The near-record string of 10 consecutive Dow Industrials record highs, a streak not seen since early 1987, may be about to end if futures, which are currently trading -0.3% lower, fail to stage a rebound.

Global markets started off Friday on the back foot, with most Asian markets dropping, while commodity-related sectors and banks led European shares lower for a third straight session on Friday as the dollar was poised for a weekly loss as the latest attempt to spark the “Trumpflation trade” fizzled, sending gold to $1,256, the highest since the US presidential election, as the dollar slumped following Mnuchin’s comments. Investors are turning cautious as European political risks remain and ahead of a major speech from U.S. President Donald Trump next week.

The big mover in commodities is Gold which has solidly jumped above the $1,250 level, a largely USD-based move, as risk sentiment rose despite the weaker greenback, but sustainability as these levels (Gold) are key over coming sessions. Gold’s rise for a fourth week was aided by Treasury Secretary Steven Mnuchin who said Thursday he expects low borrowing costs to persist, sparking a drop in the dollar. Mnuchin also took the edge off the recent market optimism when he said any policy steps by the Trump administration would probably have only a limited impact this year. The comments, made in his first televised interviews since taking office last week, suggested much work was still needed on a sweeping tax reform plan that Mnuchin called his main priority.

“Mnuchin’s comments were less belligerently reflationary than they could have been, in a dollar strength context, and that probably did much of the damage (to the dollar),” said UBS Wealth Management currency strategist Geoffrey Yu, in London.

Concerns about the credibility of Trump’s tax plan also emerged: “Next week it will be three weeks since President Trump promised something ‘phenomenal’ with respect to tax reform and investors are starting to become a little restless,” Michael Hewson, the London-based chief market analyst at CMC Markets, said in a report. If Trump’s speech next week fails to provide details, “then the rally that we’ve seen in the past three months could become susceptible to some profit-taking,” he said.

As a result, a fifth weekly gain for global equities that’s helped push their value above $70 trillion is losing momentum as money managers grapple with political uncertainty and the Federal Reserve’s schedule for lifting borrowing costs. Traders are taking profits before Trump’s address to House and Senate lawmakers Tuesday in the U.S.

European shares slid after subdued forecasts from European bluechips including BASF and Vivendi and a drop in mining shares, while Standard Chartered was among the worst performers in the FTSE 100 as profits fell short of analyst expectations. RBS also trades in the red after the bank announced a whopping GBP 7bIn loss for 2016. Elsewhere, French telecom giant Vivendi is the notable laggard across Europe amid reports that Milan prosecutors are looking in the company over alleged market manipulation in stake building in MediaSet. The Stoxx Europe 600 Index fell 0.3 percent as of 10:06 a.m. in London, dropping for a third day and paring a weekly advance.

London copper prices recovered slightly from their big overnight fall on the back of fresh doubts about Chinese demand. Three-month copper on the London Metal Exchange CMCU3 was up 0.8 percent at $5,907 a tonne by 0700 GMT after falling 3 percent in the previous session.

Japan’s Topix index lost 0.4 percent. The gauge rose 0.4 percent for the week. Futures on the S&P 500 fell 0.3 percent. The index rose less than 0.1 percent on Thursday, while the Dow posted a 10th day of gains, its longest streak of record closes since 1987.

Oil prices fell after U.S. crude inventories rose for a seventh week, showing the market is still struggling to ease oversupply despite producers’ efforts to rein in output. Benchmark Brent crude oil was down 48 cents at $56.10 a barrel, while U.S. West Texas Intermediate traded at $54.06 a barrel, down 39 cents.

In rates, German bonds were supported as credit spreads widened. German two-year yields dropped three basis points, with the ECB’s bond-buying program seen supporting the sector. Having routed the French bond market recently, sellers are now focusing on Italy where the German-Italian 10Y spread rose above 200 bps.

The swap spread rose to new records across the two- to five-year sector. A note from Citigroup suggested that German two-year yields could fall to minus 1 percent or more, as the ECB will be forced to buy more short-dated bonds.

Market Snapshot

• S&P 500 futures down 0.3% to 2,354
• STOXX Europe 600 down 0.6% to 371
• MXAP down 0.4% to 145.92
• MXAPJ down 0.5% to 468.82
• Nikkei down 0.5% to 19,283.54
• Topix down 0.4% to 1,550.14
• Hang Seng Index down 0.6% to 23,965.70
• Shanghai Composite up 0.06% to 3,253.43
• Sensex up 0.1% to 28,892.97
• Australia S&P/ASX 200 down 0.8% to 5,738.99
• Kospi down 0.6% to 2,094.12
• German 10Y yield fell 2.9 bps to 0.204%
• Euro up 0.07% to 1.0589 per US$
• Brent Futures down 0.7% to $56.19/bbl
• Italian 10Y yield rose 3.1 bps to 2.225%
• Spanish 10Y yield rose 5.4 bps to 1.74%
• Brent Futures down 0.7% to $56.19/bbl
• Gold spot up 0.5% to $1,255.96
• U.S. Dollar Index down 0.2% to 100.90

Top Overnight News from BBG

• Royal Bank of Scotland Group Plc laid out a plan to cut costs by 2 billion pounds ($2.5 billion) over the next four years as it posted its ninth straight annual loss and delayed profitability targets
• After striking deals in Russian oil and Congolese copper mining, Glencore Plc has set its sights on the U.S. grain- trading industry
• Pimco says Beijing’s “cautious tightening signals” are largely being ignored by banks and at the local level, where attention is focused on maintaining steady economic growth
• Value Partners, one of the world’s best-performing junk bond funds, is betting on stressed debt
• New Exxon Chief Darren Woods is focusing on climate change, calling for a carbon tax to discourage use of polluting fuels

In Asia, equity markets traded lower following a mixed lead from US where the DJIA and S&P 500 were buoyed by healthcare and utilities. ASX 200 (-0.8%) underperformed and was weighed by the metals & mining sector amid commodity prices sliding lower, after Dalian Iron ore declined 5.5% yesterday. Nikkei 225 (-0.5%) conformed to the downbeat tone despite support from a weakening JPY overnight as well as Toshiba stocks trading higher by around +5%. In China, Hang Seng (-0.4%) and Shanghai Comp. (+0.1%) suffered from the PBoC’s trend of ever weakening liquidity injections this week, with the daily operation providing only a total of CNY 30bIn. 10yr JGBs traded higher due to the risk averse tone in the region with the curve flattening amid outperformance seen in the super long end.

Top Asia News

• Japan Equity Movers: Komatsu, Kobe Steel, NEG, Morinaga, Line
• China’s New Banking Regulator Chief Faces Daunting Challenges
• Calmer Asian Currencies Spell Return of Global Yield Hunters
• ANA to Spend $270 Million to Raise Stake in Peach Aviation
• China H Shares Pare Weekly Gain as Anhui Conch, Great Wall Drop
• Options Traders Make Bullish Bets on HKEX as Earnings Loom
• Hong Kong Awards Ap Lei Chau Site For HK$16.9b to Logan, KWG
• Hong Kong Existing Home Prices Climb to Record, Defying Curbs
• Pearson Weighs Options for English-Language Units in China

European bourses have started the last trading session of the week on the backfoot, with Standard Chartered among the worst performers in the FTSE 100 as profits fell short of analyst expectations, while RBS also trades in the red after the bank announced a whopping GBP 7bIn loss for 2016. Elsewhere, French telecom giant Vivendi is the notable laggard across Europe amid reports that Milan prosecutors are looking in the company over alleged market manipulation in stake building in MediaSet. Across fixed income markets, yields in the German 2-yr took another leg lower to print fresh record lows (as a reminder, the ECB previously said that they investigating the squeeze in the Eurozone repo market), the GE-FR spread continues to see some modest widening, while the fixed income space has been supported by the wave of short covering.

Top European News

• RBS Cuts CEO’s Potential Share Award 40% After Ninth Annual Loss
• Jupiter Fund CEO Says Firm Is Big Enough to Remain Independent
• Lower Turkish Rate Bets Emerge as Swap Curve Pares Inversion
• Mnuchin Tells Carney to Expect America-First Push on Regulation
• UniCredit’s Record $13.8 Billion Rights Offer 99.8% Subscribed
• Banco BPM Extends Drop; Shares From Withdrawal Right From Feb

In currencies, the Bloomberg Dollar Spot Index dropped 0.1% after falling 0.3 percent in the previous session. The yen rose 0.1 percent to 112.3 per dollar, after rising 0.6 percent Thursday. It’s been more of the same in the FX markets today as the USD continues to lose ground, but very modestly so given the consensus base line of 2 Fed rate hikes this year. Rather the moves are reflective of the skew moving towards an `on-hold’ call at the March meeting, though the odds are mixed among the surveys, stretching form circa 20-40% for a 25bp rate hike. Looking at the USDJPY, TSY yields are grinding towards the lower end of the range established in recent months, with the key 10yr still inside 2.30-2.55%. We have dipped under 2.37% this morning, resulting in a rather reluctant move below 112.50, though no sudden urge to recover. This is much the same for the EUR/USD move towards 1.0600, but with (French/Dutch) election news subsiding, the single unit has moderated since. GBP is in limbo as a result, with EUFt/GBP drawn towards the 0.8450 level. We have attempted a return towards 0.8400 — which may well still materialise — but comments from the Bundesbank’s Dombret including the prospects of UK access looking ‘rather dim’ have, at the very least, curtailed the impromptu rise in GBP. Cable is struggling well ahead of 1.2600, as it did in yesterday’s North American session.

In commodities, West Texas Intermediate traded 0.6 percent lower at $54.12 a barrel. Brent fell 0.7 percent to $56.22. The big mover in commodities are in precious metals where Gold has now pierced the USD1250 level, though with limited momentum. This is purely USD based, as risk sentiment remains on an even keel, so sustainability as these levels (Gold) are key over coming sessions. Base metals may be showing some gains on the day, but after reports that president Trump’s fiscal plans may be delayed into next year, Copper has retreated some way below the USD2.700 level, dragging Iron Ore with it. Adding pressure on the latter are reports of growing stockpiles in China, and this has clear implications on demand forecasts going forward. Oil prices still holding familiar territory on hopes that the agreed production cuts will be followed up by 100% compliance. Yesterday’s build reported in the DoE reported a small build, but having a modest impact in the aftermath.

Looking at the day ahead, the only data due is January new home sales (expected to bounce back) and the final revisions to the University of Michigan consumer sentiment reading.

US Event Calendar

• 10am: New Home Sales, est. 570,500, prior 536,000; MoM, est. 6.44%, prior -10.4%
• 10am: U. of Mich. Sentiment, est. 96, prior 95.7; Current Conditions, prior 111.2; Expectations, prior 85.7; 1 Yr Inflation, prior 2.8%; 5-10 Yr Inflation, prior 2.5%

* * *

DB’s Jim Reid concludes the overnight wrap

It’s perhaps not the best time to admit that I’ve no idea why Bunds are rallying so hard at the moment. 10y yields (-4.7bps) hit 0.228% yesterday, down from their YTD peak of 0.495% intraday on the 26th of January. 2y yields also closed another -3.0bps lower yesterday at -0.932%. They traded as ‘high’ as -0.648% back on the same day. The most obvious explanation is of course Euro systemic risk – especially from France and perhaps Italy. However other markets (equities, equity vol, the Euro, broader credit spreads etc) aren’t moving much to price in redenomination risk in Europe. A lack of high quality collateral has been cited as an explanation but it’s not clear there is much new info on this over recent days to explain the move. Perhaps it’s as simple as government bond investors are generally by nature ultra conservative and Bunds seemingly offer complete safety from redenomination risk. Although on this we’d note that yesterday 10 year French OAT yields fell another -3.6bps and hit their lowest yield (0.978%) for 4 weeks. Ironically the latest Q4 Germany GDP numbers yesterday showed the country as ending the year as the fastest growing advanced economy in 2016. Indeed 2016 GDP growth in Germany was +1.9% which compares to +1.8% for the UK, +1.7% for the Eurozone and +1.6% for the US.

New US Treasury Secretary Steven Mnuchin does however expect growth in the US to hit a “sustainable growth rate of 3% or more” towards the end of next year following comments in a televised interview with CNBC yesterday. Mnuchin also said that the new administration is looking closely at the border adjustment tax and that the White House wants to pass a “very significant” tax reform by August. There was also some focus on his remarks about possibly issuing 50y or 100y Treasury bonds, saying that they are exploring the option and that they will reach out to the market and investors. On China and the recent FX manipulation chatter Mnuchin stopped short of labelling China a manipulator but said that the Treasury would go through the usual processes of looking at “currency manipulation across the board” suggesting also that no judgments will be made before the Treasury’s April report.

On a related note there was also some focus on a Business Insider report suggesting that Trump may be considering delaying a proposed  $550bn infrastructure spending plan until 2018. The crux of it was that the administration’s time is being taken up by other big proposed reforms including taxes and the Obamacare repeal and that a timing delay to 2018 would make sense in the context of next year’s mid-term elections.

While industrials and materials names did underperform on the back of that report it was still another fairly dull session overall for US equities. The S&P 500 finished +0.04% while the Dow ended +0.17% and took its run of new record highs to ten sessions in a row. By the way that is now 52 days that the S&P 500 hasn’t closed up or down by more than 1%. As a reminder the run in 2014 was 62 days so it’s now within sight. Needless to say that the VIX – little changed at 11.71 yesterday – continues to hover only just above the decade low levels. In rates Treasury yields also marched lower yesterday. 10y yields finished the day -4.1bps lower at 2.373% and are now down some 18bps from the January highs. The curve did however steepen slightly (30y yields finishing -2.0bps lower) probably reflecting those Mnuchin comments about possible ultra long-dated issuance. In commodities WTI Oil (+1.60%) did rise back above $54/bbl following the latest inventory data although base metals took a hit with Iron Ore and Copper  in particular both down over 3%.

With little new news to report of this morning it appears that those declines in metals are to blame for a soft end to the week for risk in Asia. The Nikkei (-0.49%), Shanghai Comp (-0.35%), Hang Seng (-0.34%) and ASX (-0.85%) are all in the red. Currencies have been relatively flat while rates are stronger.

Moving on. The Fedspeak continued again yesterday although it’s clear that the market is failing to price in much more chance of a March move despite a number of Fed officials signalling how “live” the March meeting is. Atlanta Fed President Lockhart was the latest yesterday and he said also that there will be “serious consideration” at the meeting but also that the term “fairly soon” (in reference to the FOMC minutes) “leaves options open for probably the next three meetings”. Lockhart also spoke about the balance sheet and said that he would be in favour of letting “natural runoff gradually shrink the balance sheet”. Late last night Dallas Fed President Kaplan also said that the committee should keep options open for a March move. Bloomberg’s calculator currently sits at a 38% probability for a March rate hike. It’s worth noting that the US data was a bit of a sideshow yesterday. Initial jobless claims came in at 244k and marginally higher than the week before while the Kansas City Fed’s manufacturing survey index rose  5pts to +14 and the highest since June 2011.

Meanwhile there were also some comments from Bundesbank President Weidmann yesterday. He opined that “the balance of risks might be more favourable today that it was before” and that possible market  anticipations about a lift in interest rates by the ECB in 2019 “don’t sound absurd” and are “in the possibility that I see”.

Staying in Europe, in terms of the other data yesterday, in Germany the latest consumer confidence reading revealed a small 0.2pt tick down in confidence to 10.0 although it’s worth highlighting that that is still at relatively elevated levels versus the last few years. In France business confidence was flat in February and in the UK the CBI’s distributive trades survey pointed to some improvement in retailers’ sales in February following a soft January. Just wrapping up, it’s worth noting that following a positive meeting between Merkel and Lagarde on Wednesday concerning Greece, the creditors are now expected to return to Greece next Tuesday where talks should focus on the exact fiscal tightening measures needed over 2018 and 2019, as well as conditional easing. So worth keeping an eye on how things proceed there.

Looking at the day ahead, it looks set to be a fairly quiet end to the week. In Europe this morning we’ll get the February consumer confidence reading as well as industrial orders and sales data in Italy. Over in the US the only data due is January new home sales (expected to bounce back) and the final revisions to the University of Michigan consumer sentiment reading.

What was until recently was a real-life reincarnation of the move “The International”, just got a double dose of “The Rock” thrown in for good measure.

When yesterday we shared the most recent update in the bizarre assassination of Kim Jong Nam, the half brother of North Korea’s ruler, who was murdered in broad daylight inside Kuala Lumpur’s budget airline terminal, we reported that while the two women suspected in the fatal poisoning attack had coated their hands with “mystery” toxic chemicals which they then wiped on Nam’s face, a key question remained unanswered, namely what was the poison used to by the woman with the “LOL” shirt used to murder the North Korean scion.

As CBS reported previously, experts routinely tasked with finding answers in poisoning cases were stumped: what substance could have been used to kill the victim so quickly without sickening the women who apparently deployed it, along with anyone else nearby? Difficult, they said, but doable.

“It’s not an agent that could be cooked up in a hotel room. It’s going to take a lot of knowledge regarding the chemical in order to facilitate an attack like this,” said Bruce Goldberger, a leading toxicologist who heads the forensic medicine division at the University of Florida. He said a nerve gas or ricin, a deadly substance found in castor beans, could be possible. A strong opioid compound could also have been used, though that would likely have incapacitated the victim immediately.

“It would have to be cleverly designed in order to be applied in this fashion without hurting anyone else,” Goldberger said.

“The more unusual, the more potent, the more volatile a poison is, the less likely it is to be detected,” said Olif Drummer, a toxicologist at Australia’s Victorian Institute of Forensic Medicine who has spent 40 years in the field. Khalid said the women knew they were handling poisonous materials and “were warned to take precautions.” Surveillance footage showed both keeping their hands away from their bodies after the attack, he said, then going to restrooms to wash. Such details are unclear in video footage that has been released to media.

Well, moments ago the Malaysian police provided the answer, when it reported that the chemical substance used to kill Kim Jong Nam last week was the nerve agent right out of the movei “The Rock” called VX, which happens to be listed as a weapon of mass destruction by the United Nations.

Khalid Abu Bakar, Malaysia’s inspector general of police, said Friday in a statement that identification of the substance came from a preliminary report. He said swabs were taken from the eye and face of the victim.

VX is described by the US Centers for Disease Control and Prevention as “the most potent of all nerve agents”, with a large dose leading to loss of consciousness, paralysis and respiratory failure. Its only known use is as a chemical warfare agent.

VX is banned under the UN Chemical Weapons Convention, to which North Korea is not a party.

The nerve agent, also known as ethyl N-2-Diisopropylaminoethyl Methylphosphonothiolate, was developed in the UK in the 1950s.

As the FT further adds, Malaysian police are seeking at least four North Korean suspects in connection with the murder, who are now believed to be back in Pyongyang. Two other North Korean nationals, including a diplomat in Malaysia, are wanted for questioning.

Police have detained a Vietnamese woman, an Indonesian woman and a North Korean man in connection with Kim’s death.

The murder has frayed relations between North Korea and Malaysia, which this week recalled its ambassador from Pyongyang.

In the aftermath of the fallout from North Korea’s ballistic missile launch and alleged orchestration of Kim Jong Nam’s murder, we reported earlier today that China, which last weekend announced it would ban all coal imports from North Korea, was preparing for “regime collapse” in North Korea, and would “take the necessary measures to safeguard national security in the event of the collapse of the neighbouring North Korean regime”, a defence official said on Thursday

Submitted by Daniel Mitchell via The Foundation for Economic Education,

Early last month, in a column on my hopes and fears for 2017, I fretted about fiscal chaos in Italy leading to default and bailouts.

Simply stated, I fear that Italy, along with certain other “Club Med” nations, has passed the point of no return in terms of big government, demographic decline, and societal dependency.

And this means that, sooner or later, the proverbial wheels are going to fall off the bus. And it might be sooner.

On Shaky Ground

I don’t always agree with his policy recommendations, but I regularly read Desmond Lachman of the American Enterprise Institute because he is one of the best-informed people in Washington on the fiscal and economic mess in Europe.

And Italy, to be blunt, is in a mess.

Here’s what Desmond just wrote about the country’s economy.

…while the euro could very well survive a Greek exit, it certainly could not survive in anything like its present form were Italy to have a full-blown economic and financial crisis that forced it to default on its public debt mountain. …Among the reasons that there should be greater concern about an Italian, rather than a Greek, economic crisis is that Italy has a very much larger economy than Greece. Being the third-largest economy in the eurozone, Italy’s economy is around 10 times the size of that of Greece. Equally troubling is the fact that Italy has the world’s third-largest sovereign bond market with public debt of more than $2.5 trillion. Much of this debt is held by Europe’s shaky banking system, which heightens the risk that an Italian sovereign debt default could shake the global financial system to its core. …the country’s economic performance since 2008 has been abysmal. Indeed, Italian living standards today are around 10 percent below where they were 10 years ago. Meanwhile, Italy’s banking system has become highly troubled and its public sector debt as a share of gross domestic product (GDP) is now the second highest in the eurozone.”

And here’s some of what he wrote late last year.

…today there would seem to be as many reasons for worrying about the Italian economy as there were for worrying about the Greek economy back in 2009. Like Greece then, Italy today checks all too many of the boxes for the making of a full-blown economic and financial crisis within the next year or two. …the Italian economy today is barely above its level in 1999 when the country adopted the Euro as its currency. Worse still, since the Great Global Economic Recession in 2008-2009, the Italian economy has experienced a triple-dip recession that has left its economy today some 7 percent below its pre-2008 crisis peak level and its unemployment rate stuck at over 11 percent. …deficiencies of its ossified labor market that contributes so importantly to the country’s very poor productivity performance. As a result, since adopting the Euro in 1999, Italy’s unit labor costs have increased by around 15 percentage points more than have those in Germany. …Italian banks now have around EUR 360 billion in non-performing loans, which amounts to a staggering 18 percent of their loan portfolio. If that were not bad enough, the Italian banks also hold unhealthily large amounts of Italian government debt, which now total more than 10 percent of their overall assets. …the country’s public debt level has risen from 100 percent of GDP in 2008 to 133 percent of GDP at present.”

The numbers shared by Lachman are downright miserable.

And he’s not the only one pointing out that Italy’s economy is in the toilet.

I shared numbers last year showing the pervasive stagnation in the country.

Falling Birthrates

So what’s the Italian government doing to solve these problems? Is it slashing tax rates? Reducing the burden of government? Cutting back on red tape?

Of course not. The politicians are either making things worse or engaging in pointless distractions.

Speaking of which, I’m tempted to laugh at the Italian government’s campaign to boost birthrates. Here’s some of what’s been reported by the New York Times.

…a government effort to promote “Fertility Day” on Sept. 22, a campaign intended to encourage Italians to have more babies. …Italy has one of the lowest birthrates in the world… Italian families have been shrinking for decades. In 2015, 488,000 babies were born in Italy, the fewest since the country first unified in 1861. It has one of the lowest birthrates in Europe, with 1.37 children per woman, compared with a European average of 1.6, according to Eurostat figures.”

By the way, I actually commend the government for recognizing that falling birthrates are a problem.

Not because women should feel obliged to have kids if that’s not what they want. But rather because Italy has a massive tax-and-transfer welfare state that is predicated on an ever-expending population of workers (i.e., taxpayers) to finance benefits to retirees.

But old people are living longer and low birthrates mean that there won’t be enough taxpayers to prop up the Ponzi Scheme of big government.

But while the government deserves kudos for acknowledging a problem, it deserves mockery for thinking empty slogans will make a difference.

More of the Same

Moreover, there’s also a problem in that Italian voters have been so conditioned to expect handouts that they think the answer to the problem is even more government!

The problem is not a lack of desire to have children, critics of the campaign say, but rather the lack of meaningful support provided by the government and many employers. …”I still feel very offended,” said Vittoria Iacovella, 37, a journalist and mother of two girls, ages 10 and 8. “The government encourages us to have babies, and then the main welfare system in Italy is still the grandparents.” …Italy’s government has tried to help families with a so-called baby bonus of 80 to 160 euros, or about $90 to $180, for low- and middle-income households, and it has approved labor laws giving more flexibility on parental leave.”

Ms. Iacovella is crazy for thinking that more taxes, more spending, more regulation, and more mandates will make things better.

Heck, even leftists are now admitting such laws undermine employment and specifically hurt women by making them less attractive to employers.

Meanwhile, the Italian government is taking lots of other dumb steps. Including, as reported by the Telegraph, creating a new entitlement for teenagers.

Italian school leavers may face the dismal prospect of 40 per cent youth unemployment, but at least they have one thing to look forward to – a €500 “culture bonus”, courtesy of the government. From next month, every 18-year-old will be entitled to claim the money and spend it on culturally enriching pursuits such as going to theatres, concerts and museums, visiting archaeological sites, and buying books. The scheme, which starts on Sept 15, will benefit 575,000 teenagers, at a cost to the government of €290 million (£250 million).”

By the way, is anyone shocked to learn that Italian teenagers look forward to these handouts?

…it has been welcomed by 18-year-olds, who face a difficult economic landscape when they leave school – high unemployment, a lack of secure, long-term contracts and an economy that has performed dismally for a decade. “Of course we’re happy…,” said Angelica Magazzino, a teenager from the southern region of Puglia who turns 18 in November.”

If you read the entire story, you’ll learn that the government justifies this new entitlement by saying it will fight terrorism. I don’t know if that’s more crazy or less crazy than the American leftists who blame terrorism on climate change or inequality.

Say What?

Last but not least, CNN is reporting that the government is also enabling other forms of Italian “culture.”

Italy’s highest court has ruled that masturbation in public is not a crime, as long as it is not conducted in the presence of minors.”

No, this is not a joke.

The decision came down from the Italian Supreme Court…in the case of a 69-year-old man…The man was convicted in May 2015 after he performed the act in front of students on the University of Catania campus, according to documents filed with Supreme Court. The man was sentenced to three months in prison and ordered to pay a fine of €3,200 (around $3,600). However, the defendant’s lawyer appealed the case to the country’s highest court, which ruled on the side of the accused in June but only just made its decision public. Judges ruled that public masturbation out of the presence of minors is no longer deemed criminal conduct due to a change in the law last year, which decriminalized the act.”

Great. I’m looking forward to my next trip to Italy. Though I guess it’s nice to see Italian seniors are staying active in their communities.

More seriously, this is why I’m sympathetic to Italians that are either privately dodging or publicly revolting when you have a government this profligate and senseless.

P.S. Amazingly, some leftists think the United States should have a bigger government and be more like Italy.

In his latest note this morning, DB’s Jim Reid admits that “I’ve no idea why Bunds are rallying so hard at the moment.” That said, he does attempt to provide some reasons noting that 10y yields (-4.7bps) hit 0.228% yesterday, down from their YTD peak of 0.495% intraday on the 26th of January. 2y yields also closed another -3.0bps lower yesterday at -0.932%. They traded as ‘high’ as -0.648% back on the same day.

The most obvious explanation is of course Euro systemic risk – especially from France and perhaps Italy. However other markets (equities, equity vol, the Euro, broader credit spreads etc) aren’t moving much to price in redenomination risk in Europe. A lack of high quality collateral has been cited as an explanation but it’s not clear there is much new info on this over recent days to explain the move. Perhaps it’s as simple as government bond investors are generally by nature ultra conservative and Bunds seemingly offer complete safety from redenomination risk.

Whatever the reason, the demand for German paper is nowhere more obvious than the “schatz”, the German 2 Year whose yield fell earlier in the week to what was then a record 0.92%, and has since continued to fall, earlier in the session sliding to a new all time low of -0.95%, down 15 bps on the week, before rebounding modestly as ravenous credit traders snapped up every German asset they can find amid rising political fears, and the above mentioned concerns about a collateral shortage.

While in the earlier part of the week the appetite for German paper was as a result of a sudden spike for Marine Le Pen in the presidential polls, this has since moderate and yet the flight to German safety has not faded.

Schatz prices have also been boosted by reports the ECB has been buying the paper at recent prices, after it revised its bond-buying parameters. Previously, the central bank limited its sovereign debt purchases to yields above -0.4 per cent.

But perhaps the big catalyst for today’s move is a note out of Citi’s Harvinder Sian and Jamie Searle, who expect to see the Schatz to drop to -1%, for one main reason which has nothing to do with French politics: the ECB needs to buy around EU80 billion 1-6y Germany by year-end, and as a result traders are merely frontrunning the ECB. They also expect the Bund yield to plunge again, dropping as low as -0.10%.

They write that in QE simulations, based on assumptions and judgments due to the lack of QE holdings data, there is no credible alternative to front-end buying in Germany. The simulation suggests that by Dec. 2017 the available pool of Bunds will be exhausted across all sectors, and this dwindling pool of Bunds raises questions over the ability to extend QE.

Here are the highlights from their note:

Schatz made record yield lows this week at -0.91% (and Bobls at -0.56% were only Gbp off their record). That is despite strong data and ECB hawks wanting to remove rate cut possibilities from forward guidance. We think Schatz yields can go even lower, initial targeting -1%.

This week’s rally has been driven by French politics and associated tail risk redenomination concerns. But, the rally owes a lot to the ECB beginning to purchase bonds below the depo rate (which started on the 16 January according to the ECB accounts). This is likely to be the lasting driver.

That is because prioritising QE purchases above the depo rate doesn’t work for Germany. Just to complete the QE already announced (to Dec-17) requires a heavy dependency on the 1.6yr sector of the German curve, according to our estimates. Our simulation suggests that the monthly average maturity of purchases will fall to just above 6 years very quickly. and stay there. To put a number on it, we think the ECB will buy around €80bn 1-6yr Bunds just to complete QE to year-end.

QE should keep up the downward pressure on Schatz and Bobl yields, regardless of developments in France. It should also drive yields lower further out given the curve is already steep (we forecast a low for lOs of 0.10%). It also means euro swap spreads can continue to richen, even from here.

Another really important point falls out from our simulation of German QE to year-end. It is surprisingly challenging to extend QE beyond Dec-17 without a hard break of the capital key. That greatly reinforces our concern that this heralds the end of the ECB’s lender-of-last-resort function. Huge risks lie ahead for the EMU periphery.

This week: 1) French politics and the chart that scared the market; 2) Simulating GE – why Schatz will stay rich; 3) QE extension beyond Dec-17 is harder than it seems; 4) German yields to fall, regardless of French risks.

And here is Citi’s simulation of QE, according to which the central bank will keep buying this most desired of German financial assets:

Simulating QE – why Schatz will stay rich

To understand the reliance of the German portion of QE (specifically the PSPP) on the 1-6yr sector, we have run a simulation to Dec-17 (announced QE).

We stress from the outset that this requires many assumptions and judgments on our part due to the lack of holdings data for ECB QE.

The starting point for our simulation is how much we think there is left to buy while respecting the 33% issue/issuer limits. As a reminder, the German portion of PSPP can be made up of sovereign bonds, agencies and regional debt. The estimates in Figure 4 are derived from our model’ for QE purchases to date.

An important assumption in the model is that purchases so far have been split 85% in Bunds, 10% in agencies and 5% in regional debt. This is tilted towards Bunds -which are only 60% of the eligible pool – to reflect relative liquidity the and relatively small outstanding sizes of agencies and regional debt. As we will see, how the asset split evolves is crucial to the longevity of QE.

How much left to buy?

Figure 4 makes it clear that the bulk of Bunds available to buy are in the front-end. And this is only thanks to the ECB now allowing purchases below the depo rate. Before this parameter change, Bunds were running out on our model.

There is quite a bit of agency and regional debt available to buy (respecting 33%), but we expect that we are overestimating. On regional debt in particular we may even be doubling the real potential (as we include all listed bonds which fit the ECB criteria of which quite a sizeable portion may be registered bonds). In reality, only benchmark format laender bonds are likely to be bought and may be hard to find.

Running a QE simulation to Dec-17

The model gives us a starting point for our simulation for monthly PSPP purchases of German debt to Dec-17. We calibrate February purchases to have an average maturity of around 7.5 years given the January figure. That involves 85% allocation to Bunds, 9% to agencies and 6% to regional debt. Within Bunds, the bulk is allocated to 1-6yr. A higher allocation to 15yr+ means it would run out very quickly. The allocation to 6-15yr is largely determined by new supply (which we allow for together with bonds dropping below lyr). Further, by running this simulation it quickly becomes apparent that the 85% allocation to Bunds is hard to sustain without prematurely running out of Bunds before Dec-17. Our simulation has this dropping to 80% then 75%.

* * *

If Citi is correct, expect a continuation of the bifurcated paradox of stocks rising even as the German “flight to safety” asset continues to show a level of near panic by market investors, leading to even more confusion.