zondag 20 augustus 2017

BofA: "This Is The Key Risk-Off Signal" Ahead Of This Autumn's "Big Fall"

One month ago, BofA's chief investment strategist Michael Hartnett predicted that the "most dangerous moment for markets will come in 3 or 4 months." So now that we are between 25% and 33% closer to said "moment", what does Hartnett think now? Perhaps not surprisingly, in a note released on Friday, the Bank of America analyst writes that with a surge in risk off flows, a "more imminent Aug/Sept risk-off trade" is looking plausible "if poor politics shows up in consumer confidence, US dollar rises despite lower UST yields and further drop in US presidential approval ratings" compounded by high yield credit spreads gapping toward 500bps and ending tech leadership reversal. In short, the "humpty-dumpty" trade that Hartnett has been describing ever since he coined the "Icarus rally" term earlier in the year, is "staring to wobble" despite, as he calculates, the $1.69 trillion in central bank purchases YTD. Some of the main factors he lists why BofA, like JPM previously, is starting to tiptoe to the exits, are the following:
- Risk-off flows: There were $1.3bn weekly outflow from equities, $3.5bn into bonds, $0.5bn into gold
- North Korea: outflows clustered in "fire & fury" Thurs/Fri/Mon period; but North Korea redemptions ($7.4bn equity outflow) not particularly large (larger 3-day outflow in April)
- High Yield outflows: biggest HY bond fund outflows in almost 6 months ($2.3bn); HY spreads jumped 36bps last week from 364bps to 400bps Emerging Market outflows: 1st EM equity and debt outflows in almost 6 months ($1.7bn); coincides with bounce in oversold USD (EM reverse-correlated with DXY)...


- BofAML Bull & Bear indicator drops: HY & EM outflows + more defensive hedge fund positioning via futures + Aug FMS cash flat at 4.9% = BB indicator drops from 7.7 to 7.2; no "sell signal" triggered but institutional sentiment on risk assets has been bullish, e.g. BofAML Aug FMS showed "Goldilocks" macro view at record high
- Private clients increase cash: BofAML GWIM allocation to cash rising to 10.6% in Aug, on course for 1st MoM increase this year, albeit from record lows (Chart 4)...


It's not all doom and gloom: there is the possibility that the optimistic, "Icarus" scenario will persist:
- Summer Icarus: dovish CB policy (CB's buying of financial assets YTD now up to $1.69tn) + 12.9% global EPS growth (fastest since 2010 - Chart 2) best rationale for ongoing Icarus trade (targets remain SPX 2630, CCMP 6666, ACWI 510); Fed will reduce balance sheet in Sept but Fed so dovish that old market adage "buy the first rate hike, sell the penultimate rate hike" new adage may be replaced with "buy the first QT, sell the penultimate QT" (QT = "Quantitative Tightening")...

And then there are the bearish outcome, and why the in addition to an autumn "humpty-dumpty" trade (see below), a summer one is also looking more imminent, and could come as soon as this month:
- Autumn Humpty-Dumpty: wider credit spreads and EPS inflection point our favorite catalysts for narrative shift from Goldilocks to Humpty-Dumpty (big fall in markets) in autumn
- Summer Humpty-Dumpty: more imminent Aug/Sept risk-off trade plausible if a. growing geopolitical/political/tax reform volatility shows up in weaker Aug US consumer confidence, EU/Japan business confidence; US high yield credit spreads (393bps today) gap further toward 500bps; d. tech leadership shows fatigue (SOX, DJECOM, EMQQITR, IBOTZ all roll over hard)
As for the key catalyst to time the big fall, "the important risk off signal", Hartnet proposes to just keep an eye on the dollar: US dollar starts rising on risk-aversion, despite lower UST yields and further drop in US presidential approval ratings (dollar correlated with politics YTD).
In other words, once the US dollar start rising rapidly despite the ongoing chaos in Washington, sliding Trump approval rating and lower TSY yields, it will be a clear indication of capital flight into the US (accelerating unwind of this year's EM trades), which would then rapidly lead to something much uglier....

"The Dreaded Phase 4": What Happens When Credit Spreads Finally Rise

With investors, traders, analysts and pundits focused on the chaos in the White House, and the daily barrage of escalating geopolitical and social news, whether terrorist attacks in Europe or clashes in inner America, the market is finally starting to notice as Friday's last hour sell-off demonstrated. And yet, according to one of the best minds on Wall Street today, Citi's Matt King, what traders should be far more concerned about, is not who is in the Oval Office or how bombastic the war of words between the US and North Korea may be on any given day, but rather what central banks are preparing to unleash in the coming months. To underscore this, two weeks ago, King made a stark warning when he summarized that we are now more reliant on central banks banks holding markets together than ever before:
# "With asset prices displaying a high degree of correlation with central bank liquidity additions in recent years, that feedback loop makes the economy, upon which both corporate profitability and bank net interest margins depend, more reliant on central banks holding markets together than almost ever before. That delicate balance may well be sustained for the time being. But with central banks beginning to move, however gingerly, towards an exit, is it really worth chasing the last few bp of spread from here?" 
One week later, he followed up with what was arguably his magnum opus on why the market is far too complacent about the threat to risk assets from the upcoming rounds of balance sheet normalization, summarized best in the following charts, showing the correlation between central bank asset purchases and the returns across global stock markets. The unspoken, if all too familiar, message was that riskier financial assets, such as credit and equities, have been artificially boosted by central bank actions, actions which are soon coming to an end whether voluntarily in the case of the Fed, or because the central bank is simply running out of eligible bonds to monetize, in the case of the ECB and BOJ...


In short, King is worried the global market is about to enter another tantrum. Is he right? To answer that question, another Citi strategist, Robert Buckland, admitting that "we are (always) worried", takes a look at where we currently stand in the business cycle as represented by Citi's Credit/Equity clock popularized also by Matt King in previous years...


For those unfamiliar, here is a summary of the various phases of the business cycle clock:
*Phase 1: Debt Reduction – Buy Credit, Sell Equities. Our clock starts as the credit bear market ends. Spreads turn down as companies repair balance sheets, often through deeply discounted share issues. This dilution, along with continued pressure on profits, keeps equity prices falling. For the present cycle, this phase began in December 2008 and ended in March 2009. Global equities fell another 21% even as US spreads tightened.
*Phase 2: Profits Grow Faster Than Debt – Buy Credit, Buy Equities. The equity bull market begins as economic indicators stabilise and profits recover. The credit bull market continues as improving cashflows strengthen company balance sheets. It’s all-round risk-on. This is usually the longest phase of the cycle. This began in March 2009, and according to most Wall Street analysts, is the phase we find ourselves in right now. Equity and credit investors both do well in this phase. 
*Phase 3: Debt Grows Faster Than Profits – Sell Credit, Buy Equities. This is when credit and equities decouple again. Spreads turn upwards as fixed income investors become increasingly worried about deteriorating balance sheets. But equity markets keep rallying as EPS rise. Share prices are also boosted by the effects of higher corporate leverage, often in the form of share buybacks or M&A. This is the time to favour equities over credit.
*Phase 4: Recession – Sell Credit, Sell Equities. In this phase, equities recouple with credit in a classic bear market. It is associated with a global recession, collapsing EPS and worsening balance sheets. Insolvency fears plague the credit market, profit warnings plague the equity market. It’s all-round risk-off. Cash and government bonds are usually the best-performing asset classes.
# The reason why Citi is concerned where exactly in the business cycle the US economy and capital markets are to be found at this very moment, is that as Goldman showed recently, corporate leverage has never been higher...


And yet, corporate spreads remain at or near all time lows. Behind this paradox is, once again, the active intervention of central banks, and explicitly the ECB, which starting in March of 2016 announced its plans to start purchasing corporate bonds, sending corporate spreads to record lows, and in some cases, pushing junk bonds yields below matched US Treasurys...


Or, as Citi puts it, "Central banks hold back the clock" Citi credit strategists suspect that this central bank intervention decoupled credit spreads from the underlying company balance sheets. As corporates lift leverage, we would normally expect the credit clock to enter Phase 3. Spreads should widen to reflect higher Net debt/EBITDA ratios. But that hasn’t happened in this cycle. In the last 18 months, corporate leverage has risen but credit spreads have fallen...


Buckland's summary is an echo of what we posted nearly a month ago in The ECB's Impact On The Bond Market In One Chart: "It seems that the corporate leverage clock has marched on to Phase 3, but the central banks have managed to hold the credit spread clock back in Phase 2." Whatever the reason for the break in the business cycle, where we are currently located is critical as it could mean the difference between BTD across all assets, or, focusing on just a specific subset. In fact, it's all about credit spreads: as Citi explains, the credit market has turned up (spreads start falling) before the equity market early in the cycle and turned down before the equity market (spreads start rising) later in the cycle. This is also shown in the next two charts below which show the progression of high yield spreads and global equity markets across the 4 phases of the cycle...


Going back to the original trhust of the article, if indeed credit spreads are finally starting to rise due to excess leverage/central bank concerns, in other words if we are finally shifting from Phase 2 to Phase 3, what are the implications? Key among them, is the as spreads rise, volatility follows, and market dips become bigger and more frequent, jeopardizing the profitability of the BTFD "strategy." Buckland explains: If credit spreads do start to widen as central banks taper later this year, then we could finally move into Phase 3 of the credit/equity clock. What are the characteristics of this phase? And what are the investment implications for global equity investors?
# Equities Up, But More Volatile; The credit/equity clock suggests that, despite widening spreads, equities can still generate decent returns in Phase 3. However, those returns are usually accompanied by higher volatility. This reflects the traditionally close relationship between credit spreads and volatility. As spreads rise, observed volatility (and the VIX) tend to follow (Figure 8). Investors should continue to buy the equity market dips, but these dips may get bigger and more frequent. While the headline equity market returns in Phase 3 are similar to Phase 2 (Figure 9), the risk-adjusted returns (Sharpe ratio) tend to be lower. The high return/low vol phase of the market cycle is over...


More importantly, this is the phase when bubbles emerge in full view, and in this case, the most obvious candidates for a bubble are global Growth stocks and US IT in particular. It’s Bubble Time: Bubbles are common in these ageing equity bull markets. Indeed, all the great bubbles of the last 30 years have occurred in Phase 3 of the equity/credit clock (Figure 10). The late 1980s Phase 3 was dominated by Japanese equities, which rose to 44% of global market cap (now 8%). The late 1990s Phase 3 saw global Growth stock indices rising to unprecedented levels. The last cycle saw a sharp rerating of EM equities. All of these bubbles inflated even as credit spreads were rising. The bursting of these bubbles was a key driver of the subsequent bear markets...


Citi also issues a warning to value investors, whose "natural inclination to fight bubbles can get them into serious trouble at this point in the market cycle. The most obvious candidates for a bubble this time round are US Growth stocks and US IT in particular (Figure 10). We recently suggested that Growth stocks everywhere are looking expensive, but they are not yet in a bubble comparable to the late 1990s." But the most critical aspect of timing Phase 3 is because the "dreaded" Phase 4 follows right after. Citi explains: "The strategies that work in Phase 3 get smashed in Phase 4. This is when a global recession pushes both equities and credit into a bear market. Bubbles collapse." The problem with the advent of Phase 4, however, is that Phase 3 is inbetween, and even if the party is nearly over for corporate bonds (and spreads), it can continue for equities according to Buckland.
# But how long does Phase 3 continue? That's the question that everyone will soon be asking, and here is Citi's attempt at an answer: Investing in Phase 3 is a dangerous game. Equity markets are moving into overshoot mode. This is nice while it lasts, but the dreaded Phase 4 may not be too far away. The late 1980s Phase 3 lasted 16 months. The late 1990s lasted 32 months. But in 2007 it only lasted 4 months. Adding to the complexities of timing the transition from Phase 3 to Phase 4 is that, as observed twice already in this cycle, credit markets can give head fakes, especially if central banks step in to stop the sell-off. This is why when Buckland cross checks against the rest of Citi's Bear Market Checklist, he is comforted because even as "credit spreads are important factors in our checklist but they are not the only factors. The others help to reduce the head-fakes. For example, our bear market checklist helped us hold our nerve during the early 2016 sell-off even as credit spreads were signaling imminent doom." Right now, only 2.5 factors out of 18 are worrying (Figure 14). If credit spreads widen significantly, we may turn them amber/red. But, everything else being equal, 4.5/18 red flags would still suggest that it is too early to call the move into Phase 4. However, we will continue to watch closely...


So as Citi refuses to sound an alarm, despite its increasingly more concerned research reports, and warnings about credit spreads, especially in the junk bond space, in theory, some of the biggest names in finance are quietly moving for the exits in practice, and as Bloomberg reported this week, "investors overseeing about $1.1 trillion have been cutting exposure to the world’s riskiest corporate debt as rates grind too low to compensate for potential risks." These professional investors are worried for all the reasons voiced by Citi above: leverage is at record highs, yet even with the recent market turmoil stemming from North Korea and US political tensions, the Bloomberg Barclays index of junk bonds is yielding just above all time lows, or 5.3%, 100 bps below its 5 year average...


How much longer will it stay here, and how much longer will the market assume that we are still in Phase 2 instead of Phase 3? Some of the world's biggest money managers aren't waiting to find out, to wit:
# JPMorgan Asset Management, AUM: $17 billion (for Absolute Return & Opportunistic Fixed-Income team)
- In early July told Bloomberg they have cut holdings of junk debt to about 40 percent from more than half.
- “We are more likely to decrease risk rather than increase risk due to valuations,” New York-based portfolio manager Daniel Goldberg said.
# DoubleLine Capital LP, AUM: about $110 billion
- Jeffrey Gundlach, co-founder and chief executive officer, said in an interview published Aug. 8 he’s reducing holdings in junk bonds and emerging-market debt and investing more in higher-quality credits with less sensitivity to rising interest rates.
- European high-yield bonds have hit “wack-o season,” Gundlach said in a tweet last week.
# Allianz Global Investors, AUM: $586 billion 
- David Newman, head of global high yield, said in an interview his fund has begun trimming its euro high-yield exposure because record valuations make the notes particularly vulnerable in a wider selloff.
# Deutsche Asset Management, AUM: 100 billion euro ($117 billion) in multi-asset portfolios
- Said earlier this month it has reduced holdings of European junk bonds. The funds are shifting focus to equities, where there is more potential upside and higher yields from dividends, according to Christian Hille, the Frankfurt-based global head of multi asset.
# Guggenheim Partners, AUM: >$209 billion
- Reduced allocation to high-yield corporate bonds across core and multi-credit strategies to the lowest level since its inception, according to a third-quarter outlook published on Thursday.
- Junk bonds are “particularly at risk due to their relatively rich pricing,” portfolio managers including James Michal say in outlook report. # Brandywine Global Investment Management, AUM: $72 billion
- Fund has cut euro junk-bond allocations to a seven-year low because of valuation concerns, Regina Borromeo, head of international high yield, said in an interview this month
*) Of course, the final complication, and what Citi did not mention, is that virtually all of the "safe" indicators in Citi's "recession/Phase 4 checklist" above are a function of funding pressures (or lack thereof) and thus, credit spreads. By the time there is a blow out in spreads, and yields, it will be too late to time the phase shift appropriately as the economy is likely already in a recession at that point. Which is why we find the Citi's spread guidance most useful:
* What might tell us that the shift into Phase 4 is imminent? We find that US HY credit spreads (currently 400bp) of around 600bps are high enough to indicate an oncoming recession. The equivalent level for US IG spreads (currently 110bp) is around 175bp. Historically, equities have been able to handle spreads rising up to these levels, but anything higher gets dangerous. 
Ultimately, the catalyst that finally sends the market (and economy) hurtling out of Phase 2 and Phase 3 and into the "Dreaded" Phase 4, will likely be the simplest, and oldest one in the book: more sellers than buyers and as the list above shows, the sellers have arrived....

zaterdag 19 augustus 2017

Bitcoin Cash Explodes To Record Highs Over $900

After meandering around $300 for the last two weeks, Bitcoin Cash has rocketed higher in the last few days - now trading at record highs over $900. As Bitcoin Cash has surged, Bitcoin has been falling (now back below $4000) as Bitcoin Cash mining profitability becomes more appealing to miners. Bitcoin Cash has surged to a new record high in the last few days, now triple the market cap of Ripple and over half the market cap of Ethereum...


And Bitcoin has been sliding...


# So just what is going on with BCH? Coinivore explains. As blocks continue to process, BCH edges its way closer to the legacy Bitcoin’s network mining profitability. It’s what could be known as the “flippening,” and block 479808 is the block to watch if it’s going to happen (this weekend), Coindesk reported. Block 479,808 (set for this weekend) will likely trigger a difficulty adjustment downwards 50%, and if the prices of bitcoin and bitcoin cash stay the same, this means miners will make almost double on bitcoin cash what they would on bitcoin. As BCH mining profitability becomes more appealing to miners, the chance of other mining pools using hash power for BCH is greater, especially if the new kid on block Bitcoin Cash’s markets continue to rise. Now, why would miners abandon the legacy Bitcoin? Because BCH chain’s difficulty has also dropped, and at the same time the price has risen over 75% in the last two days. As such, Bitcoin cash mining (BCH) is now currently 2% percent more profitable to mine than the legacy Bitcoin (BTC). Another reason is the legacy Bitcoin blockchain charges higher fees on transactions, so miners must take into account the extra 1.5 BTC per block on Bitcoin (about $6,000 USD) while Bitcoin Cash offers very low fees under $50 USD. All around BCH just seems like the more attractive opportunity for miners.
# RogerVer ✔ @rogerkver The original economic code that led to Bitcoin's great success is alive and well in the form of #BitcoinCash. Watch what happens next...


Additionally, Coindesk notes that new exchange volume is also helping drive BCH higher. While both bitcoin and bitcoin cash share a transaction history, there's at least one major differential that changes their markets, bitcoin cash didn't inherent bitcoin's expansive global exchange network. This means while bitcoin is widely available for trading across continents, only a few major players stepped up early to add Bitcoin Cash. Still, signs suggest more exchanges could soon see a value in doing so. Case in point, the trade volume in bitcoin cash observed during the recent run was largely denominated in the South Korean won today. Yesterday, about $1.2 billion of the $2 billion in total bitcoin cash trade volume, or around 56%, appeared to be transacted in won on just three South Korean exchanges, Bithumb, Coinone and Korbit, according to data from CoinMarketCap. Such a strong regional showing could indicate pent up demand, but whether it's from sellers seeking to sell, or buyers looking to buy, that remains unclear. Prior to the increase, though, bitcoin cash trading volume was relatively light earlier this week, and it increased roughly tenfold today.
# Finally, we note that Faster processing times may be appealing, as CNBC reports that Bitcoin Cash faster processing is what likely caused 40 percent of investors increasing their bet on it....

David Stockman Warns "Don't Forget About The Red Swan"

Given the anti-Trump feeding frenzy, we continue to believe that a Swan is on its way bearing Orange. But if that’s not enough to dissuade the dip buyers, perhaps the impending arrival of the Red Swan will at least give them pause. The chart below comprises a picture worth thousands of words. It puts the lie to the latest Wall Street belief that the global economy is accelerating and that surging corporate profits justify the market’s latest manic rip. What is actually going on is a short-lived global credit/growth impulse emanating from China. Beijing panicked early last year and opened up the capital expenditure (CapEx) spigots at the state-owned enterprises (SOEs) out of fear that China’s great machine was heading for stall speed at exactly the wrong time. The 19th national communist party Congress scheduled for late fall of 2017.
This every five year event is the single most important happening in the Red Ponzi. This time the event is slated to be the coronation of Xi Jinping as the second coming of Mao. Beijing was not about to risk an economy fizzling toward a flat line before the Congress. Yet that threat was clearly on the horizon as evident from the dark green line in the chart below which represents total fixed asset investment. The latter is the spring-wheel of China’s booming economy, but it had dropped from 22% per annum growth rate when Mr. Xi took the helm in 2012 to 10% by early 2016. There was an eruption as dramatized in the chart. CapEx growth suddenly more than doubled in the one-third of China’s economy that is already saturated in excess capacity. The state owned enterprises (SOE) in steel, aluminum, autos, shipbuilding, chemicals, building equipment and supplies, railway and highway construction etc boomed. It was as if a switch had been flicked on by Mr. Xi himself, SOE CapEx soared back toward the 25% year-over-year rate by mid-2016, keeping total CapEx hugging the 10% growth line. However, you cannot grow an economy indefinitely by building pyramids or any other kind of low-return/no return investment, even if the initial growth spurt lasts for years as China’s had. Ultimately, the illusion of Keynesian spending gets exposed and the deadweight costs of malinvestments and excess capacity exact a heavy toll. If the investment boom that was financed with reckless credit expansion is not enough, as was the case in China where debt grew from $1 trillion in 1995 to $35 trillion today, the morning-after toll is especially severe and disruptive. This used to be called a “depression.”
# China Fixed Asset Investment; China’s propagated spurt in global trade and commodities was artificial and short-term. It was done to flatter China’s rulers at the 19th party congress. Now that a favorable GDP glide path has been assured, China’s planners and bureaucracy are already back at it trying to find some way to reel in its runaway credit growth and bloated economy before it collapses...

China Fixed Asset Investment

# Downside Surprises in China Are Virtually Baked In;  The sell-by date has expired on this latest China credit impulse, as evident in the chart below. During the first quarter of this year, total social financing (bank credit plus shadow banking loans) reached the incredible rate of $4 trillion per annum. That’s nearly one-third of China’s entire GDP. The figure scared the daylights out of leadership in Beijing, who have now moved forcefully to reel in China’s debt machine. What is coming down the pike is the great China Debt Retrenchment. Expect a global braking motion that will get underway once Mr. Xi dramatically consolidates his power at the 19th party congress. This has the potential to drastically weaken the global economy, and the impact on corporate profits should not be underestimated...

China Total Social Financing

# The Red Swan Has Now Gone Berserk;  Half of the world’s GDP growth since the 2008 crisis has been in China, and that, in turn, was purchased by the greatest credit eruption in recorded history. As China’s nominal GDP was more than doubling from $4.6 trillion in 2008 to $11.2 trillion in 2016, its national leverage ratio soared from 175% of GDP to 300% in less than a decade. There’s reason to seriously doubt that Beijing can bring the Red Ponzi to a soft landing. It cannot and will not permit the nation’s debt load to quadruple again during the next eight years, meaning that China’s days as the world’s ultimate stimulus machine are over...

China Red Ponzi Debt to GDP Ratio 2017

# China Red Ponzi Debt to GDP Ratio 2017; The fading of the most recent China growth impulse will soon reveal that most countries, to adapt Warren Buffet’s famous metaphor, have been swimming naked from a fiscal perspective. It has left the world vulnerable to a renewed wave of funding crises as the ECB and other central banks attempt to launch monetary normalization. In sum, during the last 19 months the Red Ponzi propagated a false upturn in the global economy that is already decisively reversing. This comes at the same time that central banks of the major developed world economies are finally bringing their printing presses to a halt. The major central bankers have finally recognized that at $22 trillion on central bank balance sheets have become egregiously extended. China is the epicenter of the world’s two decade plunge into central bank monetary fraud and credit explosion. They have deformed and destabilized the very warp and woof of the global economy. So, yes, even as the Orange Swan stumbles toward the Donald’s White House, there is a Red Swan following closely behind.....

Jeremiah Johnson; "A Domestic Destabilization Is Underway"

Authored by Jeremiah Johnson (nom de plume of a retired Green Beret of the United States Army Special Forces) via SHTFplan.com, Under the guise of “political correctness,” cities (such as Baltimore, MD) are removing their Confederate monuments one-by-one and under cover of darkness. Here, as reported by CBS News:
# “The Robert E. Lee and Thomas J. “Stonewall” Jackson monument at Wyman Park Dell was removed with a crowd watching. The Robert B. Taney monument in Mt. Vernon also came down. Crews are on the site of the confederate Women’s monument at University Parkway to take that one down. This comes just days after the Baltimore City Council passed a resolution Monday calling for the immediate deconstruction of these monuments.” 
There it is! Straight out of the movie “The Patriot” with Mel Gibson, as with the character he played, Benjamin Martin: “An elected legislature can trample a man’s rights as easily as a king.” Where’s the vote by the people in the city? Oh, just that the elected officials, mind you, can make such a decision…by their vote, a tyranny in itself. At the bare minimum, it should have been put to a vote. The important thing to keep in mind is that most of these cities, city councils, and their state legislatures are being run by a pack of liberals. The “paradigm shift” is in full mode: “Democracy in America” did not mention the tyranny of the minority. In this case, a minority viewpoint, fueled by Marxists and liberals is attempting to subvert First Amendment rights under the U.S. Constitution and begin a policy of redaction to support their revisionist history. We are right around the corner from a Civil War.
The Left is fueling and funding tensions in order to exacerbate them and cause a revolution. In the middle of this, the President is being blamed and threatened with impeachment. The root of it is this: the attempt to destabilize the country and cause anarchy. Black Americans are being used as the vehicle for the destabilization, a vehicle by the oligarchs, such as Soros. Now with Charlottesville being trumpeted up and down the country, Obama weighs in “with the most popular Tweet ever.” I wrote that Barack Hussein Obama II would be back: he will be a most useful catalyst for what is to come. It was also reported that Hillary Clinton is weighing in on attacking the President, but not with words: with dollars. Fellowship of the Minds ran a piece that cites the Washington Times. Here’s an excerpt:
# “Joe Schoffstall reports for The Washington Free Beacon, August 14, 2017, that Hillary has donated $800,000 from her campaign funds to Onward Together, a new political action group that she formed three months ago in May which will fund a number of established “resistance” groups that counter President Trump with direct action and protests. According to its mission statement, Onward Together is dedicated to “encouraging people to organize, get involved, and run for office” and advancing “progressive values and work to build a brighter future for generations to come.” Federal Election Commission (FEC) filings show that on May 1, 2017, Hillary’s presidential campaign committee Hillary for America contributed $800,000 to Onward Together. In addition, Hillary also funded other “resistance” groups that have “impressed” her, including Swing Left, Run for Something, Emerge America, and Indivisible.” 
Once again, her money and power is wielded to “influence” the way things are. She is not acting alone, nor of her own initiative. Read Shadow Party to find the guy pulling her strings. (Hint: his real name is Georgy Schwarz!) By removing the Confederate memorials and markers, a part of American history is effectively being relegated to oblivion. It is all part of redaction and revision. The Marxists and Globalists have been relentless in their quest to rewrite American history and demonize whites in general…trying to create a cowed, demure, subservient class of guilt-ridden subjects…to destroy the United States from within.
To destroy the “warrior mentality” of the citizen-soldier of America’s citizenry, that is the objective. A complete orchiotomy and neutering: nothing less. Unless the United States falls, the New World Order/Global Governance cannot exist. This is the goal: enmesh it in a war (initiated by a foreign nation and/or orchestrated by the U.S.), and destroy it domestically from within. “Top down, bottom up,” to quote Van Jones, is their objective. Their playbook is Alinsky’s “Rules for Radicals,” and the battle lines are being drawn more decisively by the day. There will come a time when everyone will have to pick a side, and after it begins, the United States may look a lot different than it does now....

Erdogan Tells Turks Living In Germany Not To Vote For Angela Merkel

The rapidly deteriorating relations between Germany and Turkey took another bizarre twist on Friday when Turkey's president called on Turks living in Germany not to vote for the Christian Democrat Party (CDU) the party headed by Chancellor Angela Merkel, or for any party that supports Merkel. Speaking after Friday prayers in Istanbul, Erdogan said: "I call on fellow Turks in Germany not to vote for the CDU, the SPD or the Greens, which are all hostile to Turkey. Support those who are not enemies of Turkey. I think Turkish voters should teach a necessary lesson at the ballot box to those political parties who are so aggressive and disrespectful toward Turkey." Merkel will be running for a fourth term in the upcoming elections on September 24. Merkel rejected Erdogan's "meddling," and said: "German voters, including the ones with Turkish background, have a right to vote freely. We will not stand for any kind of interference." Yeni Safak (Ankara) and Deutsche Welle and BBC
# Germany accuses Erdogan of extortion by 'hostage diplomacy'; Erdogan's speech was probably prompted by a statement on Thursday by Germany's Foreign Minister Sigmar Gabriel accusing Turkey of practicing "hostage diplomacy" by arresting foreign nationals on bogus charges and then holding them in prison while demanding the extradition of someone he claims was part of last year's July 2016 aborted coup. In February, Turkey arrested Deniz Yücel, a Turkish-German political correspondent working for Die Welt, accused of reporting on the activities of the Kurds in Turkey. Erdogan has accused Yücel and other foreign nationals of terrorist activities. In July, Erdogan ordered the arrest of Peter Steudtner, a German human rights activist in Turkey. The arrest of Steudtner caused Sigmar Gabriel told a press conference that it was no longer safe for German people and businesses to travel to Turkey. On Thursday Gabriel was asked by Yücel had not been released. His response: "Because Turkey, in my opinion, holds him as a hostage." BuzzFeed
In fact, Erdogan is holding a number of German and American nationals on bogus charges. In particular, North Carolina Christian pastor Andrew Brunson was imprisoned on October 7 of last year, on charges of "membership in an armed terrorist organization," with no evidence whatsoever. When President Trump met with Erdogan in May, Trump asked that the Turkish government “expeditiously” return Brunson to the United States. What Erdogan wants to do is force the US to extradite Felhullah Gülen back to Turkey. Gülen is a 76-year-old political enemy of Erdogan, living since 1999 in self-imposed exile in Saylorsburg, Pennsylvania, after splitting with Erdogan. Erdogan claims that Gülen orchestrated the coup from his easy chair at his resort in the Pocono Mountains. Erdogan arrested or fired over 100,000 people since the coup on vague charges. Anyone could be arrested for any reason. If someone's child went to one of Gülen's schools, then the child's parents could be arrested.
As I've written in the past, Erdogan's claims make no sense. For one thing, Erdogan started shutting down media and arresting reporters months before the attempted coup even occurred. After the coup attempt, Erdogan moved so quickly to arrest tens of thousands of people that it was pretty clear that the arrests had been planned all along, just waiting an excuse to execute them. The reason that Erdogan has been arresting American, German and other nationals and holding them hostage is to use them as bargaining chips to force the extradition of Turks in other countries. Erdogan wants to force the US to extradite Gülen, even though Erdogan has been unable to provide evidence to satisfy a US court that Gülen had anything to do with the coup attempt. From Germany, Erdogan wants to extradite a prominent cleric, Adil Öksüz. Erdogan accuses Öksüz of being a middleman between Gülen and coup plotters. Erdogan claims that he's provided Germany with 1,500 documents, but apparently Germany's courts are also not satisfied that there's any actual evidence that Öksüz was actually doing what Erdogan accuses him of. Recently Erdogan explained his hostage diplomacy by saying that it's the policy of the "new Turkey," since the "old Turkey" no longer exists:
* "Here in Pennsylvania, there is a known charlatan (Gülen). His back team (Öksüz), they are also in Germany, mainly in Germany, and they are all around. You feed these terrorists, then you get up and say 'Give us Filjan.' Do not look up, if you have a reputation, I have a judgment. First you will give it, then you will receive it from us. You are not here. There is no old Turkey anymore, this Turkey is new Turkey. You should see it as a flag race." Anadolu (Ankara)
There's a little lost in translation, but apparently "You feed these terrorists, then you get up and say 'Give us Filjan'" is an accusation that the US and Germany feed the terrorists, and then demand that prisoners like Brunson, Yücel, and Steudtner. Erdogan has promised that after the September 24 elections in Germany, relations between Turkey and Germany will improve. Erdogan is assuming that Merkel will lose in the election, but even if she does, it seems unlikely that the new Chancellor will give into hostage extortion from Turkey, and so relations are expected to continue worsening. As I've been writing for years, Generational Dynamics predicts that the coming Clash of Civilizations world war will pit the US, India, Russia, Iran and the West against China, Pakistan, and the Sunni Muslim countries, including Turkey. Worsening relations between Turkey and Germany are following that trend line.... Asheboro NC Courier-Tribune and Arab News

Newt Offers Warning: "Trump's Much More Isolated Than He Realizes"

Appearing on Fox News, Newt Gringrich offered a rather stark warning to President Trump saying "he’s much more isolated than he realizes...you don’t get down to 35 percent approval and have people in your own party shooting at you and conclude that everything’s going fine."
Gingrich: "I think he’s in a position right now where he’s much more isolated than he realizes. On the Hill, he has far more people willing to sit to one side and not help him right now, and I think that he needs to recognize that he’s taken a good first step with bringing in General Kelly, but he needs to think about what has not worked. You don’t get down to 35 percent approval and have people in your own party shooting at you and conclude that everything’s going fine."
Hemmer: "How many times have we had this conversation? It was John McCain, Gold Star families and Access Hollywood. Is this week that much different from the numerous other situations?" 
Gingrich: "It is only different in that you go through little ground, little ground, little ground, and after a while you have enough different people pull back that you are in a qualitatively different position. I think that right now, that if he wants to get his agenda enacted that if he wants get things done and have a presidency that is stable, he is going to have to have a couple of serious changes. I think ‘The Art of the Comeback,’ which is a fascinating book that he wrote in 1997, is a really helpful reminder and he needs to think of what hasn’t been working and what he will do that is more effective in the rest of the presidency."
# Video courtesy of the Daily Caller: Of course, Trump's decision to oust his chief strategist, Steve Bannon, will likely only serve to amplify his 'isolation' as his base across the country will undoubtedly....

Mac Slavo; 'Art Of The Deal' Co-Author Slams "Racist" Trump, Says "Endgame Is On, Amazed If He Survives Til Year-End""

Tony Schwartz, the man who co-authored Art of the Deal with Donald Trump in 1987, now says that the President will likely resign before the end of the year.
# Tony Schwartz ✔ @tonyschwartz Understand this: Trump will destroy anything & anyone to protect against feeling weak & out of control. It's not a choice but a compulsion. 
In a series of Tweets earlier this week Schwartz showed his disdain for the President and echoed the sentiments of top Democrats who have claimed that Trump will either be impeached or voluntarily step away from the Presidency: There seems to be a renewed interest from Democrats who are actively working on articles of impeachment that could lead to the President’s removal from office. And though such a move would require a majority vote in the House of Representatives and two-thirds of the Senate, it appears that many Congressional Republicans are now publicly speaking out against the President, suggesting that such a measure could have legs.
# Tony Schwartz ✔ @tonyschwartz The end game is on: Trump goes down or we do. He will blow up world to prove he matters. We must stand up in opposition every day. 
Coupled with an”independent” investigation targeting the President as well as members of his administration and former business partners, it is becoming ever more likely that, as Rich Dad Poor Dad author Robery Kiyosaki recently noted, they are going to find something. While author Tony Schwartz has an obvious beef to pick with the President and may simply be pandering to the liberal left, the pressure being put on Trump could force him to resign in order to avoid impeachment and/or criminal charges, whether real or imagined. The war to take out Trump’s closest lieutenants has been raging since before he was even sworn in and will continue until the goals of The Deep State have been accomplished.
# Tony Schwartz ✔ @tonyschwartz Trump's presidency is effectively over. Would be amazed if he survives till end of the year. More likely resigns by fall, if not sooner. 
As Brandon Smith of Alt Market has warned, Donald Trump may well be first used as a scapegoat by the elite in order to usher in the next phase of crisis and a reorganization of the global order: I have been warning since long before the election that Trump’s presidency would be the perfect vehicle for central banks and international financiers to divert blame for the economic crisis that would inevitably explode once the Fed moved firmly into interest rate hikes. Every indication since my initial prediction shows that this is the case. The media was building the foundation of the narrative from the moment Trump won the election. Bloomberg was quick to publish its rather hilariously skewed propaganda on the matter, asserting that Trump was lucky to inherit an economy in ascendance and recovery because of the fiscal ingenuity of Barack Obama. This is of course utter nonsense. Obama and the Fed created a zombie economy rotting from the inside out, nothing more.
But, as Bloomberg noted rightly, any downturn within the system will indeed be blamed on the Trump administration. Fortune Magazine, adding to the narrative, outlined the view that the initial stock rally surrounding Trump’s election win was merely setting the stage for a surprise market crash. I continue to go one further than the mainstream media and say that the Trump administration is a giant cement shoe designed (deliberately) to drag conservatives and conservative principles down into the abyss as we are blamed by association for the financial calamity that will occur on Trump’s watch. If Smith is correct, and all signs seem to be pointing to such a scenario, Trump will blamed for what will likely be the most epic financial collapse in world history. Once those goals are accomplished, a push to remove him from office may become reality....

Breitbart Declares "War" On The White House

The love affair between Breitbart, whose former head Steve Bannon was just fired by Donald Trump, just turned to hate, as confirmed by Joel Pollak, a Breitbart Editor, who moments ago tweeted one word:
# Joel B. Pollak @joelpollak #WAR 
As Axios' Jonathan Swan explains, "Joel is a Breitbart editor. They're going thermonuclear, I'm told. "  # Jonathan Swan ✔ @jonathanvswan Joel is a Breitbart editor. They're going thermonuclear, I'm told. Story tk on Axios. https://twitter.com/joelpollak/
Separately, as iBankCoin reports, investigative journalist and former Breitbart employee, Lee Stranahan, offered a quick quip on today’s news that Bannon has resigned from the White House, suggesting that Steve would ‘unleash the beast’ through his online publication and call out those working against the Trump agenda in the White House.
# Lee Stranahan ✔ @stranahan Dear @POTUS: You have not yet figured out who your real enemies in the White House are. Best of luck without Bannon. #FireMcMaster 
Stranahan has been a long time loyalist to Bannon and ardent opponent to several people inside Trump’s White House, namely McMaster, Powell and Cohn. The theory he’s putting forth is that Bannon will have more power outside the White House than inside. While that might be true for Steve, I fail to see how fomenting more internal strife inside the Trump White House will be constructive at this point. Nevertheless, it’s about to get real interesting soon. Watch this clip...
# As for what Steve Bannon's next steps would be, Axios reports that it "will be all about the billionaire Mercer family." I'm told Bannon, who visited New York this week, met with Bob Mercer and together they will be a well-funded force on the outside.
* Bannon has felt liberated since it became clear he was being pushed out, according to friends. He's told associates he has a "killing machine" in Breitbart News, and it's possible he returns to lead their editorial operation.
* A source familiar with Breitbart's operations told me they would go "thermonuclear" against "globalists" that Bannon and his friends believe are ruining the Trump administration, and by extension, America.
* Watch for Breitbart's Washington Editor Matt Boyle to be a central figure in this war, which has already begun, against White House officials like HR McMaster, Dina Powell, Gary Cohn, and Jared and Ivanka.
Then again, Trump may be spared. As Politico's Robert Costa tweets;
# Robert Costa ✔ @costareports One theme I'm picking up: Bannon believes next battle is *not* w/ Trump but w/ Kushner/Cohn/Dina/HR McMaster. "Save Trump," as one R put it....

Bannon Speaks: "I'm Going To War For Trump"

Update: that was quick. As Breitbart's Charlie Spiering reports, Bannon jas returned to Breitbart News as Executive Chairman of Breitbart News "and chaired our evening editorial meeting"
 # Charlie Spiering ✔ @charliespiering Steve Bannon returned to Breitbart News as Executive Chairman of Breitbart News and chaired our evening editorial meeting
As The Hill adds, Bannon reclaimed the title of Breitbart's executive chairman and directed the outlet’s Friday editorial meeting, the website said. “The populist-nationalist movement got a lot stronger today,” said Breitbart News Editor-in-Chief Alex Marlow. “Breitbart gained an executive chairman with his finger on the pulse of the Trump agenda. As chairman, Bannon oversaw massive growth of the populist website before leaving to be chairman of Trump’s campaign. Bannon never settled into his role as chief strategist in the White House, where he feuded bitterly with ideological rivals like Trump’s son-in-law Jared Kushner, economic adviser Gary Cohn and national security adviser McMaster. Breitbart eagerly accepted Bannon back into the fold. “Breitbart’s pace of global expansion will only accelerate with Steve back,” said Breitbart president Larry Solov. “The sky’s the limit.”
# While Breitbart has warned of war 'against' Trump, should he break from the policies upon which he was elected, former White House Chief Strategist Steve Bannon has spoken for the first time since being fired today. In an interview with Bloomberg, Bannon said he was "going to war" for Trump; “If there’s any confusion out there, let me clear it up. I’m leaving the White House and going to war for Trump against his opponents, on Capitol Hill, in the media, and in corporate America.” So, war it is! 
Presumably, being outside The White House allows him more freedom to pursue his tactics. The question is, given the narrative being spun is he resigned by mutual agreement, does Bannon stil have Trump's ear? And if so, will Cohn, Kelly, and Kushner stand for it? We already know his agenda is anything but in line with theirs. Notably The White House formally launched a probe of China's intellectual property practices tonight, invoking Section 301 just as Bannon had said. With regard his internal adversaries, at the departments of State and Defense, who think the United States can enlist Beijing’s aid on the North Korean standoff, and at Treasury and the National Economic Council who don’t want to mess with the trading system, Bannon was ever harsher. “Oh, they’re wetting themselves,” he said, explaining that the Section 301 complaint, which was put on hold when the war of threats with North Korea broke out, was shelved only temporarily, and will be revived in three weeks. As for other cabinet departments, Bannon has big plans to marginalize their influence. “That’s a fight I fight every day here,” he said. “We’re still fighting. There’s Treasury and ational Economic Council chair Gary Cohn and Goldman Sachs lobbying. We gotta do this. The president’s default position is to do it, but the apparatus is going crazy. Don’t get me wrong. It’s like, every day.”
Bannon dismissed the far-right as irrelevant: “Ethno-nationalism, it's losers. It's a fringe element. I think the media plays it up too much, and we gotta help crush it, you know, uh, help crush it more. These guys are a collection of clowns,” he added. And finally, Bannon scoffed at The Democrats; “Te longer they talk about identity politics, I got ’em. I want them to talk about racism every day. If the left is focused on race and identity, and we go with economic nationalism, we can crush the Democrats.”
# Kurt Bardella, a Republican communications specialist who worked for Bannon at Breitbart but later denounced him, predicts the strategist would "feel liberated" by his departure. "Now, he will be able to operate openly and freely to inflict as much damage as he possibly can on the ‘globalists’ that remain in the Trump Administration"....

vrijdag 18 augustus 2017

'Bannon Bounce' Fails To Correct 'Cohn Crash' As Nasdaq Drops For 4th Straight Week

Well that was a week...



Roller-coaster day for stocks; 2 overnight pump efforts failed; stocks sank into and beyond the US cash open, then went bid as Bannon headlines hit, only to slide as reality struck that with Bannon gone, the probability of war is considerably higher, and an ugly close into OPEX...


All major cash indices close lower today, as it appears no one wants to hold risk into the weekend... 


VIX across all major indices rose on the week...


Small Cap stocks actually dipped into the red year-to-date in this morning's initial flush, before bouncing on Bannon headlines...


But Gold's gains this week pushed it ahead of The Dow for 2017...


The last time Nasdaq fell for 4 straight weeks was May 2016...


The S&P 500 remains below its 50DMA finding support at its 100DMA (2418). S&P has not been this close to its 100-day moving-average since the election...


Financials were unable to hold on to gains after Bannon, Tech eked out a small gain on the week. Energy and retailers were hit hard...


Energy stocks pretty much ignore crude's idiocy today...


And this is interesting...


Mixed day today for bonds but the long-end closed the week modestly lower and the rest of the curve very slightly higher in yield...



At the short end, the bill curve is notably inverted...


With the panic line in the sand around 9/28...


The 30Y Treasury Yield test 2.75%, near 2-month lows...


The Dollar Index ended the week very marginally higher but the trend was very clear into the close...      

For those who 'believe', Trump favorability has actually improved this week, implying dollar strength to come...


Copper outperformed on the week with gold, silver, and WTI all modestly lower (WTI exploded higher today, 'triggered' at the same time as Banon headlines hit)...


Gold topped $1300 once again, the 3rd time this year...


This chart made us laugh; USDJPY vs Gold...


Bitcoin had another big week, rising 16.5% to new record highs at around $4400. This is the 5th weekly rise in a row (and BTC is up 86% since the fork)...


But Bitcoin did tumble today amid increasing talk of another fork....


Finally, a reminder that 'stuff' is hitting fans, even if stocks don't really show it, USA default/devaluation risk is now twice that of Germany...

Barcelona Terrorists Planned A "Devastating Attack" With Explosives

When we described the second terrorist attack to take place in Spain, around midnight local time in the resort town of Cambrils, in which local police killed 5 people who had run over civilians and in which the terrorists were said to have carried "explosives attached to the body", we asked "has Spain become the focal point of another suicide bombing terrorist cell?" Moments ago we got what appears to be an affirmative answer, when the police chief heading the investigation said on Friday that the terrorists behind the Barcelona attack had planned a devastating assault with explosives and may have rammed pedestrians with vehicles after their initial plan failed. According to Catalan police chief Trapero, who spoke to reporters moments ago, the large explosion in the early hours of Thursday which brought down a building in Alcanar, where police think a group of terrorists had been plotting an attack for some time, deprived the terrorists of bomb-making material. This forced them to carry out the twin attacks on Barcelona and Cambrils “in a more rudimentary way.”
# "The explosion in Alcanar stopped larger attacks from happening because they no longer had some of the material they needed,” Trapero said. He also said that “It was a group, we do not know the specific number, but we do not rule out that they had other attacks in mind.” and added that there was a “clear link” between the Alcanar explosion and the attacks in Barcelona and Cambrils. Curiously, Trapero also confirmed that the Cambrils attackers were wearing fake suicide belts. “they were carrying belts which looked like suicide vests, but in the end they turned out to be fake. They were trying to simulate explosives,” he said. He said the investigation is focused on those in the building in Alcanar and the vehicles in Barcelona and Cambrils. "We think the suspects in Alcanar were preparing at least one or more attacks in Barcelona. The explosion took out some of the material they were counting on to carrying out even bigger attacks, than the ones that happened."
The Catalan police chief also revealed that a single police officer killed four of the suspects who carried out the attack in the Catalan seaside town of Cambrils. A total of five suspects were killed after the Cambrils attack in which a car plowed into a crowd, killing a woman. More importantly, Trapero confirmed that the driver of the Barcelona van has still not been identified. He said that one of the five suspects killed in Cambrils could have been the driver in Barcelona. He added: “We’re working on the hypothesis that the authors [of the attacks] had been planning them both for a while in the building in Alcanar, but we can’t join up all the scenarios. It was a group, we don’t have a concrete number, but we’re not discounting the idea that they were planning other attacks”....

UMich Beats But Warns A Drop Is Imminent

The University of Michigan Sentiment survey beat expectations with its preliminary August print (97.6 vs 94.0 exp) driven by a massive spike in 'hope' as currenct conditions slump to their weakest since Nov 2016. How long will that 'hope' spike last? 


As UMich details, half of all consumers in each of the last three Michigan surveys reported that their finances had recently improved, the best reading since 2000, the report showed. Americans were also upbeat about their financial prospects in the year ahead. However, while noting that there were too few interviews were conducted following Charlottesville to assess how much it will weaken consumers' economic assessment, UMich goes on to warn...
# The fallout is likely to reverse the improvement in economic expectations recorded across all political affiliations in early August. Moreover, the Charlottesville aftermath is more likely to weaken the economic expectations of Republicans, since prospects for Trump's economic policy agenda have diminished. Nonetheless, the partisan difference between the optimism of Republicans and the pessimism of Democrats is still likely to persist, with Independents remaining as the bellwether group. At this point, the data continue to indicate a gain of 2.4% in personal consumption expenditures in 2017....

Gold Spikes Above $1300, Overtakes Dow Year-To-Date

For the first time since early June, Gold has just broken back above $1300, continuing to mirror the ebbs and flows of USDJPY (which just snapped below 109.00). Is 3rd time the charm?


Gold is now outperforming The Dow year-to-date...

USA Is Now Twice As Likely To 'Default' Than Germany

While the market turmoil (stocks down a few percentage points from all-time record highs) is being pinned on various factors (from North Korea, Trump, & Cohn to terrible retailer earnings and J-Hole anxiety), we suspect the real cause of market uncertainty is starting to peak through; the looming debt ceiling crisis that has now become too big and too imminent to ignore. Of course, uncertainty in The White House is starting to make investors realize the chance of successfully navigating the debt ceiling crisis without a government shutdown are dwindling...


With the T-Bill market pricing in serious disruption at the end of September, the risk of a technical default for US Treasury debt is starting to rise and is now spiking relative to Germany...


In fact, as the chart above shows, the current 'risk' in USA debt/devaluation markets is twice that of Germany's, worse than at the peak of the shutdown in 2013 and worse than the shutdown debacle in 2015. USA Default Risk premium has not been this high since Lehman....

"Armageddon Risk" Returns: North Korea Predicts "Catastrophe" As Massive U.S. War Games Begin Monday

Traders barely had time to enjoy the lull from the "Armageddon trade" - the rising possibility of a nuclear exchange between the US and North Korea, which peaked over the weekend when various US officials said a nuclear war is not imminent, echoed by a statement by N. Korea's state-run news agency KCNA, before a new set of worries promptly took over, chief among them the ongoing slow motion train wreck in Donald Trump's administration coupled with yesterday's double terrorist attacks in Spain. Alas, "nuclear war" risk is about to come back with a vengeance because on Monday US and South Korea are scheduled to begin joint military exercises, a massive show of force which every time in the past has infuriated North Korea, sometimes triggering a show of force. Held every fall in South Korea, the Ulchi-Freedom Guardian war games are the world’s largest computerized command and control exercise. Some 30,000 U.S. soldiers and more than 50,000 South Korean troops usually take part, along with hundreds of thousands of first responders and civilians, some practicing for a potential chemical weapons attack. Scheduled long before the recent diplomatic fallout between Washington and Pyongyang, the U.S. and South Korean militaries will simulate warfare with North Korea from Aug. 21 to 31, well aware that North Korea could respond with another missile test, according to McClatchy.
In light of this perceived provocation by North Korea, which will almost certainly prompt some reaction, Scott A. Snyder, a Korea specialist with the Council on Foreign Relations said “Over the course of the next two weeks I expect tensions to escalate. This is always a sensitive issue, but it is more hair-trigger as the North Koreans are very sensitive to the likely additional nuclear-capable aircraft flyovers.” While the Pentagon has repeatedly stated that the biannual exercises are "defensive" in nature, both North Korea and China have long criticized them as a provocation and an affront to regional security. “There certainly will be some reaction,” said J.D. Williams, a retired Marine colonel and defense policy researcher at the RAND Corporation in California. He said he wouldn’t be surprised if North Korea conducted some kind of missile launch, not a test but a defiant demonstration of might. North Korea’s Kim backed off a threat to launch missiles at Guam, saying he’d watch “the foolish and stupid conduct of the Yankees” before deciding on the launch, a decision that Trump quickly tweeted was “very wise and well reasoned.” While the exchange suggested that cooler heads were prevailing in the latest U.S. standoff with North Korea. But next week’s war games could rekindle hostilities. On Thursday, North Korean state media declared that the military exercises will “further drive the situation on the Korean Peninsula into a catastrophe.”
# It's not just North Korea: Beijing will likely be rather unhappy too. The exercise, along with one in March, often triggers anti-war protests in South Korea and condemnation from China. While Chinese President Xi Jinping has been noticeably cool toward Kim Jong Un, and has been critical of North Korea’s development of nuclear weapons, China has long wanted the United States to shrink its military footprint in Asia, including some 12 bases in South Korea and Japan. In an editorial Monday, China’s Global Times newspaper, an arm of the Communist Party’s People’s Daily, lambasted the decision by the United States and South Korea to go ahead with Monday’s exercises. “The drill will definitely provoke Pyongyang more, and Pyongyang is expected to make a more radical response,” the newspaper said. “If South Korea really wants no war on the Korean Peninsula, it should try to stop this military exercise next week.”
# In other words, China, which is largely expected to rein in North Korea, is already hedging in case North Korea does something impulsive, suggesting the exercise itself could be the provocation that sets Kim off. And set him off, it will: in the past North Korea has reacted strongly during the biannual war games. In 2014, the north fired off scud missiles during the March exercises held by the U.S.-South Korean command, called Foul Eagle. During the 2015 Ulchi-Freedom Guardian exercises, North Korea and South Korea exchanged artillery and rocket fire over their border. That exchange came after two South Korean soldiers were maimed stepping on land mines in the Demilitarized Zone. South Korea accused North Korean soldiers of sneaking across the border and planting the land mines. Last week, China and Russia urged the United States to consider a “freeze for freeze” agreement to reduce tensions. In such a deal, Pyongyang would agree to suspend its tests of missiles and nuclear weapons, and Washington and Seoul would agree to suspend large-scale military exercises. That is not happening.
U.S. military experts say such a deal would give a lopsided advantage to North Korea, which could continue its military training even as the U.S.-South Korea exercises were suspended. “It is hard to imagine why the United States would accept that, because of the vulnerability it would create,” said Bruce Bennett, a senior defense researcher at RAND. In a media briefing on Tuesday, U.S. State Department spokeswoman Heather Nauert said the United States will continue to hold joint exercises with South Korea. And since North Korea will immediate see this "provocation" as a green light for a response, the respite that traders got from the "Armageddon trade" that sent the VIX soaring by one of its biggest and fastest intraday moves in history, may prove very short-lived. Perhaps the only silver lining is that the exercises don't begin until Monday, so traders don't have to do anything too crazy ahead of the weekend....

"From Nukes To Terrorism": Battered Investors Flee Risk For Safety Of Bonds And Gold

The global risk-off mood accelerated overnight on Trump "stability concerns", coupled with fallout from the Spain terrorist attack and lingering North Korea tensions, even if the VIX is off its latest highs, trading just above 15. Investors fled into German and U.S. Treasury bonds and bought gold for the third day in a row, as the appeal of such top-notch assets grew further due to a deadly attack that killed at least 13 people in Barcelona. "In a week where we started by worrying about nuclear war, markets have quickly moved on from this, with yesterday's weak session more of a response to fears that Mr Trump's strategy for the economy and business is falling apart and later the terrible terrorist attack in Barcelona," is how DB's Jim Reid summarized the week's psychedelic events. Concerns that Trump’s stimulus is in peril spiked following speculation that his top economic advisor, former Goldman COO Gary Cohn, was set to resign roiled markets on Thursday until reports that he’d opted to stay on board steadied the ship, however heightened terror fears added to the risk off sentiment after at least 13 people died when a van plowed into pedestrians in Barcelona. The terror attack was a reminder of lingering geopolitical risks, with nerves still raw after last week’s escalation of tensions on the Korean peninsula...


USD/JPY dropped below 109.00 and EUR/JPY 128.00; EUR/USD and GBP/USD both run upside stops as USD weakens across the board. Core fixed income markets rally, curves bull flatten with 10Y bund yield falling below 40bps. Spot gold hits YTD high just below $1300/oz, while a strong close for Dalian iron ore futures once again lifts China industrial metals. ING Bank analysts predicted the dollar would remain pinned near current levels, at the expense of the yen. "Tail risks such as geopolitics, protectionism and the unwind of easy central bank money all provide valid reasons to remain cautious in chasing risk," they told clients. "Dollar/yen continues to capture this nervousness and could move down towards the 109.00 level."
European stocks tumbled, with Spanish shares leading losses, as two Spanish terrorist incidents added to investor worries about U.S. policy chaos under the Trump administration. The Stoxx Europe 600 Index dropped 1% percent, reducing the weekly rebound to just 0.3%. In the US, S&P futures were largely flat while Asian dropped with the dollar on rising US political turmoil. Gold, yen and oil gained despite another weekly increase in US shale production. Credit spreads widen, iTraxx Crossover touches widest level seen during North Korea troubles. Travel and hospitality shares led the 1% drop in the Stoxx Europe 600 along with banks, while industries across the board were caught in the downturn. Spain’s IBEX index dropped more than 1 percent. Equities fell from Tokyo to Sydney earlier after the S&P 500 Index on Thursday tumbled 1.5 percent, its second-biggest drop for 2017.
The VIX soared higher for the second time in one week, while core bonds across the euro region advanced. In Asia, Japan’s Topix fell 1.1% at the close, down 1.2% over the week, while Australia’s S&P/500 Index ended 0.6% lower. The seemingly impervious to anything, including nuclear war Kospi index ended barely changed 0.1 percent lower. Hong Kong’s Hang Seng Index fell 0.6%. The MSCI Asia Pacific Index lost 0.5 percent, paring gains for the week. “The terror attacks in the U.S. and Spain just add to all the other geopolitical mess,” Simon Quijano-Evans, a strategist at London-based Legal & General Investment Management Ltd., said in a note to clients. “At some stage that is likely to culminate into a more extreme market reaction.”
In rates, yields have fallen in recent days following the ECB comments and amid the dash for defensive assets, with 10-year Bunds at a one-week low of 0.41 percent while 10-year Treasuries traded just off one-week lows hit on Thursday; 10Y Gilts fell one basis point to 1.075%. The turmoil also benefited gold, with spot prices for the metal rising 0.4 percent to the highest in more than two months and on track for its second week of gains. Brent crude futures rose 0.35 percent, rising off three-week lows hit on Thursday as the dollar continued to weaken and signs appeared that supply is becoming tighter in the world's biggest energy consumer, the United States. Today's data include August Michigan consumer sentiment. Deere, Estee Lauder, Foot Locker and Ascendis Pharma are among companies reporting earnings.
# Market Snapshot;
- S&P 500 futures down 0.01% to 2,427.25
- STOXX Europe 600 down 0.9% to 373.47
- Nikkei down 1.2% to 19,470.41
- Topix down 1.1% to 1,597.36
- Hang Seng Index down 1.1% to 27,047.57
- Shanghai Composite up 0.01% to 3,268.72
- Gold spot up 0.4% to $1,293.58
- U.S. Dollar Index down 0.07% to 93.55
- Euro up 0.1% to $1.1738
- Brent Futures up 0.3% to $51.17/bbl
- Spanish 10Y yield rose 10.4 bps to 1.543%
# Top Overnight News;
- European Union officials accepted the U.K.’s request to delay the start of the next round of Brexit talks to enable British officials to have time off on Britain’s Aug. 28 “summer bank holiday,” according to two people familiar with the plans
- Yellen speech at Jackson Hole confirmed for Friday, Aug. 25 at 10 a.m. New York time, topic will be financial stability; Draghi speech same day at 3 p.m. New York time
- Trump: advisory council for infrastructure will not move forward, according to a White House spokesperson
- China govt. to further limit outbound investments in foreign property, hotels, sports and gambling
- Barcelona: five suspected terrorists killed by police; Islamic State claims responsibility
- Five suspected terrorists killed by police following Barcelona attack
- China home prices rise in 56 cities vs 60 prev as property market cools
- Energy Capital Is Said to Plan $5.5 Billion Calpine Takeover
- Ping An Undervalued Even After 50%-Plus Gain, President Says
- Gap’s Old Navy Chain Keeps Retailer’s Turnaround Hopes Alive
- Roche, Sanofi May Move on House Democrats MS Drug Price Probe
- Guangzhou Auto Says No Plans to Buy Fiat Chrysler: Reuters
- Fed’s Kashkari repeats there’s no rush to raise rates
- Kaplan urges patience, would like ’more progress on inflation’ before next hike
- JPMorgan Hires Chen From Deutsche Bank For Senior China Role
- James Murdoch to Donate $1m to Anti-Defamation League: Yahoo
- July U.S. Total Video Game Sales Up 19% to $588m: NPD
- Gap CEO Says Gap Brand ‘Stable and Steady,’ Not Yet Satisfying
- Bunge Expands Soy Crush in Brazil, Cites Long-Term Positive View
- Holidays on Hold as Bond Market Defies Usual August Slowdown
- Quants Deliver Swift 10% Gain on Iron Ore From New BNP Model
- Five Suspected Terrorists Killed After Twin Attacks on Spain
- Elliott Is Said to Signal Backing for $6.3 Billion Stada Buyout
- Merkel Jeered by Immigration Foes in Biggest Campaign Unrest Yet
- Applied Materials Machines in Demand as Data Use Explodes
- ROST Boosts FY EPS View, Midpoint Beats Est.; Shares Rise 8.4%
*) In Asian trading, all major Asia-Pac indices traded in negative territory as the risk averse tone triggered by terror incidents in Spain and resignation rumours related to Trump's chief economic advisor Cohn, rolled over to the region. ASX 200 (-0.56%) dampened from the open with the largest weighted financials sector leading the declines as all big 4 banks traded with firm losses, while Nikkei 225 (-1.18%) exporters felt the brunt of the safe-haven flows into FY. Hang Seng (-1.08%) and Shanghai Comp. (+0.01%) also mirrored the global risk averse tone, although downside was stemmed in the mainland after the PBoC switched to net weekly injection in its operations vs. last week's drain and as participants mulled over the latest property price data which suggested the effectiveness of curbs to cool the over rampant sector. 10yr JGBs were marginally higher with mild support seen amid the negative backdrop in global equities, while the BoJ were also in the market for JPY 1.05fin of JGBs with maturities of up to 10yrs.
# Top Asian News;
- Malaysia GDP Growth Beats Forecasts as Economy Expands 5.8%
- After Alibaba Bonanza, Manager Said to Plan New Asia Hedge Fund
- Company Founders Find Fighting Back Has a Cost in India
- Japan Stocks to Watch: JT, Kyoei Steel, NGK Insulators, Tosoh
- Iron Ore in China Ends Week With Bang as Demand Seen Holding Up
- Ping An’s Tech Push Undervalued by Investors, Ren Says: Q&A
- Conflict With Infosys’ Founders Prompts CEO Sikka to Quit
- U.S. Equities See Further Outflows, Europe Sees Inflows: BofAML
- Falling House Prices in Shenzhen Don’t Bode Well for Steel
- Kingsgate Surges as Thailand Lifts Gold Mine’s Suspension
*) Across European markets sentiment has soured with the Eurostoxx falling over 1%, sector wise the losses are broad based with travel stocks among the worst performers following yesterday's terror attacks in Barcelona. Financials also taking a hit this morning after reports that banks are being sued by the FDIC over the Libor-rigging scandal. Flight to quality flow keeping EGBs afloat, the German curve is slightly bull flattening while the 10Y yield is approaching 0.4%. Peripheral debt spreads wider with the Italian 10Y yield edging higher.
# Top European News;
- Commerzbank Early Retirement Offers Accepted by Almost 40%
- City of London Only Sign of Brexit Weakness, Kingspan CEO Says
- Straumann Stopped Share Sale as Investors Wanted Bigger Discount
- Sistema Requests Break in Hearing After New Documents Submitted
- Czechs Move to Strip Election Favorite of Immunity Before Vote
# In currenices, JPY firmer across the board amid the fall seen across equity markets and as such USD/JPY is eying 109.00 to the downside, while support in the short term is situated at 108.70-80. USD softer against its major counterparts, EUR and GBP higher by 0.25% with the later making a move to breach 1.29. However, the backdrop of Brexit continues to weigh on GBP/USD and curb the upside. CAD: Today will see the release of the Canadian CPI figures where expectations are for a slight pick-up in inflation. Although, a miss on this could see USD/CAD make a push through 1.27.
# In commodities, safe-haven commodities supported with gold prices moving to intra-day highs. Elsewhere, the softer USD also sees crude prices ticking up as Brent crude breaches USD 51. Another day of gains for base metals, Zinc rising near 2%.
# Looking at the day ahead, in the US, the University of Michigan sentiment index (94 expected) will be released. Further, the Fed’s Kaplan will speak again today....