US futures dropped as investors waited to see whether Fed Chair Jerome Powell will differentiate himself from hawkish comments made by two policy makers on Monday when he speaks later at an event in Sweden at 9am ET. S&P 500 and Nasdaq 100 futures dropped to session lows around 7:15am ET after trading little changed for much of the overnight session. Traders are also reluctant to take strong directional bets before US inflation data is published on Thursday and visibility clears up on the trajectory of interest rates. The Bloomberg Dollar Spot Index was near session after trading earlier in a tight range, while the rest of the currencies in the Group of 10 were mixed. Treasuries also broke out above a range, hitting session highs around 3.57% around the time stocks stumbled. Oil rose with gold and Bitcoin rallying for a seventh-straight day.

Among US premarket movers, Virgin Orbit slumped as much as 27%, putting the stock on track for its biggest drop since June 2022, after the failure of a rocket that Richard Branson’s satellite company launched from a Boeing 747. Among winners, Oak Street Health rose 33% after Bloomberg reported that drugstore operator CVS is exploring an acquisition of the primary care provider, in a deal which could exceed $10 billion, including debt. Shares in Frontline, listed both in the US and Norway, surged as much as 20% in Oslo after the shipping giant controlled by billionaire John Fredriksen walked away from its plans to acquire Belgium’s Euronav, which dropped 21% on the news. Bed Bath & Beyond shares also jumped as much as 20%, poised to continue its rebound from the previous session, ahead of its earnings report and after the troubled home furnishings retailer saw its long-term rating upgraded at S&P. Here are some other notable premarket movers:

• Boeing stock slides 2.7% as Morgan Stanley downgraded its rating on the planemaker to equal-weight from overweight, saying the stock is now approaching fair value following recent outperformance.
• Frontline (FRO US) shares surge 22% after the company said it wouldn’t make a voluntary conditional exchange offer for all outstanding shares of the oil tanker operator Euronav. The decision not to proceed follows opposition from Belgium’s Saverys family – a major holder in Euronav.
• Bed Bath & Beyond (BBBY US) shares jump 20%, poised to continue their rebound from the previous session before its earnings report. The troubled home furnishings retailer also saw its long-term rating upgraded at S&P.
• HP Enterprise shares were down 1.9% after Barclays downgraded them to equal-weight, taking a cautious view on IT hardware stocks in 2023 given a challenging macro backdrop. The broker also cut NetApp (NTAP US) and upgraded Keysight (KEYS US) shares.
• Barclays expects a difficult 1H for US software stocks as estimates still look too high, even if valuation levels are “interesting.” The broker upgrades DoubleVerify (DV US) and Confluent (CFLT US), cuts Dynatrace (DT US).
• RBC anticipates a challenging start for US software stocks in 2023, which will eventually give way to “green shoots” of optimism. The broker outlines its top picks in the sector and cuts Box (BOX US) to underperform.
• Watch Chemours (CC US) after the stock was cut to sector perform from outperform at RBC on expectations that a challenging fourth quarter for the chemicals firm will feed into the first half of 2023.
• Keep an eye on PPG Industries (PPG US) as it was cut to sector perform from outperform at RBC with limited upside seen for the paint-maker’s stock amid expectations that volumes will come under pressure.

Sentiment was dented on Monday, as a 1.4% gain in the S&P was fully reversed, after the San Francisco and Atlanta Fed presidents poured cold water on hopes that monetary tightening would soon ease off by calling for interest rates to rise above 5% and staying there, a scenario strategists believe would be negative for stock markets. It’s also what they have been saying for months, but the market is always happy to keep pricing in the same flashing red headline as if it was new.

“Sentiment is torn between the fear of missing out good news on inflation and, by opposite, angsts the Fed will be stubborn in its fight against inflation which reinforces the risk of a recession,” said Sarah Thirion, a Paris-based strategist at TP ICAP Europe. Fears about Covid in China and the trend of corporate guidance which will be unveiled during the next earnings season are also weighing on stocks, Thirion said.

“The same pattern keeps emerging, with investors clinging onto any data which appears to show the economy is cooling off, only to see their hopes dashed by policymakers who clearly believe the inflation-busting job is far from over,” said Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown.

Thursday’s US inflation report, which will come out almost a week after the latest jobs data showed wage growth has decelerated, will be among the last such readings Fed policy makers will see before their Jan. 31-Feb. 1 gathering.

European stock markets, which have outperformed Wall Street since September, were also in a cautious mood with the Stoxx 600 down 0.6% after hitting an eight-month high yesterday. Retailers, industrials and miners are the worst performing sectors. Here are some of the most notable European movers:

• Orsted gains as much as 4.1% after being named among preferred picks in the renewables space by both Morgan Stanley and Exane.
• Card Factory jumps as much as 9.4% after raising full-year pretax profit guidance in a trading update. Liberum said the greetings-card retailer delivered another “impressive” update.
• Plus500 gains as much as 3% after giving an update for the year-end, with Liberum saying the trading platform saw an “excellent” performance in FY22.
• AO World rises as much as 18% after raising guidance for FY adjusted Ebitda. Jefferies says the update shows that efforts to cut costs and improve margins are working.
• European staffing stocks drop following a warning from UK recruiter Robert Walters and with Dutch peer Randstad downgraded by Degroof
• Euronav slumps 21% after Frontline said it won’t make a voluntary conditional exchange offer for all outstanding shares of the oil tanker operator.
• Husqvarna falls as much as 4.6%, the most since Dec. 15, after Danske Bank cut its recommendation to hold from buy, expecting a “challenging” first half of 2023.
• Kahoot shares fall as much as 18%, the most since November, after the company published below-forecast fourth- quarter preliminary adjusted Ebitda on weak macro conditions.
• Games Workshop falls as much as 6.9% after reporting 1H results that Jefferies said contained highs and lows, highlighting the challenges flagged by management.

Optimism for the region is rising with economists at Goldman Sachs no longer predicting a euro-zone recession after the economy proved more resilient at the end of 2022, natural gas prices fell sharply and China abandoned Covid-19 restrictions earlier than anticipated. GDP is now expected to increase 0.6% this year, compared with an earlier forecast for a contraction of 0.1%. Economists led by Jari Stehn warn in a report to clients of weak growth during the winter given the energy crisis, and say headline inflation will ease faster than thought, to about 3.25% by end-2023. As reported previously, BofA CIO Michael Hartnett said a new era may have started with the ratio of the S&P 500 index to the Stoxx Europe 600 breaking its 100-week moving average, a support that has held strong for more than a decade.

Earlier in the session, Asian stocks declined as Chinese equities halted their rally, which had pushed a key regional benchmark to a bull market, amid profit-taking and renewed caution on the Fed’s rate-hike path.  The MSCI Asia Pacific Index dropped as much as 0.3% as of 4:17 pm in Singapore, dragged lower by Alibaba and Ping An Insurance. Trading volume was about 4% lower than the three-month average, according to data complied by Bloomberg. Tuesday’s breather comes as Asia’s benchmark index a day earlier entered bull territory, driven by China’s reopening and a weakening dollar that lured investors back to the region after facing a downward spiral for much of 2022.  Benchmarks in Hong Kong posted moderate losses while stock gauges in India, Singapore and Indonesia dropped more than 1%. Indonesian stocks were on track to enter a technical correction as investors looked to cash out from one of Asia’s hottest markets for 2022.

Japanese equities climbed as traders returned from a holiday; as investors assessed the impact of China’s reopening and US job data that showed slower-than-expected average wage growth. The Topix Index rose 0.3% to 1,880.88 as of the market close in Tokyo, while the Nikkei advanced 0.8% to 26,175.56. Daikin Industries Ltd. contributed the most to the Topix Index gain, increasing 5.3%. Out of 2,162 stocks in the index, 1,092 rose and 953 fell, while 117 were unchanged. “Japanese stocks benefited from the belief that the Fed’s next rate hike will be more moderate,” said Tomo Kinoshita, a global market strategist at Invesco Asset Management. “China’s reopening has a positive impact on Japanese stocks, and inbound demand will resume once regulations around Chinese tourists are eased.”

“After the sharp rally, Asian markets could see a bout of profit taking amid headwinds from tighter financial conditions and no respite in Fed rate-hike outlook,” said Nitin Chanduka, a strategist at Bloomberg Intelligence.  Two Fed officials said the central bank will likely need to raise interest rates above 5% before pausing and holding for some time. Still, the recent rally in Chinese equities may have more legs as consumption-driven firms drive the reopening rebound further and China shifts its focus to economic growth. Investors expect a strong 2023 for both Chinese stocks and the yuan as Asia’s largest economy bucks the global trend of weakening expansion. Morgan Stanley turned even more bullish on the market, raising price targets further and expecting China to top global equity-market performance in 2023.  “We remain of the view that Asian investors should use this volatility in 1Q23 as an opportunity to raise exposure,” said Chetan Seth, an Asia equity strategist at Nomura Holdings. 

Australian stocks nudged lower after Fed speakers dampened risk sentiment. The S&P/ASX 200 index fell 0.3% to close at 7,131.00 as investors assessed hawkish commentary from Fed officials. The retreat halted the benchmark’s four-day run of gains. Miners and banks were the biggest drags on Tuesday. In New Zealand, the S&P/NZX 50 index rose 0.2% to 11,665.26

Stocks in India resumed a decline after bellwether Tata Consultancy’s quarterly earnings showed increasing caution over technology spending amid an uncertain economic outlook. The S&P BSE Sensex fell 1% to 60,115.48 in Mumbai, while the NSE Nifty 50 Index declined by an equal measure. Both the gauges are close to extending their losses from peak levels last month to 5% as investors resort to profit-taking at the start of the earnings season. Sixteen of BSE Ltd.’s 20 sector sub-gauges declined, led by telecom companies, while Reliance Industries was the biggest drag on the Sensex, plunging 1.5%. Tata Consultancy Services closed 1% lower after its net income for the fiscal third quarter trailed estimates. Foreign investors have been sellers of local shares this month, taking out about $602 million through Jan. 6 after $167m of outflows in December.

In FX, the Bloomberg Dollar Index jumped near session highs after the greenback initially slipped against most of its Group-of-10 peers. The dollar finds itself at a make-or-break technical moment, with its two-year rally under threat as key US inflation data looms.

• The euro rose to a daily high of around $1.0750 in European session. The euro hit fresh cycle highs Monday and options pricing is coming to reflect a more constructive outlook in the short-term. Bunds and Italian bonds dropped, underperforming Treasuries
• The Canadian dollar was steady. USD/CAD’s downward path is being refueled in the options space as traders position for an extended period of US dollar weakness
• The Australian dollar was the worst G-10 performer. Sovereign bonds inched up
• The yen was steady at 131.80 per dollar. Tokyo’s inflation outpaced forecasts to hit 4% for the first time since 1982, suggesting the underlying price trend is stronger than expected by economists, a factor that could further fuel speculation the Bank of Japan will adjust policy again

In rates, Treasuries ease lower, following wider losses across core European rates amid supply pressures and ahead of a Riksbank conference on central bank independence where ECB’s Schnabel, BOE Governor Bailey and Fed Chair Powell are all scheduled to speak. US 10-year yield around 3.56%, cheaper by 3bp on the day with bunds and gilts lagging by additional 2.5bp and 2bp; long-end Treasuries outperformance flattens 5s30s by 1.5bp vs Monday’s close.  Front-end and intermediates lead slight losses in Treasuries, flattening 5s30s spread. After Powell appearance, the year’s first auction cycle begins at 1pm ET with $40bn in 3-year new issue, followed by $32b 10-year, $18b 30-year reopenings on Wednesday and Thursday.  European bonds are also in the red with Bund futures underperforming their UK counterparts. The Gilt curve bear steepens with 2s10s widening 2.1bps.

In commodities, crude futures reversed an earlier drop to trade higher. WTI Has added 0.5% to trade near $75.00. Spot gold rises roughly $5 to trade near $1,877/oz.

Bitcoin is support above the USD 17k mark, holding towards the top-end of USD 17133-17294 parameters.

Looking to the day ahea, at 9 a.m., Fed Chair Jerome Powell will speak at an event hosted by the Swedish central bank. Other speakers include  BoE Governor Bailey, BoJ Governor Kuroda, BoC Governor Macklem, and the ECB’s Schnabel, De Cos, and Knot. An hour later, we’ll get the latest data on wholesale inventories. At 10:30 a.m., President Joe Biden will meet Canada’s Justin Trudeau, while Treasury Secretary Janet Yellen meets Canadian Deputy Prime Minister Chrystia Freeland at 1:30 p.m. The US will sell $40 billion 3-year notes at 1 p.m.

Market Snapshot

• S&P 500 futures down 0.5% to 3,896
• STOXX Europe 600 down 0.7% to 445.05
• MXAP little changed at 161.72
• MXAPJ down 0.3% to 534.27
• Nikkei up 0.8% to 26,175.56
• Topix up 0.3% to 1,880.88
• Hang Seng Index down 0.3% to 21,331.46
• Shanghai Composite down 0.2% to 3,169.51
• Sensex down 1.1% to 60,097.38
• Australia S&P/ASX 200 down 0.3% to 7,131.00
• Kospi little changed at 2,351.31
• German 10Y yield little changed at 2.27%
• Euro up 0.2% to $1.0751
• Brent Futures up 0.1% to $79.73/bbl
• Brent Futures up 0.1% to $79.74/bbl
• Gold spot up 0.3% to $1,876.70
• U.S. Dollar Index little changed at 103.06

Top Overnight News from Bloomberg

• Cost pressures in corporate Germany appear to be easing, with fewer companies planning price increases during the coming months. Price expectations for the whole economy fell to 40.3 points in December from 46.2 points the previous month, according to a survey by the Ifo Institute published Tuesday
• Back in October equities and bonds were breaking from their normal settings to move together far more tightly than at almost any stage in history. Since then, the ties have only become tighter, as the prospects of an end to Fed rate hikes helps to drive gains for both Treasury futures and S&P 500 contracts
• East European nations started 2023 with a flurry of dollar issuance, putting the region on track for a record year as it rediscovers the foreign-debt market beyond its traditional euro-denominated sales
• Deflationary pressure in China worsened in the fourth quarter as the economy slumped, with price-growth likely to be subdued even when the economy rebounds later this year, according to China Beige Book International
• Egypt’s urban inflation accelerated at its fastest pace in five years as several rounds of currency devaluation filtered through to consumers

A more detailed look at global markets courtesy of Newsquawk

APAC stocks traded mostly lower as the risk appetite in the region stalled following a similar handover from Wall St where the major indices failed to sustain early gains despite a further dovish Fed repricing. ASX 200 was lacklustre amid weakness in industrials and mining stocks, although price action was rangebound amid the lack of any major fresh drivers. Nikkei 225 outperformed as it played catch-up to Monday’s advances on return from the extended weekend but with upside capped as participants also reflected on weak Household Spending and firm Tokyo CPI data releases. Hang Seng and Shanghai Comp were indecisive as the border reopening euphoria faded and despite reports that China will cut VAT for small businesses, while the PBoC also continued to drain liquidity.

Top Asian News

• Chinese state media noted that the COVID-19 wave is past its peak in many parts of China.
• China’s embassy in South Korea stopped issuing short-term visas for Korean citizens visiting China and said it will adjust policy subject to the lifting of South Korea’s discriminatory entry restrictions against China, according to Reuters. Subsequently, the embassies in Japan took the same step.
• China’s State Planner publishes registration rules for mid- & long-term foreign borrowings by companies, aimed at promoting orderly offshore financing.
• PBoC is to increase financial support for domestic demand and the supply system, to guide the balance sheets of high-quality real estate enterprises back to a safe range, ensure steady and orderly property financing.

European bourses are underpressure, Euro Stoxx 50 -0.5%, in a continuation of the tepid APAC tone amid minimal newsflow. US futures are similarly contained and are diverging slightly around the unchanged mark pre-Powell. Amazon (AMZN) intends to close three UK warehouses (will impact 1,200 jobs), according to the PA.

Top European News

• ECB’s Schnabel says greening monetary policy requires structural changes to our monetary policy framework rather than adjustments to our reaction function. Preliminary inflation data for December point to a persistent build-up of underlying price pressures even as energy price inflation has started to subside. Interest rates will still have to rise significantly at a steady pace to reach levels that are sufficiently restrictive.
• Adyen, Nexi to Be Hit by Weaker Card Spending, Barclays Says
• Teneo Is Said to Near Deal to Buy British PR Firm Tulchan
• RBC Sees Good Growth For European Luxury and Premium Brands
• Uniper Says CEO and COO to Resign After Government Takeover

FX

• Dollar is trying to regroup ahead of Fed Chair Powell, but DXY is heavy on the 103.000 handle and mixed vs majors.
• Kiwi marginally outperforming as Aussie retreats with Yuan after some Chinese officials warn about 2-way volatility in 2023.
• AUD/NZD cross reverses towards 1.0800 from 1.0860+, USD/CNH bounces from 6.7585 to almost 6.8000.
• Euro consolidates on a 1.0700 handle vs Buck, but Pound runs into resistance pips from 1.2200
• PBoC set USD/CNY mid-point at 6.7611 vs exp. 6.7613 (prev. 6.8265)

Fixed Income

• Bonds retreat further from peaks in consolidation and consideration of heavy conventional and syndicated issuance.
• Bunds sub-137.00 and very close to Monday’s base, Gilts mostly under 102.00 and T-note below par within a 114-19+/11 range.
• Focus on Central Bank speakers at a Riksbank symposium where ECB’s Schnabel has already been hawkish.
• Saudi Arabia has begun marketing a three-part USD bond, via Bloomberg.

Commodities

• Crude benchmarks spent much of the European morning little changed, but have recently broken out of and eclipsed initial parameters, with upside of circa. USD 0.50/bbl as such.
• Barclays remains constructive on the space reiterating its Brent 2023 forecast of USD 98/bbl; writing there is the potential for USD 15-25/bbl of downside if the slump in global manufacturing worsens..
• Goldman Sachs cut its Summer 2023 TTF price forecast by EUR 80 to EUR 100/MWh, citing exceptionally warm realised and forecast weather, as well as strong energy conservation.
• Iraq’s December crude production was unchanged from November at 4.43mln BPD; in-line with its OPEC+ quota.
• Large Chinese nickel producer Tsingshan is in talks with struggling Chinese copper plants regarding processing its material which could double Chinese refined nickel output this year, according to Mining.com.
• LME says further work will be required to prepare and communicate to the market a detailed implementation plan re. the Oliver Wydman review.
• Spot gold and silver are diverging a touch and remain in close proximity to the unchanged mark in similarly narrow ranges, base metals are generally contained though the negative APAC bias remains in play.

Geopolitics

• US Pentagon is mulling sending Stryker armoured vehicles to Ukraine in an upcoming aid package, according to people familiar with the matter cited by Politico.
• UK is willing to send battle tanks to Ukraine with PM Sunak supportive of Challenger II supply that could provide Ukrainian President Zelensky with a ‘knockout punch’, according to The Telegraph.
• Russian Defence Minister Shoigu says Moscow will develop its nuclear triad and be the main guarantee of Russian sovereignty, according to Interfax.

Crypto

• Bitcoin is support above the USD 17k mark, holding towards the top-end of USD 17133-17294 parameters.

US Event Calendar

• 06:00: Dec. SMALL BUSINESS OPTIMISM, 89.8; est. 91.5, prior 91.9
• 10:00: Nov. Wholesale Trade Sales MoM, est. 0.2%, prior 0.4%
• 10:00: Nov. Wholesale Inventories MoM, est. 1.0%, prior 1.0%

Central Bank Speakers

• 05:10: Bailey, Schnabel, Macklem Speak in Stockholm
• 09:00: Powell Discusses Central Bank Independence at Riksbank Event

DB’s Jim Reid concludes the overnight wrap

Markets looked set to start the week off with a positive start across the globe yesterday until the last hurdle as the S&P 500 slipped around 1.5% from the European close to end -0.07%. The narrative explaining the reversal centred around more hawkish Fed speak but short-end markets didn’t move at all over this period so one has to be cautious on the reasons for the dip.

For the record though, Atlanta Fed President Bostic indicated that the Fed was committed to raising interest rates into a “5-5.25% range” and then holding there through 2024 in order to stamp down on excess demand in the economy. The length of time and the implication that rate cuts were not imminent seems to have been what the market grabbed on to, and this mirrors the comments from the FOMC minutes earlier this month, which indicated the Fed’s concern over a “pause” being mistaken by the market as a “pivot”. Bostic also was in favour of slowing rate hikes to 25bps in February if the inflation print on Thursday showed consumer prices cooling after the payrolls data last Friday showed slowing wage growth. Separately, San Francisco Fed President Daly said that she expected the fed funds rate to reach above 5% but that the final level is dependent on incoming inflation data, while highlighting how core services ex-housing has been a persistent source of pricing pressures. Neither Fed presidents are voting members this year, but offer a window into the FOMC’s thinking but as we said, Fed pricing was also little changed after these comments.

Those remarks come ahead of Fed Chair Powell today, who’ll be speaking at an event on central bank independence at 14:00 London time. It’s uncertain whether the topic in question will lead to an in-depth policy discussion, but if we do get any, a key question will be whether he entertains the prospect of a further downshift in the pace of rate hikes to 25bps. That’s currently the base case in markets, but clearly the CPI release on Thursday will be an influence on this and to future FOMC meetings too.

Most of the US session was more about pricing in less Fed hikes over the coming months with the 10yr yield down -2.59bps to 3.532% (fairly flat in Asia this morning). Investors also continued to downgrade their expectations for further hikes from the Fed, with the year-end rate at just 4.44%, down -4.2bps on the day. Those moves were given a further boost by data from the New York Fed, whose data on inflation expectations showed that 1yr expectations fell to a 17-month low in December of 5.0%. That said, the news wasn’t quite as positive when it came to longer time horizons, with 3yr expectations remaining at 3.0%, and 5yr expectations ticking up a tenth to 2.4%.

Even though US equities gave up gains, Tech stocks outperformed with yields lower, with both the NASDAQ (+0.63%) and particularly the FANG+ index (+2.41%) holding on to larger gains. Tesla (+5.9%) was the best performing member of the large-cap index and reduced its YTD losses to -2.77%. And back in Europe, the STOXX 600 (+0.88%) continued to move higher, bringing its 2023 YTD gains to +5.52%, and marking out European equities as one of the top 2023 performers so far.

However, one area that struggled yesterday were European sovereigns, with yields on 10yr bunds (+1.8bps) and OATs (+1.1bps) both rising, even if both had come off their earlier session highs. That followed data showing that Euro Area unemployment remained at a record low of 6.5% in November, which points to a historically tight labour market that could lead to further wage and hence inflationary pressures. Gilts were one of the biggest underperformers, with the 10yr yield up +5.4bps on the day amidst a speech from BoE chief economist Pill. In his remarks, he said that “the distinctive context that prevails in the UK… creates the potential for inflation to prove more persistent”.

In terms of currencies, the US Dollar index (-0.85%) weakened to its lowest level since early June, which brings its declines to almost -10% (-9.73%) since its peak in late-September, back when the UK mini-budget turmoil was at its height and global markets were selling off more broadly. This decline in the dollar very much leans into our strategists’ latest FX blueprint, where they write that various forces such as a reversal in the European energy shock and the economic reopening in China have bearish implications for the dollar with a target of $1.15 by year-end (current $1.07). You can read their full piece here.

That dollar weakness went hand-in-hand with noticeably tighter CDS spreads for most of the day, hitting levels we haven’t seen in months. For instance in Europe, the iTraxx Crossover tightened -8.4bps to 417bps, meaning it’s now more than -250bps beneath its own peak in late-September and the tightest since April. Meanwhile in the US, the CDX HY spread was down -10bps to 438bps at one point, its tightest level since August, before the late turn in risk assets saw CDX HY spreads wider (+1.9bps) on the day. A reminder that we revised our already bullish Euro Q1 credit spreads forecasts tighter over the weekend. See the piece here.

Asian equity markets are mixed this morning with the Hang Seng (-0.34%), the Shanghai Composite (-0.18%) and the CSI (-0.10%) lower whilst the KOSPI (+0.31%) and Nikkei (+0.76%) are edging higher with the latter reopening following a public holiday. DM stock futures are pricing in a weaker start with contracts on the S&P 500 (-0.28%), NASDAQ 100 (-0.35%) and the DAX (-0.85%) all trading in the red.

Early morning data showed broadening signs of inflationary pressures in Japan after Tokyo’s core consumer prices advanced +4.0% y/y in December – the fastest pace in four decades and beating market expectations of a +3.8% gain and against a +3.6% increase last month. With the core inflation figure staying above the BOJ’s 2% price target for the seventh consecutive month, it further heightens the possibility of an additional rise in the nationwide CPI.

There wasn’t much in the way of other data yesterday, although German industrial production grew by +0.2% in November (vs. +0.3% expected), and the previous month’s decline was revised to show a larger -0.4% contraction (vs. -0.1% previously).

To the day ahead now, and there are an array of central bank speakers including Fed Chair Powell, BoE Governor Bailey, BoJ Governor Kuroda, BoC Governor Macklem, and the ECB’s Schnabel, De Cos, and Knot. Otherwise, data releases include French industrial production for November, and in the US there’s the NFIB’s small business optimism index for December.

Since the end of December, a ‘parade of cyclones’ has swamped California. The latest round of torrential rain has caused flooding in Los Angeles County, and still unclear in the early morning hours of Tuesday the extent of the destruction, though social media video on Monday evening shows flooded streets, overflowing streams and rivers, and mudslides in what is usually a dry, sunny place where residents have to worry about drought.

National Weather Service said 34 million people are under flood alerts across Southern and Central California through early Tuesday. In Los Angeles County, a flood warning is in effect through the evening. 

Yet another surge of moisture will inundate #California on #Tuesday for more heavy rain and flooding. A moderate threat (level 3 out of 4) for excessive rain and #flooding covers a large chunk of southern California, including the Los Angeles metro area. #TurnAroundDontDrown pic.twitter.com/BJg4pGfbyz

— National Weather Service (@NWS) January 9, 2023

Dramatic footage has surfaced on social media showing the widespread flooding. 

BREAKING: Ellen DeGeneres shares an intense clip of raging flood waters near her home in Montecito, California, which is under mandatory evacuation following the recent storm system in the area.#southerncalifornia #flooding pic.twitter.com/WetD81ocD2

— Los Angeles Magazine (@LAmag) January 10, 2023

Flooding east of Fresno, California. #flooding #naturaldisaster #water #flood #California pic.twitter.com/zYuBhNGkh5

— Trevor (@trevsaucy) January 10, 2023

California is a mess. Mass-flooding happening all because Gavin Newsom can’t get his shit together. He’s a horrible Governor and the reason for all ot this. Here’s a shot of what Santa Cruz, California looks like. pic.twitter.com/lzIKlpvSwX

— The Sly Show🇺🇲 (@theslyshow) January 9, 2023

Just how bad is the flooding in California?

My daughter just sent me this photo from downtown San Luis Obispo (she’s a senior at Cal Poly) pic.twitter.com/V56Qzj0Zzn

— Adam Taggart (@menlobear) January 9, 2023

Flooding in California. Highway 101 is completely covered by the Ventura River… pic.twitter.com/RGsTxKrV3Q

— Citizen Free Press (@CitizenFreePres) January 10, 2023

EXTREME CAUTION
STATE ROUTE 168 CLOSED at top and bottom of 4-lane.

See dramatic video from @ChpFresno Officer.

Avoid travel to Shaver Lake and above if at all possible!⚠️ @ABC30 @KSEE24 @KMPHFOX26 @CBS47 @FresnoBee @FresnoSheriff @CaltransDist6 @Cal_OES pic.twitter.com/0B2Qqgm85z

— CHP Fresno (@ChpFresno) January 9, 2023

Forecasters estimate the latest round of rain could bring upwards of 5-10 inches in some areas by the end of this week. 

More stormy weather is forecasted for today. NWS said heavy precipitation is expected this morning and will begin to taper later in the day, warning a new and “energetic” low-pressure system was becoming more powerful offshore.

Officials said Los Angeles and San Diego residents faced an increased risk of flash flooding and mudslides. Tropical storm-strength winds were also forecast for San Luis Obispo County. Parts of Highway 101, which runs up and down the West Coast, were closed due to flooded-out sections of the major roadway. 

Santa Barbara County told residents to shelter in place and closed public schools today. Officials told wealthy residents of Montecito, such as Prince Harry and Meghan, the Duchess of Sussex, to evacuate because of the flooding.   

And it was just only six months ago ‘global warming’ alarmists and celebrities were complaining about droughts… 

California Governor Gavin Newsom announced yesterday that storms had caused 14 deaths. He said that figure was higher than deaths caused by “wildfires in the past two years combined.”

The endless deluge is due to an atmospheric river leaving low altitudes with record amounts of rain and high altitude with feet of snow. In the Sierra Nevada, a mountain range in Eastern California, some areas received 1 to 4 feet of snow. 

Most of California has seen rainfall totals in the past few weeks up to 600% higher than average, according to NWS. AccuWeather said the storms have already caused more than $1 billion in losses and damages. 

Richard Branson’s Virgin Orbit Holdings Inc. crashed in US premarket trading after a rocket launched from a Boeing 747 jumbo jet experienced an “anomaly” and prevented the payload of satellites from reaching orbit.

“The rocket then ignited its engines, quickly going hypersonic and successfully reaching space. The flight then continued through successful stage separation and ignition of the second stage. However, at some point during the firing of the rocket’s second stage engine and with the rocket traveling at a speed of more than 11,000 miles per hour, the system experienced an anomaly, ending the mission prematurely,” Virgin Orbit wrote in a statement published on Twitter.

We appear to have an anomaly that has prevented us from reaching orbit. We are evaluating the information.

— Virgin Orbit (@VirginOrbit) January 9, 2023

The crew of the Boeing 747 that air-launched the rocket at 35,000 feet returned safely to the ground. This was Britain’s first attempt to send satellites into low-Earth orbit from its own soil, which turned out to be a flop and a major setback for Virgin Orbit. 

Shares of Virgin Orbit plunged as much as 25% to $1.46 in premarket trading. Since going public through a SPAC merger in late 2021, shares have slumped 85%. 

“While we are very proud of the many things that we successfully achieved as part of this mission, we are mindful that we failed to provide our customers with the launch service they deserve,” Dan Hart, Virgin Orbit CEO, said. 

Authored by Julianne Geiger via OilPrice.com,

• Hedge fund manager Andurand: full reopening of Chinese economy could send oil prices past $140 per barrel.

• Andurand: The market is underestimating the scale of the demand boost.

• Andurand did say last week that oil demand will be limited somewhat by a growth in the EV sector.

Crude oil prices could exceed $140 per barrel yet this year if China’s economy fully reopens, hedge fund manager Pierre Andurand said on Friday.

Andurand sees the possibility of crude oil demand growing by more than 4 million barrels per day this year—a 4% increase over last year. This far exceeds crude demand growth set out for 2023 by other oil market forecasters.

“I think oil will go upwards of $140 a barrel once Asia fully reopens, assuming there will be no more lockdowns, Andurand said, adding that the “market is underestimating the scale of the demand boost that it will bring.”

Andurand’s forecast goes against the trend that crude oil prices set so far this year. During the first week of the year, crude oil prices tumbled by 9% in the first two trading days in what was the worst start to a year since 1991.

Last week, Andurand said in a tweet that oil demand could increase between 3 and 4 million bpd this year, aided by the switch from oil to gas.

Brent crude oil with inflation adjusted chart. The price action in 2022 reminded me of 2006. And fundamentally I think that the price path in 2023 might look like 2007. We will know soon enough I guess. Good luck to all in 2023! pic.twitter.com/ePWSzZW7cB

— Pierre Andurand 🇺🇦🌻🇫🇷🇪🇺 (@AndurandPierre) January 8, 2023

China’s reopening has been on the oil industry’s radar ever since it employed its zero-covid policies and locked down much of its economy. China only recently made significant changes to its covid policies, abandoning its strict measures in favor of relaxed testing requirements and travel restrictions. But China’s reopening has been plagued with a new wave of Covid, spooking many oil bulls off what would be their rejoicing at what should be a significant bump in demand.

Andurand did say last week that oil demand will be limited somewhat by a growth in the EV sector, as EVs have the potential to displace 600,000 bpd of oil demand.

The Scandinavian countries are continuing their militarized posture in response to the Russian war in Ukraine, with Sweden’s government being the latest to issue a surprise announcement and unusual move, given its longtime peace and prior stance of historic neutrality. 

On Monday Prime Minister Ulf Kristersson unveiled that new steps are being taken to reintroduce conscription for civilians, toward bolstering the country’s emergency response services, given new realities as a result of Russia’s military action in Ukraine.

Kristersson said the civil service is taking steps starting this week: “We’re going back to a situation where we have a formalized civil duty,” he said at a press briefing alongside Defense Minister Pal Jonson and Civil Defense Minister Carl-Oskar Bohlin.

They cited the conflict in Ukraine and Russian aggression as making necessary a greater and broader readiness posture in case of a state of emergency, or even potential attack on the nation.

Civil Defense Minister Carl-Oskar Bohlin stressed: “Experiences from Ukraine are clear – when it comes to protecting the civilian population, rescue services are put under very heavy pressure.”

Sweden had such conscription plans in place for emergency civil services during the height of the Cold War. National media reports say that according to early government discussions, as many 3,000 people could be called up during the beginning phase of the plan.

But details are still being ironed out, with Bohlin adding, “We do not know exactly how many may be covered by the duty. We see that the municipal rescue service today is not designed for the demands of a high alert and ultimately an armed attack.”

After existing throughout much of the 20th century, the Swedish government finally abandoned compulsory civil service, given the Cold War had definitively ended by the prior decade, and as Europe hadn’t seen a major war since WWII.

By Michael Kern of OilPrice.com

Russia has ramped up oil production from the Sakhalin-1 project and expects the field to soon pump at the full level of 220,000 barrels per day (bpd) after the project’s previous operator, U.S. supermajor ExxonMobil, quit Russian operations, an industry source with knowledge of the situation told Reuters on Monday.

Currently, oil production at Sakhalin-1 is around 150,000 bpd, or 65% of its capacity, according to Reuters’ industry source. Output is set to hit the 220,000 bpd peak level in “three to four weeks,” the source added.

Exxon announced at the start of March 2022 that it was going to withdraw from Sakhalin-1 following the Russian invasion of Ukraine. Exxon said it would exit the venture, as well as all its Russian projects, and make no new investments in Russia. In April 2022, Exxon declared force majeure on the Sakhalin-1 project due to Western sanctions against Moscow. Before the war in Ukraine, the project exported some 273,000 barrels daily of Sokol crude, with the main destination for the shipments being South Korea. Sakhalin-1 crude was also shipped to Japan, Australia, Thailand, and the United States.

After Exxon abandoned the project, oil production at Sakhalin-1 collapsed. 

In October, Russia removed Exxon as a shareholder from the Sakhalin-1 oil and gas project and transferred its stake to a Russian business entity. Exxon had a 30-percent stake in Sakhalin-1, but Russian President Vladimir Putin signed a decree with which a new entity was set up to manage the operations of the Far East oil and gas project. The decree allowed the Russian government to distribute the stakes in the project and kick out foreign partners if they saw fit.  

Russia has decided to let Japanese firms keep their stake in the Sakhalin-1 oil project in Russia’s Far East as Moscow reshuffled ownership of domestic oil and gas projects after a mass exodus of Western firms following the Russian invasion of Ukraine.     

The bulk carrier “Glory,” carrying grain from Ukraine to China, suffered “equipment failure” and went aground early Monday in the Suez Canal, the canal authority said. The vessel was refloated, and canal traffic was restored before major disruptions plagued the Egyptian waterway. 

“The authority’s marine rescue team dealt professionally with a sudden technical failure of the machines of the bulk vessel GLORY at kilometer 38 passing within the northern convoy on its journey coming from Turkey and heading to China,” the Suez Canal Authority tweeted.

“The towing of the ship Glory has now started with the Authority’s tugboats,” it added. The Suez Canal Authority said the technical failure was engine-related. 

Canal services firm Leth Agencies wrote there was a brief delay on the canal, but it has since been restored. 

M/V GLORY has been refloated by the Suez Canal Authority tugs.

21 vessels going southbound will commence/resume their transits. Only minor delays expected.

— Leth (@AgenciesLeth) January 9, 2023

The 225-meter vessel was loaded with nearly 66,000 metric tons of corn from Ukrainian and was headed for China, according to Istanbul-based Black Sea Grain Initiative Joint Coordination Center. 

Glory isn’t the first vessel to run aground in one of the world’s most important waterways. Ever Given, a massive container ship blocked the canal in March 2021 for six days. Last August, the Affinity V oil tanker ran aground and was freed after six hours. 

By Charles Kennedy of OilPrice.com

Shipping rates in the Black Sea have risen by 20% since the start of the year as war risk insurance premiums increase, Reuters reported, citing unnamed industry sources.

What’s more, some insurers have stopped providing coverage for ships and planes moving goods to and from Belarus, Russia, and Ukraine. Reinsurers have also pulled out of the region on heightened risks, the report noted.

The Black Sea, which is shared by Romania, Bulgaria, Ukraine, Russia, Georgia, and Turkey, is a major oil and oil product shipping artery.

“The effect of (the exit of reinsurers) is reducing (underwriting) capacity in the market for war risk and will mean people will pay more this year,” one of the Reuters sources explained.

These higher rates and limited availability of reinsurance coverage add to industry woes related to the G7 price cap imposed on Russian oil exports. Per the rules of the cap regime, Western insurers, which constitute about 90 percent of all maritime insurers, are banned from providing coverage for vessels carrying Russian crude sold at over $60 per barrel.

According to a recent FT report, about a quarter of Russian oil shipments in December had Western insurance coverage, suggesting at least this quarter was sold at less than $60 per barrel. Indeed, Russia’s Urals has been trading below $60 per barrel for more than a month.

Higher freight rates for Black Sea shipping, however, would add to the costs of the goods being shipped through the chokepoint.

“For shipments going in and out of Russia you will find premiums going up. It could easily rise by 50% (from the end of last year) to reflect the cost of capital from not being reinsured,” another Reuters source said.

On the flip side, tanker rates have declined despite expectations of a spike after the EU embargo on Russian crude went into effect. Among the reasons is the embargo itself: European refiners ramped up their intake of Russian crude before December 5 and after that date came the buying spree subsided and died out, effectively reducing demand for tankers.

Authored by Yves Smith via NakedCapitalism.com,

Ooh, things are getting to be fun! Nothing like watching geopolitical jousting out in the open. Here, we have the US (and NATO) attempting to push around Türkiye, a country that holds far too many cards to meekly accept Western dictates. The immediate contratemps that has just heated up is Türkiye’s threat to block Sweden’s bid to join NATO, which any NATO member can bar. Türkiye demanded that Sweden stop supporting what Türkiye deems to be Kurdish terrorists and made specific requests, including extraditions. It seemed highly unlikely that Sweden would be willing to accede to all of Türkiye’s demands, and Sweden just said so:

Conventional wisdom is that Türkiye will eventually knuckle under and will waive Finland and Sweden in. It would be too monstrously embarrassing and would worsen rifts in the bloc otherwise. But Türkiye will need some sort of bribe to go along. And is has to be visible for the sake of Erdogan depicting that he go something in return for his partial climbdown on his Kurdish terrorist position. But what might that sweetener be?

If you were to read only, say, the likes of the Economist, you’d have the strong impression that Türkiye was a vassal state that doesn’t know its place.

For those of you new to this plot line, NATO offered super duper expedited membership to Sweden and Finland. NATO acted as if the two Nordic states would be voted in quickly. Türkiye almost as quickly said it would refuse to accept their application, but backed right before an end-of-June NATO meeting. From the Guardian:

After a period of intensive negotiations, Jens Stoltenberg, Nato’s secretary general, said on Tuesday evening: “I am pleased to announce that we now have an agreement that paves the way for Finland and Sweden to join Nato.”

“Turkey, Finland and Sweden have signed a memorandum that addresses Turkey’s concerns, including around arms exports and the fight against terrorism,” he added….

[Swedish Prime Minister Magdelena] Andersson said she had shown the Turkish leader changes in Sweden’s terrorism legislation set to come into force next month.

“And of course, we will continue our fight against terrorism and as Nato members also do so with closer cooperation with Turkey,” the Swedish premier said.

NATO and EU leaders acted as if everything was settled. But voting on accepting the application and voting to approve membership are two different matters. Türkiye and Hungary have not yet approved the Sweden/Finland ascension (Hungary’s is allegedly because its Parliament hasn’t gotten to it yet, but some commentators contend pro-Russian officials are throwing sand in the gears).

Erdogan held back Türkiye’s approval for Sweden because he wanted to see performance on Sweden’s commitments. One of Edogan’s asks that Sweden agreed to, which at the time struck me as something Sweden either would or could not deliver on, was the extradition of specific individuals. From EUObserver:

Turkey has demanded Sweden extradite 33 Kurdish separatists and people linked to “FETÖ” — Ankara’s name for followers of Fethullah Gülen, a US-based Muslim leader, whom Erdoğan blames for organising a failed coup in 2016.

Sweden has so far extradited two.

In fact, Sweden had signaled that it was unlikely to comply much if at all with the extradition part of the deal. Again from EUObserver:

“The Swedish government must comply with Swedish and international law in extradition matters, which is also made clear in the trilateral agreement,” Sweden said, referring to a three-way accord on Nato enlargement with Finland and Turkey.

The agreement to secure Türkiye’s vote for Sweden blew up over the attempt to extradite a publisher who is part of Fethullah Gülen and Erdogan sees as an important figure in the coup attempt against him. From Associated Press:

Sweden’s top court on Monday rejected an extradition request for a man wanted by Turkey, saying the Scandinavian country does not criminalize the act he is accused of committing.

In a statement, the Swedish Supreme Court said there were “obstacles to extradition because it is a matter of so-called political crimes, i.e. crimes that are directed against the state and that are political in nature.”

The court in Stockholm said there was “a risk of persecution based on the person’s political views” if he were returned to Turkey.

The court did not name the man who was the subject of Turkey’s request. Swedish news agency TT identified him as Bulent Kenes and said the Turkish government wants him in connection with a 2016 coup attempt.

Erdogan has made clear that Kenes was a priority. Again from Associated Press:

Erdogan singled Kenes out last month during a joint news conference with the Swedish prime minister in Ankara.

“There is one member of the (Gulen) terrorist organization in Sweden, whose name I will give: Bulent Kenes,” Erdogan said. “For example, the deportation of this terrorist to Turkey is of great importance to us, and we of course want Sweden to act with more sensitivity (on the issue).”

And in a development that doesn’t seem to have gotten much notice in the press, Erdogan raised his demands after the Kenes ruling. From the Stockholm Center for Freedom, four days after the Supreme Court ruling:

Turkish authorities have expanded the list of people, the majority of them political dissidents, whose extradition is demanded from Sweden, increasing the number from 33 to 42, Turkish Minute reported, citing Radio Sweden.

Sweden and Finland broke with decades of military non-alignment and applied to join NATO in response to Russia’s February invasion of Ukraine. Turkey and Hungary are the only NATO members yet to ratify the Nordic neighbors’ applications.

Turkey has accused Finland and Sweden, in particular, of providing a safe haven for outlawed Kurdish groups it deems “terrorists” as well as some political dissidents and has refrained from ratifying their NATO bids despite an agreement in Madrid in June.

According to Radio Sweden, the Turkish government’s list of people whose extradition is demanded from Sweden includes 16 alleged members of the outlawed Kurdistan Workers’ Party (PKK), 12 people with alleged links to the faith-based Gülen movement and seven people from leftist groups in addition to seven people who are accused of such crimes as smuggling.

Oddly, the article does not point out that the PKK is a recognized terrorist organization; the US put PKK on its list the same day it added Hezbollah and Shining Path. One would assume extraditing them plus the accused smugglers would be viable.1

However, Sweden said it is done with catering to Türkiye to get its NATO vote. From the Financial Times:

Sweden has said Turkey is demanding concessions that Stockholm cannot give to approve its application to join Nato as the prime minister insisted the country had done all it could to meet Ankara’s concerns.

Ulf Kristersson, the new centre-right leader, on Sunday threw down the gauntlet to Turkey in the clearest indication yet from Stockholm that it could do no more to help persuade Turkey to drop its opposition to Sweden and neighbouring Finland joining the western military alliance.

“Turkey confirms that we have done what we said we would do. But they also say that they want things that we can’t and won’t give them. So the decision is now with Turkey,” Kristersson told a Swedish defence conference.

Sweden is rubbing salt in Türkiye’s wound by misrepresenting what its Foreign Minister said. From Reuters in Turkey calls for more action from Sweden on extradition for NATO backing, three days after the Supreme Court ruling that blocked Kenes’ extradition:

[Foreign Minister Mevlut] Cavusoglu said Turkey appreciated Sweden’s steps so far. “However, there is no concrete development regarding the extradition of terrorism-related criminals and the freezing of their assets,” he said….

“If Sweden wants to be a NATO ally, we have to see concrete cooperation. The negotiations are carried out in a positive atmosphere, but the denial of extradition of Kenes has intoxicated this atmosphere,” Cavusoglu said at the press meet.

In other words, Türkiye clearly reminded Sweden that it had not delivered on its commitments. Türkiye reminded Sweden that it needed to follow through to get Türkiye’s NATO vote. But Sweden is now trying to present Türkiye as somehow having come around to Sweden’s position.

Where is the counter-offer? At a minimum, it sure looks like 23 people were good candidates for extradition. Using a high-profile single case as a basis for dropping the entire matter looks like bad faith. After all, 2/3 of the attempts so far had succeeded.

This is a very long winded introduction to a key point, that Türkiye has tons of leverage and therefore has and will continue to play the Collective West off against the rest of the world. The only way that stops would be if NATO manages to do an own goal on the order of the anti-Russia economic sanctions and gets Türkiye to hike out of NATO. There’s no process for removing a NATO member2 Türkiye very very much likes the advantage it gets against Russia by being in NATO, so it is extremely unlikely that Türkiye would depart of its own accord.

So Türkiye in NATO looks increasingly like those old pre-nup marriages, where both parties really would like to be done with each other but can’t afford to get divorced.3 Türkiye’s assets include:

The Dardanelles

Second biggest NATO army, and the biggest in the European theater:

Incirlik Air Base. This is the airbase the US uses for Middle Eastern operations. And reflecting Türkiye’s position, it’s not run on normal US-as-occupier airbase lines. From MilitaryBases.com:

The base is in Turkey, which means that it is operated by both the US and the Turkish governments, unlike other co-bases. Most other military installations are operated by the US government, but under the regulation of the hosting government.

Incirlik has held (as of 2016) and may still hold as many as 50 hydrogen warheads.

Things started to go very pear shaped with the US after the 2016 coup attempt. Aljazeera gives a very good overview. Erdogan is very unhappy that the US has refused to extradite Fethullah Gulen. While Türkiye apparently has not come up with strong enough evidence of Gulen’s personal involvement, it’s not hard to see that a Muslim cleric in the normally not very Muslim-friendly US having a very lavish compound would generate suspicion back home.

This is far from a complete list of dust-ups since then:

Calls in 2016 for Türkiye to be expelled from NATO due to its ouster of Gulen allies (mind you, the purge had started in 2013 but intensified greatly after the coup attempt)

Türkiye ordering Russian S-400 air-defense systems, now twice, leading the US to cancel F-35 sales to Türkiye.4 That might seem like a gift except Türkiye is listed as a funder of the program, which at a minimum means having invested in factories to make some parts. Note that Türkiye signed the deal in 2017. The US cut Türkiye out of the F-35 program the month after Türkiye accepted the first delivery, in 2019. The Trump Administration imposed additional sanctions on Türkiye in December 2020.

The afore-alluded-to 2019 fury when Türkiye launched Operation Spring, against Kurdish (as in American-backed) forces in Syria. Erdogan poured gas on the fire by threatening to stop barring Syrian refugees from entering Europe if he wasn’t allowed to have his way.

Türkiye making some of the right noises about Russia’s conflict in Ukraine but still maintaining and even expanding relations with Russia. Ankara has been explicit: Ukraine and Russia are neighbors and it intends to stay on good terms with both. Türkiye did supply Ukraine with much-touted Bayrakter drones….that wound up big time underperforming. And as we’ll flesh out a bit more below, the Collective West regards Türkiye as not doing its part to support the war against Russia.

However, Türkiye entered into a big economic deal with Russia. The West has tried to block some elements, such as Türkiye banks accepting the Mir card. Türkiye and Russia expect to have work-arounds in place by summer 2023.

The West also can’t be happy at the prospect of Syria and Türkiye teaming up, with Russia helping to broker the deal, to go against “terrorists” which will include pretty much all of the US cat’s paws.

On the Türkiye side, I suspect but can’t prove that one of the reasons for its tart opposition to the Sweden/Finland membership offers was that it was not consulted in advance.

Today, Conor Gallagher provides an important, long-form treatment of a development that Türkiye regards in and of itself as a huge betrayal: the US working with Greece to place missiles on Aegean islands that by treaty were pledged to stay unarmed. The US rationale is that Türkiye has not been an aggressive enough NATO operative, for instance, in its refusal to let warships enter the Black Sea, and more generally, declining to operate as a US/NATO hub in the war, so it is using Greece to get at Moscow. But Türkiye has repeatedly complained that it is also in Greek crosshairs, and Conor and other analysts believe the US moves are meant to punish pressure Türkiye.

Erdogan has reacted in his typical very impolitic manner, leading to further harrumphing that his words prove he’s not a fit member of civilized society. From the Express in mid-December:

Speaking during a town hall meeting with youths in the northern Turkish city of Samsun on Saturday, Erdogan said Turkey had begun making its own short-range ballistic missiles called Tayfun, which, he said, was “frightening the Greeks.”

”(The Greeks) say ‘It can hit Athens’,” said Erdogan, whose comments were aired late Sunday.

He added: “Of course it will. If you don’t stay calm, if you try to buy things from the United States and other places (to arm) the islands, a country like Turkey … has to do something.”

Let’s return to the headline issue: will this Türkiye threat over Sweden just prove to be a show of bluster, as most of the press has been treating it (as well as NATO itself, which has been inviting Sweden and Finland to meetings and extending other privileges normally afforded only to members)? In light of all of the above, that may not be such a safe bet.

Türkiye, interestingly like India, has been trying to navigated a geopolitically independent, self-interested course. But India is not a key member of a US dominated security alliance.

It is hard to calibrate Türkiye messaging compared to its intent. If Türkiye regards the arming of Greece as a serious security threat, which seems likely, it is logical to assume that Türkiye will continue to withhold its approval of Sweden and Finland until the US winds that program back at least to a degree. It’s a clear leverage point on a matter to which the West has hopelessly committed itself.5

However, the US has likely convinced itself that using Greece to mount a joint threat against Russia and Türkiye is strategically necessary. And since it is becoming hard to paper over that the Ukraine war is not going well (witness, for instance the recent Washington Post op-ed by Condoleeza Rice and Robert Gates, Time is not on Ukraine’s side), the US is likely to engage in displacement: since it isn’t getting what it wants in Ukraine, it is going to make damned sure it gets what it wants elsewhere. That means NATO expansion among other things. The odds appear high that the US would regard Türkiye as intransigent and at a time when it feels it can’t afford even an optical setback, as in further delay in getting the Nordic nations in NATO. But instead of giving Türkiye a sweetener, the US and NATO have been big on sticks. So I would expect things to get worse before they get better on this front. And they may not get better.