For the week, the S&P500 jumped 2.1% (up 24.7% y-t-d), and the Dow gained 1.8% (up 19.9% y-t-d). The Morgan Stanley Cyclicals surged 3.5% (up 78.3%), and Transports increased 1.4% (up 18.4%). The Morgan Stanley Consumer index gained 2.1% (up 23.1%), and the Utilities added 0.2% (up 6.3%). The Banks rallied 1.6% (down 2.2%), and the Broker/Dealers jumped 2.8% (up 50.2%). The broader market was quite strong. The S&P 400 Mid-Caps surged 3.4% (up 37.4), and the small cap Russell 2000 jumped 3.7% (up 27.0%). The Nasdaq100 jumped 3.3% (up 54.3%), and the Morgan Stanley High Tech index rose 2.9% (up 70.5%). The Semiconductors surged 4.5% (up 70.2%). The InteractiveWeek Internet index gained 3.0% (up 76.4%). The Biotechs jumped 3.6% (up 45.6%). Although bullion declined $7, the HUI gold index rallied 2.0% (up 45.0%).
One-month Treasury bill rates ended the week at one basis point, and three-month bills closed at 4 bps. Two-year government yields jumped 17 bps to 0.96%. Five-year T-note yields surged 28 bps to 2.54%. Ten-year yields surged 26 bps to 3.81%. Long bond yields rose 22 bps to 4.68%. Benchmark Fannie MBS yields rose 27 bps to 4.55%. The spread between 10-year Treasury and benchmark MBS yields widened one to 74 bps. Agency 10-yr debt spreads were unchanged at 40 bps. The implied yield on December 2010 eurodollar futures jumped 25 bps to 1.44%. The 10-year dollar swap spread increased 2.0 to 15.0 bps, and the 30-year swap spread declined 3.75 to negative 12.25 bps. Corporate bond spreads moved to the narrowest levels since the Lehman collapse. An index of investment grade bond spreads narrowed 5 bps to 122, and an index of junk spreads narrowed 8 bps to 553 bps.
Investment grade issuers included JPMorgan $4.0bn.
Junk bond funds reported inflows of $206 million (from Lipper). I saw no junk or convert issues this week.
International dollar-denominated debt issuers included Commonwealth Bank of Australia $4.0bn.
U.K. 10-year gilt yields jumped 22 bps to 4.0%, and German bund yields surged 18 bps to 3.32%. Bond yields in Greece declined 5 bps to 5.73%. The German DAX equities index gained 2.1% (up 23.9% y-t-d). Japanese 10-year "JGB" yields increased 4 bps to 1.27%. The Nikkei 225 surged 3.4% (up 18.5%). Emerging markets were strong. For the week, Brazil's Bovespa equities index added 1.2% (up 80%), and Mexico's Bolsa jumped 2.2% (up 45.4%). Russia’s RTS equities index rose 2.7% (up 129.4%). India’s Sensex equities index jumped 3.7% (up 80.0%). China’s Shanghai Exchange added 0.9%, boosting 2009 gains to 72.5%. Brazil’s benchmark dollar bond yields rose 12 bps to 5.09%, and Mexico's benchmark bond yields increased 6 bps to 5.17%.
Freddie Mac 30-year fixed mortgage rates jumped 11 bps to 5.05% (down 9bps y-o-y), the first increase above 5% in 8 weeks. Fifteen-year fixed rates rose 7 bps to 4.45% (down 46bps y-o-y). One-year ARMs added 4 bps to 4.38% (down 47bps y-o-y). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed jumbo rates up 8 bps to 5.99% (down 97bps y-o-y).
Total Commercial Paper outstanding increased $9.8bn last week (19-wk gain of $84.6bn) to $1.159 TN. CP has dropped $522bn y-t-d (31.7% annualized). Asset-backed CP increased $2.5bn last week to $486bn, with a 52-wk drop of $247bn (33.6%).
International reserve assets (excluding gold) - as accumulated by Bloomberg’s Alex Tanzi – were up $876bn y-o-y, or 13.0%, to a record $7.628 TN.
Global Credit Market Watch:
December 23 – Bloomberg (Laura Cochrane): “Emerging-market borrowing costs are poised to fall to the lowest level since December 2007 as returns 19 times more than global bonds this year lure investors, managers of the best-performing funds said.”
December 24 – Bloomberg (Natalie Weeks and Paul Tugwell): “Greek Prime Minister George Papandreou won passage of a 2010 budget to cut 8 billion euros ($11bn) from the deficit after three credit rating companies lowered the country’s creditworthiness this month.”
December 22 – Bloomberg (Scott Reyburn and Katya Kazakina): “A chalk drawing by the Renaissance painter Raphael that sold for $47.5 million topped auction sales in 2009, beating a Matisse still life of cowslips that made an artist record of $45.6 million. Elsewhere, an Andy Warhol painting of dollar bills fetched $43.8 million, a Rembrandt portrait reached $32.9 million and an Art Deco chair owned by Yves Saint Laurent took $28 million (in dollar prices or equivalent at the time of the sale).”
December 21 – Bloomberg (Tiffany Kary and Don Jeffrey): “Citadel Broadcasting Corp., the owner of radio stations in cities including New York and Chicago, filed for U.S. bankruptcy protection in Manhattan with a deal to shed $1.4 billion of debt.”
Global Government Finance Bubble Watch:
December 23 – Bloomberg (Paul Abelsky): “Russian central bank Chairman Sergey Ignatiev said interest rates may be cut before the end of the year and forecast the economy may grow 5% or more in 2010, faster than the government is estimating.”
Currency Watch:
December 23 – Bloomberg (Theophilos Argitis and Christopher Fournier): “Canada’s Finance Minister Jim Flaherty said China, with the world’s largest currency reserves of $2.3 trillion, may be poised to buy Canadian dollars as it seeks to shield its reserves against the U.S. dollar’s decline. ‘It does not surprise me that China and Russia would take greater positions in the Canadian dollar than they have previously,’ Flaherty…said… ‘I would expect countries looking around the world to invest in market currencies that are reliable.’”
The dollar index was unchanged this week at 77.84. For the week on the upside, the Canadian dollar increased 1.6%, the Brazilian real 1.0%, the Norwegian krone 1.0%, the Swiss franc 0.7%, the Euro 0.5%, and the South African rand 0.4%. On the downside, the British pound declined 1.2%, the New Zealand dollar 0.8%, the Japanese yen 0.7%, the Australian dollar 0.7%, the Singapore dollar 0.3%, and the Mexican peso 0.3%.
Commodities Watch:
December 23 – Bloomberg (Stuart Wallace): “Tin for delivery in three months rose to $16,050 a metric ton on the London Metal Exchange, the highest compared with intraday prices since October 2008.”
The CRB index jumped 1.7% this week (up 22.4% y-t-d). The Goldman Sachs Commodities Index (GSCI) surged 2.9% (up 47.8%). Gold declined 0.7% to close at $1,105 (up 25.3%). Silver increased 0.7% to $17.44 (up 54.4%). February Crude jumped $3.63 to $78.05 (up 75%). January Gasoline jumped 5.0% (up 87%), while January Natural Gas slipped 2.4% (up 0.4%). March Copper jumped 4.8% (up 133%). March Wheat declined 0.7% (down 14%), while March Corn rallied 2.7% (up 0.4% y-t-d).
China Bubble Watch:
December 24 – Bloomberg: “China may cut personal income taxes next year to help increase individual earnings and maintain continued economic growth, the 21st Century Business Herald reported…”
December 23 – Bloomberg: “China’s growth may surge to as much as 12% next year, increasing the risk from inflation unless the government raises interest rates, according to Citic Securities Co., the nation’s biggest listed brokerage. The economy may be boosted by a rebound in exports and domestic spending next year, said Zhu Jianfang, chief economist… ‘We will see a change in monetary policy next year, otherwise, the growth will reach 12%, which will be a bit too fast,’ Zhu said…”
December 21 – Bloomberg: “China, the world’s third-biggest economy, is targeting 8% growth in 2010 amid a ‘fragile’ global recovery, industry minister Li Yizhong said. The nation also aims for an 11% gain in industrial production, Li said…”
December 22 – Bloomberg: “Train C2019 covers the 120 kilometers between Beijing and Tianjin in 30 minutes, passing peasants in fields burning corn stalks and warrens of shacks occupied by people who aren’t sharing in China’s economic boom. The line is part of China’s 2 trillion yuan ($292.9bn) investment in a nationwide high-speed passenger-rail network… China accelerated its high-speed-rail development plan last year in the wake of the global financial crisis, saying it would increase the passenger network by a third to 16,000 kilometers (9,944 miles) by 2020.”
December 23 – Bloomberg: “China’s economic growth in the fourth quarter will exceed the 8.9% of the preceding three months, Xu Xianchun, deputy head of the National Bureau of Statistics, told an economic seminar…”
December 23 – Bloomberg: “China’s foreign direct investment in 2009 is expected to be $42 billion, the official China Securities News reported, citing the Ministry of Commerce.”
December 22 – Bloomberg: “Chinese central bank Governor Zhou Xiaochuan said that reserve ratios for lenders remain an important tool, fueling speculation that requirements may be increased to limit the risk of asset bubbles. In China, policy makers ‘put quite some emphasis’ on reserve requirements, Zhou said… He added that tools also include ‘policy rates,’ interest-rate spreads and capital-adequacy ratios.”
December 21 – Bloomberg: “China may raise the down payment requirement for purchases of second homes to 50% in a bid to curb speculation in the property market, Beijing Business Today reported… The current down payment for second-home purchases is 40% of a property’s value…”
December 23 – Bloomberg: “China’s central bank plans to study how to strengthen oversight of risks across the financial system, an effort that echoes measures under way in the U.S. and Europe in the aftermath of the crisis. The People’s Bank of China ‘will study establishing a macroprudential management system,’ the bank said… The aim would be to prevent risks and ensure the safety of the financial system, it said.”
December 23 – Bloomberg (Chia-Peck Wong): “Cheung Kong (Holdings) Ltd., Sino Land Co. and other Hong Kong builders seeking to replenish land reserves may pay up to HK$13 billion ($1.68 billion) in next week’s government auction of two waterfront properties in the New Territories, analysts said… Hong Kong is trying to ease a shortage in land supply and homes that fueled price increases of up to 30% this year, sparking a public outcry over housing costs…”
Japan Watch:
December 24 – Bloomberg (Mayumi Otsuma): “The Bank of Japan said ‘many’ of its board members expressed readiness to act against financial- market volatility last month… ‘Many’ agreed ‘the bank would maintain its stance of responding promptly to changes in the market situation,’ according to minutes of the bank’s Nov. 19-20 meeting… The central bank ‘would adopt the most effective method for money-market operations that conformed to changes in financial markets…’”
December 21 – Bloomberg (Keiko Ujikane): “Japan’s exports fell at the slowest pace in 14 months in November as demand from Asia supported the nation’s recovery from its worst postwar recession. Shipments abroad slid 6.2% from a year earlier…”
India Watch:
December 23 – Bloomberg (Kartik Goyal and Tushar Dhara): “India’s economy may grow as much as 8% in the current financial year, Finance Minister Pranab Mukherjee said, adding he will consider removing some fiscal stimulus steps in the next two months. ‘Recent economic data confirm that the green shoots are now finally taking root,’ Mukherjee told a business conference… ‘At this rate, in the next two-to-three years, our economy will resume the spectacular growth rate of 9% experienced during the pre-downturn period.’”
Asia Bubble Watch:
December 23 – Bloomberg (Nguyen Dieu Tu Uyen): “Vietnam’s central bank said it aims to slow credit growth to about 25% next year after last month’s inflation accelerated to the fastest pace since May, keeping its ‘cautious’ monetary stance. The Asian nation plans to ease credit growth from more than 37.7% this year…”
December 24 – Bloomberg (Jason Folkmanis): “Vietnamese inflation accelerated to the fastest pace since April as higher rice prices pushed up food costs while an accelerating economy fueled domestic demand. Consumer prices rose 6.52% this month from a year earlier…”
Latin America Bubble Watch:
December 22 – Bloomberg (Daniel Cancel): “Venezuela’s government ordered a 20% reduction in electricity use and set restrictions on malls, billboards and casinos as the South American country suffers its worst drought in at least 40 years.”
December 22 - Dow Jones: “Loans from Peru’s banks to various sectors of the economy are hitting record-high levels and are expected to continue to expand alongside growth in the economy.”
Dubai Watch:
December 26 – Bloomberg (Zainab Fattah): “Some real-estate developers in Dubai, who withheld properties from the market after prices fell as much as 50%, are now selling at levels last seen in 2006, Emirates Business 24/7 reported, citing company officials.”
U.S. Bubble Economy Watch:
December 21 – Bloomberg (Carlyn Kolker): “Law firms including Cravath, Swaine & Moore LLP and Skadden, Arps, Slate, Meagher & Flom LLP cut year-end bonuses for first-year lawyers by as much as 71%, part of a bid to keep client costs down and ride out a recession that has forced structural changes in the industry.”
Central Banker Watch:
December 21 – Bloomberg (Kartik Goyal): “India’s central bank needs to drain cash from the economy to check speculation in commodities, former Governor Bimal Jalan said, after food price inflation climbed to an 11-year high this month. ‘Reduction in availability of money may help in reducing the speculative pressure on retail prices,’ Jalan, who headed the central bank between 1997 and 2003, said… ‘Monetary policy could give a signal that it is worried about inflation.’”
GSE Watch:
December 25 – Bloomberg (Rebecca Christie and Jody Shenn): “The U.S. Treasury Department will remove the caps on aid to Fannie Mae and Freddie Mac for the next three years, to allay investor concerns that the companies will exhaust the available government assistance. The two companies… have caps of $200 billion each on backstop capital from the Treasury. Under a new agreement announced yesterday, these limits can rise as needed to cover net worth losses through 2012."
December 24 – Bloomberg (Brad Skillman): “Fannie Mae Chief Executive Officer Michael Williams and Freddie Mac CEO Charles Haldeman Jr. are both eligible for compensation of as much as $6 million in 2009…”
Fiscal Watch:
December 24 – Bloomberg (Nicole Gaouette, Catherine Dodge and Ryan J. Donmoyer): “The Senate approved legislation that would make the broadest changes to the U.S. health-care system in decades… The Senate voted 60-39, with all Democrats and two independents backing an $871 billion measure that would extend coverage to tens of millions of uninsured Americans.”
December 23 – Bloomberg (Bob Ivry): “Congress and the Obama administration are taking a bigger role in the rescue of the economy from the Federal Reserve, shifting the strategy to stimulus spending from central bank lending. The amount the Fed and U.S. agencies have lent, spent or guaranteed has fallen 15% since September to $8.2 trillion, the lowest in a year… Spending on infrastructure, tax breaks and other fiscal measures account for 52% of the total, up from 39% in March, as central bank loan programs are phased out. The change marks a new phase of public intervention in the economy.”
December 24 – Bloomberg (Michael B. Marois and William Selway): “California Governor Arnold Schwarzenegger wants President Barack Obama to help ease large- scale cuts to the most populous U.S. state’s already diminished social programs amid a $21 billion anticipated deficit. Schwarzenegger… plans to ask for relief totaling as much as $8 billion… Instead of seeking one-time stimulus money or a bailout, the state wants the U.S. to reduce mandates and waive rules stipulating minimum expenditures on programs such as indigent health care, the official said.”
Real Estate Watch:
December 23 – Bloomberg (Daniel Taub): “Las Vegas home prices dipped 29% in November from a year earlier… MDA DataQuick said… The median price paid for all new and re-sold houses and condos…fell to $134,900… from $190,000 a year earlier…”
MBS/ABS/CDO/CP/Money Fund and Derivatives Watch:
December 21 – Bloomberg (John Gittelsohn and Brian Louis): “Seriously delinquent prime mortgages… more than doubled in the third quarter from a year earlier… The number of prime mortgages 60 days or more overdue climbed to 838,000 as of Sept. 30, up 118% from a year earlier…”
Muni Watch:
December 23 – Bloomberg (Jeremy R. Cooke): “The municipal market is completing a record year for fixed-rate bond sales after U.S. state and local governments shunned variable-rate issues and employed new federal subsidies to broaden demand for their debt. Municipal borrowers sold $374 billion through last week, 11% more than the $338 billion during the entire previous record year of 2007…”
New York Watch:
December 23 – Bloomberg (Henry Goldman): “New York Governor David Paterson said he will argue in court that making payments to school districts this month would render the third-most populous U.S. state insolvent. ‘We are operating really under a fundamental precept that’s really beyond the law: you can’t spend money that you don’t have,’ the governor said…”
December 22 – Bloomberg (Oshrat Carmiel): “Manhattan rents fell as much as 7% in the year… In buildings attended by doormen, rents for studio apartments dropped 7% to an average of $2,247 a month during the 12-month period, according to… the Real Estate Group of New York. One-bedroom apartments with doormen fell 5.6% to $3,262.”
Mostly Facts:
Buoyant global risk markets have recently confronted a debt crisis in Dubai, a dollar rally and a jump in global bond yields. While not earth-shaking, these were nonetheless significant developments from the perspective of gauging both marketplace reaction and market underpinnings. Thus far, markets have proved notably resilient.
Most global stock markets are heading into 2009’s final week at or near 15-month highs. U.S. stocks have enjoyed a broad-based rally over the past two weeks that has pushed the S&P500, the mid-caps and the small caps to their highest levels since the Lehman collapse. “Emerging” debt markets have been especially resilient in the face of Dubai, dollar strength, and rising global yields. U.S. corporate (investment-grade and junk) spreads remain near 14-month lows. Crude oil has jumped above $77, and the CRB Commodities index is near its 14-month high. The VIX (estimated future stock market volatility) index closed Friday at 19.47, the low since August 2008.
It would be easy to suggest that global risk markets are complacent at best and outright oblivious at worst. But, of course, markets are never that simple. I continue to analyze market dynamics through the perspective of the Global Reflation Thesis: The bursting of the mortgage/Wall Street finance Bubble ushered in the emergence of the Global Government Finance Bubble. This Bubble has the potential – perhaps the propensity - to become the biggest yet. I am of the view that recent currency, interest-rate and debt market actions must be considered carefully within the context of this analytical framework.
At this point, the weight of the evidence requires giving the benefit of the doubt to global reflationary/Bubble forces. Global Credit systems remain fragile and vulnerable. Overheated global risk markets are susceptible to any number of potential developments. Yet, exactly these acute fragilities appear poised to keep the Federal Reserve, the European Central Bank, the People’s Bank of China, the Bank of Japan and other central banks locked in ultra-loose policies - for way too long. The world is awash in cheap liquidity. Meanwhile, various robust inflationary forces flourish. I don’t have great confidence that market forces will rise to the occasion to discipline speculation or stem other inflationary biases.
The Asia-led global recovery has gained sufficient momentum to benefit from an ongoing loose global financial backdrop. Global bond yields have begun to adjust to this dynamic. And it is certainly possible that nervous bond markets could at some point place considerable pressure upon timid central bankers across the globe. As for the dollar, I am of the view that global reflationary forces are not as susceptible to dollar strength as others suggest. “Emerging” economy Credit systems came out of the global crisis in relatively decent shape. This dynamic coupled with today’s ultra-loose finance has created a backdrop conducive to unwieldy expansion. I’ve expected this dynamic to prove resilient and nothing of late has led me to tinker with this view.
I would expect the dynamic of inflationary biases creating self-reinforcing global financial flows from the “Core” (U.S.) to the Periphery (especially China, India, Asia and Brazil) to continue to weigh on dollar recovery. Of course, markets are all about greed and fear and prevalent dollar bearishness will on occasion foster bear market rallies. I believe synchronized global monetary and fiscal stimulus – along with especially energized “Periphery” Credit expansions – are major factors underpinning gold, precious metals, energy, and commodities prices. Here at home, highly speculative stock and bond markets are vulnerable to a host of risks. Yet, as over-liquefied markets persevere through adversity they tend to become increasingly emboldened – and only more speculative. There are definitely Bubble dynamics at work in U.S. risk asset markets.