vrijdag 20 juli 2018

Dollar Dumps And Bond Yields Jump On Putin Panic, Trump Tantrum, Japan Jawboning

Anyone else find it interesting that UST bonds collapse the day after Trump directly slams China over its manipulation of the currency...


After China's offshore Yuan collapsed overnight, it seems pretty clear that The National Team stepped in to save Chinese stocks (SHCOMP ended unchanged on the week with PBOX Yuan Fix dropping second most since Aug 2015)...


European stocks were hit today, erasing the gains for the week...


On the week, The Dow, S&P, and Nasdaq were practically unchanged, Trannies outperformed and Small Caps gained...


Futures show the chaotic moves better on the week...


The last 24 hours in futures show the exuberance in Nasdaq fading after each of its impulsive BTFD ramps from Trump...


FANG stocks faded intraday today...


US Bank stocks had a good week but faded from midweek...


VIX closed with a 12 handle on the week, pushing back lower after testing its 100DMA...


While VIX dropped, SKEW soared (crash risk)...


Global bonds were plugging along nicely all week until Trump and The BoJ wrecked it all...


It appears Trumpflation is back as the 10-year breakeven inflation rate had its biggest daily increase since February...


Treasuries spiked at the longer-end (chatter of rate-locks also helped)...


Dramatically steepening the yield curve, biggest curve steepening in 5 months...


10Y roundtripped yesterday's gains...


The 30Y yield jumped 7bps, back above 3.00%, the biggest absolute jump since February...


Before we move on, we note that there was NO CHANGE today in the Fed Funds Futures implications for Fed Rate Hikes this year and all the weakness in TSYs was in the long-end (not what one would expect if Trump-related). We suspect the rate-locks reasoning is more realistic. And the short-end of the curve remains inverted (implying rate cuts more likely in 2020 than rate-hikes)...


The Dollar ended the week unchanged, slammed lower by the last 24 hours of Trump tweets and comments (biggest daily drop in the USD in 4 months)...


Yuan was a bloodbath this week (overnight saw the biggest drop in the Yuan fix since 2016)...


Here's an interesting one, notice how UST Futs are bid away from, then dumped back down to the sliding Yuan...


Net FX speculative positioning has reached its longest USD since March 2017 (but note the decoupling from positioning and the USD) When will yuan's collapse spread to US stocks?


Cryptos had a good week, with Bitcoin outperforming...


Bitcoin jumped 20% on the week, its best week since early Dec 2017...


Despite the dollar's weakness on the week, commodities ended lower (though were bid today)...


President Trump did his best to make gold great again on the week...


With everyone and their cat complaining about tariffs driving prices Up (or down), we note that Lumber prices are now unchanged since softwood lumber tariffs were introduced...


And soybean prices are at their lowest since 2008 (having fallen almost constantly for 5 years)...


Will commodity's collapse start spreading to stocks?


Finally, we note that while there is plenty of potential for more, The Dow is back to its richest relative to Gold since June 2007...

Goldman: Currency War Has Erupted

A few months ago, most of the so-called experts predicted that China would almost certainly not use its semi-nuclear options, currency devaluation, to respond to Trump's escalating trade war. As events from the past month have shown, not only is China not shy to use every weapon in its retaliatory arsenal, but the recent yuan devaluation has been the fastest on record, and even prompted Trump to intervene by warning the Fed to become more activist in response to the Chinese currency that is "dropping like a rock", even halting rate hikes if that's what it takes. Bloomberg adds that as the world’s two largest economies open up a new front in their increasingly acrimonious game of brinkmanship, the consequences could be dire, and ripple far beyond the U.S. and Chinese currencies. Everything from equities to oil to emerging-market assets are in danger of becoming collateral damage as Beijing and Washington threaten the current global financial order. “The real risk is that we have broad-based unravelling of global trade and currency cooperation, and that is not going to be pretty,” said Jens Nordvig, Wall Street’s top-ranked currency strategist for five years running before founding Exante Data LLC in 2016. “Trump’s rhetoric over the last 24 hours is certainly shifting this from a trade war to a currency war.”
Bloomberg notes that China’s shock yuan devaluation in 2015 "provides a good template for what the contagion might look like" according to former Goldman head FX strategist, Robin Brooks, who is currently chief economist at the Institute of International Finance. Risk assets and oil prices would likely tumble as worries about growth arise, hitting currencies of commodity-exporting countries particularly hard, namely, the Russian ruble, Colombian peso and Malaysian ringgit, before taking down the rest of Asia. “Asian central banks will initially try to stem currency weakness through intervention,” Brooks said. “But then Asian central banks will step back, and in my mind, the big underperformer on a six-month horizon could be EM Asia.” Of course, as BofA also explained earlier, this has not happened due to the market's belief that the global economy is strong enough - for now - to deflect the deflationary wave set to emerge from China, although that particular assumption could very quickly be put to the test with dire consequences...


Now the latest to admit that currency war has erupted is none other than Goldman Sachs, which writes in a note released on Friday afternoon that "trade war is evolving into currency war." Goldman economist Zach Pandl explains why: President Trump this week brought currency matters to the center of ongoing trade disputes between the US and other economies, stating in a CNBC interview that Dollar strength puts the US at a “disadvantage”, and then commenting on Twitter that the US “should be allowed to recapture what was lost due to illegal currency manipulation”...


Goldman then discusses how Trump's jawboning of the Fed will impact both the Fed's outlook on the global economy, and negotiations with foreign nations: The evolution of the conflict to more directly focus on FX would be consistent with how major trade disputes have played out in the past, often involving negotiated Dollar weakness, as well as the Administration’s goal of reducing the US trade deficit. We do not think the President’s comments on the Fed affect the outlook for US monetary policy. However, they could impact how other countries are approaching trade disputes, either by bringing them to the negotiating table or affecting currency policy directly. There are three direct consequences of this posture, which Goldman thinks could lead to two direct outcomes: a weaker USD (offset by strong EUR and JPY), and a more stable Yuan as "the US could interpret further depreciation as a form of retaliation."
- that the correlation between trade tensions and FX will change, such that an escalating conflict may not result in consistent USD gains;
- that other reserve currencies, particularly EUR and JPY, should find support, and
- that CNY will be more stable, as the US could interpret further depreciation as a form of retaliation.
Finally, when analyzing the currency war from the perspective of China, Goldman writes that while "it is unclear how Chinese policymakers will respond to the latest comments from the White House", it believes there are two key reasons why any further CNY depreciation would likely be limited and gradual, and why chasing USD/CNY higher is probably the wrong trade:
1) Capital controls look effective, as the 4% depreciation in the Yuan vs the Dollar in June only resulted in limited outflow pressures.
2) Although copper prices have declined sharply, direct measures of China activity growth are still solid (with our June CAI tracking 7.5%), and Chinese policymakers have taken actions to support growth.
Of course, if Trump's calculus is correct and the trade war inflicts far greater pain on China's economy than most expect, then Beijing will have no choice but the aggressively expand its devaluation, pushing the USDCNY beyond 7.0 (especially if as Goldman claims, the capital controls firewall is solid and impermeable) to stabilize its rapidly decelerating economy, eventually converging with the market shock scenario of 2015...


Because, as Goldman also wrote some time ago, the only way for Trump to realize if he is winning or losing the trade war is for the US stock market to crash, a fact which is all too clear to China....

Israel's Defense Minister Says "Large And Painful Military Operation" Set For Gaza

After last weekend's significant escalation in Gaza involving Israeli airstrikes on 40 targets, which reportedly killed two teens and wounded over a dozen others, and over 30 rockets launched by Hamas toward southern Israel, all signs are currently pointing toward a broader outbreak of fighting as in new comments the Israeli defense minister is preparing the public for "a large and painful military operation" to come. Israeli officials and media have broadly referred to this latest flare-up of hostilities as the biggest attack since Operation Protective Edge in 2014, and now Defense Minister Avigdor Liberman is warning that Israel is prepared to go to war if Gazans don't cease releasing incendiary kites and balloons in attempts to set communities and farmlands in southern Israel ablaze. 
# Gaza during the 2014 war...


Liberman issued the warning at a press conference in the town of Sderot, which lies close to Gaza and is considered constantly under threat by Hamas rockets. The defense minister said, “We see in the newspapers that you don’t go to war over kites and fires. However, any reasonable person who sees a natural grove burned or thousands of dunams (1,000 square meters) of agricultural fields scorched understands that this situation is unreasonable." “We are trying to be considerate and responsible, but the heads of Hamas are forcibly leading us to a situation of not having a choice, to a situation in which we will need to carry out a large and painful military operation, not something that’s just for show, but a large and painful military operation,” he said. Liberman added further, apparently in reference to the international criticism Israel routinely receives over the indiscriminate nature of Palestinian civilian casualties that result from its offensives: “I think that the only people responsible for this are the heads of Hamas, but unfortunately all the residents of Gaza will be forced to pay the price." And while referencing the 2014 Gaza war, he indicated Israel is now prepared to "carry out an operation that is of a much wider scope and much more painful than Operation Protective Edge." Defense Minister Liberman's ominous words follow reports that the Israel Defense Forces (IDF) held a large-scale military drill simulating a ground incursion into the Gaza Strip early this week, which The Times of Israel described as follows:
# The drill in the country’s Negev region, which involved infantry and armored corps, included exercises in urban warfare, with the city of Beersheba serving as a surrogate for Gaza’s cities, Channel 10 news reported. The drill began Sunday and will continue on Tuesday, and exercises include the simulated capture of Gaza City, officials said. 
Parts of the exercise were also filmed by local media in order to "send a message" to Hamas, according to IDF officials. Meanwhile, the army has erected additional Iron Dome Missile Defense systems in central Israel ahead of any potential military escalation. One IDF infantry commander told local media: “We are ready and speaking in terms of war that could come tomorrow, it occurs to me that this drill could become a real entry into the Strip.” Israel has grown increasingly concerned at the trend of Gazans using explosive and incendiary devices released along the Israeli-Gaza border fence to target farmlands in southern Israel. Large kites or collections of balloons will typically be floated across the fence while carrying burning items attached by a long cord. They've also been dubbed 'Molotov cocktail kites' and have become the latest improvised means of getting around Israel's high-tech air defense systems, and have reportedly floated into Israel in the thousands since the 'Great March of Return' protests, reportedly destroying thousands of acres of land. Israeli authorities have specifically attributed over 400 fires which burned more than 6,000 acres to the low-tech incendiary devices, according to a spokesman for Israel's Foreign Affairs and Defense Committee.
# Last week, just prior to the Israeli air offensive, local authorities counted 21 fires originating in a single day due to burning kites launched from Gaza, impacting mainly farmlands in southern Israel. Protests along the Israeli-Gaza border fence have now reached over 100 days, with tensions exploding after an incident last Friday wherein Israeli forces shot dead a 15-year-old Palestinian who approached the fence....

Dollar Tumbles As Trump Blasts China, EU "Currency Manipulation", Fed Rate Hikes, Strong Dollar

After bouncing yesterday following White House reassurances of Fed independence and PBOC's big weakening of the Yuan fix, the dollar is tumbling again this morning, accelerating after Trump tweeted that "China, EU are manipulating their currencies," adding that Fed "tightening now hurts all that we have done."
# Donald J. Trump @realDonaldTrump China, the European Union and others have been manipulating their currencies and interest rates lower, while the U.S. is raising rates while the dollars gets stronger and stronger with each passing day, taking away our big competitive edge. As usual, not a level playing field... 
# Donald J. Trump @realDonaldTrump The United States should not be penalized because we are doing so well. Tightening now hurts all that we have done. The U.S. should be allowed to recapture what was lost due to illegal currency manipulation and BAD Trade Deals. Debt coming due & we are raising rates, Really? 
And the dollar was not happy...


As the dollar sinks, gold is jumping...


And stocks are unable to hold a bid ahead of the open...


Perhaps more worrying for the market is a renewed correlation between stocks and the yuan...


Here's why. It seems $500bn matters after all...

Markets Spasm In Violent Overnight Moves After Drama Out Of China, Italy And Trump

It has been an exhausting overnight session of two distinct, and dramatic, halves, and then Trump arrived. The start of overnight trading was marked, as has often been the case in recent weeks, with traders attention focusing squarely on China, and specifically the country's currency which tumbled in early trading after the PBOC fixed the yuan sharply lower by 605 pips to 6.7671, the weakest level in two years, and the offshore yuan initially plunging to 6.83 against the dollar in response which caused a risk-off move cross asset classes on fears this was China directly "weaponizing" the Yuan and devaluing the currency in response to the latest Trump statements including his criticism of high Fed rates and the Yuan which was "dropping like a rock"...


However, shortly after the early drop which dragged it to a fresh 1 year low the Yuan staged a dramatic turnaround after a major Chinese bank, a proxy for PBOC market intervention, sold the USD and then was repeatedly seen making large offers to sell dollars in the 6.81-6.83 level according to traders quoted by Bloomberg. As a result, the onshore yuan pared all losses after sinking as much as 0.49% earlier, while the offshore equivalent erased over 400 pips of losses, and posted modest gains before trading largely unchanged for the remainder of the session, while the dollar also declined after solid early gains which spooked emerging markets and US futures...


A similar risk-off/risk-on move was observed in Chinese stocks, which initially slumped only to explode higher, led by bank shares, on expectations regulators will loosen rules on the asset management industry. Specifically, the market moved on a report in 21st Century Business Herald which said mutual funds will be allowed to buy non-standard products, with China expected to release the bank wealth management rules soon. The CSI 300 financial was top performing of 10 CSI 300 indexes, climbing 3.8%, its biggest intraday gain since May 2017 Ample Capital director Alex Wong added that "China is probably using extraordinary measures to restore confidence in the financial sector." Separately, Dai Ming, a fund manager at Hengsheng Asset Management, said that there’s speculation that the asset management rule will be looser than expected, and that "liquidity on mainland will be boosted if mutual funds are able to buy non-standard products and banks don’t need to rush to clean up their off- balance-sheet assets" a move that would be positive for the market and economic growth. Or, in other words, even more easing to prop up the market. Chinese stocks were delighted by the report, and proceeded to storm higher, with the Shanghai Composite rising back over 2800, and closing 2.05% higher to 2,829...



It wasn't just China, however, that provided excitement overnight. Italian political risks returned with a bang following a report in Italian La Repubblica according to which Deputy PMs Di Maio and Salvini unofficially threatened to force Finance Minister Tria to resign in dispute over appointing new head at state lender CDP, the news of which caused a sharp sell-off in BTPs from the open, spreading to bunds which widened by 10bps before sentiment gradually stabilized and half the initial move is faded. Italian bonds pared the earlier slide after Five Star Movement’s Di Maio denied the report of a clash although in a subsequent interview by Corriere with the euroskeptic head of the budget committee, Claudio Borghi, he said Italy will leave Euro sooner or later. “I am completely convinced of it." That did not help sentiment and Italian 2Y yield were trading near session wides...


And with most attention focused on FX and bonds, equities also moved, with European stocks fluctuatinh between gains and losses and U.S. index futures were also mixed, even after Asian equities reversed declines amid signs the Chinese central bank stepped in to stem weakness in the yuan. The dollar edged lower along with Treasuries, on concerns Trump really means to take on the Fed in pushing for lower rates. The Stoxx Europe 600 Index trimmed early losses, with carmakers and miners among the losers, after the abovementioned whiplash session in Asia saw the Shanghai Composite Index post the largest gain in a week. Futures on the Dow Jones and S&P 500 initially declined, then recoupled all losses, before they tumbled again when shortly after 6am CNBC released the full Donald Trump interview in which in addition to his comments about the Fed, Trump also said (this was not reported before) that he is "ready to go" to $500BN on China import tariffs. "I’m ready to go to" $500b, Trump told CNBC's Joe Kernen: "I’m doing this to do the right thing for our country." Trump's comment sent futures tumbling for the second time on the session, with Dow Jones futs sliding 130 points and the E-mini back under 2800...


Meanwhile, amid all the drama, earnings season is in full swing, with a mixed picture so far doing enough to propel U.S. equities back toward the all-time high reached in January. In FX, the dollar fell against all G-10 peers following Trump’s comments on Fed rate hikes and the yuan’s drop, its first drop in 4 days. Treasuries whipsawed as the PBOC weakened the yuan fix, trading about 1 bp higher to 2.85%. The pound held near a 10-month low on jitters over U.K. politics and signs the EU isn’t keen on the government’s Brexit proposals. Meanwhile, Italy’s bonds pared early losses after the government denied a report that euro-friendly Finance Minister Giovanni Tria might be forced to step down. Commodities are mostly in the green on the day with WTI (+0.6%) and Brent (+0.7%) just off highs (at around USD 70.14/bbl and USD 73.36/bbl respectively), albeit both benchmarks are on track to set their third week of losses amid oversupply concerns fused with US-Sino trade tensions. To recap, this week’s API and DoE inventories both printed a surprise build in stockpiles, whilst speculation amounts over the potential for an economic slowdown caused by trade tensions which could lower demand in the future...

Trump's Trade War May Spark A Chinese Debt Crisis

There’s no chance China will cut its trade surplus with the U.S. in response to President Donald Trump’s tariff threats. For starters, Washington has made no specific demand to which Beijing can respond. But its efforts may have an unexpected side effect: a debt crisis in China. The 25 percent additional tariffs on exports of machinery and electronics looked, at first blush, like a stealth tax on offshoring. The focus on categories like semiconductors and nuclear components, in which U.S.-owned manufacturers in China are strong, recalled Trump’s 2016 promise to tax “any business that leaves our country.” It seems, though, that offshoring wasn’t the target after all. Now, with the imposition of new tariffs on low-value exports that mostly involve Asian value chains, the simple fact of selling cheap products that the U.S. buys has become the problem. Either way, the administration appears set on shrinking its current-account deficit (which, at a moderate 2.4 percent of GDP, is far lower than the 6 percent clocked in 2006-7) just as the Federal Reserve raises interest rates. Distress has already been registered in China. On July 19, the yuan (also known as the renminbi) hit 6.80 to the dollar, the weakest in a year and 7 percent lower than at the end of May...


Such a move is nothing earth-shaking for less controlled currencies. But a stable renminbi is a key plank in the leadership’s promise to its people, and the exchange rate is tightly managed by the central bank. Chinese investors have been buying official assurances for a year that the renminbi would be a fortress, but now they’re not so sure and are exporting money again: May saw net capital outflows and a decline in the foreign-exchange reserves. The currency is the most visible sign of slippage in the image that China tries to project of an economy so brilliantly managed that the bright sun of GDP expansion is untroubled by even temporary clouds on trade, employment or consumption.
# There are many other signs: The Shanghai Composite Index of stocks has declined 7 percent in a month, dropping below the government’s red line of 3,000 for the first time since September 2016. Corporate bonds are about to set a record for the most defaults in a year. Junk bond yields are spiking. The chorus of anxiety about debt is reaching a crescendo, with daily press reports on governments that can’t pay their employees or meet pension obligations. Property prices are tumbling in some cities and frozen in others whose governments have placed a finger in the dyke by halting transactions. That the massive burden of debt will drag the economy into recession is as obvious as the empty towers that rise on every landscape. Precise estimates are difficult, since the government’s dedication to the optics of invincibility induces financial institutions to push debt into alternate, opaque channels. But on any metric, the amount of new lending each year grows faster than the economy, and the interest newly owed exceeds the incremental rise in GDP. In other words, the whole economy is a Ponzi scheme. Many analysts point out that the Chinese government owns everything, including the banks, and can just issue renminbi to infinity to keep the economy solvent. The flaw in that argument is China’s role in the global economy: It’s the world’s biggest exporter and second-biggest importer. The currency acts as the interface between the domestic and international economies, and its value is a matter of supply and demand. The Ponzi economy has been sustained by cheap dollars coming in through legitimate or illegitimate channels, and the problem now is that structural surpluses are disappearing and there is less 'hot' money from the U.S. seeking yield. When dollars enter, the central bank buys them and issues renminbi. If it has to issue more than is justified by the amount of inflows, it creates inflation, and inflation, which has toppled or almost toppled governments from the Ming dynasty to Tiananmen, is the third rail of Chinese politics.
# That brings us back to Trump and his trade war. The fundamental idea underlying this salad of a trade agenda is an old one from the right wing of the Republican Party, which believes that the U.S. has paid too dearly for its postwar leadership role under the Bretton Woods regime; putting America first means America marching alone. The dollar standard, and not trade policies, underpins the global system of commerce. The U.S. runs trade deficits as a consequence of its desire to own the currency that dominates global commerce, not as a casualty of predatory policies by China. The rise of the gold standard in the second half of the 19th century was the key foundation for the expansion of global trade. Its collapse, starting in 1913, drove a trade implosion. After Bretton Woods, the dollar took over as a global standard, and, when former President Richard Nixon made the greenback no longer redeemable for gold, it was freed to become a pure fiat currency. That meant that the U.S. could project any level of currency around the world to support its national economic growth and lifestyle improvements that exceeded productivity gains. No wonder China wishes the renminbi could do the same.
It is tempting to see the recent yuan depreciation as a strategy to blunt the effect of U.S. tariffs, but really, the capital account is of much greater import to China Inc. than the current account. China’s central bank will almost certainly try to pull back the exchange rate in the near term: Authorities care more about the pile of reserve gold, successful stock-exchange debuts for Xiaomi Corp. and Ant Financial, and lucrative bond issues than about the private and largely foreign-owned companies that dominate exports. The truth is that China has followed a mercantilist trading policy since Mao Zedong. Most significantly, the investment splurge in the reform years helped political elites rake billions off the forced savings of the Chinese people. That was enabled by incoming capital, and there is no indication that will change. Until now, China has managed to keep its huge raft of nonperforming debt afloat thanks to capital inflows, as successive waves of quantitative easing pushed dollars into the world. A tighter dollar would seem to make the bursting of China’s credit bubble an inevitability.
When that happens, the renminbi will have to depreciate sharply. This will have a deflationary impact on the world. It will also lead to a decline in China’s share of global GDP, dramatically reduce the nation’s demand for commodities, and diminish its role on the international political stage. Much about Chinese trade practices is genuinely unfair. But the inequity flows as much from U.S. policy favoring big corporations at the expense of workers as it does from Chinese structural subsidies. Both are difficult problems to address, much harder than penalizing exports. No one will benefit when China shrinks and turns inward. Trump should be careful what he wishes for....

China "Weaponizes Yuan"; Weakens Fix By Most Since 2016

The PBOC just lowered the ax on the Yuan Fix, slashing their reference rate by the most since June 2016. In the past 48 hours China has:
- Cut its 7-day Treasury rate by 103bps
- Launched quasi QE
- Told banks to flood the system with liquidity
- Sent the Yuan tumbling
- Warned more easing is coming...


# Offshore Yuan is tumbling to new cycle lows after the fix. CNH is down over 1250 pips this week, the biggest weekly devaluation since August 2015's plunge...


President Trump is gonna be pissed!!


Will China's chaotic capital markets ripple across the world?


Yen just snapped stronger...


The Indonesian Rupiah tumbled 0.5% and gold is falling...


# So how long before the trade war, which is already shifting to a currency war as a result of the recent record devaluation in the yuan, morphs into a central bank war and a renewed race to the bottom between the world's two most important economies? Or worst still as Bannon suggested, a kinetic war. Russia is an annoyance. China is our great challenge. Russia's economy is the size of Texas or New York State? It's got lots of nuclear weapons, but in today's warfare, nuclear weapons are taking a less important role. Trump is trying to end the Cold War and the Korean War...and all he is getting is grief from the globalists. And that's a huge problem, because not only are we adversaries with China, we are at war with China, Bannon said. We're in a war with China. Ray Dalio tweeted the other day.
# There's three types of war: information war, economic war, and guns-up kinetic war. They've been at war with us for 25 years. Many people in this room have exacerbated the rise of China." Pushing back against the notion that Trump lacks grand foreign policy vision, Trump, like Reagan, is trying to build a foreign policy behind American assertiveness and optimism. Furthermore, the notion that China has advantages over the US in a trade war is laughable; the US can, and will, win, Bannon said. If they devalue their currency they're just going to flood more dollars out. That's what their own people think about their economy. We allowed them to take the South China Sea. Donald Trump is not going to back off this. Donald Trump is not going to blink. Victory is when they give us access to their markets. This trade war is going to end in victory and what you're going to see is a reorientation of the entire supply chain out of China. But, we remind readers that 'hope' is not a strategy....