Saturday, September 10, 2016

Weekly Commentary: Reversals

Commenting on Friday’s jump in global bond yields, a fund manager on Bloomberg Television downplayed the move: “Yields are back to where they were last week.” Such thinking badly misses the point.

Greed and Fear ensure that markets have an inherent tendency to “overshoot.” Over-liquefied markets can significantly overshoot on the upside. Markets for years dominated by ultra-low rates and massive central bank buying should be expected to overshoot in historic fashion. And that’s exactly what has unfolded. Major market Reversals tend to be violent and unpredictable affairs, catching almost everyone unprepared.

At the minimum, summer complacency ended rather abruptly Friday. Bloomberg: “Stocks, Bonds Spiral Lower Together in Replay of Past Hawk Raids.” Long-bond Treasury yields jumped 13 bps Friday, with a two-day surge of 20 bps (“biggest two-day rise since August 2015”). Ten-year Treasury yields rose seven bps this week to the highest level (1.67%) since June. German 10-year bund yields rose 13 bps (“biggest slide since March”) in two sessions to the first positive yield (0.01%) since July 15.

September 8 – Bloomberg (Kevin Buckland, Wes Goodman and Shigeki Nozawa): “One of the pillars of 2016’s record-setting global bond rally is starting to buckle. Japan’s sovereign debt is suffering its worst rout in 13 years, handing investors bigger losses over the past two months than any other government bonds amid speculation the Bank of Japan plans to change its asset-purchase strategy. The reversal is spurring concern the second-largest debt market is the vanguard for a broader selloff… The impact of the BOJ’s stimulus is that the bond markets worldwide are becoming one market,’ said Chotaro Morita, the chief rates strategist at… SMBC Nikko Securities Inc., one of the 21 primary dealers that trade directly with the central bank. ‘If there’s a reversal of policy, you can’t rule out that it would roil global debt."

The Bank of Japan is divided and wavering – an unsettling situation for Japanese and global bond markets. The BOJ is in the process of reviewing current stimulus measures, as it heads into a key September 20-21 policy meeting. After championing negative interest-rates, there is now recognition that prolonged negative rates and market yields have turned problematic for the banking system and pension complex. There is speculation that the BOJ may employ measures to steepen the yield curve, with all the uncertainty this latest policy gambit would entail.

Super Mario failed Thursday to allay market concerns. Restless markets were hoping that the ECB would commit to extending its QE program past the stipulated March ending date, while also expanding/tinkering with the mix of securities to be purchased (running short of bunds and other bonds to buy). Months pass by quickly. Seeking immediate assurances of “whatever it takes forever,” markets were left disappointed. Have Germany and the euro-area “hawks” been waiting patiently to reassert themselves?

Contentious central bank debates are not limited to the BOJ and ECB. Markets were hit with an untimely Friday morning “increasingly risky to delay U.S. rate hike” from none other than Fed dove Eric Rosengren. A spate of weaker data had moved sentiment away from expecting a September rate hike. Yet there is clearly an FOMC contingent that believes rates are too low considering the backdrop (M2 “money” supply up almost $900bn y-o-y; 4.9% stated unemployment rate; asset Bubbles, etc.).

History has demonstrated that, once commenced, monetary inflations are exceedingly difficult to control – let alone rein in. Speculative markets have been keen to this powerful dynamic. Once the Bernanke Fed targeted inflating securities markets as the prevailing mechanism for post-Bubble reflationary measures, there would be no returning to conventional. The Fed talked “normalization” and “Exit Strategy” in 2011, only to double-down with massive stimulus after European-led market tumult erupted in 2012. Then there was Bernanke’s - the Fed will “push back against a tightening of financial conditions” that quashed the markets’ 2013 “taper tantrum.” Repeatedly the Fed shied away from even a little baby-step rate increase in response to unsettled global markets.

It was not much different in early-2016. After at long last initiating “lift off” in December, unstable global markets in January and February saw the Fed lose its nerve to follow through. Meanwhile, the BOJ, ECB, BOE and others adopted even more outlandish monetary stimulus. For good reason, markets fully embraced “whatever it takes for as long as it takes”. The latest monetary management iteration removed any potential QE limitation. Limits to negative rates were not yet close at hand. And if sovereign buying programs ran into constraints, central banks would simply shift their buying onslaughts to corporate bonds and equities.

Central bankers had fully embraced booming global securities markets. After years of aggressive support, they were all in. No turning back. Only a surge in consumer price inflation could possibly bring about a rethink of extreme monetary stimulus; and surely that wasn’t about to happen. For the markets: The sky's the limit.

As for global securities markets, the central bank-induced short squeeze morphed into an historic 2016 global market speculative melt-up. Caution was thrown to the wind - by central bankers, speculators, investment managers and investors alike.

After ending 2015 at an incredibly low 64 bps, German 10-year bund yields closed July 8th at negative 19 bps. Japanese JGB yields dropped from positive 26 bps to negative 29 bps. After beginning the year at negative 6 bps, Swiss yields fell all the way to negative 63 bps. UK yields collapsed from 1.96% to 52 bps (August 12). Spain’s 10-year yields sank from 1.77% to 0.92% and Italy’s from 1.59% to 1.04%. The U.S. Treasury long bond yield fell almost 100 bps from the end of 2015 to 2.06% in early July.

September 6 – Bloomberg (Brian Chappatta): “In the six months through July, about $114 billion flowed into 32 types of bond funds, ranging from developed- and emerging-market governments to high-yield corporate securities and municipal debt, according to… Morningstar Inc. The last time so much money poured into fixed-income was May 2013, right as the taper tantrum began.”

Global bond markets validated my maxim, “Bubbles go to unimaginable extremes – then double!” My view holds that this year’s bond trading has been dominated by historic market dislocation. As such, I presume that enormous amounts of leverage have accumulated throughout the global derivatives complex, as hedging strategies forced those on the wrong side of derivative trades to hedge in the cash market. As I’ve noted previously, the world’s largest derivatives market (interest-rate swaps) had to contend with previously unimaginable market moves.

It’s my view that this epic market dislocation unleashed a torrent of financial leverage and associated market liquidity. This liquidity tsunami spurred securities market inflation almost across the board. Heavily shorted securities, sectors, markets and asset classes benefited inordinately. Junk bonds enjoyed a huge rally, ensuring a major short squeeze for the stocks of scores of suspect companies (benefitting from a dramatic loosening in corporate Credit Availability).

Global short squeeze dynamics spurred a major rally throughout EM. The combination of outperformance and enticing relative yields then ensured “money” flooded into EM. The resulting EM debt issuance resurgence captivated the bullish imagination, reinforcing the rally in EM stocks, bonds and currencies.

Market “melt-ups” create their own liquidity. The extraordinary development this time around was that liquidity abundance turned systemic (combination of monetization and speculative leveraging). A short squeeze and resulting outperformance powered the risky stuff. Meanwhile, the historic collapse in sovereign yields poured gas on the speculative fire that had enveloped everything with a yield. The utilities, REITS, consumer staples and dividend stocks all made power moves. “Money” flooded into perceived low-risk yield plays. “Smart beta” became a slam dunk. Even better, boosting risk and leverage worked virtually everywhere. Caution and bearishness were punished mercilessly. Exuberance. All the classic signs of a major speculative “blow-off.” Even more “money” inundated equity index products.

And speaking of “blow-offs.” Few strategies benefited from the all-encompassing global liquidity deluge than so-called “risk parity.” A leveraged strategy comprising bonds, stocks and commodities proved golden. And it’s expecting a lot for managers to get worked up about stocks, bonds and various asset classes all turning highly correlated – not when “money” is being made hand over fist.

For many in the marketplace, Friday provided a major wakeup call. Stocks, bonds and commodities were all under pressure. Risk everywhere. Diversification suddenly nowhere to be found. Crowded Trades Galore. A few headlines: “Defense Trade Unravels as Bond Yields Jump Most in Month;” “Low-Volatility ETFs Are Anything But Amid S&P 500 Tumble;” and “Oil Tumbles Most in Month…”

Friday trading saw the real estate investment trusts (BBG REITS) sink 3.9%. The Dow Jones Utilities fell 3.8%. The previously outperforming broader market underperformed. The small cap Russell 2000 dropped 3.1% and the S&P400 Mid Cap index fell 2.9%. Transports slid 3.2%. Consumer Staples (XLP) dropped 2.7%.

No surprise if market tumult again holds the Fed – along with the BOJ - at bay. Yet that wouldn’t do much to resolve the serious dilemma now overhanging central banks and the markets. At this point, the global Bubble is sustained only through unrelenting massive central bank monetization (QE). Sustaining a late-stage, runaway speculative Bubble is risky, risky business. And the more inflated and detached securities prices become from reality the more outrageous the amount of monetary stimulus necessary to avoid collapse. QE has turned increasingly, hopelessly and fatefully destabilizing.

By now, global central bankers more clearly understand the trap to which they have fallen. Extreme monetary stimulus has suffered significant diminishing returns in the real economy, obvious to all. Yet negative rates and yields are severely distorting finance - the markets, banking systems and pension complexes in particular. Even to diehard proponents, the great monetary experiment has not worked as anticipated.

All along, markets have been comforted that when monetary stimulus (rates and QE) turns less effective, central banks have been conditioned to simply (and predictably) do more (negative rates, more QE, more equities and corporate debt). Mindlessly doing more and more is reckless – and not inconspicuously so. Perhaps the markets are beginning to fret that central bankers are weary of being held hostage, confused as to what to do next and increasingly alarmed by how things have unfolded. The downside of central bank market intervention and manipulation is that participants are today generally over-exposed, under-hedged and risk complacent/oblivious. Fuel for Reversals.

For the Week:

The S&P500 dropped 2.4% (up 4.1% y-t-d), and the Dow fell 2.2% (up 3.8%). The Utilities were hit 2.4% (up 11.9%). The Banks declined 1.4% (down 2.1%), and the Broker/Dealers slipped 0.8% (down 4.0%). The Transports slid 1.6% (up 4.2%). The S&P 400 Midcaps sank 3.2% (up 9.3%), and the small cap Russell 2000 dropped 2.6% (up 7.3%). The Nasdaq100 fell 2.4% (up 1.9%), and the Morgan Stanley High Tech index dropped 2.3% (up 7.2%). The Semiconductors sank 4.8% (up 15.8%). The Biotechs rallied 2.0% (down 13.1%). With bullion down $1, the HUI gold index fell 3.9% (up 107%).

Three-month Treasury bill rates ended the week at 34 bps. Two-year government yields slipped a basis point to 0.78% (down 27bps y-t-d). Five-year T-note yields gained three bps to 1.22% (down 53bps). Ten-year Treasury yields rose seven bps to 1.67% (down 58bps). Long bond yields jumped 11 bps to 2.39% (down 63bps).

Greek 10-year yields surged 19 bps to 8.12% (up 80bps y-t-d). Ten-year Portuguese yields jumped 13 bps to 3.14% (up 62bps). Italian 10-year yields rose eight bps to 1.25% (down 34bps). Spain's 10-year yield gained six bps to 1.08% (down 69bps). German bund yields rose six bps to 0.01% (down 61bps). French yields jumped 11 bps to 0.30% (down 69bps). The French to German 10-year bond spread widened five to 29 bps. U.K. 10-year gilt yields gained 14 bps to 0.86% (down 110bps). U.K.'s FTSE equities index dropped 1.7% (up 8.6%).

Japan's Nikkei 225 equities index increased 0.2% (down 10.9% y-t-d). Japanese 10-year "JGB" yields added two bps to a six-month high negative 0.02% (down 28bps y-t-d). The German DAX equities index declined 1.0% (down 1.6%). Spain's IBEX 35 equities index gained 1.3% (down 5.4%). Italy's FTSE MIB index slipped 0.2% (down 20%). EM equities were mixed. Brazil's Bovespa index dropped 2.6% (up 34%). Mexico's Bolsa was hit 2.8% (up 8.1%). South Korea's Kospi was unchanged (up 3.9%). India’s Sensex equities gained 0.9% (up 10.3%). China’s Shanghai Exchange rose 0.4% (down 13%). Turkey's Borsa Istanbul National 100 index was little changed (up 7.4%). Russia's MICEX equities index gained 1.2% (up 15%).

Junk bond mutual funds saw inflows of $610 million (from Lipper).

Freddie Mac 30-year fixed mortgage rates slipped two bps to 3.44% (down 46bps y-o-y). Fifteen-year rates declined a basis point to 2.76% (down 34bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down two bps to 3.54% (down 51bps).

Federal Reserve Credit last week increased $0.5bn to $4.419 TN. Over the past year, Fed Credit declined $20.5bn. Fed Credit inflated $1.608 TN, or 57%, over the past 200 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt dropped $4.1bn last week to a two-year low $3.184 TN. "Custody holdings" were down $151bn y-o-y, or 4.5%.

M2 (narrow) "money" supply last week jumped another $24.8bn to a record $13.046 TN. "Narrow money" expanded $881bn, or 7.2%, over the past year. For the week, Currency increased $2.6bn. Total Checkable Deposits dropped $26.9bn, while Savings Deposits surged $53.4bn. Small Time Deposits were little changed. Retail Money Funds fell $4.0bn.

Total money market fund assets sank $29.4bn to an 11-month low $2.695 TN. Money Funds rose $32bn y-o-y (1.2%).

Total Commercial Paper increased $1.4bn to $983bn. CP declined $61bn y-o-y, or 5.8%.

Currency Watch:

The U.S. dollar index declined 0.6% to 95.35 (down 3.4% y-t-d). For the week on the upside, the Japanese yen increased 1.2%, the Swedish krona 1.1%, the Norwegian krone 0.9%, the euro 0.7%, the Swiss franc 0.5%, the New Zealand dollar 0.5% and the South African rand 0.5%. For the week on the downside, the Mexican peso declined 1.7%, the Brazilian real 0.5%, the Australian dollar 0.4%, the Canadian dollar 0.4% and the British pound 0.2%. The Chinese yuan slipped 0.1% versus the dollar (down 2.9% y-t-d).

Commodities Watch:

The Goldman Sachs Commodities Index advanced 2.2% (up 13.8% y-t-d). Spot Gold was little changed at $1,328 (up 25%). Silver declined 0.8% to $19.37 (up 40%). Volatile Crude rallied $1.68 $45.88 (up 24%). Gasoline surged 5.6% (up 7%), and Natural Gas added 0.4% (up 20%). Copper increased 0.7% (down 2%). Wheat rallied 1.1% (down 14%). Corn jumped 3.8% (down 5%).

China Bubble Watch:

September 7 – New York Times (Michael Shuman): “The global economy is full of risks right now. Growth is sluggish, and central banks seem powerless to fix it. Europe faces persistent challenges and division. In America, the election looms. But some say the biggest danger of all may be on the other side of the world, in China. China is in the midst of one of the biggest borrowing binges in recent history. Its debt load reached $26.6 trillion in 2015 — about five times what it was a decade ago, and more than two and a half times the size of the country’s entire economy. That huge increase has prompted some economists and even the prominent investor George Soros to compare China to the United States before the 2008 financial crisis.”

September 4 – Bloomberg: “China’s multi-trillion dollar boom in wealth-management products, under scrutiny around the world because of potential threats to financial stability, is set to cool as yields fall on tighter regulation, according to China Merchants Securities Co. analyst Ma Kunpeng. Ma cited a ‘significant slowdown’ in the products’ growth in the first half and said that WMPs may shrink in the future, with money flowing elsewhere… Banks have started to lower yields on WMPs in preparation for requirements for funds to be held in third-party custody, the analyst said… Currently, banks can use money generated from investment assets for longer-term products to help make payments on shorter-maturity products, Ma said.”

September 6 – Bloomberg (Tracy Alloway): “The tangled web of Chinese banks and the investment products they sell is growing more muddled as analysts attempt to gauge the impact of new rules unveiled by the country's authorities. The proposed new rules would require some banks to provision for losses against wealth management products (WMPs), which funnel money from retail investors into securities ranging from stocks to corporate bonds and real estate, in an effort to insulate the lenders from future losses. The 26.3 trillion yuan ($3.9 trillion) worth of WMPs outstanding have emerged as key cog in China's so-called shadow banking system as investors often expect to be reimbursed for on any losses on the WMPs banks manage… But with analysts scrambling to digest the impact of the draft rules on banks, fresh concerns are emerging including: the degree to which banks have been using WMPs to repackage and invest in other such products, their use as a way for to gain exposure to riskier corporate securities, banks' tendency to borrow money to boost returns on WMPs, and the potential for the new WMP rules to impact other assets.”

September 7 – Bloomberg: “China’s foreign-exchange reserves, the world’s largest foreign currency hoard, slipped to the lowest level since 2011 as the central bank continued its defense of the currency. The reserves fell by $15.9 billion to $3.19 trillion in August… ‘The central bank is still very active in the foreign exchange market, not quite as active as at the start of the year, but still intervening pretty heavily to prop up the currency,’ said Julian Evans-Pritchard, a China economist at Capital Economics… ‘Outflows aren’t going away.’”

September 7 – Bloomberg: “The cost of borrowing yuan in Hong Kong surged to a seven-month high amid speculation China’s central bank is intervening to discourage bearish bets on the currency. The overnight Hong Kong Interbank Offered Rate climbed 3.88 percentage points to 5.45%, the most expensive since February… The one-week rate rose 2.09 percentage points to 4.06%.”

September 4 – Bloomberg: “China’s banks, which dialed down fundraising efforts this year even as bad debts swelled, are making up for lost time. Both lenders and the companies set up to acquire their delinquent assets are bolstering their finances. China Citic Bank Corp. last month announced plans to raise as much as 40 billion yuan ($6bn), while Agricultural Bank of China Ltd., Industrial Bank Co. and China Zheshang Bank Co. are also boosting capital… ‘Chinese banks are preemptively raising capital while pricing remains favorable in order to tackle higher loan impairments,’ said Nicholas Yap, a credit analyst at Mitsubishi UFJ Securities HK… ‘Additionally, the mid- and small-sized lenders also need to boost their capital levels as they have been growing their asset bases rapidly, largely through their investment receivables portfolios.’”

September 8 – Bloomberg: “Two years ago China lifted a ban on property developers’ selling bonds inside the country, helping stimulate the economy and reduce swelling foreign debt. Now there are calls for some kind of limits to be restored. S&P Global Ratings said surging leverage may prompt authorities to curb onshore note sales by builders to cool an overheating real estate market, while Citic Securities Co. said the government should strengthen controls on such financing. Total debt for 119 listed developers rose 30% to a record high of 2.8 trillion yuan ($420bn) at the end of June from a year earlier… Their sales of onshore bonds surged to 458 billion yuan this year, exceeding the 443 billion yuan for all of 2015.”

September 7 – Bloomberg: “China’s passenger-vehicle sales climbed for a sixth consecutive month as consumers rushed to buy ahead of a tax cut due to expire at year-end and General Motors Co. and Great Wall Motor Co. emerged from stiff pricing competition with rising deliveries. Retail sales of cars, sport utility and multipurpose vehicles increased 24.5% to 1.8 million units in August… Deliveries climbed 13% to 14.2 million units through the first eight months of this year.”

Brexit Watch:

September 3 – Bloomberg (Flavia Rotondi, John Follain and Lorenzo Totaro): “The European Commission fired a warning shot across Theresa May’s bow after her government decided to seek a tailor-made Brexit deal on its own terms, saying that the U.K. could not pick and choose the conditions it preferred. The British premier earlier this week set out the first of her red lines for Brexit negotiations, saying she wanted to curtail the free movement of people coming to the U.K. from the European Union and suggesting she’s willing to leave the bloc’s single market to do so. European Commission Vice President Valdis Dombrovskis said… that conditions on free movement of goods, services, capital and labor were ‘a package and there cannot be cherry picking -- you like free movement of capital but don’t like free movement of labor or the other way round.’”

Europe Watch:

September 8 – Bloomberg (Jeff Black): “Take European Central Bank President Mario Draghi, who on Thursday talked up the effectiveness of his institution’s stimulus policies to date, but damped expectations that he’ll load up with fresh asset-buying soon. His only new announcement after again downgrading euro-area growth forecasts was that officials will look into how to ensure the current program overcomes a worsening scarcity of bonds. Even with the scheduled end of the 1.7 trillion-euro ($1.9 trillion) plan just six months away, Draghi said policy makers… haven’t yet discussed what they’ll do when that day comes… ‘Draghi doesn’t sound like a central banker who’s in any hurry to ease further,’ said Tim Graf, head of European macro strategy at State Street… His stance ‘fits in with the G-20 statements about using all actors to support growth, including the fiscal side. Taking ever-easier monetary policy for granted is becoming less valid.’”

September 5 – Wall Street Journal (Anton Troianovski): “Growing populist forces shook Europe’s pillar of stability this weekend, as an unprecedented defeat for Chancellor Angela Merkel’s conservatives in Germany signaled more political tumult across the continent. For the first time in postwar history, Ms. Merkel’s Christian Democrats finished behind a populist challenger to their political right in a state election. Riding a wave of discontent with her migration policy, the Alternative for Germany—a three-year-old anti-immigrant party—beat the chancellor’s party in her home state… Beyond Germany, more political crossroads are approaching that could jolt Europe—as the migrant influx, terrorism fears, and antiestablishment sentiment complicate the recovery from years of economic problems.”

September 9 – Reuters (Michael Nienaber): “German exports plunged unexpectedly in July, posting their steepest drop in nearly a year, while imports also edged down, suggesting Europe's biggest economy started the third quarter on a weak footing. ‘The second half of the year begins with a crash landing of foreign trade,’ BGA trade association head Anton Boerner said, adding that an unusual high number of risks and crises around the globe was increasing uncertainty and hampering investments.”

September 7 – Reuters (Valentina Za): “The Bank of Italy's liabilities towards other euro zone central banks rose to a new record high of 326.95 billion euros ($367.5bn) in August, above levels seen four years ago at the height of the euro zone's debt crisis. Positions within the Target 2 system, which settles cross-border payments in the euro zone, are monitored because they can signal financial stress, for example when banks in a country lose foreign funding.”

September 9 – Bloomberg (Oliver Suess): “As he tries to jump start the economies of today, European Central Bank President Mario Draghi is punching holes in the retirements of tomorrow. Draghi on Thursday said the ECB may continue asset buying beyond March 2017 until it sees inflation consistent with its targets. The purchases, along with low and negative interest rates from the ECB and the region’s national banks, are pushing more and more bond yields below zero, hurting European pension managers that are already struggling to fund retirement plans. ‘Pension funds can’t meet their future obligations if interest rates remain as low as they currently are,’ said Olaf Stotz, a professor of asset management at the Frankfurt School of Finance and Management. ‘Some sponsors will have no choice but to add more capital’ to their pension plans.”

September 7 – Bloomberg (Nikos Chrysoloras and Marcus Bensasson): “As the latest season of the Greek drama premiers this week, investors are steering clear of the country’s bonds and stocks. Greek government bonds have delivered the worst returns of all European sovereigns tracked by Bloomberg’s World Bond Indexes in the past three months… The Athens Stock Exchange trails only Nigeria and Venezuela in the worst-performing primary equity indices…”

Fixed-Income Bubble Watch:

September 8 – Bloomberg (Claire Boston): “Blue-chip companies have just sold more than $1 trillion of bonds for the fifth year in a row -- and they got there quicker than ever. Issuance has boomed as companies … rushed to take advantage of borrowing costs near record lows. And investors have flocked to the debt to escape $11.7 trillion of bonds elsewhere that are trading at negative yields… Investment-grade bond sales exceeded $1 trillion on Wednesday after companies… issued more than $20 billion of bonds. At this pace, issuance may soar past the record $1.32 trillion of bonds sold in all of 2015. ‘We’ve seen a tremendous amount of influx of capital from around the world into our market, enhancing the ability of companies to raise large sums of money,’ said Andrew Karp, co-head of Americas investment-grade capital markets at Bank of America…”

September 4 – Bloomberg (Wes Goodman): “Japanese long-term bonds fell, with 30-year debt adding to its biggest weekly loss in almost 2 1/2 years… The rout is being driven by speculation the Bank of Japan will reduce its bond-buying program at its next policy meeting Sept. 20-21 now that it owns a third of the nation’s government debt.”

September 6 – Wall Street Journal (Corrie Driebusch): “High-yield corporate bonds have been a hot investment in 2016. Now, some investors are fretting that the debt may have gotten too popular… In 2016, more than a net $6.4 billion had flowed into high-yield mutual funds through the end of August… Over the prior three years, $47.7 billion flowed out of the funds. The tide of money has pushed up prices and returns, attracting additional funds from investors. In 2016, the iShares iBoxx High Yield Corporate Bond fund has returned 12%, beating the 7.8% total return by the S&P 500, according to FactSet.”

Global Bubble Watch:

September 5 – Reuters (Kevin Yao and Kiyoshi Takenaka): “The global economy is being threatened by rising protectionism and risks from highly leveraged financial markets, Chinese President Xi Jinping said at the open of a two-day summit of leaders from G20 nations. His warning on Sunday followed bilateral talks with Barack Obama that the U.S. president described as ‘extremely productive’, but which failed to bring both sides closer on thornier topics such as tensions in the South China Sea.”

September 5 - Reuters (Kevin Yao and Michael Martina): “Leaders from the world's top economies broadly agreed at a summit in China… to coordinate macroeconomic policies, but few concrete proposals emerged to meet growing challenges to globalisation and free trade. At the two-day gathering in the scenic Chinese city of Hangzhou, the world's most powerful leaders also agreed to oppose protectionism, with Chinese President Xi Jinping urging major economies to drive growth through innovation, not just fiscal and monetary measures. ‘We aim to revive growth engines of international trade and investment,’ Xi said… ‘We will support multilateral trade mechanisms and oppose protectionism to reverse declines in global trade.’”

September 6 – Wall Street Journal (Christopher Whittall): “Investors are now paying for the privilege of lending their money to companies, a fresh sign of how aggressive central-bank policy is upending conventional patterns in finance. German consumer-products company Henkel AG and French drugmaker Sanofi SA each sold no-interest bonds at a premium to their face value Tuesday. That means investors are paying more for the bonds than they will get back when the bonds mature in the next few years. A number of governments already have been able to issue bonds at negative yields this year. But it is a rare feat for companies, which also ask investors to bear credit risk.”

September 4 – Financial Times (Elaine Moore): “Developing economies are on course to raise a record sum on global debt markets this year, as ultra-low rates in the developed world cheapen borrowing costs for countries from Asia to South America. After a slow start, governments in countries including Mexico, Qatar and Argentina have issued bonds worth $90bn in 2016. By the end of the year, credit strategists at JPMorgan expect sales of debt by emerging markets in ‘hard’ currencies such as dollars and euros to reach more than $125bn… A punishingly low yield environment for money managers has sparked a jump in demand for emerging market fixed debt in the past few months…”

September 9 – Bloomberg (Natasha Doff): “Investors scooping up the riskiest emerging-nation corporate bonds in an indiscriminate rush for yield are facing a growing clamor of warnings. While a 12.9% return this quarter on company debt rated eight levels below investment grade rewarded those who pushed into the fringes of the debt market, sub-investment grade defaults have reached a six-year high. Societe Generale SA and Bank of America Corp. are predicting a correction and on Thursday Hermes Investment Management said it’s time to ‘increase vigilance and move up in quality,’ echoing BlackRock Inc.’s earlier call to be more selective.”

September 6 – Bloomberg (Sho Chandra): “’A blindfolded monkey throwing darts at a newspaper's financial pages could select a portfolio that would do just as well as one carefully selected by experts,’ Burton Malkiel wrote in his 1973 classic, 'A Random Walk Down Wall Street.' The monkey's task would have been made even easier this year as the difference between various asset classes' returns has been pushed to the lowest in almost two decades, according to one simple measure of so-called performance dispersion. CreditSights Inc.'s 'total return range' subtracts the total return of the worst-performing asset class of the year from the total return of the best-performer. As of the start of September, that figure comes in at 14.6 percentage points — lower than last year's 22.2 point differential and the 30 point difference recorded in 2014.”

U.S. Bubble Watch:

September 7 – Bloomberg (Rich Miller): “Businesses are becoming more anxious about presidential elections set for November, according to the Federal Reserve's latest anecdotal appraisal of the economy. Election worries were cited as a source of concern seven times in the central bank's Beige Book release, a survey of business contacts published Wednesday in Washington. That's up from two mentions in the July survey of business contacts by the Fed's twelve districts and none in June.”

September 9 – Financial Times (Robin Wigglesworth): “Is one of the US stock market’s main pillars of support quietly crumbling? Since the financial crisis, companies buying back their own shares has been one of the biggest drivers of the equity markets’ advance to record highs. Between 2012 and 2015, US companies acquired $1.7tn of their own stock, according to Goldman Sachs… But the buyback-palooza has begun to sputter. US shareholder payouts rose by 15% annually between 2010 and 2014, but an earnings downturn meant growth slowed to 2% last year. And the outlook for 2016 is looking even gloomier.”

September 5 - Reuters (Nick Brown): “The federal appointees tapped to help map Puerto Rico's economic future are technocrats more than political actors, and that could make the U.S. territory's fiscal turnaround look more like a corporate restructuring than a politically charged municipal bankruptcy in the vein of Detroit. The law known as PROMESA, which created the board when it passed the U.S. Congress in June with bipartisan support, envisioned a pragmatic solution for an island combating $70 billion in debt, 45% poverty and a brain drain as residents bolt in droves for the mainland United States.”

September 6 – Bloomberg (Sho Chandra): “Some cracks could be starting to appear in the picture of an otherwise resilient U.S. economy. An abrupt drop in the Institute for Supply Management’s services gauge… to a six-year low is the latest in a string of unexpectedly weak data for August. Other less-than-stellar figures include an ISM factory survey showing a contraction in manufacturing; a cooling of hiring; automobile sales falling short of forecasts; and an index of consumer sentiment at a four-month low.”

September 8 – Wall Street Journal (Annamaria Andriotis): “Borrowers who are falling behind on their home-equity lines of credit are also missing payments on other loans… At issue are the home-equity lines of credit, or Helocs, that are switching from requiring interest-only payments to principal as well. As more borrowers’ monthly payments spike, delinquencies on those Helocs are rising and resulting in a domino effect of missed payments on regular mortgages and credit cards. Some 1.9% of borrowers whose Helocs reset between December 2014 and March 2015 were at least 90 days behind on Heloc payments by the end of last year… That’s up from a 0.1% delinquency rate as of December 2014.”

September 5 – New York Times (David Streitfeld): “Swell-looking home you’ve got here. Ever think about selling it? How about to me, right now? That is increasingly the approach the house-hungry are using in Silicon Valley, where the number of homes on the market is so small that would-be buyers are driven to desperation… Sue Zweig grew up in this working-class community, back when people said it was for the newly wed and the nearly dead. Not long ago, when she was out walking her dog, she began to realize things were different. A woman pulled over, asked about houses for sale in the neighborhood and ended up spending 45 minutes poking around Ms. Zweig’s living room and kitchen. Her four-bedroom house was not on the market then, and it was not on the market a year or so later when another eager buyer showed up. This time, Ms. Zweig, a nurse, and her husband, Steve Zweig, made a deal for $1.375 million, a seven-figure profit over what they had paid in 1987.”

September 7 – Bloomberg (Julie Verhage): “There are more signs of a slowdown in New York City real estate. According to new data from listings website, the luxury market still has some adjusting to do with price cuts now spreading from just the most expensive apartments to other price tiers. ‘Most of the increase in price cuts for the luxury tier is in the smaller price cuts bucket (5%),’ said Krishna Rao, StreetEasy's economist. ‘While sellers aren’t going for aspirational prices, they haven’t fully adjusted to reality at the top end of the market."

September 6 - NPR (Anya Kamenetz): “The fall semester has just begun on most college campuses, but tens of thousands of students in 38 states were told Tuesday that, instead, their college is closing its doors. In a press release, ITT Educational Services announced it would close all campuses of its ITT Technical Institutes. The for-profit college system has become a household name over the past half-century. The company blamed the shutdown on the U.S. Department of Education, which had stepped up oversight of the school and recently imposed tough financial sanctions.”

Federal Reserve Watch:

September 9 – Reuters (Svea Herbst-Bayliss): “The Federal Reserve, long hesitant to raise U.S. interest rates, increasingly faces risks if it waits too much longer so a gradual policy tightening is likely appropriate, a top Fed official said… In another sign that a U.S. rate hike is approaching, Boston Fed President Eric Rosengren said ‘risks to the forecast are becoming increasingly two-sided.’ That means that while a slowdown overseas remains a concern, the U.S. economy has proven resilient and could even overheat if Fed policy remains unchanged for too much longer, he said. Rosengren, an historically dovish Fed policymaker who has become more confident about hiking rates this year…”

Central Bank Watch:

September 4 – New York Times (Geta Anand): “Three years before the 2008 global financial crisis, an Indian economist named Raghuram G. Rajan presciently warned a skeptical audience of top economic thinkers that excessive risk threatened the entire global financial system. As Mr. Rajan stepped down on Sunday as India’s top central banker… he offered a new warning: Low interest rates globally could distort markets and would be difficult to abandon. Countries around the world, including the United States and Europe, have kept interest rates low as a way to encourage growth. But countries could become ‘trapped’ by fear that when they eventually raised rates, they ‘would see growth slow down,’ he said… ‘Often when monetary policy is really easy, it becomes the residual policy of choice’ he said, when deeper reforms are needed.”

September 8 – Bloomberg (Alessandro Speciale): “Mario Draghi said the European Central Bank will study how to ensure its quantitative-easing program doesn’t run out of bonds to buy, while playing down the need to commit to fresh stimulus just yet. With only six months to go until the scheduled end of QE, the ECB president needs to weigh signs that the region’s recovery is losing momentum against increasing concern about asset scarcity… ‘The assessment was that, for the time being, the changes are not so substantial as to warrant a decision to act… The main theme was to make sure that the program and decisions we took in March can be implemented in the new constellation of interest rates, which clearly have restricted the eligibility universe.’”

September 5 – Financial Times (Elaine Moore and Claire Jones): “The European Central Bank has passed the €1tn mark for its controversial purchases of government bonds, putting pressure on policymakers to address the scarcity of available assets when they meet in Frankfurt this week. A global collapse in eurozone bond yields since Britain’s vote to exit the EU has dramatically reduced the stock of eurozone government paper standing above the yield threshold set for the ECB’s €1.7tn bond-buying project — raising concern that the ECB will have to make sweeping changes to avoid running out of bonds to buy. The bond purchases are part of a quantitative easing programme, like those of Japan and the UK, launched 18 months ago to fight the threat of deflation and boost the flagging eurozone economy by driving down borrowing costs for companies and lifting confidence.”

September 5 – Wall Street Journal (Takashi Nakamichi and Megumi Fujikawa): “Bank of Japan Gov. Haruhiko Kuroda… acknowledged the downsides of his negative-interest-rate policy, suggesting caution about further reductions. Coming amid a global debate about the efficacy of extreme monetary easing, Mr. Kuroda’s unusual emphasis on the potential damage from negative rates pointed to a growing sense even among backers that easing can go too far. The BOJ governor… said negative rates particularly hit the profit of financial institutions, while low long-term yields hurt some other businesses by forcing them to put aside more money for long-term pension obligations. The central bank must consider ‘that such developments can affect people’s confidence by causing concerns over the sustainability of the financial function in a broad sense, thereby negatively affecting economic activity,’ Mr. Kuroda said.”

September 6 - Reuters (Kaori Kaneko): “The Bank of Japan's nine board members are split over how to stimulate the economy, or whether to stimulate it at all, as they prepare for a review of the central bank's ultra-loose monetary policy, the Sankei newspaper reported… The central bank will conduct a ‘comprehensive assessment’ of its effect of stimulus program when it holds next meeting Sept. 20-21. And, according to the newspaper, there is a three-way split in the board over which policy strategy to follow. One group believes the central bank should focus on its negative interest rate policy to stimulate growth, another advocates more purchases of Japanese government bonds to inflate the economy, while a third group opposes further stimulus. BOJ Governor Haruhiko Kuroda is among those who support negative interest rates… Sources have told Reuters the BOJ will consider making some modifications to its policy framework and debate some of the unintended consequences of its ultra-loose policy.”

September 6 – Financial Times (Claire Jones): “With the eurozone facing lacklustre growth, low inflation and political uncertainty, most economists expect the European Central Bank to keep buying billions of euros in bonds each month. But many also believe the ECB is not ready to take such a decision… If the ECB is to continue its large-scale asset purchases beyond March it must drop or soften self-imposed limits that restrict the bonds it can buy; otherwise it will face a scarcity of eligible debt. But altering those rules could revive a spat between the council’s hawks — notably Jens Weidmann, head of the Bundesbank — and the ECB’s top officials, led by Mario Draghi, president, who have backed QE to boost the eurozone’s economy.”

September 8 – Bloomberg (Sid Verma and Tracy Alloway): “The only thing that can gatecrash the European Central Bank bond-buying-spurred credit party is ... the European Central Bank bond-buying program itself? That's the conclusion drawn by Bank of America… analysts who argue that the ECB's Corporate Sector Purchase Programme (CSPP) could lower company borrowing costs to levels that would spark a wave of leveraged buyouts (LBOs), creating volatility in credit spreads that could shake investors' faith in the central bank and confidence in the market. The CSPP could ‘quickly become its own worst enemy if it leads to a rapid rise in releveraging’, the analysts, led by Barnaby Martin, write. A deluge of LBOs, which involve the acquisition of a public-listed company using a significant portion of borrowed money to take it private, would be just the latest in a string of symptoms suggesting over-exuberant credit markets.”

Japan Watch:

September 9 – Reuters (Leika Kihara): “The Bank of Japan is studying several options to steepen the bond yield curve that might be debated at this month's rate review as part of measures to fine-tune its massive stimulus programme, say sources… They are brain-storming ways to cut short- to medium-term bond yields, which affect corporate borrowing costs the most, while pushing up super-long yields from undesirably low levels, the sources said on condition of anonymity.”

EM Watch:

September 7 – Bloomberg (Sid Verma): “The recent woes of Hanjin Shipping Co. underscore a sea change blowing through the Asian debt market as companies, lenders, and investors come to grips with a 'new normal' in corporate financing: banks appear less inclined to prop up national champions in oversupplied sectors. That's the conclusion from analysts at HSBC Holdings Plc, who say high private-sector leverage combined with stubborn over-capacity in trade- and commodity-orientated sectors, are propelling Asian banks in mature markets to become more conservative in their lending practices. It's a sharp turnaround in a relationship that has traditionally seen banks maintain support for big local companies.”

September 6 – Bloomberg (Lyubov Pronina): “Emerging-market borrowers sold $22 billion of Eurobonds in August, the most ever for a month typically marked by slow issuance, according to data compiled by Bloomberg.”

September 5 – Bloomberg (Julia Leite and Gerson Freitas Jr): “Brazilian federal police are carrying out temporary arrests as part of a probe into the country’s largest pension funds, the latest in a string of investigations that have rocked Latin America’s largest economy in recent years. Police say there’s evidence of allegedly organized criminal groups among business leaders, pension-fund managers, companies that rated assets and private-equity fund managers… The operation, named Greenfield, is targeting alleged fraud at pension funds Funcef, Petros, Previ and Postalis -- all of which are tied to state-run companies.”

Leveraged Speculator Watch:

September 7 – Bloomberg (Devon Pendleton and Margaret Collins): “Family offices, which manage the money of wealthy clans, are growing wary of hedge funds. Offices reduced their exposure to hedge funds, which have mostly underperformed stock markets since the financial crisis, by 10% in the 12 months ending in May, according to… UBS Group AG and… Campden Wealth. ‘The reduction in allocation to hedge funds comes down to two concerns: high fees and disappointing performance,’ Philip Higson, vice chairman of… UBS’s global family office group, said…”

Geopolitical Watch:

September 9 – Reuters (Ju-min Park and Jack Kim): “North Korea conducted its fifth and biggest nuclear test on Friday and said it had mastered the ability to mount a warhead on a ballistic missile, ratcheting up a threat that its rivals and the United Nations have been powerless to contain. The blast, on the 68th anniversary of North Korea's founding, was more powerful than the bomb dropped on Hiroshima, according to some estimates…”

September 7 - Reuters (Idrees Ali): “A U.S. Navy coastal patrol ship changed course after a fast-attack craft from Iran's Islamic Revolutionary Guard Corps came within 100 yards (91 meters) of it in the central Gulf on Sunday, U.S. Defense Department officials said… It was at least the fourth such incident in less than a month. U.S. officials are concerned that these actions by Iran could lead to mistakes.”

September 7 – Bloomberg (Firat Kozok): “Turkish prosecutors say the country’s central bank is dominated by people loyal to the cleric accused of orchestrating the July 15 coup attempt, the first suggestion the regulator might be caught up in the government crackdown that followed. In a copy of an indictment against preacher Fethullah Gulen’s organization seen by Bloomberg, prosecutors cited as evidence the use of an image of Halley’s Comet on banknotes. The document, which runs more than 1,400 pages, makes one reference to the central bank allegedly being infiltrated by Gulen loyalists.”

September 3 – Bloomberg (Ian Wishart and Radoslav Tomek): “Turkey won’t take part in any future plan to stop migrants entering the European Union unless the bloc gives visa-free access to Turkish citizens, the country’s EU affairs minister said. Turkey will continue to implement the current migration arrangement that helped slow the flow of refugees into Greece to virtually nothing, but ‘without visa liberalization Turkey won’t be part of any new mechanism,’ Omer Celik told reporters…”