There are grounds for optimism about Europe’s single currency area. Yet beneath the surface of favorable sentiment towards the euro zone, the seeds of the next financial crisis are being sown. If markets connected all these dots - a weak and fragile economic recovery, the failure to break the “doom loop” between banks and sovereigns and, most importantly, scant prospect of a more secure political and economic union - the glaring disconnect between asset prices and underlying fundamentals in the euro zone would be a source of much greater concern.
US and European financials faded notably after Europe and then US unveiled new sanctions against Russia today. Most notably, the decision to sanction Russia's largest banks (and ban trading and capital markets access) has ramifications for the global financial system's stability given the increasingly inter-connected nature of the world. For that reason, we thought Bloomberg Briefs' chart of the most exposed banking systems by nation to any systemic issues in Russia would be useful.
While Goldman's "derivative-based financial advice" to Greece before the EU enabling them to join the party seemingly went unpunished, Nomura has not been so lucky. Having created complex derivatives transactions to 'help' Sicily's regional government, which have now produced major losses for the duped managers, The FT reports Nomura has had property and cash worth $150 million seized related to allegations that the investment bank defrauded the regional government of Sicily with the sale of derivatives in 2002.
Imperial Washington is truly running amuck in its insensible confrontation with Vladimir Putin. The latest round of new sanctions is a counter-productive joke. But it is the larger narrative that is so blatantly offensive - that is, the notion that a sovereign state is being wantonly violated by an aggressive neighbor arming “terrorists” inside its borders. Once again, the American Warfare State has confected a false narrative to justify policies and missions that have nothing to do with the safety and security of the citizens of Lincoln NE and Wooster MA. Unfortunately, false narratives are what the Warfare State does.
Aggressive buying of gold and particularly silver by Russia will likely lead to defaults on the COMEX gold and silver futures exchanges and potentially an international monetary crisis. As sanctions, economic war and currency wars intensify we expect Russian and Russian ally buying of gold and selling of dollars to intensify ...
Overnight markets have been a continuation of the relative peace observed yesterday before the onslaught of key data later in the week, with the biggest mover standing out as the USDJPY, which briefly touched 102 before sliding lower then recouping losses. This sent the Nikkei 225 up 0.57% despite absolutely atrocious Japanese household spending data, coupled with a major deterioration in employment: at this rate if Abenomics doesn't fix the economy it just may destroy it. Aside from that the last 24 hours could be summed as having a lot of noise but not a lot of excitement. This was best illustrated by the S&P500’s (+0.03%) performance which was the second smallest gain YTD. And while the SHCOMP is starting to fade its recent euphoria and China was up only 0.24%, Europe continues to cower in the shade of Russian sanctions as both German Bund yields rose to record highs, and Portugal's BES tumbled by 10% once again to 1 week lows. Today Europe is expected to formally reveal its latest Russian sanctions, which should in turn push Europe's already teetering economy back over the edge.
Much has been said in the popular press about Italy's surprising economic recovery (which based on recent data is starting to lose steam), as well as its much improved fiscal picture (even if the country's public debt hits record highs quarter after quarter and the bad debt within its banking system just rose by 24% from the prior year, to €169 billion the highest since 1998). Little has been said about just how Italy managed to pull this economic miracle off. The answer: robbing private suppliers to pay Paul, or rather, the public sector. According to Reuters, the Italian state owes some 75 billion euros ($102 billion)to private suppliers, as reported by the Bank of Italy. The unpaid bills have starved companies of cash and triggered layoffs, factory closures and bankruptcies.
An overview of the major events next week within the context of the capital markets, which could be at inflection points.
Within the European economic context Germany has been a star performer in recent years, outgrowing in GDP terms its Eurozone peer group as a whole in all but one year since 2006 (complete with a magnificent football/soccer team). This was quite a reversal of fortune from the ten years prior, when Germany consistently lagged in wealth creation. Together with its size and unwavering historical commitment to the EU project, this has created the expectation in political and even financial circles that if Europe faces another major economic crisis Germany will have no choice but to support the most vulnerable member states, possibly even relenting to the mutualisation of the Eurozone's debts. While this is a very complex topic, the following graph puts the odds in favor of one outcome: the next time push comes to shove in a big way, Germany will likely say NEIN!
According to Reuters, key measures suggested by the Commission include:
- closing EU capital markets to state-owned Russian banks,
- an embargo on arms sales to Moscow,
- restrictions on the supply of energy and dual-use technologies.
- a list of 15 individuals and 18 entities, including companies, subject to asset freezes for their role in supporting Russia's annexation of Crimea and detribalization of eastern Ukraine.
Of course, since France would blow a gasket if its Mistral ship was impacted by the sanctions, and since this really is just another populist measure not intended to really punish Russia (as that would mean a prompt shut off of European gas and an even prompter slide into a triple dip recession if not outright depression), Europe promptly "detoothed" the sanctions by announcing that they would not affect current supplies of oil, gas and other commodities from Russia, diplomats said.
With peripheral European sovereign bond yields at or near record lows, no matter how much GDP gets downgraded (Italy), banking system collapses (Portugal), or loan losses surge (Spain); things must be great for borrowers, right? Wrong! And this is exactly what keeps Mario Draghi up at night... In fact, as the following dismal reality chart shows, real corporate lending spreads are at record highs... crushing the credit-created-growth dream of a European Renaissance.
- EU to weigh extensive sanctions on Russia (FT)
- U.S. lifts flight ban to Israel (Reuters)
- Russia says will cooperate with MH17 probe led by Netherlands (Reuters)
- Norway faces ‘concrete and credible’ terrorist threat (FT)
- Don’t Tell Anybody About This Story on HFT Power Jump Trading (BBG)
- But... but... PMI: Unilever Sales Growth Misses Estimates on Asian Slowdown (BBG)
- World’s Biggest Wealth Fund Reviews $8 Billion Russian Stake (BBG)
- Qualcomm latest US tech company to reverse in China (FT)
- Hamptons Home Sales Rise as Buyers Find More Inventory (BBG)
Ever since going public, it appears that Markit's giddyness about life has spilled over into its manufacturing surveys: after a surge in recent Markit mfg exuberance in recent months in the US, it was first China's turn overnight to hit an 18 month high, slamming expectations and fixing the bitter taste in the mouth left by another month of atrocious Japan trade data (where even Goldman has thrown in the towel on Abenomics now) following which the euphoria spilled over to Europe just as the triple-dip recession warnings had started to grow ever louder and most economists have been making a strong case for ECB QE. Instead, German July mfg PMI printed at 52.9, above the 52.0 in June and above the 51.9 expected while the Composite blasted higher to 55.9, from 54.0, and above the 53.8 expected thanks to the strongest Service PMI in 37 months! End result: a blended Eurozone manufacturing PMI rising from 51.8 to 51.9, despite expectations of a modest decline while the Composite rose from 52.8 to 54.0, on expectations of an unchanged print. Curiously the soft survey data took place as Retail Sales declined both in Italy (-0.7%, Exp. +0.2%), and the UK (-0.1%, Exp. 0.3%), which incidentally was blamed on "hot weather." Perhaps Markit, now that it has IPOed successfully, can step off the gas or at least lobby to have surveys become part of GDP.
When it comes to the apocalypse, Krugman likes to have his apocalyptic cake and eat it too. Krugman says that the recent concern about “debts and deficits” was a “false alarm.” He attempts to paint those who were concerned about the debt crisis as scare mongers. He sarcastically says that “the debt apocalypse has been called off.”
Just like a century ago when waning British power invited a power struggle among rising nations, waning US power is creating conflict with Russia, China, etc. A century ago, they settled it on the battlefield. The great war brought brutal mass killings, bombings, heavy artillery, gassing, etc. And it changed warfare forever. This time around, the way we conduct war is different. Similarly, leaders are miscalculating, thinking that they can scare their opponents with warships and fighter jets. But modern warfare isn’t fought with boots on the ground. In 2014, cyberwar and economic war looms. And this type of war is something that will affect literally every person who is plugged in to the global financial system.