Saturday, December 10, 2016

Weekly Commentary: Renzi Falls, Markets Rise

Italian bank stocks (FTSE Italia bank index) declined a modest 2.3% Monday on the back of Sunday’s resounding defeat of Italian Prime Minister Renzi’s political reform referendum. The bank index then proceeded to surge 9.0% Tuesday, 4.5% Wednesday and another 3.6% Thursday, for a stunning 27% rally off November 28th trading lows. As they say, “par for the course.” Italian 10-year sovereign yields rose eight bps Monday, yet by Wednesday’s close yields were actually lower on the week. Italian sovereign CDS ended the week little changed. Italian stocks gained 7%.

Following Brexit, Trump’s win and Renzi’s defeat, hedging market risk has been relegated to the status “senseless lost cause”. A short squeeze and unwind of hedges fueled this week’s 12.7% Italian bank rally, along with a 9.5% surge in European banks that reverberated in Asia (Japan banks up 5.6%), the U.S. (banks up 5.4%) and globally. Especially in Europe, a reversal of bearish hedges created powerful buying power. It’s a common trading strategy to purchase put options with proceeds from selling out-of-money call options. Increasingly in the U.S. and in Europe, equities trade as if those on the wrong side of derivative (calls) trades are being forced to hedge exposure by aggressively purchasing stocks into a rapidly rising market. It’s a self-reinforcing market dislocation similar to that which not many months back fueled a historic collapse in global bond yields.

One is left to assume that there must be some silver lining to Renzi’s defeat and resignation. From a fundamental perspective, it’s not obvious where to look. Italy’s anti-establishment Five Star Movement and Northern League political parties are salivating at the thought of new elections possibly early in the year (some speculating February). The Continent’s anti-euro and anti-establishment parties are emboldened. Meanwhile, the slow-motion Italian banking train wreck is chugging along.

December 9 – Reuters (Silvia Aloisi and Paola Arosio): “The European Central Bank has rejected a request by Italy's Monte dei Paschi di Siena for more time to raise capital, a source said…, a decision that piles pressure on the Rome government to bail out the lender. Italy's third-largest bank, and the world's oldest, had asked for a three-week extension until January 20 to try to wrap up a privately funded, 5-billion-euro ($5.3 billion) rescue plan… The ECB's supervisory board turned down the request at a meeting on Friday on the grounds that a delay would be of little use and that it was time for Rome to step in… The Italian government is expected to intervene in the next few days to recapitalize the bank to avert the risk of it being wound down, according to banking sources…”

Monte dei Paschi, Italy’s third-largest bank, saw its shares halted Friday down 10%. With a private-sector recapitalization now in doubt, a government rescue would test the EU’s new rules for forcing “bail in” losses upon bondholders. Italian banks have sold large quantities of bonds to unsuspecting retail customers, creating the potential for significant political fallout in a period of already heightened public anger. There are also the serious issues of further capital flight out of Italy and even bank runs.

One doesn’t have to search far to explain the markets’ sanguine view of Italy - and the world more generally. The ECB extended its QE program – previously scheduled to conclude in March - through the end of 2017. Curiously, in his Thursday press conference Mario Draghi noted that financial markets have “proved much more resilient” than expected, crediting well-capitalized financial institutions and robust supervisory and regulatory regimes. Surely Draghi appreciates that QE is fully responsible for global markets increasingly content to dismiss risk.

It’s astounding how far the Draghi ECB has drifted away from core founding principles. Former ECB president Jean-Claude Trichet would regularly repeat “the ECB never pre-commits on rate policy.” This was an critical distinction from the Federal Reserve that under Greenspan became too fond of using prospective rate moves to manipulate market behavior. Federal Reserve policymaking incentivized speculation and was instrumental in nurturing an increasingly unwieldy global pool of speculative finance. Global policies since the 2008 crisis have spurred the expansion of speculative finance to multiples of pre-crisis levels. It’s also rather clear that European debt markets have evolved into a bastion of leveraged speculation. Draghi was in no mood to contemplate the party ever ending.

Thursday’s ECB announcement created some confusion in the markets. While QE was extended through the end of the year, the size was reduced to 60 billion euros ($64bn) monthly from 80 billion. Draghi sternly shot down attempts to label the move as “tapering,” adding that it “has not even been discussed. In fact, it’s not even on the table.”

Bundesbank president Jens Weidmann apparently voted against extending the QE program. Surely he and other German policymakers were even more disappointed in Draghi’s post-meeting comments.

I believe history will view it was a serious mistake that the ECB did not use Thursday’s meeting as an opportunity to commence the process of weening the markets away from QE. Better to use the current “Risk On” backdrop to impose some reality as opposed to nourishing the beast. Worse yet, Draghi signaled that the ECB would continue backstopping the markets indefinitely. He spoke of “open ended” QE and stated that the ECB would be operating in the markets for “a long time.” Draghi stated that “uncertainty prevails everywhere,” implying that markets can strut with absolute certainty of “whatever it takes.” With Draghi’s assurances that QE could be boosted if necessary, the markets are more confident in an expanding program than one that will wind down at the end of 2017.

December 9 – Reuters (Paul Carrel): “Mass-selling German newspaper Bild heaped criticism on European Central Bank President Mario Draghi on Friday, a day after the ECB said it would extend its massive stimulus programme for the euro zone. ‘When does Draghi's money bomb go off?’ Bild asked, with a picture of the Italian's face on a bomb with a lit fuse. The ECB has already spent more than 1.4 trillion euros buying bonds and is at risk of running out of assets. Germany's Bundesbank argues that this blurs a legal line and amounts to financing of government budgets… German Finance Minister Wolfgang Schaeuble… has called on the ECB to start unwinding its expansive monetary policy. ‘The ECB chief is again putting billions at the disposal of crisis countries,’ added Bild…”

The German DAX jumped 6.6% this week, with France’s CAC 40 up 5.2%. Stocks were up 6.6% in Spain, 5.1% in Portugal, 4.3% in Ireland, 4.1% in Switzerland and 4.3% in Greece. Meanwhile, bond yields moved higher. Yields rose 14 bps in Italy and 20 bps in Portugal. And with French yields up 9 bps to near 11-month highs, political risk has begun to make its way into France’s debt instruments.

December 9 – Bloomberg (Piotr Skolimowski and Mark Deen): “The European Central Bank’s latest extension of quantitative easing contains ‘a form of warning’ that unprecedented monetary stimulus is not going to last forever, Executive Board member Benoit Coeure said on Friday. ‘Sources of growth that aren’t dependent on monetary policy need to be found. Long-term rates will rise… Economic players need to be ready, notably governments that have benefited a lot from falling rates.’”

While expected to be down somewhat from 2016’s nearly $2.0 Trillion, global markets remain confident in the immensity of 2017 QE liquidity injections. The ECB has committed to about $800 billion, while the BOJ is poised to purchase huge quantities of JGBs as global yields rise. With printing as far as the eye can see, where’s all this “money” going to go?

The DJIA gained almost 600 points this week to another record, as the index rather rapidly approaches 20,000. The S&P500 jumped 3.1%, also to an all-time high. In the broader market, last week’s pullback proved short-lived. The small caps surged 5.6% this week, with the midcaps up 4.2% - both to record highs. The Russell 2000 has surged almost 17% since the election, with the Banks (BKX) up 23%. The Banks added another 5.4% this week, increasing 2016 gains to 27.2%. The broker/dealers rose 4.5%, increasing Q4 gains to 22.8%.

With stocks on the fly, an additional moderate increase in yields caused little market angst. Ten-year Treasury yields rose eight bps to 2.47%, the high since June 2015. (Sumit Roy): “Investors continued to plow money into ETFs at a breakneck pace during the first week of December. After adding $48 billion to U.S.-listed ETFs in November, they added $14.6 billion to the space in the week ending Thursday, Dec. 8. Year-to-date inflows now total $229.5 billion… That puts 2016's flows within range of 2014's record annual flows of $244 billion. Once again, U.S. equity ETFs took in the largest haul of the weekly flows, at $11.4 billion.”

Donald Trump can be excused these days for brimming with over-confidence. The President-elect is emboldened, and record stock prices play right into the audacity of it all. Trump is on a mission, and few these days question his determination to go about things differently. He energizes “thank you tour” crowds with rhetoric that would have traditionally receded right along with campaigning. In contrast to Draghi, Trump examines the backdrop and sees an opportunity for boldness. I would imagine Chinese officials monitored his comments this week with rising trepidation – and annoyance. Is Trump laying the groundwork to confront the Chinese?

December 8 – Reuters (Emily Stephenson): “President-elect Donald Trump said on Thursday the United States needed to improve its relationship with China, which he criticized for its economic policies and failure to rein in North Korea… ‘China is not a market economy,’ he said. ‘They haven't played by the rules, and I know it's time that they’re going to start… You have the massive theft of intellectual property, putting unfair taxes on our companies, not helping with the menace of North Korea like they should, and the at-will and massive devaluation of their currency and product dumping,’ Trump said of China. ‘Other than that, they’ve been wonderful, right?’”

December 8 – Bloomberg (Jennifer Jacobs, Mark Niquette , and David Tweed): “U.S. President-elect Donald Trump vowed that China would soon have to ‘play by the rules,’ as Chinese state media issued its clearest warning yet about its bottom line on Taiwan. ‘China is responsible for almost half of America’s trade deficit,’ Trump said at a rally Thursday evening Des Moines, Iowa. ‘China is not a market economy ... they haven’t played by the rules, and they know it’s time that they’re going to start. They’re going to start. They’re going to.’”

December 7 – Financial Times (Hudson Lockett): “China’s foreign exchange reserves fell nearly $70bn last month as the country’s central bank burnt through more of its war chest in its battle to defend the renminbi from greater depreciation on the back of accelerating capital outflows. Reserves at the People’s Bank of China fell $69.1bn to $3.051tn in November, a decline of 2.2% from the previous month and the largest drop since a 3% fall in January… The fifth consecutive monthly fall points to growing difficulty for policymakers. Since a sharp renminbi depreciation in August 2015, Beijing has sought to combat more severe softening against the dollar by selling the US currency from the central bank’s forex reserves.”

China is today unusually fragile. It’s maladjusted Bubble Economy is vulnerable to any slowing of Credit growth. Its rapidly inflating financial sector is an accident in the making. It’s bloated export sector is increasingly uncompetitive globally. China’s currency is susceptible to ongoing massive outflows – “hot money,” corporate and the Chinese household sector. And each of these serious issues is being aggravated by U.S. election results and resulting higher yields and king dollar, along with prospects for a more active Federal Reserve.

In a normal environment, markets would be reacting nervously to Trump’s unorthodox comments, tweets and positioning on China. But melt-up dynamics are the current fixation. It’s easy these days to ramble on about lower corporate taxes and deregulation than to ponder the ramifications of President Trump moving early in his administration to confront the Chinese on trade and currency manipulation. This would be a dicey fight on behalf of U.S manufacturing and the American worker – with the indomitable equities market potential collateral damage.

For the Week:

The S&P500 jumped 3.1% (up 10.5% y-t-d), and the Dow gained 3.1% (up 13.4%). The Utilities rose 2.6% (up 10.6%). The Banks surged 5.4% (up 27.2%), and the Broker/Dealers jumped 4.5% (up 19.8%). The Transports advanced 4.0% (up 25.3%). The broader market was on fire. The S&P 400 Midcaps rose 4.2% (up 21.0%), and the small cap Russell 2000 jumped 5.6% (up 22.2%). The Nasdaq100 gained 3.3% (up 6.6%), and the Morgan Stanley High Tech index rallied 3.9% (up 13.6%). The Semiconductors advanced 5.2% (up 34.5%). The Biotechs were unchanged (down 17.5%). With bullion down $18, the HUI gold index lost 3.8% (up 58.6%).

Three-month Treasury bill rates ended the week at 53 bps. Two-year government yields added three bps to 1.13% (up 8bps y-t-d). Five-year T-note yields gained seven bps to 1.89% (up 14bps). Ten-year Treasury yields rose nine bps to 2.47% (up 22bps). Long bond yields jumped nine bps to 3.15% (up 13bps).

Greek 10-year yields rose 20 bps to 6.63% (down 69bps y-t-d). Ten-year Portuguese yields jumped 15 bps to 3.85% (up 133bps). Italian 10-year yields gained 14 bps to 2.04% (up 45bps). Spain's 10-year yields declined three bps to 1.51% (down 26bps). German bund yields rose eight bps to 0.37% (down 26bps). French yields gained nine bps to 0.81% (down 18bps). The French to German 10-year bond spread widened one to 44 bps. U.K. 10-year gilt yields increased seven bps to 1.45% (down 51bps). U.K.'s FTSE equities index rallied 3.3% (up 11.4%).

Japan's Nikkei 225 equities index gained 3.1% (down 0.2% y-t-d). Japanese 10-year "JGB" yields rose two bps to 0.06% (down 20bps y-t-d). The German DAX equities index surged 6.6% (up 4.3%). Spain's IBEX 35 equities index jumped 6.5% (down 3.9%). Italy's FTSE MIB index rose 7.1% (down 14.6%). EM equities were mostly higher. Brazil's Bovespa index added 0.3% (up 39.6%). Mexico's Bolsa jumped 5.3% (up 9.2%). South Korea's Kospi gained 2.7% (up 3.2%). India’s Sensex equities index advanced 2.0% (up 2.4%). China’s Shanghai Exchange slipped 0.3% (down 8.7%). Turkey's Borsa Istanbul National 100 index rallied 3.2% (up 5.6%). Russia's MICEX equities index jumped 3.7% (up 25.4%).

Junk bond mutual funds saw inflows surge to $2.034 billion (from Lipper).

Freddie Mac 30-year fixed mortgage rates jumped 13 bps to a two-year high 4.13% (up 18bps y-o-y). Fifteen-year rates added two bps to 3.36% (up 17bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates up five bps to 4.14% (up 13bps).

Federal Reserve Credit last week slipped $1.5bn to $4.410 TN. Over the past year, Fed Credit contracted $32.2bn (down 0.7%). Fed Credit inflated $1.599 TN, or 57%, over the past 213 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt gained $12.1bn last week to $3.139 TN. "Custody holdings" were down $179bn y-o-y, or 5.4%.

M2 (narrow) "money" supply last week declined $3.0bn to $13.258 TN. "Narrow money" expanded $992bn, or 8.1%, over the past year. For the week, Currency dipped $0.6bn. Total Checkable Deposits dropped $41.1bn, while Savings Deposits jumped $41.6bn. Small Time Deposits declined $1.5. Retail Money Funds also declined $1.5bn.

Total money market fund assets jumped $16.9bn to a four-month high $2.736 TN. Money Funds declined $18bn y-o-y (0.7%).

Total Commercial Paper rose $11.9bn to $936bn. CP declined $100bn y-o-y, or 9.7%.

Currency Watch:

December 6 – Financial Times (Jennifer Hughes and Roger Blitz): “Picture it: rumours of a renminbi devaluation keep growing. Residents rush to open accounts offshore as experts warn Beijing will get off on the wrong foot with a relatively new US administration if a big depreciation happens. Official denials are made regularly — until a devaluation of about 50% follows in short order. That was China in 1994. Today the idea of a similarly brutal, if smaller, one-off move is gaining some credence among strategists and traders as authorities battle to contain the exodus of capital as the renminbi weakens. Proponents, a group which includes advisers to Beijing, have suggested a 20% devaluation would be sufficient.”

The U.S. dollar index gained 0.8% to 101.59 (up 2.9% y-t-d). For the week on the upside, the Brazilian real increased 2.9%, the Mexican peso 1.2%, the Canadian dollar 0.9%, the South Korean won 0.6% and the Swedish krona 0.3%. For the week on the downside, the Japanese yen declined 1.6%, the British pound 1.2%, the euro 1.0%, the Norwegian krone 1.0%, the Danish krone 0.9%, the Singapore dollar 0.8%, the Swiss franc 0.6%, the Australian dollar 0.1% and the New Zealand dollar 0.1%. The Chinese yuan declined 0.4% versus the dollar (down 6.0%).

Commodities Watch:

The Goldman Sachs Commodities Index gained 1.2% (up 25.4% y-t-d). Spot Gold declined 1.5% to $1,160 (up 9.3%). Silver increased 0.7% to $16.92 (up 23%). Crude slipped 18 cents to $51.50 (up 39%). Gasoline fell 3.0% (up 19%), while Natural Gas jumped 8.9% (up 60%). Copper increased 0.9% (up 24%). Wheat rallied 3.0% (down 11%). Corn jumped 3.5% (unchanged).

Italy Watch:

December 7 – Financial Times (Rachel Sanderson, Alex Barker and Claire Jones): “Italy is demanding the European Central Bank give it more time to rescue Monte dei Paschi di Siena and is preparing to blame the bank for losses imposed on bondholders if Rome is forced into an urgent state bailout. The board of MPS, which has the Italian Treasury as its largest shareholder, is asking the ECB’s supervisory arm to give it until mid-January to pull off a €5bn equity injection and try to avoid forcing losses on some debtholders as required under new EU bailout rules…”

December 5 – Financial Times (Alex Barker and Jim Brunsden): “Italy is the first and possibly the most important test of Europe’s new regime for handling failing banks. Launched with much fanfare at the beginning of this year, the EU reform was supposed to make investors shoulder bank rescue costs. But it has struggled to overcome one big hurdle: politicians seem unwilling to implement it. That moment of reckoning may be fast approaching. Matteo Renzi’s defeat in the referendum on constitutional reform has cast further doubt over Italy’s lenders. Most significantly, it has struck a heavy blow to an effort to raise €5bn in capital to shore up Monte dei Paschi di Siena, the world’s oldest bank and one of Italy’s most troubled.”

December 7 – Reuters (Stefano Bernabei and Giuseppe Fonte): “Italy is preparing to take a 2 billion euros controlling stake in Monte dei Paschi di Siena as the bank's hopes of a private funding rescue fade following Prime Minister Matteo Renzi's decision to quit, two sources close to the matter said… The government is already the ailing bank's single largest shareholder with a 4% share, but is planning to buy junior bonds held by ordinary Italians to take the stake up to 40%... This would make it by far the biggest shareholder… The sources said a government decree authorizing the deal, which would see the state buy the subordinated bonds from retail investors and convert them into shares, could be rushed through as early as this weekend.”

Europe Watch:

December 9 – Reuters (Silvia Aloisi and Paola Arosio): “The European Central Bank has rejected a request by Italy's Monte dei Paschi di Siena for more time to raise capital, a source said…, a decision that piles pressure on the Rome government to bail out the lender. Italy's third-largest bank, and the world's oldest, had asked for a three-week extension until January 20 to try to wrap up a privately funded, 5-billion-euro ($5.3 billion) rescue plan… The ECB's supervisory board turned down the request at a meeting on Friday on the grounds that a delay would be of little use and that it was time for Rome to step in… The Italian government is expected to intervene in the next few days to recapitalize the bank to avert the risk of it being wound down, according to banking sources…”

December 5 – Washington Post (Stefano Pitrelli and Michael Birnbaum): “Italy’s anti-elite parties vowed Monday to join forces with other insurgents around Europe as Prime Minister Matteo Renzi prepared to resign, but it was unclear whether an unlikely alliance of disaffected voters could propel the populists to office. Italy plunged into political uncertainty Monday after the decisive defeat of Renzi’s signature constitutional revision plan, which was meant to strengthen his hand and defuse the establishment-bashing movement. The rejection by voters had the opposite outcome. Now, anti-immigrant, anti-euro populists on the left and right who have steadily built power as an alternative to Italy’s old-guard ­political leadership are seeking to transform their success into a chance at their nation’s highest office.”

ECB Watch:

December 5 – Bloomberg (Piotr Skolimowski): “The European Central Bank bought a record monthly amount of assets under its quantitative-easing program in November in an attempt to frontload purchases before market liquidity may dry up during the holiday season. The ECB bought a total of 85.4 billion euros ($91.6 billion) of debt last month even as the pace of purchases of government bonds… An increase in monthly buying of covered bonds, asset-backed securities and corporate debt helped to make up for the difference.”

China Bubble Watch:

December 5 – Bloomberg (Christopher Balding): “How China manages its currency is likely to be the global economic story of 2017. Despite the government's best efforts, capital continues to leave the country at a brisk pace, with a balance-of-payments deficit through the third quarter of $469 billion… Enterprising Chinese figured out that while they couldn't officially move money abroad to buy a house via the capital account -- individuals are barred from moving more than $50,000 out of the country each year -- they could create false trade invoices that would allow them to deposit money where they needed it. The result was a huge discrepancy between payments recorded for imports and the declared value of goods passing through customs, amounting to $526 billion in hidden outflows last year. The problem has only worsened in 2016. French investment bank Natixis SA estimates that outflows will total more than $900 billion this year…”

December 7 – Reuters (Michael Martina and Adam Jourdan): “Tighter rules in China on outbound capital flows have raised barriers for European and U.S. companies to get money out of the country, two prominent business lobbies said… Chinese regulators have tightened restrictions on foreign exchange transactions and outflows in recent weeks amid growing concern that outflows are adding to pressure on the weakening yuan currency. The foreign exchange regulator gave window guidance to banks last week to ‘control the capital outflow from China’ by tightening approval requirements on cross-border transfers from capital accounts and dividend payments, the European Union Chamber of Commerce in China said…”

December 6 – Financial Times (Charles Clover): “Several European companies in China have been unable to remit dividends abroad following the introduction of new exchange controls, the first indication that Chinese attempts to curb capital outflows are causing problems for foreign businesses. The EU Chamber of Commerce in Beijing said the payment difficulties experienced by European companies were ‘disruptive to business operations’. The measures, which included complex approval procedures for sending money out of the country, were introduced on November 28.”

December 7 – Wall Street Journal (Lingling Wei): “Shen Jia’s New Year’s resolution is to convert as much yuan into U.S. dollars as she can when 2017 arrives. Like all Chinese, the 36-year-old homemaker is allowed to exchange up to $50,000 worth of yuan a year, and she used up her 2016 quota months ago as the yuan has weakened. So did everyone in her extended family. As Beijing struggles to slow the outflow of cash and an erosion in its stockpile of foreign currency, the clock is about to restart on individuals’ annual foreign-exchange quotas, which is expected to set off a fresh gush of outflows. The foreign-exchange pile fell by almost $100 billion in January this year, after the quota reset.”

December 7 – Financial Times (James Kynge): “As Washington steels itself for the arrival of Donald Trump and a rise in interest rates, China could be forgiven for feeling itself besieged. The country is home to the world’s most leveraged corporate sector, a notoriously volatile property sector and a swath of banks that depend on borrowing on the money markets to fund loans. That makes the Chinese economy particularly sensitive to expectations of increasing interest rates, which together with the strong US dollar since Mr Trump’s election, have already sparked a rush to sell emerging market bonds and stocks. ‘I think the Trump factor [will result in] more aggressive hiking of US interest rates, not just the one expected in December but also several times next year,’ said Shen Jianguang, chief economist at Mizuho Securities in Hong Kong… ‘A stronger US dollar will complicate the Chinese government’s efforts to stabilise the renminbi exchange rate and Beijing may have to tighten monetary policy,’ he added.”

December 4 – Reuters (Elias Glenn): “Growth in China's services sector accelerated to a 16-month high in November…, though the increase in new orders dipped slightly and business expectations moderated. The survey, along with solid factory activity readings last week, suggest building momentum for China's economy at the end of a year that saw growth stabilize…”

December 7 – Wall Street Journal (Lingling Wei): “In 2014, the Chinese city of Haimen on the mouth of the Yangtze River set out to build a large apartment complex and turned to Bank of Nanjing Co. for about $29 million in financing. The bank was happy to oblige but it didn’t call the money a loan… It was added to Bank of Nanjing’s balance sheet as an ‘investment receivable,’ a loosely regulated category of assets that allows bank officials to set aside little or nothing for potential losses. Bank officials aren’t shy about the accounting sleight of hand, which is rampant across China. The bank had about $39 billion in investment receivables in the third quarter, nearly as big as its loan portfolio, and profits have climbed by more than 20% a year. As of June, 32 publicly traded Chinese banks had a total of $2 trillion in investment receivables as of June, up from $334 billion at the end of 2011…”

December 6 – Bloomberg: “China's savers, who sock away cash like almost no one else in the world, are racking up more debt as borrowing options proliferate. Ninety-four percent of consumers used a credit or loan in the past year, up from 85% two years ago, according to… market researcher Mintel Group Ltd. Peer-to-peer lending via online lenders jumped, while car loans and mortgages nearly doubled, the poll showed.”

Global Bubble Watch:

December 4 – Financial Times (Joe Rennison): “Investors are dangerously unprepared for a sharp rise in eurozone bond yields when US interest rates march higher and European quantitative easing ends, Axel Weber, chairman of UBS and the former head of the Bundesbank, has warned. The jump in US rates could spark big jolts in the markets as the long spell of aggressive monetary easing across the globe has left many investors off-guard over a swing in the global rate cycle, he added. ‘I don’t think we will have increasing divergence among the major central banks in the world for much longer,’ Mr Weber said, predicting that Europe would follow the US with a rate rise by next September at the latest. ‘I think the ECB is closer to slowing its current quantitative easing programme than many in the market expect.’”

December 5 – CNBC (Jacob Pramuk): “Donald Trump's Twitter-fueled provocations of China are underscoring just how much the world's two biggest economies have to lose if tensions were to escalate. Trump risked angering China… by taking a call from Taiwan's President Tsai Ing-wen — a first for a U.S. president or president-elect with any Taiwan leader since 1979. For decades, the United States has not recognized Taiwan as a separate state from mainland China. China's foreign ministry lodged a formal diplomatic complaint with Washington, pointing out that it sees U.S. recognition of its ‘One China’ policy as a core of the two countries' relations… Then Trump provoked China again on Sunday, using Twitter to hammer the country for devaluing its currency, to claim China ‘heavily’ and unfairly taxes U.S. exports, and to slam it for military buildup in the South China Sea.”

December 6 – Bloomberg: “Chinese investors are hitting the pause button on U.S. and other outbound deals as they grapple with the ramifications of a Trump presidency and possible government curbs on overseas acquisitions, according to Fred Hu, a former Greater China chairman for Goldman Sachs… Political events overseas this year have brought ‘shock after shock’ and created a ‘brave new world’ that investors are still trying to make sense of, Hu said. Concerns over U.S.-China relations and President-elect Donald Trump’s protectionist stance have put the brakes on a frenetic pace of deals. Chinese firms announced a record $239 billion of foreign acquisitions so far in 2016, more than double last year’s total…”

December 7 – Bloomberg (Gaspard Sebag): “JPMorgan…, HSBC… and Credit Agricole SA were fined a total of 485.5 million euros ($521 million) for rigging the Euribor benchmark as European Union antitrust regulators wrapped up a five-year investigation into the scandal. The trio colluded to rig the Euribor rate and exchanged sensitive information to suit their trading positions in correlated derivatives markets, in breach of EU antitrust rules…”

December 5 – Wall Street Journal (Gregor Stuart Hunter and Kosaku Narioka): “Two of the world’s most important stock markets have a big new investor: the state. About 30% of all the companies in Japan’s three main equity indexes now count the country’s central bank as one of their top 10 shareholders… Six years ago, the Bank of Japan’s presence in the market was trivial. In China, two major state-owned investment funds that are part of the so-called national team have become top 10 shareholders in 39% of listed companies over the past year, according to UBS…”

U.S. Bubble Watch:

December 9 – Bloomberg (Patricia Laya): “Consumer confidence jumped more than forecast this month as Americans expressed the sunniest picture of their financial situation in 11 years, extending a boost following Donald Trump’s election victory. The University of Michigan said Friday that its preliminary index of sentiment rose to 98, the highest since January 2015, from 93.8 in November.”

December 7 - CNBC (Jeff Cox): “November's election results helped trigger a record-setting month for exchange-traded funds. Republican Donald Trump's victory coincided with investors making heavy bets that U.S.-focused stocks would rise, as the move up in the market coincided with still more cash pouring in. When it all was over, ETFs saw a whopping $49.1 billion in inflows, the highest monthly total ever in records going back to 1998…”

December 5 – Bloomberg (Patricia Laya): “America’s service industries expanded in November at the fastest clip since October of last year, putting the economy’s biggest sector on a robust growth path. The Institute for Supply Management’s non-manufacturing index jumped to 57.2, exceeding all forecasts in a Bloomberg survey…”

December 6 – Bloomberg (Patricia Laya): “The U.S. trade deficit widened to a four-month high in October as overseas sales weakened and American companies imported more equipment and consumer goods. The gap grew to $42.6 billion from the prior month’s revised $36.2 billion.. The 17.8% increase from September was the largest since March 2015.”

December 8 – Dallas Morning News (Tristan Hallman): “The Dallas Police and Fire Pension System's Board of Trustees suspended lump-sum withdrawals from the pension fund Thursday, staving off a possible restraining order and stopping $154 million in withdrawal requests. The system was set to pay out the weekly requests Friday. Pension officials said allowing the withdrawals would leave them without the liquid reserves required to sustain the $2.1 billion fund.”

December 8 – Dallas Morning News (Tae Kim): “While the S&P 500 is reaching all-time highs on optimism over Donald Trump's economic agenda, some Wall Street strategists are increasingly worried about a widely followed valuation measure that's reached levels that preceded most of the major market crashes of the last 100 years. ‘The cyclically adjusted P/E (CAPE), a valuation measure created by economist Robert Shiller now stands over 27 and has been exceeded only in the 1929 mania, the 2000 tech mania and the 2007 housing and stock bubble,’ Alan Newman wrote in his Stock Market Crosscurrents letter…”

December 7 – New York Times (Nelson D. Schwartz): “It started with Carrier. Ford was next. So by the time Donald J. Trump singled out Boeing for a Twitter taunt on Tuesday, corporate executives across America had read the writing on the wall: It was time to hunker down. Initially aiming to pressure companies like Ford and Carrier to keep factory jobs at home instead of moving them to Mexico, Mr. Trump has upped the ante in recent weeks, forcefully reminding business leaders of his campaign vows to impose painful tariffs on companies that ignore him.”

December 7 – Wall Street Journal (John Carney): “Rising interest rates have sent bank stocks soaring. But there is a dark side to this kind of market move—banks in the fourth quarter are likely to report losses on their massive bond portfolios. U.S. banks suffered a $6.5 billion unrealized loss on the value of securities they hold as investments as of Nov. 23… This was the first time since 2014 that the Fed data for the banking system as a whole showed a loss on these securities. As recently as early July, banks had total unrealized gains on these portfolios of $33.8 billion.”

December 5 – Wall Street Journal (AnnaMaria Andriotis): “Auto lenders are scaling back loans to subprime borrowers but loosening other terms in a bid to keep loan volume going. Loans extended to subprime borrowers with a credit score of 501 to 600 on a scale that tops out at 850 fell 4.5% in the third quarter from a year prior, according to… Experian Automotive… But lenders pulled other levers to keep loan volume going, in a sign of how dependent lenders and borrowers have become on easy credit in the sector. Notably, loan-repayment periods continue to grow. More borrowers got into loans with longer repayment periods; 30.7% of new auto loans in the third quarter had repayment periods of 73 to 84 months, versus 27.5% a year prior…”

December 7 – Bloomberg (Matt Scully): “Two ratings firms are assigning AAA grades to bonds backed by riskier, recently made home loans, one of the few times since the financial crisis that such securities have won top marks. Fitch Ratings and DBRS Inc. are giving ratings to more than $210 million of bonds backed by loans made by Caliber Home Loans, a unit of Lone Star Funds, and by mortgages from Sterling Bank & Trust and LendSure Mortgage Corp… The bonds are partially backed by home loans in which a lender verified a borrower’s income with bank statements rather than tax returns.”

Federal Reserve Watch:

December 8 – Bloomberg (Craig Torres and Liz Capo McCormick): “While nearly all eyes are on the Federal Reserve’s likely decision to raise short-term interest rates next week, investors in the world’s biggest debt market say central bankers have already signaled a major change in another policy tool. Fed officials have indicated they may make their super-sized balance sheet of bond holdings and $2 trillion in excess reserves created during the last financial crisis a more permanent feature of the way they interact with financial markets. That would have a lasting impact on the way the central bank manages the short-term policy rate.”

Japan Watch:

December 7 – Reuters (Leika Kihara): “Bank of Japan Deputy Governor Kikuo Iwata said the central bank has not shifted its focus away from the pace of money printing, contradicting the governor's view and exposing a rift in the board on how best to break the country's deflation shackles. BOJ Governor Haruhiko Kuroda has said the central bank may slow the pace of money printing if it can hit its interest rate targets… But Iwata, who is among advocates of aggressive money printing in the nine-member board, shrugged off the view the BOJ was now putting less emphasis on pumping money, stressing the bank remained committed to using both rate cuts and asset purchases as key tools to revive the economy.”

December 8 – Reuters (Takaya Yamaguchi): “Japan will increase an interest-free loan to the operator of the wrecked Fukushima nuclear plant, Tokyo Electric Power (9501.T), by more than a third to 14 trillion yen ($123bn)… Spiralling costs from the world's worst nuclear disaster since Chernobyl in 1986 are threatening the viability of the utility known as Tepco and hampering its ability to clean up its wrecked Fukushima Daiichi nuclear plant. The increase in the loan from 9 trillion yen is to cover the costs for compensation and decontamination areas around the plant…”

EM Watch:

December 9 – Bloomberg (Kanga Kong and Sam Kim): “Undone by an influence-peddling scandal, South Korea’s President Park Geun-hye was impeached by parliament on Friday amid a wave of anger that could overturn the nation’s politics and increase pressure on some of Asia’s biggest companies to reform. With hundreds of police forming a wall to hold back thousands of demonstrators outside the National Assembly in Seoul, lawmakers voted 234 to 56 in favor of impeachment…”

December 8 – Bloomberg (Matt Scully): “If you thought November was ugly, brace yourself for even more outflows from Indian assets in December, according to Deutsche Bank AG. Foreign funds pulled money from Indian stocks at the fastest pace since 2008 last month as Donald Trump’s surprise election win spurred expectations for more rapid interest-rate increases in the U.S. and Prime Minister Narendra Modi’s cancellation of high-denomination bank notes hurt cash-based business activity. The bond market wasn’t spared, with the biggest monthly exodus since the taper tantrum in 2013. ‘We think that the worst of the outflows are not yet over,’ said Abhay Laijawala, the head of research at Deutsche Bank… ‘The markets cannot stabilize until selling by foreigners abates.’”

December 5 – Financial Times (Joe Leahy): “Brazil’s Supreme Court… suspended the head of the Senate, Renan Calheiros, after he became a suspect in a corruption case, heightening political uncertainty in the country. The suspension of the powerful political leader, who presided over the Senate’s impeachment of former president Dilma Rousseff in August, throws into question the timing of a crucial fiscal reform agenda being pushed through the house by President Michel Temer.”

December 3 – Bloomberg (Selcan Hacaoglu): “Turkish President Recep Tayyip Erdogan… said his political enemies are trying to sabotage the economy by speculating on the stock market, foreign exchange rate and interest rates after failing to overthrow his administration in July. The lira plunged to record lows over the past week even as Erdogan urged Turks to convert their foreign currency savings into liras and gold while vowing to keep up his fight against high interest rates… ‘Someone is trying to force this country to its knees by economic sabotage after failing to seize it with tanks, guns and F-16s on July 15,’ when a coup by a faction within the military failed, Erdogan said… ‘This is not a new game and we’re used to it. Especially in the last three years, they are constantly attempting to use economic crisis as a trump card.’”

Geopolitical Watch:

December 5 – USA Today (Susan Page): “Former British prime minister Tony Blair warns that political upheaval from Great Britain's Brexit vote in June to the collapse of the Italian government on Sunday signals the most dangerous time for Western democracies in decades. ‘It does feel perilous, actually, because I think there are decisions that are being taken of vast moment in circumstances where systems are fragile,’ he told Capital Download… ‘And that is troubling.’”

December 7 – Associated Press: “China says an upcoming transit stop in the U.S. by Taiwan's president carries ulterior political motives. The comment… by Foreign Ministry spokesman Lu Kang comes amid Chinese rancor over a phone call between Taiwanese President Tsai Ing-wen and U.S. President-elect Donald Trump on Friday that broke more than four decades of diplomatic protocol barring… Tsai plans to stop in the U.S. next month on her way to visit Nicaragua, Guatemala and El Salvador, among the island's handful of diplomatic allies. Lu told reporters that ‘transit diplomacy’ is among the ‘petty moves’ employed by Taiwan and that the ‘ulterior political intentions are clear for all to see.’”

Friday, December 9, 2016

Friday Evening Links

[Bloomberg] Raging Stocks, Fed Fears Trigger ‘Dislocation’ in Global Markets

[Bloomberg] What Is Plan B for Monte Paschi After Italy Vote?: QuickTake Q&A

[Bloomberg] What’s Next for Italy After Renzi’s Resignation: QuickTake Q&A

[Bloomberg] Raging Stocks, Fed Fears Trigger ‘Dislocation’ in Global Markets

[Bloomberg] Coeure Says ECB Stimulus Extension Comes With Warning Message

[Bloomberg] Trump Threat Hits Mexico's Creditworthiness as Fitch Cuts Outlook

[Reuters] Germany's Bild lambasts Draghi over ECB "money bomb"

[WSJ] Hooked on QE: Hedge Funds See Dangerous Addiction

[FT] America and China square off over trade

Friday's News Links

[Reuters] World stocks hold near 16-month highs after strong week

[Dow Jones] Global Bond Yields Rise As Chinese Inflation Accelerates

[Bloomberg] European Stocks Rise for 5th Day in Biggest Rally in 10 Months

[Bloomberg] Consumer Confidence in U.S. Surges Thanks to Optimism About Trump

[Reuters] Exclusive: ECB rejects Monte Paschi's request for more time to raise cash - source

[Reuters] Euro zone bailout fund not preparing Italy aid: Regling

[Bloomberg] China's Capital-Control Crackdown 'Particularly Worrying' for Businesses, Says George Magnus

[Bloomberg] Trump Says China Will Have to Play by Rules Under New Ambassador

[Bloomberg] Korea’s Park Impeached as Protesters Vent Anger Over Corruption

[Reuters] Trump says U.S.-China relationship must improve

[Bloomberg] ‘Old Friends’ Aside, China Says Trump Must Toe Line on Taiwan

[WSJ] Donald Trump’s Cabinet Selections Signal Deregulation Moves Are Coming

[FT] French bonds weaken as investors sound political alarm

Thursday, December 8, 2016

Thursday Evening Links

[Bloomberg] China Factory Gate Prices Rise 1.5% on Year, Less Than Expected

[Dallas News} Dallas Police and Fire Pension Board ends run on the bank, stops $154M in withdrawals

[Bloomberg] Euro Drops; ECB Says Smaller Monthly Asset Buys Not Tapering

[Reuters] Major stock indexes rise again to new records

[Reuters] U.S. household net worth rose to $90.2 trillion in the third-quarter: Fed

[CNBC] Market indicator hits extreme levels last seen before plunges in 1929, 2000 and 2008

Thursday's News Links

[Bloomberg] ECB Expands Stimulus to $2.4 Trillion as Monthly Purchases Slow

[Bloomberg] Euro Slides With Bonds on ECB Stimulus Signal; U.S. Stocks Mixed

[Bloomberg] Bonds Extend Drop on ECB Plan as Stocks Rise, Euro Fluctuates

[Bloomberg] German Curve Steepens Most Since 2008 as ECB Tweaks QE: Chart

[Bloomberg] Confusion Reigns in Markets as ECB QE Changes Spark Wild Swings

[Bloomberg] German Yield Climbs to Highest Since January on ECB Tapering

[Reuters] Italian PM Renzi resigns, president to consult with parties

[Bloomberg] China Exports Edge Up as Imports Increase Most in Two Years

[Bloomberg] Indian Outflows: You Ain’t Seen Nothing Yet, Says Deutsche Bank

[Bloomberg] Fed Officials Leaning Toward Bigger Is Better on Balance Sheet

[CNBC] The Fed shouldn't be driving US economy, Trump advisor Judy Shelton says

[Reuters] Japan to increase loan to Fukushima operator Tepco to $123 billion -source

[WSJ] Rising Interest Rates Trigger Losses on Banks’ Massive Bond Holdings

[NYT] Wary Corporate Chiefs Keep an Ear Tuned to Trump’s Messages

[WSJ] China’s Banks Are Hiding More Than $2 Trillion in Loans

[WSJ] Rust-Belt Debt Hangs Around Beijing’s Neck

[FT] Italy demands more time from ECB to rescue Monte dei Paschi

[FT] US interest rate rises set to expose China’s frailties

[WSJ] Surge in Dollar Provokes Jitters in Emerging Markets Around World

[Reuters] Exclusive: Risking Beijing's ire, Vietnam begins dredging on South China Sea reef

Wednesday, December 7, 2016

Wednesday Evening Links

[Bloomberg] U.S. Stocks Rise to Records, Bonds Gain on ECB Stimulus Optimism

[Bloomberg] AAA Ratings Return for Securities Backed by Riskier Home Loans

[Bloomberg] Private 2010 Records Show Dudley’s Staff Urging Bold Fed Action

[Washington Post] Trump takes aim at drug companies: ‘I don’t like what has happened with drug prices’

Wednesday's News Links

[Bloomberg] U.S. Stocks Fluctuate, Bonds Advance on ECB Stimulus Optimism

[Bloomberg] Stock Rally Extends Into Asia as Oil Falls; Aussie Sinks on GDP

[Bloomberg] Bonds Plunge as Indian Policy Makers Unexpectedly Hold Key Rate

[Bloomberg] China’s Foreign Reserves Drop Most in 10 Months as Yuan Slumps

[Bloomberg] China's Yuan Pessimists Are Multiplying

[Bloomberg] Finding Risk in All the Wrong Places as Trump Era Begins

[Bloomberg] Traders Caught Up in Wall Street Probes Switch to Shadow Banking

[Reuters] China's tighter capital controls impeding Western firms' payments, dividends: lobbies

[Reuters] BOJ Iwata keeps focus on money printing, exposes rift in board

[Bloomberg] Bank of Japan’s Iwata Says No Shift Away From Asset Purchases

[Bloomberg] China's Big Savers Are Racking Up More Debt

[Bloomberg] There's a New Normal in China's Debt Market

[Bloomberg] JPMorgan Hit Hardest as EU Fines Euribor Trio $521 Million

[AP] China warns US on Taiwan leader's planned transit

[WSJ] As Beijing Battles to Keep Yuan at Home, Chinese Prepare to Sell

[WSJ] China’s Yuan and the Trillion-Dollar Numbers Game

[FT] China’s forex reserves drop $70bn as outflow accelerates

[FT] How ECB chiefs will be reading markets ahead of QE vote

[FT] The pros and cons of a renminbi devaluation

Monday, December 5, 2016

Tuesday's News Links

[Bloomberg] Stocks Fluctuate With Bonds as ECB Meeting Looms; Crude Retreats

[Reuters] Asia stocks bounce as risk appetite returns after Italy vote

[Bloomberg] Trade Deficit in U.S. Widened to a Four-Month High in October

[Reuters] Italy readying state bailout for Monte dei Paschi bank-sources

[FT/CNBC] Monte dei Paschi readied for state bailout after Renzi defeat

[Reuters] Italian minister, after talking to Renzi, sees new election likely in February

[Bloomberg] ECB Haunted by Ghost of Christmas Past as Stimulus Choice Nears

[Bloomberg] A Cheat Sheet on the Deglobalization of the Financial World

[Reuters] China's rising corporate leverage shows urgency of accelerating reforms: U.S. treasury official

[Bloomberg] Why China Can't Stop Capital Outflows

[CNBC] Traders count down to ECB, Fed meetings

[USAT] Exclusive: Tony Blair sees dangerous times ahead for Western democracies

[WSJ] For Europe’s Unity, 2017 Will Be a Year of Reckoning

[Reuters] Trump fires opening salvo in risky test of wills with Beijing

[WSJ] Harsh Political Winds Test Euro’s Stability and Future

[WSJ] In China, Trump-Style Infrastructure Partnerships Are Used to Hide Debt

[WSJ] Donald Trump’s Message Sparks Anger in China

[WSJ] Amid Rising Delinquencies, Auto Lenders Scaling Back Loans to Subprime Borrowers

[FT] What can be done to stop an Italian banking crisis?

[FT] Brazil uncertainty intensifies as Senate head suspended

[FT] Rapid rise of the ETFs sparks growing pains

Monday Evening Links

[Bloomberg] Asian Stocks to Join Post-Italy Vote Rally as Volatility Abates

[Reuters] Techs buoy S&P, Nasdaq; Goldman pushes Dow to record high

[Bloomberg] ECB Buys Record Amount of Debt as QE Frontloaded Before Holidays

[Bloomberg] Everything You Need to Know About Italy's Five Star Movement: QuickTake Q&A

[CNBC] 'Everybody loses': What an economic war between US and China would look like

[NYT] Matteo Renzi’s Loss in Italy Is Clear, but Who Are the Winners?

[Washington Post] Anti-immigrant, anti-euro populists gain ground in Italy as prime minister resigns

Sunday, December 4, 2016

Monday's News Links

[Bloomberg] Euro Gains With Stocks as Italy Vote Absorbed in ‘Three Minutes’

[Reuters] Oil tops $55 for first time in 16 months as OPEC deal fuels buying

[Reuters] Monte dei Paschi subordinated debt drops as swap seen at risk

[Reuters] Rescue of Italian bank Monte Paschi in danger after Renzi's defeat

[Bloomberg] Service Industries in U.S. Expand at Fastest Pace in 13 Months

[Bloomberg] Europe Stock Volatility Bets Unravel After Italian Vote Outcome

[Bloomberg] What Next for Italy After Renzi’s Resignation? QuickTake Q&A

[Reuters] Europe suffers Italian blow but bigger tests loom

[CNBC] Renzi's Italy referendum loss heightens tensions in euro zone politics

[Bloomberg] Fed’s Dudley Says He Favors Tighter Monetary Policy Over Time

[Reuters] China services sector activity expands at quickest rate in 16 months in November: Caixin PMI

[Bloomberg] China Regulator Slams Leveraged Stock Acquirers as ‘Robbers’

[CNBC] Donald Trump insults China with Taiwan phone call and tweets on trade, South China Sea

[CNN] Trump takes fresh swipe at China after controversial Taiwan call

[WSJ] Italy Referendum: Prime Minister Renzi Quits as Voters Deliver Stinging Rebuke

[WSJ] There’s a Big New Investor in Stock Markets: The State

[FT] Markets unprepared for central bank shifts, warns Axel Weber

[FT] Bankers scramble to secure Monte dei Paschi rescue

Sunday Evening Links

[Bloomberg] Renzi Resigns After Populists Defeat Italy Reforms in Referendum

[Bloomberg] Renzi Quits as Italy Referendum Defeat Deepens Europe’s Turmoil

[Bloomberg] Live Now: Renzi Resigns as Italy Votes ‘No’

[Bloomberg] Euro Slips With Asian Stocks While Bonds Rise as Italy Votes No

[Bloomberg] Euro Slides to 20-Month Low as Renzi Concedes Referendum Defeat

[Reuters] Wall Street stock futures fall after Italy referendum

[Bloomberg] Austrian Nationalist Beaten to Presidency in Blow to Populists

[Bloomberg] Trump Takes on China in Tweets About Currency, South China Sea

[AFP] Massive turnout as Italy referendum battle enters final hours

[UK Guardian] Matteo Renzi's future in the balance amid high turnout in Italy referendum

[Bloomberg] Taiwan Risks China’s Wrath for Unprecedented Call to Trump

[WSJ] Italy’s ‘No’ Poses Trouble for Eurozone

[FT] US corporate bonds: The weight of debt

Sunday's News Links

[Reuters] Italy votes in referendum with PM Renzi's future at stake

[Bloomberg] Europe’s Populists Target Landmark Victories in Italy, Austria

[BBC] Italy referendum: PM Renzi's future in the balance

[AFR] Populist revolt leaves Italy on the brink ahead of refendum

[Bloomberg] What Italy’s Referendum Means for Monte Paschi: QuickTake Q&A

[AP] Trump threatens payback for US companies that move abroad

[Bloomberg] Draghi Seen Ready for One More QE Sprint in ECB Stimulus Finale

[Reuters] Greece needs reforms, not debt relief: Germany's Schaeuble

[AP] Trump's call inspires hope in Taiwan, concern in Beijing

[FT] Italy and Austria vote in crucial tests for European centre ground

[FT] ECB treads carefully to avoid taper tantrum

[WSJ] Dispensing With Tip-Toeing, Trump Puts Taiwan in Play

Saturday, December 3, 2016

Saturday's News Links

[Dow Jones] Irrational Exuberance: Alan Greenspan's Call, 20 Years Later

[Reuters] India's Modi defends clampdown on cash economy

[Bloomberg] Erdogan Says Turkey Faces ‘Economic Sabotage’ as Lira Plunges

[Washington Post] Amid global anti-establishment anger, Italy may be next in line for upheaval

[Reuters] China lodges protest after Trump call with Taiwan president

[Washington Post] A far-right Italian leader wants to take a Trump upset to Italy on Sunday

Weekly Commentary: Trump, Bonds, Peripheries, China and Italy

The trading week saw WTI crude surge 12.2%. The GSCI commodities index jumped 5.8%. Wheat dropped 3.6% and corn fell 3.1%. Italian 10-year yields fell 18 bps, and Greek yields dropped 37 bps. Meanwhile, Portuguese yields jumped 13 bps. In U.S. equities, Bank stocks (BKX) jumped 1.5%, while the Morgan Stanley High Tech index dropped 3.4%. The Biotechs (BTK) sank 6.4%. The DJIA was little changed, while the small caps fell 2.4%. Just another week for unstable global markets.

Pre-election trepidation morphed into post-election market exuberance, in only the latest demonstration of the power of an over-liquefied market backdrop. Here in the U.S., the bullish imagination has been captivated by the Trump administration’s pro-growth agenda, with its focus on tax and health-care reform, deregulation and infrastructure spending. The DJIA this week added slightly to record highs.

Meanwhile, a decidedly less halcyon reality seems to be coming into somewhat clearer focus: Trump’s victory likely marks a major inflection point for global markets. Bond yields have shot higher, while inflation expectations are being reset. The U.S. dollar has surged, while the emerging markets have come under pressure. From U.S. equity and bond ETFs to international financial flows, “money” is sloshing about chaotically.

There’s an extraordinary amount of confusion throughout the markets. For over a year I’ve posited that the global Bubble has been pierced. This view was in response to faltering EM, mounting Chinese instability, the collapse in crude and energy-related debt problems (from U.S. junk to global corporates and sovereigns). Especially in response to early-2016 global market instability, the Fed froze its baby-step “tightening” cycle, while the Bank of Japan and European Central Bank (and others) ratcheted up what were already desperate QE measures. In China, officials threw up their hands and set the Credit floodgates wide open.

It’s worth noting that the S&P500 rallied 22% from February 2016 lows. U.S. bank stocks (BKX) have surged a stunning 60%. From January lows to November highs, Brazilian stocks jumped 75%. Emerging Market equities (EEM) rallied almost 40%. Chinese stocks recovered 25%. Basically, EM stocks, bonds and currencies rallied sharply from Asia to Eastern Europe to Latin America.

Waning badly early in the year, confidence in central banking was rejuvenated by an audacious display of concerted “whatever it takes.” I believe history will view ECB and BOJ QE moves as dangerously misguided, while the Fed (again) failed to heed the lessons of leaving policy way too loose for too long. Forces that central bankers set in motion early in the year may have largely run their course.

These days it’s important to appreciate that the primary effects of monetary stimulus can change profoundly depending on prevailing market dynamics. Recall that the first (2009) QE basically accommodated speculative de-leveraging and the transfer of securities from troubled holders onto the Federal Reserve’s balance sheet. General inflationary impacts – within the securities markets as well as throughout the real economy – were muted. QE2 (late-2010 into 2011) stoked the powerful inflationary (“bullish”) bias that had evolved in bond prices and throughout the emerging markets. Concerted “whatever it takes” “QE3 and beyond” that unfolded in the second-half of 2012 threw fuel both on Bubbling global securities markets as well as China’s “Terminal Phase” of excess. The upshot has been only greater over-investment, over-capacity, asset inflation, inequitable wealth distribution and social tension. In many real economies around the world (notably Japan, Europe and the U.S.), consumer price inflation trended even lower.

Importantly, the predominant consequence from the 2016 QE bonanza was to spur global bond Bubbles to precarious speculative “melt-up” dynamics. Yields around the world collapsed indiscriminately to record lows. Japanese 10-year yields sank to negative 30 bps. German bund yields dropped to negative 19 bps and Swiss yields to negative 63 bps. Having issued bonds going back to 1693, UK Gilt yields dropped to a record low 52 bps. Few, however, benefited more than Europe’s troubled periphery. In one of history’s more spectacular asset mispricings, Italian bond yields sank to an incredible 1.05% and Spanish yields fell to 88 bps. In the U.S., Treasury yields dropped to 1.36%. Brazil (dollar) yields sank to about 4%, with Mexican (dollar) yields below 3%.

There’s a major problem associated with destabilizing speculative “blow-offs:” They notoriously conclude with sharp reversals, catching everyone by surprise and unearthing all kinds of excesses and associated maladjustment. Coming in conjunction with mounting global anti-establishment fervor, political instability and President-elect Donald Trump, the current bond market reversal ensures uncertainty even more acute than normal: A historic bond market Bubble meets historic social, political and geopolitical uncertainty – not to mention uncharted territory with respect to global monetary policy and economic structure.

Trump policies notwithstanding, global economic prospects remain murky at best. Record stock prices more reflect expectations of winning the money game than an indication of a brightening future. And with air now being released from the Bubble, the best days for bond prices have passed. Especially in the era of king dollar, “money” is now fully expected to deluge the world’s premier asset class - U.S. equities.

Let’s ponder for a moment The Other Side of the Story. Surging global bond yields will entail enormous amounts of speculative de-leveraging. This has yet to become a major issue for the markets only because of the ongoing $2.0 TN of global QE. Yet in this post-Bond Bubble and Trump to the White House backdrop, QE is rather suddenly no longer the bond market’s best friend. QE instead only exacerbates flows into stocks and king dollar – and perhaps even real economies where a shift in inflation trends is already indicated.

So, it’s this confluence of surging bond yields, de-leveraging, unwieldy flows and the potential for inflationary pressures to take root that is now rocking Peripheries around the globe. Importantly, policy confusion and uncertainty are poised to become a pressing market issue. With central bank liquidity inflating Bubbles and exacerbating instability more generally (rather than propping up bond prices), will this speed up rate “normalization” in the U.S. and QE “tapering” especially from the ECB and BOJ? Inquiring markets will want to know.

U.S. Treasury yields closed the week up another eight bps to a 16-month high 2.39%, after trading up to 2.49% on Thursday. Higher global yields again weighed on EM. This week’s trading action saw the Argentine peso drop 2.4% and the Brazilian real and Turkish lira fall 1.8%. All three of these Periphery economies have serious issues that will be aggravated by a tightening of global finance. Stocks were down 2.0% in Brazil, 2.5% in Argentina and 1.8% in Mexico this week. More noteworthy, EM yields made another leg higher. Local yields jumped 36 bps in Brazil, 27 bps in Turkey, 19 bps in Argentina, 15 bps in South Africa, 32 bps in Poland, 19 bps in Hungary, 11 bps in South Korea and 14 bps in China.

Pursuing the theme of tightening global liquidity and associated effects on EM, (King of EM) China instability appears poised to reemerge as a market concern. A few headlines from the week: “China Limits Gold Imports and Renminbi Outflows” (FT); “Beijing Plan to Curb Outflows Fuels Fears Over Foreign Deals” (FT); “China Capital Curbs Sow Doubt Over Renminbi Ambitions” (FT); “Bank of China Sharply Limits Forex Sales to Companies in Shanghai” (Reuters); “PBOC Headache Worsens as New $50,000 Conversion Quota Looms” (Bloomberg); “Foreign Companies Face New Clampdown for Getting Money out of China” (WSJ); “China has Quietly Hiked Borrowing Costs Through PBOC Operations” (Bloomberg).

December 1 – Wall Street Journal (James T. Areddy and Lingling Wei): “Multinational companies are suddenly finding themselves in the crosshairs as China dials back its effort to turn the yuan into a global currency, alarmed that it has accelerated the flight of capital from its shores. In recent days, according to bankers and officials familiar with the situation, China’s foreign-exchange regulator has instructed banks to sharply limit how much companies move out of the country and into their other operations around the world. Until this week, it was possible for big companies to ‘sweep’ $50 million worth of yuan or dollars in or out of China with minimal documentation. Now, these people say, the cap is the equivalent of $5 million, a pittance for the largest corporations. Beijing is fighting an increasingly vicious cycle of capital outflows that weaken the yuan.”

December 2 – Reuters (Samuel Shen and Engen Tham): “Bank of China, one of the country's ‘Big Four’ state banks, has begun to sharply limit corporate customers' ability to purchase foreign currency in Shanghai, in what sources said on Friday was a bid to help stem capital outflows and ease depreciation pressure on the yuan. Under the unwritten new policy, described by two sources familiar with the details, bankers at China's fourth-biggest lender began this week to discourage companies wishing to change yuan into dollars. Those firms which insisted on doing so were told they would be restricted to exchanging a maximum of $1 million… The policy comes as China's government adopts increasingly aggressive measures to control movements of yuan out of the country and snuff out expectations that the currency would continue to spiral lower.”

November 30 – Bloomberg: “China added new restrictions on pulling yuan out of the country as authorities seek to prevent a flood of capital outflows from destabilizing the financial system. Officials won’t approve requests to bring the yuan overseas for the purpose of converting into foreign currencies unless applicants provide a valid business reason… The monetary authority has noticed funds are increasingly leaving the country as yuan payments… The equivalent of $275 billion exited the country via yuan payments this year through October, versus a $101.5 billion inflow in the same period of 2015…”

Keep in mind that Chinese international reserves ended October at a more than five-year low $3.12 TN, this after peaking in June, 2014 at $3.99 TN. Policymakers are surely responding to what must be a surge of outbound flows. So-called “disorderly capital flight” is invariably a risk to an EM economy combating a faltering Bubble with loose finance and monetary inflation. Unprecedented annual Credit expansion of about $3.0 TN has thus far stabilized China’s faltering Bubble. But the issue then becomes an unstable currency as copious amounts of liquidity seek an exit. I would expect this week’s measures meant to slow outflows will heighten anxiety to get “money” out of China before more draconian controls are deemed necessary. King dollar and Trump uncertainty seriously complicate China’s financial and economic dilemmas.

And speaking of serious dilemmas, let’s not forget Europe. Italy’s political referendum will take place Sunday. Prime Minister Matteo Renzi has threatened to resign if voters don’t approve his plan for political reform. Between political opposition and a spirited anti-establishment movement, the vote is not projected to go Renzi’s way. But after sailing through Brexit and Trump’s win, there’s not a great deal of trepidation heading into Sunday. It is true that Italy is well-accustomed to political instability. Perhaps it’s complacency’s turn to be surprised.

The Italian banking system is a mess, and prospects for the Italian economy remain poor. Years of QE have done little to promote reform but a lot to inflate a Bubble in Italian debt (much of it held by Italian banks). It might be at least a year until Italian voters have the opportunity for voicing opinions on remaining in the euro. Yet in this unfolding uncertain global liquidity backdrop, it would not be surprising if the markets again begin pondering the long-term viability of the euro monetary experiment. The Germans and Italians sharing a currency forever? The Trump win has both emboldened Italy’s powerful anti-establishment movements and heightened Italy’s vulnerability to a deteriorating global financial backdrop.

Global financial conditions have begun to tighten – ominously, even in the face of $2.0 TN of ongoing global QE. While pretty clear in the near-term, intermediate and long-term QE prospects are really fuzzy. Heightened uncertainty now has “money” on the move, with associated instability an immediate issue for the fragile Periphery. Europe remains a global weak link, with their banking system at the heart of the continent’s fragility. Italian banks are the European banking system’s weak link. In this context, Italy’s Sunday referendum should not be taken lightly. In the event of a no vote and Renzi resignation, will political uncertainty (and capital flight) push Italy’s fragile banks over the edge? Recall 2012: Fears surrounding Italian banks and Italy’s long-term commitment to the euro over time escalated into fear of euro disintegration.

For the Week:

The S&P500 declined 1.0% (up 7.2% y-t-d), while the Dow added 0.1% (up 10%). The Utilities declined 1.0% (up 7.8%). The Banks gained another 1.5% (up 20.7%), and the Broker/Dealers added 0.2% (up 14.6%). The Transports were little changed (up 20.5%). The S&P 400 Midcaps fell back 1.0% (up 16.2%), and the small cap Russell 2000 dropped 2.4% (up 15.7%). The Nasdaq100 fell 2.7% (up 3.2%), and the Morgan Stanley High Tech index sank 3.4% (up 9.3%). The Semiconductors dropped 4.7% (up 27.9%). The Biotechs were clobbered 6.4% (down 17.4%). Although bullion was down $6, the HUI gold index rallied 4.3% (up 65%).

Three-month Treasury bill rates ended the week at 46 bps. Two-year government yields slipped two bps to 1.10% (up 5bps y-t-d). Five-year T-note yields declined two bps to 1.82% (up 7bps). Ten-year Treasury yields added two bps to 2.38% (up 13bps). Long bond yields rose six bps to 3.06% (up 4bps).

Greek 10-year yields fell 37 bps to 6.44% (down 88bps y-t-d). Ten-year Portuguese yields jumped 13 bps to 3.70% (up 118bps). Italian 10-year yields fell 18 bps to 1.90% (up 31bps). Spain's 10-year yields slipped three bps to 1.54% (down 23bps). German bund yields gained four bps to 0.28% (down 34bps). French yields fell five bps to 0.72% (down 27bps). The French to German 10-year bond spread narrowed nine to 44 bps. U.K. 10-year gilt yields slipped three bps to 1.38% (down 58bps). U.K.'s FTSE equities index dropped 1.6% (up 7.8%).

Japan's Nikkei 225 equities index added 0.2% (down 3.2% y-t-d). Japanese 10-year "JGB" yields increased a basis point to 0.04% (down 22bps y-t-d). The German DAX equities index dropped 1.7% (down 2.1%). Spain's IBEX 35 equities index declined 0.8% (down 9.8%). Italy's FTSE MIB index rallied 3.5% (down 20.2%). EM equities were mostly lower. Brazil's Bovespa index fell 2.0% (up 39%). Mexico's Bolsa lost 1.8% (up 3.7%). South Korea's Kospi slipped 0.2% (up 0.5%). India’s Sensex equities index dipped 0.3% (up 0.4%). China’s Shanghai Exchange declined 0.6% (down 8.3%). Turkey's Borsa Istanbul National 100 index fell 1.3% (up 2.3%). Russia's MICEX equities index gained 1.5% (up 21%).

Junk bond mutual funds saw inflows of $342 million (from Lipper).

Freddie Mac 30-year fixed mortgage rates gained five bps to a 16-month high 4.08% (up 15bps y-o-y). Fifteen-year rates rose nine bps to 3.34% (up 18bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates up a basis point to 4.09% (up 20bps).

Federal Reserve Credit last week declined $11.2bn to $4.411 TN. Over the past year, Fed Credit contracted $29.2bn (down 0.7%). Fed Credit inflated $1.600 TN, or 57%, over the past 212 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt gained $6.4bn last week to $3.127 TN. "Custody holdings" were down $198bn y-o-y, or 6.0%.

M2 (narrow) "money" supply last week jumped $46.5bn to a record $13.262 TN. "Narrow money" expanded $990bn, or 8.1%, over the past year. For the week, Currency increased $2.6bn. Total Checkable Deposits gained $19.0bn, and Savings Deposits rose $19.7bn. Small Time Deposits were little changed. Retail Money Funds expanded $6.0bn.

Total money market fund assets increased $13.9bn to a 13-week high $2.719 TN. Money Funds declined $22.3bn y-o-y (0.8%).

Total Commercial Paper added $1.8bn to $924bn. CP declined $119bn y-o-y, or 11.4%.

Currency Watch:

The U.S. dollar index declined 0.7% to 100.77 (up 2.1% y-t-d). For the week on the upside, the South African rand increased 2.2%, the British pound 2.0%, the Norwegian krone 1.9%, the Canadian dollar 1.7%, the New Zealand dollar 1.4%, the euro 0.7%, the Danish krone 0.7%, the Singapore dollar 0.6%, the South Korean won 0.4%, the Swedish krona 0.4%, the Swiss franc 0.3%, the Australian dollar 0.2% and the Mexican peso 0.1%. For the week on the downside, the Japanese yen declined 0.3% and the Brazilian real fell 1.8%. The Chinese yuan rallied 0.6% versus the dollar (down 5.6%).

Commodities Watch:

November 30 – Reuters (Rania El Gamal, Alex Lawler and Ahmad Ghaddar): “OPEC has agreed its first oil output cuts since 2008 after Saudi Arabia accepted ‘a big hit’ on its production and dropped its demand on arch-rival Iran to slash output, pushing up crude prices by around 10%. Fast-growing producer Iraq also agreed to curtail its booming output, while non-OPEC Russia will join output cuts for the first time in 15 years to help the Organization of the Petroleum Exporting Countries prop up oil prices. ‘OPEC has proved to the skeptics that it is not dead. The move will speed up market rebalancing and erosion of the global oil glut,’ said OPEC watcher Amrita Sen from consultancy Energy Aspects.”

November 27 – Bloomberg (Narae Kim): “In China, money flow is tightly controlled and capital markets are relatively underdeveloped, meaning the economy works like squeezing a balloon. You press it in one place, and it bulges in another. Policy-maker moves to cool one expansion only serve to inflate another. Now that ‘gyration of bubbles,’ according to Société Générale SA’s chief China economist Wei Yao, has been heating up the commodities market again. Earlier this month, thermal and coking coal futures hit a record high since their debut in 2013 while zinc soared to the highest since 2011. Steel rebar, nickel, tin, iron ore and rubber futures also climbed to multi-year highs.

The Goldman Sachs Commodities Index jumped 5.8% (up 24% y-t-d). Spot Gold declined 0.5% to $1,178 (up 11%). Silver rallied 1.5% to $16.80 (up 22%). Crude surged $5.62 to $51.68 (up 40%). Gasoline jumped 13.3% (up 22%), and Natural Gas surged 12.1% (up 47%). Copper declined 2.1% (up 23%). Wheat sank 3.6% (down 14%). Corn fell 3.1% (down 3.2%).

Italy Watch:

November 27 – Financial Times (Rachel Sanderson): “Up to eight of Italy’s troubled banks risk failing if prime minister Matteo Renzi loses a constitutional referendum next weekend and ensuing market turbulence deters investors from recapitalising them, officials and senior bankers say. Mr Renzi, who says he will quit if he loses the referendum, had championed a market solution to solve the problems of Italy’s €4tn banking system and avoid a vote-losing ‘resolution’ of Italian banks under new EU rules. Resolution, a new regulatory mechanism, restructures and, if necessary, winds up a bank by imposing losses on both equity and debt investors, particularly controversial in Italy, where millions of individual investors have bought bank bonds. The situation is being closely watched by financiers and policymakers across Europe and beyond, who worry that a mass failure of Italian banks could trigger panic across the eurozone banking system.”

November 29 – Wall Street Journal (Giovanni Legorano): “The day of reckoning for Banca Monte dei Paschi di Siena SpA, Italy’s No. 3 lender by assets and one of Europe’s most troubled, is drawing near. Long-simmering political, financial and market tensions promise to come to a head next week when it becomes clear whether Monte dei Paschi will be able to succeed in executing a make-or-break plan to bring itself back to health. This weekend will be decisive, when Italians vote on a referendum that could open the door to political instability and unnerve investors, threatening to derail Monte dei Paschi’s rescue plan. That in turn could force a state bailout of the lender, perhaps by year-end—deeply complicating Italy’s efforts to clean up its banking sector. Nervous investors have pummeled Italian banking stocks ahead of Sunday’s vote, sending the FTSE Italia All-Share Banks Index down 12% in the past month…”

December 1 – Reuters (John Geddie): “Speculators convinced the euro zone faces fresh instability have zeroed in on Italy's constitutional reform referendum on Sunday, amassing huge bets on a slump in Italian banks and bonds should Prime Minister Matteo Renzi lose the vote. Blindsided by skewed bookmakers' odds and equivocal opinion polls, financial markets ended up on the wrong side of Britain's vote to leave the European Union in June and Donald Trump's surprise U.S. election win last month… ‘There are colossal short positions on Italy from the U.S. and other countries where big investors are based,’ Raffaele Jerusalmi, the CEO of the Italian stock exchange said this week.”

November 30 – CNBC (Silvia Amaro and Julia Chatterley): “As political uncertainty looms in Italy, the populist Five Star Movement said it would renegotiate the country's membership of the euro if it came into power. Luigi Di Maio, a member of the Five Star Movement, wants to ‘re-discuss the EU and euro parameters’ to address poverty and investment issues in Italy. If such negotiations failed, Italy would have a referendum on a new kind of relationship with the euro area. ‘If (the EU) won't listen to us, we will propose a referendum on the euro to ask the Italian citizens what they want to do,’ Maio told CNBC… ‘Those who brought us in the euro never asked us if we did want to join it. Now we ask the citizens if they want to stay in the common currency or begin to address a two-tier euro scenario or a return to monetary sovereignty,’ Maio said.”

November 29 – Wall Street Journal (Manuela Mesco and Deborah Ball): “The founder of Italy’s populist 5 Star Movement showed off his growing confidence in a video posted ahead of Sunday’s pivotal national referendum. ‘An era is going up in flames,’ Beppe Grillo said as Donald Trump’s Election Night acceptance speech played in the background. ‘It’s the risk-takers, the stubborn, the barbarians who will carry the world forward…We will end up in government, and they will be asking, ‘How did they do it?’ Italian voters will decide Sunday on a constitutional change that would effectively strip the Senate of most of its powers. It is a gamble by Prime Minister Matteo Renzi—for Italy and abroad—and a centerpiece of his efforts to more quickly revamp Italy’s sickly economy.”

November 28 – Bloomberg (Sonia Sirletti, Tom Beardsworth and Chiara Albanese): “Banca Monte dei Paschi di Siena SpA started the first crucial stage of its turnaround plan on Monday as fresh worries about the future of Italy’s government rattled financial markets. The Italian lender is asking bondholders to swap 4.3 billion euros ($4.6bn) subordinated bonds for equity, a step that would allow the bank to proceed with a share sale by the end of the year. Bond investors have five days from Nov. 28 to sign up. The board of directors at Assicurazioni Generali SpA, Italy’s biggest insurer and an investor in the bonds, voted in favor of a conversion.”

Europe Watch:

November 30 – Bloomberg (Joao Lima): “Portugal’s string of good news is getting little attention from investors. Its Prime Minister Antonio Costa just got his second budget through parliament, its economy is picking up and the country stands out as a beacon of stability in the midst of the turmoil set off by Brexit, a referendum in Italy that might bring down the government and rising populism. For all that, investors aren’t showing Portugal’s bonds any love… Portugal’s 10-year bonds yield 3.7%, up from 2.4% at the start of January 2015, the month when ECB President Mario Draghi unveiled his quantitative easing program. It peaked at 18% in 2012 at the height of the euro region’s debt crisis.”

November 28 – Reuters (Ingrid Melander and Michel Rose): “Hardline reformist Francois Fillon scored a resounding win in France's conservative primaries on Sunday, making him favorite to win a presidential election five months from now against the popular far-right and a deeply divided left. Fillon, a former prime minister who wants to raise the retirement age, cut back social security and scrap the 35-hour working week, would easily beat National Front leader Marine Le Pen in a run-off second round, a flash opinion poll said right after his primaries victory.”

ECB Watch:

November 29 – Financial Times (Dan McCrum): “The calendar is not kind to the European Central Bank. A week on Thursday, its governing council will deliberate, just days after Italy’s vote on constitutional reform, and a week before the bank’s US counterpart holds a meeting which could move the world’s bond and currency markets. Temporal pressure of another kind is also building, as the ECB buys €80bn of bonds each month in a programme that runs until March. Extending it could create a new problem, as there may not be enough German Bund’s available next year to keep the ECB’s spending on the eurozone member country’s debt in line with a carefully agreed formula. So Mario Draghi, head of the bank, must somehow ensure stability following a referendum many expect the Italian government to lose, without unduly favouring that country’s sovereign bonds. He must try to keep borrowing costs suppressed across a continental economy where inflation is absent, while also keeping banks healthy and profitable so they lend to businesses and consumers.”

November 29 – Reuters (Balazs Koranyi and Frank Siebelt): “The European Central Bank is ready to temporarily step up purchases of Italian government bonds if the result of a crucial referendum on Sunday sharply drives up borrowing costs for the euro zone's largest debtor, central bank sources told Reuters. Italian government debt and bank shares have sold off ahead of the Dec. 4 referendum on constitutional reforms because of the risk of political turmoil. Opinion polls suggest the 'No' camp is heading for victory, which could force out Prime Minister Matteo Renzi in the latest upheaval against the ruling establishment sweeping the developed world. The ECB could use its 80-billion-euro ($84.8bn) monthly bond-buying programme to counter any immediate, further spike in bond yields after the vote, smoothing market moves and supporting bonds, according to four euro zone central bank sources…”

November 28 – Wall Street Journal (Tom Fairless and Todd Buell): “European Central Bank President Mario Draghi issued a blunt warning over the risks that low interest rates pose to the eurozone’s €10 trillion ($10.6 trillion) economy—just as the ECB prepares to decide whether to hold rates down for longer. The warning underlines the dearth of policy choices central banks face as they seek to further stimulate their economies after years of aggressive easy-money policies. Speaking at the European Parliament in Brussels…, Mr. Draghi said a lengthy period of low rates had created ‘fertile terrain’ for financial-market risks, including a buildup of debt and excessive risk-taking. In an unusual move, the ECB chief also flagged ‘significant vulnerabilities’ in eight European real-estate markets, as a result of rising debt levels or excessive valuations.”

November 30 – Reuters (Paul Day): “Populism and waning national appetite for vital reforms threaten European integration, putting at risk the continent's prosperity and raising the specter of falling incomes, European Central Bank President Mario Draghi said… The ECB has bought governments time with its super-easy monetary policy, yet reform efforts looks to be softening, a major worry as productivity growth is already weak, innovation is low and aging populations will be a huge drag, Draghi said. ‘Monetary policy is providing support and space for governments to carry out necessary structural reforms,’ Draghi said… ‘It is a window of opportunity they should seize.’”

China Bubble Watch:

November 29 – Financial Times (Gabriel Wildau, Don Weinland and Tom Mitchell): “China is readying new restrictions on outbound foreign investment in an effort to curb capital outflows that are putting downward pressure on the renminbi and draining foreign exchange reserves... The State Council is most concerned about outbound mergers and acquisitions worth more than $10bn, said two people familiar with the government’s deliberations. They added that Chinese officials would scrutinise purchases of more than $1bn if they were outside the investor’s core business. Meanwhile, state-owned enterprises will not be allowed to invest more than $1bn on a single overseas real estate transaction. News of the stricter measures worried many company executives, investment bankers and M&A lawyers… as they tried to assess the impact on their pending transactions… According to commerce ministry data, Chinese companies’ overseas purchases have surged past last year’s record of $121bn for non-financial outbound investments, reaching $146bn over the first 10 months of 2016.”

December 1 – Bloomberg: “People’s Bank of China Governor Zhou Xiaochuan already has one policy headache with the currency falling to near an eight-year low. He could have an even bigger one next month. That’s when a $50,000 cap on how much foreign currency individuals are allowed to convert each year resets, potentially aggravating capital outflow pressures that are already on the rise. If just 1% of China’s almost 1.4 billion people max out those limits, that’s an outflow of about $700 billion -- more than the estimated $620 billion that Bloomberg Intelligence estimates indicate has already flowed out in the first 10 months of this year.”

November 29 – Financial Times (Don Weinland, Tom Mitchell and Gabriel Wildau): “The days when a Chinese iron ore miner could buy a UK video game developer are drawing to a close as Beijing tightens up on cross-border investment by its companies. Investment banks in Asia have worked overtime this year on bringing an expansive range of acquisition targets to aggressive Chinese groups, many of which have strayed far beyond the acquirers’ original scope of business. …Overseas purchases by Chinese companies have surged past last year’s record of $121bn for non-financial outbound investments, reaching $146bn over the first 10 months of 2016.”

November 27 – Bloomberg (Lianting Tu): “Without a policy announcement, China’s central bank has effectively tightened monetary conditions in recent weeks, an analysis of its transactions shows. The People’s Bank of China has cut back on seven-day open-market operations and is instead injecting more funds through 14-day and 28-day contracts. That’s had the effect of raising short-term borrowing costs and pressing up bond yields. It’s another sign of selective tightening by the PBOC that’s reinforced the views of many economists that China has turned the corner away from monetary stimulus.”

November 29 – Bloomberg: “China’s government is stepping up efforts to contain runaway property prices, with the central bank clamping down further on mortgage lending in areas deemed overheated, people with knowledge of the matter said. Some lenders in those cities have been asked to suspend distributing new home loans…”

November 27 – Bloomberg (Chisaki Watanabe): “China risks wasting $490 billion by building more coal power plants than it needs as slower power demand growth and less polluting energy sources squeeze coal generation out of the power mix, according to a study from an environmental think tank. As of July, the country had 895 gigawatts of operating coal capacity being utilized less than half the time, with another 205 gigawatts under construction, …Carbon Tracker Initiative said…”

Fixed-Income Bubble Watch:

November 30 – Bloomberg (Eliza Ronalds-Hannon and Charlotte Ryan): “Treasuries wrapped up their worst month since 2009 as investors pulled money from the U.S. bond market on speculation Donald Trump’s victory in the presidential election will pave the way for increased fiscal stimulus. A Bloomberg Barclays index tracking the Treasuries market lost 2.4% this month through Nov. 29. U.S. government debt extended declines Wednesday as OPEC reached a deal to cut oil output, while Trump’s pick for Treasury secretary said he’ll consider adding longer maturities. As U.S. 10-year yields held close to the highest levels this year, the difference over German bunds, Europe’s benchmark sovereign securities, approached the widest on record, according to closing-price data going back to 1990.”

November 30 – Bloomberg (Scott Lanman and Liz McCormick): “Steven Mnuchin, President-elect Donald Trump’s pick for U.S. Treasury secretary, said he’ll explore issuing debt maturing in more than 30 years to cushion the effect of rising interest rates, signaling incoming officials may be open to ideas that the current administration has been unwilling to implement. ‘Interest rates are going to stay relatively low for the next couple of years,’ Mnuchin said… Among other initiatives, ‘we’ll look at potentially extending the maturity of the debt, because eventually we are going to have higher interest rates, and that’s something that this country is going to need to deal with.’”

November 30 – Bloomberg (Joe Light): “Steven Mnuchin, president-elect Donald Trump’s nominee to be U.S. Treasury Secretary, said Fannie Mae and Freddie Mac should leave government control and that the incoming administration ‘will get it done reasonably fast.’ The comments… sent shares of the mortgage-finance giants soaring Wednesday. Fannie Mae and Freddie Mac each jumped 46%, the most since March 2013. The fight over the future of the mortgage companies has been raging since they were bailed out in 2008 for an eventual cost of $187.5 billion.”

December 1 – Reuters (Trevor Hunnicutt): “Investors pulled $4.1 billion from U.S.-based taxable-bond mutual funds, the most since June, as a bond selloff forced interest rates higher and rattled investors, Lipper… showed… ‘Investors are pulling the trigger and are starting, maybe, the rotation out of bond funds," said Tom Roseen, head of research services for Thomson Reuters Lipper. Municipal bond funds continued to be punished as well, losing $2.1 billion to redemptions. Investment-grade corporate bonds posted $1.3 billion in outflows during the seven days through Nov. 30.”

November 30 – Financial Times (Eric Platt): “Investors are buying up riskier corporate debt in a bet that US economic expansion will accelerate due to the boost of government stimulus and tax cuts proposed by president-elect Donald Trump. Despite a $1.6tn hit to fixed-income portfolios in the wake of the global bond market rout, losses concentrated within the sovereign debt sphere, investors have warmed to the idea that a burst of stimulus at the start of Mr Trump’s first term in January will buoy the sales of US companies while tax cuts bolster margins and earnings.”

Global Bubble Watch:

December 1 – Bloomberg (Garfield Clinton Reynolds and Anooja Debnath): “The 30-year-old bull market in bonds looks to be ending with a bang. The Bloomberg Barclays Global Aggregate Total Return Index lost 4% in November, the deepest slump since the gauge’s inception in 1990. Bonds in Europe extended declines with their U.S. peers as OPEC’s agreement on Wednesday to cut oil production added to prospects of higher inflation. The reflation trade has been driving markets since Donald Trump’s presidential election win due to promises of tax cuts and $1 trillion in infrastructure spending… November’s rout wiped a record $1.7 trillion from the global index’s value in a month that saw world equity markets’ capitalization climb $635 billion. The yield on 10-year U.S. notes rose 56 bps in November, the biggest jump since 2009…”

December 1 – Reuters (Leika Kihara): “Bank of Japan board member Makoto Sakurai said the central bank will continue to buy massive amounts of government bonds even under a new policy framework targeting interest rates, shrugging off the view that its bond-buying programme was nearing a limit. But the former academic urged the government and companies to do more to help the BOJ beat subdued inflation and growth in Japan by raising wages and promoting innovation.”

November 27 – Bloomberg: “There’s a Chinese saying that stems from the philosophy in Sun Tzu’s ancient text ‘The Art of War’: You can kill 1,000 enemies, but you would also lose 800 soldiers. Centuries later, the proverb is suddenly apt again, being mentioned frequently in discussions around Beijing. Now, it highlights the potential damage U.S. President-elect Donald Trump could inflict if he makes good on his threat to start a trade war with China, the world’s second-biggest economy. Having backed off some other campaign pledges, it’s unclear if Trump will end up slapping punitive tariffs on China... Still, the message from China is that any move to tax Chinese imports would bring retaliation: The U.S. economy would take a hit and America would damage its longstanding ties with Asia.”

U.S. Bubble Watch:

November 29 – Bloomberg (Michelle Jamrisko): “The U.S. economy expanded more than previously reported last quarter on a sunnier picture of household spending, the primary growth engine. Gross domestic product rose at a 3.2% annualized rate in the three months ended in September, the fastest in two years…”

November 29 – Wall Street Journal (Laura Kusisto): “U.S. home prices have climbed back above the record reached more than a decade ago, bringing to a close the worst period for the housing market since the Great Depression and stoking optimism for a more sustainable expansion. The average home price for September was 0.1% above the July 2006 peak, according to the S&P CoreLogic Case-Shiller U.S. National Home Price index... Adjusted for inflation, the index still is about 16% below the 2006 high. Home prices jumped 5.5% over the past year.”

November 29 – Bloomberg (Patricia Laya): “Consumer confidence rose in November to the highest level since July 2007 on increased optimism about the U.S. labor market and economy, according to… the Conference Board. Confidence index increased to 107.1 (forecast was 101.5) from a revised 100.8. Present conditions gauge rose to 130.3, also the highest since July 2007, from 123.1…”

November 30 – CNBC (Elizabeth Gurdus): “In line with President-elect Donald Trump's proposals, Steve Mnuchin told CNBC… his focus as Treasury secretary will be stimulating economic growth and creating jobs through tax reform. ‘By cutting corporate taxes, we're going to create huge economic growth and we'll have huge personal income,’ Mnuchin told ‘Squawk Box’… Reducing the corporate tax rate from 30% to 15% will be a major goal for the Trump administration, the former Wall Street executive said.”

November 29 – Wall Street Journal (Aaron Back): “After a yearslong boom in lending, signs of trouble are popping up in auto loans. In the past few weeks, some auto lenders have warned that default rates are creeping up. Used-car prices are also falling faster than many anticipated, leading to lower recovery amounts when borrowers do default. The latest stress signal comes from auto research firm, which said in a recent report that record numbers of shoppers are trading in old cars for new ones when they still have substantial amounts due on their existing car loans.”

December 1 – New York Times (Michael Corkery): “Regulators are airing ‘significant concern’ about the millions of Americans who are falling behind on their car loans, even as auto lending continues to boom at a near record pace. …The Federal Reserve Bank of New York noted increasing distress among auto borrowers with shaky credit, as subprime delinquencies rose in the third quarter. In the third quarter, 2% of subprime auto loan balances became at least 90 days delinquent, up from 1.6% in the third quarter of 2014.”

November 30 – Wall Street Journal (Josh Mitchell): “The federal government is on track to forgive at least $108 billion in student debt in coming years, as more and more borrowers seek help in paying down their loans, leading to lower revenues for the country’s wider program to finance higher education. The Government Accountability Office disclosed that sum… in a report to Congress that for the first time projected the full costs of plans that set borrowers’ monthly payments as a share of their earnings and which eventually forgive portions of their debt. The GAO report also sharply criticized the government’s accounting methods for its $1.26 trillion student-loan portfolio, pointing to flaws that have led it to alter projected revenues widely over the years.”

Federal Reserve Watch:

November 28 – The Hill (Peter Schroeder): “The Federal Reserve could be in for a bumpy ride as resurgent Republicans led by President-elect Donald Trump look to make a big mark on the central bank. The right has grown increasingly irritated by the central bank’s policies since the financial crisis and may now be poised to finally push through long-stalled changes to overhaul its operations. ‘We knew there was going to be limited progress under Barack Obama’s administration,’ said Rep. Bill Huizenga (R-Mich.), who authored a broad Fed reform bill in the last Congress. ‘Now, with a partner at 1600 Pennsylvania Avenue that’s interested in moving the needle, frankly we’d be dumb not to try to pursue this.’ For years, GOP-led efforts to impose new rules and restrictions on the Fed ran aground amid substantial Democratic opposition…”

Central Banker Watch:

November 30 – Reuters (David Milliken and Huw Jones): “Donald Trump's victory in the U.S. presidential election has increased the threats to the world economy from higher interest rates and less trade, the Bank of England said… The BoE also pointed to potential dangers from rapid Chinese credit growth or a disorganized British departure from the European Union in a half-yearly assessment of risks to Britain's financial system. BoE Governor Mark Carney highlighted a big rise in U.S. market interest rates since Trump's victory, which the Bank said could be a precursor to a destabilizing sharp move higher in global government borrowing costs from previous record lows.”

Japan Watch:

November 28 – Bloomberg (Keiko Ujikane): “Japan’s household spending dropped for an eighth straight month and retail sales fell slightly in October, even as the unemployment rate remained at the lowest in two decades. Household spending fell 0.4% from a year earlier, following a 2.1% decline in September. Retail sales fell 0.1% from a year ago…”

November 28 – Reuters (Osamu Tsukimori): “Japan's trade ministry has almost doubled the estimated cost of compensation for the 2011 Fukushima nuclear disaster and decommissioning of the damaged Fukushima-Daiichi nuclear plant to more than 20 trillion yen ($177.51bn), the Nikkei business daily reported…”

EM Watch:

November 27 – Financial Times (Kiran Stacey and David Keohane): “Indian banks will have to deposit as cash all the extra money they have been given as a result of demonetisation with the Reserve Bank of India, the central bank announced… The RBI made its sudden move after the country’s banks, flush with cash, went on a bond-buying spree, bringing down interest rates and triggering fears of both inflation and even a shortage of bonds. The central bank said on Saturday evening it was putting in place the temporary restrictions on bond buying to tackle ‘large excess liquidity in the system’. Since Narendra Modi, India’s prime minister, announced the withdrawal of 86% of the country’s banknotes on November 8, Indians have rushed to their banks to deposit the old notes. In that time, around 6tn rupees have been put into the banks. In response, banks have bought up around 4.3tn rupees’ worth of government bonds…, causing prices to jump and the yield on a 10-year bond yield fall more than 50 bps to its lowest in more than seven years.”

November 27 – Reuters (Suvashree Choudhury and Rajendra Jadhav): “Life was good for Mitharam Patil, a wealthy money lender from a small village in the Indian state of Maharashtra. Small-time financiers like Patil would typically lend cash to farmers and traders every day, providing a vital source of funding for a rural economy largely shut out of the banking sector, albeit at interest rates of about 24%. All that came crashing down on Nov. 8, when Prime Minister Narendra Modi banned 500 and 1,000 rupee ($7.30-$14.60) banknotes… The action was intended to target wealthy tax evaders and end India's ‘shadow economy’, but it has also exposed the dependency of poor farmers and small businesses on informal credit systems in a country where half the population has no access to formal banking.”

December 1 – AFP: “President Recep Tayyip Erdogan urged Turks on Friday to convert their foreign currencies into gold and lira to stimulate the country's economy as the lira continued its slide against the dollar. ‘For those who have foreign currencies under the pillow, come change this to gold, come change this to TL (Turkish lira). Let the lira win greater value. Let gold win greater value,’ he said… ‘What necessity is there to let foreign currency have greater value?’ he asked.”

November 29 – Bloomberg (Sid Verma): “For Asian markets, 2017 could be the year of the dollar crunch. Foreign portfolio flows have taken a sharp downturn since Donald Trump's election victory, with $15 billion fleeing Asian bonds and stocks this month alone — close to 30% of year-to-date inflows to the region, according to Deutsche Bank AG… Lending spreads, domestic demand and the resolve of domestic central banks to offset liquidity shortages will be tested next year, analysts warn, as key sources of dollar flows to the region — trade and portfolio inflows — may unravel if Trump makes good on his key campaign proposals.”

November 30 – Bloomberg (Kanga Kong and Jaehyun Eom): “The most vulnerable holders of more than $1 trillion in household debt could spark a financial crisis in South Korea that rivals the one seen during the Asian crisis two decades earlier, according to a former Bank of Korea monetary policy board member. ‘It evokes memories of the late 1990s when Korea was bailed out by the International Monetary Fund,’ said Choi Woon Youl, now a lawmaker with the main opposition Democratic Party of Korea… ‘If it was corporate debt that drove the crisis 20 years ago, it is household debt that would take the lead this time."

Geopolitical Watch:

December 2 – Reuters (Jennifer Jacobs and Nick Wadhams): “President-elect Donald Trump spoke Friday by phone with Taiwan President Tsai Ing-Wen in an unprecedented move that’s sure to provoke China, which regards the country as a renegade province. Trump’s transition team sent a statement saying that Taiwan’s president congratulated Trump on his victory and the two ‘noted the close economic, political and security ties” between the nations. The statement didn’t indicate if the call presaged a shift in longstanding U.S. policy against recognizing Taiwan’s sovereignty or allowing direct communication between top leaders.”