A "Market" That Needs $1 Trillion In Panic-Money-Printing To Stave-Off Implosion Is Not A Market
It was all fun and games enriching the super-wealthy but now the karmic cost of the Fed's manipulation and propaganda is about to come due.
A "market" that needs $1 trillion in panic-money-printing by the Fed to stave off a karmic-overdue implosion is not a market: a legitimate market enables price discovery. What is price discovery? The decisions and actions of buyers and sellers set the price of everything: assets, goods, services, risk and the price of borrowing money, i.e. interest rates and the availability of credit.
The U.S. has not had legitimate market in 12 years. What we call "the market" is a crude simulation that obscures the Federal Reserve's Socialism for the Super-Wealthy: the vast majority of the income-producing assets are owned by the super-wealthy, and so all the Fed money-printing that's been needed to inflate asset bubbles to new extremes only serves to further enrich the already-super-wealthy.
The apologists claim the bubbles must be inflated to "help" the average American, but that claim is absurdly specious. The majority of Americans "own" near-zero assets that earn income; at best they own rapidly-depreciating vehicles, a home that doesn't generate any income and a life insurance policy that pays off only when they pass away.
The average American uses the family home for shelter, and so its currently inflated price does nothing to improve the household income: it's paper wealth, and we've already seen how rapidly that paper wealth can vanish when Housing Bubble #1 popped. (Housing Bubble #2 is currently sliding toward the edge of the abyss.)
Were legitimate price discovery allowed, the asset bubbles would pop, and the real-world impact on the average household that owns essentially zero income-producing assets would be minimal. Their overvalued house would fall in half, but since it still functions as shelter, the actual economic impact is minimal. As for the life insurance company's losses--where's the benefit today of an "asset" that only pays out when you die?
Meanwhile, the super-wealthy own stocks, bonds, companies and commercial real estate, all of which generate income. The rich get richer in two ways: their assets generate small fortunes in income (unearned income is what separates "the rich" from everyone else) and thanks to the Fed's constant goosing of asset prices, their paper wealth has multiplied.
The dirty little secret that nobody dares whisper lest the whisper trigger a self-reinforcing avalanche is that this Fed-manipulated "market" is illiquid: if any serious selling were to arise, there wouldn't be enough buyers to stave off a complete implosion of the bubbles.
The Fed's game is to create the illusion of liquidity by being the buyer of last resort, only now the Fed is the only buyer. This is the toxic consequence of the Fed's 12 long years of Socialism for the Super-Wealthy: thanks to the Fed's destruction of price discovery, the super-wealthy no longer worry about liquidity, so leverage is the name of the game.
The Super-Wealthy can gamble with hundreds of billions to stripmine the economy and not worry about whether a buyer will actually pay the overvalued price of the asset, because they can count on the Fed to step up and panic-money-print whatever sums are needed to maintain the illusion of liquidity.
If the "market" is so healthy, why is the Fed panic-money-printing over $1 trillion in a few months? Please glance at the charts below: the Fed has printed $213 billion in repos and $336 billion for asset purchases in the blink of an eye, and the Fed has promised to panic-print another $200+ billion in repos and another $300+ billion in asset purchases, for a grand total of over $1 trillion in panic-money-printing.
Why has the Fed been forced to panic-money-print $1 trillion to stave off an implosion of their phony "market"? Moral hazard is coming home to roost, and the Fed is having a full-blown panic-attack because the Super-Wealthy (banks, corporations, financiers) have no fear that liquidity could dry up and markets go bidless, i.e. buyers disappear and there's nobody left to buy their overvalued assets at bubble valuations.
If you want to understand how liquidity can dry up overnight and bids disappear, please read Mandelbrot's book The Misbehavior of Markets: A Fractal View of Financial Turbulence. The point Mandelbrot makes here is that markets are intrinsically unstable and prone to sudden, chaotic turbulence. In a legitimate market with intact price discovery, buyers and sellers understand risk cannot be reduced to zero and so they trade accordingly.
But in our bogus Fed-controlled "market," buyers and sellers are supremely confident the Fed will always buy assets regardless of price, and so they trade accordingly: There are no limits on leverage, derivative positions, credit lines, stock buy-backs or currency (FX) swaps: the Fed has been reassuring the legalized looters that the sky is the limit, go ahead and gamble hundreds of billions of dollars, we'll buy your overvalued assets if things get dicey.
And so the tissue-thin "market" is fundamentally illiquid, and hence the Fed's sudden panic-money-printing of $1 trillion, which is roughly equivalent to the entire GDP of Indonesia.
The Fed's thorough destruction of price discovery and its elevation of moral hazard have created a monster that is about to devour the Fed's phony facade of a "market". It was all fun and games enriching the super-wealthy but now the karmic cost of the Fed's manipulation and propaganda is about to come due, and few of the "market's" supremely complacent and confident participants are prepared for the unraveling of the Fed's illusion of liquidity.
If you want an analogy, try a population of rats that have proliferated on an island, and now the ravenous horde has consumed the last remaining bits of food. You can work out what happens next.
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Global Markets Hit All Time High As Traders Brace For "Phase Two" Optimism
This is where we stand as we enter Monday morning:European markets are firmer this morning, though the FTSE 100 significantly outperforms on a second-wave of UK election optimism. China State Council stated it will continue to suspend additional tariffs on US vehicles and auto parts due to the Phase One deal. China sources cited by CNBC's Yoon note that the USD 40-50bln target on agricultural purchases is a "best case target". Boeing (BA) is mulling cutting or stopping its 737 MAX production, via WSJ – Co. shares are down 2% pre-market USD remains subdued although Sterling and Euro were dented by the latest poor PMIs.
Now that "Phase one" of the US-China deal is in the history books, traders around the world are bracing for a full year of "Phase Two" optimism in continuation of the only thing that matters since the spring of 2018 (that, and central banks cutting like there's a global crisis, of course). And after US cash markets hit a new all time high on Friday, world stock markets rudhes to catch up with the US on Monday, trading at fresh all time highs in what was another "sea of green" day.
Whether it was looking ahead to Phase Two optimism, or simply relishing the (non) deal that was China's ridiculous promise to double US ag imports, Wall Street was quick to try and shape narratives as one of buying the rumor and then buying the news as well:
“We may have reached the point of ‘peak tariffs’ and this deal could be the start of a series of phased rollbacks, which could unlock further upside for equity markets, driven by an improvement in business confidence and a recovery in investment,” said Mark Haefele, CIO of UBS Global Wealth Management in a note to clients. We may have... but we haven't, because as Morgan Stanley explained most supply chains are already in process of being moved while the "deal" will hardly inspire confidence among companies to spend more on CapEx.
For now, however, the optimism is working: European shares stormed out of the gate, and the pan-European STOXX 600 index was up by 1.1% hitting a new record high. Germany’s DAX rose as much as 0.5%, despite weakness in the Stoxx 600 Automobiles & Parts Index which underperformed the broader gauge. German auto stocks fell after China’s ambassador to Germany threatened retaliation if Germany excludes Huawei Technologies Co. as a supplier of 5G wireless equipment. Auto-parts stocks such as Valeo and Hella also underperformed after Morgan Stanley cut both stocks along with Schaeffler to underweight, saying that suppliers have failed to fully understand the size of structural changes ahead, which makes it tough to justify their re-rating against OEMs.
European markets also ignored the latest disappointing PMI print, indicating that Europe remains stuck in a manufacturing recession: German private sector activity shrank for the fourth month running in December as a downturn in manufacturing offset services sector growth in Europe’s largest economy. Across the boarder, French businesses grew at a steady pace in December despite a nationwide strike against pension reform, although activity in the manufacturing sector came unexpectedly close to stagnating. Overall, the Eurozone composite PMI was unchanged at 50.6, modestly missing the expectation of a rebound to 50.7, driven by continued manufacturing weakness which shrank from 46.9 to 45.9, well below the 46.9 expectation, while the Services PMI rose modestly from 51.9, to 52.4.
The weakness was largely due to another decline in both German and French mfg PMIs, both of which dropped, with the former now in contraction since March and the latter just one pension strike away from a sub-50 print.
Earlier in Asia, MSCI’s broadest index of Asia-Pacific shares outside Japan to its highest level since April 18. It was last up 0.13%. Australia’s S&P/ASX 200 led the way as it jumped 1.63%, while shares in Taiwan added 0.22%. Japan’s Nikkei 225 succumbed to some profit-taking, falling 0.29% after surging 2.55% to a 14-month closing high on Friday.
While everyone was busy ignoring the latest European economic data, markets were positively giddy at the all too credible rebound in Chinese data unveiled late on Sunday night which saw most indicators post a sharp and orchestrated rebound.
Chinese investors initially had a more tepid reaction to the trade news, with the blue-chip CSI300 index struggling to rise further after trade hopes fanned a near 2% rise on Friday. But after a lackluster morning session, the CSI300 index turned higher in the afternoon and was last up 0.3%, helped by the latest industrial output and retail sales data.
And so, thanks to China's latest data dump, positive sentiment helped push MSCI’s All Country World Index up 0.15%, after hitting an all-time high on Friday when the trade deal was agreed.
Looking at the latest trade development, on Sunday, China State Council stated it will continue to suspend additional tariffs on US vehicles and auto parts due to the Phase One deal, whilst also suspending the additional 5-10% tariffs on some US goods planned to take effect on December 15th, according to CNBC’s Yoon. Meanwhile, China's Foreign Ministry said that more trade information will be released in due course and working-level officials from both sides remain in contact.
China sources cited by CNBC's Yoon note that the USD 40-50bln target on agricultural purchases is a "best case target", and that the US would likely allow 'best endeavor' purchases; adds that general feeling on tariff rollback is an issue of linguistics. Additionally CNBC’s Yoon adds, no Chinese confirmation regarding the hard targets for US agricultural purchases; although, China is likely to agree but cannot acknowledge this publicly due to a possible backlash.
In addition to the trade deal, markets were excited by the apparent end of the Brexit drama, if only for the time being. Ryan Felsman, senior economist at CommSec in Sydney, said the trade deal and the receding risk of a disorderly Brexit after the British election produced a strong Conservative majority provided support for sentiment in Australia. A lower-than-expected Australian budget surplus due to a sluggish economy has also “built expectations by markets for further easing from the Reserve Bank (of Australia),” he said. He added that investors wanted more details and the reduction in U.S. tariffs may have disappointed some looking for more aggressive action.
“Certainly there were expectations perhaps that the rollback would be more significant than just 50%."
In the US, S&P futures were back to record highs hit last week. U.S. shares struck a cautious note on Friday, paring initial gains to end barely higher as weary investors awaited signs of a concrete deal.
However, the news of a deal was still enough to send the S&P 500 to a record closing high of 3,168.8, up just 0.01%. The Nasdaq Composite added 0.2% to end at 8,734.88, also a record, and the Dow Jones Industrial Average rose 0.01% to 28,135.38.
In rates, U.S. Treasury yields moved modestly higher on Monday, after the sharp reversal on Friday, reflecting the more positive mood. Benchmark 10-year Treasury notes rose to 1.8452% compared with their U.S. close of 1.821% on Friday, and the two-year yield touched 1.6304% compared with a U.S. close of 1.604%.
In FX, the Bloomberg Dollar Spot Index slipped and the euro held gains after data showed the euro-area economy is still struggling. EURUSD touched 1.1151 versus the dollar before paring gains after a slew of European PMIs. Treasuries halted their advance from Friday, while euro-area bonds were mostly higher. As noted above the latest Eurozone composite PMI stayed at 50.6 in December, slightly lower than the forecast of 50.7. The reading signals fourth-quarter output will be the weakest since the region exited a double-dip recession in the second half of 2013.
Sterling pared Asia session gains on profit taking and after a flash indicator for all business activity dropped to the lowest since the aftermath of the 2016 Brexit referendum; manufacturing activity slipped to 47.4, a sharper downturn than the 49.2 reading predicted by economists.
In commodities, oil prices which had risen on Friday following the deal, climbed further on Monday. Brent crude rose 0.1% to $65.28 per barrel, and U.S. West Texas Intermediate crude was down 0.05% at $60.11 per barrel. Spot gold prices were down 0.06% at $1,474.64 per ounce.
Looking at today's US calendar we get the November Markit PMI data, December Empire State manufacturing survey, NAHB housing market index, October net long-term TIC flows, total net TIC flows.
Market SnapshotS&P 500 futures up 0.3% to 3,181.25 STOXX Europe 600 up 1% to 416.15 MXAP down 0.1% to 168.88 MXAPJ up 0.06% to 542.89 Nikkei down 0.3% to 23,952.35 Topix down 0.2% to 1,736.87 Hang Seng Index down 0.7% to 27,508.09 Shanghai Composite up 0.6% to 2,984.39 Sensex down 0.1% to 40,950.83 Australia S&P/ASX 200 up 1.6% to 6,849.71 Kospi down 0.1% to 2,168.15 German 10Y yield fell 1.5 bps to -0.304% Euro up 0.1% to $1.1133 Italian 10Y yield rose 20.4 bps to 1.09% Spanish 10Y yield fell 0.7 bps to 0.406% Brent Futures up 0.1% to $65.33/bbl Gold spot up 0.1% to $1,477.23 U.S. Dollar Index down 0.1% to 97.08
Top Overnight NewsChina’s economy showed signs of stabilizing and regaining growth momentum in November; industrial output rose 6.2% from a year earlier, versus a median estimate of 5.0%. Retail sales expanded 8.0%, compared to a projected 7.6% increase. Fixed-asset investment was unchanged at 5.2% in the first eleven months, the same as forecast President Recep Tayyip Erdogan warned that Turkey could shut down two of the most critical NATO installations on its territory if the U.S. imposes sanctions over its purchase of an advanced Russian missile-defense system Boris Johnson will appoint top ministers to his cabinet on Monday as he pushes ahead with Brexit, emboldened by the historic majority he won in last week’s British general election China’s economy showed signs of stabilizing and regaining growth momentum in November, adding to the good news for the nation’s outlook after a preliminary trade deal with the U.S. was reached last week. China steps up talks with U.S. on opening its companies’ books China’s ambassador to Germany threatened Berlin with retaliation if it excludes Huawei Technologies Co. as a supplier of 5G wireless equipment, citing the millions of vehicles German carmakers sell in China Australia’s Treasury lowered its forecast surplus for the 12 months through June 2020 to A$5 billion ($3.4 billion) from April’s budget estimate of A$7.1 billion as it scaled back estimated tax revenues, according to the Mid-Year Economic and Fiscal Outlook released in Canberra Monday. It also predicted narrower surpluses for the following three fiscal years Oil retreated from a three-month high as optimism the U.S.-China trade deal will spur demand for crude gave way to caution due to the agreement’s limited nature and lack of detail Hong Kong’s demonstrators clashed with police late Sunday as Chief Executive Carrie Lam visited Beijing where she’s expected to update Chinese President Xi Jinping and other senior officials on the violent protests that have gripped the city for the past six months. Chinese Premier Li Keqiang gives Hong Kong leader fresh boost after protests
Asian equity markets traded mixed following relatively light newsflow over the weekend and last Friday’s flat performance on Wall St. where the major indices consolidated near record levels after the confirmation of a US-China Phase One deal which officials plan to sign in early January, although some noted the deal was only limited and questions arose over the feasibility of China committing to as much as USD 50bln of US agriculture goods. ASX 200 (+1.6%) was lifted by outperformance in defensives and the top-weighted financials sector with sentiment buoyed after the world’s 2 largest economies averted the December 15th tariffs, while Nikkei 225 (-0.3%) was subdued by the recent pullback in USD/JPY and as the latest Japanese Manufacturing PMI data remained in contraction territory. Hang Seng (-0.7%) and Shanghai Comp. (+0.6%) were constrained despite the phase one agreement confirmation and better than expected Chinese data in which Industrial Production and Retail Sales both topped estimates, as the stats bureau stated the economy still faces relatively big downward pressure and amid expectations for a reduced growth target for next year, while the mood in Hong Kong was also soured by a rise money market rates (Overnight HIBOR +57bps) and the resumption of violent protests over the weekend. Finally, 10yr JGBs were flat with prices hampered by last week’s resistance levels and with demand also subdued due to the absence of the BoJ in the market today.
Top Asian NewsTop Turkish Bankers Say They Were Fired on Orders of Regulators India Protests Spread as Anger Against Citizenship Law Grows Masayoshi Son’s Bankers Are Worried About Their Favorite Client Philippine Stocks Sink to Two-Month Low as Utilities Retreat
European equities kick-start the week on the front foot [Eurostoxx 50 +0.7%] following on from a relatively mixed APAC session, with traders citing an overall improvement in the trade environment as a reason for the advances. Cash Stoxx 600 (+1.1%) managed to notch intraday record highs, albeit the FTSE 100 (+2.1%) stands as the marked outperformer amid further post-election tailwinds on large-cap stocks, miners benefitting from rising copper prices and exporters taking advantage of a declining Sterling – Standard Chartered (+3.3%), RBS (+3.2%), Barclays (+3.5%), Glencore (+4.0%), BHP (+3.2%), Rio Tinto (+2.9%) and Antofagasta (+2.7%). DAX and other core European indices stalled gains amid disappointing December Flash PMIs. Sectors opened modestly in positive territory but have since gained traction, with cyclical Materials and Financials outperforming on the back of FTSE 100 gainers. In terms of other individual movers, Novartis (unch) opened lower after the Co. stated it will be dropping development of its asthma drug amid a string of disappointing trials. Meanwhile, Kerry Group (-3.5%) shares fell to the foot of the pan-European index after losing a USD 26bln deal to International Flavours and Fragrances for US-listed DuPont’s nutrition division (+1.9% pre-market). Last but not least, Sports Direct (+20%) soared on the back of a profit jump with group revenue increasing 14% YY which comes amid performance woes after the Co. acquired the troubled House of Fraser.
Top European NewsEuro-Area Economy Ends 2019 Still Struggling as Momentum Stalls Factory Woe Puts U.K. Economy on Brink of Contraction, PMI Shows German Factory Slump Deepens Again as Recovery Seems Elusive U.K. Rainmakers Eye Dealmaking Return Post Tory Election Win
In FX, Sterling’s post-UK election 2nd coming was already fading after a fleeting foray above 1.3400 vs the Dollar and test of resistance around the psychological 0.8300 level against the single currency when the preliminary PMIs for December confounded expectations for some improvement and missed consensus by quite a distance, especially in the manufacturing sector. Cable duly retreated towards 1.3325 and the cross rebounded to circa 0.8350 even though the earlier Eurozone flash surveys were also disappointing, and Germany’s manufacturing headline in particular. However, Eur/Usd remains depressed within a 1.1123-50 range and may struggle to pull away from decent option expiries between 1.1120-25 and 1.1100-10 (1.2 bn clips) rather than challenging slightly larger interest at 1.1150 (1.3 bn).NZD/CAD/AUD - All firmer vs their US counterpart that continues to flounder (DXY anchored around 97.000), with the Kiwi keeping tabs on the 0.6600 handle, Aussie hovering just under 0.6900 and Loonie pivoting 1.3150 in wake of some upbeat Chinese data overnight (ip and retail sales) and further reserved reflection on US-China trade deal Phase 1. Nzd/Usd and Aud/Usd have both regrouped after losing some ground on independent impulses via growth forecast downgrades from the NZIER and government respectively, while the former also took note of Westpac rolling its RBNZ rate cut prediction to August next year from February. NOK/SEK - The Scandi Crowns are both holding firm lines ahead of this week’s Norges Bank and Riksbank policy meetings, but Eur/Nok’s retreat is more technical after breaching the 100 DMA (10.0385) compared to Eur/Sek’s reversal through 10.4300 in anticipation of a 25 bp repo rate hike on Thursday. CHF/JPY - The safe-haven Franc and Yen are narrowly mixed against the Buck, with Usd/Chf nearer the bottom of a 0.9825-45 band in contrast to Usd/Jpy hovering just below 109.50 compared to 109.25 at one stage and flanked by expiries between 109.00-05 and 109.50 in 1bn.
In commodities, little to report on the commodities front - with WTI and Brent futures largely unchanged on the day, albeit in positive territory after a relatively flat APAC session. WTI futures trade on either side of USD 60/bbl whilst its Brent counterpart topped USD 65/bbl in recent trade with little by way of fresh fundamental catalysts, and with participants somewhat cautious of the US-China Phase One deal amid a lack of details and a paucity on China’s commitments. Elsewhere, gold prices remain choppy within a tight USD 5/oz range thus far, as traders and investors await further Phase One details. Copper meanwhile has resumed its upwards trajectory with risk-sentiment a cited factor, although upside may be more due a receding USD and above-forecast China industrial production and retail sales. Finally, Dalian iron ore futures fell in excess of 1.5% after data showed weekly utilisation rates at 163 mills across China slumped almost 66 – thus casting fresh doubts on demand for the base metal.
US Event Calendar8:30am: Empire Manufacturing, est. 4, prior 2.9 9:45am: Markit US Composite PMI, prior 52 Markit US Manufacturing PMI, est. 52.6, prior 52.6 Markit US Services PMI, est. 52, prior 51.6 10am: NAHB Housing Market Index, est. 70, prior 70 4pm: Net Long-term TIC Flows, prior $49.5b
DB's Jim Reid concludes the overnight wrap
This is the last full week of the year and there are still a number of interesting events/data points to get through before the soporific Xmas week. I’m starting it a bit tired as for the second night in a row I fell asleep trying to finish “The Irishman” - the new Scorsese/De Niro et al film with de-ageing technology used. It’s very very good but 3hr 30mins is a little tough to watch in one (or even two) sitting(s) after a day running after atrociously behaved children. We’ll be trying to finish tonight.
As for this week, today’s global flash PMIs stand out, along with the German IFO (Wednesday) and the BoE/BoJ meetings (Thursday). We don’t often mention the Swedish central bank decision as a main highlight but on Thursday it’s expected that the Riksbank will end Sweden’s five year experiment with negative rates and take them back to zero even though they haven’t met their inflation target. As concerns over the side effects of negative rates rise around the world, especially in Europe, a lot of attention will be placed on how the Swedish economy and banking system deals with this in the months ahead.
More on the week ahead below but after a lot of drama we finally got a Phase One trade deal between the US and China, confirmed by both sides on Friday. The legal work, full details and signing (probably in January) is still to come but it appears that agreement has been made. The immediate consequence is that the tariffs scheduled to have come into effect yesterday have now been suspended. Meanwhile, tariffs on $120bn of Chinese imports by the US will be halved from 15% to 7.5%, although 25% on a remaining $250bn worth will remain, and the fact sheet released by the US Trade Representative’s office said that China has committed “to import various U.S. goods and services over the next two years in a total amount that exceeds China’s annual level of imports for those goods and services in 2017 by no less than $200 billion.” Looking forward, President Trump tweeted that discussions on the Phase Two deal would begin “immediately”, as opposed to after next year’s presidential election. There will clearly be relief that it looks like a deal has been done but there are fewer tariff rollbacks than some had thought likely and Mr Trump’s comments suggest phase two will be a live issue straight away. My base case was that this would wait until after next November’s election assuming he won. So it will be very interesting as to how much Trump keeps the negative China rhetoric alive in 2020 after the deal is eventually signed.
Staying with politics and as an additional word on the U.K. election result from the end of last week, I wonder if it marks a new chapter in populism. The victorious Conservative Party is traditionally a party of the better off with the Labour Party the party of the poorer and working class communities. The problem is that the working class is generally in favour of Brexit and the Conservatives ruthlessly exploited this and they subsequently voted for them in waves in areas that haven’t for a century in some cases. To maintain this support the Tories will have to shape policy to help those left behind by globalisation (mostly in the north of the country) and by definition reduce inequality. If you want to see a great graph look at the FT today where they show a scatter of the percentage of blue collar jobs in a constituency against the vote swing in this election in favour of the Tories. There was a big correlation. Although politics isn't often rational, it would make perfect sense if this election heralded a spending bias towards the poorer parts of the U.K. that voted for Brexit. In terms of the read through to other countries, to arrest the rise of populism we’ve always thought mainstream parties will adopt more populist policies aimed at the so-called left behinds. No-one has done this better in terms of winning an election than Mr Trump in the US and Boris Johnson in the U.K. The confusing thing about the Trump presidency is that his tax cuts were biased towards the rich which is probably why the likes of Warren and Sanders remain in the Presidential race and populism is still alive there. As we said on Friday though, the U.K. election result may at the margin make Democratic voters conclude that a lurch too far to the left is dangerous in Anglo-Saxon countries. We will see. Nevertheless the concluding remark is that the U.K results show that populism is far from dead – it’s just that mainstream parties can morph into populist parties if the will is there. To me it seems that European mainstream parties have so far struggled with this. I wonder if lessons will be taken from this on the continent.
Overnight, we’ve seen a number of data releases from China that have surprised to the upside, something that will further boost sentiment after the reaching of a Phase One agreement with the US. November retail sales were up +8.0% yoy (vs. +7.6% expected), while industrial production was up +6.2% yoy (vs. +5.0% expected). That said, fixed-asset investment over the Jan-Nov period was only up +5.2% yoy, the joint weakest since at least 1998 where data became more readily available. Equity markets in Asia are treading water this morning though, with the Nikkei (+0.03%), the Shanghai Comp (+0.06%) and the Kospi (-0.05%) seeing little movement in either direction, though the Hang Seng is down -0.37%. S&P 500 futures are up +0.28% following another record high for the index on Friday.
In terms of a fuller rundown of the week ahead, for today’s PMIs, we’ll see manufacturing, services and composite PMI data for France, Germany, the Euro Area, UK and the US. So quite a collection to watch for, especially as the market expectation is that the global economy is steadily turning after recently bottoming out. In November, the PMIs showed some sign of this in the Euro Area with a 50.6 reading for the composite PMI, but which included both Germany (49.4) and Italy (49.6) in contractionary territory led by manufacturing.
With the Fed and the ECB having announced their policy decisions in the week just gone, attention will turn to central banks elsewhere over the week ahead. The major action takes place on Thursday, with the Bank of Japan, Bank of England, Riksbank, the Banco de Mexico and Bank Indonesia all announcing policy decisions that day. As we said at the top the Riksbank might be the most interesting longer-term as they are expected to end a 5-year dalliance with negative rates. The rest of the world will be watching to see if the sky falls in or whether this helps persuade people that negative rates are part of the problem. My guess is the latter when the history books are written.
In terms of central bank speakers next week, there’s a conference being held at the ECB on Wednesday in honour of Benoît Cœuré, whose 8-year tenure on the ECB Executive Board concludes at the end of the month. Cœuré himself, along with ECB President Lagarde and the Fed’s Brainard will all be making remarks there. In the US, we’ll also hear tomorrow from New York Fed President Williams, Boston Fed President Rosengren, and Dallas Fed President Kaplan. Chicago Fed President Evans will also be speaking on Wednesday.
Staying with Europe, Wednesday sees the publication of the latest Ifo survey from Germany. Last month, the business climate indicator rose to its highest level since July, so it’ll be interesting to see if recent momentum is sustained, with the consensus looking for a modest increase to 95.5. Separately, Wednesday also sees the final release of the CPI and core CPI readings for the Euro Area in November, and on Friday there’ll be the advance December reading of the European Commission’s consumer confidence reading for the Euro Area.
From the US, we also have a number of key readings out this week. Alongside the PMIs, Tuesday sees the release of November’s industrial production figures, as well as housing starts and building permits data. Last month, building permits rose to their highest level since May 2007, so it’ll be interesting to see if this strength in the recent data is sustained. Friday sees the final Q3 US GDP reading where the component breakdown will influence Q4 thinking.
Recapping Friday and last week now. Global markets were buoyed by the combination of a Phase One deal between the US and China, along with signs of a resolution to the immediate Brexit impasse from the UK election. The S&P 500 ended the week up +0.73% (+0.01% Friday) at a new record high, while in Europe the STOXX 600 was up +1.15% (+1.09% Friday) at its highest level since April 2015. Bond yields ended the week slightly lower after a sizeable trading range, with 10yr Treasury yields down -1.4bps (-7.0bps Friday), and 10yr bund yields -0.3bps (-2.0bps Friday). The removal of downside risks to the global economy saw investors move into other risk assets, with brent crude up +1.29% (+1.59% Friday) last week, while the spread of BTPs over bunds narrowed by -8.9bps.
Meanwhile, UK assets rallied on Friday as it emerged the Conservatives had won an 80-seat majority at the general election. Sterling ended the week up +1.45% (+1.29% Friday) at $1.3331, its highest level since March, while against the euro it was up +0.94% (+1.39% Friday) at its highest level since July 2016. UK equities also outperformed, with the FTSE 100 up +1.57% (+1.10% Friday), while the more domestically-focused FTSE 250 index was up +2.75% (+3.44% Friday). Banks in particular rose following the result, with Friday seeing big share price moves for Lloyds Banking Group (+5.25%), Barclays (+6.18%) and RBS (+8.39%). The other major rises were seen from the companies that had been floated as targets for nationalisation by Labour. Centrica, parent of British Gas, was up +10.51% on Friday, its best day since November 2008, while BT Group was up +6.54%, its best since November 2018.
Finally, in terms of data on Friday, US retail sales were weaker than expected, with a +0.2% (vs. +0.5% expected) increase in November, although the previous month was revised up a tenth to +0.4%. The year-on-year figure fell to +2.9%, its lowest since June. In spite of the figures, Fed Vice Chair Clarida said on Fox Business that “the U.S. consumer’s never been in better shape in my professional career.” Elsewhere, New York Fed President Williams also sounded a positive note on the outlook, saying that “we’ve got the economy on a very strong footing, sustainable footing, for good growth next year.”Tyler Durden Mon, 12/16/2019 - 07:48 Tags Business Finance
Turkey Gives NATO The Middle Finger, Threatens To Shutter Critical Military Bases Over Sanction Threats
French President Emmanuel Macron complained during the NATO summit in London earlier this month about Turkey's decision to buy a Russian missile-defense system and its invasion of Syria, musing about how Turkey could justify its continued membership in the alliance if it counties to flout its interests at every turn.
These comments, only the latest round of complaints about Turkey's behavior toward its Western NATO allies, inspired speculation about whether NATO could formally expel Turkey. But aside from whatever legal complications might lie in wait, we posit that there's another more fundamental reason why NATO likely won't be able to expel Turkey. Because Turkish President Recep Tayyip Erdogan would likely quit first.
That's right: Although Trump and Erdogan have tried to maintain at least the veneer of a personally amicable relationship, and though Trump has at times defied his own senior NatSec officials to offer a major sop to Erdogan (like when Trump pulled US troops out and stepped aside to allow the Turkish invasion, the the horror of Europe), Erdogan's increasingly tight relationship with Russia - a relationship built on defense and energy ties - is becoming impossible for many western leaders to countenance.
Congressional hawks like Lindsey Graham (for the Republicans) and Chris Van Hollen (on the Democratic side) have already successfully pushed Trump to "announce" more sanctions against Turkey via Twitter. And they might be able to finally push him to follow through, too.
In response to this and myriad other slights both perceived and real, Erdogan made it clear on Monday that he's had about enough of this harassment from his supposed "allies" in the West. Because when it comes to Trump cards, Erdogan still has one to play.
According to Bloomberg, Erdogan warned that he could shutter two of the most important NATO bases in the world if more sanctions are imposed.
In the minds of US NatSec officials, Erdogan's threat is an extremely low blow. An early-warning radar at Turkey's Kurecik air base is a critical component of NATO's early-warning defense system against ballistic missile attacks. And the Incirlik air base in southern Turkey is critical to tactical air strikes and drone attacks throughout the region.
"If it is necessary to shut it down, we would shut down Incirlik," Erdogan told AHaber television on Sunday. "If it is necessary to shut it down, we would shut down Kurecik, too."
"If they put measures such as sanctions in force, then we would respond based on reciprocity," Erdogan said. "It is very important for both sides that the U.S. should not take irreparable steps in our relations."
Additionally, Erdogan warned the US not to recognize the Turkish genocide of Armenians in the early part of the 20th century, an issue that has long been important for Erdogan.
Until now, the US and NATO military presence in Turkey has been held sacred, even as the relationship between the two countries became increasingly bitter over the past two years. Those aren't the only two bases in Turkey: the US has for decades heavily leaned on Turkey as critical to its policing of the Middle East.
Bottom line: It's Turkey's party, and it can buy missiles from Russia if it wants to. After all, placating Russia is important for an energy importer like Turkey. Russian energy subsidies can be a huge economic boon for an economy - just look at Belarus.
Plus, now that Erdogan has cemented his control over the levers of power in Turkey, even if his decision to re-run the mayoral elections in Istanbul didn't turn out quite as well as he had probably hoped. He's eager to establish Turkey as a regional power, and bending to the US on this would make him look week.
Of course, for the US, Erdogan's demands present a difficult dilemma: The US and NATO need Turkey to host its bases, but they're worried that, if the S-400 system becomes fully operational (expected in April), many worry the Russian system could be used to collect intelligence on the stealth capabilities of the F-5 fighter jet.
Now, will President Trump risk calling Erdogan's bluff? That remains to be seen.Tyler Durden Mon, 12/16/2019 - 07:00 Tags Politics War Conflict
Boeing Considers Suspending 737 MAX Production
Sources have told The Wall Street Journal that Boeing could temporarily halt production of the 737 Max amid concerns the timeline of ungrounding the aircraft could be pushed further out. The decision to disclose the fate of the 737 Max production could arrive as early as Monday.
Boeing hosted a regular board meeting on Sunday in Chicago. Sources said the fate of the 737 Max production comes days after US regulators criticized Boeing for providing unrealistic timelines for when the plane will return to the skies.
In April, Boeing slashed production by 20% from 52 to 42 planes per month. A more extended cut or even production halt could be absolutely damaging to the global aerospace industry, as any reduction in planes could ripple down the supply chain and cause financial hardships for suppliers.
Boeing's board meeting is expected to conclude on Monday. Sources weren't exactly sure when the production-related announcement will be released.
"We continue to work closely with the FAA and global regulators towards certification and the safe return to service of the Max," Boeing stated. "We will continue to assess production decisions based on the timing and conditions of return to service, which will be based on regulatory approvals and may vary by jurisdiction."
We've noted in the past that production cuts could have severe consequences for the US economy. Over 600 suppliers provide 600,000 parts needed for each plane; the brunt of the shock would be seen down the chain at smaller firms.
Some Max suppliers have already cut production rates after Boeing reduced plane output by 20% in April. There are other reports that some suppliers have already furloughed employees and shut down equipment as the groundings enter the ninth month.
"It's easier to ramp down gradually and then ramp back up," said John Scannell, chief executive of Moog Inc., which makes control motors for the MAX.
The upcoming production decision isn't easy for Boeing since two of its Max planes experienced flight control system malfunctions and crashed in the past year or so, killing 346 people.
With no clear timeline on when the planes can return to the skies, and production likely slashed in 2020 - this could further weigh on Boeing shares:Tyler Durden Mon, 12/16/2019 - 06:30 Tags Disaster Accident Business Finance
It's D-Day For The Repo Market: On Monday $100 Billion In Liquidity Will Be Drained - What Happens Next?
Last week's apocalyptic report by repo market guru Zoltan Pozsar, which for those who missed it predicted that an imminent market crash and loss of control of overnight rates by the Fed would spark nothing short of QE4, sparked an unprecedented panic at the Federal Reserve, which just two days later unveiled a historic liquidity injection, in which the Fed promised to inject no less than $500 billion in the next 4 weeks to avert a catastrophic freeze in the repo market as we approach the year end "turn", which would consist not only of a continuation of the Fed's T-Bill POMO, but also a massive injection of nearly $500 billion in overnight and term repos in the coming days.
In other words, instead of a reactive QE4 - as predicted by Pozsar - the Fed will flood the repo market with a proactive firehose of liquidity.
There's more: add in the incremental liquidity from the expanded overnight repo of about $50 billion and another $60 billion in T-Bill purchases, and the Fed will inject a total of just shy of $500 billion in the next 30 days. This also means that by Jan 14, the Fed's balance sheet would have grown by a cumulative $365BN in "temporary" repos, and together with the expanded overnight repos, and the $60BN in monthly TBill purchases, and by mid-January, the Fed's balance sheet, currently at $4.066 trillion, will surpass its all time high of $4.5 trillion!
The question then is whether this will be sufficient to refute the repo Doomsday predicted by Pozsar, one which was supposed to launch QE4, or will the Fed's gargantuan liquidity injection still not be enough and lead to a collapse in the repo market.
Well, since the next key catalyst in the potential repo market turmoil is imminent, we may know as soon as tomorrow, when there is another large December corporate tax payment date (with as much as $78BN being remitted to the TSY) and another $54 billion in US Treasury settlements.
Recall, that as we explained last week, the mid-December funding dynamics looks very similar to mid-Sep except for the outsized role of the Fed. On Monday, Dec 16, Bank of America anticipates that $54Bn of UST coupon settlements coupled with what has historically been $30-50BN of corporate tax payments to UST. This could result in a UST cash balance inflow - or a liquidity drain - of up to $80-$100bn in just one day.
Also recall, every dollar of UST cash balance increase represents a similar USD reserve drain from the banking system, and a similar liquidity drain in mid-September culminated with the now historic explosion in overnight repo rates.
So should traders panic? Well, if the Fed's gargantuan liquidity injection is anything to go by, the answer is no, and as BofA's Mark Cabana writes, "despite the similarities we do not anticipate a material spike in funding due to the Fed's ongoing reserve management operations."
The main reason we do not anticipate considerable funding stress is due to the outsized presence of the Fed now vs mid-Sep. In mid-Sep the Fed was still under the impression it could drain reserves from the banking system without a material impact on funding levels. Since mid-Sept the Fed has learned the banking system has reached reserve scarcity and the Fed it is now adding reserves via repo operations and outright bill purchases to stabilize funding markets. The Fed will ensure it adds enough reserves to offset any Treasury cash balance drain in Dec.
Consider that as of last week, the Fed has provided $340bn in funding through their existing repo and bill purchase operations:
Furthermore, as revealed on Friday, in anticipation of the Monday liquidity drain, the Fed announced that it would expand the Monday term repo up to $50 billion, and extend the maturity date to January 17, allowing dealers to lock in excess liquidity well beyond the "turn". However, contrary to Cabana's expectation that "the Fed will increase O/N repo operation limits to around $200bn in the days surrounding Dec 16" there is some risk the Fed has misjudged how much net liquidity will be soaked up as a result of Monday's drain.
As a result, Cabana notes that even with this operational change, funding could still be volatile as bank portfolios and money fund deposits get pared back amidst corporate outflows, while dealer intermediation of Fed repos may also be challenged with year-end regulatory reporting dynamics limiting how smoothly this funding gets passed along, something Pozsar discussed extensively last week.
In any case, the adjustment to Fed repo operations is the latest of measures undertaken to ensure repo remains relatively stable at year end, and although overnight repo markets will likely be volatile around year-end BofA's concern around the turn has moderated in recent weeks and certainly after Friday's announcement of a gargantuan liquidity backstop.
As a result, Cabana now "thinks the Fed has provided enough liquidity and dealers have adjusted their businesses around GSIB to ensure funding markets remain relatively stable leading into year end." Ironically, the BofA strategist now sees risks that "funding trades too soft early in 2020 vs the Fed's policy target range. This will likely result in one or two 5bps technical IOER increases to ensure fed funds does not fall below the Fed's target range in 1H '20" as the overall funding situation shifts from too little reserves, to too many, potentially forcing dealers to shift from the repo facility to the reverse repo facility!
Incidentally that observation was echoed by another repo market experts, Curvature's Scott Skyrm, who on Friday penned the following year-end repo market prediction:
Soft December Funding
With the Fed committed to dumping $500 billion in liquidity into the market over year-end, there WILL be an abundance of cash overall. More cash will be added than will actually leave the market. However, the Fed is adding much of this cash via term RP operations over the next two weeks, whereas most of the cash is only needed for the Turn itself. I predict, by the last week in December, overnight GC rates will trade very soft. Perhaps opening at 1.50% each day - though GC will have a hard time dropping below the 1.45% RRP rate.
Soft Year-End Funding
I believe the Turn rate will close soft on year-end. Probably below 1.00%. What will be even more interesting is that Money Market Funds will be "crowded out" by the Fed cash entering the market. When Primary Dealer banks take billions of dollars of cash from the Fed, they will give all of their collateral to the Fed. That will leave little collateral for banks to give to Money Market Funds on the day of quarter-end - forcing the MMFs to go to the Fed's RRP window. The Fed will effectively both loan cash into the market and borrow cash from the market.
Bottom line: after Pozsar's apocalyptic forecast prompted the Fed to unleash a liquidity tsunami, fears about an imminent seizure in the repo market have faded, with BofA's Cabana now writing that "overall, the Fed's guiding hand should make market participants comfortable not to fear material repo stress around the mid-Dec corporate tax date and to believe any year-end funding pressures should be relatively short lived."
Still, as Skyrm cautions, "there is still one major phantom year-end risk looming around the market. If the Fed's term RP operations fully fund the Primary Dealer bank balance sheets and the banks cannot increase their balance sheets further, the last few Fed operations of the month might not have any takers. There is a chance there will be little Primary Dealer bank balance sheet left by year-end."
In any case, when looking at tomorrow's massive $100 billion liquidity drain, the repo market should be able to digest it without a spike in the G/C repo rate now that the Fed has effectively backstopped any and all year-end liquidity needs. If, however, the first repo prints come in elevated: at 2% or higher, it will mean that not even the Fed's half a trillion dollar liquidity injection was enough, and that Pozsar's fire and brimstone forecast is starting to come true.Tyler Durden Mon, 12/16/2019 - 05:11 Tags Business Finance
Matthew Mason, 18, of Ollerton, Cheshire, was arrested four hours after Alex Rodda (left), 15, was discovered dead in the village of Ashley on Friday morning.
Virginia Roberts, who now uses her married name Giuffre, has sent a public message of support to Princesses Beatrice and Eugenie after the Duke of York was retired by the Queen over the scandal.
Jewel thief Michael Weir, 53, has today been jailed for life with a minimum term of 30 years at the Old Bailey in London, for the murders of two pensioners during burglaries carried out in 1998.
EXCLUSIVE: The ex-F1 supremo suggested Tamara may have been betrayed after burglars spent 50 minutes emptying safes in her £70m Kensington home and fled through an open window.
Hitler's forces launched the attack on December 16, 1944, taking Allied troops in Belgium and Luxembourg by surprise. Today the anniversary will be marked in Bastogne, Belgium.
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