By Michael Every of Rabobank

The Pause That Didn’t Refresh

Eagle-eyed readers may notice I haven’t written the Global Daily since May 23. That’s quite the pause, but with Covid pneumonia responsible, it wasn’t one that refreshed. Ironically, ‘The Pause That Doesn’t Refresh’ was my 2023 outlook title, which mocked the market view that early rate cuts loomed, and spoke about the risks of sticky services spending and core inflation, supply destruction in commodities, escalating geopolitical shocks, low unemployment and lingering Covid effects for some (Amen!); larger fiscal deficits; a drive for reindustrialisation; and that when we were expected to have rate cuts (i.e., now, as some said in January) we would still be looking at the risk of further rate hikes – just alongside central-bank policy acronyms to keep things stable. Not a bad take, I think one can say.

In the 11 weeks since May 23, the US S&P is +9.0%, the broad US dollar index is lower, and the Hamburg World Commodity Index +5.7% and +4.5% in July alone. US 2-year yields were 4.26% and are now 4.76% (+50bps), 10s were 3.70% and are now 4.09% (+39bps); in German Bunds, it’s 2.81% vs. 2.96% (+15bps) and 2.46% vs. 2.59% (+13bps); in Australia, 3.52% vs. 3.96% (2s +44bps) and 3.66% vs. 4.19% (10s +53bps); in the UK 4.14% vs. 4.95% (2s +81bps) and 4.14% vs. 4.53% (10s +39bps); and in Japan -0.07% vs 0.02% (2s +9bps) and 0.38% vs. 0.63% (10s +15bps). The focus is now on curve steepening, and whether this will be of the bull (deflation/rate cuts) or bear (no cuts or more hikes/stagflation) variety. As in January and May, most are taking the optimistic view, which is buoying other assets.

However, the only place where that bad is good view is ‘justified’ right now is China, so if you want a pre-2020 lower-for-longer economy, look there. Its 2-year yield has dropped from 2.23% to 2.14% and its 10-year from 2.69% to 2.65%; the Financial Times quotes an auto analyst saying it now produces 40m cars a year, but can only consume 20-25m; trade data today are expected to show imports declining by 5.6% y-o-y, so China ‘boosting global growth’ is factually incorrect, and export growth is seen -13.2%; and tomorrow’s CPI and PPI are both set to print more deeply negative y-o-y. In theory, Western analysts baying for deflation and rate cuts should like this, but they don’t. Talk of a ‘Zombie Economy’ isn’t welcome because said author notes, “a web of Wall Street bankers and corporate executives had reason to suppress more sceptical analyses, as they continued to profit off luring investors into China. The illusion of limitless high-speed growth thus ruled the day at the very moment when the economy entered its most serious crisis since the outset of the market reform era.” Beijing has more understandably also banned negative commentary in its economic, financial media, including the word “deflation”.

Meanwhile, Western central banks are pausing to assess contradictory data, but it remains to be seen if they can truly halt or, more importantly, reverse to previous rate lows. After all, we see:

• An ageing workforce and ultra-low unemployment. The UAW is now demanding a 46% pay deal over four years, airlines face massive labor shortages and pay demands too (‘America’s Truckers, Cargo Pilots and Package Carriers Are Fed Up’), and FedEx pilots are demanding a 30% pay rise. That’s got the decimal place in the wrong place for inflation hawks.

• The US Department of Labor is proposing to today restore the New Deal-era Davis-Bacon Act that sets a wage floor for construction workers on public-works projects, reversing its 1979 gutting by President Carter, and potentially one of the most significant changes to pay in decades. Of course, that means higher, not lower wages. There is an election in 2024 you know!

• There is a need for massive defense spending –percentage points of GDP, not tenths of one percent– in the US, UK, Australia, and even New Zealand, while Canada, like Europe ex-France and Poland, lags dangerously far behind.

• A resulting onshoring/reshoring boom lies beyond the current inventory down-leg of the bullwhip effect is over – look at the surge in US manufacturing construction spending.

• Huge government bond issuance hence comes along with, not a replacement for, private demand for capital.

• The Economist warns ‘The West’s de-risking strategy towards China will fail’: but that means more decoupling and supply shocks than we are being sold by politicians, not less. On friend-shoring, the WSJ warns ‘The Era of Ultracheap Stuff Is Under Threat’ because Asian factories can’t find enough young workers either.

• The US trade and tech war with China is about to become an investment war, with a long-awaited executive order to limit US outbound capital flows likely to be introduced this week. When that starts to happen in both directions, the global architecture will change even more.

• Supply destruction in commodities is underway via war in the Black Sea, possibly West Africa, and always potentially the Middle East; that is as the SCMP reports ‘Mainland China airs documentary signalling military preparation for Taiwan attack and willingness to sacrifice’.

• Supply is also constrained by trade restrictions in oil from Saudi; rice from India; uranium from Niger; nickel from Indonesia and the Philippines; and rare earths from China. More will follow.

• The FT (‘Inconvenient truths about the green transition’) points out that Western green production ex-China will take six years to develop and cost twice as much as it does today, when the bill was already astronomical.

• Entrenched global oligopolies and monopolies most economists refuse to recognize will raise prices whenever they can get away with it – i.e., in times like these.

It’s no surprise then that a market-implied inflation expectation measure, the US 5-year 5-year forward breakeven inflation rate, has again surged to its highest level in over a year at 2.53%, and isn’t far off its mid-2022 peak of 2.57%. More short term, US inflation is going to rise again y-o-y on a headline basis as soon as this Thursday, where CPI is already seen up from 3.0% to 3.3% with only a 0.2% m-o-m print; the base effects then get even less helpful even before higher energy and food prices hit again.

Yes, central banks can then opt to look at core CPI and ignore all of the above – but that is exactly the error they made in the 1970s, and how you move the market dial towards stagflation fears.

Of course, not cutting rates also comes with real risks. The Fed no longer sees a recession ahead, though our US team does, but Bloomberg argues ‘The Euro-Zone Economy Is Set for a Painful Reckoning: ECB rate hikes will trim 4% from economic output, research shows, a hit that will coincide with a return of restraints on public spending’. The German press also reports specialty chemicals group Lanxess plans to close two production plants by 2026 due to high electricity price, adding German industry has enormous disadvantages domestically, so companies are migrating: “De-industrialization begins,” said the Lanxess CEO. “This seriously jeopardizes German prosperity and social security for people in the medium and long term. The federal government had to wake up. We need an economic policy that deserves this name.“ For anyone thinking deindustrialisation is bullish Bunds, because lower growth, think again. Back in February we already conclusively showed what bad, stagflationary outcomes deindustrialization means for Germany. Berlin will no doubt be hoping that today sees Taiwan’s TSMC decide to proceed with a German chip plant, even if this creates frictions with China.

Yet our real problem is that this not just about inflation or rates, which are just painful symptoms, but rather a paradigmatic failure across the political-economy – which we are trying to resolve without addressing political-economy. The more we only write about inflation and rates, the deeper the hole we dig.

Likewise, appointing the Deputy Governor of the RBA, with an A$6m property portfolio, as Governor and holding fewer rate meetings per year is not going to shake the tree; neither is the BOE hiring Ben Bernanke to analyze why it made such large forecast errors – except in that it takes one to know one. These (in)decisions betray not so much a pause as a freeze: they show an establishment frozen like deer in a car’s headlights; or stuck like pigs in a large trough; or as just deeply unimaginative, overpaid civil servants unable to think outside the box.

On the missing political-economy note, the New York Times’ David Brooks just asked ‘What if We’re the Bad Guys Here?’, belatedly grasping the view that the Clinton and Obama Spamalot administrations allowed a new ‘technocratic’ elite to enjoy old Cantillon nest-feathering as others lost their nest-eggs, while still feeling morally superior about their gains because ‘they were the smart ones’; and then the backlash was the Sir-Mix-A-Lot Trump administration; and now Biden’s, which the Financial Times’s Gideon Rachman just called ‘the heir to Trump’. I’m not sure if Brooks knew he was echoing the British comedy duo Mitchell & Webb, who years ago played SS officers asking, “Are we the baddies?” Yet with real-life fears of the Far Right rising, what is Brooks suggesting *we do* specifically? We will be waiting a long time for that punchline, I suspect. However, if you think the answer is to cut rates and or taxes, let assets rip, and ‘allow nature to heal’, then when that punch does finally land, it will hurt all the more.

To make that point, consider ‘Last call for neoliberalism: What I saw at the party at the end of the world order’ from the Canada’s Globe and Mail, whose author notes of a recent glittering New York encounter:

“[The] end of neoliberalism – and the subsequent decay of democracy – were on my mind as Justin Trudeau entered the room at the consul-general’s soirée…. But even as this party was just beginning, everyone seemed to understand that the way things had been done for so long – that party was over.

The outlines of the new order that Mr. Biden’s national security adviser sketched out earlier that afternoon have since come into focus: protections for sensitive industries; de-risking from China; building up domestic capabilities. We need a new industrial strategy for the next century, Washington has made clear – one that recognized that a society was more than its economy, that workers were the lifeblood of democracy, and that foreign policy must ultimately improve the lives of ordinary citizens at home…

Later, I managed to speak with Mr. Trudeau; I gave him a copy of my book, in which he is featured. I also asked him: What could we thinkers and intellectuals do to reinforce democratic principles from outside the system?

Mr. Trudeau stepped back. I saw his eyes darting as he thought of how to respond. It was an honest question, asked in good faith.

Finally, he leaned in and said: “I think you shouldn’t be so cynical about people working on the inside.” Before I could reply, Mr. Trudeau glided away to another group of people.

All my life, I have repudiated cynicism: I had seen elite systems from within, and witnessed the kind of liberal-elite behaviour that had given people so much reason for pessimism. Yet I still retained my ability to hope. I did not think there was anything cynical about expecting leaders to live up to their own stated principles, or about acknowledging the reasons that others – including many young people – were becoming despondent about the state of the world. Indeed, it would be up to citizens on the inside and outside of government to ensure democracy was upheld and progress was shared. If the Prime Minister really thought my question was cynical, in this pivotal moment of transition – these dying days of neoliberalism – I am deeply worried about what comes next.”

And now I need a pause to recharge my fading battery, and I suspect many of you are feeling far from refreshed.

Authored by Michael Snyder via The Economic Collapse blog,

The economic meltdown that is coming should not be a surprise to anyone. 

Throughout U.S. history, there have always been signs that a major downturn was coming, and that is precisely what we are witnessing right now.  Tax revenues are way down, demand for trucking services is way down, demand for cardboard boxes is way down, the money supply is shrinking at the fastest pace in modern history, and the Conference Board’s index of leading economic indicators has already declined for 15 months in a row.  At this point, anyone that cannot see what is coming has got to be willingly blind. 

The following are 7 trends which indicate that economic disaster is approaching very rapidly…

#1 When economic activity slows down, less tax revenue comes in.  Right now, federal government and state government tax revenues are declining precipitously…

US state and local governments just experienced the worst decline in income tax revenues ever recorded.

This was the second steepest year-over-year percentage decline in history, with only the GFC having a worse outcome.

Note that Federal tax receipts are also dropped again, now at recessionary levels and approaching -10% on a YoY basis.

#2 When the economy slows down, trucking companies see less demand for their services.  So it is deeply alarming that truck freight volume and spending absolutely plummeted during the second quarter…

Truck freight volume and spending in the second quarter of 2023 declined by the highest levels since the early days of the pandemic, the latest U.S. Bank Freight Payment Index revealed. Spending by shippers dropped 10.9% compared to the second quarter of 2022 while shipment volume dropped 9%, according to a statement from the Minneapolis-based bank.

#3 Employment is supposed to be the “bright spot” for the economy, but the latest employment report shows that the U.S. actually lost 585,000 full-time jobs last month…

Well, one look at this month’s adjustment and it’s literally a shocker: you will not hear anyone from the Biden admin or associated economist cheerleaders mention this, but the BLS reported that in July the number of full-time jobs plunged by 585,000 to 134.274 million, the biggest monthly drop since record covid crash of 14.7 million jobs!

#4 U.S. employers have already announced more job cuts this year than they did in all of 2022, and the hits just keep on coming…

CVS Health said Monday it is cutting approximately 5,000 jobs to focus more on healthcare services for its customers.

The move, which is supposed to help the company save money, will affect workers primarily in corporate jobs, the Wall Street Journal reported.

#5 Thanks to rapidly rising interest rates, monthly costs for new homebuyers are almost 20 percent higher than they were a year ago.  This is absolutely crushing the housing market…

The monthly cost for a potential homebuyer has surged nearly 20% compared with a year ago as prices remain elevated, according to new data.

During the four-week period ending July 30, the monthly mortgage payment for the typical U.S. homebuyer sat at $2,605, 19% higher than the same period a year earlier, according to Redfin.

#6 The fact that delinquency rates for commercial real estate mortgages are skyrocketing is yet another sign that we are in the early stages of the worst commercial real estate crisis in all of U.S. history…

The delinquency rate of commercial real estate mortgages on office properties that had been securitized into Commercial Mortgage-Backed Securities (CMBS) spiked to 5.0% by loan balance in July, up from a delinquency rate of 2.8% in April, having now spiked by 2.2 percentage points in three months, by far the biggest three-month spike in the data going back to 2000, and by 3.4 percentage points so far this year, by far the biggest seven-month spike, according to Trepp, which tracks and analyzes CMBS.

#7 The share of the U.S. population that cannot even afford “a $400 emergency expense” just continues to go up…

“The share of U.S. adults who said they would cover a $400 emergency expense with cash or equivalents dropped by 2 percentage points from the previous quarter to 46%, highlighting how cash-strapped many Americans are despite the recent decrease in headline inflation,” according to the survey developed by Bloomberg and conducted by intelligence company Morning Consult. 

But Joe Biden and his defenders continue to insist that everything is just fine.

In fact, Joy Behar is quite certain that “the economy is booming” right now…

Leftist Joy Behar — who reportedly earns $7 million annually as a co-host on “The View” — said on Friday’s program that “the economy is booming” and “people are having an easier time putting bread on the table” in a passionate defense of President Joe Biden.

For those that are making millions of dollars a year, I am sure that everything must seem great.

But for the rest of us, things are tough.

Meanwhile, our banks continue to experience really weird “technical glitches”.  For example, in recent days many Wells Fargo customers have been greatly upset about money disappearing from their accounts…

On X, the platform formerly known as Twitter, users complained about their disappearing funds. One bank customer said they saw the news about the problem right as they noticed their deposits weren’t in their account.

“Right before this popped up in the news I saw that my deposits weren’t in my account,” their tweet read. “I was trying to pay bills and none would go through. This is so unacceptable.”

The company responded in a statement to CNN that a “limited amount” of their customers are experiencing the disappearing deposits. They said most of them were “resolved” and that they would fix the problem soon.

This is another example which shows why it is wise to never keep all of your eggs in one basket.

Our financial institutions are far more vulnerable than most people realize, and the cyberattacks that we have seen so far are just a small preview of what is coming.

Unfortunately, most Americans don’t understand any of the things that I have discussed in this article.

Most Americans are simply trusting that our leaders have everything under control, and so they will be bitterly, bitterly disappointed when they finally realize the truth.

*  *  *

Michael’s new book entitled “End Times” is now available in paperback and for the Kindle on Amazon.com, and you can check out his new Substack newsletter right here.

Ukraine’s security services say they have thwarted a major assassination plot which targeted President Volodymyr Zelensky, according to the country’s Secret Service (SSU) on Monday.

A woman who lives in Ochakov in southern Ukraine has been arrested, allegedly for planning to inform Russian intelligence of Zelensky’s precise whereabouts as be visited the Mykolaiv region where the southeastern front with Russian forces is located. Security officials say she was “caught red-handed”.

The SSU described that the detained woman, who hasn’t been identified, worked on a military base as a clerk in one of their military stores. 

She’s accused of “gathering intelligence” in order to pass the info along to her Russian handler so that a large-scale airstrike could be executed, specifically during Zelensky’s trip to the region in late July. He had at that time visited a medical facility in Ochakiv along with other places in the southern region.

She was caught in the act, Ukrainian officials allege, with Ukraine media sources saying “The suspected Russian agent tried to find out the schedule of the presidential route in the region.

“The SBU managed to stay ahead of her actions and caught her in the act,” one Ukrainian media report reads. “She also traveled to photograph electronic warfare systems and ammunition warehouses in the area near Ochakiv on the Black Sea coast, as well,” it alleges further.

Ukrainian intelligence officials say they received a tip about the woman’s alleged activities, which included mapping out the locations of key military locations and filming sensitive facilities.

Kiev officials have in the past during the conflict indicated there have been multiple assassination plots against the president uncovered and thwarted. But this case appeared to be the most serious, as the woman was caught “trying to pass intelligence to the invaders” in preparation for airstrikes which would coincide with Zelensky’s visit.

In March, Ukrainian presidential adviser Mykhailo Podolyak went so far as to suggest Zelensky has survived over a dozen assassination attempts.

Many outlets have reported a foiled assassination attempt against Zelensky according to Ukraine.

It is definitely possible but I’ve learned to be skeptical about the veracity of Ukraine’s official statements especially ones related to attacks where lies have been so common.

— Max Abrahms (@MaxAbrahms) August 7, 2023

“Foreign sources talk of two or three attempts. I believe that there have been more than a dozen such attempts. We are constantly receiving intelligence that there are certain reconnaissance groups trying to enter government quarters and the like,” Podolyak has previously been quoted in Ukrainska Pravda as saying.

But these dramatic stories of thwarted plots also tend to be coupled with desperate appeals for more weapons and funding from the West. However, it is likely that there really are threats and plots against the Ukrainian leader given there’s an active war unfolding, even if perhaps accounts are exaggerated in some instances—also for the purpose of Western media consumption.

Global stocks slid, US equity futures slumped and bond yields tumbled as a raft of news on collapsing Chinese trade, Italian banks hit with an unexpected windfall tax, and a downgrade of US banks by Moodys (on increasing funding costs/CRE exposure) sparked a fresh round of fears about the financial system and global economy.  At 7:45am, S&P futures were down 0.7% trading as low as 4,502 while Nasdaq futures dropped 0.8% amid a broad flight to safety across markets which sent yields on the 10-year Treasury 10 basis points lower and the equivalent rates in Germany fell 15 basis points. The Bloomberg dollar index climbed 0.5% while oil resumed its slide following ugly oil import data by China. Today’s macro data includes Small Biz Optimism, Trade Balance, and Wholesales Sales/Inventories … nothing market-moving as we await Thursday’s CPI print.

In the premarket, tech and small-caps underperformed while defensives were the green. Investors are also closely watching US financials after Moody’s lowered credit ratings for 10 small and midsized lenders and warned about the risks tied to commercial real estate: the XLF was indicated -67bps and KRE -1.3% lower in premarket trading. Eli Lilly extended gains to 8.6%, after the drugmaker boosted its revenue guidance for the full year; the guidance beat the average analyst estimate. Earlier, Lilly shares jumped following Novo Nordisk’s Wegovy update. Here are some other notable premarket movers:

• Hims & Hers Health shares surge 17% after the telehealth company boosted its full- year adjusted Ebitda outlook. Overall, analysts said the print was better than expected, with Citi highlighting the better average order value being a key driver for the beat.
• Home Depot and Lowe’s are downgraded to market perform from outperform at Telsey Advisory Group. Home Depot falls 1.3%, while Lowe’s slides 1.4%.
• Lucid gains as much as 4.5% on Tuesday after the EV startup said it still believes it will produce at least 10,000 vehicles this year.
• Maravai LifeSciences shares slide 15% after the biotech firm cut its full-year outlook for adjusted earnings per share, adjusted Ebitda and total revenue.
• Olaplex tumbles as much as 27%, after cutting its full-year projections for net sales, adjusted Ebitda and adjusted net income.
• Palantir Technologies shares edge higher 2.6% after the data-analysis software company reported second-quarter results and raised its full-year adjusted operating profit forecast.
• Paramount Global rises as much as 4.4% after the media company reported revenue for the second quarter that beat the average analyst estimate, driven by a jump in its streaming-TV business.
• Proterra Inc. which makes heavy-duty electric vehicle components like chargers and batteries, filed for bankruptcy on Monday. Shares fall 66%.

In Europe, the Stoxx 600 dropped 0.7% with banks posting the steepest losses after Italy announced an unexpected tax on windfall profits, sending shares of UniCredit SpA and Intesa Sanpaolo SpA down more than 7%. The euro-area banks index slumped as much as 3.4%. BPER Banca, Banco BPM, Intesa Sanpaolo and UniCredit all fell at least 7%. In the UK, banks also fall as BNP Paribas Exane says that while lenders in Britain are cheap, it is staying relatively cautious, downgrading Barclays to neutral and Virgin Money UK to underperform. Here are the most notable European movers:

• Novo Nordisk jumps as much as 16%, the most since 2002, after results from the SELECT cardiovascular outcomes trial for Wegovy, where the obesity drug achieved its primary objective.
• Glencore shares drop as much as 4.4% after the miner reported a 50% drop in first-half adjusted Ebitda. Analysts said profits were weaker than expected amid a drop in commodity prices
• Abrdn falls as much as 9.6% after the investment company posted 1H operating profit and net outflows that missed expectations. RBC says the results signal a further delay of return to growth
• InterContinental Hotels shares rise as much as 2.2% after the hotel operator reported estimate- beating results and said there’s no sign of cooling in leisure demand
• Fraport rises as much as 8.6% after the German airport operator produced second-quarter earnings that beat analysts’ estimates and showed a continued recovery toward pre-pandemic levels
• Norma shares advance as much as 9.4%, the most in more than six months, after the tech hardware firm provided guidance that Baader Helvea says looks “reasonable”
• TI Fluid shares rose as much as 22%, the most intra-day on record, after the UK car- fluid-storage manufacturer delivered what the analysts saw as a strong trading update with a significant EBIT beat

Earlier in the session, Asian stocks slumped as the early optimism following the positive lead from Wall St was soured as Chinese markets entered the fray, while the region also digested disappointing Chinese trade data.

• Hang Seng and Shanghai Comp spooked markets with the Hong Kong benchmark heavily pressured as tech and property stocks lead the broad declines across sectors, while sentiment was also not helped by the wider-than-expected contraction in Chinese exports and imports data.
• ASX 200 traded rangebound after mixed consumer sentiment and business confidence surveys.
• Nikkei 225 was initially lifted by a weaker currency and earnings release but then wiped out nearly all of its gains as markets were spooked by selling in Chinese stocks.

Investor sentiment took a big hit after China released more data that showed its economic engine is sputtering. Exports plunged by the most since early 2020, the beginning of the Covid pandemic, and imports contracted last month. The Hang Seng China Enterprises Index and a gauge of European mining shares fell about 2%. Commodities prices retreated, with oil and copper losing almost 2%. Sentiment was further dented after two missed coupon payments by Country Garden.

As Bloomberg notes, China’s disappointing economic recovery is being felt acutely among exporting nations in the developing world. The MSCI Emerging Market Index of stocks headed for the lowest close in almost four weeks and looked to breach the support level at its 50-day moving average. Its currency-index counterpart also traded at the weakest level since July 10, with the South Korean won and Malaysian ringgit among the worst performers. 

“Reduced demand for raw materials and commodities due to its economic slowdown is likely to lead to a decrease in global commodity prices,” according to Nigel Green, CEO of DeVere Group. “Those countries heavily reliant on commodity exports would then experience economic hardships as their revenues decline.”

In FX, the Bloomberg Dollar Spot Index rises 0.4% with the world’s reserve currency advancing against all of its of Group-of-10 peers. The yen slid the most against the US currency after falling as much as 0.7%. The People’s Bank of China set Tuesday’s yuan reference rate at 7.1565 per dollar, revising an earlier fixing in the morning when it had indicated a stronger fixing of 7.1365. The latest fixing was set at the weakest level in nearly a month. “A clearly visible CNY depreciation trend might further strengthen the tendency of private domestic capital to leave China,” said Ulrich Leuchtmann, head of currency strategy at Commerzbank AG in Frankfurt. “The Chinese authorities have to be very certain that their capital controls work well if they want to risk that.”

In rates, treasuries hoeld gains into early US session with yields lower by up to 10bp across long-end of the curve. Treasury yields are down 3bp to 10bp across the curve with 2s10s, 5s30s spreads flatter by 5.5bp and 2.5bp on the day; 10- year yields just under 4% are richer by 10bp on the day with bunds and gilts outperforming by 4.5bp and 1bp in the sector. Treasuries drew support during Asia session following disappointing China trade data. Today’s bull-flattening move is led by bunds, drawing flight-to-quality flows with Italian banks slumping after the government introduced a surprise tax on “extra profits” this year. US regional banks are also in focus after Moody’s Investors Service lowered credit ratings for 10 small and midsize lenders based on mounting funding costs. Treasury auction cycle begins with 3-year note sale at 1pm New York time. The treasury auction cycle includes $42b 3-year note followed by $38b 10-year Wednesday and $23b 30-year bond Thursday in upsized auction amounts. WI 3-year yield around 4.38% is ~15bp richer than last month’s, which stopped 0.2bp through the WI yield.

In commodities, crude futures declined with WTI falling 2% to trade near $80. Spot gold drops 1%

Looking to the day ahead, on the data side in the US we will get the July NFIB small business optimism, June wholesale trade sales and June trade balance releases. Over in Europe, we have the final Germany inflation print for July as well as the releases of the ECB’s latest consumer expectations survey. Our economists’ dbDIG survey suggests that the ECB survey should show a further slight easing of inflation expectations – see their earlier note here. Among central bank speakers, we will hear from the Fed’s Harker and Barkin. Finally, earning releases include Eli Lilly, UPS, Glencore, Bayer, Coupang, Barrick Gold, Take-Two Interactive, Rivian and Lyft.

Market Snapshot

• S&P 500 futures down 0.3% to 4,522.00
• MXAP down 0.8% to 165.03
• MXAPJ down 1.1% to 520.05
• Nikkei up 0.4% to 32,377.29
• Topix up 0.3% to 2,291.73
• Hang Seng Index down 1.8% to 19,184.17
• Shanghai Composite down 0.3% to 3,260.62
• Sensex down 0.1% to 65,876.04
• Australia S&P/ASX 200 little changed at 7,311.14
• Kospi down 0.3% to 2,573.98
• STOXX Europe 600 down 0.4% to 457.83
• German 10Y yield little changed at 2.49%
• Euro down 0.2% to $1.0979
• Brent Futures down 1.2% to $84.28/bbl
• Gold spot down 0.2% to $1,932.35
• U.S. Dollar Index up 0.31% to 102.37

Top Overnight News

• China’s trade plunged in July as slowing global demand clouded the outlook for exports, while domestic pressures weighed on imports in a hit to the economic recovery. Overseas shipments dropped 14.5% in dollar terms last month from a year earlier — the worst decline since February 2020 — while imports contracted 12.4%, the customs administration said Tuesday. That left a trade surplus of $80.6 billion for the month. BBG
• Country Garden (2007.HK) said it has not paid two dollar bond coupons due on Aug. 6 totaling $22.5 million, confirming market fears that the biggest privately owned developer in China is slipping into repayment troubles. The bonds in question are notes due in Feb 2026 and Aug 2030 , the firm told Reuters. Both payments have 30-day grace periods, according to investors citing prospectuses. RTRS
• Chinese firms forced to cut prices amid tepid demand, raising the risk of a Japan-like slide into sustained deflation. BBG
• Eurozone inflation expectations sink further according to the latest ECB survey (“median expectations for inflation over the next 12 months decreased further to 3.4%, from 3.9% in May, and those for inflation three years ahead also declined, easing to 2.3% from 2.5% in May”) (ECB)
• Italy’s right-wing government shocked markets with an unexpected tax on banks’ windfall profits, wiping out around $10 billion from the market value of the country’s lenders. Deputy Prime Minister Matteo Salvini announced a 40% levy on the extra profits of lenders for 2023 late Monday night, as part of a wide-ranging decree approved at a cabinet meeting. BBG
• Apartment buildings, long considered a real-estate haven, are emerging as the next major trouble spot in the beleaguered commercial-property world. Investors bid up the prices of multifamily buildings for years, attracted by steadily rising rents and the prospect of outsize returns. Many took on too much debt, expecting they could raise rents fast enough to pay it down. WSJ
• Moody’s cut its rating on 10 small and midsize banks including MTB, WBS, BOKF, ONB, PNFP, FULT, ASB, and PB. and adopted a negative outlook for 11 lenders including PNC, COF, CFG, FITB, RF, ALLY, OZK, and HBAN. In addition, the agency said that it may downgrade major lenders including USB, BK, STT, TFC, and NTRS. The action came as part of a review driven by the challenges facing the industry including higher funding costs, potential regulatory capital weaknesses, and rising risks tied to commercial real estate loans amid weakening demand for office space “which have collectively lowered the credit profile of a number of US banks, though not all equally”. BBG
• Some of the biggest names in commercial real-estate lending have all but turned off the spigot. Blackstone Mortgage Trust and KKR Real Estate Finance Trust, two of the biggest mortgage real-estate investment trusts, have halted loans to any new borrowers. WSJ
• UPS (-7% pre mkt) reported small EPS upside at 2.54 (vs. the Street’s 2.50 forecast) as very healthy operating margins (13.2% vs. the Street’s 12.4% forecast) helped to offset a revenue shortfall (-10.9% to $22.055B vs. the Street’s $22.99B forecast). However, the company is cutting its guidance, with revenue getting hit by the macro environment (they now see $93B vs. the prior $97B) and op. margins pressured by the new Teamsters deal. RTRS
• Booming oil prices last year powered U.S. inflation to 40-year highs. That trend was reversing in 2023—until now. Benchmark crude prices are up 21% over the past six weeks, driving up the cost of American workers’ commutes and freight haulers’ trips.

A more detailed look at global markets courtesy of Newsquawk

Asia-Pacific stocks traded mixed after the early optimism following the positive lead from Wall St was soured as Chinese markets entered the fray, while the region also digested disappointing Chinese trade data. ASX 200 traded rangebound after mixed consumer sentiment and business confidence surveys. Nikkei 225 was initially lifted by a weaker currency and earnings release but then wiped out nearly all of its gains as markets were spooked by selling in Chinese stocks. Hang Seng and Shanghai Comp spooked markets as they entered the fray with the Hong Kong benchmark heavily pressured as tech and property stocks lead the broad declines across sectors, while sentiment was also not helped by the wider-than-expected contraction in Chinese exports and imports data.

Top Asian News

• China’s Ambassador to the Philippines said the Philippines took unilateral actions to undermine the existing management status quo on Second Thomas Shoal and China had no choice but to make necessary responses. Furthermore, China hopes the Philippines meets China halfway and said third-party forces will not help the situation, while China is waiting for feedback from the Philippine side and hopes to start talks ASAP, according to Reuters.
• Major Chinese property developer Country Garden Holdings (2007 HK) said it has not paid two USD bond coupons due Aug 6th worth some USD 22.5mln, according to Reuters.

European bourses are lower across the board, Euro Stoxx 50 -1.20%, risk tone hit by Chinese trade and reports around a property developer. Within Europe, the FTSE MIB -2.2% lags following Italy approving a 40% windfall tax on banks, pressuring the broader banking index, -2.7%. Elsewhere, sectors are more mixed; Banking lags as mentioned while Basic Resources are dented by the trade data and a poorly-received update from Glencore. Stateside, futures are in the red, ES -0.5% and feature continued modest underperformance in the RTY -0.8%. Elsewhere, the risk tone around banks was soured further by Moody’s downgrading several US banks.

Top European News

• BoE’s Pill said inflation remains much too high and they have seen a lot of news on inflation persistence. Pill added that there are risks on both sides on UK inflation and risks that the UK hasn’t raised rates enough but also noted that a lot of rate hikes have yet to hit the economy.
• Barclaycard UK July consumer spending rose 4.0% Y/Y vs. prev. 5.4% growth in June, while it noted that supermarket spending growth slowed sharply, according to Reuters.
• Italy’s Deputy PM said the Cabinet approved a 40% windfall tax on banks, limited to 2023. Subsequently, it was reported that Italy expects to collect last than EUR 3bln from windfall tax on banks, according to Reuters citing sources. Note, Italian banks have been under marked pressure in European trade, SX7E -2.7%
• ECB Consumer Inflation Expectations survey (Jun) – 12-months ahead 3.4% (prev. 3.9%); 3-year ahead 2.3% (prev. 2.5%)

FX

• A firm session thus far for the DXY, to a 102.47 peak irrespective of downside in yields in what is seemingly a flight to safety against the backdrop of the soured risk sentiment.
• Antipodeans are the marked laggards in early European hours amid the aforementioned downbeat risk tone and concerning Chinese trade data, whilst Australia also saw a decline in consumer confidence and sentiment data overnight.
• Traditional havens are softer on the back of the firmer Dollar, but losses are cushioned by the haven statuses, whilst a decline in US yields could also be providing some padding against the Buck.
• EUR and GBP are subdued given the USD’s upside, single currency saw little reaction to the latest consumer expectation survey while drivers for GBP have been limited and action largely USD-driven.
• The NOK is among the G10 laggards given its sensitivity to risk.
• PBoC set USD/CNY mid-point at 7.1565 vs exp. 7.1869 (prev. 7.1380)

Fixed Income

• Core benchmarks are firmer across the board given the deterioration in broader risk sentiment that took hold during APAC trade.
• Bund lifted to a 133.17 peak following a particularly strong Bobl auction, surpassing the July 31st/August 1st virtual double-top at 133.05/06. A move which brings into play 133.34 and thereafter 133.92, from the 28th and 27th of July respectively.
• A slight widening of the BTP-Bund yield spread to just above the 170bp mark, incrementally higher than the last few weeks but shy of the mid-July wides at circa. 175bp.
• Gilts are similarly bid with their own specifics light and action seemingly a function of the broader risk tone and aforementioned factors.
• Stateside, the picture is much the same as EGBs and Gilts with Treasuries posting gains of circa. 15 ticks in relative proximity to the high point of 110.31 to 111.18+ parameters, ahead of Fed speak and 3yr supply.

Commodities

• WTI and Brent futures are on the backfoot as a function of a firmer Dollar, broader risk aversion, and headwinds from downbeat Chinese trade data.
• Spot gold is subdued by the Buck and trades under its 50 DMA (USD 1,944.27/oz) around the USD 1,932/oz mark in a relatively tight USD 1,938-30/oz intraday range; yellow metal hit by the USD, but somewhat cushioned by the overall tone given its haven allure.
• Base metals have continued to dip following the commencement of the European session, initial pressure from APAC factors was further fanned by the release from Glencore. Though, internal commentary noted of a more positive macro backdrop in H2 and above-average real-term prices ahead.
• UBS retains a positive outlook for oil prices and forecasts Brent at USD 90/bbl by end-2023; Oil demand is set to breach 103mln BPD in August for the first time, due to China, India and the Middle East. See a market deficit of circa. 2mln BPD in July and August, vs around 0.7mln BPD in June.
• Turkey imposed a 20% extra fee for some gold imports, according to the Official Gazette.

Geopolitics

• Japan ruling LDP’s Aso said in Taipei that ‘we’ are moving from peacetime to times of turbulence and believe that issues that were hidden beneath the surface are coming to the fore, while he added that Taiwan is an important partner and friend. Furthermore, Aso said Japan has continued to say that peace in the Taiwan Strait is important for regional stability and the most important thing is to make sure war doesn’t break out in the Taiwan Strait.
• Polish Defence Ministry to send additional troops to Belarus border following request from border guard, according to PAP.
• Economic Community of West African States (ECOWAS) plans to mobilise 25,000 troops for possible intervention in Niger, according to Al Arabiya citing French Press.

US Event Calendar

• 06:00: July SMALL BUSINESS OPTIMISM, est. 91.3, prior 91.0
• 08:30: June Trade Balance, est. -$65b, prior -$69b
• 10:00: June Wholesale Trade Sales MoM, est. -0.2%, prior -0.2%
• 10:00: June Wholesale Inventories MoM, est. -0.3%, prior -0.3%

DB’s Jim Reid concludes the overnight wrap

As we approach the dog days of summer, and my holiday in a few days, it sometimes gets harder to explain moves in markets in both direction but as I’ve been doing this daily for nearly 17 years I’ve learnt to try to come up with rationales or I’ll have a blank piece of paper. We’ve had some big moves in rates in the last week following the US Treasury announcement last Monday, the Fitch US downgrade, the Treasury refunding announcement and then the reverse move after payrolls. All others things being equal I thought the extent of the rates rally after payrolls was strange given how 2-way the release was, and yesterday a 10bps intra-day rally in 2yrs from an earlier sell-off was also difficult to explain. All in all, 2yr US yields were flat (-0.1bp) at the close, with 10yr and 30yr yields up +5.6bps and +6.9bps. The S&P 500 (+0.90%) did rise after four days of losses though. Overnight, US 10yrs and 30yr yields are back -4bps and -5bps lower as I type so we are seeing some decent sized moves in these thin markets at the moment.

We did hear contrasting comments from FOMC members yesterday on the potential for further hikes. Federal Reserve Governor Bowman, who typically leans hawkish, emphasised the potential for further hikes, saying she expects that “additional increases will likely be needed to lower inflation to the FOMC’s goal”. By contrast, in an interview published by the New York Times, New York Fed President Williams said that “monetary policy is in a good place” and “whether we need to adjust it in terms of that peak rate — but also how long we need to keep a restrictive stance — is going to depend on the data”. To be fair, Bowman also stressed data dependence but she focused more on still high inflation and tight labour market. Williams did dangle a rate cutting carrot for 2024 if inflation continued to behave.

An ongoing theme in US rates has been that the sizable US yield moves have continued with only minor changes in near-term Fed pricing though. Rate pricing for end-23 rose by 1.5bps on Monday to 5.38%, while end-24 pricing retreated -2.0bps to 4.00%. So that is five and a half 25bp cuts priced for 2024. On the topic of 2024 rate cuts, yesterday our US economists published a report in which they consider what policy rules would imply for the timing and pace of rate cuts in 2024 under different economic scenarios. See their note here.

Meanwhile, short-end yields in Europe rallied on Monday following news late on Friday that the Bundesbank will from October stop paying interest on domestic government deposits. Back in September 2022, the ECB had lifted the zero ceiling on such deposits to rise in line with policy rates amid fears of a negative impact on the repo market, before reducing this ceiling to ESTR minus 20bp in the spring. A decline in government deposits at the central bank and reduced collateral scarcity may have made the Bundesbank less concerned about the risks, though it is rather unusual for it to take this step unilaterally (without other euro area national central banks). Together with the recent ECB move to pay zero interest on banks’ minimum reserves, central banks might be looking for ways to reduce their high interest costs, at least if this can be done without hindering policy effectiveness.

The yield on 6m German bills thus fell by -4.7bps on Monday, while the 2yr yield declined by -2.7bps. The German curve notably twisted and steepened as 10yr Bund yields were +3.9bps higher. An additional notable feature in European rates has been the ongoing gradual rise in long-term inflation breakevens. The 5y5y rose for the seventh session in a row yesterday to 2.67%, its highest level since 2009. So the market is not giving a strong vote of confidence in the 2% inflation target. This is similar to the US where a similar measure is up over 10bps in the past week and at levels less than a handful of basis points from 10yr highs. Elsewhere, 10yr UK yields were the biggest underperformer yesterday and +8.1bps higher, largely reversing their Friday decline.

A risk-on mode returned to equity markets on Monday, with the S&P 500 rising +0.90%, ending a run of four declines in a row. A broad rally was led by communication services (+1.88%) and financials (+1.36%). Energy stocks underperformed (+0.15%) as oil prices retreated from their 3-month high reached on Friday (Brent -1.04% to $85.34/bl). Tech stocks were a slight underperformer, although the NASDAQ still posted a solid +0.61% gain. Within the megacaps, Apple (-1.73%) and Amazon (+1.90%) saw continued contrasting moves. Meanwhile, Berkshire Hathaway gained +3.60% after its results, further cementing its position as the largest US company by market cap outside the tech mega caps. Over in Europe, equities were near flat on the day. The STOXX 600 eked out a +0.09% rise, after being weighed down initially by the weak US session last Friday.

Asian equity markets are mixed this morning despite a strong handover from Wall Street overnight. Across the region, the Hang Seng (-1.15%) is leading losses with the KOSPI (-0.12%), the CSI (-0.02%) and the Shanghai Composite (-0.04%) inching lower. Otherwise, the Nikkei (+0.32%) is bucking the regional trend. S&P 500 (-0.22%) and NASDAQ 100 (-0.34%) futures are moving a bit lower.

Early morning data from China showed that exports dropped for the third consecutive month, sliding -14.5% y/y in July (v/s -13.2% expected; -12.4% in June) and recording its biggest drop since July 2020, highlighting that the world’s second biggest economy is being dragged lower by weakness in global demand and a domestic slowdown. At the same time, imports contracted -12.4% y/y in July (-5.6% expected) compared to a -6.8% drop in the previous month. Elsewhere, household spending in Japan fell -4.2% y/y in June (v/s -3.8% expected), a steeper fall than the prior month’s -4.0% drop while recording a fourth straight month of decline. Meanwhile, real wages declined for a 15th straight month, easing -1.6% y/y in June (v/s -0.9% expected) and against May’s downwardly revised drop of -0.9%. Nominal pay growth in June (+2.3% y/y) came in lower than a revised +2.9% rise in May (v/s +3.0% expected).

It was fairly quite day on the data front yesterday. A highlight was Germany’s industrial production print, which saw a larger-than-expected -1.5% mom decline in June (-0.5% exp). Also in Europe, French private sector labour market data showed a slowing in Q2. Employment grew 0.1% qoq, the slowest pace since Q4 2020, while wage growth was +1.0% qoq, down from +1.9% in Q1. So some evidence to argue against the risks of a wage-price spiral emerging in the euro area.

Looking to the day ahead, on the data side in the US we will get the July NFIB small business optimism, June wholesale trade sales and June trade balance releases. Over in Europe, we have the final Germany inflation print for July as well as the releases of the ECB’s latest consumer expectations survey. Our economists’ dbDIG survey suggests that the ECB survey should show a further slight easing of inflation expectations – see their earlier note here. Among central bank speakers, we will hear from the Fed’s Harker and Barkin. Finally, earning releases include Eli Lilly, UPS, Glencore, Bayer, Coupang, Barrick Gold, Take-Two Interactive, Rivian and Lyft.

Authored by Lance Roberts via RealInvestmentAdvice.com,

There is much debate as of late on the current market cycle. Is it a bear market? Maybe. But what if this is just a correction within a 40-year-long secular bull market cycle? It is a question posed by Jacques Cesar previously.

“The cyclical bull started in late March of 2020, after the market plunge sparked by the initial outbreak of Covid-19. The secular bull began way back in 1982, as equities shook off a vicious 14-year slump that more than halved the S&P 500 index when adjusted for inflation. There have been some notable cyclical bears amid the current secular bull, including the 1987 crash, the internet bust, and the global financial crisis.”

Before you dismiss the notion entirely, his claim has some credence.

For example, as shown, valuations remain high by historical standards. Valuations in a bear market cycle should mean revert and forward return expectations.

Furthermore, the detachment of the stock market from underlying profitability has been a constant companion since 1980. The lack of a mean reversion in profits is a concern.

“Profit margins are probably the most mean-reverting series in finance, and if profit margins do not mean-revert, then something has gone badly wrong with capitalism. If high profits do not attract competition, there is something wrong with the system, and it is not functioning properly.” – Jeremy Grantham

The lack of these mean reversions, which are needed, is mainly due to the “animal spirits,” which were awakened by consecutive rounds of financial stimulus on a global scale. Despite the market decline in 2022, investors remain focused on a Fed “pivot” to eliminate the risk of a market cycle completion.

That “faith” has been carefully cultivated by the Federal Reserve over the last decade to keep the psychological cycle from completing. The Fed is aware of the economic havoc unleashed if they lose control of the financial narrative. Such is why Jerome Powell recently clarified that they would act if needed.

“If we overtighten, we can support economic activity.”

We will focus on the following psychological cycle related to the current secular market cycle, which has remained consistent throughout history. (Chart courtesy of Jean-Paul Rodrigue.)

The Importance Of Full-Market Cycles

I have often discussed the importance of full-market cycles.

However, you should note that when investing, what has separated long-term “investing success” stories is when those individuals started their journey. 

• Warren Buffett started in 1942 and acquired Berkshire Hathaway in 1964.

• Paul Tudor Jones launched his hedge fund in 1980

• Peter Lynch managed the Fidelity Magellan Fund starting in 1977

• Jack Bogle launched Vanguard in 1975

The list goes on, but you get the idea. Much of these investing greats’ success came from catching the beginning of a bull cycle with low valuations and high forward returns.

“Here is the critical point. The MAJORITY of the returns from investing came in just 4 of the 8 major market cycles since 1871. Every other period yielded a return that actually lost out to inflation during that time frame.”

By looking at each full-cycle period as two parts, bull and bear, I missed the importance of the “psychology” driven by the entirety of the cycle. In other words, what if instead of there being 8-cycles, we look at them as only four? 

Viewing the market in complete cycles would suggest the bull market that began in 1980 is not yet complete. 

Notice in the chart above the CAPE (cyclically adjusted P/E ratio) reverted well below the long-term in both prior full-market cycles. While valuations did, very briefly, dip below the long-term trend in 2008-2009, they have not reverted to levels either low or long enough to form the fundamental and psychological underpinnings seen at the beginning of the last two full-market cycles.  

Combining Psychological And Market Cycles

Reframing our analysis to combine psychological and full market cycles provides a different view of where we are currently. The combination of the psychological cycle compresses the four primary secular market cycles into just three full market cycles.

The first full-market cycle lasted 63 years, from 1871 through 1934. This period ended with the crash of 1929 and the beginning of the “Great Depression.” 

The second full-market cycle lasted 45 years, from 1935-1980. This cycle ended with the demise of the “Nifty-Fifty” stocks and the “Black Bear Market” of 1974. While not as economically devastating to the overall economy as the 1929 crash, it greatly impaired the investment psychology of those in the market.

The third (current) full-market cycle is only 42 years in the making. Given the still elevated valuations, it is highly likely we have yet to complete the current market cycle.

The following chart supports the idea that the “bull market” began in 1980.

1. The long-term bullish trend line remains.

2. The cycle oscillator is only halfway through a long-term cycle.

3. On a Fibonacci-retracement basis, a 61.8% retracement would almost intersect with the long-term bullish trend line around 1500, suggesting a complete reversion could be nasty.

Again, I am NOT suggesting this is the case. This is a thought experiment about the potential outcome of the collision of weak economics, high debt levels, valuations, and “irrational exuberance.”

Understanding The Risk

This thought experiment aims to recognize that excesses exist currently that have historically never occurred.

As Vitaliy Katsenelson once wrote:

“Our goal is to win a war, and to do that we may need to lose a few battles in the interim. Yes, we want to make money, but it is even more important not to lose it.”

I agree with that statement, so we remain invested but hedged within our portfolios.

Unfortunately, most investors do not understand market dynamics and how prices are “ultimately bound by the laws of physics.” While prices can seem to defy the law of gravity in the short term, the subsequent reversion from extremes has repeatedly led to catastrophic losses for investors who disregard the risk.

Just remember, in the market, there is no such thing as “bulls” or “bears.” 

There are only those who “succeed” in reaching their investing goals and those that “fail.” 

Sure, this time could be different. However, as Ben Graham said in 1959:

“‘The more it changes, the more it’s the same thing.’ I have always thought this motto applied to the stock market better than anywhere else. Now the really important part of the proverb is the phrase, ‘the more it changes.’

The economic world has changed radically and will change even more. Most people think now that the essential nature of the stock market has been undergoing a corresponding change. But if my cliché is sound,  then the stock market will continue to be essentially what it always was in the past, a place where a big bull market is inevitably followed by a big bear market.

In other words, a place where today’s free lunches are paid for doubly tomorrow. In the light of recent experience, I think the present level of the stock market is an extremely dangerous one.”

Remember, making money in the first half of a full market cycle is easy. Keeping it during the second half is the hard part.

Italy’s right-wing populist government surprised European markets on Monday night with a new tax on bank profits limited to fiscal year 2023. The country’s lenders plunged in Milan trading, wiping out billions of euros in market capitalization. 

Italian Deputy Prime Minister Matteo Salvini told a press conference that the 40% tax on banks’ ‘extra profits’ derived from higher interest rates amounts to billions of euros that will help fund working families hit by the worst cost-of-living crisis in a generation, including support for mortgages for first-time owners and tax cuts. 

Bloomberg reported that Italy’s cabinet approved the new tax:

• Government to apply 40% levy on highest amount between net interest income of 2022 and 2021 — when the difference exceeds 5%, or on difference in net interest income between 2023 and 2021 — with a floor of 10%

• Levy to be paid in 2024

As a result, Italian banks were the worst performers compared to European stocks. UniCredit SpA dropped 7%, and Intesa Sanpaolo SpA sank 8%. 

Even though Italy’s cabinet approved a proposal to introduce a tax on banks’ profits, it’s still subjected to approval by parliament — and can still be challenged in the courts. 

“The move comes shortly after Italian banks unveiled a bumper set of earnings with Intesa and Unicredit raising their full-year guidance for the second consecutive quarter on the back of the European Central Bank’s rapid policy tightening. Net interest income at UniCredit, for example, surged 42% in the first half,” Bloomberg said. 

Commentary by Wall Street analysts overwhelmingly said the news is a strong headwind for the banking sector (list courtesy of Bloomberg): 

Citi, Azzurra Guelfi 

• Sees this tax as substantially negative for banks given both impact on capital and profit as well as for the cost of equity of bank shares

• Introduction of this tax could lead to Italian banks increasing their cost of deposits in order to reduce the extra profit

• Based on data available at this stage, calculates one-off tax is equal to ~19% of banks net profit in 2023

Banca Akros, Luigi Tramontana

• According to initial estimate, the one-off tax is expected to generate over €2b tax income for the government

• Estimates an average impact of 7% on the EPS of Italian banks under coverage and a negative reaction of market prices to this unexpected bad news 

Deutsche Bank, Giovanni Razzoli

• Italy’s government approved a decree which includes “to our and probably investors’ surprise” a taxation in the form of a levy on banks 

• While most details are not yet available, the move will likely trigger a short-term selloff on Italian banks

Mediobanca, Andrea Filtri

• Measure comes as a surprise and will hit share prices today, especially for those banks with “pending top-up to shareholder remuneration, as such Intesa and Banco BPM”

• With the level of UniCredit’s CET1 ratio at 16.6%, the bank would be in a position to withstand both the levy and the announced share buyback, even in a worse scenario

Equita, Andrea Lisi

• News is “clearly negative” for the sector, not only because of the one-off impact but also because of the increased regulatory risk on the sector

• Estimates Paschi to be the most impacted name, while in light of lower top line growth and/or greater diversification of revenue mix, sees restrained impact for Mediobanca, asset gatherers and specialty finance firms

Bloomberg Intelligence

• Calculates Italy lenders’ 2023 net income could be cut ~10% by proposed extraordinary tax on their “extra profits” this year 

• There’s a risk the tax could be extended beyond 2023, despite lenders’ net interest income peaking 

• From Banco BPM to UniCredit, Italian banks’ net income 2023 estimates had risen 36% in the past six months

Financials weigh around 30% in the Italian stock market — the surprise announcement is a fresh headwind for European stocks. Backlash for the cost of living crisis is growing. 

Authored by Charles Kennedy via OilPrice.com,

India’s crude oil imports from Russia in June were the cheapest since the Russian invasion of Ukraine, during which time the world’s third-largest oil importer became a key Russian oil customer alongside China.

The average cost of a barrel of Russian crude that landed at India’s ports in June was at $68.17, per data from India’s Ministry of Commerce and Industry cited by Bloomberg.

The price exceeds the $60 price cap set by the G7, but the cap does not include shipping.   

Most of India’s purchases of Russian crude oil are being done on a delivered basis inclusive of freight, insurance, and other costs.

To compare, India paid $70.17 on average per barrel of Russian crude in May and $100.48 a barrel in June 2022, according to the data.  

International crude oil prices were lower in June compared to July and early August amid concerns about the global economy and the uneven Chinese recovery after the end of the Covid restrictions.  

But prices have rallied in recent weeks as hopes have grown of a soft landing of the U.S. economy. Analysts and traders expect the supply cuts by OPEC+ and the unilateral output and export reductions from Saudi Arabia and Russia, respectively, to tighten the market for the rest of the year.

India’s crude oil imports from Russia dropped in July and could be headed to a more significant decline in August, to the lowest since January this year, according to Kpler.

In July, crude imports from Russia into India, the world’s third-largest oil importer, dropped to 2.09 million barrels per day (bpd), down from 2.11 million bpd in the previous month, Viktor Katona, head of crude analysis at Kpler, told Bloomberg last week. 

This month, India’s crude oil imports could further decline and fall to 1.6 million bpd, Katona added. If the projection is correct, India’s imports of Russian oil in August could drop to their lowest level since January 2023.

Days ago, the editorial board of The Baltimore Sun, Maryland’s largest general-circulation daily newspaper, published an article titled “Drop in downtown Baltimore real estate values not a crisis — yet,” which comes immediately after we shined a spotlight on crashing office tower prices: 

• Beginning Of CRE Firesale? Baltimore Office Tower Dumped At 63% Discount
• CRE Panic Hits Baltimore As Second Office Tower Dumped At 69% Discount

The op-ed attempts to downplay the CRE earthquake in the Inner Harbor business district, citing Maryland Comptroller Brooke Lierman, the state’s chief tax collector, who said, “It’s not time to panic.”

However, CRE turmoil is underway after the recent firesales, and a wave of building owners are expected to file assessment appeals and unleash a “potential domino effect that continually diminishes the central business district’s tax base and puts further strain on the commercial market,” Michael L. Higgs, director of the State Department of Assessments and Taxation, told the Baltimore Business Journal in June. 

• “I See A Wave Coming”: Assessed Value Of Baltimore City Office Tower Nearly Halved Amid CRE Panic

Months before the CRE panic hit the Inner Harbor in June, we provided readers with an April note titled “Entire Downtown Is Effectively Dead:” Baltimore City Descends Further Into Turmoil — laying out the downtown district was full of shuttered shops, and vacant office building.

And chaos on the streets. 

Just a late night run at the great Baltimore City’s #InnerHarbor #SpringBreak vibes #SpringBreak2023 #Baltimore #Maryland #น้องวินอยากเป็นพี่วิน #TAEHYUNGxCELINE #SuccessionHBO #Succession #ChaguoSmartNaAirtel #Maryland #Taiwan #TikTok #SummerMMFF2023 #INVASION #Russia… pic.twitter.com/X36btbT65g

— Daniel Barahona (@GlobalSETT) April 10, 2023

Some say hybrid and remote work killed the Inner Harbor economy. Still, it could be a combination of that, and companies no longer want any parts of the crime-ridden business district following progressive city leaders failing to enforce law and order. It’s not our opinion; it’s the businesses that are actively searching for new office space outside the city who have conveyed this to us. 

Republican State Del. Nino Mangione from Baltimore County pointed out that the issues with CRE in the Inner Harbor stem from a mix of remote work and a surge in violent crime: 

“Yes, we all understand the current challenges post-Covid with commercial real estate, however I believe this current spiral of downtown values is directly tied as well to the continued increase in violent crime in Baltimore. Many businesses are reluctant to locate in Baltimore because they do not feel their employees or property are safe. Very simply, unless and until citizens and businesses feel safe, these values will continue to decrease. The leadership of Baltimore needs to take crime seriously and take steps to end violent crime. This is their responsibility, and they need to implement harsher punishment policies dealing with violent crimes extending to juvenile crimes as well. We are too busy making excuses and failing to support police rather than punishing violent offenders. You cannot have a great city when violent crime remains unchecked.” 

Meanwhile, the editorial board hedges itself at the end by saying, “None of this is to suggest that falling downtown property values should be taken lightly.” But wait a minute. They cited earlier in the op-ed a state official who said, “It’s not time to panic.” Confusing. 

Perhaps the editorial board is trying to instill calm because the last thing Democratic Mayor Brandon Scott needs for the imploding metro area just north of the White House is another crisis. 

Authored by Mark Cudmore, Bloomberg macro strategist,

The US stock market capitalization accounts for 44.1% of the global equities market.

That’s near the seeming limit of the past 20 years (Bloomberg data on this only goes back to September 2003) and there are structural reasons why the US share should decline over the coming years.

It’s not just that US stocks are extremely expensive when compared to most other global share markets or even their own internal history. It’s that the US slice of global market cap is very stretched relative to the US share of global GDP.

The share of global GDP stood at 25.3% as of end-2022, according to World Bank data.

That’s been on a declining trend over the past 60 years, with volatility provided by significant currency effects. It’s intuitive and unsurprising that the decline will continue.

The US has a falling share of the world population and is growing more slowly than most of the world. Consensus forecasts on Bloomberg put 2023 US growth at 1.6% versus world (including US) growth at 2.6%. Those are the most important long-term drivers, but over the shorter-term cycle of a few years, the much larger impact is due to currency changes. The dollar rose to a 20-year high in 2022.

US stock market cap shouldn’t have anything close to a direct 1:1 correlation with the nation’s GDP — they are mostly multinational companies, after all — but there’s some connection.

Over the past decade, US stocks have significantly outperformed the nation’s growth to give them their expensive valuations. Now, all the dynamics are turning negative, on a relative basis, at the same time: GDP growth, share-price valuations and currency impacts.

How quickly can that ratio of global market cap shrink? In November 2010, it fell to 28.6% from a high of 46% in September 2003:

One final point is that this long-term argument makes no assumption on whether stocks are in a bull or bear market. It’s a relative valuation framework.

Last week witnessed two major Ukrainian strikes on Russian ships at sea in merely two days, which resulted in severe damage to a warship (seen listing as it was towed to port), and damage to an oil tanker known to supply fuel to Russia’s military in Syria. 

This emerging “battle at sea” also comes as Russia has stepped up major assaults of Ukrainian ports, including on the Black Sea and in the Danube, across from NATO member Romania. 

Kiev and Washington have accused President Vladimir Putin of ‘weaponizing food’ – while the Kremlin has blamed Ukraine and its NATO backers for making Black Sea transit routes dangerous, given the sea drone attacks and release of sea mines.

In new statements, President Volodymyr Zelensky has signaled there will be more attacks on Russian ships to come, which is likely to see the conflict slide further toward “unlimited war” – where any and all targets, including civilian, are taken out. 

Zelensky said in a fresh interview with the Latin American publication La Nacion that Ukraine forces will turn the ongoing blockade of Ukrainian ports back on Russia.

“If Russia continues to dominate the Black Sea and block it with missiles, then Ukraine will do the same, which is a fair defense of our capabilities,” he said. And significantly, he added:

“If they continue to shoot, we don’t have many weapons, but if they continue to shoot, they may be left without ships until the end of the war. And this is what we want to show them.”

“Therefore, Ukraine will definitely respond to any attacks on the civilian population and grain corridors,” Zelensky emphasized.

He further asserted that Ukraine’s right to produce foodstuffs and export it to global markets via the Black and Azov seas will be defended. 

⚡️ Footage of the Russian Olenengorsky Gornyak landing ship being towed as a result of damage caused by a naval kamikaze UAV in Novorossiysk, where there are still no protective booms.

Such attacks are likely coordinated by American reconnaissance over the Black Sea pic.twitter.com/dKhZbvKtcM

— What the media hides. (@narrative_hole) August 4, 2023

Romania has meanwhile pledged it will continue to assist Ukraine in exporting its grain via Romanian territory, and by alternative means, as Politico reports Monday:

Romania is working to find more ways to help transport Ukrainian grain, the country’s foreign minister said Monday, describing the security situation in the Black Sea region as “quite serious.” 

More than half of Ukrainian exports using the EU’s solidarity lanes — corridors set up to facilitate transit by road, rail and inland waterway — came through Romania. The European Commission has estimated that more than 65 percent of the grain exported via solidarity lanes in June traveled along the Danube corridor. 

Romanian Foreign Minister Luminița-Teodora Odobescu has blasted Russia’s attacks on grain silos as “really cynical” – also following Moscow’s refusal to renew the Black Sea Grain Initiative deal.

Russia is “seriously impeding Ukrainian grain exports that are a lifeline for vulnerable people in many importing countries,” which “is really exacerbating the global food crisis,” she emphasized.