Tag: Australia (page 1 of 5)

FX Week Ahead: Market In Need Of Brain-Changer, Not Game-Changer

Submitted by Shant Movsesian and Rajan Dhall MSTA at FXDaily.co.uk

After the FOMC meeting last week, it was (yet) again apparent that the Fed are still keen to maintain a normalisation path designed to not only get rates back to neutral levels, but also build up the policy tool kit again as well as staving off excessive leverage which has boosted stock markets to record highs.  In the latter part of that, many of us believe we have already gone way past the point of excess, and therein lies the delicate situation the Fed is faced with.  As such, it is steady as she goes, and as we can see with the plans on balance sheet reduction, the reinvestment caps are barely scratching the surface.  

On these bases, the market is happy to continue 'taking on' any USD recovery, and alongside this, we also have a persistent bid in the EUR, as the pace of economic expansion shows greater acceleration in Europe – what we call gamma in the options market.  Consequently, the prospects of a meaningful pullback in EUR/USD look slim, but over-exhaustion and the constantly communicated concerns from the ECB limit gains to the degree that sellers above 1.2000 are also a little more confident in 'playing the range' for now.  As we noted a few weeks back, 1.1800 will prove to be a strong support point given president Draghi revealed this level as the reference point in the last staff projections, and will be seen to be tacit 'acceptance' of fair value – for now. 

On Friday, we saw the EU wide PMIs pointing to continued expansion in activity, and looking to the 5 days ahead, we expect the German IFO survey on Monday to do the same.  Midweek we get Italian trade and industrial orders which have also been improving at a rapid pace, while in Germany again, we get Sep inflation data, retail sales and unemployment.  At the end of the week however, we also have EU wide inflation, but this will have to dip significantly to derail EUR sentiment.  

So from the US perspective, Thursday's final Q2 GDP number will be the focal point, preceded by the volatile durable goods orders reported the day before.  This is expected to remain at 3.0%, and traders will naturally pounce on this if we miss on expectations.  Any upside surprise will likely have less of an effect given a series of downgrades due to the impact of Hurricanes Harvey, Irma and Maria.  On Friday we then core PCE for Aug as well as the personal income and spending components, so we expect a cautious start to the week for all USD pairs, with limited upside likely unless we get some good news on fiscal policy.  

The Trump administration reverts focus back to efforts on tax overhaul, which has slipped up and down the priority list as the GOP look for some form of progress here as well as in health-care reform and the multitude of trade agreements and disputes including China and NAFTA. Working from a low base – ie, none – one could argue that from this perspective, the USD 'risk' is to the upside, but after so many falls over hurdles, the market confidence is low.  

This may well be one of the more supportive factors for USD/JPY, with the pick up in Treasury yields having run their course.  10yr has tested and held first 'target' at 2.30%, and odds for a Dec Fed move are back up to 70%, so above 112.00 there is and has been little momentum to drive us to the next target area which we see closer to 114.00. That said, we see limited downside from here in the meantime, though this has room to extend into the mid to lower 110.00's.  

Barring any fresh developments emanating from North Korea, the JPY pairs should be relatively stable through the week, but as ever, this carry trade relies on stock market performance.  AUD, CAD and NZD rates are all off better levels, but will be seen to represent a dip buying opportunity for now.  

Lots of Japanese data to look to, chief of which is the inflation number on Friday.  Core CPI is expected to rise from 0.5% to 0.7% in Aug.  Later on in the session, industrial production and construction orders also stand out, less so retail sales, but all expected to show market improvement in Aug.  

Friday is also the focal point of UK data watchers as we get the latest estimates of Q2 GDP and also business investment.  The BoE believe this is strong enough to weather a rate increase in order to tame inflation first and foremost, but I remain firmly in the camp that a 25bp move – now widely priced into November – would be a case of 'one and done'.  Little else to note earlier in the week other than the CBI's distributive trades survey – recall last week – industrial trend orders on Friday saw the index weaken from 13 to 7.  

On Brexit, the hype over Theresa May's speech in Florence was overdone, but this comes as little surprise for a market hungry for event risk – and Brexit is good source of this.  Even so, judging by comments from the EU's Barnier, it was relatively well received in terms of spirit, but including the line that 'no deal is better than a bad deal', there is clearly a line which the UK government will not cross, no matter how conciliatory they have been in recent weeks and months.  

GBP gains from here should be limited – indeed, some will have been surprised that we have extended this far, with the present day market hanging on every word of central banks.  That said, some of the data has been holding up well under the circumstances, but numbers such as the strong retail sales print last week should be taken in context – in this case seasonality.  Cable has hit a wall of selling interest above 1.3600, and with the CofT positioning somewhat lightened, we cannot count on short covering to drive GBP south at this stage, with EUR/GBP losses having taken us back to key levels in and around 0.8800.  

Little of note of Australia again, with the AUD tone softened a little after comments from gov Lowe that even though the next move in rates is likely up, we should not expect any imminent change. 

Over in NZ, the election result means another hung parliament and coalition to be formed, so it will be an interesting start to NZD trade when Asian markets get underway, with the Nationals and Labour vying for the support of New Zealand First to form government.  As if that is not enough, we also have the RBNZ meeting and announcement Wednesday, but in the current climate, no change and or material change in their statement will be anticipated.  Trade data on Monday to note, but likely to be overshadowed.  

AUD/NZD will be as volatile as NZD/USD, with both pairs reacting to the polls last week which saw the Nationals back in the lead – the vote count so far matching the 46% touted, but uncertainty from here set to weigh again.  AUD/USD levels to watch for lie at .7900 and .8100, and are largely dependent on the USD from here.  

This may also be the case for the CAD, though on Friday, we saw core CPI in Canada sticking to 0.9% while the headline rate rose less than expected from 1.2% to 1.4%.  Growth and improving economic activity have pushed the BoC to reverse the rate cuts from 2015, so from here we would not be pursuing the steep rate profile the market is now pricing in, so we see further room for CAD correction. 

BoC gov Poloz is speaking next week and may well take a more cautious tone in light of the strong CAD appreciation, which the central bank are now monitoring along with the impact of higher rates.  Jul GDP on Friday is the only key data point of note, with a rise of 0.1% expected (seems a little low) vs 0.3% in Jun.  

Retail sales data in both Norway and Sweden to look to as well as Norwegian unemployment and Swedish trade.  From a policy point of view, both central banks are on the cautious side, more so the Riksbank, but the Norges bank will not have been encouraged the slippage in inflation – a global phenomenon (UK excluded) which the market seems to forget at times.  NOK/SEK still well contained.  


Australia Cracks Down On Foreign Real Estate Buyers As “Ghost Towers” Increasingly Outrage Locals

As we’ve discussed frequently over the past several years, home prices in some of Australia’s largest markets have gone completely vertical since 2013 as wealthy Chinese buyers have increasingly sought safe havens outside of the mainland to launder invest their cash.  Per the chart below, home prices in Melbourne have more than tripled since 2002 and Sydney is almost as bad.

Not surprisingly, the bubbly home prices have angered locals, not only because they’ve been priced out of the market by foreign buyers, but more so because those foreign buyers scoop up prime real estate and then proceed to let it sit vacant.  The problem is so pervasive that these luxury towers, with apartments approaching $1 million, have been dubbed “ghost towers” by locals.  Per Bloomberg:

These “ghost towers,” as the high-end residential property with three-bedroom apartments costing almost $1 million have been dubbed, are popular with Chinese investors who mostly live abroad. Their darkened blocks loom as sparsely occupied symbols of a property market where even solidly middle class households have increasingly found themselves priced out.


Now, policy makers are seizing on public resentment and hitting foreign buyers with more taxes. New South Wales has doubled its surcharge when foreigners purchase residential property, and Western Australia has added a new tax as well. More controversially, both the conservative federal government and the left-leaning one in Victoria state that includes Melbourne this year imposed additional taxes on properties deemed to be empty for six months or more.


More than 60 percent of Sydney residents blame foreign investment for the rising prices, according to a survey by University of Sydney academic Dallas Rogers. The idea of taking prime real estate out of the housing supply and leaving it vacant has become a focus of anger as homelessness has risen and hundreds of people have been camping in the rough out outside places like the Reserve Bank of Australia.


“It’s just absurd,” said Tony Keenan, chief executive officer of affordability advocacy group Launch Housing, referring to the fact that Australia’s long period of uninterrupted growth should have ensured homes for everyone instead of “record levels of homeless and massive construction with empty properties at the end.”


An analysis of Australian census data by the City Futures Research Centre found more than one in 10 homes unoccupied on the night of the count last year, with empty properties having risen 19 percent in Melbourne and 15 percent in Sydney since the last census five years previously.


Foreigners, mainly from China, purchased 25 percent and 16 percent of the new housing supply in New South Wales and Victoria, respectively, in the year through September 2016, according to a Credit Suisse Group AG examination of state tax receipts.

But, much like Vancouver where city officials slapped foreign nationals with a 15% transfer tax on home purchases last summer, the city of Melbourne has decided to fight back by imposing its own taxes to curb what increasingly looks like one of the world’s largest housing bubbles.

Melbourne’s tax of 1 percent of an empty home’s value takes effect in January, adding to a nationwide tax imposed in May that starts at A$5,500 ($4,400) and scales sharply upward for properties worth more than A$1 million.


Figuring out if a home is vacant is a vexing subject for public officials. Those in Victoria have said they plan to ask owners to self-declare, and also intend to monitor electricity and water usage to find cheaters. The Australian Taxation Office suggests the government investigate tips from informants. Other potential sources could include postal data or tax returns, said Catherine Cashmore, president of land tax reform group Prosper.


But real estate professionals say it’s easy enough to hire someone to come in and turn on switches and taps, making a place appear lived-in. Agents say many properties are only temporarily empty, waiting for children to attend university or a family to able to move in. They also raise questions of fairness.

Of course, not everyone is happy with the new taxes, including Monika Tu who has undoubtedly made a fortune helping rich Chinese buyers launder money through the Australian real estate market.

“What next?” said Monika Tu, the Sydney-based director of Black Diamondz, which specializes in high end property sales to mainly Chinese buyers. “Shall we tax people who buy new shoes and don’t wear them?’’

Sorry, Monika…you can always move to Seattle…we hear they’re still very receptive to helping launder Chinese cash…


The Race For The “Holy Grail” Of Renewables

Authored by Irina Slav via OilPrice.com,

In February, AES Energy’s Escondido battery storage facility in California was hailed as the largest one to date, with a capacity of 30 MW/120 MWh. Now, Tesla is building a bigger one—100 MW/129 MWh—in Australia.

On the face of it, it’s a race for the bigger battery storage system. But there’s much more to it than that.

The race is on for increasingly reliable, grid-scale, quick-to-install energy storage solutions that will make the shift to all-renewable power much more realistic. In this, factors such as renewable-friendly regulation and integration of storage systems with renewable power generation capacity can tip the energy transformation scales.

California is one of the places to be if you’re a renewables fan. Its authorities have ambitious plans in this regard, eventually hoping to replace all fossil-fuel generation capacity with renewables. Wholly reliable grid-scale storage systems are crucial for this strategy, and they are becoming increasingly popular in the state.

Unfortunately, the initiative to make the 100-percent renewable plan a law fell through. Unions, worried about possible job losses, pulled their support. Legislators themselves tweaked the bill, so its goal is now to produce 100-percent greenhouse-gas-free energy. The debate about the feasibility of the plan and how fast it could become a reality continues. California is a cautionary tale for other ambitious clean energy proponents. 

Meanwhile, the leaders of the battery pack are expanding. AES recently teamed up with Siemens on a joint venture, Fluence, focusing specifically on energy storage system development. Fluence will deal in AES’ Advancion and Siemens’ Siestorage platforms, the companies said, adding it will target the development of new energy storage capacity across 160 countries worldwide.

Tesla is looking in another direction. It already has the largest portfolio of completed energy storage projects globally, at 300 MWh. What it is looking for now is integrating future storage systems with wind and solar electricity producers.

When Tesla said it had won a deal for the construction of the world’s biggest lithium-ion battery storage facility in Australia, it noted that the deal involves partnering with local wind power producer, Neoen, which will supply the battery complex with electricity.

At the same time, AES is working mainly with traditional utilities to supply them with energy storage capacity, focusing on constantly improving the energy density and efficiency of its arrays. Tesla’s all-renewables focus is well documented, and now it could give it the lead in the energy storage race.

Earlier this month, Tesla closed another partnership, with wind power leader Vestas, to develop integrated wind power-energy storage solutions. The Danish company announced earlier this year that it has big plans for energy storage, with Chairman Bert Nordberg telling Reuters that the company had 3.2 billion euro (US$3.84 billion) in cash and no debt, so it could afford some good investments. So far this year, Vestas has invested in almost a dozen battery storage makers.

Energy storage, according to AES’ CEO Andres Gluski, is “the Holy Grail for renewables.” It is the key to the renewables kingdom of the future, eliminating the adverse effects of renewable power’s intermittency. Integrating this Holy Grail with the clean energy producers is the next step. Tesla and other battery makers have already made it. Yet staying with traditional utilities might not be a bad strategy either: it will be some time before renewables become the predominant energy source in the world.


Metals Massacre – Iron Ore Enters Bear Market, Copper Collapses To 1-Month Lows

The hype surrounding the credit-fueled resurgence in base metals in the first half of 2017 has crashed and burned on the altar of reality in China's slowdown with industrial metals from copper to iron ore and zinc all plunging in the last two weeks. Odd that we don't hear much from mainstream business media discussing the implications for a global coordinated economic growth narrative

Since the start of September, industrial metals have been hammered (as stocks soared)…


Iron Ore prices have crashed into a bear market…

As Citi describes it, complete carnage in Iron Ore today down over 6% on day as local specs reduce length ahead of holiday in China on the first week of October as bearish sentiment continues to gather pace. After peaking in August at $80 as we saw surging demand for high grade ores. Iron Ore started to trend down in early September, which reflected that fundamentals had begun to turn weaker. The tightness of high-grade ore market I referred to is now starting to gradually resolve as more supply coming online from Brazil and Australia. Demand is softer, as we see little improvement in China's steel consumption . Steel inventory also built as environmental inspections and steel mills' enter maintenance. We remain bearish on the long-term outlook of iron ore and expect 2018 prices to average $53/t so a ways to go. Needless to say today's move in IO has driven base prices lower with Nickel and Zinc taking the brunt.

Even Dr.Copper has given up…

And here’s some more grist for the doubters who scoffed at copper’s rally to a three-year high earlier this month.

The metal for immediate delivery on the London Metal Exchange cost $40.75 less than benchmark three-month futures on Tuesday, the biggest discount since 2009.

That market structure, known ascontango, shows “there’s no part of the world where copper is really scarce,” said Rene van der Kam, Singapore-based managing director of trader Viant Commodities Pte Ltd. He says to expect more losses after a pullback in prices this week.

And finally, as we warned previously, bear in mind that the lagged response to China's credit impulse is about to hit base metals… The rise and fall in China's credit impulse that has been so highly correlated (on a lagged basis) with industrial metals for the last eight years…

It appears "Dr.Copper" and his economics afficcianados are about to be relegated to "ignore" status once again.


Global Markets, US Futures Barely Move With All Eyes On The Fed

The day has finally arrived: today the Fed will officially announce the start of its balance sheet shrinkage (full preview here) while keeping rates unchanged, perhaps hiking again in December (market odds at 56%), while revising its economic projections and “dots”, most likely in a lower direction.

And while we wait for the announcement and press conference after 2pm, US index futures – as well as European and Asian equities – are little changed, signaling a pause for Wall Street’s three major benchmark indexes after they hit new all-time highs ahead of the Federal Reserve’s policy announcement due today. They probably will not be changed after 2:30 pm, however, especially if Yellen surprises on the hawkish side. Don’t look at the dollar for clues though: The DXY fell less than 0.1% against a basket of major currencies and was down against the euro, the yen and sterling. The Bloomberg Dollar Spot Index fell a second day, with the U.S. currency confined to a narrow trading range, as Treasury yields edged lower; broad lack of directional catalyst seen over the session as traders awaited the FOMC decision.

“If we move closer to a U.S. rate hike, that should come along with a bit more dollar strength and euro weakness which would harden the ECB’s exit case and be a headwind for government bonds,” said Commerzbank strategist Rainer Guntermann.

Ahead of the Fed, Europe’s Stoxx Europe 600 Index was mixed alongside S&P 500 futures and a fractionally higher session for Asian equities. The dollar slipped, the euro and yen gained and the British pound jumped as data showed U.K. retail sales rose more than forecast in August. Spanish assets showed resilience even as the government stepped up its crackdown on an illegal separatist referendum planned for the Catalonia region. The Mexican peso swung after a 7.2 magnitude earthquake struck. Benchmark crude rose but struggled to break $50 a barrel. US Treasuries halted a three-day decline awaiting the Fed’s interest-rate projections. New Zealand’s dollar led gains versus the greenback after an election poll showed the ruling National Party ahead, while the pound advanced after U.K. retail-sales data beat forecasts.

Financial markets remain largely calm – even after President Donald Trump used a UN speech to threaten to annihilate North Korea – as all eyes turn to Wednesday’s Fed decision. Expectations are high that the central bank of the world’s biggest economy will unveil plans to start shrinking its $4.5 trillion balance sheet, while any clues on the chances of a rate increase this year could tip the balance – market expectations of another hike in 2017 are at about 50 percent.

Asian stocks swung between gains and losses as investors awaited the Fed. The MSCI Asia Pacific Index rose 0.2 percent to 164.44 even as most shares declined, after earlier falling by the same magnitude; the gauge closed Tuesday at its highest level since December 2007. The Topix index ended the session in Tokyo almost flat at the highest since August 2015. Australia’s S&P/ASX 200 and the Kospi index in Seoul closed slightly lower. The Hang Seng Index in Hong Kong swung between gains and losses with the Shanghai Composite Index, before both advanced.  Telecommunications and energy stocks advanced, while utilities and consumer shares slipped. SoftBank Group Corp. was the biggest boost the gauge while Sony Corp. was among the biggest drags after Credit Suisse Group AG downgraded the stock, saying earnings may plateau in fiscal 2019. Japanese shares fluctuated in a narrow range throughout Wednesday’s session as investors awaited the outcome of the U.S. Federal Reserve’s policy meeting. The benchmark Topix index ended little changed, with about five shares declining for every four that rose. Nintendo Co. and telecommunications companies provided the most support, while chemicals and pharmaceutical shares were the biggest drags. The yen strengthened slightly against the dollar following a three-day. 1.2 percent drop

The Asia benchmark has risen about 22 percent this year, outstripping the S&P 500 Index’s 12 percent advance to a record, as investors looked past tensions between the U.S. and North Korea. Further gains may lie ahead because the Fed is expected to leave rates unchanged and may use “slightly dovish” language when announcing its decision later Wednesday in Washington, said James Soutter, a fund manager at K2 Asset Management in Melbourne. “Lower for longer rates probably means the U.S. dollar remains weak,”  Soutter said in an email. That’s “a positive for Asian stocks.”

Elsewhere, the New Zealand dollar surged after a poll put the ruling National Party back in the lead ahead of the main opposition Labour Party ahead of this weekend’s election. And the fixing of the yuan remained in focus as investors try to gauge where the People’s Bank of China wants the currency. In a notable move in Chinese rates, the local 5Year bond yield had its biggest move since March.

Similarly, European equities are little changed for a second day, unwilling to make major moves ahead of any potential Fed surprises: the Stoxx Europe 600 Index was unchanged. Zara owner Inditex SA was among the worst performers after posting first-half earnings that missed analysts’ forecasts, while Kingfisher Plc was the best gainer after reporting France retail profit for the first half that beat the average analyst estimate.

In rates, the yield on 10-year Treasuries declined two basis points to 2.22 percent, the largest drop in almost two weeks. Germany’s 10-year yield fell two basis points to 0.44 percent, the biggest drop in almost two weeks. Britain’s 10-year yield declined less than one basis point to 1.327 percent.

In commodities, gold advanced 0.3 percent to $1,315.36 an ounce. Oil prices rose after Iraq’s oil minister said Organization of the Petroleum Exporting Countries producers and others were considering extending a supply cut and after data showed U.S. crude stocks were lower than expected.

Aside from the Fed, economic data include mortgage applications and existing home sales. General Mills is reporting earnings

Bulletin Headline Summary From RanSquawk

  • GBP & NZD see initial bids following Retail Sales and Election Polls
  • UK PM May intends to make a EUR 20bln Brexit payment offer to the EU, according to the FT
  • Looking ahead, highlights include DoEs and the FOMC announcement & press conference

Market Snapshot

  • S&P 500 futures little changed at 2,505.10
  • STOXX Europe 600 up 0.03% to 382.25
  • MSCI Asia up 0.2% to 164.48
  • MSCI Asia ex Japan up 0.2% to 544.19
  • Nikkei up 0.05% to 20,310.46
  • Topix unchanged at 1,667.92
  • Hang Seng Index up 0.3% to 28,127.80
  • Shanghai Composite up 0.3% to 3,366.00
  • Sensex up 0.03% to 32,413.08
  • Australia S&P/ASX 200 down 0.08% to 5,709.09
  • Kospi down 0.2% to 2,412.20
  • Brent futures up 0.9% to $55.61/bbl
  • German 10Y yield fell 1.0 bps to 0.442%
  • Euro up 0.1% to $1.2011
  • Italian 10Y yield fell 2.4 bps to 1.756%
  • Spanish 10Y yield fell 1.0 bps to 1.546%
  • Gold spot up 0.2% to $1,313.11
  • U.S. Dollar Index down 0.1% to 91.68

Top Overnight News from BBG

  • Investors looking to own exposure on the euro need to pay the stiffest premium since December 2016 when it comes to a Federal policy decision
  • Even as the Fed will likely hold rates today, futures suggest another Fed hike could happen this year
  • Oil rises on signs the pace of U.S. stockpile gains is slowing as refiners resume operations after Hurricane Harvey, boosting crude demand
  • At least 248 people were confirmed dead after a 7.2 magnitude earthquake struck near Mexico City
  • Bitcoin is looking increasingly likely to splinter off again in
    November, creating a third version of the world’s largest cryptocurrency
  • Hurricane Maria was on course to hit Puerto Rico just two weeks after Irma caused as much as $1 billion in damages
  • Impact of pound fall on goods inflation may have peaked, BOE says in quarterly agents’ summary of business conditions
  • Capital Four, which is the largest European high-yield bond fund, is now cutting down on risk as higher interest rates loom on the horizon
  • Merkel pact with SPD still looks most likely after Germany votes
  • Abe said to delay fiscal 2020 primary balance target: Nikkei
  • U.K. retail sales rise 1% m/m in Aug. vs est. +0.2%
  • Japan Aug. exports rise 18.1% y/y; est. +14.3%
  • Bain Is Said to Plan Toshiba Deal Close Despite Legal Threat
  • Thyssenkrupp and Tata to Create Europe’s No. 2 Steelmaker
  • Maersk Sells Tankers Unit for $1.17 Billion to Holding Company
  • After Reaping 40% in Turkey, Traders Eye 2017’s Worst Stocks
  • Noble Group CDS Ruling Puts Payouts in Doubt in Market Feud
  • OPEC Has Success at Last, But Oil Revival May Be Short-Lived

Asia markets saw an indecisive trading day amid a cautious tone ahead of today’s FOMC announcement. The looming risk event initially sapped the momentum from another record close on Wall St. and kept bourses in Australia and Japan subdued, while Chinese markets also conformed to the tentativeness after a significantly weakened liquidity operation by the PBoC. However, sentiment then gradually improved throughout the session which helped Nikkei 225 (Unch), Hang Seng (+0.2%) and Shanghai Comp. (+0.2%) pare losses, although gains were only superficial as focus remained on the FOMC and ASX 200 (-0.1%) continued to lag amid weakness across its major industries. 10yr JGBs were flat with participants sidelined amid an enhanced liquidity auction in which the b/c fell from previous, while the BoJ also kick starts its latest 2-day policy meeting where it is widely anticipated to refrain from any policy tweaks. PBoC injected CNY 20bln via 7-day reverse repos and CNY 10bln via 28-day reverse repos. PBoC set CNY mid-point at 6.5670 (Prev. 6.5530) Japanese Trade Balance Total Yen (Aug) 113.6B vs. Exp. 104.4B (Prev. 418.8B).

Top Asian News

  • China Is Said to Mull Relaxing Foreign EV Maker Restrictions
  • Buffett-Backed BYD Looks Overcharged on China Electric Car Bets
  • Philippine Tax Reform Bill Heads for Senate Plenary Debates
  • Iron Ore Sinks as ‘Peak Steel’ Call, Supply Angst Rattle Market
  • Yuan Fix Back in the Spotlight as Traders Track PBOC Signals
  • Bitcoin’s Likely to Split Again in November as Debate Rages On

European equity markets trade close to flat levels, as much of the anticipation is on the Fed decision and press conference later in the session. Kingfisher is the notable out-performer following their better than expected trading update, while Thyssenkrupp also trade in the green, following agreeing a JV with Tata Steel. Bonos have been surprisingly calm ahead of the Catalonia independence referendum, where we saw earlier reports stating that the Spanish Police have arrested the Catalonian Jr Minister. 10y spreads to Bunds have been tighter by over 10bps to 111.3bps, from a wide of 123bps earlier this month. Much fixed income anticipation was on the new German 30y Bund auction, with a B/C of 1.8 and an average yield of 1.27%. Gilts saw some bearish pressure following the stela Retail Sales report from the UK, falling 30 ticks as a reaction and printing fresh recent lows

Top European News:

  • Banks Are Said to Hire Lazard to Solve Turkey’s Biggest Default
  • Zara Owner’s Profitability Drops to Eight-Year Low on Euro
  • Volkswagen Comeback Pushes Europe Bond Sales Past Trillion Euros
  • U.K. Retail Sales Rise More Than Forecast as Consumers Stir
  • Kingfisher Gains Most Since 2011 in ‘Litmus Test’ for Sector
  • NorteGas Energia May Sell EUR Benchmark 5Y, 10Y Bonds Tomorrow
  • Major Lender Requests Bailout as Russian Banking Woes Spread

In currencies, GBP was the outperformer early in the EU session, evident of the aforementioned strong Retail Sales report from the UK, printing the largest increase since April. Cable was pushed towards the week’s high around the 1.3619 area, finding some resistance around these levels and retracing much of the move, trading back at pre-announced levels. EUR/GBP bears also took advantage of the strong figures, reversing the failed attempt to attack yesterday’s high. The latest New Zealand election poll sparked some early volatility on the futures open, with the seemingly market friendly, National Party regaining ground in the One News Poll (National Party 46% (+6%), vs. Labour 37% (-7%), vs. Green 8% (+1%)). AUD/NZD trades back inside the 2017 range and back below 1.1, a close below 0.9 could see the 1.1 – 1.03 2017 range once again become the trading pattern in the pair. The DXY remains range bound as much focus is on the Fed later in the session

In commodities, oil markets have seen slow trade, with WTI’s attempt of a successful break of yesterday’s high failing, and now consolidating back in the post API range. Elsewhere, Saudi Aramco will be able to release its financial accounts in early 2018 if the government decides where they plan to list the oil giant, according to sources.

Looking at the day ahead, Germany’s August PPI printed at 2.6%, vs 2.5% yoy expected; in the US, data wise there is MBA mortgage applications and existing home sales. Onto other events, the main story is the FOMC rate decision in the US, followed by Yellen’s press conference at 14:30 EDT. Elsewhere, EU’s Chief Brexit negotiator Michael Barnier will speak and the OPEC’s panel of technical representatives will meet to discuss production cuts.

US Event Calendar

  • 7am: MBA Mortgage Applications, prior 9.9%
  • 10am: Existing Home Sales, est. 5.45m, prior 5.44m
  • 10am: Existing Home Sales MoM, est. 0.18%, prior -1.3%
  • 2pm: FOMC Rate Decision (Upper Bound), est. 1.25%, prior 1.25%
  • 2pm: FOMC Rate Decision (Lower Bound), est. 1.0%, prior 1.0%

DB’s Jim Reid concludes the overnight wrap

I was casually watching CNBC yesterday afternoon, listening on my headphones while doing some work. So generally minding my own business. However I nearly spilt my coffee when the anchor suddenly asked one of the guests whether he thought Jim Reid was “crazy” for the conclusions of his latest report. I suppose they say all publicity is good publicity. One pastime I’m strangely addicted to is occasionally reading the comments section of the more ‘far out there’ financial market blogs whenever they quote one of my pieces. Yesterday was no exception with hundreds of comments from readers at the bottom of one questioning  me (a polite way of putting it), my profession and then discussing numerous random conspiracy theories which in the past have included whether or not man walked on the moon. To be fair, my dearly departed  father was absolutely convinced that man on the moon was a Hollywood stunt. I spent years trying to have a rational conversation with him about it. Alas I never got him to change his mind.

Hollywood are unlikely to make a movie about the last 6 days of trading as the S&P 500 (+0.11%) saw its 6th consecutive session where the intraday range was no larger than 0.35%. This is the first time that this has happened since Bloomberg started collating intra-day data back to April 1982. I suspect with the Fed concluding their FOMC today this run will come to an end.

For those who may have missed it, DB’s Peter Hooper and his team expects the reinvestment tapering to begin on October 1 and that the Committee will also signal, via its economic projections and in Yellen’s commentary during the press conference, that it still anticipates raising rates one more time this year so long as incoming data are supporting its projections for inflation and growth. In their view, the median Fed expectation of three rate hikes next year will likely also remain intact despite downward revisions to individual forecasts.

Staying in the US, Trump’s debut speech at the UN general assembly seemed to have lots of punchy rhetoric but little material policy implications. On North Korea, he said “if US is forced to defend itself or its allies, we will…totally destroy NK” and that “rocket man is on a suicide mission for himself and for his regime”. On Iran, he said its nuclear program is “an embarrassment to the US” that should be revisited. He also stressed the importance of sovereignty for individual nations, noting “as president of US, I’ll always put America first”. Finally, on the UN, he said the institution was often associated with “bureaucracy and process”, although later noted that he hopes disputes would be resolved via the UN. Notably, other world leaders including Germany’s Merkel, Russia’s Putin, UK’s May and China’s President Xi were absent from  the meeting given their domestic commitments.

Turning to Europe, Reuters reported that the Euro’s strength is causing a rift among ECB policymakers on the timing and approach to the unwinding of QE. Sources told Reuters that Germany is ready to wind down the bond purchase program, while others prefer to reduce the monthly pace of buying, with earlier reports suggesting the scenarios discussed involved reducing the monthly buying to €20bln-€40bln (from €60bln). The split of opinions may mean no definitive end date for QE will be set when officials formally met in October. There was some talk of a delay on the decision until December.

Looking at how markets are kicking off on FOMC day over in Asia, we’ve pared back earlier losses following stronger than expected Japanese August import (15.2% yoy vs. 11.6% expected) and export (18.1% yoy vs. 14.3% expected) figures. As we type, markets are mixed but broadly unchanged, with the Kospi (-0.04%) and ASX 200 (-0.19%) down slightly, while the Nikkei is flattish and the Hang Seng is up 0.23%. Notably, Japan’s Abe is holding a press conference on 25 September, with speculation suggesting that a snap early election will be called. Returning to yesterday, US equities edged up slightly with all three bourses at fresh all-time highs. The S&P and Nasdaq were both up 0.1% and the Dow rose 0.18%. Within the S&P, gains were led by the telco sector (+2.25%), partly buoyed by merger talks between Sprint and T-Mobile. European markets were also higher, but little changed, with the Stoxx 600 (+0.04%) and DAX (+0.02%) broadly flat, while the FTSE 100 advanced (+0.30%) for the second consecutive day.

Core bond yields were also little changed, with Bunds and French OATs 10y yields down slightly (c0.5bp), while 10y Gilts continued to underperform (+2.7bp).

Elsewhere, peripherals have continued to outperform, with Italian and Spanish 10y yields down 2.5bp and 3bp respectively. Over in the US, yields were slightly higher (2Y: +0.5bp; 10Y: +1.6bp) yesterday, but are firmer (-0.7bp) this morning. Turning to currencies, Sterling was range bound intra-day on reports of whether Foreign Secretary Boris Johnson will resign or be sacked after his unauthorised Brexit manifesto but closed the day little changed (+0.06% vs. USD). Elsewhere, the US dollar index dipped 0.28% and the EURUSD gained 0.33%. In commodities, WTI oil rose 0.57% and Iron ore fell 4.06% as concerns build that Chinese steel production may be close to a peak. Precious metals have slightly recovered (Gold +0.28%; Silver +0.60%) after two consecutive days of weakness, while industrial metals broadly rose, with Copper (+0.04%), Zinc (+2.23%) and Aluminium (+1.38%) all up modestly.

Away from the markets and back to Brexit. Yesterday was an evolving day on the political front. Initially, the Telegraph reported that Foreign Secretary Boris Johnson may quit if PM Theresa May oppose his Brexit demands in her big speech later this week. Perhaps in response to this, Bloomberg reported that PM May has called a special cabinet meeting and avoided answering whether Johnson will resign or not. Then finally, later reports suggest the situation has been defused with Johnson planning to attend her keynote speech at Florence and that PM May plans to pay €20bln divorce payment to the EU to kick start the stalled Brexit talks. We can’t wait to hear what she has to say.

Elsewhere, the FT reported that France’s Emmanuel Macron will outline his proposal for EU reform in a speech on 26 September, potentially including themes such as a separate budget, a finance ministry and an EU monetary fund. This broadly echoes earlier comments made by EC President Juncker in his State of Union address where he called for a tighter EU integration.

Finally, the power of Amazon on traditional bricks and mortar stores has been shown again with Toys R US officially filing for Chapter 11 after c12 years under private equity ownership. Notably, its October 2018 bond now trades at 26c versus 97c at the start of this month. Elsewhere, S&P noted that 24 US retailers have filed for Chapter 11 this year, compared to 18 for all of 2016. So in a low default world the retail sector is certainly bucking the trend.

Before we take a look at today’s calendar, we wrap up with other data releases from yesterday. In the US, August housing starts were soft, edging down 0.8% mom (vs. 1.7% expected), in part due to the impact of Hurricane Harvey. However, building permits were stronger than expected, rising 5.7% mom (vs. -0.8% expected) and leaves annual growth at 8.3% yoy. The level of permits has now returned to 1.3m, which is in line with this year’s high in January. Moving along, higher fuel prices have helped to drive a 0.6% mom increase in import prices in August (vs. 0.2% expected). Elsewhere, the 2Q current account deficit was -US $123.1bln (vs. -US$116bln expected), equivalent to c2.6% of GDP.

In Germany, the ZEW survey was above market expectations in the lead up to elections. For the current situations component, the reading came in 87.9 (vs. 86.2 expected) and on the expectations component, it was also higher at 17 (vs. 12 expected) – the highest in ten months. In the Eurozone, the ZEW survey on expectations rose to 31.7 (vs. 29.3 previous), while the July construction output came in at 0.2% mom (vs. 0.2% previous).

Looking at the day ahead, Germany’s August PPI will be out early in the morning (0.1% mom, 2.5% yoy expected). In the UK, there is retail sales for August (0.1% mom for core expected). Over in the US, data wise there is MBA mortgage applications and existing home sales. Onto other events, the main story is the FOMC rate decision in the US, followed by Yellen’s press conference at 14:30 EDT. Elsewhere, EU’s Chief Brexit negotiator Michael Barnier will speak and the OPEC’s panel of technical representatives will meet to discuss production cuts.


Global Equities Hit New All Time High Ahead Of The Fed; VIX < 10; Japan Stocks Surge

S&P futures are little changed as the Fed begins its two-day FOMC meeting pushing the VIX below 10, down 1.3% and falling for the 7th day; European shares are lower as is the dollar while Japanese stocks soar on the back of a tumbling yen as a snap election in Japan now appears imminent. Despite the cautious action ahead of the Fed, the The MSCI All-Country World Index rose 0.1% to a new record high.

Among the notable overnight moves, the USDCNH climbed to highest since late August ahead of this week’s FOMC decision. Ten-year Treasury yields fell 1 bp; Australia’s 10-year gained 1 bp. Japanese equities rose 1.5% ahead of an expected snap election to be called by PM Abe this week; China and Hong Kong shares declined. WTI crude holds just below $50; Dalian iron ore contract dropped. The Bloomberg Dollar Spot Index was little changed before tomorrow’s Fed’s policy decision, when interest-rate projections are seen drawing more attention than any balance-sheet announcement as tapering is seen as a given. The euro was supported by unwinding of shorts against the pound and by yen selling amid improved risk appetite and reports of Japan PM Abe calling for snap elections. Treasuries were underpinned in Asian hours as Japanese investors returned after Monday’s holiday, while price action was muted in London trading.

Meanwhile, nobody appeared concerned about tomorrow’s Fed announcement, where the balance sheet unwind is expected while attention will focus on any revision to the Fed’s dots. “We are not overly concerned about” the Fed’s quantitative-tightening plans, Merrill Lynch and U.S. Trust head of fixed-income strategy Matthew Diczok told Bloomberg TV. “If you model it out, over about the next three years they’ll take out about $1.3 trillion or so. That’s only a third of what they put into the market. So it’s going to be very slow, very gradual, very deliberate and it shouldn’t lead to any near-term fireworks into the market at all.”

Following the recent improvement in data, December rate hike odds once again rose back to 50%, suggesting another rate hike may be possible this year.

JP Morgan Asset Management portfolio manager Iain Stealey said markets were now fully set for the Fed to officially announce it will cut, or taper, the amount it re-invests from the profits of its $4.2 trillion crisis-era bond portfolio. “They have already announced the amounts they are going to start with, $10 billion on a monthly basis and probably starting over the next month or so,” Stealey said. “What may be more important to keep an eye on is the dot-plot. We still think they will have the dots set up to expect one more hike this year, which will obviously be in December, and three next year.”

With little in terms of overnight newsflow, the highlight was Japanese shares which surged to their highest level in more than two years as the yen weakened for a third day, bolstering appetite for electronics makers, autos and banks. Japanese equities gained on expectations Prime Minister Shinzo Abe will call a snap election. As reported on Sunday, Prime Minister Abe is considering calling a poll for as early as next month to take advantage of his improved approval ratings in the wake of the North Korea crisis, and disarray in the main opposition party, according to sources. The benchmark Topix index extended gains after capping its best week since April on Friday, as investor focus shifted to economic fundamentals from concerns over North Korea. The yen dropped to an almost two-month low against the dollar Tuesday.

Abe said Monday he’ll decide on calling a snap election after he returns from a trip to the U.S., confirming our previous report that he’s considering calling a vote a vote more than a year early, prompting speculation for more fiscal stimulus while keeping the BOJ on hold. “The weaker yen is providing tail wind to export-related stocks” after the market shrugged off the North Korea’s missile launch last week, Hiroaki Hiwada, a strategist at Toyo Securities told Bloomberg. “The equity market is taking the news about a possible snap election positively as it boosts expectations Abe’s coalition parties will retain power.” As a result, “Japanese shares generally gain around calls to hold new elections”, Nomura Securities wrote in a report.

Stefan Worrall, director of Japan equity sales at Credit Suisse in Tokyo said there has been concern growing for a while among foreign investors about the future of Abe’s stimulus-focused Abenomics program. “If Abe is cemented in power for another few years, that would be a market-positive event,” he said. “Certainty is preferred to uncertainty, when it comes to market confidence.”

The Nikkei’s 2 percent jump overnight took its gain to almost 30 percent since Abe took power in late 2012.

Another notable overnight move was the sudden drop in the yuan, where the CNH tumbled to a two-and-a-half week low as a state-run firm was said to be buying dollars to make dividend payments. The onshore yuan dropped as much as 0.34% to 6.5987 per dollar and was down 0.12% at 6.5838 as of this morning. In addition to the currency move, the PBOC pumps in net 150b yuan ($23b) via reverse- repurchase agreements, after adding 300b yuan Monday.

Elsewhere in Asia the mood had been more subdued. South Korean shares dipped 0.1 percent, against a backdrop of caution ahead of the Fed meeting as well as continuing tensions on the Korean peninsula. The MSCI Emerging Market Index decreased 0.3 percent, the largest dip in more than two weeks. Asian stock traded cautiously ahead of the FOMC and as the region failed to maintain the early impetus from US where financials led the S&P 500 and DJIA to fresh record closes. Australia’s ASX 200 (-0.1%) and Nikkei 225 (+2.0%) were positive in which the latter surged as it played catch up to the gains on return from holiday, while weakness in defensive stocks restricted upside in Australia. Shanghai Comp. (-0.2%) and Hang Seng (-0.4%) were dampened despite another firm PBoC liquidity operation, with the underperformance in China the rest of the region attributed to profit taking. The PBOC injected net 150b yuan in open-market operations on Tuesday, bringing the additions since last Thursday to 750b yuan. 10yr JGBs lacked demand amid the positive risk tone in Japan and although the BoJ were present in the bond market, this was for a relatively reserved JPY 535bln total.

In Europe, the Stoxx Europe 600 Index was fractionally in the red, amid mixed regional benchmarks. Gauges from Hong Kong to South Korea had retreated earlier, even as Japan soared following a holiday on Monday. Germany’s DAX Index decreased 0.1 percent while the U.K.’s FTSE 100 Index rose 0.2%. The pound reversed an advance as investors weighed the latest political disarray over Brexit strategy, and the euro headed for a fourth daily advance.  Elevated risk appetite in Europe meanwhile saw the gap between Portuguese and Italian 10-year government bond yields narrow to levels not seen since the start of the euro zone debt crisis of 2010-2012. That followed a strong rally in Portuguese debt over the last two sessions, after S&P became the first major ratings agency to give the country back an investment grade rating, more than five years after it first sank into junk territory.

In currencies, Britain’s sterling also started to retreat again having been pushed off post Brexit highs on Monday by Bank of England governor Mark Carney who said any upcoming UK rate hikes would be gradual and limited. The Bloomberg Dollar Spot Index fell less than 0.05 percent. The euro increased 0.2 percent to $1.1978, the strongest in more than a week. The British pound decreased 0.1 percent to $1.3477.

In commodity markets, metals shifted lower and oil prices steadied near last week’s multi-month highs. Traders braced for a potential stockpile build-up expected later this week, limiting the prospect for further gains. U.S. crude futures were up 19 cents at just above $50 per barrel, within sight of Thursday’s nearly four-month high of $50.50. Brent crude hovered at $55.50, not far from an almost five-month high of $55.99 it had marked that day.

In rates, the yield on 10-year Treasuries fell one basis point to 2.22 percent, the largest fall in more than a week. Germany’s 10-year yield declined one basis point to 0.45 percent, the biggest fall in more than a week. Britain’s 10-year yield declined two basis points to 1.281 percent, the largest fall in more than a week.

On the news front, President Trump is scheduled to address the United Nations on Tuesday for the first time as world leaders continue to seek a diplomatic solution to North Korea’s nuclear provocations. Data include August housing starts and 2Q current account. Adobe, AutoZone, Copart, FedEx are among companies reporting earnings. The Iraq Oil Minister said he does not think now that there is a need for more output reductions, but if there was a need for more cuts in the future, Iraq will support consensus within OPEC, Adding, that there are proposals for more cuts, but he does not think it will be implemented, but will be studied.

Bulletin Headline Summary

  • European bourses trade with little in the way of firm direction ahead of upcoming risk events this week
  • GBP/USD saw some selling pressure early doors with initial gains in USD/JPY trimmed throughout the session
  • Looking ahead, highlights include NZ Dairy Auction and US APIs

Market Snapshot

  • S&P 500 futures little changed at 2,503.20
  • VIX Index down 1.3%, falling for the 7th day
  • STOXX Europe 600 down 0.1% to 381.66
  • MSCI Asia up 0.5% to 164.03
  • MSCIA Asia ex Japan down 0.3% to 543.02
  • Nikkei up 2% to 20,299.38
  • Topix up 1.8% to 1,667.88
  • Hang Seng Index down 0.4% to 28,051.41
  • Shanghai Composite down 0.2% to 3,356.84
  • Sensex up 0.09% to 32,453.75
  • Australia S&P/ASX 200 down 0.1% to 5,713.58
  • Kospi down 0.09% to 2,416.05
  • German 10Y yield fell 0.6 bps to 0.449%
  • Euro up 0.3% to $1.1984
  • Italian 10Y yield fell 0.6 bps to 1.78%
  • Spanish 10Y yield fell 1.4 bps to 1.573%
  • Brent futures up 0.3% to $55.67/bbl
  • Gold spot little changed at $1,308.52
  • U.S. Dollar Index down 0.2% to 91.87

Top Overnight News

  • EU wants the Paris-based regulator European Securities and Markets Authority to get a bigger role in reviewing fund managers’ activities, Financial Times reports, citing plans seen
  • Japanese Prime Minister said he is considering dissolving parliament to hold a snap general election, ruling Liberal Democratic Party Secretary General Toshihiro Nikai told reporters in Tokyo; Abe to express his intention to dissolve the Lower House at a press conference on Sept. 25, FNN reports, without attribution
  • French President Macron is planning to provide details on his proposals for euro-zone reforms in a speech on the future of EU on Sept. 26, FT reports, citing unidentified aides; proposal includes a separate budget, a finance ministry and a European Monetary Fund
  • Norway’s sovereign wealth fund hit $1 trillion for the first time on Tuesday, driven higher by climbing stock markets and a weaker U.S. dollar
  • Germany ZEW Sept. survey expectations 17 vs est. +12
  • Toys ‘R’ Us Seeks Bankruptcy, Crushed by Debt and Online Rivals
  • BNP Among Firms Said to Be Eyeing Axa Asset- Management Tie-Up
  • Mexico’s Femsa Sells $3 Billion Stake in Brewer Heineken
  • Park Hotels Is Said to Seek Over $500 Million for 15 Properties
  • Bayer Sees Monsanto Transaction Closing Delayed to Early 2018
  • Wall Street’s Bond Gurus Have It All Wrong as QE Unwind Looms
  • Trump at UN to Urge Action on North Korea, Iran Threat; U.S. to Act on North Korea Rockets That Pose Threat, Mattis Says
  • Maria Weakens as Storm Passes Dominica on Way to Puerto Rico
  • Brexit Rift Widens as Johnson Talks of Life After Government

Asia equity markets traded with a cautious tone as the FOMC draws closer and after the region failed to maintain the early impetus from US where financials led the S&P 500 and DJIA to fresh record closes. ASX 200 (-0.1%) and Nikkei 225 (+2.0%) were initially positive in which the latter surged as it played catch up to the gains on return from holiday, while weakness in defensive stocks restricted upside in Australia. Shanghai Comp. (-0.2%) and Hang Seng (-0.4%) were dampened despite another firm PBoC liquidity operation, with the underperformance in China the rest of the region attributed to profit taking. 10yr JGBs lacked demand amid the positive risk tone in Japan and although the BoJ were present in the bond market, this was for a relatively reserved JPY 535bln total. PBoC injected CNY 130bln via 7-day reverse repos and CNY 20bln via 28-day reverse repos. PBoC set CNY mid-point at 6.5530 (Prev. 6.5419). Japanese PM Abe is told hold a press conference on Monday 25th September; comes in the context of recent speculation that he could call a snap election.

Top Asian News

  • Hong Kong Dollar Surges With Hibor Rates as HKMA Mops Up Cash
  • Goldman Sachs Names Hitchner Chairman, CEO Asia-Pacific Ex- Japan
  • Markets Are Betting That Japan’s Abe Would Win a Snap Election
  • Alibaba Is Said to Buy $100 Million in Best Inc.’s Downsized IPO
  • Tata Is Said to Be Boosting Carmaker Stake for $312 Million

European equity markets trade in subdued fashion, as much anticipation remains on the FOMC tomorrow. EU bourses are mixed for the session, failing to gather any bullish impetus from another record close on Wall Street, not helped by a morning bullish grind in the Euro. Equity specific stories have also dragged down markets, noticeably, Heineken is a leading faller, down close to 4%, after bottler and retailer Femsa has sold a 5.24% stake in the firm. Kantar and Nielsen released their 12-week supermarket sales, helped lead to Sainsbury’s and Morrisons to be two of the out-performers in the FTSE. The grocer optimism has not spread however, with despite what appeared to be strong results for Ocado, the concerns of rising costs have seen the Co. down over 4%. Bond markets have traded in a consolidated range through the European morning. Spreads have seen some marginal volatility, the 10y Spain/Germany has been tightening on the back of Portuguese bonds. PGBs continue to stand out, being down as much as 2-4.0bps along the curve, with the 10y trading through -2.40%. Supply has come from the DMO this morning who came to market with a 30yr auction which drew a smaller b/c than previous (albeit still healthy at 1.97) and a wider tail than previous but did little to cause traction in longer duration paper.

Top European News

  • Merkel Eyes BMW Homeland for Final Election Boost After Spat
  • Carney Says U.K. Rate Increase Looms in Brexit-Hobbled Economy

In currencies, the pound has seen some marginal selling this morning, as cable looks to attempt a break through yesterday’s low. Position unwinding in cable is evident as the Fed is due tomorrow, with buyers potentially not convinced by Carney’s ‘gradual and limited’ comments. Elsewhere, an upbeat ZEW report from Germany failed to inspire any noteworthy price action in the EUR. USD/JPY caught a bid heading into European trade after breaking above the prior session’s highs before dissipating throughout the EU session. AUD was largely unreactive to an unsurprising minutes release where the RBA stuck to its usual rhetoric.

In commodities, oil markets have been relatively unfazed by the speech from the Iraq Oil Minister who said there are proposals for more OPEC cuts, yet with no clear clarity the OPEC extension comments seem disconcerting to markets. WTI crude futures has seemed to consolidate above 49.50, above 50/bbl and looking to break through 50.50, where stops are likely to be triggered. Price action in metals has been subdued overnight with copper also relatively subdued.

Looking at the day ahead, there are housing starts, building permits, current account balance and the import / export price index. President Trump is scheduled to address the United Nations on Tuesday for the first time as world leaders continue to seek a diplomatic solution to North Korea’s nuclear provocations.

US Event Calendar

  • 8:30am: Housing Starts, est. 1.17m, prior 1.16m; Housing Starts MoM, est. 1.65%, prior -4.8%
    • Building Permits, est. 1.22m, prior 1.22m; Building Permits MoM, est. -0.81%, prior -4.1%
  • 8:30am: Current Account Balance, est. $116.0b deficit, prior $116.8b deficit
  • 8:30am: Import Price Index MoM, est. 0.4%, prior 0.1%; Import Price Index YoY, est. 2.2%, prior 1.5%
    • Export Price Index MoM, est. 0.2%, prior 0.4%; Export Price Index YoY, prior 0.8%

DB’s Jim Reid concludes the overnight wrap

It’s been a quiet start to the week ahead of the important Fed meeting today and tomorrow, but no news is good news as risk continues to recover from a few difficulties in recent weeks. In fact the VIX briefly fell below 10 yesterday for the first time since the 7th of August (closed 10.15). Elsewhere, the S&P edged up 0.15% to consolidate around its record high.

There was a bit more action in sovereign bond yields yesterday, in particular for Portugal where its 10y yields fell 37bp, mainly reflecting S&P’s upgrade of its credit rating back to investment grade (BBB-) – the first main agency to do so since 2012. The spread to Bunds has now narrowed to 196bp, which is the lowest since January 2016. Other peripherals slightly outperformed too, with Italian BTPs (2Y: -1bp; 10Y: -1bp) and Spanish (2Y: +0.5bp; 10Y: -1.6bp) yields down c1bp, with Ireland’s 10y yields unchanged after Moody’s upgraded its rating from A3 to A2-. Core bond yields underperformed, but changes were modest, with Bunds (2Y: +1bp; 10Y: +2bp) and Gilts (2Y: +3bp; 10Y: unch) up slightly, while UST 10yr also rose 2.6bp.

Turning to the UK, BOE’s governor Carney spoke at IMF’s headquarters and reiterated the need for some withdrawal of stimulus if the UK economy evolves as expected. On rates, he noted that there are global factors that could justify UK’s potential move to hike rates, in part as UK’s monetary policy “has to move in order to stand still” and that Brexit undermines UK’s supply capacity and makes it harder for the economy to grow without generating inflationary pressures. However, relative to the hawkish BOE tone set last week, some interpreted his rate hike comments of “gradual and to a limited extent” as a bit dovish, partly contributing to a softening in Sterling yesterday (-0.73%). On Brexit, he said there remains “considerable risks to the UK outlook” and that the Brexit process would weigh on the economy’s potential growth for a period.

Elsewhere, at a Reuter’s interview, ECB’s governing council member Ardo Hansson reiterated that solid Eurozone growth will allow the ECB to dial back stimulus but normalisation will be gradual. Notably, he called out that ECB’s “forward guidance could be more precise about interest rates”.

This morning in Asia, markets are paring back initial gains and are now trading broadly unchanged ahead of the FOMC meeting. As we type, the Nikkei is up 1.47%, partly playing catch up as the market was closed yesterday for holiday. Elsewhere, the Hang Seng (-0.07%), Kospi (-0.05%) and ASX 200 (+0.05%) are fairly flat. The UST 10y is also trading a bit firmer (-1bp) this morning. In his first visit to the UN, President Trump has said that a decision on Iran’s nuclear deal will be seen “very soon” and that the UN has not reached its full potential. Trump’s first official address will occur later today so eyes will be on that.

Turning back to markets yesterday. Equities strengthened further in both the US and Europe, but changes were modest, in part as investors await for the FOMC meeting. The S&P edged 0.15% higher, while the Nasdaq and the Dow rose 0.10% and 0.28% respectively. Within the S&P, gains were led by the financials (+1.02%) and materials sector, partly offset by losses from utilities. European markets were all higher, with the Stoxx and DAX both up c0.3%, while the FTSE firmed 0.52% following four consecutive days of losses.

Currency markets were fairly quiet excluding the changes for Sterling, where it weakened 0.73% and 0.77% versus the Greenback and Euro respectively. Elsewhere, the US dollar index gained 0.19% and EURUSD rose 0.08%. In commodities, WTI oil was broadly flat again while precious metals fell (Gold -0.97%; Silver -2.15%) given the bias away from safe haven assets. Elsewhere, base metals as per LME prices have broadly increased, with Copper (+0.31%), Aluminium (+0.17%) and Zinc (+2.21%) all slightly higher.

Away from the markets and onto the topic of elections. In Spain, the Catalan government has passed a law organising an independence referendum on 1 October, although the move has been ruled illegal by the Spanish courts and government. The Spanish economy minister Luis de Guindos warned yesterday that Catalonia’s independence would result in an automatic exit from the EU and that the hit to Catalonia’s economy would be “brutal”, with GDP falling 25%-30% and unemployment to double. The Catalonia region accounts for c20% of Spain’s GDP. Moody’s noted earlier the vote was negative for credit, but it expects the Catalonia region to remain part of Spain.

Over in Germany, according to ARD Deutschland-trend, the winner of the upcoming election seems to be clearly Merkel’s CDU/CSU party, but the composition of the next coalition is not so clear. DB’s Stefan Schneider takes a look at the coalition scenarios and their possible implications for Germany’s economic and EU policies as well as financial markets. For more details Turning to Japan, there were weekend reports that PM Shinzo Abe is considering an earlier Lower House election sometime in October 2017. Our Japanese team notes the move appears to be motivated by a rebound in Abe’s approval ratings and his potential intent to lengthen his time in power. Our team thinks that a key economic focus in this election (if it takes place),could be whether the consumption tax should be raised as planned in October 2019 from 8% to 10% and a transformation of the social security system from one orientated towards the elderly to one focused on all generations.

Before we move to today’s calendar a few things to wrap up. First the latest ECB CSPP holdings were released yesterday. They bought €2.12bn last week which equates to €423mn/dayvs. €348mn/day since CSPP started. After the summer lull and with more primary issuance, the ECB have made up for the low levels of summer buying with the CSPP/PSPP ratio of net purchases at 19.2% last week (vs. 13.6%, 12%, 10.3%, 9.6%, 11.4% in previous weeks). The CSPP/PSPP ratio since the taper in April has been c.12.9% which is higher than the pre-taper ratio of 11.6%. So still suggesting the ECB has tapered credit purchases less than Government bonds.

Circling back to Brexit, Oliver Robbins has left his post as the official in charge of the Brexit department to focus full time on the Brexit negotiations. This coupled with PM Theresa May’s big speech later this week could add momentum back to the stalled negotiation talks with the EU.

Finally, turning to a fairly quiet day for key macro data, in the US, the NAHB Housing market index was slightly lower than expected at 64 (vs. 67), with both the current sales and sales expectations indices returning to their July readings. In Europe, the final reading of Eurozone’s August inflation was unchanged, with headline inflation at 1.5% yoy (0.3% mom) and core at 1.2% yoy. Italy’s total trade balance for July increased to $6.6bln (vs. $4.5bln previous). In the UK, the Rightmove index pointed to a further softening of the housing market in September, with nationwide asking prices falling 1.2% mom, leaving annual growth at 1.1% yoy – the slowest pace since February 2012.

Looking at the day ahead, the Eurozone’s current account and construction output stats are due. There is the ZEW survey on economic growth for Germany and the Eurozone. Over in the US, there are housing starts, building permits, current account balance and the import / export price index. Onto other events, Germany’s Merkel will give a pre-election interview to RTL television.


Flags, Symbols, And Statues Resurgent As Globalism Declines

Authored by Wayne Madsen via The Strategic Culture Foundation,

As the forces of globalism retreat after numerous defeats in the United States, the United Kingdom, Turkey, and other nations, there is a resurgent popularity in national, historical, and cultural symbols. These include flags, statues of forbearers, place names, language, and, in fact, anything that distinguishes one national or sub-national group from others. The negative reactions to cultural and religious threats brought about by the manifestations of globalism – mass movement of refugees, dictates from supranational organizations like the European Union and the United Nations, and the loss of financial independence – should have been expected by the globalists. Caught up in their own self-importance and hubris, the globalists are now debasing the forces of national, religious, and cultural identity as threats to the “world order.”

The most egregious examples of globalist pushback against aspirant nationhood and the symbols of national identity are Catalonia and Kurdistan.

Two plebiscites on independence, a September 25, 2017 referendum on the Kurdistan Regional Government declaring independence from Iraq and an October 1 referendum on Catalonia beginning the process of breaking away from the Kingdom of Spain, are expected to achieve “yes” votes. Neither plebiscite is binding, a fact that will result in both votes being ignored by the mother countries.

Iraq, the United States, Turkey, and Iran have warned Kurdish Iraq against holding the independence referendum. The United States is prepared to double-cross its erstwhile Kurdish allies for a fourth time. President Woodrow Wilson, who has been cited as the “first neoconservative or neocon, reneged on Kurdish independence during the post-World War I Versailles peace conference. Henry Kissinger double-crossed Kurdish leader Mustafa Barzani in 1975 with the Algiers Accord between Iraq and Iran, a perfidious act that forced 100,000 of Barzani’s Kurdish forces into exile in Iran. George H. W. Bush promised the Kurds help after Operation Desert Storm in 1991 if they revolted against Saddam Hussein’s government. US military aid was not forthcoming and the Kurds were forced into a small sliver of northern Iraq, over which a US “no-fly zone” was imposed. Now, Donald Trump’s administration has warned the Kurds not to even think about independence, even though the Kurdish peshmerga forces helped the US and its allies to drive the Islamic State out of Kirkuk and the rest of northern Iraq.

In Spain, the conservative prime minister is trying to emulate the Spanish fascist dictator Generalissimo Francisco Franco in making threats against Catalonia’s independence wishes.

In response to the Catalan Parliament's vote to hold an October 1 referendum on Catalonia's independence from Spain, Prime Minister Mariano Rajoy and his People's Party government have promised to round up the pro-independence members of the Catalan government, as well as pro-independence legislators of the parliament and mayors, and criminally charge them with sedition.

Rajoy's stance should be no surprise since his party, the Popular Party, is the political heir of Franco's Falangist party. Franco's version of the Nazi Gestapo, the Guardia Civil, brutally suppressed Catalan and Basque identity. Particular targets for suppression, according to Falangist doctrine, were "anti-Spanish activists," "Reds," "separatists," "liberals," "Jews," "Freemasons," and "judeomarxistas."

The Falange was eventually replaced by the National Movement, which continued many of Franco's policies, including repression of the Catalan and Basque culture, autonomy, and language.

The Francoist People's Alliance, founded in 1989 by Franco's Interior Minister, Manuel Fraga Iribarne, eventually morphed into the People's Party of Rajoy. The People's Party considers itself "Christian Democratic," but it receives support from Franco's fascist Roman Catholic order, the Opus Dei.

Rajoy is using a decision by Spain's Constitutional Court, suspending the independence referendum in Catalonia, as justification for his threats against the region. Apparently, the neo-fascist government of Spain has been trawling Twitter to collect the names of Catalan mayors who have posted photographs of themselves and messages of support for the “Junts pel Si” (Together for Yes) pro-independence coalition. The mayors, along with members of parliament and the government in Barcelona, are being placed on a Guardia Civil list targeting them with arrest and incarceration if the referendum is carried out.

Rajoy has also warned officials of local municipal councils that their cooperation in holding a referendum vote will be considered an act of sedition and that they, too, face arrest and detention.

Rajoy's channeling of Franco will only solidify anti-Spanish feelings in Catalonia, even among those not keen on independence. The iron boot of Rajoy and the People's Party in Catalonia will only boost support for Catalan independence from those mildly opposed to it or neutral. If Catalonia's regional and local government leaders are paraded off to prisons, the peaceful independence movement in the region could easily turn violent. There is also widespread support for Catalan independence in the separatist Basque region, where parades have been held in support of the Catalan cause. In August, 3000 pro-Catalan independence Basques marched in the Basque city of San Sebastian. If Rajoy carries through with his threat against Catalonia, the Basque region will also see it as a threat to them and join in a renewed campaign of violence against the Madrid neo-fascists. The Basque secessionist terrorist group ETA agreed to disarm in 2011 but it has not turned in all its weapons.

The Basque party EH Bildu has already submitted a bill in the regional Basque parliament that is a copy of the Catalan independence referendum bill that passed the parliament in Barcelona.

People around the world are rejecting the notion that states, harboring more than one nation, ethnic group, or tribal entity, should be recognized by globalist institutions like the EU and UN as representing all the constituent parts.

Currently, the Republic of Macedonia is negotiating with Greece, the EU, and NATO on membership under a nation-state name that suits Greece. Greece does not recognize Macedonia by that name because it believes Macedonia harbors irredentist designs on Greek Macedonia. Greece insists the country use the provisional name of FYROM, which stands for the “Former Yugoslav Republic of Macedonia.” Macedonian nationalists scoff at such a name, likening it to being forced to use the fictional Klingon language of “Star Trek.”

As a result of the United Kingdom’s exit from the EU, Scotland, Wales, and Northern Ireland are demanding that London grant them the right to maintain their own economic and other links with the Eurocrats in Brussels. Scotland may hold a second independence referendum with or without the blessing of London. The Welsh Assembly in Cardiff is sounding more and more like the Scottish Parliament in demanding a separate deal with the EU for Wales. Even in the heart of the EU bureaucracy – Belgium – Flanders and Wallonia show no signs of abandoning their march toward independence, leaving Brussels as its own independent city-state hosting the headquarters of the EU, NATO, and Godiva Chocolatier. Rather than the Belgian flag, one is more likely to find Flemish flags flying from poles in Antwerp and Walloon flags adorning buildings in Liège.

Around the world, statues of historical figures are being defaced and removed by contrarian groups who bear ethnic or political grudges. They include Confederate General Robert E. Lee throughout the United States, Captain James Cook in Australia, Father Junipero Serra in California, Christopher Columbus in New York, King Kamehameha in Hawaii, Hugo Chavez in Venezuela, and Marthinus Pretorius and Paul Kruger in South Africa. This all represents the trend toward dissolution of the nation-state.

Nation-state flags, monuments of past political and religious figures, and other nation-state symbols are not only being questioned but, in some cases, ignored or cast aside completely. The world is “going tribal” and there is little the governing globalists and elites can do about it. They brought this situation upon themselves with their aloofness and ignorance. The UN General Assembly will soon welcome 193-member state leaders to its plenary session in New York. The UN may do well to plan for future sessions at which 300 or more member-state leaders, from Åland to Zanzibar and Baltistan to Mthwakazi, converge on New York.


Global Stocks Storm To New Record High Ahead Of Historic Fed Announcement

Last week’s bullish sentiment that sent the S&P not only to a new all time highs, but a burst of last-second buying pushed above 2,500 for the first time ever, has carried through to the new week, with European and Asian shares rallying across the board, US futures again the green, and world stocks hitting a new record high on Monday ahead of a historic Fed meeting in which the FOMC is expected to announce the start of the shrinkage of its balance sheet.

“The FOMC’s latest verdict will be of special interest,” said Daniel Lenz, an analyst at DZ Bank in Frankfurt. “The Fed could well set the balance-sheet-reduction process in motion.”

MSCI’s index of world stocks hit a new all-time high, adding to gains seen on Friday when Wall Street set its own record level, while Europe’s main stock index opened at a six-week high on Monday and MSCI’s broadest index of Asia-Pacific shares ex-Japan rose to heights not seen since late 2007.

As DB’s Jim Reid summarizes the week’s key events, this week will be dominated by 3 of the most powerful women in the world “and I’m not talking about Daenerys Targaryen, Cersei Lannister and Sansa Stark. Instead we have our real world version with Mrs Yellen likely to announce the end of Fed reinvestment on Wednesday, Mrs Merkel firm favourite with the pollsters to see a big election win on Sunday and Mrs May set to outline her latest Brexit vision in Florence on Friday. Of the three, Mrs May’s speech is currently the least predictable but after a big week for the UK last week (GBPUSD +2.98%, GBPEUR +3.75%, 10yr Gilts +32bps, and the November hike probability from 18.4% to 64.5% according to Bloomberg’s calculator), Sterling assets are seeing some significant volatility at the moment.”

Before we get there, however, there is much optimism and the Stoxx Europe 600 jumped the most in almost a week as 16 of 19 sectors advanced, rising 0.3% in early trading, the highest in almost six weeks. The European rally was led by banks, telecoms and utilities, while travel & leisure shares underperform as Ryanair falls after saying it plans to cancel flights amid crew issues. The Stoxx Europe reached its highest level since Aug. 8. The FTSE 100, recently hit by a surge in the pound, is up 0.4%. Shares in Ryanair drop 3.3% after the Irish airline said it will scrap 40 to 50 flights daily for six weeks. Fingerprint sinks 21% after warning on its revenue outlook.

Asian equities rose more than a percent, the most in two months, after the record-breaking Wall Street session on Friday amid optimism the U.S. will pursue a peaceful resolution to North Korea’s nuclear threats. The MSCI Asia Pacific ex-Japan Index added 1% as of 4:39 p.m. in Hong Kong to trade close to its highest level since December 2007. The Philippines benchmark gauge, South Korea’s Kospi index and Hong Kong’s Hang Seng Index are the three biggest gainers Monday with an advance of more than 1 percent each. S.Korea’s Kospi index climbed 1.4% and Australia’s main gauge was up 0.5% at the close. The Hang Seng Index in Hong Kong gained 1.3% . The Shanghai Composite Index was 0.3% higher. Japan markets are shut for respect-for-the-aged day. The Japanese yen fell as much as 0.5 percent to 111.37 per dollar, the weakest in almost eight weeks before recoupoing some losses and trading at 111.20 last.

Hong Kong shares rallied Monday as developers were buoyed by policy hopes and brokerages gained after China relaxed rules on stock-index futures trading. Hang Seng Index jumps 1.3%, most in a month, to close above 28,000 resistance level for first time since Aug. 30 as developers extend rally into third day, with China Resources Land Ltd. jumping 7.5% to highest since May 2015; China Overseas Land & Investment Ltd. gains 4.9%. According to Bloomberg, concerns over possible tightening before the 19th Party Congress has waned after data showed home prices increased in fewer cities in August, reducing the probability of more curbs, says Toni Ho, analyst at Rhb Osk Securities Hong Kong Ltd.

U.S. futures also rose after equities increased from Australia to Hong Kong. The gains come after the S&P 500 Index broke through 2,500 for the first time on Friday and the Dow Jones Industrial Average chalked another record.

Not all is certain however, as an address by President Trump to world leaders at the United Nations on Tuesday, and elections in Germany and New Zealand will add extra political uncertainty to the mix this week.  But the main event will be the abovementioned Fed meeting on Tuesday and Wednesday, at which it is virtually guaranteed to take another step toward policy normalisation amid what is rapidly becoming a global trend. As a reminder, Canada has already hiked interest rates twice in recent months – the last time in a shock move that surprised most traders –  while the Bank of England shocked many last week by flagging its own coming increases. The European Central Bank is meanwhile expected to shed more light on plans to exit its extraordinary stimulus in October.

Political uncertainty also made a surprise appearance after sources said Japanese Prime Minister Shinzo Abe was considering calling a snap election for as early as next month to take advantage of his improved approval ratings and disarray in the main opposition party.

And yet persistently subdued global inflation despite a pick-up in growth remains the “trillion dollar” question for central banks looking to normalize policy, a report from Bank for International Settlements said on Sunday. As such, investors are far from convinced the Fed will move on rates again this year, with a December change put at less than a 50 percent probability in the futures market.

“It is fair to say that in our recent travels most of the investors we have spoken to question not just a December hike, but whether the Fed will hike at all again this cycle,” said Tom Porcelli, chief U.S. economist at RBC Capital Markets. “When you press investors on the why, the standard reply is the lack of inflationary pressures.”

In any case, overnight the dollar was stronger, reaching an eight-week high against the yen, as investors await the widely telegraphed Fed announcement, as oil climbed while safe havens continued to slide as investors breathed a sigh of relief that the weekend passed with no new provocation by North Korea. Currency traders started the week by adding risk-on positions amid optimism the U.S. will pursue a peaceful resolution to North Korea’s nuclear threats; the dollar climbed against the yen as 10-year Treasuries held last week’s losses in London trading; sterling fell as some investors took money off the table following the pound’s best week versus the greenback since 2009, while the euro swung between losses and gains as a report cited ECB Governing Council member Hansson advocating a “somewhat broader recalibration” of stimulus.

The U.S. dollar rose to an almost eight-week high against yen after U.S. Secretary of State Rex Tillerson said his country is seeking a peaceful outcome to end the nuclear standoff with North Korea, and as Japanese markets were closed for holiday. The USD was also supported by 10-year Treasury yields, which rose to the highest level in almost a month as bets build for Fed to announce timing of balance-sheet tapering after policy meeting Wednesday, and rising U.S. stock futures. The ten falls against almost all major peers as investors expect BOJ to maintain stimulus when it sets policy on Thursday; Japanese Prime Minister Shinzo Abe said he’ll decide on calling a snap election after he returns from a trip to the U.S., giving the pair a lift on speculation of further continuation of Abenomics.

In rates, U.S. Treasury yields jumped a hefty 14 bps last week, but were little changed on Monday, as were most developed bond markets. In Europe, the eye-catching move was a sharp slide in Portuguese yields on the country regaining an investment grade rating after 5-1/2 years.  The yield on 10-year Treasuries gained one basis point to 2.21 percent, the highest in almost a month. Germany’s 10-year yield advanced less than one basis point to 0.44 percent. Britain’s 10-year yield decreased less than one basis point to 1.31 percent, the first retreat in more than a week.

U.S. crude oil prices rose above $50 per barrel on Monday and were near last week’s multi-month highs as the number of U.S. rigs drilling for new production fell and refineries continued to restart after getting knocked out by Hurricane Harvey.  Talk of monetary tightening and a bounce in the dollar put gold on the defensive. The precious metal was off 0.4 percent at $1,314.43 an ounce.

Investors will be keeping a close eye on a speech by BOE Governor Mark Carney later on Monday. HSBC sees two more rate hikes by the BoE between now and the end of next year. Economic data include NAHB Housing Market Index for September. Houghton Mifflin and Steelcase are reporting earnings.

Bulletin Headline Summary from RanSquawk

  • European and Asian markets in the green
  • In FX, the greenback gains some ground
  • Looking ahead, highlights include BoE’s Carney and BoC’s Lane

Market Snapshot

  • S&P 500 futures up 0.3% to 2,503.50
  • STOXX Europe 600 up 0.3% to 382.00
  • MSCI Asia up 0.6% to 163.29
  • MSCI Asia ex Japan up 1.1% to 544.11
  • Nikkei up 0.5% to 19,909.50
  • Topix up 0.4% to 1,638.94
  • Hang Seng Index up 1.3% to 28,159.77
  • Shanghai Composite up 0.3% to 3,362.86
  • Sensex up 0.7% to 32,493.91
  • Australia S&P/ASX 200 up 0.5% to 5,720.60
  • Kospi up 1.4% to 2,418.21
  • German 10Y yield fell 0.5 bps to 0.428%
  • Euro down 0.2% to $1.1926
  • Italian 10Y yield rose 1.9 bps to 1.786%
  • Spanish 10Y yield fell 5.5 bps to 1.554%
  • Brent futures up 0.4% to $55.74/bbl
  • Gold spot down 0.4% to $1,314.44
  • U.S. Dollar Index up 0.2% to 92.03

Top Overnight News

  • Inflation in the euro-area rose an annual 1.5% in Aug., matching the median economist forecast in a Bloomberg survey
  • The PBOC has drafted plans to allow foreign investors greater access to the country’s financial sector, including a proposal to give overseas firms control of their joint ventures in China, according to people familiar with the discussions
  • U.K. house prices grew at the slowest annual pace in more than five years this month as a slump in London weighed on the market
  • Base effects from energy and unprocessed food prices “will exert a strong impact on the projected path for headline HICP inflation in the coming quarters,” ECB says
  • The kiwi dollar has dropped whenever opinion polls show the main opposition Labour Party is ahead, while the currency jumped a full U.S. cent after a survey last week put the ruling National Party in the lead
  • AT&T-Time Warner Deal Said on Track to Win U.S. Nod by November
  • Trading Execution Prices Are Seen Plunging in MiFID Share Grab
  • Economists Boost Euro-Area Outlook, See Best Year in a Decade
  • U.K. Outlook Seen as Rosier as BOE Edges Closer to Rate Hike
  • Fingerprint Plunges After Warning Revenue Will Miss Estimates
  • S. Korea Says Additional N. Korea Missile, Nuke Tests Likely

Asia equity markets began the week strongly, with significant profits after last Friday’s gains in US, where all majors eked fresh record levels and the S&P 500 just about surmounted the 2500 level. This supported the Asia-Pac region and lifted ASX 200 (+0.4%) and KOSPI (+1.1%) from the get-go, with strength in financials front-running the sectors in Australia. Shanghai Comp. (+0.3%) and Hang Seng (+1.0%) were also positive after better than expected lending data and a substantial liquidity injection of CNY 300bln by the PBoC, although gains across the region were somewhat contained with Japan away for holiday and ahead of key risk events including the FOMC this week. The PBOC is said to draft plan for foreign access to the finance sector. As reported over the weekend, Japanese PM Abe is reported to be considering dissolving the lower house for a snap election next month and informed the ruling coalition of his plans, with October 22nd seen as a likely date for the snap elections.  Chinese House Prices YY (Aug) 8.3% (Prev. 9.7%). Chinese House Prices increased M/M in 46 out of 70 cities (Prev. 56) and increased Y/Y in 68 out of 70 cities (Prev. 70). PBoC injected CNY 280bln via 7-day reverse repos and CNY 20bln via 28-day reverse repos, most since January: the People’s Bank of China added the most cash into financial system via open-market operations since January, as it seeks to ensure ample liquidity before end-quarter regulatory checks and a week-long holiday early next month.

Top Asian News

  • China PBOC Is Said to Draft Package for Financial Market Opening
  • Abe Says He’ll Decide on Snap Japan Election After Trip to U.S
  • Saudis Said to Weigh Raising Gasoline Prices by End- November
  • Chinese Online Insurer ZhongAn Starts $1.5 Billion Hong Kong IPO
  • Iron Ore Bears Push for Control as Futures Drop Near Bear Market
  • Qatar to Buy 24 Typhoon Jets to Beef Up U.K. Defense Partnership
  • BYD Extends Weekly Surge on China’s Plan to Boost Electric Autos

European equity markets trade in the green across the board, following the global price action, as the US saw fresh
record levels once again, highlighted by the S&P 500, which closed above the 2500 level. All 10 sectors trade in the green,
led by Telecoms, which outperformed in the US on Friday, trading up over 1% with Telecom Italia leading the FTSE MIB charge.
BAE Systems are one of the outperformers in the UK, following news that they have secured a Typhoon fighter aircraft deal with
Qatar which could be worth more than GBP 2bln.
Portuguese yields underperform, following their rating upgrade curtesy of S&P on Friday. 10 y spreads trade more than
20bps tighter to Bunds, as such the 2y Portuguese yield now trades firmly in the negative (-0.09%). The European triple A’s
continue to trade alongside the hawkish bank rhetoric with Bunds and Gilts trading around session lows.

Top European News

  • London Slumps as U.K. Sellers Raise Home Prices Least Since 2012
  • Portugal Bonds Lead Peripheral Rally on Sovereign Rating Upgrade
  • Natixis Unlikely to Buy AXA Investment Management Unit: JPMorgan
  • European Telco Rally Overdue, May Rotate Quickly: Deutsche Bank
  • ECB Sees Base Effect Affecting Inflation in the Coming Quarters

In currencies, the European morning has been dictated by the greenback, as the DXY has broken out of the overnight range. A push through 92.00 helped many of the dollars major pairs to see some volatility. USD/JPY trades at session highs, firmly back in Apr – Aug trading range, looking like a test of 114.00 is now possible. GBP/USD continues to struggle to break 1.36, however traders are likely to await Carney at 16:00BST. Sterling has seen some early choppy trade, with early week, Monday thin trade evident. Cable managed to spike through overnight highs, back through 1.36. However, trade quickly stalled, with pending offers pushing the pair back towards overnight lows, looking for a break of 1.3550.

In commodities, oil has seen an early bid amid no real fundamental news, WTI trades back through 50.00/bbl looking towards August’s 50.51 high. Another pending hurricane could cause continued Energy concerns, as Hurricane ‘Maria’ is forecast to become another Category 4. Precious metals continue to come off highs, as geopolitical concerns have dampened in the market with gold seemingly set to see another outside down day. A key tech level to watch will be the 1295 area, which behaved as resistance up until August 28th.

Looking at the day ahead, Monday starts with the final reading of the Eurozone’s August inflation, which printed largely as expected although there was some upside in core prints. Over in the US, there is the NAHB Housing market index and total net TIC flows for July. Also on Monday, US’s lead negotiator on the NAFTA talks will speak and lay out the US’s priorities. There are also other speakers, including: i) BOE’s governor Mark Carney giving a lecture at IMF’s headquarters, ii) Bank of Canada’s deputy governor Timothy Lane, iii) ECB’s supervisory board member Angeloni speaking at an Italian banking conference, as well as iv) Germany’s Merkel and EC President Juncker speaking at the 75th birthday of Germany’s longest serving finance minister.

US Event Calendar

  • 10am: NAHB Housing Market Index, est. 67, prior 68
  • 11am: BOE Governor Carney Speaks at IMF in Washington, DC
  • 4pm: Total Net TIC Flows, prior $7.7b
  • 4pm: Net Long-term TIC Flows, prior $34.4b

DB’s Jim Reid concludes the overnight wrap

Mondays are the new Fridays. At least they are for me at the moment as being  back to work allows me to escape from the madhouse at home. One example sums this up. At the moment we put the feeding bottles and expressing units in the steriliser case and then in the microwave every 3 hours. This goes on at 1000 watts for 6 minutes. We have now done this nearly 200 times in the 3 weeks of having the twins. We do it on autopilot and can literally do it in our sleep which we frequently do. So yesterday morning I get home from walking Bronte with Maisie to find the microwave on and the contents of it splattering everywhere within in. It only had 5 seconds to run, I rushed to turn it off and found that my wife had put her porridge in it and on autopilot left it cooking for 6 minutes on 1000 watts. It was absolutely everywhere and glued to the sides. For someone who is very switched on this showed how tired she is. She had collapsed on the sofa. My poor wife never did get round to eating her breakfast as the twins then demanded to feed again.

This week will be dominated by 3 of the most powerful women in the world and I’m not talking about Daenerys Targaryen, Cersei Lannister and Sansa Stark. Instead we have our real world version with Mrs Yellen likely to announce the end of Fed reinvestment on Wednesday, Mrs Merkel firm favourite with the pollsters to see a big election win on Sunday and Mrs May set to outline her latest Brexit vision in Florence on Friday. Of the three, Mrs May’s speech is currently the least predictable but after a big week for the UK last week (GBPUSD +2.98%, GBPEUR +3.75%, 10yr Gilts +32bps, and the November hike probability from 18.4% to 64.5% according to Bloomberg’s calculator), Sterling assets are seeing some significant volatility at the moment.

Indeed bonds generally had a more difficult week than of late on the back of stronger than expected US and UK inflation, a hawkish shift from the BoE, a slightly less severe hurricane than feared in the US, and haven fatigue when it came to the still tense North Korean situation. Over the week, Gilts were clearly the underperformer with yields up c30bp across maturities (2Y: +27bp; 10Y +32bp). To be fair, other core bond yields were also up 6-15bp, with UST 10Y (2Y: +12bp; 10Y: +15bp), Bunds (2Y: +6bp; 10Y: +12bp) and French OATs (2Y: +7bp; 10Y: +9bp) all higher for the week. Peripheral bonds modestly outperformed, in particular Portugal where 10yr bond yields rose only 1bp for the week, likely supported by S&P’s upgrade of its sovereign credit rating back to investment grade.

Bonds will probably take a lot of their lead from the Fed this week. They have been signalling for some time that reinvestment tapering will be announced at this meeting (Wednesday) with our expectations being that it will start on October 1st. Mrs Yellen’s press conference and how she steers markets on the chances of a December hike will arguably be more important as will the latest dot plot changes. For those who have missed it, DB’s Peter Hooper has detailed the team’s expectations, with particular focus on potential changes to the Fed’s forecasts, rate expectations in the dot plot, and inflation narrative. He expects the Committee will signal, via its economic projections and in Yellen’s commentary during the press conference, that it still anticipates raising rates one more time this year so long as incoming data are supporting its projections for inflation and growth.

As for Mrs Merkel, assuming the polls are correct the main focus post the election will be on the composition of the coalition. This is the main area of uncertainty. The process normally takes 1-2 months but could take longer if negotiations are protracted.

Not to be outdone by that power trio, we also have Mr Trump’s debut speech (Tuesday morning) at the big UN get together in NY this week. Whilst not likely to be immediately market moving, his view on both the UN and America’s role in the world are clearly vital issues going forward.

This morning in Asia, markets have followed the positive lead from the US and are trading higher as we type. The Nikkei is closed for a holiday but the Kospi (+1.06%), Hang Seng (+1.01%), Chinese bourses (up c0.4%) and ASX 200 (+0.54%) are all higher.

Quickly recapping the market’s performance on last Friday. The S&P edged up 0.18% to another record new high, closing marginally above 2,500. Elsewhere, both the Dow and the Nasdaq rose c0.3%. Within the S&P, gains were led by the telco sector (+1.78%), partly offset by weakness in health care and discretionary consumer sectors. European markets were modestly weaker, with the Stoxx 600 and Dax down 0.28% and 0.17% respectively, but the FTSE fell more (-1.10%), likely impacted by the more hawkish BOE, stronger pound and concerns about the fresh terrorist event on the London Underground.

Moving to currencies, the US dollar index fell 0.27% following lower than expected August retail sales figures. Elsewhere, Sterling jumped for the second consecutive day, up 1.46% against the Greenback and 1.21% vs. the Euro. In commodities, WTI oil was broadly unchanged, while precious metals (Gold -0.72%; Silver -1.16%) and base metals (Copper -0.40%; Aluminium -0.70%) fell modestly.

Away from the markets, the BOE’s more hawkish message from Thursday was further reinforced by the usually dovish Gertjan Vlieghe (a member of the MPC), who in a speech on Friday said “The evolution of the data is increasingly suggesting that we are approaching the moment when bank rate may need to rise”. Elsewhere, the Centre for Economics and Business Research has upgraded the outlook for UK, now expecting economic growth of 1.6% (+0.3ppt) and 1.4% (+0.2ppt) in 2017 and 2018 respectively. The cause for the upgrade reflects a pickup in manufacturing and that the worst of the consumer spending squeeze has now passed.

Staying in the UK, British executives from 120 businesses have signed a letter urging PM Theresa May to seek a three year transition period after Brexit, warning that failure to secure sufficient time would jeopardize “our collective prosperity”. Turning back to North Korea, US Secretary of State Rex Tillerson reiterated his preference for a diplomatic solution, he noted “if our diplomatic efforts fails… our military option will be the only left….but (let’s) be clear, we seek a peaceful solution to this”.

Before we take a look at today’s calendar, we wrap up with other data releases from Friday. In the US, macro data were overall slightly lower than expected. Headline August retail sales fell 0.2% mom (vs. +0.1%  expected), this coupled with some modest downward revisions has meant through year growth is now 3.5% yoy. Core retail sales (ex-auto and gas) were also weaker than expected, down 0.1% mom (vs. +0.3% expected). While part of the weakness may have been due to the impacts from Hurricane Harvey, the underlying picture is still likely a bit softer nonetheless. Moving along, the August IP was also below market at -0.9% mom (vs. +0.1% expected). Core manufacturing output was down 0.3% mom, but according to the Fed’s estimates, Hurricane Harvey subtracted c0.75pps from both headline and manufacturing output in August, so the underlying performance of the manufacturing sector looks a bit stronger this month. Even so, the overall weakness in IP, when combined with the retail sales report, means that the Atlanta Fed’s GDPNow model of Q3 GDP growth was slashed by eight-tenths to 2.2% saar. Elsewhere, the empire manufacturing survey beat at 24.4 (vs. 18 expected) and the University of Michigan’s consumer sentiment index was also above market at 95.3 (vs. 95 expected).

Onto the week ahead now. Data wise Monday starts with the final reading of the Eurozone’s August inflation along with Italy’s trade balance. Over in the US, there is the NAHB Housing market index and total net TIC flows for July. Onto Tuesday, the Eurozone’s current account and construction output stats are due. There is also the ZEW survey on economic growth for Germany and the Eurozone. Over in the US, there are housing starts, building permits, current account balance and the import / export price index. Turning to Wednesday, Germany’s August PPI along with the Japanese trade balance and exports & imports stats will be out early in the morning. In the UK, there is the retail sales release for August. Over in the US, the main event is the FOMC rate decision along with data on MBA mortgage applications and existing home sales. For Thursday,Japan’s all industry activity index will be due early in the morning along with the BOJ policy rate decision later on. Then the Eurozone’s confidence index and ECB’s economic bulletin is also due. In the UK, data on the Finance loans for housing, private sector and public sector borrowing are due. Over in the US, there are numerous data, including: Conference board leading index, Philadelphia Fed business index, FHFA house price index, initial jobless claims and continuing claims. Finally on Friday, Japan will release data on the buying of Japanese bonds and stocks early in the morning. In France, there is the final reading of 2Q GDP and wages. Over in Canada, there is the August inflation and retail sales. Elsewhere, the Markit PMIs on services, manufacturing and Composite will be available for the US, Eurozone,Germany and France

Onto other events, on Monday, US’s lead negotiator on the NAFTA talks will speak and lay out the US’s priorities. There are also other speakers, including: i) BOE’s governor Mark Carney giving a lecture at IMF’s headquarters, ii) Bank of Canada’s deputy governor Timothy Lane, iii) ECB’s supervisory board member Angeloni speaking at an Italian banking conference, as well as iv) Germany’s Merkel and EC President Juncker speaking at the 75th birthday of Germany’s longest serving finance minister. Moving to Tuesday, there is the general debate of the UN general assembly and Germany’s Merkel will give a preelection interview to RTL television. Turning to Wednesday, there is the FOMC rate decision in the US, followed by Yellen’s speech at 14:30 EDT. Elsewhere, EU’s Chief Brexit negotiator Michael Barnier will speak and the OPEC’s panel of technical representatives will meet to discuss production cuts. Then onto Thursday, there is the BOJ rate decision. Back in Europe, the ECB’s Mario Draghi will give a welcome address at the European systemic risk board’s annual conference in Frankfurt and the ECB’s Frank Smets will also speak. Finally, on Friday, we have three Fed speakers, including John Williams, Esther George and Robert Kaplan. Over in Europe, the ECB’s Vice President Constancio will speak and the EU foreign ministers will also hold an informal meeting. In the UK, PM Theresa May will give her big speech updating her government’s position on Brexit.


Which Countries Have The Most Economic Complexity?

As Visual Capitalist's Jeff Desjardins notes, rvery country has an economy that is unique.

In some places, such as the United States or Germany, economies are able to produce many different goods and services that get exported around the world. These countries tend to house world-class businesses in sectors like financials, technology, consumer goods, and healthcare, with companies that produce highly specialized goods like automobiles, software, or pharmaceutical products. Ultimately, these are innovative economies that can roll with the punches, creating growth even when prospects are dim.

In other places, this level of sophistication is just not there. Innovation and knowledge are stunted or non-existent for most industries, and these countries may focus exclusively on one or two goods to pay the bills. Venezuela’s reliance on oil is an obvious example of this, but there are even many Western countries that miss the mark here as well.


In 2009, a team at Harvard formalized a measure of economic complexity that compared nations based on the sophistication of their economies. Now known as the Economic Complexity Index (ECI), the exact measurement is complicated, but it essentially uses data on two main things to uncover the underlying level of economic complexity:

1. Economic Diversity 
Measures how many different products a country can produce.


2. Economic Ubiquity
Measures how many countries are able to make those products.

In other words: if a country produces only a few goods, that economy is not very complex. Further, if a country produces many different products, but they are all simple ones that can be replicated elsewhere, the economy is still not complex. See full details on the project here.


Here are the most complex economies in order, along with the changing rankings over time:

As you’ll notice, the most recent set of data is from 2015.

Topping the list are the economies of Japan (1st), Switzerland (2nd), Germany (3rd), and South Korea (4th). The United States sits in 9th place, and Canada is further down at 33rd.

Australia, which relies heavily on commodities, ranks notably low for Western countries in 73rd place, where it is sandwiched between Kazakhstan and the Dominican Republic.


The most recent iteration of the index also highlighted some movers and shakers over the last 10 year period:

In particular, the crisis in Venezuela has had an effect on economic complexity, eroding any sophistication that existed.

Meanwhile, Cuba’s economy is also in the decline in terms of sophistication – and with major exports including raw sugar (27%), rolled tobacco (15%), nickel (12%), oil (11%), hard liquor (7%), and crustaceans (4%), it’s not hard to see why.

On the opposite side of the spectrum, the Philippines is the biggest mover upwards, ascending 28 spots.

Some African countries are also moving fast up the rankings: Botswana, Malawi, Uganda, and Cameroon each jumped over 20 spots.


How Rich Chinese Use Visa Fixers To Move To The U.S.

Authored by Peter Robison, Karen Weise, Wenxin Fan, and Yan Zhang via Bloomberg.com,

Have a spare $500,000 to invest in an economically distressed American area (that actually isn’t distressed at all)? China’s EB-5 fixers will help you every step of the way

One summer Saturday in 2013, Vivian Ding took the stage in the grand ballroom of Shanghai’s Shangri-La Hotel to hold forth on a subject in which she was both an expert and an inspiration: emigrating to the U.S.

Tall, with a commanding presence, Ding is what you might get if Tony Robbins were a Chinese woman capable of both pumping up a cavernous ballroom and filling out an I-526, the Immigrant Petition by Alien Entrepreneur form. Standing next to a 6-foot-high pyramid draped in black velvet, she recounted her own move to America and described the prestigious U.S. high school her daughters attended, thanks to a program that lets immigrants invest in new commercial enterprises in exchange for permanent residency visas—green cards. The cloth was pulled to reveal a model of a Manhattan building: the glassy residences on the Hudson River now known as Via 57 West. Sign a contract that day to lend $500,000, help build a “landmark for mankind”—and take home a prize, Ding implored the audience. That day, the prize was an iPad mini.

Ellis Liu, a finance manager at a company that runs internet cafes, was in the audience. He didn’t sign up on the spot, but he couldn’t shake the idea. Shanghai had become so smoggy; his young son was constantly sneezing. A few months later, he paid $50,000 in fees to Ding’s company, Qiaowai, and got money from his father to make a $500,000 investment in another New York project, to bring Wi-Fi to the city’s subway system. Then he settled in for the four-year wait before, conditional visa in hand, he’d be able to begin job hunting in Los Angeles.

Some immigrants pile into rafts or fishing boats to get to America. Others try to slip past the cameras and sensors along the southern border. And many simply pay up via the EB-5 visa program, through which U.S. Citizenship and Immigration Services issues 10,000 conditional green cards annually. By investing $500,000 in areas deemed economically distressed, prospective immigrants can get temporary U.S. residence for themselves and their families. Anyone whose investment creates 10 jobs can apply to become a permanent resident.

When the program started, in 1990, Congress was squeamish about creating the impression that U.S. visas were for sale, so the law specifies that investors’ money must be at risk. The hope was that the program would jump-start development in moribund rural areas. But it languished unused for years, until developers in New York and other large cities figured out how to get just about any area to qualify as distressed, and the program took off. In recent years more than 90 percent of EB-5 investments have been in cities, and about three-quarters in real estate—often luxury residential properties in Manhattan. Most of the money comes from Chinese investors lined up by fixers such as Ding, who flood WeChat with advertisements and bring over American politicians to attach their names to projects, like Hollywood stars hawking whiskey in Japan.

Post-Brexit, mid-Trump, borders appear to be tightening, but China’s visa fixers still sell a world of limitless possibilities. They’ve turned some of the world’s most forbidding bureaucratic machinery into a kind of consumer good for China’s rising wealthy class. “No other country in the world comes anywhere near the Chinese market in terms of the network of agents,” says Philadelphia attorney Ron Klasko, who heads the American Immigration Lawyers Association’s EB-5 committee. At least 1,000 migration agents are registered in China, and industry participants say there are many more unofficial ones. “Some operate at an exceedingly high level,” Klasko says, “and some do not.”

Ding’s company, Qiaowai, inadvertently put the industry under additional scrutiny in May when it hosted an event at the Beijing Ritz-Carlton headlined by Nicole Meyer, the sister of Jared Kushner, President Trump’s son-in-law and a White House adviser. She was seeking investors for One Journal Square, a pair of apartment towers Kushner Cos. is building in Jersey City overlooking Manhattan. Meyer said the project “means a lot to me and my entire family.” At one point in the session, a photo of Trump was displayed on a giant screen. Qiaowai had published advertisements inviting investors to consider the “government-supported” development, which, it claimed, “in a real sense guarantees a permanent green card and the safety of the investment principal.”

Meyer’s remarks were immediately reported by international news agencies, and a Kushner Cos. spokesman apologized. Qiaowai pulled the advertisements. Federal prosecutors later sought emails and documents from Kushner Cos., which said it “did nothing improper” and is “cooperating with legal requests for information.” Kushner Cos.’ partner in One Journal Square, KABR Group, told CNN in August that the two companies were no longer seeking EB-5 financing for the project.

The incident was a gift for the significant number of congressional members who’ve grown to despise the EB-5 program. Some can’t get over the idea that it smacks of selling citizenship. Others say the program is dirty and point to a series of scams that have defrauded foreign investors and put U.S. citizens in jail. Still others say the program has enriched middlemen and a few big-city developers while doing almost nothing for the parts of the country it was designed to help. Republican Senator Charles Grassley of Iowa—a state that hasn’t seen an EB-5 project since 2010, according to the Iowa Economic Development Authority—is perhaps the most vocal and vehement critic. He’s asked the Department of Homeland Security, which oversees immigration to the U.S., to investigate “potentially fraudulent statements and misrepresentations” made by Qiaowai in promoting the Kushner buildings.

Chinese agents have heard this all before. “An agent said to me once, ‘You know, we make a lot of money every time you cry wolf,’ ” recalls Robert Whyte, a Los Angeles banker who advises U.S. developers on EB-5 compliance. “They go out there and sell ‘This is your last opportunity!’ knowing full well it’s not.”

Mickey Rowley was running the Greater Philadelphia Hotel Association when Pennsylvania Governor Ed Rendell named him, in 2003, deputy secretary for tourism, film, and economic development marketing. A few years into his tenure, someone asked him to look into using EB-5 funding to attract film production to the state. After all, moviemaking, like condo construction, creates jobs. His colleagues shrugged when he told them he was headed to China to round up $60 million from immigrant investors. “They were like, ‘Go get ’em, sport,’ ” he recalls.

He had the commitments in 12 days. EB-5 loans were eventually used to make the Russell Crowe thriller The Next Three Days and the slasher flick My Bloody Valentine 3D, among others, in Pittsburgh. And Rowley—suddenly regarded as a China expert—returned a half-dozen times to raise money for projects across the state.

What made it so easy, Rowley says, were the agents. They waited in his hotel lobby each morning. They stood at attention until he took his seat at dinner. And during meals, he says, “no one takes food off the Lazy Susan until I take food off the Lazy Susan. These agents really suck up to you.” They would offer him a car and driver, restaurant reservations, invitations to karaoke. “I never paid for anything,” Rowley says. “I was never alone. I was handled right up to the hotel lobby.”

He also came to understand the extent to which the agents traded in proximity to power—sometimes physically. One agent sublet space in Pennsylvania’s trade office in Shanghai to impress clients. At presentations, Rowley spoke in English as an agent translated. It could be awkward. Standing before an audience in Wuhan, wearing a tie with a map of Pittsburgh on it, he tried to connect by saying he felt at home because rivers flowed through both cities. But what he’d meant as a little flourish died as the agent held up his own tie, pointed to it, and told the audience something like, “This guy’s tie has a map of Pittsburgh.” As Rowley gave more speeches, he noticed that people listened intently when the governor’s name came up. So he made it part of his talks. “I always made casual mention of a conversation when ‘I was just speaking to our governor the other day about Chinese investment,’ ” he says.

Agents sometimes exploited the language barrier. Rowley remembers one having a long and animated discussion in Chinese with an audience member. Others jumped in. A Chinese-speaking American told him afterward that the agent had reassured the audience member he didn’t need to worry that he’d been in the Communist Party. Someone told the agent she was mistaken. The U.S. generally denies visas to current and former party members.

With EB-5 loans, developers pay interest rates of 4 percent to 8 percent a year, compared with commercial alternatives of 10 percent to 18 percent. The developers latched onto the program during the Great Recession and now count on it for a big part of their financing; the value of all EB-5 loans jumped from $240 million in 2007 to $4.4 billion in 2015, according to financial adviser Brandlin & Associates.

Agents make money on both sides of the deal. In addition to a fee of about $50,000 paid by each investor, they claim as much as half of the interest payments made by the developer. Middlemen in the U.S., who bundle EB-5 investments for developers, get most of the rest. The immigrant investor typically gets 0.5 percent or less.

But many aren’t interested in their rate of return. They want the visa—and a project that’s sure to succeed. If it fails, there’s a chance they’ll lose both their principal and their shot at a green card. Agents who can quickly deliver investors likely to get initial approval from U.S. immigration can get a bigger piece of the interest payments from developers, Klasko says. And agents connected to good projects can charge investors more. “China is nothing if not a capitalist society—it’s all negotiated,” he says.

The pay quickly adds up, particularly for large companies such as Qiaowai, which says it has 600 employees in 15 Chinese cities. Last year the U.S. received about 11,000 immigration petitions from Chinese investors, and Qiaowai claims it accounts for a third of the EB-5 market in China. If each of those approximately 3,700 petitioners who were Qiaowai clients paid a typical $50,000 fee, Ding’s company made something like $185 million, not including interest payments. Qiaowai and Ding didn’t respond to multiple requests for comment for this article.

Ding places her personal American success story at the center of Qiaowai’s marketing, sometimes inviting her twin daughters, who went to the same prep school in Dallas as George W. Bush’s twins, to join her on stage. The company has posted photos on social media of Ding at Trump’s inauguration and at a post-inaugural party called the Liberty Ball.

Agents are responsible for finding the hook that will make each project appeal to Chinese investors. Often, it’s an American politician or celebrity. “They completely trust the American government,” Rowley says, “despite the fact they don’t trust their own government.” Last year former New York Mayor Rudy Giuliani spoke in Beijing and Shanghai at Qiaowai seminars for Maefield Development’s renovation of a Times Square theatre. Giuliani, who was billed as “the father of the Times Square revival,” gave short speeches on the strength of the New York economy.

In 2013, Qiaowai helped raise $50 million in EB-5 loans for a Jersey City tower known as Trump Bay Street, built by Kushner Cos. It was a fallow moment for the family brand. “Nobody knew who Kushner was, and we felt Trump was a funny character,” recalls Lily Wang, a former Qiaowai manager who now runs the competing Guanyi Investment Consulting Group. “He was no Buffett, and leveraging on him could not be convincing.” Qiaowai instead promoted the project’s proximity to Manhattan. A video put viewers behind the wheel of a car driving through Jersey City as Woke Up This Morning, the theme song from The Sopranos, played. It was still a difficult sell; Wang says it took Qiaowai a year to find 100 investors for the Trump-Kushner project.

In June, a month after Qiaowai held the event in Beijing featuring Nicole Meyer and the big photo of Trump, people crowded into the grand ballroom in Shanghai’s Four Seasons Hotel for another Qiaowai seminar. Two massive TV screens looped a video profile of Ding and shorter stories about successful immigrants. “These are all true stories,” Song Ying, a sales manager, told the crowd. Qiaowai hadn’t had an easy start with the EB-5 program, she confided. Early clients doubted they’d get their $500,000 back. When the first of them did, Song recalled, they threw a party.

This day, Song was announcing the company’s newest project (its 88th, according to the company website), a Criterion Group development on the Astoria waterfront in Queens, N.Y. Even though congressional critics were calling for an investigation of Qiaowai’s claims at the Kushner event, Song repeated the pitch. “Choose Qiaowai,” she told attendees, “you will get what you want. Guaranteed.”

At the seminar’s next session, a tax expert highlighted an important benefit of emigrating to the U.S.: The country hasn’t signed on to an automated international information exchange, designed to reduce tax evasion, that China had just joined. “The Chinese government won’t know how much money you have in the U.S.,” he said to a room of investors, some of whom rose to snap photos of his slide presentation.

The families, some with toddlers, spilled from the ballroom into a foyer. There, more experts stood by to answer prospective investors’ questions on housing, education, and other aspects of resettlement. Jannie Zhang, a business development officer from the China offices of Standard Chartered Plc, was there to advise on perhaps the most important concern: getting money out of the country. China allows its citizens to move only $50,000 abroad each year, far below the minimum EB-5 investment of $500,000. To get around this, investors often line up friends and family, or even pay strangers, to wire money overseas, a process known as “ant moving.”

China monitors transfers from multiple sources into a single overseas account. Zhang told people that transferring money out of mainland China into multiple overseas accounts, instead of just one, should be enough to avoid the government’s attention. She said investors could open an account at one of the bank’s branches in China for 500,000 yuan ($76,500) and get additional accounts in Hong Kong or Singapore. From there, the money could be routed freely to the U.S. “This is a service that we are not allowed to promote proactively,” Zhang said. “But we can answer questions.”

Not every agent can afford Qiaowai’s trappings at the Four Seasons. Two smaller operations set up shop in smaller conference rooms next door, and in the lobby, a man approached every person leaving the hotel who carried one of Qiaowai’s gray tote bags. “Do you need immigration service?” he asked. “Take my card.”

In 2009, as Chinese investors were flocking to EB-5, Larry Wang, founder of Well Trend United Consulting, a large immigration agency based in Beijing, joined a nationally televised debate about the program. Some participants argued that it was unfair to China—just a way for the U.S. to squeeze money out of the country during the Great Recession. Wang, an EB-5 supporter, countered that the program was good so long as agents brought solid projects to their customers. Thinking back on that debate today, he says, he wishes he’d been more critical. “It’s getting too popular in China,” he says. “Are most Chinese clients knowledgeable enough? Are most agents good enough, capable enough to handle the situations? I don’t think so.” Wang learned the hard way about the risk that clients will be swept up in fraud. In 2010, Well Trend found four investors to supply $500,000 apiece in EB-5 funding for a factory that a Beverly Hills businessman was proposing to build in Moberly, Mo., 130 miles east of Kansas City. The facility was meant to produce Sweet-O, an artificial sugar substitute developed by a company called Mamtek. The city of Moberly sold $39 million in bonds to help fund the project.

A year later, Mamtek was broke. The businessman, Bruce Cole, was charged with theft and fraud after it emerged that he’d used the money to avoid foreclosure on his California home. He pleaded guilty and was sentenced in 2014 to seven years in prison. The city defaulted on its bonds, and investors lost their money. Wang says he personally repaid his clients $2.5 million to cover their lost investment and other fees.

In 2013 the U.S. Securities and Exchange Commission issued an alert warning investors to avoid companies that guarantee returns or visas or that claim to be supported by the U.S. government. But frauds big and small continue to haunt the program. In Seattle, a Tibetan monk-turned-developer was recently sentenced to four years in federal prison for misusing money he raised from more than 280 Chinese investors. Another developer misused $200 million in EB-5 money raised from 731 investors to build a biotech center in rural Vermont, according to the SEC. The commission also says it’s stopped some scams in progress, including one in which a man raised about $160 million from more than 290 Chinese nationals for the “World’s First Zero Carbon Emission Platinum LEED certified” hotel in Chicago, then never even went so far as to apply for building permits. The investors got $147 million of their money back—and those who were still interested had no choice but to start the process over again.

The U.S. hit its annual quota of 10,000 EB-5 visas for the first time in 2014. Eighty-five percent of them went to Chinese nationals. The quota system stipulates that no country’s citizens can claim more than 7 percent of the total EB-5 visas in a year, as long as any other country wants them. But demand from outside China is small—though it’s growing—so in practice, citizens of every other country go directly to the front of the line and Chinese investors hoover up whatever’s left. The most visas ever claimed by a country other than China was 903, by South Korea in 2009.

Just before Trump took office, Homeland Security proposed rules that would raise the minimum investment for an EB-5 visa to $1.35 million and tighten the qualifications for distressed areas. The Trump administration hasn’t yet made clear whether the rules will go into effect.

Congress, for its part, continues to scrutinize the program. Primarily because of opposition by Grassley, Democratic Senator Dianne Feinstein of California, and a few others, EB-5 has been surviving on short-term extensions for the past two years. Feinstein wants to kill the program entirely.

But that appears to be a minority view. Most politicians find it hard to turn down any program that promises economic development, and even some of those who take a hard line on immigration can stomach EB-5. In July, Senator Ted Cruz spoke in San Francisco at the EB-5 & Investment Immigration Convention. The Texas Republican told attendees that EB-5 creates jobs at zero taxpayer expense. The program also meshes with the priorities Trump set in his immigration proposal to curtail family preferences while maintaining those based on skills or wealth. Trump and his son-in-law, of course, have benefited from the program themselves through the Jersey City project. Kushner says he’s recused himself from any administration decisions on EB-5.

It may be that the only losers in this system are the prospective immigrants. Over the past four years, 13 percent of EB-5 loans failed to perform, more than twice the rate of commercial mortgage-backed securities, according to Mark Elletson, managing director at Brandlin & Associates. Lance Jurich, a Los Angeles bankruptcy attorney, says he’s been hearing lately from more EB-5 investors, and they’re often in a tough spot, because their loans are typically junior to others in bankruptcy proceedings. In addition to getting their principal back, Jurich’s EB-5 clients want help proving their money created jobs while the project was still viable, so they can maintain their immigration status. “When you’re representing a financial institution like a bank, the loan officers don’t get deported if the project fails,” Jurich says.

Basic math is also working against aspiring immigrants. The number of visas available to Chinese nationals is falling—to about 7,500 in 2016—as more people from other countries apply for the program. There are now so many pending applications from China that the U.S. government estimates a Chinese investor filing now may have to wait 10 years from the time he forks over his $500,000 to when he gets approval to move to the U.S. Liu, who paid his money in late 2013, didn’t get an interview with a U.S. visa officer until this May. He flew to Guangzhou, where a visa officer at a U.S. field office, seemingly without a glance at the files Qiaowai had prepared for him, granted him, his wife, and their son conditional visas good for two years.

In September, Liu plans to visit Los Angeles and see Disneyland with his family. Then he’ll start looking for a job in the area. He’s trying not to share his unease about the uncertainty of the visa process. “I’m actually quite worried,” he says. “But I leave the pressure to myself.”

As the backlog in the U.S. builds, Chinese agents see a new kind of opportunity: They’re trying to sell clients on destinations where investor visas are easier to obtain. At the seminar in June, Qiaowai’s Song suggested investors check out Malta, which is part of the European Union. It’s pricey, but fast. And there are other options. Whyte, the consultant, isn’t convinced of the potential. “The agents say to me, ‘My clients are also considering Australia,’ ” he says. “And I say, ‘Let them go to Australia. Go ahead!’ They want to come to America.”