Saturday, October 3, 2015

Weekly Commentary: Party Crashing

October 2 – Reuters (Ann Saphir): “Letting the U.S. economy run at ‘high-pressure’ for a while by keeping interest rates relatively low will help push inflation back up to the Federal Reserve's 2% goal faster, a top Fed official said… But the Fed probably needs to raise rates this year to begin to slow the economy before it develops risky financial imbalances, San Francisco Fed President John Williams told reporters… ‘It's okay to have the party. It's okay to get the party going -- but we just don't want it to go too far,’ he said. If it were not for the global slowdown, the U.S. economy would be growing much faster, he added.”

This week provided further evidence that the bursting global Bubble has progressed to a critical juncture, afflicting Core markets and economies. Ominously, few seem aware of the profound ramifications – or even the unfolding hostile market backdrop. Even many of the most sophisticated market operators have been caught off guard. There is, as well, scant indication that Federal Reserve officials appreciate what’s unfolding.

I was again this week reminded of an overarching theme from Adam Fergusson’s classic, “When Money Dies: The Nightmare of Deficit Spending, Devaluation, and Hyperinflation in Weimar German”: throughout that period’s catastrophic monetary inflation, German central bank officials believed they were responding to outside forces. Somehow they remained oblivious that the trap of disorderly money printing had become the core problem.

Dr. Williams’ comment, “It's okay to have the party. It’s okay to get the party going…”, would be laughable if it were not so tragic. At this point, let’s hope the true story of this period gets told. I’m trying: monetary policies for almost 30 years now have been disastrous, a harsh reality masked by epic global market Bubbles.

It’s incredible that confidence in central banking has proved so resilient, though this dynamic no doubt revolves around a single – and circular - dynamic: “whatever it takes” central banking has thus far succeeded in sustaining securities market inflation. And it’s astounding that central bankers at this point are professing “It’s ok to get the party going.” The central bankers’ beloved Party is going to get crashed.

My mind this week also drifted back to a CBB written weeks after the tragic 9/11/2001 attacks. Shock had hit the markets, confidence and the real economy. Officials were determined to stimulate. I recall writing something to this effect: “If stimulus is deemed necessary, please rely on some deficit spending rather than monkeying with the financial markets. Market intervention/manipulation is such a slippery slope.” Back then no one had any idea how far experimental monetary policy could slide into the dark caverns of the deep unknown. Economic, financial, terror, geopolitical – or whatever unanticipated risk that might arise – all-powerful central bankers had an answer that would make things right.

I read with keen interest a Q&A with Jim Grant (Grant’s Interest Rate Observer) reproduced at Zero Hedge. Like others, I’m a big fan of Jim’s writing and analysis.

Question: “So what’s next for the global financial markets?” Grant Answers: “The mispricing of biotech stocks or corn and soybeans is of no great consequence to financial markets at large. Interest rates are another matter. They are universal prices: They discount future cash flows, calibrate risks and define investment hurdle rates. So interest rates are the traffic signals of a market based economy. Ordinarily, some are amber, some are red and some are green. But since 2008 they have mainly been green.”

It’s apropos to expand on Grant’s comments. Overnight lending rates and Treasury yields are the pillar for a broad range of rates and market yields – at home as well as abroad. Had the Fed, as in the past, restricted its operations – and market distortions – to Treasury bills, I would be much less apprehensive. If the Fed limited its rate-setting doctrine to responding to real economy variables the world would today be a less unstable place.

Instead, the Fed over recent decades nurtured securities market inflation and even turned to targeting higher market prices as its prevailing reflationary policy instrument. Importantly, the Fed and central bankers later resorted to the full-fledged manipulation of broad market risk perceptions. This was a game-changer. Essentially no risk was outside the domain of central bankers’ reflationary measures. As such, audacious markets could Party on, gratified that central bankers had relegated hangovers to a thing of the past.

Key aspects of central bank experimentation over time bolstered global risk assets and, in the end, fomented a historic global financial Bubble. First, by slashing rates all the way to zero, the Federal Reserve and others imposed punitive negative real returns on savers. Part and parcel to the Bernanke Doctrine, rate policies incited unprecedented global flows to equities, corporate bonds and EM bonds and equities. Meanwhile, dollar devaluation spurred historic (“Global Reflation Trade”) speculative excess and leveraging, especially destabilizing for susceptible commodities and EM complexes. Literally Trillions flooded into EM markets and economies, spurring Trillions more of further destabilizing domestic “money” and Credit expansion. Fiasco.

Over-liquefied global markets were conspicuously unstable. Repetitious Fed (and global central bank) responses to fledgling “Risk Off” Bubble dynamics along the way solidified the perception that “whatever it takes” central banks were prepared to fully backstop global securities markets. The summer of 2012 demonstrated to what extent concerted global policy measures would go in response to nascent financial crisis in Europe. Faith in the central bank market backstop became complete in 2013; a bout of market “Risk Off” had the Fed delaying “lift-off” and Bernanke reassuring markets that the Fed was prepared to “push back against a tightening of financial conditions.” It had essentially regressed to the point where a high-risk Bubble backdrop had central bankers telegraphing their willingness to invoke the “nuclear option” (open-ended QE/“money” printing) to blunt incipient market risk aversion.

“Moneyness of Risk Assets” has been fundamental to my “global government finance Bubble” thesis. Policy measures transformed risk perceptions throughout the markets, with global financial assets coming to be perceived as highly liquid and safe stores of wealth (money-like). It may have appeared subtle but it was nonetheless revolutionary. Post-mortgage finance Bubble reflationary measures fomented unprecedented global securities markets distortions. Central bank purchases launched Treasury, agency and global sovereign debt prices to the stratosphere. “Money” flooded into global equities funds, pushing stock prices to record highs. The EFT industry exploded to $3.0 TN, matching the bloated hedge fund industry. The global yield chase coupled with over-liquefied markets ensured record corporate debt issuance. The easiest borrowing conditions imaginable stoked stock buybacks, M&A and other financial engineering.

The global financial Bubble evolved to be systemic in nature. So long as global financial conditions remained extraordinarily loose and market prices continued inflating, an expanding global economy appeared to underpin booming securities markets.

The bullish consensus has been convinced that central bankers saved the world from crisis (the “100-year flood”) and securely placed the world recovery on a solid trajectory. I’m sure they have instead fomented catastrophe. Empirical research quantifies central bank impact on market yields in the basis points. Such research would surely also claim QE has had minimal impact on equities prices. Equities are not seen as overvalued. No one it seems sees comparable excesses to 1999 or 2007.

I will make an attempt to concisely state my case. Central banks have convinced market participants that they can ensure liquid (and continuous) markets. Markets perceive that the Fed and global central banks have the willingness and capacity to backstop securities markets. While impossible to quantify, these perceptions have become fully embodied in securities markets around the globe. Importantly, central bank assurances and market perceptions of boundless central bank liquidity are today fundamental to booming global derivatives markets.

Following the 2008 crisis, I expected U.S. and global equities to trade at lower than typical multiples to earnings and revenues. After all, risk premiums would be expected to remain elevated based on recent history. I believed mortgage securities would trade at wider spreads to Treasuries. I thought that, after the market collapse and economic crisis, investors would view corporate debt cautiously. Moreover, I expected counter-party concerns to weigh on derivatives markets for years to come.

I did not anticipate that do “whatever it takes” central banking would overpower the world. Zero rates for seven years and a $4.5 TN Fed balance sheet weren’t in my thinking - because they certainly weren’t in the Fed’s (recall the 2011 “exit strategy”). A $30 TN Chinese banking system would have seemed way far-fetched. Besides, there were indications that Washington had at least learned the crucial lesson of “too big to fail” and moral hazard.

In reality, they learned all the wrong lessons. Traditional central banking was turned on its head. Reckless “money” printing was let loose. Foolhardy market manipulation became the norm. The role played by leveraged speculation and derivatives trading in the 2008 market meltdown was disregarded. And somehow “too big to fail” was transposed from goliath financial institutions to gargantuan global securities markets. And it’s now coming home to roost.

There’s a perilous misperception that central bankers have mitigated market risk. They have instead grossly inflated myriad risks – market, financial, economic, social and geopolitical. As for market risk, Trillions were enticed to global risk markets under false premises and pretense – certainly including specious central bank assurances. And there is the multi-hundreds of Trillions global derivative marketplace that operates under the presumption of liquid and continuous markets. Importantly, central bank manipulation – of market prices and perceptions – fomented the type of excesses that virtually ensures a crisis of confidence.

Individuals can hedge market risk. The broader marketplace, however, cannot effectively hedge market risk. There is simply no one with the wherewithal to shoulder the market attempting to offload risk. Yet central bankers have convinced the marketplace that do “whatever it takes” includes a promise of market liquidity. And this perception of boundless liquidity has ensured a booming derivatives “insurance” marketplace.

There’s a crisis scenario that’s not far-fetched at this point. Fear that global policymakers are losing control spurs risk aversion. The sophisticated leveraged players panic as markets turn illiquid. The Trillions-dollar trend-following and performance-chasing Crowd sees things turning south. Worse still, illiquidity hits confidence in the ability of derivative markets to operate orderly. In short order securities liquidations and derivative-related selling completely overwhelm the market.

It comes back to a momentous flaw in contemporary finance: Markets do not have the capacity to hedge market risk. Indeed, the perception that risks can easily be offloaded through derivative “insurance” has been instrumental in promoting risk-taking. Never have markets carried so much risk. And never have markets been as vulnerable to an abrupt change in perceptions with regard to central banker competence, effectiveness and capabilities.

A Friday morning Bloomberg (Tracy Alloway) article was appropriately headlined “It’s been a Terrible Week for the Credit Market,” included a series of notable paragraph subtitles: “It started in high yield…”, “Glencore made it worse…”; “Then the quarter ended on a down note…”; “And attention turned to investment grade…”; “The pain intensified…”; “What happens next.” A Friday afternoon Bloomberg (Sridhar Natarajan and Michelle Davis) headline read “Credit Investors Bolt Party as Economy Fears Trump Low Rates.” According to Bloomberg, the average junk bond yield this week surged 40 bps to 8.30%, with Q3 junk bond losses the second-worst quarter going back to 2009. This week also saw investment-grade CDS jump to a more than two-year high.

It’s worth noting that the markets were (again) at the brink of disorderly in early-Friday trading. “Risk Off” saw stocks under significant pressure. The dollar/yen traded to 118.68, near August panic lows, before rallying back above 120 late in the day. Treasuries were in melt-up mode. And despite bouncing 4.1% off of Friday morning trading lows, bank stocks ended the week down 1.5%. Underperforming ominously, the 3.8% rally from Friday’s lows still left the Securities Broker/Dealers down 3.1% for the week. Earlier in the week, Glencore worries spurred the first serious “counter-party” concerns in awhile.

October 2 – Reuters (Christopher Condon Craig Torres): “Federal Reserve Vice Chairman Stanley Fischer said he doesn’t see immediate risks of financial bubbles in the U.S., while raising concerns that the central bank’s policy tool kit is limited and untested. ‘Banks are well capitalized and have sizable liquidity buffers, the housing market is not overheated and borrowing by households and businesses has only begun to pick up after years of decline or very slow growth,’ Fischer said… Still, he warned that ‘potential shifts of activity away from more regulated to less regulated institutions could lead to new risks.’ Created a century ago in response to recurring banking crises, the Fed has taken a renewed interest in identifying potential systemic financial threats since the global meltdown of 2008-09…”

Today’s paramount systemic financial threat is not new. Risk is now high for a disorderly – Party Crashing - “run” on financial markets.  At the minimum, global markets will function poorly as faith in central banking begins to wane.

For the Week:

The S&P500 rallied1.0% (down 5.2% y-t-d), and the Dow recovered 1.0% (down 7.6%). The Utilities gained 1.0% (down 9.7%). The Banks dropped 1.5% (down 6.5%), and the Broker/Dealers sank 3.1% (down 10.9%). The Transports increased 0.3% (down 13.9%). The S&P 400 Midcaps slipped 0.2% (down 4.6%), and the small cap Russell 2000 declined 0.8% (down 7.6%). The Nasdaq100 rallied 1.0% (up 0.7%), and the Morgan Stanley High Tech index jumped 2.0% (up 0.2%). The Semiconductors surged 2.6% (down 11.4%). The Biotechs increased 0.3% (up 3.0%). Although bullion slipped $8, the HUI gold index rallied 3.0% (down 30.1%).

Three-month Treasury bill rates ended the week at negative one basis point. Two-year government yields dropped 11 bps to 0.58% (down 9bps y-t-d). Five-year T-note yields sank 18 bps to 1.29% (down 36bps). Ten-year Treasury yields fell 17 bps to a five-month low 1.99% (down 18bps). Long bond yields declined 14 bps to 2.82% (up 7bps).

Greek 10-year yields declined six bps to 7.91% (down 184bps y-t-d). Ten-year Portuguese yields sank 26 bps to an almost five-month low 2.28% (down 34bps). Italian 10-yr yields dropped 16 bps to 1.63% (down 26bps). Spain's 10-year yields sank 26 bps to a five-month low 1.77% (up 16bps). German bund yields dropped 14 bps to a four-month low 0.51% (down 3bps). French yields fell 15 bps to 0.89% (up 6bps). The French to German 10-year bond spread narrowed one to 38 bps. U.K. 10-year gilt yields dropped 14 bps to 1.70% (down 5bps).

Japan's Nikkei equities index declined 0.9% (up 1.6% y-t-d). Japanese 10-year "JGB" yields slipped a basis point to 0.31% (down one bp y-t-d). The German DAX equities index dropped 1.4% (down 2.6%). Spain's IBEX 35 equities index increased 0.9% (down 6.6%). Italy's FTSE MIB index recovered 0.3% (up 12.5%). EM equities were mixed. Brazil's Bovespa index rallied 4.7% (down 6.2%). Mexico's Bolsa gained 0.7% (down 1.0%). South Korea's Kospi index gained 1.4% (up 2.8%). India’s Sensex equities index recovered 1.4% (down 4.6%). China’s Shanghai Exchange dropped 1.3% (down 5.6%). Turkey's Borsa Istanbul National 100 index slipped 0.3% (down 13.2%). Russia's MICEX equities index was hit 1.7% (up 15.5%).

Junk funds this week saw outflows surge to $2.2bn (from Lipper).

Freddie Mac 30-year fixed mortgage rates slipped a basis point to 3.85% (down 2bps y-t-d). Fifteen-year rates dipped one basis point to 3.07% (down 8bps). One-year ARM rates were unchanged at 2.53% (up 13bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down two bps to 3.87% (down 41bps).

Federal Reserve Credit last week declined $8.5bn to $4.448 TN. Over the past year, Fed Credit inflated $40bn, or 0.9%. Fed Credit inflated $1.637 TN, or 58%, over the past 151 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt dropped $17.9bn last week to a nine-week low $3.334 TN. "Custody holdings" were up $40.5bn y-t-d.

M2 (narrow) "money" supply surged $36.7bn to a record $12.223 TN. "Narrow money" expanded $745bn, or 6.5%, over the past year. For the week, Currency increased $1.9bn. Total Checkable Deposits jumped $18.9bn, and Savings Deposits rose $11.1bn. Small Time Deposits slipped $1.0bn. Retail Money Funds increased $3.0bn.

Money market fund assets gained $8.5bn to $2.669 TN. Money Funds were down $64bn year-to-date, while gaining $55bn y-o-y (2.1%).

Total Commercial Paper sank $72.9bn to end the quarter at $958bn. CP declined $50bn year-to-date.

Currency Watch:

The U.S. dollar index declined 0.4% to 95.92 (up 6.3% y-t-d). For the week on the upside, the Norwegian krone increased 1.8%, the Canadian dollar 1.4%, the South African rand 1.3%, the Mexican peso 1.3%, the Brazilian real 1.1%, the Swiss franc 0.8%, the New Zealand dollar 0.7%, the Swedish krona 0.7%, the Japanese yen 0.6%, the Australian dollar 0.3% and the euro 0.2%.

Commodities Watch:

The Goldman Sachs Commodities Index declined 1.0% (down 14.3% y-t-d). Spot Gold slipped 0.7% to $1,139 (down 3.9%). December Silver gained 0.9% to $15.24 (down 2.3%). October Crude declined four cents to $45.66 (down 14%). October Gasoline sank 3.5% (down 8.5%), and October Natural Gas dropped 3.5% (down 15%). September Copper rallied 2.7% (down 17%). December Wheat gained 1.1% (down 13%). December Corn was little changed (down 2%).

Global Bubble Watch:

October 2 – Financial Times (Jonathan Wheatley): “Emerging markets will suffer a net outflow of capital this year for the first time since the 1980s as their economic fortunes darken and the US Federal Reserve prepares to lift interest rates. The projection will heighten concerns about the prospects for leading emerging economies including China and Brazil that are set to weigh on central bankers and finance ministers… The Institute of International Finance said it expected foreign investor flows to EMs to fall to just $548bn this year, lower than levels recorded in 2008 and 2009 at the height of the global financial crisis. Combined with accelerating outflows from resident investors, it said net capital outflows would amount to $540bn this year, the first time this had been seen since 1988. That follows inflows of $32bn in 2014… The IIF estimates that private outflows from EMs will amount to more than $1tn this year. Mr Collyns said the biggest single cause of outflows was repayments of foreign currency loans by EM corporates, especially in China. The IIF estimates that indebtedness at non-financial corporations in EMs has increased more than fivefold over the past decade to $23.7tn.”

September 29 – Financial Times (Shawn Donnan): “The International Monetary Fund has warned that emerging economies and bond markets need to prepare for an increase in corporate failures if and when the US Federal Reserve and other central banks in advanced economies begin raising rates. The IMF… and others have expressed growing concern about the surge in dollar-denominated debt in emerging economies and the potential impact that a sudden increase in rates would have… In a chapter of its Global Financial Stability Report…, IMF economists warn that a surge in corporate leverage has preceded many emerging market financial crises in history. Fed by the cheap cost of money, over the past decade the corporate debt of non-financial firms across major emerging market economies more than quadrupled from $4tn in 2004 to more than $18tn in 2014. In the same period, the average ratio of emerging market corporate debt to gross domestic product grew by 26 percentage points… A growing portion of corporate debt in emerging economies also trades in the bond market, the IMF said. In 2004 just 9% of the total corporate debt in emerging economies was made up of bonds. That figure had almost doubled to 17% in 2014.”

September 28 – Wall Street Journal (Liz Hoffman): “Corporate executives earlier this year were feeling the love from investors when they announced acquisitions. Now, some buyers are getting burned. On Monday, pipeline operator Energy Transfer Equity LP’s shares fell nearly 13% on news of its $32.6 billion deal to take over rival Williams Cos., making it the latest acquirer in the past few months to suffer a big stock selloff on deal news. Others include health insurer Centene Corp., index provider McGraw Hill Financial Inc. and chip maker Dialog Semiconductor PLC. The rebukes represent a reversal of an important driver of the mergers-and-acquisitions boom over the past few years, namely a surge in the stock prices of companies announcing acquisitions. Those rising prices had the twin effect of emboldening other buyers and boosting the value of shares that are often used as currency.”

October 1 – Bloomberg (Elena Popina): “Traders dumped exchange-traded funds tracking emerging-market stocks at the fastest pace in over a year last quarter amid concerns over the slowdown in China, a selloff in commodities and the prospect of higher interest rates in the U.S. Investors pulled $6.1 billion from U.S.-traded ETFs that offer exposure to a basket of developing-nation equities in the three months through September… Exchange-traded funds that invest in both emerging-market stocks and debt as well as individual countries saw outflows in 12 out of 13 weeks ending Sept. 25, with losses totaling $12 billion… The ETF withdrawals mirror broader emerging-market outflows during the period. Investors have pulled $40 billion from developing-economy stock and bond funds in the third quarter, fleeing emerging markets at the fastest pace since the height of the global financial crisis in 2008…”

September 30 – Financial Times (Miles Johnson): “Three of the US’s biggest hedge funds have suffered billions of dollars in losses from their portfolios thanks to a sharp sell-off in the shares of Valeant Pharmaceuticals. Bill Ackman’s Pershing Square, Jeff Ubben’s ValueAct, and John Paulson’s Paulson & Co have been hit hard this week because of their concentrated bets on Valeant, with Mr Ackman holding 30% of his fund in the pharmaceutical company’s shares. Valeant shares fell a further 5% on Tuesday, adding to a 16.5% plunge on Monday… One US-based investor in hedge funds said: ‘Large, focused bets on single companies can lead to huge returns for managers when they go well, but destroy years of gains when they go wrong. It is always a risky strategy no matter how much of an edge a hedge fund thinks it has’.”

September 27 – Financial Times (Simeon Kerr): “Saudi Arabia has withdrawn tens of billions of dollars from global asset managers as the oil-rich kingdom seeks to cut its widening deficit and reduce exposure to volatile equities markets amid the sustained slump in oil prices. The Saudi Arabian Monetary Agency’s foreign reserves have slumped by nearly $73bn since oil prices started to decline last year as the kingdom keeps spending to sustain the economy and fund its military campaign in Yemen. The central bank is also turning to domestic banks to finance a bond programme to offset the rapid decline in reserves. This month, several managers were hit by a new wave of redemptions, which came on top of an initial round of withdrawals this year… ‘It was our Black Monday,’ said one fund manager, referring to the large number of assets withdrawn by Saudi Arabia last week. Institutions benefited from years of rising assets under management from oil-rich Gulf states, but are now feeling the pinch after oil prices collapsed last year.”

October 2 – Reuters (Jamie McGeever): “Investment banking fees slumped in the third quarter, with the volatility that swept through global financial markets resulting in the slowest three months for fees in almost four years, according to… Thomson Reuters… Global fees for services ranging from merger and acquisitions advisory to capital markets underwriting totaled $17.4 billion, down 30% from the previous quarter and the lowest since the last three months of 2011. The third quarter was a torrid time for global markets. Only two out of 21 financial benchmarks tracked by Reuters rose in the period, making it highly likely that 2015 will be the worst year for investors since the credit bust and banking collapse of 2008.”

September 30 – Wall Street Journal (Rob Copeland and Bradley Hope): “Wall Street is concocting ways to capitalize on potential weak spots in exchange-traded funds, which showed signs of vulnerability during the recent market turmoil. Aiming at ETFs from cybersecurity to oil, traders are designing wagers to take advantage of what they say are shortcomings in the ETFs’ structure. In some instances, their trades pay off as investors who have invested in low-cost ETFs in various parts of their portfolios suffer. Troubles befell some ETFs in August. As stock markets world-wide dived, dozens of stock ETFs traded at sharp discounts to the sum of their holdings for a short time, before stabilizing. The imbalance emboldened traders, who have been crafting bets against ETFs designed to generate small profits in steadier markets and bigger gains in volatile times.”

China Bubble Watch:

September 30 – Reuters (Kazunori Takada): “China's economy is officially growing at a brisk clip of 7%, but many locally based executives at multinationals say they wouldn't know it from the performance of their businesses. By China's standards 7% is already the weakest annual growth in 25 years, but on the ground the slowdown in the world's second-biggest economy is being felt more acutely in many sectors… ‘How can China's economy be growing at 7%?’ said an executive at a Western conglomerate that does business with a wide range of Chinese and foreign firms in China. He said his business wasn't growing that fast, and those of his clients didn't appear to be, either. Reuters spoke to 13 executives in charge of China operations at international firms, and nine said they felt they were operating in an environment where the economy was growing between 3 and 5%.”

September 28 – Bloomberg: “Chinese industrial companies reported profits fell the most in at least four years as the pillars of China’s infrastructure-led growth model suffered from a devalued yuan, a tumbling stock market and weak demand. Industrial profits tumbled 8.8% in August from a year earlier, with the biggest drops concentrated in producers of coal, oil and metal… It was the biggest decline since the government began releasing monthly data in October 2011…”

Fixed Income Bubble Watch:

September 27 – Financial Times (Eric Platt and Nicole Bullock): “After a debt binge comes the bill and that is the grim message for investors looking at the current performance of the US corporate bond market. As the third quarter concludes, slowing global economic activity threatens the earnings power of many US companies, which have amassed $7.8tn in debt. Years of easy monetary policy that kept borrowing costs low, a wave of mergers and acquisitions and the threat of shareholder activism have all contributed to an erosion of balance sheet quality. Most vulnerable are junk rated companies, which account for $2.5tn of the recent US corporate debt binge, with bonds worth roughly $1.5tn set to mature over the next five years... Michael Contopoulos, a strategist with Bank of America Merrill Lynch, said: ‘Finally investors are starting to wake up, they are starting to trade on earnings and they’re starting to trade on downgrades.’”

October 2 – Reuters (Jamie McGeever): “Investment banking fees slumped in the third quarter, with the volatility that swept through global financial markets resulting in the slowest three months for fees in almost four years, according to… Thomson Reuters… Global fees for services ranging from merger and acquisitions advisory to capital markets underwriting totaled $17.4 billion, down 30% from the previous quarter and the lowest since the last three months of 2011. The third quarter was a torrid time for global markets. Only two out of 21 financial benchmarks tracked by Reuters rose in the period, making it highly likely that 2015 will be the worst year for investors since the credit bust and banking collapse of 2008.”

September 28 – Wall Street Journal (Mike Cherney): “Bond-market turmoil mounted Monday, as three companies reduced or put off planned bond sales in response to soft investor demand… Santander Holdings USA Inc., the U.S. arm of Spanish bank Banco Santander SA, canceled a planned sale that had been expected at $1 billion or more… …Shopping-center company CBL & Associates Properties Inc. pulled a $300 million bond sale. Westfield Corp., another shopping-center firm, canceled the sale of 10-year bonds… The deals pulled Monday came from companies carrying investment-grade ratings; bankers had little trouble selling similar bonds earlier in the year. ‘I have never seen the investment-grade primary markets this schizophrenic before,’ said Ron Quigley, managing director and head of fixed-income syndicate at Mischler Financial Group…. U.S. corporate-bond issuance in 2015 is up 15% from the comparable year-ago period… after setting records in each of the past three years.”

September 28 – Bloomberg (Eshe Nelson and Wes Goodman): “Bond bulls are piling into Treasuries as turmoil in junk bonds pushes investors into the safety of lower-yielding government debt. Diminished demand for energy companies spurred losses in speculative-grade debt, pushing the yield on an index of U.S. high-yield corporate obligations above 8%... The yield of 8.01% reached Sept. 25 on the junk-bond index was only surpassed once in the past four years, in August…”

October 1 – Bloomberg (David Yong): “Investors may struggle to profit from bonds of distressed companies in developing nations this year after a plunge last quarter… The securities tumbled 13.4% in the three months to Sept. 30, paring annual returns to 0.95%... The market value of the gauge’s 156 notes has dropped by almost 30% since Dec. 31 to $54 billion, or about 58.8 cents on the dollar. Global high-yield bonds fell 4.51% in the third quarter, bringing year-to-date losses to 1.4%. They’re on track for their first negative return since 2008.”

Central Bank Watch:

September 30 – Reuters (Marius Zaharia): “If the European Central Bank decides to extend its asset-purchase programme in response to global growth risks and flatlining inflation, it could hit its self-imposed limits on bond ownership in several countries within a year. Analysts say this would happen first in Portugal and Finland, followed closely by the most important euro zone member, Germany. The limits on individual bond holdings, set by the ECB to avoid becoming mired in any future debt restructurings, were raised for most government bonds to 33% from 25% earlier this month. Other factors defining how long the ECB could extend QE include a ban on holding more than a third of any country's government debt and the fact that bonds must be bought in proportion to each country's contribution to the ECB's capital.”

U.S. Bubble Watch:

September 28 – Bloomberg (Eshe Nelson and Wes Goodman): “U.S. regulators fretting that asset managers aren’t prepared for the Federal Reserve’s liftoff or another event that might trigger market turmoil may have found their problem child. Alternative mutual funds, which mimic the strategies of hedge funds by using leverage and short selling, have outflows that are harder to predict, according to a paper released last week by the U.S. Securities and Exchange Commission. That’s because alternative funds experience larger swings in the size of investor redemptions, with the variation of the typical fund’s flows more than twice as great as that of the broader industry, the agency’s economists found… While investors frequently move in and out of alternative funds, the products are still the fastest growing of all mutual-fund categories, with assets surging to $334 billion in 2014 from $365 million in 2005, the SEC reported. One reason they are popular is that the funds have helped small investors diversify beyond stocks and bonds into strategies once restricted to the wealthy.”

September 30 – Wall Street Journal (Mark Peters and Ben Leubsdord): “Hopes for an American export boom are wilting under the weight of a strong dollar and global economic strains. U.S. exports are on track to decline this year for the first time since the financial crisis, undermining a national push to boost shipments abroad. Through July, exports of goods and services were down 3.5% compared with the same period last year. New data… showed that exports of U.S. goods sank a seasonally adjusted 3.2% in August to their lowest level in years. The weak trade performance is restraining overall economic growth, a sign of how troubles in China and other major economies are dinging the U.S. economy.”

September 28 – Bloomberg (Prashant Gopal): “A development team that includes a real estate investment arm of JPMorgan… is offering the ultra-wealthy a rare opportunity to build mansions bigger than the White House on a hillside overlooking Los Angeles. Starting price: $115 million. Junius Real Estate Partners, part of JPMorgan’s private bank, and developer Domvs London acquired an 11-acre site near the Hotel Bel-Air a year ago, and are preparing it for three estates. The first lot will go on the market Tuesday. ‘There’s a shortage of trophy properties that are available for sale in this pocket of Los Angeles,’ Barry Watts, president of Domvs London, said… ‘You’ve got high-net-worth people who want to own multiple homes across the world, and Los Angeles offers something different. If you want to drive your convertible car 12 months a year, it’s a city where you can do that.’ Homes priced at more than $100 million are becoming increasingly common as billionaires, seeking places to put cash, shatter sales records from Los Angeles to London.”

EM Bubble Watch:

September 30 – Financial Times (Roger Blitz): “The scale of emerging markets’ weakness is palpable in the rapid stalling of foreign currency debt sales in Brazil and Russia and a sharp slowdown in several other countries, according to research by Nomura. A debt ‘bonanza’ was witnessed across EM in 2012-14, with around $250bn issued in each of those years. But it is clear that period is over, said Nomura’s Global FX strategist, Jens Nordvig. This year has seen net bond issuance in EM grind to a halt, with the sole exception of China where corporates have issued around $50bn of debt… In its latest Global Financial Stability Report, the IMF said EM corporate debt of non-financial companies reached $18tn last year, more than four times the level of 2004, and there was a risk of corporate failures. Nomura said gross issuance has been close to zero for a while in Brazil and Russia, the latter mostly the result of sanctions.”

September 27 – Financial Times (Chris Flood): “Fears about deteriorating economic conditions in China, Brazil and Russia have led to a massive retreat from emerging market exchange traded funds. So far this year investors have pulled $19bn from emerging market ETFs but experts suggest these vehicles are vulnerable to much more selling pressure. Geoff Dennis, head of emerging markets equity strategy at UBS, the bank, said: ‘It feels like no one wants to be in emerging markets at the moment.’”

Brazil Watch:

September 28 – Bloomberg (Sebastian Boyd Filipe Pacheco): “Brazilian companies including state oil producer Petrobras are at risk from a weakening real after they issued a record amount of debt in foreign currency. The mismatch prompted President Dilma Rousseff to say over the weekend that she’s ‘extremely concerned’ about the situation. Borrowing in overseas markets by non-finance companies reached a record $137 billion last year, seven times the level just a decade earlier… Petroleo Brasileiro SA, with $56 billion of outstanding bonds, has become the world’s largest non-investment grade corporate issuer after Standard & Poor’s cut its rating this month following a similar move by Moody’s…”

September 28 – Reuters (Guillermo Parra-Bernal): “Loan default and unpaid utility bills among Brazilian companies rose during the first eight months at the fastest pace in three years, reflecting the steepest economic recession in 25 years, soaring borrowing costs and a slump in the currency, credit research firm Serasa Experian said… The so-called Serasa Experian Corporate Default Index rose 13.3% in the January-to-August period from a year earlier, the biggest jump since a 14.3% rise three years ago. On an annual basis, corporate delinquencies surged 16.1% in August from a year earlier…”

Japan Watch:

October 1 – Bloomberg (Stephen Stapczynski): “The decline in Japan’s power use to the weakest in 12 years underlines the risk to earnings at the nation’s biggest utilities and raises expectations of increased competition and consolidation fueled by government reforms. Power consumption dropped to 74.6 terawatt-hours in August, the lowest for that month since 2003… Demand from manufacturers, which makes up more than a third of the nation’s total consumption, fell for the 15th straight month, as output from machinery and metals products lagged…”

Geopolitical Watch:

October 1 – Wall Street Journal (Dion Nissenbaum, Adam Entous, Nathan Hodge and Sam Dagher): “Russia launched airstrikes in Syria on Wednesday, catching U.S. and Western officials off guard and drawing new condemnation as evidence suggested Moscow wasn’t targeting extremist group Islamic State, but rather other opponents of Bashar al-Assad’s regime. One of the airstrikes hit an area primarily held by rebels backed by the Central Intelligence Agency and allied spy services, U.S. officials said, catapulting the Syrian crisis to a new level of danger and uncertainty. Moscow’s entry means the world’s most powerful militaries—including the U.S., Britain and France—now are flying uncoordinated combat missions, heightening the risk of conflict in the skies over Syria.”

October 1 – Reuters (Sam Wilkin): “Iran's supreme leader called on the armed forces… to increase their capabilities in order to protect the Islamic Republic's influence in the Middle East and deter would-be attackers. ‘The armed forces must urgently increase their readiness, so that the enemy dare not think of attacking,’ Supreme Leader Ayatollah Ali Khamenei was quoted as saying… in a meeting with army commanders. Khamenei often invokes an unspecified ‘enemy’ when talking about Western powers, particularly the United States and Israel, which he suspects of plotting to overthrow the Islamic Republic.”