Wednesday, July 8, 2020

HSBC Leads Markets Lower As White House Targets Hong Kong Dollar Peg

From Zero Hedge:

For the first time in 30 years, the Hong Kong dollar's peg to the greenback is facing a legitimate threat, and not - as Kyle Bass once articulated, and as we explained earlier this week - simply because a mass exodus from the city would likely drain the HKMA's FX reserves, making the maintenance of the peg impossible. For years, the flood of foreign capital into Hong Kong guaranteed the peg's security.
When Bloomberg reported last night that the Trump Administration was mulling a plan to deliberately break the peg and ratchet up pressure on Hong Kong as retribution for Beijing's adoption of a new National Security law that severely encroaches on the freedoms guaranteed to Hong Kongers in the British 'Basic Law', the reporter carefully noted that some in the administration are pushing back against the plan, for fear it would only hurt US banks and Hong Kongers, while doing little to dissuade Beijing.
Unsurprisingly, the news has undermined shares of global banks that derive sizable portions of their revenue from Hong Kong, leaving financials as the worst-performing stocks across Asian and European trading on Wednesday. HSBC led declines on the Stoxx Europe 600, as the bad news also drove Investec to cut its rating on HSBC.
The bank with the most to lose here is, of course, HSBC, which shed another 4.3% in London trading, its biggest daily drop since June 11, when officials in Beijing singled out the bank for not enthusiastically backing the HK security law. Having since offered the lip service that was due, the bank's shares have still considered to suffer, as the White House has imposed sanctions on Chinese officials over abuses tied to Xinjinag, while moving to eventually revoke Hong Kong's "special status" under US law.
HSBC's biggest UK-based regional rival operating in HK, StanChart, falls as much as 2.3%.

According to BBG, the US government is looking for a way to punish Hong Kong-based banks, and HSBC, which is suddenly caught in the middle of a geopolitical dispute, might find itself in Washington's crosshairs. Investec analyst Ian Gordon wrote that he was "running out of arguments" to hold HSBC. Even plans to fire 35,000 workers as part of a sweeping restructuring sadly just isn't enough.

Tuesday, July 7, 2020

"There's No Price-Discovery Mechanism" - Gundlach Warns Fed "Desperation" Has Removed All Signals From Markets

Billionaire bond investor Jeffrey Gundlach recently spoke with Yahoo Finance's Julia La Roche, and reiterated a similar message from his DoubleLine Total Return Bond Fund webcast in June, of how the Federal Reserve, through extraordinary measures, is propping up the economy - distorting market signals. 
Gundlach, the CEO of $135 billion DoubleLine Capital, told La Roche the Federal Reserve's "most incredible fiscal lending" is the largest policymakers have ever deployed, even dating back to the financial crisis of 2007–2008.

He said since the pandemic began, the central bank has printed trillions of dollars to prevent the economy from crashing further - by purchasing corporate bonds - which managed to suppress volatility. In the process, the Fed's balance sheet swelled to a mind-boggling $7 trillion. 
DoubleLine June webcast 
Gundlach said the Fed has "decided that they want to pull out all the stops to reduce market and economic volatility," via unprecedented money printing. "'What they're doing is really a bridge further than they have ever gone before."
He said the Fed was motivated to keep "throwing things" at the market to rein in volatility across multiple asset classes. In his 35-years of market experience, he said the disruptions in credit markets were "far worse" than the financial crisis a decade ago. 
"That led to what looked like was going to be some very substantial bankruptcies in some of the leveraged pools like mortgage-related REITs and other types of investments," he explained.
Similar to the latest DoubleLine webcast, Gundlach said the Fed's backstopping of the corporate debt markets is a violation of its charter. 
"The Fed figured desperate times...require desperate measures, and the went all the way into buying corporate bonds," Gundlach said.
In the next downturn, he said the Fed "could go even further" in its ability to unleash an arsenal of tools to provide liquidity to markets. 
Gundlach noted the weakest portion of the corporate bond market is low-tier investment-grade debt, commonly known as BBB, which, if re-rated to junk, could cause significant losses for investors who would have to dump into illiquid markets. 
"There's been so much issuance of corporate bonds. The prices have been propped up to levels where I think the owners that own them at these levels will end up losing principal on a basket of these assets," he said.
Gundlach said the Fed's money printing is "delaying the inevitable. In the meantime, they have a lot of wherewithal to continue delaying because they are spraying money all over the place and buying all these assets."
He said, "the price of corporate bonds isn't really real. There's no price discovery mechanism that's being pegged. There's no message; there's just a target price that the Fed has been doing, and that led to a pop-up in corporate bonds." 
He cautioned against buying LQD exchange-traded-fund:
"It's about the interest rate risk of the 10-year Treasury and the yield-to-no losses is about 2.25. There's not a lot of reward there, and there's a lot of risk if the bonds get downgraded because the yields on junk bonds are far higher today than the yields on BBB corporate," he said.
"So, if they get downgraded, we know the pricing is going to suffer very significantly." 
Watch the full interview

Gundlach's message over the last month has stayed about the same. He believes the Fed's easy money policies have only delayed the crisis, BBBs are the most significant risk in corporate debt markets and remains skeptical of the stock market rally. 

Trump Aides Discuss Busting The Hong Kong Dollar Peg To Punish China

From Zero Hedge:

While admitting that there are many pushing back against the idea, Bloomberg is reporting that the Trump administration is escalating its plans to hold China accountable for its recent global pandemic chaos and Hong Kong freedom oppression.
Secretary of State Pompeo told Fox News earlier in the day that the US was mulling the possibility of banning social media app TikTok in the US, but tonight Bloomberg reports that some top advisors have suggested the Washington should undermine the Hong Kong dollar’s peg to the US dollar.
According to people familiar with the matter, Bloomberg reports that the idea of striking against the Hong Kong dollar peg - perhaps by limiting the ability of Hong Kong banks to buy U.S. dollars - has been raised as part of broader discussions among advisers to Secretary of State Michael Pompeo but hasn’t been elevated to the senior levels of the White House, suggesting that it hasn’t gained serious traction yet.

As a reminder, we suggested that one major reason for China's recent push for everyone and their pet rabbit to buy stocks (sending Chinese markets exploding higher) was dramatic investment outflows from China.
China-dedicated equity funds saw an 11th consecutive week of net outflows.
Taking a page of the Robinhood playbook, China is desperate to halt and reverse the massive equity outflows as it urgently needs the flow of US Dollars to reverse into Chinese markets, instead of away from. To do that, it needs to create an initial upward momentum in prices which halts the selling/outflows and prompts a reappraisal of Chinese asset values. Ideally, it will also capture the euphoria of US daytraders who will buy Chinese, not US stocks.
This potential 'strawman' to break the HKD peg comes a day after we noted the simple maths that if 500,000 Hong Kongers were to leave the city and take USD1m equivalent with them then ceteris paribus, the HKD peg would surely have to go as all FX reserves evaporated.
In recent weeks we have seen the HK authorities publicly state they will not impose capital controls – which as a key global financial center should always be unthinkable. Yesterday, after a Chinese official response strongly opposing the UK government making clear it will offer 2.9m Hong Kongers a path to citizenship, the HK authorities had to publicly disavow rumours of a travel ban on its citizens.
Yes, that’s where we stand.
What does monetary policy have to offer here?

Not much, because it is The Fed's ZIRP policy (relative to HIBOR) that is forcing carry traders' flow to buy Hong Kong Dollars (and lend them) against cheaply-funded USDollars.
As the chart above attempts to show, the relative spread between USD funding and HKD funding implies a stronger HKD which would 'break' the peg band (green dotted line) and thus Hong Kong Monetary Authority had to intervene to maintain that upper peg band.
The proposal reportedly faces strong push back from others in the administration who worry such a move would only hurt Hong Kong banks and the U.S., not China.
But the very fact that this serious monetary threat has been raised (or leaked) implies two things: 1) US authorities appear to want to punish banks based in Hong Kong (especially HSBC after Pompeo singled out HSBC's "show of fealty"); and 2) it will force a response (or pre-response) from China, which could also ripple through becalmed markets and ruin the glorious gains in Nasdaq for retail bagholders everywhere.
As Pompeo said earlier in the week: "We’d love to preserve the freedom in Hong Kong; but if we can’t, we’re going to hold the Chinese Communist Party accountable."

Monday, July 6, 2020

Trader: "Markets Are Basically Just A Liquidity Meth Lab..."

The Bubble

At this stage markets are basically just a liquidity meth lab, an artificial behemoth constructed and subsidized by the Fed stepping in on any downside in markets. Following $3 trillion in liquidity injections in 3 months ($12 trillion annualized) markets have entirely disconnected from the economy and any traditional valuation metrics. The Fed’s role in managing markets is becoming ever larger and has now expanded into buying $AAPL and $VZ bonds among others in addition to monetizing US debt. Call it what you like, just don’t call it capitalism, rather a nationalization of sorts.
Indeed just in June we saw the Fed making policy announcements 3 times, each time following the S&P 500 seeing downside action toward retesting its 200MA and each time markets reacted with bounces and rallies. Call it a coincidence if you like, but it’s not. These markets remains closely managed and watched by the Fed.
Wall Street analysts have largely been made obsolete as earnings growth metrics have long been rendered irrelevant with everybody bowing to the Fed put as the primary reason for buying stocks.
Cases in point: The 2019 rally didn’t kick off until the Fed expanded its balance sheet via repo beginning in September 2019 and markets rallied 30% on zero earnings growth. The 2020 crash didn’t stop until the Fed went into QE unlimited mode, and the current rally stopped on June 8th for the broader market during the same week the Fed’s balance sheet peaked. Negative earnings growth for 2020 yet $SPX is now flat on the year. Nothing happened. Nothing matters.
With no earnings growth during both years it is folly to pretend markets are about anything else but the Fed.
The state of affairs: The unemployed and poor are dependent on government handouts, the middle class is sweating staring at permanent job losses mounting as the top 1% and billionaire stock owner class is subsidized by the Fed as stocks keeps rising despite the worst economic backdrop in decades. All the while the Fed is steadfastly denying against all evidence that it is contributing to ever expanding wealth inequality even though that is precisely what it is doing.
How to navigate through our new nationalized markets? Buy the dips, sell the rips and watch your back as we’re witnessing a historic asset bubble that could pop at any time or take on ever more extreme proportions as nothing and nobody is stopping central banks from continuing to inject liquidity into the system.
But tech is increasingly dangerous and the bifurcation in market performances getting ever more apparent, a point I highlighted this morning on CNBC:

In equal weight there is truth I mentioned, highlighting the great distortion in markets. On an equal weight basis the S&P500 is actually sitting at the December 2018 lows when $SPX was trading at 2350:
Chart: $XVG equal weight compared to $SPX going back to Jan 2018:
The disconnect of course driven by the Nasdaq which now has 7 stocks equaling $6.75 trillion in market cap hiding that most indices are in substantially worse shape than is advertised:
The rest? Not so much:
The message: The real economy is in much worse shape and the presumed “V” is not confirmed by the bond market or the banks. In fact the contrast in performance between the banking index and the tech sectors couldn’t be more crass:
$NDX+18% year to date with the banking index down 36% on the year.
Which brings me to tech itself. Overvalued and over owned. Massive valuation expansion over the past year.
Examples:
$AAPL forward P/E in the past 12 months has increased from 16 to over 24, a 50%+ increase.
$AMZN PEG ratio (price earnings growth) increased from 1.32 to over 3.0 in the past 12 months, an increase of over 135%.
And this massive multiple expansion has led tech to a multi year resistance trend line with $NDX the most extended above its daily 200MA and weekly 50MA since the year 2000 tech bubble.

And perhaps a monthly linear chart of $NDX highlighting the vertical nature of this latest Fed sponsored rally showing tech far outside its monthly Bollinger band:
No, markets remain beholden to the greatest monetary expansion in human kind making a mockery of the very basic concept of price discovery:
Want to celebrate massive improvement coming from historic collapsing data? Be my guest, but don’t neglect to keep an eye on the year over year data and it’s dreadful. Permanent job losses keep mounting and they don’t speak to a V shaped recovery any time soon:
Bottomline: We have an asset bubble in tech, dependent on unrealistic multiple expansions as Fed liquidity has prompted a chase in the supposed save havens creating the most divergent stock market in decades.
Buy the dips, sell the rips and watch your back. The natural market is much lower in price and risk remains that the broader market is still in bear market rally mode. As it stands $SPX remains below the June highs, as does $DJIA, $RUT, $NYSE, $BKX, you know, the broader market altogether.

Sunday, July 5, 2020

Moon Mining Could Begin As Early As 2025

Plans to start mining the Moon as early as 2025 became more attractive this week after a US National Aeronautics and Space Administration (NASA) team found evidence that the Earth’s natural satellite may, underneath its surface, be richer in metals than previously thought. Using data from the Miniature Radio Frequency (Mini-RF) instrument onboard NASA’s Lunar Reconnaissance Orbiter (LRO), a team of researchers came to the conclusion that the lunar subsurface contains a higher concentration of certain metals, such as iron and titanium, than estimated.
The study, published in the journal Earth and Planetary Science Letters, contends the most popular theory surrounding the Moon’s origins. The hypothesis contends the satellite was formed when a Mars-sized object collided with Earth, vaporizing large portions of the Earth’s upper crust.
“By improving our understanding of how much metal the moon’s subsurface actually has, scientists can constrain the ambiguities about how it has formed, how it is evolving and how it is contributing to maintaining habitability on Earth,” lead study author Essam Heggy said in a statement.
The evidence was discovered while the scientists were looking for ice at the bottom of craters in the lunar north pole region, NASA said. It means that fine dust found at the base of those holes are  parts of the deeper layers of the Moon, ejected during meteor impacts. As such, this dust represents the composition in deeper Moon layers.
The researchers found a pattern in which larger and deeper craters have higher metal concentrations than smaller and shallower ones. Specifically, in craters approximately 1 to 3 miles wide, the dielectric constant or electrical property increased along with crater size. However, the electrical property remained constant for craters between three to 12 miles wide.

Order to mine

US President Donald Trump signed an order in April encouraging citizens to mine the Moon and other celestial bodies with commercial purposes.
The directive classifies outer space as a “legally and physically unique domain of human activity” instead of a “global commons,” paving the way for mining the moon without any sort of international treaty.
“Americans should have the right to engage in commercial exploration, recovery, and use of resources in outer space,” the document states, noting that the US had never signed a 1979 accord known as the Moon Treaty. This agreement stipulates that any activities in space should conform to international law.
Russia’s space agency Roscosmos quickly condemned Trump’s move, likening it to colonialism.
“There have already been examples in history when one country decided to start seizing territories in its interest — everyone remembers what came of it,” Roscosmos’ deputy general director for international cooperation, Sergey Saveliev, said.
Aircraft taking off from Ronald Reagan National Airport in Arlington, Virginia. (Public domain CC0 image.)
The proposed global legal framework for mining on the moon, called the Artemis Accords, would be the latest effort to attract allies to the National Space Agency’s (NASA) plan to place humans and space stations on the celestial body within the next decade.
It also lines-up with several public and private initiatives to fulfill the goal of extracting resources from asteroids, the moon and even other planets.
In 2015, the US Congress passed a bill explicitly allowing companies and citizens to mine, sell and own any space material.
That piece of legislation included a very important clause, stating that it did not grant “sovereignty or sovereign or exclusive rights or jurisdiction over, or the ownership of, any celestial body.”
The section ratified the Outer Space Treaty, signed in 1966 by the US, Russia, and a number of other countries, which states that nations can’t own territory in space.
Trump has taken a consistent interest in asserting American power beyond Earth, forming the Space Force within the US military last year to conduct space warfare.
The country’s space agency NASA had previously outlined its long-term approach to lunar exploration, which includes setting up a “base camp” on the moon’s south pole. 

Trillion-dollar market

The US isn’t the first nor the only nation to jump on board the lunar mining train.
Russia has been pursuing plans in recent years to return to the moon, potentially travelling further into outer space.
Roscosmos revealed in 2018 plans to establish a long-term base on the moon over the next two decades, while President Vladimir Putin has vowed to launch a mission to Mars “very soon.”
Luxembourg, one of the first countries to set its eyes on the possibility of mining celestial bodies, created in 2018 a Space Agency (LSA) to boost exploration and commercial utilization of resources from Near Earth Objects.Unlike NASA, LSA does not carry out research or launches. Its purpose is to accelerate collaborations between economic project leaders of the space sector, investors and other partners.
Thanks to the emerging European network, scientists announced last year plans to begin extracting resources from the moon in five years.
NASA is working on lunar bases that can travel on wheels, or even legs, increasing landing zone safety, provide equipment redundancy and improve the odds of making key discoveries. (Image courtesy of NASA.)
The mission, in charge of the European Space Agency in partnership with ArianeGroup, plans to extract waste-free nuclear energy thought to be worth trillions of dollars.
Both China and India have also floated ideas about extracting Helium-3 from the Earth’s natural satellite. Beijing has already landed on the moon twice in the 21st century, with more missions to follow.
In Canada, most initiatives have come from the private sector. One of the most touted was Northern Ontario-based Deltion Innovations partnership with Moon Express, the first American private space exploration firm to have been granted government permission to travel beyond Earth’s orbit.
Space ventures in the works include plans to mine asteroids, track space debris, build the first human settlement in Mars, and billionaire Elon Musk’s own plan for an unmanned mission to the red planet.
Geologists, as well as emerging companies, such as US-based Planetary Resources, a firm pioneering the space mining industry, believe asteroids are packed with iron ore, nickel and precious metals at much higher concentrations than those found on Earth, making up a market valued in the trillions.