5 things to start your day

Forward Guidance

House set to vote on funding measure, China growth beats estimates again, and OPEC cuts may be working too well.

Shutdown showdown The House is on track to pass a one-month government spending bill later today, with Speaker Paul Ryan said to be close to gathering the votes needed. The bill would then pass to the Senate where Democrats would be confronted with the conundrum over whether to block the measure in order to gain leverage on immigration. White House Press Secretary Sarah Sanders said that President Donald Trump supported the bill in its current form.  China growth China’s economy expanded 6.9 percent in 2017, slightly ahead of expectations, with activity lifted by global growth. There was some cynicism about the data, with Beijing’s continuing ability to beat economist expectations by the slimmest of margins a “source of disquiet," according to Bloomberg’s chief Asia economist Tom Orlik. A report by the Centre for Economics and Business Research in London says China’s economy is set to overtake the U.S. as the world’s largest by 2032. Too good OPEC and its production-cut allies meet this weekend to review their strategy to clear the global oil glut as they risk becoming victims of their own success. U.S. production to exploit soaring prices could undo all of OPEC’s hard work with output that could top 11 million barrels a day next year, surpassing both Saudi Arabia and Russia, according to U.S. government forecasts. In the market this morning, a barrel of West Texas Intermediate for February delivery remained near three-year highs, trading at $63.99 by 5:45 a.m. Eastern Time.  Markets mixed Overnight, the MSCI Asia Pacific Index slipped 0.4 percent, with Japanese stocks accounting for much of the drop as the Topix index closed 0.7 percent lower after rising above 1,900 for the first time since June 1991 earlier in the session. In Europe, the Stoxx 600 Index was little changed at 5:45 a.m. in a quiet session ahead of earnings season. S&P 500 futures were flat, the 10-year Treasury yield was at 2.605 percent and gold was lower.  Tax change Morgan Stanley will report fourth-quarter earnings this morning, a day after it saw its market capitalization pass that of Goldman Sachs Inc. for the first time in a decade. Investors will focus on the bank’s tax overhaul costs, after it flagged a $1.25 billion charge related to the changes. The new fiscal regime has Apple Inc. bringing hundreds of billions of dollars held overseas back to the U.S. – and coughing up $38 billion in taxes.

Here's what you should read today

Pimco says the lack of fear in markets means you should be worried. Here’s what could make the next global recession even worse. The gold rally may have more room to run. Wall Street has a $1.7 billion bet on the rising risk of grid attacks. Microsoft says AI advances will require new laws. Weaker dollar won’t derail global growth. Is a steeper yield curve good news for banks?

@TicToc by Bloomberg: 24/7 news. Streaming LIVE on Twitter. Introducing the first global news network built for Twitter. With 2,700+ journalists and analysts in 120+ countries, @TicToc provides news with a truly global perspective.

And finally, here’s what Joe’s interested in this morning

How did Michael Wolff get White House access to write his best-selling tell-all book "Fire and Fury"? Bloomberg's Jennifer Jacobs answers that question in a great account of how the author managed to finagle his way inside the early days of the administration and get ample participation from key players, despite his history of writing highly critical pieces about his subjects. What's fascinating is the article reads like a case study in how human-made catastrophes come about. See it turns out, nobody actually ever greenlit the book. "Nearly everyone who spoke with Wolff thought someone else in the White House had approved their participation," Jacobs writes. Some White House staffers were under the impression that Hope Hicks, one of Trump's closest aides, had given them official approval to talk to Wolff. Instead, it appears, she was mostly just offering them advice that if they did talk to him, they should try to shape a positive narrative. Also, Wolff initially gave the impression he was going to write a glowing book, which caused everyone to drop their guard. The ultimate impact of the book may be minor, but how it all came about is a microcosm of true disasters like Enron or even Chernobyl. In such cases, there was nobody in a position to see the big picture, a key contributor to calamities. Ego, risk concealment, and poor communication rolled into one: It's a politics story that's a great lesson in risk management.

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Hike launches 'Total' to let users access essential services without an active data connection

Instant messaging app Hike on Wednesday launched "Total, built by hike" that lets users access essential services such as messaging, news and recharge among others without an active data connection and allows get on data by providing packs for as low as Re 1.

Hike Total. Image: Twitter/ @hikeapp

The product will be available from 1 March on Aqua Lions N1, Aqua Lions T1 and Aqua Lions T1-Lite Intex devices as well as Karbonn A40 Indian smartphone across Airtel, Aircel and BSNL networks.

"We have taken the 15-20 step process of someone coming online and made it into only a few steps. Buy a phone, turn it on and you are good to go. Everything, all the essential services all work out of the box even without data," Kavin Bharti Mittal, Founder and CEO, Hike, said in a statement.

Mittal said that the company's goal is to bring more Indians online.

'Total, built by hike', has four key elements that make the end-to-end experience extremely seamless.

Users just need to provide a single login via a phone number to access all of 'Total' services such as messaging, news, horoscope, recharge, wallet, cricket scores and rail information which take between 100kb to 1MB data.

All of the services built on "Total" can be accessed even without data via proprietary technology.

Developed in-house, the proprietary technology, based on the USSD protocol does the heavy lifting of encrypting, compressing and transmitting data.

Users will be able to purchase data packs starting as low as Re 1 from inside the "Total" experience itself with the goal of lowering the cost of access.

"We have worked closely with telcos on special data packs for these phones starting as low as Re 1 to give people a taste of what it feels like. This is really powerful," Mittal added.

Total users will also get up to Rs 200 to spend on any of the services when they buy one of these devices.

Bitcoin falls by seven percent on fears that regulators might clamp down on the cryptocurrency

Bitcoin extended its sharp tumble of the past 24 hours, skidding more than seven percent on Wednesday in a rapid downturn in fortunes as investors were spooked by fears regulators might clamp down on an asset whose value has skyrocketed in the past year.

A picture showing the Bitcoin logo. Image: Reuters

The price of the world’s biggest and best-known cryptocurrency fell to as low as $10,567 on the Luxembourg-based Bitstamp exchange, not far from its six-week nadir of $10,162 touched the previous day. The session’s high was $11,794.07.

It led the fall in cryptocurrencies, although others such as Ethereum and Ripple, have also slid sharply this week after reports South Korea and China could ban trading, sparking worries of a wider regulatory crackdown.

“Cryptocurrencies could be capped in the current quarter ahead of G20 meeting in March, where policymakers could discuss tighter regulations,” said Shuhei Fujise, chief analyst at Alt Design.

At its lows on Tuesday, bitcoin had fallen 25 percent in the session, its biggest daily decline in four months. It was a far cry from its peak close to $20,000 in December when the virtual currency had risen nearly 2000 percent over the year.

Tuesday’s decline followed reports that South Korea’s finance minister had said banning trading in cryptocurrencies was still an option and that the government plans a set of measures to clamp down on the “irrational” cryptocurrency investment craze.

Separately, a senior Chinese central banker said authorities should ban centralised trading of virtual currencies as well as individuals and businesses that provide related services.

“Bitcoin is deciding whether this is the moment to crash and burn,” said Steven Englander, head of strategy at New York-based Rafiki Capital.

“My conjecture is that cryptocurrency holders are trying to decide whether to abandon bitcoin because its limitations mean it will be superseded by better products or bet that it can thrive despite them.”

Makoto Sakuma, analyst at Tokyo-based NLI Research Institute, said trading volumes had been low despite the volatility.

“I would say the strong rally in bitcoin and other cryptocurrencies we saw last year is over,” he said.

“But while the rally phase is over, I don’t think it is right to say bitcoin is finished.”

Bitcoin futures maturing on Wednesday on the Cboe Global Markets Inc’s Cboe Futures Exchange were at $10,740, with 1,586 contracts traded, after having opened at $10,850. The open interest was 2,895 contracts. The Cboe 14 March 2018 contract was quoted at $11,130.

The futures are cash-settled contracts based on the auction price of bitcoin in US dollars on the Gemini Exchange, which is owned and operated by virtual currency entrepreneurs Cameron and Tyler Winklevoss.

The MVIS CryptoCompare Ripple Index, which covers the performance of a digital assets portfolio which invests in Ripple (XRP), a cryptocurrency developed by Ripple Labs, dropped 15 percent to $7,298 on Wednesday.

That equity index has seen a 66 percent slide in its value since the start of the year. Ripple itself was quoted at $1.15 on website CoinMarketCap, down from a high of $3.81 on Jan 4.

“The run-up in bitcoin created a mystique of one-way trading which is being shaken but the pricing requires faith that there will always be demand,” Englander wrote.

“This is far from guaranteed given the existence of alternatives with better characteristics.”

Brexit Bulletin

To read the Brexit Bulletin on the web, click here.

It’s still not clear what the U.K.’s relationship with the European Union will look like after March 2019, let alone in 2021 when the country is supposed to cast aside the last remnants of EU membership altogether.

That in-between time – the transition phase, if your preference for jargon originates in Brussels; the implementation period if you parrot the British government – could have been the easy bit. But, as we’re learning with all things Brexit, nothing is the easy bit.

The EU27’s ambassadors reconvene on Thursday for another discussion about their position on the issue. Their aim is to have something to present to the British by the end of the month. When last they met, the EU27 added all sorts of extra language to their draft position, the most controversial of which was to state that the protection of rights of EU citizens should cover people moving to the U.K. until the end of the transition period at the end of 2020, rather than simply until Brexit day in March 2019.

The U.K. thinks that’s not in the spirit of the agreement that Theresa May signed with the EU last month, which put in black and white that citizens would be protected until “the time of the U.K.’s withdrawal” (and let’s not forget, the U.K. originally wanted it to be much earlier). The EU points toward a line in the joint agreement stating it doesn’t “prejudge any adaptations that might be appropriate in case transitional arrangements were to be agreed.” Well, here are some adaptations.

Ask a few diplomats around Brussels and they say all the difficulty of the transition might have been avoided had the U.K. simply asked the EU to extend the two-year Article 50 deadline to cover the transition period, too. That was certainly an option on the table. But it would have meant keeping the U.K. in the EU for another two years or so (and maybe more if a trade deal wasn’t ready). That’s politically unpalatable in London, even if the rules of the transition as they stand mean that’s effectively what’s happening anyway.

It puts Theresa May, again, in a difficult position. She’d quite like to put the transition agreement to bed as soon as possible so the two sides can get on to discussing the proper stuff: what the longer-term relationship will be. There’s so much to do before October (to give the European and British parliaments time to approve the deal) and it’s barely begun.

But the thorny political and legal issues of the transition won’t just go away. Beyond the citizens’ rights dispute, the EU’s draft position makes it clear that the arrangement “requires the U.K.’s continued participation in the customs union and single market.” Hardline euro-skeptic lawmaker Jacob Rees-Mogg, who has said that arrangement would make the U.K. a “colony” of the EU, was on Tuesday elected leader of an influential group in the British Parliament to hold the government to account on the Brexit negotiations, the Daily Telegraph reported.

— Ian Wishart

Brexit Latest

Internal Conflict | Theresa May faces a cabinet split over the government’s position on EU trade talks, the Financial Times reports. Pro-EU ministers, such as Home Secretary Amber Rudd and Chancellor Philip Hammond, are becoming increasingly assertive and are pushing for the British economy to remain aligned with the bloc, the newspaper said.

Shaken, Not Stirred | May’s flagship piece of legislation was back in the House of Commons on Tuesday for its final stages in the lower chamber before it’s punted up to the House of Lords. Debate will continue on Wednesday. All the signs are that the Conservative rebels who embarrassed the premier last month still don’t like the bill in its current form, but won’t rebel because they think the Lords will change the legislation for them. “It’s not my desire to cause further stir,” the ringleader of the rebels, Dominic Grieve, said on Tuesday.

About That Bus | On a trip to Vancouver, Foreign Secretary Boris Johnson was asked about his assertion that Britain’s European contributions were more than he and others had claimed during the referendum campaign, which led to infamous slogans on buses saying the U.K. could save £350 million  a week that could be paid into the health service instead. “There is, I think, no doubt that when you look at the gross contributions by 2021, 2022, they’re rising to £438 million per week and that is the total sum over which we will take back control, in the famous phrase,” Johnson said. He has told the prime minister she must commit to spending an extra £100 million a week on the health service after Brexit if the Conservatives are to win the next election, the Daily Telegraphreports.

Good News/Bad News | Net immigration to the U.K. is likely to fall to 180,000 in 2018, the closest the government has come to meeting its longstanding target of a reduction to the “tens of thousands,” according to a forecast from the Institute of Directors. While that might be good for May’s ambitions, business doesn’t quite see it the same way. Small and medium-sized companies in particular, “will find it more difficult to recruit the people they need for our economy to prosper, resulting in a labor-market tightening,” the institute said.

Let’s Go Dutch | Dutch Finance Minister Wopke Hoekstra said EU countries that are set to suffer the most from Brexit shouldn’t also have to help plug the hole it will tear in the bloc’s budget. “A small group of countries on the west coast of Europe is hit very hard in the economy by Brexit, which applies primarily to Ireland, but also to the Netherlands, Denmark, Spain and a number of other countries,” Hoekstra said in interview with Dutch TV station RTL Z. “It cannot be the intention that those who already experience the damage of Brexit will also pay the bill.”

Ad Break | U.K. companies are keeping a tight rein on marketing budgets as they fret over Brexit, sending one indicator of the advertising industry’s health to its lowest since early 2016. The share of companies increasing ad budgets exceeded those scaling back by 8.6 percentage points in the final quarter of 2017, the Institute of Practitioners in Advertising said in its Bellwether Report on Wednesday. Although marketing budgets have expanded continuously since the end of 2012, that’s the smallest gap since the first quarter of 2016.

You’re All Heart | EU leaders kept alive the notion of the U.K. reversing its plan to leave the bloc in a sign of lingering hopes that May will call a halt to Brexit. “We, here on the continent, haven’t had a change of heart; our hearts are still open” to Britain, EU President Donald Tusk told the European Parliament.

And Finally...

Obviously the return of the blue passport isn’t enough of an attraction. Brits are increasingly looking to their roots over the Irish Sea as they seek to keep a foot in the European Union.

For the first time, the number of Irish passport applications received from England, Scotland and Wales, some 81,287, beat the 80,964 from Northern Ireland, according to Darragh O’Brien, foreign affairs spokesman for Fianna Fail, the biggest opposition party, citing a response to a parliamentary question.

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The Daily Prophet: Can't Complain About a Lack of Volatility

BloombergView Daily Prophets Tuesday was a day of wild swings in the markets, with the Dow Jones Industrial Average quickly surging above the 26,000 level for the first time only to give up the gains and finish lower by 10.33 points, or 0.04 percent, to 25,792.86. In all, the benchmark swung about 400 points from its high to its low of the day. Who said volatility is dead? Although commodities producers and industrial shares were largely to blame for the reversal, and it's too early to say this is the start of a prolonged slump, the action suggests there is a limit to investor exuberance heading into earnings season. Or, maybe all the good news is priced into stock prices. “This is going to be a philosophical question within the market, in terms of how much higher earnings growth from tax cuts is worth in terms of valuation, and how much is it worth just purely on a dollar per share earnings basis,” Jurrien Timmer, director of global macro at Fidelity Investments, told Bloomberg News. Thanks to the U.S. tax cut passed into law in December, analysts have been raising their estimates at a rate not seen in at least six years, according to Bloomberg News' Lu Wang. Forecasts for 2018 profit from companies in the S&P 500 Index increased 3.5 percent over the past four weeks to $151 a share, the fastest pace over comparable periods in Bloomberg data that go back to 2012. Investors tempted to reduce their exposure to stocks after the S&P 500’s successful start to 2018 might be wise to hang on a bit based on historical trading patterns, Bloomberg News' Sarah Ponczek reports. More than 40 percent of companies in the benchmark index traded at a 65-day high Friday, the most in almost five years, according to Strategas Research Partners. Since 1990, when more than 30 percent of S&P 500 companies hit 65-day highs, returns were positive in the next 3 months almost 85 percent of the time. DOLLAR WEAKNESS DECIPHERED The dollar is on an epic slide. The Bloomberg Dollar Spot Index reversed its gains to fall for a fifth straight day. One would have to go back to go back to the very start of 2015 to find the last time the index as was weak as it is now. Given the rally in U.S. equities and the idea that the Federal Reserve will raise interest rates another three times this year, the weakness is a bit of a headscratcher. The strategists note that the latest weakness in the dollar emerged on Dec. 13 and coincided with a sharp rise in bond yields. They conclude that this indicates the key factor driving dollar weakness is likely concern that the U.S. tax reform bill will not pay for itself via faster growth. A report by the Joint Committee on Taxation published at the start of December argued that the bill would create a revenue loss of about $1 trillion over 10 years. And because of the rising government budget deficit and the Fed running down its balance sheet, Deutsche Bank estimates the supply of U.S. Treasuries that investors will need to absorb will almost double to $1 trillion in 2018. That's not good for the dollar given how much the U.S. depends on foreign investors to buy its debt and finance its deficits. SOMETHING FOR THE BOND BULLS It's been a tough few months for bond bulls, as the yield on the benchmark 10-year Treasury rose from 2.01 percent in early September to 2.60 percent last week. Now comes Bank of America's latest monthly survey of portfolio managers, and embedded in the results is something that on the surface looks extremely bond bearish but could actually lift the spirits of the bulls. The allocation to equities among survey participants is at a two-year high of net 55 percent overweight, while the allocation to bonds is at four-year low of net 67 percent underweight. That makes investors the most overweight equities relative to government bonds since August 2014. But a look back to that time shows that was no reason to sell bonds. In fact, the yield on the benchmark 10-year Treasury went from about 2.40 percent to about 1.64 percent the following January. And while yields did go back up after that, to above 2.40 percent by mid-2015, they then fell anew, all the way down to less than 1.40 percent in mid-2016. Here's something else for the bulls: CFTC data show hedge funds and large speculators are the most bearish on 10-year Treasuries since March, which is when yields topped out before slowly descending through early September. TOO MUCH OF A GOOD THING Emerging-market stocks continue surge, closing in on a record set in 2008, but some pretty influential people and Wall Street firms are expressing caution. The MSCI Emerging Markets Index has been on a tear for two years, rising 77 percent from its cycle lows in January 2016. That beats the 49.5 percent gain in the MSCI All Country World Index and the 49.2 percent jump in the Standard & Poor's 500 Index. Yet, contrarians abound, with Morgan Stanley saying EM equities may see a repeat of 2000, which began well but ended with a 32 percent drop, Bloomberg News' Ben Bartenstein reports. Jeff Gundlach, chief investment officer at DoubleLine Capital, says a near-term rally in the dollar and valuations at near-record levels will probably prove a temporary setback for developing-nation stocks. Goldman Sachs says records for global stocks imply a higher risk for a market retreat. The firm notes that the MSCI Emerging Market Index is on its longest streak without a 10 percent correction. METALS TAKE A BREATHER It was fun while it lasted. After a robust rally, metals prices are starting to pull back, led by copper, which is suffering its biggest loss in six weeks. Aluminum, zinc, lead and nickel also retreated on Tuesday as investors focused on the rebounding dollar and evidence of ample supply in the physical market, according to Bloomberg News' Mark Burton. Palladium and other precious metals also retreated, with spot silver falling as much as 3.2 percent. “We’ve had a significant rally across base metals, and it’s hard to justify a further move higher at these levels,” Warren Patterson, a commodities strategist at ING Groep, told Bloomberg News. Metals have been on a tear since May as enthusiasm over growth in China and demand from electric vehicles lured investors. The rally sent copper above $7,000 a metric ton for the first time in three years and palladium to a record. TEA LEAVES The Bank of Canada will be in the spotlight Wednesday as policy makers at the central bank meet. The speculation among traders is that they will raise their benchmark interest rate to 1.25 percent from 1 percent, but temper any expectations of much tighter monetary policy amid the possible breakup of Nafta, a stronger Canadian dollar and growing household debt, according to Bloomberg News' Maciej Onoszko. A survey of 22 economists conducted by Bloomberg News from Jan. 5 to Jan. 10 found that Canada's economy is expected to expand by 2.2 percent in 2018, slower than the 3 percent in 2017. At the same time, they see inflation accelerating to 2 percent this year from 1.6 percent. If you’d like to get The Daily Prophet in e-mail form, right in your inbox, please subscribe to this link. Thanks! 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