In his latest weekend note, One River CIO Eric Peters discussed, among other topics, what he thought would be the nightmare scenario if not for the current, then certainly next Fed chairman: a world in which despite the Fed’s best intentions (and we use the term loosely), the Fed continued to hike rates without any perceptible increase in wages and thus, long-term inflation expectations. The result would be a failure to raise bond yields, which would provide further ammo for stocks to keep rising ever higher into what even the Fed tacitly admits is increasingly an asset bubble. This is how Peters described the ominous dynamic that would lead to major headaches for the next (and perhaps current, if Yellen remains in her spot) dynamic:
“Global profits are rising, unemployment is falling, growth is up” said the strategist. “Yet bond yields seem unable to jump.” US 10yr bond yields are 2.27%, Germany 0.40%, Japan 0.05%. “The cyclical surprise is that the Phillips curve finally kicks in, just as everyone gives in.” US unemployment is 4.2%, a 17yr low. Germany 3.6%, a 37yr low. Japan 2.8%, a 23yr low. “And the biggest structural surprise is that technology has rendered wage inflation a phenomenon for the history books.” “But if we don’t see a sustained cyclical jump in wages, then yields won’t go up. And if yields don’t go up, then the asset price ascent will accelerate,” continued the strategist. “Which will lead us into a 2018 that looks like what we had expected out of 2017; a war against inequality, a battle for Main Street at the expense of Wall Street, an Occupy Silicon Valley movement.” He paused, flipping through his calendar. “Then you’ll have this nightmare for the next Federal Reserve chief, because they’ll have to pop a bubble.”
Today, picking up on this divergence between rising short-term rates, and an inability – and unwillingness – of the long-end to reprice higher which continues to manifest itself in a flattening of the yield curve, where today the 2s10s pancaked to the lowest since the financial crisis…
… a move which continues to be ignored by markets…
… was Deutsche Bank’s derivatives strategist Aleksandar Kocic who confirms what Peters said, and argues that “for anything to happen, long rate has to move higher.” Taking a slightly different angle than Peters however, who focused on the structural deflationary forces which prevent the curve from steepening, Kocic frames a move higher in longer yields as one which underscores the trap the current (or future) Fed chairman is in: any notable steepening would be an indication of the Fed potentially losing control, or as Kocic puts it “possible missteps in monetary policy unwind” and a “disorderly unwind of the bond trade”, with the end result being an explosion in pent up volatility: “this is the risk that would be probably impossible to control, its trigger being either excessive deficit spending or inflation. “
As a result, Kocic writes that the Fed “has an uncomfortable (and complicated) task in this context: Fed needs to raise rates in order to prevent rates rise. What must not be, cannot be: Inflation cannot be allowed to develop because it would be no way of avoiding dramatic rise in rates. If the Fed embarks on aggressive hikes in order to fight inflation, rates would rise. If the Fed stays behind the curve, the market would bear steepen the curve. Either way, the long rates go up.”
Which, ironically, as Peters explained, is precisely what needs to happen to avoid the continued blowing of a massive equity bubble,or to summarize: the market finds itself in an increasingly unstable dysequilibrium in which on one hand the stock bubble grows ever bigger, while on the other, a normalization in equities is intimately linked to the Fed losing control of the yield curve. And, as Kocic has claimed on prior occasions, the ultimate catalyst that can trigger an end to this “metastable” market state is inflation. The outcome, in either case, would be explosive.
Here is Kocic:
With abundant liquidity, Fed transparency, and “predictable” political shocks, we have entered a regime of noisy status quo whereby the only temporary source of transient bid for gamma could be triggered by possible missteps in monetary policy unwind. However, even that seems to be relatively unlikely and, even if it happens, episodic at best. The largest, and possibly, the only risk capable of resetting the vol higher is the tail risk associated with bear steepening of the curve and disorderly unwind of the bond trade. This is the risk that would be probably impossible to control, its trigger being either excessive deficit spending or inflation.
It is precisely the severity of this problem that prevents return of volatility. Current monetary policy is focused on the management of the underlying tail risk and the Fed transparency and gradual hikes are all about the reduced maneuvering space that has remained after almost a decade of stimulus. Fed has an uncomfortable (and complicated) task in this context: Fed needs to raise rates in order to prevent rates rise. What must not be, cannot be: Inflation cannot be allowed to develop because it would be no way of avoiding dramatic rise in rates. If the Fed embarks on aggressive hikes in order to fight inflation, rates would rise. If the Fed stays behind the curve, the market would bear steepen the curve. Either way, the long rates go up.
Going back to the increasingly flatter curve, this is what Kocic defines as the “maneuvering space” left for the Fed. One look at the chart above confirms that said space is getting increasingly smaller. A flat, or worse – inverted – yield curve would imply game over. Here is Kocic again, who points out that the steepness of the curve is the “market’s playground”, in which “everything that can happen, has to happen inside this space”… a space which is curently a paltry 60 bps and shrinking every day:
The gap between the Short term rate expectations and the Long rate represents the remaining maneuvering space that the Fed has left. This gap defines the playground for the markets — everything that can happen, has to happen inside that space. This gap is narrow, currently at 60bp .
Mechanistically, this is logical, as the longer the current business cycle continues without a recession – and some immaculate increase in productivity and r-star – the flatter the curve become:
If the Fed has a long way to go into the cycle, the back end remains steep. However, as the hikes approach the final destination (the Long rate), the curve will continue to flatten reflecting the declining inflation expectations. These are pure mechanics of the Fed cycle. These stylized facts are illustrated in the Figure 14.
This is also a problem, because all else equal, the Fed has at most two more rate hikes before it loses control. In the interim, it somehow has to reprice both risk premia and vol higher… but without crashing equities, forcing a new easing cycle, which may include not only more QE but also NIRP:
“Given where long rates are, Fed appears as overly hawkish – it has only two more hikes to go and, for volatility and risk premia to reprice higher, the gap has to widen. As is appears unlikely that the Fed will be cutting rates any time soon, the gap could widen only if the Long rates sell off.”
And, as noted above, “for anything to happen, 5Y5Y sector has to move higher”, however the $6.4 trillion question is whether this sell off in long rates will be violent or controlled. As Kocic concludes, “This is the catalyst for everything.”
LONDON: A campaign against anti-Muslim hate crime was launched across London buses and tubes on Monday.
Transport for London (TfL) and police in the UK capital are working together on 200 events across in support of the broader National Hate Crime Awareness Week.
Muslims have been the targets of several attacks on London buses and tubes — some of which have been posted on YouTube and other social media.
Spikes in anti-Muslim hate crime were recorded in both London and Manchester following terror attacks in the cities this summer as innocent members of the public became victims of violence and abuse.
Newspaper reports over the summer reveal numerous incidents involving attacks on Muslims in the capital ranging from an acid attack on two cousins in East London to a woman who had a hijab ripped from her head at Baker Street tube station.
Between April and June 2017, reports of hate crime on the transport network of the capital increased by a quarter to 822 compared with the same period last year, according to official figures.
“Every so often, a member of our congregation can find themselves being abused on London’s transport network, and we want to send a clear message, that you do not have to be afraid and that you can report incidents discreetly to the police,” said Nozmul Hussain, CEO of the East London Mosque Trust.
Police officers visited communities in east London yesterday along with TfL staff and representatives from Tell Mama – a reporting service for victims of anti-Muslim hate crime.
They urged people to report hate crimes and stressed that “London’s public transport system is safe and welcoming for all.”
“London represents one of the most diverse capital cities in the world, and we will never tolerate those that seek to divide us through hatred and bigotry we will always stand united,” said Detective Superintendent Adnan Qureshi from the Met’s Roads and Transport Policing Command.
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MANILA: Daesh has suffered a major setback in East Asia. The Armed Forces of the Philippines (AFP) reported to have killed two of the main leaders of Daesh who have held parts of Marawi city on Mindanao in the Philippines since May 23.
The crisis has left more than 1,000 people dead, mostly members of the Maute group, but including 162 soldiers and policemen, and 47 civilians.
Defense Secretary Delfin Lorenzana on Monday announced the deaths of Isnilon Hapilon and Omarkhayam Maute. The two men were killed during an early morning ground assault on the remaining stronghold of the Maute group in Marawi.
“I confirm the killing of Isnilon Hapilon and Omar Maute,” Lorenzana said. The bodies of the slain militant leaders have been recovered and will be subjected to DNA tests, he added.
AFP Chief Gen. Eduardo Año called their deaths “the straw that has broken the camel’s back” and claimed “the Marawi crisis will be over sooner than later.”
Hapilon, a former Abu Sayyaf Group (ASG) leader regarded by the US as one of the world’s most dangerous terrorists, was Daesh’s designated leader for Southeast Asia. The US had placed a $5 million bounty on him, while the Philippine government had offered a 17.4 million peso bounty (approximately $348,000).
Maute was the co-founder, along with his brother Abdullah, of Daesh. Maute had a 5 million peso bounty on his head.
Lorenzana said the offensive began at 2 a.m. and lasted around four hours. It was triggered by information provided by a former female hostage on the location of Isnilon and Maute, he added.
“She was able to confirm the presence of Isnilon and Maute in that particular building.”
Military spokesman Maj. Gen. Restituto Padilla said Hapilon was hit in the chest during an exchange of fire with government forces. Maute was shot in the head by a sniper.
Año said troops were also able to recover seven other bodies of suspected militants.
The operation also resulted in the rescue of 20 civilian hostages, including a two-month-old girl.
Steve Cutler, an international security analyst and former head of the Federal Bureau of Investigation (FBI) in Manila, told Arab News that the death of Hapilon and Maute is a major setback for Daesh.
“It is a huge blow to Daesh… and any dreams that Daesh have of establishing a caliphate here.”
Cutler said that the longer the Marawi crisis continues, the more strength the narrative of Daesh establishing a caliphate in East Asia has. But the death of the two leaders, he said, completely changes that narrative.
“These deaths are game changers. They remove the guiding lights — the leading personalities of the movement here,” Cutler said. They will be replaced, he added, but “the replacements are not charismatic leaders of the caliber of these two.”
And while the death of Hapilon and Maute diminishes the morale of the militants, it greatly improves that of the Philippine government.
“It strengthens the general view of the competence of the Philippine forces and their ability to fight effectively,” Cutler said. “Daesh is under destruction in the Middle East and their plans for the Philippines to become a hub in Southeast Asia are severely damaged.
“(The militants) will continue to fight, and will kill more. They are still dangerous and cannot be underestimated. But they will not succeed (in their aims),” he added.
Political analyst Ramon Casiple, however, while admitting it was a major blow to Daesh, described the deaths of the two militant leaders as “a temporary setback.”
“This will not stop them,” he said. “Remember, Daesh is a religious organization.” He warned that their deaths do not mean there is no longer a Daesh “presence” in the Philippines.
“There’s still the ASG and other groups (such as the Bangsamoro Islamic Freedom Fighters),” he said, noting that a new generation with Daesh-provided strategies and tactics will eventually replace them.
Año believes it will just be a matter of days before the government can finally declare that Marawi has been freed from Daesh’s control.
“I’m certain that the neutralization of Hapilon and Omar is the last straw. The terrorists will crumble. It is a dead-end. There is nowhere to go for them,” Año said. He then urged the remaining Maute fighters to free their hostages.
Lorenzana said government forces are still pursuing Mahmud Ahmad, said to be Malaysia’s most wanted terrorist. Ahmad is suspected of channeling more than P30 million (approximately $600,000) from Daesh to fund the Marawi siege.
The army believes he is currently in one of the buildings inside the main battle zone.
Around 30 militants, including eight foreign terrorists, reportedly remain in the area. The militants are also believed to still hold 22 civilian hostages.
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JAKARTA: Former Education Minister Anies Baswedan and businessman-turned-politician Sandiaga Uno were sworn in Monday as the new governor and deputy governor of Jakarta at a ceremony held by President Joko Widodo at the State Palace.
Baswedan and Uno will lead the capital of Southeast Asia’s largest economy and manage an annual city budget of roughly 70 trillion Indonesian rupiah ($5.192 billion) for the next five years.
The pair won a 57.96 percent mandate out of a total of 5,591,353 votes, defeating then-incumbent governor Basuki TjaHajja Purnama and his deputy Djarot Saiful Hidayat who gained 42.04 percent of the votes.
“The governor of Jakarta is a governor for all, for those who voted (for me) and those who didn’t vote,” Baswedan told journalists after the ceremony which was broadcast live on national television.
Hidayat later became governor following Purnama’s blasphemy conviction in May. The two-year prison sentence came after Purnama, who is a Christian of Chinese descent, was accused of insulting the Qur’an.
Purnama’s statement triggered a string of mass rallies, involving protesters from other cities calling for his prosecution and a rising wave of refusal to have a non-Muslim leader for a population of some 12 million in the Indonesian capital.
The election turned out to be very polarizing and by far the most religiously charged in Indonesia, pitting a Muslim candidate against a double minority incumbent.
Purnama was deputy for Widodo when the latter was elected governor in 2012 and he inherited the gubernatorial post from Widodo who was elected president in 2014.
“We can’t wait to get to work right away. We have been waiting for six months. Insha Allah, Jakarta will be better,” Baswedan said in his first official speech as governor after a handover ceremony at the city hall during which his predecessor Hidayat was away on holiday in Labuan Bajon in eastern Indonesia.
Both men will have to work hard to meet their 23 campaign promises which include zero down payment for housing schemes and entrepreneurial programs to create 200,000 new jobs.
Yayat Supriyatna, an urban planning expert from Trisakti University in Jakarta, said other pressing challenges for the new leaders were classic Jakarta problems — eviction, traffic gridlock and floods. These problems continue to tarnish Jakarta’s reputation as the diplomatic capital of the Association of Southeast Asian Nations (ASEAN) with more foreign embassies establishing separate diplomatic missions to the regional bloc.
“We have various masterplans to address those problems; what remains to be seen is their execution,” Supriyatna told Arab News.
Both Baswedan and Uno are known as moderate Muslims.
ST. PETERSBURG: Shoura Council President Abdullah Al-Asheikh said that the Kingdom, under the leadership of King Salman, believes in dialogue as an effective means to achieve security, peace and prosperity.
Al-Asheikh delivered his speech at the 137th International Parliamentary Union (IPU) assembly in Saint Petersburg, Russia, under the theme “Promoting Cultural Pluralism and Peace Through Inter-Faith and Inter-Ethnic Dialogue.”
Al-Asheikh said the Kingdom is seeking to spread a culture of dialogue locally, regionally and internationally, in order to reinforce and promote coexistence, respect, and global peace.
He highlighted the Kingdom’s great efforts espoused by the King Abdul Aziz Center for National Dialogue, including periodic meetings to discuss local issues.
The establishment of the King Salman Center for International Peace in Malaysia and the King Salman Center for Interreligious and Intercultural Dialogue in Austria are a result of the Kingdom’s strong belief in the human capacity to make the world a more peaceful place, he said.
He called for concerted international efforts to fight terrorism, issue more laws and regulations against terrorist attacks, fight the terrorist mindset and its financing sources, and create a list of all terrorist organizations and states that support them.
“The Kingdom has never missed a chance to fight terrorism. It even organized the Arab-Islamic-American Summit focusing on ways to eliminate terrorism, and established the Global Center for Combating Extremist Ideology (Etidal) in Riyadh,” he said.
Concerning local and international issues, Al-Asheikh confirmed that the Palestinian cause remains one of the Kingdom’s priorities. He called for just and comprehensive peace in Palestine in accordance with international resolutions and the Arab Peace Initiative.
On the war in Yemen, he stressed that the Kingdom is aware of the suffering of the Yemeni people caused by Houthi militias.
The Kingdom will not waver in its determination to stand beside the Yemeni people, he said. The aid the Kingdom has provided to Yemen in the past few years has reached more than $8 billion allocated through the King Salman Center for Relief and Humanitarian Aid and UN organizations, he added.
Al-Asheikh also said that the Kingdom supports a political solution in Syria.
King Salman also allocated $15 million to help the Rohingya people fleeing Myanmar, and communicated with the Bangladesh government to reopen border crossings for them.
The UAE requested the inclusion of an emergency item in the assembly sessions: The Rohingya humanitarian crisis.
At the 137th IPU Assembly in St. Petersburg, a new president will be elected for a three-year term. The candidates are: Gabriela Cuevas Barron from Mexico and Ivonne Passada from Uruguay.
The IPU has more than 171 Parliament members from around the world and works through an executive committee and four permanent committees: Peace and international security; sustainable development; finance and trade; democracy and human rights; and UN affairs.
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RIYADH: Justice Minister Walid Al-Samaani has officially launched the commercial courts after they had started to operate on Muharram 1 of this year.
Al-Samaani, who is also the Supreme Judicial Council chairman, said the three commercial courts in Riyadh, Jeddah and Dammam would help enhance the business environment, encourage investment and boost economic development, in line with the objectives of Saudi Vision 2030.
Addressing the inaugural ceremony, Al-Samaani also said specialized commercial chambers had also opened within the public courts in a number of Saudi cities.
The justice minister said the new measures would uphold the rights of the people and ensure a sound business environment.
He also said that the tripartite working group — comprising the Supreme Judicial Council, the Ministry of Justice and the Board of Grievances — had worked for the past two years to transfer commercial courts from the Board of Grievances to the Ministry of Justice.
Al-Samaani said that the ministry had launched the “paperless court” project, which cut down around 45 percent of procedures, and shortened the period for execution of judicial orders from two months to only 72 hours.
“This e-link has been activated so far with 19 government agencies to provide around 60 e-services to clients,” the minister said.
He said that the ministry had started the gradual implementation of the e-link between the courts of first instance and appeals courts to electronically transfer the full case.
Dr. Khalid bin Mohammed Al-Yousuf, head of the Board of Grievances, said: “The entire judiciary is proud to achieve the loftiest goals and the high expectations of our authorities under the leadership of King Salman and Crown Prince Mohammed bin Salman.”
Author: Mohammed Al-SulamiTue, 2017-10-17 03:00ID: 1508187836468763900JEDDAH: Saudi security forces have arrested 66 people for links with terrorist organizations and operations in the Kingdom since the beginning of October. They are in Gener…
JEDDAH: Forty-five experts and speakers from 15 countries are taking part in the First International Symposium on Land and Maritime Border Security and Safety (challenges and solutions) in Jeddah.
The symposium will discuss several issues concerning the safety and security of sea ports and ground crossings, as well as the protection of vital facilities.
It was launched under the patronage of Interior Minister Prince Abdul Aziz bin Saud bin Naif bin Abdul Aziz Al-Saud.
Dr. Mohammed Ali Koman, secretary-general of the Arab Interior Ministers Council, and Kiroja Michi Chini, representative of the secretary-general of the International Maritime Organization (IMO), attended the opening ceremony.
Border Guards Director General Awad Al-Balawi said that the event aims to find solutions to combat cross-border crimes, such as drug trafficking, trafficking in human beings and all forms of transnational organized crime, strengthen national, regional and international cooperation, and review legislation, regulations and mechanisms that would prevent such crimes.
He also said that border security is of vital importance for improving national security and stability.
“Border security has faced hazardous challenges and threats caused by security and political crises in some countries, which contributed to an increase in the activities of terrorist organizations and organized transnational crime groups.”
Al-Balawi said: “Besides, maritime security threats have increased due to poor control of some seas and coasts, resulting in misusing them as transit areas to target countries.”
Al-Balawi said that improving maritime security is a key factor for maritime and international trade development and securing ports and shipping routes, which in turn ensures sustainable economic growth and food security.
“Hosting this important event, which is characterized by the participation of border and coastal security leaders and officials from 17 countries, is proof of Saudi Arabia’s important global role and evidence of its leading role in the region at political, economic and social levels,” he added.
The IMO official said that his organization had worked for more than 30 years on coordinating international efforts and collaborating with relevant bodies to improve performance at the national and regional levels.
“The development of an efficient maritime range is key to achieving global stability and sustainable development,” he said. “It also aids the flow of world trade, which is the IMO’s main mission.”
During the “Saudi Border Guards and Comprehensive Border Security” session, Al-Balawi showcased the Border Guards’ implementation of strategic plans for managing capacities; the intelligent border security system; the comprehensive systems project; the maritime program project; the project for renovating land patrol vehicles; the development of weapon systems; and enhancing operational readiness for search and rescue operations.
He also referred to the Border Guards’ most remarkable achievements, which include foiling an attempt to infiltrate the Al-Wadia and Arar border crossings, an attempt to smuggle 2.1 million amphetamine pills in Al-Issawiya, a maritime terrorist attack, and an attempt to target important establishments in Jazan.
Al-Balawi said: “Studies showed how the Saudi Border Guards faced security challenges with the use of a comprehensive system supported by the commanding unit, guidance and strategic plans for developing technologies through smart borders, strengthening human resources capacity and imposing a high level of readiness.”
He added: “Moreover, the Border Guards largely improved the work environment, provided full housing and medical care and provided logistics support, which positively impacted the morale of workers and their families.”
The event includes hands-on exercises that simulate how to stop terrorist attacks on land border units and offshore installations.
The exhibition has 79 booths for 34 companies from nine countries: Saudi Arabia, the US, France, Germany, Spain, Switzerland, South Korea, Egypt and the UAE.
These companies will showcase the latest equipment, techniques, devices and systems for border security and safety.
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JEDDAH: The Italian Consulate in Jeddah has lined up a series of events until Wednesday to celebrate World Italian Language Week.
The consulate is holding this event for the fourth year in a row with different themes for each year. This year’s theme is “cinema” as there are expectations about theaters opening in the Kingdom soon.
Italian comedian Saverio Raimondo attended a press conference on Monday at the Italian Cultural Center along with Fabio Ferri and Biancaria Gismondi from Mondadori Education to discuss the celebrations.
The first day’s event featured a stand-up comedy show by Raymondo. The show was focusing on Italian comedy in general, and about Fantozzi, one of the most famous comedy characters in Italy.
Comedy is a “strange thing” to export to a foreign country, but it is also an important cultural experience.
The character of Fantozzi had such an important influence on the Italian language in a way that epitomizes the influence of cinema on a language. The second and third days of the event will be two “movie nights.”
An Italian movie with English subtitles will be screened, and then a Swiss movie in Italian, also with English subtitles, will be shown on the last day. All the events will be held at the Italian Consulate starting at 9:00 p.m.
The consulate has also prepared debates and seminars at the Italian Culture Center, the Italian School of Jeddah, Effat University and Dar Al-Hekma College.
“The beacon of Saudi youth is US culture, but our aim is to show that stand-up comedy does not only belong to the US. There is also an Italian way to have stand-up comedy,” said Italian Consul General Elisabetta Martini.
A seminar at Dar Al-Hikma Collage will held on Tuesday about the Italian entertainment industry, and on how to start a career in the entertainment field.
“This is something very important for Saudi Arabia because they just started to focus more on entertainment businesses and entertainment as a job creator market,” Martini added.
“Italy is a cultural superpower and it is eager to contribute to the implementation of Saudi Vision 2030 also as far as the creative industry is concerned,” said the consul general.
The series of events are sponsored by End Consumer, Creative Marketing Solutions, Bin Zagger Company, Al-Bilad Hotel and Al-Danoub Market.
Ferri from Mondadori Education underlined that Italian is a European language spoken in Italy and Switzerland. And it is the fourth most studied foreign language in the world.
“Italy has always been at the crossroads of trade and this is why many Arabic words were adopted into Italian,” he said.
The aim of the initiative is to “underline what unites the Arabic and Italian cultures — not what divides us, namely creativity and common words,” said Martini.
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Hydrogen fuel cells are a controversial thing. Elon Musk, for example, finds them “incredibly dumb”, and he’s far from the only one. Yet the concept of using the universe’s most abundant element to fuel vehicles is still alive and kicking. The latest of its proponents to make headlines is Swiss company, H2 Energy, which says it has achieved a closed-cycle hydrogen production process that uses all-renewable sources to make hydrogen for fuel and other applications. Its project, in partnership with utility IBAarau, is reportedly…