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US Equity Futures Trade Near All Time High After ECB Goes All In

US Equity Futures Trade Near All Time High After ECB Goes All In

If it was Powell’s intention to have the S&P trade at an all time when he cuts rates by another 25bps next Wednesday, he achieved it.

S&P futures rose alongside Asian and European stocks as shares globally headed for a third weekly gain and a six week high as markets cheered signs of progress in US-China trade talks and the ECB’s just launched open-ended QE. Treasury yields climbed, with the US 10Y rising as high as 1.81%; the dollar slipped while the yuan rose and pound soared on easing no-deal Brexit fears.

 The resurgent risk appetite was largely the result of renewed trade war optimism after President Trump said on Thursday he was potentially open to an interim trade deal with China, although he stressed an “easy” agreement would not be possible.

Following a muted Asian session where many markets in the region were closed, we saw a groggy start in European trading after Bloomberg reported that most core European nations did not want to restart the ECB’s money printing program, the main bourses eventually traded well in the green, as basic resources and auto sectors outperformed, adding to what was already set to be a fourth straight week of gains.

“We have quite an interesting reaction to the ECB meeting with the sense of the pushback from the core countries, and that essentially that the ECB has now thrown its last cards in,” said John Hardy, head of FX strategy at Saxo bank. “It looks like we are also getting to some pretty interesting levels for yields. If the consolidation continues, at some point you have to question whether the easing (from the central banks) is actually there.”

…click on the above link to read the rest of the article…

Trump Praises ECB For “Depreciating The Euro”, Slams The Fed For Doing Nothing

Trump Praises ECB For “Depreciating The Euro”, Slams The Fed For Doing Nothing

When discussing the barrage of easing unleashed by the ECB moments ago, we said that as “we prepare for the ECB press conference in 30 minutes, that will be nothing compared to the angry twitter tirade we expect by president Trump who will demand that Powell immediately match everything that Powell has done.

And sure enough, just about half an hour after the ECB announcement, Trump praised the European Central Bank, for “acting quickly, Cuts Rates 10 Basis Points. They are trying, and succeeding, in depreciating the Euro against the VERY strong Dollar, hurting U.S. exports….” And, as expected, the president lashed out at the Fed again, saying that “the Fed sits, and sits, and sits. They get paid to borrow money, while we are paying interest!”


European Central Bank, acting quickly, Cuts Rates 10 Basis Points. They are trying, and succeeding, in depreciating the Euro against the VERY strong Dollar, hurting U.S. exports…. And the Fed sits, and sits, and sits. They get paid to borrow money, while we are paying interest!


Draghi Goes All Out: ECB Cuts Rates, Restarts Open-Ended QE, Changes Forward Guidance, Eases TLTRO, Introduces Tiering

Draghi Goes All Out: ECB Cuts Rates, Restarts Open-Ended QE, Changes Forward Guidance, Eases TLTRO, Introduces Tiering

With the market worried that Mario Draghi could surprise hawkishly in his parting announcement…

… that is how the market initially interpreted today’s ECB press release, which cut already negative deposit rates for the first time since 2016 to stimulate the sagging European economy, but by a smaller than expected 10bps to -0.50% while restarting QE but by “only” €20 billion, less than the €30 billion baseline.

However, there was more than enough offsetting dovish bells and whistles, because while the restarted QE (or the Asset Purchase Program) was smaller than expected, it will be open-ended, and the ECB will run it “for as long as necessary to reinforce the accommodative impact of its policy rates, and to end shortly before it starts raising the key ECB interest rates.” Of course, the question here is how long can a safe-asset constrained Europe run an “open-ended” QE, and the answer is it depends on what the issuer limit by nation is, with Frederik Ducrozet observing that “at €20bn/month, assuming up to €5bn in corporate bonds, QE can run for ~9 months under current limits… and for more than 7 years if limits are raised to 50%!” So look for more information on that angle.


 · 43m

OPEN-ENDED QE. Let that sink in. Much more important than the monthly pace of asset purchases, i.e. even better than we hoped.

At €20bn/month, assuming up to €5bn in corporate bonds, QE can run for ~9 months under current limits… and for more than 7 years if limits are raised to 50%!
We might get details about issuer limits in the separate press releases and/or the press conference.

View image on Twitter

 …click on the above link to read the rest of the article…

Why The Next ECB Stimulus Plan May Fail

Why The Next ECB Stimulus Plan May Fail

Why The Next ECB Stimulus Plan May Fail

In June 2014 I wrote an article called Draghi’s Plan does not fix Europe. In that article, I explained that the structural challenges of the eurozone -high government spending, excessive tax wedge, lack of technology leadership and demographics- were not going to be solved by a round of quantitative easing.

Now, the evidence of the European Union leads the ECB to hint at another stimulus plan. Gone is the triumphalism displayed by of the European Commission on August 2017 (read).  The “strong recovery” they credited to the “decisive action of the European Union” has all but disappeared. 

The slowdown in the eurozone is not similar to other economies. The ECB has slashed growth estimates consistently and currently expects a level of growth that is half of what they had projected eighteen months ago.

It is fascinating because many analysts tend to discuss the European slowdown as if the stimulus had been abandoned. Far from it. Let us remember that the European Central Bank repurchases all debt maturities in its balance sheet and that it has launched a  new liquidity injection (TLTRO) in March this year.

That is why it is appropriate to discuss the severity of the Eurozone slowdown in the context of the chain of fiscal and monetary stimuli that have been implemented. To understand the serious mistake of constantly stumbling on the same stone, we need to understand the size of the fiscal and monetary programs and their underwhelming results.

 …click on the above link to read the rest of the article…

Can the Fed really Control the Economy?

Can the Fed really Control the Economy? 

QUESTION: This whirligig talk of whether the Fed cuts rates by 25 or 50 basis points is carnival-level absurdity. Does the Fed have the “pretense of knowledge,” as F.A. Hayek, said, that they can regulate the economy like turning up or down the thermostat? I know you don’t agree with this, Martin, but then, Wall St. trades on daily sentiment not ideology.

TM

ANSWER: I understand the theory, but where it is seriously flawed is the idea that people will borrow simply because you lower rates. More than 10 years of Quantitative Easing, which has failed, answers that question. The way the Fed was originally designed allowed it to stimulate the economy by purchasing corporate paper directly, which placed it in a better management position. Buying only government paper from banks who in turn hoard the money fails. As Larry Summers admitted, they have NEVER been able to predict a recession even once.

The Fed lowered rates during every recession to no avail just as the ECB has moved to negative rates without success. The central banks are trapped and they are quietly asking for help from the politicians which will never happen.

Signs of recession are hitting Europe. Is its new Central Bank president up for the challenge?

Signs of recession are hitting Europe. Is its new Central Bank president up for the challenge?

If new institutional reform is to come to the Eurozone, it will entail a major paradigmatic shift

We now know that there will be a changing of the guard at the European Central Bank (ECB) in October. The current head of the International Monetary Fund (IMF), Christine Lagarde, will succeed current ECB President Mario Draghi at that time.

A known quantity among the political and investor class of Europe, Lagarde seems like a safe choice: she is a lawyer by training, not an economist. Hence, she is unlikely to usher in any dramatic changes, in contrast to current European Central Bank president Mario Draghi, who significantly expanded the ECB’s remit in the aftermath of his pledge to do “whatever it takes” to save the single currency union (Draghi did this by underwriting the solvency of the Eurozone member states through substantially expanded sovereign bond-buying operations). Instead, Lagarde will likely stick to her brief, as any good lawyer does. There’s no doubt that her years of operating as head of the IMF will also reinforce her inclination not to disrupt the prevailing austerity-based ECB ideology.

Unfortunately, the Eurozone needs something more now, especially given the increasingly frail state of the European economies. The Eurozone still doesn’t have a treasury of its own, and there’s no comprehensively insured banking union. Those limitations are likely to become far more glaring in any larger kind of recession, especially if accompanied by a banking crisis. That is why the mooted candidacy of Jens Weidmann may have been the riskier bet for the top job at the ECB, but ultimately a choice with more political upside. An old-line German central banker might have been able to lay the groundwork for the requisite paradigmatic shift more successfully than a French lawyer, especially now that Germany itself is in the eye of the mounting economic storm.

 …click on the above link to read the rest of the article…

End Game

End Game

Well, here we are. All roads have led to here. The combustion case outlined in April, the technical target zone outlined in January of 2018. Trade wars, 20% correction in between, Fed capitulation in response, slowing growth data, inverted yield curves, political volatility, deficit and debt expansion, buybacks. All the big themes that have dominated the landscape in recent memory, they all have led us to here: Record market highs and high complacency into a historic Fed meeting where once again a new easing cycle begins.

Like flies drawn to a light investors have ignored everything that may be construed as negative as the market’s primary price discovery mechanism, central banks, are once again embarking on a global easing cycle from the lowest bound tightening cycle ever. By far. Many central banks such as the BOJ and ECB have never normalized, the Fed barely raising rates before capitulating once again to macro and market reality:

What’s the end game here? I have to ask given the larger backdrop:

Central banks 2009-2018:
We will print $20 trillion & cut rates to nothing & that will reach our inflation goals.

Central banks 2019: Ok, none of that worked so let’s print more & cut rates again. Trust us we know what we’re doing.

What has all this produced? For one the slowest recovery on record, but also the longest expansion. But this expansion has come at a very steep price as artificial low rates have led to massive record debt expansion, $250 trillion in global debt:

The world is sitting on over $13 trillion in negative yielding debt, corporate debt ballooned to all time highs is keeping zombie companies afloat, the desperate search for yield is forcing pension funds into riskier assets, 100 year bonds, BBB rated credit is the largest component of debt markets, everything is distorted and the desperate search for yield has produced another market bubble.

 …click on the above link to read the rest of the article…

World’s Central Banks End Pact That Limited Selling Of Gold

World’s Central Banks End Pact That Limited Selling Of Gold

In a surprising announcement on Friday morning, the European Central Bank said the 21 signatories of the 4th Central Bank Gold Agreement (CBGA) “no longer see the need for formal agreement” as the market has developed and matured, and as a result the signatories “decided not to renew the Agreement upon its expiry in September 2019.”

For readers unfamiliar, the first CBGA was signed in 1999 to coordinate planned gold sales by the various central banks. When it was introduced, the ECB notes that “the Agreement contributed to balanced conditions in the gold market by providing transparency regarding the intentions of the signatories. It was renewed three times in 2004, 2009 and 2014, gradually moving towards less stringent terms.”

The fourth CBGA, which expires on 26 September 2019, was signed by the ECB, the Nationale Bank van België/Banque Nationale de Belgique, the Deutsche Bundesbank, Eesti Pank, the Central Bank of Ireland, the Bank of Greece, the Banco de España, the Banque de France, the Banca d’Italia, the Central Bank of Cyprus, Latvijas Banka, Lietuvos bankas, the Banque centrale du Luxembourg, the Central Bank of Malta, De Nederlandsche Bank, the Oesterreichische Nationalbank, the Banco de Portugal, Banka Slovenije, Národná banka Slovenska, Suomen Pankki – Finlands Bank, Sveriges Riksbank and the Swiss National Bank.

The simplest reason why the agreement is no longer needed, is that whereas central banks used to sell gold in the 1990s and early 2000s, most famously the UK’s sale of 401 tonnes of gold of its total 715 tonne holdings under Gordon Brown, broadly seen as one of the “worst investment decisions of all time“, currently they are buying at an unprecedented pace, and in 2018, central bank gold demand was the highest in the “modern” era, or since Nixon closed the gold window in 1971.

 …click on the above link to read the rest of the article…

Strait Outta Hormuz

Strait Outta Hormuz

The Strait of Hormuz these days seems to be what the streets of Compton used to be in the 90s. Yesterday, Iran’s Revolutionary Guard said it has seized a “foreign vessel” for smuggling fuel. And this morning, news came in that the US has shot down an Iranian drone in the Strait of Hormuz, after it allegedly threatened a US warship. About a fifth of global daily oil consumption (c. 21 million barrels) passes through the Strait each day. Moreover, tensions between the US and Iran are more likely to increase than not (don’t forget Iran also shot down a US drone last month). So don’t expect a smooth ride for oil prices this summer.

From the Strait of Hormuz, to back to Europe. According to Bloomberg sources, ECB staff is looking into potentially reforming its inflation target from “below, but close to 2%” to perhaps a policy band around 2%. Such a band would explicitly make the inflation target symmetric (something President Draghi favours), which means that the ECB can better signal willingness to overshoot the target for a short while. As such, it can reinforce inflation expectations if it is seen as a signal of more (or a prolonged period of) loose monetary policy. However, our ECB watcher Bas van Geffen cautions that the risk of such a symmetric band is that the market could also interpret the lower bound as ‘good enough’, especially if inflation keeps undershooting the ECB’s aim. Suppose the band is 0.5%. This implies the ECB might target an inflation rate of 2.5%, but it also implies that an inflation rate of 1.5% is within the ECB’s target band. Hooray, the ECB has achieved its inflation target by simply changing the definition of the target. What does that mean for its credibility? To avoid that situation, a symmetric band should probably be accompanied by more stimulus to rekindle inflation expectations.

 …click on the above link to read the rest of the article…

Lagarde, the ECB and the next crisis

Lagarde, the ECB and the next crisis

The appointment of Christine Lagarde as president of the ECB has been greeted with euphoria by financial markets. That reaction in itself should be a warning signal. When risky assets soar in the middle of a huge bubble due to a central bank appointment, the supervising entity should be concerned.Lagarde is a lawyer, not an economist, and a great professional, but the market probably interprets correctly is that the European Central Bank will become even more dovish. Lagarde, for example, is a strong advocate of negative rates.

Lagarde and Vice President De Guindos have warned of the need to carry out measures to avoid a possible financial crisis, proposing different mechanisms to mitigate the shocks created by excess risk. Both are right, but that search for mechanisms to work as shock buffers runs the risk of being sterile when it is the monetary policy that encourages excess. When the central bank solves a financial crisis by absorbing the excess risk that the market once took it does not reduce it, it only disguises it. 

Supervisors ignore the effect of risk accumulation because they perceive it as necessary collateral damage to the recovery. Risk accumulates precisely because it is encouraged.

Draghi said that monetary policy is not the correct instrument to deal with financial imbalances and macroprudential tools should be used. However, it is the monetary policy which is causing those imbalances when an extraordinary, conditional and limited measure becomes an eternal and unconditional one.

When monetary policy disguises and encourages risk, macroprudential measures are simply ineffective. There is no macroprudential measure that mitigates the risk created by negative rates and almost three trillion of asset purchases.

 …click on the above link to read the rest of the article…

Meet the New European Union, Same as the Old One

Meet the New European Union, Same as the Old One

The European Union chose new leadership this week. It was, for once, a fraught affair. 

No rubber stamps were anywhere to be seen. 

In the end all four of the new European Union leadership were not the frontrunners as put forth by German Chancellor Angela Merkel. Her choice for EU Commission President was rejected.

So too was Mario Draghi’s replacement at the top of the European Central Bank, Bundesbanke President Jens Weidmann. 

French President Emmanuel Macron was the clear winner this weekend.

The choices for these positions are all designed to both maintain the path of European integration but also weaken the hold Germany has on European Union power politics.

And this thorough rebuke to Merkel immediately threw the euro into defensive mode. But, don’t kid yourself. Weidmann was never an acceptable choice as ECB President. More on this later.

The new Commission President, replacing the odious Jean-Claude Juncker, is German Defense Minister Ursula Von der Leyen. She’s a thorough Europhile and Russophobe. Since she’s a Social Democrat, to me it looks like ALDE’s Guy Verhofstadt flexed his expanded presence in the room. He helped ensure no populist upstarts would control EU foreign policy.

It will will continue being virulently anti-Russian, if not more so than in the past.

Von der Leyen is a perfect example of leadership chosen by committee (and The Davos Crowd behind them) to be nothing more than a puppet of the globalist/neo-liberal forces which control the direction of the EU. 

Merkel’s a lame-duck trying to get what she wants from Russia while maintaining a brave face to the United States. Putting Von der Leyen in charge ensures any good relations between here and Vladimir Putin should be heavily discounted going forward.

 …click on the above link to read the rest of the article…

Europe Gives Up On Sound Money, Prepares To Join The Currency War

Europe Gives Up On Sound Money, Prepares To Join The Currency War

Not so long ago, Europe seemed to have its financial house more-or-less in order. German government spending was actually falling. Industries that had been nationalized in the socialist 70s were being privatized. The European Central Bank – run by sound money advocate Jean-Claude Trichet – was smarter and more cautious than the incoherently rambunctious Bernanke Fed. The euro, for a while, was actually preferred by many over the dollar. 

Then – gradually at first and now very quickly – everything went sideways.

Mario Draghi took over for Trichet at the ECB and promised to do “whatever it takes” to generate at least 2% inflation. Then he proceeded to deliver on that promise with massive asset purchases and negative interest rates. 

Inequality – which, we’re now coming to realize – is fed by low interest rates and easy money, rose to near-US proportions. Immigration was mishandled to the point that it became THE political issue. And populist parties opposed to the existing system attracted enough votes to rattle the mainstream parties. 

The entrenched political/financial class, shocked by the unwashed masses’ effrontery, are now responding exactly as you’d expect, with massive increases in social spending, promises of even easier money (Draghi actually claimed that there was “plenty of headroom” to cut rates from the current -0.4%) and, well, whatever else it takes to stay in power.

Here, for instance, is Germany’s government spending. Note the uptrend now that the Greens are contenders:

German government spending Europe currency war

From today’s Wall Street Journal

To win voters lost to an anti-globalization backlash, Europe’s mainstream parties are going back to the 1970s.

In Germany, the U.K, Denmark, France and Spain, these parties are aiming to reverse decades of pro-market policy and promising greater state control of business and the economy, more welfare benefits, bigger pensions and higher taxes for corporations and the wealthy. Some have discussed nationalizations and expropriations.

 …click on the above link to read the rest of the article…

Global Negative Yielding Debt Hits Record $12.3 Trillion

Global Negative Yielding Debt Hits Record $12.3 Trillion

Somewhere, SocGen’s permabearish strategist Albert Edwards is dancing a jig, as every day that passes bring us every closer to his trademark “Ice Age.”

One week after the universe of negative yielding debt regained its prior high of $11.7 trillion, overnight – thanks to the dovish capitulations by both the ECB and Fed – the notional value of global sovereign debt with a minus yield sign jumped to $12.3 trillion, a new all time high.Source: Bloomberg

The collapse in yields started on Tuesday morning when Mario Draghi said that the central bank might also trim rates and resume its bond-buying should inflation continue to languish well below its 2% target (recently European 5Y5Y forwards hit an all time low but have since rebounded following Draghi’s comments).

The dovish comments sent another jolt through fixed income markets and pushed another $714bn worth of bonds into sub-zero yield territory on Tuesday. The market value of bonds trading at negative yields — once thought to be economic lunacy — to a fresh record of $12.3TN, according to Bloomberg surpassing the last peak in 2016. The average yield of the global bond market is now just 1.76 per cent, down from 2.51 per cent in November last year.

Meanwhile, in another startling observation, Bank of America recently wrote that “highly-anticipated events in recent years (e.g. Shanghai G20, Brexit, Trump) have typically coincided with big unwinds of crowded positions; and “Japanification” rate theme max consensus.” As a result, the collapse in global inflation breakeven levels have taken global govt bond yields (ex. UST) to a new all-time low of 1.2%.

While the majority of core European and Japanese government bonds have been trading with negative yields since 2016, on Tuesday the Austrian, French and Swedish 10-year yields all slumped below zero for the first time. The 10Y German Bund yield stands at -0.32, an all time record low.

 …click on the above link to read the rest of the article…

Draghi Punts, Trump Grunts, Gold Bunts

Draghi Punts, Trump Grunts, Gold Bunts

ecb-draghi-failure

For months now the markets have been in denial that ECB President Mario Draghi has any answers to the Euro-zone’s problems. Today’s statement confirms what anyone with eyes to see has been saying.

There is no Plan B.

Draghi started the year saying he would end his various QE programs and by June he’s not only put them back on the table (New TLTRO in September) but has now opened up the possibility of taking rates lower.

Draghi told an ECB conference in Sintra, Portugal, that “further cuts in policy rates… remain part of our tools.” He added that there was “considerable headroom” to re-start bond purchases, which inject newly created money into the financial system in the hope of boosting lending and economic activity. 

Draghi has been exposed as swimming naked, as Warren Buffet would put it.

The fun part is that Draghi used the cover of Trump’s trade war with everyone to justify a policy that was inevitable anyway.

In response, President Trump piled on accusing Draghi of being a currency manipulator. And then announced his upcoming meeting with Chinese Premier Xi Jinping to hammer out a trade deal.

But, as I’ve pointed out in the past, Trump doesn’t have a serious offer on the table for China. 

Trump backed himself into a corner with China, essentially demanding it give the U.S. ultimate say over its fiscal, monetary and trade policy.

The Chinese aren’t going to agree to that any more than the Palestinians are going to agree to a Palestinian State in name only, administered like a Native American reservation by Israel.

Lebanon is not going to accede to Pompeo’s demands to remove Hezbollah from its government. North Korea isn’t going to give up its nukes so the U.S. will allow it to trade with dollars. Negotiations with Trump are nothing of the sort.

 …click on the above link to read the rest of the article…

The Great Unknown

The Great Unknown 

QUESTION: Martin, if Europe and Japan have destroyed their bond markets, would it be a good idea for them to get the government out of the bond market and have short term rates be floating in the free market?  The free market would probably help since they don’t know how to move rates correctly.

RG

ANSWER: What will happen is that there is already unfolding a bifurcation in interest rates with a widening spread between real rates (Private Sector) and government. If they allow government rates to float, that means they must abandon QE.

Neither the BoJ nor the ECB is ready to admit total failure. This means that the entire Keynesian-Monetarist tools have failed and they have no economic theory upon which to manage the economy. That means the government cannot control the economy and therein lies the denial of power.

Welcome to the Great Unknown

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