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British Court Refuses To Release Venezuelan Gold To Maduro

British Court Refuses To Release Venezuelan Gold To Maduro

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British Court Refuses To Release Venezuelan Gold To Maduro Tyler Durden Thu, 07/02/2020 - 11:55

18 months ago, the 'virtue-signaling' Bank of England stuck a knife between the ribs of Venezuela's embattled socialist leader, Nicolas Maduro, a former bus driver and anointed successor of Huge Chavez who managed to cling to power last year despite a Western-backed coup attempt led by opposition leader Juan Guaido, whose government was officially recognized by dozens of foreign governments.

But when the Venezuelan military refused to break with Maduro, choosing instead to back him over Guaido, Guaido gradually faded into irrelevance. He's still there, and still claiming to be the legitimate ruler of Venezuela, but instead of looking like a credible alternative to Maduro, he's sounding more like a deranged street preacher proclaiming that he is the one true messiah.

Despite the fact that Venezuela's leadership is no longer in doubt, a lawsuit brought by the Venezuelan central bank against the British government seeking the release of the Venezuelan gold sitting in the BoE's vaults ended on Thursday with a decision against the Maduro government, as it was denied access to $1 billion of venezuelan gold in the BoE vaults. Instead, the court ruled that it could only release the gold to the legitimate government of Venezuela. Since Britain recognizes Guaido as Venezuela's legitimate ruler, the British government has legal standing to treat the Maduro government like an illegitimate regime, allowing the gov't to essentially freeze and seize government assets at will.

Here's more from the Guardian:

Mr Justice Teare, a commercial court judge sitting in the high court, ruled on Thursday the Maduro-supporting bank was not entitled to make the request. “Her Majesty’s government does recognise Guaidó in the capacity of the constitutional interim president of Venezuela and, it must follow, does not recognise Maduro as the constitutional interim president of Venezuela,” he said.

“Whatever the basis for the recognition, Her Majesty’s government has unequivocally recognised Guaidó as president of Venezuela. It necessarily follows that Her Majesty’s government no longer recognises Maduro as president of Venezuela … There is no room for recognition of Mr Guaidó as de jure president and of Maduro as de facto president."

Sarosh Zaiwalla, senior partner at Zaiwalla & Co, representing the Banco Central de Venezuela, said his clients would appeal and challenged the court judgement for “entirely ignoring the reality of the situation on the ground”.

He said the ruling would delay money being sent to help the people of Venezuela. “Maduro’s government is in complete control of Venezuela and its administrative institutions, and only it can ensure the distribution of the humanitarian relief and medical supplies needed to combat the coronavirus pandemic."

He added that none of the member of a rival, Guaidó-appointed BcV board that sought to keep the gold in the UK, have “been resident in Venezuela for some years now”.

Though the Venezuelans plan to appeal, we suspect they won't have very much luck. That's of course terrible news for the Maduro government, which is officially broke with its oil output at record lows and its currency essentially worthless, the government has no money to finance anti-COVID-19 programs. And the international community, aside from Maduro's benefactors in Russia and China, has been pretty unforgiving. Back in May, we pointed out that Venezuela's gold vaults are probably empty, or close to it, after the government was forced to make some payments to the Iranians in gold.

The central bank's solicitor argued that the decision was illegal under international law as an illegal intervention in the affairs of Venezuela. The decision also puts the kibosh on a Venezuelan plan whereby proceeds from the gold could be handed to the UN allowing it to intermediate the purchases of critical COVID-19 supplies for Venezuela.

Ultimately, we imagine Hugo Chavez, who took strides to repatriate most of Venezuela's gold held in the vaults of foreign central banks, is rolling over in his grave. And Maduro is learning once again that gold doesn't have any owners - only spenders. He who controls the vault, controls the gold.

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Spread & Containment

Russia’s energy war: Putin’s unpredictable actions and looming sanctions could further disrupt oil and gas markets

Russian President Vladimir Putin has not hesitated to use energy as a weapon. An expert on global energy markets analyzes what could come next.

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The new Baltic Pipe natural gas pipeline connects Norwegian natural gas fields in the North Sea with Denmark and Poland, offering an alternative to Russian gas. Sean Gallup/Getty Images

Russia’s effort to conscript 300,000 reservists to counter Ukraine’s military advances in Kharkiv has drawn a lot of attention from military and political analysts. But there’s also a potential energy angle. Energy conflicts between Russia and Europe are escalating and likely could worsen as winter approaches.

One might assume that energy workers, who provide fuel and export revenue that Russia desperately needs, are too valuable to the war effort to be conscripted. So far, banking and information technology workers have received an official nod to stay in their jobs.

The situation for oil and gas workers is murkier, including swirling bits of Russian media disinformation about whether the sector will or won’t be targeted for mobilization. Either way, I expect Russia’s oil and gas operations to be destabilized by the next phase of the war.

The explosions in September 2022 that damaged the Nord Stream 1 and 2 gas pipelines from Russia to Europe, and that may have been sabotage, are just the latest developments in this complex and unstable arena. As an analyst of global energy policy, I expect that more energy cutoffs could be in the cards – either directly ordered by the Kremlin to escalate economic pressure on European governments or as a result of new sabotage, or even because shortages of specialized equipment and trained Russian manpower lead to accidents or stoppages.

Dwindling natural gas flows

Russia has significantly reduced natural gas shipments to Europe in an effort to pressure European nations who are siding with Ukraine. In May 2022, the state-owned energy company Gazprom closed a key pipeline that runs through Belarus and Poland.

In June, the company reduced shipments to Germany via the Nord Stream 1 pipeline, which has a capacity of 170 million cubic meters per day, to only 40 million cubic meters per day. A few months later, Gazprom announced that Nord Stream 1 needed repairs and shut it down completely. Now U.S. and European leaders charge that Russia deliberately damaged the pipeline to further disrupt European energy supplies. The timing of the pipeline explosion coincided with the start up of a major new natural gas pipeline from Norway to Poland.

Russia has very limited alternative export infrastructure that can move Siberian natural gas to other customers, like China, so most of the gas it would normally be selling to Europe cannot be shifted to other markets. Natural gas wells in Siberia may need to be taken out of production, or shut in, in energy-speak, which could free up workers for conscription.

European dependence on Russian oil and gas evolved over decades. Now, reducing it is posing hard choices for EU countries.

Restricting Russian oil profits

Russia’s call-up of reservists also includes workers from companies specifically focused on oil. This has led some seasoned analysts to question whether supply disruptions might spread to oil, either by accident or on purpose.

One potential trigger is the Dec. 5, 2022, deadline for the start of phase six of European Union energy sanctions against Russia. Confusion about the package of restrictions and how they will relate to a cap on what buyers will pay for Russian crude oil has muted market volatility so far. But when the measures go into effect, they could initiate a new spike in oil prices.

Under this sanctions package, Europe will completely stop buying seaborne Russian crude oil. This step isn’t as damaging as it sounds, since many buyers in Europe have already shifted to alternative oil sources.

Before Russia invaded Ukraine, it exported roughly 1.4 million barrels per day of crude oil to Europe by sea, divided between Black Sea and Baltic routes. In recent months, European purchases have fallen below 1 million barrels per day. But Russia has actually been able to increase total flows from Black Sea and Baltic ports by redirecting crude oil exports to China, India and Turkey.

Russia has limited access to tankers, insurance and other services associated with moving oil by ship. Until recently, it acquired such services mainly from Europe. The change means that customers like China, India and Turkey have to transfer some of their purchases of Russian oil at sea from Russian-owned or chartered ships to ships sailing under other nations’ flags, whose services might not be covered by the European bans. This process is common and not always illegal, but often is used to evade sanctions by obscuring where shipments from Russia are ending up.

To compensate for this costly process, Russia is discounting its exports by US$40 per barrel. Observers generally assume that whatever Russian crude oil European buyers relinquish this winter will gradually find alternative outlets.

Where is Russian oil going?

The U.S. and its European allies aim to discourage this increased outflow of Russian crude by further limiting Moscow’s access to maritime services, such as tanker chartering, insurance and pilots licensed and trained to handle oil tankers, for any crude oil exports to third parties outside of the G-7 who pay rates above the U.S.-EU price cap. In my view, it will be relatively easy to game this policy and obscure how much Russia’s customers are paying.

On Sept. 9, 2022, the U.S. Treasury Department’s Office of Foreign Assets Control issued new guidance for the Dec. 5 sanctions regime. The policy aims to limit the revenue Russia can earn from its oil while keeping it flowing. It requires that unless buyers of Russian oil can certify that oil cargoes were bought for reduced prices, they will be barred from obtaining European maritime services.

However, this new strategy seems to be failing even before it begins. Denmark is still making Danish pilots available to move tankers through its precarious straits, which are a vital conduit for shipments of Russian crude and refined products. Russia has also found oil tankers that aren’t subject to European oversight to move over a third of the volume that it needs transported, and it will likely obtain more.

Traders have been getting around these sorts of oil sanctions for decades. Tricks of the trade include blending banned oil into other kinds of oil, turning off ship transponders to avoid detection of ship-to-ship transfers, falsifying documentation and delivering oil into and then later out of major storage hubs in remote parts of the globe. This explains why markets have been sanguine about the looming European sanctions deadline.

One fuel at a time

But Russian President Vladimir Putin may have other ideas. Putin has already threatened a larger oil cutoff if the G-7 tries to impose its price cap, warning that Europe will be “as frozen as a wolf’s tail,” referencing a Russian fairy tale.

U.S. officials are counting on the idea that Russia won’t want to damage its oil fields by turning off the taps, which in some cases might create long-term field pressurization problems. In my view, this is poor logic for multiple reasons, including Putin’s proclivity to sacrifice Russia’s economic future for geopolitical goals.

A woman walks past a billboard reading: Stop buying fossil fuels. End the war.
Stand With Ukraine campaign coordinator Svitlana Romanko demonstrates in front of the European Parliament on Sept. 27, 2022. Thierry Monasse/Getty Images

Russia managed to easily throttle back oil production when the COVID-19 pandemic destroyed world oil demand temporarily in 2020, and cutoffs of Russian natural gas exports to Europe have already greatly compromised Gazprom’s commercial future. Such actions show that commercial considerations are not a high priority in the Kremlin’s calculus.

How much oil would come off the market if Putin escalates his energy war? It’s an open question. Global oil demand has fallen sharply in recent months amid high prices and recessionary pressures. The potential loss of 1 million barrels per day of Russian crude oil shipments to Europe is unlikely to jack the price of oil back up the way it did initially in February 2022, when demand was still robust.

Speculators are betting that Putin will want to keep oil flowing to everyone else. China’s Russian crude imports surged as high as 2 million barrels per day following the Ukraine invasion, and India and Turkey are buying significant quantities.

Refined products like diesel fuel are due for further EU sanctions in February 2023. Russia supplies close to 40% of Europe’s diesel fuel at present, so that remains a significant economic lever.

The EU appears to know it must kick dependence on Russian energy completely, but its protected, one-product-at-a-time approach keeps Putin potentially in the driver’s seat. In the U.S., local diesel fuel prices are highly influenced by competition for seaborne cargoes from European buyers. So U.S. East Coast importers could also be in for a bumpy winter.

This article has been updated to reflect conflicting reports about the draft status of Russian oil and gas workers.

Amy Myers Jaffe does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.

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Bonds

Bounce In Futures Fizzles As Dollar Surge Returns

Bounce In Futures Fizzles As Dollar Surge Returns

If yesterday markets made little sense, when the dollar and yields slumped yet stocks and…

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Bounce In Futures Fizzles As Dollar Surge Returns

If yesterday markets made little sense, when the dollar and yields slumped yet stocks and other risk assets tumbled alongside them in a puzzling reversal of traditional risk relationships (a move which was likely precipitated by the plunge in AAPL and KMX), today things are a bit more logical with the dollar initially extending its slide helping futures rise to session highs just below 3,700, before the dollar surged just after 5am as sterling tumbled after Bloomberg reported that Prime Minister Liz Truss’s government signaled it was sticking with its plan for tax cuts after a meeting with the UK’s fiscal watchdog, dashing market expectations that a policy U-turn might be imminent which has pushed cable briefly above 1.12 overnight, wiping out a week's worth of losses. As a result, after rising as much as 0.8%, S&P futures were flat, up just 0.1%, the same as Nasdaq futures. Government bonds rallied across Europe and the US, as the dollar strengthened after reversing its earlier loss.

In premarket trading, Nike shares fall 10% after the sportswear giant cut its margin outlook for the year while reporting surging inventory, fueling worries over consumers’ ability to spend as inflation takes a toll. Micron shares rose 3% in premarket trading, after analysts said the ongoing inventory correction was only a short-term hurdle and that the bottom is near, a potential relief for semiconductor stocks that have taken a beating this year. Amylyx Pharmaceuticals’s (AMLX US) shares soared as much as 13% in US premarket trading after winning FDA approval for its Relyvrio drug, for the treatment of amyotrophic lateral sclerosis (ALS) in adults. Analysts said they expected the drug to see a strong launch given demand from patients. Xos jumped 6.3% in extended trading after delivering 13 battery-electric vehicles to FedEx.

Thursday's bruising session took the S&P 500 down 2% to the lowest in almost two years and the Nasdaq 100 tumbling almost 4%. The S&P 500 Index has dropped on seven of the past 8 days, and is headed for its third straight quarter of losses for the first time since 2008-2009 and the Nasdaq 100 Stock Index for the first time in 20 years. Fears of global recession are growing by the day as the threat of higher rates saps growth and as the Fed confirms with every speech that not even a recession will stop it. The case of the UK shows how faultlines between government and central bank policy on tackling inflation can erupt into a crisis. Hopes evaporated that the British government would succumb to pressure to back down from tax cuts that brought the pound to the edge of dollar parity.

“Today, everything is just oversold so you are seeing a rebound,” said Esty Dwek, chief investment officer at Flowbank SA. “We are closer to bottoms and sentiment is so negative the downside is becoming more limited.”

Elsewhere, Global equity funds garnered inflows of $7.6 billion in the week to Sept. 28, according to data compiled by EPFR Global. Bonds had $13.7 billion of outflows in the week, while $8.9 billion flowed into US stocks, the data showed.

In Europe, the Stoxx 50 rose 0.9%. Real estate, energy and retailers are the strongest-performing sectors.  Here are some of the biggest European movers today:

  • Krones shares rose as much as 2.7% to their highest intra-day level since Feb. 2022, after HSBC increased the German machinery and equipment company’s price target to EU102
  • Clariant shares rally by the most intraday since mid-May after Credit Suisse raises to outperform, partly as it expects Clariant’s new management team to boost performance
  • ABN Amro jumped as much as 6.3% after Goldman Sachs raised the stock to buy from neutral, citing its gearing toward higher interest rates, increasing estimates on net interest income
  • Zealand Pharma rise as much as 35%, the most on record, after the company announced positive data from its phase 3 trial of glepaglutide to treat patients with short bowel syndrome
  • Sinch shares rise as much as 24% after SoftBank sold its entire stake in Sinch AB following a share price collapse of more than 90% in the Swedish cloud-based platform provider
  • Adidas and Puma drop as their US peer Nike slumped in late trading Thursday after it said inventory buildup forced it to push through margin-busting discounts
  • Hurricane Energy shares drop as much as 5.6% after 1H earnings; Canaccord Genuity notes the results did not surprise, and flags lack of regulatory reassurance on gas-management approvals
  • Fingerprint Cards shares drop as much as 17% after saying it is raising fresh capital in order to strengthen the balance sheet and to address a forecasted covenant breach

Earlier in the session, Asian stocks fell again, putting the regional benchmark on course for its worst monthly performance since 2008, as a selloff spurred by concerns over higher interest rates and a global recession deepened. The MSCI Asia Pacific Index slid 0.5% after earlier falling as much as 1% on Friday. Still down over 12% this month, the gauge has trailed global peers and is set to cap a seventh straight week of declines. That matches its losing streak from September 2015, which was the longest since 2011. Equities in Japan, which has the highest weight in the Asia index, were among the biggest losers on Friday, with the Topix falling 1.8%. Consumer discretionary and industrials were the worst sectors, while Chinese tech shares listed in Hong Kong also fell. READ: China Shares Plunge to Lowest Valuation on Record in Hong Kong Global funds have pulled almost $10 billion from Asian emerging-market stocks excluding China this month, as the dollar and Treasury yields climbed after Federal Reserve officials ramped up their rate-hike rhetoric. Taiwan’s tech-heavy market has suffered the bulk of the outflow from Asia. Its regulators tightened short selling rules as shares extended their slide. 

“I think emerging markets as a whole are still going to have a pretty difficult six months until the Fed rate peaks,” Louis Lau, a fund manager at Brandes Investment Partners, said in an interview with Bloomberg TV. How much damage is a strong dollar causing? That’s the theme of this week’s MLIV Pulse survey. It’s brief and we don’t collect your name or any contact information. Please click here to share your views. The turmoil in the UK has been another source of market volatility for Asia investors, who continue to grapple with the fallout from strict lockdowns in China, the region’s biggest economy. “There’s been some correlation (between risk assets and sterling) recently,” said Takeo Kamai, head of execution services at CLSA. Overall, “the theme hasn’t changed. The scenario that the Fed will cut rates next year is breaking down. I think we could see further downside in stock prices towards November,” he said. Stocks in India gained after the central bank raised the benchmark rate by an expected 50 basis points. The MSCI Asia Pacific Index is down 4% this week and on course for its lowest close since April 2020

Japanese equities extended declines on Friday as a global market rout deepened, capping its worst month since the onset of the pandemic in 2020.    The Topix Index fell 1.8% to 1,835.94 as of market close Tokyo time, taking declines in September to 6.5%. The Nikkei declined 1.8% to 25,937.21. Toyota Motor Corp. contributed the most to the Topix Index decline, decreasing 4.2%. Out of 2,169 stocks in the index, 299 rose and 1,823 fell, while 47 were unchanged.  Federal Reserve officials reiterated Thursday that they will keep raising interest rates to rein in high inflation.  “There are concerns that the economy will slow from further rate hikes while inflation doesn’t stop,” said Kenji Ueno, a portfolio manager at Sompo Asset Management.

In Australia, the S&P/ASX 200 index fell 1.2% to close at 6,474.20, dragged by banks and industrials, after another plunge on Wall Street as the prospect of higher interest rates and turmoil in Europe stoked fears of global recession. The benchmark notched its third-straight week of losses. In New Zealand, the S&P/NZX 50 index fell 1.2% to 11,065.71

Stocks in India outperformed Asian peers after the Reserve Bank of India raised borrowing costs and exuded confidence to tackle inflation without any major impact to its growth projections. The S&P BSE Sensex added 1.8% to 57,426.92, while the NSE Nifty 50 Index rose by 1.6% as the indexes posted their biggest single-day jump since Aug. 30. Despite the rally, the key gauges fell more than 1% each for the week and over 3% for the month, their biggest decline since June. India’s central bank raised its repurchase rate by 50 basis points to 5.90%, matching the expectations of most economists. The RBI trimmed the economic growth outlook for the financial year ending March to 7% while retaining it 6.7% forecast for inflation.  The increase in the benchmark interest rate “mainly supports stocks of financial companies, which have been seeing strong credit growth,” said Prashanth Tapse, an analyst at Mehta Securities. 

In FX, the Bloomberg Dollar Spot Index rebounded after sliding initially, as cable tumbled when it emerged that Liz Truss is not backtracking on its massive fiscal easing. Iniitlally, the pound advanced a fourth day, to briefly trade above $1.12, fully reversing the moves since last Friday, however it then tumbled, wiping out all gains after Prime Minister Liz Truss’s government signaled it’s sticking with its plan for tax cuts after a meeting with the UK’s fiscal watchdog, dashing market expectations that a policy U-turn might be imminent. Notable data: U.K. 2Q final GDP rises 0.2% q/q versus preliminary -0.1%. The Aussie and kiwi crept higher, but are still set for their biggest monthly declines since April as rising Fed interest rates and fears of a global economic slowdown sap demand for risk assets

In rates, Treasuries advanced, 10-year yield dropping 8bps while bunds 10-year yield drops 6bps to 2.11%. Treasury 10-year yields around 3.685%, richer by 10bp on the day -- largest moves seen in UK front-end where 2-year yields are richer by 25bp on the day as BOE tightening premium fades out of interest-rate swaps. Short-end UK bonds surged amid political pressure on the government to water down some of its budget proposals, while the pound regained its budget-shock losses. US session focus is on PCE data and host of Federal Reserve speakers while month end may add some support into long end of the curve.  Long end of the Treasuries curve may find additional month-end related buying support over the session; Bloomberg index projects 0.07yr Treasury extension for October. Gilts rallied, with short-end bonds leading gains as traders trimmed BOE tightening bets amid political pressure on the government to water down some of its budget proposals. Meanwhile in Japan, JGBs gained after the BOJ boosted purchases for maturities covering the benchmark 10-year zone. The Bank of Japan will buy more bonds with maturities of at least five years in the October-December period, according to a statement from the central bank

In commodities, WTI trades within Thursday’s range, adding 1.3% to near $82.26. Spot gold rises roughly $10 to trade near $1,671/oz. 

Bitcoin is essentially unchanged and in very tight ranges of circa. USD 400 and as such well within the week's existing parameters

Looking to the day ahead now, and data releases include the flash Euro Area CPI release for September, as well as the Euro Area unemployment rate for August and German unemployment for September. In the US, we’ll also get August data on personal income and personal spending, the MNI Chicago PMI for September, and the University of Michigan’s final consumer sentiment index for September. Finally, central bank speakers include Fed Vice Chair Brainard, the Fed’s Barkin, Bowman and Williams, as well as the ECB’s Schnabel, Elderson and Visco.

Market Snapshot

  • S&P 500 futures up 0.9% to 3,686.00
  • STOXX Europe 600 up 1.3% to 387.83
  • MXAP down 0.5% to 139.25
  • MXAPJ little changed at 453.72
  • Nikkei down 1.8% to 25,937.21
  • Topix down 1.8% to 1,835.94
  • Hang Seng Index up 0.3% to 17,222.83
  • Shanghai Composite down 0.6% to 3,024.39
  • Sensex up 2.0% to 57,539.66
  • Australia S&P/ASX 200 down 1.2% to 6,474.20
  • Kospi down 0.7% to 2,155.49
  • Brent Futures up 1.2% to $89.55/bbl
  • Gold spot up 0.7% to $1,671.56
  • U.S. Dollar Index down 0.52% to 111.67
  • German 10Y yield little changed at 2.10%
  • Euro up 0.3% to $0.9840

Top Overnight News from Bloomberg

  • Prime Minister Liz Truss is under pressure to cut spending on the same scale as George Osborne’s infamous austerity drive of 2010 in order to stabilize the UK public finances and win back the confidence of investors
  • Prime Minister Liz Truss and Chancellor of the Exchequer Kwasi Kwarteng are holding talks Friday with the UK government’s fiscal watchdog, amid intense criticism over their unfunded tax cuts that roiled markets
  • A dash for cash among sterling investors after market turmoil sparked by pension fund margin calls is coming at a bad time, according to an M&G Investments executive
  • The ECB shouldn’t let concerns about its profitability obstruct decision-making over monetary policy, according to Governing Council member Gediminas Simkus
  • The SNB trimmed its foreign-exchange portfolio in the second quarter as the franc gyrated against the euro before rising above parity for the first time since 2015. The central bank sold 5 million francs ($5.1 million) worth of foreign currencies in the three months through June
  • Norway’s central bank will increase its purchases of foreign currency to 4.3 billion kroner ($400 million) a day in October from 3.5 billion in September as it deposits energy revenues into the $1.1 trillion sovereign wealth fund.
  • Japan’s factory output expanded by 2.7% in August from July, according to the economy ministry Friday, beating analysts’ 0.2% forecast. The output of semiconductor and flat-panel making equipment hit its highest level in data going back to 2003, as the effect of lockdowns in China abated
  • Japanese Prime Minister Fumio Kishida instructed the government Friday to come up with an economic stimulus package by the end of October to help mitigate the impact of inflation, as economists warned against over-sized spending
  • China’s factory activity continued to struggle in September, while services slowed, as the country’s economic recovery was challenged by lockdowns in major cities and an ongoing property market downturn. The official manufacturing purchasing managers index rose to 50.1 from 49.4 in August
  • An organization formed by China’s biggest foreign- exchange traders asked banks to trade the currency at levels closer to the central bank’s fixing at the market open, according to people familiar with the matter

A more detailed look at global markets courtesy of Newsquawk

Asia-Pac stocks were mostly lower after the negative performance across global peers amid inflationary headwinds and with risk appetite subdued heading quarter-end, while the region also digested mixed Chinese PMI data. ASX 200 declined amid weakness across most sectors and with tech the notable underperformer after the recent upside in yields and with Meta the latest major industry player to announce a hiring freeze. Nikkei 225 was pressured and fell below the 26,000 level with better-than-expected Industrial Production and Retail Sales data releases overshadowed by the broad risk aversion. Hang Seng and Shanghai Comp were indecisive after the PBoC conducted its largest weekly cash injection in more than 32 months ahead of the week-long closure in the mainland, while participants also digested mixed PMI data in which Official Manufacturing PMI topped forecasts with a surprise return to expansion, but Non-Manufacturing and Composite PMIs slowed and Caixin Manufacturing PMI printed at a wider contraction. NIFTY eventually notched mild gains in the aftermath of the RBI rate decision in which it hiked the Repurchase Rate by 50bps to 5.90% as expected via 5-1 split and with the central bank refraining from any major hawkish surprises.

Top Asian News

  • Japan's Chief Cabinet Secretary Matsuno said they want to compile an extra budget swiftly after the economic package in late October, while they will consider further support for hard-hit consumers and businesses in view of higher energy and food prices, as well as consider steps to promote wage hikes, according to Reuters.
  • Chinese Finance Ministry is to offer a tax refund for people who sell their homes and repurchases new ones by the end of 2023; additionally, China has told banks to provide USD 85bln in property funding by the end of the year, according to Bloomberg.
  • Chinese NBS Manufacturing PMI (Sep) 50.1 vs. Exp. 49.6 (Prev. 49.4); Non-Manufacturing PMI (Sep) 50.6 vs Exp. 52.4 (Prev. 52.6)
  • Chinese Composite PMI (Sep) 50.9 (Prev. 51.7)
  • Chinese Caixin Manufacturing PMI Final (Sep) 48.1 vs. Exp. 49.5 (Prev. 49.5)
  • Japanese Industrial Production MM SA (Aug P) 2.7% vs. Exp. 0.2% (Prev. 0.8%); Retail Sales YY (Aug) 4.1% vs. Exp. 2.8% (Prev. 2.4%)

European equities are attempting to claw back some of yesterday’s downside on quarter and month end. Sectors are firmer across the board with Real Estate outperforming peers in what has been a tough week for the UK property market. Stateside, futures are also attempting to recover from yesterday’s losses which saw a tough session for the tech sector after Apple shed the best part of 5%.

Top European News

  • UK OBR Chair Hughes says a statement will be released today after the meeting with UK PM Truss and Chancellor Kwarteng. On this, the UK Treasury has not sought to accelerate watchdog's economic forecast, according to Bloomberg. Reminder, UK PM Truss to conduct emergency talks with the OBR on Friday after failing to calm markets, according to the Guardian.
  • UK cross-party MPs in the Treasury Select Committee called for Chancellor Kwarteng to release a full economic forecast from the OBR by end of October, according to Sky News.
  • UK PM Truss has confirmed she will attend next week's European Political Community summit, via BBC.
  • Reports that technical level discussions between the UK and EU could resume as soon as next week, via BBC's Parker; writing, that there has been a 'warmer' tone in recent weeks, some believe pressure from the US on the UK has had influence.
  • German VDMA, survey of members: majority expect nominal sales growth in 2022 and 2023.

FX

  • GBP's revival has continued ahead of a meeting between PM Truss and the OBR, with a statement expected, a move that has taken Cable above 1.12 but shy of mini-Budget levels.
  • USD is firmer overall but continues to retreat from YTD peaks, though the DXY is seemingly drawn to the 112.00 area.
  • Yuan derived further, fleeting, support from reports the FX body has asked banks to trade closer to the onshore fixing.
  • Elsewhere, FX peers are under modest pressure but more contained vs USD; EUR unfased by a record EZ flash CPI print of 10.0%.

Fixed Income

  • Benchmarks bid but modestly off best levels with Bunds leading the charge, but well within recent ranges, amid potential month/quarter-end influence.
  • Gilts lifted, but the 10yr yield remains above 4.0% ahead of the OBR statement.
  • Stateside, USTs are equally buoyed ahead of a packed PM agenda include PCE Price Index and Fed speak.

Commodities

  • The broader commodity market is benefitting from a pullback in the USD coupled with a broader risk appetite.
  • Metals are buoyed by the recent pullback in the Dollar with spot gold edging above its 10 DMA (USD 1,656.72/oz) and towards the USD 1,680/oz mark which coincides with the yellow metal’s 21DMA (USD 1,680.56/oz) and 200WMA (USD 1,680.20/oz).
  • Base metals are also firmer across the board with 3M LME copper back above the USD 7,500/t mark, whilst nickel and aluminium outperform on the exchange.

Central Banks

  • China loosened FX restrictions in response to the Fed rate hike and the yuan's fall over the past week, according to people familiar with the matter cited by FT.
  • China's FX body is reportedly asking banks to trade the Yuan closer to the PBoC fixing, according to Bloomberg.
  • PBoC injected CNY 128bln via 7-day reverse repos with the rate kept at 2.00% and injected CNY 58bln via 14-day reverse repos with the rate kept at 2.15% for a CNY 184bln net daily injection and a net CNY 868bln weekly injection.
  • RBI hiked Repurchase Rate by 50bps to 5.90%, as expected, via 5-1 vote and the Standing Deposit Facility was adjusted to 5.65%. RBI Governor Das said MPC is to remain focused on the withdrawal of accommodation and that the persistence of high inflation necessitates further calibrated withdrawal of monetary accommodation. However, Das noted that the Indian economy continues to be resilient with economic activity stable and overall monetary and liquidity conditions still remain accommodative, while Real GDP growth forecast for 2022/23 was revised lower to 7.0% from 7.2% and 2022/23 CPI was seen at 6.7%.
  • RBI is reportedly encouraging state-run refiners to reduce USD buying in the spot market; asking to lean on USD 9bln credit line instead, according to Reuters sources.
  • BoE was reportedly warned about a looming catastrophe in the pensions sector within the next 5 years before it was forced to intervene to prevent a market collapse, according to The Telegraph.
  • Fed's Daly (2024 voter) said a downshift in economic activity and labour is needed to bring down inflation and additional rate increases are necessary and appropriate. Daly also stated that a myriad of risks narrows the path to a smooth landing but does not close it, while she added they have gotten rates to neutral and expect to raise rates further in coming meetings and early next year.
  • Norges Bank will purchase FX equivalent to NOK 4.3bln/day in October (3.5bln in September); reflecting an increase in projected NOK revenues from petroleum activity.

Geopolitics

  • Russian President Putin signed decrees recognising occupied Ukrainian regions of Kherson and Zaporizhzhia as independent territories which is an intermediate step before the regions are formally incorporated into Russia, according to Reuters.
  • ** Russia's Kremlin says strikes against the new territories incorporated into Russia will be considered an act of aggression against Russia**; says Ukraine has shown no willingness to negotiate, via Reuters.
  • Russia's Spy Chief says they have material which show a Western role in Nord Stream incidents, via Ifx.
  • Armenia's Foreign Ministry says their Ministers and Azerbaijani counterparts will meet in Geneva on October 2nd, via AJA Breaking.

US Event Calendar

  • 08:30: Aug. Personal Spending, est. 0.2%, prior 0.1%
    • Aug. Real Personal Spending, est. 0.1%, prior 0.2%
    • Aug. Personal Income, est. 0.3%, prior 0.2%
    • Aug. PCE Deflator MoM, est. 0.1%, prior -0.1%
    • Aug. PCE Core Deflator MoM, est. 0.5%, prior 0.1%
    • Aug. PCE Core Deflator YoY, est. 4.7%, prior 4.6%
    • Aug. PCE Deflator YoY, est. 6.0%, prior 6.3%
  • 09:45: Sept. MNI Chicago PMI, est. 51.8, prior 52.2
  • 10:00: Sept. U. of Mich. Current Conditions, est. 58.9, prior 58.9
    • U. of Mich. Sentiment, est. 59.5, prior 59.5
    • U. of Mich. Expectations, est. 59.9, prior 59.9
    • U. of Mich. 1 Yr Inflation, est. 4.6%, prior 4.6%; 5-10 Yr Inflation, est. 2.8%, prior 2.8%

Central Bank Speakers

  • 08:30: Fed’s Barkin Speaks at Chamber of Commerce Event
  • 09:00: Fed’s Brainard Speaks at Fed Conference on Financial Stability
  • 11:00: Fed’s Bowman Discusses Large Bank Supervision
  • 12:30: Fed’s Barkin Discusses the Drivers of Inflation
  • 16:15: Williams Speaks at Fed Conference on Financial Stability

DB's Jim Reid concludes the overnight wrap

As we arrive at the end of a tumultuous month in financial markets, there’s been little sign of respite for investors over the last 24 hours, with the S&P 500 (-2.11%) reversing the previous day’s gains to close at a 21-month low. There were a number of factors behind the latest selloff, but fears of further rate hikes were prominent after the US weekly initial jobless claims showed that the labour market was still in decent shape, whilst the PCE inflation readings for Q2 were revised higher as well. That came alongside fresh signals of inflationary pressures in Europe, where German inflation in September moved into double-digits for the first time in over 70 years. Thanks to some hawkish rhetoric from central bank officials on top of that, the result was that the synchronised selloff for equities and bonds continued. In fact, barring a massive turnaround today, both the S&P 500 and the STOXX 600 are on course for their third consecutive quarterly decline, which is the first time that’s happened to either index since the financial crisis.

We’ll come to some of that below, but here in the UK there were signs that the market turmoil was beginning to stabilise slightly relative to earlier in the week. For instance, sterling (+2.09%) strengthened against the US Dollar for a third consecutive session, moving back above $1.10 for the first time since last Friday when the mini-budget was announced, and at a couple of points overnight was very briefly trading above $1.12. Indeed, it was the strongest-performing G10 currency on the day, so this wasn’t simply a case of dollar weakness. In the meantime, investors moved again to lower the chances of an emergency inter-meeting hike from the Bank of England, instead looking ahead to the next scheduled MPC meeting on November 3. That followed a speech from BoE Chief Economist Pill, in which he said “it is hard to avoid the conclusion that the fiscal easing announced last week will prompt a significant and necessary monetary policy response in November.”

However, gilts continued to struggle yesterday following the massive Wednesday rally after the BoE’s intervention. Yields on 10yr gilts were up by +13.0bps by the close, a larger increase than for German bunds (+6.4bps) or French OATs (+8.0bps). Furthermore, the spread on the UK’s 5yr credit default swaps closed at its highest level since 2013, so there are still plenty of signs of investor jitters. That came as the government showed no signs of U-turning on their programme of tax cuts, with Prime Minister Truss saying “I’m very clear the government has done the right thing”. It’s also worth noting that one factor seen as supporting sterling overnight was growing speculation that Truss might come under political pressure to reverse course on the fiscal announcements, particularly after a YouGov poll gave the opposition Labour Party a 33-point lead, which is its largest in any poll since the late-1990s. We also heard from the Conservative chair of the Treasury Select Committee, who tweeted that Chancellor Kwarteng should bring forward the November 23 statement on his medium-term fiscal plan and publish the independent OBR forecast as soon as possible.

Away from the UK, the broader selloff in financial markets resumed yesterday as investors priced in a more hawkish response from central banks over the months ahead. In the US, that followed a fresh round of data that was collectively seen as offering the Fed more space to keep hiking rates. First, the weekly initial jobless claims fell to a 5-month low of 193k over the week ending September 24. That was beneath the 215k reading expected, and the previous week was also revised down by -4k. Nor was this just a blip either, as the 4-week moving average is now at its lowest level since late May as well. In the meantime, we had an upward revision to core PCE in Q2, taking the rate up by three-tenths to an annualised +4.7%.

Those data releases came alongside some pretty hawkish Fed rhetoric, with Cleveland Fed President Mester saying that a recession wouldn’t stop the Fed from raising rates. And in turn, that led markets to price in a more aggressive Fed reaction, with the terminal rate expected in March 2023 up by +3.0bps on the day. Incidentally, we saw yet further signs that the Fed’s tightening was having an effect on the real economy, with Freddie Mac’s mortgage market survey showing that the average 30-year fixed rate had risen to 6.70%, which is their highest level since 2007. The more hawkish developments were reflected in US Treasury yields too, particularly at the front end, with yields on 2yr Treasuries up +5.8bps to 4.19%, and those on 10yr Treasuries up +5.4bps to 3.79%. Overnight in Asia, yields on the 10yr USTs are fairly stable as we go press, seeing a small +0.3bps rise, whilst those on 2yr Treasuries are up +1.8bps to 4.21%.

Europe got a fresh reminder about inflation as well yesterday, after the German CPI release for September came in well above expectations. Using the EU-harmonised measure, inflation rose to +10.9% (vs. +10.2% expected), which marks the first time since 1951 that German inflation has been running in double-digits. Earlier in the day, the German government separately announced that they’d be borrowing another €200bn to cap gas prices, with the previously planned consumer levy not going ahead. Looking forward, it’ll be worth looking out for the flash CPI release for the entire Euro Area today at 10am London time, where the consensus is expecting we’ll see the highest inflation since the formation of the single currency. That would keep the pressure on the ECB, and markets are continuing to price in another 75bps hike as the most likely outcome at the October meeting.

With investors digesting the prospect of continued hawkishness from central banks, equities lost further ground over yesterday’s session. The S&P 500 fell -2.11%, meaning the index is now down by nearly a quarter (-24.10%) since its closing peak in early January. The declines were incredibly broad-based across sectors, but interest-sensitive tech stocks struggled in particular, with the NASDAQ (-2.84%) and the FANG+ index (-3.38%) seeing even larger losses. Those heightened levels of volatility were also reflected in the VIX index (+1.7pts), which closed at 31.8pts. For European equities it was much the same story, with the STOXX 600 (-1.67%) closing at a 22-month low. Adding to the tech woes, Meta (-3.67%) joined the growing list of firms announcing a hiring freeze, with the tech giant also issuing a warning of potential restructuring, so it’ll be important to see if this is echoed more broadly and what this means for the labour market. In overnight trading, equity futures are pointing to further losses today, with those on the S&P 500 (-0.25%) and NASDAQ 100 (-0.27%) both moving lower.

As we arrive at the final day of the month, Asian equities are similarly retreating this morning, putting a number of indices on course for their worst monthly performance in years. For instance, the Nikkei is currently on track for its worst month since March 2020, and the Hang Seng is on track for its worst month since September 2011. In terms of today, the Nikkei (-1.67%) is leading losses in the region with the Shanghai Composite (-0.21%), the CSI (-0.14%), the Kospi (-0.11%) and the Hang Seng (-0.07%) following after that overnight sell-off on Wall Street.

One source of better news came from the Chinese PMIs, with the official manufacturing PMI unexpectedly in positive territory in September with a 50.1 reading (vs. 49.7 expected), which is up from a contractionary 49.4 in August. The composite PMI was also in positive territory with a 50.9 reading. However, the Caixin manufacturing PMI unexpectedly deteriorated further to 48.1 in September, so not every indicator was positive. In the meantime, Japanese data showed that industrial production growth came in above expectations with a +2.7% reading (vs. +0.2% expected), as did retail sales with growth of +1.4% (vs. +0.2% expected).

There wasn’t much in the way of other data yesterday. However, the European Commission’s economic sentiment indicator for the Euro Area fell for a 7th consecutive month to 93.7 in September (vs. 95.0 expected).

To the day ahead now, and data releases include the flash Euro Area CPI release for September, as well as the Euro Area unemployment rate for August and German unemployment for September. In the US, we’ll also get August data on personal income and personal spending, the MNI Chicago PMI for September, and the University of Michigan’s final consumer sentiment index for September. Finally, central bank speakers include Fed Vice Chair Brainard, the Fed’s Barkin, Bowman and Williams, as well as the ECB’s Schnabel, Elderson and Visco.

Tyler Durden Fri, 09/30/2022 - 08:10

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Do multimillion-dollar dinosaur auctions erode trust in science?

Derided as ‘toys for the rich,’ the specimens being bought and sold raise broader questions about the relationship between science and capitalism.

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Sotheby's sold a 77 million-year-old Gorgosaurus skeleton for over $6 million in July 2022. Alexi Rosenfeld/Getty Images

Dinosaurs are in the news these days, but it’s not just for groundbreaking discoveries.

More and more paleontologists are ringing alarm bells about high-profile auctions in which dinosaur fossils sell for outrageous sums. The most recent example involves a 77 million-year-old Gorgosaurus skeleton that Sotheby’s sold for over US$6 million in August 2022.

But that’s not even close to the most anyone ever paid for a dinosaur. In May 2022, Christie’s sold a Deinonychus skeleton for $12.4 million. And a couple of months before that, Abu Dhabi’s Department of Culture and Tourism paid an eye-popping $31.8 million for Stan, a remarkably complete T. rex from South Dakota’s Hell Creek Formation that’s going to be the centerpiece of the Persian Gulf city’s new natural history museum.

Some scientists are so dismayed they are speaking out. University of Edinburgh paleontologist Steve Brusatte told the Daily Mail that auction houses turn valuable specimens into “little more than toys for the rich.” Thomas Carr from Carthage College in Wisconsin was even more forthright, saying, “Greed for money is what drives these auctions.” He also complained that wealthy elites – including actors Nicholas Cage and Leonardo DiCaprio – are competing to acquire the best specimens in a game of juvenile one-upmanship, describing them as “thieves of time.”

Most commenters trace the booming market for dinosaurs back to Sue, the largest and most complete T. rex ever found. After the FBI confiscated it from the same group of fossil hunters who found Stan, the Field Museum of Natural History in Chicago acquired it – with financial backing from Disney and McDonald’s – for over $8 million in 1997.

But as I document in my recent book, “Assembling the Dinosaur,” the commercial specimen trade is as old as the science of paleontology itself. And its history shows the debate over whether dinosaurs ought to be bought and sold involves much deeper questions about the long-standing but hotly contested relationship between science and capitalism.

Two sides of the debate

Paleontologists have good reason to oppose the commercial sale of valuable fossils. Science is fundamentally a community enterprise, and if specimens aren’t available for public examination, paleontologists have no way to assess whether new findings are true. What if a particularly outlandish theory is based on a fraudulent specimen?

This happens more often than you’d think. In the late 1990s a private collector purchased what appeared to be a feathered dinosaur at the Tucson Gem and Mineral Show. National Geographic subsequently reported on it to great fanfare, claiming it was a “missing link” between dinosaurs and modern birds. When scientists grew suspicious, they found that the so-called “Archaeoraptor” fossil combined pieces of several distinct specimens to make a chimerical creature that never existed.

But commercial fossil hunters make a compelling point, too. Most fossils first come to light through the natural process of erosion. Eventually, however, erosion also destroys the specimen itself – and there simply aren’t enough scientists to find every fossil before it is lost. Hence, the argument goes, commercial collectors should be celebrated for saving specimens by digging them up.

Wealthy philanthropists distance themselves

Both sides of the argument make a compelling point. But as the fiasco around “Archaeoraptor” reveals, it’s worth asking whether financial incentives erode trust.

Dinosaurs first came to the attention of geologists during the 19th century. In fact, these gigantic lizards did not acquire their name until the comparative anatomist Richard Owen invented the biological category “Dinosauria” in 1842.

Portrait of man with white beard wearing a suit seated in a chair.
Industrialist and philanthropist Andrew Carnegie had a dinosaur species, Diplodocus carnegii, named after him. Library of Congress

At that time, scientists did not treat dinosaurs any differently from other valuables that could be dug out of the ground, such as gold, silver and coal. Museums purchased most of their fossils from commercial collectors, often using funds donated by wealthy industrialists like Andrew Carnegie, who even had a dinosaur named after him: Diplodocus carnegii.

That started to change at the very end of the 19th century, when there was a concerted effort to decommodify dinosaur bones, and museums began to distance themselves from the commercial specimen trade.

One impetus came from museums’ wealthy benefactors, who sought to demarcate their charitable activities from the unsavory world of commerce. Philanthropists like Carnegie and J.P. Morgan gave money to cultural institutions because they wanted to signal their refined taste, their appreciation for learning and their republican virtues – not to enter into a business transaction.

Moreover, the first Gilded Age resembled the present in that it, too, saw a sharp increase in economic inequality. This led to widespread class conflict, which could be remarkably violent and bloody. Afraid that incendiary labor leaders would bring the industrial economy to its knees, wealthy elites began using public displays of conspicuous generosity to demonstrate that American capitalism could yield public goods in addition to profits.

For all these reasons, it was essential for their philanthropic activities to be seen as selfless acts of genuine altruism, utterly divorced from the cutthroat competition of the marketplace.

Scientists take control

At the same time, paleontologists embraced the language of “pure science” to claim they produced knowledge for its own sake – not financial gain.

By arguing that their work was free from the corrupting influence of money, scientists made themselves more trustworthy.

Ironically, scientists found they could attract more funds by claiming to be completely uninterested in money, fashioning themselves into ideal recipients for the philanthropic largesse of wealthy elites. But that further necessitated a clear demarcation between the the culture of capitalism and the practice of science, which entailed a reluctance to acquire specimens via purchase.

Old photograph of three men working on an excavation site.
At the turn of the 20th century, museums started funding excavations to unearth dinosaur bones. Museum Wales

As scientists began shunning the commercial specimen trade, museums set about using the generous donations of wealthy philanthropists to mount increasingly ambitious expeditions that allowed scientists to collect fossils themselves.

Dinosaurs in the New Gilded Age

But their ability to control the private market for dinosaur bones did not last forever. With the United States in the middle of what some call a New Gilded Age, it has come roaring back.

Today, the most spectacular dinosaur fossils often hail from the Jehol formation of northeastern China. And more often than not, they are purchased from local farmers who supplement their incomes by hunting for fossils on the side.

As a result, the question of whether commercial incentives erode trust is back with a vengeance. Li Chun, a professor at Beijing’s prestigious Institute for Vertebrate Paleontology and Paleoanthropology, estimates that more than 80% of all marine reptiles on display in Chinese museums have been deceptively altered to some degree, often to increase their value.

The age-old worry about whether the profit motive threatens to undermine the values of science is real. But it is hardly unique to paleontology.

The spectacular implosion of Theranos, a tech startup that secured more than $700 million in venture capital based on false promises of having developed a better way to conduct blood tests, is just just a particularly high-profile example of commercial deceit paired with scientific misconduct. So much scientific research is now being paid for by people who have a commercial stake in the knowledge produced – and you can see the ramifications in everything from Exxon’s decision to hide its early research on climate change to Moderna’s recent move to begin enforcing its patent on the mRNA technology behind the most effective COVID-19 vaccines.

Is it any wonder that so many people have lost trust in science?

Lukas Rieppel has received funding from the National Science Foundation and the Mellon Foundation, among others.

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