Goldman’s John Marshall estimates that today’s options expiration will be the largest ever with over $4.9 trillion of notional options exposure expiring, including $490 billion notional of single stock options.

While December expirations are typically the largest of the year, this one breaks all past records.

Options expiring today represent a notional value that is equal to 10% of the Russell 3000 market capitalization. The largest expiration on record.

And with a record $8BN long gamma position about to be unclenched…

As SpotGamma notes, today we see ~30% of S&P500/Nasdaq/Russel gamma expiring, with the bulk of that centered in the:

• 4,700-4,750 area for S&P (470-475 SPY),

• near the 400-405 strikes for QQQ,

• and 200 strike for IWM.

The removal of this gamma with expiration should allow for index volatility to increase – a factor which has already started to come into play.

As you can see below, December expiration is huge with ~1.3trillion of call delta notional set to expire. Puts are essentially nonexistent.

A blow-off-top seems to be consensus now, but options positions seem poised to support a sharp move. Seasonality, rates, and sentiment seem to support higher stocks into year end – and a “stock up, vol up” scenario would accelerate movement. Further, single stock call skews are not all that heavy when we look broadly across names (i.e. calls are not bid to the extremes).

Who could have seen this coming?

And now Fed speakers start to backtrack on the pivot

— zerohedge (@zerohedge) December 14, 2023

It appears the message is not unanimous among The Fed heads.

In a comment almost perfectly opposed to that of Fed Chair Powell, NY Fed’s JohnWilliams appeared on CNBC and poured cold water on the idea of imminent and ongoing rate-cuts.

“We aren’t really talking about rate cuts right now,” Williams said in an interview on CNBC.

Which is odd given that Powell said that:

‘Rate cuts are clearly a topic of discussion out in the world and also a discussion for us at our meeting today.’

When asked about cutting interest rates in March, Williams said “I just think it’s just premature to be even thinking about that.”

The NY Fed head agreed with Powell on something:

“As Chair Powell said, the question is: Have we gotten monetary policy to a sufficiently restrictive stance in order to ensure that inflation comes back down to 2%? That’s the question in front of us,” he said.

“It is looking like we are at or near that in terms of sufficiently restrictive, but things can change,” adding 

“One thing we’ve learned even over the past year is that the data can move and in surprising ways, we need to be ready to move to tighten the policy further, if the progress of inflation were to stall or reverse.”

Williams said he was optimistic the recent improvement on inflation would continue and give the Fed the scope to consider rate cuts later next year.

“If we get the progress I am hoping to see on inflation and the economy, then of course it will be kind of natural to move monetary policy over a period of a few years to a more normal level,” he said.

Additionally, Williams noted that the market may be reacting more strongly than Fed’s forecasts suggest…

And so the market moved.

Stocks dropped…

TSY yields jumped…

Gold dumped (as the dollar pumped)…

And the odds of a March rate-cut are plunging…

Mutiny? Or just good-cop-bad-cop to cap the exuberance?

After three strong ‘beats’ in a row, the Empire State Manufacturing Survey crashed back into contraction, well below expectations in December (from +9.1 to -14.5, +2.0 exp).

The drop takes the measure from ‘expansion’ at 7-month-highs to ‘contraction’ at 4-month-lows…

Source: Bloomberg

The new orders fell six points to -11.3, pointing to a decline in orders for a third consecutive month, and the shipments index fell sixteen points to -6.4, indicating that shipments fell.

The unfilled orders index held steady at -24.0, a sign that unfilled orders continued to fall significantly.

After rising into positive territory last month, the inventories index retreated fourteen points to -5.2, suggesting that inventories moved lower.

The delivery times index dropped ten points to -15.6, its lowest reading in several years, a sign that delivery times shortened.

The index for number of employees fell four points to -8.4, its lowest level in several months, pointing to a modest decline in employment levels.

On the bright side, the prices paid index moved down six points to 16.7, suggesting an ongoing moderation in input price increases, while the prices received index held steady at 11.5, a sign that selling price increases remained modest.

Is this the start of ‘soft’ data’s reversion to ‘hard’ reality?

The Fed – with its six rate-cuts – better hope so.

Authored by Jesse Coghlan via CoinTelegraph.com,

The rules now allow crypto-holding companies to report their paper gains, not just losses, which industry observers say could give firms more confidence to buy…

Bitcoin and crypto may soon see another mass wave of adoption by United States-based firms after a new accounting rule change that lets companies more accurately reflect the value of their crypto holdings. 

Cory Klippsten, the CEO of Bitcoin-only exchange Swan Bitcoin, told Cointelegraph that Bitcoin-holding companies like MicroStrategy and Tesla, which both had to report impairment on their holdings, “can now more accurately reflect their Bitcoin investments’ true value.”

“This change is crucial for a broad range of companies, not just those primarily focused on Bitcoin, encouraging more mainstream corporate adoption.”

The new Financial Accounting Standards Board (FASB) rules released on Dec. 13 that come into effect in December 2024 see the estimated market value of crypto held by companies represented accurately on companies’ accounting books by allowing them to record when they’re holding assets at a gain.

Previously, crypto held by companies was subject to impairment only when the value of crypto decreased on the books, which could not be increased until sold, even if its value increased while being held.

Klippsten added that companies could now use Bitcoin as a “strategic financial asset,” as they would be able to report on their value gains and losses, a feature that could help drive adoption.

Matrixport research head and Crypto Titans author Markus Thielen told Cointelegraph that the rule change “underscores the palpable corporate demand” for incorporating crypto into a firm’s accounting.

“Digital assets are increasingly becoming a crucial component of financial statements,” said Thielen, adding that companies will now have more confidence when valuing their crypto holdings.

“This signals a resounding confirmation that digital assets have firmly established themselves in the financial landscape.”

Others were also excited by the rule change. David Marcus, co-creator of Facebook’s binned stablecoin project Diem, posted to X (formerly Twitter) on Dec. 13, saying the new rules are “actually a big deal,” which remove “a large obstacle standing in the way of corporations holding Bitcoin on their balance sheet.”

You may think this is a small accounting change that doesn’t mean much. It’s actually a big deal. This removes a large obstacle standing in the way of corporations holding #Bitcoin on their balance sheet. 2024 will be a landmark year for $BTC. https://t.co/gV0KRISt8B

— David Marcus (@davidmarcus) December 13, 2023

In a Sept. 6 note following the FASB’s approval of the rules, Berenberg Capital’s senior equity research analyst Mark Palmer said crypto-holding companies could “eliminate the poor optics that have been created by impairment losses under the rules that the FASB has had in place.”

2023 is almost in the history books (the last two weeks of December are usually a volumeless, skeleton crew formality), and the S&P is set to close out the year just shy of all time highs hit in January 2022, largely thanks to the dovish Fed pivot this week and to a relentless buildup (well ahead of said pivot) in Fed reserves which are also closing out the year at 2023 highs…

… and are set for 7 consecutive gains in a row, the longest such stretch since 2017.

S&P futures are up 0.2% as of 7:50am, although today’s smooth meltup sailing is anything but assured as today we see a record $4.9 trillion option expiration quad witching…

… one which will promptly cancel out the record $8 billion in dealer gamma, which has served as rock-solid gamma gravity over the past two weeks, resulting in a potential spike in volatility.

Treasuries were steady after the yield on the 10-year benchmark broke below 4% for the first time since August. The dollar traded in tight range against Group-of-10 peers. In company news, Citigroup is shutting down its municipal business, meaning most of the relevant sales, trading and banking staffers will be leaving in the coming months. Today’s key macro events include industrial production and capacity utilisation for November, along with the Empire State manufacturing survey for December and the latest TIC data release.

In premarket trading, Intel rose 2.3%, looking set to extend recent gains, after the world’s biggest maker of PC processors unveiled new chips for personal computers and data centers as it seeks to break into the lucrative AI hardware space. Here are some other notable movers:

• Costco gains 2.8% after reporting earnings per share for the first quarter that beat the average analyst estimate.
• First Solar rises 2.7%, Enphase gains 3.1% and Sunrun is up by 3.6% after Jefferies initiates a slew of US solar stocks as the broker starts to see tailwinds and a turnaround in performance for the sector.
• Independence Realty Trust falls 2.2% and Camden Property Trust is lower by 0.8% following downgrades from BMO. Analysts cited concerns over new supply in many of the apartment REITs’ markets.
• Rocket Lab USA shares rise as much as 15% after the SpaceX rival blasted off for space for the first time since its September failure.

The Fed ignited a speculative frenzy this week when it affirmed speculation it’s ready to declare victory on inflation and shift to rate cuts without a significant cost to the economy. US equity funds clocked a ninth week of inflows, taking in $25.9 billion, the longest streak since Dec. 2021, according to BofA’s Michael Hartnett.

“The pivot is pretty distinct and the Fed is now talking about rate cuts,” Wei Li, global chief investment strategist at BlackRock, said in an interview with Bloomberg TV. “We’re now keen to really think about the selective opportunities that we can take advantage of, as we think about the year that is going to be characterized by rate cuts.”

A note of caution from Europe’s central bankers that they’re not ready to follow the Fed’s policy pivot damped some of the excitement. European Central Bank Governing Council member Madis Muller said Friday that markets are getting ahead of themselves in betting that the ECB will start cutting interest rates in the first half of next year. Yesterday ECB President Christine Lagarde said the bank had not discussed rate cuts at all.

“The contrast between the resilient US economy adopting a dovish stance and faltering European economies holding on to a hawkish position gives the impression that something is amiss,” Ipek Ozkardeskaya, a senior analyst at Swissquote, wrote in a note to clients.

European stocks are on course to log a fifth consecutive week of gains, boosted by expectations of looser monetary policy in 2024 despite that – unlike the Fed – ECB policymakers yesterday pushed back further on dovish expectations, urging patience and data-dependence before any rate reductions emerge. The Stoxx 600 rises 0.5% to its highest since January 2022, led higher by mining and auto shares. Here are some of Europe’s biggest movers today:

• Trainline shares rise as much as 22% to hit a one-year high following the UK government’s decision to abandon plans to create a rival rail ticketing platform. Barclays upgraded the stock.
• STMicroelectronics shares gain as much as 2.6% in Paris to the highest since August as Citi names the chipmaker as a top pick in Europe’s tech hardware sector.
• H&M shares gain as much as 1.4%, in line with the wider Stockholm stock market, after the Swedish fast-fashion retailer reported 4Q sales figures that analysts say were in line with expectations.
• Inchcape rises as much as 2.7% to a two-month high after BNP Paribas Exane said the automotive stock’s valuation does not reflect its growth potential.
• Atos shares gain as much as 20% after Le Figaro reports Airbus is in advanced talks to buy the French IT services firm’s big data and cybersecurity (BDS) activities.
• Sectra shares jump as much as 17%, the most since Sept. 2021, after the Swedish medical imaging and cybersecurity firm reported an increase in 2Q net sales and operating profit.
• Symrise shares fall as much as 10% after the company posted a profit warning due to inventory writedowns and FX impacts.
• Santander Bank Polska leads a retreat in Polish lenders after the country’s financial regulator published dividend rules for 2024 limiting the maximum payout to 75% of profits.
• Campari shares fall as much as 5.9% after the Italian drinks maker agreed to pay at least $1.2 billion for Courvoisier Cognac, a brand that Jefferies described as “dusty and unloved.”

Earlier in the session, Asian stocks gained, led by advances in Hong Kong after China’s central bank stepped up support for the economy by adding $112 billion of cash into the financial system. The MSCI Asia Pacific Index rose as much as 1.1% to the highest level since early August, with Tencent, Alibaba and BHP among the biggest boosts. Benchmarks in Hong Kong climbed more than 3% after the People’s Bank of China offered a record amount of cash via its medium-term lending facility. Mainland equities also gained. In a further positive, authorities late Thursday relaxed homebuying curbs in Beijing and Shanghai. A batch of data released Friday showed China’s economic recovery remains patchy, putting more pressure on the government to roll out supportive policies to fuel growth.

• Hang Seng and Shanghai Comp were varied with notable outperformance in the Hong Kong benchmark amid tech strength although the mainland lagged after mixed Chinese data in which Industrial Production topped estimates but Retail Sales disappointed despite showing double-digit percentage growth, while House Prices continued to decline and attention was also on the PBoC which maintained its 1-year MLF rate at 2.50% but delivered a record net injection through the facility.
• Japan’s Nikkei 225 was lifted at the open and briefly returned to above the 33,000 level amid the global risk-on mood.
• Australia’s ASX 200 was led higher by the commodity-related sectors after gains in oil and metal prices which helped the index shrug off the latest flash PMIs from Australia which slightly improved but remained in contractionary territory.
• Key stock gauges in India rise, on pace for their record closing highs, driven by a rally in the country’s information technology stocks. The S&P BSE SENSEX Index rose 1.4% to 71,490.13 as of 3:15 p.m. Mumbai time, while the NSE Nifty 50 Index advanced 1.3% to 21,467.80 A gauge of technology stocks on the BSE gains as much as 4.2%, taking its two-day gains to 7.6%

In FX, the euro underperforms, falling 0.3% versus the greenback. The pound rises 0.2% after UK  companies reported their strongest growth in six months. Emerging-market currencies and stocks rose on Friday as investors’ appetite for riskier assets soared after the Federal Reserve sent dovish signals this week. The South African rand led gains among its peers as it advanced as much as 1.2% against the dollar to trade at the strongest since August. The Hungarian forint dropped most in emerging markets after the country blocked the European Union’s planned financial aid package for Ukraine.

In rates, treasuries are mixed with front-end and belly holding small gains after plying narrow ranges during Asia session and European morning. Long-end lags, steepening 5s30s spread by ~2bp. Treasury 10-year yields around 3.915%, ~1bp richer on the day, trailing bunds in the sector by ~6bp following European PMIs. Gilts also outperform Treasuries despite stronger-than-forecast UK services PMI. Bunds jumped after euro area PMI data missed estimates, raising the risk that the region may experience a recession in the second half. German 10-year yields fall 9bp to 2.03%. US session includes manufacturing data and comments by Fed’s Williams at 8:30am New York time.   

In commodities, oil was set to post its first weekly gain in almost two months as the Fed’s latest stance triggered a bullish pulse across markets. WTI rose 0.5% to trade near $72. Spot gold also rose, adding 0.3%

Looking to the day ahead now, and data releases include the global flash PMIs for December, and in the US there’s industrial production and capacity utilisation for November, along with the Empire State manufacturing survey for December and the latest TIC data release. Central bank speakers include the ECB’s Holzmann, Centeno, Vasle, Kazimir, Muller, Scicluna, Simkus and Vujcic, along with BoE Deputy Governor Ramsden and Bank of Canada Governor Macklem.

Market Snapshot

• S&P 500 futures up 0.3% to 4,734.00
• MXAP up 1.0% to 165.58
• MXAPJ up 1.2% to 515.85
• Nikkei up 0.9% to 32,970.55
• Topix up 0.5% to 2,332.28
• Hang Seng Index up 2.4% to 16,792.19
• Shanghai Composite down 0.6% to 2,942.56
• Sensex up 1.2% to 71,347.18
• Australia S&P/ASX 200 up 0.9% to 7,442.69
• Kospi up 0.8% to 2,563.56
• STOXX Europe 600 up 0.3% to 478.09
• German 10Y yield little changed at 2.06%
• Euro down 0.3% to $1.0960
• Brent Futures up 0.4% to $76.88/bbl
• Gold spot up 0.3% to $2,041.46
• U.S. Dollar Index up 0.13% to 102.09

Top Overnight News

• China’s economic data was mixed for Nov, with strong industrial production (+6.6% vs. the Street +5.7% and up from +4.6% in Oct) but relatively soft retail sales (+10.1% vs. the Street +12.5% and up from +7.6% in Oct). BBG
• China will target a 2024 fiscal deficit of 3%, lower than the 3.8% objective for this year, although additional fiscal support could come from off-budget debt. RTRS
• China ramps liquidity via the MLF (the net injection was CNY800B, “the biggest monthly increase on record”) but keeps rates unchanged at 2.5%. RTRS
• The EU has failed to agree a critical €50bn financial aid package to Ukraine after Hungary’s Prime Minister Viktor Orbán vetoed the proposal, throwing into doubt Europe’s ongoing support to Kyiv. FT
• The euro-area dipped deeper into contraction, with Germany and France hit particularly hard. Private-sector activity unexpectedly worsened this month, PMIs show, raising the risk of a recession. ECB speakers echoed Christine Lagarde’s pushback on rate cuts, with Francois Villeroy saying the bank will be patient. BBG
• The EU is set to extend its truce with the US over steel tariffs imposed by Donald Trump until after presidential elections next year. FT
• Fed QT is feeding angst in overnight funding markets over whether officials are misjudging how far it can shrink its balance sheet without causing dislocations. The Fed said it will slow or halt reductions to make sure reserves remain “ample,” but markets participants said it’s unclear what that level is. BBG
• Jan Marsalek, the jet-setting former COO of now-defunct Wirecard, enabled Moscow to fund covert operations around the world, officials say; ‘whiff of Silicon Valley’. WSJ
• Blackstone and CPPIB won a $1.2 billion stake in a portfolio of commercial-property loans from the failed Signature Bank. BBG
• Trading in call options surged to an all-time high during the Fed-fueled stock rally Thursday. Around 43 million calls changed hands, Cboe Global Markets data showed. WSJ

A more detailed look at global markets courtesy of Newsquawk

APAC stocks traded mostly higher after the positive handover from Wall St where sentiment remained underpinned amid encouraging data and as yields continued to decline following the recent dovish Fed pivot, while the region also digested mixed Chinese activity data. ASX 200 was led higher by the commodity-related sectors after gains in oil and metal prices which helped the index shrug off the latest flash PMIs from Australia which slightly improved but remained in contractionary territory. Nikkei 225 was lifted at the open and briefly returned to above the 33,000 level amid the global risk-on mood. Hang Seng and Shanghai Comp were varied with notable outperformance in the Hong Kong benchmark amid tech strength although the mainland lagged after mixed Chinese data in which Industrial Production topped estimates but Retail Sales disappointed despite showing double-digit percentage growth, while House Prices continued to decline and attention was also on the PBoC which maintained its 1-year MLF rate at 2.50% but delivered a record net injection through the facility.

Top Asian News

• PBoC conducted CNY 1.45tln in 1-year MLF lending with the rate kept unchanged at 2.50% for a net injection of CNY 800bln.
• China stats bureau spokesperson said China’s economy recovers as macro policy effects kick in but added that domestic demand is still not sufficient and the economic recovery needs further consolidation. Furthermore, the spokesperson said China is to increase the intensity of macro policies and full-year development targets are expected to be achieved, while short-term adjustments in the property sector are said to be conducive for the stable and sound development of the sector in the long run.
• China is likely to set the 2024 GDP growth target at around 5% and is to target a budget deficit of 3% of GDP in 2024 vs. a revised ratio of 3.8% for 2023, while it may issue off-budget special bonds if the economy requires extra fiscal support, according to Reuters sources.
• China’s MOFCOM said it determined that restrictive trade measures taken by Taiwan against it constitute trade barriers and stated that Taiwan’s restrictive trade measures have caused negative impacts on relevant mainland industries and enterprises. Taiwan’s government later stated they can talk anytime if China is sincere and that issues can be dealt with under WTO mechanisms as both are WTO members, while Taiwan’s government also said China’s trade barrier probe does not accord with the facts and called on China to stop politicking.
• Nio (NIO/ 9866 HK) President says tariffs from EU probe into subsidies for China-made EVs would affect sales forecasts and investments

European equities, Eurostoxx50 (+0.3%), are building on yesterday’s gains; though the FTSE 100 (-0.1%) marginally lags weighed on by losses in heavyweight AstraZeneca (-1.9%) European sectors have a strong positive bias; Automobiles & Parts and Basic Resources are the clear outperformers, with the former seemingly benefitting from broad-based gains within the sector, alongside strength in Renault on a buyback update; Chemicals underperform, hampered by Symrise (-9.2%). US equity futures are entirely in the green, having traded mixed in yesterday’s session; the RTY (+0.9%) continues to outperform.

Top European News

• ECB’s Muller says it is still a little early to celebrate victory over inflation; still a little bit to go to reach 2% inflation, and its still too early to talk about near-term rate cuts, according to Bloomberg. Adds, markets are a bit optimistic if they see cuts in H1.
• ECB’s Holzmann says there was no discussion on rate cuts at yesterday’s meeting; Majority said there are risks to the upside on inflation; Majority are focus on core inflation; When questioned on whether the ECB is at terminal, the chance has increased but there is a remaining chance that they haven’t.
• ECB’s Villeroy says they want to express a message of confidence and patience at the December meeting. Change to the inflation outlook was the important signal; Will bring inflation back to target by 2025; Policy transmission is slightly faster than initially expected; Next policy move should be a lowering of rates “unless surprises”
• ECB’s Vasle says the current policy rate is to help return inflation to 2%
• UBS now expects ECB to deliver its first rate cut in April (prev. June)
• EU is to extend the trade truce with the US until after the presidential election, according to FT.
• Bundesbank Forecasts: HICP: 2023 6.1%; 2024 2.7%; 2025 2.5%; 2026 2.2%; GDP: 2023 -0.1%; 2024 0.4%; 2025 1.2%; 2026 1.3%
• CBRT Survey (Dec): Repo Rate seen at 36.65% (prev. survey 37.01%), USD/TRY seen at 29.6229 (prev. 29.9961), 12-month CPI seen at 41.23% (prev. 43.94%). End-2023 CPI seen at 65.39% (prev. 67.23%). End-2023 GDP growth seen at 4.2% (prev. 4.1%).

FX

• The Dollar is firmer intraday as a function of the softer EUR post-PMIs, whilst the index attempts to trim the hefty post-Fed losses after the ECB and BoE struck a less dovish tone than their US peer.
• Antipodeans are bid intraday largely a factor of commodities gains after a higher-than-expected Chinese Industrial Output metric.
• EUR on a softer footing amid dismal Flash PMI data whereby France and Germany fell deeper into contraction territory, though labour unit cost pressures remain a concern.
• PBoC set USD/CNY mid-point at 7.0957 vs exp. 7.1132 (prev. 7.1090).

Fixed Income

• USTs are a touch firmer on the session having moved in tandem with the EGB reaction and only paring slightly from their 112.22 peak on the Gilt move, which itself is 6 ticks shy of the contract best.
• EGBs are bid across the board with initial contained performance giving way to an approach of the contract high after the morning’s Flash PMI data for December.
• Gilts were initially bolstered by the EZ figures, but then trimmed on the regions own strong PMI data with Services continuing to prop up the economy and crucially with wage pressures still evident.

Commodities

• WTI Jan and Brent (+0.7%) Feb futures hold a modest positive bias, in line with the broader risk tone, with prices also underpinned by firmer Chinese Industrial Output overnight.
• Metals trade on a firmer footing, with spot gold holding a mild positive bias keeping its sight on the USD 2,050/oz level to the upside; Base metal futures are firmer across the board after the Chinese Industrial Output data topped forecasts and reignited demand optimism for the sector.
• Commerzbank says OPEC+ production cuts are likely to keep the oil market in balance at the start of next year despite weaker demand; For WTI, expects price of USD 75/bbl at the end of the first quarter; USD 85/bbl in H2’24
• Commerzbank sees a further price increase to USD 2150/oz for Gold in H2’24; Silver price increase to USD 30/oz by end 2024; Sees further significant upside for Copper and price recovery to USD 9200/t over the course of the year; Sees aluminium around USD 2,800/t next year.
• Qatar reportedly sells February-loading cargoes at discounts and lowest levels in years, according to Reuters sources.

Geopolitics

• Israel reportedly told Washington intensive raids and the large-scale ground operation will be completed within two or three weeks, according to Al Jazeera via social media platform X.
• Yemen’s Houthis said it carried out an operation against a Maersk cargo ship on its way to Israel and that it targeted the ship with a drone after the ship’s crew refused to respond to calls from Yemeni naval forces. Furthermore, US Central Command said a ballistic missile was fired from the Houthi-controlled area of Yemen towards the international shipping lane north of Bab-El-Mandeb Strait on Thursday but there were no injuries or damage from the ballistic missile attack.
• US President Biden’s administration sent messages to the Houthi rebels in Yemen via several channels recently warning them to stop their attacks on ships in the Red Sea and against Israel, according to Axios.
• US President Biden and Turkish President Erdogan discussed the importance of strengthening the NATO alliance including the importance of welcoming Sweden as an ally. Biden expressed support for recent constructive steps in the relationship between Turkey and Greece, while they discussed efforts to increase humanitarian assistance to Gaza and protect civilians and the need for a political horizon for Palestinians, according to the White House.
• EU agreed to open accession talks with Ukraine, while it was separately reported that Hungary’s PM Orban said Ukraine’s membership in the EU is a bad decision and that talks continue on the modification of the budget.
• Hungary held up the deal on EUR 50bln of financing for Ukraine and EU leaders postponed the discussion to January. Furthermore, Dutch PM Rutte said he is fairly confident the EU can reach a breakthrough early next year on Ukraine financing and the EU budget revision, according to Reuters.
• Japan is to ban imports of Russian diamonds for non-industrial use and will impose new sanctions on Russia-related groups and individuals, according to the Foreign Ministry.
• Guyana and Venezuela agreed to continue dialogue on pending matters related to the territorial dispute and to avoid conflict escalation, while the sides agreed to meet again in Brazil to continue dialogue over border issues, according to St Vincent’s PM.
• UKMTO has received reports of an incident in the vicinity of Hodeideah, Yemen
• US Officials say there is an almost complete halt in ship access to Israel’s Eilat port, via AJA Breaking citing Axios

US Event Calendar

• 08:30: Dec. Empire Manufacturing, est. 2.1, prior 9.1
• 09:15: Nov. Industrial Production MoM, est. 0.3%, prior -0.6%
  • Nov. Manufacturing (SIC) Production, est. 0.5%, prior -0.7%
  • Nov. Capacity Utilization, est. 79.1%, prior 78.9%
• 09:45: Dec. S&P Global US Services PMI, est. 50.7, prior 50.8
• 09:45: Dec. S&P Global US Manufacturing PM, est. 49.5, prior 49.4
• 16:00: Oct. Total Net TIC Flows, prior -$67.4b

DB’s Jim Reid concludes the overnight wrap

This is my last EMR of 2023. Many thanks for reading and interacting this year and happy holidays to you and your family if you’re celebrating. Henry will be carrying on the EMR for most of next week so it’s only good bye from me. We have a 14 hour car journey today to the Alps and I still can’t hear due to the ear infection in both ears so it’s not going to be one packed with enlightening conversation. At this rate I’ll be put in the rear with poor Bronte. As it’s my last of the year I’ll add my favourite TV series of 2023 at the end. Regular readers know that I try to carve out 45-60 minutes every night when I’m home to watch TV with my wife. The last week has been with subtitles due to the above. By the way I’ve seen two of the worst films I’ve ever seen relative to the hype this year. Namely “Everything everywhere all at once” and “Barbie”. Perhaps the second one wasn’t aimed at me.

Everything everywhere all at once was a good description of the last 24 hours as there were several stories operating in parallel when it came to markets, albeit slightly less confusing in nature than those in that film. On one level it was more of the same from recent weeks, with the massive rally continuing and the 10yr Treasury yield closing (3.92%) beneath 4% for the first time since July. Indeed, we’ve seen one of the sharpest 2-day declines in real yields since the height of the Covid pandemic (-42.9bps for the 5yr). Moreover, the S&P 500 (+0.26%) closed less than 2% from its all-time high last year, with the small cap Russell 2000 (+3.52% and +2.72% over 2-days) moving into bull market territory, having now risen by +22.2% from its low on October 27.

So there was undoubtedly a lot of good news. But after the wave of euphoria following the Fed meeting, neither the ECB nor the BoE offered the same dovishness with their own decisions, which led markets to row back a bit on the chances of aggressive rate cuts next year. Then we had another batch of decent US data, which led to further questions about how soon the Fed would be able to cut rates. So even though expectations are still far more dovish than before the Fed’s decision, yesterday saw a mild pushback, albeit nothing that was able to break the astonishing market rally we’ve seen into year-end.

Starting from the top, the day began with the dovish narrative in the ascendancy, with European bonds seeing a massive rally at the open as they caught up with the Fed’s decision the previous day. And then in the morning, the Swiss National Bank kept rates on hold and dropped the wording in their statement about possible future hikes. But then we heard from the Bank of England, who struck a much less dovish tone in their own statement. Specifically, they held rates at 5.25%, and three of the nine members on the committee were still in favour of another 25bp hike. The statement also said that monetary policy would “need to be sufficiently restrictive for sufficiently long”, so there wasn’t an equivalent nod to rate cuts like we had from the Fed. Governor Bailey himself pushed back on market expectations, saying that “we are more cautious because we need to see those more persistent elements of inflation, which we see in things like services prices, turn in the right direction quite decisively .”

Shortly afterwards, the ECB then announced their own decision, where they kept rates on hold as widely expected. But as with the BoE, they didn’t echo the more dovish stance from the Fed, and President Lagarde said that “we should absolutely not lower our guard” and that “we did not discuss rate cuts at all”. Alongside that, the ECB also announced that they would reduce the PEPP portfolio by €7.5bn per month on average over H2 2024, and discontinue reinvestments under PEPP by year-end 2024 .

Nevertheless, the ECB did acknowledge the better inflation picture, dropping the wording from previous statements that inflation was set “to stay too high for too long”. Their latest forecasts also expect weaker inflation, with headline inflation now seen falling to 2.7% in 2024 (vs. 3.2% in September ). Looking further out, they even saw inflation falling below target to 1.9% in 2026, but core inflation was still seen at 2.1% then. But even with the downgrades, our European economists see the updated inflation forecasts as too high, with a meaningful downgrade likely by the March meeting. They see the hawkish tilt of yesterday’s meeting as reducing the risk of the ECB cutting as soon as March, but retain their view of rate cuts starting in April with 150bp of cuts by the end of next year. See their reaction note here.

Despite the more hawkish tones from the ECB, sovereign bond yields still fell in Europe yesterday, as the impact of the Fed’s dovishness at the open outweighed Lagarde’s remarks. For instance, yields on 10yr bunds (-6.4bps) initially fell as low as 2.02% intraday, before recovering to end the session at 2.11%. That was echoed elsewhere, with yields on 10yr OATs (-7.0bps) and gilts (-4.6bps) both closing at their lowest in months. The largest yield decline came for BTPs (-13.9bps), as the delayed and gradual reduction in PEPP reinvestments was favourable for sovereign spreads. The Fed’s impact was evident across other asset classes too, as the STOXX 600 (+0.87%) closed at a 22-month high, and the iTraxx Crossover (-24.4bps) saw its biggest daily move tighter since March .

Whilst central banks helped to push back on the European yield moves, the rally in US Treasuries showed little sign of stopping yesterday. Indeed, the 10yr Treasury yield was down a further -9.5bps to 3.92%, though they did rise slightly during the latter half of the US session, having traded as low as 3.88% near the European close, and this morning they’re up another +2.2bps to 3.94%. The 10yr real yield saw an even larger decline of -13.9bps, which builds on the move after the Fed meeting, and brings the 2-day decline to -34.4bps in the 10yr real yield. So this is a substantial easing in financial conditions, and US HY spreads (-29bps) are also at their tightest since April 2022, whilst Bloomberg’s index of US financial conditions is now at its most accommodative this morning since the Fed began hiking rates in early 2022 .

That optimism carried over into other risk assets, with the S&P 500 (+0.26%) posting a 6th consecutive advance, which left the index at a fresh all-time high in total return terms. It also means the index is still on track for a 7th consecutive weekly advance, which would be the first time that’s happened since 2017. Small-cap stocks led the gains, with the Russell 2000 advancing +2.72%, following on from its +3.52% gain the previous day. So maybe some rebalancing going in the small caps’ favour after the FOMC. Tech stocks posted ‘only’ a slight increase (NASDAQ +0.19%), while banks were an outperformer within the S&P 500, up +4.15%.

The risk-on mood was also positive for commodities, with the Bloomberg commodity index (+2.27%) posting its strongest daily gain in over a year, whilst oil prices (Brent +3.16% to $76.61/bbl) are now on course to avoid an 8th consecutive weekly decline .

Whilst that was happening, we had another round of positive data on the surface from the US. For instance, retail sales surprised on the upside in November, with the headline number up +0.3% (vs. -0.1% expected). However downward revisions meant that retail control (which feeds into GDP) netted out in line with expectations. Back to the positives, weekly initial jobless claims fell back to 202k over the week ending December 9 (vs. 220k expected). Next stop will be the December flash PMIs today from the US and Europe, which are one of the last major pieces of data before Christmas. Overnight the initial releases have shown signs of improvement from November, with Japan’s composite PMI back into expansionary territory at 50.4, whilst Australia’s composite PMI picked up to 47.4, from 46.2 last month.

Equity markets in Asia have continued the positive momentum overnight, as the PBoC offered commercial lenders a net 800bn yuan of 1yr loans. However, the data from China has been a bit more mixed, with industrial production up +6.6% year-on-year in November (vs. +5.7% expected), whilst retail sales were beneath consensus at +10.1% year-on-year (vs. +12.5% expected). Against that background, the H ang Seng (+2.18%) is leading gains in the region, with the Nikkei (+0.76%) and the KOSPI (+0.70%) also posting a strong advance. However, the CSI 300 (-0.15%) and the Shanghai Composite (-0.39%) have both lost ground. Looking forward, US equity futures are pointing to modest gains, with those on the S&P 500 (+0.06%) and the NASDAQ 100 (+0.09%) both advancing.

To the day ahead now, and data releases include the global flash PMIs for December, and in the US there’s industrial production and capacity utilisation for November, along with the Empire State manufacturing survey for December. Central bank speakers include the ECB’s Holzmann, Centeno, Vasle, Kazimir, Muller, Scicluna, Simkus and Vujcic, along with BoE Deputy Governor Ramsden and Bank of Canada Governor Macklem.

The federal government’s terrorist watchlist has hit approximately 2 million people worldwide, and includes thousands of Americans, CBS News reports. This revelation, derived from an extensive review of court records, government documents, and interviews with intelligence community leaders, paints a complex picture of national security measures and civil liberties.

Unprecedented Growth of the Watchlist

The Terrorist Screening Dataset, a consolidated watchlist of individuals deemed as known or suspected terrorists, has seen a dramatic increase in numbers. Launched in 2003 with approximately 120,000 individuals, it ballooned to 1.6 million individuals by 2017. As of the end of 2023, this figure has reached an astonishing 2 million, including, as we noted, thousands of Americans.

The Criteria for Listing and Its Implications

According to Russ Travers, a four-decade veteran of the U.S. intelligence community who helped create the watchlist: “It doesn’t mean they’re a terrorist. It means there’s something that has led a department or agency to say, ‘This person needs a closer look.’” However, the criteria for adding individuals to this list remain shrouded in secrecy, with the government neither confirming nor denying an individual’s presence on the list.

Monte Hawkins, overseeing watchlisting policy for President Biden, claims that “those 2 million people who are on the list are on there for a reason,” with a majority being non-U.S. citizens or legal residents. Yet, the lack of transparency and accountability in this process raises significant concerns.

National security officials acknowledge that there are people listed in the consolidated terrorist database whose names should probably be removed, but that there isn’t enough staff to audit every person’s file regularly.

“I’m sure that there are a lot of people that are in the database that are dead, that we don’t even know it,” said Travers.  

The interagency group that oversees the watchlist also administers a second list targeting primarily American gangs with international ties. That other watchlist, known as the Transnational Organized Crime Actor Detection Program, contains another 40,000 individuals, according to a recent audit obtained by CBS News. -CBS News

People on the watchlist have faced various challenges – from being prevented from flying, to failing background checks for employment. The Department of Homeland Security acknowledges that 98% of complaints filed were due to “false positives,” often caused by name similarities.

One striking case involved a Stanford PhD student, who after a nine-year legal battle, was removed from the watchlist due to an FBI agent’s clerical error.

In one case, it took a Stanford PhD student fighting a nine-year court battle to prove that she was wrongfully listed; the FBI finally admitted she was watchlisted by mistake because an agent had accidentally checked a wrong box. 

The FBI told CBS News that it recently revised its criteria to require more identifying information about individuals for them to be added to the database. If enough information is not provided for any individual, that person won’t be listed, and people already on the list will be removed if their files are deemed too thin under the new standard. Officials said they were also prioritizing the collection of biometrics, particularly faces and fingerprints, to reduce cases of mistaken identity. -CBS News

According to the report, the threat of both foreign and domestic terrorism are on the rise, which intelligence community insiders (of course) say means that the watchlist is a critical part of its “early warning system.”

Civil liberties advocates cry foul

Many in the civil liberties field as well as former counterterrorism insiders who have worked directly on the watchlist, have expressed grave concerns over the system’s expansion – noting a multitude of government abuses, errors, and a lack of willingness to admit to and correct mistakes since it launched.

“People might think that the watchlisting system is a remnant of 9/11. It is not,” said Hina Shamsi, National Security Project director at the American Civil Liberties Union. “This is a system that has only expanded.“

By Gregory R. Copley, Editor, GIS/Defense & Foreign Affairs.

Venezuela’s revival of its border dispute with the Cooperative Republic of Guyana may provide an opportunity for the AUKUS pact – Australia, United Kingdom, United States – to reverse or challenge the gains of the People’s Republic of China (PRC), Russia, Iran in South America and the Caribbean.

The territorial dispute over the Essequibo region of Guyana extends back to 1840, ostensibly resolved with the Paris Arbitral Award of 1899, but was revived with the discovery of massive energy reserves off its coast in the early 21“ Century.

This was exacerbated by Venezuela and its allies in 2022-23 for a variety of reasons, and in ways that broke with years of bilateral and multilateral agreements and negotiations between the two states.

The US Southern Command has the new dispute on its radar, and the UK Government and the Commonwealth have been stirred into action. Southern Command, as of early December 2023, had begun conducting joint flight operations with the Guyana Defense Forces, sending a message to Venezuela. And US Secretary of State Antony Blinken told Guyana Pres. Mohamed Irfaan Ali that the US would support “Guyana’s sovereignty and our robust security and economic cooperation”.

Venezuelan Pres. Nicolas Maduro criticized Guyana for involving the United States, even knowing this was an inevitable consequence of the Venezuelan military build-up on Guyana’s border.

As well, several major US energy corporations have a stake in the outcome, given their participation in one of the largest new petroleum fields in the world.

And yet it is Beijing and Tehran that have worked with the Venezuelan Government to escalate the crisis to the point of conflict in order to pull US forces away from build-ups in the Indo-Pacific which challenge, separately, the PRC’s People’s Liberation Army (PLA) expansion, and Iran’s security as Israel and the US move against Iranian military adventurism.

The PRC has for the past few years worked consistently to keep US and UK forces locked into the Euro-Atlantic, and has benefited from the Russia-Ukraine war, the Hamas-Israel war, and the feints of PRC basing in the Atlantic, along with attempts to push Argentina into threatening war again over the Falkland Islands.

The prospect of US and UK military engagement to support Guyana is real, and while it does indeed promise to keep their forces out of the Pacific —to the benefit of the PRC — it also offers a chance for the UK to demonstrate its commitment to a Commonwealth ally and for the US, in particular, to clear the PRC’s influence out of the Caribbean basin, where it has become pervasive. It could also be a test of the AUKUS alliance in that Australia would need to show that it is as committed to the Alliance’s interests outside the Indo-Pacific as well as in it and that it recognized that the alliance’s conflict with the PRC was, indeed, global.

The sudden re-emergence of the prospect of imminent military conflict, then, between Venezuela and neighboring Guyana is more a reflection of the broader strategies of the People’s Republic of China (PRC) and Iran, rather than a reflection of the 1899 Paris Arbitral Award it claims to be. Yes, there is a genuine component of Venezuelan nationalism and competition for territory now that Guyana’s on and gas reserves in the disputed region are known to be among the most significant in the world.

The fact that Venezuela faces a Presidential election in 2024 is also significant and requires Pres. Maduro campaigned on nationalist lines and the promise that the new energy coveries would revive the economy. But Venezuelans know that the extensive national energy reserves — largely heavy petroleum rather than the light crude of the new Guyana deposits — have been poorly managed by the Maduro Government and have yielded little to the Venezuelan voters.

Venezuela, even by its Central Bank estimates, has inflation running at more than 280 percent a year in 2023, although that figure understates the real hollowing of the national economy.

In the midst of all this, Guyana Pres. Mohamed Irfaan Ali and Venezuela Pres. Nicolàs Maduro on December 10, 2023, agreed to meet in St. Vincent and the Grenadines on December 14, 2023, to discuss the issue of the disputed territory in the Essequibo region — after considerable pressure from Brazil, the Caribbean Community (CARICOM), and the Community of Latin American and Caribbean States (CELAC). The matter is already before the International Court of Justice (ICJ), and Pres. Irfaan Ali (People’s Progressive Party/Civic) said that he would abide by the ICJ ruling and that he would not succumb to threats from Venezuela.

Pres. Irfaan Ali, on December 12, 2023, wrote to Dr. Ralph Gonsalves, the Prime Minister of St. Vincent and the Grenadines, to firmly outline the discussions set to take place in Kingstown, St. Vincent, in which the Guyana President expected that CARICOM would stand by its support for Guyana, and reiterating that the talks would not be about a resolution of the border claims by Venezuela, noting that these had already been arbitrated, and that there was no valid dispute over the offshore territorial waters of Guyana, referencing the Stabroek Block, some 120 miles offshore Guyana (and therefore within its exclusive economic zone/EEZ).

The issues of the actual case, however, are secondary to the global geopolitical reality that both the PRC and Iran have been seeking to remove US and Western military pressures on them. The PRC has been seeking to keep the US, in particular, engaged in the Euro-Atlantic space and unable to deploy forces to the Indo-Pacific, and has thus supported the ongoing conflicts between Russia and Ukraine, Israel and HAMAS, and has attempted to prod Argentina into reviving a military threat to Britain’s continued possession of the Falkland Islands in the South Atlantic.

In the Venezuela-Guyana context, the PRC and Iran, along with Russia, are the primary allies of Venezuela, and have been clearly preparing for some time to push the Guyana land claim to the point of conflict, including the postulated Venezuelan military invasion of the Essequibo region of Guyana. Venezuelan troops are already deployed on the border of the 159,500 sq.km (61,600 sq.mi). Essequibo region, which is on the western bank of the Essequibo River, splits Guyana.

It is in the offshore territorial waters and economic zone which relate to the Essequibo region that US oil producer ExxonMobil has discovered 11.4-bn barrels of oil in the area since 2015, making it one of the largest finds of the 21st Century. The oilfields of the offshore Stabroek block produce over 500,000 barrels daily. And ExxonMobil is just one of the petroleum companies exploiting the Guyanese oilfields off Essequibo. Exxon owns 45 percent of Stabroek; Hess, which Chevron is buying, owns another 35 percent; the PRC’s CNOOC holds the remaining 20 percent.

The PRC would fare well, possibly better than now, if the Essequibo landgrab (and seagrab) was successful for Venezuela, but the US companies would be at risk. Logically, then, the US Government would be seen to be forced to defend Guyana’s position, if only in order to protect US economic interests.

Venezuela itself has more than 300 billion barrels of oil reserves, but this is now dwarfed by its previously insignificant neighbor. Venezuelan State oil company PDVSA theoretically has the expertise to exploit the Stabroek block, but would need investment. Its nationalization of the energy industry has also meant that its energy management has become a political tool, generating funds for the military by not the nation. Venezuela could count on some expertise coming from U.S. oil companies, such as Chevron itself which operates with PDVSA, exporting an average of 124,000 barrels per day from Venezuela.

So the situation becomes complex.

In Venezuela’s 2024 Presidential election, Maduro was slated to compete with Maria Corina Machado, an economic conservative and member of the opposition party in the Venezuelan National Assembly. But Machado has been disqualified from holding public office because of her support for U.S. sanctions against the Maduro Government. The U.S. Government has said that sanctions would not be lifted unless the opposition parties could participate in elections.

While Maduro’s election victory would be seen as hollow if there was no credible opposition candidate, it is questionable whether the PRC, Russia, and Iran would be disheartened if Maduro resisted U.S. sanctions threats. They (and Caracas) anticipate that Venezuela would, in the future, be able to trade within the new trading bloc outside the U.S. dollar zone, and as part of the enlarged BRICS (Brazil, Russia, India, China, South Africa) group.

The growth of the non-dollar trading bloc has been largely a result of national leaders wanting to remain outside the threat of U.S. sanctions, a trend that has largely seen the end of the efficacy of sanctions as a viable weapon in U.S. strategic warfare.

The tide seems to be turning against open border immigration policies in Europe, with half measures and false solutions being rejected outright, even by French lawmakers.  

France is now in political crisis and far-left French President Emmanuel Macron has been humiliated after a long sought deal on immigration reform was immediately struck down in a surprise move by the National Assembly without even being debated.  Traditionally, when a legislative effort of this magnitude fails so absolutely, the members of government involved in its drafting are expected to resign. 

The government’s stunning defeat in parliament prompted opposition politicians to call for its dissolution. Jordan Bardella, the president of Marine Le Pen’s National Rally, told BFMTV on Tuesday he was “ready to serve as prime minister”.

The immigration bill was originally presented by Macron as a way to derail the expansive rise of right-wing movements within France, which are gaining power across Europe on the promise that they will stop mass migration and illegal migration policies put in place nearly a decade ago by EU bureaucrats.  Conservative groups have gained considerable ground in the past few years as crimes by migrants receive more attention on the national and international stage.

While the EU vehemently denies that mass immigration leads to rising crime rates, concerted efforts to hide the statistics have been uncovered in the past.  Specifically, authorities in multiple countries have removed migrant status from arrest reports, or made it easy for criminals to refuse to reveal their migrant status upon arrest.  In some cases, crime among immigrants has been covered up by police and politicians, including organized rape gangs in nations like Sweden.  

French statistics do not provide a breakdown of crimes based on race or ethnicity, nor do they reveal immigration backgrounds.  So, when EU officials claim that “there is no link” between migrants and rising crime, this is a lie based on omission.  They often hide such data as a means to obscure any relationship.

In contrast, Denmark’s data includes such information and reveals that migrants and second-generation migrants with Danish citizenship actually have higher crime rates, including instances of murder and physical assault, according to their percentage of the population.   

Germany’s federal police office, the Bundeskriminalamt (BKA), has recently revealed that mass immigration into the country is a significant contributing factor in the surge in violent crime.  The number of crimes involving German citizens – which includes dual citizens who may have been born elsewhere, rose by 8 percent in 2023 compared to non-German suspects which increased by as much as 23 percent. Furthermore, cases involving foreign minors rose considerably by 37 percent.

Ironically, migrant activists argue that the practice of redacting migrant status in criminal reports helps hide police profiling against them; they claim that they are targeted and arrested at a much higher rate than white Europeans.  In reality, migrants are simply much more likely to commit crimes.

In a rare admission by the Ministerial Statistical Department for Internal Security (SSMSI), they reported that 69% of violent robberies and other violent crimes, which include sexual assaults, occurring on public transport in the greater Paris region of Île-de-France were committed by individuals who are foreign nationals.  More comprehensive reports like this are impossible to come by for the whole of France, but what happens in Paris is probably a reflection of most cities across the nation.

European politicians have sought to gaslight the public, telling them that the increase in crime they see around them on a daily basis is in their heads and that there is no migrant problem.  The con game is failing, with more Europeans joining conservative efforts in response as the the only movement willing to acknowledge the problem.  

Macron’s immigration bill was supposed to assuage the concerns of the French citizenry, but much like Democrat sponsored immigration bills in the US, the legislation pretends to address open borders while actually making it easier for foreigners to illegally enter and operate within the country.  

Both leftists and conservatives are claiming a “victory” in the wake of the bill’s failure; leftists claim a win because the bill would have made it easier to deport migrants who commit crimes, which they argue would encourage “racial profiling.” In addition, the bill would have theoretically added obstacles for migrants to relocate family members to France.  Leftists applauded the bills failure, asserting that the act of debating immigration was in itself a display of racism.    

Conservatives claim a win because the bill would have made it easier for migrants to get work visas, which they argue would only incentivize more illegal immigration.  And, any migrants that do get expelled from the country through the new law could simply reenter within days.    

Ultimately, the bill never addressed the greater issues of mass migrant movements or secure borders.  Furthermore, the primary purpose of the legislation was to dilute the growth of conservative influence in French politics, so the defeat of the bill is a far more important win for the right wing.  The French socialist establishment is now in a panic.  

In 2022, France’s “far-right” National Rally party scored a historic success in legislative elections, increasing its number of lawmakers almost tenfold and cementing the party’s rise from fringe status to mainstream opposition.     

Authored by John Mac Ghlionn via The Epoch Times,

OpenAI, the company responsible for ChatGPT, recently announced the creation of a new team with a very specific task: to stop AI models from posing “catastrophic risks” to humanity.

Preparedness, the aptly titled team, will be overseen by Aleksander Madry, a machine-learning expert and Massachusetts Institute of Technology-affiliated researcher. Mr. Madry and his team will focus on various threats, most notably those of “chemical, biological, radiological and nuclear” variety. These might seem like far-fetched threats—but they really shouldn’t.

As the United Nations reported earlier this year, the risk of countries turning to nuclear weapons is at its highest point since the Cold War. This report was published before the horrific events that occurred in Israel on Oct. 7. A close ally of Vladimir Putin’s, Nikolai Patrushev, recently suggested that the “destructive” policies of “the United States and its allies were increasing the risk that nuclear, chemical or biological weapons would be used,” according to Reuters.

Merge AI with the above weapons, particularly nuclear weapons, cautions Zachary Kallenborn, a research affiliate with the Unconventional Weapons and Technology Division of the National Consortium for the Study of Terrorism and Responses to Terrorism (START), and you have a recipe for unmitigated disaster.

Mr. Kallenborn has sounded the alarm, repeatedly and unapologetically, on the unholy alliance between AI and nuclear weapons. Not one to mince words, the researcher warned, “If artificial intelligences controlled nuclear weapons, all of us could be dead.”

He isn’t exaggerating. Exactly 40 years ago, as Mr. Kallenborn, a policy fellow at the Schar School of Policy and Government, described, Stanislav Petrov, a Soviet Air Defense Forces lieutenant colonel, was busy monitoring his country’s nuclear warning systems. All of a sudden, according to Mr. Kallenborn, “the computer concluded with the highest confidence that the United States had launched a nuclear war.” Mr. Petrov, however, was skeptical, largely because he didn’t trust the current detection system. Moreover, the radar system lacked corroborative evidence.

Thankfully, Mr. Petrov concluded that the message was a false positive and opted against taking action. Spoiler alert: The computer was completely wrong, and the Russian was completely right.

“But,” noted Mr. Kallenborn, a national security consultant, “if Petrov had been a machine, programmed to respond automatically when confidence was sufficiently high, that error would have started a nuclear war.”

Furthermore, he suggested, there’s absolutely “no guarantee” that certain countries “won’t put AI in charge of nuclear launches,” because international law “doesn’t specify that there should always be a ‘Petrov’ guarding the button.”

“That’s something that should change, soon,” Mr. Kallenborn said.

He told me that AI is already reshaping the future of warfare.

Artificial intelligence, according to Mr. Kallenborn, “can help militaries quickly and more effectively process vast amounts of data generated by the battlefield; make the defense industrial base more effective and efficient at producing weapons at scale, and may be able to improve weapons targeting and decision-making.”

Take China, arguably the biggest threat to the United States, for example, and its AI-powered military applications. According to a report out of Georgetown University, in the not-so-distant future, Beijing may use AI not just to assist during wartime but to actually oversee all acts of warfare.

This should concern all readers.

“If the launch of nuclear weapons is delegated to an autonomous system,” Mr. Kallenborn fears that they “could be launched in error, leading to an accidental nuclear war.”

“Adding AI into nuclear command and control,” he said, “may also lead to misleading or bad information.”

He’s right. AI depends on data, and sometimes data are wildly inaccurate.

Although there isn’t one particular country that keeps Mr. Kallenborn awake at night, he’s worried by “the possibility of Russian President Vladimir Putin using small nuclear weapons in the Ukraine conflict.” Even limited nuclear usage “would be quite bad over the long-term” because “the nuclear taboo” would be removed, thus “encouraging other states to be more cavalier with nuclear weapons usage.”

“Nuclear weapons,” according to Mr. Kallenborn, are the “biggest threat to humanity.”

“They are the only weapon in existence that can cause enough harm to truly cause human extinction,” he said.

As mentioned earlier, throwing AI into the nuclear mix appears to increase the risk of mass extinction. The warnings of Mr. Kallenborn, a well-respected researcher who has dedicated years of his life to researching the evolution of nuclear warfare, carry a great deal of credibility.

The White House has welcomed a “historic” move by the EU to initiate membership talks with Ukraine. For Kiev, this is a major breakthrough which it has been lobbying hard for throughout nearly two years of the Russian invasion, which has served to fast-track something previously only thought impossible, given that Ukraine remains ranked among the top most corrupt countries in Europe and the world.

“We welcome the EU’s historic decision to open accession negotiations with Ukraine and Moldova, a crucial step toward fulfilling their Euro-Atlantic aspirations,” National Security Advisor Jake Sullivan announced on X Thursday, within hours after European Union leaders officially agreed to open up formal accession talks. The decision marks a huge reversal which came during a Brussels summit of the EU’s 27 leaders. European Council President Charles Michel called it “a clear signal of hope for their people and our continent” during a press briefing. 

Ukrainian President Volodymyr Zelensky welcomed the development as “a victory for Ukraine. A victory for all of Europe”—however, most observers say that it will likely be years down the road, or even possibly decades, before Ukraine reaches its goal of full EU membership. 

It follows closely on the heels of the Ukrainian president’s somewhat lackluster trip to Washington where he met with Biden and Congressional leaders, but failed to successfully lobby GOP holdouts to swiftly pass Biden’s requested $106 billion defense aid package. “History is made by those who don’t get tired of fighting for freedom,” Zelensky said of the EU breakthrough. Kiev is against the ropes militarily, but this serves as a major consolation prize at the difficult moment.

Importantly, EU accession talks have at the same time been opened for the tiny eastern European state of Moldova, which Western leaders have also warned is in Moscow’s crosshairs for political change.

Donald Tusk has just returned to the prime minister’s office in Poland, rolling back years of Polish conservative rule, and in his first European Council summit since said: “Dear Volodymyr Zelenskyy, we did it! I dedicate our today’s decision on enlargement to your heroes who gave their lives for an independent and European Ukraine.”

But it was Hungary’s Viktor Orbán who entered the proceeding as a ‘pariah’ figure – having long vowed to block Ukraine’s EU aspirations. Going into the summit, his office had said firmly: “The European Union is about to make a terrible mistake and they must be stopped — even if 26 of them want to do it, and we are the only ones against it.” He emphasized, “This is a mistake, we are destroying the European Union.”

But apparently at the end of the day Hungary used this leverage to get what it wants out of EU leaders. Orban’s administration is vowing future roadblocks, BUT for now:

Meanwhile, in a move critics have described as a bribe, the European Commission unfroze around 10 billion euros earmarked for Hungary, arguing that the country successfully completed judicial reforms.

So in the end a pragmatic Eurocratic quid pro quo won out, amid apprehension that Hungary’s veto would dominate the whole proceedings. Instead, with the 10 billion euros secured, the Hungarian delegation with Orban at the helm simply walked out of the summit, having abstained from the vote. 

Still, there are critics, and a continued fight is basically guaranteed on the long haul path forward…

Now that’s a mixed bag—

Ukraine & Moldova proceeding to accession talks: historic

The Commission falling for a dirty blackmail: pathetic

Orban *leaving* the room: deplorable

Let’s focus on the first one— a new chapter for the EU. https://t.co/Sj9yBWxolQ

— Katalin Cseh (@katka_cseh) December 14, 2023

Here’s how Orban’s office explained the move in a lengthy social media statement in Hungarian and English: 

In the last few hours in Brussels, the European Council has deliberated on Ukraine’s accession. Hungary’s stance remains firm and unaltered: we do not consider Ukraine ready for EU negotiations. Consequently we oppose commencing negotiations.

However, 26 EU Member States hold a contrary view. Following extensive negotiations, Hungary opted to exit the meeting room and abstain from the vote—not to obstruct the outcome but to avoid cooperating in what we perceive as a misguided decision.

The European Council’s agreement represents a decision in principle. Subsequently, Member States must also unanimously agree on the specific negotiating framework. Additionally, a minimum of 70 unanimous decisions will be required throughout the upcoming years to endorse Ukraine’s accession to the EU.

Pro-EU members are hailing Orban’s having ‘backed down’ or essentially caved from his months-long hardline stance of resistance, with MEP Philippe Lamberts, co-president of the Greens group in the European parliament, stating as follows: “EU leaders have avoided the worst possible outcome and managed to show support to Ukraine by opening accession talks.”

He then emphasized: “Hungarian prime minister Viktor Orbán has backed down from his threats of a veto over Ukraine. However, if this is the result of a €10bn bribe then this is an unacceptable way for the EU to do business.”

Perhaps Orban knows his objection in the long-run may not even matter, considering Ukraine’s ongoing corruption – no doubt exacerbated by a wartime situation and economy – ultimately means than immense hurdles remain, possibly requiring up to decades of reform…

ATTENTION DOGS: DO NOT TRAVEL OR SPEND MONEY ON YOUR ROADS. SPEND YOUR MONEY FOR UKRAINE’S WAR (not hyperbole) pic.twitter.com/N3USr8tfOG

— The_Real_Fly (@The_Real_Fly) December 13, 2023

The coming months will be interesting as Hungary attempts to ‘prove’ to its people and conservative leaders and right wing supporters abroad that it’s still in for the fight.