iii)Russia/Syria

US equity futures were deleriously bid from the moment Europe opened overnight…

But as US equity cash markets opened, ‘risk off’ flows suddenly hit sending Yen, bonds, and gold kneejerking higher…

S&P 500 futures are higher, continuing on yesterday’s momentum, after European and Asian shares also rose alongside a rebound in oil, as the year-end performance chase appears to be accelerating. There were several different moving parts in a mixed European session, in which early Euro strength gave way to weakness…

… which in turn pushed the Stoxx 600 and US index futures higher, rising above yesterday’s session high on negligible volumes.

Global equity futures rallied with Hang Seng futures outperforming and flash smashing to close the session, after a strong finish for Chinese equities following a report out of MNI that Chinese deleveraging may not be as stringent next year.

European stocks rose this morning (Stoxx 600 +0.3%) as the Euro sank, helped by positive notes out from Goldman Sachs, who are overweight European automakers.  Goldman said in a Europe strategy note that “deep value sectors” (autos, oil, and utilities) will help Stoxx Europe to return 12% in next 12 months. As a result, European automakers outperform led by VW for a second straight day, with the SXAP index advancing as much as 1.9%, best of 19 groups on the Stoxx Europe 600 benchmark (Volkswagen +3.8%, Porsche +2.7%, BMW +2%, Daimler +1.7%).  Additionally, Imperial Brand shares rallied after their CEO change, as analysts speculate that this could increase the likelihood that the company will be taken over by Japan Tobacco. Airliner EasyJet is flying high this morning following strong financial results. Bunds are taking another look at 163.00+ levels having faded rallies above the big figure on several occasions recently.

Stocks have already moved on from this weekend’s German government crisis: German President Frank-Walter Steinmeier said Germany was facing its worst governing crisis in the 68-year history of its post-World War Two democracy and pressed all parties in parliament “to serve our country” and try to form a government.

“The events have already been likened to Germany’s Brexit-moment,” said Daniel van Schoot, an economist at Rabobank. “That is perhaps exaggerated, but the German political situation is now very unpredictable, more than in the past three decades.”

Bonds across the region followed a rise in Treasuries after the
European Central Bank was said to be likely to make only small
adjustments to its guidance on monetary policy next year. EGBs rallied led by gilts which are supported ahead of index extension tomorrow, additionally some focus from European traders on dovish ECB sources piece from yesterday.

The dollar stayed within relatively tight ranges versus its major peers, with average volumes. The euro and the pound edged higher, backed by leveraged interest, only to be capped by their respective 55-DMAs before shedding gains. The Swedish krona led G-10 losses on the back of record low interbank rate fixings, while the Turkish lira pared a drop to an all-time low after the central bank raised borrowing costs. Meanwhile, sterling was steady and gilts advanced amid reports Prime Minister Theresa May has the backing of ministers to offer the European Union more money to break the Brexit deadlock. The Australian dollar dropped to a five-month low after suggestions from the central bank that interest rates will stay lower for longer; EUR/SEK breache’d 10.00 briefly before fading back. Turkey’s lira hit a new record low against the dollar but pared some of the drop after its central bank tightened liquidity, as the standoff between Erdogan and central bank continues.

In overnight central bank announcements, the Bank of England’s Deputy Governor Cunliffe said inflation has been a bit lower than BoE forecast in Autumn and that it’s possible to wait before tightening policy until there is clear evidence that pay growth is responding to unemployment level. Elsewhere, RBA minutes from November 7th meeting stated that any further appreciation in AUD would slow expected pick-up in inflation and the economy. The minutes also stated that there is considerable uncertainty on how fast wages might pick up and add to inflation, while it added that a pass through to inflation may be delayed by many factors. RBA’s Lowe stated that there is ‘not a strong case’ for near-term change in interest rates with the bank paying attention to soft wage growth.

In the U.S., confirmation that Federal Reserve Chair Janet Yellen will leave the board in February creates a fourth vacancy for President Trump to fill, making it trickier for investors to bet on the central bank’s interest rate trajectory next year. While the Thanksgiving holiday gives traders an excuse to pause, equities are heading into the end of the year near their peaks, with investors optimistic about global growth and company earnings.

Meanwhile the collapse in the US Treasury curve continued, with 2s10s moving below 60bps, and screaming inversion as soon as early next year.  At the same time, The gap between French and German borrowing costs on Tuesday narrowed to its tightest level since before the euro zone debt crisis of 2010-2012.  Germany’s 10-year yield fell two basis points to 0.34%, the lowest in almost two weeks. Britain’s 10-year yield decreased four basis points to 1.257%, the lowest in almost two weeks. Japan’s 10-year yield dipped one basis point to 0.033%, the lowest in more than a week.

Oil prices rose on expectations of an extended OPEC-led production cut, although rising output in the United States capped gains. Brent crude futures were up 0.78 percent to $62.72.     West Texas Intermediate crude fell 0.6 percent to $56.09 a barrel. Gold increased 0.3 percent to $1,280.39 an ounce. Copper gained 0.3 percent to $3.13 a pound, the highest in more than a week.

Expected economic data include Chicago Fed National Activity Index and existing home sales. Companies including Medtronic, Lowe’s, Salesforce, Analog Devices, HP Enterprise and HP Inc. are reporting earnings

Bulletin Headline Summary from RanSquawk

• EU bourses firmer this morning with auto names racing away amid a positive note from Goldman Sachs
• FX price action fairly tepid thus far.
• Looking ahead, highlights include US existing home sales, APIs, ECB’s Coeure and Fed’s Yellen

Market Snapshot

• S&P 500 futures up 0.2% at 2,586.75
• STOXX Europe 600 up 0.3% at 387.49
• MSCI Asia up 0.9% to 171.57
• MSCI Asia ex Japan up 1.1% to 565.37
• Nikkei up 0.7% to 22,416.48
• Topix up 0.7% to 1,771.13
• Hang Seng Index up 1.9% to 29,818.07
• Shanghai Composite up 0.5% to 3,410.50
• Sensex up 0.4% to 33,492.20
• Australia S&P/ASX 200 up 0.3% to 5,963.52
• Kospi up 0.1% to 2,530.70
• German 10Y yield fell 1.7 bps to 0.346%
• Euro down 0.08% to $1.1724
• Italian 10Y yield fell 2.7 bps to 1.543%
• Spanish 10Y yield fell 2.4 bps to 1.491%
• Brent futures up 0.8% to $62.69/bbl
• Gold spot up 0.3% to $1,280.53
• U.S. Dollar Index little changed at 94.08

Top Overnight News

• U.K. Prime Minister Theresa May won the backing of ministers on both sides of her divided cabinet to offer the European Union more money to break the Brexit talks deadlock; Barring some major breakthrough, global banks will implement their relocation plans early next year to guarantee they’re able to have new offices inside the EU running by the time the U.K. exits
• German Chancellor Angela Merkel said she’s ready to face voters again to break the country’s political stalemate, betting they won’t blame her for failed talks on forming a coalition
• Germany: FDP chairman reaffirms rejection of four-party talks; SPD reiterates they will not be part of a grand coalition
• Putin held a surprise meeting with Syria’s Bashar al-Assad, kicking off a diplomatic drive this week to outline the terms of an end to the Middle Eastern country’s civil war; Putin will speak by phone with Trump later Tuesday, the Kremlin said
• The ECB is likely to make multiple small adjustments to its guidance on monetary policy next year rather than any major change in language as it ends quantitative easing, according to euro-area officials familiar with the thinking of policy makers
• BOE: Cunliffe says CPI will peak in 4Q 2017, it’s possible to wait before tightening; McCafferty says equilibrium unemployment rate may be below 4.5%
• RBA’s Lowe: no strong case for a near-term adjustment in policy, more likely that next move in rates will be higher; increasingly likely that inflation will be subdued for some time yet
• MNI: PBOC deleveraging campaign may ease somewhat in 2018; PBOC will continue to manage currency and capital controls for at least another decade, according to people familiar
• Turkey Central Bank: has decided to provide all funding from its late liquidity window effective Wednesday, which will raise the weighted average cost of funding by 25bps
• Nestle Is Said to Be Among Potential Hain Celestial Suitors
• AT&T, U.S. Prepare to Battle in Court Over Time Warner Merger
• Cannabis Grower Aurora Plans to Go Hostile With CanniMed Bid
• ECB Is Said Likely to Take Small Steps in QE Exit Guidance

Asian equity markets were higher across the board as the region took the impetus from the positive close on Wall St, with Nikkei 225 (+0.9%) underpinned as exporters benefitted from JPY weakness. The benchmark Japanese index briefly broke above the 22,500 level as stocks coat-tailed on the rebound in USD/JPY, with Toshiba reprieved from yesterday’s slump to sit among the biggest gainers. ASX 200 (+0.3%) also traded with broad-based optimism across its sectors albeit to a lesser extent and Chinese markets completed the upbeat picture following another significant liquidity operation by the PBoC, with the Hang Seng (+1.5%) leading on continued gains in its largest weighted stock Tencent which recently became a member of the exclusive USD 500bln market-cap-club. Finally, 10yr JGBs were relatively flat throughout the session with demand subdued by the broad positive risk tone and a tepid longer-dated enhanced liquidity auction, although a mild uptick was seen in late trade as prices broke above 151.00. PBoC injected CNY 130bln in 7-day reverse repos, CNY 40bln in 14-day reverse repos and CNY 10bln in 63-day reverse repos. Net of maturities, the injection was only CNY 10bn however. PBoC also set the CNY mid-point weaker at 6.6356 vs Prev. 6.6271. Elsewhere, the Japanese Government to cut 30 and 40 year JGB supply in FY 2018/2019.

Top Japanese News;

• Top Fund Backs Tencent to Drive Hong Kong Index Even Higher
• China H Shares Jump to Two-Year High as Financial Firms Rally
• Richest Asian Banker Sees Once-in-Lifetime India Opportunity
• Turkey Lifts Bank-Funding Costs as Lira Weakens to All-Time Low

European equities modestly higher this morning (Stoxx 600 +0.2%), with positive notes out from Goldman Sachs, who are overweight European automakers.  Goldman said in a Europe strategy note that “deep value sectors” (autos, oil, and utilities) will help Stoxx Europe to return 12% in next 12 months. As a result, European automakers outperform led by VW for a second straight day, with the SXAP index advancing as much as 1.9%, best of 19 groups on the Stoxx Europe 600 benchmark (Volkswagen +3.8%, Porsche +2.7%, BMW +2%, Daimler +1.7%).  Additionally, Imperial Brand shares rallied after their CEO change, as analysts speculate that this could increase the likelihood that the company will be taken over by Japan Tobacco. Airliner EasyJet is flying high this morning following strong financial results. Bunds are taking another look at 163.00+ levels having faded rallies above the big figure on several occasions recently. The bullish fundamentals and flow/positioning motives are well known and documented, but chart-wise market contacts note that support around 162.86 (rising trendline and Monday’s late Eurex base) held on the downside, prompting some intraday buying for a bounce to  163.06 resistance initially and then 163.16 (yesterday’s session peak) vs a high so far at 163.15. Beyond that, 163.22 needs to be breached to expose 163.40 and this month’s 163.63 peak. However, another retreat and failure to retain grasp of the 163.00 handle will bring 162.82 back into play as support (Monday’s actual intraday low), and on a break those short term longs not booking profit at 163.06 are expected to bail. Turning to Gilts, more upside also seen and a return to the 125-plus zone, at 125.29 for a 33 tick gain on the day vs 12 tick loss at one stage, before easing back slightly on larger than forecast UK PSNB shortfalls.

Top European News

• Brexit-Hit Banks Said to Start Moving Staff Abroad in Early 2018
• Paris, Amsterdam Brexit Winners as Coin Toss Assigns EU Agencies
• May Prepares New Brexit Offer After Talks With Ministers
• U.K. Budget Deficit Widens as Inflation Boosts Debt Costs
• Uniper Tells Shareholders to Reject Fortum’s Takeover Offer
• EasyJet Reaping Benefit of Ryanair Retreat as Winter Prices Gain

In FX markets, price action has been relatively contained thus far. The USD index is firmer around the 94.000 handle in thin holiday-impacted trade, with the USD gaining ground vs most major counterparts on a generally more risk-on mood. EUR has been resilient in the face of Germany’s struggles to form a new Government and the threat of another election. EUR/USD continues to find support ahead of stops around 1.1720 and bids at 1.1700, with reported fixing demand in Asia propping the pair, but the 100 DMA around 1.1745-50 capping recovery gains. Elsewhere, AUD has rebounded from overnight lows post-RBA minutes, as Governor Lowe underlined that the next move in rates will be up, although the lead time to any tightening remains lengthy. Meanwhile, GBP was unreactive to the latest public borrowing data as markets look to see whether or not PM May will get the green-light for an enhanced divorce bill offer to the EU.

In commodities, WTI and Brent crude futures have continued to climb through the European session with energy related newsflow on the light-side as prices retrace some of the declines seen in the early stages of yesterday’s session. Energy markets are looking ahead to next week’s OPEC meeting, however, markets are firmly expecting an extension to existing production cuts in lieu of recent rhetoric from the cartel. In metals markets, gold only managed to nurse some of yesterday’s losses overnight as a broad positive risk tone kept safe-haven demand subdued. Copper maintained most of the prior session’s gains with prices supported by the risk appetite and amid gains in Chinese steel and iron ore prices on optimism for increased demand following the winter season.

Looking at the day ahead, central bank speakers will likely be the centre of attention again with Fed Chair Yellen due to speak in the evening as part of a series with former BoE governor Mervyn King, while the ECB’s Coeure chairs a panel in Frankfurt in the afternoon. Datawise, UK public sector net borrowing and CBI trends data for October and November are due, while in the US the Chicago Fed national activity index and existing home sales data for October is due.

US Event Calendar

• 8:30am: Chicago Fed Nat Activity Index, est. 0.2, prior 0.2
• 10am: Existing Home Sales, est. 5.4m, prior 5.39m
• 10am: Existing Home Sales MoM, est. 0.19%, prior 0.7%
• 6pm: Fed’s Yellen Speaks at Stern Business School

DB’s Jim Reid concludes the overnight wrap

There wasn’t much contagion yesterday after the surprise collapse in German coalition talks late on Sunday night. Over the last couple of years negative market reaction to political shocks has often been over before you can digest it fully. Examples being the Greek and Brexit referendums and the Trump election results. Although the German coalition talks collapsing is much lower key than these events, it was still interesting that the DAX was only negative for 1 hour 16mins and that the Euro had snapped back into positive territory 37 minutes earlier even if it  did soften again as the day progressed closing -0.49% against the dollar. The DAX closed +0.50% (high to low had been as much as +1.23%) and the Stoxx 600 +0.67% (range 0.91%).

Overall it’s hard to see what the solution is to the gridlock in Germany but it’s also hard to see it being that negative for markets other than at the margin. Mrs Merkel yesterday effectively ruled out a minority government and the SPD continue to rule out a return to a Grand Coalition so unless talks can be reignited, a snap election early next year seems increasingly likely. As an outsider not as familiar with the German election process as many of my readers I can’t help wondering how a fresh election will help much with recent polls seemingly not changing that much from the September 24th election. However, perhaps the campaigning would persuade enough voters to change their mind that the coalition math might be easier. Unlikely but possible.

The good news from our economists in Germany is that the political system means there’s no power vacuum and thus no time pressure to progress things. This probably helped prevent the market reacting too negatively yesterday although it can’t be too positive at the margin for Brexit talks and for fresh Macron/ Merkel European initiatives in the near-term. For more on the technicalities and options open now see the note “Coalition talks collapsed – unchartered territory ahead” from our German economists yesterday.

Overnight, the Fed’s Yellen has confirmed that she will be stepping down from the Board of Governors once Mr Powell is sworn into the office. Her vacancy will give President Trump a fourth spot to fill in the new Fed, including the Vice Chairman spot. Elsewhere, Trump has redesignated North Korea as a state sponsor of terrorism and the Treasury department is  expected to announce additional sanctions today. Notably, Secretary of State Tillerson “still hopes for diplomacy” with the State. We wonder whether North Korea will retaliate with some form of defiance after this so watch out for that. This morning in Asia, markets have followed the positive lead from the US. The Hang Seng (+1.30%), Nikkei (+0.93%), Kospi (+0.15%) and Shanghai Comp (+0.40%) are all up as we type.

Turning to Brexit headlines, it seems that in addition to the stalemate on UK’s financial settlement to the EU, there are other unresolved issues before talks can move onto trade and a transition deal. Chief EU Brexit negotiator Barnier has noted that the Irish border will require a specific solution and it’s up to “those who wanted Brexit” to come up with those solutions.  Elsewhere, he has warned “the legal consequence of Brexit is that the UK financial services providers lose their passport (rights to the EU bloc)”. Also press reports last night suggested that PM May has cabinet approval to double the settlement offer from the current EUR20bln.

Moving onto central bankers’ commentaries now. The ECB’s Draghi reiterated that despite the sound economic recovery, “underlying inflation pressures are still subdued as labour market  slack remains significant….(and that we) still need time to translate into dynamic wage growth”. On non-performing loans in the EU bloc, he cautioned that we need to “…work together to cope with this problem….but at the same time doesn’t create the destabilizing effects that people fear”. On Brexit, he noted it was difficult to properly analyse, mainly because “we don’t have yet a precise or even imprecise view of what the negotiating platform will be”. Notably, he said that the Brexit “transition can be managed in a smooth way…but it should be done without compromising over the integrity of the single market”, although “this is easier to be said than done”.

Following on, BOE policy maker Mr Ramsden has warned that Brexit could put the economy in an “unusual” slow down for years. He noted “given the long horizon over which the effects of Brexit could play out, we’re likely to be on the flat part of the saucer for some time”. On his decision to dissent on the recent rate hike, he noted there may be more room for the economy to grow without price gains, noting “…one must pay close attention to any signs that above target inflation is feeding through to second-round effects in domestic costs…so far, that doesn’t seem to be the case”.

Now recapping other markets performance from yesterday. US equities all strengthened, with both the S&P and Nasdaq up c0.1% and Dow up 0.31%. Within the S&P, telco (+0.97%) and financials stocks rebounded and led the gains, with partial offsets from health care and utilities names. European markets were all modestly higher despite the German political instability.  Across the region, the Stoxx 600 (+0.67%), DAX (+0.50%) and CAC (+0.40%) rose modestly, while the FTSE 100 was the relative underperformer (+0.12%). The modest risk on bias was evident in volatility measures, with the VIX down for the third consecutive day (-6.8% to 10.65) while the VSTOXX also fell -7.05% after spending only 43 minutes higher at the open.

Over in government bonds, core bond yields were mixed but little changed (UST 10y: +2.3bp; Bunds +0.2bp; Gilts -0.3bp), while peripherals outperformed with Italy and Spanish yields down 3-4bp. Elsewhere, the flattening across the Treasury curve has continued with the 5s30s curve c3bp flatter to 68.8bp, marking a fresh 10 year low.

Turning to currencies, the US dollar index and Sterling gained 0.44% and 0.12% respectively, while Euro fell 0.49% following the aforementioned developments in Germany. In commodities, WTI oil dipped 0.58%, in part as investors await potential confirmation of production cuts in the upcoming OPEC meeting on 30th November. Elsewhere, precious metals weakened (Gold  -1.20%;Silver -2.30%), with Gold down the most since late September, while other base metals were mixed (Copper +0.91%; Zinc -0.06%; Aluminium -1.44%).

Away from the markets, DB’s China research team have published another note looking at China’s macro risks. They have noticed new signs of a tightening in fiscal and monetary policies over the past week. For example, on the fiscal front, the Ministry of Finance issued a document to tighten control over public private partnership projects. On monetary front, the  government released draft guidelines on the asset management sector, which from a macro perspective could structurally constrain financial leverage and further tighten credit growth. Overall, the team believes these new measures are positive for China in the long term, but in the next 6 months they will likely cause the economy to slow.
Elsewhere the latest ECB holdings were released yesterday. Net CSPP

purchases last week was €2.33bn and Net PSPP purchases €12.27bn. This left the CSPP/PSPP ratio at 19.0% last week (15.4% over the last 4 weeks vs. 11.5% before QE was trimmed in April 2017). Although we don’t think CSPP will be trimmed much after the January taper last week’s buying seemed anomalous in part as issuance was high over the period and the ECB may have taken advantage of this, particularly as the upcoming holiday season might bring liquidity challenges later on.

Moving to the limited macro data releases from yesterday. In the US, the October Conference board leading index was above expectations at 1.2% mom (vs. 0.8% expected) and 5.2% yoy – the highest since May 2015. In Germany, the October PPI was in line at 0.3% mom and 2.7% yoy. In Japan, we saw a trade surplus of JPY323bn in October, which was modestly larger than expected.

Looking at the day ahead, central bank speakers will likely be the centre of attention again with Fed Chair Yellen due to speak late in the evening as part of a series with former BoE governor Mervyn King, while the ECB’s Coeure chairs a panel in Frankfurt in the afternoon. Datawise, UK public sector net borrowing and CBI trends data for October and November are due, while in the US the Chicago Fed national activity index and existing home sales data for October is due.

Two days after Israel provided the first ever official confirmation of covert ties with Saudi Arabia, a step many analysts see as a precursor to future conflict in the Middle East involving adversaries Iran and Lebanon, on Tuesday the head of the Lebanese Army told the military to be at “full combat readiness” to face “the Israeli enemy” at the country’s southern border. The announcement comes as Arab nations, including Saudi Arabia, vow to tighten their grip on Lebanon’s Hezbollah militia.

“The army needs to be prepared to “confront the threats and violations of the Israeli enemy and its hostile intentions against Lebanon,” Joseph Aoun said on Tuesday, while urging the army to cooperate with United Nations forces in Lebanon under UN Security Council Resolution 1701, adopted to resolve the 2006 Israel-Lebanon conflict. The statement came after Lebanese President Michel Aoun said that “Israeli targeting still continues and it is the right of the Lebanese to resist it and foil its plans by all available means,” according to Reuters.

President Aoun’s remarks were echoed by Lebanese Foreign Minister Gebran Bassil, who also cautioned Tel Aviv against sparking a war, according to RT. Lebanon is ready to act, but will do its utmost to prevent Israel from an invasion, he told RT last week. “We should restrain Israel from starting a war exactly because Lebanon is sure to win it,” he said.

Lebanese Army soldiers. Hassan Abdallah / Reuters

As reported at the start of the month, Lebanon has been undergoing a deep political crisis after Prime Minister Saad Hariri abruptly resigned on November 4 in a televised statement from Saudi Arabia. In his resignation address, Hariri accused Iran and Shiite Hezbollah militia of sowing strife in Arab countries.

As further reported, on Sunday the Arab League called an emergency meeting in Cairo blaming Iran for destabilizing the region. The alliance also described Hezbollah as a terrorist organization, but stopped just short of threatening any action against either. Ahmed Aboul Gheit, the Arab League’s secretary-general, said its members may reach out to the UN Security Council to discuss possible steps against the Islamic republic.

Meanwhile, Tehran dismissed the Arab League statement on Iran, saying it was “full of lies” and the product of Saudi “pressure and propaganda.” Iranian Foreign Ministry spokesman Bahram Ghasemi called on Saudi Arabia to stop its “barbaric attacks” in Yemen. He also called on Riyadh to drop its embargo on Qatar, a country which has close ties to Tehran.

 On Tuesday, president Aoun defended Hezbollah, saying his country had been subject to Israeli invasions for decades and therefore had the right to protect itself. Aoun rejected “insinuations accusing the Lebanese government of partnering in terrorist acts.”

“Lebanon has confronted Israeli aggressions from 1978 until 2006 and has been able to liberate its territories,” he added, as cited by National News Agency.

For those who may have missed some of the recent, rapidly moving events in the region, here is a quick rundown:

Saudi Arabia, a regional arch-rival of Iran, has recently demanded that the Lebanese government pressurize Hezbollah to disarm, and also threatened to take action against Iran’s “aggressive” involvement in the affairs of Yemen and Lebanon. Speaking to Reuters last Thursday, Saudi Foreign Minister Adel Al-Jubeir said Riyadh is “reacting to that aggression and saying enough is enough.”

 

The bellicose statements from Saudi Arabia notably coincided with comments made by Israel’s top political and military brass. On Sunday, Israel’s Energy Minister Yuval Steinitz told Israeli Army Radio that cooperation “with the moderate Arab world, including Saudi Arabia, is helping us curb Iran.” Steinitz added that his country, which fought Arab nations in several wars, is “usually the party that is not ashamed” of such ties.

 

The disclosure comes days after Lieutenant General Gadi Eisenkot, chief of staff of the Israeli Defence Forces (IDF), said that Tel Aviv is willing to contribute to “a new international alliance” in the Middle East, which is determined “to stop the Iranian threat.”He said that, while Israel does not planning on striking Hezbollah, it is ready to share intelligence on Iran with Saudi Arabia. Tel Aviv and Riyadh do not have diplomatic ties with each another.

Earlier this week, Iran reiterated once again it is determined to bring lasting peace to Syria, while its Gulf neighbors are sparking tensions in the region. Tehran has been working with international allies such as Russia and Turkey to ensure ceasefire in Syria and pave the way for political reconciliation, Iranian Foreign Minister Javad Zarif said on Sunday. At the same time, Riyadh “fuels terrorists, wages war on Yemen, blockades Qatar [and] foments crisis in Lebanon,” Zarif tweeted. The Iranian diplomat posted his statement after a new round of talks with his Russian and Turkish counterparts, Sergey Lavrov and Mevlut Cavusoglu, respectively who met in Antalya, Turkey, on Sunday to discuss the Syrian conflict.

On Wednesday, the president of Iran and Turkey are set to meet with Russian president Putin in Sochi, where a day after a previously undisclosed meeting with Syrian leader al-Assad, Putin will seek to formalize the end of the Syrian civil war and establish the framework for the future in the middle east, one which certainly will include a prominent role for the Kremlin which has eagerly stepped into the power vacuum left by the receding US presence from the region.

For the past couple of weeks we’ve written frequently about the sudden political turmoil in Saudi Arabia that resulted in two Saudi princes being killed in a span of just 24 hours and dozens others being detained on charges of corruption while having their bank accounts frozen.  Here are couple of our most recent background posts on the topic:

• The Saudi Purge: The Middle-East Is On The Verge Of A New War
• If The Saudi Arabia Situation Doesn’t Worry You, You’re Not Paying Attention

Now, per an exclusive report from Reuters, it appears as though the latest casualty of the Saudi shakeup is a financing deal sought by the $8 billion dollar Kingdom Holdings which is owned and run by Prince Alwaleed bin Talal...at least until he was recently arrested that is.

Kingdom Holding’s plan to borrow money to fund new investments has stalled because owner Prince Alwaleed bin Talal has been detained in Saudi Arabia’s anti-corruption crackdown, according to four banking sources familiar with the matter.

 

Kingdom 4280.SE had approached banks to obtain the loan, but the financing plan has been held up because the lenders are worried about potential repercussions if they lend to the prince’s company, the sources said.

 

One of the sources, who was approached for the loan, said it would have been worth roughly 5 billion riyals ($1.3 billion).

For those who aren’t familiar with the company, Kingdom Holdings is a leading Saudi investment firm with stakes in prime real estate including New York’s Plaza Hotel and London’s Savoy Hotel.

The busted bank deal apparently surfaced after Kingdom Holdings attempted to pledge an equity position it recently acquired in Banque Saudi Fransi as collateral for a new $1.3 billion loan but several banks balked until the charges levied against Prince Alwaleed bin Talal were resolved.

Kingdom completed the acquisition of a 16.2 percent stake in local lender Banque Saudi Fransi (BSF) 1050.SE in September, buying about half of France’s Credit Agricole stake in BSF for 5.76 billion riyals.

 

The company approached banks to obtain a loan that would have been secured by its BSF stake, as the company wanted to leverage the newly acquired shares in order to make new investments, according to the sources.

 

One of the four sources, a senior banker at a Saudi financial institution, said the loan deal would not go ahead until the situation facing the prince was resolved.

Of course, Kingdom Holdings is likely not the only Saudi company finding it difficult to tap debt markets these days as Moody’s recently warned that a prolonged freeze of bank accounts could “damage corporate credit quality” all across the country.

Eight Saudi and international bankers, including the four sources, said in addition to the Kingdom loan, a range of other transactions involving clients who are directly or indirectly involved in the detentions had also been put on hold.

 

Banks have not reached the point of recalling existing loans, but they have increased the level of scrutiny for some new financing, the bankers said.

 

In a report last week, debt rating agency Moody’s said a prolonged freeze of bank accounts in Saudi Arabia could damage corporate credit quality in the kingdom because large depositors were often large borrowers and business owners.

 

“Saudi Arabia’s corporate sector remains dominated by unlisted family-owned businesses with uneven governance and disclosures and frequent intermingling of individual and corporate activities, which ultimately could expose corporates to these individuals’ frozen accounts,” Moody’s said.

Meanwhile, despite assurances from the Riyadh government that the economy would not suffer from the country’s political turmoil “because investigators are targeting only individuals, not their companies,” Kingdom Holdings shareholders don’t seem to be convinced…

With NAFTA negotiations currently taking place, and NAFTA currencies very sensitive to every headline, both the Peso and Loonie suddenly spiked on a Bloomberg headline that suggests that talks just may be progessing in a favorable fashion:

• NAFTA DEAL NEAR ON TELECOM, ENERGY, E-COMMERCE:MEX BUSINESS REP

While details are lacking for now, USDMXN has charged lower on the headline, as any whiff of Nafta being saved sends both MXN and CAD surging. USDMXN is now at 18.8625 and USDCAD is at 1.275.

Ignore gold, ignore earnings expectations, ignore the dollar, ignore the yield curve… and…

German stocks sum it all up… Buy The F**king German Government Crisis… (even as EUR stays weaker)

Record Highs all around in ‘Murica…

As once again the European Session (green boxes) cominated the ramp…

As VIX was slammed back to a 9 handle…

Here’s a couple things though…

The last 5 days have been quite a ride for ‘shorts’… as “Most Shorted” stocks have soared over 6% – This is the biggest short-squeeze since Dec 8th 2016 (which was followed by a 6% decline)

High yield bond prices rose once again but remain below the 200DMA for the 11th straight day (the longest period since Q1 2016)

But the ultra-sensitive Small Caps love the tiny relief in HY…

Treasury yields were mixed oncoe again as the long-end rallied (30Y -2bps) and short-end was sold (wY +2bps)…

For the first time since early Nov 2007, the spread between 2Y and 30Y Treasury yields has crashed below 100bps…

In fact the yield is crashing this year at the fastest rate in at least a decade…

The Dollar Index declined once again…

Bitcoin surged to yet another record high…

WTI/RBOB rallied today ahead of tonight’s API data…

Gold and Silver held on to early gains today but faded in the afternoon…

And here is why stocks are rallying to record highs… because earnings expectations are tumbling, silly!!

Following September’s positive housing data rebound, October data is starting well with existing home sales surging 2.0% MoM (better than expected 0.2%) to 5.48mm SAAR, as US existing home sales inventory tumbled 10.4% YoY, to 1.8 months, the lowest since 1999.

Sales of previously owned U.S. homes rose to a four-month high, indicating demand was firming at the start of the quarter as the impact from hurricanes faded, according to a National Association of Realtors report released Tuesday.

However, this is the second straight YoY sales decline, first back-to-back months since 2014…

The median sales price increased 5.5% YoY to $247,000.

Bloomberg reports that Houston and several areas of Florida saw gains when compared with a year earlier, while Miami is still showing some softness, according to NAR.

As in the past, economic activity including in the housing industry typically bounces back after major storms as rebuilding and repair work gets under way.

Another possible headwind comes from tax legislation being advanced in Congress, which the Realtors association strenuously opposes.

The group said last week that the plans debated by lawmakers would “overwhelmingly remove the tax incentive to purchase and own a home in America,” and economists surveyed by Bloomberg said the House bill would reduce demand from homebuyers.

“The momentum appears to be good,” Lawrence Yun, NAR’s chief economist, said at a press briefing accompanying the report. The hurricane impact was “more modest” than anticipated in October and activity is “quickly bouncing back.”

The tax plan could be a “major wild-card disrupter to the housing recovery,” he said. Even so, he sees another “respectable year in 2018,” provided any tax changes don’t set back demand.

More than 100 al-Shabaab militants were killed Tuesday in the latest US airstrike in Somalia the Pentagon announced, the latest in a series of strikes against the al Qaeda affiliated group and ISIS fighters in the war-torn country meant to support the local government. The strike occurred 125 miles northwest of the capital of Mogadishu, and was the 29th such strike since the start of 2017, and 7th since November 9.

The Pentagon released the following statement commemorating the latest airstrike:

U.S. Conducts Airstrike in Support of the Federal Government of Somalia

 

In coordination with the Federal Government of Somalia, U.S. forces conducted an airstrike in Somalia against an al-Shabaab camp on Tuesday, Nov. 21 at approximately 10:30 a.m. local Somalia time, killing more than 100 militants. The operation occurred 125 miles northwest of the capital, Mogadishu.

 

Al-Shabaab has pledged allegiance to al-Qaeda and is dedicated to providing safe haven for terrorist attacks throughout the world. Al-Shabaab has publicly committed to planning and conducting attacks against the U.S. and our partners in the region.

 

U.S. forces will continue to use all authorized and appropriate measures to protect Americans and to disable terrorist threats. This includes partnering with AMISOM and Somali National Security Forces (SNSF); targeting terrorists, their training camps and safe havens throughout Somalia, the region and around the world.

 

Our political and security goals in Somalia are the same: a reconstituted Somali state at peace internally and able to address all threats within its territory.

As we reported yesterday, the Defense Department has deployed more than 500 personnel in Somalia including military, civilians and contractors, more than double the 200 personnel that had been reported to be in Somalia in March 2017, according to US Africa Command which oversees US forces on the continent. The personnel are part of the effort to support African forces fighting al-Shabaab as well as ISIS forces there. While estimates have fluctuated over time, the US now estimates there are between 3,000 and 6,000 al-Shabaab fighters and less than 250 ISIS operatives in Somalia.

US troops have primarily operated in Somalia to provide training and assistance for local forces, according to CNN, but US special operations forces also continue to rotate in and out of Somalia, conducting counter terrorism operations according to defense officials.

Early November saw a decided uptick in US airstrikes in Somalia. Africa Command and the Pentagon insist the series of airstrikes are simply due to the ability to identify targets and not as a direct result of a number of recent massive deadly suicide attacks in the Somali capital of Mogadishu, including a double truck bomb attack in October that killed hundreds.

“We’ve always stressed the importance of putting pressure on the network,” said Samantha Reho, an Africa Command spokesperson. “The opportunities presented themselves with the right conditions and are purely coincidence.”

The increase in strikes in Somalia as well as Libya and Yemen, is driven by the intelligence that is gathered, according to officials: “I think as we constantly assess the battle space, when targets present themselves that are actionable and within the law of armed conflict, we’re going to strike those targets,” Lt. Gen. Kenneth McKenzie, director of the Joint Staff told reporters.

There have been 29 strikes acknowledged by the Pentagon so far this year. Seven of those strikes took place between November 9 and 14.

• November 9, killing several militants, 100 miles west of the capital of Mogadishu.
• November 10 in the Lower Shabelle Region of Somalia, about 20 miles north of Mogadishu, killing several militants.
• November 11 near Gaduud, about 250 miles southwest of the capital, Mogadishu. Prior to the strike, US forces observed the al-Shabaab combatant participating in attacks on a U.S. and Somali convoy. US forces subsequently conducted the strike under collective self-defense authorities.
• November 12 there were two separate airstrikes against al-Shabaab and ISIS, killing several terrorists. The first was against al Shabaab in the Lower Shabelle region, the second against ISIS in Puntland.
• November 13, there was another airstrike 250 miles southwest of Mogadishu when al Shabaab fighters posed a threat to a Somali led counterterrorism operation.
• November 14 strike against al Shabaab about 60 miles northwest of Mogadishu.

The strikes have been “made possible” by President Donald Trump’s decision in April to grant new authorities to the commander of Africa Command. The new authorities gave the Africa Command commander the ability to carry out “precision airstrikes” in support of African Union and Somali troops fighting terrorists in Somalia. Previously, strikes could only be conducted in self-defense of US forces.

Separately, the US military also carried out two drone strikes in Libya on Friday and Sunday, targeting ISIS fighters in near Fuqaha, Libya, multiple US officials told CNN

As previewed this morning, when we discussed the surprise meeting between Syria’s al-Assad and Vladimir Putin in which the Syrian president said “Today, on behalf of the Syrian people, I extend my gratitude to you for what you did, we will never forget it”, the Russian president was set to hold a phone call with Donald Trump ahead of further meetings in Sochi on Wednesday with the leaders of Iran and Turkey. Moments ago both the Kremlin and White House released read outs of the talking points on the call that took place around noon.

According to ABC, president Donald Trump spoke for more than an hour Tuesday by phone with Russian President Vladimir Putin. Syria, Iran, North Korea and Ukraine were on the agenda, the White House said.

The Kremlin echoed the White House, and said that the two leaders discussed “a number of topics”, including the Syrian crisis, the North Korean nuclear problem and the situation in Afghanistan as well as the Ukrainian crisis. Putin briefed Trump in the phone call about his talks with the Syrian leader and plans for a political settlement in Syria.

Putin stressed that there were no alternatives for full implementation of the Minsk agreements on peaceful settlement of the armed conflict in eastern Ukraine. .

“Considering the crisis situation in southeastern Ukraine, the Russian president pointed out the absence of a real alternative for the unconditional implementation of the Minsk accords signed on February 12, 2015,” the statement said.

The Kremlin also said Putin also called for coordination of anti-terror efforts with the U.S. Afghanistan was also discussed, the Kremlin said.

Trump and Putin spoke informally several times last week when they attended a summit in Vietnam, where they agreed on a number of principles for the future of war-torn Syria. The following close exchange also took place: