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Even by Brexit standards, the blowback to the fourth iteration of Theresa May's Brexit deal was pretty extreme. Tories hated it, and demanded that May remove a stipulation that Parliament vote on holding a second referendum if an initial vote on the withdrawal deal bill passes. 

The fallout has been extreme. It has been a while since a senior member of May's cabinet resigned, but British press reports suggest that Andrea Leadsom and Sajid Javid, the Tory leader in the Commons and the Read more.....

Even by Brexit standards, the blowback to the fourth iteration of Theresa May's Brexit deal was pretty extreme. Tories hated it, and demanded that May remove a stipulation that Parliament vote on holding a second referendum if an initial vote on the withdrawal deal bill passes. 

The fallout has been extreme. It has been a while since a senior member of May's cabinet resigned, but British press reports suggest that Andrea Leadsom and Sajid Javid, the Tory leader in the Commons and the Home Secretary, respectively, could abandon May's cabinet on Wednesday as they plan leadership runs.

The defections might finally be enough to push May out of Downing Street, as Sky News reports that May is preparing to resign Wednesday night. The reports are unconfirmed, but some in the British press are taking them seriously.

Very senior MP tells me the word from the Cabinet corridor in the HoC is that the PM will resign tonight, Andrea Leadsom is poised to resign to launch a leadership bid, others may also resign & David Lidington will take over as acting PM. Unconfirmed!

— Jon Craig (@joncraig) May 22, 2019

The politics editor at the Daily Mail noted that Downing Street is refusing to deny the report, telling him only that May will make a statement later.

The pound moved higher on the rumors, presumably because May's departure could lead to further Brexit delay as it would increase the odds of a general election being held later this year.

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From a comfortable position thousands of miles away from the White House (he has reportedly been spending a lot of time in Europe lately), former White House Chief Strategist Steve Bannon has embraced a stance toward Beijing that's somewhere to the right of John Bolton. Bannon calls himself a China "superhawk", which helps make President Trump's tough stance look moderate by comparison, while pro-business negotiators like Steven Mnuchin look like sinophiles.

Bannon used Read more.....

From a comfortable position thousands of miles away from the White House (he has reportedly been spending a lot of time in Europe lately), former White House Chief Strategist Steve Bannon has embraced a stance toward Beijing that's somewhere to the right of John Bolton. Bannon calls himself a China "superhawk", which helps make President Trump's tough stance look moderate by comparison, while pro-business negotiators like Steven Mnuchin look like sinophiles.

Bannon used two recent interviews with CNBC to explain his hostility toward Beijing. His argument boils down to this: for too long, Washington has allowed Beijing to get away with its anticompetitive subsidies and market protections, while the MSS steals whatever technology isn't deliberately handed over by American companies hoping to enter the world's largest growth market. Instead of fighting back, Washington has sat idly by as American money and corporations helped transform the Chinese economy, giving the Chinese the tools to stand up to the US. 

But now that Beijing is making serious strides toward achieving its goal of supplanting the US as the world's top military and economic power, the White House can't afford to be silent any longer, which is why Bannon believes Trump "won't back down" during the trade war.

Expanding on this theme during an interview with the South China Morning Post, a Hong Kong-based newspaper whose owner has ties to the Communist Party, Bannon explained that driving Huawei out of Europe and the US is "10 times more important" than striking a trade deal.

"It is a massive national security issue to the West," Bannon said, in a phone interview on Saturday with the South China Morning Post. "The executive order is 10 times more important than walking away from the trade deal. It [Huawei] is a major national security threat, not just to the US but to the rest of the world. We are going to shut it down."

Despite being largely shut out of the US and a handful of other international markets, Huawei has made inroads in Europe, where governments have tentatively cleared domestic telecoms firms to use Huawei products in the construction of their 5G networks. The Trump Administration has warned that using Huawei parts could invite spying by Beijing, though Huawei has denied it would ever cooperate with the government against its customers and has promised to sign "no spying" pledges. Of course, Chinese law stipulates that Chinese companies must help the state when asked.

The interview took place earlier this week, shortly after President Trump announced a brief waiver that will keep Huawei off the Commerce Department's "Entity List" for 90 days. Once the prohibition takes effect, however, the Chinese telecoms giant won't be able to buy components from American firms. It also took place before reports that leaked late Tuesday claimed the administration was weighing whether to add more Chinese companies to the "Entities List".

Going one step further, Bannon said his ultimate goal is to shut Chinese companies out of American capital markets, something that would horrify Wall Street and the investment bankers whom Bannon has accused of being moneymen for the Communist Party.

"The next move we make is to cut off all the IPOs, unwind all the pension funds and insurance companies in the US that provide capital to the Chinese Communist Party," he said.

"We’ll see a big move on Wall Street to restrict access to capital markets to Chinese companies until [they agree to] this fundamental reform."

Trump made a huge mistake last spring when he intervened to lift restrictions on ZTE.

"During the trade talks’ early stage, he [Trump] gave a waiver for ZTE, which I think was a mistake," Bannon said.

The crux of Bannon's argument is that by engaging Beijing in an all-out "economic war", Washington might succeed in forcing the Communist Party leadership to make certain structural reforms. Bannon doubts this will be resolved quickly: "I don’t think it’s going to be resolved quickly. This is the beginning of a very long and tough process."

But regardless of the outcome, Bannon believes the US - including its bankers and corporations - can no longer afford to coddle Beijing. "The pressure we will keep up will be relentless. We are not going to be quiet."

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Authored by Michael Lebowitz via RealInvestmentAdvice.com,

Since the post-financial crisis era began more than a decade ago, record low-interest rates and the Fed’s acquisition of $4 trillion of the highest quality fixed-income assets has led investors to scratch and claw for any asset, regardless of quality, offering returns above the rate of inflation. 

Financial media articles and Wall Stree Read more.....

Authored by Michael Lebowitz via RealInvestmentAdvice.com,

Since the post-financial crisis era began more than a decade ago, record low-interest rates and the Fed’s acquisition of $4 trillion of the highest quality fixed-income assets has led investors to scratch and claw for any asset, regardless of quality, offering returns above the rate of inflation. 

Financial media articles and Wall Street research discussing this dynamic are a dime-a-dozen. What we have not heard a peep about, however, are the inherent risks within the corporate bond market that have blossomed due to the way many corporate debt investors are managed and their somewhat unique strategies, objectives, and legal guidelines. 

This article offers insight and another justification for moving up in credit within the corporate bond market. For our prior recommendation to sell junk debt based on yields, spreads, and the economic cycle, we suggest reading our subscriber-only article Time To Recycle Your Junk. If you would like access to that article and many others, you can sign up for RIA Pro and enjoy all the site has to offer with a 30-day free trial period. 

Investor Restraints

By and large, equity investors do not have guidelines regulating whether or not they can buy companies based on the strength or weakness of their balance sheets and income statements. Corporate bond investors, on the other hand, are typically handcuffed with legal and/or self-imposed limits based on credit quality. For instance, most bond funds and ETFs are classified and regulated accordingly by the SEC as investment grade (rated BBB- or higher) or as high yield (rated BB+ or lower). Most other institutions, including endowments and pension funds, are limited by bylaws and other self-imposed mandates. The large majority of corporate bond investors solely traffic in investment grade, however, there is a contingency of high-yield investors such as certain mutual funds, ETFs (HYG/JNK), and other specialty funds.

Often overlooked, the bifurcation of investor limits and objectives makes an analysis of the corporate bond market different than that of the equity markets. The differences can be especially interesting if a large number of securities traverse the well-defined BBB-/BB+ “Maginot” line, a metaphor for expensive efforts offering a false line of security.

Corporate Bond Market Composition

The U.S. corporate bond market is approximately $6.4 trillion in size. Of that, over 80% is currently rated investment grade and 20% is junk-rated.This number does not include bank loans, derivatives, or other forms of debt on corporate balance sheets.

Since 2000, the corporate bond market has changed drastically in size and, importantly, in credit composition. Over this period, the corporate bond market has grown by 378%, greatly outstripping the 111% growth of GDP.  The bar chart below shows how the credit composition of the corporate bond market shifted markedly with the surge in debt outstanding. 

As circled, the amount of corporate bonds currently rated BBB represents over 40% of corporate bonds outstanding, doubling its share since 2000. Every other rating category constitutes less of a share than it did in 2000. Over that time period, the size of the BBB rated sector has grown from $294 billion to $2.61 trillion or 787%.

The Risk

To recap, there is a large proportion of investment grade investors piled into securities that are rated BBB and one small step away from being downgraded to junk status. Making this situation daunting, many investment grade investors are not allowed to hold junk-rated securities. If only 25% of the BBB-rated bonds were downgraded to junk, the size of the junk sector would increase by $650 billion or by over 50%. Here are some questions to ponder in the event downgrades on a considerable scale occur to BBB-rated corporate bonds:  

• Are there enough buyers of junk debt to absorb the bonds sold by investment-grade investors?
• If a recession causes BBB to BB downgrades, as is typical, will junk investors retain their current holdings, let alone buy the new debt that has entered their investment arena?
• Will retail investors that are holding the popular junk ETFs (HYG and JNK) and not expecting large losses from a fixed income investment, continue to hold these ETFs?
• Will forced selling from ETF’s, funds, and other investment grade holders result in a market that essentially temporarily shuts down similar to the sub-prime market in 2008?

We pose those questions to help you appreciate the potential for a liquidity issue, even a bond market crisis, if enough BBB paper is downgraded. If such an event were to occur, we have no doubt someone would eventually buy the newly rated junk paper. What concerns us is, at what price will buyers step up?  

Implied Risk

Given that downgrades are a real and present danger and there is real potential for a massive imbalance between the number of buyers and sellers of junk debt, we need to consider how close we may be to such an event. To provide perspective, we present a graph courtesy of Jeff Gundlach of DoubleLine.

The graph shows the implied ratings of all BBB companies based solely on the amount of leverage employed on their respective balance sheets. Bear in mind, the rating agencies use several metrics and not just leverage. The graph shows that 50% of BBB companies, based solely on leverage, are at levels typically associated with lower rated companies.

If 50% of BBB-rated bonds were to get downgraded, it would entail a shift of $1.30 trillion bonds to junk status. To put that into perspective, the entire junk market today is less than $1.25 trillion, and the subprime mortgage market that caused so many problems in 2008 peaked at $1.30 trillion. Keep in mind, the subprime mortgage crisis and the ensuing financial crisis was sparked by investor concerns about defaults and resulting losses.

As mentioned, if only a quarter or even less of this amount were downgraded we would still harbor grave concerns for corporate bond prices, as the supply could not easily be absorbed by traditional buyers of junk.   

Recommendation

Investors should stay ahead of what might be a large event in the corporate bond market. We recommend corporate bond investors focus on A-rated or solid BBB’s that are less likely to be downgraded. If investment grade investors are forced to sell, they will need to find replacement bonds which should help the performance of better rated corporate paper. What makes this recommendation particularly easy is the fact that the current yield spread between BBB and A-rated bonds are so tight. The opportunity cost of being wrong is minimal. At the same time, the benefits of avoiding major losses are large. 

With the current spread between BBB and A-rated corporate bonds near the tightest level since the Financial Crisis, the yield “give up” for moving up in credit to A or AA-rated bonds is a low price to pay given the risks. Simply, the market is begging you not to be a BBB hero.

Data Courtesy St. Louis Federal Reserve

Summary

The most important yet often overlooked aspect of investing is properly recognizing and quantifying the risk and reward of an investment. At times such as today, the imbalance between risk and reward is daunting, and the risks and/or opportunities beg for action to be taken.

We believe investors are being presented with a window to sidestep risk while giving up little to do so. If a great number of BBB-rated corporate bonds are downgraded, it is highly likely the prices of junk debt will plummet as supply will initially dwarf demand. It is in these types of events, as we saw in the sub-prime mortgage market ten years ago, that investors who wisely step aside can both protect themselves against losses and set themselves up to invest in generational value opportunities.

While the topic for another article, a large reason for the increase in corporate debt is companies’ willingness to increase leverage to buy back stock and pay larger dividends. Investors desperate for “safer but higher yielding” assets are more than willing to fund them. Just as the French were guilty of a false confidence in their Maginot Line to prevent a German invasion, current investors gain little at great expense by owning BBB-rated corporate bonds.

The punchline that will be sprung upon these investors is that the increase of debt, in many cases, was not widely used for productive measures which could have strengthened future earnings making the debt easier to pay off. Instead, the debt has weakened a great number of companies.

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Speaker Nancy Pelosi (D-CA) is facing new pressure from House Democrats to open impeachment proceedings against President Trump, as the White House continues to resist Democratic Congressional investigators who are in the 11th inning of their battle to unseat Trump from office. 

Read more.....

Speaker Nancy Pelosi (D-CA) is facing new pressure from House Democrats to open impeachment proceedings against President Trump, as the White House continues to resist Democratic Congressional investigators who are in the 11th inning of their battle to unseat Trump from office. 

On Wednesday, Pelosi met with her party behind closed doors to discuss the latest avenue for impeachment, telling the press that House Democrats believe Trump is engaged in a cover-up in regards to the administration's efforts to prevent former White House Counsel Don McGahn from testifying Tuesday before the House Judiciary Committee. 

"It was a very positive meeting, a respectful sharing of ideas. And I think a very impressive presentation by our chairs. We do believe it is important to follow the facts, that no one is above the law, including the president of the United States. And we believe that the president of the United States is engaged in a cover-up. A cover-up. And that was the nature of the meeting."

JUST IN: Speaker Pelosi says "we believe the president of the United States is engaged in a cover up" by stonewalling testimony for ongoing congressional investigations. pic.twitter.com/7ILMb95vZM

— NBC News (@NBCNews) May 22, 2019

Pelosi, meanwhile, has long considered impeachment a political trap which could blow up in Democrats' faces - alienating swing voters and ensuring another victory for Trump in 2020. She and her top lieutenants were also on Capitol Hill in 1998, when Republican efforts to impeach former President Clinton without bipartisan support resulted in a backlash at the polls. 

Everything the Democrats are asking me for is based on an illegally started investigation that failed for them, especially when the Mueller Report came back with a NO COLLUSION finding. Now they say Impeach President Trump, even though he did nothin wrong, while they “fish!”

— Donald J. Trump (@realDonaldTrump) May 22, 2019

Last month's release of the Mueller report, however, has caused a split among Democrats - as a small pack of rank-and-file members have broken away to endorse impeachment proceedings. 

In at least two private meetings this week, Pelosi was pressed by Democrats to consider moving more quickly toward impeachment. In one of the meetings, Judiciary Chairman Jerrold Nadler conveyed that some of his panel’s Democrats now want to pursue that option, according to a House official. His committee would likely oversee the early stages of such an inquiry.

A vocal minority, including Financial Services Chairman Maxine Waters and Alexandria Ocasio-Cortez, has long been calling for Trump’s impeachment, with even more urgency since Special Counsel Robert Mueller’s report was released. But until this week, that talk had been relatively isolated. And Pelosi retains many influential supporters who firmly back her go-slow approach, including No. 3 House Democrat James Clyburn and long-time ally Rosa DeLauro. -Bloomberg

After McGahn skipped out on the House Judiciary panel on Tuesday, Democrats appeared to be unsure about how to proceed. The Democrats on Nadler's panel scrapped a post-hearing press conference because they couldn't agree on what to say, according to Bloomberg, citing a person familiar with the matter. 

Sounding a lot like Maxine Waters, Karen Bass (D-CA) - chairwoman of the Congressional Black Caucus, told reporters after the hearing that when it comes to impeachment "I think that we are probably going to wind up there," adding "I don’t know if that is today; I don’t know if we might be forced to act very soon." 

"Obviously, all of us respect [Pelosi’s] perspective and her opinion," said Rep. Joaquin Castro (D-TX) who sits on the Intelligence Committee. "But I think, individually, each of us have a perspective of our own. And I think it’s time to start [impeachment]."

Rep. Jamie Raskin (D-MD), who also sits on the Judiciary Committee and has recently changed his mind in favor of launching an inquiry, said "I would say that there are arguments for doing it, but we have to agree collectively." 

Kentucky Democrat John Yarmuth, the House Budget Committee chairman, said lawmakers need to pursue impeachment investigations even if the Republican majority in the Senate won’t support removing Trump. “We need in this Congress not necessarily to expel the president but to call attention to the threat he poses to our way of life,” Yarmuth told CNN Wednesday. -Bloomberg

Slow down...

Democrat Sheila Jackson Lee of Texas - a senior member of the Judiciary panel, is taking a more measured approach, telling reporters that she will introduce a resolution over the next two days to authorize the Judiciary Committee to investigate whether there are sufficient grounds to launch impeachment proceedings in the first place. 

"We believe and continue to believe that we are doing the right thing by investigating, and that our task is to educate before we activate, and that is what we will do," said Jackson Lee. 

Rep. Steve Cohen (D-Tenn.) is also backing Trump’s impeachment, but he cautioned that no such effort will go anywhere before Pelosi and Judiciary Committee Chairman Jerrold Nadler (D-N.Y.) jump on board.

“I think he’s committed impeachable offenses and he ought to be impeached,” said Cohen, who chairs the Judiciary Committee’s subpanel on the Constitution. “[But] if Speaker Pelosi and Chairman Nadler don’t change their mind it’s not going to happen.”

“There’s more people in favor of an impeachment inquiry; there’s more people in favor of impeachment, yes. So I guess that’s momentum,” Cohen added. “But as far as momentum going to a level of a majority or action, then we’re not anywhere near that.” -The Hill

"We have to have the American people behind us," said Rep. Judy Chu (D-CA). "Even if we are successful in the impeachment vote on the House side, my concern is that if that vote is not successful on the Senate side — which in fact would be unlikely — then would that be considered a victory for Trump?"

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While stocks are modestly lower overnight as "risk-off" returns, pushing yields and commodities lower and the VIX and gold higher, on one or more of the following catalysts - take your pick - listed by Nomura's Charlie McElligott:

• More trade war noise / rhetoric—Xi’s “New Long March” commentary, but particularly Mnuchin “no plans to go to Beijing yet” headline—which makes tariff imposition likely
• US consumer concerns around outlook cuts from Nordstrom and Lowe’s
< Read more.....

While stocks are modestly lower overnight as "risk-off" returns, pushing yields and commodities lower and the VIX and gold higher, on one or more of the following catalysts - take your pick - listed by Nomura's Charlie McElligott:

• More trade war noise / rhetoric—Xi’s “New Long March” commentary, but particularly Mnuchin “no plans to go to Beijing yet” headline—which makes tariff imposition likely
• US consumer concerns around outlook cuts from Nordstrom and Lowe’s
• QCOM blow-up -12.5% on anti-trust ruling from FTC (crowded / favorite HF name)
• Brexit again devolving with May “toast”
• The DoJ recommending to block the Sprint / T-Mobile deal

... the question remains why do markets continue to stubbornly selloff and reprice lower even as the probability of a drawn out, lengthy trade war with China, as neither Trump nor Xi will be willing to de-escalate absent a major market (or economic) shock lower, is now effectively 100%.

One possible explanation for this recurring refusal to drop suggested by McElligott (besides the now daily ramp in stocks at the open of trading) is a number of flow catalysts for "rolling squeezes" in Equities despite what the Nomura strategist calls "the deteriorating macro & trade — where despite the now very ‘neutral’ current options-implied Gamma & Delta profile of the market we see"...

1. the recent bulking-up of Shorts and reduction of Nets (1Y + lows) from Leveraged Funds act as potential “upside risk” demand catalysts—especially with
2. Nomura's CTA models across Global Equities “well within” reach of COVERING levels in Russell, Eurostoxx, Nikkei, DAX, FTSE, CAC, Hang Seng / Hang Seng CH and KOSPI (while also near re-leveraging in critical SPX and Nasdaq, as well as Bovespa)—and while
3. the bank's Risk Parity model estimates exposure to US Equities futures at 26m lows—meaning there is plenty of room to add from systematic / vol-sensitive buyers—all at a time where
4. VIX roll-down strategies are again in position to sell vol with the term structure back neatly in contango, while we are also seeing
5. the gradual return of systematic vol sellers (i.e. put underwriters)—which not only means pressure on vol, but also then creates dealer Delta to “buy”

Digging into the technical and positional reasons for the continued levitation despite deteriorating sentiment, Nomura charts the latest market "Greeks" (see below) and highlights that "the SPX / SPY combined $Delta is now effectively “Neutral” at just -$13.4B (27th %ile since 2014) and with the SPX / SPY options Delta position vs Spot near “flip” level at 2866; for QQQ the $Delta position too is just -$4.4B (12th %ile since ’14)"

At the same time, "the profile for SPX/SPY- and QQQ-options Gamma has changed meaningfully over the past week+ as well, with 1) the total notional $Gamma sum dropping significantly to VERY low historic %iles while also 2) the current spot location sees the overall Dealer Gamma profile at effectively “Neutral” (vs its recent “Negative Gamma” location)",

• SPX / SPY $Gamma just 20.8th %ile since 2014; QQQ just 17.5th %ile since 2014
• SPX / SPY combined Gamma per 1% move vs Spot at “Neutral” position, with Spot essentially “at” the flip zone (@ 2871 including this week’s expiry; 2876 without this week’s expiry)

Finally, McElligott calculates that the two largest notional Gamma strikes in SPX/SPY consolidated options have spot “surrounded”, with the lower 2800 strike has $4.2B of Gamma, while the upper 2900 strike has $4.6B, serving as yet another source of "gamma gravity" around 2,850.

There is another reason for the lack of a selloff: the recent increase in shorts (at least according to Nomura, other sellside sources fail to find such a development) by leveraged funds has prompted fears of a short squeeze. Here are Nomura's observations:

• Leveraged Funds actually ADDED to their US Equities futures shorts last week with -$9.6B of incremental notional selling WoW across SPX -$6.4B, NDX -$3.1B and RTY -$100mm
• Our intraday implied price distribution for SPX saw “real” shifts towards higher strikes yday, particularly for this Friday’s expiry:

It's not just leveraged/hedge funds who have turned short: according to the Nomura QIS CTA model, there has been a "powerful blast of CTA deleveraging over the course of May, with Russell, Eurostoxx, Nikkei, DAX, FTSE, CAC, Hang Seng, Hang Seng Ch and KOSPI all flipping outright -100% Short—while SPX and NDX have reduced the size of their ‘long positions’ (although SPX and NDX are still the remaining ‘long’ holdouts along with ASX and Bovespa)"

The danger to McElligott, is this: the majority of the Equities futures we follow are well-within range of their “trigger” levels to COVER shorts or re-leverage longs (PARTICULARLY in global risk appetite indicators SPX and NDX).

Putting all this together, McElligott - who one should note has been predicting that a squeeze-driven melt up in stocks is likely - doubles down on his narrative, noting that the factors listed above "are at risk of providing new “mechanical” sources of covering / buying demand for stocks in coming weeks, despite the clear degradation of the US / China trade situation."

His conclusion, "expect the sideways chop to continue despite this macro deterioration", which of course is without a sharp drop in equities, the probability of a push to compromise in the trade war is nil. Meanwhile, the longer trade war continues - without the market noticing - the more the imbalances will build up, eventually leading to a far more painful collapse in risk, once markets can no longer ignore what is happening to the global economy.

 

 

 

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In a harbinger of what's to come as the US-China trade war gets worse by the day, a Chinese company has told all of its employees to boycott American products and halt international travels to the U.S., reported The Epoch Times.

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In a harbinger of what's to come as the US-China trade war gets worse by the day, a Chinese company has told all of its employees to boycott American products and halt international travels to the U.S., reported The Epoch Times.

Jinggang Motor Vehicle Inspection Station notified all employees last Thursday, May 16 that the use of iPhones, driving in American automobiles, eating at American fast food restaurants, using American household products, and even traveling to the U.S. was forbidden by a new company policy; any employee who violated the new rules would be fired. Here are some excerpts from the notice:

"Employees are prohibited from purchasing or using iPhones; instead, they are recommended to use Chinese domestic brands of cell phones, such as Huawei.

"Employees are not allowed to purchase vehicles made by China-U.S. joint venture automakers. They are recommended to purchase 100 percent Chinese-made vehicles.

"Employees are forbidden to eat at McDonald's or Kentucky Fried Chicken. They are not allowed to purchase P&G [Proctor and Gamble, a U.S. maker of household products], Amway [U.S. maker of health and beauty products], or any other American brands. Employees must not go to the United States as a tourist."

The company's memo was emailed to employees several days after state-run newspaper Global Times published an editorial piece that called on the Chinese public to "fight a people's war" against the U.S.

As a result of a prolonged trade war with the U.S., the company said: "To help our country win this war, company authorities have decided that all employees must immediately stop purchasing and using American products."

The Times said the notice went viral on Chinese social media platforms: "Computers should be banned as well, because it is a U.S. invention," one Chinese internet user said. Another said: "Stop using the Windows operating system, everyone."

However, some Chinese internet users thought it was ridiculous to ban American products.

Earlier this week, people across China called for an immediate boycott of Apple products after the Trump administration targeted Huawei. Trump signed an executive order last week that prevented U.S. firms from buying Chinese telecommunication equipment. Then in a separate announcement, the administration banned Huawei from buying U.S. chips without government approval.

On Weibo, users reacted to the deepening trade war and pressure on Huawei by denouncing iPhones. "The functions in Huawei are comparable to Apple iPhones or even better. We have such a good smartphone alternative; why are we still using Apple?" wrote one user.

"I feel guilty watching the trade war. Once I have money I will change my smartphone," said another user.

"I think Huawei's branding is amazing, it chops an apple into eight pieces," said another post.

Some Weibo users called for a boycott of U.S. chips. "Trump doesn't allow companies to use Huawei, then let's not use Apple. We shouldn't buy any phone that uses Qualcomm as well," one angry user said.

The ban against Huawei comes days after the Trump administration increased tariffs to 25% on $200 billion of Chinese products. In a tit-for-tat effort, China slapped a 25% tariff on $60 billion worth of American products that go into effect June 1.

Another report showed a restaurant in China was charging a tariff to only American customers. An English translation of the sign read: "From now on, our store will charge 25% service fee (tariff) to American customers. If you don't understand, please consult the American Embassy!"

Earlier this week, we reported that CCTV 6, the movie channel of China's leading state television broadcaster, recently aired three anti-American movies.

The three movies are Korean war films: Heroic Sons and Daughters (1964), Battle on Shangganling Mountain (1954), and Surprise Attack (1960).

CCTV 6 has gone trending on Chinese social media today for changing its schedule and playing three anti-American movies for three days in a row, sending out a clear anti-US message while the trade war is heating up. Read: https://t.co/w5aju3vMDs pic.twitter.com/21mEfC5Ha5

— What's on Weibo (@WhatsOnWeibo) May 18, 2019

All last week, anti-American propaganda flourished across the country, with the slogan "Wanna talk? Let's talk. Wanna fight? Let's do it. Wanna bully us? Dream on!" going viral on Chinese social

Another report from Tuesday showed how a song titled "Trade War," has gone viral on one the largest Chinese social media platforms. The song begins with a chorus singing "Trade war! Trade war! Not afraid of the outrageous challenge! Not afraid of the outrageous challenge! A trade war is happening over the Pacific Ocean!"

As has been the case during previous trade feuds, nationalist sentiment is spreading throughout China, which with foreign markets closing off, may be the only Trump - no pun intended - card left for China's economy, where even a modest hiccup could lead to recession. Meanwhile, while it is debatable if anyone wins a trade war, the escalating collapse in existing supply chains will only get much worse before it gets better, and will likely lead to a global trade recession or even a depression, which as we showed last week...

... may have already started.

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Blain's Morning Porridge, submitted by Bill Blain of Shard Capital

Have you ever watched a house of cards collapse? Sometimes a corner or a side comes down, and it can be sort of fixed… Sometimes the whole thing just gets blown away.  My Spidey Senses are all a-tingle this morning, triggered by 2 factors:

1. Telsa: The spike in negative commentary on Tesla suggests THE moment is coming: a downgrade by a previ Read more.....

Blain's Morning Porridge, submitted by Bill Blain of Shard Capital

Have you ever watched a house of cards collapse? Sometimes a corner or a side comes down, and it can be sort of fixed… Sometimes the whole thing just gets blown away.  My Spidey Senses are all a-tingle this morning, triggered by 2 factors:

1. Telsa: The spike in negative commentary on Tesla suggests THE moment is coming: a downgrade by a previous bull to $10 target price, doubts on the trajectory of sales, the realisation the Solar Tiles project is complete tosh (and a bail out of Musk’s cousins), the crash in its debt and recent convertible price, and loads more, has led to the rather obvious conclusion Tesla will struggle to fund ongoing capital burn. Peak-Musk was some time ago. Many now think the orchestra is about to strike up Gotterdammerung. A loss of confidence in Tesla and Musk triggers all kinds of consequences.
2. Europe: If you think UK politicians have embarrassed themselves trying to agree on how to exit Europe, wait till next week and ponder how such a disparate, populist hodge-podge of populist well-intentioned Euro-philes and Euro-phobes are going to agree on how to reform and continue European integration. I see two big market threats: i) The bond market, ii) and especially the bond market. (And Brussels!)

Since anyone can read all the Tesla stories and draw their own conclusions as to what happens next, lets stick to the consequences. The obvious one is what does it do to confidence in the Modern Disruptive Tech (“MDT”) price model: “We don’t have to pay dividends or make profits because we are a disruptive company that's triggered a paradigm in demand and made ourselves a monopoly – therefore it’s all in our stock price” ?

Tesla’s current stock crash shreds that MDT model. (Down 46% since Dec high, 30% from April.)

Why? a) Because Tesla did not have anything like a monopoly. Its failing to deliver. It’s not selling enough cars in China, and others are selling more in Europe. Competitors are eating its lunch - customers are nervous. Other secondary Tesla wins like capacitance, autonomy etc are irrelevant if the main light goes out. b) The MDT Model requires the stock to retain the confidence of the capital markets to keep it capitalised – Tesla has now lost that confidence. c) It needs to demonstrate continued ability to disrupt, deliver and reap the windfall stock gains – but confidence in Musk’s abilities and focus has crashed: witness the failure in solar tiles, his tweeting, the other businesses from tunnels to rockets.

It’s all so embarrassing.

Tesla doesn’t matter. They are simply the DeLorean’s of the modern age. If you own one, stick in a garage and wait. Plenty of other Electric choices… Tesla was good while it lasted. (For disclosure’s sake I still hold a small Tesla position, but sold out most in June last year.)

But the consequences of a collapse in the MDT model will be massive. Consider the pain. Consider firms like Softbank which have funded themselves from everywhere and anywhere on the basis they are oh-so-clever at Tech investing. And suddenly they find they own a whole bunch of stocks that have never paid, and never will pay a dividend or repay debt, and yet they have promised Mrs Watanabe (the archetypal Japanese retail investor) their bonds are great value (Junk as far as Moodys and S&P are concerned, investment grade according to local rating agencies). The Saudi’s might be a little miffed at their equity investments...

If Tech shrugs, the whole US stock market will wobble – and that’s when this will get very interesting: look to buy the tech winners with either real monopolies, real revenues and real funding, and sell those likely to fall as a result of competition, liquidity traps, and ennui. (Great word that… I should use it more often..)

Meanwhile, back in Yoorp…

A number of issues struck me yesterday – wondering about the widening divide between Merkel and Macron, this week’s elections and how its going to work politically. How does Europe agree on growth initiatives when it will be fighting in Brussels about who gets what job, and who can do whatever they want on debt, immigration and policy. It's going to make Brexit look tidy.

And I then I realised that doesn’t matter anyway. The ECB will sort it out. They always do. Then doubt set in. A question from one client about renewed Italian debt threats, another asking about prospects for European zombie companies. Then an article on Bloomberg pointing out French issuers make up a disproportionate amount of the Euro 177 bln BBB/Junk Corporate bond portfolio held by the ECB, a quick glance at that portfolio of 1200 bonds and concluding it’s a bit risky…. And then a look at the leading European corporate bond ETF – and the volume that’s been piling into a bond fund that yields very little. Asking around the reason for investment holders putting dosh into the fund is that anything is better than paying banks for the privilege of holding your cash.

It struck me all as bit silly. France, that well know bastion of social equality, industrial peace, sensibility, stability, benevolent banks and companies accounts for over 25% of Euro corporate debt issuance. Italy, the problem child, accounts for less than 4%. You could say that’s because France is the home of such great world class large companies, and Italy is a collective of small family firms.

We worry about the Italians’ debt because they want to spend money to rebuild and reform their economy by borrowing more? (Yes, I know the real reason we worry about Italy borrowing more is because we expect them to waste/nick it, while we turn a blind eye to France breaching its sov debt limits, and corporates owing 125% of GDP because we trust them to spend it sagely?)

Or should we worry about the consequences of the ECB holding Euro 177 BN of corporate debt – and won’t like the mark-to-market if European rates were to rise? Or what happens if rising rates trigger a wave of unemployment driving defaults – meaning the ECB would have to trigger lower rates to avoid them. Yet another consequence of QE – Europe trapped in activity-numbing low rates for eternity.. Check out the ECB numbers here.

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Some 500 Nusra-front militants, accompanied by seven tanks and about 30 pickup trucks armed with mounted heavy machine guns launched three major offensives against government troops in Idlib province on Wednesday, the Russian Defense Ministry said.

The counterattack focused on the town of Kafr Nabudah, which was recently captured by the Syrian government.

Militants also launched a missile attack on Russia's Hmeymim air base on Wednesday, but nine of the missiles were shot down, and another 8 didn't reach their target, the ministry added.

Northwest Syria, which runs along Syria's border with Turkey, is home to the last remaining rebel strongholds, including a swath of land dominated by the Al Qaeda-linekd Nusra Front, which has adopted a new name, Tahrir al-Sham, Haaretz reports.

The increase in shelling in the region has led to the displacement of 180,000 people, while the increase in shelling marked the most intense period of fighting between Bashar al-Assad and the rebels

According to RT, more than 150 rebels were killed during the morning offensive. Three tanks were destroyed, while 24 trucks mounted with heavy guns were also destroyed in the fighting.

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Cable has plunged almost 2 full handles from the post-May-'New Deal' hope of yesterday afternoon as it's increasingly clear her latest and last gambit is dead on arrival...

Read more.....

Cable has plunged almost 2 full handles from the post-May-'New Deal' hope of yesterday afternoon as it's increasingly clear her latest and last gambit is dead on arrival...

Bloomberg reports that Theresa May is facing pressure to abandon her Brexit deal and quit as British prime minister within days, according to people familiar with the matter. Several senior government officials said they were shocked that the premier’s new offer intended to win votes in Parliament for her European Union divorce agreement had been so badly received so quickly.

Which just goes to show how disconnected from reality they are. FX traders, however, were not surprised...

Dragging sterling to its weakest level of 2019...

Early year hopes of avoiding a hard Brexit are dashed by the combination of May's failure and the rising euroskeptic sentiment across Britain (and Europe).

As Mike Shedlock notes, Nigel Farage's Brexit Party is on a stunning roll. That's what happens when you take a firm position the public favors.

The final YouGov poll on the European Parliament elections for the UK is in.

UK, YouGov poll:

European Election

BREX-EFDD: 37% (+3)
LDEM-ALDE: 19% (+2)
LAB-S&D: 13% (-2)
GREENS-G/EFA: 12% (+1)
CON-ECR: 7% (-2)

+/- 8-17 May 2019

Field work: N/A
Sample size: N/A#EP2019 #Brexit pic.twitter.com/7fgqGszsjX

— Europe Elects (@EuropeElects) May 21, 2019

Some will be shocked. I am not.

Beyond Embarrassment

Theresa May truly embarrassed herself today.

Her Meaningful Vote 4 Speech Flopped Splendidly.

She tried to reach out to everyone at the same, offending everyone. May has changed her tune so many times, who the hell even knows what she wants?

The best summation I can come up with is "Any deal is better than no deal".

Labour

Please be serious.

Jeremy Corbyn is just like Theresa May. He wants to "honor" Brexit, by not doing it.

Two Peas in a Pod

Corbyn is simultaneously for and against another referendum, just like Theresa May!

Despite how they pretend, they are in bed with each other.

Another Poll Needed

YouGov needs another poll: Who is more pathetic? Theresa May or Jeremy Corbyn?

From where I sit, it's a close call.

*  *  *

Finally, as Human Events reports, Farage has pledged to field a “full 650 candidates” when Britain has its next general election. The talk behind the scenes at Brexit Party gatherings, is of what a government might look like if Farage and his band of brothers (and sisters) held the balance of power after an election.

Long-term euroskeptic and former President of the Czech Republic, Vaclav Klaus, sums things up well:

"As I look at it from Prague, the British main political parties totally failed, and betrayed and abandoned the British citizens, their own voters. It had, however, one positive side effect: by behaving in this way, they probably and unwillingly created the Brexit Party...

...Dear Brexit friends, you should in the forthcoming elections give the whole rest of Europe a good example. Many Europeans need it, and many are waiting for it. Don’t disappoint them.”

Read more here...

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The Turkish Lira tumbled as much as 1% against the dollar, leading a decline across emerging markets...

Read more.....

The Turkish Lira tumbled as much as 1% against the dollar, leading a decline across emerging markets...

... while Turkish stock market losses accelerated as the Borsa Istanbul 100 Index falls 1.5%, declining for a 6th day and 13 of the past 14, to touch the lowest level since January 2017, effectively entering a bear market, having tumbled 20% from the March highs.

While there wasn't a specific event behind today's mauling of Turkey, which to many investors has become the canary in the emerging markets coalmine, the selling picked up after Turkey said soldiers had been dispatched for training in Russia ahead of the delivery of the S-400 missile-defense system. As Defense Minister Hulusi Akar said additionally, as the deadline of S-400 system delivery looms, Turkey will send more personnel for training in the coming months.

Meanwhile, the Kremlin on Wednesday condemned as unacceptable a US ultimatum delivered to Turkey meant to force Erdogan to cancel a deal to buy Russian S-400 surface-to-air missile systems and purchase U.S. Patriot missile systems instead. According to Reuters, Moscow was responding to a CNBC report which said Washington had given Turkey just over two weeks to scrap the Russian deal and do an arms deal with the United States instead or "risk severe penalties." More from CNBC:

Turkey has a little more than two weeks to decide whether to complete a complex arms deal with the U.S. or risk severe penalties by going through with an agreement to buy a missile system from Russia, according to multiple people familiar with the matter.

By the end of the first week of June, Turkey must cancel a multibillion-dollar deal with Russia and instead buy Raytheon’s U.S.-made Patriot missile defense system — or face removal from Lockheed Martin’s F-35 program, forfeiture of 100 promised F-35 jets, imposition of U.S. sanctions and potential blowback from NATO.

As extensively reported here previously, Ankara (which recently flipped away from Erdogan's ruling AKP party in local elections) and Washington have been at odds on several fronts, including Ankara’s decision to buy the S-400s, which cannot be integrated into NATO systems. Washington alleges that the Russian deal, if it goes ahead, would jeopardize Turkey’s role in building Lockheed Martin F-35 fighter jets.

When asked about the CNBC report by reporters on Wednesday, Kremlin spokesman Dmitry Peskov said:

“We regard this extremely negatively. We consider such ultimatums to be unacceptable, and we are going on the many statements made by representatives of Turkey’s leadership headed by President (Tayyip) Erdogan that the S-400 deal is already complete and will be implemented.”

Turkey’s defense minister said earlier on Wednesday that Ankara was preparing for potential U.S. sanctions over its purchase of the Russian missile system even though he said there was some improvement in talks with the United States over buying F-35 fighter jets.

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