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.

Western sanctions on Moscow have backfired, failed to paralyze Russia’s economy, and ultimately sparked financial pain for ordinary Europeans and the largest economy in the block.

According to Reuters calculations, Germany has hemorrhaged cash to the tune of 440 billion euros ($465 billion) in energy bailouts and schemes, as well as keeping energy supplies flowing while it lost access to inexpensive natural gas from its leading supplier Russia in 2022. 

“How severe this crisis will be and how long it will last greatly depends on how the energy crisis will develop,” said Michael Groemling at the German Economic Institute (IW). He added: “The national economy as a whole is facing a huge loss of wealth.”

Reuters said the “cumulative scale” of energy bailouts and other schemes employed by Berlin equates to 1.5 billion euros per day since Russia invaded Ukraine, or about 12% of national economic output, or 5,400 euros for each German. 

Germany has shown Europe how backfiring sanctions ruin its country’s finances and send millions of its citizens crashing into energy poverty overnight. These anti-Russian measures have caused soaring electricity and NatGas prices and elevated risks of entering a recession in 2023. 

“The German economy is now in a very critical phase because the future of energy supply is more uncertain than ever.

“Where does the German economy stand? If we look at price inflation, it has a high fever,” said Stefan Kooths, vice president and research director of business cycles and growth at the Kiel Institute for the World Economy.

 Many other European countries find themselves at the mercy of the weather as NatGas injections into EU storage facilities have flipped to draws amid a wicked cold spell boosting heating demand. 

“The country has turned to the pricier spot, or cash, energy market to replace some of the lost Russian supplies, helping drive inflation into double-digits,” Reuters noted.

And due to the reliance on Russian NatGas, Germany has limited LNG infrastructure, which forced it to charter five floating storage and regasification units on the country’s north coast. The cost of chartering FSRUs is a whopping 9.7 billion euros. The first LNG vessel will arrive at the floating terminal this weekend.

The five FSRUs will only be able to cover about a third of Germany’s current NatGas demand — still unable to offset the supply deficit since Russian flows have been cut. 

“I think Germany has been doing whatever it can,” said Giovanni Sgaravatti, research analyst at the Bruegel think-tank. He added, “In the LNG market, Germany had to start from scratch, which isn’t easy.”

The energy crisis in Europe is far from over, as winter weather is in full swing across the energy-stricken continent that has yet to offset lost supplies. Germany’s half-trillion-euro bazooka might not be enough as global LNG supplies are tight. 

Update (0720ET): Crypto exchange Binance has seen its proof-of-reserve audits removed from auditor Mazars’ website.

“Mazars has indicated that they will temporarily pause their work with all of their crypto clients globally, which include Crypto.com, KuCoin, and Binance. Unfortunately, this means that we will not be able to work with Mazars for the moment,” a spokesperson for the firm said in an emailed statement to Bloomberg News on Friday.

Binance CEO Changpeng “CZ” Zhao was quick to react to the news on Twitter with a retweet from a random commenter.

“Making a statement on why an auditing company decided to quit working with crypto? Ask them lol,” the tweet reads.

The news comes shortly after Mazars confirmed on Dec. 7 that Binance possessed control over 575,742 Bitcoin of its customers, worth around $9.7 billion at the time of writing.

The report has since been also removed from Mazars’ website.

CZ appeared on CNBC yesterday to ‘explain’…

Holy Sh*t!

Get your bitcoin OFF Binance.#bitcoinpic.twitter.com/xSxNoyARXH

— Neil Jacobs (@NeilJacobs) December 15, 2022

Bitcoin puked right as the Mazars headlines hit, dropping back to $17,000…

*  *  *

As Bitcoin Magazine Pro’s Dylan LeClair and Sam Rule asked (and answered) earlier, is Binance facing FUD or legitimate questions? 

Binance’s bitcoin balance sees its largest one-day outflow ever. BUSD stablecoin experiences large redemptions and the price legitimacy for the exchange-native BNB token is called into question.

By far, one of the biggest winners in the aftermath of the FTX collapse has seemed — on the surface — to be Binance. After only having 7.82% market share of the bitcoin supply on exchanges in 2018, their share is now 27.50% despite a much broader trend of bitcoin supply leaving exchanges. The bitcoin balance on Binance now totals 595,864 BTC, which is 3.1% of outstanding supply, worth $10.58 billion. This bitcoin belongs to their customers and reflects a growing trend in market share over the last few years that has made Binance the largest bitcoin and cryptocurrency exchange in the world.

As highlighted previously in “The Exchange War: Binance Smells Blood As FTX/Alameda Rumors Mount,” Binance now controls approximately 60% of the spot and derivatives volume in the entire market as well. It’s hard to see how any exchange in the space can be a “winner” in the current market conditions, but one could make the case for Binance, with the exchange’s growing strength in a decimated industry. On top of that, Binance’s BNB token, the native currency of Binance’s own Ethereum-competing Layer 1 blockchain, is still one of the better performing tokens when valued in bitcoin terms this year.

Yet, is this recent “strength” everything that it seems or is it a facade? We’ve learned over the last month that no company is safe in this industry right now (especially exchanges) and questions are growing around Binance’s practices, solvency, BNB token value and the overall state of their business over the last few weeks. Is it FUD or legit? Let’s try to break some of it down, addressing the concerns through an objective and skeptical lens. 

Binance Flows

Over the last day, we’ve seen significant outflows from Binance across different various tokens and bitcoin when looking at both Nansen and Glassnode tracking. Across ETH and ERC20 tokens, Binance saw $3 billion leaving the exchange in its largest single-day outflow since June. Across Nansen total wallet tracking, all Binance balances are estimated at $62.5 billion with around 50% of those balances in stablecoins across BUSD and USDT.

Source: Nansen

Source: Nansen

According to Glassnode, the total bitcoin exchange balance on Binance is down around 6-7% over the last day, after reaching a peak on December 1. Although balances remain above 500,000 bitcoin and Binance has shown a rising trend of bitcoin balances on the platform this year, this is a significant move for outflows in just 24 hours. The largest one-day change in bitcoin outflows was just shy of 4% back in July.  As a general comparison, the trend of bitcoin exchange balances was a much different story for FTX, whose balance had been falling heavily since June.

Note that in some of the charts below, exchange balances are using daily data from Glassnode instead of 10-minute or 1-hour intervals where we can see more of the latest bitcoin exchange outflows. The numbers above reference the latest 1-hour interval data. Exchange balance data, especially intraday, can change and data is typically more reliable on a longer time horizon, especially given that we have little insight into Glassnode’s classification and data science techniques that are used to label different wallets and addresses. Yet, however you cut the data, Binance outflows over the last 24 hours are a bit alarming and raise questions: Is this a one-off event and just business as usual or is this the start of something more?

In absolute terms, the last 24 hours have brought about the largest ever flight away from Binance for both bitcoin and stablecoins — an extremely notable move.

In particular, in the case of BUSD, Binance’s native stablecoin that has its reserves custodied by U.S. financial firm Paxos, there has been a notable amount of redemptions as of late. Large holders of BUSD have been withdrawing from Binance and sending it to Paxos, redeeming the stablecoins for dollars. This shows up as BUSD being “burned” at the Paxos Treasury.

🔥 🔥 🔥 🔥 🔥 🔥 🔥 🔥 🔥 🔥 559,000,053 #BUSD (558,832,353 USD) burned at Paxos Treasuryhttps://t.co/y925vxE9sB

— Whale Alert (@whale_alert) December 13, 2022

🔥 🔥 🔥 🔥 🔥 🔥 🔥 🔥 🔥 🔥 700,000,000 #BUSD (700,350,000 USD) burned at Paxos Treasuryhttps://t.co/hXClXhREUK

— Whale Alert (@whale_alert) December 13, 2022

Readers can track the on-chain addresses provided by Binance for free here.

The main cause for concern is not whether Binance has any bitcoin/crypto or not. We can transparently see that the firm controls tens of billions worth of crypto assets. What isn’t exactly clear, similar to FTX, is whether the firm has commingled users funds or whether the firm has any outstanding liabilities against user assets.

Binance CEO Changpeng Zhao (CZ) has said that the firm has no liabilities with any other firms, but as recent months have shown, words don’t mean all that much. While we are not claiming that CZ is lying to the public about the state of Binance finances, we have no way to prove otherwise.

Will you be doing an independent audit on liabilities against those reserves and will other coins be audited also in due time?

— Willy Woo (@woonomic) December 7, 2022

yes, but liabilities are harder. We don’t owe any loans to anyone. You can ask around.

— CZ 🔶 Binance (@cz_binance) December 7, 2022

CZ’s response as to whether the company was going to audit liabilities against user assets was, “Yes, but liabilities are harder. We don’t owe any loans to anyone. You can ask around.”

Unfortunately, “ask around” isn’t a satisfactory enough answer for an ecosystem supposedly built around the ethos of don’t trust, verify.

Big red flag for me is that this seems to be more of an attempt at proving collateral rather than proving reserves. They even admit to be insolvent with regard to actual assets owed vs tokens controlled. The “collateral” accounting trick is exactly how FTX played solvent as well.

— Jesse Powell (@jespow) December 11, 2022

While there is no doubt that Binance is an industry giant in the crypto derivatives industry, how do we know the firm isn’t doing similar things as past actors in regards to trading against clients using user funds and/or proprietary data. Things like the former Chief Legal Officer of Coinbase departing Binance U.S. last summer after just three months as the CEO leaves one with many questions.

To add to our skepticism, the price of the Binance exchange token BNB is near all-time highs in bitcoin terms, appreciating an astounding 828% against bitcoin in the last 785 calendar days.

Is BNB, a more centralized cousin to Ethereum, really worth approximately 14% of all bitcoin that will ever exist? BNB is not equity in the Binance company. BNB is a crypto token spun up from nothing in 2017.

BNB is one of the few cryptocurrencies that is up year-to-date in bitcoin terms, with the others being illiquid alts well below their BTC-denominated all-time highs.

The only other two outperformers during 2022 have been the “meme” DOGE, which is 55% below its all time high in bitcoin terms, and quasi-security XRP, which has been delisted by major exchanges and is 87% below its all-time highs in bitcoin terms.

Why is the outperformance so notable? Why are we hammering this point so hard? Because financial markets aren’t magical machines tied to a fantasy-land reality. Financial markets — while appearing to be disconnected from reality at times — always come crashing down to reality, exposing those that were possibly perceived as giants once before.

For the most part, the crypto industry is an attempt at modern alchemy, and exchange tokens minted from nothing with centrally engineered “tokenomics” are no different.

In fact, they are part of the problem.

It could be possible that BNB was pushed up with the internal help of Binance or its unofficial affiliates during the bull run. Just look at the volume profile of where coins changed hands on its native exchange. While it would be a leap of faith to say this took place directly using customer funds à la FTX, the revenue of the company has been used to buy back the token, similar to a stock buyback.

Label me a pessimist, but all I see is a whole lot of hot air.

9x in two months during the bull run with barely a retrace? 10x against BTC since 2021?

Must be a “new paradigm”.$BNB pic.twitter.com/ysJ04lXPPZ

— Dylan LeClair 🟠 (@DylanLeClair_) November 29, 2022

While it remains to be seen whether the firm is levered against its own token in any sort of way, it would certainly be no surprise to us if the company supported the ascent of the token/chain, similarly to many other exchanges with token that outperformed bitcoin during the bull run. BNB is a “blockchain” that can be arbitrarily halted by the Binance team. It is not even attempting to be a decentralized application set. 

An exploit on a cross-chain bridge, BSC Token Hub, resulted in extra BNB. We have asked all validators to temporarily suspend BSC. The issue is contained now. Your funds are safe. We apologize for the inconvenience and will provide further updates accordingly.

— CZ 🔶 Binance (@cz_binance) October 6, 2022

$600 million hack of BNB, and Binance has decided to halt BSC (Binance Smart Chain).

[De]Centralized finance.

— Dylan LeClair 🟠 (@DylanLeClair_) October 6, 2022

That’s fine, but we remain extremely skeptical that its relative valuation against bitcoin — what we believe to be humanity’s best bet as decentralized digital cash — is tethered to reality. 

$BNB can be used as collateral on Binance, and they also subsidize the rate:https://t.co/BzHnJ4II1t

If it’s used as collateral, explain how it trades with 2x the volatility of $BTC during the bull, but no excess vol in the bear…

Last 758 days: BNB/BTC +898%, BTC/USD +0% pic.twitter.com/Crtao4x0UQ

— Dylan LeClair 🟠 (@DylanLeClair_) December 12, 2022

How does something that traded with double the realized volatility of bitcoin during the bull market now have the same implied volatility in the bear market after it has appreciated by over an order of magnitude with a strong relative outperformance throughout 2022? 

The entire “industry” is cross-collateralized, and all of the altcoins are merely riding on the beta of bitcoin with far less liquidity, thus having greater volatility and potential (fleeting) upside. 

We think this attempt at modern alchemy is destined to fail, at worst. At best, the asset likely drastically underperforms global neutral money through its adoption phase. Said differently, the worst-case, paranoid-style take would be that the exchange rate of BNB is tied to the solvency status of Binance the exchange. We don’t think that there is an overly strong probability of this outcome per say, but it is certainly non-zero.

The coming weeks will be full of headlines around the state of global crypto regulation in a post-FTX world. In a 48-hour period, Reuters published news stating that the U.S. Justice Dept is split over charging Binance, Binance withdrawals for bitcoin and aggregate stablecoin pairs have hit all-time highs and the BNB exchange token has fallen 10% relative to bitcoin.

Out of an abundance of caution, we will continue to urge readers operating on any centralized exchange — of which Binance is most definitely included — to look into self custody solutions. There have been far too many instances of incompetence and/or misconduct from exchanges.

It’s not that we don’t trust CZ or Binance, it’s the fact that we don’t trust anyone.

The whole point of bitcoin is we now have an asset that is truly the liability of no one. Verify the ownership of an open distributed network with cryptography; don’t trust permissioned IOUs. With the mix of regulatory concerns about the global crypto derivatives industry, a questionable exchange token with unbelievable relative performance over the last two years and a shaky proof-of-reserves attestation — that was incorrectly claimed to be an audit and had industry CEOs raising eyebrows — we find the need to urge our readers to evaluate their counterparty risk.

We will update readers as the situation developers.

*  *  *

Relevant Past Articles:

• The Everything Bubble: Markets At A Crossroads

• Collapsing Crypto Yield Offerings Signal ‘Extreme Duress’

• The Contagion Continues: Major Crypto Lender Genesis Is Next On The Chopping Block

• The Crypto Contagion Intensifies: Who Else Is Swimming Naked?

• Counterparty Risk Happens Fast

By Irina Slav of OilPrice.com

The energy crisis that began last year in Europe and dramatically escalated following the EU response to Russia’s invasion of Ukraine has seen many in government worry about the survival of the continent during the winter.

Yet not all see such a bleak picture.

In fact, some believe that not only is the worst over for Europe but that the crisis actually did the EU a favor. That favor took the form of accelerating the buildout in renewables and the restart of hydrocarbon-fueled power plants.

This take, which is certainly not very common right now, came from one investment manager, Per Lekander, who is managing partner at a firm called Clean Energy Transition LLP. Speaking to CNBC this week, Lekander said that Russia had, in fact, very little to do with Europe’s crisis, and it could even be said Vladimir Putin did Europe a favor.

“This [the crisis] is the consequence of long term under-investments in conventional, long term red tape in renewables and then these political closures of nuclear, coal, lignite, etcetera,” Lekander told CNBC.

He then went on to add that the measures that European countries took after Russia began responding to EU sanctions by reducing gas flows went a long way toward ensuring that the continent would survive this winter.

Energy demand reduction was one of these measures, according to the financier, and returning to hydrocarbons for power generation was another. A third one was the planned reduction in red tape in wind and solar power system construction—obstacles that these two industries have been complaining about for years.

It could be argued that this energy demand reduction that has allowed Europe to save on gas was a result of exorbitant prices rather than any voluntary change in energy consumption behavior patterns.

Indeed, millions of people across the continent are being hit with electricity bills that are substantially higher than last year’s bills because of the international gas price inflation caused by the tightening of supply following the EU sanctions on Russia and Russia’s easy to predict response. The sabotage of Nord Stream added to this tightening and pushed prices higher.

Another reason for the lower demand was the warm European autumn, as many noted at the time. As the weather was warmer than usual, people’s heating needs were lower. Yet now that winter proper has begun and the cold is settling in, consumption will increase, whatever the price of gas. 

Indeed, the worst might not be over. The Guardian reported this week that Germany was at risk of gas shortages because it had failed to hit its consumption reduction target. The reason it had missed it—the target is 20 percent of consumption—was the colder weather last week, the head of the country’s energy regulator said.

The European Union last month approved a gas consumption reduction target of 15 percent, but Germany was more ambitious because of its high reliance on the commodity. Whether the rest of Europe would be able to hit the 15-percent target is yet to be seen because, as Klaus Mueller said, “With temperatures of -10C [14F], gas consumption shoots up dramatically.”

Meanwhile, the other silver lining of the crisis, per Lekander, is the facilitation of wind and solar power capacity additions. Because Europe is in urgent need of finding new sources of energy and wind and solar seem like the most logical choice, the authorities in Brussels are going to make it a lot easier to boost generation capacity. Yet this is also not without its problems.

There is severe cost inflation in critical minerals and metals, and it’s a trend that is only going to accelerate in the coming years, driven by higher demand for these metals and minerals stemming from legislation of the sort that the EU has approved for wind and solar.

Meanwhile, wind power developers are reporting losses and worrying about competition from Chinese firms, and the European solar industry is overwhelmingly dependent on Chinese panels, which is not something the EU is particularly happy with and is looking to change, which could affect the supply of these panels.

Yet the biggest concern for most observers is that next winter will be even harsher than this one. This year, European countries managed to stock up on Russian gas before flows declined dramatically.

Next year, these flows will remain subdued, meaning Europe will need to find a lot more gas from alternative suppliers. It is no wonder the EU is already preparing for next winter, discussing joint gas buying and getting a shoulder from the IEA with a set of measures aimed at securing enough energy for the next heating season.

Unfortunately, demand reduction is a big part of these 2023 winter energy consumption management plans, And while it is easy to consume less energy in the summer, especially in the cooler parts of Europe, it is not that easy in the winter without adverse effects on people’s health and wellbeing.

Ukrainian President Volodymyr Zelensky on Thursday issued his latest demand before the international community concerning punishing Moscow, issuing a call for a total ban on all Russian and Belarusian athletes at the Olympics, even under a ‘neutral’ flag.

What he’s urging is tantamount to a complete and permanent purge of Russians from Olympic competition. Zelensky said in a call with International Olympic Committee (IOC) president Thomas Bach that it’s necessary for Russia to suffer “complete isolation” on the world stage, including international sporting events.

“Since February, 184 Ukrainian athletes have died as a result of Russia’s actions,” Zelensky said in the call. “One cannot try to be neutral when the foundations of peaceful life are being destroyed and universal human values are being ignored.”

The Zelensky call was in response to Bach last week signaling the Olympic Committee is ready to allow Russian and Belarusian athletes to compete in the 2024 Summer Olympics to be held in Paris. This marks a shift from its previous stance of not allowing their participation.

Bach in the latest comments, however, indicated the athletes can compete under a neutral flag – essentially still disallowing any official team under the Russian or Belarusian national flags.

“Athletes cannot be punished for acts of their government as long as they do not contribute or support it,” Bach laid out at last week’s press conference. “What we never did and we never want to do is prohibiting athletes from participating in sports only because of their passport.”

But Zelensky is now arguing this isn’t good enough, according to the IOC call readout: 

“In the call, the Ukrainian President requested the full isolation of Russia and Russians from the world community,” the IOC said in a statement. “From his point of view, this must also apply to athletes.”

“In this context, the IOC President explained the unifying mission of the IOC and the Olympic Games enshrined in the Olympic Charter.”

“At the end of this open and constructive discussion, both presidents agreed to stay in contact.”

During the 2022 Winter Olympics in Beijing, all Russian athletes competed under the flag of the Russian Olympic Committee – which was the result of prior sanctions on Russia by the World Anti-Doping Agency related a years-long performance enhancing substances scandal.

Authored by Dave DeCamp via AntiWar.com,

Germany on Wednesday signed a contract with the US to purchase dozens of Lockheed Martin-made F-35 fighter jets, which are capable of carrying nuclear warheads that the US keeps in Germany.

There are about 20 US B-61 nuclear gravity bombs stored in Germany under NATO’s nuclear sharing program. While Germany has no nuclear weapons of its own, it maintains a fleet of aging Tornado bombers capable of dropping them, which the F-35s will replace.

“The German F-35 program will ensure the continuation of Germany’s alliance commitments and guarantee NATO’s credible deterrence in the future,” the US Embassy in Berlin said in a statement.

Germany announced its intention to purchase the F-35s back in March as part of a plan to boost military spending. Germany will acquire 35 of the fighter jets in a deal worth about $10.5 billion, and they are expected to be delivered between 2026 and 2029. The F-35s are be scheduled to replace the Tornados in the nuclear-sharing mission in 2030.

Under NATO’s nuclear sharing program, the US keeps nuclear warheads in Germany, Belgium, Italy, the Netherlands, and Turkey.

There are currently no known nuclear weapons in countries that joined NATO after the collapse of the Soviet Union, but Poland is open to hosting them and has held discussions with the US about the issue.

“There is always a potential opportunity to participate in the nuclear sharing program,” Polish President Andrzej Duda told the newspaper Gazeta Polska. “We have spoken with American leaders about whether the United States is considering such a possibility. The issue is open.”

You will find more infographics at Statista

Finnish leaders have said they wouldn’t rule out hosting NATO nuclear weapons if they join the alliance, which would be a major provocation as Finland shares an over 800-mile border with Russia.

But Finland’s president has since assured that the country has no plans to host nukes and that there are “no signs” NATO would look to deploy them there.

Authored by John Cody via Remix News,

The influential Wall Street Journal has set its sights on Germany’s migration policy, accusing the country of continuing to pursue more migrants for its workforce despite remarkably poor results up until now.

The paper raises the question of the “paradoxical” situation regarding why Germany continues to lack so many workers despite taking in nearly 13 million people since 2015, citing data from the Federal Statistical Office.

The problem, the paper notes, is that the migrants who are coming are simply not filling the needs of Germany’s high-skill economy. Of the 800,000 working-age Syrians and Afghans who arrived during the 2015 migrant crisis, only a third of them actually have a tax-paying job. Unemployment among foreigners stands at 12 percent, while for Germans it is 5 percent, and as Remix News has also reported in the past, those migrants who are working often work in low-skilled and low-paying jobs that require the state to continue paying out welfare benefits.

“Many refugees are ill-suited for the German high-skilled labor market,” the paper writes, and Germany is also “not good at training them.”

The Wall Street Journal argues that Germany is unsuccessful at attracting labor migrants. The paper writes, “Labor migrants currently only make up one in 10 new arrivals to Germany, compared with one in three to Canada. An earlier European program to draw skilled foreigners, known as the Blue Card, attracted about 70,000 workers to Germany in total over the past decade.”

Germany is looking to introduce reforms to attract more workers, but it faces a major problem. It is a country already dealing with the blowback from a huge migrant influx that has seen 1.2 million arrive in 2022 alone; any attempt to increase labor migrants will also come as Germany takes in more asylum seekers.

Berlin is planning to introduce a points-based immigration system modeled on Australia’s or Canada’s next year, hoping to woo better-qualified foreigners, but migration experts are skeptical. Even if it succeeds, Germany will likely continue to receive large numbers of asylum seekers it can’t employ, who will fill the ranks of welfare recipients or boost crime statistics, where they are already overrepresented. 

The paper details a number of employers who have struggled to bring in foreigners, all the way from Deutsche Bahn to local plumbing businesses in Berlin. A professor of social work, Ingo Neupert, began a training program in 2016 for 25 young refugees to become nurses and medical assistants, but only three graduated from the four and half year program, and a shorter version only saw a third graduate. The project has since been placed on hold.

Germany’s population has reached a record high of 84 million, and unemployment is not the only concern; education, social services, and housing are all suffering the burden.

The German government is arguing that the country needs to take in 400,000 migrants a year, but if the past is any guide, this plan faces serious roadblocks. Countries like Japan and Hungary, which are facing demographic issues but are focused on increasing their own native birth rate, may offer an alternative path that Germany should begin considering.