Rising Deficits, and What They Mean for Silver and Gold Silver Fortune
Published on Feb 11, 2018
With a 2 year budget deal in the works, and the already massive deficit set to rise by over $300 billion over the next two years, what does this all mean for precious metals, interest rates, monetary policy, and the economy?
Kerry Lutz of the Financial Survival Network (FSN) interviewed GoldCore’s Mark O’Byrne about the outlook for crypto currencies, financial markets and precious metals.
– Are bitcoin and crypto prices being manipulated like precious metals?
– Is there a coordinated backlash against bitcoin from JPM and powerful interests?
– 95% of cryptocurrencies and ICOs will likely go to zero
– Good cryptos will thrive, most will disappear in “massive creative destruction”
– Ponzi like nature of financial markets and fiat monetary system
– Fundamentals do not justify the massive gains in US stocks in recent years (near parabolic rise of over 300% in the S&P 500 since 2009)
– Is Plunge Protection Team (PPT) active in supporting markets?
– Retail investors including millennials piling into markets near top
– Smart money is reducing allocations to stocks and bonds; diversifying into gold
– Bitcoin is just nine years old and not proven store of value
– Gold proven store of value as seen in data, history and experience
– Gold backed crypto, crypto bullion, “digital gold” and “gold on the blockchain” has huge potential
– Perth Mint, Royal Mint, Royal Canadian Mint, LBMA and many others looking at blockchain
– Important blockchain solutions have full backing, transparency, security, stop the fraud and have customers interest at heart
– Important to own hard assets including physical gold and silver outside our digital financial and banking systems
By Christian Wienberg (Bloomberg) — The chief executive officer of the world’s biggest shipping company says curbs on immigration backed by the administration of President Donald Trump risk hurting the U.S. economy.
“The U.S. economy is running at full steam and therefore wages have started to rise,” which “in itself is positive,” Soren Skou, the CEO of A. P. Moller-Maersk A/S, said in a phone interview. “But if the U.S. succeeds in cutting off immigration, it will be very challenging to keep the economy going at the same pace.”
Koch Network Warns Trump Against ‘Arbitrary’ Immigration Cuts
Running a company that transports goods around the world puts Skou in a unique position to observe how a wave of protectionism is reshaping the global trade map. And as the Trump administration blames globalization for pummeling the middle classes, the Maersk CEO says it’s clear other regions are emerging as economic powerhouses.
“My personal belief is that Europe has more potential,” Skou said.
“There are parts of Europe with a lot of potential if they make reforms that strengthen their labor markets and seize the opportunities that arise from digitization,” he said. “If the political situation can be kept under control, I think Europe has some good years ahead.”
Maersk transported 10.7 million 40-foot containers last year, an increase of 3 percent from 2016. The company’s fleet of almost 800 vessels controls about a fifth of the world’s seaborne trade, according to industry consultant Alphaliner.
Trump’s Trade Tariffs: You Ain’t Seen Nothing Yet
When it comes to the longer term, Skou said Maersk is “positive” on Africa and Latin America. “And that’s why we’ve invested a lot in those two regions.”
“Global trade is not at risk of stopping, but we also have to acknowledge that we probably won’t get to see new, large free-trade agreements,” Skou said. “So we won’t get a boost or an acceleration from that, and that’s a shame because we think that free trade makes the world richer.”
By Mathew Carr and Anna Shiryaevskaya (Bloomberg) — Asia’s rapacious thirst for liquefied natural gas is sucking supplies from surprising places.
China to Japan and South Korea are paying top dollar for the super-chilled fuel. The pull is so strong that Norway’s Statoil ASA, which usually exports most of its LNG to Europe, is shipping a rare cargo east. It plans to send more.
Asia gets most of its LNG from Australia, including from the giant Gorgon project on the country’s northwest coast. Malaysia, Papua New Guinea and Indonesia are also big suppliers.
Statoil’s tanker, the Arctic Aurora, due in South Korea this week shows how the LNG market is becoming global, with more cargoes traveling long distances from the Atlantic to the Pacific region as China leads a landmark shift to burning gas instead of coal. For Statoil, it’s a chance to squeeze a little more profit from its overall gas production that’s already near full capacity.
“What we’ve seen in Asia is strong prices,” said Peder Bjorland, Statoil’s head of natural gas. But “it doesn’t help to have strong prices if you don’t have the shipping capacity. It’s been difficult to get hold of spot vessels.”
The producer has in the past sent cargoes to Malaysia, China, India and Japan, but it mainly serves the markets in Europe and the Americas.
As well as shipping its own production from its Arctic plant, which produces about 40 cargoes a year, Statoil buys and sells LNG in the market. It traded about nine cargoes in each of past two years and has plans to handle more.
“We do third-party trading mainly to optimize our activities around equity volumes from our liquefaction plant in Norway, and to generate additional margins,” Bjorland said.
Norway, Europe’s second-biggest natural gas supplier after Russia, was last year preparing for a price drop in the region as a long-expected flood of new liquefied natural gas finally arrives. This is now less likely because of surging demand in Asia.
Rising transport costs can reduce the arbitrage gains from sending cargoes to Asia and can even exceed the price differential between Europe and Asia. With available shipping increasingly scarce, tapping those profits hasn’t been that easy, he said.
Still, Asian demand is driving market rates higher and global prices are set to become more correlated, he said.
Gold Seeker Closing Report: Gold and Silver Gain With Stocks By: Chris Mullen, Gold Seeker Report
Gold gained $11.10 to $1325.90 in early Asian trade before it fell back to $1317.50 in London, but it then climbed to a new session high of $1326.10 in New York and ended with a gain of 0.49%. Silver rose to as high as $16.619 and ended with a gain of 1.23%.
By David Wethe and Sheela Tobben (Bloomberg) — The latest example of America’s turnaround from buyer to supplier in the global oil market can be seen 20 miles off the coast of Louisiana.
There, buoys that served as critical infrastructure for bringing crude into the U.S. for more than 30 years are being readied for the exact opposite purpose: pump oil into massive tankers for shipments around the globe.
Using the Louisiana Offshore Oil Port is emblematic of the upended U.S. oil market, where declining domestic production since the 1970s had turned Gulf of Mexico refineries into avid consumers of foreign crude.
Now, thanks to the shale boom that vaulted the U.S. to the ranks of top producers Saudi Arabia and Russia, older systems designed to move crude north from the Gulf are getting a second look for new uses. While the Louisiana hub would likely be used to ship crude produced in nearby offshore fields, that oil would probably be heading for U.S. refineries if it weren’t for the abundance of production coming from shale plays.
“For 40 years, our entire infrastructure was being built from the south to the north — that is our entire infrastructure direction,” Paul Cheng, an analyst at Barclays, said Tuesday in a phone interview. “And for the last 10 years, we’ve been very actively reversing that direction.”
American crude production has topped 10 million barrels a day, and the government forecasts it will surge to 11 million later this year.
Being able to load very large crude carriers, which is industry terminology for massive tankers that hold 2 million barrels of oil, will significantly cut the cost of shipping cargoes overseas. At ports in Corpus Christi and Houston, which currently handle the most exports, smaller vessels are needed to ferry the fuel out to the 1000-foot-long ships waiting in deeper waters.
But that’s not a problem for the LOOP, which has long been the biggest entry point for U.S. oil imports, offering super tanker buoys for hooking up hoses 20 miles offshore in 100 feet of water. On the LOOP’s website early Tuesday, officials said they’re testing modifications from last year to be able to export oil.
Even if LOOP finds it can load a super tanker for export seamlessly, its shipment volumes will likely be limited as it also handles oil imports. LOOP pumps crude from ships at the offshore buoys through a 45-mile pipeline to onshore tanks at Clovelly, Louisiana.
Oil already sitting in the pipe, known as linefill, kick-starts the discharge of supplies from the vessel. Much of that linefill is the heavy, high-sulfur crude that LOOP typically receives. By contrast, most of the U.S. exports would be light and low sulfur.
One solution would be to empty the pipe into a tank and refill it with another type of crude similar to the export cargo before a ship pulls up to receive it, Sandy Fielden, director of research and commodities for Morningstar Inc. in Austin, Texas, said in a phone interview.
“Logistically it’s going to be complicated,” Fielden said. “Even if it’s bidirectional pipe, it still is single pipe. Until they build a parallel pipe, they will have to limit how often to do exports.”
The decades-old LOOP may also need the help from some other legacy gear in the oil patch being looked at for a reversal in flow.
Marathon Petroleum Corp. has said it’s gauging interest for possibly reversing the flow of oil southward for its Louisiana-Illinois Capline. If it goes ahead, the pipeline project would be ready in the second half of 2022, at an initial capacity of 300,000 barrels a day.
It will likely take a number of years for the LOOP to become a dominant exporting hub, Cheng said. And even so, the terminal will still be called upon for importing as well.
“You want to test it out,” Cheng said. “You want to arm yourself so that when the time comes, we can use it all at the same time.”
By Mike Wackett (The Loadstar) – Already facing higher fuel costs, ocean carriers could now be hit by a rise in charter hire rates.
Container shipping lines are being obliged to pay higher daily hire rates for chartered vessels as the availability of tonnage falls to a new low.
Speaking during Maersk Group’s 2017 Q4 earnings call last week, Maersk Line COO Soren Toft conceded that shipowners were finally beginning to regain the upper hand in charter party negotiations.
“We are seeing some pressure on the time charter rates, mainly as a result of the idle fleet being low,” he said.
Indeed, according to the most recent survey by Alphaliner, idle container capacity has shrunk to 191,441 teu, representing just 0.9% of the global fleet.
“The idle fleet has dropped sharply in the past fortnight as carriers rushed to add capacity to take advantage of the high pre-lunar new year holiday demand in the Far East,” said Alphaliner.
“Container vessel owners are confident that the charter market will maintain its positive momentum after the lunar new year, with an expected push in demand, which, considering the low availability of spot tonnage, should result in strengthening charter rates.”
It noted that supply was “getting tight in the VLCS segment” of 7,500-11,000 teu ships, and that there were regions, such as the Atlantic, where there are “no ships available”.
And, according to one broker source The Loadstar spoke to this week, if you can find a VLCS, “rates are high and conditions tough”.
He said owners were “starting to get their revenge on carriers” that had “squeezed them” for so long.
Higher charter rates, and particularly less-flexible terms such as options and off-hire redeliveries, is bad news for Maersk Line’s operating costs in particular, as it charters 48.8% of its 4.3m teu capacity.
However, the bottom line of its top-ranking peers could be even harder hit by the scarcity of prompt tonnage and rising charter hire rates. For example, MSC charters 65.4% of its 3.2m teu capacity, CMA CGM 62.6% of 2.5m teu and Cosco 69.9% of 1.9m teu.
Fifth in the carrier rankings, Hapag-Lloyd charters just 31.9% of its 1.5m teu capacity, thus if the market continues to rise, the German carrier will develop a cost-base advantage over its larger rivals.
Meanwhile, containership owners are deferring scrapping their older tonnage to take advantage of the market conditions. One of the biggest, Athens-based Danaos, reported an $84m profit for 2017, compared with a loss of $366m the year before, when it had been hit by impairments and the aftermath of the Hanjin bankruptcy.
Moreover, although Danaos has several ships with charters expiring this year, in the current climate it should not have too many problems in either extending these or finding new charterers.
According to the latest demolition report from London-based broker Braemar ACM, so far this year only five ships, for 13,000 teu, have been scrapped. This compares with 41 vessels, for 127,000 teu, at the same time in 2017.
The Loadstar is fast becoming known at the highest levels of logistics and supply chain management as one of the best sources of influential analysis and commentary.
Gold Seeker Closing Report: Gold and Silver Gain Almost 2% By: Chris Mullen, Gold Seeker Report
Gold gained $7.60 to $1336.90 in Asia before it dropped back down to $1318.50 just after this morning’s inflation data was released, but it then soared back higher for most of the rest of trade and ended near its early afternoon high of $1355.50 with a gain of 1.72%. Silver rose to as high as $16.929 and ended with a gain of 1.81%.
John Williams – US Deficit Is Beyond Control Greg Hunter
Published on Feb 13, 2018
Are the Trump tax cuts going to help the economy or hurt it? The answer is both. Economist John Williams explains, “The tax cuts are generally positive. Anytime you cut taxes that is generally a plus for the economy. The problem is the average guy is still not making ends meet. Anything that increases disposable income is a plus. This does not necessarily go to the guys at the lower end of the income scale, but generally there should be a little economic pick up here from it. The problem is what happens to the budget deficit. We just went through the government shutdown and a package that lays things out for the next two years, but it widens the deficit. The deficit is beyond control. We have $100 trillion in unfunded liabilities. That means you need $100 trillion in hand right now to cover the federal obligations going forward. . . . Printing money to meet obligations is what happened in the Weimar Republic in Germany. This happened in Zimbabwe. This kind of thing eventually gives you a hyperinflation. . . . Ongoing budget deficit and debasing of the dollar will give you global selling pressures in the currency markets. . . . We haven’t seen much selling in the dollar, but that is going to change. You are going to see flight from the dollar and flight from the markets as well.”
Join Greg Hunter as he goes One-on-One with economist John Williams, founder of ShadowStats.com.
Global stocks, bond yields and commodities all jumped higher on Thursday while the dollar plunge continued, as investors suddenly seemed to forget the inflation fears blamed for a brutal market sell-off in recent weeks.
Last week's volocaust is a fading, distant memory, and this morning global stocks - albeit without China which is on weekly holiday for the Lunar New Year - continue their relentless surge with the Dow set to open back over 25,000, even as yields rise and the 10Y is fast approaching 3.00%, thanks to a plunging dollar which fell for a firth day, keeping financial condition well lubricated. As a result, global stocks and futures are a sea of green this morning despite growing inflationary noise in the background.
Commenting on the overnight price action, one major bank said it can be briefly summarized as: bearish USD, bearish fixed income, bullish equities, bullish oil. As the trader notes, "We’ve definitely been here before – in fact, it was the consensus trade for 2018 until the recent market rout questioned the move." Therefore there’s certainly a sense of déjà vu as the paradoxical moves in markets continue at least until inflation fears hit the next tipping point and launch the next equity market selloff.
In the meantime, one can scratch their heads: the bank adds that "the bewildering nature of recent price action has become a somewhat familiar feature of markets lately."
One needs just three charts to understand what is going on on most days: futures are up, as they are this morning...
... even if yields are sharply higher, which they also are as the 10Y rises above 2.93%...
... as long as the dollar is tumbling, and financial conditions are looser.
As Reuters notes, economists were struggling to explain the turnaround except for the argument that historically it’s not unusual for stocks and bond market borrowing costs to rise in tandem with a rapidly expanding economy.
Some just blamed the weather and time of year. They speculated that strong U.S. inflation data on Wednesday that many had predicted could reignite the rout was probably distorted. They also said the looming Chinese New Year may have caused Asian traders to square up.
Meanwhile, bond traders increased their expectations for the number of Federal Reserve interest-rate hikes to four by the end of next year after yesterday's blistering CPI report. The inflation figures gave rise to debate among investors and traders on the breakdown in correlations to interest rates, as currency investors focused instead on the U.S.’s twin deficits.
“For me it’s a clear indication that inflation is not as big a threat as people made it out to be over the past couple of weeks,” said Lukas Daalder, chief investment officer at Robeco in Rotterdam. "The trend behind the market is still very strongly pointed upwards. 2017 was a very momentum-driven market, and if that’s still the case, which after yesterday it appears to be, then we will probably see new highs before too long."
Volatility shrank back rapidly too. The VIX index fell all the way back to 18, less than half the 50-point peak touched last week.
* * *
Whatever the reason, the animal spirits were back. However, should the dollar and yields rise at the same time, run.
For now, China is off to enjoy the Lunar New Year and welcome the Year of the Dog, and there’s another celebration in EM FX as the ZAR continues to revel in the resignation of Zuma.
The Stoxx Europe 600 Index took its cue from a rally in the truncated Asian session, to advance for a second day - ignoring the growing, $22 billion Bridgewater short of European stocks - as traders assessed earnings from heavyweights including Nestle and Airbus while eyeing rising bond yields that may be approaching a critical level for the direction of equity markets.
As a result, the Stoxx 600 climbed 0.4%, heading for a weekly gain of ~2%. Airbus advanced 8.9% in the best performance among single stocks on the gauge after the planemaker struck an optimistic tone in its outlook for 2018, promising earnings growth of 20%. Nestle dropped 2.6% after it posted the weakest sales growth in more than 20 years. Elsewhere, South African exposed Old Mutual (+3.8%) and Anglo American (+3.0%) lead the FTSE 100 as South Africa now eyes life-after Zuma with Ramaphosa now appointed as Preisdent. Miners occupy a bulk of the other outperformers in the UK amid movements in the commodity complex with Antofagasta (+2.9%) also lifted after winning approval for a USD 1.1bln revamp of its Los Pelambres copper mine.
In Asia, Australia's ASX 200 (+1.2%) was positive with its biggest movers dictated by earnings releases and as commodity names were underpinned by strength in the complex. Elsewhere, Nikkei 225 (+1.5%) advanced and managed to ignore the latest plunge in the USDJPY, which took out downside stops after Finance Minister Taro Aso said the currency’s strength isn’t abrupt enough to require intervention- as well as a slump in machine orders, while Hang Seng (+1.6%) closed the session as the outperformer in a holiday-shortened session, before it joined mainland China for Lunar New Year celebrations.
In FX, it was all about the ongoing dollar weakness, which persisted pushing the Bloomberg Dollar Index down a fifth day. The dollar tumbled though across the board, including to a 15-month low against the yen of 106.18 yen as worries about the U.S. government’s finances seemed to set again after a White House-led spending splurge and recent corporate tax cuts. That also marked a drop of 3.8 percent from its early February peak near 110.50 yen, while the euro and pound both climbed back above the $1.25 and $1.40 thresholds.
“The story I hear most frequently from people is it’s the re-emergence of the twin deficits,” said RBC Capital Markets head of currency strategy Adam Cole, in London, of the dollar’s persistent weakness. “There seem to be concerns on the U.S. fiscal position and what that implies for the current account.”
The EUR/USD climbed a fifth day, approaching Jan. 25 high of 1.2537, which was the highest since Dec. 2014, while GBP/USD sustains advance over 1.40 on reports of the EU’s softening Brexit stance, set for fourth daily rise. As noted above, the USD/JPY slipped; the yen earlier touched its strongest level since Nov. 2016 versus the dollar on comments from the finance minister dismissing the need for intervention. The South African rand was the biggest gainer versus the dollar among its major peers on news of Jacob Zuma’s resignation; the rand appreciated to its strongest level since Feb. 2015.
Looking at the ongoing Brexit drama, UK PM May is reportedly facing a crisis related to the Brexit border deal, after Northern Ireland power sharing discussions were said to have collapsed. Separately the Telegraph reported that the EU will demand the right to raid financial services firms in Britain after Brexit and hand its regulators sweeping new powers, as Brussels moves to shackle the City of London with red tape after the UK leaves the bloc. Finally, in some good news, the BBC reported that EU diplomats have removed a so-called "punishment clause" from a draft text of the arrangement for the Brexit transition period, the BBC understands. However, it was later reported that the EU denied this was the case...
In the commodities complex, WTI and Brent crude futures trade in close proximity to recent highs seen in the wake of yesterday’ssmaller than expected build in the DoEs and comments from Saudi with prices also supported by the broad softness in the USD. Inmetals, gold prices have also benefitted from the softer USD, although gains are likely capped by the broad-based risk sentiment inthe market. Elsewhere, copper prices have hit their highest level in 10 days amid this morning’s risk environment, while priceaction was relatively limited during Asia-Pac trade given the closure of the Shanghai Futures Exchange for the Lunar New Year holiday.
S&P 500 futures up 0.8% to 2,718.50
STOXX Europe 600 up 0.8% to 377.54
MSCI Asia Pacific up 1.4% to 176.14
MSCI Asia Pacific ex Japan up 1.3% to 578.63
Nikkei up 1.5% to 21,464.98
Topix up 1% to 1,719.27
Hang Seng Index up 2% to 31,115.43
Shanghai Composite up 0.5% to 3,199.16
Sensex up 0.4% to 34,273.84
Australia S&P/ASX 200 up 1.2% to 5,908.99
Kospi up 1.1% to 2,421.83
German 10Y yield rose 2.4 bps to 0.781%
Euro up 0.3% to $1.2492
Italian 10Y yield fell 2.0 bps to 1.795%
Spanish 10Y yield rose 0.6 bps to 1.52%
Brent futures up 0.2% to $64.49/bbl
Gold spot up 0.3% to $1,354.33
U.S. Dollar Index down 0.4% to 88.76
Top Overnight News from Bloomberg
Cyril Ramaphosa faces a tough road ahead as South Africa’s new president after Jacob Zuma’s resignation late Wednesday ended nine years of his scandal-marred administration. Ramaphosa remains acting president until his expected election in parliament later Thursday
U.S. tax authorities have requested documents from lenders and investors in real estate projects managed by Jared Kushner’s family, according to a person familiar with the matter.
Japanese Finance Minister Aso said the yen’s recent move isn’t abrupt enough to warrant intervention causing the yen to climb
A report from Politico that the European Union is looking to ease Brexit transition conditions, helped support the pound
Merkel vows to ensure Germany maintains balanced budget
Japan’s Aso says yen strength isn’t abrupt enough now to intervene
Kuroda says BOJ will continue to take best policy for price target
Australia Jan jobs 16.0k vs 15.0k est; unempl. rate 5.5% vs 5.5% est
Singapore Jan exports -0.3% vs 4.2% est; y/y 13.0% vs 8.9% est
Asian stocks traded higher as the region received a tailwind from US where all major indices finished with firm gains and the DJIA posted its best 4-day performance in almost a decade. ASX 200 (+1.2%) was positive with its biggest movers dictated by earnings releases and as commodity names were underpinned by strength in the complex. Elsewhere, Nikkei 225 (+1.5%) advanced and managed to overlook a firmer JPY and slump in machine orders, while Hang Seng (+1.6%) closed the session as the outperformer in a holiday-shortened session, before it joined its mainland counterparts for Lunar New Year celebrations. Finally, 10yr JGBs were relatively flat with early mild pressure seen amid the uptick in riskier assets, although this was later counterbalanced amid the BoJ’s presence in the market for 1yr-10yr JGBs totalling over JPY 1tln.
Top Asian News
Philippine Central Bank Cuts Reserve Ratio by 1 Point to 19%
Abe Said to Be Likely to Nominate BOJ Governor on Friday
IDG-Backed China Online Credit-Checking Firm Is Said to Plan IPO
Cathay Pacific Supplier Topcast Aviation Is Said to Pursue Sale
European bourses trade higher across the board (Eurostoxx 50 +0.6%) in a continuation of the sentiment seen yesterday on Wall Street and overnight in Asia-Pac trade. On a sector basis, consumer staples underperform following lacklustre earnings from Swiss-titan Nestle (-2.2%), with the index heavyweight subsequently leading the SMI to lag its peers in the region. Elsewhere, South African exposed Old Mutual (+3.8%) and Anglo American (+3.0%) lead the FTSE 100 as South Africa now eyes life-after Zuma with Ramaphosa now appointed as Preisdent. Miners occupy a bulk of the other outperformers in the UK amid movements in the commodity complex with Antofagasta (+2.9%) also lifted after winning approval for a USD 1.1bln revamp of its Los Pelambres copper mine. Elsewhere, Standard Life (-4.9%) sits at the bottom of the FSTE 100 after Scottish Widows and Lloyds sent notices to co. to terminate investment management relations. Finally, earnings dominate the state of play in the CAC with Airbus (+9.3%), Schneider Electric (+3.6%) and CapGemini (+2.5%) all lifted by encouraging earnings.
Top European news
Dalio Causes Stir With $18 Billion Surge in European Short Bets
Austrian Bitcoin Scam May Affect Over 10,000 Users, Presse Says
In the Age of Brexit, Events Manager RELX Opts for London Base
In FX, Japan’s Finance Minister Aso has given the green light for Jpy bulls to charge on, and 106.00 vs the Usd is now within striking distance given little in the way of technical support until 105.85 vs the latest 106.20 low. Moreover, all other G10 rivals are eyeing recent peaks vs the Greenback with Cable just eclipsing the 1.4067 level posted after the BoE’s hawkish policy guidance shift on February 8th, while Eur/Usd almost challenged Fib resistance at 1.2518 ahead of the 1.2537 year to date high before slipping back below 1.2500. Usd/Chf is toppy around the bottom of a 0.9300-0.9230 range, while Nzd/Usd has rebounded above the 0.7400 handle and Aud/Usd is over 0.7950 despite mixed jobs data overnight and ahead of RBA Governor Lowe orates later today. Usd/Cad relatively steady albeit sharply down from Wednesday’s post-US CPI data spike highs and sub-1.2500 amidst ongoing NAFTA uncertainty and awaiting a speech from BoC Deputy Governor Schembri. All this leaves the Dollar Index below 89.00 again and vulnerable against a deeper set-back towards 2018 lows under 88.50, especially as the Usd continues to suffer broader losses with the likes of Usd/Zar sliding towards 11.6400 in wake of the resignation of Zuma as SA President with immediate effect.
In the commodities complex, WTI and Brent crude futures trade in close proximity to recent highs seen in the wake of yesterday’s smaller than expected build in the DoEs and comments from Saudi with prices also supported by the broad softness in the USD. In metals, gold prices have also benefitted from the softer USD, although gains are likely capped by the broad-based risk sentiment in the market. Elsewhere, copper prices have hit their highest level in 10 days amid this morning’s risk environment, while price action was relatively limited during Asia-Pac trade given the closure of the Shanghai Futures Exchange for the Lunar New Year holiday.
Looking at the day ahead, the January PPI and IP, February empire manufacturing, February Philly Fed PMI, February NAHB housing market index and the latest weekly initial jobless claims readings are all due in the US. In Europe Q4 employment data in France and the December trade balance for the Euro area are due. The ECB’s Mersch and Praet are also slated to speak at an event in Paris.
US Event Calendar
8:30am: Empire Manufacturing, est. 18, prior 17.7
8:30am: Initial Jobless Claims, est. 228,000, prior 221,000; Continuing Claims, est. 1.93m, prior 1.92m
8:30am: PPI Final Demand MoM, est. 0.4%, prior -0.1%; Ex Food and Energy MoM, est. 0.2%, prior -0.1%
8:30am: PPI Final Demand YoY, est. 2.4%, prior 2.6%; Ex Food and Energy YoY, est. 2.0%, prior 2.3%
8:30am: Philadelphia Fed Business Outlook, est. 21.6, prior 22.2
9:15am: Industrial Production MoM, est. 0.2%, prior 0.9%; Manufacturing (SIC) Production, est. 0.25%, prior 0.1%
10am: NAHB Housing Market Index, est. 72, prior 72
4pm: Total Net TIC Flows, prior $33.8b; Net Long-term TIC Flows, prior $57.5b
DB's Jim Reid concludes the overnight wrap
Happy Boxing Valentine’s Day. My wife went to bed at 7pm last night with the twins to desperately try to catch up on sleep while I watched a rampant Liverpool win 5-0 away from home in Europe on the telly, with Bloomberg TV on my iPad alongside me to catch up with the post CPI rally. A question for long time married readers though is when does romance come back into a marriage after having children?
Anyway yesterday was one of those days where having the most important data release ahead of time probably wouldn’t have helped you much. In fact it may have helped you lose money in risk. The well above expectations number for CPI was negative for bonds - as you would have expected - but equities rallied hard (S&P 500 +1.34%) after a large sell off in the minutes following the release (S&P futures slumped c.-1.8%). The price action yesterday perhaps tells us that the normalisation from last week’s vol shock is more powerful for markets for now than the data. However if this inflation trend holds (as has been and still is our expectation) we’re in for some real fun and games in markets in 2018 once the dust settles.
To be fair, weaker US retail sales (more details later) may have confused the story somewhat but it was all about inflation. For core, once we added in the extra decimal places the number came in at +0.349% putting clear air over the consensus estimate for just +0.2% and nearly rounding up to 0.4% MoM. In fact that was the largest monthly climb since March 2005 and kept the YoY steady at +1.8% (+1.7% expected). The three-month annualized rate also jumped to the highest since 2011 (+2.9%) and the six-month annualized rate also hit the highest since 2008 (+2.6%). The underlying components appeared to also affirm that inflation was relatively broad-based while there was a similar beat at the headline level (+0.5% mom vs. +0.3% expected).
Treasury yields marched higher with 10 year yields +7.3bp higher on the day to 2.903%, but c9bp up from just before the release. 2 and 30yr yields were up 6.1 and 5.1bps on the day. A reminder that yesterday we published a note (link) showing asset prices in the first and second half of the 1960s using our economists’ framework that there are big similarities between the inflection point on inflation in the 1960s and the current day.
In terms of US equities, sectors such as Banks (+2.55%), tech (+1.95%) and energy (+1.40%) led the rally. The VIX also swung c7pts intraday to close 5.7pts lower at 19.26. As we said earlier perhaps this current vol normalisation trend held sway yesterday but if inflation continues like this it feels impossible for us to imagine vol settling back down around 10 for a persistent period. We are likely to have some big trading days this year.
This morning in Asia, markets are extending on the positive US lead. The Nikkei (+1.21%) and Hang Seng (+1.97%) are up as we type, while the Chinese markets are now closed until the 21st for the lunar New Year holidays. After the bell in the US, Cisco’s share price jumped c7% after guiding to higher than expected sales for the current quarter and plans to boost its share buybacks by $25bn. Elsewhere, the YEN rose for the fourth straight day (+0.4%), partly helped by Japan’s Finance minister Aso prior comments where he noted “the current situation doesn’t warrant special intervention. The Yen isn’t rising or falling abruptly”.
Now recapping other markets performance from yesterday. European bourses initially traded lower post the US CPI print, but recovered throughout the day to be up c1%, partly aided by sound corporate results and supportive GDP prints. The Stoxx 600 (+1.07%), DAX (+1.17%) and FTSE (+0.64%) were all up and only the energy sector was in the red within the Stoxx. The VSTOXX fell 20% to 20.71. Over in government bonds, 10y Bunds and Gilts yields rose 0.7bp and 2.1bp respectively, while peripherals partly recovered from the prior day losses with yields down 1-6bp. Turning to currencies, the US dollar index weakened for the third consecutive day (-0.65%), while both the Euro and Sterling gained c0.8%. Elsewhere, the South African Rand was up 2.1% following President Zuma’s resignation. In commodities, WTI oil rebounded 2.38% to $60.60/bbl, in part as the latest EIA report showed US crude stockpiles rose less than expected last week. Precious metals gained c1.6% (Gold +1.59%; Silver +1.67%) and other LME base metals increased as the USD continues to fall (Copper +2.50%; Zinc +2.80%; Aluminium +1.80%).
Away from the markets, President Trump said he supports a 25c per gallon increase in federal gasoline and diesel taxes to help pay for upgrading roads, bridges and other public works. So perhaps there is more potential to fund his $1.5bln infrastructure plans, although Republican Senator Grassley noted the tax hike was unlikely to come up for a vote in the Senate and that “he’ll never get it by (Senator) McConnell”.
Staying in the US, our economists have been highlighting the upside risks to their growth outlook for some time. Given the recent passage of a bipartisan budget agreement provides for c$300 billion in additional discretionary spending over the next two years, they have now raised their 2018 real GDP growth forecast (Q4/Q4) to 2.9% (+0.3ppt) and the 2019 forecast rises to 2.5% (+0.4ppt). Following on, stronger growth should put further downward pressure on the unemployment rate, which they now expect will trough at 3.2% in 2019, about 1.5ppt below NAIRU. On rates, their views are unchanged and they continue to expect four rate hikes this year and three next year. But recent developments have tilted the balance of risks to the upside.
Now turning to some of the Brexit headlines. Foreign secretary Boris Johnson seemed to support the status quo during the Brexit transition period by noting “things will remain as they are”. However, he does make a case for a clean break with the EU – leaving the single market and customs union and pursuing flexibility for the UK to choose which EU rules it wants to keep post Brexit. Elsewhere, he noted “Theresa” was the right PM for the UK to lead Brexit talks while also indicating “let’s not go there” in terms of a potential second referendum on Brexit. On the other side, the EC’s Juncker’s response was quite colourful, he noted some in British politics “are against the truth, pretending that I’m a stupid, stubborn federalist…that I’m in favour of the EU superstate”, but “I’m strictly against (a superstate)….we aren’t the United States of America, we are the EU…”.
In Germany, Ms Merkel reiterated that the “black zero” fiscal prudence is the trademark of the CDU and “it will remain so in the future”. She noted that “if the SPD occupy the Finance Ministry in the future, our budget lawmakers will have to be even more careful that they don’t pile on new debt”.
Before we take a look at today’s calendar, we wrap up with other data releases from yesterday. In the US, the core CPI for January was above market at 0.3% mom (vs. 0.2%) as discussed earlier. Price increases were well spread across the core CPI, but part of the CPI gain was from a 1.7% monthly increase in apparel prices, the biggest increase since 1990. Notably, retail sales missed expectations. In the details, headline retail sales was -0.3% mom (vs. +0.2% expected). Ex auto and gas sales (-0.2% mom vs. +0.3%) and control group sales (0.0% mom vs. +0.4% expected) were also accompanied by downward revisions to December sales. The data certainly suggested a weaker looking consumption profile to the start the year and will likely cause the street to reassess growth forecasts the current quarter. Indeed the Atlanta Fed slashed their Q1 forecast to 3.25% from 4% but be slightly careful as their could have been some post hurricanes payback here. Elsewhere, December business inventories slightly beat at 0.4% mom (vs. 0.3% expected).
The Euro area’s 4Q GDP was in line at 0.6% qoq and 2.7% yoy. Across the countries, Germany’s 4Q GDP was also in line and solid at 0.6% qoq while Italy was slightly lower than expected at 0.3% qoq (vs. 0.4%). Elsewhere, the Euro area’s December IP was above market at 0.4% mom (vs. 0.1%), while Germany’s final reading of the January CPI was unrevised at 1.4% yoy. In Sweden the Riksbank left its policy rate at -0.5% and continued to forecast a gradual tightening from the second half of this year.
Looking at the day ahead, the January PPI and IP, February empire manufacturing, February Philly Fed PMI, February NAHB housing market index and the latest weekly initial jobless claims readings are all due in the US. In Europe Q4 employment data in France and the December trade balance for the Euro area are due. The ECB’s Mersch and Praet are also slated to speak at an event in Paris. Nestle will report earnings.
Gold Seeker Closing Report: Gold and Silver End Higher In Mixed Trade By: Chris Mullen, Gold Seeker Report
Gold gained $4.90 to $1357.00 in late Asian trade before it drifted back to $1348.60 in London and then bounced back above unchanged in early New York trade ahead of another dip into midday, but it then rallied back higher into the close and ended with a gain of 0.1%. Silver swayed between $16.976 and $16.648 and ended with a gain of 0.06%.
WASHINGTON, Feb 16 (Reuters) – The Trump administration on Friday said it would offer the largest oil and gas offshore auction in U.S. history on March 21 for areas in federal waters off the Gulf Coast, less than a year after a similar sale yielded little corporate interest.
The Interior Department said it would offer 77.3 million acres (31.3 mln hectares) offshore Texas, Louisiana, Mississippi, Alabama and Florida for oil and gas development, an auction that includes all available unleased areas in the Gulf of Mexico. The blocks are from 3 to 231 miles (5 to 372 km) offshore and in waters 9 to 11,115 feet (3 to 3,390 meters) deep.
The department announced the auction in October, without an exact date. The sale is in support of President Donald Trump’s so-called America First Offshore Energy Strategy, which aims to reduce energy imports and boost jobs in the industry.
But offshore drilling is expensive in a time of relatively low oil prices held in check partially by plentiful supplies of onshore petroleum, which is cheaper to produce.
A lease sale in August last year got a tepid response from oil companies. The offer of 73 million acres received $121.14 million in high bids for 90 tracts covering 508,096 acres (205,619 hectares).
Bureau of Ocean Energy Management spokesman John Filostrat has said that Interior hopes for “a healthy number of bids, more so than we did in August.”
(Reporting by Timothy Gardner Editing by Marguerita Choy)
Loan Shark Nation: Forcing Our Kids To Choose Between Student Loans And Everything Else
By: John Rubino
-- Published: Friday, 16 February 2018
It’s mid-winter, which means millions of high school seniors are winding up their childhoods and planning for what comes next. For many this next stage is college.
But in yet another example of how we baby boomers have rigged the system in our favor at the expense of pretty much everyone else, student loans – barely necessary when most boomers graduated 40 years ago – have become a life-defining problem for our kids and grandkids.
A college degree is now so expensive that for most students it requires massive borrowing. But the starting salary in most fields has risen so slowly that growing numbers of indebted grads can’t reduce – let alone pay off – their loans. From today’s Wall Street Journal:
Jumbo Loans Are New Threat in U.S. Student Debt Market
During the housing boom of the 2000s, jumbo mortgages with very large balances became a flashpoint for a brewing crisis. Now, researchers are zeroing in on a related crack but in the student debt market: very large student loans with balances exceeding $50,000.
A study released Friday by the Brookings Institution finds that most borrowers who left school owing at least $50,000 in student loans in 2010 had failed to pay down any of their debt four years later. Instead, their balances had on average risen by 5% as interest accrued on their debt.
As of 2014 there were about 5 million borrowers with such large loan balances, out of 40 million Americans total with student debt. Large-balance borrowers represented 17% of student borrowers leaving college or grad school in 2014, up from 2% of all borrowers in 1990 after adjusting for inflation. Large-balance borrowers now owe 58% of the nation’s $1.4 trillion in outstanding student debt.
“This is comparable to mortgage lending, where a subset of high-income borrowers hold the majority of outstanding balances,” write Adam Looney of Brookings and Constantine Yannelis of New York University.
“A relatively small share of borrowers accounts for the majority of outstanding student-loan dollars, so the outcomes of this small group of individuals has outsized implications for the loan system and for taxpayers,” the authors say.
The problem is particularly acute among borrowers from graduate schools, who don’t face the kinds of federal loan limits faced by undergraduate students. Half of today’s big balance borrowers attended graduate school. The other half went to college only or are parents who helped pay for their children’s education.
Grad school borrowers tend to be among the best at paying off student debt because they typically earn more than those with lesser degrees. But the rising balances unearthed in the latest study suggest that pattern might be changing.
Overall across the U.S., one-third of borrowers who left grad school in 2009 hadn’t paid down any of their debt after five years, compared to just over half of undergraduate students who hadn’t, federal data show.
The findings on graduate schools are particularly noteworthy because the government offers little information on the loan performance of grad students, who account for about 14% of students at universities but nearly 40% of the $1.4 trillion in outstanding student debt.
Now, a 25-year-old with massive student debt probably doesn’t qualify for a mortgage. But they might be able to get a car loan, which partially explains why auto loans are rising right along with student loans. A car is necessary to get to work, and borrowing is the only way to get a car if a big piece of your income is going towards student loan interest.
So that’s our world: Stocks, bonds and real estate – long since acquired by baby boomers who graduated college with minimal student debt and therefore had the cash flow to invest – are way up, making us the richest generation ever. Meanwhile our kids and grandkids are going ever deeper in debt with no apparent way out.
Of course there is an eventual way out: Someday they’ll inherit our manipulated wealth. But in the meantime their inability to cover our Social Security and Medicare is forcing the government to pick up the slack with trillion-dollar deficits as far as the eye can see, more or less offsetting the value of our estates.
The only real solution? A massive devaluation that shifts resources away from owners of financial assets like bonds and towards debtors who get to discharge their loans with cheaper currency. All roads, in short, lead to currency crisis — and soaring gold and silver.
JPMorgan has more silver than anyone else in recent history. Their COMEX position is more than 133 million ounces, says James Anderson of SDBullion.
In this week’s SD Metals & Markets with Elijah Johnson, Eric Dubin, and James Anderson:
Is JPMorgan giant silver position used for price manipulation?
If silver is being manipulated, and the manipulation gets exposed, then be ready for vertical moves in silver.
Why own precious metals?
Why is the U.S. dollar falling when interest rates are rising?
Idaho says investors don’t have to pay state capital gains tax on gold and silver.
Charles Hugh Smith – All Currencies Will See Catastrophic Drop Greg Hunter
Published on Feb 17, 2018
Financial writer Charles Hugh Smith sees one very big problem coming at us, and that is a dramatic loss in buying power of the U.S. dollar, but it’s not just the dollar. According to Smith, “All these currencies, there is nothing backing the currencies except the government’s force. That’s the yen, the euro, the dollar and the Chinese yuan. They are all going to have a catastrophic drop against real assets because they are all based on too much leverage, too much debt, too much money being pumped into the financial system that ends up in unproductive speculation. You can’t grow your debt at six times the rate of your economy. In other words, if you are creating $6, $8 or $10 of debt to eke out $1 of low productivity growth, you are dooming your currency, and all currencies are doing the same thing. All the currencies are going to take a big drop at some point . . . relative to real stuff. Real stuff is commodities we need: water, grains, food, oil, natural gas and, of course, precious metals. Everybody knows they have been money for 5,000 years, and I personally feel there is a role for crypto currencies.”
Toxic Case: Dutch shipping bosses in court over selling vessels with harmful waste RT
Published on Feb 19, 2018
A Dutch shipping group is facing accusations of selling a number of vessels with harmful waste to scrap-yards in Turkey and India adding to environmental and health problems there and violating EU laws.
With the US on holiday for President’s Day and many Asia markets still closed for Lunar New Year holidays, it has been a quiet start to the week, even as last week's dollar turbulence has resumed, while S&P futures are doing their best to levitate without anyone manning the controls.
World stocks were set for a sixth session of gains on Monday, extending a recovery from a selloff sparked by fears of creeping inflation and higher borrowing costs.
The MSCI world index rose 0.1% in Monday trading. The index has recovered nearly half of its losses from late January to last week’s low, posting a gain of 4.3% last week. That was its best weekly performance since December 2011.
“Market confidence often attracts even more market confidence, and that is what we are seeing at the moment,” said CMC Markets' David Madden. “The cooling of the volatility index (VIX) has given some dealers the green light to buy back into the stock market, and while the fear factor keeps sliding, it is likely equity benchmarks will continue to push higher.”
Asian stocks rose for the 6th consecutive day, with Japan and South Korea sharaes advancing in holiday-thinned trade as the MSCI Asia Pacific index rose as much as 0.8% before trimming gains to 0.35%. Japan's Topix rose as much as 2% after Japan’s exports beat estimate.
European shares struggled to carry forward last week's momentum after rebounding from a selloff with their biggest weekly gain in 14 months. The Stoxx Europe 600 Index dipped -0.2% after erasing modest opening gains amid disappointing earnings reports, while a strong euro capped potential gains among European exporters.
In company specific news, Reckitt Benckiser fell -5% after posting its first-ever year of stagnant sales. Daimler sank -2% after US investigators said they are looking into whether the company used illegal software to cheat emissions tests on diesel vehicles in the US. Reports suggest the existence of documents indicating that one software function on Daimler diesel vehicles turned off the car's emissions control system after driving just 26 km. Swiss Re rose on news Softbank was seeking to join the company's board to influence how the reinsurer manages its $160BN in investments. Discussion is centred on a deal where Softbank would become an anchor shareholder in the company with a 20% to 30% stake while gaining multiple seats on the board. European steel companies including ArcelorMittal, Outokumpu and Tenaris climbed after Friday's U.S. commerce department revealed recommendations to impose tariffs or quotas on imports of aluminum and steel, and China said it reserves the right to retaliate.
The dollar swung around from losses to gains and back to losses; the yen retreat from a 15-month high even as data showed Japan’s exports and imports grew strongly in January from a year earlier in a sign the economy continues to expand. As a result, the USDJPY rebounded as intraday traders who sold earlier, bought back after the Nikkei 225 closed 2 percent higher, boosting risk sentiment. The Bloomberg Dollar Spot Index recouped early losses as the greenback’s gains vs yen helped offset its decline against the Aussie and kiwi which were buoyed by commodity prices.
The U.S. currency has been weighed down by a barrage of factors, including worries about widening U.S. trade and budget deficits and speculation Washington might pursue a weak dollar strategy. There is also talk that foreign central banks may be reallocating their reserves out of the dollar.
* * *
Treasury futures were little changed while Australian sovereign bonds hold onto opening gains with 10-year yield four basis points lower. 10Y Treasuries yield closed at 2.87% on Friday, after rising to a four-year high of 2.944% last week. Treasuries are not trading Monday due to the holiday in the U.S.
Following today's holiday respite, the U.S. Treasury will open the borrowing floodgates, and it’ll be up to bond traders to signal how much that extra supply will cost American taxpayers. The Treasury will pack in auctions totaling $258 billion this week, including record-sized sales of three- and six-month bills. With little in the way of significant economic data on the schedule, the sales will provide the clearest gauge yet of how steeply borrowing costs may rise.
Greek government bond yields dipped after a ratings upgrade from Fitch that highlighted improving sentiment towards the indebted southern European state. That marked an outperformance of euro zone peers, with yields across the currency bloc creeping higher in the absence of any fresh drivers.
WTI crude climbs fourth day, topping $62.50; Brent crude rose 0.3 percent to $65.05 per barrel. Gold gained 0.1 percent to $1,348.05 an ounce. Bitcoin rose back over $11,000 on Monday morning, rebounding more than 50% from recent lows.
Today sees the vote for the next Vice-President of the ECB (effectively Draghi’s deputy) as the highlight. It’s a two horse race between Spain’s Luis de Guindos (Spanish finance minister) and Ireland’s Philip Lane (governor of the Irish Central Bank) with the FT reporting that sources suggest the Spaniard is favourite. There is some controversy about his candidacy as he’s not an economist and there are fears that a transitioning political figure will weaken the image of the bank’s independence.
The minutes of the Fed’s last policy meeting, held amid the equities tumble on Jan. 30-31, are due on Wednesday. Besides the outlook on rates, markets will be keen to see what, if anything, the Fed makes of the gyrations in markets.
Top Overnight News
President Trump spent much of his weekend hammering the FBI, Democrats, Robert Mueller’s investigation and his own national security adviser over Russia’s efforts to sway the 2016 election. Excepted from the criticism -- Russia
Theresa May will temporarily set Brexit aside and try to repair her image with young voters with a speech on education, an issue where the opposition has the upper hand; As May retreats to the countryside with her Cabinet to thrash out differences on Brexit, it’s starting to become clearer what the prime minister wants the divorce to look like. Some in Brussels will call it cherry- picking, but May wants to stay very close to the EU in some areas, while breaking free in others
An historic expansion in U.S. borrowing during a period of economic growth, alongside rising bond yields, will cause a surge in the cost of servicing American debt, according to Goldman Sachs
Rick Gates said to plead guilty, may testify against Manafort: LA Times
Japan’s trade recovery powered into 2018, with exports and imports registering strong growth. The increase in imports resulted in the first monthly trade deficit since May 2017; Japan Jan trade balance -943.4 billion yen vs -1.0 trillion yen estimate
Latvian central bank Governor Rimsevics, a member of the ECB’s governing council, was detained by the anti-graft bureau in a flurry of actions by officials
Iraq’s political risk ranks among the highest in the world. A four-year war against the Islamic State left parts of entire cities in ruins. Corruption runs rampant. And its debt produces returns quadruple the average of peers
Fed’s Powell has appointed monetary policy specialists Jon Faust and Antulio Bomfim as senior advisers, according to people familiar; Faust advised advised Yellen and Bernanke, Bomfim is a long-term economist at the Fed’s monetary affairs division
Italy: Berlusconi (Forza Italia) and Salvini (Northern League) both failed to show up at an event in Rome Sunday at which they had been invited to sign a pledge to remain faithful to the center- right coalition
China says proposed U.S. tariffs groundless; reserves right to retaliate
Singapore to raise goods and services tax to 9% from 7% in 2021-2025
U.K. Feb Rightmove house prices 0.8% vs 0.7% prev, y/y 1.5% vs 1.1% prev
DB's Jim Reid concludes the overnight wrap
Don’t expect markets to require too much energy today as the US is off for President’s Day. Today does see the vote for the next Vice-President of the ECB (effectively Draghi’s deputy) as the highlight. It’s a two horse race between Spain’s Luis de Guindos (Spanish finance minister) and Ireland’s Philip Lane (governor of the Irish Central Bank) with the FT reporting that sources suggest the Spaniard is favourite. There is some controversy about his candidacy as he’s not an economist and there are fears that a transitioning political figure will weaken the image of the bank’s independence. So that’s the intrigue for today.
The rest of the week isn’t really that overloaded with data. Wednesday seems to be the big day with the flash February PMIs the focal point with manufacturing, services and composite readings due in Europe and the US. As a reminder, the January manufacturing reading for the Euro area came in at an impressive 59.6, albeit slightly down from the highs above 60 in December and November last year. The consensus is for another small pullback to 59.2 on Wednesday, while the composite is expected to edge down to a still solid 58.4 from 58.8. Outside of this Wednesday sees the monthly U.K. employment release with eyes on wages as the BoE gets closer to their next hike. FOMC minutes from the January meeting will be a focus later that day but it will be outdated news given it occurred before the higher AHE’s and CPI/PPI prints and before the market sell-off. The other highlight later in the week will be Friday's release from the Fed of the semi-annual monetary policy report to Congress, which lays the foundation for Fed Chair Powell's semiannual testimony on the 28th of February. For the rest of the week ahead see the end of today’s note for the full preview.
Back on Friday, the US Commerce department proposed that the US should impose tariffs or quotas on imports of steel and aluminium. One of the options was a 24% global tariff on steel imports and 7.7% duty on aluminium imports. The news contributed to a 4.51% rally in the steel sector within the S&P and a 2% rise in aluminium. Looking ahead, President Trump has until mid-April to decide on potential actions. In terms of other initial responses, China’s Ministry of Commerce has noted that it reserves the right to retaliate if the tariffs are imposed, while Germany’s acting economy minister Zypries said “we don’t share the assessment that steel imports from Europe…might threaten US national security”, “so there’s no basis for any unilateral US import restriction on steel”.
Staying in the US, the S&P initially traded c0.9% higher during the session but pared back gains to close +0.04% as news broke that Special Counsel Mueller had charged 13 Russians and three Russian entities with conspiring to interfere in the 2016 US election. That said, the S&P was still up 4.3% for the week while now ‘only’ 4.9% down from its all-time high in late January. The VIX rose marginally and for the first time in six days (+1.7% to 19.46). In Europe, the Stoxx 600 was up for the third day with all sectors in the green (+1.09%, +3.3% for the week), while the DAX (+0.86%) and FTSE (+0.83%) also advanced.
This morning in Asia, market are trading higher with the Nikkei (+1.80%), Kospi (+0.59%) and ASX 200 (+0.64%) all up while other key bourses are closed for the lunar New Year holidays. Datawise, Japan’s January trade deficit was smaller than expected (-943bn Yen vs. -1trn Yen expected) with exports growing above expectations (12.2% yoy vs. 9.4% expected) and outpacing import growth of 7.9% yoy.
Back to Friday, Nick Burns in our team published a Credit Bite called “The Resilience of Loans”: In the aftermath of the recent inflation induced spike in volatility he analysed the impact it has had on the relative performance of HY bonds and leveraged loans. One of the key relative value views in our 2018 outlook was that loans would fare better than bonds if we did indeed see an inflation/ rising yields led move higher in volatility that puts pressure on credit spreads. You can download the report here.
Staying with our team, Michal Jezek published a one-pager called “IG Bond Strategy Charts & Comment:Outflows Hit Credit Funds” which provides charts and short commentary on the latest IG bond fund flows and puts them in the broader context of flows in other asset classes. You can download the report here.
Now briefly recapping other markets performance from Friday. Government bonds firmed for the first time in three days, with core bond yields down 4-7bp (UST 10y -3.4bp; Bunds -5.7bp; Gilts -6.4bp) while peripherals yields also fell 4-8bp. Turning to currencies, the US dollar index strengthened for the first time in five days (+0.57%), while the Euro and Sterling fell 0.80% and 0.52% respectively. In commodities, WTI oil was up 0.55% to $61.68/bbl. Elsewhere, precious metals weakened c1% (Gold -0.50%; Silver -1.33%) and other LME base metals broadly advanced, in particular aluminium (Zinc +0.14%; Copper +0.71%; Aluminium +1.99%).
Now onto Brexit, the EU negotiator and former Belgium PM Guy Verhofstadt noted a Brexit trade deal with the EU is unlikely to be fully finalised before March 2019. Instead, he said “…what is possible…will be the withdrawal agreement. (Then) inside that withdrawal agreement (is) also an agreement on the transition”, which describes what the future relationship will be. This “annex” will then allow both sides to clarify the trade deal details over the two year transition period. Elsewhere, he did not think a bespoke agreement was possible, noting “….there can be not a type of saying….that we like, this is not interesting for us…”
Over in Germany, the new SPD leader Ms Nahles noted “I’m convinced we will get a majority” approvals from 464,000 SPD members to form a coalition government with Ms Merkel’s bloc, although conceded that we “…don’t have a plan B”.
Before we take a look at this week’s calendar, we wrap up with other data releases from Friday. In the US, the February Uni. of Michigan consumer sentiment index was above market and the second highest since 2004 (99.9 vs. 95 .5 expected). In the details, inflation expectations were unchanged mom, with the 1 and 5 year-ahead expectation at 2.7% and 2.5% respectively. The January housing starts (1,326k vs. 1,234k) and building permits (1,396k vs. 1,300k) were also both above market, with the latter up 7.4% yoy and at a fresh cycle high. Elsewhere, the January import index (1% mom vs. 0.6%) and export index (0.8% mom vs. 0.3%) were both above expectations. Factoring in the above, the Atlanta Fed now estimate 1Q GDP growth of 3.2% saar, while the NY Fed expect 3.1% saar. In the UK, January core (ex-auto) retail sales was below market at 0.1% mom (vs. 0.6% expected) and 1.5% yoy (vs 2.4% expected).
With US markets shut for Presidents' Day, expect it to be a pretty quiet start to the week with mainly second tier data releases due including February house price data in the UK and the Euro area current account reading for December. Away from that, Euro area finance ministers are expected to vote for the next ECB vice-president position, as well as debate Greece's bailout.
Just hours after the Trump administration received a green light from the Commerce Department to impose steep tariffs on aluminium and steel imports on national security grounds across the board, but especially on China and Russian, China threatened with immediately retaliation in the latest escalation of the growing trade war between the two superpowers.
In an unexpected announcement on Friday, commerce secretary Wilbur Ross recommended a possible global tariff of at least 24% on imports of steel and 7.7% on aluminum after investigations into trade in both metals determined that import surges seen in recent years “threaten to impair [US] national security.”
Responding to the unprecedented Commerce recommendation which many interpreted as the first official salvo in global trade wars, Wang Hejun - chief of the trade remedy and investigation bureau at China’s Ministry of Commerce - said imposing tariffs on such grounds was reckless.
Quoted by the FT, he said that "The spectrum of national security is very broad and without a clear definition it could easily be abused," and added that “if the final decision from the US hurts China’s interests, we will certainly take necessary measures to protect our legitimate rights."
For now the threat of "nuclear" trade war seems to be contained: analysts say Beijing is wary of escalating any trade disputes for fear of damaging its export-dependent economy, and so will focus any retaliation on specific sectors — most likely particular agricultural goods such as soybeans, for which China is the US’ largest export market. Earlier this month, Beijing launched an anti-dumping investigation into US exports of sorghum, an animal feed.
For the moment I think China will just put out harsher rhetoric,” said Bo Zhuang, an economist at consultancy Trusted Sources. “Agricultural sector retaliation is more likely since (China’s) food price inflation is low. The next possible step will be going on further with a soybean and corn investigation."
Still, expectations of only a "cold" trade war may soon be dashed, as Friday's action shows that trade hardliners in the Trump administration are eager to take action against China "after months of internal debate" according to the FT.
One option presented by the commerce department on Friday was a targeted tax on steel and aluminium imports from China and other countries like Brazil and Vietnam. A third option would impose quotas to reduce metals imports from all countries to far below the level of 2017.
But the recommendations illustrate how Mr Trump’s desire to hit China, which the US steel industry blames for a collapse in metal prices in recent years, may result in collateral damage for US allies and invite retaliation.
Meanwhile, as China plans its response, European officials in Brussels are already drafting their retaliatory measures aimed at politically sensitive US products like Kentucky bourbon and Wisconsin dairy products, which will be implemented if Trump opts for a global quota or tariff system.
As a reminder, Trump has until April to decide whether to adopt any of the recommendations, Ross said. The long-awaited results of the “Section 232” investigations into aluminium and steel imports caused shares in major US producers to rise sharply on Wall Street on Friday, while companies in the materials sector slumped.
In what appeared to be a jusitification of imminent trade wars, Trump said he was convinced that imposing tariffs would “create a lot of jobs” during a meeting with members of Congress, and dismissed warnings that such measures in the past had hurt more than they had helped by causing higher costs for many companies.
“I want to keep prices down but I also want to make sure that we have a steel industry and an aluminium industry and we do need that for national defence,” Mr Trump said. “If we ever have a conflict we don’t want to be buying steel [from] a country we are fighting.”
In its report, the commerce department stated that Canada is the top supplier of both metals to the US, suggesting the NAFTA member may - ironically - suffer the most from any new protectionist measures. The northern US neighbour has long been treated as part of the US defense industrial base along with countries like the UK and Australia. But whether Canada or any other allies would be exempted from the proposed tariffs remains unclear, according to the FT.
As for China, it was "only" the fourth-largest supplier of aluminum to the US in 2017, and accounted for less than 10% of imports; it was also the 11th-largest steel supplier over the same period, with a roughly 2% share of US imports.
The US commerce department argued that the rapid rise in China’s production of steel and aluminium in recent years — it now produces more than half of global output of both metals — has depressed international prices.
While the threat of a sharp escalation in trade tensions remains low for now, in commentary from SMBC Nikko Securities, the bank said that the proposal to restrict steel imports "could lead to a chain of higher tariffs imposed by other nations" resulting in dramatic imbalances in global commodity trade and prices.
While the brokerage expects direct impact on Japanese steel industry to be limited, it admits it is difficult to gauge the effect on international markets given details yet to be decided, and adds that the risk is that other countries shipping steel to U.S. begin selling cheaply on Japan’s export markets; in effect a sharp escalation to trade wars in which countries not targeted by the US scramble to take away market share from dominant trade partners.
By Jonathan Saul and Maiya Keidan LONDON, Feb 19 (Reuters) – Forced to abandon ship after mistiming their investments five years ago, hedge funds are venturing back in a bid to profit from growing global trade flows.
Around 90 percent of traded goods by volume are transported by sea and global shipping sectors, including dry bulk, are on course for a recovery this year after a near-decade long crisis, ratings agency S&P said in a report last week.
The IMF has forecast GDP growth at 3.9 percent for 2018 and 2019 versus 3.7 percent last year, which analysts say is boosting sentiment for shipping.
As a result, many hedge funds are loading hundreds of millions of dollars into the sector, putting behind them losses suffered in 2013 when, based on forecasts of improved world economic growth, they piled in to shipping debt and equity.
That strategy hit the rocks for many investors when the shipping companies they had put their faith in over-ordered new vessels and saw their shares fall by as much as 80 percent.
“They all came in too early,” Tor Svelland, chief investment officer at hedge fund Svelland Capital, said, adding that the market is different this time around as capacity is shrinking.
“It looks like the new building market will not be able to ‘kill’ the positive demand story. This is a dream scenario.”
This time round it is not only shipping stocks, but also freight forward agreements (FFA), which allow investors to take positions on freight rates at a point in the future, that are more widely used to get into what is still a niche sector.
For Demetris Polemis, a portfolio manager at $250 million Guernsey based hedge fund Paralos Fund, the tide is turning and with less chance of a shipping glut there are now “some interesting opportunities for investors.”
Another new feature are exchange traded funds which U.S. filings show are being set up to focus on shipping investments. These would allow hedge funds and retail investors to access FFAs, Polemis said.
“A lot of people have been talking about shipping recently. Last year, a few funds were setting up bespoke products,” said a London-based hedge fund investor.
One example is Tufton Ocean, a hedge fund and private equity firm, which started a long-only strategy run solely for a U.S.-based investor in January.
The wave of new money is clear from data last week which showed that hedge funds bet at least $675 million on shipping stocks in the fourth quarter of 2017.
Hedge fund participation in 14 of the top shipping stocks reached 29 percent in the fourth quarter, up from 23 percent in the previous three months, data from U.S. Securities and Exchange Commission filings compiled by Symmetric showed.
And activists, who buy up shares in undervalued companies and agitate for change to drive up the share price, have also been increasingly moving into shipping stocks.
Activist hedge funds made public demands of five shipping companies in the 12 months to Jan. 31, the highest number of campaigns in more than five years, with three in the previous year and two between Feb. 1, 2013 and Jan. 31, 2014, according to research group Activist Insight.
Duncan Dunn, senior director with leading FFA broker SSY Futures Ltd, said a number of investment funds started betting on dry bulk FFAs when the sector downturn started to bite at the end of 2008.
He said there had been an increase in the estimated underlying transaction value of dry bulk FFAs to $16.5 billion in 2017 from around $9 billion in 2016 and hopes that the underlying value could reach $24 billion if both volume and values grow by 20 percent this year.
“Last year’s improvement in time charter rates was such that not only will there be more hedging opportunity for dry FFA traders, but also a compelling case for renewed investment.”
Elsewhere, the London-run Baltic Exchange, founded in 1744, is creating the possibility of its globally tracked main sea freight index, which gauges the cost of shipping dry bulk commodities including iron ore, grain and coal, becoming a tradeable instrument.
The Baltic is also looking into launching a freight index for LNG (liquefied natural gas), creating further scope for trading plays.
Such developments are likely to be a boost for those who caution against stocks as a way of gaining shipping exposure.
Nicholas Tsevdos, managing director of Ocean Way Navigation, a London-based shipping investor and asset manager, said shipping stocks are a particularly poor way in.
“This is due to the exorbitant combined G&A (general and administrative expenses) and management fees, which on average are around three times the market standard,” Tsevdos said, adding that the correlation between underlying asset values and the share price is often not as expected.
“You can watch a company achieve a phenomenal price for a vessel or fleet sale, and watch the stock tank as the market views it as a retraction,” Tsevdos said.
Others, such as Jens Rohweder, managing partner with German-based investment and asset manager Notos Group, say some markets such as dry bulk, which accounts for an estimated 18 percent of the world’s cargo fleet, may already be past their peak, leading him to prefer counter-cyclical investments such as LPG (liquefied petroleum gas) stocks.
“This will be the third time round for them (hedge funds), let’s hope they get the timing right,” one shipping industry source said.
(Graphic by Alasdair Pal; Editing by Alexander Smith)
By Javier Blas and David Marino (Bloomberg) — The flood of U.S. oil exports stepped up a gear on Monday after the first fully laden supertanker sailed from an American port, alleviating a bottleneck that’s limited overseas shipments.
The Louisiana Offshore Oil Port, or LOOP, the only deep water port in the U.S. able to handle the industry’s biggest tankers, said in a statement it had successfully completed the first loading of a very large crude carrier. Shipping data compiled by Bloomberg show the tanker is the Saudi Arabian-owned Shaden, now heading to the Chinese port of Rizhao.
“There could not be a better time to offer this service as domestic production surpasses 10 million barrels per day in the ever-dynamic global crude oil market,” said LOOP LLC President Tom Shaw.
LOOP has been a vital piece of U.S. energy infrastructure for more than 30 years, handling oil imports from across the world as well as gathering crude pumped from deepwater deposits in the Gulf of Mexico. Since it started receiving oil in 1981, it has offloaded 10,200 tankers.
The Shaden, which is owned by the National Shipping Co. of Saudi Arabia and carries the flag of the kingdom, was the first VLCC to load oil at the port rather than discharge it.
Pipelines and ports have become the biggest bottleneck in U.S. oil exports, with traders at times engineering logistically complex chains combining railways, trucks, pipelines, barges, and ship-to-ship transfers to get crude out of the country. As U.S. output surpasses the record high of 10 million barrels a day set in 1970, trading houses, pipeline owners and ports are investing in new infrastructure to ship more American crude overseas.
While U.S. crude has already been exported using supertankers, other ports are too shallow to allow full loadings, meaning smaller ships must shuttle multiple cargoes to the giant vessels as they wait to load offshore. LOOP, because it stands in deeper water about 18 miles off of the Louisiana coast, allows the industry’s largest tankers to load in one go.
Using very large crude carriers will significantly cut shipping costs. The new export capacity at LOOP will allow the supertankers to deliver foreign crude into the U.S. and depart laden, known as back-hauling in the industry’s jargon, rather than returning empty.
LOOP said the “shipper of record” was the trading arm of Royal Dutch Shell Plc. However, data compiled by Bloomberg showed the Shaden was booked last month by Unipec, China’s biggest oil trader. a unit of the country’s refining giant China Petroleum & Chemical Corp., or Sinopec.
LOOP didn’t disclose what kind of oil the Shaden loaded, but traders said it was unlikely U.S. shale oil. It’s more likely to be a mix of crude pumped out of the U.S. Gulf of Mexico.
Washington lifted a 40-year ban on most oil exports in late 2015, reshaping the world’s energy map as U.S. crude was shipped to countries including Switzerland, China, Israel and even the United Arab Emirates. The de facto export ban, which only allowed a few exceptions, was imposed in the aftermath of a 1973 to 1974 oil embargo led by Saudi Arabia.
Even though the country remains a net oil importer, U.S. crude exports have surged to a record high of 2.1 million barrels since the ban was lifted. China and other Asian nations have become big buyers.
SYDNEY, Feb 19 (Reuters) – Australia, the United States, India and Japan are talking about establishing a joint regional infrastructure scheme as an alternative to China’s multibillion-dollar Belt and Road Initiative in an attempt to counter Beijing’s spreading influence, the Australian Financial Review reported on Monday, citing a senior U.S. official.
The unnamed official was quoted as saying the plan involving the four regional partners was still “nascent” and “won’t be ripe enough to be announced’ during Australian Prime Minister Turnbull’s visit to the United States later this week.
The official said, however, that the project was on the agenda for Turnbull’s talks with U.S. President Donald Trump during that trip and was being seriously discussed. The source added that the preferred terminology was to call the plan an “alternative” to China’s Belt and Road Initiative, rather than a “rival.”
“No one is saying China should not build infrastructure,” the official was quoted as saying. “China might build a port which, on its own is not economically viable. We could make it economically viable by building a road or rail line linking that port.”
Representatives for Turnbull, Foreign Minister Julie Bishop and Trade Minister Steven Ciobo did not immediately respond to requests for comment.
First mentioned during a speech by Chinese President Xi Jinping’s to university students in Kazakhstan in 2013, China’s Belt and Road plan is a vehicle for the Asian country to take a greater role on the international stage by funding and building global transport and trade links in more than 60 countries.
Xi has heavily promoted the initiative, inviting world leaders to Beijing last May for an inaugural summit at which he pledged $124 billion in funding for the plan, and enshrining it into the ruling Communist Party’s constitution in October.
Local Chinese governments as well as state and private firms have rushed to offer support by investing overseas and making loans.
In January, Beijing outlined its ambitions to extend the initiative to the Arctic by developing shipping lanes opened up by global warming, forming a “Polar Silk Road.”
The United States, Japan, India and Australia have recently revived four-way talks to deepen security cooperation and coordinate alternatives for regional infrastructure financing to that offered by China.
The so-called Quad to discuss and cooperate on security first met as an initiative a decade ago – much to the annoyance of China, which saw it as an attempt by regional democracies to contain its advances. The quartet held talks in Manila on the sidelines of the November ASEAN and East Asia Summits.
(Reporting by Jane Wardell and Colin Packham; Editing by Peter Cooney)