Dax in the Evening

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Sell sell sell sell

US dollar and debt begin to disagree

A sharp 0.5% rally in the DXY dollar index overnight has heightened uncertainty as to the underlying state of the US economy.

A big month-on-month increase in US wholesale inventories and a noticeable pull back in weekly unemployment claims both helped fuel the dollar rally overnight. This comes hot off the back of US JOLTS employment data, which saw the vacancy rate reach a 15-year high. Although the hiring rate saw a further pullback, and this vacancy/hiring divergence could be showing a skills mismatch between job applicants and job postings. The divergence between the vacancy rate and the hiring rate shows the uncertainty around exactly where the US economy is heading. And while the US dollar shot up overnight, the US government debt seemed unconvinced with bond yields falling across the yield curve.

US wholesale inventories are increasingly looking like they may have hit a turning point. The Atlanta Fed’s GDPNow 2Q forecast remained unchanged at 2.5%, but could be set to see a boost from inventories investment if this trend continues into the May and June data.

The divergence in the JOLTS vacancy and hiring rates quite nicely sums up the current divergence between the US dollar and government bond market.

Nonetheless, this US dollar spike has sent jitters through the commodities complex with copper, in particular, having an awful night. LME copper prices hit their February lows, as LME copper inventories look to have seen a massive influx from Chinese copper inventories. The COMEX copper price in the US lost 1.1%.
AUM-COPPER-100616-SML
Click to enlarge

Oil similarly saw a dollar-induced pullback, as WTI oil lost 1.5% overnight, but managed to hold comfortably above the US$50 level.

Given the hit to commodities, the commodities-heavy ASX is set to have the toughest open in the Asian session. Currently, we are calling the Aussie market down 0.7% at the open. BHP’s ADR saw a massive 5.6% drop in the US session, its biggest one-day fall since 9 May. CBA’s ADR similarly underperformed, losing 2% overnight. Other Asian markets are all set to open slightly lower. Despite the big gains in the USD, the USD/JPY was little changed. The Nikkei is set to open down 0.2% and is unlikely to see a familiar dollar strength pop today.

ps
just for today anyway
 
Waiting for the ASX to open.
And nothing was happening at 950am
I now found out it's closed in New South Wales for the public holiday. :eek:

Happy Queens Birthday weekend.

Game of Thrones on in 60 mins.:D
 
Oscar Reed said:
Waiting for the ASX to open.
And nothing was happening at 950am
I now found out it's closed in New South Wales for the public holiday. :eek:

Happy Queens Birthday weekend.

Game of Thrones on in 60 mins.:D
Click to expand...

jpy 225 is moving down, hk open in an hr
crosses of jpy still going south

and you're gonna watch telly !!! :LOL:
 
counter_violent said:
jpy 225 is moving down, hk open in an hr
crosses of jpy still going south

and you're gonna watch telly !!! :LOL:
Click to expand...

Sell into strength repeat sell into strength.

Simple.:LOL:

Hopefully are American friends buy which will give us better prices to sell into.
 
Buy a Gold Necklace

Volatility and risk aversion on the rise

Undoubtedly, the story of the moment is the consistent moves into fixed income, with a focus on when the German 10-year bund will go negative, Japanese debt making new record lows on a daily basis and whether the Aussie ten-year will push below 2%.
t’s cheaper to lend the US treasury money for a month than lend to the Swiss monetary authorities for 50 years. But not only is the fixed income market benefiting from low inflation expectations and unconventional central bank policy, but we are now seeing increasing risk aversion flows. We always talk about traders missing the boat on the equity rally, but the truth is the rally in fixed income is where the real FOMO (Fear of Missing Out) trade is occurring.

The Federal Reserve will not be enthused by Friday’s US economic data, which showed the Uni of Michigan five- and ten-year inflation expectations at all-time lows, while the Fed’s Labor Market Conditions Index (LMCI) was the most negative since 2009. The yield curve is the flattest since 2007 and while narrowing credit spreads have meant borrowing for corporates is super compelling, the Fed won’t like raising rates with inflation expectations and the yield curve flattening aggressively. Two rate hikes are currently not priced into markets until April 2019, so the market is either gradually warming to the idea that we are more likely to see easing from the Fed, or a near-term hike would be seen as a policy mistake. This week’s FOMC meeting is going to be the central focus, especially after Yellen’s recent speech in Philadelphia suggesting that inflation expectations have ‘caught her attention’. Well, if she focused on the US five year/five swaps market then the Fed would never raise rates.

The other key story is the huge hedging exercise seen through markets. This has been prevalent in GBP/USD for a week or so, with GBP/USD two-week implied volatility (at 38%) now the highest ever (see Bloomberg chart below). The bookies have the probability of a ‘Leave’ vote in the UK referendum at 35%, but traders are taking no risks here and there seems to be a genuine view that we could be staring at a ‘Brexit’. Clearly the polls in the last few days suggest the 35% probability of this event is too low, but hedging UK risks at the current cost is not attractive, so we should look at other markets such as the EUR which is considerably cheaper. While I still sit in the camp that the status quo will prevail, key personnel behind the ‘remain’ camp are clearly not rallying the troops.

The move in implied volatility has now spread to the equity market where the VIX (US volatility index) has pushed into 21, rallying 55% in the last six days. Higher implied volatility as I have mentioned is absolutely key behind the trading landscape and means adjusting both risk and money management for the increased range expansion and risks in the market. To survive and thrive as a trader, we simply have to adjust to volatility.

All the variables points to a tough open locally, with SPI futures 1.9% lower than Friday’s ASX 200 cash close. In the same time, S&P 500 futures are 1.6% lower, with oil futures down 3.2%. We have the ASX 200 opening at 5215, with BHP likely down 3% and yield plays likely to be hit as investors react to higher implied volatility. China and Japanese equities are hardly inspiring either, with both markets finding strong sellers yesterday, so another day of strong selling could lead the ASX 200 into 5200, a level where we saw strong bids in late April.

The key consideration here is what happens if we do actually see a ‘leave’ vote and a sudden shock to markets. What have central banks got in the kitty this time around? The answer of course is significantly less than in prior cycles. As I have argued for some time, for risk assets to find sizeable downside means a strong loss of confidence that central banks can dictate financial markets. That is firmly in the markets’ sights and the gold bulls will be getting fairly excited at the prospect.
 
China’s economy likely to follow ‘L-shaped’ path in coming years, says an 'authoritative insider'



China’s economic growth trend in the coming years will be “L-shaped” rather than “U-shaped” or “V-shaped,” according to an "authoritative insider" who conducted an exclusive interview with People’s Daily.

The Q&A with the insider receives lots of attention, since the "authoritative insider" is presumed to be high-level officials.

The year 2016, which marks the start of China’s 13th Five-Year Plan, plays a decisive role in the journey to build the country into a moderately prosperous society. Chinese society is also now poised to arrive at the final success of supply-side structural reform.

Although the economy saw a good start in growth, structural optimization and standard of living in the first quarter, a number of difficulties still lie ahead. Such potential difficulties include overcapacity, bad loans, local government debt, a property bubble and illegal financing.

Thanks to weak demand and overcapacity, the “L-shaped” recovery is projected to last more than two years, the insider said. But the source also pointed out that China's economic growth will not drop abruptly given its potential, resilience and room for maneuvering. “We shouldn't be overly excited about some rebounding indexes, nor should we be overly panicked about some falling ones,” the person was cited as saying.

Though the overall economy is recovering, regional imbalance remains, with the coastal areas seeing a stronger recovery as the northeastern, central and western areas encounter bottlenecks. The source explained that such imbalance is inevitable along the path of economic development. Sectors with high returns usually attract more resources, but at the same time this gives rise to competition and overcapacity. When that happens, some areas utilize resources in order to innovate, while others wait for better luck. The imbalance, therefore, emerges.

The authoritative insider also emphasized that an imbalance is not such a bad thing, as those regions, industries and enterprises that manage to stand out will become prosperous, while those that lag behind can draw lessons from their failures.

This article is edited and translated from 权威人士谈当前中国经济 Source：People's Daily
 
L Word

We have been banging on about deflation for longer than I care to remember. Interest rates are going lower (and staying lower for longer) there are impacts of technology on the inflation rate, the internet is the biggest deflationary force the world has ever seen, etc. Yes I know you’re sick of it too. Well it seems that now every time you turn on the television, read about markets on the internet, read a paper, or turn on the radio, all you hear is radio gaga. Freddie Mercury would be horrified. God rest his soul.

What I mean by this is now everyone's talking about deflation, you just can't get away from it. Everywhere you turn, deflation this, deflation that. So much so that I have grown very bored with their ‘me too’, copycat stuff. Do your own homework I say, stop looking at ours and copying across the desk. So I've decided to stop, to go the other way, to call the curtain down on these pessimistic poochers. Enough is enough.

So what now? Undoubtedly our mantra that "the millennials are just not buying what the boomers are selling" is still intact, and will remain so. But to be clear, the great transition is on. We have recently seen a watershed moment from the Chinese in Beijing’s decision to depart from using monetary stimulus toward an embrace of fiscal policies and a shift to supply-side structural reform. This is profound.

Recently, a very important article was published on the front page of the Communist Party’s mouthpiece, People’s Daily (May 9th issue), which was essentially an interview between the newspaper and an unnamed “authoritative figure” (believed to be Liu He, Vice Chairman of the National Development and Reform Commission [NDRC] and the chief of the General Office serving the Leading Group for Financial and Economic Affairs).

As President Xi once told news reporters, Liu is “very important” to him. In the 1960s, Liu and Xi went to the same high school and they became friends afterward. Liu is reportedly the “prime architect” of Xi’s economic plan and is sometimes dubbed by the western media as “China’s Larry Summers”, whom I personally believe is far ahead in his thinking than most.

The interview notes most likely were reviewed and approved by President Xi before appearing in People’s Daily. It represents a sea change in Beijing’s handling of the economy and although it garnered immense interest in Hong Kong, it amazingly received almost no attention in the West – people are obviously way too busy watching Donald Trump insult someone for television ratings.

Suffice to say, it represents one of the most important policy shifts in modern Chinese history. Beijing’s policy shift confirms the view that worldwide confidence in central banks is waning, as evidenced by the BOJ’s inability to weaken the yen, and that fiscal policy is going to be increasingly used as a lever for growth. Once again, China is leading the world in a major policy shift, as it did with its anti-corruption campaign in the Autumn of 2012 and efforts to lessen income and wealth inequality, which began in June 2009 and later spread to the rest of the world.

Beijing has prepared itself for an “L-shaped” recovery, implying that China’s GDP growth is likely to stay around 6%, or perhaps somewhat lower for several years at least, as they transition the economy to more consumption and services based. Just watch the growth in Chinese technology companies and the internet services economy.

“Comprehensively, China’s economic trend will be ‘L-shaped’, rather than ‘U-shaped’, and definitely not ‘V-shaped’. The ‘L-shaped’ economic trend will last for some time and will not end in a year or two. China is taking ‘one step back’ in order to take ‘two steps forward’. China has enough potential, great tenacity and lots of manoeuvring room. There won’t be a drastic decline in growth rates even in the absence of major economic stimulus.”

Supply-side structural reforms are being emphasised. “The central government has said that supply-side structural reform is China’s top-priority task for now and for the years to come. Worldwide, more and more countries have come to the realisation that structural reform is the fundamental solution to get out of their respective troubles. At the same time, local governments have also been taking proactive actions. Some provinces — such as Guangdong, Chongqing, Jiangsu, Zhejiang and Shanxi have released their supply-side structural reform plans. Many companies have taken substantial steps to rein-in capacity expansion.” Beijing is well attuned to the risks of excess leverage in promoting asset bubbles, and wants to avoid this outcome.

It is particularly interesting that the interview devoted several passages to the risks of excess leverage in the economy, which addresses one of the persistent risks that China watchers have cited. The following passage stands out; "As trees cannot grow to the sky, high leverage will inevitably result in high risk". If not handled well, high leverage will trigger a systemic financial crisis, resulting in negative economic growth and even wiping out household savings. It is neither possible, nor necessary, to stimulate growth by adding leverage.

The government will also spend more money on bolstering its basic social safety net, as well as training and education for laid-off workers in industries with excess capacity (unlike the U.S.). There was a noteworthy emphasis not just on shutting excess capacity, but on enabling a transition to other jobs for the many workers to be affected: “We should protect jobs instead of enterprises. We should set job/personnel relocation as the top priority when closing ‘zombie companies’ and shutting overcapacity. We should provide training for workers and transfer workers to suitable positions. For those who are laid-off and are unable to find new jobs, we should ensure that their basic needs are met.”

The government has decided not to use financial markets and hard assets (i.e. stocks, currencies, bonds, properties, etc.) as tools to bolster economic growth. Beijing has made it clear via this interview that it is leaving the markets to themselves, with minimal interference from the government. This stands in sharp contrast to what is happening in many other places, most notably the U.S., Europe and Japan, where government manipulation rules the day. We also learned that China is preparing for a rising tide of protectionism coming from the U.S. and E.U.

Just a few days ago, the European Parliament passed a resolution not to recognise China’s market economy status (MES), which came as no surprise to Beijing.

Several points are worth adding to put the article in proper perspective. First, the notion of supply-side reform has a different meaning in China as opposed to the U.S. It does not imply Reagan style tax cuts, but rather, cutting excess capacity while letting demand catch-up to reduced supply. This is important because it is excess capacity caused by mal-investment, largely by State-Owned Enterprises (SOEs) that has been responsible for much of the global deflationary pressure of the last two years. Hence, my change in stance.

Second, SOE reform has been talked about for years but never happened, largely because local governments did not listen to Beijing and feared the consequences of social unrest from layoffs due to shuttered plants. Beijing is now saying that local governments need to listen and follow its instructions, otherwise local government officials might lose their jobs.

Third, the coming round of reforms will have a much-improved safety-net, i.e., subsidies for laid-off workers and re-education and re-training programs — a very different scenario from the U.S., where laid-off workers were not able to replace their income. In this case, China learned from America’s mistakes, and those mistakes have caused the widespread feelings of anger in American society that presidential candidates, Donald Trump and Bernie Sanders, have been able to exploit.

And I believe them. You should too.
 
Five basis point drop in five-year US inflation expectations overnight to 1.51%

The European banking system: The key market to focus on next week

Asia is shaping to close the week out on modestly positive footing, with BHP indicated to open up 2% and CBA closer to 0.5%, given the moves in the American Depository Receipt (ADR).

This was certainly not the case through European trade with our call for the ASX 200 a lowly 5096 (or 1% lower), but US traders have come and turned things around with the S&P 500 rallying 1.4% from its intraday low of 2050. SPI futures (September contract) have rallied in appreciation, as has AUD/USD, USD/JPY and other risk assets – with the exception of oil, which is still 2.9% lower from yesterday’s ASX 200 close.

We still need to see the ASX 200 close 5312 to avoid a third consecutive week of losses, which clearly isn’t going to happen.

It’s hard to see traders buying the open with any conviction given next week’s event risk, but we could see some brave souls who see a ‘remain’ vote in the UK referendum tempted by adding selective risk to portfolios. I suspect any upside in the index should be contained to 5175. This is a highly risky strategy as next Friday promises to be utter madness and as such, we have heard from the Bank of Japan, Federal Reserve and Swiss National Bank overnight assuring participants that they will provide liquidity should it dry up on the day.

What I am genuinely interested in though was the five basis point drop in five-year US inflation expectations overnight to 1.51% – the lowest levels since early March. We see a further dovish twist from the Fed and yet inflation expectations keep falling. The Fed will not like that one bit, although we have seen a slight move higher in nominal US treasuries. Inflation expectations (measured through the bond market) continue to be part of the holy trinity of Fed influences, the others being the UK referendum and the labour market.

Traders would be wise to start to pay greater focus to the European banking sector, where both investment and sub-investment grade credit default swaps (CDS) are once again on the move higher and worryingly eyeing January highs. Bond yield spreads between Southern European countries and German debt are widening and this is a huge negative for European banking system. We need to remember just how exposed European banks are to their domestic bonds (given their exposure on the balance sheet), so if yields rise, the markets’ perception of the asset quality deteriorates. Names like Deutsche and Unicredit will become central to sentiment in all markets if we see a vote to ‘Brexit’ and the hugely overleveraged European banking system could be in trouble. It’s this issue above all others that would be keeping me awake as a consideration for the vote.

On the other hand, if we see a vote to ‘remain’, then these spreads will come in nicely and European markets will absolutely fly. Long Stoxx 50, short S&P 500 will be very compelling trade for traders who are happy to somewhat take the macro out of the equation, given the Stoxx50/S&P 500 ratio has run so far so fast, as we can see from the chart and the line of best fit. Everyone will be focused on FTSE and rightly GBP, but for me the most interesting dynamic will be what happens to European yield spreads and the knock-on effect to the banking system.
 
Day 1

Australia is going for the record.

Belgium 589 days with no elected government.


 
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