May 1 – Reuters (Jamie McGeever): “The calm on global financial markets masks a growing threat to their smooth functioning should shrinking liquidity morph into an outright crunch in response to a U.S. interest rate rise or some other shock. The price of German 10-year government bonds plunged this week, triggering the biggest rise in yield in over two years. Some analysts blamed the sell-off on a lack of liquidity, with Commerzbank going so far as to call it a ‘flash crash’… Liquidity is an amorphous concept and impossible to measure accurately. Its scarcity is only exposed in times of crisis. But everyone agrees it is shrinking, and this could dramatically push up the cost of trading, widen bid-ask spreads and make it harder for traders to close out positions. As long as asset prices are rising, as most are thanks to super-easy global monetary policy, this isn't a problem. But it will be if there is a sudden reversal and traders are forced to offload assets only to discover there are no buyers.”
It was yet another week replete with Bubble Dynamics, indications of fragility and heightened market liquidity worries. There was more disappointing economic data, especially considering the extraordinary monetary and market backdrops. Festering social instability has again bubbled to the surface. And Dr. Bernanke was out defending his record/doctrine, this time taking a shot at The Wall Street Journal. All in all, there was again ample confirmation of the global government finance Bubble thesis.
In a December 2001 CBB, I introduced “Financial Arbitrage Capitalism.” This was an update of the great Hyman Minsky’s “stages of development of capitalistic finance”:
“To garner better understanding as to the causes and ramifications of recent financial and economic turmoil it is helpful to contemplate the nature of dominant financial entrepreneurs, institutions, relations and structures. Minsky saw in capitalist economies ‘at least four models of the structure of relations among business, households and finance… Although all four coexist in advanced capitalistic economies, they can be viewed as stages in the development of capitalist finance. These are (1) commercial, (2) financial (3) managerial and (4) money market capitalism. These stages are related to what is financed and who does the proximate financing.’”
In that same 2001 post, I noted a piece from The Wall Street Journal (Greg Ip and Jacob Schlesinger), “Did Greenspan Push US High-Tech Optimism Too Far?”:
“The article addressed a central issue: ‘The Fed’s growth debate amounts to an argument over what kind of economy America can look forward to once the recession ends: one of rapidly rising living standards, low inflation, low interest rates, and federal budgets in reasonable balance – like that in most of the 1950s and 1960s – or a much-less-robust version.’”
Thirteen years have passed and by now it seems the answer is rather obvious. Yet this critical debate is anything but resolved. Actually, as the issue becomes more acute the discussion turns only more muddled. Dr. Bernanke deflects responsibility for the boom and bust, the crisis and the weak and unbalanced recovery. He instead credits monetary policy for being “the only game in town.” I am again reminded of a central theme from “When Money Dies: The Nightmare of Deficit Spending, Devaluation, and Hyperinflation in Weimar Germany:” Weimar central bankers would not accept that their policies were the overriding problem. Rather, they believed they were responding to outside forces. Their responses only got bigger.
Key facets of Minskian analysis remain pertinent today: “Financial structure is a central determinant of the behavior of a capitalist economy.” There is a critical role played by the evolution of financial structures and institutions - and their effects on economic structure and performance. As they say, “You are what you eat”. An economy is how its Financial Sphere lends, invests and speculates. Monetary inflation is the root cause of disease, and I’ve been pounding on my Analytical Framework of late as the global system approaches a major inflection point.
In my terminology, economic prospects are only as favorable as the underlying finance is sound. After the bursting of the nineties “tech” Bubble, central bankers responded to stagnation by pushing monetary inflation even harder. The results were predictable: Only greater distortions to market incentives – more leverage, more financial speculation and an explosion of high-risk mortgage securities and derivatives.
The historic boom in high-risk debt issuance and leveraging - “Financial Arbitrage Capitalism” – played a prevailing role in economic development throughout the boom period. Today’s confluence of secular stagnation, unending extreme monetary measures and unstable global Bubble markets has its roots in nineties financial innovation and excess. And the more conspicuous policy shortcomings have turned, the more entrenched central bankers have become to a dangerously flawed inflationary doctrine.
The critical issue is neither inflation nor deflation. To be clear, the rapid expansion of non-productive Credit, speculative leveraging, risk-market distortions, Bubbles and attendant resource misallocation and wealth redistribution are the predominant risks. Deeply flawed monetary management is directly culpable – and has been for better than two decades.
I began chronicling the “global government finance Bubble” in 2009. In 2013, I again updated Minky’s “stages.” “Financial Arbitrage Capitalism” had been supplanted by “Government Finance Quasi-Capitalism (GFQC).”
From August 17, 2013 CBB: “The government now essentially determines market yields throughout the entire Credit system. The government now basically insures system mortgage Credit and sets mortgage borrowing costs. Massive federal deficits and low Fed-dictated borrowing costs sustain inflated corporate earnings and cash-flows. The Fed has come to believe it is within its mandate to inflate securities and asset prices. It has crushed returns on saving instruments. Amazingly, the Fed believes it is within its mandate to dictate that savers flee the safety of deposits and other “money” for the risk markets. “Government Finance Quasi-Capitalism” exacerbates fragilities. It fosters ongoing Credit excesses including a historic expansion of non-productive government debt. GFQC and the resulting flow of finance exacerbate imbalances and economic maladjustment. Accordingly, resulting financial and economic fragilities ensure an even bigger role for Washington in the real economy and for the Federal Reserve in the financial markets.”
I stick by this analysis. Appreciation of the ongoing evolution of finance, financial players, financial structures and financial/monetary policies has become critical. It’s a feeble debate that fixates on the timing of Fed “liftoff.” Of course, conventional analysis sees things conventionally bullish. My analytical framework sees unstable “money” and Credit, unstable financial structures and weak economic underpinnings, with desperate monetary policy on a global basis trying to ward off mounting systemic vulnerability.
A few “Government Finance Bubble Quasi-Capitalism” tenets are in order: After unprecedented “money” printing and market liquidity injections, it will not be possible for central bankers to extricate themselves from the Bubbles they’ve instigated. Government policies targeting higher securities prices are pro-market Bubbles; pro-resource misallocation; pro-wealth inequality; pro-economic imbalances and stagnation; and pro-social tension. Since Bubbles and wealth redistributions now thrive on an unprecedented global scale, the backdrop is exceptionally pro-geopolitical instability and risk. In a world of complexities, inconsistencies and contradictions, I believe this framework is especially germane.
I would strongly argue that Fragility and Illiquidity are integral and interminable to GFQC. Central bankers have inflated securities markets through the purchase of Trillions of sovereign debt, bonds and stocks. They have pledged liquid markets. Central banks have incentivized the flow of Trillions into global securities markets. Monetary policy has incentivized Trillions of leveraged speculation on a global basis. Government stimulus and market backstopping policies have been fundamental to a flourishing derivatives “insurance” marketplace.
GFQC has directly fostered a massive expansion of the global pool of trend-following and performance-chasing finance. At this point, a sustained bout of risk aversion would confront a dearth of buyers. Liquidity risks have become structural. This ensures that bolstering markets prevails as a policy priority even in the face of booming stocks and bonds. This only works to further distort securities markets, exacerbating the dominance of “Financial Sphere” returns over “Real Economy Sphere” profits.
The upshot is a further widening of the historic divergence between inflating securities markets and deflating real economy prospects. Moreover, the massive global pool of speculative finance has turned progressively unwieldy, held in check by extreme policy measures that perpetuate risk-taking and “bull market” confidence.
GFQC has fomented a problematic “Crowded Trade” dilemma on a global basis. There is way, way too much “money” (and leverage) chasing speculative securities and derivative market returns. This creates intractable stability issues that again raised their head this week. Crowding has altered the game of financial speculation.
Fundamentally, “Crowded Trades” Change the Risk vs. Reward Calculus. Too much “money” chasing limited returns ensures that opportunities are quick to disappear. Meanwhile, a potential Crowd rush for the exits equates to major liquidity risk. Sophisticated market operators well appreciate this dynamic. Yet surviving a prolonged Bubble backdrop entails joining the Crowd and the performance chase. For most professionals, not participating is not an option. These are all textbook elements for a financial crash – though central bankers have apparently banished panics and market dislocation.
The global leveraged speculating community has struggled for performance over recent years. I have posited that this creates susceptibility to market losses spurring redemptions and a self-reinforcing risk-off dynamic. Notably, the savior Mario Draghi’s QE/euro devaluation provided a huge boost to speculative returns. Ongoing BOJ QE and Fed Ultra-Dovisness have also supported the speculator community. More recently, fiscal and monetary stimulus out of China has provided major underpinning for global speculation.
A prolonged period of unabating policy moves has solidified the view of limitless measures available to sustain global market booms. I’ll throw out a counter-view: Highly speculative markets are again approaching a critical juncture. For the most part, “developed” policy rates are near zero, while Trillions of “developed” sovereign debt yield near or less than nothing. Furthermore, global markets have now largely priced in ongoing loose monetary policy.
Global markets now react with blistering speed. It took seemingly no time for European sovereign yields to collapse to historic lows. The euro sank from about 1.40 to 1.05 (vs. $) in ten months. European stocks surged almost 50% in six months. Notably, prospects for aggressive fiscal and monetary stimulus spurred a spectacular 90% six-month gain in the Shanghai Composite. Where is the next big move?
Wednesday was an intriguing session in the markets. In the face of weaker-than-expected Q1 GDP (0.2%), Treasury yields jumped to a six-week high. U.S. bond yields followed the big reversal in German bunds, and somewhat less dramatic jumps in European and Japanese sovereign yields.
Curiously, Treasury yields rose this week in the face of unstable equity markets. The dollar was also under pressure. Biotech stocks were slammed. Higher-yielding stocks were being sold. So-called “defensive” stocks were underperforming. Small caps were underperforming. Meanwhile, many heavily shorted stocks and sectors were outperforming. Copper surged 6.4%, as an almost 2% gain in the Goldman Sachs Commodities Index boosted 2015 gains to 6.1%. In short, Crowded Trades were causing a bit of angst. I’m not so sure Friday’s equity market rally rectified the situation.
Global bond markets are fully priced for QE and disinflation forever. This historic Bubble – with all the unknown leverage and unappreciated risks to sophisticated and unsophisticated alike – now confronts a major risk: China.
Chinese officials were too slow and timid in efforts to rein in their runaway Bubble. “Terminal Phase” excesses have been accommodated to the point where massive fiscal and monetary stimulus will surely be forthcoming. This creates major uncertainty for the global pricing backdrop – for commodities, for things and for bonds. And with even signs of life in Europe, there’s now a catalyst for a potential upside surprise in inflation “psychology”. As such, the risk vs. reward calculus for the Crowded global deflation bond trade is turning unattractive. Moreover, Treasuries - and government bonds generally – are losing their appeal as a reliable hedge against market risk.
Government finance has made such a mess of things. Global bonds have become a historic Crowded Trade. Long dollar (short euro, yen, commodity currencies, EM, etc.) is a huge Crowded Trade. If a Chinese move toward massive stimulus (in concert with ultra-loose policies everywhere) does begin to weigh on global bond markets, what might this mean for the currencies Crowd? How vulnerable is the dollar to a self-reinforcing decline, the mirror image of the king dollar melt-up. What would this mean to the Crowded commodities short trade? Commodities and commodity currencies have been trading more bullishly.
The unwind of the Crowded post-crisis Global Reflation Trade had potential to be quite destabilizing. For the most part, instability was held in check by zero rates; open-ended QE and a flood of global liquidity; and a seemingly indefatigable Chinese Bubble. Aggressive QE and devaluation from Draghi and Kuroda helped mobilize king dollar. This spurred a rush to establish positions short commodity-related and leveraged long bonds and stocks – the Global Deflation Trade. Throughout it all, the outcome was only more global speculative leveraging.
A buyer of 10-year German bunds last Friday was willing to accept an annual yield of 15 bps. That same buyer lost 210 bps of principal on those bonds this week, as yields surged 22 bps. At this point, I’ll assume most global “bond” investors have forgotten how quickly losses can be incurred. This week saw French yields surge 23 bps to 0.65%. UK bond yields jumped 19 bps this week to 1.84%. Japanese JGB yields rose seven bps to a five-week high 0.36%. Ten-year Treasury yields jumped 21 bps to a seven-week high 2.12%. Long-bond yields surged 22 bps to near four-month highs.
I won’t get too carried away by a one-week reversal in global bond yields and some recent outperformance by commodities and EM. But it’s worth pondering the ramifications of heightened instability for a number of Crowded Trades. It’s always been somewhat of a challenge to square aggressive open-ended monetary stimulus with ongoing global deflationary pressures. And just when the massive global pool of speculative finance became comfortably (heavily) overweight U.S. securities markets -American markets underperform. Government policies have spurred historic global financial flows.
There are huge unavoidable costs associated with flawed policies and flagrant inflationism. At this point, what more can policy measures do to promote additional speculative leveraging? If the answer is “perhaps not much,” then it’s worth pondering the possibility that ebullient global markets are nearing an inflection point. Liquidity issues are a serious problem.
For the Week:
The S&P500 slipped 0.4% (up 2.4% y-t-d), and the Dow declined 0.3% (up 1.1%). The Utilities dropped 1.5% (down 6.3%). The Banks jumped 1.6% (down 0.4%), while the Broker/Dealers dipped 0.6% (up 3.8%). The Transports sank 1.6% (down 4.4%). The S&P 400 Midcaps lost 1.3% (up 4.2%), and the small cap Russell 2000 was hit for 3.1% (up 1.9%). The Nasdaq100 fell 1.3% (up 5.7%), and the Morgan Stanley High Tech index declined 0.7% (up 2.8%). The Semiconductors rallied 1.7% (up 2.7%). The Biotechs were hammered 5.2% (up 13%). While bullion was little changed, the HUI gold index gained 3.5% (up 9.7%).
One-and three-month Treasury bill rates ended the week at zero. Two-year government yields rose nine bps to 0.60% (down 7bps y-t-d). Five-year T-note yields jumped 19 bps to 1.50% (down 15bps). Ten-year Treasury yields surged 21 bps 2.12% (down 6bps). Long bond yields rose 22 bps to 2.83% (up 8bps). Benchmark Fannie MBS yields jumped 17 bps to 2.80% (down 3bps). The spread between benchmark MBS and 10-year Treasury yields narrowed four to 68 bps. The implied yield on December 2015 eurodollar futures rose 4.5 bps to 0.63%. Corporate bond spreads widened modestly. An index of investment grade bond risk increased two bps to 63 bps. An index of junk bond risk rose five bps to 338 bps. An index of EM debt risk fell nine bps to a five-month low 335 bps.
Greek 10-year yields dropped 219 bps to 10.35% (up 60bps y-t-d). Ten-year Portuguese rose 10 bps 2.07% (down 55bps). Italian 10-yr yields added two bps to 1.46% (down 43bps). Spain's 10-year yields gained eight bps to 1.46% (down 15bps). German bund yields surged 22 bps to 0.37% (down 17bps). French yields jumped 23 bps to 0.65% (down 18bps). The French to German 10-year bond spread widened one to 28 bps. U.K. 10-year gilt yields rose 19 bps to 1.84% (up 9bps).
Japan's Nikkei equities index was slammed for 2.4% (up 11.9% y-t-d). Japanese 10-year "JGB" yields jumped seven bps to 0.36% (up 4bps y-t-d). The German DAX equities index fell 3.0% (up 16.8%). Spain's IBEX 35 equities index declined 1.0% (up 10.8%). Italy's FTSE MIB index fell 1.6% (up 21.2%). Emerging equities were mostly under pressure. Brazil's Bovespa index slipped 0.6% (up 12.4%). Mexico's Bolsa was hit for 2.6% (up 3.3%). South Korea's Kospi index fell 1.5% (up 11.1%). India’s Sensex equities index fell 1.6% (down 1.8%). China’s bubbling Shanghai Exchange added 1.1% to a new six-year high (up 37.3%). Turkey's Borsa Istanbul National 100 index sank 1.9% (down 2.1%). Russia's MICEX equities index added 0.3% (up 20.9%).
Debt issuance remained strong. Investment-grade issuers included Oracle $10bn, Amgen $3.5bn, Pepsico $2.5bn, Crown Castle Towers $1.0bn, American Honda Finance $550 million, Texas Instruments $500 million, Northwestern University $500 million, Union Pacific Railroad $400 million, Reliance Standard Life $400 million, Texas Health Resources $300 million, FS Investment Corp $275 million, PriSo $200 million and AHS Hospital $200 million.
Convertible debt issuers this week included Echo Global Logistics $200 million.
Junk funds saw outflows of $859 million (from Lipper). Junk issuers included Quicken Loans $1.25bn, Micron Technology $1.0bn, Ahern Rentals $550 million, ESH Hospitality $500 million, 21st Century Oncology $360 million and Zayo Group $350 million.
International debt issuers included CNOOC $3.8bn, Dominican Republic $3.5bn, Nederlandse Waterschapsbank $2.6bn, Bank of Nova Scotia $1.4bn, Virgin Media Secured Finance $1.0bn, Lamar Funding $1.0bn, JLL/Delta Dutch Pledgeco $550 million, Emirates Telecom $400 million, Banco Latinoamericano de Comercio Exterior $350 million, Nightingale Finance $310 million, Everglades Re $300 million, ACI Airport SudAmerica $200 million and DaVinciRe $150 million.
Freddie Mac 30-year fixed mortgage rates increased three bps to 3.68% (down 19bps y-t-d). Fifteen-year rates gained two bps to 2.94% (down 21bps). One-year ARM rates were up five bps to 2.49% (up 9bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates rising seven bps to 4.06% (down 22bps).
Federal Reserve Credit last week declined $3.2bn to $4.444 TN. Over the past year, Fed Credit inflated $194bn, or 4.6%. Fed Credit inflated $1.633 TN, or 58%, over the past 129 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt were little changed last week at $3.289 TN. "Custody holdings" were down $4.6bn y-t-d.
Global central bank "international reserve assets" (excluding gold) - as tallied by Bloomberg – were down $358bn y-o-y, or 3.0%, to a 15-month low $11.541 TN. Reserve Assets are now down $491bn from the August 2014 peak. Over two years, reserves were $416bn higher, for 4% growth.
M2 (narrow) "money" supply slipped $1.9bn to $11.890 TN. "Narrow money" expanded $686bn, or 6.1%, over the past year. For the week, Currency increased $0.3bn. Total Checkable Deposits declined $5.9bn, while Savings Deposits gained $8.8bn. Small Time Deposits dipped $1.0bn. Retail Money Funds fell $4.2bn.
Money market fund assets declined $5.9bn to a new six-month low $2.582 TN. Money Funds were down $151bn year-to-date, while increasing $7.8bn from a year ago.
Total Commercial Paper declined $2.3bn to $1.023 TN. CP declined $8.4bn over the past year, or 0.8%.
Currency Watch:
The U.S. dollar index fell 1.7% to 95.214 (up 5.5% y-t-d). For the week on the upside, the euro increased 3.0%, the Danish krone 2.9%, the Swedish krona 2.7%, the Swiss franc 2.3%, the Norwegian krone 2.2% the Taiwanese dollar 0.7%, the South African rand 0.5%, the Australian dollar 0.4%, the South Korean won 0.2%, the Singapore dollar 0.1% and the Canadian dollar 0.1%. For the week on the downside, the Brazilian real declined 2.1%, the Mexican peso 1.0%, the Japanese yen 1.0%, the New Zealand dollar 0.9% and the British pound 0.3%.
Commodities Watch:
The Goldman Sachs Commodities Index gained 1.9% (up 6.1% y-t-d). Spot Gold was about unchanged at $1,179 (down 0.5%). July Silver rallied 2.9% to $16.135 (up 3%). June Crude gained $2.00 to $59.15 (up 11%). June Gasoline jumped 2.0% (up 39%), and May Natural Gas recovered 8.1% (down 4%). July Copper surged 6.4% (up 4%). May Wheat was down 3.3% (down 20%). May Corn declined 1.3% (down 9%).
Fixed Income Bubble Watch:
April 30 – Bloomberg (Finbarr Flynn and Lisa Abramowicz): “Japanese investors are plowing back into the same types of risky U.S. corporate-loan investments that caused them losses during the 2008 financial crisis. They’re pouring cash into loans to finance Burger King operator Restaurant Brands International Inc., hotel manager Hilton Worldwide Finance LLC and Caesars Entertainment Resort Properties LLC. They’re snapping up pools of the debt that have been sliced into pieces of varying risk and return, and converted into yen-denominated securities. The logic is simple: These buyers are desperate for a way to juice returns with local sovereign bonds yielding almost nothing, and speculative-grade loans offer more than five extra percentage points of compensation.”
April 29 – Financial Times (Robin Wigglesworth and Nicole Bullock): “Amgen and Oracle led a US corporate bond sales charge on Tuesday, raising $13.5bn to buy back shares as the market for company debt heated up again after the traditional earning season blackout period… US share buybacks and dividends are forecast to hit $1tn this year, as companies continue to eschew investments in favour of returning money to shareholders… This represents the best start to a year on record for both investment grade and junk-rated corporate debt sales, according to Dealogic, with $247.9bn of blue-chip bonds being sold and $132.2bn of high yield debt so far in 2015.”
April 28 – Bloomberg (Lisa Abramowicz): “Here’s a quick way for credit investors to earn billions of dollars this year: simply buy pieces of the largest new junk-bond sales, then sell them for a profit. It’s been a seemingly easy formula of late. Bonds issued recently by companie… have gained more in value than the U.S. high-yield bond market on average. The only obstacle is winning the chance to purchase the new sales directly, and that can prove to be a significant hurdle, because the largest, most-active investment firms usually have first dibs. For those lucky enough to get a seat at the table, the financial rewards have been hefty at a time of historically low bond yields around the world. Almost $10 billion of bonds sold by drugmaker Valeant have increased in value by about $345.5 million since their issuance last month…”
April 28 – Bloomberg (Jody Shenn and Matt Scully): “America’s mounting student-debt problem is threatening to create trouble in part of a $170 billion bond market tied to government-guaranteed loans. With borrowers increasingly struggling to repay their student loans, Moody’s… is warning it may take investors longer than promised to get their money back. The credit grader said this month it may lower rankings on $3 billion of top-rated debt as investors face the threat of slowing principal payments or even receiving no interest. The concern underscores the fallout from a record $1.2 trillion in U.S. student loans that’s spreading to everything from the housing market and consumer spending to taxpayers. As a sluggish economic recovery forces borrowers to miss payments or tap relief programs, only 37% are current and reducing their balances, according to a Federal Reserve Bank of New York presentation…”
U.S. Bubble Watch:
April 26 – CNBC (Alex Rosenberg): “The bottom line of earnings season adds up to this: companies are running into big trouble with their top lines. While companies generally tend to beat both earnings and revenue expectations, this year more have missed their first-quarter top-line estimates than beaten. Out of the first 201 S&P 500 Index companies to report first-quarter earnings, only 47% have beaten revenue estimates… If this number holds, it will be the first time that more companies have missed than beaten earnings expectations since the first quarter of 2013. Now, analysts on the whole expect to see S&P 500 revenue fall 3.5% year-over-year, whereas they had expected just a 2.6 percent drop when the first quarter ended. Meanwhile, earnings have surpassed analyst expectations nicely, with 73% of companies beating earnings-per-share estimates…”
April 30 – Bloomberg (David Wison): “Surging student-loan debt represents a key risk to the economy’s expansion because wage gains are failing to keep up, according to Beth Ann Bovino, U.S. chief economist at Standard & Poor’s… Education-related loans amounted to $1.16 trillion at the end of last year, a 71% increase from the second quarter of 2009… The growth contrasted with declines in mortgages, home-equity loans, credit cards and other forms of consumer borrowing. ‘Millennials’ heavy student-loan burdens could seriously crimp spending,’ Bovino wrote… ‘This is not a future anyone wants to see.’ …Student borrowing rose more than six times as fast as average hourly earnings between mid-2009 and the end of last year, according to data compiled by the Labor Department. The wage indicator rose 11% during the period.”
April 30 – Bloomberg (Tracy Alloway and Matt Scully): “It began with a seemingly wacky idea to reinvent banking as we know it. But no one is scoffing at peer-to-peer lending anymore -- least of all, Wall Street. Barely a decade old, ‘P2P’ has gone mainstream and is now being co-opted by some of the big financial players it was supposed to bypass. Investment funds can’t get enough of this business, which involves lending to people over the Internet and hoping they pay you back. Investors are snapping up the loans directly, while the banks are bundling them into securities, much as they did with subprime mortgages. Now peer-to-peer lending and its Internet enablers like LendingClub Corp., the industry leader, are being pulled into the high-octane world of derivatives. While many hail Wall Street’s growing involvement, others warn investors could get carried away, as they did during the dot-com era and again during the mortgage mania. The new derivatives could help people hedge their risks, but they could also lure speculators into the market. ‘It feels like the year 2000 again,’ said Frank Rotman, a partner at QED Investors, an Alexandria, Virginia-based venture-capital firm that has invested in Prosper Marketplace Inc., Social Finance Inc. and 13 other P2P lending platforms. ‘Everyone is chasing ’it,’ but they don’t know what ’it’ is, and that is kind of scary.’”
April 30 – Associated Press: “Results of financial ‘stress tests’ show that mortgage giants Fannie Mae and Freddie Mac, rescued by taxpayers in the 2008 crisis, would need as much as $157.3 billion in additional aid in a severe U.S. and global recession. The agency that oversees Fannie and Freddie, the Federal Housing Finance Agency, announced the results of the second annual stress tests.”
April 30 – Bloomberg (David M Levitt): “New York City construction spending jumped 26% last year to $36 billion, led by a record amount of residential building in a market skewed toward luxury housing, according to the New York Building Congress. Spending on residential construction surged 73% to $11.9 billion in 2014, exceeding an October forecast and marking the first time it has ever topped $7 billion… The number of new housing units failed to keep pace, increasing 11% to 20,329. That compares with more than 30,000 homes created annually between 2005 and 2008. The numbers suggest a tilt toward building high-end homes at a time when more housing is needed that’s within reach of middle-class residents, said Richard Anderson, the building congress’s president.”
Federal Reserve Watch:
May 1 – Wall Street Journal: “It’s nice to know we’re being read, and Thursday’s editorial on “The Slow-Growth Fed” sure got a rise out of Ben Bernanke. The former Federal Reserve Chairman turned blogger turned Pimco adviser wrote to defend the central bank and by implication his policies as innocent of responsibility for subpar economic growth… We’ve written that we are in uncharted monetary territory with risks and outcomes we lack the foresight to predict. Our view has been that the Fed’s first round of quantitative easing was necessary to stem the financial panic—and that it worked. We were skeptical of the later bouts of QE, and in our view these have been notably less successful in helping the economy return to robust health. Asset prices are up and the wealthy are better off, but the working stiff is still waiting for the economic payoff. But perhaps Ben should consult Stanley Fischer, the Fed’s current vice chairman, who recently said on CNBC that “we are going to be changing monetary policy from the most extremely expansionary we’ve been able to do in all of history to an extremely expansionary monetary policy.” That doesn’t sound like a return to tight money. Lifting rates off zero means beginning an inevitable return to monetary normalcy that lets markets set rates and allocate capital. We can understand that Mr. Bernanke doesn’t like being tagged with any responsibility for poor economic results. He absolved himself for any mistakes before the financial crisis too. But sooner or later he and the Fed have to stop using the financial crisis as the all-purpose excuse for slow growth.”
Curiously, Treasury yields rose this week in the face of unstable equity markets. The dollar was also under pressure. Biotech stocks were slammed. Higher-yielding stocks were being sold. So-called “defensive” stocks were underperforming. Small caps were underperforming. Meanwhile, many heavily shorted stocks and sectors were outperforming. Copper surged 6.4%, as an almost 2% gain in the Goldman Sachs Commodities Index boosted 2015 gains to 6.1%. In short, Crowded Trades were causing a bit of angst. I’m not so sure Friday’s equity market rally rectified the situation.
Global bond markets are fully priced for QE and disinflation forever. This historic Bubble – with all the unknown leverage and unappreciated risks to sophisticated and unsophisticated alike – now confronts a major risk: China.
Chinese officials were too slow and timid in efforts to rein in their runaway Bubble. “Terminal Phase” excesses have been accommodated to the point where massive fiscal and monetary stimulus will surely be forthcoming. This creates major uncertainty for the global pricing backdrop – for commodities, for things and for bonds. And with even signs of life in Europe, there’s now a catalyst for a potential upside surprise in inflation “psychology”. As such, the risk vs. reward calculus for the Crowded global deflation bond trade is turning unattractive. Moreover, Treasuries - and government bonds generally – are losing their appeal as a reliable hedge against market risk.
Government finance has made such a mess of things. Global bonds have become a historic Crowded Trade. Long dollar (short euro, yen, commodity currencies, EM, etc.) is a huge Crowded Trade. If a Chinese move toward massive stimulus (in concert with ultra-loose policies everywhere) does begin to weigh on global bond markets, what might this mean for the currencies Crowd? How vulnerable is the dollar to a self-reinforcing decline, the mirror image of the king dollar melt-up. What would this mean to the Crowded commodities short trade? Commodities and commodity currencies have been trading more bullishly.
The unwind of the Crowded post-crisis Global Reflation Trade had potential to be quite destabilizing. For the most part, instability was held in check by zero rates; open-ended QE and a flood of global liquidity; and a seemingly indefatigable Chinese Bubble. Aggressive QE and devaluation from Draghi and Kuroda helped mobilize king dollar. This spurred a rush to establish positions short commodity-related and leveraged long bonds and stocks – the Global Deflation Trade. Throughout it all, the outcome was only more global speculative leveraging.
A buyer of 10-year German bunds last Friday was willing to accept an annual yield of 15 bps. That same buyer lost 210 bps of principal on those bonds this week, as yields surged 22 bps. At this point, I’ll assume most global “bond” investors have forgotten how quickly losses can be incurred. This week saw French yields surge 23 bps to 0.65%. UK bond yields jumped 19 bps this week to 1.84%. Japanese JGB yields rose seven bps to a five-week high 0.36%. Ten-year Treasury yields jumped 21 bps to a seven-week high 2.12%. Long-bond yields surged 22 bps to near four-month highs.
I won’t get too carried away by a one-week reversal in global bond yields and some recent outperformance by commodities and EM. But it’s worth pondering the ramifications of heightened instability for a number of Crowded Trades. It’s always been somewhat of a challenge to square aggressive open-ended monetary stimulus with ongoing global deflationary pressures. And just when the massive global pool of speculative finance became comfortably (heavily) overweight U.S. securities markets -American markets underperform. Government policies have spurred historic global financial flows.
There are huge unavoidable costs associated with flawed policies and flagrant inflationism. At this point, what more can policy measures do to promote additional speculative leveraging? If the answer is “perhaps not much,” then it’s worth pondering the possibility that ebullient global markets are nearing an inflection point. Liquidity issues are a serious problem.
For the Week:
The S&P500 slipped 0.4% (up 2.4% y-t-d), and the Dow declined 0.3% (up 1.1%). The Utilities dropped 1.5% (down 6.3%). The Banks jumped 1.6% (down 0.4%), while the Broker/Dealers dipped 0.6% (up 3.8%). The Transports sank 1.6% (down 4.4%). The S&P 400 Midcaps lost 1.3% (up 4.2%), and the small cap Russell 2000 was hit for 3.1% (up 1.9%). The Nasdaq100 fell 1.3% (up 5.7%), and the Morgan Stanley High Tech index declined 0.7% (up 2.8%). The Semiconductors rallied 1.7% (up 2.7%). The Biotechs were hammered 5.2% (up 13%). While bullion was little changed, the HUI gold index gained 3.5% (up 9.7%).
One-and three-month Treasury bill rates ended the week at zero. Two-year government yields rose nine bps to 0.60% (down 7bps y-t-d). Five-year T-note yields jumped 19 bps to 1.50% (down 15bps). Ten-year Treasury yields surged 21 bps 2.12% (down 6bps). Long bond yields rose 22 bps to 2.83% (up 8bps). Benchmark Fannie MBS yields jumped 17 bps to 2.80% (down 3bps). The spread between benchmark MBS and 10-year Treasury yields narrowed four to 68 bps. The implied yield on December 2015 eurodollar futures rose 4.5 bps to 0.63%. Corporate bond spreads widened modestly. An index of investment grade bond risk increased two bps to 63 bps. An index of junk bond risk rose five bps to 338 bps. An index of EM debt risk fell nine bps to a five-month low 335 bps.
Greek 10-year yields dropped 219 bps to 10.35% (up 60bps y-t-d). Ten-year Portuguese rose 10 bps 2.07% (down 55bps). Italian 10-yr yields added two bps to 1.46% (down 43bps). Spain's 10-year yields gained eight bps to 1.46% (down 15bps). German bund yields surged 22 bps to 0.37% (down 17bps). French yields jumped 23 bps to 0.65% (down 18bps). The French to German 10-year bond spread widened one to 28 bps. U.K. 10-year gilt yields rose 19 bps to 1.84% (up 9bps).
Japan's Nikkei equities index was slammed for 2.4% (up 11.9% y-t-d). Japanese 10-year "JGB" yields jumped seven bps to 0.36% (up 4bps y-t-d). The German DAX equities index fell 3.0% (up 16.8%). Spain's IBEX 35 equities index declined 1.0% (up 10.8%). Italy's FTSE MIB index fell 1.6% (up 21.2%). Emerging equities were mostly under pressure. Brazil's Bovespa index slipped 0.6% (up 12.4%). Mexico's Bolsa was hit for 2.6% (up 3.3%). South Korea's Kospi index fell 1.5% (up 11.1%). India’s Sensex equities index fell 1.6% (down 1.8%). China’s bubbling Shanghai Exchange added 1.1% to a new six-year high (up 37.3%). Turkey's Borsa Istanbul National 100 index sank 1.9% (down 2.1%). Russia's MICEX equities index added 0.3% (up 20.9%).
Debt issuance remained strong. Investment-grade issuers included Oracle $10bn, Amgen $3.5bn, Pepsico $2.5bn, Crown Castle Towers $1.0bn, American Honda Finance $550 million, Texas Instruments $500 million, Northwestern University $500 million, Union Pacific Railroad $400 million, Reliance Standard Life $400 million, Texas Health Resources $300 million, FS Investment Corp $275 million, PriSo $200 million and AHS Hospital $200 million.
Convertible debt issuers this week included Echo Global Logistics $200 million.
Junk funds saw outflows of $859 million (from Lipper). Junk issuers included Quicken Loans $1.25bn, Micron Technology $1.0bn, Ahern Rentals $550 million, ESH Hospitality $500 million, 21st Century Oncology $360 million and Zayo Group $350 million.
International debt issuers included CNOOC $3.8bn, Dominican Republic $3.5bn, Nederlandse Waterschapsbank $2.6bn, Bank of Nova Scotia $1.4bn, Virgin Media Secured Finance $1.0bn, Lamar Funding $1.0bn, JLL/Delta Dutch Pledgeco $550 million, Emirates Telecom $400 million, Banco Latinoamericano de Comercio Exterior $350 million, Nightingale Finance $310 million, Everglades Re $300 million, ACI Airport SudAmerica $200 million and DaVinciRe $150 million.
Freddie Mac 30-year fixed mortgage rates increased three bps to 3.68% (down 19bps y-t-d). Fifteen-year rates gained two bps to 2.94% (down 21bps). One-year ARM rates were up five bps to 2.49% (up 9bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates rising seven bps to 4.06% (down 22bps).
Federal Reserve Credit last week declined $3.2bn to $4.444 TN. Over the past year, Fed Credit inflated $194bn, or 4.6%. Fed Credit inflated $1.633 TN, or 58%, over the past 129 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt were little changed last week at $3.289 TN. "Custody holdings" were down $4.6bn y-t-d.
Global central bank "international reserve assets" (excluding gold) - as tallied by Bloomberg – were down $358bn y-o-y, or 3.0%, to a 15-month low $11.541 TN. Reserve Assets are now down $491bn from the August 2014 peak. Over two years, reserves were $416bn higher, for 4% growth.
M2 (narrow) "money" supply slipped $1.9bn to $11.890 TN. "Narrow money" expanded $686bn, or 6.1%, over the past year. For the week, Currency increased $0.3bn. Total Checkable Deposits declined $5.9bn, while Savings Deposits gained $8.8bn. Small Time Deposits dipped $1.0bn. Retail Money Funds fell $4.2bn.
Money market fund assets declined $5.9bn to a new six-month low $2.582 TN. Money Funds were down $151bn year-to-date, while increasing $7.8bn from a year ago.
Total Commercial Paper declined $2.3bn to $1.023 TN. CP declined $8.4bn over the past year, or 0.8%.
Currency Watch:
The U.S. dollar index fell 1.7% to 95.214 (up 5.5% y-t-d). For the week on the upside, the euro increased 3.0%, the Danish krone 2.9%, the Swedish krona 2.7%, the Swiss franc 2.3%, the Norwegian krone 2.2% the Taiwanese dollar 0.7%, the South African rand 0.5%, the Australian dollar 0.4%, the South Korean won 0.2%, the Singapore dollar 0.1% and the Canadian dollar 0.1%. For the week on the downside, the Brazilian real declined 2.1%, the Mexican peso 1.0%, the Japanese yen 1.0%, the New Zealand dollar 0.9% and the British pound 0.3%.
Commodities Watch:
The Goldman Sachs Commodities Index gained 1.9% (up 6.1% y-t-d). Spot Gold was about unchanged at $1,179 (down 0.5%). July Silver rallied 2.9% to $16.135 (up 3%). June Crude gained $2.00 to $59.15 (up 11%). June Gasoline jumped 2.0% (up 39%), and May Natural Gas recovered 8.1% (down 4%). July Copper surged 6.4% (up 4%). May Wheat was down 3.3% (down 20%). May Corn declined 1.3% (down 9%).
Fixed Income Bubble Watch:
April 30 – Bloomberg (Finbarr Flynn and Lisa Abramowicz): “Japanese investors are plowing back into the same types of risky U.S. corporate-loan investments that caused them losses during the 2008 financial crisis. They’re pouring cash into loans to finance Burger King operator Restaurant Brands International Inc., hotel manager Hilton Worldwide Finance LLC and Caesars Entertainment Resort Properties LLC. They’re snapping up pools of the debt that have been sliced into pieces of varying risk and return, and converted into yen-denominated securities. The logic is simple: These buyers are desperate for a way to juice returns with local sovereign bonds yielding almost nothing, and speculative-grade loans offer more than five extra percentage points of compensation.”
April 29 – Financial Times (Robin Wigglesworth and Nicole Bullock): “Amgen and Oracle led a US corporate bond sales charge on Tuesday, raising $13.5bn to buy back shares as the market for company debt heated up again after the traditional earning season blackout period… US share buybacks and dividends are forecast to hit $1tn this year, as companies continue to eschew investments in favour of returning money to shareholders… This represents the best start to a year on record for both investment grade and junk-rated corporate debt sales, according to Dealogic, with $247.9bn of blue-chip bonds being sold and $132.2bn of high yield debt so far in 2015.”
April 28 – Bloomberg (Lisa Abramowicz): “Here’s a quick way for credit investors to earn billions of dollars this year: simply buy pieces of the largest new junk-bond sales, then sell them for a profit. It’s been a seemingly easy formula of late. Bonds issued recently by companie… have gained more in value than the U.S. high-yield bond market on average. The only obstacle is winning the chance to purchase the new sales directly, and that can prove to be a significant hurdle, because the largest, most-active investment firms usually have first dibs. For those lucky enough to get a seat at the table, the financial rewards have been hefty at a time of historically low bond yields around the world. Almost $10 billion of bonds sold by drugmaker Valeant have increased in value by about $345.5 million since their issuance last month…”
April 28 – Bloomberg (Jody Shenn and Matt Scully): “America’s mounting student-debt problem is threatening to create trouble in part of a $170 billion bond market tied to government-guaranteed loans. With borrowers increasingly struggling to repay their student loans, Moody’s… is warning it may take investors longer than promised to get their money back. The credit grader said this month it may lower rankings on $3 billion of top-rated debt as investors face the threat of slowing principal payments or even receiving no interest. The concern underscores the fallout from a record $1.2 trillion in U.S. student loans that’s spreading to everything from the housing market and consumer spending to taxpayers. As a sluggish economic recovery forces borrowers to miss payments or tap relief programs, only 37% are current and reducing their balances, according to a Federal Reserve Bank of New York presentation…”
U.S. Bubble Watch:
April 26 – CNBC (Alex Rosenberg): “The bottom line of earnings season adds up to this: companies are running into big trouble with their top lines. While companies generally tend to beat both earnings and revenue expectations, this year more have missed their first-quarter top-line estimates than beaten. Out of the first 201 S&P 500 Index companies to report first-quarter earnings, only 47% have beaten revenue estimates… If this number holds, it will be the first time that more companies have missed than beaten earnings expectations since the first quarter of 2013. Now, analysts on the whole expect to see S&P 500 revenue fall 3.5% year-over-year, whereas they had expected just a 2.6 percent drop when the first quarter ended. Meanwhile, earnings have surpassed analyst expectations nicely, with 73% of companies beating earnings-per-share estimates…”
April 30 – Bloomberg (David Wison): “Surging student-loan debt represents a key risk to the economy’s expansion because wage gains are failing to keep up, according to Beth Ann Bovino, U.S. chief economist at Standard & Poor’s… Education-related loans amounted to $1.16 trillion at the end of last year, a 71% increase from the second quarter of 2009… The growth contrasted with declines in mortgages, home-equity loans, credit cards and other forms of consumer borrowing. ‘Millennials’ heavy student-loan burdens could seriously crimp spending,’ Bovino wrote… ‘This is not a future anyone wants to see.’ …Student borrowing rose more than six times as fast as average hourly earnings between mid-2009 and the end of last year, according to data compiled by the Labor Department. The wage indicator rose 11% during the period.”
April 30 – Bloomberg (Tracy Alloway and Matt Scully): “It began with a seemingly wacky idea to reinvent banking as we know it. But no one is scoffing at peer-to-peer lending anymore -- least of all, Wall Street. Barely a decade old, ‘P2P’ has gone mainstream and is now being co-opted by some of the big financial players it was supposed to bypass. Investment funds can’t get enough of this business, which involves lending to people over the Internet and hoping they pay you back. Investors are snapping up the loans directly, while the banks are bundling them into securities, much as they did with subprime mortgages. Now peer-to-peer lending and its Internet enablers like LendingClub Corp., the industry leader, are being pulled into the high-octane world of derivatives. While many hail Wall Street’s growing involvement, others warn investors could get carried away, as they did during the dot-com era and again during the mortgage mania. The new derivatives could help people hedge their risks, but they could also lure speculators into the market. ‘It feels like the year 2000 again,’ said Frank Rotman, a partner at QED Investors, an Alexandria, Virginia-based venture-capital firm that has invested in Prosper Marketplace Inc., Social Finance Inc. and 13 other P2P lending platforms. ‘Everyone is chasing ’it,’ but they don’t know what ’it’ is, and that is kind of scary.’”
April 30 – Associated Press: “Results of financial ‘stress tests’ show that mortgage giants Fannie Mae and Freddie Mac, rescued by taxpayers in the 2008 crisis, would need as much as $157.3 billion in additional aid in a severe U.S. and global recession. The agency that oversees Fannie and Freddie, the Federal Housing Finance Agency, announced the results of the second annual stress tests.”
April 30 – Bloomberg (David M Levitt): “New York City construction spending jumped 26% last year to $36 billion, led by a record amount of residential building in a market skewed toward luxury housing, according to the New York Building Congress. Spending on residential construction surged 73% to $11.9 billion in 2014, exceeding an October forecast and marking the first time it has ever topped $7 billion… The number of new housing units failed to keep pace, increasing 11% to 20,329. That compares with more than 30,000 homes created annually between 2005 and 2008. The numbers suggest a tilt toward building high-end homes at a time when more housing is needed that’s within reach of middle-class residents, said Richard Anderson, the building congress’s president.”
Federal Reserve Watch:
May 1 – Wall Street Journal: “It’s nice to know we’re being read, and Thursday’s editorial on “The Slow-Growth Fed” sure got a rise out of Ben Bernanke. The former Federal Reserve Chairman turned blogger turned Pimco adviser wrote to defend the central bank and by implication his policies as innocent of responsibility for subpar economic growth… We’ve written that we are in uncharted monetary territory with risks and outcomes we lack the foresight to predict. Our view has been that the Fed’s first round of quantitative easing was necessary to stem the financial panic—and that it worked. We were skeptical of the later bouts of QE, and in our view these have been notably less successful in helping the economy return to robust health. Asset prices are up and the wealthy are better off, but the working stiff is still waiting for the economic payoff. But perhaps Ben should consult Stanley Fischer, the Fed’s current vice chairman, who recently said on CNBC that “we are going to be changing monetary policy from the most extremely expansionary we’ve been able to do in all of history to an extremely expansionary monetary policy.” That doesn’t sound like a return to tight money. Lifting rates off zero means beginning an inevitable return to monetary normalcy that lets markets set rates and allocate capital. We can understand that Mr. Bernanke doesn’t like being tagged with any responsibility for poor economic results. He absolved himself for any mistakes before the financial crisis too. But sooner or later he and the Fed have to stop using the financial crisis as the all-purpose excuse for slow growth.”
April 28 – New York Times (Binyamin Appelbaum): “The cardinal rule of central banking, in the United States and in most other advanced industrial nations, is that annual inflation should run around 2%. But as the Federal Reserve prepares to start raising its benchmark interest rate later this year to keep future inflation from exceeding that pace, it is facing persistent questions about the wisdom of the rule and the possible benefits of significantly increasing its target. Higher inflation could disrupt economic activity, but it also would enhance the Fed’s power to stimulate the economy during recessions. And some experts say the struggles of the Fed and other central banks to provide enough stimulus since the Great Recession suggest they could use more room for maneuvering. ‘Most developed countries’ central banks have experienced difficulty in providing sufficient monetary stimulus to spur a robust recovery in their economies,’ Eric Rosengren, president of the Federal Reserve Bank of Boston, said… ‘This may imply that inflation targets have been set too low.’”
Global Bubble Watch:
April 28 – Bloomberg (Andrea Wong and Liz McCormick): “Trading volume is so thin in the foreign-exchange market that it’s difficult for strategists and investors to analyze the signals behind the price actions. That’s what Geoffrey Yu of UBS Group AG says. Overall flows of Group-Of-10 currencies fell below average for three consecutive weeks, the bank’s client flow data show. Among the worst were currencies that are traditionally the most liquid, such as the yen, Swiss franc and the Canadian dollar, where volumes were down at least 30%. ‘If the flow is only 50% of its 52-week average, then it’s really only half as meaningful,’ Yu, a senior currency strategist… said… ‘Since volumes have come off, it means the interpretation value of flows in currencies is limited.”
Global Bubble Watch:
April 28 – Bloomberg (Andrea Wong and Liz McCormick): “Trading volume is so thin in the foreign-exchange market that it’s difficult for strategists and investors to analyze the signals behind the price actions. That’s what Geoffrey Yu of UBS Group AG says. Overall flows of Group-Of-10 currencies fell below average for three consecutive weeks, the bank’s client flow data show. Among the worst were currencies that are traditionally the most liquid, such as the yen, Swiss franc and the Canadian dollar, where volumes were down at least 30%. ‘If the flow is only 50% of its 52-week average, then it’s really only half as meaningful,’ Yu, a senior currency strategist… said… ‘Since volumes have come off, it means the interpretation value of flows in currencies is limited.”
April 29 – Bloomberg (Lyubov Pronina): “Swiss investors paid to buy emerging-market bonds as Poland became the latest government to borrow at negative yields. The European Union’s largest eastern nation almost tripled its offering to 580 million Swiss francs ($609 million) of three-year notes as investors accepted a yield of minus 0.21%... Still, that’s 60 bps less negative than equivalent Swiss government debt. Poland’s sale shows how the group of governments and companies benefiting from near-zero central bank rates and stimulus policies is widening to lower rated investment-grade borrowers.”
April 30 – Bloomberg (John Gittelsohn): “The ultra-luxury housing market is scaling new heights as a record number of properties around the world command prices topping $100 million. Demand for mega-mansions and penthouses has accelerated as wealthy buyers seek havens for their cash and search for alternative investments such as art and collectible real estate, according to… Christie’s International Real Estate… Five homes sold for more than $100 million last year, with at least 20 more on the market with nine-figure asking prices, the brokerage said. ‘You’re looking at a universe of over 1,800 billionaires who are starting to become members of this club of collectors of the most unique and incredible real estate in the world,’ Dan Conn, chief executive officer of Christie’s International Real Estate, said… ‘It’s something they’ll hold onto for a lifetime, the same way they’ll hold onto a Picasso or a Warhol or any number of the great pieces of art we’ve sold over the years.’”
ECB Watch:
April 30 – Bloomberg (Katie Linsell): “The appeal of risky debt is deepening in Europe, even as credit quality slides and compensation shrinks. The balance has shifted in favor of companies, which are on pace to sell a record amount of hybrid bonds this year. Non-financial borrowers have already issued more than 19 billion euros ($21bn) of the low-ranking notes following 28 billion euros in 2014… ‘The main risk for hybrids looking ahead is that investors get more and more comfortable because of QE, while companies become more aggressive,’ said Thibault Colle… credit strategist at UBS Group AG. ‘In this environment where there’s no yield out there, these bonds are getting lots of demand.’”
May 1 – Bloomberg (Cecile Gutscher and Kevin Buckland): “Investors revolting against negative yields in Europe wiped 142 billion euros ($160 billion) off the value of the region’s government bonds this week, heading for the biggest selloff since at least October 1993… ‘Yields had gotten to levels where any investor who had discretion around where they want to put their money would not want to own these bonds as a long-term proposition,’ said Peter Jolly… head of market research at National Australia Bank… ‘It was always unreasonable to my mind that, just because the ECB was buying bonds, that yields had to be jammed to the floor.’”
Europe Watch:
April 30 – Reuters (Michael Nienaber): “German unemployment fell to its lowest level in more than two decades in April… The number of people out of work decreased by 8,000 on a seasonally-adjusted basis to 2.792 million, hitting its lowest level since December 1991… The jobless rate remained at 6.4%...”
April 30 – Bloomberg (John Gittelsohn): “The ultra-luxury housing market is scaling new heights as a record number of properties around the world command prices topping $100 million. Demand for mega-mansions and penthouses has accelerated as wealthy buyers seek havens for their cash and search for alternative investments such as art and collectible real estate, according to… Christie’s International Real Estate… Five homes sold for more than $100 million last year, with at least 20 more on the market with nine-figure asking prices, the brokerage said. ‘You’re looking at a universe of over 1,800 billionaires who are starting to become members of this club of collectors of the most unique and incredible real estate in the world,’ Dan Conn, chief executive officer of Christie’s International Real Estate, said… ‘It’s something they’ll hold onto for a lifetime, the same way they’ll hold onto a Picasso or a Warhol or any number of the great pieces of art we’ve sold over the years.’”
ECB Watch:
April 30 – Bloomberg (Katie Linsell): “The appeal of risky debt is deepening in Europe, even as credit quality slides and compensation shrinks. The balance has shifted in favor of companies, which are on pace to sell a record amount of hybrid bonds this year. Non-financial borrowers have already issued more than 19 billion euros ($21bn) of the low-ranking notes following 28 billion euros in 2014… ‘The main risk for hybrids looking ahead is that investors get more and more comfortable because of QE, while companies become more aggressive,’ said Thibault Colle… credit strategist at UBS Group AG. ‘In this environment where there’s no yield out there, these bonds are getting lots of demand.’”
May 1 – Bloomberg (Cecile Gutscher and Kevin Buckland): “Investors revolting against negative yields in Europe wiped 142 billion euros ($160 billion) off the value of the region’s government bonds this week, heading for the biggest selloff since at least October 1993… ‘Yields had gotten to levels where any investor who had discretion around where they want to put their money would not want to own these bonds as a long-term proposition,’ said Peter Jolly… head of market research at National Australia Bank… ‘It was always unreasonable to my mind that, just because the ECB was buying bonds, that yields had to be jammed to the floor.’”
Europe Watch:
April 30 – Reuters (Michael Nienaber): “German unemployment fell to its lowest level in more than two decades in April… The number of people out of work decreased by 8,000 on a seasonally-adjusted basis to 2.792 million, hitting its lowest level since December 1991… The jobless rate remained at 6.4%...”
April 30 – Bloomberg (Lorenzo Totaro): “Italy’s jobless rate unexpectedly rose in March as employers delayed hiring until there are clear indications the nation is emerging from the record-long recession that’s thwarted Prime Minister Matteo Renzi. Unemployment increased to 13% from 12.7% in February…”
China Bubble Watch:
April 28 – Wall Street Journal (Lingling Wei): “China’s central bank is planning to launch its own version of innovative credit-easing programs adopted by its counterparts in developed countries, according to officials with knowledge of the matter, as Beijing’s flagship plan to restructure trillions of dollars of local-government debts is hitting snags. Under the plan, which could be put in place in the next couple of months, the People’s Bank of China will allow Chinese banks to swap local-government bailout bonds for loans as a way to bolster liquidity and boost lending… The strategy—dubbed Pledged Supplementary Lending—is similar to the long-term refinancing operations, or LTROs, used by the European Central Bank… Adopting the strategy would mark a major shift in the policies of the Chinese central bank, which has traditionally relied on interest rates and banks’ reserve requirements to regulate money supply. Now, the slowing Chinese economy, which has resulted in a surge in the amount of capital leaving China’s shores, is pressing the PBOC to come up with new ways to beef up bank lending and lower borrowing costs. Driving the new program is Beijing’s struggle to solve the country’s mounting local-government debt problems. The latest official data show that borrowing by city halls and towns across China jumped nearly 50% from June 2013—the last time such data were available—to about 16 trillion yuan ($2.6 trillion).”
April 28 – Reuters (Nathaniel Taplin): “China's Ministry of Finance has warned of slowing tax revenue growth and told local authorities to hasten issuance of newly-approved municipal bond debt - signalling official concern over provincial budgets at a critical time for the economy and planned fiscal reforms. In a statement, the Ministry of Finance urged local finance bureaus to ‘speed up local government debt issuance and scheduling, rationally set debt issuance times, and urgently complete the work of issuing bonds.’ The direction to accelerate bond issuance comes as local government revenue from land sales is dropping sharply, and signs emerge that the ministry's plan to tap China's fledging local government bond market to make up for the loss of tax proceeds and off-balance sheet fundraising may be faltering. Reports that banks are reluctant to purchase the new debt at the yields on offer have appeared in official media following the postponement, for unspecified reasons, of a Jiangsu provincial bond auction initially set for April 23.”
April 27 – Bloomberg (Filipe Pacheco): “A surge in China’s local-government debt pile is drawing focus to the central bank’s role in avoiding a credit crunch as policy makers seek to develop a municipal-bond market. Provincial authorities estimated they had 16 trillion yuan ($2.6 trillion) in liabilities in a review earlier this year, the China News Service said April 25, citing a Ministry of Finance official -- a 47% jump from June 2013. With liquidity in the bond market being restrained by capital flowing out of China, a slowing economy and a booming stock market, the challenge for officials will be to ensure demand as they restructure local finances… One of its new tools to boost liquidity, the PSL last year was used to channel credit to shantytown redevelopment. Other options for People’s Bank of China Governor Zhou Xiaochuan include broad monetary easing and direct purchases of municipal bonds in the secondary market.”
April 28 – Bloomberg: “China’s central bank is considering expanding a new lending tool in an effort to bolster demand for local-government bonds, as policy makers seek to develop a municipal debt market and avoid a credit crunch. The People’s Bank of China is discussing letting banks tap its Pledged Supplementary Lending program to buy local-authority debt along with other favored purposes, according to people familiar with the matter… The PBOC last year channeled 1 trillion yuan ($161bn) through the PSL facility to China Development Bank for redevelopment of shantytowns.”
April 30 – Bloomberg (John Gittelsohn): “What’s frothier than the Chinese stock market? Chinese IPOs. They’ve become so bubbly that one concerned management team has solemnly urged the investing public to ‘invest rationally and pay attention to risks’. Beijing Baofeng Technology, the online video company with the worried boardroom, is the leading example of IPO excess. After jumping by the maximum-allowed 44% from the offer price when it floated in Shenzhen just over a month ago, the stock has risen by the daily maximum of 10% every day since. Forget valuations; the company (“Storm” in English) has risen 17-fold in 26 trading days, making it far and away China’s best-performing stock this year. From being one of China’s tinier stocks, it is now valued at $2bn. Others are following suit. Every one of the 29 IPOs in Shanghai and Shenzhen this month have risen by the daily limit each day since. The worst performing IPO from earlier in the year has doubled in price.”
April 30 – Bloomberg (Lianting Tu): “Sound Global Ltd., a Beijing-based water treatment company, slumped in the bond market after saying auditors had identified a cash shortfall and that it would miss a promised filing deadline. Its $150 million of 11.875 percent 2017 securities plunged 13.6 cents on the dollar to 72 cents… The notes have slid from this year’s high of 107.8 cents in February. Auditors found a discrepancy of about 2 billion yuan ($323 million) between Sound Global’s bank and book cash balances as of Dec. 31… Global investors are scrutinizing Chinese companies, the world’s biggest corporate debtors, amid the slowest economic growth since 1990 and President Xi Jinping’s crackdown on corruption.”
April 29 – Bloomberg: “If you’re worried about China’s worst earnings season since the global financial crisis, you’re looking at this stock-market rally all wrong. At least that’s the message from individual investors. They’ve propelled the Shanghai Composite Index to a 90% surge since mid-October, even as 2014 profits missed estimates by the most in six years and analysts cut their outlooks at the fastest pace since 2009. Foreign skeptics see the disconnect between earnings forecasts and share prices -- now bigger than in any of the world’s top 40 markets -- as a sign that China’s rally has gone too far. Yet it’s mainland individuals who account for at least 80% of trades, and they’re still buying shares at a record pace in anticipation of further government stimulus… ‘Right now, people are betting on policies instead of fundamentals,’ said Alex Wong, a Hong Kong-based asset-management director at Ample Capital Ltd., which oversees about $150 million.”
Geopolitical Watch:
April 27 – Financial Times (Kathrin Hille): “Vladimir Putin has accused the US of directly supporting separatist militants in Russia’s North Caucasus region against whom Moscow fought a brutal war. The remarks… appeared to be aimed at justifying the Russian president’s actions in Ukraine and highlighted his belief that the West is out to weaken Russia. ‘Our special services documented direct contacts between fighters from the North Caucasus and US special forces in Azerbaijan,’ said Mr Putin… The claim is the latest in a litany of accusations against the US, which has been building for years but intensified since Moscow’s falling-out with the west over its annexation of Crimea in March 2014 and its subsequent involvement in the conflict in eastern Ukraine.”
Brazil Watch:
April 26 – Bloomberg (Filipe Pacheco): “The bribery investigation at Petroleo Brasileiro SA has already pushed two companies implicated by the alleged graft into default. Now, a cement producer untainted by the scandal -- but upended by its fallout -- risks joining their ranks, bond prices show. Cimento Tupi SA’s $185 million of bonds due 2018 have plummeted 70% this year as the construction industry is roiled by accusations that some builders paid bribes to Petrobras executives… Tupi’s case is emblematic of the collateral damage wrought by the investigation at a time when Brazil’s economy is also floundering. Construction and engineering companies Galvao Engenharia SA and OAS SA have already missed debt payments and filed for bankruptcy protection after the allegations choked off their access to bond financing.”
April 30 – Reuters (Stephen Eisenhammer): “Brazil's Vale SA , the world’s No. 1 producer of iron ore, on Thursday posted its third straight quarterly loss under pressure from falling prices of the commodity as demand growth from China slows. The miner reported a net loss of $3.2 billion in the first quarter, compared with a net profit of $2.4 billion in the same period last year. The result compares with a forecast net loss of $2.4 billion…”
EM Bubble Watch:
April 29 – Bloomberg (Michael Heath): “The cheap, young labor and strategic location of Myanmar, Cambodia and Laos are set to draw increasing numbers of manufacturers to Southeast Asia, which will eventually displace China for the title of ‘world’s factory.’ The transformation will be part of the rise of the Association of Southeast Asian Nations to become the ‘third pillar'’ of regional growth after China and India, ANZ Bank economists led by Glenn Maguire reckon. By 2030, more than half of 650 million people in Southeast Asia will be under the age of 30, part of an emerging middle class with high rates of consumption. ‘We also believe Southeast Asia will take up China’s mantle of the ‘world’s factory’ over the next 10-15 years as companies move to take advantage of cheap and abundant labor in areas such as the Mekong,’ ANZ said.”
Russia and Ukraine Watch:
April 30 – Reuters (Phil Stewart and David Alexander): “Russia's military may be taking advantage of a recent lull in fighting in eastern Ukraine to lay the groundwork for a new military offensive, NATO's top commander told the U.S. Congress on Thursday. U.S. Air Force General Philip Breedlove, the NATO supreme allied commander, said Russian forces had been seeking to "reset and reposition" while protecting battlefield gains, despite a fragile ceasefire agreed in February. ‘Many of their actions are consistent with preparations for another offensive,’ Breedlove said.”
Japan Watch:
April 27 – Associated Press: “Fitch Ratings lowered Japan’s credit rating as the country continued to wrestle with staggering debt. The rating agency said Monday that the government did not include sufficient measures in its budget to replace a sales tax increase it delayed in the current fiscal year, which ends next March. Japan’s debt, more than twice the size of its economy, is the largest among developed nations. The country has struggled to find a way to cover rising costs for health and elder care.”
April 28 – Reuters (Chris Gallagher): “Japanese retail sales in March declined at their fastest annual pace in 17 years as consumer spending struggled to pick up a year after a sales-tax increase, keeping alive speculation the Bank of Japan will expand stimulus again later this year. Retail sales slid 9.7% in March from the same month last year… Sales had been expected to drop sharply in comparison with March 2014, when they had surged ahead of the sales-tax hike the following month, but the result was even worse than the median forecast for a 7.3% fall…”
China Bubble Watch:
April 28 – Wall Street Journal (Lingling Wei): “China’s central bank is planning to launch its own version of innovative credit-easing programs adopted by its counterparts in developed countries, according to officials with knowledge of the matter, as Beijing’s flagship plan to restructure trillions of dollars of local-government debts is hitting snags. Under the plan, which could be put in place in the next couple of months, the People’s Bank of China will allow Chinese banks to swap local-government bailout bonds for loans as a way to bolster liquidity and boost lending… The strategy—dubbed Pledged Supplementary Lending—is similar to the long-term refinancing operations, or LTROs, used by the European Central Bank… Adopting the strategy would mark a major shift in the policies of the Chinese central bank, which has traditionally relied on interest rates and banks’ reserve requirements to regulate money supply. Now, the slowing Chinese economy, which has resulted in a surge in the amount of capital leaving China’s shores, is pressing the PBOC to come up with new ways to beef up bank lending and lower borrowing costs. Driving the new program is Beijing’s struggle to solve the country’s mounting local-government debt problems. The latest official data show that borrowing by city halls and towns across China jumped nearly 50% from June 2013—the last time such data were available—to about 16 trillion yuan ($2.6 trillion).”
April 28 – Reuters (Nathaniel Taplin): “China's Ministry of Finance has warned of slowing tax revenue growth and told local authorities to hasten issuance of newly-approved municipal bond debt - signalling official concern over provincial budgets at a critical time for the economy and planned fiscal reforms. In a statement, the Ministry of Finance urged local finance bureaus to ‘speed up local government debt issuance and scheduling, rationally set debt issuance times, and urgently complete the work of issuing bonds.’ The direction to accelerate bond issuance comes as local government revenue from land sales is dropping sharply, and signs emerge that the ministry's plan to tap China's fledging local government bond market to make up for the loss of tax proceeds and off-balance sheet fundraising may be faltering. Reports that banks are reluctant to purchase the new debt at the yields on offer have appeared in official media following the postponement, for unspecified reasons, of a Jiangsu provincial bond auction initially set for April 23.”
April 27 – Bloomberg (Filipe Pacheco): “A surge in China’s local-government debt pile is drawing focus to the central bank’s role in avoiding a credit crunch as policy makers seek to develop a municipal-bond market. Provincial authorities estimated they had 16 trillion yuan ($2.6 trillion) in liabilities in a review earlier this year, the China News Service said April 25, citing a Ministry of Finance official -- a 47% jump from June 2013. With liquidity in the bond market being restrained by capital flowing out of China, a slowing economy and a booming stock market, the challenge for officials will be to ensure demand as they restructure local finances… One of its new tools to boost liquidity, the PSL last year was used to channel credit to shantytown redevelopment. Other options for People’s Bank of China Governor Zhou Xiaochuan include broad monetary easing and direct purchases of municipal bonds in the secondary market.”
April 28 – Bloomberg: “China’s central bank is considering expanding a new lending tool in an effort to bolster demand for local-government bonds, as policy makers seek to develop a municipal debt market and avoid a credit crunch. The People’s Bank of China is discussing letting banks tap its Pledged Supplementary Lending program to buy local-authority debt along with other favored purposes, according to people familiar with the matter… The PBOC last year channeled 1 trillion yuan ($161bn) through the PSL facility to China Development Bank for redevelopment of shantytowns.”
April 30 – Bloomberg (John Gittelsohn): “What’s frothier than the Chinese stock market? Chinese IPOs. They’ve become so bubbly that one concerned management team has solemnly urged the investing public to ‘invest rationally and pay attention to risks’. Beijing Baofeng Technology, the online video company with the worried boardroom, is the leading example of IPO excess. After jumping by the maximum-allowed 44% from the offer price when it floated in Shenzhen just over a month ago, the stock has risen by the daily maximum of 10% every day since. Forget valuations; the company (“Storm” in English) has risen 17-fold in 26 trading days, making it far and away China’s best-performing stock this year. From being one of China’s tinier stocks, it is now valued at $2bn. Others are following suit. Every one of the 29 IPOs in Shanghai and Shenzhen this month have risen by the daily limit each day since. The worst performing IPO from earlier in the year has doubled in price.”
April 30 – Bloomberg (Lianting Tu): “Sound Global Ltd., a Beijing-based water treatment company, slumped in the bond market after saying auditors had identified a cash shortfall and that it would miss a promised filing deadline. Its $150 million of 11.875 percent 2017 securities plunged 13.6 cents on the dollar to 72 cents… The notes have slid from this year’s high of 107.8 cents in February. Auditors found a discrepancy of about 2 billion yuan ($323 million) between Sound Global’s bank and book cash balances as of Dec. 31… Global investors are scrutinizing Chinese companies, the world’s biggest corporate debtors, amid the slowest economic growth since 1990 and President Xi Jinping’s crackdown on corruption.”
April 29 – Bloomberg: “If you’re worried about China’s worst earnings season since the global financial crisis, you’re looking at this stock-market rally all wrong. At least that’s the message from individual investors. They’ve propelled the Shanghai Composite Index to a 90% surge since mid-October, even as 2014 profits missed estimates by the most in six years and analysts cut their outlooks at the fastest pace since 2009. Foreign skeptics see the disconnect between earnings forecasts and share prices -- now bigger than in any of the world’s top 40 markets -- as a sign that China’s rally has gone too far. Yet it’s mainland individuals who account for at least 80% of trades, and they’re still buying shares at a record pace in anticipation of further government stimulus… ‘Right now, people are betting on policies instead of fundamentals,’ said Alex Wong, a Hong Kong-based asset-management director at Ample Capital Ltd., which oversees about $150 million.”
Geopolitical Watch:
April 27 – Financial Times (Kathrin Hille): “Vladimir Putin has accused the US of directly supporting separatist militants in Russia’s North Caucasus region against whom Moscow fought a brutal war. The remarks… appeared to be aimed at justifying the Russian president’s actions in Ukraine and highlighted his belief that the West is out to weaken Russia. ‘Our special services documented direct contacts between fighters from the North Caucasus and US special forces in Azerbaijan,’ said Mr Putin… The claim is the latest in a litany of accusations against the US, which has been building for years but intensified since Moscow’s falling-out with the west over its annexation of Crimea in March 2014 and its subsequent involvement in the conflict in eastern Ukraine.”
Brazil Watch:
April 26 – Bloomberg (Filipe Pacheco): “The bribery investigation at Petroleo Brasileiro SA has already pushed two companies implicated by the alleged graft into default. Now, a cement producer untainted by the scandal -- but upended by its fallout -- risks joining their ranks, bond prices show. Cimento Tupi SA’s $185 million of bonds due 2018 have plummeted 70% this year as the construction industry is roiled by accusations that some builders paid bribes to Petrobras executives… Tupi’s case is emblematic of the collateral damage wrought by the investigation at a time when Brazil’s economy is also floundering. Construction and engineering companies Galvao Engenharia SA and OAS SA have already missed debt payments and filed for bankruptcy protection after the allegations choked off their access to bond financing.”
April 30 – Reuters (Stephen Eisenhammer): “Brazil's Vale SA , the world’s No. 1 producer of iron ore, on Thursday posted its third straight quarterly loss under pressure from falling prices of the commodity as demand growth from China slows. The miner reported a net loss of $3.2 billion in the first quarter, compared with a net profit of $2.4 billion in the same period last year. The result compares with a forecast net loss of $2.4 billion…”
EM Bubble Watch:
April 29 – Bloomberg (Michael Heath): “The cheap, young labor and strategic location of Myanmar, Cambodia and Laos are set to draw increasing numbers of manufacturers to Southeast Asia, which will eventually displace China for the title of ‘world’s factory.’ The transformation will be part of the rise of the Association of Southeast Asian Nations to become the ‘third pillar'’ of regional growth after China and India, ANZ Bank economists led by Glenn Maguire reckon. By 2030, more than half of 650 million people in Southeast Asia will be under the age of 30, part of an emerging middle class with high rates of consumption. ‘We also believe Southeast Asia will take up China’s mantle of the ‘world’s factory’ over the next 10-15 years as companies move to take advantage of cheap and abundant labor in areas such as the Mekong,’ ANZ said.”
Russia and Ukraine Watch:
April 30 – Reuters (Phil Stewart and David Alexander): “Russia's military may be taking advantage of a recent lull in fighting in eastern Ukraine to lay the groundwork for a new military offensive, NATO's top commander told the U.S. Congress on Thursday. U.S. Air Force General Philip Breedlove, the NATO supreme allied commander, said Russian forces had been seeking to "reset and reposition" while protecting battlefield gains, despite a fragile ceasefire agreed in February. ‘Many of their actions are consistent with preparations for another offensive,’ Breedlove said.”
Japan Watch:
April 27 – Associated Press: “Fitch Ratings lowered Japan’s credit rating as the country continued to wrestle with staggering debt. The rating agency said Monday that the government did not include sufficient measures in its budget to replace a sales tax increase it delayed in the current fiscal year, which ends next March. Japan’s debt, more than twice the size of its economy, is the largest among developed nations. The country has struggled to find a way to cover rising costs for health and elder care.”
April 28 – Reuters (Chris Gallagher): “Japanese retail sales in March declined at their fastest annual pace in 17 years as consumer spending struggled to pick up a year after a sales-tax increase, keeping alive speculation the Bank of Japan will expand stimulus again later this year. Retail sales slid 9.7% in March from the same month last year… Sales had been expected to drop sharply in comparison with March 2014, when they had surged ahead of the sales-tax hike the following month, but the result was even worse than the median forecast for a 7.3% fall…”