billions in unsecured claims (and deposits) and leading to a full-blown systemic bank run as depositors everywhere rush to withdraw their savings, leading to a collapse of the fractional reserve banking mode (in which there is only 10 cents in physical deliverable cash for every dollar in depositor claims).
Which of the four choices Deutsche Bank will pick should become clear in the coming days. Until it does, it will keep the market on edge and quite volatile, because as Jeff Gundlach explained today, a “do nothing” scenario is no longer an option for CEO John Cryan as the market will keep pushing the price of DB lower until it either fails, or is bailed out.
Secular investor highlights the derivative problems facing DB
(courtesy Secular Investor)
Deutsche Bank ’s Problems Could Snowball… As Soon As Next Week!
Last week, the situation of Deutsche Bank kept the entire financial world busy as a $14B fine was hanging like a sword of Damocles over the company’s virtual head. We have to admit we had a good chuckle when the mainstream media were falling over themselves to report on Deutsche Bank’s problems, because most open-minded people in this sector already knew the company was one of the weakest links in the entire financial system, with the possibility to infect dozens of other players.
A weak link indeed, but most definitely not an unimportant link considering Deutsche Bank isn’t just ‘too big to fail’ but ‘waaaaay too big to be allowed fail’, and the existing problems very likely are just the tip of the iceberg. The markets were suddenly spooked by a potentially massive fine related to the sale of toxic mortgage bonds, but the concerns seemed to alleviate after the CEO of the bank published an open letter emphasizing the bank still has plenty of liquidity and reserves of in excess of 215B EUR.
It does look like the term ‘reserves’ has been used in quite a loose way, considering the majority of these so-called reserves are actually debt, and the market shouldn’t confuse ‘reserves’ with ‘liquidity reserves’. Even if you have 200B+ in liquidity, there will be a point in time when a company has to repay its creditors or refinance the existing debt, so relying on borrowed liquidity is usually just kicking the can further down the road. Indeed, after checking the H1 financial results of Deutsche Bank, the equity portion of the balance sheet is just a fraction of the 215B EUR in claimed reserves. The total shareholders equity was just 62B EUR as of at the end of June, with an equity/total assets ratio of just 3.3% compared to 12.2% at Bank of America and 12.75% at Citigroup. Even Banco Santander’s equity/total assets ratio is twice as high as Deutsche’s!
Source: Deutsche Bank
Die Zeit reported earlier this week the government and financial authorities were already preparing a rescue plan in case the bank could not meet its commitments by raising cash on the open market, because even selling the Abbey Life insurance group to Phoenix Life holdings for approximately $1.2Blast week won’t move the needle in case of a huge liquidity crunch.
Indeed, the market wasn’t buying CEO Cryan’s optimistic speech, and on the open market the 6% CoCobonds fell to less than 70 cents on the dollar, indicating a lot of debtholders wanted to get out of these CoCo’s as fast as possible, and the price of these bonds recovered slightly after the rumor about a $5.4B settlement was in the making.
We are uncertain about why the market thinks a $5.4B settlement would be good news. Sure, it’s less than the $14B the DoJ was originally seeking from Deutsche Bank, but even if the $5.4B number would be correct (Morgan Stanley thinks the total settlement will be closer to $6B, which we consider to be more likely considering Citigroup was slapped with a $12B fine, but settled for $7B), it would wipe out the entire provision on the balance sheet! Indeed, at the end of the second quarter of this year, the total amount of provisions on Deutsche Bank’s balance sheet was just 5.5B EUR ($6.1B), so a $6B settlement would wipe this out completely.
If you really believe a $5.4-6B settlement would solve all problems, think again. Selling toxic mortgages isn’t Deutsche Bank’s problem, but the exposure to the derivatives market is. And this problem could start snowballing, anytime now.
They haven’t even started the settlement negotiations yet. The rumour that caused the big rise in DB stock on Friday was false.
(courtesy zero hedge)
About That Deutsche “Settlement” Rumor: Cryan Hasn’t Even Started Negotiations With The DOJ
Friday’s market session was about one thing: will Deutsche Bank stock close the week ahead of a three day holiday at a record low. It did not because, as we reported, the AFP announced that based on “sources” (most likely from Twitter), the DOJ was willing to reduce the $14 billion settlement that sent DB stock on a rollercoaster ride over the past two weeks, to just under $6 billion. The news unleashed a massive short squeeze relief rally, which sent DB stock soaring on Friday, pushing the entire market up 1%.
And while repeated attempts by the likes of Reuters to get additional information from either the DOJ, the German government or Deutsche Bank itself, have proven fruitless, overnight Frankfurter Allegemeine Zeitung reported that Deutsche Bank executives are heading to the United States in the coming days to negotiate the $14 billion settlement over a fine the infamous $14 billion for misselling RMBS.
The FAZ did not cite any sources for its report. Deutsche Bank did not immediately respond to a request for comment on Chief Executive John Cryan’s travel plans.
In other words, not only was the $5.6 billion “agreed upon” number, as “reported” by Twitter and then AFP, bogus, but the actual negotiations have not yet even begun.
It also means that the catalyst for Friday’s ramp was, as we suspected, nothing but the latest attempt at media manipulation meant to push DB stock higher and prevent a concerned German population from pulling its cash out of the bank, of which DB has well over €300 billion in retail deposits.
With Germany closed on Monday and only the far more illiquid US DB stock trading on Monday, we look forward to the market’s reaction to the realization that what it soared on what was nothing more than a media stunt, especially in the aftermath of Saturday’s announcement that Italy is the latest sovereign to take Deutsche Bank to task for its allegedly illegal manipulation and misrepresentation of Monte Paschi’s books.
This did not help over the weekend: IT outages at DB as customers could not get their cash out of the banks:
Some Deutsche Bank Clients Unable To Access Cash Due To “IT Outage”
While it now seems that Friday’s rumor of a substantially reduced Deutsche Bank settlement with the DOJ, which sent the stock price soaring from all time lows, was false following a FAZ report that CEO John Cryan has not yet begun the renegotiation process, and in the “next few days” is set to fly to the US to discuss the proposed RMBS misselling settlement with the US Attorney General, Germany’s largest lender continues to be impacted by the public’s declining confidence, exacerbated over the weekend by a disturbing “IT glitch.”
For one, it remains unclear if Friday’s report halted, or reversed, the outflow of cash from DB’s prime brokerage clients, which as Bloomberg first reported last week was a major catalyst for the swoon in the stock price. However, as UniCredit’s chief economist Erik Nielsen notes in a Sunday notes, one thing is certain: “so long as a fine of this order of magnitude ($14 billion) is an even remote possibility, markets worry.”
There is also the threat of the bank’s massive derivative book, which despite attempts of many pundits to gloss over, over the weekend none other than JPM admitted that that is what the markets will likely be focusing on for the foreseeable future: “In our opinion it is not so much funding issues but rather derivatives exposures that more likely to trouble markets going forward if Deutsche Bank concerns continue. This is especially true if these concerns propagate into a confidence crisis inducing more rapid unwinding of derivative contracts.”
Indeed, as we first hinted last Thursday…
… and as CNBC’s Jeff Cox correctly observed subsequently, at the core of this week’s investor angst is a word that came up during Bear’s demise: “novation,” or a request by hedge funds that deal with the bank to have others take their place in derivatives trades. In the case of Bear Stearns, word in March 2008 that Goldman Sachs had refused a novation request spread panic through Wall Street.
A few days later, the erstwhile Wall Street institution was no more. Though Bear was loaded with toxic assets, it was essentially a rapid crisis of confidence that had done in the firm.
That’s why Thursday’s news that a couple of hedge funds doing business with Deutsche were trimming their sales caused such a ruckus in the market. A Bloomberg report indicated that three hedge funds that do business with Deutsche were reducing their positions, causing afternoon market hyperventilation that the funds were losing confidence in the bank.
But while DB’s market woes have been duly discussed, at home, the bank is fighting a “rearguard action” as Reuters writes, seeking to shore up confidence among the public, politicians and regulators who say the bank brought many of its problems upon itself by overreaching itself and then reacting too slowly to the 2008 financial crisis.
Making matters even worse, as Reuters and Handelsblatt reported, the bank suffered a further blow to its image this weekend with a third IT outage in the space of a few months on Saturday “that prevented some customers getting access to their money for a short time.”
Handelsblatt adds that “among rumors about state aid, the dramatic fall in its stock price, and an attack by hedge funds on the most important domestic bank, now come reports of a new IT glitch. “Customers can not access their cash because it is blocked”, a customer complained on Saturday morning to Handelsblatt, adding that “I am stunned: I can’t make weekend purchases since I can neither get cash nor pay by card.”
While the bank emphasized that the glitch was temporary, “and only a few customers were affected”, it was still an embarrassing moment as this was just the latest “glitch” to affect the bank.
One week ago, the bank suffered delays and errors in its online banking platform, and in many cases deposits and debits “were displayed twice or not displayed at all.” In June, customers were unable to withdraw money. Also, as reported here, in late August, Deutsche Bank was forced to make a statement after reports emerged that it was unable to provide physical gold upon request for delivery from the Xetra-Gold ETN. This is what DB said:
As one of the sponsoring financial institutions, Deutsche Bank fulfils the obligations specified in the Xetra-Gold sales prospectus as a matter of course. This includes fulfilling claims to the delivery of physical gold certified by Xetra-Gold. This must take place through the investor’s principal bank where the investor’s securities account is maintained. Deutsche Bank accepts such orders for delivery from its clients. The investor incurs the costs described in the sales prospectus, for example, for the forming, packaging and the insured transport to the place of delivery. For this reason, we recommend in each specific case an individual review of the economic efficiency of a physical delivery. Should an investor’s request for the handover of physical gold not have been complied with immediately in individual cases, this will be reviewed and an individual solution will be found with the client.
Less than a month later, rumors of a state bailout of Deutsche Bank had gripped both the capital markets and the press.
* * *
As a result of the ongoing crisis of confidence, DB has gotten an outpouring of both industry and regulatory support. German business leaders from companies including BASF, Daimler, E.ON, RWE and Siemens lined up to defend the bank Sunday in a front-page article in the Frankfurter Allgemeine Sonntagszeitung. “German industry needs a Deutsche Bank to accompany us out into the world,”BASF Chairman Juergen Hambrecht said. Curiously, a spokesman for a blue-chip company that did not feature in the article told Reuters he had been asked by Deutsche for an executive to provide a similar supportive comment.
It did not stop there: in an interview with the Frankfurter Allgemeine Sonntagszeitung newspaper, the head of Bafin, Felix Hufeld said: “I warn people not to let themselves be drawn into a kind of downward spiral of negative perception. Not every nervous market reaction is backed by objective facts” warning of negative perceptions that could lead to downward spirals on the markets.
Which, perhaps, goes to underscore the biggest problem for Deutsche Bank: the bank and the government in Berlin have had to play a delicate balancing act, emphasizing the substance and importance of the bank without implying any need for state aid or willingness to supply it. Both the bank and Berlin this week denied reports that the government was preparing a rescue plan, even as the outpouring of moral support for the bank continues.
Finally, any negative news in the coming days, whether involving the just filed charges in Italy over the falsification of Monte Paschi accounts and “market manipulation“, more reports of cash outflows, or news of further operational weakness, may lead to a prompt return of the panicked selling. Just moments ago, Bloomberg reported that Deutsche Bank is poised to reach an agreement with labor representatives this week that will pave the way for eliminating another 1,000 jobs in its home market. The cuts will mostly affect back-office staff such as in IT services.
We hope that among those IT specialists laid off are not the ones responsible for keeping the bank’s online bank accounts and ATMs online, because a few more “IT glitches” that prevent depositors from accessing their cash could be all that it takes for DB’s impressive liquidity position as described here first last week, to become rather, well, “deplorable.”
Finally, Wall Street Journal reports that there is no settlement deal between Deutsche bank and the Dept of Justice. The German economic minister is quite angry at DB
(courtesy Wall Street Journal/zero hedge)
WSJ Reports “No Settlement Deal” Between Deutsche, DOJ As German Econ Minister Slams Deutsche Bank
As we predicted on Friday, and as we reported earlier today, the AFP “story” of a $5.4 billion revised settlement between DB and DOJ was indeed “sources” on Twitter, and had no basis in reality. The reason: not only has John Cryan barely started the negotiations with the DOJ, and is set to arrive in the US this week to beg for mercy, but as the WSJ, which broke the original settlement story more than two weeks ago just reported, Deutsche Bank’s settlement talks with the DOJ are continuing, “with no deal yet presented to senior decision makers for approval on either side.”
The talks are moving forward, but they have “not progressed to a degree that a proposed deal has reached senior-level review at the Justice Department or with Deutsche Bank’s supervisory board, people familiar with the matter said.”
While there is much more information one could hope for in what is now the most important litigation in capital markets, we will gladly take what the WSJ reports over the market-manipulating garbage spewed by AFP with the sole intent of getting both DB and the market to close higher.
Some more details from the WSJ:
“People familiar with the continuing settlement talks say details remain in flux. Justice Department lawyers have floated the possibility of also reaching accords with other European banks who have yet to resolve similar investigations and announce them at once, but no such move is certain, the people say.”
The WSJ also adds that CEO John Cryan plans to be in Washington, D.C. this week for meetings of the International Monetary Fund and World Bank. The visit has stoked speculation that he could delve in person into ongoing talks with the Justice Department. The Deutsche Bank spokesman declined to comment on any matters related to talks with Justice Department.
Meanwhile, as Deutsche ponders what rumors it will have to unleash tomorrow to provide another much needed boost to the stock, especially if the market sells off on today’s denial of the settlement speculation, German Economy Minister Sigmar Gabriel accused Deutsche Bank on Sunday of blaming speculators for last week’s plunge in its share price when the bank had itself made speculation its business.
Cited by Reuters, he said that “I did not know if I should laugh or cry that the bank that made speculation a business model is now saying it is a victim of speculators,” Gabriel told reporters on a plane to Iran, which he is visiting with a business delegation.
That does not sound like the soothing words of a government willing to backstop its biggest lender.
Gabriel, who is also leader of the Social Democrats the junior partner in Angela Merkel’s coalition government, also said he was worried about those who were employed by the lender. As Reuters repeats, the problems of Deutsche Bank are awkward for Berlin, which has berated many euro zone peers for economic mismanagement and taken a hard line on other EU nations giving state aid to bail out their problem banks.
Last week the German finance ministry moved swiftly to dismiss a report that a government rescue plan was being prepared in case Deutsche Bank was unable to raise sufficient new capital to settle litigation which includes cases dating back to its expansion before the financial crisis.
However, if now that the rumors of a revised settlement have been taken off the table if only for the time being, and if the selling once again resumes – if for no other reason that to prompt precisely such a discounted settlement borne out of existential fears for the German bank – the German finance ministry may find itself busy once again: on one hand denying it would bailout Deutsche Bank, on the other scrambling to round up all possible resources – listed in a previous post – to boost confidence in the German bank, just in case another fake rumor of an imminent “fix” doesn’t restore the public’s, and counterparties’, confidence in the ailing lender with tens of trillions of derivatives on its books.
Monday morning: 9:30 est
A very good reason for the boys to whack gold this morning: Credit default swaps spikes to record highs:
(courtesy zero hedge)
EU, US Stocks Slide After Deustche Bank Default Risk Spikes To Record High On Disappearing ‘Deal’ Hype
Following confirmation over the weekend that the rumors were false of a lower-priced ‘deal’ with The DOJ somehow saved Deutsche Bank from its potential liquidity crisis; Deutsche Bank assets are notably marked down this morning. Despite Germany being closed, Credit markets are trading in the US and Europe with CDS spiking to new record highs (extending Friday’s decoupling).
Counterparty Risk hedges are soaring… (1Y SUB CDS +84bps at 548bps)
while repeated attempts by the likes of Reuters to get additional information from either the DOJ, the German government or Deutsche Bank itself, have proven fruitless, overnight Frankfurter Allegemeine Zeitung reported that Deutsche Bank executives are heading to the United States in the coming days to negotiate the $14 billion settlement over a fine the infamous $14 billion for misselling RMBS.
The FAZ did not cite any sources for its report. Deutsche Bank did not immediately respond to a request for comment on Chief Executive John Cryan’s travel plans.
In other words, not only was the $5.6 billion “agreed upon” number, as “reported” by Twitter and then AFP, bogus, but the actual negotiations have not yet even begun.
And Bloomberg reporting that Deutsche Bank is most likely to tap existing shareholders for funds to help weather mounting legal costs as other options including a sale of the asset management business or a merger with Commerzbank AG are more damaging, Autonomous Research LLP said.
The lender may face litigation charges of $5.6 billion in an investigation of the U.S. Department of Justice tied to residential mortgage-backed securities and $2.5 billion in a money-laundering probe into its Russian operations, sparking a capital shortfall of as much as 9.5 billion euros ($11 billion), Stuart Graham, chief executive officer at Autonomous, said in a note on Monday. While the lender has several options, they’re all “unattractive,” he said.
“Deutsche has waited too long to conduct yet another rights issue, in our view,”Graham wrote, who has an underperform on the shares. “It has understandably been fearful of raising equity ahead of settling its major litigation cases with the U.S. DOJ.”
A spokesman at Deutsche Bank declined to comment.
Investors see a rights issue as the “most likely tool management will use” to restore market confidence, Autonomous said in the note, citing a Procensus survey with 202 respondents. Clawbacks and scrapping bonuses were the second-most likely outcome, while a merger with Commerzbank ranked last of six options considered, according to the note.
And the decoupling between credit and equity markets extends…
In the pre-market, DB ADRs are fading modestly for now...
And European bank stocks are sliding…
As are US equities…
Overnight trading: Monday 8 am
Futures Flat With Germany Closed; Sterling Slides On “Hard Brexit” Fears
With China, German and South Korea closed for holiday, it has been a relatively quiet day in overnight equity trading, especially in the one stock everyone is keeping a close eye on, Deutsche Bank, whose ADRs are trading fractionally lower, down under 1% in premarket trading. The British pound dropped 0.8% to $1.2872 in early trading, touching the weakest level since July 6, on concern Britain may face a so-called hard Brexit after British Prime Minister Theresa May pledged to start pulling the U.K. out of the European Union by March. As a result the FTSE 100 Index added 1.1% rising to a fresh 16 month high as the “fear of Brexit” once again proves quite generous for UK stock markets. The yield on 10-year gilts slipped one basis point to 0.74% as the BOJ’s efforts to fix the benchmark paper to 0% continue to struggle.
With futures little changed, and what international markets are open rising modestly on Friday’s US stock momentum higher, driven by a now rejected rumor of a $5.4 billion revised settlement between the US and DOJ, the key highlight of the trading session so far has been sterling, which dropped by the most in two weeks, helping support British shares. As Bloomberg notes, the MSCI All Country World Index added 0.2% as stock markets rallied in Asia, also reacting for the first time to a report that Deutsche Bank AG would face a smaller fine than feared from the U.S. Department of Justice; ironically a report which US traders now see as having been made up. Crude oil rose for a fourth day, boosting the currencies of commodity-exporting nations. Markets in China, Germany and South Korea were shut for holidays on Monday.
The pound has sunk about 13 percent versus the dollar this year, making it the worst-performing major currency, on concern Britain’s decision to quit the EU will force it out of the single market, hurt exports and dent financial services. With negotiations on the terms of the exit yet to start, business groups and foreign capitals are grasping for more detail. May told her Conservative Party’s annual conference in Birmingham that she’ll invoke Article 50 of the EU’s Lisbon Treaty by the end of March.
“Yesterday the impression participants got was that the pendulum has swung towards a hard Brexit,” said Neil Jones, head of hedge fund sales at Mizuho Bank Ltd in London. “Hard Brexit is a sell for the pound. I know the government line is that they don’t see a need to differentiate between hard and soft Brexit, but the market certainly does.”
In notable M&A news, Henderson Group Plc agreed to buy Janus Capital Group creating a $320 billion money manager as both companies seek to boost profit and assets in the face of rising competition from passive managers. Henderson’s shares surged the most in more than seven years. The combined firm, Janus Henderson Global Investors Plc, will have a market value of at least $6 billion, the Denver and London-based companies said in a statement Monday. Japanese insurer Dai-ichi Life Holdings Inc., Janus’s biggest shareholder, will hold a 9% stake in the combined company and intends to increase that to at least 15 percent, according to the statement.
In commodities, crude oil rallied 1.1 percent to $48.75 a barrel after rising 8 percent over the previous three sessions as OPEC members forged a preliminary agreement to reduce output. Treasury 10-year note yields were at 1.60% after slipping two basis points last week. Japan’s was at minus 0.085 percent and Germany’s at minus 0.11 percent. Attention will focus on today’s General Collateral print after the surge in GC to post-crisis highs on Sept 30 to confirm that this was quarter-end driven and not a function of a collapse in USD-liquidity, precipitated by Deutsche Bank fears.
Despite the Deutsche-driven bounce in Western markets on Friday, the ‘panic in The Kingdom’ that we highlighted earlier in the week is accelerating fast. Following demands from officials for banks to reschedule loans to clients affected by last week’s decision to cut salaries and bonuses for state employees, Middle-East bank stocks are collapsing and Saudi’s Tadawul Index is back near its 2009 lows…
The weakness – despite crude strength – was driven by Saudi Arabia’s central bank decision to direct local lenders to reschedule the consumer loans of clients affected by last week’s decision to scrap the bonuses and allowances of many state employees. As Bloomberg reports,
The Saudi Arabian Monetary Agency, as the central bank is known, said in a statement on its website on Sunday that the step was part of efforts to “reduce pressure on borrowers” whose income was cut by the government’s Sept. 26 package of measures to further trim spending.
The agency said local banks must obtain the client’s approval before rescheduling a loan. Borrowers should present proof that their income has been affected by the recent cuts to the nearest bank branch, the regulator said. Loans taken after the cabinet decision to end the payments won’t be rescheduled.
Under Deputy Crown Prince Mohammed bin Salman, the world’s biggest oil exporter has already delayed payments owed to contractors and started cutting fuel subsidies as it tries to manage lower oil prices. The measures may help narrow the budget deficit to 13 percent of gross domestic product this year and below 10 percent in 2017, according to International Monetary Fund estimates.
The cancellation of bonuses and allowances — and a simultaneous decision to lower ministers’ salaries by 20 percent — further spread the burden of shoring up public finances to a population accustomed to years of government largesse. Yet analysts have warned the cuts risk deepening the kingdom’s economic slowdown by damaging consumer confidence.
Which collapsed Saudi banking stocks to record lows…
And trust is rapidly being lost in the Saudi interbank markets…
And this is a major problem…
No help at all as oil prices rebounce post-Algiers.
As the forward market implies dramatic devaluation is looming…
And investors are loading up on record amounts of CDS protection (red line)…
Unemployment skyrockets in France to 10.5%
(courtesy zero hedge)
French Unemployment Soars: Will Hollande Keep His Word Or Will He Humiliate Himself?
The unemployment rate in France surged in August (the latest report) to a 12-month high of 10.5%. French President Francois Hollande said he will not run for reelection unless the rate drops below 10%. Will he keep his word?
The Financial Times reports French Unemployment at 12-Month High.
France is bucking the trend among the major economies in the eurozone, with its closely-watched unemployment rate hitting a 12-month high in August.
Europe’s second largest economy is sticking out like un sore thumb, with almost every other country in the 28 member EU trimming or holding its jobless rate.
France’s jobless rate inched up to 10.5 per cent this month according to figures from Eurostat. That’s risen steadily from 9.9 per cent in May and defied the broader eurozone-wide trend where unemployment is hugging five-year lows at 10.1 per cent.
French unemployment has become a lightning rod in the country’s political debate after incumbent president, Francois Hollande, has vowed to only stand for re-election next year if the rate falls into single figures.
The International Monetary Fund has warned France’s “structural unemployment” is set to remain elevated as the country is hampered by burdensome regulations and high tax levels.
Currently led by a former French finance minister, Christine Lagarde, the IMF has called on France to reform its minimum wage structure and boost private sector job creation through ambitious labour market reforms.
On rare occasions, make that extremely rare occasions, Christine Lagarde actually says something that makes sense. This is one of those times.
France’s wage structure, hiring and firing rules, tax structure, work hour rules, etc., etc. are all horrendous.
But at the first hint of badly needed reforms in France, what typically happens is the unions, the socialists, and the farmers dump “merde” all over the place, shutting the country down.
Then the reformers back down, and the only thing remaining is merde.
So “Will Hollande keep his word or will he humiliate himself?”. Actually close to 90% of the country thinks Hollande is a fool. He has already humiliated himself.
Will Hollande humiliate himself even more?
We do not know for certain, but that’s what fools typically do.
USA vs RUSSIA NEWS
This is not good as the USA suspends diplomatic relations with Russia;
(courtesy zero hedge)
US Suspends Diplomatic Relations With Russia On Syria
What last week was just a not-so-thinly-veiled-threat lobbed by John Kerry to the Kremlin has, now that Russia suspended its participation in a Plutonium cleanup accord with the US, become official, and as the State Department announced moments ago, the US has now suspended bilateral discussions, i.e. diplomatic relations, with Russia over Syria, escalating the conflict in the war-torn nation to a level last seen in late 2015.
- U.S. STATE DEPARTMENT SAYS SUSPENDING BILATERAL DISCUSSION ON SYRIA WITH RUSSIA
- RUSSIA FAILED TO LIVE UP TO ITS COMMITMENTS, STATE DEPT SAYS
- U.S. WILL WITHDRAW PERSONNEL WHO HAD BEEN DISPATCHED TO WORK ON
PLANNED JOINT IMPLEMENTATION CENTER
- U.S. WILL STILL USE `CHANNEL OF COMMUNICATIONS’ WITH RUSSIA
As Reuters adds, the United States said on Monday it was suspending talks with Russia on trying to end the violence in Syria and accused Moscow of not living up to its commitments under a ceasefire agreement. “The United States is suspending its participation in bilateral channels with Russia that were established to sustain the cessation of hostilities,” U.S. State Department spokesman John Kirby said in a statement. “This is not a decision that was taken lightly.”
While we await more, we can’t help but note that the drums of (global, non-proxy) war in Syria are beating ever louder. The next escalatory step from the US at this point would be to send US troops in Syria, which would be promptly met with a matched retaliatory response by Russia, and perhaps China too, which as reported several weeks ago, informally joined the conflict on the side of Syria’s president Assad when it said it would provide “aid and military training” to Syria’s current president.
Restaurant Industry – Leading Indicator Of US Economy – Sours; As Bankruptcies Pile Up
“Very challenging” sales trends.
On Friday, September 30, Restaurants Acquisitions, the operator of Black-eyed Pea and Dixie House restaurant chains, converted its Chapter 11 filing to Chapter 7 liquidation. The bankruptcy court ordernoted the company had shuttered its restaurants and management had resigned.
The day before, Cosi Inc., a fast-casual chain with 1,100 employees filed for bankruptcy. It closed 29 of its 74 company-owned restaurants and laid off 450 people. The 31 independently owned franchise operations continue operating.
Also last week, Logan’s Roadhouse, a casual steakhouse with over 200 locations, closed more than 10 restaurants, on top of the locations it had already closed in August when it filed for Chapter 11 bankruptcy.
Eight restaurant companies representing 12 chains have filed for bankruptcy since December: Restaurants Acquisitions, Cosi, Logan’s Roadhouse, Fox & Hound, Champps, Bailey’s, Old Country Buffet, HomeTown Buffet, Ryan’s, Johnny Carino’s, Quaker Steak & Lube, and Zio’s Italian Kitchen.
Restaurants are precarious creatures. They lease costly space and have to invest in equipment and furnishings. It’s a competitive environment, with high expenses and little pricing power. To expand, they load up on debts. Some, like Cosi, always lose money. Customers are finicky and fickle. When new competitors come along, or when the economy tightens, customers thin out and creditors begin to fret and turn off the money spigot.
Some of that is normal. The restaurants come along, and old ones die.
“But the current wave of bankruptcies is definitely unusual, and rivals the chain bankruptcy wave of 2009 and 2010, when several chains filed for debt protection after sales fell,” writes Jonathan Maze at Nation’s Restaurant News, adding:
In this case, the wave of bankruptcies is largely due to a decline in sales at restaurant chains that is particularly harmful to companies that are already walking a balance-sheet tightrope. The companies that filed for bankruptcy recently were already weak.
Some are repeat offenders, including Buffets LLC (Old Country Buffet, HomeTown Buffet, and Ryan’s) which is now mired in its third bankruptcy. Many of them, battered by declining sales and rising expenses, have been losing money for a long time. But now things are coming to a head.
Restaurant bonds moved into fourth place early this year in Standard & Poor’s Distress Ratio, behind brick-and-mortar retailers and the doom-and-gloom categories of “Energy” and “Metals, Mining, and Steel.”
Other restaurants are trying to hang on by cutting costs and shrinking their footprint, which entails more sales declines, and thus continues the downward spiral.
In August, casual-dining operator Ruby Tuesday announced that – after “a rigorous unit-level analysis of sales, cash flows, and other key performance metrics, as well as site location, market positioning and lease status” – it would sell its headquarters and close 15% of its 624 or so company-owned restaurants by September.
Clinton Coleman, interim CEO of Rave Restaurant Group, which operates Pie Five Pizza Co. and the Pizza Inn buffet brand, put it this way on September 23, after reporting that same-store sales had tumbled in Q4 and that losses had ballooned: “Sales trends in the fourth quarter were very challenging for the Pie Five system, as was the case in much of the fast-casual segment.”
The restaurant industry is not a sideshow. About 14 million people work in it, according to the National Restaurant Association. With $710 billion in annual sales, it’s an important part of consumer spending and accounts for about 4% of GDP. If the industry is having problems, it’s a red flag for the overall economy.
Its difficulties are not limited to just a few beat-up restaurant chains. The National Restaurant Association reported on Friday that its Restaurant Performance Index (RPI) for August fell 1% to 99.6 and is now in contraction mode (below 100 = contraction). It was the worst reading since October 2012.
The RPI’s post-Financial Crisis peak was in the spring and summer 2015, when it dabbled with 103. Its all-time peak, going back to its inception in 2003, was 103.4 in 2004. Its all-time low of 96.5 occurred during the depth of the Financial Crisis.
The index consists of two components:
- The Current Situation Index, which tracks restaurant operators’ reports on same-store sales, customer traffic, hiring, and capital expenditures
- And the Expectations Index which tracks restaurant operators’ six-month outlook, including on the overall economy – more on that in a moment.
The Current Situation Index fell in August to 97.7, the lowest since February 2010. Three of its four indicators declined: same-store sales, customer traffic, and labor.
Only 30% of the restaurant operators reported a year-over-year increase in same-store sales. That’s down from 71% in February.
But 53% reported a year-over-year decline in same-store sales. This metric has been deteriorating for months. In February, March, and April, between 19% and 38% of the operators had reported lower same-store sales. Then it ticked up: 42% in May, 43% in June, 45% in July, then jumping to 53% in August.
Operators also reported a net decline in customer traffic: while 21% reported a year-over-year increase, 59% reported a year-over-year decline. August was the fourth months in a row of year-over-year net declines in customer traffic.
And optimism is beginning to wane. The Expectation Index edged down to 100.6: “While the Expectations component of the index remains in expansion territory, it too has trended downward in the past several months.”
And operators are turning gloomy about the overall economy: only 17% expect the economy to improve over the next six months, but 29% expect conditions to worsen:
This represented the 10th consecutive month in which restaurant operators had a net negative outlook for the economy.
Restaurant operators as a group are an optimistic bunch – they have to be, or else they wouldn’t do it. But they also have daily intense contacts with consumers and are thus a leading indicator of the consumer-based economy.
In the beaten-up brick-and-mortar end of the retail industry, the meme has been that Millennials aren’t buying enough goods but like spending money on “experiences” – such as eating out. If that’s true, and not just an excuse by faltering retailers, it appears Millennials are not doing enough of that either anymore. Either way, the restaurant industry has been giving off increasingly loud warning signs about the overall economy, and the state of the consumer.
And the fate of that consumer-based US economy?
Bizarre!! It sure looks like the FBI are co conspirators!
(courtesy zero hedge)
FBI Allowed 2 Hillary Aides To “Destroy” Their Laptops In Newly Exposed “Side Agreements”
Just when you think the Hillary email scandal can’t get any more bizarre and corrupt, it does. According to a just released letter from the Chairman of the House Judiciary Committee, Bob Goodlatte (R – Virginia), to Attorney General Lynch, the FBI apparently struck “side agreements” with both Cheryl Mills an Heather Samuelson to “destroy” their “laptops after concluding its search.”
While we parse the letter to understand what basis for action the FBI may have had when pursuing such a course of action, we can’t help but note that the FBI appears to have acted as a co-conspirator in what appears to be an unprecedented case of destruction of key evidence.
Below are some of the key excerpts from the letter (full document attached at the end of this post):
As part of the Judiciary Committee’s ongoing oversight of Secretary Clinton’s unauthorized use of a private email server during her tenure as Secretary of State, the Justice Department (DOJ) provided in camera review’ of certain immunity agreements. After a specific request from the Committee, based on references made in the immunity agreements to certain “side agreements,” DOJ subsequently provided in camera review of those “side agreements” between DOJ, the Federal Bureau of Investigation (FBI), and Beth Wilkinson, the lawyer representing both Cheryl Mills and Heather Samuelson. Like many things about this case, these new materials raise more questions than answers. Please provide a written response to the below questions and make DOJ staff available for a briefing on this matter no later than October 10, 2016.
1. Why did the FBI agree to destroy both Cheryl Mills’ and Heather Samuelson’s laptops after concluding its search?
2. Doesn’t the willingness of Ms. Mills and Ms. Samuelson to have their laptops destroyed by the FBI contradict their claim that the laptops could have been withheld because they contained non-relevant, privileged information? If so, doesn’t that undermine the claim that the side agreements were necessary?
7. Please explain why DOJ agreed to limit their search of the Mills and Samuelson laptops to a date no later than January 31, 2015 and therefore give up any opportunity to find evidence related to the destruction of evidence or obstruction of justice related to Secretary Clinton’s unauthorized use of a private email server during her tenure as Secretary of State.
8. Why was this time limit necessary when Ms. Mills and Ms. Samuelson were granted immunity for any potential destruction of evidence charges?
9. Please confirm whether a grand jury was convened to investigate Secretary Clinton’s unauthorized use of a private email server. Disclosure is authorized under Fed. R. Crim. P. 6(e)(3)(A)(i) and (e)(3)(D).
Of course, since this will be promptly spun as just more “plumes of smoke” we hope people will stop trying to “criminalize behavior that is normal.”