Rabobank: "How Is This Not Front-Page News?"
Submitted by Michael Every of Rabobank,
All the news that’s fit to print. It’s a classic phrase, but it’s clearly not One Size Fits All in our fractured political/media landscape. Want to hear how awful party X or country Y is? There is a media outlet for you. Want to hear the complete opposite? There is another channel for that. Want to get an objective opinion? Well good luck with that - but there are some slim pickings out there in blog-land. The best approach is arguably Hegelian – follow everything. Read The Telegraph and The Guardian; read The Washington Times AND The Global Times; watch MSNBC AND Fox News; then compare and contrast – and this runs true for financial press and market news too.
For example, yesterday’s Daily underlined expectations that US-China relations would go off a cliff. Subsequently we saw two bombshell Reuters stories. The first is that according to anonymous officials, the Trump White House is going to “turbocharge” the extraction of supply-chains from China, taking an ‘all of government’ approach; this including financial incentives such as tax cuts or subsidies for those firms; the US is considering higher tariffs and targeted sanctions of Chinese individuals, and even close relations with Taiwan as well; and it wishes to bring other countries with it in a so-called new “Economic Prosperity Network”, which sounds like a combination of the TPP and the Cold War. At any point during the 2018-19 trade war, this would have been front page news. Instead, it got hardly a mention. It did rightly see markets dip somewhat yesterday, but arguably not to the extent the story deserved. It also ignored Peter Navarro following up that “Buy American would soon be the law of the land” for some US government departments. Perhaps the market, in its infinite wisdom, believes this is all electioneering and/or that Trump won’t follow through? There is form there - but such certainty in the face of such uncertainty!
Later in the day Reuters was at it again. This time with news that an internal Chinese report seen by Xi Jinping has concluded that in the post-pandemic era Beijing will face the toughest international anti-China pushback since 1989, and that in a worst-case scenario it needs to be prepared for armed confrontation between itself and the US. Reuters states that the report is regarded by some in China as their version of the 1946 “Novikov Telegram”, which was the former USSR’s response to George Kennan’s infamous telegram from Moscow that concluded the Soviets did not see the possibility of peaceful coexistence with the West, and that a US policy of containment was needed. One might think THAT would be front-page news. It wasn’t. It was hardly news at all. Yet there is no election coming up in Beijing.
It is probably not a coincidence that both of these stories emerged yesterday. The US clearly wants China to know that economic sabres are being sharpened in the hope that they don’t have to be used, just rattled; and China wants the US to know that they know the sabres are being sharpened – and that the outcome would be awful for both sides if they are used. Duelling with words is certainly preferable, after all.
This does not mean that something important is not happening here: it is. Neither does it mean markets should be ignoring it: they shouldn’t. Geopolitical tensions are escalating rapidly far beyond the extent to which markets are pricing for - apart from US Treasury yields, where the 2-year is hovering around a record low of just 18bp. An extra 10% US tariff on Chinese goods at this stage, as a random example, would actually be a very benign outcome given the rhetoric being flourished. Of course, one can make the point that USD/CNH is hardly moving. Yet as was stressed yesterday, this is not really a market. When it starts moving sharply we know that at least one sabre is already being used.
Meanwhile, on a different front, there are lots more headlines today about virus lockdowns being rolled back. It seems that real life will begin again in many developed economies within the next few weeks to some extent. That obviously generates one set of headlines – mainly “V-shaped” in tone. The problem is that once we get out of our houses we will see what the real economic damage is: no more hypothesizing what a post-pandemic recovery will look like. As alluded to yesterday, it’s likely to be very ugly due to lingering restrictions and prudent changes in behaviour (the kind of risk prudence markets aren’t showing re: US-China relations). For example:
- As 3 in 4 Brits remain sceptical of leaving lockdown, the UK Chancellor is warning that half the population is now being supported by the government. Imagine what the bill is going to be. Imagine how we don’t need a Magic Money Tree to get out it.
- New Zealand, which is seeing zero new infections, has seen PM Arden stress its borders will be staying closed for a long while yet. No tourism, sorry.
- Australia, also doing well versus the virus, also has closed borders….and the RBA left rates on hold and pledged to keep them there until the economy is back at full employment, which could be years – or ever, depending on immigration policy. The RBA also pledged to do more QE if needed. (Which stopped AUD from ramping at this meeting for once.)
- Showing the mental confusion when post-Covid geopolitics meets traditional “because markets” neoliberal thinking, Aussie Treasurer Frydenberg has stated that the country must avoid the evils of protectionism…while ensuring it is self-sufficient. Mate, self-sufficiency *requires* protectionism else everyone would already be buying Aussie because it’s cheaper. And perhaps it requires an Economic Prosperity Network too?
But back to what’s fit to print. Also not exactly screaming to the top of the front pages, Germany’s constitutional court will today rule on what Reuters (again!) is calling “an existential challenge to the ECB’s bond purchases”. Will judges give the green light for ECB operations to continue as normal, or place real limitations on them? Might that be an important story, perhaps, given the key role the ECB is playing, the risk downside, and the uncertainty of the outcome for markets? Apparently not. It’s more pressing for Bloomberg to tell us that US stock futures are heading higher along with oil. Perhaps to stop us all from having a fit.
Norwegian Cruise Line and subsidiary announce public offering of $350 mln of ordinary shares, investment by L Catterton, and offering of exchangeable notes and senior secured notes (14.44)
- Norwegian Cruise Line has commenced an underwritten public offering of $350 mln of ordinary shares of the company. The company expects to use the net proceeds from the Offering for general corporate purposes.
- NCL Corporation, a subsidiary of Norwegian Cruise Line, announced a private placement of up to $400 mln in aggregate principal amount of exchangeable senior notes due 2026 to an affiliate of L Catterton.
- L Catterton will be entitled to nominate one member to the company's board of directors so long as a minimum ownership threshold is met, as well as one observer to the company's board.
- NCL Corporation also announced that it is proposing to sell $650 mln aggregate principal amount of its exchangeable senior notes due 2024 in a private offering.
- A separate disclosure providing an update on the company's liquidity and management's plan notes that certain factors impacting performance, "in particular the suspension of cruise voyages and decline in advanced bookings, as well as debt maturities and other obligations over the next year, have raised substantial doubt about the Company's ability to continue as a going concern, as the Company does not have sufficient liquidity to meet its obligations over the next twelve months, assuming no additional financing or other proactive measures."
Gapping down
In reaction to disappointing earnings/guidance:
- FN -9.8%, FIVN -9.3%, UNM -8.8%, KPTI -8.1%, IAG -7.9%, MNK -7.9%, WRK -5.8%, AMCX -3.8%, PLOW -3.3%, LANC -2.9%, TXRH -2.8%, TREE -2.8%, W -2.3%, KN -2.1%, LITE -2%, LDOS -1.9%, INCY -1.4%, AXS -1.1%, CRI -0.8%, AWR -0.7%, LPX -0.6%, TRI -0.6%
Other news:
- HTZ -32.4% (reportedly taps Moelis (MC) and FTI Consulting (FCN) for bankruptcy restructuring, according to WSJ)
- CODI -10.9% (prices 5 mln common shares of the Trust at $17.60 per share)
- LB -8.3% (previously announced transaction with Sycamore Partners is terminated)
- INSM -0.8% (stock offering)
- COR -0.5% (prices 5 mln common shares of the Trust at $17.60 per share)
Analyst comments:
- ATUS -1.5% (downgraded to Mkt Perform from Outperform at Bernstein)
Gapping up
In reaction to strong earnings/guidance:
- CHGG +16%, DBD +12.5%, WH +8.9%, THC +8.5%, FANG +8%, NSP +7.7%, AER +7.6%, ACGL +7.5%, OHI +7.5%, RMBS +7.3%, LMNX +7%, TREX +6.5%, XPO +6.4%, ALSN +6.1%, NS +6.1%, HTGC +6%, PE +5.7%, ATI +5.4%, O +5.3%, USFD +5.2%, APTV +5%, REGN +4.8%, MPC +4.6%, TOT +4.4%, VAR +4.3%, JKHY +4.3%, CAR +4.1%, AGCO +4%, TDG +3.7%, LHX +2.8%, VRNS +2.7%, MOS +2.5%, HSIC +2.5%, CORT +2.4%, GPI +2.4%, LGIH +2.4%, EVER +2.1%, USCR +2.1%, GLT +2%, SWKS +1.9%, VNOM +1.9%, BWXT +1.8%, ICHR +1.7%, CRUS +1.7%, ACM +1.7%, LEG +1.3%
M&A news:
- PTLA +130.9% ( to be acquired by Alexion (ALXN) for $18/share in cash)
Other news:
- TGTX +33.7% (announces "positive" top-line results from the global UNITY-CLL Phase 3 trial evaluating the combination of umbralisib plus ublituximab (U2) compared to obinutuzumab plus chlorambucil in patients with previously untreated and relapsed/refractory chronic lymphocytic leukemia)
- ADVM +22.4% (reports "positive" interim data from Cohorts 1-3 of OPTIC Phase 1 trial of ADVM-022 in wet AMD)
- AKBA +18.4% (announces "positive" top-line results fromm global Phase 3 programs for vadadustat)
- CEMI +14.8% (attains CE Marking for its DPP COVID-19 System)
- GNMK +11.2% (names new CEO, increases full year outlook)
- ITI +11.1% (sells Agriculture and Weather Analytics segment to DTN)
- AVID +8% (renews cloud collaboration agreement with Microsoft)
- EXPR +7.7% (provides details on store reopening plans)\
- BNTX +4.8% (Pfizer and BioNTech SE doses first patients in the U.S. in the Phase 1/2 clinical trial for the BNT162 vaccine program to prevent COVID-19)
- QSR +4.1% (Pershing Square discloses 9.6% active stake; intends to engage with mgmt, board)
- SBUX +3.4% (expects 90% of stores will likely be reopened in June, citing CNBC)
- WBA +2.9% (AmerisourceBergen reportedly exploring deal for WBA's pharma wholesaling unit, according to Reuters)
- PFE +1.8% (Pfizer and BioNTech SE doses first patients in the U.S. in the Phase 1/2 clinical trial for the BNT162 vaccine program to prevent COVID-19)
- ABBV +1% (receives Health Canada approval for the combination of VENCLEXTA with obinutuzumab for patients with previously untreated chronic lymphocytic leukemia)
Analyst comments:
- CUTR +12.4% (upgraded to Buy from Hold at Stifel)
- BCRX +8.7% (upgraded to Overweight from Equal Weight at Barclays)
- HOG +2.8% (upgraded to Buy from Hold at Argus)
- TWOU +2.4% (upgraded to Buy from Hold at Berenberg)
German court has set a bomb under the EU legal order
Its ruling on the ECB’s bond-buying programme is misguided and ill-timed
Ahead of the German federal constitutional court’s verdict today on the European Central Bank’s 2015 programme to buy sovereign bonds, observers were nervous that a ruling of illegality would have serious legal and financial repercussions. As it was, the judges in Karlsruhe managed to do something even more damaging.
The court did not, “for now”, deem quantitative easing illegal. Instead it set off three grenades under the European legal order.
First, by dismissing the European Court of Justice’s legal reasoning as inadequate, it took upon itself the role of interpreting this area of EU law.
Second, it posited an interpretation that turns EU Treaty provisions on their head, and flies in the face of both the legal text and its political understanding — including in Germany.
Third, it gave German institutions three months’ notice: if by then the ECB has not complied with the court’s new doctrine, the Bundesbank and other German entities are banned from participating in the quantitative easing programme.
It is hard to say which of these is worse. But start with the economic questions at the heart of the issue.
The Karlsruhe court’s main line of reasoning is that the ECB, like all EU institutions, is limited by the “proportionality” principle in the Treaty: it may only exercise the powers granted to it to the extent necessary to fulfil its mandated goals.
One may have thought that this means QE is legal if necessary to achieve the ECB’s inflation target. The acceptance of that necessity was at the core of the ECJ’s 2018 ruling that QE was legal, given safeguards against breaching the Treaty limitation on “credit facilities” for governments.
But the view from Karlsruhe is that the ECB should not do what is necessary to fulfil its own mandate, but “balance” this against side effects for policy areas reserved for other institutions. It was, says the court, “incumbent upon the ECB to weigh [the] considerable economic policy effects and balance them . . . against the expected positive contributions to achieving the monetary policy objective”.
And the “economic policy effects” that worry the court are the one-sided litany well known from the conservative fringe of German monetary politics: by lowering interest rates, QE helps governments, hurts “savers or insurance policyholders” and “allows economically unviable companies to stay on the market”.
This is economically illiterate. As the ECJ understood, but the German court seems not to, any loosening of financial conditions will have such effects; it is precisely through them that monetary policy affects inflation.
Moreover, the court says “it is not ascertainable that any such balancing was conducted” and demands the ECB “provides documentation”. Did the judges even look at the ECB’s website and the governing council meeting accounts posted there?
The court instructs the German government to ensure that the ECB undertakes the missing “proportionality assessment”, and bans the Bundesbank from continuing QE unless the ECB issues a new decision to the court’s satisfaction within three months.
This is a breathtaking arrogation of power — against the ECB, but above all against the ECJ. Dismissing the EU court’s authority with shoddy legal argument has so far been the preserve of parts of the legal establishments in Poland and Hungary. For a German court now to do so is a source of deep concern.
What would it mean for the Karlsruhe doctrine to be adopted? The Treaties do in fact require the ECB to support the EU’s economic policies (which include growth, employment, economic cohesion), but as a secondary mandate, in strict subordination to price stability and not something to be “balanced” against it.
The logical consequence of the court’s reasoning is instead that the ECB should subject its monetary policy independence to the EU’s fiscal and economic objectives. That is not just wrong-headed, but coming from Germany, deeply ironic.
German court calls on ECB to justify bond-buying programme
Bundesbank told to halt participation unless central bank shows policy ‘proportionate’
Germany’s constitutional court has called on the European Central Bank to justify its vast purchases of public sector debt and threatened to block new purchases of German bonds unless it does so within three months.
Ruling in a long-running case about the legality of the ECB’s quantitative easing programme of bond-buying, the court in Karlsruhe said the German government and parliament had “a duty to take active steps against” QE “in its current form”.
The court also opened the door to fresh legal challenges against the ECB’s new €750bn pandemic emergency purchase programme (PEPP), saying that the earlier bond purchases were only acceptable because of a number of limits that have subsequently been eased under the new programme.
The judgment calls into question one of the key pillars of the eurozone central bank’s policymaking approach. The ECB has bought more than €2.2tn of public sector debt since launching QE in 2014 to try to halt a slide in inflation. In recent weeks it has vastly expanded its purchases to mitigate the economic consequences of the coronavirus pandemic.
However the bond-buying programme has long been controversial in Germany, where critics argue the central bank has exceeded its mandate by illegally financing governments and exposing taxpayers to potential losses. The complainants — a group of about 1,750 people, led by German economists and law professors — first brought their case in 2015. They argued that the ECB was straying into monetary financing of governments, which is illegal under the EU treaty.
Their case was referred to the European Court of Justice, which ruled in favour of the ECB in 2018, but it then went back to the German constitutional court, which on Tuesday rebuffed part of the ECJ’s earlier ruling, calling it “untenable from a methodological perspective”.
On Tuesday, the German constitutional court laid out a long list of reasons why the ECB may have overstretched its mandate in a decision published on its website. But the court said it could not decide if the ECB had broken EU law without more information on how the central bank balanced the economic and fiscal impact of its actions against its monetary policy aims.
“Unless the ECB provides documentation demonstrating that such balancing took place, and in what form, it is not possible to carry out an effective judicial review as to whether the ECB stayed within its mandate,” it said.
The court ordered the German government and parliament to ensure that the ECB carried out a “proportionality assessment” of its government debt purchases to ensure that their “economic and fiscal policy effects” did not outweigh its monetary policy objectives.
Most observers had expected the court in Karlsruhe to grudgingly accept that the ECB’s purchases of government debt were legal, and the court said that it “did not find a violation of the prohibition of monetary financing of member state budgets”. It added: “The decision published today does not concern any financial assistance measures taken by the European Union or the ECB in the context of the current coronavirus crisis.”
However, it said that Germany’s central bank would no longer be allowed to participate in public sector bond purchases if the ECB did not show that its policy was not disproportionate within a three-month period. It added: “On the same condition, the Bundesbank must ensure that the bonds already purchased and held in its portfolio are sold based on a — possibly long-term — strategy co-ordinated with the Eurosystem.”
Clemens Fuest, head of the Ifo economic institute in Munich, said the German court’s dismissal of the earlier ECJ ruling “reads like a declaration of war”.
The euro fell by 0.7 per cent against the dollar — its lowest level in a week — as investors contemplated the ruling, and German and Italian debt came under selling pressure.
“This is another barrier to solidarity during the Covid crisis,” said Rabobank strategist Richard McGuire. “We knew there was a political hurdle to sharing the costs between eurozone members — now there’s a legal one too.”
When the ECJ approved QE in 2018, it cited the ECB’s self-imposed limits on sovereign bond purchases in justifying its decision. These limits include a commitment to buy sovereign bonds only in proportion to each country’s economic size — as measured by its contribution to the central bank’s capital — and not to buy more than a third of any country’s total eligible debt.
But when it launched the PEPP, the ECB said it would waive the issuer limit and exercise flexibility on the capital rule and promised to consider further revising the limits if needed.
The court did not rule on the PEPP, but the plaintiffs are now expected to consider whether to bring a fresh case.
“This is the big risk,” Vítor Constâncio, former vice-president of the ECB, said on Twitter, saying the court had made a “ridiculous distinction between monetary policy and economic policy”.
“New court cases will come immediately in Germany against PEPP,” he warned.
Analysts at ABN Amro said: “Theoretically, the ECB [or] another national central bank could step in to purchase the target for German public sector assets or even the stock, though that is complicated as there is no risk sharing when it comes to government bond purchases.”
In a statement the ECB said that it was “analysing the ruling and will comment in due course”; its governing council is due to discuss the ruling on Tuesday evening. The Bundesbank declined to comment.
The plaintiffs in the case include Bernd Lucke, an economics professor from Hamburg university and a founding member of the anti-immigration Alternative for Germany party; Peter Gauweiler, a former deputy chairman of Angela Merkel’s sister CSU party; and Patrick Adenauer, a grandson of Germany’s first postwar chancellor.
Early premarket gappers
- Gapping up:
- CHGG +18.5%, CEMI +12.7%, ITI +10.5%, AVID +9.1%, GNMK +8.6%, WH +8.2%, MPC +7.8%, NSP +7.7%, ACGL +7.5%, RMBS +7.3%, LMNX +7%, HTGC +6.6%, ALSN +6.1%, THC +4.4%, TOT +4.4%, QSR +4.3%, JKHY +4.3%, O +4.1%, ADVM +3.8%, MOS +3.7%, CORT +3.6%, MNK +3.3%, XPO +3.2%, SBUX +3.1%, TREX +3.1%, VNOM +2.9%, EVER +2.8%, SHAK +2.7%, VAR +2.6%, WBA +2.3%, EXPR +2.2%, OHI +2.2%, USCR +2.1%, GLT +2%, MPLX +1.9%, BWXT +1.8%, SWKS +1.7%, ICHR +1.7%, LHX +1.7%, APTV +1.5%, LEG +1.3%, NS +1.3%, FANG +1.2%, VRNS +1%, CRUS +0.9%
- Gapping down:
- HTZ -27.4%, UNM -11.5%, CODI -10.3%, FN -9.8%, FIVN -9.4%, LB -8.7%, TXRH -4.5%, FRPT -4.5%, IAG -3.8%, PLOW -3.3%, INSM -2.9%, ARMK -2.2%, KN -2.1%, CAR -1.6%, WBT -1.3%, AXS -1.1%, AWR -0.7%, LDOS -0.7%, LPX -0.6%, TRI -0.6%