Opening Quote: Co-Op Bank- still more challenged than challenger

Greece is due to make a payment of €3.2bn to the European Central Bank as part of the  €86bn re-drawn bailout package agreed with eurozone finance ministers, which was approved the the German parliament on Wednesday. 

The Big Read China: Weakened foundations "Why did China decide last week to break the great taboo and devalue its currency when there was no apparent crisis? The answer is that China is already in the midst of its own creeping economic crisis and does not have enough tools to deal with it."
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Kazakhstan and keeping up with Russians

An unspecified number of tenge (not excluding zero) to those who can spot when Kazakhstan decided to let go of its currency band:

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Further reading

Elsewhere on Thursday,

- The creative apocalypse that wasn’t.

- Russia vs the cheese mob.

- Levine line du jour: “I suppose because diversification is not at all bae.”

- China’s building a huge canal in Nicaragua, but we couldn’t find itRead more

FirstFT – Fed ‘approaching’ lift-off, Audi takes on Tesla and missing Nazi gold

Conditions for rate rise are approaching, says the Fed Read more

China: Uber but for countries

A unicorn is a legendary mystical animal with a single spiralling horn that is both highly sought after and impossible to find.

In techland, however, it represents the hunt for something even more elusive: a start-up with the potential to become a multi-billion dollar company on the back of the winner-takes-all monopolistic eco-system superpower effect.

Given that unicorns are supposed to be rare, it’s weird there are so many of them these days. Read more

Finally, some action from the Finanstilsynet…

That’s the Danish financial regulator, of course, which has belatedly closed what had become a European scam-central for listed small-caps.

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DIY private equity

Or, a coda to our recent post on hacking the world’s most expensive asset class.

If investors locking up their money in leveraged buyout funds really could have gotten the same aggregate return all along simply by buying the right, leveraged stocks in the public market — then there’s an interesting implication.

Why isn’t everyone already doing it? Read more

Smoking African Pot

We should know better than to write about a company that currently ranks as the No1 topic of investor bulletin board discussion in the UK, but here goes…

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Pettis explains why the RMB is not fundamentally overvalued

Nobody knows China like Michael Pettis, and his latest post on the RMB doesn’t disappoint.

Before we get to the crux of his argument we should point out that FT Alphaville has long argued that the RMB was probably over rather than under valued, based on its capital account position.

Understandably we were feeling a bit chipper with our analysis following last week’s depreciation, until we read Pettis this morning.

The Beijing-based academic argues convincingly that the RMB is still under valued because there’s a big difference between a technical misvaluation and a fundamental one. Read more

Approaching the acceptance phase of liquidity’s repricing

Do remember that, generally, many people are worried about people being worried about bond market liquidity.

This time we shall kick off with a very good note from Jim Croft at Standard Bank.

First, on why what’s changed is really just the cost of getting your trades done — which is going to anger those coddled folk used to abundant liquidity just being shoveled into their paths — with our emphasis:

In our world it’s the ability to swap a series of highly uncertain future cash flows for a payment two or three days later of hard cash. It’s a pretty cool service when you think about it (and not guaranteed by any bond prospectus that I have read.) But like any service that is provided, it has an associated price. So in my thinking what people really mean when liquidity has got “worse”, is that the price of liquidity has gone up. You can still get most trades done if you are willing to pay the new price.

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Opening Quote: Weaker China takes toll on Glencore

The Big Read Eurozone: The case against ‘cash for reform’"The eurozone establishment has largely internalised the idea that “cash for reform” is necessary to keep the euro together. The most direct challenge to it, from Greece’s Syriza party, was defeated when other countries — most notoriously Germany — made clear they would rather force Greece out of the euro than consider alternatives to offering refinancing in return for control over fiscal and reform policies."


The Short View 
China’s gloom overshadows global outlook"A depressed outlook is being priced into everything from economically-sensitive cyclical stocks in developed countries to the bond market’s long-run inflation expectations and emerging market currencies."
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Further reading

Elsewhere on Wednesday,

- Pettis on the RMB and why market exchange rates don’t always reflect fundamentals.

- On the quantity and quality of Chinese GDP.

- BNY Mellon had some v special interns.

- Amazon and a reminder that there is no right to an upper middle class lifestyle.

- London’s black cabs vs the (uber) tide. Read more

FirstFT – Emerging market exodus, Ukraine on the brink and an exit route for smokers

Nearly $1tn has gushed out of emerging markets in the past 13 months Read more

Someone didn’t read Santiago Principle No. 14…

That would be the Santiago Principles signed up to by sovereign wealth funds in 2008, regarding good governance — including via-a-vis the custodians of SWFs’ often-plentiful assets.

While it was BNY Mellon who paid nearly $15m on Tuesday to settle SEC charges that it handed out internships to the family of a SWF client’s official, in order to retain the fund’s business… Read more

Dear China, we can think of at least one job that needs filling

Wanted: A go-getting, self starter with no appetite for tautology and with a mandate to fully count unemployment in the world’s second largest economy. Must leak to press if not allowed to report findings.

Anyway…

Remember Xi who must keep you employed? The idea that social stability, rather then employment per se, is what the Party really cares about. Remember also how the unemployment stats we and, very possibly, they are working with are a bit rubbish? And that it’s possible the Party will be reacting to problems rather than preempting them?

Well, an attempt by Shuaizhang Feng, Yingyao Hu and Robert Moffitt to add some clarity to China’s dodgy unemployment numbers raises some fresh questions about the Party’s control of the economy. Read more

Why Soylent is a dangerous cult

There is so much wrong with Soylent, the meal replacement slop, it’s hard to know where to begin.

I mean you could start with Rob Rhinehart, the 26 year old boy wonder who “invented” the goo.* He’s got a wonderful habit of saying profoundly annoying things like:

Kitchens are expensive and dirty. This home manufacturing center has been by far the most liberating to eliminate. They are the greediest consumers of power, water, and labor and produce the most noise and garbage of any room. Moreover, they can be made totally unnecessary with a few practical life hacks.

Nevermore will I bumble through endless confusing aisles like a pack-donkey searching for feed while the smell of rotting flesh fills my nostrils and fluorescent lights sear my eyeballs and sappy love songs torture my ears.

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There really isn’t such thing as a policy independent exchange rate anyway

Sensible sentences from Citi’s Buiter et al on China’s valuation shock (with our emphasis):

This decision by the PBOC is a significant event, even if its implications and motivations are not yet fully clear. It appears that the Chinese government has moved from operating a pretty stable peg to something closer to a managed float, raising questions about how strongly it will manage it. As liberalization proceeds, (sterilized) foreign exchange market intervention will effectively only work through signaling and announcement effects. However, ‘domestic’ interest rate policies, credit and other financial and/or fiscal policies are likely to gain strength as well as they affect the ‘market-determined’ exchange rates. As such, monetary policy and exchange rates will work in tandem as there is no such thing as a policy independent exchange rate, regardless of how freely it floats…

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China has a moral hazard problem

Late last week the Financial Stability Board completed its peer review of the Chinese financial market.

For anyone who’s ever wondered about the structure of China’s shadow banking industry or the evolution of the wealth management product sector the whole report really is worth a read.

But most interesting, especially given last week’s depreciation, was the following recommendation from the FSB:

The authorities should continue to promote a more diversified and resilient financial system by: (1) increasing reliance on market-based pricing mechanisms via the removal of implicit guarantees; and (2) further developing capital markets and an institutional investor base as an alternative pillar to bank financing.

Herein lies the crux of the challenge for China. Removing implicit guarantees and effective market subsidies. Read more

Opening Quote: Oil sector sings the blues

UK inflation data for July is out at 9.30am, with the consumer price index expected to remain flat month-on-month, while the retail price index is forecast to rise 1 per cent year-on-year, in line with last month’s data. The producer price index is expected to fall 1.5 per cent year-on-year. The numbers come for a month when oil prices fell by around 9 per cent, offsetting an appreciation of about 1 per cent for sterling. 

As US earnings season draws to a close, investors are waiting for numbers from WalMart, which was recently overtaken as America’s biggest retailer in terms of market capitalisation by its online rival Amazon. The bricks and mortar chain is expected to post a fall in quarterly earnings after investing in its own digital offering, as well as refurbishing its physical stores. Home Depot, another US retailer, is also reporting and is expected to file a rise in profit. 
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Further reading

Elsewhere on Tuesday,

- The solution to corporate short-termism “isn’t on Wall Street. It’s in the executive suite.”

- Perry Mehrling on the fuss about market liquidity.

- And the NY Fed on people being worried about people being worried about bond market liquidity.

- Valuing and pricing “trophy” assets.

- Paul Tudor Jones, analogs, and a young Jeff Bezos saying “It is easier to focus if you don’t go home”. Read more

FirstFT – Billion-pound suits for global banks, a green light for Shell and a caffeinated cure

Global banks are bracing for civil claims over the rigging of currency markets Read more

It doesn’t matter if the investment is domestic or foreign…

…so long as it catches value

Deng Xiaoping (sort of)

We’ve already theorised that China depreciating the yuan against the dollar in stages will have helped to shake-out the short-term dollar leverage in the system before a Fed rate hike later this year.

But, as PRC Macro, a Hong-Kong based advisory, noted late last week, with dollar deposits at commercial banks still leaving the system, we may not be home-free on China’s private sector dollar and capital outflow exposure just yet:

Today the PBOC released foreign reserve data for July that provides evidence of an additional motive behind the Bank’s sudden devaluation of the RMB/ USD exchange rate earlier this week. Specifically, the outflow of foreign exchange from commercial banks – as shown by the net monthly change to foreign exchange deposits – gathered pace in July. On a month-over-month basis, net capital outflows increased from RMB 93 billion (US$ 15 billion) in June to RMB 257 billion (US$ 41 billion) in July, with total FX deposits down by 2% YoY. This decline to China’s foreign reserves also highlights the difficulties that the PBOC has faced where it comes to managing systemic liquidity and this may also have contributed to the timing of the Bank’s decision to devalue the RMB earlier this week.

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This is nuts. When’s the crash?

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Wirecard: a rolling processor gathers no loss

Wirecard, the German listed payments company, is what might be called a tug of war stock.

On the one side are fans, who have long liked fast growth in sales and earnings and expect it to continue.

On the other are critics and potential sellers, concerned about what appears to be an unexplained pile of assets on the company’s books. If there isn’t a good explanation for that pile, the risk is sales and profits — the basis for enthusiasm — were overstated.

On Tuesday Wirecard will have the opportunity to resolve that debate when it publishes results, by doing what any company should be able to: explain its business in clear and simple terms. Read more

How does that bail-in instrument work again?

Following the results of the Asset Quality Review and Stress Tests before the end of the year, the bail in instrument will apply for senior debt bondholders whereas bail in of depositors is excluded.

Eurogroup statement on Greece, August 14th

Which ‘instrument’ might that be for wiping the senior bonds of under-capitalised Greek banks? Read more

What are Chinese capital controls really? – Part 2

Here follows the second in a series of posts explaining why this week’s RMB depreciation is akin to the Great China Money Market fund breaking the buck.

But first a disclaimer! Whilst our analysis errs to the view that the depreciation was driven by market forces and thus inevitable, that’s not to suggest China “the market economy” is bust or about to face a hard landing. We’re very specifically talking about the state-managed part of the external capital account.

So, let’s continue from where we left off, namely, the point when the commodity super-cycle was sending the message that for China to have its rebalancing cake and eat it some major global restructuring probably would have to take place. Read more

Doubling your frozen capital, Hong Kong style

Jennifer Hughes in Hong Kong

And then there was $29bn in frozen capital.

When we last calculated the equity value of long-suspended Hong Kong stocks in July, it came to just $12bn. News from the biggest of the new entrants to the HK freezer is not exactly lifting the tone of the group, either. Read more

Opening Quote: Last of the summer wine for housebuilders?

Monday’s diary features eurozone trade balance data for June at 10.00am London time.

During the US session, there is the housing market index for August from National Association of House Builders. It is expected to rise again, to 61, having hit its highest level since November 2005 in July reaching 60. Also in the US, the Empire Manufacturing Index for August is due at 1.30pm London time.  Read more

Further reading

Elsewhere on Monday,

- On supposed overvaluation of the yuan and global rebalancing.

- People’s QE and Corbyn’s QE.

- Trump the clown genius, and his mind anchors.

- “Amazon is in the vanguard of where technology wants to take the modern office: more nimble and more productive, but harsher and less forgiving.” Read more

FirstFT – Merkel fights to contain revolt, a thirst for craft beer and the Tetris effect

German chancellor works to dissuade potential rebels in her party from voting against Greek rescue plan Read more