It has been a mixed overnight session, following data out of China first showing that any hopes of ongoing PBOC tapering are dead and buried, following the June report showing money and loan creation (1.08 trillion Yuan up from 871 billion in May and above the 980 billion expected) in China soared, slamming expectations and indicating that Beijing is once again set on masking slowing growth with a surge in money creation. Should the Chinese not so secret any more money laundering channel be plugged this means local inflation may be set to surge in the coming months. More worrying was the release of a big drop in the German ZEW Survey expectations print at 27.1, down from 29.8 and below the expected 28.2. The low print has prompted several banks to warn that Europe's growth spurt has finally ended and there may be substantial downside surprises ahead, and certainly even more cuts to the IMF "forecast" for European growth. Finally, the Portuguese situation may be out of sight, but it is certainly not out of mind as the stock of BES continues to tumble and now the contagion has finally moved over to Espirito Santo Financial Group whose shares dropped to the lowest since 1993. Keep a close eye on this "not so lonely" cockroach.
To much trumpeting the IMF have kindly agreed to help out desperate and war torn Ukraine. How wonderful they are we are all meant to think, but the truth couldn’t be more opposite. but in reality the IMF has a very different purpose from that which is stated. If you look at the history of the IMF’s intervention in countries around the world you will see a trail of disaster and looting that repeats time and time again wherever they go.
- Secret Path Revealed for Chinese Billions Overseas (BBG)
- Traders Flood U.S. With $3.4 Trillion of Bond-Auction Demand (BBG)
- Just in time to cover bad earnings in a massive $3.8 billion "one-time charge": Citi says to pay $7 billion to settle securities investigation (Reuters)
- Troubled Epirito Santo family loosens grip on Portugal's BES (Reuters)
- BES puts in place new executives after central bank push (Reuters)
- Bank of China-CCTV drama may reveal power struggle in Beijing (SCMP)
- Portugal speeds up Banco Espírito Santo management changes (FT)
- Dark pool probe builds pressure on Barclays boss (Reuters)
- Russia Vows to Respond After Shelling From Ukraine (BBG)
- Ukraine forces end rebel airport blockade (Reuters)
- Obama Contends With Arc of Instability Unseen Since '70s (WSJ)
Another round of overnight risk on exuberance helped Europe forget all about last week's Banco Espirito Santo worries, which earlier today announced a new CEO and executive team, concurrently with the announcement by the Espirito Santo family of a sale of 4.99% of the company to an unknown party, withe the proceeds used to repay a margin loan, issued during the bank's capital increase in May. This initially sent the stock of BES surging only to see it tumble promptly thereafter even despite the continuation of a short selling bank in BES shares this morning. Far more impotantly to macro risk, it was that 2013 staple, the European open surge in the USDJPY that has reset risk levels higher, while pushing gold lower by over 1% following the usual dump through the entire bid stack in overnight low volume trading. Clearly nothing has been fixed in Portugal, although at least for now, the investing community appears to have convinced itself that the slow motion wreck of Portugal's largest bank even after on Sunday, Portugal’s prime minister said taxpayers would not be called on to bail out failing banks, making clear there would be no state support for BES.
A look at key events and data in the week ahead.
Martin Armstrong warns that 50% of the municipal governments in Germany are on the verge of bankruptcy. This is part of the reason they are looking for bail-ins and even Merkel has determined they cannot allow any referendums fearing the people will vote against the EU. The Bremen state government has now imposed a spending freeze today. The reason has been the unexpected expenditure and revenue shortfalls in the total amount of 60 million euros. Politicians cannot see that this system is doomed. They keep looking for everything possible to raise more and more taxes. It is just amazing who disconnected government are from the reality of the economy. Everything is geared to move toward the confiscation of wealth not reforming the system.
Syrian refugees, whose numbers are set to pass 3 million in the next few weeks, are almost all in Lebanon, Jordan and Turkey, with smaller numbers in Iraq and Egypt. But, as Reuters reports, that looks set to change: UNHCR chief spokeswoman Melissa Fleming exclaimed that Europe must open its doors to more Syrian refugees, having welcomed only a "miniscule" number while Syria's neighbors have reached "saturation point."
This clown parade of clueless opinions (did we mention Goldman had BES at a buy until this morning?), stretched all the way to the very top with Bank of Portugal itself issuing the following pearl:
- BANK OF PORTUGAL SAYS BES DEPOSITORS CAN STAY CALM
Uhhh, what else would the Portugal central bank say? Panic and withdraw your deposits from a bank whose exposures to insolvent entities have been largely unknown until today (and even now).
This week was interesting to say the least and it is ending with a bang. We are covering a number of brief subjects this week. I hope you enjoy them.
But... but... the VIX said everything is ok, and European rates were the lowest they have been in centuries... How can something possibly go wrong?
It just did.
Many seem to believe that if we worked our way out of debt problems in the past, we can do the same thing again. The same assets may have new owners, but everything will work together in the long run. Businesses will continue operating, and people will continue to have jobs. We may have to adjust monetary policy, or perhaps regulation of financial institutions, but that is about all. I think this is where the story goes wrong. The situation we have now is very different, and far worse, than what happened in the past. We live in a much more tightly networked economy. This time, our problems are tied to the need for cheap, high quality energy products. The comfort we get from everything eventually working out in the past is false comfort.
This battle has been fought many times in history. "This is why you see politicians doing everything possible to kill democracy for that falls whenever socialistic/communism rises. That collapses the economy sucking in everything like a black-hole and then the pendulum swings back and you get freedom once again..."
Risk assets have started the week off on a slightly softer footing but overall volumes are fairly low given the quiet Friday session last week and with the lack of any major weekend headlines. Equity bourses are down between 25-50bp on the day paced by the Nikkei (-0.4%). In China, a number of railway construction stocks are up 3-4% after reports that China Railway Corp will buy around 300 sets of high speed trains and may potentially launch 14 news railway construction projects soon as part of national investment plans.
Many in Ukraine are talking about major revisions to the Constitution (leading one local journalist to ask – “Why don’t we use the American Constitution? It was written by really smart guys, it has worked for over 200 years, and they’re not using it anymore…”) He’s right. Much of the West, in fact, has descended into the same extractive system as Ukraine. There’s a tiny elite showering itself with free money and political favors at the expense of everyone else. Ukraine may be in the midst of turmoil right now, but they at least hit the big giant reset button and are looking to build something new. The West, meanwhile, continues down its path of more debt, more money printing, more regulations, and less freedom. How long can this really go on without consequence?
The US and UK are the 'best' performing world economies based on PMIs. Despite slumping real incomes, surging gas prices, a dismal Q1, fading Q2 growth expectations, and the US being the worst relative performing macro-surprise index in the world this year, it is the cleanest clean shirt with the great expansion based on soft-survey data. France joins Korea at the bottom of the global pile of macro-economic performers with Russia, Brazil, Australia, and Greece also in contraction. Here is your 1-stop-shop guide to global macro - USA USA USA...