Nomura

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.

Nomura has threatened to seek the immediate repayment of at least €100 million of loans to Espirito Santo Financial Group, prompting today’s sale by the Portuguese co. of a stake in Banco Espirito Santo, according to people with knowledge of the talks who asked not to be identified. Failure to repay the loan could have triggered multiple defaults across cos. within Espirito Santo group.

• 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)

A money-laundering butterfly flaps its wings in China... and the US housing market crashes?

There has been a growing number of defaults since China first broke its non-payment cherry earlier this year. Names like Chaori Solar have "promised" to pay back the money they owe, only to falter on that promise mere months after a temporary reprieve. Wide-scale panic has for now been avoided by liquidity provision to banks (not shadow-banks) and mini-stimulus which many assumed was targeted at keeping the state-owned enterprises (SOEs) alive no matter what. That 'hope' all changed this weekend... As Bloomberg reports, Qilu Bank's annual report shows that Licheng district urban construction development company has not paid its loan interest..."To the best of our knowledge, this is the first official disclosure of a LGFV default on a bank loan."

Abe's honeymoon is over. Following nearly two years of having free reign to crush the Japanese economy with his idiotic monetary and fiscal policies - but, but the Nikkei is up - the market may have finally pulled its head out of its, well, sand, and after last night's abysmal economic data from Japan which saw not only the highest (cost-push) inflation rate since 1982, in everything but wages (hence, zero demand-pull) - after wages dropped for 23 consecutive months, disposable income imploded - but a total collapse in household spending, the USDJPY  appears to have finally been dislodged from its rigged resting place just around 102. As a result the 50 pip overnight drop to 101.4 was the biggest drop in over a month. And since the Nikkei is nothing but the USDJPY (same for the S&P), Japan stocks tumbled 1.4%, their biggest drop in weeks, as suddenly the days of the grand Keynesian ninja out of Tokyo appear numbered. Unless Nomura manages to stabilize USDJPY and push it higher, look for the USDJPY to slide back to double digits in the coming weeks.

What is really going on in Iraq?

• World Bank Cuts Global Growth Forecast After ‘Bumpy’ 2014 Start (BBG)
• Al-Qaeda Offshoot Threatens Iraq Oil Site After Taking Mosul (BBG)
• Fed Prepares to Keep Record Balance Sheet for Years to Come (BBG)
• EU investigates tax rulings on Apple, Starbucks, Fiat unit (Reuters)
• Cantor Loss Shocks Republicans, Dims Immigration Changes (BBG)
• More surveillance: Google to Buy Satellite-Imaging Startup for $500 Million (WSJ)
• Tea Party activist who defeated Cantor focused on budget, immigration (Reuters)
• Airbus Suffers Worst Order Loss as Emirates Deal Scrapped (BBG)
• Amazon.com plans local services marketplace this year (Reuters)
• Amazon Stops Taking Advance Orders for ‘Lego’ and Other Warner Videos (NYT)

Yesterday's market action was perfectly predictable, and as we forecast, it followed the move of the USDJPY almost to a tick, which with the help of a last minute VIX smash (just when will the CFTC finally look at the "banging the close" in the VIX by the NY Fed?) pushed the DJIA to a new record high, courtesy of the overnight USDJPY selling which in turn allowed all day buying of the key carry pair. Fast forward to today when once again we have a replica of the set up: a big overnight dump in USDJPY has sent the dollar-yen to just over 102.000. And since Nomura has a green light by the BOJ to lift every USDJPY offer south of 102.000 we expect the USDJPY to once again rebound and push what right now is a weak equity futures session (-8) well above current levels. Unless, of course, central banks finally are starting to shift their policy, realizing that they may have lost control to the upside since algos no longer care about warnings that "volatility is too low", knowing full well the same Fed will come and bail them out on even the tiniest downtick. Which begs the question: is a big Fed-mandated shakeout coming? Could the coming FOMC announcement be just the right time and place for the Fed to surprise the market out of its "complacency" and whip out an unexpected hawk out of its sleeve?

• Attorneys Known for Large Civil Settlements Line Up to Sue GM Over Company's Handling of Defective Ignition Switches (WSJ)
• Pakistani Taliban attack airport in Karachi, 27 dead (Reuters)
• U.S. Official: Sgt. Bowe Bergdahl Has Declined to Speak to His Family (WSJ)
• Ukraine Gas Talks Resume in Brussels to Avoid Cut-off This Week  (BBG)
• China's Central Bank Flexes Muscle (WSJ)
• China says Vietnam, Philippines' mingling on disputed isle a 'farce' (Reuters)
• World Needs Record Saudi Oil Supply as OPEC Convenes (BBG)
• Kraft Raises Prices on Maxwell House, Yuban U.S. Coffee Products (BBG)
• United Continental: One Sick Bird (WSJ)

As we have heard numerous times this year already, tomorrow may be 'another' most important day of the year/cycle as Mario Draghi and his band of merry men at the ECB appear to be finally cornered (by market exuberance, macro weakness, and excess positioning) into "doing" something as opposed to just talking about it. While we have discussed the ins and outs of the potential for a small focused ABS bailout QE, negative rates, and why whatever Draghi does tomorrow will have minimal impact on the real economy; Bloomberg provides a quick and easy guide to the five things to watch for from Mario Draghi tomorrow...

• At least 74 dead in crashes similar to those GM linked to faulty switches (Reuters)
• Obama Calls for $1 Billion Europe Security Fund; Will Increase U.S. Military Presence in Eastern Europe (WSJ)
• Euro Inflation Slowing More Than Forecast Pressures ECB (BBG)
• China accelerates as euro zone stumbles (Reuters)
• Russia says Ukraine situation worsening, submits U.N. resolution (Reuters)
• Secondary Sales Squeeze Investors (WSJ)
• Barclays Said to Start Cutting Jobs in Investment Banking Unit (Bloomberg)
• Backlash Grows on Release of Sgt. Bowe Bergdahl in Taliban Prisoner Swap (WSJ)
• For fallen soldiers' families, Bergdahl release stirs resentment (Reuters)
• PIMCO's Gross stares at record outflow (Reuters)

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."

• Yellen Concerned by Housing Slowdown She Has Scant Power to Cure (BBG)
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• Banks Raise Caution Flag on Trading (WSJ)
• The answer is yes: Hilsenrath asks if BOJ’s Kuroda Awakening to His Limits? (WSJ)
• Google Develops Prototype Cars for Fully Autonomous Driving (WSJ)
• Amazon Expects Lengthy Hachette Dispute (WSJ)
• Tencent $1 Billion Game Shows Global Hunt for Mobile Hits (BBG)

• Vietnam, China trade accusations after Vietnamese fishing boat sinks (Reuters)
• SEC Set to Spur Exchange Trading (WSJ)
• Bank of Japan quietly eyes stimulus exit (Reuters)
• Japan Risks Low Growth Even as Easing Spurs Inflation (BBG)
• Hello Japan: Bond Market Message to Fed: Your 4% Rate Outlook Is Too High (BBG)
• Malaysia, UK firm release satellite data on missing MH370 flight (Reuters)
• Fighting rages in eastern Ukraine city, dozens dead (Reuters)
• Bad Credit No Problem as Balance-Sheet Bombs Rally 94%  (BBG)
• Draghi’s Asset-Backed Drive Rouses Academic Skeptics (BBG)
• For-Profit Colleges Face Test From State, Federal Officials (WSJ)