vrijdag 20 oktober 2017

So, Now what?

BTFD, Stocks Dip And Rip After China Bubble Warnings

Before we start, something went very funky in the last couple of minutes of the market today,
*TRUMP SAID TO BE LEANING TOWARD POWELL FOR FED CHAIR: POLITICO,
a Dovish pick...


For a brief moment there this morning, some reality poked its head out of the cave after PBOC's Zhou raised fears of asset bubbles needing to be controlled, Hong Kong stocks crashed, Spain appeared to invoke Article 155, and AAPL slid on sales concerns, but that did not last long as commission-takers reminded the machines that 1987 can never happen again, ever, and that every dip is beholden to be bid...


Small Caps and Nasdaq remain red on the week as The Dow pushes on...


Once US equity markets were open for action, risk-off became risk on...


Everything the same...


VIX briefly spiked above (drum roll pls) 11 before being beaten back once again...


The decoupling remains...


Tech stocks tanked today (FANGs and AAPL leading the way) but did not bounce like the main indices...


Trannies tumbled early, driven by a plunge in airlines (but even that was bid)...


United shares fell as much as 12 percent, which would be the biggest drop since October 2009 on a closing basis, after the airline’s profit outlook disappointed investors. UAL’s forecast for a pretax profit margin of no more than 5 percent this quarter means it will fall further behind industry leader Delta, according to JPMorgan...


Healthcare stocks extended their gains, despite no deal...


Financials were the big dip that was bought...


Treasury yields were all lower (and the curve flatter) on the day, something seems to be happenening between the close of Asia and the close of Europe...


And as the yield curve flattens to bank stocks keep outperforming!!


For the 3rd day in a row, the dollar index reversed its early trend (this time from weaker to stronger) after Europe closed. The dollar index bounced perfectly of unchanged for the week...


EURUSD has been the week's biggest gainer so far of the majors and Cable the loser...


Gold jumped overnight with everything else (mirroring USDJPY as usual)...


WTI slid to one-week lows on the heels of rising inventory concerns...


Bitcoin continued its rebound, erasing the week's losses...

donderdag 19 oktober 2017

Dana Lyons; A 52-"Weak" High For Stocks?

While the S&P 500 his on an impressive string of new highs, a number of them have come on questionable breadth. When it comes to analyzing the quality of a stock market rally, we are big on breadth, or the internals, of the market. The more participation there is on the part of all stocks, the better the foundation to support the rally. If the rally is reliant on only a relatively few large stocks, it only takes a few stocks breaking down to undermine the advance. On that basis, the quality of the post-August rally has been, for the most part, superb. The validity of that assessment over the past few weeks, however, has come into question due to an odd string of new highs. Specifically, the S&P 500 has recorded 5 all-time highs over the past 10 days. Interestingly, 3 of those have occurred on negative NYSE breadth, more NYSE declining stocks than advancing stocks. If that seems unusual, it’s because it is. Looking back in our database to 1965, we find only 3 other 2-week stretches containing at least 3 new highs occurring on negative breadth:
- 3/20/1995
- 6/20/1997
- 12/14/2010
The concern with these clusters of negative breadth new highs is that the rally participation may be starting to wane. Thus, despite the new highs in the average, the market may be getting more vulnerable. Looking back at the prior clusters, did the performance of the S&P 500 bear out that concern? Well, the sample size is a minuscule 3, but the evidence would clearly suggest no. We won’t present the full performance table following those 3 precedents, but we’ll say that 2 months later, the S&P 500 was higher by at least 4.5% each time. Furthermore, the worst 6-month drawdown of any of the 3 events was a mere -2.4%. So, that puts some of the concern about weakening internals to rest, but, again, only based on 3 occurrences. We’d prefer a larger sample size in order to place any real measure of confidence in the data. If we relax the parameters a bit and look at clusters of just 2 negative breadth new highs within a 10-day span, we come up with 14 unique occurrences in 52 years, prior to the current one...


So does this larger sample size add validity to the concern about weakening internals? As the chart reveals, a number of the occurrences certainly took place in the vicinity of intermediate-term, or even cyclical, tops. But what about in aggregate? Is the signal a consistent enough warning to warrant our attention? Let’s check out the full post-event performance history...


Overall, the S&P 500′s performance following these events is pretty solid, with slightly above average median returns over most time frames. However, it has been anything but consistent. There were, again, a handful of events, 1968, 1979, 1980, 1998, 1999, that preceded sizable drawdowns in the intermediate-term, or even full-on bear markets. So, is there any distinguishing market characteristic that delineates the good episodes from the bad? And on which side does our present case fall? As you know, we are generally able to isolate a condition or two in these studies that has led to a consistent pattern of behavior in the market. This time, however, it was a struggle to find such a pattern. No matter which way we parsed the data, the results seemed to come up mixed. About the only pattern we identified, and a loose one at that, was that the index’s short-term performance often foretold of its longer-term fate.
For example, each of the 4 events that saw the S&P 500 lower 1 week later were also down 3-6 months later. Besides that pseudo-trend, the results seemed to genuinely be of a random nature. Eventually, we stopped looking for a “magic” indicator delineating the good episodes from the bad, as our efforts began to head dangerously down the data-mining path. So what’s the bottom line here? This study is a difficult one to put much stock into, so to speak. Multiple S&P 500 new highs occurring on negative NYSE breadth in a 2-week period have led to mixed results, though, more good than bad. Perhaps the most instructive thing we can say is that these events have not been a consistently accurate warning of weakening internals and a vulnerable market. We certainly would not consider this development to be a bullish signal. However, if you want to find something to worry about when it come to the stock market, there are much better candidates than this one....

Initial Jobless Claims Crash To Lowest Since 1973

So much for the hurricane distortions of the US labor market...


Just a few short weeks after initial unemployment claims jumped in the aftermath of Hurricanes Harvey and Irma, in the latest week the DOL reported that filings for unemployment benefits tumbled to the lowest level in 45 years, or since 1973, as all those workers who were unable to work due to the two hurricanes, returned to their jobs...


The initial claims print for the latest week, which however included Columbus Day and thus could have been seasinally distorted, was 222K, below the 240K expected, and down 22K from the 244K last week. The less volatilte 4-week initial claims average alsod dropped to 248,250 from 257,750, Meanwhile, continuing claims fell by 16K to 1.89M in the week ended October 7.
# As Bloomberg notes, "the larger-than-projected decrease in claims probably reflected difficulty adjusting for the Columbus Day holiday. At the same time, the report showed further declines in claims in hurricane- affected states, which initially led to a spike in applications in Texas and the southeastern U.S. in late August and early September." According to the DOL, the unemployment rate among people eligible for benefits fell to 1.3% from 1.4%. The Dept of Labor also announced that application slumped in the hard hit states of Florida, Texas, and Georgia. Of note, the DOL said that claims were estimated only for the Virgin Islands last week. Finally, and perhaps most notably, the latest period includes the reporting week that the Labor Department surveys for its October employment figures.

Synchronized Global Sell-Off

As Nanex' Eric Hunsader shows, today's trading session is shaping up, at least for now, as the biggest post-midnight selloff in the S&P in 2017. With a notable risk-off tone...


The selloff is global...


AsiaPac...

Europe...

And US...

Of course, after months of calm acquiescence to the melt-up in global risk assets, a modest drop like today's needs a narrative to explain it, in order that bullish asset-gatherers can thusly dismiss the fears as 'one-offs' and reiterate how the central banks will step in if things get worse. Here are your catalysts du jour;
- Apple: supplier orders for iPhone 8 and Plus are reduced by ~50% for Nov. and Dec. with shipments seen at 5-6m units per month: EDN
- PBOC Zhou warning about household debt levels and asset bubbles
- Hong Kong: Hang Seng stock index crashed into the close, biggest drop in 11 months
- Catalonia: Spain to invoke Art. 155 and suspend Catalan autonomy after regional president refused to drop independence claims
- ECB’s Nowotny: ECB cannot stop QE purchases abruptly; policy can be normalized before inflation reaches 1.9%, would be a mistake to wait too long on changing QE
- China 3Q GDP 6.8% down from 6.9%; Retail Sales 10.3% vs 10.2% est; Industrial Output 6.6% vs 6.5% est; Fixed Assets 7.5% vs 7.7% est.
- New Zealand: new coalition govt formed between Labour and First parties; National Party ousted
- U.K. Sept. Retail Sales m/m: -0.8% vs -0.1% est.
# As Alexandre Baradez, chief market analyst at IG France, notes, “It’s a synchronized risk-off move for stocks, with gold, the yen, the Swiss franc rallying, right on the day of the Black Monday anniversary. There hasn’t been a clear trigger in the news this time, rather of mixed negative elements, including worries that Trump won’t be able to deliver on tax cuts anytime soon.” Baradez is correct that Trump Tax hope is gone...


# Happy Black Monday Anniversary...

Traders Puzzled By Last Minute Hong Kong Crash

Is this what sparked the global slide in stocks? After months of 'calm', well-managed market gains, Hong Kong's Hang Seng Index crashed almost 600 points in the last few minutes of the day - the biggest drop since the day of the US election in Nov 2016...


Some big movers included Geely Automobile Holdings, which has more that tripled this year, plunged 7.5 percent, while Hong Kong developers declined after three-month bank borrowing costs climbed the most this year; and ZTE Corp., a telecoms equipment maker, sank 11 percent after disappointing preliminary results. The crash - over 2.2% - was not driven by the disappointing China GDP growth data per se (it was not a reactionary drop) but perhaps was triggered by comments about household debt and asset bubble risk by PBOC governor Zhou.
# As Bloomberg noted, "the turmoil broke a sense of bullish calm that’s prevailed throughout this year in Hong Kong’s stock market, with the benchmark index jumping 31 percent through Wednesday in Asia’s best performance." Tracking other indexes, the Hang Seng last week climbed above its 2015 high to return to levels not seen for a decade, mostly due to window dressing effort by various central banks who intend on keeping regional stocks as high as possible during the 19th Chinese Communist Congress.

Things To Ponder

- Rajoy Deploys Ultimate Weapon of Law on Catalonia (BBG)
- Congress Rolls Toward Shutdown Fight Over Immigration, Obamacare (BBG)
- Hong Kong Stocks Tumble Most This Year as Geely, Developers Sink (BBG)
- Inside battle imperils $230 million cryptocurrency deal (Reuters)
- From Damascus, Iran vows to confront Israel (Reuters)

Global Markets Shaken By Sudden Equity Sell-Off: Hang Seng Crashes, VIX Surges

Has the market's "melt-up" levitation finally ended? Of course, it could be much worse: as Bloomberg's Paul Jarvis recalls, thirty years ago on this day traders around the globe were staring at their screens in disbelief as stock markets turned to a sea of red: the Dow, S&P 500, FTSE, DAX and CAC fell -23%, -20%, -10%, -9% and -10% respectively.
# Fast forward to 2017 and the day known as Black Monday appears as little more than a blip in U.S. and European stock markets’ relentless progress. Having closed above the 23,000 mark for the first time on Wednesday, the Dow Jones Industrial Average has led markets back from the abyss, rising more than 13-fold since falling 23% in a single trading session on Oct. 19, 1987. 
Then again, "all" it took was central banks collectively buying a little over 30% of global GDP in debt over the past 3 decades, and especially in the past 8 years, to create the world's most artificial "bull market" and "recovery" in history, and one day there will be hell to pay, but not just yet. Instead, on "Not Green Thursday", traders wake up today to a modern day version of mini Black Monday, in which a sudden "risk-off" equity selloff has swept across global markets during early European trading, before gradually running out of steam, following a day in which the Dow Jones closed at one of its most overbought levels in the past 100 years...


US equity futures lead the move, with the VIX surging more than 1 vol to 11.550 (up 14%) the highest in five weeks, with Nasdaq futures heavily underperforming on reports of orders being cut for Apple iPhone 8. Losses compounded by poor earnings from major European names including SAP (-2.2%), Unilever (-4.8%) and Nestle (-0.6%); additionally, Hang Seng sold off into the close to end the day down 1.9%. As stocks sell off, USTs rally sharply in response, with the short end of the curve flattening again as the USD/JPY spikes lower, as do crude futures. Here are the key overnight events that are having the biggest impact on this morning's trading:
- Apple: supplier orders for iPhone 8 and Plus are reduced by ~50% for Nov. and Dec. with shipments seen at 5-6m units per month: EDN
- Catalonia: Spain to invoke Art. 155 and suspend Catalan autonomy after regional president refused to drop independence claims
- ECB’s Nowotny: ECB cannot stop QE purchases abruptly; policy can be normalized before inflation reaches 1.9%, would be a mistake to wait too long on changing QE
- China 3Q GDP 6.8% down from 6.9%; Retail Sales 10.3% vs 10.2% est; Industrial Output 6.6% vs 6.5% est; Fixed Assets 7.5% vs 7.7% est.
- New Zealand: new coalition govt formed between Labour and First parties; National Party ousted U.K. Sept. Retail Sales m/m: -0.8% vs -0.1% est.
# As Nanex' Eric Hunsader shows, today's trading session is shaping up, at least for now, as the biggest post-midnight selloff in the S&P in 2017...


Meanwhile, as noted earlier, Spanish bonds marginally underperform due to auction concession and confirmation that govt will suspend Catalan autonomy. NZD weakest in G-10 after new coalition govt is formed, with the potential for RBNZ mandate to therefore be expanded beyond inflation. Gold and VIX rally given the risk-off sentiment The Stoxx Europe 600 Index headed for the biggest drop in almost two months, with all industry sectors in the red, after Spain said it would move ahead with suspending Catalonia’s autonomy. Spanish shares lagged the benchmark and bond yields for peripheral Europe fluctuated. Underwhelming earnings from companies including Unilever and SAP SE further frayed investors’ nerves, already on edge amid concerns about the escalating Catalan stand-off, the lack of progress in Brexit negotiations and the search for a new Federal Reserve chief. “European markets have started the day firmly on the back foot as a raft of company report earnings missed expectations, while investors await the next steps with respect to the constitutional crisis in Spain and today’s EU summit in Brussels,” said Michael Hewson, chief market analyst at CMC Markets U.K. “We look set for a lower U.S. open today.
All eyes are likely to be on today’s meeting with current Fed chief Janet Yellen and U.S. President Trump with some Republicans calling for her to be allowed to leave.” Meanwhile in safe havens, bunds gained as European stocks slumped from the open. Spanish bonds softened as Spain moves ahead with suspending Catalonia’s autonomy, though bounced after solid auctions. The late day selloff in stocks in Hong Kong stood out in a mixed Asian session, as the Hang Seng crashed as much as 600 points, or 2.4%, in the last minutes of trading, coming even as China reported its economy expanded 6.8 percent last quarter, as traders focused on comments about household debt and asset bubble risk by PBOC governor Zhou...


The dollar rebounded after losses earlier in the week while the pound weakened as data showed U.K. retail sales dropped more than forecast in September, making third-quarter growth in the sector the weakest in four years. The euro briefly dropped before recovering. Haven currencies led G-10 gains amid risk-off mood as weak earnings dragged stocks lower. Elsewhere, the kiwi dollar plummeted 1.3% after New Zealand’s Labour Party got the backing of the nationalist New Zealand First Party to form a government, as reported earlier. China’s currency retreated even after data from the central bank suggested that the country is now seeing capital inflows. Iron ore fell the most since September. 
Treasuries pared weekly losses and the greenback snapped a three-day winning streak. The euro felt the heat from latest Catalonia headlines, yet was supported by demand for upside ECB exposure, while sterling dropped the most in two weeks as soft U.K. data coincided with start of EU summit. In commodities, West Texas Intermediate crude fell 1.3 percent to $51.34 a barrel, the lowest in a week. Gold increased 0.3 percent to $1,284.68 an ounce. Copper declined 0.8 percent to $3.15 a pound. In rates, the yield on 10-year Treasuries decreased two basis points to 2.32 percent. Germany’s 10-year yield dipped less than one basis point to 0.39 percent. Britain’s 10-year yield decreased three basis points to 1.288 percent. Japan’s 10-year yield declined one basis point to 0.067 percent. Data include jobless claims and Philadelphia Fed Business Outlook. Philip Morris, Paypal, BNY Mellon, Danaher and Blackstone are among companies reporting earnings....

Spain To Activate Article 155 Process, Suspending Catalonia Autonomy

Spain announced it will trigger the so-called "nuclear option" of Article 155 under the Spanish Constitution, and move ahead with the process of suspending Catalan autonomy and the powers of the local government, after Regional President Carles Puigdemont for the second time in four days refused to comply with a Spanish ultimatum to clearly drop his claim to independence. Spain deployed the ultimate constitutional weapon after Puigdemont said the regional parliament may declare independence unless the government in Madrid agrees to talks. Puigdemont’s response came to an ultimatum from Madrid to renounce his claims to full autonomy by Thursday or face the consequences. "It's not that difficult to reply to the question”, but there is still no definitive “yes” or “no”.
Consequently, Madrid is poised to trigger Article 155 this Saturday, suspending the autonomy of the breakaway region. As previewed, the "final" deadline passed and the Catalonian leader failed to satisfy Madrid's demands. Puigdemont had sent a new letter to Mariano Rajoy minutes before the second Article 155 deadline ran out at 10 a.m. on Thursday morning. That new letter did not provide the clarity the central government was seeking about the status of the independence of Catalonia, the Spanish Prime Minister's office said. “The suspension remains, it’s up to the Spanish Government to enforce article 155 with the authorisation of the Senate. If the central government persists in blocking dialogue and continues its repression, the Catalan Parliament may proceed, if it considers it appropriate, to approve a formal declaration of independence,” Puigdemont said in his letter to Rajoy. Puigdemont also said that his request for a face-to-face meeting had been ignored, and that Spanish “repression” of Catalonia was being stepped up with the jailing of two separatist activists on Monday. “My request for the repression to end has not been met either,” Puigdemont said. “On the contrary, it has increased.”
In response, the Spanish government said in a Thursday morning statement that “the government will continue with the procedures set out in Article 155 of the Constitution to restore the legality of self-rule in Catalonia." The deadline had been imposed by the Spanish Government and yesterday Deputy Prime Minister, Soraya Saenz de Santamaria, warned that anything less than dropping the secession bid meant that it would begin the process of taking control of the Catalonian Administration. This morning, Madrid’s initial response has been to accuse Puigdemont of blackmail and confirm it will continue the process of triggering Article 155. Next, the Spanish Cabinet will meet this Saturday to trigger Article 155: the Spanish Senate, under the control of Rajoy’s party, would initiate the transfer of power from Catalonia to Madrid "in order to protect the general interest of Spaniards, among them the citizens of Catalonia, and restore constitutional authority in that autonomous community region". It is expected to take 48 hours to appoint a replacement for Puigdemont and set a timeframe for regional elections in Catalonia. After that, it is expected to take several more days for the Government’s decisions to be implemented.
So, we are probably looking at late next week before Madrid might take control of policing in Catalonia. Besides the possibility of civil unrest in Catalonia, Rajoy is also likely to face pressure from groups which are sympathetic to the Catalans. From a BBC report “The Spanish parliament has seen sharp exchanges in recent days, with the head of one left-wing Catalan party accusing the government of choosing humiliation, repression and fear over dialogue. At one point, politicians from radical left-wing Spanish party Podemos held up placards urging the release of the Catalan independence activists, calling them ‘political prisoners’.” In addition, Rajoy has lobbied the Socialists to back him over Catalonia, but they are advising him to take adopt a gradual approach to intervention. Article 155 is contained in Spain's 1978 constitution, which was drawn up in the wake of Franco’s death. It has never been invoked, so Spain and financial markets are heading into uncharted territory. The initial market reaction has been negative, with Europe’s Stoxx 600 extending losses to as much as 0.8%, while Spain’s IBEX 35 slid as much as 1%. Spain 5Y CDS was currently quoted 73.53 according to CMA data as of 9:56am London Wider than South Korea (70.38) and India (71.76) and just inside inside Peru (78.04) and Panama (78.30), according to Bloomberg. The Euro initially slumped on the news, dropping as low as 1.770 before recouping all losses....

Elijah Magnier; Barzani's Failed Kurdistan Project, A Deathblow To The Partition Of Iraq And Syria

The project to divide Iraq was dealt a deathblow by a decision of the Iraqi Prime Minister Haider Abadi to send the Army and the security forces to recover all Iraqi territories controlled by the Kurds of Massoud Barzani. The Kurdish leader was riding the horse of Iraqi partition (in fact, a lame horse) to establish a Kurdish state in the northern part of the country. Following the failure of Barzani’s project in taking advantage of the fight against ISIS and therefore declaring his “state”, every country in the Middle East is abandoning him because no one likes to be associated with failure. Barzani sent envoys (I personally met some) around the globe who returned with apparently promising results: “over 80 countries promised to recognise the new State of Kurdistan”. These promises turned out to be false (“no friends but the mountains”), other (existing) political alliances turned out to be stronger and Barzani was left alone with his empty promises and unreliable advisers. Countries of the region, France, Saudi Arabia and the Emirates to start with, are now establishing a clear and unambiguous relationship with Baghdad’s government.
Abadi, following an authorization of parliament, used a fist of iron to fragment the partition project, not only of Iraq, but of the entire region, that was supposed to be sparked off by the Kurds in Iraq and in Syria and via the regime change attempt in the Levant. In less than 48 hours, the Iraqi army, with all its security services (army, popular mobilization units, Counter-Terrorism, Federal Police), extended its control over Kirkuk, Khanaqin (Diyala), Bashiqa, Makhmour (Nineveh) and Sinjar - the city that leads to the borders with Syria. All territories that were established for Baghdad’s control under the US administrator Paul Bremer in 2003-2004 (with the limits of Kurdistan) are back now in place. Abadi forced the Kurdish Peshmerga to return to the old areas they controlled in 2003 after they took advantage of the “Islamic State’s” (ISIS) occupation of large Iraqi territories in the north and north-east and north-west of Iraq in 2014. Most importantly, the Baghdad government has started its recovery of territory (following Kurdistan referendum) from the rich province of Kirkuk, which produces more than 65 percent of Iraq’s northern oil (about 500,000 bpd), a region which accounts for about 40 percent of Iraq’s total national oil production. Kirkuk includes the oil fields of Tawke, Peshkabir, Atrush, Shaikan, TaqTaq, Khurmala Dome Avana Dome, Bab Jambur, BaiHasan: all were recovered and are now under Baghdad’s central government control.
By recovering Kirkuk (and its oil fields), Abadi stopped the rise of the “State of Kurdistan”, which cannot exist with the remaining northern oil without substantial financial support from Baghdad to pay the salaries of the army (Peshmerga) and official employees, and this as long as Erbil delivers the full production of oil: in exchange 17% of its revenue will be due to Kurdistan. Massoud Barzani will have to withdraw from the political scene because he will be unwilling to beg for the return to the archaic relationship with Baghdad government and obey the Prime Minister- this might prove just too humiliating. Pavel Talabani, the son of the Iraqi ex-President Jalal Talabani, declared that the Kurdish army in the eastern regions of Khanaqin-Sulaymaniyah was under the command of the commander-in-chief of the armed forces, the Prime Minister Haider al-Abadi, thus taking his distance from Erbil, further isolating the Kurdish Leader Masoud Barzani: who is in fact the biggest loser today in Iraq. The first to abandon Barzani was Turkey, which has announced that it will close its border (after days of hesitation awaiting the concrete results of Massoud’s separatist rejection of biding by the constitution and Baghdad’s reaction to it) with Kurdistan and handed over the main crossing point between the two countries to the central government in Baghdad and its forces. Saudi Arabia followed immediately with direct contact with King Salam, who offered his congratulations to Abadi and rejected Barzani’s rebellion.
With the collapse of the Barzani project, the United States had much less hope than before of pushing Syrian Kurds towards independence from Damascus. Baghdad has regained control of the crossings between Iraq and Syria in Sinjar, Rabi’a. Two more crossings remain outside of Baghdad’s control: Tanf under US control temporarily and al-Qaem under ISIS. This means no support, no exit and no entrance will remain legally available to the Syrian Kurds. The new situation will lock down the airspace from Syrian al-Hasaka which is surrounded by Turkey in the west, by the forces of Damascus in the south and by the regular Iraqi forces in the east. Nope. Recent events dealt a deathblow to partition...


The Sykes-Picot agreement, which divided the Levant in the wake of World War I, was revived after analysts and diplomats called for the redrawing of the borders of the Middle East region, especially Iraq and Syria, the creation of a new state called Kurdistan (Iraq and Syria), a new Sunnistan (for Sunni in Anbar-Iraq and Idlib, Syria) and Shiistan in south of Iraq. Turkey has begun to review its policy with Iraq and it will certainly find common ground with Baghdad so that it withdraws its troops from Bashika and other areas now that Abadi has showed his teeth against Erbil’s decision and his willingness to wage war against those who want to divide Iraq (and without considering the cost). The attractive commercial relationship, that has been at the centre of the attention of President Erdogan, will prevail, and will encourage Iraq and Turkey to re-establish good neighbourly relations ( Turkish-Syrian relationships will certainly follow after the war ends in Syria). The US will be forced today to reconsider its presence in the north-east of Syria because such a presence has now become meaningless. The US forces are stationed in al-Tanaf without any strategic purpose and in al-Hasaka/Raqqah with the Kurds, whereas ISIS has been defeated in its Syrian capital.
It is possibly easier for its own proxies, the Syrian Kurds, to give up this alliance in time, before this same US drops them. Kurdish interests don’t lie with Washington but with Damascus, ready to establish a constructive dialogue with them if they stop being seduced by the US’s temporary interest in the Levant. And lastly, Haider al-Abadi gave himself the political impetus he had missed in recent years. Yes, Iran played a key role in warning Masoud Barzani, a day before the start of the Iraqi operation to recover all territories from the Peshmerga: the commander of Iran’s Revolutionary Guard Qasem Soleimani alerted Barzani to the gravity of the situation (but in vain). He pressed the Iranian-Talabani ally to stand down and take distance from Barzani, and to support Abadi in countering Kurdistan’s “partition plans”. But it was Abadi’s final decision to act. He rendered a huge service to Syria and to his own country. Abadi has secured himself a strong place in the Iraqi political arena and the upcoming elections as a Prime Minister for a second term. It will be very difficult to compete with him, he who destroyed ISIS but, above all, the “hero” who exploded the biggest danger of all: the partition of Iraq … and Syria....

Yield Curve Inverts, Yuan Slides As China GDP Growth Slows

Despite all the talk of deleveraging, China did anything but according to its most recent data but the lagged impact of the tumbling credit impulse is starting to show up in the broader macro data. Despite the National Congress being under way (and recent credit spikes and positive PBOC hints) GDP growth limped lower to the expected +6.8% YoY, and fixed asset investment growth was the weakest in over 17 years. Ahead of tonight's data dump, China macro data had been disappointing notably, having tumbled for over a month to its weakest since August 2016...


"A further acceleration in growth would surprise many investors who have taken their lead from measures to slow the property market, credit tightening moves and the government’s 6.5-percent or so growth objective for this year," said Shane Oliver, head of investment strategy at AMP Capital Investors in Sydney. But amid The National Congress, and demands for calm in all markets, expectations for tonight's data were for the usual spot on 'meet' or even a 'beat' of well-managed expectations (following People’s Bank of China Governor Zhou Xiaochuan's hints last weekend that expansion may accelerate in the second half to 7 percent).
- China GDP YoY: MEET +6.8% vs +6.8% Exp (+6.9% prior) - missed the whisper number of +6.9% YoY
- China Retail Sales YoY: BEAT +10.3% vs +10.2% Exp (+10.1% prior)
- China Fixed Assets Investment YoY: MISS +7.5% vs +7.7% Exp (+7.8% prior) - lowest since Feb 2000
- China Industrial Production YoY: BEAT +6.6% vs +6.5% Exp (+6.0% prior)
"Caution is needed in the Byzantine world of Chinese statistics," said Pauline Loong, managing director at research firm Asia-Analytica in Hong Kong. The data "traditionally deliver exactly what its leaders want to hear, and what its leaders want the public and the market to hear, ahead of any sensitive political event"...


As a reminder, The IMF is convinced that China will overtake the eurozone GDP in 2019...


Offshore Yuan had sold off heading into the data and extended losses after (remember Q3 was notable strength reverse into notable weakness after PBOC verbally intervened)...


Still, China's inverted yield curve suggests not everyone is so excited about the future...

The Dollar Funding Shortage: It Never Went Away And It's Starting To Get Worse Again

Very quietly, in the last few weeks, cross currency basis swaps (CCBS) related to the dollar have reversed their rise and started moving deeper into negative territory, again. This might not be of much interest to buyers of global equity markets at this point, but it is signalling ominous signs of growing funding stress in the financial “plumbing”. As Bloomberg notes “cross-currency basis swaps, which money managers and corporate treasurers outside the U.S. can use to borrow in dollars, remain close to the widest levels since January even after quarter-end, when such financing strains typically dissipate. The market was a key indicator of stress during the financial crisis, and while it’s nowhere near the alarming levels of that era, it’s still garnering the attention of analysts.” In simple terms, the CCBS is the cost in basis points (typically for three months) of swapping these currencies into dollars over and above prevailing interest rate differentials. In a benign environment the CCBS should trade at zero, not in negative territory. The latter implies a shortage of US dollar balance sheet (credit) offered by the global banking system. As the chart above shows, dollar liquidity became extremely tight in December 2016, especially for Yen borrowers, although it not nearly as bad as what happened in May of 2015 when we first brought attention to this little followed corner of the financial system. Despite the weakness in the dollar during much of the current year, the dollar liquidity issue never completely disappeared...


# There are several reasons why, like in recent years, financing in dollars is becoming more expensive. Among the reasons cited by strategists, are the political tensions in Spain related to Catalonia’s independence push and the slow pace of Brexit talks, which may be heightening the perception of credit risk for the region’s banks. Combine that with the prospect that a U.S. tax overhaul could trigger dollar repatriation, and the outlook for monetary-policy divergence with the Federal Reserve starting to unwind its balance sheet, and analysts see the trend only worsening.” "This is keeping a lot of people feeling uneasy,’ said Gennadiy Goldberg, an interest-rate strategist at TD Securities in New York. ‘This now seems more of a political story, with Catalonia, U.K. Brexit negotiations and potential U.S. tax reform and repatriation. Spreads could keep widening. While Republican efforts to get a tax plan through the Senate may be off to a rocky start, any framework that spurs U.S. companies to repatriate cash could compound the scramble for dollar financing. Although that’s probably a story that will play out in the second quarter, it may already be factoring into expectations."
While we couldn’t disagree, there’s one important factor they’re missing, the US Treasury’s account (Treasury General Account) with the Federal Reserve. By running down this account by $400bn in the first quarter of 2017 (mainly due to the debt ceiling issue), the Treasury effectively increased dollar liquidity (bank reserves) by the same amount. This not only helped to ease the dollar funding problem, but was a factor in the dollar’s weakness. Since last month, the Treasury has rebuilt the balance in its account at the Fed from $38bn on 6 September 2017 to $170bn on 11 October 2017, for a net increase of $132bn, not insignificant. Obviously, if and when the Treasury rebuilds its account at the Fed to the previous level, dollar liquidity could become extremely tight again, especially if the Fed is tapering its balance sheet at the same time. We have been wondering whether the Fed governors fully understand this, although some of the boys at 33 Liberty no doubt do. Credit guys also understand it “there’s another reason the strain is set to grow. The Fed is set to boost the pace of its balance-sheet roll-off each quarter, potentially putting upward pressure on U.S. rates relative to Europe and making it tougher for global investors to get dollar funding," according to Mark Cabana, head of U.S. short rates strategy at Bank of America Corp.” Clearly the issue is attracting the attention of investors as BoA analyst, Cabana writes in a recent report, and explains that “we have received a number of client questions recently about the outlook for banking reserves both in the near and medium term due to the Fed's balance sheet unwind and potential swings in Treasury's cash balance.”
# In summary, Cabana expects a large reserve drain in Q2 2018 with banking reserves dropping by more than $1 trillion by the end of 2019, which “highlights the potential for funding strains to emerge around Q2 next year and uncertainties around the Fed's longer-run policy framework. This reserve drain and the Fed’s portfolio unwind should pressure funding conditions tighter through wider FRA-OIS and more negative XCCY (cross currency basis swaps) levels”...


Here are his views in more detail for the rest of this year, next year and 2019-20.
- Reserves through Year End: The aggregate amount of reserves outstanding will decline only modestly between now and the end of the year, minimizing any near-term funding pressures. The $30 bn reduction from the Fed's portfolio this quarter along with near-term fluctuations in Treasury's cash balance due to the debt limit will result in only modest swings in overall reserve levels. Treasury's cash balance will need to decline ~$100 bn between now and December 8, but should rebound to ~$200 bn by year end via corporate tax receipts and ~$70 bn in bill supply during the last 3 weeks of the year.
- Reserves in 2018: A material drain of over $600 bn bank reserves during 2018 should occur due to the increased pace of Fed portfolio unwind and build in the Treasury cash balance post debt limit resolution. The Fed is projected to have $381 bn in Treasury and agency MBS roll off of their portfolio next year with the pace of reduction accelerating to $90 bn in Q2 and around $115 bn in each of Q3 & Q4 (the Fed is expected to have monthly redemptions below the cap in these quarters). The sharpest reserve drain is likely to come from a boost in Treasury's cash balance after the debt limit resolution in March. Treasury will likely increase the cash balance to $350 - $400 bn early in Q2 through tax receipts and higher bill supply. This reserve drain and the Fed's portfolio unwind should pressure funding conditions tighter through wider FRA-OIS and more negative XCCY basis levels.
- Reserves in 2019 & 2020: Large reserve drains of $400 - $500 bn are expected in each of these years. This will primarily be driven by the expected $425 and $337 bn Fed portfolio reduction as well as growth in currency in circulation, which we project to average around 5% per year ($80-90 bn / yr). We also expect slightly lower usage of the Fed's reverse repo facilities as the Fed's balance sheet shrinks due to more attractive short-term investment opportunities amidst higher Treasury supply. We expect to see signs of reserve scarcity emerge at some point over the course of 2020 or in early 2021. While the total amount of required reserves is currently unknown we have previously estimated that required level of reserves in the system is likely between $600 bn - 1 tn. This is consistent with the NY Fed's surveys of primary dealers and market participants where the median respondent believes reserve balances will total $613bn, while the 75th and 25th percentile of responses were $1tn and $406 bn. As reserve scarcity is reached, we expect to see continued upward movement in LIBOR as well as higher rates and volumes in the fed funds / OBFR markets”...


Cabana finishes with a discussion about how bank reserves will fit into monetary policy and the potential appointment of a new Fed Chairman.
Framework question: A key question in thinking about the longer-term outlook for reserves is the monetary policy operating regime that the Fed will employ, which will be heavily influenced by the next Fed Chair. As our economists recently noted, if Chair Yellen or Governor Powell leads the Fed they would likely be in favor of maintaining a "floor" regime (relying on IOER & ON RRP). In contrast, Fed Chair contenders Warsh and Taylor would likely favor a "corridor" system that relies on a scarcity of reserves that would reduce IOER usage, increase fed funds trading activity, and require frequent open market operations to adjust reserves in order to hit the Fed's target. It seems current staff at the Fed have a strong preference to maintain a "floor" regime. The November 2016 FOMC meeting minutes noted a number of advantages of such a system and recent Fed research has highlighted that abundant reserves can smooth interbank payments, reduce daylight overdrafts at the Fed, and lead to less discount window usage. A "floor" system would also aid in satisfying bank LCR HQLA requirements while reducing the need for frequent open market operations to smooth volatility in Treasury and financial market utility deposits at the Fed. This regime would keep fed funds below IOER and likely ensure that the ON RRP remains a key fixture of the Fed's monetary policy well into the future.
Negative cross currency basis swaps indicate that the structural tightness in dollar liquidity never disappeared despite the weaker dollar. If dollar funding markets get a lot tighter again, this won’t be good news for EM markets with offshore (Euro) dollar debt in the region of $10 trillion. Rolling over dollar debt periodically will be uncomfortable, to say the least, for some of the region’s banks....

Paul Craig Roberts Warns The Biggest Danger To Stocks Is The Dollar

Former Assistant Treasury Secretary in the Reagan Administration, Dr. Paul Craig Roberts, says the record highs you see in the stock markets are based on “phony profits” that come from global central banks “propping up” the financial system. Roberts says, “Any of these central banks are really only there for a handful of big banks. That’s all they are concerned with. All the Federal Reserve has been concerned with for the last decade is the welfare of a handful of mega banks. Of course, the banks are too large. They should have never been allowed to get that large. When you have a bank too big to fail, then your policy has failed. You’ve allowed too much concentration. Where is anti-trust? Where is the Sherman Act? Everything that was legislated in the past to prevent the kind of looming catastrophe that is hanging over our heads, this looming catastrophe is produced by central banks. They are perpetuating it because they don’t know how to get out of it.” The IMF has just warned on the profitability of nine huge global banks. Some say they equal nine possible Lehman Brothers, which was the financial institution that started the 2008 meltdown. Is the IMF terrified of the slightest correction in the markets? Dr. Roberts says, “I think so, yes, because it’s not based on reality. It’s based on massive liquidity. So, it’s full of all kinds of dangers.” The biggest danger to Dr. Roberts, is the U.S. dollar.
# Dr. Roberts contends, “It seems to me that the only thing that would cause the Federal Reserve to stop the liquidity would be if the U.S. dollar fell under attack. If for some reason people said, hey, we don’t want the dollar anymore, and they started moving out of dollars into other currencies or into something else, if they cease to hold assets in dollars, if that happened, the Fed would have to try to raise interest rates to support the dollar. Then you could see that everything could come apart. If the interest rates would go up, there would be all kinds of derivatives that would not be sustainable. The stock market would collapse. It would be a mess. It would be an utter mess. That’s what the IMF is worried about. It’s a messy situation. How do you get out of it?” How does Dr. Roberts say people should protect themselves? Dr. Roberts says, “I would not be in debt”....

Phoenix Capital; Charts That Signal A Major Warning

Inflation is going to annihilate the stock market. The reason, in fact the BIG reason, that stocks have been soaring since November 2016 is because of the coming inflationary storm. Stocks LOVE inflation at first as it results in asset prices rising. However, stocks absolutely HATE inflation once it starts eating into profit margins. When this happens, companies begin to lose money as higher operating costs eat into their profits. On that note, take a look at the following chart of corporate profits pre-tax...


What you are looking at, is an “end of cycle” situation in which corporate profits begin to roll over in a bit way. Why are corporate profits rolling over? Profit margins are shrinking as inflation begins eating away at profits. And this is just the beginning. What happens when inflation REALLY starts to bite into stocks?

Catalan Leader Vows To Declare Independence If Spain Triggers "Nuclear Option"

The Spanish government crackdown on Catalan separatists has intensified this week, with a judge jailing two of the movements leaders and the country’s constitutional court officially declaring the region’s Oct. 1 referendum to be illegal. However, after confusing the Spanish government with his independence (non) declaration, regional leader Carles Puigdemont is refusing to back down ahead of tomorrow's second, and final, Spanish ultimatum. According to Reuters, Puigdemont told a meeting of his party on Wednesday he would formally declare independence Thursday morning if Spanish Prime Minister Mariano Rajoy follows through with his threat to invoke the so-called "nuclear option" of Article 155 of the Spanish Constitution, and suspend Catalonia’s regional autonomy - a decision that would likely lead to the arrest of Puigdemont and his government, followed by another violent crackdown on separatists. Madrid has set a second and final deadline of 10 am local time Thursday for the Catalonian government to recant and officially revoke its symbolic declaration of independence, which Puigdemont suspended last week while hoping to negotiate with the Spanish government, Reuters reported...


Puigdemont has urged the European Union to mediate between Barcelona and Madrid, but EU member states have so far been reluctant to intervene, while Madrid has refused to even engage in any diplomatic contact. In what some interpreted as an attempt to stall until international concern intensified, Puigdemont delivered a confusing speech in which he neglected to clearly explain his government’s planned course of action, and also refused to clarify whether his government had in fact declared independence, a strategy he employed again on Monday when Barcelona blew through Madrid’s original deadline for withdrawing its independence bid. As the standoff enters its third, and perhaps final week, many believe the tensions have already had a negative impact on the Spanish economy. On Monday, Spain cut its economic forecast for 2018 as the costs of the Catalan crisis began to mount. And Spain’s threats to (peacefullly or otherwise) suspend home rule has sent Spanish spreads a little wider as investors brace for a disruptive Thursday morning confrontation, as short-term yields on Catalan on Spanish debt ticked higher...


If Prime Minister Mariano Rajoy moves to apply direct rule on Thursday, it would take between three and five days for regional autonomy to be effectively suspended. If that happens, expect a replay of the violent scenes that marred the region’s independence referendum, which inspired nearly 90% of the more than 2 million Catalans who successfully voted to choose independence. Indeed, in a preview of what may happen next, Mike Krieger wrote overnight the following:
# If you think you’ve seen enough, brace yourselves because it may get far more chaotic in the days ahead. If Spain’s Prime Minister Mariano Rajoy goes through with his threat to invoke Article 155 on Thursday should Catalonia refuse to clarify its position on independence (it won’t), it’ll be the equivalent of a political nuclear bomb going off in Europe. Should the Spanish government activate Article 155, it’ll mark the culmination of a perfectly played independence movement by the Catalans. This isn’t to say that the road to independence, or more autonomy, will be smooth or easy from that point forward, but it will create a sense of increased solidarity amongst the Catalan people that wasn’t as widespread before October 1st. Many of those who opposed independence before, or were on the fence, will come around to standing with their friends and neighbors in the face of unacceptable aggression from Madrid. The road may be a long one, but invoking Article 155 will mark the beginning of the end for Madrid....

Wolf Richter; Mnuchin Deploys Stock Market Bubble As Political Weapon

But the ballooning National Debt has disappeared from the agenda. The S&P 500 has soared 20% since the presidential election, the Dow Jones Industrial Average 26%, and the Nasdaq 28%, in about 11 months. Understandably, everyone is taking credit for the surge in stock prices, including President Trump, who according to CNBC, has tweeted “more than 20 times since the election” about the stock market, “extolling the market’s gains,” including this gem on Monday: “Stock Market has increased by 5.2 Trillion dollars since the election on November 8th, a 25% increase.” The folks in Congress are heavily invested in the skyrocketing stock market, and unless they pass the tax cut, their gains could be eviscerated, that’s the warning that Treasury Secretary Steven Mnuchin has thrown their way in an interview with Politico. Sure, everyone wants a tax cut, the lucky ones that get them. Especially since we no longer have to worry about how to pay for it. The reason we don’t have to worry about it anymore is because the ballooning US national debt has miraculously disappeared from the agenda. Nevertheless, the kinds of tax cuts proposed by the White House are not a clear-cut deal in Congress, and like other proposals, it might sink into political quicksand.
# So here comes the political weapon to force Congress to act: money. Mnuchin told Politico that the surge in stock prices since the election is largely based on hopes that Congress would pass the tax-cut bill, and if it doesn’t, part of the recently obtained paper wealth could just evaporate. Not only would the folks in Congress see part of their wealth disappear, they’d also have to answer to their constituents who’d be in the same debacle. So Mnuchin in the interview: “There is no question that the rally in the stock market has baked into it reasonably high expectations of us getting tax cuts and tax reform done.” To the extent we get the tax deal done, the stock market will go up higher. But there’s no question in my mind that if we don’t get it done you’re going to see a reversal of a significant amount of these gains.” So the tax-cut deal is “priced in, in anticipation,” he said. But there’s more good news: “I don’t think it’s priced in 100% certainty,” he said. “So I think the market will go up” if the deal passes. But if it doesn’t pass, duck for cover.
# Politico interpreted the warning this way: If that sounds like a threat to Republicans, and perhaps some Democrats, to pass a tax bill, that’s because it is. In fact, some analysts on Wall Street say that if a tax overhaul falters, a big correction on Wall Street could help push the legislative process back on track. “If it suddenly looked like a tax bill was dead, stocks could sell off sharply. Then the blame game would begin,” said Greg Valliere of Horizon Investments. “I think Trump would hammer hard at Democrats, blaming their intransigence for a stock market sell-off. A half-dozen Democrats in the Senate, fearing a defeat next year, would waver.” 
But really, there is nothing to worry about, according to Mnuchin, who gave an “absolute guarantee” that Trump would have the deal on his desk and sign it by the end of the year. This is the same guy who earlier this year had promised that the tax-cut deal would be wrapped up and done by August, a deadline that came and went without anything but a continued surge in the stock market. Trump is a little more sanguine about the timing of the tax-cut deal. “I would like to see it be done this year,” he told reporters on Monday. “But don’t forget it took years for the Reagan administration to get taxes done, I’ve been here for nine months. We could have a long way to go, but that’s OK.” But the reality is this: The stock market doesn’t need a fundamental reason, such as increased after-tax earnings, in order to surge. Earnings, or more precisely earnings per share (EPS), are the primary fundamental reason that should drive stock-market valuations. But as this chart by FactSet shows, aggregate EPS (black line) for the S&P 500 companies have stagnated since August 2014 even the the S&P 500 index (blue line) has soared (red marks added)...


So what gives? We know that fundamentals no longer matter. And corporate tax cuts are part of the fundamental data set. When they didn’t happen in August, stocks didn’t blink. And if they don’t happen in December, that fact alone won’t crash stocks. Something will eventually drive down stocks, but it won’t be a simple one-item fundamental thing. The fundamentals have been lousy for years, as the above chart shows. Instead, excess liquidity is trying to find a place to go. Investor enthusiasm is at record levels, volatility at record lows. Market powers have been lulled asleep on the certainty that nothing can go wrong anymore. But that “certainty” can change direction without notice, and to do so, it doesn’t need the failure of Congress to pass a tax bill. It’s going to do it when it’s ready and on its own terms. And then not even an Act of Congress can resurrect it....

SKEW....

Finally we note that 'crash' risk (SKEW) has never been this high relative to 'normal' risk (VIX)...


For almost 2 weeks now (9 TD), we have been this narrow red channel...


Markets have been in a Stuck-Up/Melt Up phase since 9/25. A close up shows the daily has a bearish rising wedge...