Is the oil cartel impotent? Is the price of oil going to fall further? What to expect from tomorrow's OPEC meeting.
US shale oil is now the marginal swing barrel in the new world oil order, and as Goldman Sachs warns (despite Larry Kudlow apparently knowing better), a decline in WTI to $75/bbl would start to significantly slow US shale growth (and thus employment, capex, and the entire US economy).
We have now done the math and compiled the Q2 earnings for the S&P 500 and we can indeed confirm that (at least in the second quarter) the buyback part is not only over but has ended with a thud, with the total notional amount of buybacks completed in Q2 plunging by 27% in Q2 to "only" $117 billion - the lowest since Q1 of 2013!
With the Federal Reserve ending their support of the markets by October, and as discussed yesterday, corporate share buybacks on the decline; two of the biggest supports of asset prices over the last couple of years is fading. What does this mean for investors going forward?
"two landmark firsts have occurred only recently, with the S&P500 breaking above 2,000 and the 10y bund yield breaking below 1%. Our Ice Age thesis has long called for sub-1% bond yields and I see this extending to the US and UK in due course. It is the equity markets where I have been consistently surprised. QE has been an essential driver for the equity market, providing the fuel for the heavy corporate bond issuance being used for share buybacks. Companies themselves have been the only substantive buyers of equity, but the most recent data suggests that this party is over and as profits also stall out, the equity market is now running on fumes." - Albert Edwards
No Yen carry levitation overnight and, naturally, no Spoo levitation, with the futures struggling following the Nikkei's -1.7% drubbing (pushing it back to nearly -10% on the year) and down well from Friday's closing print. Risk averse sentiment following on from lower close on Wall Street on Friday, NASDAQ 100 (-2.7%) marked the worst session since 2011 dominated the price action in Asia, with JGBs up 32 ticks and the Nikkei 225 index (-1.7%). The Shanghai Composite was closed for a market holiday. Overall, stocks in Europe have recovered off lows but remain in negative territory (Eurostoxx50 -0.64%), with tech sector under performing in a continuation of sector weakness seen in the US and Asia, however Bunds remained under pressure as speculation of QE by ECB continued to undermine demand for core EU bonds. No major tier 1 releases scheduled for rest of the session, with focus likely turning to any policy related comments from ECB’s Weidmann, Constancio and Fed’s Bullard.
- Putin Threatened With More Sanctions as Russia Out of G-8 (BBG)
- China Faces ‘Mini Crisis’ on Debt Defaults, Ex-PBOC Adviser Says (BBG)
- Don't laugh too hard: Obama to propose ending NSA bulk collection of phone records (Reuters)
- SEC Is Probing Dealings by Banks and Companies in Loan Securities (WSJ)
- Japan GPIF asset review not aimed at supporting domestic stocks (Reuters)
- Chinese families clash with police, slam Malaysia over lost plane (Reuters)
- Russian Capital Flight Surges in First Quarter, Fueled by Ukraine Crisis (WSJ)
- Democrats ditch Nate Silver after data whiz predicts dismal midterm outcome (DN)
- China’s Urbanization Loses Momentum as Growth Slows (BBG)
If public pensions don't delay and start plugging their funding holes now, they will need to contribute just under $200 billion per year over the next 30 years, amounting to 1.2% of GDP and 8.8% of state and local tax revenues. If funds wait a decade, the impact per year explodes to $325 billion over 30 years and will "cost" 1.2% of GDP and 12.2% of tax revenues. But the most likely, and worst case scenario, is if pension funds do nothing at all, "let the machine run its course", then the economic damage is unquantifiable as low asset returns inevitably cause lower income through benefits after assets are fully depleted.
When the US federal government was shutdown, China jumped in on the financial bandwagon and suggested that we build ‘a de-Americanized world’, which boils down to getting rid of the dollar as the international reserve currency.
Late last night, Paul Ryan wrote a WSJ op-ed titled "Here's How We Can End This Stalemate" in which some believe he provided the framework for what a possible fig leaf offering on the government shutdown and debt ceiling compromise could look like. While on the surface this may be grounds for optimism, the reality is that Ryan, whose entire proposal is based on the assumption that Obama is willing to negotiate which for now he has shown repeatedly he won't, merely fell back to his traditional "grand bargain" talking point made so clear during the Mitt Romney presidential campaign. What Ryan does suggest is yet another angle to a common bargaining position, one which would be certainly more palatable to Obama: because in order to get both parties happy and reach a compromise, all that would happen is for various long-term assumptions would be changed, with zero actual, real current impact - something politicians are good at, because it does not generate an adverse impact during their tenure (afterwards, it becomes someone else's problem).
The Chief Economist at Citi Willem Butler has said today on CBC in an interview that the fiasco over the US budget and the lack of money is nothing more than irresponsible on all political wings and that the country is being run by Munchkins in the Land of Oz.
- JPMorgan eyes $4bn ‘pay for peace’ deal (FT)
- Prosecutors Pursue Big SAC Settlement (WSJ) - in the US if you are rich enough, no crime is bad enough
- Cruz's Defiant Stand Is Also a Lonely One (WSJ); Texas senator speaks for more than 14 hours (FT)
- Iran Applies Brakes to U.S. Mideast Plans (WSJ)
- Americans in Poll Doubt Economy Rebound in Defiance of Forecasts (BBG)
- Big Banks Cut Basel III Shortfall by $112 Billion at End of 2012 (BBG) - the equivalent of 10 bridges to the Kalahari desert
- Obama’s Jabs at Russia on Syria Shows Diplomacy Tensions (BBG)
- ICAP Staff Face Criminal Charges Tied to Libor (WSJ)
- Alibaba Is Said to Shift Target for I.P.O. to U.S. From Hong Kong (NYT)
- Home gold rush is over (Reuters)
- Conoco in landmark Alaska drone flight (FT)
Following the FOMC surprise, no less than twelve Fed speeches will provide some "clarifications" on where the Fed now stands. It is very likely that this subject will continue to dominate the discussions of market participants. At the same time, US data will get scrutinized after the recent weakening and to see how warranted the Fed's concerns were. Two US consumer sentiment surveys, durable goods orders, and the third reading of Q2 GDP are important. In addition, monthly consumption and income data for August provide more information on the third quarter and of course there will be interest in the latest weekly claims numbers after some distortions in recent readings.
US Fed's exit plan poses a critical dilemma and underscores important contradictions. The calendar says Europe should be talking about exits too--as aid packages for Spanish banks, and Ireland and Portugal are to wind down in the coming year--yet more rather than less assistance may be neeed.
As macro news continues to trickle in better than expected, the latest batch being benign (if completely fake) Chinese inflation data (CPI 2.6%, Exp. 2.6%, Last 2.7%) and trade data released overnight which saw ahigher than expected trade balance ($28.5bn vs Exp. $20.0; as exports rose from 5.1% to 7.2%, and imports dipped from 10.9% to 7.0%, missing expectations), markets remain confused: is good news better or does it mean even more global liquidity will be pulled. As a result, the release of an encouraging set of macroeconomic data from China failed to have a meaningful impact on the sentiment in Europe this morning and instead stocks traded lower, with the Spanish IBEX-35 index underperforming after Madrid lost out to Tokyo to win rights to host 2020 Olympic Games. Even though the news buoyed USD/JPY overnight, the pair faced downside pressure stemming from interest rate differential flows amid better bid USTs. The price action in the US curve was partly driven by the latest article from a prolific Fed watcher Jon Hilsenrath who said many Fed officials are undecided on whether to scale back bond purchases in September. Hilsenrath added that the Fed could wait or reduce the programme by a small amount at the upcoming meeting. Going forward, there are no major macroeconomic data releases scheduled for the second half of the session, but Fed’s Williams is due to speak.