Most world markets have reopened following the holiday weekend, but trading volumes remain significantly muted. Asian and European shares advance modestly amid low volumes with U.K. and Ireland closed; S&P futures are little changed while the dollar rose and oil extended its longest winning streak in four months.

Crude advanced for a seventh day ahead of the new year when OPEC and other producing nations are expected to start reducing output. European shares edged higher, though volume was two-thirds lower than the 30-day average. Despite the dolllar rising against most peers, gold reached an almost two-week high amid reduced supply during the holidays.

With most carbon-based traders out on vacation this week, do not expect volumes to pick up, although with algos in charge it is possible to have a pickup in volatility due to thin, illiquid markets. As Reuters notes, concerns about Italian banks, Chinese growth and U.S. President-elect Donald Trump’s protectionist bent look set to keep investors on edge into the start of 2017.

For now the prevalent theme remains one of Trump and “optimism”, as even the president-elect tweeted last night…

… although that too appears to have peaked and traders are now casting cautious glances at what comes next: “The financial markets seem to have already priced in expectations toward a Trump presidency, and are shifting toward a market that’s waiting to gauge his actual policies,” Hideyuki Ishiguro, a senior strategist at Daiwa Securities told Bloomberg. “We also have a lack of market participants with overseas markets closed.” In addition to the U.K., financial markets in Australia, New Zealand and Hong Kong remained shut on Tuesday.

Tuesday data showed Chinese industry racked up its strongest profit growth in three months in November, suggesting the world’s second-largest economy was improving. In Japan, however, core consumer prices fell in annual terms for the ninth month as household spending slumped.

“Markets have calmed down a lot since the U.S. election and the decisions by the ECB and Fed (earlier in December),” said Daniel Lenz, a bond market strategist with DZ Bank in Frankfurt. “There is a feeling that some of the expectations after the Trump election may have been exaggerated and now it is a question of waiting to see what the U.S. government will look like when it finally takes shape.”

The Shanghai Composite Index, which has been hovering around the same level since mid-December, slid 0.3 percent. China’s economy is closing out the year on a high note as the earliest December indicators give no signs that the expansion is faltering. Data on Tuesday showed industrial-profit gains accelerated in November. The Jakarta Composite Index rose 1.5 percent, ending its longest losing streak since 2005 and helping send the MSCI Emerging Markets Index up 0.2 percent. Japan’s Topix index gave up earlier gains to finish lower for the fourth straight day, after data showed the nation’s consumer prices dropped in November. Toshiba Corp. sank the most in a year on reports it may book a loss of as much as 500 billion yen ($4.3 billion) on its U.S. nuclear operations.

The Stoxx Europe 600 Index added 0.1%. Despite heading for its biggest monthly rally in more than a year, it’s been hovering around overbought levels. An index tracking volatility expectations jumped 11% on Tuesday, the most in a month.

S&P 500 futures slipped less than 0.1% after closing on Friday just 0.4% shy of a new record, while the Dow Jones Industrial Average is just points away from the 20,000 level.

Top stories also include Toshiba saying it may have to write down its nuclear business; the ECB warning Monte Paschi its capital shortfall has surged by over 75% in a few weeks, Panasonic, Tesla to Start Output at Buffalo Plant Next Summer, Russia caling the U.S. move to supply Syria rebels weapons a hostile act; Russia finding the first black box from the Black Sea crashed jet.

Market Snapshot

• S&P 500 futures down less than 0.1% to 2258
• Stoxx 600 up 0.1% to 360
• DAX up less than 0.1% to 11459
• German 10Yr yield down less than 1bp to 0.22%
• Italian 10Yr yield up 2bps to 1.84%
• Spanish 10Yr yield up 2bps to 1.4%
• S&P GSCI Index up 0.5% to 393.8
• MSCI Asia Pacific up less than 0.1% to 134
• Nikkei 225 up less than 0.1% to 19403
• Shanghai Composite down 0.3% to 3115
• U.S. 10-yr yield up 2bps to 2.55%
• Dollar Index up 0.02% to 102.99
• WTI Crude futures up 0.5% to $53.27
• Brent Futures up 0.1% to $55.24
• Gold spot up 0.8% to $1,144
• Silver spot up 1.7% to $16.01

Global Headline News

• Toshiba Says Nuclear Writedown May Reach Billions of Dollars: Writedowns may be more than company’s projected profit
• Oil Extends Longest Run of Gains Since Aug. Before OPEC Cuts: Prices to recover as output curbs help rebalancing: Al-Falih
• Dollar Gains Amid Japan Importer Buying, Rise in Treasury Yields: Greenback set for first advance versus yen in five days
• Democrats Plotting ‘Collision Course’ With Trump’s Tax Plan: They’ll emphasize benefits for the rich amid populist pitch
• Gold Surges Above $1,150 as Precious Metals Post Year-End Rally: Platinum, palladium, silver also rallying
• Panasonic, Tesla to Start Output at Buffalo Plant Next Summer: Plant’s capacity to reach 1GW by 2019
• Qualcomm Signs 3G/4G China Patent License Pact With Gionee: Qualcomm granted Gionee a royalty-bearing patent license
• Outrage Over Economy Doesn’t Explain Surging Global Populism: Greece’s anti-establishment push shows progress can be slow
• Russia Urges Libya Leadership Role for UN-Defying Military Chief: UN envoy ignoring influential players in Libya: Gatilov

* * *

In Asia, the MSCI index of Asia-Pacific shares ex-Japan was marginally higher while Japan’s Nikkei closed little changed. “It is the time of the year when markets trade with hushed tones,” Jingyi Pan, market strategist at IG, wrote in a note. “The magnitude of moves could remain capped with thin market trades expected to remain the case. Markets are expected to remain thin today,” Pan added saying that “for Asia, it is likely to be a second day of mixed performance with a lack of leads. Japan could nevertheless experience gains with the dollar climbing against the yen.” 6 out of 11 sectors decline in the MSCI Asia Pacific Index with industrials, telecom services underperforming and health care, consumer staples outperforming. China’s CSI 300 index was down 0.1% and the Shanghai Composite slipped almost 0.2 percent, despite the upbeat industrial data.

Asian Eco Data:

• Japan Nov. core consumer prices -0.4% Y/Y; est. -0.3%
• Japan Nov. jobless rate 3.1%; est 3.0%
• Japan Nov. household spending fell 1.5% Y/Y
• China Jan.-Nov. industrial companies’ profit rises 9.4% Y/Y

Top Asian News

• Early China Data Show Economy on Firmer Footing in December: Satellite activity gauge stabilizes near a five-year high
• China Promotes Yin Yong to Deputy Governor of Central Bank: Yin was director of SAFE’s investment center from 2007 to 2015
• Investors Bet on Vietnam as Valuations Top Southeast Asia: Corporate earnings expected to see double-digit growth
• Tepco Seeks Growth With Services as Gas Market Set to Open: Tepco partners with Nippon Gas to supply fuel, gain customers

In Europe, stocks rose in light trading as U.K. and Ireland are closed today. 18 out of 19 Stoxx 600 sectors rise with media, food & beverage outperforming and banks and autos underperforming. 67% of Stoxx 600 members gain, 29% decline. Germany’s DAX and France’s CAC both gained around 0.1% while Spain’s IBEX dipped by a similar amount.

European Eco Data:

• Finland Dec. Consumer Confidence Index 19.5, prior 17.6
• Finland Dec. Business Confidence 1, prior -4
• Switzerland Dec. Total Sight Deposits CHF528.4b, prior CHF527.9b
• Switzerland Dec. Domestic Sight Deposits CHF463.6b, prior CHF457.3b

Top European News:

• Paschi Says ECB Sees the Need for $9.2 Billion of Capital: Paschi seeking further information on ECB calculations
• Nornickel to Buy $1.1 Billion of Copper Ore From Rostec: Rostec, Nornickel agreed on copper contract this week
• Deutsche Bank Says 2017 CET1 Requirement Is at Least 9.51%: ECB lowers 2017 phase-in CET1 ratio from 10.76% in 2016

In currencies, the Bloomberg Dollar Spot Index rose less than 0.1 percent, trading near the highest level in more than a decade.  The yen slipped against the dollar for the first time in five days, while the euro was little changed. The South Korean won fell 0.5 percent against the dollar, after strengthening for the first time in nine sessions on Monday. The South African rand strengthened 0.5 percent.

In commodities, crude futures advanced 0.5 percent to $53.26 a barrel in New York. Prices are set to recover next year as production cuts help re-balance an oversupplied market, Saudi Arabia’s Energy Minister Khalid Al-Falih said last week. OPEC and 11 nations from outside the group including Russia have agreed to trim about 1.8 million barrels a day from January. Gold rose 0.9 percent to $1,143.65 an ounce, while silver and platinum climbed more than 1.5 percent.

US Event Calendar

• 9am: S&P CoreLogic Case-Shiller U.S. Home Price Index MoM, Oct. (prior 0.83%)
• 10am: Conf. Board Consumer Confidence, Dec., est. 108.5 (prior 107.1)
• 10am: Richmond Fed Manufact. Index, Dec., est. 5 (prior 4)

While both global monetary and fiscal policies struggle to keep aggregate demand if not rising, then at least constant, demographics continues to wreak havoc on the best laid plans of central planners around the rapidly aging world. Just last week we reported that in 2016, the US population grew at the slowest pacesince the Great Depression, largely driven by the collapse in household formation as the number of Millennials living at home with their parents has hit a 75 year high.

However, while the US is finally starting to feel the social, political and economic hit from an aging population, nowhere is the demographic impact more visible than in what is the epicenter of the developed world’s demographic problems: Japan. It is here that according to the latest government data, the number of births in Japan is likely to fall below a million this year for the first time since data became available in 1899, reflecting a fast-ageing society and the high cost of child care.

The number of births is estimated at 981,000 this year, down from slightly more than a million last year, data from the ministry showed. Births hit a record high of 2.696 million in 1949.

Japan will also post a natural population decline this year as deaths outpace births, its 10th consecutive drop, as seen by the light blue line in the chart above.

A shrinking population of women in their 20s and 30s is a key factor in the falling number, a ministry official said. Japan’s fertility rate was 1.45 in 2015, up 0.03 points from a year earlier, helped by an economic recovery, and is recovering from the record low of 1.26 hit in 2005. However, it is still far from the government’s goal of 1.80.

On Thursday, Japan’s cabinet approved a record $830 billion spending budget for fiscal 2017, which includes child-rearing support: at this rate, the local population may not need the free money in the not too distant future. The only hope, as in the case of many European nations, is that a surge in immigration will offset the natural decline of the domestic population whose average age has never been higher.

Meanwhile, after peaking at the start of the decade, Japan’s total population of 126.92 million is back to the where it was at the start of the century and declining fast.

* * *

Courtesy of Mizuho, here are some further observations on Japan’s demographic plight, and an amusing tangent where according to the Tokyo-based bank, Japan is now also fabricating demographic data to obfuscate the full severity of the demographic situation:

Summary and macroeconomic implications:

The total population of Japan was 126.92m in December 2016 (down 160,000 or 0.13% YoY). With statistical disconnects set to continue, it appears likely that users of population data for 2010–2015 will be kept in the statistical shade (there appears to be little will to conduct statistical revisions by bureau authorities). An increase in the foreign population has been especially conspicuous in areas such as Tokyo, with such increases partially offsetting natural declines. It will be interesting to see the degree to which trends in the foreign population are reflected in new population projection released after the end of January 2017. We have already noted that the Nikkei newspaper ran an article on its front page titled “Japanese births set to drop below 1m in 2016” on 22 December, and while this is an issue we have previously discussed in our reports, we will be focusing on reactions and measures undertaken by the authorities and politicians.

Disconnect in population statistics continues: population data for 2010–2015 to be kept in the statistical shade?

According to the Ministry of Internal Affairs and Communications’ population estimates, the total population of Japan as of December 2016 was 126.92m (down 0.13%, or 160,000, YoY; see Figures 1 and 2).

Japan’s population statistics have reflected figures from the 2015 national census survey fully since October 2015, but estimates were based on figures from the 2010 national census survey in September 2015 and months prior, with this statistical disconnect to be allowed to stand without any retroactive revisions taking place. In essence, this means that the population is not falling by as much as expected and that previous population statistics can be assumed to be mistaken. According to Statistics Bureau authorities, there will be no retroactive revision of statistics and the statistical disconnect will live on in population statistics between October 2010 and September 2015.

This is a regrettable outcome both for users of the statistical data sets and policymakers involved in demographic planning. With the complementary correction value directly applicable only to the total population, we note that attribute-level data for this period have been rendered unsuitable for time series analyses. The total population on a seasonally adjusted basis (using the complementary correction value) declined 28,000 MoM in December (see Figure 5).

People aged 65 and over accounted for 27.32% of the total population in December, up 0.58ppt YoY, while the ratio of people aged 15–64 came to 60.27% (down 0.46ppt) and the ratio of people aged 0–14 came to 12.41% (down 0.11ppt)

We note that the net number of marriages (number of marriages – number of divorces) between August 2015 and July 2016 came to 413,000 (up 5,000), and while a decline in the number of divorces was the main factor here, we nevertheless note signs of a bottoming out in this data point. We will be following this as a leading indicator for the number of births moving forward.

We also note that the Tokyo Metropolitan Government released new population projection on 29 November. Tokyo’s population for 2015 was projected at 13.35m based on March 2013 population projection (according to National Institute of Population and Social Security Research), but in the event ended 150,000 above this at 13.49m. The updated stats also suggest a population of 13.98m in 2025, 800,000 above the previous projection (13.18m) (see Figure 11).

This research institute will be releasing new population projection from January 2017, but it will also be interesting to see how the “population pessimists” react thereafter. One of the main points of focus will be whether materials are updated using population data altered to reflect new estimates and statistical anomalies or whether there is a naïve ongoing use of old estimates. The upside being seen in Tokyo’s population stats has come about mainly as a result of prolonged lifespans and increases in the foreign population (which is growing at an annual rate of above 30,000) (see Figure 12).

There have been substantial net increases in the number of Chinese, Southeast Asians (especially Vietnamese), and South Asians (especially Nepalese) settling in Tokyo (see Figure 13).

* * *

Which is good news for the millions of Middle-eastern and north-African refugees who have suddenly found themselves “undesirable” in Europe: well, if Germany won’t have them, then surely Japan’s PM Abe will welcome them with open arms.

While the big news last week was that Italy’s third largest bank, Monte Paschi, had been nationalized after JPM destroyed the bank’s chances of securing a private-sector rescue, and that Italy would issue up to €20 billion in public debt to fund the bailout of this, and other insolvent Italian banks, it appears there may be more moving parts to the story.

Recall that as we warned, the biggest danger for both Monte Paschi, and Italy’s banking system in general, is that retail depositor confidence in the Siena bank is shaken enough to lead to a bank run either in the world’s oldest bank, or worse, across the entire Italian banking sector, leading to a worst case probability outcome of falling bank dominoes as bank funding needs explode, resulting in even more deposit outflows, and so on in a toxic feedback loop.

To be sure, Monte Paschi’s deposit run is hardly new, and as the bank itself admitted last week, it had already suffered roughly €14 billion in deposit outflows, or 11%, in the first nine months of the year as shown in the chart below.

It turns out that  the bank run not only continued but accelerated.

As Reuters reports this afternoon, the ECB has told Monte dei Paschi it needs to plug a capital shortfall of €8.8 billion, 76% greater than the previous €5 billion gap estimated by the bank, and which hole the entire recently failed bank recapitalization was aimed at plugging, the lender said on Monday.

Meanwhile, for those who missed the last few episodes in the dramatic third bailout, and nationalization, in as many years involving Monte Paschi, here is a recap from Reuters:

Last Friday the Italian government approved a decree to bail out Monte dei Paschi (BMPS.MI) after Italy’s No. 3 lender failed to win investor backing for a desperately needed 5 billion euro capital increase. The bank said on Monday it had officially asked the ECB last Friday for go ahead for a “precautionary recapitalisation”.

A precautionary recapitalisation is a type of state intervention in a struggling bank that is still solvent. It means only a modest bail-in of investors though the government can buy shares or bonds only on market terms endorsed by EU state aid officials in Brussels.

In its reply, the ECB said it had calculated the capital it believed the bank needed on the basis of a shortfall emerging from European stress test of large lenders earlier this year. In those tests Monte dei Paschi was the only Italian bank to come short under an adverse scenario.

The ECB said the lender was solvent but signaled the bank’s liquidity position had rapidly deteriorated between the end of November and December 21, Monte dei Paschi said.

In other words, depositors yanked even more billions from the bank – a perfectly reasonable course of action in light of concerns about the bank’s viability – which in turns has led to an even worse liquidity situation at Monte Paschi.

The Siena bank said that it “has quickly started talks with the competent authorities to understand the methodologies underlying the ECB’s calculations and introduce the measures for a precautionary recapitalisation…”

The bank’s problems date back several years but successive Italian governments have failed to tackle the issue, which became a political taboo this year with new EU rules banning state bailouts unless private investors take losses first. The European Commission said on Friday it would work with Rome to establish conditions were met for a bailout of Monte dei Paschi.

But on Monday ECB policymaker Jens Weidmann said plans for a state bailout of Monte dei Paschi should be weighed carefully as many questions remain to be answered. In an interview with Bild, the Bundesbank head said the bar should be high for government funds being used for bank as these are intended as last resort. He added that the planned Italian government measures can only be directed to banks that are healthy “in their core.” He also joined S&P in warning that the raised rescue funds may not serve to cover  foreseeable losses and that if government funds are used, there should be matching public funding because of Italy’s high government debt. There won’t be as the whole point of the exercise is to avoid angering the public by impairing its investments.

Italy’s market watchdog Consob said last week the bank’s shares and securities would be suspended from trading until the conditions of a state bailout become clear.

Israel’s anger mounted for a second day after Friday’s United Nations snub, when on Sunday it summoned ambassadors of countries from the UN Security Council for a Christmas Day reprimand for their support of a resolution condemning Israel’s illegal settlements on Palestinian lands. The vote passed in the 15-member Security Council on Friday because the United States broke with its long-standing approach of diplomatically shielding Israel and did not wield, as a permanent member of the forum, its veto power, instead abstaining.

On Saturday, Prime Minister Netanyahu lashed out at the US, calling Obama’s behavior a “shameful ambush”, warning he would re-evaluate his contacts with (and defund) the United Nations, while saying he looks forward to working with his “friend” Donald Trump. Then on Sunday, Netanyahu put his personal imprint on the show of anger by repeating at the weekly cabinet meeting what an unidentified Israeli government official contended on Friday – that Washington had conspired with the Palestinians to push for the resolution’s adoption. The White House has denied the allegation

“According to our information, we have no doubt the Obama administration initiated it (the resolution), stood behind it, coordinated the wording and demanded it be passed,” Netanyahu told the cabinet in public remarks. “The resolution that was passed at the UN yesterday is part of the swan song of the old world that is biased against Israel but, my friends, we are entering a new era,” Mr Netanyahu said at a Hanukkah candle-lighting ceremony. “And just as President-elect Trump said yesterday, it will happen much sooner than you think.”

One can only hope that in this “new era” airplanes full of world-famous army singers are not targeted in retaliation for diplomatic scandals.

Ambassadors from 10 of the 14 countries that voted in favor of the resolution and have embassies in Israel – Britain, China, Russia, France, Egypt, Japan, Uruguay, Spain, Ukraine and New Zealand – were summoned to the Foreign Ministry in Jerusalem, the ministry said.

Moments ago, the Haaretz newspaper added that Netanyahu had also summoned the US ambassador.

The move came as Israeli prime minister Benjamin Netanyahu cancelled a visit to Israel by Volodymyr Groysman, his Ukrainian counterpart, and accused US President Barack Obama of “disgraceful” behaviour for failing to exercise the US veto. Mr Groysman had due to arrive in Israel on Wednesday on his first official visit to the Jewish state.  As reported yesterday, Israel will also suspend some of its funding to the UN, Netanyahu said in a vituperative speech on Saturday evening, in which he warned of further diplomatic and economic retaliation against countries that opposed Israel in international bodies. The Israeli leader vowed to work with incoming US President Donald Trump and members of Congress to fight “all-out war against this resolution”, in his sharpest public attack ever on Mr Obama.

Sunday is a regular work day in Israel, but most embassies are closed, and calling in envoys on Christmas Day is highly unusual Reuters adds.

At the weekly cabinet meeting on Sunday, Netanyahu described a telephone conversation with U.S. Secretary of State John Kerry on Thursday, when Israel and President-elect Donald Trump successfully pressed Egypt to drop the anti-settlement resolution it had put forward. It was resubmitted a day later by New Zealand, Senegal, Venezuela and Malaysia.

“Over decades American administrations and Israeli governments disagreed about settlements, but we agreed that the security council was not the place to resolve this issue,” Netanyahu said.

“We knew that going there would make negotiations harder and drive peace farther away. As I told John Kerry on Thursday, ‘Friends don’t take friends to the Security Council’,” he said, switching from Hebrew to English.

Israel has pursued a policy of constructing settlements on territory it captured in a 1967 war with its Arab neighbors – the West Bank, Gaza and East Jerusalem, areas Palestinians seek for a state.

Most countries view the settlement activity as illegal and an obstacle to peace. Israel disagrees, citing biblical and historical connections to the West Bank and Jerusalem as well as security interests.

Netanyahu’s government is likely to get new support in pursuing hardline policies toward the Palestinians when Mr Trump, who has promised to be the most pro-Israel president in history, takes office on January 20 the FT notes. Foreign diplomats in Israel had, before Friday’s vote, speculated that Mr Obama might withhold the US veto on a resolution critical of Israel as a way of putting down legal parameters on the conflict and the two-state solution before leaving office.

Mr Trump said on Saturday that the UN vote was “a big loss yesterday for Israel in the United Nations will make it much harder to negotiate peace.”

“All American presidents since (Jimmy) Carter upheld the American commitment not to try to dictate permanent settlement terms to Israel at the Security Council,” Mr Netanyahu said on Saturday evening. “And yesterday, in complete contradiction of this commitment, including an explicit commitment by President Obama himself in 2011, the Obama carried out a shameful anti-Israel ploy at the UN.”

END