Economic principles explain why the Saudis began, in late 2014, to pump crude as fast as they could – or close to as fast as possible. In fact, there is a good reason why the Saudi princes are panicked and pumping.
We believe Hillary Clinton lost the Presidency this past week. While the explosive DNC leaks will undoubtably have a long lasting effect, this post will barely reference the leaks. Rather, it will explain how recent decisions by the Hillary campaign played right into Trump’s hands by essentially waving a gigantic middle finger to the 73% of Americans who think the country is headed in the wrong direction.
Refiners are shifting to yet another desperate attempt to delay the inevitable market equilibrium point by switching from summer to winter blend as demand for the former has disappointed. The problem is that by doing so early, stocks of winter blend will fill that much sooner, and absent some miraculous surge in demand in the winter months, the moment when the price of oil tumbles has merely been postponed for a few months while assuring that the drop - when it comes - will be much more acute.
In a surprising rejection of Ben Bernanke, BOJ governor Haruhiko Kuroda said that there will be no helicopter money in Japan, amid increasing speculation over monetary and fiscal policy in the world’s third-largest economy. Given the current institutional setting, there is "no need and no possibility for helicopter money," Kuroda said in a BBC Radio 4 program that was broadcast Thursday. “At this moment, the Bank of Japan has three options with quantitative and qualitative easing with negative interest rates."
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"A worst-case scenario would be a series of major negative surprises sparking a crisis of confidence around the globe. These unforeseen events could quickly destabilize the market, pushing investors and lenders to exit riskier positions (a ’crexit’ scenario). If mishandled, this could result in credit growth collapsing as it did during the global financial crisis.”
Following the example set by the other banks, earlier today Morgan Stanley, the last big bank to report earnings, said its profit fell 12% in Q2 on a 9% drop in revenue even as the company weathered volatile markets that affected its investing and corporate clients. The EPS of $0.75, however, beat sharply lowered expectations of $0.60 on the back of sharp cost-cutting measures, pushing its shares up 3% in the premarket.
After yesterday's positive close in the Dow Jones, which hasn't had a losing day since July 7 and which took the series of consecutive green closes to 8 in a row - the longest stretch since 2013 - the index will look to lock in its 9th green day in a row with futures currently trading well in the green. It's not just the US - equities edged higher in Asia and Europe as positive earnings results from some of the world’s biggest companies countered concern the global economy is losing steam. The dollar strengthened while gold retreated.
After a head-scratching S&P500 rally - which not even Goldman has been able to justify - pushed stocks to new all time highs with seemingly daily record highs regardless of fundamentals or geopolitical troubles, overnight US equity futures dipped modestly, tracking weak European stocks as demand for safe haven assets including U.S. Treasuries and gold rises. Asian stocks outside Japan fall. Crude oil trades near $45 a barrel.
Having panciked briefly on Friday night on news of a Turkish coup, which has since not only failed but been cast away as speculation rises that it was staged and designed to give Erdogan even more authoritarian power, markets have moved on and are now focusing on the main overnight event which was the surprising $32 billion bid by Japan's SoftBank for U.K.’s semiconductor giant ARM which has sent comparable semis higher in European trading and pushing the Stoxx Europe 600 Index up by 0.6%, after surging 3.2% last week. After sliding sharply on Friday, US equity futures are up 0.1% in early trading.
Take a 60/40 portfolio constructed today from the S&P 500 and US Treasuries. To make up for a 10% decline in the equity market, Treasury yields would need to go… negative. Not impossible, but certainly a high hurdle! We think investors in European and Japanese bonds are seeing a clear example of this dilemma, with Bunds and JGBs simply unable to rally enough to offset recent equity market declines.
With half of 2016 in the history books, corporate bond defaults just hit the milestone "century" mark, or 100, last week, rising by 50% from the number of bankruptcies at this time last year and the highest level since the US emerged from recession in 2009. What is most troubling is that at the current run-rate, with half of 2016 still to come, the global debt default total is on pace to surpass 2009 for the all time corporate bankruptcy record.