Size of figure can be misleading, but some of those assets are hard to value, stoking concern among investors
Concerns about Deutsche Bank’s derivatives exposure is adding to other worries about Germany’s largest lender by assets.
By MIKE BIRD
Updated Oct. 5, 2016 1:53 p.m. ET
Shares in Deutsche Bank AG have fallen by more than 48% this year amid concerns that the lender faces a hefty fine from the Justice Department and as its core lending business suffers from low interest rates and weak economic growth.

But some analysts also worry about the exposure at Germany’s largest bank by assets to derivatives and the large pool of hard-to-value assets that the bank holds on its books. Derivatives are financial contracts that draw their value from the performance of an underlying asset, index or interest rate. They can be used to hedge risks.

How vulnerable is Deutsche Bank to derivatives?

In its 2015 annual report, Deutsche Bank said its exposure to derivatives was €41.940 trillion ($46.994 trillion). As a comparison, Germany’s gross domestic product was €3.032 trillion in 2015.

But that raw size can be misleading, since it covers the notional value of the derivatives. For instance, the notional value of an interest-rate swap—the amount from which the payments to each party are calculated—may be large but the actual derivative may cover only small interest payments for either party. That makes the risk to either side much smaller than the figures suggest.

That means its exposure could be considerably smaller than the value of the derivative. Many derivatives contracts also cap their losses.

Most of the derivatives Deutsche Bank is exposed to aren’t overly complex. About 78% of its derivatives exposure allows people to hedge the risks of movements in interest rates.

And as with many other banks, Deutsche Bank’s exposure to derivatives has been falling, peaking in 2011 during the height of the euro crisis, at €59.195 trillion.

What is the problem then?

While the derivatives pile may not be as large as the headline number suggests, Deutsche Bank is sitting on a pile of assets that are hard to value when some investors don’t need much excuse to sell its stock. That unknown is contained in the Level 3 assets it holds, or those whose value is difficult to determine, such as complex derivatives and distressed debt.

Deutsche Bank has more Level 3 assets compared with its common equity Tier 1 ratio, a measure of financial strength, than its peers. Its Level 3 assets are estimated as being valued at 72% of its Tier 1 assets, according to J.P. Morgan Chase & Co. analysts. That compares with a 38% average for 12 global banks.

The difference is in part because of derivatives. At the end of last year, Deutsche Bank was sitting on a pool of $10.2 billion in illiquid derivatives, according to the bank’s own valuations, compared with $8 billion for Barclays PLC and $5.9 billion for Goldman Sachs Group Inc.

For illiquid assets, investors have to rely largely on the bank’s internal valuations, which S&P Global Ratings noted “could be vulnerable to adverse changes in the underlying assumptions.”

Is it something to worry about?

Because these illiquid assets are harder to evaluate, that stokes concern when a bank is being squeezed in the market.

David Hendler of advisory firm Viola Risk Advisors said the bank is developing a “Lehman-like profile,” and the Level 3 holdings pose a considerable risk to Deutsche Bank’s capital base, given the lender’s low earnings.

Many other analysts aren’t panicking.

Banks disclose far more information about derivatives than in prior years. “Deutsche Bank’s capital, leverage and asset quality ratios already take into account many more derivative-related risks than in the past,” said Simon Adamson, CEO of research firm CreditSights, in a recent note.

UBS Group AG notes that Deutsche Bank has €223 billion in liquidity reserves: cash, cash-like holdings and highly liquid securities. And its liquidity coverage ratio, as mandated by regulators, is 24% higher than the minimum requirement.

As with the bank’s derivatives book, Level 3 assets are generally a much smaller proportion of the bank’s business than they once were. They were €28.9 billion in the second quarter of this year, down from €88 billion in 2007.

So, the selloff isn’t about derivatives?

Not really. For Deutsche Bank, there is a list of greater concerns.

Last month, The Wall Street Journal reported that the Justice Department proposed the bank pay $14 billion to settle mortgage-securities probes stemming from the financial crisis. Deutsche Bank said it wouldn’t pay “anywhere near” that amount and many observers expect a smaller fine, but it adds to the stress when the bank’s earnings outlook looks so bleak.

Eurozone banks’ expected earnings per share is down by about three-quarters since its peak in early 2008, according to FactSet. Deutsche Bank’s situation is even grimmer, with forward EPS more than 85% lower than its peak.

A miserable outlook for earnings makes the company’s shares less attractive, reducing their price. It also makes it more expensive for the company to raise capital.

The worries about an opaque corner of the bank’s derivatives business doesn’t help Deutsche Bank as it tries to soothe investors’ concerns.

Write to Mike Bird at Mike.Bird@wsj.com

China is sinking ever deeper into debt, and risks a major banking crisis CREDIT: SINA

• Ambrose Evans-Pritchard

18 SEPTEMBER 2016 • 11:00AM

China has failed to curb excesses in its credit system and faces mounting risks of a full-blown banking crisis, according to early warning indicators released by the world’s top financial watchdog.

A key gauge of credit vulnerability is now three times over the danger threshold and has continued to deteriorate, despite pledges by Chinese premier Li Keqiang to wean the economy off debt-driven growth before it is too late.

The Bank for International Settlements warned in its quarterly report that China’s “credit to GDP gap” has reached 30.1, the highest to date and in a different league altogether from any other major country tracked by the institution. It is also significantly higher than the scores in East Asia’s speculative boom on 1997 or in the US subprime bubble before the Lehman crisis.

Studies of earlier banking crises around the world over the last sixty years suggest that any score above ten requires careful monitoring.  The credit to GDP gap measures deviations from normal patterns within any one country and therefore strips out cultural differences.

It is based on work the US economist Hyman Minsky and has proved to be the best single gauge of banking risk, although the final denouement can often take longer than assumed. Indicators for what would happen to debt service costs if interest rates rose 250 basis points are also well over the safety line.

China’s total credit reached 255pc of GDP at the end of last year, a jump of 107 percentage points over eight years. This is an extremely high level for a developing economy and is still rising fast .

China’s debt ratio has rocketed CREDIT: IIF

Outstanding loans have reached $28 trillion, as much as the commercial banking systems of the US and Japan combined. The scale is enough to threaten a worldwide shock if China ever loses control. Corporate debt alone has reached 171pc of GDP, and it is this that is keeping global regulators awake at night.

The BIS said there are ample reasons to worry about the health of world’s financial system. Zero interest rates and bond purchases by central banks have left markets acutely sensitive to the slightest shift in monetary policy, or even a hint of a shift.

“There has been a distinctly mixed feel to the recent rally – more stick than carrot, more push than pull,” said Claudio Borio, the BIS’s chief economist. “This explains the nagging question of whether market prices fully reflect the risks ahead.”

Bond yields in the major economies normally track the growth rate of nominal GDP, but they are now far lower. Roughly $10 trillion is trading at negative rates, and this has spread into corporate debt. This historical anomaly is underpinning richly-valued stock markets at time when profit growth has collapsed.

The risk is a violent spike in yields if the pattern should revert to norm, setting off a flight from global bourses. We have had a foretaste of this over recent days.  The other grim possibility is that ultra-low yields are instead pricing in a slump in nominal GDP for years to come – effectively a trade depression – and that would be even worse for equities.

“It is becoming increasingly evident that central banks have been overburdened for far too long,” said Mr Borio.

The BIS said one troubling development is a breakdown in the relationship between interest rates and currencies in global markets, what it describes as a violation of the iron law of “covered interest parity”.

The concern is that banks are displaying a highly defensive reflex, and could pull back abruptly as they did during the Lehman crisis once they smell fear. “The banking sector may become an amplifier of shocks rather than an absorber of shocks,” said Hyun Song Shin, the BIS’s research chief.

This conflicts with what the Bank of England has been saying and suggests that recent assurances by Governor Mark Carney should be treated with caution.

Yet it is China that is emerging as the epicentre of risk. The International Monetary Fund warned in June that debt levels were alarming and “must be addressed immediately”, though it is far from clear how the authorities can extract themselves so late in the day.

The risks are well understood in Beijing. The state-owned People’s Daily published a front-page interview earlier this year from a “veryauthoritative person” warning that debt had been “growing like a tree in the air” and threatened to engulf China in a systemic financial crisis.

The mysterious figure – possibly President Xi Jinping – called for an assault on “zombie companies” and a halt to reflexive stimulus to keep the boom going every time growth slows. The article said it is time to accept that China cannot continue to “force economic growth by levering up” and that the country must take its punishment.

One bright spot is a repayment of foreign debt denominated in dollars. Cross-border bank credit to China has fallen by a third to $698bn since peaking in late 2014 as companies scramble to slash their liabilities before the US Federal Reserve raises rates. The tally for emerging markets as a whole has fallen by $137bn to $3.2 trillion.

China’s problem is internal credit. The risk is that a fresh spate of capital outflows will force the central bank to sell foreign exchange reserves to defend the yuan, automatically tightening monetary policy. In extremis, this could feed a vicious circle as credit woes set off further outflows.

The Chinese banking system is an arm of the Communist Party so any denouement will probably take the form of perpetual roll-overs, sapping the vitality of economy gradually.

The country was able to weather a banking crisis in the late 1990s but the circumstances were different. China was still in the boom phase of catch-up industrialisation and enjoying a demographic dividend.

Today it is no longer hyper-competitive and its work-force is shrinking, and time the scale is vastly greater.

Jens Meyer

o    CONTACT VIA EMAIL

Well, not exactly no-one. Goldman Sachs chief economist Tim Toohey reckons the speech RBA assistant governor Chris Kent delivered on Tuesday amounts to an explicit shift to a neutral policy stance.

Having so closely linked the RBA’s easing cycle to the weakness in the terms of trade (and earlier decline in mining investment), Chris Kent’s key remark was to flag “the abatement of those two substantial headwinds” and highlight that this “would be a marked change from recent years”. Photo: Brendon Thorne

Dr Kent spoke about how the economy has performed since the mining boom, and in particular how the performance matched the RBA’s expectations.

Reflecting on the RBA’s forecasts of recent years, Dr Kent essentially framed the RBA’s earlier rate cut logic around an initial larger than expected decline in mining capital expenditure and subsequent larger than expected decline in the terms of trade, Mr Toohey notes.

Having so closely linked the RBA’s easing cycle to the weakness in the terms of trade (and earlier decline in mining investment), Dr Kent’s key remark was to flag “the abatement of those two substantial headwinds” and highlight that this “would be a marked change from recent years”.

Mr Toohey notes that Dr Kent also suggested that we might be at a transition point from a prices perspective – noting that “wage growth has shown signs of stabilisation” with a “pick-up” in some broader measures of wage pressures.

“Overall, while China and the AUD (Australian dollar) continue to present risks, the RBA appears quite comfortable with current economic conditions and also of the view that we are now at a positive transition point for nominal incomes, investment, and wages inflation.”

Mr Toohey says there was no sense from Dr Kent’s remarks that further policy easing is in the pipeline, increasing his conviction that rates will remain unchanged for an extended period.

Market pricing of another rate cut has edged lower over the past week. There’s now just a 25 per cent chance of a rate cut in November, moving up to 60 per cent by July next year, according to Citi.

At the beginning of the month, markets were pricing in a 44 per cent chance of a November cut, moving up to 100 per cent by July.

Morgan Stanley economist Daniel Blake agreed the Kent speech struck an upbeat tone and that the most likely course for the central bank now was to keep rates on hold.

“While the Australian dollar was a little higher than they would expect (with the RBA’s modelled fair value around US70¢), there was no hint of policy concern,” Mr Blake said in a note to clients.

“So while today’s labour market data was soft on balance, we would not expect the RBA’s outlook to be shifted, and expect the cash rate to be held at 1.50 per cent through the remainder of 2016.”

ANZ notes that while the Kent speech indicated that the RBA is broadly happy with momentum in the non-mining economy, inflation will be the key factor for the RBA in determining whether to keep rates on hold or cut again.

Third-quarter inflation numbers are due at the end of October and the RBA will be hoping for a pick-up from the last quarter, when consumer prices rose just 1 per cent over the year, their slowest annual rate since 1999.

In the short term events will be driven by monetary policy, says Magellan Financial Group CEO Hamish Douglass. Daniel Munoz

by Sally Patten

.

Since taking over the listed shell occupied by Pengana Hedge Funds in late 2006, Magellan Financial Group has grown to become one of the country’s most successful international fund management businesses and its chief executive one of Australia’s most respected strategists.

As a keen student of monetary policy, the global economy, technology and investment legend Warren Buffett, the opinions of Hamish Douglass have never been more sought after than they are today. (Douglass and Magellan co-founder Chris Mackay met and hit it off at Schroders Australia in 1989 over a mutual love of Buffett and his then hard-to-get annual reports.)

But Douglass does a lot more than talk the talk. With $40 billion under management, there is a lot riding on his predictions for the future.

What are the two or three most important global trends investors should be following?

I think we have to split this between very near term and the medium term and I think they are fundamentally two different issues. The very near term is all about monetary policy. It is absolutely what drives events. The long term bond yields in the United States last year went from 2.4 per cent to 1.5 per cent and bond sensitive assets did very well. In the short term assets are very sensitive about the direction of monetary policy. And I still think that’s going to be the story of the next 12 months.

And longer term?

If we extend that into the future, equity markets aren’t pricing a risk free rate of 1.5 per cent which is the US current 10-year bond rate. If you look over the last 30 years, nominal GDP growth in America had averaged 5 per cent to 5.5 per cent and the average long term bond rate has been at 5 per cent to 5.5 per cent.

The current bond rate is at 1.5 per cent. If equity markets believed that would be the long term rate, they would be double where they are today. There is a huge debate about what the risk-free rate is over the very long term. Is it going to go back to 5 per cent or 5.5 per cent or to 2 per cent, or is it going to go to 4 per cent?

Our best estimate is that equity markets are currently pricing in a risk-free rate of between 3 per cent and 3.5 per cent. We think that long term rates will revert lower [although] they will be somewhat higher than markets are currently pricing if you look out three or four years.

What does this mean for equity prices?

The correct long term risk free rate may be higher than priced by markets, but lower than the historic mean reversion will tell you, so if the long term risk free rate is higher than the market is currently factoring in, then equities in general may be somewhat overvalued at present.

How fast will rates in the US rise?

Slowly. I would say one rate increase this year and maybe a few rate increases next year. But it could change depending on what is going on in the world. Europe will have rates on hold for the foreseeable future and it would appear that Australia is probably on an easing bias, predominantly trying to weaken its currency.

How can investors approach technology, given the sector’s unpredictability?

There are things that are caused by technology that are highly predictable. There are some industries where it would appear to be more obvious that they are going to get disrupted. I would say the television advertising industry is one of them. Television, particularly pay television, has held up particularly well, but it’s likely at some point it is going to be fundamentally disrupted. People are going to have to pay for digital goods and there are payments networks, Visa, MasterCard and PayPal that will benefit from that. Disruption is going to happen but they are almost certainly going to be beneficiaries. There are other things where you really don’t know which way it is going to go. They are the ones we tend to avoid.

What else could be fundamentally disrupted?

I believe there is going to be a revolution in 3D manufacturing. So instead of going to buy your handbag, you could download a source code from the internet and have that printed very close by to you at a manufacturing cost of very close to the cost to raw materials cost. That changes whole series of paradigms. 3D manufacturing may reverse the effect of globalisation. It makes no sense to manufacture a lot of goods in China because they can be manufactured more cheaply in a 3D printing facility around the corner.

So a whole lot of businesses that you believe are going to be the beneficiaries of emerging markets growth over 20 years might not be beneficiaries. Then there is the issue of branded goods. When you want to order a chair, do you download an open source, source code that doesn’t have any IP costs, or do you pay to get the proprietary chair you want? So does it start changing the value of brands?

On top of that, what is the value of a brand as the advertising industry starts to get disrupted? The big brands still have an advantage because television is still a very powerful medium that hasn’t yet been disrupted. Facebook has completely changing the game of brand advertising. We are seeing brands come from nowhere mainly because of the advent of social media. You may ask if brands are nearly as valuable as you thought they were.

We don’t have a clear crystal ball but you need to start asking these questions.

As an investor, what do you think of President Trump?

In terms of domestic economic policy I am not overly worried. It is one thing to have a presidential platform and it is another about reality of legislation in the United States. The bigger risk for investors is in terms of foreign policy under Trump. Foreign policy is in the purview of the President and not Congress, unless you are declaring war.

He could do things that are unpredictable and if he did things that are unpredictable markets could get very, very spooked. That is what would worry me most. Economically between Trump and Clinton I don’t think there is going to be a lot of difference.

Nominate your favourite and least favourite sectors

Technology platforms and payments platforms would be my two favourite sectors. My least favoured sector would be the media sector. Longer term I’d be cautious on the energy sector. Over the very long term it is going to be fundamentally disrupted. There is going to be far less oil consumed in the world if you take the very long term as we move to a much less fossil fuel intensive world. So anything directly related to fossil fuels, whether it is coal mining or oil, I would be very cautious.

A series of contrasting speeches have left Fed-watchers looking for a signal
Jeanna Smialek

September 11, 2016 — 2:01 PM AEST

Heading into the Federal Reserve’s September meeting, all eyes are on Lael Brainard.

The Fed governor is speaking in Chicago on Monday, making hers the last scheduled appearance before U.S. central bankers go into their traditional pre-meeting quiet period ahead of a Sept. 20-21 confab in Washington. Some Fed watchers think Brainard, who’s been among the most dovish of Fed members, will send a signal that tightening is coming—a flip-flop that would be sure to move markets. Others see the timing of her speech as consistent with her record because she spoke close to both the March and June meetings, urging a patient stance both times.

Details of Brainard’s speech to the Chicago Council on Global Affairs were posted on its website Aug. 30, though the Fed’s own announcement came on Thursday.

In the run-up, here’s a review of some of the most important Fed comments since Chair Janet Yellen last spoke. As you can see from this list — which goes chronologically, but leads with this year’s voters — there’s a significant divergence of views.

Janet Yellen
Chair
Speech: 8/26
Quote: “The case for an increase in the federal funds rate has strengthened in recent months.” Many economists saw this as a sign that Yellen views a rate increase as being on the horizon, though she didn’t explicitly signal that one was coming in September.

Jerome Powell
Governor
Speech: 8/26
Quote: Powell said that “we can afford to be patient. But when we see progress toward 2 percent inflation and a tightening labor market, and growth strong enough to support all that, we should take the opportunity” to hike.

Stanley Fischer
Vice Chairman
Speech: 8/30
Quote: Asked on CNBC on Aug. 26 whether Fed watchers should be looking for a move in September, and possibly for two hikes this year, Fischer said, “What the chair said today was consistent with answering ‘yes’ to both of your questions.” He wasn’t asked about September during an Aug. 30 interview, but he didn’t voluntarily walk the comment back, either.

Eric Rosengren
Boston Fed President
Speech: 8/31, 9/9
Quote: “Modest increases in wages and salaries seem to me consistent with tightness in labor markets beginning to appear more strongly in the wage data,” and “a failure to continue on the path of gradual removal of accommodation could shorten, rather than lengthen, the duration of this recovery,” Rosengren said in Quincy, Massachusetts, on Sept. 9. His comments were broadly hawkish, favoring an increase sooner rather than later.

Loretta Mester
Cleveland Fed President
Speech: 9/1
Quote: Mester said “a gradual upward path of interest rates” is consistent with her outlook, based on incoming economic data. “If you have a forecast and inflation is moving up to your target and you’re at full employment, then it seems like a gradual increase from a very low interest rate is pretty compelling to me.”

Daniel Tarullo
Governor
Speech: 9/9
Quote: “I wouldn’t foreclose that possibility,” Tarullo said on CNBC, when asked about a 2016 rate increase. “It’s important for all of us, in going into each meeting, to remain open to the possibility that momentum has changed, that expectations have changed, and thus for us to change our own views.” Even so, he didn’t sound that optimistic about the near term, saying “what is optimal right now is to look to see actual evidence that the inflation rate would continue to go up and would be sustained at around the target.”

Other Voters

… So the next question, now that we’ve gone over the recent voter speeches: What’s the rest of the voting committee’s stance?

It’s hard to tell, because we’ve gotten three data points that could have changed hearts and minds since the Chair spoke in late August. Nonfarm payrolls for August came in at 151,000, which isn’t actually a terrible number but was below consensus. Both of the Institute for Supply Management data points for August, manufacturing on Sept. 1 and services on Sept. 6, turned down.

Still, we know where they stood before the recent spate of disappointing data. The New York Fed’s William Dudley said on Aug. 18 that strong third-quarter data would “probably make you more optimistic” about the sustainability of the expansion, and “that would probably push you in the direction of being more inclined to tighten policy. But not necessarily.” Not exactly a rousing call for tighter policy. James Bullard, the St. Louis Fed chief, has been favoring a rate increase this year, but said on Aug. 26 before Yellen’s speech that he’s “agnostic” about when it comes. And finally, Kansas City Fed President Esther George has long favored an increase—the pertinent question to ask about her is whether she’ll dissent if the Fed doesn’t hike, as she did in July.

As you can see in the chart above, market views on the likelihood of a September rate hike have oscillated — a signal that traders aren’t feeling really confident one way or the other. Investors will be hoping for some guidance from Brainard.

TradeTheNews.com Weekly Market Update: Passive ECB and Hawkish Fed Finally Jar Markets

Fri, 09 Sep 04:05 PM EST/09:05 PM GMT

September trade finally ushered in some volatility after the long slog higher for much of the summer. Early on in the week volumes remained light and movement remained minimal coming on the heels of a disappointing August employment report last Friday. An uptick in M&A announcements after the Labor Day holiday did little to juice equity markets. Corporate debt offerings surged as company’s looked to roll over financing costs ahead of a potential Fed rate hike. US data continued to come in soft, highlighted by the August ISM Services reading that touched its lowest level since 2010. The weaker readings helped push Treasury markets higher, keeping a lid on yields through midweek.

By Wednesday traders focus turned decidedly towards Europe. With August (post-Brexit) economic readings holding up generally better than some officials admittedly had forecasted, expectations that much would come of Thursdays ECB meeting were diminished. Nevertheless, markets responded when the ECB held pat on rates and stimulus measures and Draghi was decidedly more hawkish than many had expected in his commentary. Notably Draghi said the ECB did not discuss extending its QE timeframe, even as the nominal end date is looming in March. The reverberations were felt most potently in the rates complex. Sovereign bonds sold off globally pushing benchmark rates in Europe and the US up to levels not seen since the Brexit vote. The pressure was amplified by a more hawkish tone from a slate of Fed speakers that spooked markets about the possibility the Fed could actually make its next rate move this month. Boston Fed President Rosengren said there is a reasonable case for gradual tightening, and even the usually cautious dove Governor Tarullo said he would not rule out a rate hike this year. Stock markets came under pressure and the selling accelerated into week’s end. The S&P, Dow and Nasdaq Composite each fell below their 50-day moving averages on Friday for the first time since the post Brexit swoon, and the S&P500 saws its first daily move of greater than 1% for the first time in over 40 sessions. For the week, the DJIA lost 2.2%, the S&P500 dropped 2.4%, and the Nasdaq fell 2.4%.

Energy futures pushed higher for most of the week after Russia and Saudi Arabia agreed to form a working group on oil price stability and other oil producers including Iran made constructive comments about a potential oil production freeze agreement. Weekly energy inventory data also provided a boost for crude futures as the 12% of US Gulf of Mexico oil production that was shut in by tropical storm Hermine resulted in the largest weekly draw in crude since 1999.

In the realm of corporate news, the most anticipated event this week was Apple’s product unveiling. CEO Cook divulged the new ‘water-resistant’ iPhone 7 model, which features larger hard drives, an upgraded camera, and a somewhat controversial removal of the headphone jack, but the announcement revealed few features that surprised any tech-watchers. The consumer electronics giant also introduced the Apple Watch 2, with built-in GPS, and Airpod wireless earphones. While the event disappointed some, Apple’s week was considerably better than competitor Samsung’s; the Korean electronics maker announced a global recall of its Galaxy Note 7 phones on reports of battery fires. M&A began to pick up from the relatively quiet pre-Labor Day holiday period. Hewlett Packard Enterprise announced it would spin off and sell its non-core software assets to Micro Focus in a deal valued at $8.8B, creating one of the world’s largest pure-play enterprise software companies. Reports indicated Monsanto is could announce a deal to be acquired by Bayer next week at price a little below $130/share. And Liberty Media Corp agreed to acquire motorsports league Formula One for an equity value of $4.4B.

Sun 9/4
(CN) CHINA AUG CAIXIN PMI SERVICES: 52.1 V 51.7 PRIOR

Mon 9/5
(EU) EURO ZONE SEPT SENTIX INVESTOR CONFIDENCE: 5.6 V 5.0E
(RU) SAUDI ARABIA AND RUSSIA SIGN AGREEMENT ON OIL MARKET; discussed cooperation on oil and gas to avoid catastrophe and achieve stability; could include possible production freeze (as speculated)

Tues 9/6
(AU) RESERVE BANK OF AUSTRALIA (RBA) LEAVES CASH RATE TARGET AT 1.50%; AS EXPECTED
(EU) EURO ZONE Q2 FINAL GDP Q/Q: 0.3% V 0.3%E; Y/Y: 1.6% V 1.6%E
CPHD: To be acquired by Danaher for $53/shr valued at $4B
SE: To combine companies with Enbridge in an all stock for stock merger, EV at C$165B; values Spectra common stock at ~C$37B
NAV: Confirms wide-ranging strategic alliance with Volkswagen Truck & Bus; VW to invest at $15.76/shr for 19.9% stake
(US) AUG ISM NON-MANUFACTURING COMPOSITE: 51.4 V 55.0E (lowest since Feb 2010)
(US) Aug Labor Market Conditions Index Change: -0.7 v +1.0 prior
FDML: Enters into definitive merger agreement with Icahn Enterprises L.P. at $9.25/shr in all-cash offer
CMG: Pershing Square discloses new 9.9% stake; intends to engage in discussions with management – 13D filing
(AU) AUSTRALIA Q2 GDP Q/Q: 0.5% V 0.6%E (1-year low); Y/Y: 3.3% V 3.3%E (annual pace hits a 2-year high)

Wed 9/7
(SE) SWEDEN CENTRAL BANK (RIKSBANK) LEAVES REPO RATE UNCHANGED AT -0.50%; AS EXPECTED
(CN) CHINA AUG FOREIGN RESERVES: $3.185T V $3.190TE (lowest level since Dec 2011)
(UK) JULY INDUSTRIAL PRODUCTION M/M: +0.1% V -0.2%E; Y/Y: 2.1% V 1.9%E
(UK) JULY MANUFACTURING PRODUCTION M/M: -0.9% V -0.3%E; Y/Y: 0.8% V 1.7%E
(CA) BANK OF CANADA (BOC) LEAVES INTEREST RATES UNCHANGED AT 0.50%; AS EXPECTED
AAPL: Introduces iPhone 7 and Apple Watch 2 – product event
(US) FEDERAL RESERVE RELEASES BEIGE BOOK: ECONOMY CONTINUED TO EXPAND AT MODEST PACE THROUGH LATE AUGUST; UPWARD WAGE PRESSURES INCREASED FURTHER
(JP) JAPAN Q2 FINAL GDP Q/Q: 0.2% V 0.0%E; ANNUALIZED GDP: 0.7% V 0.2%E (2nd straight expansion both quarterly and annualized)
(CN) CHINA AUG TRADE BALANCE: $52.1B V $58.4BE

Thrs 9/8
(CN) China Passenger Car Association (PCA): China July vehicle sales 1.8M units, +24.5% y/y; YTD 14.2M units, +12.7% y/y
(EU) ECB LEAVES MAIN 7-DAY REFINANCING RATE UNCHANGED AT 0.00%; AS EXPECTED
(EU) ECB Statement: Reiterates to continue €80B/month asset purchases program until Mar 2017 or beyond if necessary (no change in current timeline)
(US) INITIAL JOBLESS CLAIMS: 259K V 265KE; CONTINUING CLAIMS: 2.14M V 2.15ME
(EU) ECB chief Draghi: Sees rates at present or lower level for extended period; to preserve very substantial amount of support – prepared remarks
(EU) ECB chief Draghi: Did not discuss extension of QE; working on smooth implementation of policies, changes are needed – Q&A
(EU) ECB chief Draghi: Have not discussed helicopter money or equity buying
(US) DOE CRUDE: -14.5M V +0.5ME; GASOLINE: -4.2M V -0.5ME; DISTILLATE: +3.4M V +1ME (largest crude draw since 1999)
(PE) PERU CENTRAL BANK (BCRP) LEAVES REFERENCE RATE UNCHANGED AT 4.25%; AS EXPECTED
(KR) BANK OF KOREA (BOK) LEAVES 7-DAY REPO RATE UNCHANGED AT 1.25%; AS EXPECTED (3rd straight puase in current easing cycle)
(CN) CHINA AUG CPI Y/Y: 1.3% V 1.7%E; 10-month low
(CN) CHINA AUG PPI Y/Y: -0.8% V -0.9%E; 54th consecutive month of decline; smallest decline since Apr 2012

Fri 9/9
(FR) FRANCE JULY INDUSTRIAL PRODUCTION M/M: -0.6% V +0.3%E; Y/Y: -0.1% V +1.0%E
(FR) FRANCE JULY MANUFACTURING PRODUCTION M/M: -0.3% V +0.7%E; Y/Y: 0.4% V 1.8%E
GILTS: (UK) 10-year Gilt yield approaching 0.81%; highest since BOE announced new QE measures back on Aug 2nd – dealers
(US) Fed’s Rosengren (moderate, FOMC voter): Sees reasonable case for gradual tightening
(CA) CANADA AUG NET CHANGE IN EMPLOYMENT: +26.2K V +14.0KE; UNEMPLOYMENT RATE: 7.0% V 7.0%E
(US) Weekly Baker Hughes US Rig Count: 508 v 497 w/w (+2%)

Please click the link to see the Fund’s performance results.

Edge 3 +41.18% since February

Edge 2 +31.98% since February

Nivin Global Performance updated for August

Please contact NIVIN or Gfin for more information.

Netty Idayu Ismail
@NettyIsmail
Lilian Karunungan
lilianten
September 8, 2016 — 12:35 PM AEST Updated on September 8, 2016 — 1:36 PM AEST

Kiwi advances for seventh day after reaching May 2015 high

Milk prices drive gains as New Zealand rate-cut odds recede

New Zealand’s dollar rose for a seventh day versus the greenback, its best winning streak since June, as bets the Federal Reserve will move slowly in raising interest rates enhanced the allure of the highest yielding developed-market currency.
Start your day with what’s moving markets.
Get our markets daily newsletter.
The kiwi has outperformed its Group-of-10 peers this month and strengthened toward parity versus the Australian dollar as milk prices recovered. The probability that the Reserve Bank of New Zealand will cut its key rate this month from a record low has dropped to 21 percent from 33 percent in mid August, interest-rate swaps show. Asset-purchase programs from Japan to the euro area have kept borrowing costs low worldwide, with most economists predicting that the European Central Bank will lengthen quantitative easing for a second time when policy makers meet Thursday.
“The kiwi is finding support from various sources that don’t seem likely to falter near term,” said Sean Callow, a senior currency strategist at Westpac Banking Corp. in Sydney. “Receding hopes for a Fed rate hike in December make the 2 percent New Zealand cash rate look more tempting.”

The kiwi climbed 0.1 percent to 74.55 U.S. cents as of 12:35 p.m. in Tokyo, adding to a 3.2 percent rally over the past six-days. It reached 74.86 cents on Wednesday, the highest versus the greenback since May 2015. Against the Australian dollar, the New Zealand currency rose 0.1 percent to NZ$1.0291, after reaching its strongest intraday level since April 2015 on Wednesday.
Traders are pricing in a 22 percent probability of a rate hike at the Fed’s Sept. 20-21 meeting, futures contracts indicate, after recent disappointing U.S. data.
“The New Zealand dollar end is well understood — the economy is accelerating, our interest rates look fabulous for investors in a relative comparison, and our commodity prices are recovering,” Sharon Zollner, a senior economist in Auckland at ANZ Bank New Zealand Ltd., wrote in a client note. “But the broad path of the U.S. dollar is clearly important too.”