- The Kerry Konfusion Kontinues: Kerry urges Kurds to save Iraq from collapse (Reuters)
- Abe Unveils Japan’s New Growth Strategy (WSJ)
- Because the recovery: Avon to Cut 600 Jobs as CEO McCoy Seeks to Trim Expenses (BBG)
- Iraqi Parties Pressure Prime Minister Nouri al-Maliki to Step Down (WSJ)
- Ukraine Rebels Call Cease-Fire to Match Government Truce (BBG)
- IRS accused of obstruction over lost emails in Tea Party affair (Reuters)
- IRS chief scorched as 'liar' (WND)
- Big Investors Missed Stock Rally (WSJ)
- U.K. Jury Finds Coulson Guilty of Conspiracy to Intercept Phone Voice-Mail Messages (WSJ)
- HSBC to halve countries served by private bank, sells assets (Reuters)
- Bond Market Has $900 Billion Mom-and-Pop Problem When Rates Rise (BBG)
This week brings PMIs (US and Euro area ‘flash’) and inflation (US PCE, CPI in Germany, Spain, and Japan). Among other releases, next week in DMs includes [on Monday] PMIs in US (June P), Euro Area Composite (expect 52.8, a touch below previous) and Japan; [on Tuesday] US home prices (FHFA and S&P/Case Shiller) and Consumer Confidence (expect 83.5, same as consensus), Germany IFO; [on Wednesday] US Durable Goods Orders (expect -0.50%, at touch below consensus) and real GDP 1Q anniversary. 3rd (expect -2.0%) and Personal Consumption 1Q (expect 2.0%), and confidence indicators in Germany, France and Italy; [on Thursday] US PCE price index (expect 0.20%), Personal Income and Spending, and GS Analyst Index; and [on Friday] Reuters/U. Michigan Confidence (expect slight improvement to 82, same as consensus), GDP 1Q in France and UK (expect 0.8% and 0.9% yoy, respectively), and CPI in Germany, Italy, Spain and Japan.
As we noted previously, it is likely that whatever Draghi does this week "will not deliver a significant impulse to the real economy" in Europe but while negative rates are almost guaranteed (based on the consensus), reviving the ABS market (via focused QE) is being heralded by many as a positive swing factor. Unfortunately, as SocGen explains, even if the ECB began purchasing ABS in H2 2014, the size and reach of the market is not enough to move the scale as Europe acts desperately to avoid a Japanese-style lost decade.
Ahead of this Thursday's ECB meeting, speculation is rife about what Mario Draghi will announce, and as the following Nomura chart highlights most pundits are convinced that the most likely announcement is a cut in the refi and deposit rate with a probability of around 90%, an LTRO in distant third at 34%, and a full blown QE dead last with 10%. However, as SocGen predicts, which is rather aggressive in its assumptions expecting a negative deposit rate of -0.1%, a targeted LTRO to "boost lending to the private sector", and a "signal" of €300 billion in asset purchases, the bulk of this new-found liquidity will almost exclusively go to boost capital markets, and the wealth effect. As for the broader economy? "We do not expect the 5 June measures to deliver a significant impulse to the real economy."
With real incomes stagnant and the cost of everything from food, school tuition and healthcare premiums skyrocketing for millions of Americans, it appears that borrowing against one’s home is once again a key source for consumption, if not survival, for the nearly extinct socio-economic demographic known as the middle-class. The Wall Street Journal reported yesterday that home-equity lines of credit (Helocs) had increased at a 8% rate year-over-year in 1Q14...The new American Dream.
A dispassionate look at the week ahead.
According to the Chinese financial publication Securities Daily, emergency real estate rescue packages have been launched in large cities such as Wuxi, Nanning, Hangzhou, Tianjin, Tongling and Zhengzhou in the last month alone..."if a borrower does not fulfill the loan repayment obligations as agreed in the contract, the guarantee institutions will have to repay the housing loans..." What a surprise – a government guarantee. The market is imploding and defaults are going through the roof. Property vacancy rates in Zhengzhou are an astounding 23%. So the government is putting taxpayers on the hook. In other words, the government is panicking. But it’s not working... so much excess inventory has built up, a major slowdown was inevitable. And like the butterfly that flaps its wings, a slowdown in China has substantial effects on the rest of the world.
After the initial crash in many of the commodities backing China's shadow-banking system's ponzi, levels recovered modestly as rumors were spread of bailouts, stimulus, and in fact the exact opposite of what the Chinese government had declared it was trying to do. That ended for Iron Ore this weekend when, as The FT reports, China announced plans to get tougher on loans for iron ore imports as concerns grow that steel mills are using import loans to stay afloat in defiance of policies to reduce overcapacity in heavily polluting and lossmaking industries. Iron Ore prices tumbled overnight, closing near the lowest levels since Sept 2012 as it appears the PBOC and CBRC are serious and set to implement the tougher rules on May 1st.
The PBOC's willingness to a) enter the global currency war (beggar thy neighbor), and b) 'allow' the Yuan to weaken and thus crush carry traders and leveraged 'hedgers' is about to get serious. The total size of the carry trades and hedges is hard to estimate but Deutsche believes it is around $500bn and as Morgan Stanley notes the ongoing weakness means things can get ugly fast as USDCNY crosses the crucial 6.25 level where losses from hedge products begin to surge. This is a critical level as it pre-dates Fed QE3 and BoJ QQE levels and these are pure levered derivative MtM losses - not a "well they will just rotate to US equities" loss - which means major tightening on credit conditions...
The positive sentiment stemming from a positive close on Wall Street and saw Shanghai Comp (+0.33%), Hang Seng (+1.09%) trade higher, failed to support the Nikkei 225 (-2.10%), which underperformed its peers and finished in the red amid JPY strength as BoJ's Kuroda failed to hint on more easing. Stocks in Europe (Eurostoxx50 +0.32%) traded higher since the open, with Bunds also under pressure amid the reversal in sentiment.
Alcoa kicked off earnings season yesterday, with shares up 3% in after-market hours. Focus now turns to the release of the FOMC meeting minutes.
Gold is a tangible commodity. It's a material good that can be held in the hand, bought and sold--and warehoused. You have to understand warehousing to understand the gold market.
Looking ahead at the next couple of weeks, Citi's Stephen Englander sees multiple sources of risk which he does not think are fully priced in. Most of these risks appear to be asset market negative, involving higher US rates, more geopolitical disruption and downside economic shocks.
One of the primary drivers of the real estate bubble in the past several years, particularly in the ultra-luxury segment, were megawealthy Chinese buyers, seeking to park their cash into the safety of offshore real estate where it was deemed inaccessible to mainland regulators and overseers, tracking just where the Chinese record credit bubble would end up. Some, such as us, called it "hot money laundering", and together with foreclosure stuffing and institutional flipping (of rental units and otherwise), we said this was the third leg of the recent US housing bubble. However, while the impact of Chinese buying in the US has been tangible, it has paled in comparison with the epic Chinese buying frenzy in other offshore metropolitan centers like London and Hong Kong. This is understandable: after all as Chuck Prince famously said in 2007, just before the first US mega-bubble burst, "as long as the music is playing, you've got to get up and dance." In China, the music just ended.
One month ago, when we last looked at the incredible amount of Chinese new loan issuance, a topic which even the mainstream media is slowly starting to circle in on as the primary source of hot money flow creation in the world, we found the highest loan notional issued by the country's semi-sovereign banks since 2009, and the largest one-month ever monthly total in the largest aggregated, Total Social Financial, series, which rose by an unprecedented CNY2.6 trillion, or over $400 billion in one month! That was just before the tremors surrounding first the potential defaults of several Chinese shadow-banking Trusts, and certainly before the first official corporate bond default which took place last week. Overnight, the PBOC released its latest, February, loan data. As expected, it reveals something else entirely.
Iron Ore prices have dropped 25% since the end of last year, sending the key steel-making component into a bear market after slumping by over 9% overnight - its biggest daily drop on record. We warned last week this was likely to happen on the heels of Copper prices fell on monetary financing fears as we explained here how Iron Ore replaced copper as the collateral pool for new loans (following China's clampdown on cash-for-copper deals last year) and stockpiles hit record highs. What is further hurting the Iron ore prices are concerns over China's new anti-pollution reforms which are set to close thousands of furnaces.