The problems for Elon Musk continue to pile up in all directions around him. 

Of the many outstanding issues Musk and Tesla (not to mention Twitter) are dealing with is a 2017 lawsuit that called the company a “hotbed for racist behavior.” The plaintiff in that case, Marcus Vaughn, is now trying to add more than 100 workers to the lawsuit. 

Tesla meanwhile has asked a California appeals court to force the complaint into private arbitration, which would prevent a class action status, Bloomberg reported Thursday. 

Five years ago, Vaughn had claimed that “racial discrimination and harassment were widespread at Tesla’s factory in Fremont, California”. The company punched back in a blog post and fired three employees after looking into some of the incidents in question. 

Vaughn said he heard the “N-word” used at least 100 times while working at Fremont. He also said that employees called the factory “the plantation” or “slaveship.” 

Vaughn’s lawyers certainly smell blood in the water at Tesla – they also represented a former elevator operator at the company who won a $137 million jury verdict over the company last year for discrimination. 

That case is now in appeals and is expected to be settled within 90 days, Bloomberg noted. 

Authored by Eva Fu via The Epoch Times,

The recently revealed censorship that has plagued Twitter in recent years is “criminal,” according to former White House COVID adviser Dr. Scott Atlas, as it allowed “lies to be imposed on the public” during a pandemic that wrought untold damage worldwide.

“When correct science policy is blocked, people die, and people died from the censorship,” Atlas, a special coronavirus adviser during the Trump administration and contributor to The Epoch Times, said in an interview.

Atlas was speaking days after Elon Musk, the new owner of Twitter, released troves of internal files showing how the previous Twitter team built a blacklist to limit disfavored tweets’ visibility without the knowledge of those using the platform. Among those flagged was Dr. Jay Bhattacharya of Stanford, whose tweet criticizing pandemic lockdowns shortly after joining the platform last August got him on the “trends blacklist” preventing the amplification of his tweets.

But such revelations, Atlas said, are “only the tip of the iceberg.”

“There’s a far larger story here that we need to hear,” he said, which he considers “far more nefarious and more systemic than isolated tweets being pulled down.”

“This seems to be criminal behavior, and I think it needs to be investigated in the courts,” he said.

The Censorship of 2020

Atlas wants to direct attention back to 2020, when health officials followed in the Chinese Communist Party’s footsteps to implement blanket COVID-19 lockdowns.

In November of that year, while Atlas was still on the White House’s coronavirus task force, Twitter took down his post that argued mask-wearing was not effective in curbing the spread of the virus—a decision celebrated by some proponents of the measures, including fellow task force member Dr. Deborah Birx.

“One would think that the American public should hear what the adviser to the president is saying during the pandemic of 2020. Yet Twitter decided to simply block that discussion from the public,” he said.

Both Twitter and Facebook that August also removed a video from President Donald Trump in which he said children are “almost immune” to COVID-19. That same month, Facebook said it had deleted 7 million pieces of content it deemed to be COVID-19 misinformation over the second quarter of 2020.

Despite most states having a mask mandate until early this year, a number of studies found children and teenagers to be at a far lower risk of getting or dying from COVID-19, even with the emergence of new variants. But the “censorship of 2020,” be it deleting individual tweets, suspending accounts, or blocking the amplification of posts, had done its damage.

“When decisions were being made in 2020 and imposed upon the public, that’s when censorship counted the most,” Atlas said.

The absence of alternative viewpoints manipulated not only the public, but government officials as well, Atlas said.

“It created this illusion that there was a consensus among science and public health policy experts that lockdowns should be imposed; it created and perpetrated lies that if you were opposed to lockdowns, you were choosing the economy over lives, and that if you were opposed to lockdowns, you were somehow calling for letting the infection spread without any mitigation whatsoever,” he said.

“They absolutely contributed to policies that killed massive numbers of people and destroyed children and low-income people, who are the most vulnerable. That’s why it’s criminal.”

Atlas has been a vocal critic of COVID-19 lockdowns since early on in the pandemic, saying that “targeted protection was the logical, safer, and ethical way to manage the pandemic.” In May 2020, he wrote an article for the Hill warning about the “millions of years of life” such policies would cost Americans.

Learning loss aside, the pandemic restrictions led to an explosion of child abuse, drug overdoses, mental health issues, and obesity among youth, who were deprived of normal social interaction and forced to continue schooling through remote learning.

Collectively, America’s social media and legacy media, “coupled with incompetent bureaucrats running the policy and ignorant university professors have left a sinful legacy of damage,” said Atlas—the reason for the massive loss of trust in public health agencies that people depend for guidance in future crises.

Former Twitter CEO Jack Dorsey recently said his “biggest mistake” while at the company was to “invest in building tools for us to manage the public conversation, versus building tools for the people using Twitter to easily manage it for themselves,” a decision he said has “burdened the company with too much power.”

Late last month, Musk announced an end to the COVID-19 “misleading information” policy, which has resulted in 100,000 pieces of content cut from the platform and more than 11,000 account suspensions.

Atlas welcomed the gesture but thought that more individuals need to “rise up” for real change.

“There should be a public outrage that is massive,” he said.

He believes those the American public elected to represent them haven’t done their part.

“Where are our elected officials in this, where are they?” he asked. “If they can’t act, simply for ensuring free speech, they should all step down.”

‘Distortion’ Around Vaccine Mandates

A recent study published in Nature of over 15,000 citizens across 21 countries shows that people who have received COVID-19 vaccines are far more likely to be prejudiced against the unvaccinated than the other way around, which Atlas saw as yet another illustration of how social media censorship has shaped public opinion through suppressing critical information.

More than 5.47 billion people worldwide have received at least one dose of one of the COVID-19 vaccines, accounting for roughly 70 percent of the world population, despite a “thorough, detailed understanding of efficacy and side effects from the vaccines,” Atlas noted.

But because of the lockdown mandates, which he called “pseudo-scientific,” throngs of workers in healthcare, education, and the military lost their jobs and hospitals suffered staffing shortages, causing backlogs of patients needing vital treatment for other non-COVID-19 diseases.

In perpetrating a “false narrative,” social media platforms have deviated from their promised role as a digital town hall and a visible source of information, and instead allowed themselves to be a tool for harm, said Atlas.

“We are living in an Orwellian society if this sort of censorship is allowed to keep going.”

Atlas faced considerable pressure in 2020 for airing his views on COVID-19 and resigned after four months of repeated clashes with other members of the task force. But he said this “character assassination” won’t stop him from doing what he believes is right.

He quoted English writer G. K. Chesterton: “Right is right even if nobody does it. Wrong is wrong even if everybody is wrong about it.”

Thousands from around the world, he said, have written to him encouraging him to keep speaking up, including some “whose family members had committed suicide from the lockdowns and many in the health profession who said they were “afraid to step forward.”

“We need people with integrity to rise up when the pressure is on, and when you do that, you empower other people to speak up.”

Authored by Jonathan Turley via jonathanturley.org,

Despite my support for Elon Musk’s continuing efforts to reduce censorship and restore free speech protections on Twitter, I have been critical of some of his moves from his use of polls on restoring certain posters to the suspensions of media figures this week. However, this morning, I was struck by the European Union (EU) rushing into the controversy to threaten, again, sanctions against Musk. The EU is apparently aghast that Twitter could suspend media even temporarily after ignoring the bans on conservative media for years under the old management.

I understand Musk’s view of such tracking as a form of doxxing (particularly after a man reportedly used the information to attack the car with one of his children inside). Doxxing has long been subject to suspension. Indeed, figures connected mainstream media from CNN to the Washington Post have been previously accused of doxxing. Liberal groups were accused of doxxing conservative justices and others, including dangerously posting information on the children of Justice Amy Coney Barrett. It does not seem to matter when the targets are conservative, Republican, or libertarian.

However, it was the appearance of the EU that was most jarring. We have been discussing efforts by figures like Hillary Clinton to enlist European countries to force Twitter to restore censorship rules. Unable to rely on corporate censorship or convince users to embrace censorship, Clinton and others are resorting to good old-fashioned state censorship, even asking other countries to censor the speech of American citizens. It is an easy case to make given the long criminalization of speech in countries like France, Germany, and England.

The EU responded immediately by threatening Musk that restoring free speech could result immediate sanctions or an entire ban.  Now, EU commissioner Vera Jourova warned that the EU’s Digital Services Act was preparing to act to defend press freedom: “Elon Musk should be aware of that. There are red lines. And sanctions, soon.”

Jourova’s self-righteous tirade was almost comical given the EU long-standing attacks on free speech and silence of prior media suspensions. Jourova insisted “[The] EU’s Digital Services Act requires respect of media freedom and fundamental rights. This is reinforced under our Media Freedom Act.”

Really? Where was Jourova and the EU when Twitter was aggressively suspending media like the New York Post for publishing the true story of Hunter Biden’s laptop? How about the slew of conservative writers and experts barred for questioning official accounts on issues ranging from Covid to climate change?

…How about the slew of conservative writers and experts barred for questioning official accounts on issues ranging from Covid to climate change? The past suspension of writers like Greg Piper, Alex Berenson, and others was not nearly as concerning for the EU.

— Jonathan Turley (@JonathanTurley) December 16, 2022

Not surprisingly, the EU is threatening to use the unprecedented anti-free speech law recently passed by the body.

For years, some of us have denounced the EU’s efforts to pass the Digital Services Act, a roadmap for state censorship on the Internet. It is the Western embrace of Chinese style speech controls on the Internet. The chief censor in the West has been Breton, who has shown open contempt for free speech values.

Breton has made no secret that he views free speech as a danger coming from the United States that needs to be walled off from the Internet. He previously declared that, with the DSA, the EU is now able to prevent the Internet from again becoming a place for largely unregulated free speech, which he referred to as the “Wild West” period of the Internet.

Jourova has also been a leading anti-free speech voice globally. She has pressed the United States for greater and greater censorship, declaring “democracies may die in noise and cacophony.” She wanted the tiddy silence and order that comes from state imposed censorship.

Now, however, Jourova is deeply upset that some are being suspended as part of an anti-doxxing rule. Of course, the past suspension of writers like Greg Piper, Alex Berenson, and others was not nearly as concerning for the EU. The “red line” was only crossed when favored media were subject to such suspensions. The fact that this comes soon after threatening Musk not to restore free speech rights only makes the EU’s position more maddeningly conflicted and obtuse.

While I disagree with the scope of this action, I still support his efforts at Twitter in the fact of an all-out-war declared by an alliance of political, media, and business interests. Musk has dismantled one of the most massive censorship systems in the world. Many of us in the free speech community will not hesitate to call him out when he is wrong, but the EU and many of these anti-free speech figures can spare us the transparent outrage after years of supporting censorship.

Just last month, EU officials were threatening @ElonMusk with sanctions and other legal reprisals if he doesn’t censor more.

Now they’re threatening him with sanctions due to last night’s bans.

Do you see the issue? Zero principles. Just whether the right people are censored: pic.twitter.com/Uv46J6jJJ0

— Glenn Greenwald (@ggreenwald) December 16, 2022

The Russian government has said one of its diplomats stationed in Africa was hospitalized Friday after opening a letter bomb, which detonated upon opening. 

“Dmitry Sitiy, who runs the Bangui branch of Russian House, a state-funded cultural center that promotes Russian culture around the world, collected a parcel addressed to him from a DHL office earlier on Friday, according to a source in the Russian Embassy cited by news agency RIA Novosti,” The Moscow Times writes, citing state sources.

“The parcel — which had no return address on it — later detonated when Sitiy opened it at his home. Sitiy was hospitalized, although the severity of his injuries remains unclear,” authorities detailed.

Police in the Central African Republic, or CAR, called it a terrorist act, describing further that the diplomat had previously received death threats.

“Earlier, he received the first package, and when he opened it, there were threats in it,” CAR police chief Bienvenue Zokoue said. “He contacted me so that I could help him identify the person who sent it.”

Russia’s foreign ministry subsequently described that the mail bomb was a deliberate attempt by nefarious entities to “harm” ties between Moscow and the CAR government. 

“We strongly condemn this criminal action, which is clearly intended to hinder the activities of the Russian House in Bangui and, more broadly, to harm the successful development of friendly relations between our two countries,” the ministry said.

It’s unclear if the mail bomb attack is related to the ongoing Ukraine war, but the last month has witnessed a string of mysterious parcel bomb incidents at European as well as Ukrainian consulates and embassies across Europe. The US Embassy in Madrid at one point even had a mail bomb sent to it, which was intercepted by security services before it arrived on the grounds in a December 1st incident.

Dmitri Sytiy, the nominal founder of Wagner-linked Prigozhin firm Lobaye Invest in the Central African Republic, reportedly hospitalized after being injured by a mail bomb. Prigozhin blames France via Concord Press Service on VK. https://t.co/Gsy6pWm4eq

— Jack Margolin (@Jack_Mrgln) December 16, 2022

One aspect to tensions over Russia’s presence in central Africa is the activities of Wagner Mercenaries. French officials in the same region have complained of the threat and shady activities of the Putin-linked Russian security firm, so it’s possible the mail bomb attack on the diplomat may be related to these ongoing tensions, and also could be related to the Ukraine conflict.

Some reports are saying Sitiy is in serious condition, and CAR authorities along with the Russian Embassy are conducting a full investigation.

By Michael Every of Rabobank

2022 was a year dominated by inflation, capped off with a week of 50bp rate hikes from the Fed, the BOE, and the ECB, and even the suggestion of less ridiculously-easy BOJ monetary policy.

Stefan Koopman (see ‘Division!’) underlines the BOE’s 2-6-1 split decision to hike 50bp to 3.50%, with two votes for no change and one for 75bp. He thinks the downshift to 50bp combined with the net dovish dissent signals the MPC is looking for a landing zone in H1 2023, but that it will take some time to get there, particularly due to the tight labour market. He forecasts a terminal BOE rate of 4.75%. The math issue is if the BOE is doing long division.

The ECB also went 50bp, taking the deposit rate to 2%, and reportedly this was only not 75bp due to Lagarde emphasizing several more 50bp hikes to come: one in February, and another one or two after that, which is a clear upside risks to our forecast of another 50bp in February followed by two 25bp hikes (see ‘More to Follow’). Note that even that would not put the deposit rate above the projected level of core CPI by end-2023 (4.2%). Indeed, the updated ECB projections show it missing its inflation target through to end-2025. It therefore intends to maintain restrictive rates, and QT is starting soon too, thought with no active sales of securities.

There were few takers in December 2021 for the view that 2022 would end with rates here, with the promise of them moving higher. However, the risks were visible: the logistics industry was tearing its hair out over how Deep the Ship was that we were in, and military experts were doing the same over Russia’s troop build-up. Have lessons been learned as we head into 2023?

On rates, the market is only very reluctantly being disavowed that imminent pivots loom. The room for further volatility in terms of the level of yields, if not the flattening of curves, as well as in key FX crosses, as the reality of what is actually happening sinks in remains.

On geopolitics, there is still little market focus on potential flashpoints outside Ukraine –although CEOs are aware– and the market is pricing that the Ukraine War is dialling down despite Ukrainians and Russians both saying they are in this for the long haul, and the former just saying that the latter will try for Kyiv again at some point eventually.

In logistics, markets are confusing a collapse in demand with an improvement in supply. First, the absence of ships off the port of LA/Long Beach is due to the slump in retail sales reported this week, but also due to firms moving to other, now more strained, US ports: don’t believe charts showing LA/LB backlogs as a metric of supply chains ‘healing’. Second, if the scale of Covid disruption about to hit China had coincided with demand remaining where it was, we would again be seeing stories of goods shortages and even more rampant supply-side inflation. Third, while ocean carrying rates on most (not all) routes are back to more normal levels, that is in the face of a looming recession: and blank sailings and scrapping older tonnage aims to bring supply down to lower demand to keep freight rates up.  

Indeed, the industry is not learning much from 2022. Shipping Australia warns of ‘Five problems that could slow supplies of food, computers, cars and other goods this winter*’ (inflation, labour unrest, energy shortages, geopolitics, and extreme weather), and notes “global external shocks require a total rethink, repurpose and reform of the process of globalisation.” Yet it “cautions against government support for protectionist maritime policies”, is against Aussie trucking too; urges the Productivity Commission’s inquiry into maritime logistics to drop all key proposals; and opposes “the Federal government handing control of supply chain to unions”.

So, there are huge problems – but doing more of the same is the proposed solution. Shipping Australia specifically argues Oz is failed by its version of the US’ Jones Act, which only allows domestically owned and registered vessels with domestic crews to engage in cabotage, or trade between domestic ports, and should scrap it. They also argue the Jones Act is an economic failure for the US, citing pro-union Democrat AOC on how unfair it is on Puerto Rico(!) while arguing for lower maritime wages and increased foreign penetration of an industry with massive national security implications. They even conclude with the Karl Marx quote that history repeats itself, first as tragedy, then as farce – and again as 2022, I might add.   

Their core argument inverts the actual problems 2022 raised, including for central banks. They rightly point out the Jones Act hasn’t seen either the US or Australia build more merchant ships; but they fail to point out that this is the failure of neoliberal capitalism in the face of competition from state capitalism and mercantilism, not the Jones Act. Without beating any nationalist drum, Shipping Australia has NO AUSTRALIAN SHIPS, with membership comprised of Hong Kong, Dutch, Japanese, Taiwanese, Danish, Italian, Djibouti, and Norwegian/Swedish firms. Their argument against “government support for protectionist maritime policies” is against proposals to build a national Aussie carrier to ensure services in an emergency, and to reduce prices in what the White House alleges is a cartelised global industry. The Chair of the Aussie parliament’s Joint Standing Committee on Treaties meanwhile stresses, “Without a sovereign shipping capacity, our economy and security is at risk…. Maintaining an effective maritime capability requires naval capacity, an Australian merchant marine, a shipbuilding and sustainment industry and, of course, a skilled workforce and training framework.” He adds there is no Australian-flagged ship capable of transporting petroleum.

Where this links to central banks is that capital flows where it can make most money – and that isn’t into a rival to a global ocean carrier cartel, however needed. Or into infrastructure; or into productive investment that increases supply. Economies practising mercantilism do all that – and so they dominate said supply. As such, it doesn’t matter how low you set Western rates, because there are financial bubbles to chase instead of vital investments. Yet then you end up with highly vulnerable logistical systems and economies, and rate hikes, as 2022 demonstrated.

Logically, the way to get cheaper long-term ocean carrying without a recession, and the spare capacity to build up one’s navy at short notice, is to have the Jones Act; and a larger ship-building industry and a larger merchant marine. That history is clear for the US: W.L. Marvin (1903) underlines if you don’t control the oceans, you don’t control much – and if you control the oceans militarily, but not economically, you won’t control them for long, because you are literally paying to open the doors to your own rivals. That is why legislation is before Congress to strengthen the Jones Act.

Likewise, it seems the only way to get more supply of reliable key goods is for a protectionist shield for the private sector to operate behind; and state spending to jump start it; and central-bank rate hikes to choke off bubble alternatives. Relatedly, the US Inflation Reduction Act, alongside Europe’s energy crisis, is threatening to suck European industry and jobs to the US. Again, a policy of tax incentives and local content provision alongside state spending –and the failure of Europe’s neoliberal reliance on Russia– is a gamechanger. So much so that Germany’ Scholz says Europe must be included under the same US policy umbrella, like Canada; and France’s Macron warns if Europe doesn’t, then there won’t be much of Europe left, so the EU will then have to respond in kind.

Meanwhile, Indonesia is going a route I spent 2022 arguing would end up being embraced after others have been tried and failed: to get the central bank to cover the fiscal deficits required to jump-start state supply-side spending, even as rates are raised. Its parliament just passed legislation mandating Bank Indonesia to directly finance the budget in times of defined crisis, as it has been doing, while also recognising a digital rupiah as legal tender. I suspect 2023 will be a year in which these kind of thoughts will resurface in ‘developed’ markets too.

In short, whether it be rate hikes, the shift towards mercantilism, or defence spending, we are all keeping up with the Joneses… and getting rid of ‘the Jones Acts’ only makes sense if you think that more neoliberalism is still the cure for all our problems. Which is like saying we need more housing bubbles and exotic derivatives after 2008; more Brexit after Brexit; more QE after QE; more crypto after FTX; more globalisation and integration after Ukraine; and more rate cuts after decades of them ending up with double-digit inflation – but of course these are still popular views in some circles. Yet if you think the Joneses trend won’t have enormous economic, market, and geopolitical consequences then you are making the same error to end-2022 as you would have made at end-2021 when ignoring panicked logistics industry or military experts.

This is my last Daily for 2022, though the Global Daily goes on under other authorship until just before Xmas – so please keep reading! Best wishes from me to all readers.

Happy Friday – and an early Happy New Year.

A 50-foot tall, 264,000-gallon aquarium containing around 1,500 tropical fish burst in the German hotel in the capital of Berlin on Friday, sending fish and water through the lobby and onto the street, along with all sorts of hotel debris – from bellhop trolleys to twisted lamps.

Guests described the scene as a street strewn with dying fish, some of which appeared to have frozen to death in 19-degree F frigid morning temps, the NY Times reports.

According to police, the aquarium – known as the AquaDom, exploded early in the morning. Two people injured by glass shards were taken to a local hospital. Around 100 firefighters arrived on scene, which is currently under investigation.

The incident caused “incredible maritime damage,” according to the police, who noted that the aquarium held around 100 species of tropical fish.

Und so sieht es drin aus #aquarium #berlin pic.twitter.com/QyiImxbxvW

— rbb|24 (@rbb24) December 16, 2022

A video made by Sandra Weeser, a member of the federal Parliament who was staying at the hotel, showed the wreckage of the giant tank amid mangled debris.

In an interview on local television, Ms. Weeser described waking up to a shock wave that she thought was a small earthquake before falling back asleep. When she got up an hour later, she saw dozens of people and firefighters outside the hotel, and was soon guided out of the building herself. -NYT

“It’s a picture of devastation with lots of dead fish and broken shards,” said Weesler. “The ones that might have been saved were frozen to death.”

Update- being evacuated from #radissonblu and #aquadome now. Here’s my view as we left pic.twitter.com/vCjXjZde40

— Larissa (@lararimmer) December 16, 2022

The AquaDom stood 46-feet high, 38-feet in diameter, and cost around $13.6 million to build. It opened in 2003, and underwent a modernization procedure around two years ago. It was described by its makers as the largest cylindrical free-standing aquarium in the world.

The incident resulted in a shutdown of the building’s power, which put other fish at risk housed in smaller aquariums inside the building.

“The fish that have survived are being moved as safely as possible,” said Markus Kamrad, an official at the Berlin Senate. “Our Plan A is to reactivate the electricity. Plan B would be to bring them to a safe location, and we have some offers from places that say they are ready to take them.”

Authored by Simon White, Bloomberg macro strategist,

Equities will remain mired in a bear market until we see a turnaround in global growth, a revival in investor sentiment and positioning, and a resurgence in excess liquidity.

Seasonally, the last quarter of the year is the best for US equities and this year, despite the misery of the bear market (if you’re a long-only investor), the fourth quarter is on course to be by far the best – and only positive – one of the year.

But this is not a new dawn, and even if the year manages to finish on a festive high, the throbbing headache of the bear market will return in 2023, due to (at least) three major headwinds for US stocks.

First, there is the ongoing global slowdown. Higher rates around the world along with protracted Covid restrictions in China have blunted global growth. Rates around the world looked to have turned a corner, and peak global hawkishness is behind us, but it will take time for this to feed through.

Further, in China, even though there is incremental easing in Covid measures, a strong and immediate bounce back can’t be assumed when the populace has been living in fear to a virus most of the rest of the world has adapted to with the help of effective vaccines.

One of the best barometers of global growth is South Korean exports. As a small, open, trading economy, its exports are sensitive to the cross-currents in global growth. As the chart below shows, US earnings will face mounting headwinds while South Korean exports continue to fall. Moreover, we are unlikely to see a bounce in P/Es while inflation remains elevated.

Second, investor sentiment and positioning in equities continues to weaken. Retail-investor cash positions continue to rise to the detriment of their stock allocations, according to the AAII, while institutional cash holdings are below their long-term average, according to BAML.

On top of this, investors continue to pull money out of their stock-margin accounts, to levels only seen in recessions, and consistent with further declines in equity prices.

Finally, and most importantly, equities are highly unlikely to stage a sustainable rally until we see a decisive pivot in excess liquidity, the difference between real money growth and economic growth.

While monetary conditions remain tight, growth is still positive and inflation is elevated, excess liquidity will remain low and act as a major brake on stock prices.

Poland’s police chief Jaroslaw Szymczyk was hospitalized after a “gift” package that he received exploded, according to international reports, after a recent string of similar exploding mail and package incidents across Europe believed related to the war in Ukraine. 

On Thursday Poland’s Interior Ministry confirmed, “Yesterday at 7:50 a.m., an explosion occurred in a room adjacent to the office of the Police Chief.” It’s said that Szymczyk only sustained minor injuries. “During the Police Chief’s working visit to Ukraine on December 11-12 this year, where he met with the heads of the Ukrainian Police and Emergency Situations Service, he received some gifts, one of which exploded,” the statement detailed.

But that’s precisely what’s different and more bizarre about this case, compared to the anonymous threatening packages and in some cases mail bombs which have been sent to embassies and consulates in Europe over the past month which authorities have been scrambling to track down: the exploding “gift” actually came from one of the heads of the Ukrainian services, according to the Polish government. 

“As a result of the explosion, the Commander suffered minor injuries and has been in the hospital for observation since yesterday,” the ministry followed with.

Initially Polish investigators didn’t reveal precisely what the gift was, leaving open the question of whether the Ukrainian side had intentionally given him an ‘exploding gift’.

However, follow-up reports in Polish media said that it was a grenade launcher, thus it appears to have been an accident based on faulty or volatile munitions – or else Polish police may have been handling the weapon improperly indoors. Polish outlet Wyborcza reported [machine translation]:

According to unofficial reports, the cause of the explosion was the launch of a grenade launcher, which was kept in the “secret room” mentioned by the spokesman. There is no certainty as to the cause of the accident, but according to information from one of the people who had access to the scene, the police officers sitting in the room were playing with the grenade launcher.

But that’s just one likely explanation of the incident. Speculation has abounded given how vague all of the initial Polish Interior Ministry statements were. 

The gift in question?

There was reportedly significant damage to the ceiling and floor of the room where the explosion occurred. What continues to make the circumstances strange, however, is that Polish authorities are still demanding the Ukrainian side to “provide relevant explanations” over the ‘gift’ and why it exploded.

Authored by Lance Roberts via RealInvestmentAdvice.com,

In 2023, the math of valuations suggests returns will likely be challenging as markets remain difficult to navigate.

Estimating price targets for the next full trading year is an exercise in futility. Too many variables, from politics to economics to monetary and fiscal policies, can impact market outcomes. However, we can build some ranges based on current valuations when estimating possible and probable returns for the following year.

As discussed previously, using FORWARD operating earnings for any analysis is flawed. The reason is that forward operating earnings today will not be at the same level in the future. Since May 2022, forward earnings estimates have declined by 15%. We suspect estimates will fall further, making forward valuation assumptions unreliable.

When analyzing historical valuations, a shift higher occurred as the Federal Reserve became active in monetary policy. The long-term historical median valuation from 1871 to 1980 is 15.04x earnings. When including 1980 to the present, that long-term media rose to 16.44x earnings. However, as the monetary and fiscal policies employed kept “mean-reverting” events from happening, valuations jumped to 23.38x earnings since 1980.

This analysis gives us three baselines for estimating next year’s potential return ranges. We will have to make several assumptions:

1. We will use Wall Street’s current earnings estimates for a “Soft-Landing Recession” and “No Recession” scenario of $205/share, assuming only valuation adjustment.

2. We will use Wall Street’s estimates for fair value at 17x earnings for a “No Recession” scenario and 15x for a “Mild Recession” outcome.

3. In a “Recession” scenario, we would expect $160/share earnings, equating to a reversion to the growth trend. (Shown below). We will use a valuation adjustment or 15x and earnings reversion to account for a “deep recession” scenario.

As noted, the current earnings estimates for 2023 remain well above the long-term historical 6% peak-to-peak earnings trend throughout history. We will use the recent 15% decline in earnings estimates for the “soft landing” scenario, but history suggests sustaining earnings at these levels will likely prove problematic.

Estimating The Outcomes

The problem with current forward estimates is that several factors must exist to sustain historically high earnings growth.

1. Economic growth must remain stronger than the average 20-year growth rate.

2. Wage and labor growth must reverse to sustain historically elevated profit margins, and,

3. Both interest rates and inflation must reverse to very low levels.

While such is possible, the probabilities are low, as strong economic growth can not exist in a low inflation and interest-rate environment.

However, with that said, we can use the current forward estimates, as shown above, to estimate both a recession and non-recession price target for the S&P 500 as we head into 2023.

In the NO-recession scenario, the assumption is that valuations will fall to 17x earnings over the next year. If such is the case, based on current estimates, then the S&P 500 should theoretically trade at roughly 3500. Given the market is trading at approximately 4000 (time of this writing), such would imply a 12.5% decline from current levels.

However, should the economy slip into a “soft landing” or mild recession and valuations revert to the longer-term median of 15x earnings, such would imply a level of 3100.

While an additional 22.5% decline from current levels seems hostile, such would align with typical recessionary bear markets throughout history.

However, in a “deep recession” scenario, we expect a valuation and an earnings reversion (15x valuations on earnings of $160/share). Such would imply a price target of 2400 or a decline of roughly another 40% from current levels.

While such seems like an unduly large correction from current levels, there are previous precedents in history to suggest the possibility. Such would also align with the Federal Reserve “breaking something” in the credit markets, which impairs market functioning.

The chart below plots both paths for the S&P 500 for a better visual.

Optimistically, we saw the market’s lows in September, and a retest next year will bring valuations down to 17x earnings. Pessimistically, a recession will pull the market below the 2019 peak and revert valuations to 15x earnings, with earnings reverting towards historical growth trends.

Could There Be A Bullish Scenario?

We would be remiss in not giving some assessment for a bullish outcome in 2023. However, for that bullish outcome to take shape, we must consider several factors.

1. We assume the $205/share in year-end estimates remains valid.

2. That the economy avoids a recession even as inflation falls

3. The Federal Reserve pivots to a lower interest rate campaign.

4. Current valuations remain static at 22x earnings.

In this scenario, the S&P 500 should rise from roughly 4000 to 4500 by the end of 2023. Such would imply a 12.5% gain for the year. However, such would not recoup the losses from the market’s peak in 2022.

Adding the bullish scenario to our projection chart gives us a full range of options for 2023, which run the gamut from 4500 to 2400, depending on the various outcomes.

Here is our concern with the bullish scenario. It entirely depends on a “no recession” outcome, and the Fed must reverse its monetary tightening. The issue with that view is that IF the economy does indeed have a soft landing, there is no reason for the Federal Reserve to reverse reducing its balance sheet or lower interest rates.

More importantly, the rise in asset prices eases financial conditions, which reduces the Fed’s ability to bring down inflation. Such would also presumably mean employment remains strong along with wage growth, elevating inflationary pressures.

While the bullish scenario is possible, that outcome faces many challenges in 2023, given the market already trades at fairly lofty valuations. Even in a “soft landing” environment, earnings should weaken, which makes current valuations at 22x earnings more challenging to sustain.

Is A Recession Inevitable?

While the “no recession” case is possible, we struggle with that view.

With the Federal Reserve committed to continued rate hikes in 2023, reducing market liquidity through Quantitative Tightening, and the consumer struggling to make ends meet, the risk of a recession seems quite elevated.

However, if employment remains strong, unemployment doesn’t rise, and wages continue to rise to offset inflation pressures, then it is possible to avoid a recession. The problem is that strong employment and wage growth will add to inflationary pressures. Of course, that is what the Federal Reserve is actively trying to resolve.

A recession seems highly probable if the Fed’s end game is higher unemployment and lower inflation through higher interest rates, which will ultimately slow wage growth. The economic data already seems well tilted into a recessionary trend. However, the composite economic index declines further during a recession, suggesting a deeper reversion in the stock market.

Given the Fed’s ongoing monetary tightening, the risks seem tilted toward weaker economic outcomes. However, as stated previously, the Fed will reverse course when something eventually breaks.

The bullish expectation is that when the Fed finally makes a “policy pivot,” such will end the bear market. While that expectation is not wrong, it may not occur as quickly as the bulls expect. Historically, when the Fed cuts interest rates, such is not the end of equity “bear markets,” but rather the beginning. Such is shown in the chart below of previous “Fed pivots.”

Our best guess is that reality lies somewhere in the middle. Yes, there is a bullish scenario where earnings decline, and a monetary policy reversal leads investors to pay more for lower earnings. But that outcome has a limited lifespan as valuations matter to long-term returns.

As investors, we should hope for lower valuations and prices, which gives us the best potential for long-term returns. Unfortunately, we don’t want the pain of getting there.

Regardless of which scenario plays out in real time, there is a substantial risk of poor returns over the next 12 months.

That is just the math.

A miserable week for global stocks – which wrongfooted traders as risk first soared after a weaker than expected CPI only to tumble more than 7% just two days later – was set to end with even more selling on Friday after hawkish signals from the Fed and the ECB sparked worries about higher-for-longer interest rates leading to a possible recession: the latest economic data signaled a slowdown in US growth; data from France showed that it faces a greater recession risk, with its PMI falling to its lowest level in two years. Similarly UK companies are steeling themselves for an economic contraction, with both the manufacturing and service sectors experiencing a slump in the fourth quarter. Economists now see a 60% probability of recession in the US and an 80% chance in Europe. Equity analysts have cut 12-month earnings estimates for the regions to the lowest levels since March and July, respectively.

Not helping matters is today’s massive, $4 trillion quad-witching option expiration, which as we previewed yesterday threatens to become a liquidity-draining vortex just as CTAs are forced to dump stocks. potentially leading to outsized price moves. With the S&P 500 stuck for weeks within 100 points of peak gamma at the 4,000 strike, the sheer volume provides a positioning reset that could turbocharge market moves. Given the backdrop of hawkish central banks and slowing growth, worries are mounting the expiration will act as an air pocket.

Finally, bitcoin plunged back under $17K following news that accounting firm Mazars has paused work for all crypto clients globally, according to Binance, which was a customer of the auditing firm.

Between all that, it is perhaps surprising that S&P futures are down only 1% while contracts on the Nasdaq 100 dropped 0.62% by 6:56 a.m. in New York. The overnight selloff accelerated when Europe opened as European peripheral bonds blew out amid fears that the ECB’s aggressive tightening and QT will crash the European bond market. The dollar fluctuated and Treasuries dropped across the curve. Oil trimmed a weekly gain, sliding more than 2% amid renewed fears that the Fed is pushing the US into a crash-landing.

The S&P 500 index, already on track for its biggest annual slump since 2008, erased another $1.1 trillion in market capitalization in the past two days after both the Fed and the ECB took a more hawkish tone than expected about how much further rates will need to rise to tame inflation. The MSCI ACWI Index, the global equities gauge, headed for a 1.4% retreat this week.

“The worrying aspect for markets is the rate hike finishing lines are still unknown, and we have the two most dominant central banks in the world climbing the mountain into very restrictive territory,” Stephen Innes, managing partner at SPI Asset Management, wrote in a note. “Hiking interest rates into a dimming macro environment will undoubtedly trigger a recession. The question is just how profound.”

Ann-Katrin Petersen, senior investment strategist at BlackRock Investment Institute, said on Bloomberg Television that central banks were starting to acknowledge they will have to crush growth and will likely engineer recessions to tame inflation.

Among notable moves in US premarket trading, Adobe shares are up 3.7% in premarket trading, after the software company reported adjusted fourth-quarter earnings that beat expectations. Analysts said the report speaks to positive demand for creative design software despite economic uncertainties. Guardant Health shares sank after following disappointing results from a study of its blood test for detecting colorectal cancer in average-risk adults. Here are some other notable premarket movers:

• Amazon (AMZN US) falls 1.3% in premarket trading as JPMorgan cut its price target on the stock to $130 from $145 primarily due to AWS revenue deceleration and margin compression amid challenging macro conditions. .
• Meta Platforms (META US) rises 1.7% in premarket trading as JPMorgan raised the recommendation on the stock to overweight from neutral, citing increased cost discipline and a more favorable revenue outlook.
• Lanvin (LANV US) shares surge 56% in US premarket trading, following a volatile New York trading debut for the luxury group that saw its stock bounce between a gain of as much as 130% and declines of more than 50%.
• Stocks exposed to cryptocurencies drop in US premarket trading, as the price of Bitcoin fell below the $17,000 level after the Binance exchange said French auditor Mazars Group had paused work for all crypto clients globally. Hut 8 Mining (HUT CN) -4.6%, Block (SQ US) -2.1%.

“Recessionary fears raced back to the top of the agenda and any thoughts of a Santa rally have all but evaporated, with previous hopes of peak inflation and interest rates being soundly rejected,” said Richard Hunter, head of markets at Interactive Investor. “Comments from the ECB in particular that ‘we are not slowing down, we are in for the long game’ were in direct contrast to what markets had been pricing in over recent weeks.”

The slump this week also kept the S&P 500 from overcoming a technical downtrend in place since the start of the year, which has put an end to the past three bear-market rallies. The index didn’t convincingly break above its 200-day moving average, and is now close to testing its 50-day moving average, two other closely watched technical thresholds.

Europe’s equity benchmark fell for a third day, to a five-week low. European real-estate stocks were the biggest declinerss in Friday trading, with the subindex for the rate-sensitive sector the biggest laggard on the Stoxx 600, after the ECB on Thursday hit a more hawkish tone than expected alongside its latest rate decision. Stoxx 600 Real Estate sector declines 2.2% with the wider Stoxx 600 -1%. Telecoms and retailers also underperformed as all sectors fell barring autos, which are supported by recent data that showed auto sales in Europe rose for a fourth straight month. Here are some of the biggest European movers:

• Games Workshop shares jump as much as 15%, the most since September 2020, after the maker of the Warhammer series of games said it has reached an agreement in principle for Amazon to develop the company’s intellectual property into film and television productions.
• TeamViewer shares jump as much as 11% to touch their highest level in six months, after the remote- software provider said that it would eventually end its sponsorship partnership with Manchester United
• Hollywood Bowl rises as much as 6.8% to its highest level since June 8 after the bowling chain reported a strong set of FY22 results
• Suedzucker rises as much as 5.9%, adding to yesterday’s 3.3% gains, as Warburg says the German sugar producer’s latest financial update is a “blow-out guidance” for the coming fiscal year.
• OVS shares rise as much as 5.3% in Milan after 9-month results, with Banca Akros upgrading to buy from neutral, noting that the 4Q sales performance is “much higher of our expectation.”
• Rank falls as much as 9.1%, most in two months, after a trading update from the gambling firm.
• Wood shares fall as much as 8% as Barclays cuts the energy services firm to equal-weight
• National Express falls as much as 6.5% after being cut to hold from buy at Liberum, with the broker highlighting that growing headwinds point to a “deleveraging challenge,” according to note.
• Aalberts shares drop as much as 5.1% after the Dutch piping firm announced Wim Pelsma has notified its supervisory board that he wishes to step down as chief executive officer in the second half of 2023
• Tele2 shares drop as much as 4.7% after Redburn analyst Steve Malcolm cut the recommendation to sell from neutral, citing a potential 2023 guidance cut.

Asian equities fell Friday, extending the week’s decline, as hawkish views from global central banks offset the boost from easing delisting risk for Chinese stocks in the US. The MSCI Asia Pacific Index dropped as much as 0.9%, led by technology stocks. Shares in Japan and Taiwan were among the worst performers in the region; it posted the first weekly decline since October.  Chinese shares eked out small gains after US officials said they got sufficient access to audit documents on companies in China and Hong Kong, removing the acute threat of delisting faced by those firms. Still, caution remained as the US government added dozens of Chinese tech companies to its blacklist. A risk-off mood extended into Friday’s trading after the Fed’s hawkish tone from its latest rate decision was echoed by the European Central Bank, squashing hopes for a pivot in monetary policies next year.

“As premature pivot bets collide with overly-exuberant China re-opening bets,” expectations will need to be “tempered for a bumpy path out of Zero-Covid amid winter/Lunar New Year travel and lingering confidence deficit,” said Vishnu Varathan, head of economics & strategy at Mizuho Bank. The Asian stock benchmark has fallen 1.8% this week, set to snap a six-week gaining streak as traders took profit following a recent rally, and as China’s surging Covid cases and the Fed’s tightening weighed on sentiment.

Japanese stocks declined for a second day, leading losses in the region, as investors assess the possibility of further tightening by global central banks and weak US retail sales data.  The Topix Index fell 1.2% to close at 1,950.21, while the Nikkei declined 1.9% to 27,527.12. The MSCI Asia Pacific Index dropped 0.7%. Toyota Motor Corp. contributed the most to the Topix Index decline, decreasing 1.9%. Out of 2,163 stocks in the index, 343 rose and 1,737 fell, while 83 were unchanged. “Both the U.S. and Europe were down significantly yesterday, and Japanese stocks are also dragged by this,” said Ryuta Otsuka, a strategist at Toyo Securities Co

In FX, the greenback traded mixed versus its Group-of-10 peers; the yen was the best performer.

• The euro swung between modest gains and losses against the US dollar. The euro’s volatility skew steepened with the currency failing to tackle spot offers around $1.0750 after the hawkish ECB decision and as profit-taking took over.
• The pound climbed and UK bonds fell, in line with bunds.
• Australian dollar reversed an intraday gain after iron ore fell on news that China would be centralizing purchases of the commodity.
• Kiwi rose as data showed non-resident bond holdings hit a four-year high.
• In rates, Treasury yields added up to 4bps led by the long end.

In rates, treasury futures drifted lower over Asia and early European session, following wider losses seen across core European rates after several ECB policy members reinforced the bank’s hawkish stance. US session light, with focus including manufacturing data and Fed’s Daly talking on inflation. US yields were cheaper by up to 5bp across long-end of the curve, with 2s10s and 5s30s spread steeper by 3bp and 1bp on the day; 10-year yields near cheapest levels of the session at around 3.49% with bunds, gilts lagging by additional 6bp and 7bp in the sector. The German curve added 10-12 bps while Italian yields rose by 15-23bps after money markets bet the ECB will lift the deposit rate as high as 3.36% after a barrage of hawkish comments from ECB policy makers.

In commodities, crude benchmarks posted losses in excess of 2.0%; though, WTI still has around USD 4.0/bbl of downside required to bring it back to the WTD low of USD 70.25/bbl which printed on Monday. French President Macron said EU energy policy is likely to be finalized during the meeting on Monday, while it was separately reported that the Czech PM said EU leaders agreed the gas price cap deal must be done by Monday at the energy ministers’ meeting, according to Reuters. Spot gold and silver are experiencing some marked divergence with the yellow metal essentially unchanged, while silver has slipped by around 2% to the mid-USD 22/oz region.

Looking to the day ahead now, and data releases include the global flash PMIs for December. Central bank speakers include the Fed’s Daly, and the ECB’s Rehn, Holzmann and Centeno. Finally, earnings releases include Accenture.

Market Snapshot

• S&P 500 futures down 1.1% to 3,854.25
• STOXX Europe 600 down 0.8% to 426.66
• MXAP down 0.7% to 156.22
• MXAPJ down 0.6% to 508.56
• Nikkei down 1.9% to 27,527.12
• Topix down 1.2% to 1,950.21
• Hang Seng Index up 0.4% to 19,450.67
• Shanghai Composite little changed at 3,167.86
• Sensex down 0.8% to 61,333.94
• Australia S&P/ASX 200 down 0.8% to 7,148.68
• Kospi little changed at 2,360.02
• German 10Y yield little changed at 2.20%
• Euro little changed at $1.0625
• Brent Futures down 1.9% to $79.66/bbl
• Brent Futures down 1.8% to $79.72/bbl
• Gold spot down 0.0% to $1,776.18
• U.S. Dollar Index little changed at 104.59

Top Overnight News from Bloomberg

• An estimated $4 trillion of options is expected to expire Friday in a monthly event that tends to add turbulence to the trading day. This time, with the S&P 500 stuck for weeks within 100 points of 4,000, the sheer volume provides a positioning reset that could turbocharge market moves
• The Fed’s quarterly projections showed officials now expect so-called core inflation — which excludes food and energy — to end this year around 4.8%, up from the 4.5% figure they forecast in September. Yet that number looks much too high to Wall Street economists
• The ECB is likely to raise interest rates by 50 basis points at its meetings in both February and March, Governing Council member Olli Rehn said
• The ECB will likely accelerate the pace at which it offloads government debt accumulated during past crises from July next year as part of its fight against soaring inflation, Governing Council member Francois Villeroy de Galhau said
• Markets have understood the hawkish message sent by ECB rate setters, Governing Council member Robert Holzmann tells reporters in Vienna
• ECB Governing Council member Madis Muller said interest rates will likely rise above levels anticipated by markets as the economic slowdown isn’t enough to curb inflation as needed
• Euro-zone composite PMI rose to 48.8 in December, from 47.8 in the prior month and versus an estimate 47.9
• Three senior Italian politicians criticized the ECB’s increase in borrowing costs, pointing to rising tensions between Giorgia Meloni’s government and Frankfurt officials
• UK Composite PMI was little changed at 49 in December, compared to last month’s reading of 48.2 and expectations for a drop to 48
• Britain is enduring the highest number of strikes since Margaret Thatcher was prime minister, according to estimates by a group of economists
• UK retail sales unexpectedly fell in November. The volume of goods sold in shops and online fell 0.4%, the Office for National Statistics said Friday. Sales excluding auto fuel fell 0.3%. Economists expected a 0.3% gain on both measures
• China’s abrupt ending of its Covid Zero restrictions have forced economists to make sharp revisions to their growth projections for this year and next. UBS Group AG and Australia & New Zealand Banking Group Ltd. were the latest to adjust forecasts on Friday, cutting estimates for this year to 2.7% as Covid infections spread rapidly. Predictions for next year were raised sharply to close to 5% or higher, on the expectation that consumer and business activity will recover as Covid infections subside

A more detailed look at global markets courtesy of Newsquawk

Asia-Pac stocks were pressured on spillover selling from global counterparts following the slew of central bank rate hikes and with markets also unnerved by a flurry of dismal US data releases. ASX 200 was lower with sentiment not helped by a deterioration in the latest Australian flash PMI data releases. Nikkei 225 underperformed after the ruling LDP tax panel agreed and provided details on the tax hike plan to boost the defence budget and with index-heavyweight Fast Retailing hit by the announcement of a 3-for-1 stock split. Hang Seng and Shanghai Comp lacked firm direction amid mixed headlines with some encouragement from reports related to US audits in which Chinese companies averted a delisting after the US was given full inspection access, while there was also a constructive tone in discussions between US Treasury Secretary Yellen and China’s Ambassador to the US in which they agreed to step up coordination on trade and policies.

Top Asian News

• China National Health Commission issued a plan to step up COVID control and prevention in rural areas where it will strengthen reserves of essential drugs and COVID home test kits. China will also accelerate COVID vaccination of the rural population, especially among the elderly and said that people returning to their hometowns in rural areas should monitor their health and reduce contact with the elderly at home, according to Reuters.
• China’s NDRC said the economy is facing more complex and grim external environments but added that the long-term positive trend hasn’t changed and it approved CNY 1.5tln of major projects as of end-November. NDRC said China’s economic growth is expected to continue picking up following the implementation of new COVID rules and that they will focus on stabilising growth, employment and prices, as well as speed up infrastructure project construction and expand effective investment, according to Reuters.
• China’s securities regulator said it welcomes the US PCAOB decision on auditing and will continue supervision work on auditing in the future, while it will create a more stable regulatory environment with the US, according to Reuters.
• China’s ambassador to the US met with US Treasury Secretary Yellen to discuss their views on global macroeconomic and financial developments, while it was reported that they agreed to step up coordination on trade and policies.
• Japan’s government is to implement defence tax hikes in stages over multiple years to secure more than JPY 1tln by fiscal 2027, while it is to adopt a new corporate surtax of 4.0%-4.5% and will introduce a surtax of 1% on incomes for the time being. Furthermore, it is to raise the tobacco tax in stages by JPY 3 a piece and said it will implement defence taxation at an appropriate time from 2024 onwards, according to a draft by the ruling LDP cited by Reuters.

European bourses remains on a downward trajectory as the post-ECB slump continues, Euro Stoxx 50 -1.0%. Sectors were initially mixed but are now all underwater with Real Estate lagging giving the detrimental rate environment. Stateside, US futures are pressured in-line with the above price action and ahead of a handful of Fed speakers, ES -1.1%.

Top European News

• UK Companies Brace for Recession as Manufacturing Slumps
• UK Dec. Flash Services PMI 50; Est 48.5
• Most Banks See More ECB Rate Hikes With Potentially Higher Peak
• Russian Missile Barrage Knocks Out Power to Ukrainian Cities
• UK Civil Aviation Regulator Raises Concerns With Wizz Air
• Bunzl Sinks as Barclays Cuts to Underweight, RS Group Upgraded

FX

• USD has whipsawed within a 104.20-73 range, well within yesterday’s bands, though an overall underlying bid has emerged, with the DXY climbing to incremental new peaks on multiple occasions.
• Though, this action is capped by marked JPY upside given its traditional haven allure and post-data; USD/JPY down to 136.83 at worst.
• GBP impaired further post-BoE dissent on the USD’s move and as the EUR proves comparably more resilient given the hawkish ECB; Cable to 1.2120 and EUR/USD holding above 1.06.
• Elsewhere, G10 peers are generally downbeat given the above narrative, though CAD has proven relatively resilient to the crude action.
• PBoC set USD/CNY mid-point at 6.9791 vs exp. 6.9844 (prev. 6.9343)

Fixed Income

• EGBs continue to slide. With Bunds lower by over 150 ticks and the associated 10yr yield above 2.2% post-ECB.
• Gilts are pressured in-turn, though to a slightly lesser extent given the BoE’s dovish dissenters.
• USTs are in the red, but with magnitudes much more contained and the curve steepening ahead of Fed speak and the region’s PMIs.

Commodities

• Currently, the crude benchmarks are posting losses in excess of 2.0%; though, WTI still has around USD 4.0/bbl of downside required to bring it back to the WTD low of USD 70.25/bbl which printed on Monday.
• Qatar Energy sells February Al-Shaheen crude at USD 1.30-1.50/bbl above Dubai quotes, according to sources.
• French President Macron said EU energy policy is likely to be finalised during the meeting on Monday, while it was separately reported that the Czech PM said EU leaders agreed the gas price cap deal must be done by Monday at the energy ministers’ meeting, according to Reuters.
• ICE warned it may pull the gas market from the EU over the Brussels price cap, according to FT.
• Currently, Dutch TTF Jan’23 is lower by around 8% on the session, though seemingly found a floor around EUR 120/MWh.
• Panama’s government ordered the suspension of operations at First Quantum Minerals’ copper project.
• Spot gold and silver are experiencing some marked divergence with the yellow metal essentially unchanged, while silver has slipped by around 2% to the mid-USD 22/oz region

Central Banks

• ECB’s Villeroy says must not speculate on the number of interest rate rises, too early to talk about the terminal rate.
• ECB’s Muller says rates are likely to increase by more than the market expects. Cannot rely on an economic slowdown to tame inflation.
• ECB’s Rehn says rates need to rise significantly. Interest rates will still have to rise significantly to reach levels that are sufficiently restrictive to ensure a timely return of inflation to the 2% medium-term target.
• ECB’s Holzmann says inflation still poses a challenge, does not want to say where the terminal rate is, the hawkish statement is equivalent to a 75bp hike.
• Bundesbank: German recession now expected in 2023, downturn not seen severe. Click here for more detail.

Geopolitics

• North Korean Leader Kim Jong Un guided a successful test of a ‘high-thrust solid-fuel motor’ at the satellite launching ground and the test was said to have provided a guarantee for the development of another new strategic weapon system, while Kim hopes the new-type strategic weapon would be made in the shortest span of time, according to KCNA.
• HKEX (388 HK) welcomed Asia’s first crypto assets ETFs after the listing of CSOP Bitcoin Futures ETF & CSOP Ether Futures ETF, according to Reuters.
• FTX is reportedly seeking permission to sell off LedgerX, Ember and its branches in Japan and Europe before they lose value and have their licences revoked, according to Cointelegraph.
• Kraken says “We are investigating reports from clients having difficulty connecting to the site and API as well as via mobile apps.”.
• Binance reports that Mazars is to pause work for crypto clients, via Bloomberg.

US Event Calendar

• 09:45: Dec. S&P Global US Composite PMI, est. 46.9, prior 46.4
• 09:45: Dec. S&P Global US Services PMI, est. 46.5, prior 46.2
• 09:45: Dec. S&P Global US Manufacturing PM, est. 47.8, prior 47.7

DB’s Jim Reid concludes the overnight wrap

At this age in life I generally have an idea of what I like and new experiences are rarer, for mostly good reasons. However, tomorrow I’ll attend my first ever artistic swimming (synchronised swimming in old parlance) Christmas performance. Maisie is the youngest in it but has taken to the sport very well in spite of her hip issues. I never thought in a million years I’d go to such an event but here goes.

Talking of year end performances, it would have been completely out of character for 2022 to go out with a whimper and with the last major act of the year, the ECB ensured that we didn’t. Following the hawkish message from the Fed, yesterday saw the ECB join in with a clear signal for markets to price in more aggressive rate hikes. Indeed, there could be no doubt about their message as they 1) pointed to further rate hikes ahead, 2) outlined their plans for quantitative tightening, and 3) upgraded their inflation forecasts significantly. Meanwhile, Bloomberg even reported afterwards that over a third of the Governing Council wanted a larger 75bps hike. That led to some massive market moves coming on the heels of the Fed, with yields on 2yr German debt (+22.1bps) seeing their largest daily increase since September 2008 if you use the generic 2yr series on Bloomberg and to the highest since that point too. And with the Fed and the ECB now pledging to take rates further into restrictive territory in 2023, risk assets took another major hit, with the S&P 500 (-2.49%) and the STOXX 600 (-2.85%) both seeing sizeable losses. The first punch from the Fed didn’t really land on markets but the second punch from the ECB did.

In terms of the details, the main headline was much as expected as they unveiled a 50bps rate hike, thus taking the deposit rate up to a post-GFC high of 2%. However, just about every other detail leant in a hawkish direction. First, there was the comment at the top of the ECB’s statement that rates would “still have to rise significantly”, even after the 250bps worth of hikes we’ve already had. Second, President Lagarde then followed that up in her press conference, saying that “we should expect to raise interest rates at a 50 basis-point pace for a period of time”, which dampened investor hopes that the ECB might downshift again to 25bps at the next meeting. And third, the staff inflation forecasts were much more hawkish than in September, with the 2023 projection upgraded to +6.3% (vs. +5.5% in September), 2024 at +3.4% (vs. +2.3% in September), and 2025 still above target as well at +2.3%.

Alongside those hawkish details, the ECB also outlined plans to begin quantitative tightening from March. They said that their Asset Purchase Programme portfolio would start declining by €15bn per month from March until the end of Q2 2023, and that afterwards the pace “will be determined over time.” The statement said we should get “the detailed parameters” for QT at the next meeting in February, and that by the end of 2023, they’d also review the “operational framework for steering short-term interest rates, which will provide information regarding the endpoint of the balance sheet normalisation process.”

Given the comments from Lagarde about further 50bp hikes ahead, investors moved to price in a more aggressive path of ECB rate hikes over the months ahead. For instance, if you look at overnight index swaps, the rate hike priced in for the next meeting in February moved up from +40.1bps the previous day to +58.1bps now, so fully pricing in another 50bp move. Our own European economists now think the terminal rate will be 3.25% rather than the 3% expected before the meeting. This was always the direction they saw the risks moving with Mark Wall now expecting hikes of 50bps in February, 50bps in March and 25bps in May. There is risk of another 50bps in May but Mark thinks the ECB growth forecast is too strong for H2 2023 and into 2024, and that an earlier start to QT and a rapid rate means he thinks they’ll step down at that point. See Mark’s team’s excellent review of a very important ECB meeting here.

Against the backdrop of mounting expectations of further ECB hikes, sovereign bonds saw a massive selloff across the Eurozone yesterday. For instance, yields on 10yr bunds (+14.0bps), OATs (+15.9bps) and BTPs (+28.9bps) all rose significantly after the policy decision was announced. Furthermore, there was a significant widening in peripheral spreads, with the gap between Italian and German 10yr yields moving back above 200bps for the first time in a month. In the meantime, the moves at the front-end of the curve were even more pronounced, with yields on 2yr German debt hitting 2.44% intraday, before closing at 2.39%, a post-2008 high.

With the two major DM central banks having taken a very hawkish stance over the last 48 hours, risk assets struggled yesterday as investors grappled with the prospect of further rate hikes into 2023. The S&P 500 (-2.49%) had its worst day in over a month, and Europe’s STOXX 600 (-2.85%) put in its worst day since May. Those losses were seen across the board, with just 32 companies in the S&P 500 moving higher on the day. We will see if now the big event risk days are out the way, whether the market just calms down massively into Xmas and we pick up the battle again next year.

Whilst the focus was understandably on the ECB yesterday, the Bank of England also announced their latest policy decision, where they confirmed that the Bank Rate would rise 50bps as expected, taking it up to a post-2008 high of 3.5%. Six of the nine members on the committee were in favour of the hike, but one preferred a larger 75bps move, and two others wanted no change at all. Looking forward, they echoed the other central banks in pointing to further hikes ahead, with a majority saying that if the economy evolved in line with their November projections, then “further increases in the Bank Rate might be required for a sustainable return of inflation to target.” Market pricing for the upcoming meetings saw little change following the decision, but gilts outperformed significantly, with 10yr yields down -6.9bps on the day.

Elsewhere in markets, yesterday brought a mixed bag of US data releases for investors to react to. On the plus side, the weekly initial jobless claims unexpectedly fell to 211k (vs. 232k expected) over the week ending December 10, and that’s one of the most timely indicators we get. However, the decline in November retail sales of -0.6% (vs. -0.2% expected) was faster than anticipated, whilst industrial production also contracted by -0.2% (vs. unch expected). Some of the surveys for December didn’t look too good either, with the Empire State manufacturing survey down to -11.2 (vs. -1.0 expected), and the Philadelphia Fed’s business outlook came in at -13.8 (vs. -10.0 expected).

One asset that didn’t follow the pattern elsewhere yesterday was Treasuries. In spite of the hawkish tone from Fed Chair Powell on Wednesday, they strongly outperformed their counterparts in Europe, with the 10yr yield down -3.1bps to 3.45%. So this was a strong day for the DB house view of bunds underperforming Treasuries. The 10yr UST move was driven by a -2.6bps decline in the 10yr inflation breakeven to 2.17%, which is just above its recent closing low in late-September of 2.1545%. If it breaches that point, then it would be at its lowest since February 2021, and demonstrates that for the time being, investors still have confidence that central bankers aren’t going to let longer-term inflation get out of control. Nevertheless, there’s still something of a divergence between the Fed’s dots from Wednesday and market pricing, with the Fed pointing to end-2023 rates at 5.1%, whereas futures are still only at 4.40%. Something will eventually have to give. Meanwhile, in Asia this morning, yields on 10yr USTs (+3.64 bps) slightly pulled back, trading at 3.48% as we go to print.

Asian stock markets are trading in negative territory for a second consecutive day on concerns that the hawkish stance of global central banks will push the economy into a recession. Across the region, the Nikkei (-1.74%) is leading losses with the Shanghai Composite (-0.25%), the CSI (-0.33%) and the KOSPI (-0.26%) all moving lower. Elsewhere, the Hang Seng (+0.09%) is fractionally higher in early trading. Outside of Asia, stock futures tied to the S&P 500 (-0.06%) and the NASDAQ 100 (-0.03%) are trading just below flat.

We had mixed data from Japan as manufacturing activity contracted at the fastest pace in more than two years in December with the au Jibun Bank flash manufacturing PMI falling further to 48.8 from a level of 49.0 in the previous month amid soft demand. At the same time, the au Jibun Bank flash services PMI rose to a seasonally adjusted 51.7 in December, from November’s final reading of 50.3 as the sector activity expanded on tourism reopening.

To the day ahead now, and data releases include the global flash PMIs for December. Central bank speakers include the Fed’s Daly, and the ECB’s Rehn, Holzmann and Centeno. Finally, earnings releases include Accenture.