ETFs Archives - The Automatic Earth

The flows into tech funds of late have been absolutely astounding if not totally surprising. The FAANNG stocks have been the market darlings for quite some time now so it’s understandable investors would chase this performance just as they do during every bull market.

It’s not just tech-focused funds overweighting the FAANNG stocks. There is a huge number of non-tech-focused funds that own these stocks, as well, and in a significant way further supporting their popularity in the marketplace. You can find them represented in size today in everything from consumer discretionary, retail, media and entertainment to momentum, cloud computing, internet and social media. In fact, without Amazon and Netflix, the consumer discretionary sector would be down on the year rather than up.

What’s more, in many cases, the ownership of these companies in many funds appear to be clear violations of their implicit if not explicit mandates. To demonstrate, let’s just run through the FAANNG stocks by market cap beginning with the biggest: Apple. There are fully 92 ETFs, according to ETFdb.com, that not only own the stock but also have an overweight (relative to the S&P 500) allocation to the shares. So not only are Apple fans and traditional passive investors buying tons of Apple stock, these other ETF investors are even more aggressively acquiring shares.

What I found notable in this case was that Apple was found in both value and growth-focused ETFs. I guess this isn’t really much of a stretch theoretically. A high-growth stock can become cheap just like any other. What is strange in Apple’s case, though, is that the stock now trades at its highest price-to-free cash flow in years. At the same time, the company’s 5-year average revenue growth is now the lowest in its history. Still, these systematic funds somehow find reason to not just own it but to overweight it as both a value stock and as a growth stock.

Deutsche Bank should be scared.

• Brexit To Put £29 Trillion In Derivatives Contracts At Risk – BOE (G.)

Britain’s chief financial watchdog has warned that contracts worth trillions of pounds between UK and European Union banks remain at risk of collapse following Brexit, after Brussels’ failure to implement protective legislation. In a warning to EU officials that time is running out before next March to devise rules for EU banks, the Bank of England’s financial policy committee (FPC) said £29tn worth of contracts could be declared void. Derivatives contracts, which provide banks and corporations with protection from interest rate rises, could come to an end without fresh legislation from the UK and EU, the committee said in its latest quarterly health check on Britain’s financial services industry.

The warning will be seen as a direct response to the European Banking Authority, which argued earlier this week that the UK was dragging its feet preparing for Brexit. In an increasingly bitter war of words, EBA officials said there was little preparation by the UK authorities and individual banks for life outside the EU. The FPC hit back, saying the Treasury was well advanced in its efforts to bridge the gap between banks in London and those on the continent, but Brussels had made little obvious effort to support its own financial institutions. “The biggest remaining risks of disruption are where action is needed by both UK and EU authorities, such as ensuring the continuity of existing derivatives contracts. As yet the EU has not indicated a solution analogous to a temporary permissions regime,” it said.

The incompetence is almost funny.

• EU To Raise Pressure On May Over Chances Of No-Deal Brexit (G.)

The European Union’s 27 leaders are to ratchet up the pressure on Theresa May by giving her a strong warning about the growing risk of a no-deal Brexit, as countries across Europe confirmed they were intensifying work on their contingency plans for Britain crashing out of the bloc. With a complete absence of progress on key issues, including that of avoiding a hard border on the island of Ireland, the prime minister will be pressed at a summit in Brussels to reassure her fellow leaders about her intentions. The Danish prime minister, Lars Løkke Rasmussen, told his parliament in Copenhagen on Wednesday: “It is the first time we are saying clearly to the British that we can end, in the worst scenario, [with] no deal.”

May has agreed to address the leaders at a dinner on Thursday night after discussions with Donald Tusk, the European council president, earlier this week in Downing Street. She is expected to sketch out her intentions for the coming few weeks before they come to their conclusions on the state of the negotiations the following morning. Asked whether Tusk was more confident about the future following his last meeting with May, a senior EU official laughed, adding: “Well, I don’t think he is less optimistic.” On the so-called backstop solution for the Irish border – a default state to be in place until a free trade deal or bespoke technological solution is agreed – the official said there had “frankly been no progress, and that’s reason to express concern”.

I made up that headline. It’s a little exaggerated. But only a little. It’s a crazy experiment Kuroda is in.

• Bank of Japan Now Owns Half the Country (ZH)

The last time we looked at how much of the stock market the Bank of Japan controls, we found that as of September, Kuroda’s central bank owned a stunning 75% of all Japanese ETFs as the central bank keeps buying stocks under its ultraloose monetary policy. Since December 2010 – when The Bank of Japan held no ETFs at all – the central bank has been buying ETFs (doubling its annual buying target to 6 trillion yen in July 2016) as part of unprecedented economic stimulus. Over this period, the Nikkei 225 Stock Average has risen 89% since December 2010. It is safe to say the two are correlated. Fast forward to today, when according to the latest BOJ holdings update following even more ETF purchases, the Japanese central bank has also become a major shareholder in nearly 40% of listed companies.

According to Nikkei calculations, the bank was one of the top 10 shareholders in 1,446 listed companies out of 3,735 at the end of March. This means that just over the past year, when the BOJ was a major owner of 833 stocks, the BOJ’s equity holdings have expanded by a staggering 70%. In addition, the Central Bank bank is now the top shareholder in Tokyo Dome, Sapporo Holdings, Unitika, Nippon Sheet Glass and Aeon. This means that the BOJ has amassed an estimated 25 trillion yen ($227 billion) of equities as a result of purchasing exchange-traded funds. Putting these holdings in context, the BOJ holdings are equal to nearly 4% of the roughly 652 trillion yen aggregate market value of stocks traded on the first section of the Tokyo Stock Exchange.

In justifying the BOJ’s relentless takeover of the stock market, Kuroda has said that buying up stocks is an integral part of the BOJ’s strategy to lift inflation to 2%, a program which “has fulfilled its role to a certain extent,” according to Kuroda. But, as the Nikkei adds, the size of the buying spree could complicate an eventual exit strategy from the monetary easing and also distort basic market mechanisms.

We’re still talking.

• Trump Says Security Panel Can Protect US Technology From China (R.)

President Donald Trump on Tuesday endorsed U.S. Treasury Secretary Steven Mnuchin’s measured approach to restricting Chinese investments in U.S. technology companies, saying a strengthened merger security review committee could protect sensitive American technologies. Trump, in remarks to reporters at the White House, said the approach would target all countries, not just China, echoing comments from Mnuchin on Monday amid a fierce internal debate over the scope of investment restrictions due to be unveiled on Friday. “It’s not just Chinese” investment, Trump told reporters when asked about the administration’s plans. Mnuchin and White House trade adviser Peter Navarro sent mixed signals on Monday about the Chinese investment restrictions, ordered by Trump on May 29.

Mnuchin said they would apply to “all countries that are trying to steal our technology,” while Navarro said they would be focused specifically on China. The restrictions are being developed to help put pressure on China to address the administration’s complaints that it has misappropriated U.S. intellectual property through joint-venture requirements, unfair licensing policies and state-backed acquisitions of U.S. technology firms. Mnuchin would prefer to use new tools associated with pending legislation to enhance security reviews of transactions by the Committee on Foreign Investments in the United States (CFIUS), some administration officials have said.

Property gains have been a substantial part of ‘growth’. Watch out Xi.

• Whack-a-Mole: China Steps Up Property Crackdown In 30 Major Cities (R.)

China said on Thursday it would renew efforts to crack down on property irregularities in 30 major cities from July to end-December, mobilizing powers from seven major Chinese government agencies in a concerted effort to rein in rising prices. Property prices in China have soared since 2016, prompting the government to roll out tightening measures in more than 100 cities to dampen demand amid bubble fears. But new home prices in May posted their fastest growth in nearly a year even as prices cooled in big cities, suggesting buyers are shifting to smaller cities. Policymakers have been careful not to tap on the brakes too hard, as real estate remains a major driver of the economy.

Growth in the world’s second-largest economy is at risk of slowing as the authorities try to tame rapid domestic credit growth at a time when trade tensions are causing worries for the economic outlook. The crackdown would be carried out by government entities including the housing ministry and the Ministry of Public Security, and the banking and insurance regulators, according to a notice posted on the housing ministry’s website. They would focus on stemming speculation, cracking down on illegal agencies and developers, and fake advertisements.

Among the 30 cities that will be scrutinized are the country’s four largest or top tier cities, including Beijing and Shanghai, and tier 2 provincial capitals such as Wuhan and Chengdu, and also smaller cities, such as Yichang and Foshan. The notice said targeted irregularities include manipulating prices, deliberately holding off sales, illegally providing loans for downpayment and publishing false price information that mislead buyers.

The party swung so far right the only way to go is left.

• Lobbyists And Business-Friendly Pundits Mourn Ocasio-Cortez’s Victory (IC)

Several Democratic pundits appeared on Fox Business Network to raise the alarm about the election. “The party is swinging left,” said Robin Biro, a former DNC delegate supporting Hillary Clinton. “It’s concerning for someone who is more moderate like myself.” Mark Penn, a strategist who owns several corporate lobbying and public relations firms and previously advised both Bill and Hillary Clinton’s presidential campaigns, attempted to downplay the significance of Ocasio-Cortez’s victory. Asked by Fox Business host Maria Bartiromo if Ocasio-Cortez’s win signified a drift toward socialism, Penn said no. “I just don’t think that’s where the Democratic Party is going. I think that’s where that district is going,” said Penn.

“I think the national implications are being overblown,” he added. Crowley was seen as the next Democratic House leader and had won support from business executives as a leading moderate. As The Intercept reported, Crowley helped spearhead efforts against bank regulations, and, as a longtime leader of the New Democrat Coalition, was widely viewed as a point person for lobbyists to influence that caucus of centrist Democrats. He also voted in support of the Iraq War and the Patriot Act. The Wall Street-friendly wing of the Democratic Party similarly attempted to diminish Ocasio-Cortez’s victory.

Matt Bennett, co-founder of Third Way, a business-friendly Democratic think tank governed by a council of finance industry executives, told Axios that Crowley lost because of his gender and the particular dynamics of the district. Ocasio-Cortez’s victory “had more to do with the nature of her very blue district than it does with national politics,” Bennett said.

Many similarities to Hillary’s loss.

• An Upset in the Making: Joe Crowley Never Saw Defeat Coming (NYT)

It was less than three weeks until Primary Day and, on first blush, the poll that Representative Joseph Crowley had been shown by his team of advisers was encouraging: He led his upstart rival, Alexandria Ocasio-Cortez, by 36 percentage points. It was the last poll Mr. Crowley’s campaign would conduct. Despite his many reputed strengths — his financial might as one of the top fund-raisers in Congress, his supposed stranglehold on Queens politics as the party boss, his seeming deep roots in an area he had represented for decades — Mr. Crowley was unable to prevent his stunning and thorough defeat on Tuesday night. Ms. Ocasio-Cortez bested Mr. Crowley by 15 percentage points, delivering a victory expected to make her, at 28, the youngest woman ever elected to Congress.

If it takes a perfect storm to dislodge a congressional leader, then Ms. Ocasio-Cortez and her crusading campaign about class, race, gender, age, absenteeism and ideology proved to be just that. She and her supporters swept up Mr. Crowley in a redrawn and diversifying 14th Congressional District where the incumbent, despite two decades in Congress, had never run in a competitive primary. She flipped the levers of power he was supposed to have — his status as a local party boss and his money — against him, using that as ammunition in an insurgent bid that cut down a possible successor to Nancy Pelosi and the No. 4 Democrat in the House. No single factor led to Mr. Crowley’s defeat, more than a half-dozen officials inside and close to his campaign said in interviews, most on the condition of anonymity.

It was demographics and generational change, insider versus outsider, traditional tactics versus modern-age digital organizing. It was the cumulative weight of them all. [..] Ms. Ocasio-Cortez, in an interview on Wednesday, dismissed race as a driving factor in her win, though she had regularly highlighted her heritage on the campaign trail. “It would be a huge mistake to just say that this election happened because X demographics live here. That is to absolutely miss the entire point of what we just accomplished,” Ms. Ocasio-Cortez said. A former organizer for Bernie Sanders, Ms. Ocasio-Cortez won across the district, carrying Mr. Crowley’s home borough of Queens by a larger margin than she won the Bronx. “She won virtually everywhere,” said Steven Romalewski, a researcher at the Center for Urban Research [..], who mapped the results.

It’s not just Facebook and Google, everyone wants a piece of the fat pie.

• Thomson Reuters Defends Its Work For ICE (IC)

The reporters at Reuters have been providing crucial, unfliching coverage of the cruel treatment of would-be immigrants under policies pushed by President Donald Trump. Meanwhile, the news agency’s parent company, Thomson Reuters, has been supplying U.S. Immigration and Customs Enforcement with data from its vast stores as part of federal contracts worth close to $30 million. A letter from a Thomson Reuters executive shows that the company is ready to defend at least one of those contracts while remaining silent on the rest. Last week, advocacy and watchdog group Privacy International wrote to Thomson Reuters CEO James Smith to “express concern” over contracts between ICE and two of the company’s subsidiaries.

Thomson Reuters Special Services sells ICE “a continuous monitoring and alert service that provides real-time jail booking data to support the identification and location of aliens” as part of a $6.7 million contract, and West Publishing, another subsidiary, provides ICE’s “Detention Compliance and Removals” office with access to a vast license-plate scanning database, along with agency access to the Consolidated Lead Evaluation and Reporting, or CLEAR, system, which Thomson Reuters advertises as holding a “vast collection of public and proprietary records.” The two West contracts are together worth $26 million. The Privacy International letter cites the practice by U.S. authorities of separating children from their parents, as well as the Trump administration’s overall “zero tolerance” approach to immigration violations.

The children — thousands of them — are typically intercepted by U.S. Customs and Border Protection with their parents; the parents are then detained by ICE while the children, having been forcibly separated, are held in conditions that some have described in horrifying terms, under the supervision of Health and Human Services. (ICE agents have also been accused of sexual abusing hundreds of detainees, underhanded arrest tactics, and more.) Privacy International’s letter requested that Thomson Reuters “commit to not providing products or services to U.S. immigration agencies which may be used to enforce such cruel, arbitrary, and disproportionate measures.”

Long read on how fraud takes place where no-one expects it. And on a scale that no-one thinks possible. Libor.

• How To Get Away With Financial Fraud (Davies)

It is not a pleasant thing to see your industry subjected to criticism that is at once overheated, ill-informed and entirely justified. In 2012, the financial sector finally got the kind of enemies it deserved. The popular version of events might have been oversimplified and wrong in lots of technical detail, but in the broad sweep, it was right. The nuanced and technical version of events which the specialists obsessed over might have been right on the detail, but it missed one utterly crucial point: a massive crime of dishonesty had taken place. There was a word for what had happened, and that word was fraud. For a period of months, it seemed to me as if the more you knew about the Libor scandal, the less you understood it.

That’s how we got it so wrong. We were looking for incidental breaches of technical regulations, not systematic crime. And the thing is, that’s normal. The nature of fraud is that it works outside your field of vision, subverting the normal checks and balances so that the world changes while the picture stays the same. People in financial markets have been missing the wood for the trees for as long as there have been markets. Some places in the world are what they call “low-trust societies”. The political institutions are fragile and corrupt, business practices are dodgy, debts are rarely repaid and people rightly fear being ripped off on any transaction.

In the “high-trust societies”, conversely, businesses are honest, laws are fair and consistently enforced, and the majority of people can go about their day in the knowledge that the overall level of integrity in economic life is very high. With that in mind, and given what we know about the following two countries, why is it that the Canadian financial sector is so fraud-ridden that Joe Queenan, writing in Forbes magazine in 1989, nicknamed Vancouver the “Scam Capital of the World”, while shipowners in Greece will regularly do multimillion-dollar deals on a handshake? We might call this the “Canadian paradox”.

There are different kinds of dishonesty in the world. The most profitable kind is commercial fraud, and commercial fraud is parasitical on the overall health of the business sector on which it preys. It is much more difficult to be a fraudster in a society in which people only do business with relatives, or where commerce is based on family networks going back centuries. It is much easier to carry out a securities fraud in a market where dishonesty is the rare exception rather than the everyday rule.

Long read on what happened since 2008.

• After the Fall (John Lanchester)

Some of the more pessimistic commentators at the time of the credit crunch, myself included, said that the aftermath of the crash would dominate our economic and political lives for at least ten years. What I wasn’t expecting – what I don’t think anyone was expecting – was that ten years would go by quite so fast. At the start of 2008, Gordon Brown was prime minister of the United Kingdom, George W. Bush was president of the United States, and only politics wonks had ever heard of the junior senator from Illinois; Nicolas Sarkozy was president of France, Hu Jintao was general secretary of the Chinese Communist Party, Ken Livingstone was mayor of London, MySpace was the biggest social network, and the central bank interest rate in the UK was 5.5 per cent.

It is sometimes said that the odds you could get on Leicester winning the Premiership in 2016 was the single most mispriced bet in the history of bookmaking: 5000 to 1. To put that in perspective, the odds on the Loch Ness monster being found are a bizarrely low 500 to 1. (Another 5000 to 1 bet offered by William Hill is that Barack Obama will play cricket for England. I’d advise against that punt.) Nonetheless, 5000 to 1 pales in comparison with the odds you would have got in 2008 on a future world in which Donald Trump was president, Theresa May was prime minister, Britain had voted to leave the European Union, and Jeremy Corbyn was leader of the Labour Party – which to many close observers of Labour politics is actually the least likely thing on that list. The common factor explaining all these phenomena is, I would argue, the credit crunch and, especially, the Great Recession that followed.

It may be smart but it can’t be good.

• Animals Are Becoming Nocturnal To Avoid Human Beings (Wef)

On Thursday, ecologists at the University of California, Berkeley, released a study published in Science Magazine that indicates animals are adjusting their habits to avoid the stresses of human encroachment on their habitat. According to the research from Kaitlyn M. Gaynor, Cheryl E. Hojnowski, Neil H. Carter, and Justin S. Brashares, human population growth is having a profound influence on the way animals go about their business—specifically, when they choose to go about their business. It seems that a number of mammalian species have become nocturnal in an effort to avoid us. Scientists admit that this probably works for the animals, but could have potential “ecosystem-level consequences” we don’t yet fully understand.

It’s been acknowledged in the past that mammals have been adjusting to the presence of humans by moving less, retreating to remote areas, and spending less time looking for food, according to Phys.org, who spoke with Gaynor, the leader of the study. All these altered behaviors contribute to overall stress in the animals. Gaynor’s study indicates that even things like camping and hiking could be having a negative effect on wildlife. “It suggests that animals might be playing it safe around people,” said Gaynor. “We may think that we leave no trace when we’re just hiking in the woods, but our mere presence can have lasting consequences.”

Debt Rattle February 21 2016

Feb 212016

February 21, 2016 Posted by Raúl Ilargi Meijer at 9:58 am Finance Tagged with: Calais, ETFs, oil, outflows, PBOC, refugees, Shanghai Accord, TPP, TTIP, Xi Comments Off

Wyland Stanley Boeing 314 flying boat Honolulu Clipper. 1939

• BofA: ‘Shanghai Accord’, Massive Central Bank Intervention Imminent (ZH)

• I Don’t Know What The Bulls Are Smoking: Stockman (CNBC)

• China Lenders’ Foreign-Exchange Holdings Omitted From PBOC Data (BBG)

• Sensitive Financial Data ‘Missing’ From PBOC Report On Capital Outflows (SCMP)

• Xi Jinping Demands ‘Absolute Loyalty’ From Chinese State Media (AP)

• The Only Thing Worse Than Oil? Investing in It (WSJ)

• A Furious Turkey Says US Is “Acting Like An Enemy” (ZH)

• TPP, Abe Set To Demolish Japan’s Small Scale Agriculture Model (FT)

• EU-US TTIP Talks Seen By The French Threatening Small Farms (BBG)

• Calais ‘Jungle’ Eviction Postponed Because Of Risk To Lone Children (G.)

• Razor Wire Fence Fails To Keep Refugees, Migrants Out Of Hungary (BBC)

• Despite Aegean Rescuers’ Best Efforts, Not All Migrants Are Saved (NPR)

Shanghai Accord to be like Plaza Accord, mass devaluation of the yuan, to “reset global monetary policy stability if only for a few more months”…

• BofA: ‘Shanghai Accord’, Massive Central Bank Intervention Imminent (ZH)

Any time the relative performance of global financials to US Treasuries has stumbled as far as it has, as shown in the chart below, it has meant one thing – a major central bank intervention was imminent. At least that’s the interpretation of BofA’s Michael Hartnett, who shows that in order to provide the kick for the bounce in this all too important “deflationary leading indicator”, central banks engaged in major unorthodox easing episodes, whether QE1-3, or the ECB’s QE.

Why intervene now? Here are the problems according to Hartnett:
• Problem 1: US economy in “bad Goldilocks”, i.e. US economy not hot/strong enough to lift global GDP & EPS; but not cold/bad enough to induce global coordinated response
• Problem 2: global policy-maker rhetoric in recent days shows “coordinated innocence” not stimulus, all blaming global economy for weak domestic economies (“Overseas factors are to blame”…Japan PM Abe; “drag on U.S. economy from greater-than-expected-slowdown in China & other EM economies“…FOMC minutes; “increasing concerns about the prospects for the global economy”…ECB Draghi; “the change in China’s growth rate can be attributed in part to weak performance of the global economy”…PBoC)

Problem 2 is static, meant for media propaganda and jawboning; it can easily be removed once the global economy takes the next leg lower. Which incidentally would also resolve the gating factor of Problem 1 – as we have said for months, the Fed and its central bank peers need the political cover to launch more stimulus.

And in a reflexive world, where the “economy is the market”, this means just one thing – a big leg lower in stocks is the necessary and sufficient condition to once again push stocks higher, as policy failure is internalized, and global risk reprises from square 1. This is Bank of America’s summary, warning that unless a major policy intervention is enacted, the market will then sell off to the next support level, below the 1,812 which has proven so stable since August. Stabilization of “4C’s” (China, Commodities, Credit, Consumer) allowed SPX 1800 to hold/bounce to 1950-2000; weak policy stimulus in coming weeks could end rally/risk fresh declines to induce growth-boosting policy accord.

Here is a summary of the near-term events which stocks are betting on do not disappoint: G20 Shanghai (February 26-27); ECB (March 10), BoJ (March 15) & FOMC (March 16). And as documented previously, the one main near-term event Hartnett is focusing on is the Shanghai meeting next weekend. Recall: “We remain sellers into strength in coming weeks/months of risk assets at least until a coordinated and aggressive global policy response (e.g. Shanghai Accord) begins to reverse the deterioration in global profit expectations (currently heading sharply south – Chart 1) and credit conditions.”

In other words, Hartnett expects a “Shanghai Accord” to be unveiled next weekend, one where like the Plaza Accord three decades earlier, the Yuan will be massively depreciated, which ironically would halt all piecemeal Yuan devaluation on expectation of future devaluation (as it will have already happened), and reset global monetary policy stability if only for a few more months. Said otherwise, if next weekend the G-20 disappoints and unveils nothing, the next big leg down in the selloff will have arrived.

“They should have the good graces to resign. They are lost. None of this is helping the economy..”

• I Don’t Know What The Bulls Are Smoking: Stockman (CNBC)

Anyone who believes that the global economy isn’t crashing must be delirious, according to David Stockman. The former director of the Office of Management and Budget argues that a rapidly deteriorating economic environment is going to send stocks and oil prices spiraling even lower than they already have. “I think your traders are smoking something stronger than what I can legally buy here in Colorado,” Stockman said Thursday on CNBC’s “Futures Now.” The S&P 500 has fallen 6% year to date, and crude oil has plunged more than 17%. However, Stockman still sees a long way to go.

He expects the S&P 500 to drop to 1,300 before making any new highs, and sees oil falling below $20. Investors have been too optimistic about the U.S. economy because they are not factoring in global risk, said Stockman, who expects to see a recession by the end of the year. “Everywhere trade is drying up, shipping rates are at all-time lows,” he said. “There is a recession that’s going to engulf the entire world economy, including the United States.” Contributing to the turmoil is the ineptitude of central banks, he said. While Stockman doesn’t expect the Federal Reserve to adopt a negative interest rate policy, he said monetary policymakers have exhausted all other options.

“They should have the good graces to resign. They are lost. None of this is helping the economy,” he said. Add in the 2016 presidential election, and Stockman said the markets will find themselves in a situation similar to that of the global financial crisis. “The out-of-control election process will feed into and create an environment that we haven’t seen since the fall of 2008,” he said. Of course, this isn’t the first time Stockman has been bearish. For years, he has been predicting a crash worse than 2008. Stockman headed the White House OMB during President Ronald Reagan’s first term.

Creative accounting 2.0. Don’t like what you see? Just stop reporting it. The US learned this trick a long time ago.

“..the slide in foreign-currency assets held by Chinese financial institutions “is typically much larger than the decline in foreign reserves..”

• China Lenders’ Foreign-Exchange Holdings Omitted From PBOC Data (BBG)

China’s central bank omitted details of financial institutions’ foreign-exchange holdings from monthly data that sheds light on the scale of its intervention to support the yuan. The change took effect in its report for January, when the currency’s slide to a five-year low roiled global financial markets and prompted the People’s Bank of China to step up efforts to boost the exchange rate amid record capital outflows. While the authority announced a $99.47 billion slide in its foreign-exchange reserves for last month, less than December’s record $107.9 billion drop, the figure may not represent the true extent of dollar sales if state-owned lenders were also used to intervene. “Sometimes it’s the commercial banks that sell a lot of dollars when the PBOC wants to prop up the yuan,” said Zhou Hao at Commerzbank in Singapore.

When this happens, the slide in foreign-currency assets held by Chinese financial institutions “is typically much larger than the decline in foreign reserves,” he said. In September, the assets dropped by a record $117 billion – almost triple the $43.3 billion decline in the nation’s reserves – as large state banks sold borrowed dollars for yuan and used forward contracts with the central bank to hedge those positions. Historically, the numbers tend to be broadly in line with one another. China used intervention, verbal warnings and a tightening of capital controls in its bid to quell speculative attacks on the yuan in the offshore market last month. The measures, which caused overnight borrowing costs for the currency to surge to an unprecedented 66.82% in Hong Kong, enjoyed some success and the offshore exchange rate has strengthened 3.6% to 6.5244 a dollar since sinking to a five-year low on Jan. 7. The onshore rate gained 1.2% to 6.5201 in Shanghai.

More detail on this creative outburst in China. Funny thing is, this will backfire. Analysts have other ways of getting the data, and they will do so now with a lot more scrutiny and suspicion.

• Sensitive Financial Data ‘Missing’ From PBOC Report On Capital Outflows (SCMP)

Sensitive data is missing from a regular Chinese central bank report amid concerns about capital outflow as the economy slows and the yuan weakens. Financial analysts say the sudden lack of clear information makes it hard for markets to assess the scale of capital flows out of China as well as the central bank s foreign exchange operations in the banking system. Figures on the “position for forex purchase” are regularly published in the People’s Bank of China’s monthly report on the “Sources and Uses of Credit Funds of Financial Institutions”. The December reading in foreign currencies was US$250 billion. But the data was missing in the central bank s latest report. It seemed the information had been merged into the “other items” category, whose January figure was US$243.9 billion a surge from US$20.4 billion the previous month.

Another key item of potentially sensitive financial data was altered in the latest report. The central bank also regularly publishes data on the forex purchase position in renminbi, which covers all financial institutions including the central bank. The December reading was 26.6 trillion yuan (HK$31.7 trillion). But the January data gave information on forex purchases made only by the central bank, detailing the lower figure of 24.2 trillion yuan. China’s foreign exchange reserves shrank almost US$100 billion last month as the central bank sells dollars and buys renminbi to shore up the country s weakening currency. It followed a record US$108 billion drop in December. Optimism for the yuan has taken a hit from continuous capital outflows amid growing concern about China s economic outlook.

The central bank has been criticised for contributing to the panic through its poor communication with the market and its foreign counterparts. PBOC governor Zhou Xiaochuan last week told Caixin the central bank was “neither a god nor a magician”, though it was very willing to improve communication with the public. This is not the first time the PBOC has tweaked items in its financial reports, but the unannounced changes come at a sensitive time as Beijing tries to stabilise the yuan exchange rate. “Its non-transparent method has left the market unable to form a clear picture about capital flows,” said Liu Li-Gang, ANZ’s chief China economist in Hong Kong. “This will fuel more speculation that China is under great pressure from capital outflows. It will hurt the central bank’s credibility.”

He can bully his own people, unlike foreign investors.

• Xi Jinping Demands ‘Absolute Loyalty’ From Chinese State Media (AP)

The Chinese president, Xi Jinping, has made a rare and high-profile tour of the country’s top three state-run media outlets, telling editors and reporters they must pledge absolute loyalty to the Communist party and closely follow its leadership in “thought, politics and action”. His remarks are the latest sign of Beijing’s increasingly tight control over the media and Xi’s unceasing efforts to consolidate his power as head of the party. Xi overshadowed the propaganda chief, Liu Yunshan, who accompanied him on his visits to the newsrooms of the party newspaper People’s Daily, state-run news agency Xinhua, and state broadcaster China Central Television (CCTV). At CCTV, Xi was welcomed by a placard pledging loyalty. “The central television’s family name is the party,” the sign read, anticipating remarks made by Xi at a later meeting.

“The media run by the party and the government are the propaganda fronts and must have the party as their family name,” Xi told propaganda workers at the meeting, during which he demanded absolute loyalty from state media. “All the work by the party’s media must reflect the party’s will, safeguard the party’s authority, and safeguard the party’s unity,” he said. “They must love the party, protect the party, and closely align themselves with the party leadership in thought, politics and action.” Willy Lam, an expert on elite Chinese politics at the Chinese University of Hong Kong, said Xi is raising standards for state media by requiring they obey the will of the Communist party’s core leadership, which is increasingly defined by Xi himself in another sign of how he has accrued more personal authority than either of his last two predecessors.

“This is a very heavy-handed ideological campaign to drive home the point of total loyalty to the party core,” Lam said. “On one hand, Xi’s influence and power are now unchallenged, but on the other hand, there is a palpable degree of insecurity.” Lam said Xi faces lurking challenges not only from within different party factions but also from among a disaffected public, who are unhappy with the slowing economy and a recent stock market meltdown. Zhang Lifan, a Beijing-based independent historian and political observer, said the tour of state media further added to Xi’s burgeoning personality cult. “I am afraid we will see more personal deification in the media in the future,” Zhang said. “I think Xi is declaring his sovereignty over the state media to say who’s really in charge.”

Gentlemen, count your losses.

• The Only Thing Worse Than Oil? Investing in It (WSJ)

One of the few assets performing worse than oil is a set of products used to bet on it. The $3.86 billion United States Oil Fund LP, an exchange-traded fund that goes by the ticker USO, is down 22% so far this year, while the $575 million iPath S&P GSCI Crude Oil Total Return Index exchange-traded note, known as OIL, is down 26% in that period. In comparison, U.S. crude-oil futures for March delivery settled at $29.64 a barrel on Friday, down 20% this year. The poor returns illustrate the difficulty of making such bets, particularly on oil prices, which have confounded investors by continuing to sink in 2016. Even after oil’s fall over the past year, investors in products that track crude have something else dragging on returns: it’s more costly to make long-term bets.

A glut of oil has shifted the dynamics of the futures market, which reflects the cost of holding oil, and that has further weighed on the performance of some of the products in recent weeks. Many commodity-investment products hold or track the nearest-month futures and regularly rebalance into the following month’s contracts. If the nearer-term contract costs less than the further-dated one, a condition known as contango, the rotation involves getting rid of cheaper contracts to buy more expensive ones. The bigger the difference between the two, the more this so-called roll cost drags on performance. Crude has been in contango since mid-2014, but the differential has risen sharply recently. The difference in the settlement price between March and April oil futures contracts has more than doubled since the end of last year.

At Thursday’s settlement, it cost $2.16 more to buy a barrel of West Texas Intermediate oil for April delivery than oil for March delivery, compared with 96 cents at the end of 2015. The differential was as high as $2.62 on Feb. 11. If left unchanged at Thursday’s settlement prices, the difference between the two contracts implies a monthly loss of 7.02% simply from roll costs, according to FactSet. It “hurts returns,” said Alan Konn at Uhlmann Price Securities, a wealth-management firm in Chicago. The firm has investments tied to the Rogers International Commodity Index, which tracks a basket of 37 commodities. The index is down close to 6% this year and more than 29% over the past 12 months.

A longer quote than usual for a Debt Rattle of Tyler Durden describing how convoluted the position of the US, EU and NATO is becoming because of their support for Erdogan. Then again, our main export these days is failed states. I added the graph (Who fights what in Syria) from another source.

• A Furious Turkey Says US Is “Acting Like An Enemy” (ZH)

As you might have noticed, Turkish President Recep Tayyip Erdogan is about to lose his mind with the situation in Syria. To be sure, the effort to usurp the Bashar al-Assad government wasn’t exactly going as planned in the first place. Regime change always takes time, but the conflict in Syria was dragging into its fifth year by the time the Russians got directly involved and although it did indeed look as though the SAA was on the verge of defeat, the future of the rebellion was far from certain. But to whatever extent the rebels’ fate was up in the air before September 30, the cause was dealt a devastating blow when Moscow’s warplanes began flying sorties from Latakia and while Ankara and Riyadh were initially willing to sit on the sidelines and see how things played out, once Russia and Hezbollah encircled Aleppo, it was do or die time.

The supply lines to Turkey were cut and without a direct intervention by the rebels’ Sunni benefactors, Moscow and Hassan Nasrallah’s army would ultimately move in on Aleppo proper and that, as they say, would be that. The problem for Turkey, Saudi Arabia, and Qatar is optics. That is, everything anyone does in Syria has to be justified by an imaginary “war on terror.” Turkey can’t say it’s intervening to keep the rebels from being defeated by the Russians, and similarly, Saudi Arabia, Qatar, the US, France and everyone else needs to preserve the narrative and pretend as though this all doesn’t boil down to the West and the Sunnis versus the Russians and the Shiites. Here’s what we said earlier this month: somehow, Turkey and Saudi Arabia need to figure out how to spin an attack on the YPG and an effort to rescue the opposition at Aleppo as an anti-ISIS operation even though ISIS doesn’t have a large presence in the area.

Well it turns out that’s an impossible task and so, Turkey has resorted to Plan B: a possible false flag bombing and the old “blame the Kurds” strategy. The attack on military personnel in Ankara this week was claimed by The Kurdistan Freedom Hawks (an offshoot of the PKK) in retaliation for Turkey’s aggressive campaign in Cizre (as documented here), but Erdogan has taken the opportunity to remind the world that the PKK and the YPG are largely synonymous. That is, they’re both armed groups of non-state actors and if one is a terrorist organization, then so is the other. Erdogan’s anti-Kurd stance is complicated immeasurably by the fact that both the US and Russia support the YPG out of sheer necessity. The group has proven especially adept at battling ISIS and has secured most of the border with Turkey.

As we noted way back in August, it was inevitable that Washington and Ankara would come to blows over the YPG. After all, the US only secured access to Incirlik by acquiescing to Erdogan’s crackdown on the PKK, but some of the missions the US was flying from Turkey’s air base were in support of the YPG. The whole thing was absurd from the very beginning. Well now, Turkey is not only set to use the fight against the YPG as an excuse to intervene in Syria on behalf of the Sunni rebels battling to beat back the Russian and Iranian advance, but Ankara is also demanding that the US recognize the YPG as a terrorist group. If Washington refuses, “measure will be taken.” “If the Unites States is really Turkey’s friend and ally, then they should recognize the PYD — a Syrian branch of the PKK — as a terrorist organization.

If a friend acts as an enemy, then measures should be taken, and they will not be limited to the Incirlik Airbase, Turkey has significant capabilities,” Erdogan advisor Seref Malkoc told Bugun newspaper. So yeah. Turkey just threatened the US. It’s notable that Malkoc specifically said actions would go “beyond Incirlik,” because pulling access to the base would be the first thing any regional observers would expect from Ankara in the event of a spat with Washington. For Turkey to say that measures will go beyond that, opens the door for Erdogan to become openly hostile towards his NATO allies. “The only thing we expect from our U.S. ally is to support Turkey with no ifs or buts,” PM Ahmet Davutoglu told a news conferenceon Saturday. “If 28 Turkish lives have been claimed through a terrorist attack we can only expect them to say any threat against Turkey is a threat against them.”

In other words, Turkey is explicitly asking the US to support Ankara’s push to invade Syria and not only that, Erdogan wants Washington to sanction attacks on the YPG which the US has overtly armed, trained, and funded. “The disagreement over the YPG risks driving a wedge between the NATO allies at a critical point in Syria’s civil war,” Reuters wrote on Saturday. “On Friday, a State Department spokesman told reporters Washington would continue to support organizations in Syria that it could count on in the fight against Islamic State – an apparent reference to the YPG.”

Right. “Washington will continue to support organizations in Syria that it can count on in the fight against Islamic State.” So we suppose that means the US will support Russia. And Iran. And Hezbollah. But most certainly not Turkey, who is the biggest state sponsor of the Islamic State on the face of the planet.

Japan ag works fine, so that should be destroyed.

• TPP, Abe Set To Demolish Japan’s Small Scale Agriculture Model (FT)

It is a source of national angst: why is Japan — culinary superpower and undisputed champion of the Michelin guide — so terrible at exporting food? In 2014, Japan’s food exports were about $5bn. The Netherlands, a country with a fraction of Japan’s population, exported food worth $103bn — with all the delights of sushi, green tea and wagyu beef generating about the same export sales as Edam cheese. For the government of Prime Minister Shinzo Abe, a missed economic opportunity is now colliding with the political imperative to help Japan’s farmers survive the Trans-Pacific Partnership trade deal, which will slash tariffs on ultra-efficient farmers in the US and Australia. The government has set a goal of more than doubling agricultural exports to Y1trn from 2012 to 2020.

Despite an emerging market slowdown that is hurting Japan’s exports overall, this week trade minister Nobuteru Ishihara said there was a chance of hitting the target early. In yen terms, food exports surged by 24.3% to Y599bn last year, even as overall exports rose by a disappointing 3.5%. Masayoshi Honma, professor of agricultural economics at the University of Tokyo, said the reason for low exports is not complicated. “Japanese exports are so low because they’re expensive,” he says. “There’s a huge differential between the Japanese price and the overseas price.” Japan’s obsession with rice production, a longstanding focus on national self-sufficiency in food and the low productivity of its small-scale, highly-subsidised farms all contribute to high prices.

For years, the importance of rural votes to the ruling Liberal Democratic party meant agriculture was sacred, but as the farming population ages — the average farmer is now 70 — it is one area where Mr Abe has proved willing to grasp the nettle on reforms. One of the few measures his government hopes to pass before upper house elections this summer will permit corporate ownership of agricultural land. That is regarded as crucial to allowing more efficient, large-scale agriculture. Mr Honma is cautious about the Y1trn exports target. “It’s not really agricultural exports because it includes marine and processed products,” he says. Most of Japan’s existing agricultural exports are seafood caught by its vast fishing fleet.

And the same goes for France.

• EU-US TTIP Talks Seen By The French Threatening Small Farms (BBG)

For Bruno Dufayet, the latest round of trade talks between the European Union and the U.S. could sound the death knell for France’s small cattle farms. “For a beef farmer in Europe now, the biggest threat is massive imports of U.S. beef produced in feedlots,” said Dufayet, who notes that his 50 beef-cattle farm in south-central France is typical for the country. “The end could be nigh for this type of livestock farm in France.” French farmers and lawmakers fear free-trade talks with the U.S. will pit Europe’s small family operations against intensive American animal farming. Dufayet is a member of French meat lobby Interbev, which hosted senators and members of parliament at a meeting in Paris on Tuesday that finished over beef canapes and red Bordeaux wine.

European farmers would be unable to compete with a “massive opening” of the region’s markets to U.S. operations that handle thousands of animals at a time, the lobby said. The 12th round of negotiations on the Transatlantic Trade Investment Partnership, or TTIP, starts in Brussels on Feb. 22. The contents of any proposed deal are still to be discussed, and there will be no full liberalization for agricultural products, said Daniel Rosario, a spokesman for the EC. The trade concerns come as farmers across France, Europe’s largest agricultural producer, are protesting against plunging prices of everything from pork to milk. The EU needs to protect its family-owned livestock farms based on extensive grazing and beef should be excluded from the talks, Jean-Paul Denanot, a member of the European Parliament and a substitute member on its agriculture committee, said at the Interbev meeting.

“This is a face-off between systems that have nothing in common,” Jean-Pierre Fleury, who heads the beef working group at EU farm lobby Copa-Cogeca. In addition to differences in scale, the EU tracks animals from birth, while U.S. traceability only applies to livestock moving interstate and exempts beef cattle under 18 months. While the EU banned antibiotics as growth promoters in animal feed in 2006, many U.S. states still allow the routine use of the drugs to promote growth in cows, chickens and pigs. There’s also the argument of higher animal welfare standards in the EU than in the U.S., according to the U.S.-based Humane Society International.

The French were ‘only’ some 300% off in their estimates. That tells you something about their priorities.

• Calais ‘Jungle’ Eviction Postponed Because Of Risk To Lone Children (G.)

The forced eviction of thousands of migrants and refugees from the sprawling “Jungle” camp on the outskirts of Calais has been put on hold by the French authorities, the Observer has learned. French courts have postponed Tuesday’s planned eviction after a census conducted by the charity Help Refugees found that far more refugees were living in the area of the camp earmarked for demolition than French authorities had calculated. Researchers for the charity counted 3,455 people living in the southern stretch of the Jungle, which is scheduled to be destroyed. Of these, 445 were children and 315 were without their parents, the youngest was a 10-year-old Afghan boy. By contrast, French authorities had estimated between 800 and 1,000 people were living there.

The eviction has been placed on hold until a judge visits the camp on Tuesday morning to re-assess the situation, with the case being heard in Lille later that afternoon. Under the previous expulsion order, refugees had been ordered to remove their makeshift homes and possessions by 8pm on Tuesday, while camp shops, cafes, churches and mosques would be razed. Josie Naughton, co-founder of Help Refugees, said: “Hopefully it’s all going to be OK. The judge will decide yes or no, so we hope they show compassion. The figures highlight the brutality of destroying these homes before proper child protection schemes have been put in place. These children have post-traumatic stress, you can’t just put them on a bus, they are going to be in danger.”

George Gabriel of Citizens UK, a group involved in the growing campaign calling for children stranded in the jungle to be allowed into the UK said: “It’s great news that the French courts have put the breaks on the demolition of wide sections of the Jungle. Day after day we find more refugee children living in that terrible camp and risking their lives each night as they try to reach their families. “They have a full legal right to do so, and so for as long as the British and French governments refuse to properly implement the law, it’s vital those boys aren’t dispersed away from the legal advice they so badly need.” However Naughton warned that if the judge does decide that the eviction can go ahead as French authorities want, then the bulldozers would arrive at the Jungle on Wednesday morning.

How long does it take to figure this out?

• Razor Wire Fence Fails To Keep Migrants Out Of Hungary (BBC)

Police in Hungary say increasing numbers of migrants are breaching a razor wire fence built to stop them crossing the border from Serbia. In January, 550 people were caught getting through – up from 270 in December. More than 1,200 were caught in the first 20 days of February. Hungary caused controversy with the 4m barrier, completed in September. However, several other countries have since introduced tough border controls to stop the influx of migrants. The number of people crossing from Serbia dropped after Hungary built the fence along the 175km border with its neighbour last year. But police say migrants are now increasingly getting through, mostly by cutting through or climbing over the barrier. Most are from Pakistan, Iran and Morocco, who are no longer admitted through other routes.

It follows moves by Austria, Slovenia, and Balkan countries to limit the nationalities and the numbers of those being allowed through. More than a million people arrived in the EU in 2015, creating Europe’s worst refugee crisis since World War Two. The majority of migrants and refugees have headed for countries like Germany and Sweden via Hungary and Austria after crossing from Turkey to Greece. Many are fleeing the conflict in Syria. Far fewer migrants are entering Hungary than Austria but the sharply increasing trend of people breaching the border fence is alarming the authorities, reports the BBC’s Central Europe correspondent, Nick Thorpe.

More people crossed from Serbia into Hungary in the first 20 days of February than in the same period in 2015, before a fence was even contemplated, our correspondent adds. Once in Hungary, they face criminal charges or deportation. Meanwhile Interior Minister Sandor Pinter has renewed the closure of three railway crossings to Croatia, for fear that migrants and refugees will again start walking down the tracks into Hungary. On Friday Austria introduced a daily cap on the number of migrants and refugees allowed into the country. Just 80 asylum applications will be accepted each day at the country’s southern border, in a move condemned by critics as incompatible with European law.

Oh God almighty… How do we sleep?

• Despite Aegean Rescuers’ Best Efforts, Not All Migrants Are Saved (NPR)

It’s just before midnight on a February night when the crew of the Responder gets word from the Greek coast guard that a boat with migrants aboard is nearby. It’s in trouble somewhere in Greek territorial waters in the Aegean Sea. “There’s a light, a flash,” says Eugenio Miuccio, a 38-year-old Italian doctor, pointing to a flicker in the pitch-black sea. He and an Italian nurse, 27-year-old Roberto Pantaleo, pull on red life jackets as the ship heads toward the light. Iain Brown, a volunteer rescue diver from Scotland, is also ready. He’s listening, trying to make out people’s voices. “We can hear them screaming before we see them,” he says. “The boats they are in are so thin. We can hear them breaking up.” They’re ready to jump into a small speedboat piloted by Dominic “Mimmo” Vella, a 44-year-old father of three from Malta and a member of the Responder’s crew.

“If something happens and people fall in the water,” Vella says, “with the big boat, we cannot go near them, so we go with the small ones.” The Responder arrives where the migrant boat is supposed to be. But there is no boat, no people. Just empty sea. “False alarm,” Brown says. “We found nothing,” Vella says. “So we’re going to keep on patrolling.” The Responder, a 167-ft. search and rescue tug vessel has been patrolling these waters for the past two months. False alarms come with the territory, but the dangers for which the crew remains prepared are real. The boat is leased by a Malta-based nonprofit called the Migrant Offshore Aid Station (MOAS). An American businessman, Christopher Catrambone, and his Italian wife, Regina, started MOAS in early 2014 to help rescue asylum seekers crossing the Mediterranean between Libya and Italy.

Then, last September, 3-year-old Alan Kurdi washed up on a Turkish beach. The Syrian toddler had drowned trying to reach Greece with his family. The image of his lifeless body jolted the world’s empathy. Donations flooded into MOAS. The charity leased the Responder, hired a crew and recruited volunteers. The Responder arrived in the Aegean at the end of December. The two speedboats aboard are named after Alan and his 5-year-old brother, Galip, who also drowned in September. Brown, the diver, heard about MOAS on the news. He’s 51 and volunteers with the Coast Guard back home in Ayr, Scotland. “I couldn’t stand it anymore, sitting at home while kids were drowning here,” he says. “So I [took] time off and came here. I can help. I understand the sea.”

The Responder patrols a stretch of the Aegean Sea between Turkey and the tiny Greek islet of Agathonissi, just south of the larger island of Samos. The distance between Greece and Turkey is relatively short, as close as 8 miles here. But the sea can look deceptively calm to migrants. “They could leave from a sheltered bay,” says MOAS search and rescue operations officer John Hamilton, as he monitors a radar on deck. “Once they get out of this bay, they come across rough seas.” More than 400 people fleeing war and poverty have died or gone missing in the Mediterranean since the beginning of this year, according to the U.N. refugee agency. At least 311 have drowned in the Aegean, according to the International Organization for Migration. The Responder has been backing up the Greek coast guard in the southern Aegean Sea, and has rescued 739 people here so far. And since 2014, MOAS crews have rescued nearly 12,000 people.

But the crew can’t stop thinking about a boat that capsized on January 15. “That night, we got a call that there was a boat,” Vella says. “And when we arrived to where the boat was supposed to be, we didn’t find the boat. But we found the people. They were screaming.” As the boat sank, people hung onto its blue-and-white hull, moaning loudly for help. “It was so cold that night, so very cold,” Vella says. “I prayed there were no kids in the water.” Miuccio, the Italian doctor, did too. He worried about hypothermia. “Children and babies can only stay in such cold water for a few minutes,” he says. A diver jumped into the sea and swam to the people clinging to the hull. “Children? Children?” the diver screamed. “Babies?”

The first baby was a chubby-cheeked little boy, no more than 2-years-old. Miuccio, on the speedboat that night, remembers that the little boy’s face was blue and he was foaming at the mouth. He had no pulse. “I gave him CPR for 15 minutes,” he says. “But nothing worked.” Pantaleo, the nurse, tried to revive another little boy, also to no avail. A third child, a 4-year-old girl, was also found dead. Then two more children, a boy and a girl, arrived — unconscious but with a pulse. “They responded immediately [after] CPR,” Miuccio recalls. “They started crying, which is a good sign. We took off their wet clothes and immediately wrapped them in isothermal blankets.”

[..] The morning after the three children died in January, Mimmo Vella called his own kids back in Malta. He told them he loved them so much. He told them they were lucky to be safe at home. As MOAS begins yet another patrol, he calls them again. His youngest son’s tiny voice rises above the wind and the waves.