Is the Federal Reserve running out of time?

The Federal Reserve was steamrolled by a perfectly hedged move by the POTUS, who escalated the Chinese tariffs conflict, imposing a 10% tariff on 300 bln of Chinese goods. The POTUS and his team decided to further escalated trade wars, after a calculated move urging the FED to cut the IOER by 50 bps during the FOMC July meeting. Since then the market has rallied to long duration trades, which has led to more curve flattening and further inversion of the 3s10y TSY curve. At this point the 2y10y has still not inverted but has come under massive pressure following recent days. Even though long duration trades are not any novelty, due to the fact that financial institutions are chasing yields at every price possible, the sharp decrease in TSY is astonishing.

Generally a flattening of the curve does not mean a downfall for equities. Nonetheless such a flattening emphasizes the fear of escalating trade wars and a Federal Reserve which is not able to communicate its policy in an effective way. The risk of a market correction/downtrend have risen dramatically and market participants are slowly positioning towards a risk-off scenario, with gold slowly but surely crawling back to the levels of the GFC, trading at USD 1502 with no real profit-taking in sight. The aforementioned global tensions are reflected by equities, most notably the S&P 500, who saw a harsh and quick drawdown. The S&P ended up drawing down 205 points, losing 6.78% of its total market cap.

As of recent the distress is also felt in the interbank market with the 3M LOIS widening back to the yearly high, showing a worsening in credit. The move in credit is widely off-set by liquidity constraints, driving towards a wider the EURUSD XCCY basis. This comes as no surprise with the Treasuries decision of increasing the debt ceiling and the earlier than expected stop in balance sheet unwinding. At this moment the XCCY basis is at some sort of a sweet spot. On the one side Europe investors are looking for high yields in the U.S. zone and on the other side U.S. debt managers are looking at tendering low-yield debt. This can be observed by the growth in reverse Yankee funding.

The 5y5y forward rates on inflation levels have come down from the highs off 2.30 to well below the inflation target of 2% set forth by the Federal Reserve. This comes as an aftermath of the slowing in Economic data and the dovishness of most central banks.

The crucial factors which could impact equities are:

1. Forward Guidance of the Central Banks: As other central banks have proceeded to react to growing worries with respect to global trade tensions, like the RBNZ who cut its rate by 50 bps the FED has come under increasing pressure. Fed Fund Futures are pricing in a total of 100 bps cuts up to December 2020. This is not observable in TSY, where the 2Y Yield is trading at 1.5978. If the Fed is unable to put markets at ease ad keeps running behind the curve we could see a correction in equities. In essence, the September FOMC could be absolutely pivotal to resetting animal spirits. The Fed has plenty of excuses to do this, trade-escalations being the primary factor, particularly as Chair Powell has consistently noted that the biggest risks to the economy are those that are external. Nonetheless compared to the rest of the globe US yields are still very attractive compared to other jurisdiction, like the German 10Y Bund who is yielding at -0,587%.
2. Fading fiscal stimulus: With the fiscal easing under Trump, stocks saw an artificial rejuvenation. Since then fiscal stimulus has faded away and makes the comparison of companies earnings rather difficult. This phenomenon could be observed when fiscal easing began an economic surprise was very high, now with fading effects of fiscal stimulus the Citi Economic Surprise Index has been trending lower.
3. Further Escalation in Trade Wars: In the initial rounds of tariffs President Trump raised tariffs to 25% after having levied an initial 10%. This could well become a deja-vu in the newest round of discussions, between the US and CHINA.

As observed by Citi equity markets seem to be essentially trading like a two-factor model, with the input variables Trump Tweets and FED pricing:

1. The end of 2018 brought about more conciliatory tweets from Trump in November but crucially these were unable to prevent the equity market from correcting ~20% due to a hawkishly delivered Fed hike. An almost immediate dovish turn by Powell in conjunction with a friendly Trump tweet reversed the market sell-off at the turn of the year. At this stage, the money market curve hadn’t yet started to price cuts but did price out further hikes.
2. By the beginning of March stocks were up 18% from the December lows, but an abysmal non-farm payrolls number spooked the money markets into pricing an entire cut by the end of the month. Ironically, this is where the “bad-data = good-news” regime emerged. Data weakness gave lower projected discount rates which helped the equity market rally back to all-time highs in May, supercharged by pacifying Trump tweets.
3. The May escalation of trade wars started the vicious circle of the risk assets relying almost entirely on the premise of Fed cuts. The market recovered as ~70bps worth of Fed cuts were priced by June. Sentiment recovered following what looked like a temporary end to trade escalations in the G20.
4. As of now, the Fed has disappointed the market with a ‘hawkish cut’ whilst there looks to be no sight of trade détente in the short term given the move higher in USD/CNH and the subsequent branding of China as a currency manipulator by the US Administration.

BNP to lose 3,5 billion Euro Credit Plan

After a bad week the German DAX continues its downward movement. The downturn in the Eurozone is fueled by the terror attacks in Spain and the political instabilities in Washington. Two hours before close the German Index is down 0,84% at closely 12050. In the afternoon the DAX tried to outbreak and had a fast rise from the 12100 mark up to the 12140 point mark, but rapidly went crashing down after that.

The major U.S. equity indexes are about to start the new week coming off their worst fortnight of trading in quite some time. The most recent five-day stretch saw a spike in volatility, and the major averages shed more of their value. There were a number of factors that came together to weigh on the market, most notably a negative reaction to President Trump’s commentary on the tragic event earlier this month in Charlottesville, Virginia and emerging worries that the fallout will be that the President and Congress will be unable to pass some of his business-friendly agenda, including tax reforms. That, along with worries about what the Federal Reserve’s possible decision to begin reducing its $4.2 trillion balance sheet by selling Treasury bonds and mortgage-backed securities will have on the U.S. economy, pressured the world equity markets. Adding the aforementioned factors up, the Dow Jones Industrial Average, the NASDAQ, and the broader S&P 500 Index are all down around 2% over the last fortnight of trading. Even more discouraging was the selling that we saw into Friday’s closing bell, and that came despite news that President Trump’s top aide Steve Bannon was removed from the White House staff, likely bringing with him his protectionist economic policies. The initial sense on Wall Street was that this would be good for the market (the averages rallied on Friday shortly after the news broke), as it would likely mean that President Trump’s top economic advisor and National Economic Council Director Gary Cohn will remain in his position, which would be good news for Corporate America, Big Business, and Wall Street. This situation, though, remains very fluid and may mean more twist and turns for the near-term performance of the world’s equity markets. Mr. Cohn’s commitment to the Administration bears watching, as many pundits believe that if he was to resign from the White House staff, it would lead to a notable correction in the equity market. Looking ahead to the week at hand, we still expect the world’s equity markets to be driven by the ongoing political news from Washington D.C. Overall, we think that any news or actions seen as possibly impeding the Administration’s ability to get some tax reforms passed will have on detrimental effect on the U.S. equity market. The market has risen significantly since last November’s Presidential Election on hopes that the new Administration will get some business-friendly policies passed, including the discussed tax reforms. That said, we do get a few reports on the U.S. economy, including data on existing home sales and durable goods orders. Investors also should be aware that the Federal Reserve’s annual Jackson Hole, Wyoming confab will take place later this week, which may bring more clues about how the central bank will proceed with regard to monetary policy over the remainder of this year.

This week notable earnings:

1. HP Inc.
2. American Eagle Outfitters
3. Abercombie and Fitch
4. Staples Inc
5. Tiffany & Co.
6. Delta Natural Gas Co Inc

Total SA agreed to buy the oil and gas unit of A.P. Moller-Maersk A/S, the French company’s biggest acquisition since 1999 and another sign of the accelerating pace of energy deals after a long downturn. Total will pay Maersk with $4.95 billion of its own shares and assume $2.5 billion of the Copenhagen-based company’s debt, according to a statement on Monday. The full transaction value of $7.45 billion is above what some analysts were expecting and Maersk shares jumped as much as 5.7 percent following the announcement. Total’s Chief Executive Officer Patrick Pouyanne is following through on a hint last month that he was ready and willing to make acquisitions to grow production, taking advantage of a plunge in company valuations, the cost of drilling and other equipment during the three-year industry downturn. The Maersk assets will boost the French giant’s business in the North Sea, adding to deals earlier this year that expanded its presence in Uganda and Brazil. “We had the feeling that on the North Sea, we had to go a step further to be more competitive,” Pouyanne said on a call with reporters. Maersk had been considering spinning off the oil and gas assets in an initial public offering, but “we offered them another option.” The deal ranks among the largest that a super-major has done since oil prices crashed in 2014. Royal Dutch Shell Plc agreed to buy BG Group Plc for $52 billion in 2015 and has been reaping the benefits since the transaction closed the following year. In January, Exxon Mobil Corp. agreed to pay $5.6 billion in shares, plus a series of contingent cash payments totaling as much as $1 billion, for drilling rights in the Permian shale region of Texas. Energy deals have picked up pace more broadly in recent months as the industry puts the worst of the slump behind it, although major oil companies have tended to be sellers. BP Plc has offloaded assets including a $1.7 billion stake in a Chinese petrochemical venture and Shell exited its Irish venture for $1.2 billion. “We like this deal,” Jason Kenney, an analyst at Banco Santander SA, said in a note. The transaction is “timely and opportune” with Brent crude, the international benchmark, trading at about $52 a barrel, he said.

Commerzbank announced it would end its credit plan partnership with BNP Paribas. 300’000 contracts with a total volume of 3,5 billion Euro will be handled solely by the German bank. During this process 150 employees will be transferred. The Credit Plan had initially been closed between Dresdner Bank and the French Bank and was taken over by Commerzbank with the acquisition of Dresdner Bank in August of 2008.

 

Wall Street suffers amid White House instability

The Dax is finishing off the weak on a low. Pre-Markets brought down the DAX to the 12100 point mark. This bearish sentiment is stained by the weak U.S. performance, which has quoted the biggest loss in 3 months, with what seem to be a big correction in the U.S.

on Wednesday, we saw the stock market break to the upside initially, before giving back much of that gain later in the day on political concerns at home, notably the furor growing out of the President’s reaction to last weekend’s events in Charlottesville. An extension of these latter worries pulled equities down early yesterday and did so sharply. Also worrying traders was the flow of earnings reports from additional retailers. In all, the Dow Jones Industrial Average, off moderately at the open and during the first half hour, fell further as we proceeded into the middle stages of the morning, surrendering 125 points at its low. In part, this reaction came in spite of the release of better-than-expected earnings from Dow component Wal-Mart Stores. One analyst commented that this was not a blowout report. Also, the big chain reduced its 2017 guidance. In total, the second quarter, a good one, in general, for Corporate America, has been only a mixed affair for the nation’s retail establishments. As critical as earnings continue to be, even as reporting season draws to a close, it is the political situation in Washington that is yielding most of the shifting sentiment. On point, the Street has had to contend this week with the fallout from the President’s dissolving of two advisory forums made up of some of the nation’s top CEOs, a number of whom had announced departures in the past 48 hours. Those departures reflected dissatisfaction with Mr. Trump’s aforementioned assessment of events in Charlottesville over the past weekend. Things worsened as we moved into the afternoon, with the Dow’s early loss of some 125 points ballooning to just over 185 points by the early afternoon. The NASDAQ, under even more pressure, fell back by 90 points as the session moved long, with losses spread all across the board. And then after word broke that there had been an attack in Barcelona killing 13 people, stocks fell further into the close. Meanwhile, as to Washington, stocks plummeted later in the day after word spread that Gary D. Cohn, the President’s chief economic advisor was considering leaving the Administration. He quickly denied this story. Still, the damage was done, and the market continued to descend, falling to the day’s low at the close. In all, the Dow shed 274 points; the S&P 500 lost 38 points, or more than 1.5%; and the NASDAQ toppled at a session-worst 123 points, or 1.94%. Losses of well over 1.7% were suffered by the S&P 400 and the Russell 2000. Among individual groups, all 10 of the equity sectors ended lower, with just the utilities failing to fall a full 1%, or more. The telecom, technology, and basic materials groups did the worst, on a day that saw declining stocks overwhelm gaining issues with the late selling rush.

European stocks fall amid North-Korea conflict

In Case you missed out our Weekend Special Bitcoin article make sure to catch up with it.

The North-Korean conflict is staining the stock markets. European stocks fell sharply across the board today as investors around the world piled cash into safe-haven assets amid increasingly dangerous rhetoric between North Korea and the United States. President Trump presented a statement warning North Korea that any threats to the United States would be met with “fires and fury.” Gold and Silver are up 1,26% and 2,84%respectively.On the other hand all major European Stock Indices ,with a few exceptions such as the ATHEX, are quoting a negative net change. The DAX is no different and as such is down 1,17%, two hours before close. After a pretty slow week, the DAX opened by climbing a little and reaching the 12226 point mark 30 minutes after opening. After reaching the intraday high, the DAX went crashing and is now down 1,17%.

Following a mostly higher beginning to the trading week on Monday, Wall Street got off to a somewhat weaker start yesterday, with the Dow Jones Industrial Average, a 26-point winner on the first session of the week, moving down to a 40-point loss in early dealings. With the economic calendar light and no new political headlines of note until late in the day, the focus was again on earnings, which continue to pour in for the second quarter. To be sure, most of the nation’s larger companies have reported already. Now, we are starting to hear from some smaller names, as well as results from a few retailers, which often have July ending periods. As has been the case almost uniformly, however, the bulls didn’t stay down for long, and as we ended the first half hour of trading, the early setback was pared, although the indexes remained a bit under water. That would change in the next half hour, as the Dow would make it back into the black, with the bulls hoping for a 10th straight record close. Meantime, the big item of note on the earnings calendar was yesterday afternoon’s pending quarterly release from Dow stock Walt Disney, which is noted below. Some retailers also were on the docket, as noted above. Indeed, with respect to the latter item, the retail reports made surprisingly good reading, with better-than-expected results from both Ralph Lauren and Michael Kors Holdings helping to turn things around as the morning wound down. In fact, as we approached the noon hour in New York, all three large-cap indexes were securely in the green, with the Dow seemingly on course for a 10th straight record close, with a mid-session gain of some 50 points. All told, corporate earnings have been up some 10% for the second quarter, which is well ahead of the 6% increase that has been forecast. Little wonder stocks are strong. The good news would continue into the first part of the afternoon, affirming that when the focus is on earnings, rather than politics and even the economy, this overbought stock market has continued to do well. And yesterday, the gains extended to the S&P 400, the mid-cap benchmark and the small-cap-dominated Russell 2000. Meantime, the gains increased in the first part of the afternoon, with the Dow’s intraday uptick reaching 60 points. But that would prove to be the high water mark for stocks, and as the afternoon moved along, the sellers entered the fray. However, there was little intensity to that pullback. The mid-afternoon selloff, albeit modest, did continue into the close, with the energy and basic materials sectors leading the way lower, with an assist from health care. Few groups showed any noteworthy strength, although recently soaring Apple Inc. shares did press ahead to an all-time high of just over $161. Still, while the Dow and the S&P 500 Index both set intraday peaks, each fell back below the neutral line in the final hour of trading–especially during the closing half hour. Also, losing stocks held a plurality on winning issues on the Big Board and the NASDAQ. The late selloff, meanwhile, was driven largely, it would seem, by President Trumps statement.The weakness then accelerated somewhat into the close, with the Dow at one time dropping by some 60 points. So, when all the numbers were added up, the blue chip composite was off by 33 points; the S&P 500 Index was lower by six points; and the NASDAQ’s deficit was 13 points, as more stocks fell than gained on the session. Then, after the close, Disney chimed in with a profit beat, but a shortfall on the revenue side, causing that stock to falter in after hours trading.

Walt Disney will stop providing new movies to Netflix starting in 2019 and launch its own streaming service as the world’s biggest entertainment company tries to capture digital viewers who are dumping traditional television. Walt Disney will launch two Netflix-like streaming services, one for sports and another for films and television shows. As a reaction to these news Disney is up 0,19% and Netflix is down 2,61%, as these move could be a predecessor for further pullbacks.

Office Depot‘s profits fell on weaker sales in the second quarter, missing analysts’ estimates. Second-quarter sales declined 9 % to $2.4 billion YoY, the Boca Raton-based office supply retailer said Wednesday. Same-store sales — those open at least a year — fell 6%, Office Depot said. Retail sales were $1.1 billion for the quarter compared with $1.2 billion a year ago. Office Depot had lower traffic, transaction counts and average order value, according to its regulatory filing. It saw lower sales in most categories, including ink and toner, computer and technology products, offset in part by cleaning and break-room products. Office Depot had previously said 2017 sales would be lower due to store closures. The company said it closed 31 stores during the quarter, ending with a total of 1,408. For 2017, 75 stores are scheduled to close.

The airlines of the Lufthansa Group welcomed 13.1 million passengers on board in July 2017. This shows an increase of 16.9% YoY. The available seat kilometers were up 12.4% over the previous year, at the same time, sales increased by 12.8%. The seat load factor improved accordingly, rising 0.3 percentage points to 86.3%, compared to July 2016. In total the airlines of the Lufthansa Group carried more than 73 million passengers this year until July. The overall seat load factor reached a historical record with 80.2 percent.

Todays Economic Calendar:

1. MBA Mortgage Applications
2. Productivity and Costs
3. Wholesale Trade
4. EIA Petroleum Status Report