US paper gold suppression allowing Russia & China to buy real gold at discount prices

Efforts by the US to suppress gold prices in order to prop up the dollar are allowing Russia and China to build up huge reserves of physical gold by purchasing large quantities of the precious metal at significantly lower prices.

Net central bank purchases in the first quarter of the current year surged by 42 percent compared to the same period a year ago, totaling 116.5 tons, according to data compiled by the World Gold Council (WGC). The number reportedly represents the highest quarterly total since 2014.

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Russian reserve fund to get a $35 billion boost - Finance Ministry 

Over the past two decades, Russia has been ramping up the purchases of physical gold. In May, the country's gold reserves surged to 1,909 tons, Russia's Finance Ministry reported. Since 2000, the country's gold reserves have surged by 500 percent.

Russia remained the most prolific purchaser of gold in the first quarter of 2018. The country's holdings currently account for 18 percent of total reserves, according to the WGC.

Last month, Russia managed to force China out of the top five gold holders, which also includes the United States, Germany, Italy and France. However, China is not far behind, with a reported 1,843 tons of gold held in its national reserves.

China and Russia, along with Turkey, India and other countries have been aggressively accumulating gold reserves in a bid to diversify their reserve financial assets from the greenback that currently serves as the global reserve currency.

The tendency presents a perfect opportunity for investors to buy gold or shares in gold mines, while putting the US dollar's dominance at risk as the main global reserve currency.

Many gold investors say the price of the precious metal is artificially curbed because of the paper gold trading on Western exchanges.

According to Claudio Grass of the Precious Metal Advisory in Switzerland, the total trading volume in the London Over-the-Counter (OTC) gold market is estimated at the equivalent of 1.5 million tons of gold. Only 180,000 tons of gold have actually been mined up to today.

"The paper scams in London and New York will either blow up when the paper price of gold drops to zero or when just a fraction of investors insists upon receiving physical gold in return," Grass told RT.

Goldman Co-Head Of Trading: I Am Worried The Market May "Break" And Not Snap Back

Several weeks ago, Goldman's Chief Markets Economist Charlie Himmelberg became the latest Wall Street strategist to admit the threat to the market posed by HFT. Picking up on our original warning from April 2009, the Goldman strategist warned that HFTs – due to their inability to process nuanced fundamental information - may trigger surprisingly large drops in liquidity that exacerbate price declines, and result in flash crashes.

Himmelberg highlighted the growing market share of HFT and algorithmic trading across all markets, and warned that the growing lack of traditional, human market-makers has made the market increasingly fragile.

He is, of course, correct as active traders will attest, if nothing else then by the collapse in market liquidity around critical, market-moving events when HFTs strategically "pull out" from the market, making price swings especially sharp and resulting in a spike in volatility as shown in the schematic below.

As we discussed in greater detail back in April, the relentless, and increasingly commoditized ascent of HFTs, as well as the change to market structure and topology in a post-Reg NMS world, prompted Himmelberg to conclude that we live in a world where the biggest threat is not market leverage, but periods of sudden, unexpected and acute losses of liquidity. Or, as he put it, "liquidity is the new leverage." This is how he explained it:

That analogy is meant to invoke the potential unrecognized problems or imbalances that build up over the course of long expansions. Financial leverage was obviously the imbalance that built up during the pre-crisis period, but that has been contained in the current cycle. In this cycle, there have been dramatic shifts in the way that secondary markets source liquidity, but this market structure has not yet been stress-tested by a recession or major market event. I therefore see a risk that markets are paying too little attention to liquidity risk, much as they previously paid too little attention to the risks posed by excess leverage.

Furthermore, the fact that for the past decade global capital markets and risk assets have been constantly prodded higher courtesy of central bank liquidity injections, has exposed them to increasing instability not only at the micro level but at the macro: while virtually HFTs – and roughly 30% of all active asset managers (who were simply too young during the global financial crisis) have never encountered a market crash, the big test will be what happens, and how the market would react during the next crisis in which there is no "big picture" central bank intervention, to make "buying the dip" at the micro, HFT level, the correct response, even though so far aggressively purchasing the "crash" has been the correct response every single time…

… as volatility always inevitably tumbled, making selling vol one of the preferred "carry" strategies for numerous investors classes (ultimately leading to the historic VIX explosion of February 5 which blew up several of the most popular retail vol-selling strategies such as inverse VIX ETNs in a matter of minutes).

But what if what HFTs do is nothing really new: what if the liquidity collapse that results in such flash crashes as the May 2010 US "Flash Crash", the October 2014 10Y Treasury "Flash Rally", the October 2016 Pound Sterling "Flash Event" and the February 2018 VIX Spike, are merely an accelerated version of events that took place repeatedly in market history, if only on a much more accelerated timeframe?

That is the point made by Brian Levine, Goldman's co-head of Global Equities Trading, who in a recent "Top of Mind" interview with Goldman's Allison Nathan. When asked if he is "concerned that HFTs cause or exacerbate flash crashes by reducing liquidity", Levine's response was oddly sanguine for a man who oversees one of the world's most active trading desks.

Noting that "scarce liquidity in volatile markets is nothing new", Levine counters that the risk of HFTs causing or exacerbating flash crashes by reducing liquidity is "overstated" and notes that while we may live in a time of "HFT stop" when market depth suddenly evaporates, "in the days of manual markets, market makers just didn't answer their phones."

For example, in the '87 crash, people were really crowded on one side of the trade and all ran for the exit at the same time. This isn't much different than a hypothetical scenario today in which systematic strategies all try to exit a position at once. It might happen within a few seconds instead of the 20 minutes it took for someone to answer the phone.

Furthermore, Levine sees an almost beneficial role played by HFTs who help the "market readjusts quickly today."

 Not everyone agrees. Many investors feel uncomfortable with a stock falling to 70 from 80 in a very short period of time. But I don't think there's anything inherently wrong with that. Bottom line, I don't blame HFTs for flash crashes. In the grand scheme of things, these players do little to improve or worsen the situation. Remember, they generally end the day flat—they're not taking much market risk.

And while that is correct, the wild market swings created by HFTs can and often do prompt those who are increasingly on edge about market structure, stability and asset overvaluation – here the culprit is as much the Fed as HFTs due to the injection of $20 trillion in liquidity by the world's central banks over the past decade – to commence liquidating assets, resulting in a selling cascade, one which becomes self-reinforcing and ultimately results in a crash, even if so far every such crash has been bought up either by HFTs or central banks, whether directly or through jawboning - everyone remembers St Louis Fed president James Bullard explicitly hinting at QE4 during the market's sharp correction in October 2014 which unleashed a furious buying spree and halted the selloff.

But while Levine may not be too worried about the HFTs' role in creating and propagating flash crashes, there is one aspect of that the current broken market structure that does keep him up at night. As he admits in the interview, "what's more worrisome to me is a real flash crash, which I define as a situation when the market "breaks."

Indeed, the market breaking is surely high on the list of every trader's worst nightmares, and reminds us of what we predicted several years ago, namely that when the "big one" finally hits for whatever reason, there won't be a 20%, 30%, 40% or more drop in seconds. The market will simply be halted indefinitely (see "How the market is like SYNC which was halted indefinitely").

This is how Levine describes his own trading nightmare, the one in which the crash is not a "flash" and the market simply breaks:

The data is wrong, everything trades at dislocated prices relative to the NBBO, and everyone—justifiably—widens their spreads. That happens almost every time there's volatility, largely because message traffic increases dramatically. This is due to the fact that the opportunity set is greater and there's no economic disincentive for sending messages to the market, so more electronic orders come in. This slows the system, widening spreads and generating price dislocations, which triggers even more orders and compounds the delays—a predicament that is only further exacerbated by the fragmentation of the equity markets. As this happens, stocks may trade outside of the NBBO briefly in millisecond or microsecond increments, constituting what I consider a genuine flash crash. All of this becomes a negative feedback loop that causes more volatility. 

Interestingly, if you define a flash crash by the percentage of executions that took place outside the NBBO, one of the largest ones occurred in 2008 after the first TARP bill failed, according to internal analysis we did a few years ago. And the market didn't snap back, with the SPX closing down 10% on the day and on its lows. I think that may have been why there wasn't talk of a "flash crash" afterward, but clearly the market structurally failed pretty badly that day, too. This suggests to me that, in a situation with actual bad news, the current US market structure may not be able to handle it, and there could be a downward spiral.

In other words, there will come a day "with actual bad news" when the selling onslaught is so broad, not even BTFD HFTs will be able to  resist the sudden avalanche of selling. That's the day when the increasingly fragile market, one in which "liquidity is the new leverage" will officially break and stocks will "trade outside of the NBBO constituting a genuine flash crash" in a "negative feedback loop that causes more volatility." A selloff from which there will be no "snap back."

Of course, here skeptics have a quick counter to this worst case scenario: how come it has never happened yet? The answer is simple: so far, every time the market crashed, central banks stepped in (as Bank of America recently showed).

And, more ominously, as of this moment - for the first time in the past decade - central banks, that ultimate backstop of every market crash, are once again draining liquidity…

 ... which, as we and Deutsche Bank explained previously, together with central bank tightening has been the catalyst for every major "market event", whether economic recession or market crash or both in the post-Fed era.

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Emerging Market Contagion Goes Global As Fund Outflows Spike Most In Over 4 Years

Emerging Market Contagion Goes Global As Fund Outflows Spike Most In Over 4 Years

Despite promises from various foreign officials that just a little more intervention and just a few more billion in bailouts from Lagarde will 'fix' the "short-term speculator-driven" crisis in Emerging Markets (even as Brazil admits failure), things are escalating way beyond the idiosyncratic fears of Argentina and Turkey...

As investors Emerging Markets' anxiety spreads globally with ETF outflow across all EM ETFs soaring to the highest since Jan 2014...

In fact, as Bloomberg reports, outflows from U.S.-listed exchange-traded funds that invest across developing nations as well as those that target specific countries totaled $2.7 billion in the week ended June 15, the most in over a year and more than seven times the previous week.

The 'baby' is being thrown out with the 'bathwater' as even countries with solid prospects for growth and debt financing haven't been immune to the selloff. South Korea and Thailand, which have current-account surpluses, are among the six-worst emerging currencies this month.

"The statistics itself reflect worries about emerging markets in terms of the growth outlook, in terms of what the Fed tightening means," said Sim Moh Siong, a currency strategist at Bank of Singapore Ltd.

"We're starting to see a blurring of the differentiation between current-account deficit currencies and current-account surplus currencies. That reflects the worries about trade-war jitters."

The last week has seen derisking everywhere...

Seems like EM stocks have a long way to fall...

BTFSIFID?

BTFSIFID?

Recently we exposed an awkward reality - that as a handful of mega-tech companies in America were dragging stock indices higher, some of the world's most systemically important financial institutions were falling dramatically.

And things have got considerably worse in the last few days...

At some point, says Ian Hartnett, chief investment strategist at London-based Absolute Strategy Research, central bankers will have to respond to bearish signals from almost half the global SIFIs, rather than continuing to tighten monetary policy:

"The clue is in the name," he said.

"If these banks are supposed to be systemically important then policymakers ought to be watching them to see what is happening."

"The synchronised dips were a sign of global financial stress."

And now, a portfolio of the SIFI's stocks has tumbled into a bear market from those January highs...

As The FT wrote last week, what many of the harder-hit Sifi banks have in common, said Mr Harnett, was a heavy dependence on US-dollar funding, putting them at risk of a squeeze if US rates continue to rise and the dollar continues to strengthen. Banks in Canada, Australia and Sweden, in particular, came through the last crisis in relatively good shape, thanks largely to their exposures to China and a strong commodities market. But in the years since then, the banks had overextended, he said, trying to support rapid asset growth with wholesale funding, rather than traditional deposits.

When will Powell be told to slow it down?

Trader Spots A "Bad Omen" For Global Markets | Zero Hedge

Trader Spots A "Bad Omen" For Global Markets

A canary in the coal mine of global equities is beginning to warrant attention, and equity bulls would do well to take notice. The signal: an advance in defensive stocks, according to Bloomberg's Cormac Mullen, who spent more than a decade as an equity analyst, trader and sales trader in Europe before becoming a journalist covering global financial markets.

Mullen explains below:

For a number of years now, defensive stocks have been shunned by investors in favor of cyclical peers that were preferred as the global economic recovery gathered steam. The underperformance of defensive sectors has seen their share in the S&P 500 Index fall to 11% from over 22% in 2009, according to The Leuthold Group.

The past month has seen some change. Even as consumer discretionary and tech stocks led U.S. equities to a 2-percent plus gain, a bunch of defensive stalwarts have been hot on their heels. Consumer staples, real estate, health care, telcos and utilities names have all outperformed cyclical counterparts from industrials, materials and financials to energy stocks.

Those defensive bellwethers, U.S. consumer staples, rose above their 50-day moving average earlier this month for the first time since February, and are close to a two-month high. The long- suffering sector has risen from a more than two-year low reached in May.

And investor demand is picking up -- staples and health-care equity ETFs have seen inflows for the last 10 weeks, with almost $11 billion going to global staples ETFs since the beginning of the year, according to Jefferies.

And a move away from cyclical stocks is already underway in other parts of the world. Japanese defensives have been outperforming cyclical peers since the end of January and are trading at a nine-month relative high. European defensives are also beginning to outperform.

It's early days, and the shift may not yet be the omen for the end of a historic bull run for stocks. At least in the U.S., economic indicators continue to look solid and the Trump administration's stimulus boost is coursing its way through the corporate veins of the world's largest economy

But as trade war rhetoric turns to action, political risk in Europe resurfaces, emerging markets across the globe shudder and the Chinese economy starts to slow, this defensive canary is definitely one investors should be keeping an eye on.

Bank of America: "We Have Not Seen This Movie Before" | Zero Hedge

Bank of America: "We Have Not Seen This Movie Before"

With just months left until the global central bank liqiudity supernova finally ends, and turns into a drain of cash ...

... Bank of America has published its latest Quantitative Tightening analysis, writing that whereas Quantitative easing was mostly characterized as an environment with too much money chasing too few bonds, lower interest rates, tighter credit spreads and volatility was suppressed, "there is no doubt that quantitative tightening (QT) at times will lead to the opposite - i.e. higher interest rates, wider credit spreads and very volatile market conditions (Figure 1)."

However, the reason why all hell has not yet broken loose, is that we are still in this "intermediate phase" - i.e. on the road from QE to QT - where things remain orderly although as the BofA credit team writes, "technicals of the high grade credit market have weakened notably this year due to less demand (Figure 2).

Hence, as we slowly make the transition from QE to QT, we have already witnessed higher interest rates, wider credit spreads (Figure 3) and more volatility (Figure 4). And this is just the beginning.

Of course, it will hardly come as a surprise to anyone paying attention that the reason why the markets haven't i mploded yet, and the reason why we are not yet experiencing the full effect of QT is that foreign central banks - the ECB and BOJ in particular - are still providing tremendous monetary policy accommodation via QE and negative interest rates (Figure 5), even if these two risk-boosting stimuli are gradually fading.

This push-pull equilibrium as defined last week by Jeff Gundlach, allows the system to persist in this unstable state indefinitely, because every time US yields rose too much due to QT and rate hikes, there would be large foreign inflows. "Hence, US yields would not increase too much and fixed income volatility remains moderate" according to BofA's Hans Mikkelsen. Preventing an out of control collapse in risk assets, whereas last week the ECB announced the end to QE, it also came out unexpectedly dovish by returning explicit calendar guidance and promising continued negative interest rates (NIRP) for a long period of time (Figure 6).

At the end of the day, the dovishness prevailed, sending the EUR plunging, as NIRP in the Eurozone works much like QE, as it encourages companies and individuals to take risk way out the maturity curve or down in quality.

But while NIRP controls the short end doesn't the ECB needs QE to infludence the back end of the curve? Not really: with persistent negative interest rates, European investors are forced to either take a lot of interest risk or credit risk to earn even a small positive yield of 0.50% for example (Figure 9). That asserts bull flattening pressure on both rates and quality curves.

And this is where things get interesting, or as BofA notes, "we have not seen this movie before", because as Mikkelsen writes, "while QT in itself is a rare occurrence we have never been in an environment of QT with a backdrop of major foreign QE/NIRP. Given the clear failure of the ECB and BOJ to meet their policy goals of near 2% inflation (Figure 8) the road from QE to QT may be very long - certainly years."

What does all this mean in terms of practical credit trades? Here BofA is growing skeptical that a bullish credit trade will be appropriate as we continue to shift away from QE and closer to full-blown QT.

While we consider high grade credit spreads this year range bound - and in fact presently are at the wide end of the range due to supply pressures that will ease and Italian risks we will increasingly decouple from (although they remain severe a bit further out) - we continue to believe that the end to ECB QE means moderately wider spreads next year and in 2020.

This is because the ECB presently buys about $400bn of bonds annually, which pushes investors into the US market. Without that we get less inflow from Europe and technicals deteriorate further. Partially offsetting this will be less supply as the relative after-tax cost of debt has risen due to higher interest rates and a lower corporate rate.

The only question is when will the algos, buybacks and occasional central bank intervention in stocks (mostly the SNB  and BOJ) that set the daily trading mood, finally concede what is coming, and let fundamentals and market logic finally reassert themselves.

ZTE Crashes After Senate Passes Trump-Deal-Killing Bill | Zero Hedge

ZTE Crashes After Senate Passes Trump-Deal-Killing Bill

As detailed recently, a group of senators successfully attached an amendment that would effectively kill the Trump administration's deal with Chinese telecoms firm ZTE to a "must-pass" defense authorization bill. The amendment to kill the deal, which was first unveiled a week ago shortly after Commerce Secretary Wilbur Ross announced the administration had worked out a deal to save ZTE, would reimpose the White House's original ban on ZTE buying components from US firms (what some have described as a "death sentence" for the company).

Tonight, the US Senate passed the "must-pass" $707.7b defense policy bill for FY19 - that includes the provision that would reimpose penalties on ZTE - creating a standoff with the White House, which had planned to 'fix' the provision in negotiations.

The Vote on H.R. 5515 was 85-10, and, as The Wall Street Journal reports, President Trump is now expected to turn his attention to persuading congressional negotiators to strip the ZTE sales ban out of the final version of the defense authorization bill.

The House has already passed its own version of the legislation without the sales ban, and the chamber's top negotiator has said he aims to reconcile any differences with the Senate by the end of July.

The two chambers must pass identical legislation before Mr. Trump signs a defense measure into law - or uses his veto powers.

Mr. Trump had personally negotiated with Chinese President Xi Jinping to get ZTE back in business by overriding a decision by his own Commerce Department to block sales to the telecom company.

ZTE - which was already down hard after re-opening for trading last week - is now down another 15%, down almost 50% from pre-ban levels...

Despite Commerce Secretary Wilbur Ross's insistence that the ZTE deal was "quite separate" from China's trade talks (and North Korea), we suspect it is close to top of mind for China's President Xi and therefore will rapidly get on Trump's agenda in the negotiations.

The Corporate Yield Curve Has Just Inverted | Zero Hedge

The Corporate Yield Curve Has Just Inverted

Just days after we first showed that the world's "Most Systemically Important Banks", or G-SIFIs, are tumbling even as US stocks trade just shy of all time highs, prompting Ian Hartnett to issue his first "black swan" alert since 2009...

... Nedbank analysts Neels Heyneke and Mehul Dahya picked up on this topic, and in the latest note write that with the market-weighted cap index of the FSB's G-SIFI's starkly decoupling from the S&P 500 and the Nasdaq since the beginning of 2018, and nearly entering a bear market, or down 18%, they warn that "this decoupling will be sustainable. Either the rest of the equities must come under pressure or the financial sector must rally."

Reverting back to their favorite theme of dollar liquidity, or the lack thereof, as the catalyst for virtually all of the world's risk asset woes, Heyneke and Dahya show that whereas the S&P500 has so far ignored the slide in the dollar liquidity, the megabanks have not been so lucky, and that the higher the dollar spike, the greater the threat to the G-SIFIs, until eventually the drop is so substantial, the rest of the market will have no choice but to follow lower.

And while we noted much of this last week, a more interesting observation by the Nedbank analysts is that the corporate sector curve (Baa-rated Corporates less the Prime rate) has now inverted. The implication of this is just as profound as a sovereign yield curve inversion as it means that "the cost of capital for corporates is now higher than the return on capital."

Incidentally, as the chart below shows, every trough in this curve has always corresponded to some market crisis, whether the Asian Crisis, the Tech bubble, the Great Financial Crisis, or the $-liquidity squeeze we are experiencing now.

Their conclusion: "Corporates are highly geared and we are concerned the next phase of a contraction in global $-Liquidity and rising real rate (term premium) will infiltrate the stock markets."

Well, the dollar just hit a fresh 2018 high, and stocks are tumbling, so once again the shape of the yield curve may very well be all we needed to know what happens next.