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Fri, 21 Sep 2018 08:08:53 -0400 Walmart Warns It Will Be Forced To Raise Prices Due To Trade War
One of the reasons why the US economic response to Trump's trade war with China had been lukewarm at best, is that US consumers had not been subject to any of the inflationary consequences of the escalating tariffs between Washington and Beijing. That, however, is about to change: overnight Walmart issued a warning in a letter to U.S. Trade Representative Robert Lighthizer that it may have to raise prices due to tariffs on Chinese imports, CNN Money reported.
Read more.....
One of the reasons why the US economic response to Trump's trade war with China had been lukewarm at best, is that US consumers had not been subject to any of the inflationary consequences of the escalating tariffs between Washington and Beijing. That, however, is about to change: overnight Walmart issued a warning in a letter to U.S. Trade Representative Robert Lighthizer that it may have to raise prices due to tariffs on Chinese imports, CNN Money reported.
"The immediate impact will be to raise prices on consumers and tax American business and manufacturers," Walmart said, according to the CNN Money report .
The letter came two weeks after Walmart asked the Trump administration to walk back its plan to put tariffs on Christmas lights, shampoo, dog food, luggage, mattresses, handbags, backpacks, vacuum cleaners, bicycles, cooking grills, cable cords and air conditioners.
However, the administration was unmoved and on Monday, it pressed forward with 10% tariffs on those products and $200 billion worth of other imports from China. The tariffs, which take effect next week, will jump to 25% at the end of the year, and target far more consumer goods - some $78BN according to DB calculations - than the first phase of $50BN in tariffs, that had relatively little impact.
Other retailers and consumer goods companies, including Ace Hardware and Joann fabric and craft stores, also lobbied the administration. Target said the tariffs will "hurt American consumers," and said working families will pay more for school and college essentials like notebooks, calculators, binders and desks. And while administration generally ignored the concerns, it did spare bicycle helmets, high chairs, car seats and playpens from the final list. It also left off Apple Watches and Air Pods, a reprieve for Apple.
Target and Walmart will now face a tough choice: They can absorb the higher costs from tariffs by taking a hit to their profit margins, or they can pass some of the price increases on to their customers.
"Either consumers will pay more, suppliers will receive less, retail margins will be lower, or consumers will buy fewer products or forego purchases altogether," Walmart warned in its letter.
The National Retail Federation, a trade group, estimated that a 25% tariff on furniture would cost Americans $4.5 billion more per year, while a 25% levy on travel items like luggage and handbags would cost an additional $1.2 billion.
As a reminder, washing machines were an early example of how tariffs filter down to shoppers. The Trump administration imposed a 20% trade penalty on washers earlier this year, and laundry equipment prices spiked over 16% in recent months.
Walmart will have to wrestle with the price question in a big way: of the company's $500 billion in sales last year, about $50 billion was linked to Chinese imports or investments in Chinese businesses, estimated Greg Melich, a retail analyst at MoffettNathanson.
Needless to say, for the company which promises "everyday low prices", raising prices is anathema to Walmart, a company that controls 10% of the US retail market and has a customer base of low- and middle-income Americans.
"Given that Walmart was such a huge source of cheap products for low income customers over the years, this really hurts the very people that Trump professes to help," said Sucharita Kodali, a retail analyst for research firm Forrester.
In addition to prices, Walmart is facing a different threat: collapsing supply chains .
As CNN notes, Walmart's American suppliers rely on parts from China to assemble and finish production in the United States. For example, Lasko fans, which are assembed in the United States and sold at stores, rely on motors from China. The same with bikes: Each mass market bicycle requires 40 individual parts to make, all of which are imported. "Tariffs on these parts would make U.S. manufacturing uncompetitive and drive up the price of bicycles for children and families," Walmart told Lighthizer.
And while the company has been working to buy more bikes from American manufacturers, not enough are made in the United States to meet demand. Even with 25% tariffs, buying bikes with Chinese parts will still be cheaper than suppliers shifting production entirely, Walmart said.
One of Trump's prerogatives with pursuing trade war is to push companies to manufacture more goods in the United States. But the National Retail Federation says the administration's thinking is flawed and carefully planned supply chain plans can't be redrawn overnight.
Retailers order their products six months to a year in advance, and they are left scrambling to find new options for 2019.
"The [administration] continues to overestimate the ability of US companies to shift supply chains out of China," the trade group said in its own letter to Lighthizer. "Global supply chains are extremely complex. It can take years to find the right partners who can meet the proper criteria and produce products at the scale and cost that is needed."
Case in point: the United States imported close to $220 million worth of dog leashes last year, and more than 80% came from China. And $474 million worth of lights for Christmas trees were imported to the United States last year, 85% of which were from China.
So while Walmart is already locked in for the coming holiday season, Christmas lights will probably be more expensive next year.
Close Fri, 21 Sep 2018 07:41:03 -0400 NYC Home Sellers Are Slashing Prices "Like It's 2009"
The crumbling New York City real estate market has continued apace during the third quarter, after more than half of homes sold in Manhattan during the second quarter closed below asking price - the worst Q2 tally since 2009. And while real-estate brokers had hoped that the seasonal shift during Q3 would help lift sales as a flood of higher-quality offers hit the market, it appears canny buyers - wary of being left holding the bag after nearly a decade of asset appreciation - are refusing to
Read more.....
The crumbling New York City real estate market has continued apace during the third quarter, after more than half of homes sold in Manhattan during the second quarter closed below asking price - the worst Q2 tally since 2009. And while real-estate brokers had hoped that the seasonal shift during Q3 would help lift sales as a flood of higher-quality offers hit the market, it appears canny buyers - wary of being left holding the bag after nearly a decade of asset appreciation - are refusing to indulge sellers' lofty asks.
To wit, NYC home sellers slashed prices on almost 800 listings during a single week this month, the largest wave of discounts in at least 12 years, per Bloomberg .
In the week through Sept. 9, there were 774 homes in Manhattan, Brooklyn and Queens that got a price cut, the most for any seven-day period in data going back to 2006, according to a report Friday by listings website StreetEasy. The previous weekly record was in March 2009, during the global recession, when 713 properties were reduced.
With another post-Labor Day wave of listings expected, sellers are experiencing a "gut check" as they realize they must lower prices to the point of demand, because the days of foreign (mostly Chinese) buyers willing to pay the "Chinese premium" are over.
Sellers with older listings are adjusting expectations just as a wave of newer properties hits the market - customary in New York after Labor Day. In that same September week, Manhattan got 662 additional listings, the third-highest total for any week in StreetEasy’s data.
"It’s a big gut-check for sellers," said Grant Long, senior economist at StreetEasy. "We’re at a period in the sales market where sellers have been incredibly ambitious with the prices they’re asking. They’re having to come down and bring prices to where demand actually exists."
As we pointed out earlier this year, sales of luxury apartments (those that cost $5 million or more) plummeted more than 31% over the first six months of this year, forcing sellers to slash price (and developers, who have neglected the sub-luxury market in favor of supposed higher margins at the top end, to eat losses).
Steven James, CEO of Douglas Elliman, provided an apt summary of the dynamics at play in the contemporary NYC housing market.
"It’s about perception - that the market went way up, and it went way up real fast, and it’s not happening anymore, and I am not going to be the fool who gets burned by overpaying," said Douglas Ellman CEO Steven James, who adds that buyers "do believe that over time, the market will go up, but it’s not going up right now."
Meanwhile, in the real world outside of New York, the familiar problems remain: with housing starts still lagging expectations, the housing market appears stuck in a vicious cycle. Low development and supply are squeezing prices higher, which are rising more than 2x faster than wage growth across the nation, and as a result most working and middle-class Americans still can't afford to buy a home.
Close Fri, 21 Sep 2018 07:18:31 -0400 Euphoria Grips Markets As Traders Brace For Quad Witching, Huge Index Rebalance
Global equity markets rallied into the last day of the week, with euphoric sessions in Asia and Europe pushing U.S. equity futures through overnight highs and into new all time highs, amid a trader focus on today's quadruple witching and huge S&P rebalancing.
Read more.....
Global equity markets rallied into the last day of the week, with euphoric sessions in Asia and Europe pushing U.S. equity futures through overnight highs and into new all time highs, amid a trader focus on today's quadruple witching and huge S&P rebalancing.
US traders braced for a surge in volume on "quad-witching " day that will see stock index futures, stock index options, stock options, and single stock futures expire...
... on top of the largest revision to the Global Industry Classification Standard since 1999 as Facebook, Google and others exit the Info-Tech sector and move to the newly created Communication Services sector, which replaces the venerable Telecom sector.
The MSCI All-Country World Index was poised for a seven-month high after its strongest week since May, as stocks across Asia capped their best two-week rally since February. China's Shanghai Composite soared 2.5% amid receding trade war fears, despite a flimsy start after the PBoC refrained from liquidity operations and dramatically slowed its net liquidity efforts for the week.
Japan’s Topix Index closed at the highest in four months as the yen continued to slide despite the BOJ's announcement to further taper its bond buys in the 25+ year bucket, which bear steepened the JGB curve, and sent the yield on 10-year JGB bonds up 1.5 bps to 0.13%, the highest level since Aug. 3. Morgan Stanley revised upward its USD/JPY forecast through to mid-2019, citing continued strength in U.S. asset prices and rising bond yields in developed markets.
European markets ignored poor PMI data, and were green across the board, as the Stoxx Europe 600 Index headed for its best week in six months rising 2% from last Friday , led by the beaten-down mining and auto sectors, while banks have also been outperformers. Those sectors have been increasingly immune to the global trade noise, which is a hint that investors have started to price in the impact of tariffs and are now seeing upside risks if a trade deal is signed. Europe will see some index rebalancing today as well, as Dassault Systemes will replace Solvay in the CAC40, Wirecard will replace Commerzbank in the DAX, while Linde Tendered, Amadeus IT and Kering will replace Saint-Gobain, E.ON and Deutsche Bank in the Euro Stoxx 50.
Still, storm clouds may be gathering because as Bloomberg notes, there have been quite a few profit warnings in Germany since August, including Henkel, Continental, K+S, Zalando, Ceconomy, Suedzucker, Tom Tailor to name a few.
Amid the bubbly stock market, further political drama erupted in Europe, with French president Macron branding Brexiteers as “liars” and ongoing fighting inside the Italian coalition government over the next budget. But the noise did not stop the pound and the euro from flying. With the dollar weakening in recent days, the correlation between the Euro Stoxx 50 and the euro reaches its highest level in two years.
Even as stocks soared, core European bonds inched higher after the latest PMI data showed euro-area expansion edged lower in September as manufacturing export orders slumped to the weakest in five years, though the euro clung onto gains to head for a three-month high. Europe's September Composite PMI showed misses across the board, with France 53.6 vs 54.6 est; Germany 55.3 vs 55.4 est; Eurozone 54.2 vs 54.5 est; Markit noted the near stagnation of exports dragging manufacturing slower, and despite a buoyant services sector, risks to growth appear tilted to the downside.
Italian bonds climbed as Finance Minister Giovanni Tria prepares a draft budget.
The greenback whipsawed before edging higher, but remained on course for its worst weekly performance in two months as measured by the Bloomberg Dollar Spot Index. The euro briefly climbed above $1.18 as medium-term accounts closed shorts, while fast-money names took profit on pound longs.
Elsewhere in FX, the euro initially edged up against the dollar although it has since dropped to session lows after a disappointing round of Manufacturing and Service PMI data, while the pound weakened against pairs after European Union leaders bluntly rejected U.K. Prime Minister Theresa May’s "chequers" Brexit blueprint and warned that time is running out for striking a deal; the Swiss franc rallied a second day against the dollar. In Japan, the yen slid, touching a two-month low as investors looked past the U.S.-China trade war, boosting stocks and sapping demand for haven assets; Japan’s government bond yields advanced after the Bank of Japan signaled it is persisting with stealth tapering by cutting purchases of bonds due in more than 25 years. The Aussie touched a three-week high, supported by the improving risk sentiment and as S&P Global Ratings raised the outlook on Australia’s AAA credit rating to stable from negative
US 10Y yields traded north of 3.00%, although so far all attempts to stage a firm break out above the key technical level of 3.10% have been unsuccessful.
In Brexit news, former UK Brexit Secretary Davis warned as many as 40 MPs could vote against PM May's Chequers plan but added that Brexiteers are "reasonably terrified" of a Labor general election victory and that Downing Street is "banking on" this fear. UK PM May today will review the fallout of the Salzburg summit with her closest aides with suggestions from a senior minister that she could have to re-write her Chequers Brexit plan. However, BBC’s Kuenssberg tweeted that no announcement is to be made today by PM May, despite suggestions there would be.
Meanwhile, over in Italy Deputy PM and Five Star Leader Di Maio said he never wanted to bring down the government and reiterated being committed to keep election promises, while Italy's League said it will govern with Five Star Movement for five years and will respect all the points in the government program. Di Maio later said new pension rules, flat tax and universal income will be part of the 2019 budge.
Elsewhere, crude oil headed for a second weekly advance, with Brent and WTI set to end the week positive by over 1% ahead of the OPEC meeting in Algeria this weekend, leading the Bloomberg Commodity Index to its highest level in more than a month. JP Morgan raised its Q4 Brent forecast by $22/bbl to $85/bbl.
Elsewhere on Friday, copper climbed to highest level in more than a month as metals extend their surge, with Goldman Sachs predicting raw materials will gain through the year-end as investors become used to trade war tensions and growth in major economies remains strong. Gold still holds strong above $1,200.
On today's calendar, expected data include PMIs with no major company scheduled to report earnings.
Market Snapshot
S&P 500 futures up 0.1% to 2,943.00
STOXX Europe 600 up 0.5% to 384.69
MXAP up 1% to 166.04
MXAPJ up 1.2% to 529.29
Nikkei up 0.8% to 23,869.93
Topix up 0.9% to 1,804.02
Hang Seng Index up 1.7% to 27,953.58
Shanghai Composite up 2.5% to 2,797.49
Sensex down 1% to 36,762.09
Australia S&P/ASX 200 up 0.4% to 6,194.60
Kospi up 0.7% to 2,339.17
German 10Y yield fell 0.8 bps to 0.463%
Euro up 0.08% to $1.1786
Italian 10Y yield rose 2.9 bps to 2.521%
Spanish 10Y yield fell 0.7 bps to 1.504%
Brent futures up 0.8% to $79.35/bbl
Gold spot little changed at $1,207.87
U.S. Dollar Index little changed at 93.95
Top Overnight News from Bloomberg
Donald Trump continued to hit out at China days after announcing another round of tariffs. The Trump administration hasn’t put a process in place for companies to get exemptions from 10 percent tariffs it’s imposing on $200 billion of Chinese goods, unlike earlier rounds of the duties, four people familiar with the matter said
Japan’s 40-year yield climbed above 1 percent after the Bank of Japan cut buying of debt due in more than 25 years by 10 billion yen at its regular operation on Friday, the first reduction in the segment since July
Theresa May promised fresh plans to break the stalemate in Brexit negotiations after European Union leaders bluntly rejected her blueprint and warned that time is running out for striking a deal
Nafta talks have probably missed the latest in a string of deadlines, leaving all eyes on the U.S. over what will happen next
Oil retreated after U.S. President Trump resumed his criticism of OPEC, as the global benchmark crude flirted with $80-a-barrel earlier this week
Australia ratings outlook revised to stable from negative by S&P. Stable outlook reflects expectations that the general govt fiscal balance will return to surplus by the early 2020s, S&P Global Ratings says
U.K.’s Theresa May promised fresh plans to break the stalemate in Brexit negotiations
Hong Kong’s sleepy foreign- exchange market suddenly came to life on Friday, propelling the local dollar to its biggest gain in 15 years. In a city that keeps its currency on one of the world’s tightest leashes, swings greater than 0.4 percent have only happened three times since Hong Kong widened its trading band in 2005
A former Deutsche Bank AG trader who was responsible for submitting the company’s daily borrowing rates -- combined with those of other banks to calculate the Libor benchmark -- said he would often alter the figure at the request of other traders to benefit their own positions
GAM holding AG said it had begun paying out some investors as it proceeds with the wind-down of suspended star manager Tim Haywood’s funds, and plans to return more than 80 percent of the money to clients in certain funds in coming days
Euro-area expansion edged lower in September as manufacturing export orders slumped to the weakest in five years, according to IHS Markit’s composite Purchasing Managers Index which slowed to 54.2 in September, down from 54.5 in August
Asian equity markets traded higher as the region took impetus from the rally in US where the Nasdaq outperformed on a rebound in tech, while the S&P 500 and DJIA notched all-time highs . ASX 200 (+0.4%) and Nikkei 225 (+0.8%) were positive with Australia led by strength in miners following the recent upside in the metals complex, while the Japanese benchmark remained underpinned by a weaker currency and approached closer towards this year’s highs. Hang Seng (+1.7%) and Shanghai Comp. (+2.5%) both conformed to the heightened global risk appetite and markedly outperformed their peers, despite a flimsy start for mainland China after the PBoC refrained from liquidity operations and dramatically slowed its net liquidity efforts for the week. Finally, 10yr JGBs declined amid gains in stocks and after a reduction of the BoJ’s Rinban purchases of 25yr+ JGBs to JPY 50bln from JPY 60bln, which pushed the 20yr yield and 30yr yield to their highest since July 2017 and October 2017 respectively. PBoC skipped open market operations for a net weekly injection of CNY 60bln vs. CNY 330bln net injection last week. Japanese Economy Minister Motegi said they will hold a 2nd round of bilateral trade discussions with US in New York on Monday, while he added he wants a win-win outcome and doesn't expect it to lead to FTA negotiations. Furthermore, Japanese Chief Cabinet Secretary Suga said PM Abe and US President Trump will meet for dinner on September 23rd and will hold a summit on September 26th.
Top Asian News
India Stock Market Rocked by Sudden Plunge in Financial Shares
Japan’s Long Bonds Join Global Selloff as BOJ Tapers Buying
Hong Kong Dollar Gone Wild: A 0.6% Move Shocks a Sleepy Market
Dewan Crashes as Much as 60% on Fear Default at Rival May Spread
European equities have started the day on the front foot, with the Eurostoxx 50+0.8% on the day, and setting the index up for a 2.7% climb this week, as trade concerns continue to ease. The FTSE MIB is todays outperformer, driven by Atlantia, who have reportedly not had the Hochteif-Abertis acquisition next week quashed, despite suggestions it may be delayed by the Italian bridge disaster. Mining names are leading gains in the FTSE 100, with Rio Tinto, Glencore and Anglo American benefitting from higher metals prices. Just Eat are at the foot of the index on competition concerns after source reports suggested Uber is looking to take over Deliveroo.
Top European News
Euro Area Expansion Unexpectedly Slows on Trade War Turmoil
Italian Data Revision Gives Tria Final View for Populist Budget
Spain’s CaixaBank to Take $530 Million Charge on Repsol Sale
Denmark Says U.S. Won’t Take Drastic Steps Against Danske Bank
Putin’s Government Said to Fume After First Rate Hike Since 2014
In FX, the Euro extended and widespread gains for the single currency with early tests of 1.1800 vs the Greenback and 0.8925 vs the Pound before weaker than expected Eurozone preliminary PMIs (German manufacturing in particular) stymied the Eur’s advance. CHF/NZD/AUD - All firmer vs the Usd, as the DXY attempts to keep its head above key chart support (93.713 and 93.640) and in touch with the 94.000 handle, with the Franc now eyeing 0.9550, Kiwi hovering just below 0.6700 and Aud re-testing 0.7300 in wake of Moody’s reaffirming NZ’s AAA rating and maintaining a stable outlook after S&P’s upgraded its outlook for Australia overnight. In EM , The Rand continues to outperform or carry the recovery baton across the region after yesterday’s hawkish hold from the SARB, and the Zar is now eyeing the 14.2000 level flagged by the Central Bank vs the Usd with extra momentum derived from SA President Ramaphosa’s economic stimulus plan based on reallocating budget expenditure rather than ramping up spending.
In commodities, oil is in the green heading into the weekend, with Brent and WTI set to end the week positive by over 1% ahead of the OPEC meeting in Algeria this weekend. In energy newsflow JP Morgan raised their Q4 Brent forecast by USD 22/bbl to USD 63/bbl. Metals are generally higher, with the market benefitting from a marginally softer dollar and further dissipation of trade tensions. Gold is set for a 1.5% weekly rise in prices, its first weekly rise in four, and is up on the day. This comes despite Goldman Sachs revising down their gold price forecast to USD 1325/oz from USD 1450/oz. Copper is the largest benefactor of reduced trade tensions, with the industrial material up 2% on the day, and hitting a 6 week high, despite Barclays expecting copper prices to fall from USD 6,603/T in 2018 to USD 6,263/T in 2019
Looking at the day ahead , the main focus datawise should be the flash September PMIs in Europe and the US. The consensus expects no great change in the composite level for the Eurozone of 54.5 and likewise the manufacturing component while in the US only very modest increases in the manufacturing and services prints are expected. Away from that the final Q2 GDP revisions are due in France while in the UK August public sector net borrowing data is slated for release. A reminder also that today is quadruple witching day in the US which is when the quarterly expiration of futures and options occurs on the same day – a four days a year phenomenon. It can usually lead to increased volumes and volatility in certain equity markets so something to be aware of.
US Event Calendar
9:45am: Markit US Manufacturing PMI, est. 55, prior 54.7
Markit US Services PMI, est. 55, prior 54.8
Markit US Composite PMI, prior 54.7
DB's Jim Reid concludes the overnight wrap
Risk is having a great time at the moment with the main highlight yesterday being another fresh all-time high for the S&P 500 (+0.78%) – the 19thtime this year we’ve closed with a new high but only the 5th since January. The NASDAQ (+0.98%) and DOW (+0.95%) were up even more with the latter also hitting a new high - the first since January.The VIX also hit an intraday low of 11.31 (closed at 11.80) while it was one-way traffic in Europe too with the STOXX 600 rallying +0.70% to notch up a fifth consecutive daily gain - the longest streak since early July. The DAX (+0.88%), CAC (+1.07%), FTSE MIB (+0.51%) and IBEX (+1.03%) also didn’t miss out and as you’ll see shortly it’s been a decent end to the week for Asia too.
In early US trading yesterday it looked like we might be talking about new highs for equities and a new YTD high for 10yr Treasury yields after they rose sharply to an intraday high of 3.094% (within two basis points of the May YTD and 7yr high) following a decent slug of US data releases. However, a rally back saw yields eventually pare all of that move to close unchanged at 3.064%. Yields in Europe also ended largely 1-2bps lower. There were no obvious headlines which drove the u-turn for yields but with 10yr Treasury yields up 26bps from the August lows, pullbacks are to be expected.
As we discussed yesterday this most recent sell-off in rates has not been accompanied by a sell-off in bond implied vol measures as it was with the selloffs in January/February and in May. I asked our rates strategist Francis Yared last night why vol hasn’t increased this time around and he believed it was because there hadn’t been any major change in inflation expectations as part of the move. It has been as much about removing some of the flight to quality premium that had been in the bond market over the summer due to Italy, Turkey, wider EM woes and the trade war. Indeed, since the recent trough on 25 August, real yields have driven 21bps of the 26bps move in Treasuries; inflation breakevens have moved only 5bps. Inflation remains the glue to stability in financial markets. Growth is strong (especially in the US) but the Fed can be measured, vol can stay relatively contained and risk firm if inflation remains subdued. We still think the risks on inflation are still asymmetric on the upside at the moment though. In terms of activity indicators all eyes next on today’s flash PMIs from around the world.
Back to yesterday, the factors which appeared to be contributing to the strong day for risk were a rebound for US tech, decent US data, no further escalation in the trade war, and in fact incrementally positive news from China with Premier Li Keqiang announcing that China would reduce tariffs on non-US imports from the majority of its trading partners, possibly as soon as next month. A weaker USD (-0.66%) and yet another strong day for EM FX (+0.71%) probably didn’t hurt either.
Touching on that US data that we highlighted above, the headline grabber was another new 48-year low (when population was a lot lower) for jobless claims at 201k (vs. 210k expected). Continuing claims also hit the lowest since 1973. Meanwhile the Philly Fed PMI hit 22.9 for September (vs. 18.0 expected) which was an 11pt rise from August. Helping risk (and perhaps stabilising bond yields) was the soft prices component while other components like new orders, shipment and employment all jumped. Later in the day, the August Conference Board Leading Index printed at 0.4%, modestly below expectations but still consistent with third quarter growth above 3% and consistent with our expectations. August home sales were flat mom, suggesting some softness, which is understandable given the 80bps rise in mortgage rates over the last year.
In Europe it was more strong data out of the UK which stole the show. Core retail sales printed +0.3% mom compared to expectations for a -0.2% mom decline. Prior month data was also revised up and as a reminder this follows better than expected CPI earlier this week and strong wages data last week. So we’ve seen a strong run of data from the UK of late and the latest has helped Sterling (+0.92% yesterday) to rise back above $1.32 for the first time since July. As for the latest Brexit headlines, the two sides continue to go back and forth with no immediate progress. Nevertheless, press reports suggested that EU officials have picked 17-18 November for another summit, at which they aim to agree on a formal Brexit arrangement before the transition period begins in March next year.
Speaking of Brexit, yesterday our UK economists published a special report diving into the impact on the UK economy from a crash Brexit. They calculate that UK growth would be around 4% cumulatively lower than under their baseline scenario by end-2020 with a two-year recession hitting in 2019 and 2020. With a large fiscal response (taken to be GBP 25bn of additional borrowing a year), the loss of output is less severe, with the UK economy growing 0.2% and 0.5% in 2019 and 2020 respectively. The team also make the point that the impact on the EU would be material. They expect the net cost of a crash Brexit to be around 0.5% of EU GDP. This would mean that their base case projection of EU growth (excluding the UK) would fall from 1.7% to 1.1% (y-o-y and rounded).
On the flip side our US economists were of the opinion that this time could be different and that Mr Powell could engineer the first ever soft US landing after unemployment has undershot the natural rate. This is especially relevant ahead of next week’s FOMC meeting, when officials will give their first macroeconomic projections for 2021. See here for their full report.
In Italy the only new news over the last day was a story about 5SM leader Di Maio threatening to quit the coalition over budget talks if it is not stretched to implement election campaign promises. Italian bonds sold off a bit after this, with 10y and 2y yields up 3.0 and 7.7bps, respectively.
Before we wrap up, in credit, Michal in my team published a one-pager with charts and commentary called “Credit Fund Flows – Europe Less Weak, US Still Strong” which provides the latest update on fund flows after rather brutal European IG outflows in the previous weekly period and puts them in the context of flows in other asset classes.
In terms of the day ahead the main focus datawise should be the flash September PMIs in Europe and the US. The consensus expects no great change in the composite level for the Eurozone of 54.5 and likewise the manufacturing component while in the US only very modest increases in the manufacturing and services prints are expected. Away from that the final Q2 GDP revisions are due in France while in the UK August public sector net borrowing data is slated for release. A reminder also that today is quadruple witching day in the US which is when the quarterly expiration of futures and options occurs on the same day – a four days a year phenomenon. It can usually lead to increased volumes and volatility in certain equity markets so something to be aware of.
Close Fri, 21 Sep 2018 06:31:03 -0400 Google Staff Discussed Search "Tweak" To Bias Trump Travel Ban Results
The notion that Google's search algorithm is biased (explicitly or implicitly) against conservative voices and media outlets is nothing new. President Trump slammed Google for this tendency over the summer when he tweeted a screen shot of the results from a search using the terms "Trump news"...
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The notion that Google's search algorithm is biased (explicitly or implicitly) against conservative voices and media outlets is nothing new. President Trump slammed Google for this tendency over the summer when he tweeted a screen shot of the results from a search using the terms "Trump news"...
...and it came back with only left-leaning news organizations in the top spots.
So it's hardly surprising that, according to a late Thursday report by the Wall Street Journal, two tech reporters exposed an incident where Google employees considered actively biasing the company's search algorithm to favor news sources that would offer the perspective that Trump's then-newly issued travel ban was unconstitutional, illegal and dangerous , while also surfacing links to resource and information that would allow users to contribute to the ACLU or other organizations working against the ban, while also providing resources for people impacted by the ban.
The list of suggestions included:
"Actively counter islamophobic, algorithmically biased results from search terms 'Islam', 'Muslim', 'Iran', etc."
"Actively counter prejudiced, algorithmically biased search results from search terms 'Mexico', 'Hispanic', 'Latino', etc."
"Can we launch an ephemeral experience that includes Highlights, up-to-date info from the US State Dept, DHS, links to donate to ACLU, etc?" the email added.
Several officials responded favorably to the overall idea. "We’re absolutely in…Anything you need," one wrote.
But a public-affairs executive wrote: "Very much in favor of Google stepping up, but just have a few questions on this," including "how partisan we want to be on this."
"To the extent of my knowledge, we’d be breaching precedent if we only gave Highlights access to organizations that support a certain view of the world in a time of political conflict," the public-affairs executive said. "Is that accurate? If so, would we be willing to open access to highlights to [organizations] that…actually support the ban?"
While these suggestions were being bandied about, Google co-founder Sergey Brin, who moved to the US from the former Soviet Union as a child, was attending rallies in the Bay Area protesting the ban. Google also joined nearly 100 technology companies in filing a joint amicus brief that February challenging the ban. "The order inflicts significant harm on American business, innovation, and growth."
According to the email chain, which was leaked to WSJ, employees responsible for search marketing said they were engaged in a "large brainstorm" about how to react to the search.
"Overall idea: Leverage search to highlight important organizations to donate to, current news, etc. to keep people abreast of how they can help as well as the resources available for immigrations [sic] or people traveling," the email says. Some suggested ways to "actively counter" Google searches that produced anti-Islamic and anti-Hispanic search results. Others focused on how the company could use its "highlights" function, the code name for an experimental project that allowed influencers like politicians and musicians to post text updates that would appear directly in Google's search feed.
A spokesperson for Google emphasized in a statement that none of these ideas was ever implemented, and that "Google has never manipulated its search results" - which is, of course, objectively untrue. In fact, Attorney General Jeff Sessions is expected to meet with states' attorneys general next week to discuss possible criminal action against tech firms that bias their products against conservatives.
"These emails were just a brainstorm of ideas, none of which were ever implemented," a company spokeswoman said in a statement. "Google has never manipulated its search results or modified any of its products to promote a particular political ideology - not in the current campaign season, not during the 2016 election, and not in the aftermath of President Trump’s executive order on immigration. Our processes and policies would not have allowed for any manipulation of search results to promote political ideologies."
Because who could ever forgot how Trump's electoral victory caused such "panic and dismay" among top Google executive, after the company actively aided the Clinton campaign only to find that its vast influence on the culture still wasn't enough to push her over the line.
VIDEO
Close Fri, 21 Sep 2018 06:09:33 -0400 BOJ Unexpectedly "Stealth Tapers", Sparking Japanese Bond Selloff
The global bond rout accelerated overnight, when Japan surprised the market - which had been already on edge over the BOJ's tightening intentions - with an announcement to further "stealth taper" its QE by trimming its buying of bonds due in more than 25 years by 10 billion yen ($88.9 million), from 60 to 50 billion yen at its regular operation on Friday, the bank's first reduction in the segment since July.
The announcement bear-steepened the JGB curve, sending loca
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The global bond rout accelerated overnight, when Japan surprised the market - which had been already on edge over the BOJ's tightening intentions - with an announcement to further "stealth taper" its QE by trimming its buying of bonds due in more than 25 years by 10 billion yen ($88.9 million), from 60 to 50 billion yen at its regular operation on Friday, the bank's first reduction in the segment since July.
The announcement bear-steepened the JGB curve, sending local long-term bond yields climbing to just shy of the highest levels since the central bank introduced its negative interest-rate policy in January 2016. The yield on 10-year JGB bonds climbed 1.5 bps to 0.13%, the highest level since Aug. 3, after trading 0.5bps before the BOJ announcement
The move was most pronounced among the longest duration Japanese bonds, as 30-year JGB yields rose 4bps to 0.89% hitting the highest level since October, while 40-year broke 1% level, rising as much as 4.5bps, and the highest since November. Futures volumes were running 200% of 10-day average through morning trade.
The "super-long" sector for Japanese bonds is favored by institutional investors, and especially pension funds who are seen as major buyers of 40-year debt, life insurers are among the largest holders of 20- and 30-year zones. And as Bloomberg notes, the 1 percent level for the super-long zones is seen as critical in prompting these long-term investors to shift some money back into the yen from higher-yielding overseas debt.
The 30-year yield rose four basis points to 0.89 percent, while that on 20-year debt increased 2.5 basis points to 0.645 percent.
JGB volatility spiked in July after the BOJ said it would tolerate a wider band of fluctuations in the benchmark yield and allow more flexibility in bond operations, allowing the 10Y yield to rise as high as 0.20% in an attempt to steepen the yield curve and provide some comfort for struggling local banks, even as it continues to push forward with its extraordinary monetary easing. On July 31, the BOJ said that it will allow the 10-year yield to deviate by as much as 0.2% points around zero percent.
Earlier this week, governor Kuroda on Wednesday kept the BOJ’s monetary policy unchanged and reaffirmed its commitment to reaching 2 percent inflation. Meanwhile, the re-election as party leader of PM Abe - who appointed Kuroda to head the BOJ in 2013 - will ultimately serve as an endorsement of his mix of monetary easing, regulatory reform and fiscal flexibility.
Yet even with the de facto tightening, the Japanese yen ignored Friday’s tapering move, dropping to a two-month low versus the dollar and the USDJPY rising as high as 112.87, as the Topix index rallied to the highest level since May in the footsteps of the furious rally that has gripped global stocks in recent days.
Commenting on the move, Mitsubishi UFJ's Naomi Muguruma said that "the BOJ’s action is in line with the policy of conducting market operations more flexibly and is aimed at improving market activity, not at raising yield levels. The move also comes in light of a supply/demand balance as government bond issuance in the super-long zone is reduced this year ."
The rise in Japanese yields joined a global selloff in U.S. Treasuries, which overnight traded at 3.08% - one of the highest levels in recent years - and German bunds, ahead of another interest-rate hike by the Federal Reserve next week. The European Central Bank this month confirmed it will cut bond-buying in half next month and anticipates that new purchases will be halted by the end of the year.
While Friday’s surprising announcement will bolster speculation that the BOJ is seeking to intentionally guide yields higher, many investors do not see the advance in Japanese yields sustaining as they see authorities carrying on with the ultra-loose monetary policy indefinitely, after Prime Minister Shinzo Abe’s winning his third straight three-year term as head of the ruling Liberal Democratic Party on Thursday took him a step closer to becoming the country’s longest-serving premier.
"The BOJ’s move Friday confirmed market views that it will continue to gradually reduce buying in super-long maturities as it looks sustain its easy policy for a while with Abe government continuing,” said Akio Kato of Mitsubishi UFJ Kokusai Asset Management in Tokyo. "The longer-yields have reacted but their moves are contained within the levels of steepening anticipated under the BOJ’s latest tweaks."
In an attempt to encourage curve steepening, earlier in the month the central bank raised purchases of short-tenor notes this month to offset a cut in frequency of operations for those maturities.
Still some said this may be too much ado about nothing: “We shouldn’t read too much into each operation as it is conducted within the policy mandate” of being more flexible, said Muguruma of Mitsubishi UFJ.
Close Fri, 21 Sep 2018 05:44:00 -0400 Was Kavanaugh Accuser Almost Raped By His Doppelgänger? A New Theory Emerges
A new theory has emerged in the case of whether Supreme Court nominee Brett Kavanaugh sexually assaulted accuser Christine Blasey Ford roughly 35 years ago; it was Kavanaugh's high school look-alike, whose high school house better fits Ford's description, and who kept in touch with the other guy allegedly in the room, Mark Judge.
The theory was presented Thursday afternoon by Ed Whelan, a former clerk to USSC Justice Antonin Scalia and currently president of the Ethics and Public Pol
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A new theory has emerged in the case of whether Supreme Court nominee Brett Kavanaugh sexually assaulted accuser Christine Blasey Ford roughly 35 years ago; it was Kavanaugh's high school look-alike, whose high school house better fits Ford's description, and who kept in touch with the other guy allegedly in the room, Mark Judge.
The theory was presented Thursday afternoon by Ed Whelan, a former clerk to USSC Justice Antonin Scalia and currently president of the Ethics and Public Policy Center (EPPC), a conservative think tank. Using entirely circumstantial evidence which could certainly ruin the life of the man at the center of the new theory, Whelan suggests that Kavanaugh's high school doppelgänger , Chris Garrett, may have in fact been responsible for Blasey Ford's recollection of the alleged incident .
Brett Kavanaugh (left), Chris Garrett Earlier t his week, Whelan tweeted "By one week from today, I expect that Judge Kavanaugh will have been clearly vindicated on this matter . Specifically, I expect that compelling evidence will show his categorical denial to be truthful . There will be no cloud over him."
Update: Washington Post There is zero chance that I would confuse them ."
Here is Whelan's theory:
In response to Whelan's theory, New York Times columnist Ross Douthat tweeted: "I don't know Brett Kavanaugh, which has made it easier for me than for conservatives closer to the man to believe he might be guilty. I do know Ed Whelan, which makes me assume there's more reason to believe the doppelganger theory than just what he just tweeted. We'll see ."
Close Fri, 21 Sep 2018 05:00:00 -0400 Despite Pledge Not To, Germany Approves Sale Of Weapons To Saudi Arabia
Authored by Jason Ditz via AntiWar.com,
With Saudi Arabia forever escalating their war in Yemen, the growing calls by human rights groups to stop selling them arms with which to commit war crimes are struggling to compete with the vast sums of money the Saudis are offering for those arms.
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Authored by Jason Ditz via AntiWar.com,
With Saudi Arabia forever escalating their war in Yemen, the growing calls by human rights groups to stop selling them arms with which to commit war crimes are struggling to compete with the vast sums of money the Saudis are offering for those arms.
Germany is the latest to renege on promises to ban weapons sales for use in the Yemen War, announcing Wednesday that the Economy Minister has greenlit a new round of artillery systems for sale to the Saudis .
However, as Statista's Niall McCarthy notes, even though the Saudi-led coalition is using advanced western warplanes and precision guided munitions in its aerial campaign over Yemen , innocent civilians are still ending up in the crosshairs. Around 10,000 people are thought to have perished in the conflict so far, two thirds of them civilians, according to the UN. The fighting and a partial blockade has also left 22 million people in need of aid and the situation could deteriorate even further depending on the outcome of the assault on the coastal city of Hudaydah. It is a vital port for humanitarian aid and severing that flow could put hundreds of thousands more people at risk of starvation.
Reliable statistics about the conflict in Yemen are notoriously difficult to come by. A non-profit organization called The Yemen Data Project has been monitoring airstrikes by the Saudi coalition and their findings help build a picture of the scale of the air campaign. There have been around 17,000 airstrikes in total since March 2015, the following infographic provides an overview of some of the targets struck. While around 3,400 military sites have been hit, residential areas have been targeted on 1,543 occasions. There have been 70 airstrikes on medical facilities, along with 266 on educational institutions and 45 on mosques.
You will find more infographics at Statista
As Ditz notes, the systems are designed for precise counterattack, and are clearly being bought explicitly to use in Yemen.
Yet the Merkel government, as part of its coalition deal, announced a full export ban to “any sides fighting in Yemen,” including the Saudis.
While this was at the time supposed to be a condition of the Social Democrats joining the government. So far, Merkel has not explained why the sale was approved over the putative ban, and the Social Democrats have not complained either.
Close Fri, 21 Sep 2018 04:15:00 -0400 Danske Bank Scandal Could Cost Denmark Its 'AAA' Rating
Denmark has for decades maintained a reputation as one of Europe's most cleanest and most credit-worthy countries. But that reputation now lies in tatters thanks to the widening scandal involving the country's largest lender, Danske Bank, and allegations that it blithely aided shadowy criminals from the Soviet Union by helping them launder money through Danske's branch in Estonia.
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Denmark has for decades maintained a reputation as one of Europe's most cleanest and most credit-worthy countries. But that reputation now lies in tatters thanks to the widening scandal involving the country's largest lender, Danske Bank, and allegations that it blithely aided shadowy criminals from the Soviet Union by helping them launder money through Danske's branch in Estonia.
An internal audit published Wednesday by Danish law firm Bruun & Hjejle only exacerbated the situation by revealing that the potential for fraud was even larger than authorities initially believed - with a total of $234 billion in transactions now labeled "suspicious" by the bank. Denmark’s government, which is presently investigating the bank along with authorities in Estonia and the US, revealed that the bank is potentially facing as much as 4 billion kroner ($630 million) in fines, according to Bloomberg. That sum is many multiples of Estonia's GDP.
Danske officials estimated at the time that they had done business with some 6,200 "suspicious" clients between 2007 and 2015, when the bulk of the alleged money laundering occurred.
That would be tantamount to the largest fine ever levied by Danish authorities , which is understandable, since the Danske scandal is one of the largest money laundering cases in European history. Bloomberg Intelligence estimates Danske may have to pay more than 1 billion euros ($1.2 billion) in total.
This could have a serious impact on the bank's financial health, which could be hugely problematic for Danes because the bank holds one-third of all deposits in the country. Indeed, the scandal could have far-reaching ramifications for the entire Danish financial system and Danish companies as S&P has warned that the case might impact Denmark's AAA credit score. Germany, Norway, the Netherlands, Switzerland, Sweden, Leichtenstein and Luxembourg also have AAA ratings from S&P in Europe.
According to EU Observer, Danish authorities began seriously investigating the allegations only after a whistleblower, and investigative reporters, shed light on it last year. These revelations followed warnings from Estonian, US and Russian authorities. Yet the bank refused to act on the warnings as now-former CEO Thomas Borgen, who resigned earlier this week, brushed them aside. Before ascending to the top job, Borgen was in charge of the bank's international business, and the Estonia branch was a crucial locus of profits. Borgen said at a board meeting in 2010 that he did not "come across anything that could give rise to concern," according to meeting minutes released by the bank on Wednesday.
To save face, the bank pledged €200 million ($235 billion) to create an anti-money laundering foundation in Denmark and Estonia that will "serve only subsidiaries of our Nordic customers and international customers with a solid Nordic footprint." Meanwhile, Danish Trade Minister Rasmus Jarlov on Wednesday said he would begin drafting "significantly sharper" penalties for money laundering.
According to the internal audit, Bruun & Hjejle said many of the transactions originated in Moscow and St. Petersburg, and some may have involved "members of the Putin family."
Since the scandal first surfaced earlier this year, Danske bank shares have tumbled 35%.
And if S&P moves through with the downgrade, or the US Treasury Department hints that it may be considering sanctions that would ban Danske from handling dollars - a punishment known as "the death penalty" - that selloff could get much, much worse.
Close Fri, 21 Sep 2018 03:30:00 -0400 Against Eurotopia: 30 Years Later, Margaret Thatcher's Vision For Europe Revisited
Authored by Kai Weiss via The Austrian Economics Center,
This week we celebrate the 30th anniversary of Margaret Thatcher’s famous ‘Bruges Speech,’ where she put forward her vision for the future of the Europe. In our new study 30 years after Bruges: Margaret Thatcher’s Vision for Europe Revisited , we have looked at what we can still learn from the former British Prime Minister.
Download the study here, and read a summary below:
Europe is today in the midst of a debate on the future of the European Union. It is not the first one : back before the Maastricht Treaty was passed in 1992, political leaders were discussing as well about where the EU, or as it was called back then, the European Community, was heading. Should it go the way of the “ever closer union,” or revert back to the fundamental principles? There was a split going through Europe on questions like this.
This was the situation in which the British Prime Minister Margaret Thatcher found herself on September 20, 1988, when she stepped in front of a crowd at the College of Europe in Bruges.
“I decided that the time had come to strike out against what I saw the erosion of democracy by centralization and bureaucracy, and to set out an alternative view of Europe’s future,” she would later write in her memoirs The Downing Street Years .
The result was today’s infamous yet magnificent ‘Bruges speech,’ which was far from being anti-EU, but a stark warning against Brussels, an attempt to save the EU in the wake of federalists demanding more and more integration. This week, we are celebrating the thirtieth anniversary of this speech. And, as it turns out, it has stood the test of time shockingly well. Indeed, many of the warnings that Thatcher put forth are even truer today (which you can read in our new study ).
The European Heritage In Thatcher’s vision, the European heritage is of crucial importance. She tries to teach us that Europe can be proud of its history. While wars did play too big of a role in the past, Europe is still the continent in which the ideal of individual liberty prevailed before anywhere else. It is the continent which brought forth many of the greatest innovations, artistic pieces, literary works, and intellectuals the world has ever seen.
Great Britain has played an instrumental part in the European story, Thatcher makes clear:
“Our links to the rest of Europe, the continent of Europe, have been the dominant factor in our history.”
Britain has contributed mightily to European history and its values with the Magna Carta, the Glorious Revolution, and many other major steps on the path to freedom. But so has Britain benefitted from its link to mainland Europe, for instance having “borrowed that concept of the rule of law which marks out a civilized society from barbarism.”
This special relationship, says Thatcher, must be retained. Today this is even truer: on the eve of Brexit, it is of the utmost importance to keep this mutual understanding between the two sides intact, regardless of whether Britain is in- or outside of the EU.
Despite the millennia-long European history of (much) success, we need to remember that it is the long history of Europe, not the EU (the latter being only sixty years old):
“Europe is not the creation of the Treaty of Rome. Nor is the European idea the property of any group or institution.”
Not everyone who criticizes the EU is automatically anti-European – an important point in today’s world in which Europe and the EU are most of the time used synonymously.
Rather, the European Union is a tool which can be used to promote the values Europeans defended so often in the twentieth century: the EU “is not an end in itself,” but rather “a practical means by which Europe can ensure the future prosperity and security of its people.”
A Europe of Free Enterprise and Free Trade What is the way to future prosperity? For Thatcher, it is “to deregulate and remove the constraints on trade.” It means “action to free markets, action to widen choice, action to reduce government intervention.” Instead of increasing centralization and regulatory efforts, Europe should remain a champion of free enterprise. History – and the Soviet Union, should be enough proof that centralized decision-making doesn’t work.
The EU should not only be pro-trade to the inside, however. Instead, it should be globally oriented: “Europe never would have prospered and never will prosper as a narrow-minded, inward-looking club,”
For this, a strong relationship with America is needed.
For Margaret Thatcher, the U.S. was indeed to a certain extent part of Europe, “in the sense that she shares a common heritage of civilised values and a love of liberty.”
It is a natural fit between the two sides of the Atlantic, since the core values are shared with one another. In the face of today’s trade wars and aggressions on both sides, it would be all the worse if this relationship would be squandered in just a few months’ time.
Against Eurotopia If there is any argument which the Prime Minister hit home continuously, it was her stark opposition to a centralized federal state, ruled by the Brussels bureaucracy. The idea of a United States of Europe is a utopia that “never comes, because we know we should not like it if it did.” Instead of politicians trying to create a single European identity, the mantra should be unity in diversity:
“Europe will be stronger precisely because it has France as France, Spain as Spain, Britain as Britain, each with its own customs, traditions and identity. It would be folly to try to fit them into some sort of identikit European personality.”
In Margaret Thatcher’s opinion, the EU should stay a supranational organization which is based on voluntary cooperation between sovereign states, rather than one federal state. She perhaps felt alone with this opinion when she presented it thirty years ago. But today, with another debate on the future of the European Union – and even farther down the road of the “ever closer union,” we should keep in mind what Lady Thatcher said, and “to raise the flag of national sovereignty, free trade and free enterprise – and fight.”
Indeed, as the Prime Minister wrote in her memoirs, “if there was ever an idea whose time had come and gone it was surely that of the artificial mega-state.”
Close Fri, 21 Sep 2018 02:45:00 -0400 Italy Is Suffering The Worst 'Brain-Drain' In Europe
Figures released today by Eurostat have revealed a concentration of the European Union's scientists and engineers in the UK and Germany.
As Statista's Martin Armstrong points out , combined, the two countries are home to 38 percent while at the same time only accounting for 29 percent of the EU's total population .
You will find more infographics at Statista
Conversely, France and Italy have 25 percent of the total population but only 16 percent of the scientists and engineers, but Italy stands out among the larger populations with just a 6% share of the EU's scientists and engineers, while representing 12% of the EU's total population - a serious brain drain.
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