Monday, December 15, 2014

12/12/2014 The Collapsing Periphery *

This week saw things take a turn for the worse for the faltering Periphery Bubble. On the back of crude's $8.03 collapse (to five-year lows), Venezuela CDS surged another 1,402 bps to 4,151 bps. Ukrainian bond yields surged 517 bps this week to 28.63%. Russian ruble yields jumped another 95 bps to 12.82%. On the currency front, the Russian ruble was slammed for another 9.25% (down 43.6% y-t-d). The Colombian peso fell 3.7%, the South African rand 2.1%, Indonesia rupiah 1.4%, Chilean peso 1.1% and Indian rupee declined 0.8%. The Chinese renminbi declined a not insignificant 0.6% against the dollar this week.

Importantly, the Periphery’s core has fallen under major duress. The Mexican peso was hit for another 2.7% (down 11.7%) this week, while the Brazilian real was down 2.5% (down 11%) and the Turkish lira 1.7% (down 6.5%). Brazilian CDS (Credit default swap) surged 48 bps to a one-year high 212 bps. Mexican CDS jumped 22 bps to a one-year high 112 bps. Brazilian stocks sank 7.7%. Turkey CDS rose 36 bps to 185 (high since October). Indonesian rupiah bond yields jumped 34 bps to 8.11%.

As EM currencies have faltered, local-currency denominated debt has been under pressure. Yet for the most part, dollar-denominated EM debt has performed well – that is, until this week. Importantly, the EM dollar-denominated bond dam has given way. Russia dollar bond yields surged 59 bps to 6.62% this week. Brazil dollar yields jumped 47 bps to 4.56%. Turkey dollar yields rose 45 bps to 4.45%; Mexico 18 bps to 3.53%; Peru 22 bps to 3.80%; and Colombia 28 bps to 3.94%. Venezuela dollar-denominated yields jumped 381 bps this week to 24.28%.

Interesting dynamics at the Core. German stocks were hit for 4.9%, Spanish stocks fell 6.9% and Italian stocks dropped 7.4%. Greek stocks collapsed 20%. Greece five-year bond yields surged 332 bps to 9.15% - “worst week since the euro crisis.” Italian to German bond spreads widened 25 bps, and Portugal to German spreads widened 38 bps. Here at home, the S&P500 fell 3.5%. Yet the Morgan Stanley Retail index gained 0.8%. Healthcare, pharmaceuticals and the airlines advanced. Treasury bond yields sank below closing levels from tumultuous October 15th trading. Corporate bond spreads blew out to the widest level since the October market tumult.

U.S. equities bulls are clinging to a sanguine view of collapsing oil and commodities prices. A well-known strategist was on CNBC late Friday afternoon espousing the bullish thesis, comparing the current backdrop to 1997, when the U.S. expansion soldiered on impervious to EM debacles and sinking commodities. Yet EM debt was miniscule then compared to now. Global debt was a fraction of today’s level. U.S. debt was about a third the current level. And, importantly, the amount of global leveraged speculation was a small fraction of that which surely inflates speculative markets these days. That said, the Russian collapse and LTCM debacle almost brought the global financial system down in October 1998.

Especially these days, “Core vs Periphery” analysis is as fascinating as it is challenging. As always, it’s as much an “art” as it is a “science.” Importantly, initial stress at the Periphery only tends to spur financial flows to the Core. Serious unfolding issues can go so far as to rejuvenate Core Bubble Dynamics. At some point, however, a profoundly consequential transformation begins to unfold: De-risking/de-leveraging (liquidity “vaporization”) actually begins to suck liquidity from even Core markets. Progressively more powerful contagion momentum at the Periphery is apt to jump what had seemed an impermeable fire wall (between Periphery and Core). This will manifest first, often subtly, at the Core’s periphery. Still, with bullishness having become so engrained throughout the Core marketplace, critical warning signals will be readily dismissed.

I believe Collapsing Bubbles at the Periphery have at this point attained irreversible momentum. And the further that crude, commodities and EM currencies fall, the less likely EM countries, corporations and financial institutions will have the wherewithal to service huge amounts of dollar-denominated debt. A critical issue to ponder today is to what extent higher-yielding dollar-denominated debt has been used as fodder for leveraged speculation – for so-called “carry trades” as well as in the proliferation of high-return derivative structures and products. This debt has also found a home in scores of funds that ballooned in size courtesy of central bank measures and an unmatched global yield chase. The amount of dollar-denominated EM debt and its widespread distribution are unprecedented. The associated risks (especially Credit and liquidity) seemed this week to begin resonating.

Back in the late-nineties, the emerging markets were referred to as “roach motels.” It’s always the case that funds flow so smoothly into EM markets and economies. And as long as flows spur domestic lending, booming securities markets, generally loose financial conditions and economic expansion, the dream can persist that EM policymakers and economic players have learned from previous fiascos. At the same time, I do sympathize with EM. Developed world policy ineptness helped to really, really bury them this time around.

It’s a harsh fact of life that “loose money” and attendant Credit and speculative Bubbles provide fertile breeding grounds for fraud and corruption (not even mentioning resource misallocation). Throw Trillions of cheap finance at “developing” financial and economic systems and you’ll at some point be dealing with major problems. And this is fundamental to the “global government finance Bubble” thesis: it’s been six years of history’s greatest and by far most dangerous Bubble. Now that Bubbles are Collapsing and the days of endless “hot money” inflows have turned to a rush for rapidly closing exits, some of the chicanery is coming into clearer view (i.e. Russia, Venezuela, Turkey, Brazil, Mexico, etc.). Just you wait for China.

It is also fundamental to my current analysis that central bank reflationary measures have rapidly lost their capacity to hold the global Bubble together. The wheels almost came off in October. Yet the efforts of Bullard, Draghi and Kuroda turned things around and incited yet another destabilizing speculative run. The market viewed that a Trillion from Draghi and another Trillion from Kuroda would more than offset the end of Federal Reserve liquidity creation. The game would continue.

The game, however, has changed. Flagrant euro and yen devaluation propelled king dollar, in the process giving a powerful bear hug to already deflating Periphery Bubbles. King dollar placed further downside pressure on crude and commodities markets. Collapsing oil and commodities impaired financial and economic stability for scores of countries and companies – too many that had ballooned debt (much dollar-denominated) throughout the previous boom. Huge amounts of global debt have rather suddenly turned suspect, inciting a self-reinforcing flight out of currencies, debt markets and commodities. And the more flows reverse out of the Periphery and head to the bubbling Core, the more destabilizing the unfolding king dollar dynamic for the global financial “system” and economy.

I’m sticking with my view of the existence of a massive “yen carry trade” (short a devaluing yen to leverage in higher-yielding instruments elsewhere). As was experienced during October’s bout of market instability - and as we saw at times again this week - any yen rally almost immediately fosters problematic de-risking/de-leveraging. And the assumption has been that as long as Kuroda remained at the helm, ongoing yen devaluation could be taken to the bank. This is reasonable and it may still play out this way. Indeed, the assumption of ongoing yen devaluation has been key to the resilient Bubble at the Core.

Yet, from the game aspect of it all, trading dynamics have undergone some subtle yet important changes. Nowadays, yen weakness powers king dollar – at the expense of Collapsing Periphery Bubbles. In a world where the Periphery and Core Bubble Dynamics have so profoundly diverged, no longer does yen devaluation keep the global Bubble afloat. And I think it’s reached the point where yen weakness has actually become destabilizing for the overall global Bubble. Yen devaluation works to sustain huge amounts of speculative leverage, but at the same time resulting dollar strength has pushed the unfolding EM collapse to the breaking point. This new dynamic provides a real policy quandary. Throwing more liquidity at the problem isn’t going to help.

The Fed released its Q3 2014 Z.1 “flow of funds” report this week. I won’t take as deep a dive as usual. From my perspective, what appears on the surface as a relatively benign Credit backdrop is in reality one with extraordinary vulnerability. I look out to 2015 and it is not clear how the system achieves ample Credit growth to sustain elevated securities markets, profit expectations and bullish optimism for the markets and real economy more generally - especially with ominous global storm clouds now gathering on the horizon.

Total Non-Financial Debt (TNFD) expanded at a 4.4% rate during Q3, up from Q2’s 3.4% and compared to Q3 2013’s 3.5%. Total Household debt expanded at a 2.7% rate, down from Q2’s 3.4%. And while Household Mortgage debt posted its first expansion in four quarters (0.7%), non-mortgage Consumer Credit slowed to a 6.4% pace, down from Q2’s 8.2% and Q1’s 6.6%. Total Business borrowings expanded at a 5.2% pace, up slightly from Q2’s 5.0% - but weaker than Q1’s 6.0%. State & Local government borrowing contracted at a 2.8% pace during Q3, more than reversing Q2’s 1.2% increase (which was the first positive number in five quarters). The star for the quarter, federal borrowings, expanded at a 7.2% annual pace, up significantly from Q2’s 2.5%.

In seasonally-adjusted and annualized rates (SAAR), TNFD expanded $1.801 TN, up from Q3’s $1.370 and Q1’s $1.688 TN. It was actually the strongest SAAR Credit growth since Q4 2012 ($1.962 TN). It is certainly worth noting that at SAAR $913bn, federal borrowings accounted for about half of TNFD. Household Debt expanded SAAR $366bn (mortgage $67bn and Consumer $206bn). Total Business borrowings expanded SAAR $605bn. State & Local contracted SAAR $84bn.

With equities under a little pressure during the period, Total Household Assets declined slightly in Q3 to $95.410 TN. And with Household Liabilities increasing $121bn (3.5% rate), Household Net Worth declined $141bn during the quarter to $81.349 TN. Over the past year, Household Assets increased $5.467 TN, with Net Worth inflating $5.140 TN. Net Worth was up a staggering $11.823 TN in two years and $26.664 TN in four years. As a percentage of GDP, Household Net Worth has increased from 331% to 463% in four years - to return almost to the record level from the end of 2007 (476%). There would be significant economic impact if Household Net Worth were to give back a few years of inflated gains.

I am fond of analysis that combines Treasury Securities, Municipal debt, GSE Securities, Corporate Bonds and Equities as a proxy for Total Marketable Securities (TMS). After beginning 1990 near $10 TN, TMS ended the nineties at about $33 TN. By the end of 2007, TMS had inflated to $52 TN. As a percentage of GDP, 2007’s 371% compared to 1990’s 178% (and 1999’s bubbly 355%).

TMS ended Q3 2014 at $70.79 TN, or 403% of GDP (both down slightly from Q2). TMS is now up $27 TN, or 62%, from the end of 2008. It is also worth noting that Equities at 200% of GDP surpasses 2007 (182%) and is almost back to 1999’s record 209%. And despite talk of system “deleveraging,” Total Debt Securities-to-GDP ended Q3 at 203%, up from 2007’s 182%, 1999’s 147% and 1989’s 114%.

One doesn’t have to go too crazy in search of cause and effect. The Federal Reserve’s Balance Sheet expanded SAAR $291bn during the quarter to a record $4.508 TN. Fed holdings jumped $720bn over the past year, or 19%. This puts the two-year open-ended QE operation (announced in the summer of 2012) at a staggering $1.700 TN, for 58.8% growth. It’s also worth noting that Security Credit jumped $189bn, or 16%, over the past year to a record $1.373 TN. Throughout the financial sector, no expansion is even remotely comparable to Federal Reserve and Security Credit.

Home mortgage borrowings expanded SAAR $77bn during Q3. This compares to 2005’s $1.128 TN, 2006’s $1.080 TN and 2007’s $771bn. Amazingly, six-years of ultra-loose monetary policy have done little to spur mortgage Credit expansion. And with Fed Credit growth supposedly ending and corporate Credit increasingly vulnerable to the forces of risk-aversion, mortgage Credit becomes only more critical to overall system Credit expansion. A strong case can be made that lowering market yields (and declining mortgage rates) no longer has much impact on mortgage borrowing (Household mortgage borrowings up 1.3% over the past two years!).

It is worth noting that GSE Securities expanded SAAR $225bn during Q3 (to $7.834 TN), up from Q2’s SAAR $185bn expansion. GSE Securities increased $240bn in 2013, the first growth since 2008. And with Fannie and Freddie now moving to lower lending standards, Washington appears ready for another push of GSE-induced Credit growth. As difficult as it is to believe, we’ll have to again keep close tabs on the GSE over coming quarters.

But the winner of the Q3 Z.1 Credit Sweepstakes goes to, once again, the U.S. Treasury. Treasury Securities expanded SAAR $914bn during the quarter to a record $12.756 TN. Over the past year, Treasury Securities increased $799bn, or 6.7%, with a two-year gain of $1.500 TN, or 13.3%. Since the end of 2007, outstanding Treasury Securities has increased $7.656 TN, or 150%. Over this period, total Household Debt declined about $420bn (to $13.414 TN). Tough to call this “deleveraging.”

Expanding upon comments made earlier, I think “ominous” when analyzing this Z.1. There is very little to indicate that an unprecedented expansion of Federal Reserve and Treasury Credit has resuscitated a private-sector Credit cycle. Corporate debt has expanded briskly over recent years, but even this important source of system Credit is now susceptible to both global and domestic forces.

My analytical hunch is that “hot money” flowing freely into our booming securities markets helps explain the robust asset price inflation backdrop in the face of lackluster underlying Credit dynamics. Thus far, troubles at the Global Bubble’s Periphery have ensured that king dollar flows inundate Core U.S. markets. But, again, there will be a point when Global de-risking/de-leveraging leads to waning risk-taking and liquidity – even at the susceptible Core.

I’ve argued for awhile now that the maladjusted U.S. economic structure requires in the neighborhood of $2.0 TN of annual non-financial Credit growth. The number for Q3 came in at $1.801 TN. System Credit has remained meaningfully below the $2.0 TN bogey since 2012. Yet I would argue strongly that the Fed’s massive QE program short-circuited typical dynamics. Miraculously, QE provided “money” for inflating securities prices, for ensuring ultra-loose corporate Credit conditions, for federal and state receipts, for corporate cash-flows and earnings, for record stock buybacks, for record M&A and for lots of spending (especially by the wealthy!). QE incited leveraged speculation and booming “hot money” flows. But QE has ended (for now).

I expect the post-QE landscape to be one of disappointing market performance, weakening corporate profits, less financial engineering and waning growth in government revenues (resurgent deficits!). I look out to 2015 and it’s not clear how we get anywhere near the $2.0 TN system Credit growth bogey. “Hot money” is the big wildcard. King dollar flows could help to sustain inflated securities markets, in the process inflating Household Net Worth (perceived wealth) and spending. But with my view that the global Bubble has burst, the probability for a problematic Risk-Off dynamic impacting the world has increased significantly. In that scenario, I don’t see the sources of sufficient liquidity and system Credit expansion to keep the U.S. Bubble markets and Bubble Economy levitated.

To summarize, six-years of unprecedented fiscal and monetary stimulus have ensured that everyone is today fully dressed up, liquored up, and silly eager for The Big Party. “Anybody seen the punchbowl?” “Where is it, and I mean now!” “Oh crap, where on earth did it go!!” “Who took it away!!” “I’m telling you to bring it back right now or there’s going to be some serious trouble!!!” What a fiasco.

For the Week:

The S&P500 sank 3.5% (up 8.3% y-t-d), and the Dow fell 3.8% (up 4.3%). The Utilities added 0.5% (up 20.1%). The Banks were hit for 3.8% (up 3.6%), and the Broker/Dealers sank 3.5% (up 10.5%). Transports declined 3.4% (up 19.4%). The S&P 400 Midcaps lost 2.9% (up 4.5%), and the small cap Russell 2000 dropped 2.5% (down 1.0%). The Nasdaq100 declined 2.6% (up 16.9%), and the Morgan Stanley High Tech index sank 3.6% (up 8.7%). The Semiconductors were slammed for 4.5% (up 25.5%). The Biotechs slipped 0.9% (up 46.8%). Although bullion rallied $30, the HUI gold index declined 0.4% (down 16.3%).

One-month Treasury bill rates closed the week at one basis point and three-month rates ended at two bps. Two-year government yields dropped 10 bps to 0.54% (up 16 bps y-t-d). Five-year T-note yields fell 17 bps to 1.51% (down 23bps). Ten-year Treasury yields sank 22 bps to 2.08% (down 95bps). Long bond yields fell 23 bps to 2.74% (down 123bps). Benchmark Fannie MBS yields were down 16 bps to 2.79% (down 82bps). The spread between benchmark MBS and 10-year Treasury yields widened six to 71 bps. The implied yield on December 2015 eurodollar futures dropped 10.5 bps to 0.83%. The two-year dollar swap spread increased three to 24 bps, and the 10-year swap spread gained two to 13 bps. Corporate bond spreads widened significantly. An index of investment grade bond risk jumped 10 to 72 bps. An index of junk bond risk surged 52 bps to 396 bps. An index of emerging market (EM) debt risk jumped 67 to 383 bps (high since June 2012).

Greek 10-year yields surged 192 bps to 9.15% (up 73bps y-t-d). Greek five-year yields jumped 332 bps to 9.15%. Ten-year Portuguese yields rose 22 bps to 2.97% (down 316bps). Italian 10-yr yields gained nine bps to 2.06% (down 206bps). Spain's 10-year yields rose five bps to 1.88% (down 227bps). German bund yields sank 16 bps to a record low 0.62% (down 131bps). French yields dropped 13 bps 0.90% (down 166bps). The French to German 10-year bond spread increased three to 28 bps. U.K. 10-year gilt yields fell 22 bps to 1.80% (down 122bps).

Japan's Nikkei equities index dropped 3.1% (up 6.6% y-t-d). Japanese 10-year "JGB" yields were down three bps to a record low 0.39% (down 35bps). The German DAX equities index sank 4.9% (up 0.5%). Spain's IBEX 35 equities index was clobbered for 6.9% (up 2.3%). Italy's FTSE MIB index was hammered for 7.4% (down 1.9%). Emerging equities were for the most part under significant pressure. Brazil's Bovespa index collapsed 7.7% (down 6.8%). Mexico's Bolsa fell 3.5% (down 2.4%). South Korea's Kospi index fell 3.3% (down 4.5%). India’s Sensex equities index was slammed for 3.9% (up 29.2%). China’s Shanghai Exchange was unchanged (up 38.9%). Turkey's Borsa Istanbul National 100 index declined 2.4% (up 22.8%). Russia's MICEX equities index fell 4.6% (down 3.0%).

Debt issuance slowed. Investment-grade issuers included American Honda $1.5bn, State Street $1.0bn, Goldman Sachs $1.0bn, New York Life Global $650 million, Trans-Allegheny Interstate Line $550 million, Penske Truck Leasing $500 million, Ingram Micro $500 million, AIG Global Funding $450 million and Overseas Primate Investment Corp $240 million.

Junk funds saw outflows surge to $1.89bn (from Lipper), the largest outflows since October. Junk issuers this week included OneMain Financial Holdings $1.5bn, Kindred Healthcare $1.35bn, CBRE Services $425 million, Westmoreland Coal $350 million and WGL Holdings $150 million.

Convertible debt issuers included Envestnet $150 million and IGI Laboratories $125 million.

International dollar debt sales dropped sharply. Issuers included Neder Waterschapsbank $1.5bn, Nakama RE $375 million and Asian Development Bank $300 million.

Freddie Mac 30-year fixed mortgage rates increased four bps to 3.93% (down 49bps y-o-y). Fifteen-year rates jumped 10 bps to 3.20% (down 23bps). One-year ARM rates slipped one basis point to 2.40% (down 11bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates up three bps to 4.14% (down 40bps).

Federal Reserve Credit last week expanded $1.8bn to $4.448 TN. During the past year, Fed Credit inflated $542bn, or 13.9%. Fed Credit inflated $1.637 TN, or 58%, over the past 109 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt increased $2.5bn last week to $3.324 TN. "Custody holdings" were down $30bn year-to-date and fell $43bn from a year ago.

Global central bank "international reserve assets" (excluding gold) - as tallied by Bloomberg – were up $233bn y-o-y, or 2.0%, to another seven-month low $11.771 TN. Over two years, reserves were $924bn higher for 9% growth.

M2 (narrow) "money" supply expanded $35.6bn to a record $11.603 TN. "Narrow money" expanded $630bn, or 6.2%, over the past year. For the week, Currency increased $2.4bn. Total Checkable Deposits jumped $18.2bn, and Savings Deposits gained $18.4bn. Small Time Deposits slipped $0.8bn. Retail Money Funds fell $2.5bn.

Money market fund assets rose $18.5bn to $2.706 TN. Money Funds were down $12.3bn y-t-d and $3.3bn from a year ago, or 0.1%.

Total Commercial Paper dropped $9.0bn to $1.087 TN. CP expanded $40.8bn year-to-date and was up $5.1bn over the past year, or 0.5%.

Currency Watch:

December 10 – Bloomberg (Fion Li): “Don’t fight the central bank is an old adage on Wall Street. In China, currency traders are doing the opposite. Traders pushed the yuan’s onshore exchange rate to a five- month low even as the People’s Bank of China raised the official rate to the highest since March. The 1% discount between the market and central bank rates is the widest gap since June. That’s a turnaround from the first four months of the year, when weaker fixings by the PBOC prompted speculators to reverse bets on yuan appreciation and sent the spot rate lower.”

The U.S. dollar index declined 1.1% to 88.36 (up 10.4% y-t-d). For the week on the upside, the Japanese yen increased 2.3%, the Swiss franc 1.6%, the Danish krone 1.5%, the euro 1.5%, the South Korean won 1.0%, the British pound 0.9%, the New Zealand dollar 0.9%, the Singapore dollar 0.7% and the Swedish krona 0.2%. For the week on the downside, the Mexican peso declined 2.7%, the Norwegian krone 2.6%, the Brazilian real 2.5%, the South African rand 2.1%, the Canadian dollar 1.3%, the Australian dollar 0.8% and the Taiwanese dollar 0.6%.

Commodities Watch:

December 10 – Bloomberg (Grant Smith): “OPEC cut the forecast for how much crude oil it will need to provide in 2015 to the lowest in 12 years amid surging U.S. shale supplies and reduced estimates for global consumption… The impact of this year’s 40% price collapse on supply and demand remains unclear, OPEC said.”

The Goldman Sachs Commodities Index sank 5.9% to a more than five-year low (down 29%). Spot Gold rallied 2.5% to $1,223 (up 1.4%). March Silver recovered 4.9% to $17.057 (down 12%). January Crude collapsed $8.03 to $57.81 (down 41%). January Gasoline sank 9.9% (down 43%), and January Natural Gas slipped 0.2% (down 10%). March Copper gained 1.1% (down 14%). March Wheat increased 2.1% (up 1%). March Corn jumped 3.2% (down 3%).

U.S. Fixed Income Bubble Watch:

December 11 – Bloomberg (Christine Idzelis and Craig Torres): “The danger of stimulus-induced bubbles is starting to play out in the market for energy-company debt. Since early 2010, energy producers have raised $550 billion of new bonds and loans as the Federal Reserve held borrowing costs near zero, according to Deutsche Bank AG. With oil prices plunging, investors are questioning the ability of some issuers to meet their debt obligations. Research firm CreditSights Inc. predicts the default rate for energy junk bonds will double to 8% next year. ‘Anything that becomes a mania -- it ends badly,’ said Tim Gramatovich, who helps manage more than $800 million as chief investment officer of… Peritus Asset Management. ‘And this is a mania.’ The Fed’s decision to keep benchmark interest rates at record lows for six years has encouraged investors to funnel cash into speculative-grade securities to generate returns, raising concern that risks were being overlooked. A report from Moody’s… this week found that investor protections in corporate debt are at an all-time low, while average yields on junk bonds were recently lower than what investment-grade companies were paying before the credit crisis.”

December 12 – Bloomberg (Cordell Eddings and Nabila Ahmed): “The market for new junk bonds has all but shut as plunging oil prices and borrowing costs at an 18-month high deter issuers. Even as sales of high-yield, high-risk notes in the U.S. reached a record $353.1 billion this year, offerings have stalled this month with the slowest pace for a December since 2011. Junk is on track to deliver its second straight quarterly loss, the first time that’s happened since 2008, and trimming gains for the year to 1.47%... After six years of easy monetary policies by the Federal Reserve boosted the ability of the least-creditworthy companies to borrow on favorable terms, investors are becoming more discriminating. The average yield on speculative-grade debt climbed to 7.11% yesterday from an all-time low of 5.69% in June…”

December 9 – Bloomberg (Sridhar Natarajan): “BlackRock Inc. Chief Executive Office Laurence D. Fink said moments of severe volatility will continue to plague the corporate bond market unless regulators enforce a push toward more electronic trading. ‘Regulators need to admit that we have changed the ecosystem of bonds and yet we are not seeing regulatory pressure to transform the bond market into more electronic trading,’ Fink said… ‘I am absolutely convinced we will have a day, a week, two weeks where we will have a dysfunctional market. It’s going to create some sort of panic, create uncertainty again.’”

U.S. Bubble Watch:

December 12 – Bloomberg (Lisa Abramowicz): “Credit investors are preparing for the worst. They’re cleaning up their portfolios, selling riskier debt that’s harder to trade in bad times and hoarding longer-term government bonds that do best in souring markets. While investors have pruned energy-related holdings in particular as oil prices plunge, they’re also getting rid of other types of corporate bonds, causing yields to surge to the highest in more than a year. ‘We believe the pervasive nature of the sell-off is more reflective of overall liquidity concerns in the cash market than of fundamental deterioration,’ Barclays Plc analysts Jeffrey Meli and Bradley Rogoff wrote… ‘The weakness, while certainly most pronounced in the energy sector, has been broad based.’”

December 11 – Bloomberg (Lisa Abramowicz): “Perhaps 2014 will go down in history as the year that junk bonds sent a warning signal as oil plummeted and stocks just kept rallying. Prices on high-yield bonds have declined 2.4% this month and 5.7% since the end of August, even as U.S. equities have climbed to new highs. The dollar-denominated debt is now yielding the most relative to a comparable measure on the Standard & Poor’s 500 index since 2011.”

December 8 – CNBC (Phil LeBeau): “In the latest sign Americans are comfortable paying more for what they'll drive, the country is on the cusp of major milestone. This year, automakers are on pace to sell more than one million vehicles in the U.S. with transaction prices of at least $50,000 according to new data compiled by TrueCar… The growth in sales of higher priced models is stunning when compared with the auto industry overall. From January through November 931,064 vehicles were sold in the U.S. with average price above $50,000, a whopping 30.8% increase compared to the same period last year… Meanwhile, …sales of models with average transaction prices under $50,000 are up just 4.1% this year.”

December 8 – Bloomberg (Clea Benson): “Fannie Mae and Freddie Mac have set terms for letting borrowers put down as little as 3% of a home’s cost to get mortgages, a step criticized by Republican lawmakers as a return to risky lending. Starting on Dec. 13, Fannie Mae will allow the lower down payments for first-time homebuyers and permit refinancing borrowers to reduce equity to 3% to cover closing costs… Freddie Mac will begin a program in March giving breaks to lower-income buyers and first-time borrowers who get housing counseling.”

December 9 – Dow Jones (Jon Ostrower): “Boeing Co. will reduce monthly production of its 747-8 jetliner to 1.3 aircraft a month from 1.5, as demand continues to slow for the storied jumbo jet. The aerospace giant… said it would make the reduction, which will lower annual deliveries of the 747 to approximately 16 from 18, in September 2015. The planned cut enables ‘us to continue to run a healthy business,’ Boeing said… Boeing last year said it was cutting 747 output to 1.5 aircraft a month from 1.75.”

Federal Reserve Watch:

December 9 – Wall Street Journal (Jon Hilsenrath): “Federal Reserve officials are seriously considering an important shift in tone at their policy meeting next week: dropping an assurance that short-term interest rates will stay near zero for a ‘considerable time’ as they look more confidently toward rate increases around the middle of next year. Senior officials have hinted lately that they’re looking at dropping this closely watched interest-rate signal… ‘It’s clearer that we’re closer to getting rid of that than we were a few months ago,’ Fed Vice Chairman Stanley Fischer said… New York Fed President William Dudley has avoided using the ‘considerable time’ phrase in recent speeches and instead said the Fed should be ‘patient’ before raising rates.”

ECB Watch:

December 11 – Financial Times (Claire Jones): “The European Central Bank has injected €129.8bn through its second offer of cheap four-year loans, missing expectations of a higher take-up. Analysts polled by Bloomberg last week had forecast eurozone lenders to bid for €170bn of a possible €317bn. Banks took €82.6bn in the first of the auctions, which the ECB hopes will boost lending to the region’s credit-starved smaller businesses. The offer is part of a package of eight auctions, known as ‘Targeted Longer-Term Refinancing Operations’, allowing banks to borrow at ultra-low fixed rates if they agree to terms for lending to businesses and households in the region. The remaining six auctions will take place over the next two years. The result of the auction will weigh on the ECB’s decision-making in the months ahead, with weak demand supporting the case for doing more.”

Central Bank Watch:

December 11 – Bloomberg (Saleha Mohsin): “Norway’s central bank cut its main interest rate for the first time in more than two years and signaled it may ease again next year as plunging oil prices threaten growth in western Europe’s biggest crude exporter. The rate was lowered by 0.25 percentage point to 1.25%... The bank sees a ‘50-50 chance’ for another rate cut next year, Governor Oeystein Olsen said… The job now is to ‘prevent a severe downturn,’ he said…”

Russia/Ukraine Watch:

December 11 – Bloomberg (Olga Tanas, Anna Andrianova and Ksenia Galouchko): “Russia’s fifth interest-rate increase this year failed to stem the ruble’s worst rout in 16 years, risking further damage to an economy battered by sanctions and oil prices near the lowest since 2009. The Bank of Russia increased its key rate to 10.5% from 9.5%... ‘This is a spineless decision,’ Vadim Bit-Avragim, who helps oversee about $4 billion at Kapital Asset Management LLC in Moscow, said… ‘If the central bank’s goal was to defend the ruble, it would’ve raised rates by 2-3 percentage points.’”

December 10- Financial Times (Peter Spiegel in Brussels and Roman Olearchyk): “The International Monetary Fund has identified a $15bn shortfall in its bailout for war-torn Ukraine and warned western governments the gap will need to be filled within weeks to avoid financial collapse. The IMF’s calculations lay bare the perilous state of Ukraine’s economy and hint at the financial burden of propping up Kiev… The additional cash needed would come on top of the $17bn IMF rescue announced in April and due to last until 2016… ‘It’s not going to be easy,’ said one official involved in the talks. ‘There’s not that much money out there.’ …Without additional aid, Kiev would have to massively slash its budget or be forced to default on its sovereign debt obligations. Since the bailout programme began in April, Ukraine has received $8.2bn in funding from the IMF and other international creditors… Under IMF rules, the fund cannot distribute aid unless it has certainty a donor country can meet its financing obligations for the next 12 months, meaning the fund is unlikely to be able to send any additional cash to Kiev until the $15bn gap is closed. The scale of the problem became clearer last week after Ukraine’s central bank revealed its foreign currency reserves had dropped from $16.3bn in May to just $9bn in November. The data also showed the value of its gold reserves had dropped by nearly half over the same period.”

December 10 – Bloomberg (Lyubov Pronina and Natasha Doff): “Russian companies lost tens of billions of rubles on foreign-exchange derivatives amid a rout in the ruble, Interfax reported, citing Sergey Moiseev, the head of financial stability at the central bank. Companies were forced to close out the contracts after the central bank’s move to a free-floating currency exposed them to the world’s highest currency volatility amid a slump in oil prices, Moiseev said…”

December 11 – Bloomberg (Jason Corcoran, Ilya Khrennikov and Anna Baraulina): “Anatoly Ivanov, a 39-year-old software engineer who lives in a 53 square-meter (570 square-foot) St. Petersburg apartment with his wife and child, said he feels boxed in. The ruble’s collapse this year has caused a headache for Anatoly, who bought his Soviet-era home with a dollar mortgage in 2008… At the time, a dollar was 23 rubles and the interest rate on the mortgage was 4 percentage points lower than on loans in rubles. Yesterday, the rate was about 55 to the dollar, and Ivanov is considering paying a penalty to switch the mortgage into rubles. ‘Our $800 monthly payment has jumped to 38,000 rubles from 26,000 rubles since the start of the year,’ Ivanov, who is paid in rubles, said… Lured by foreign banks offering lower rates, Russians have taken 108.5 billion in non-ruble mortgage loans… While that represents 3% of total mortgages, 15% of the foreign currency home loans are delinquent, while 0.9% of ruble loans are overdue.”

Brazil Watch:

December 10 – Bloomberg (Filipe Pacheco): “Brazil’s plan to cut subsidized loans is coming at an inopportune time for corporate borrowers. Incoming Finance Minister Joaquim Levy pledged last month to scale back transfers to state development banks including BNDES, part of a strategy to trim debt levels after Standard & Poor’s lowered Brazil’s credit rating to the cusp of junk in March. While his plan reduced the nation’s funding costs in the bond market, it may also boost expenses for companies struggling to obtain overseas financing with yields at a 13-month high, Barclays Plc and Banco Mizuho do Brasil SA said. Levy’s strategy marks a shift after funding for BNDES doubled during President Dilma Rousseff’s first term, which benefited corporate borrowers including Petroleo Brasileiro SA, Norte Energia SA and Oi SA. Three Brazilian companies have pulled overseas bond offerings in the past month as economic growth stalls and a bribery probe into Petrobras prompts investors to shun sales.”

December 8 – Bloomberg (Julia Leite): “In 2011, Moody’s… rated Petroleo Brasileiro SA three levels above its owner, Brazil’s government. Today, the bond rater says the oil producer would merit a junk grade without state support and is proving a drag on the nation’s own creditworthiness. Mauro Leos, Moody’s lead analyst for Brazil, said… that a bribery probe into Petrobras is contributing to the negative outlook on Brazil’s rating, two days after Moody’s cut its so-called stand-alone rating for the oil producer to speculative grade. The comments came after the investigation took another turn last week when President Dilma Rousseff’s ruling party was alleged to have received donations from companies in exchange for securing contracts with Petrobras.”

December 8 – Bloomberg (Sabrina Valle): “AP Moeller-Maersk A/S is among foreign companies being investigated in Brazil over allegations they bribed Petroleo Brasileiro SA executives in exchange for contracts, widening the probe from local suppliers to companies working on oil projects around the globe. A prosecutor and a federal police agent said in interviews that they found evidence of international suppliers paying bribes through agents to Paulo Roberto Costa, the former Petrobras executive who is cooperating with authorities in exchange for a reduced sentence…”

December 11 – Bloomberg (Anna Edgerton and Rachel Gamarski): “Petroleo Brasileiro SA, the oil producer at the center of Brazil’s biggest-ever corruption scandal, plans to sell debt this year backed by the national treasury and state-run Centrais Eletricas Brasileiras SA. The transaction will be guaranteed by money that Eletrobras… owes Petrobras from the purchase of fuel for power plants, Energy Minister Edison Lobao told reporters…”

December 11 – Bloomberg (Francisco Marcelino, Gerson Freitas Jr. and Tariq Panja): “The boost that the World Cup was supposed to give Brazilian soccer hasn’t materialized as a sluggish economy and budget shortfalls leave the majority of top division clubs unable to pay salaries. Five of the league’s 20 clubs, including former FIFA world club champion Sao Paulo and Santos, where soccer star Pele spent the majority of his career, ended the season this month without major sponsors on their shirts. At least 17 clubs delayed players’ salaries this year, said a person with direct knowledge of the matter…”

EM Bubble Watch:

December 8 – Bloomberg (Srinivasan Sivabalan): “Foreign-debt levels of companies in emerging markets from China to India and Brazil are underestimated, threatening financial stability, the Bank for International Settlements said. Companies are raising more foreign funds through their offshore affiliates and accounting practices understate the currency risk in such transactions, the… institution said in its quarterly report. Almost half of the $554 billion that the firms raised in the five years through 2013 came from the affiliates, the BIS said. ‘Offshore subsidiaries of emerging-market non-financial corporates are increasingly acting as surrogate intermediaries,’ raising money abroad and transferring it to their parent companies, economists led by Stefan Avdjiev wrote. ‘This trend could have important financial-stability implications.”

December 11 – Financial Times (Pan Kwan): “Market fears over Venezuela’s creditworthiness are approaching panic levels as the price of oil plunges. The cost of insuring the South American country’s government debt against default surged to a new high on Wednesday… The five-year credit-default swap on Venezuelan government debt surged more than 832 bps — its biggest one-day jump on record — to 4019.57 bps. This makes Venezuelan debt the most expensive to insure in the world, surpassing even Argentina’s, which went into default for the eighth time in its history this year. The cost of insuring a portfolio of Venezuelan sovereign debt for five years against default has quadrupled since June, when oil began its downward spiral… With oil accounting for roughly 96 per cent of its export earnings and 48% of budget revenue, the slump in oil prices has taken a toll on the country’s already dire finances.”

December 9 – Bloomberg (Katia Porzecanski): “The scores of money managers and analysts who crowded into Cleary Gottlieb Steen & Hamilton LLP’s panel discussion on Venezuela last week are a testament to the deepening concern over whether President Nicolas Maduro can make good on the nation’s debt obligations. … Among the topics debated were whether the state oil company’s U.S. gasoline stations could be seized as collateral and whether it was legally possible for Venezuela to restructure the producer as an empty shell to avoid bondholder claims, they said. For a country that hasn’t missed a foreign bond payment in decades, the questions reflect growing speculation the socialist revolution that transformed Venezuela over the past 15 years under Hugo Chavez and now Maduro has finally pushed the nation to the brink of economic collapse.”

December 10 – Bloomberg (Onur Ant and Constantine Courcoulas): “Turkey’s economic growth slowed in the third quarter as falling borrowing costs failed to spur domestic demand and agricultural output contracted. Gross domestic product grew 1.7%, the slowest pace since 2012, compared with a revised 2.2% during the previous three months… Household consumption, which makes up two-thirds of the Turkish economy, grew 0.2% from a year ago compared with 0.5% during the previous quarter.”

December 12 – Bloomberg (Onur Ant): “Turkish central bank Governor Erdem Basci is sending monetary-policy signals that are upending a two-month government bond rally. Lira bonds have lost 3.8% in December after the biggest returns in emerging markets the previous two months… Further declines are in store after Basci indicated two days ago that he’s in no rush to cut interest rates further…”

December 9 – Bloomberg (Sandrine Rastello): “India’s current-account deficit widened more than estimated to the largest since the quarter through June 2013 as exports slowed and gold imports surged. The July-September shortfall in the broadest measure of trade widened to $10.1 billion from $7.8 billion the previous quarter… A recession in Japan and deteriorating outlook for the euro-area economy are keeping a lid on demand for Indian products as Prime Minister Narendra Modi seeks to revive manufacturing in Asia’s third-largest economy.”

December 9 – Bloomberg (Maciej Martewicz and Konrad Krasuski): “Poland’s real-estate developers are selling a record amount of debt this year to fund an office construction boom even as the central bank warns of a glut. Builders including Echo Investments SA and Ghelamco NV have issued about 1.7 billion zloty ($500 million) of bonds amid record low interest rates at home and in the neighboring euro region, according to Fitch… While the Polish central bank said last week that Warsaw vacancy rates at 14% signaled a ‘growing imbalance,’ no fewer than 46 office buildings, including the 48-story Warsaw Spire, are under construction.”

Europe Watch:

December 11 – Bloomberg (David Goodman): “Greece’s government bonds fell, pushing three- and five-year rates to the highest since the nation restructured its debt in 2012, amid speculation early presidential elections will spark renewed political turmoil. The nation’s 10-year yield exceeded 9% after Prime Minister Antonis Samaras said the markets fear a victory for anti-bailout party Syriza in potential elections next year.”

December 8 – Reuters (John O’Donnell and Paul Carrel): “The euro zone is experiencing a massive weakening in its economy not least due to a slowdown in its biggest member, Germany, a senior ECB policy maker said… ‘We see a massive weakening in the euro zone economy,’ Ewald Nowotny, a member of the ECB's Governing Council, told a conference… Nowotny said that the European Central Bank had struck a middle ground in its monetary policy, between extremes in the United States that called for full-blown money printing and others that wanted the ECB to take a less expansive path.”

December 10 – Reuters (James Mackenzie): “In a European political landscape increasingly populated with insurgent, anti-system parties, Italy's eurosceptic anti-immigrant Northern League is the latest to profit from a groundswell of hostility to the European Union. The League's 41-year-old leader, Matteo Salvini calls the euro a ‘criminal currency’ and wants to demolish the Brussels consensus that has dominated European politics since the end of World War Two. He is also, at odds with mainstream leaders, an admirer of Russian President Vladimir Putin. Salvini has become Italy's second-most popular leader since taking over the party, founded in the early 1990s as a separatist movement in the prosperous north of Italy.”

December 10 – Bloomberg (Sonia Sirletti): “Italian banks boosted their holdings of the country’s sovereign debt to a record high as Italy’s third recession in six years makes lending to companies and individuals risky. Italian banks increased Italian sovereign-debt holdings by almost 18.4 billion euros ($22.8bn) in October to a record 414.3 billion euros…”

December 8 – Bloomberg (David Goodman): “The drop in Italy’s 10-year bonds that followed a Standard & Poor’s downgrade of the nation lasted less than a morning, amid speculation the European Central Bank will start buying sovereign debt as soon as next month. Government bonds from Germany to Spain rose today after ECB President Mario Draghi said last week officials would act should current stimulus prove insufficient when it is reassessed early next year. A round of loans from the ECB to banks this week, part of stimulus plans intended to add as much as 1 trillion euros ($1.22 trillion) to the institution’s balance sheet, won’t even cover the repayments they owe from a previous program, according to a Bloomberg News survey…”

December 8 – Bloomberg (Ambereen Choudhury): “European banks will be weakened further by poor economic conditions and high litigation costs in 2015, according to Moody’s… Banks’ profits in the region, with the exception of the U.K. and Scandinavia, may be exposed to ‘economic tailwinds,’ hurting loan demand and the value of transactions, Moody’s said… ‘Weak macroeconomic conditions weigh on Europe’s banking sector, and low overall bottom lines implies that the European banking industry remains structurally vulnerable,’ Carola Schuler, Moody’s managing director…, said”

December 9 – Financial Times (John Plender): “France’s finance minister has called on the German establishment to watch its words when criticising his country’s economic policies, claiming barbs from Germany are fuelling the rise of anti-EU populists. Michel Sapin, who is under pressure from Brussels and Berlin to be more aggressive in cutting spending and in his reforms, said he was concerned by ‘certain extreme comments in Germany’. He called for mainstream parties to counter ‘outdated’ stereotypes.”

Global Bubble Watch:

December 8 – Financial Times (Claire Jones and Sam Fleming): “Global financial policy makers have sounded the alarm about the impact of a resurgent US dollar on emerging markets, where companies have racked up large debts denominated in the American currency. The Bank for International Settlements, known as the central bankers’ bank, warned… in its Quarterly Review that a prolonged rally in the dollar could expose financial vulnerabilities in emerging markets by damaging some companies’ creditworthiness. The… organisation added that there were increasing signs of fragility in financial markets, despite renewed hopes for economic growth, pointing to the recent stress in the $12.3tn US Treasury market that serves as the bedrock of the global financial system. ‘To my mind, these events underline the fragility — dare I say growing fragility — hidden beneath the markets’ buoyancy,’ said Claudio Borio, the head of the BIS’s monetary and economic department… However, companies in emerging markets have been borrowing heavily via the issuance of dollar securities in recent years… It said emerging market borrowers had issued a total of $2.6tn of international debt securities, of which three-quarters were denominated in dollars. International banks’ cross-border loans to emerging market economies amounted to $3.1tn in mid-2014, mainly in US dollars, the BIS added. Mr Borio said: ‘Should the US dollar, the dominant international currency, continue its ascent, this could expose currency and funding mismatches by raising debt burdens. The corresponding tightening of financial conditions could only worsen once interest rates in the US normalise.”

December 12 – Bloomberg (David Goodman): “The last time Greece’s bonds had this bad a week, the nation had just undergone the biggest debt restructuring in history, inconclusive elections had stoked concern it may exit the euro and Mario Draghi’s ‘whatever it takes’ pledge was more than two months away. The yield on Greek 10-year bonds has surged about 200 bps this week, the biggest leap since the height of the euro- area sovereign-debt crisis in May 2012. Worse still, the yield on three-year notes, issued in July as part of Greece’s emblematic return to capital markets, have jumped more than 450 bps, climbing above the longer-dated rates in a sign that investors are increasingly concerned the nation will be unable to pay its debt.”

December 8 – Reuters (Chris Vellacott): “China has become the largest emerging market destination for international bank lending, accounting for more than a quarter of cross-border claims on all emerging market economies, a central banking report shows. Cross-border claims on China increased by $65 billion in the second quarter of 2014 to $1.1 trillion, and were up nearly 50% in the year to the end of June, according to a quarterly report from the Bank for International Settlements… ‘China has become by far the largest (emerging market) borrower for BIS reporting banks. Outstanding cross-border claims on residents of China totaled $1.1 trillion at end-June 2014, compared with $311 billion on Brazil and slightly more than $200 billion each on India and Korea,’ the report says.”

Geopolitical Watch:

December 12 – Bloomberg (Diep Ngoc Pham and John Boudreau): “Tensions over the South China Sea were reignited after Vietnam said it had submitted its stance on the dispute to the international arbitration tribunal reviewing the Philippines’ challenge against China’s claims. Vietnam has asked the arbitration court to take into account its legal rights and interests in the disputed sea region, spokesman Le Hai Binh, said… The country also refuted China’s claims to the Paracel and Spratly islands in the statement, which provoked a Chinese response yesterday that its neighbor’s claims were unlawful. The renewed tensions are being sparked as the United Nations tribunal in the Hague considers Philippine’s challenge to China’s claim to much of the South China Sea as the island nation seeks to check Beijing’s bid for control of waters rich in oil, gas and fish. Vietnamese and Philippine leaders say they are determined to oppose China’s move to control the sea region…”

December 12 – Bloomberg (Alex Nussbaum and Alex Morales): “Envoys at the United Nations climate talks enter their final day in Lima divided on how to put teeth into a deal that the biggest polluters have turned into a package of mostly voluntary measures. Developing countries led by China and India want to pin down industrial nations on how they’ll meet a pledge for $100 billion a year in climate-related aid by 2020. The U.S. and its allies want to secure a way to ensure that all governments, rich and poor alike, will curb greenhouse gases. The differing goals underscore how quickly the problem about how to rein in emissions has shifted from an issue aimed mostly at rich polluters into one that needs to be answered by all nations.”

China Bubble Watch:

December 11 – Reuters: “China has told its banks to lend more in the final months of 2014 and relaxed enforcement of loan-to-deposit ratios to expand credit, sources told Reuters… Figures on inflation, imports and fiscal spending in November have already undershot expectations since the People's Bank of China (PBOC) sprang a surprise interest rate cut on Nov. 21… ‘I wouldn't be surprised by that at all,’ said Andrew Polk, resident economist for the Conference Board in Beijing. ‘It seems pretty clear activity is continuing to weaken throughout this fourth quarter.’ Two sources with knowledge of the matter said China's central bank increased the annual new loan target to 10 trillion yuan ($1.62 trillion) for 2014, up from what Chinese media have said was a previous target of 9.5 trillion yuan. Banks have disbursed 8.23 trillion yuan of loans between January and October, so they will have to quicken the pace in the last two months if they are to meet the new target.”

December 9 – Bloomberg: “China took one of its biggest steps yet to push local governments away from using opaque financing vehicles to raise money as policy makers seek to reduce leverage and develop a more transparent municipal bond market. The nation’s clearing agency for exchanges said yesterday it won’t allow bonds rated below AAA or sold by issuers graded lower than AA to be used as collateral for short-term loans obtained through repurchase agreements. The new rules sparked a retreat in lower-rated bonds of local government financing vehicles and contributed to a tumble in Shanghai shares as noteholders reassessed the appeal of owning such debt.”

December 12 – Bloomberg: “A local government financing vehicle in China’s eastern province of Jiangsu has delayed a bond sale after authorities ruled it wouldn’t be backed by the state. Changzhou Tianning Construction Development Co. said it won’t go ahead with a 1.2 billion yuan ($194 million) offering planned for Dec. 15 because of market volatility… The Finance Ministry has said local governments must detail all outstanding borrowings by Jan. 5 as it determines which of the thousands of financial entities set up by cities and provinces it may be willing to support.”

December 11 – Bloomberg: “The People’s Bank of China injected 400 billion yuan ($65bn) into the banking system, according to a person familiar with the matter, pressing ahead with targeted steps to add liquidity as the economy slows… The move comes as a previous PBOC injection of 500 billion yuan comes due this month. The PBOC had said it pumped that amount into the economy in September with a term of three months and a rate of 3.5%. Another 269.5 billion was added in October with the same terms, it said.”

December 10 – Bloomberg: “With $90 billion of bonds sold by local government financing vehicles coming due next year, China is walking a fine line between teaching investors a lesson and preventing widespread defaults. The nation’s clearing agency said this week that local bonds rated lower than the highest AAA grade are too risky to be used as collateral for short-term loans. That means about half of the outstanding 1 trillion yuan ($162bn) securities sold by local government financing vehicles, or LGFVs, in the exchange market can no longer be pledged to raise funds, according to Morgan Stanley. Warning that these securities aren’t risk free caused the yield spread on seven-year AA-rated local debt over Chinese government bonds to widen the most on record yesterday. Now investors will be looking for clues as to which of the thousands of financial entities set up by cities and provinces the government may be willing to support, and which it won’t. ‘We could see a further sell-off in LGFV and corporate bonds as investors are more aware of the credit and liquidity risks,’ said Ken Hu, the… chief investment officer for Asia-Pacific fixed income at Invesco… ‘The new rules are leading to some large-scale deleveraging.’”

December 11 – Bloomberg: “Loan defaults at China’s state-owned enterprises may increase as growth in the world’s second-biggest economy slows, according to Moody’s… Risks are greatest in industries with excess production capacity, Kai Hu, a senior credit officer at the rating company, said… Regulators stepped up efforts to curb local-government debt on Dec. 8, prompting borrowing costs to jump and companies to cancel or postpone at least 46.6 billion yuan ($7.5bn) of note sales this week… In the latest signs of concern in China’s credit markets, the extra yield companies rated AA must pay to sell bonds due in seven years over similar-maturity government notes has surged 51 bps this week to a two-month high of 263 bps. The seven-day repurchase rate, a gauge of interbank funding availability, rose as much as 17 bps today to a four- month high of 3.81%...”

December 6 – Financial Times (Jamil Anderlini): “China’s previously overheated property market has been in the doldrums for most of this year but things are likely to get a lot worse, because of demographic shifts that are about to reverse a main driver of the decades-long boom. According to newly published research, the size of China’s main property-buying population — people aged 25 to 49 — will peak next year and then start to decline, just as a huge glut of new apartments hits the market. This demographic will shrink drastically from 2018, with the number of urban homebuying Chinese falling much faster than contemporaries from the countryside, who are far less likely to have the means to buy expensive apartments, according to Ai Jingwei, an expert on Chinese real estate and author of the research… Moody’s Analytics estimates the building, sale and outfitting of apartments accounted for 23% of Chinese gross domestic product last year.”

December 12 – Bloomberg: “China’s economy slowed in November as factory shutdowns exacerbated weaker demand, raising pressure on the central bank to add further stimulus. Bloomberg’s gross domestic product tracker came in at 6.78% year-on-year in November, down from 6.91% in October and a fourth month below 7%... Factory production rose 7.2% from a year earlier, retail sales gained 11.7%, and investment in fixed assets expanded 15.8% in January through November from a year earlier…”

December 10 - South China Morning Post (Phoenix Kwong): “Economic weakness continues to weigh on China auto sales growth, which slowed to 2.3% last month. Vehicles sales last month totalled 2.1 million units, with the year-on-year growth rate slowing from October’s 2.8%, the state-backed China Association of Automobile Manufacturers (CAAM) said… November’s growth rate was 7.4 percentage points lower than that of the same period of last year, it said.”

December 12 – Bloomberg: “China plans to establish a fund to support troubled trust firms as repayment risks accumulate in the 13 trillion yuan ($2.1 trillion) industry. Under rules jointly issued by China Banking Regulatory Commission and the Ministry of Finance, each trust firm is required to contribute 1% of their net assets to the fund, while each trust product will pay 1% of the money raised… Premier Li Keqiang is trying to sustain economic growth while containing financial stress after the nation’s loosely regulated shadow-banking system started swelling in 2010.”

December 9 – Bloomberg: “China’s residential building boom is petering out, with the effects seen from slumping steel and cement prices, to electricity use, rail-freight traffic and retail sales. The drag will be long lasting with home completions set to fall by 1 to 3% annually from next year to 2025 after almost tripling in 13 years, according to… Gavekal Dragonomics. A once-in-a-generation shift in demand for housing and an overhang of supply suggests policy makers can cushion the effect with interest-rate cuts such as the one announced Nov. 21, not reverse it. ‘The turning point has come,’ said Wang Tao, chief China economist at UBS… ‘Construction has to come down so that means growth has to slow, and therefore steel demand, cement demand, energy consumption, mining production, appliances, automobiles -- everything has to come down.’ …Increasing evidence the slowdown is structural, not cyclical, is playing out on commodity markets and leaves the U.S. shouldering prospects for a pickup in 2015 global growth.”

December 12 – Bloomberg: “Regulators in China are considering restricting individual investors from buying corporate bonds rated below the top grade as policy makers seek to shift away from a ‘too small to fail’ mentality, Fitch… said. China Securities Regulatory Commission is proposing to only allow so-called qualified investors or institutional funds to buy anything less than locally AAA rated exchange-traded domestic bonds, Ying Wang, a… director at Fitch, said…”

Japan Bubble Watch:

December 12 – Bloomberg (Toru Fujioka and Masahiro Hidaka): “The Bank of Japan rejects the idea that additional monetary stimulus is needed to prevent the decline in oil prices in recent months from pulling down inflation, according to people familiar with the discussions. For now, policy makers assess that while cheaper energy costs may weigh on consumer prices for a time, they ultimately will boost the economy -- spurring inflation, the people said… Less agreement is found on how much capacity the central bank has to expand its buying of government debt, some of the people said.”