Saturday, October 1, 2016

Weekly Commentary: A Take on Deutsche Bank

September 30 – Wall Street Journal (James Mackintosh): “Lehman failed the way all banks fail: It ran out of cash and liquid assets it could quickly sell to pay clients and counterparties as they ran for the exit. In principle, the same could happen to any bank, as they never have enough easy-to-sell assets to pay back every depositor immediately. Deutsche is now in focus in part because clients have been spooked by its plummeting shares… But Lehman was particularly vulnerable, due to its reliance on the overnight repurchase, or repo, market and on hedge funds to finance itself. Billions of dollars of cash and other assets from its so-called prime brokerage business drained away in its final few days, while repos couldn’t be renewed and banks and other counterparties demanded extra collateral to back derivatives trades. Deutsche is different. It has a far more diversified client base, sourced from German retail banking and multiple institutional business lines. It has a lot more liquidity, amounting to $246.8 billion at the end of June, equal to 12% of assets, against the $45 billion Lehman had a month before its downfall, 7.5% of assets.”

Deutsche Bank comparisons to Lehman Brothers resonate with bulls and bears alike. The bulls are comforted that policymakers readily admit their mistake allowing Lehman to fail back in 2008. As revisionist thinking goes, no Lehman failure would have meant no “worst financial crisis since the Great Depression.”

Learning from the crisis, Deutsche Bank’s balance sheet is these days heavy on liquid assets. There are as well various emergency liquidity facilities available from the ECB and Bundesbank. Deutsche Bank is better prepared, policymakers are better prepared and the world is better prepared. From the bullish perspective, it’s almost unthinkable that global policymakers would sit back and watch the collapse of the “world’s most systemically risky bank.”

The sanguine bullish view is supported by Deutsche Bank (senior debt) Credit default swaps. Despite Friday’s morning’s 20 bps surge, CDS closed at 240 bps, still below trading highs from February. While elevated, these are not levels indicative of a looming Lehman-style collapse. Moreover, there’s the U.S. equities VIX index. It closed the week at 13.29, a level suggesting nothing but blue skies ahead. Moreover, the S&P ended Q3 only about 1% below record highs.

The bears, well, they’re convinced the bulls are nuts. More important than whimsical CDS pricing, the naysayers point to an incipient exodus of Deutsche Bank clients. Global markets were shaken Thursday by a Bloomberg article discussing how some key hedge funds were abandoning ship. Not yet faded from memory, Lehman Brothers proved a prime brokerage and counter-party exposure nightmare. Those who panicked first panicked best.

It’s perfectly rational for hedge funds in particular to shift assets, collateral and derivative business away from the slow-motion train wreck, Deutsche Bank. The bears see an approaching point of no return: a crisis of confidence and “run” on Deutsche that will necessitate a bailout and restructuring.

September 30 – Financial Times (James Shotter, Martin Arnold and Laura Noonan): “Hedge funds have started to pull some of their business from Deutsche Bank, setting up a potential showdown with German authorities over the future of the country’s largest lender. As its shares fell sharply in New York trading, Deutsche recirculated a statement emphasising its strong financial position. European regulators and government officials have kept a low profile in public over Deutsche’s deepening woes. However, in private they have struck a sanguine tone, stressing that in extremis there is scope under European regulation to inject state funds to support the bank, provided it is done in line with market conditions.”

I’ll take a somewhat different tack. Deutsche Bank is to the global government finance Bubble what Lehman was to the U.S. mortgage finance Bubble. Lehman may have been the catalyst, but the root of the problem was Trillions of mispriced securities, unsustainable home prices and deep structural impairment (financial and economic). Deutsche Bank is much larger today than Lehman was in 2008, and its tentacles are everywhere. The scope of the global government finance Bubble is multiples of the mortgage finance Bubble. These days, ispriced securities are in the tens of Trillions. Global structural impairment is unprecedented. There were lessons learned from 2008 – though most now work to bolster and prolong history’s greatest Bubble.

Deutsche Bank is rather clearly in trouble. But it is unclear if a crisis of confidence is imminent. This institution desperately needs to raise capital. Transparency is lacking with regard to Deutsche Bank’s massive derivatives portfolio. Their investment banking, prime brokerage and derivatives businesses, already thin on profits, will suffer. But as Germany’s largest bank, it is not clear that as an institution it’s today as vulnerable to a run as Lehman was in 2008.

Rumor of a Department of Justice settlement saw Deutsche Bank shares rally 10% intraday to close Friday’s session up 14%. Italian stocks rallied 6% intraday. European stocks recovered 4.5%. Even with Friday’s gains, it was another rough week for global financial stocks. Notably, Japan’s TOPIX Bank index sank 7.5%, increasing 2016 losses to 30%. Hong Kong’s Hang Seng Financials dropped 2.7%. Italian bank stocks declined another 1.7% this week, taking its y-t-d decline to 50%. Europe’s STOXX 600 Bank index declined 1.0%, increasing 2016 losses to 23%. The wild volatility in financial shares is reminiscent of pre-crisis 2008.

Deutsche Bank is a potential catalyst for the bursting of the global Bubble. It has company, though it is almost unique as a poster child of the mess global policymaking has made of things. After the 2008 crisis, Deutsche Bank had the opportunity to take market share in global prime brokerage, derivatives and investment banking – and couldn’t resist. As a German institution, it benefitted from European economic and banking system fragility. Not surprisingly, all the abundant cheap finance ensured the bank found myriad avenues to get itself into trouble. And then the Draghi ECB, along with global central bankers, lost their minds, with massive QE and negative rates inciting dislocation throughout the massive global bond and derivatives markets.

Deutsche Bank exemplifies the fragility of the global financial system. And this vulnerability is associated directly with egregious monetary stimulus – past and present. Trouble at Deutsche Bank comes at an inopportune for the unsound European banking system. It comes at a tough time for Merkel, the Bundesbank and the German government more generally. The political backdrop makes it difficult for the German government to support its largest bank. A faltering Deutsche Bank will only toughen German public enmity toward ECB policymaking.

To be sure, Deutsche Bank is illuminating the serious predicament associated these days with being a highly leveraged financial institution in a world of acute monetary disorder and price instability. They are certainly not alone. Sinking global bank stocks provide another important crack in global confidence – confidence in finance and confidence in policymaking.  Importantly, the Deutsche Bank imbroglio comes as faith in central banking is waning.  It comes with geopolitical tensions running high.

The VIX is about 13. Meanwhile, the costs of all types of market derivative insurance are rising – especially in currency swaps markets. Deutsche Bank will have little option than to back away from derivatives market-making activities. This comes at the expense of already susceptible marketplace liquidity, ensuring heightened caution from other major derivatives players. The cost of market insurance will likely continue to rise, with negative ramifications for risk-taking and market liquidity more generally. While convenient, don’t blame it all on Deutsche Bank. It’s becoming increasingly systemic.

September 30 – Bloomberg (Liz McCormick): “Quarter-end is often a tumultuous period. Banks typically rein in collateral lending as they shore up balance sheets, driving up rates on repurchase agreements. When banks curb repo activity, money funds -- the key cash providers in the transactions -- need alternative places to invest. In the past few years, one option they’ve turned to is directing more money into the Federal Reserve’s reverse repos, the tool the central bank uses to put a floor under its target for overnight rates. But this quarter, the movements are out of the ordinary, partly because of the looming Oct. 14 deadline for the overhaul of rules governing money funds. Treasury repo rates have reached the highest since 2008. Meanwhile, the amount of money piling into the Fed’s overnight reverse repos surpassed $270 billion, one of the highest levels since officials began testing the program in 2013.”

September 30 – Bloomberg (Lukanyo Mnyanda and Liz McCormick): “Banks borrowing dollars are paying the most since the height of the euro region’s sovereign-debt crisis as concerns mount about the health of Germany’s largest lender, just as new money-market rules are disrupting U.S. short-term financing markets. The three-month cross-currency basis swap, the rate for banks to convert euro payments into dollars, fell to 58 bps, or 0.58 percentage point, below the euro interbank-offered rate. That’s the most negative reading on a closing basis since July 2012, when the debt crisis was seen threatening the very existence of the euro. It widened to 210 bps below Euribor as banks refused to lend to one another in 2008 after the collapse of Lehman Brothers…”

For the Week:

The S&P500 added 0.2% (up 6.1% y-t-d), and the Dow increased 0.3% (up 5.1%). The Utilities sank 3.9% (up 13.7%). The Banks declined 0.5% (down 3.1%), while the Broker/Dealers were little changed (down 2.5%). The Transports rose 1.8% (up 7.6%). The S&P 400 Midcap index was little changed (up 11.0%), while the small cap Russell 2000 slipped 0.2% (up 10.2%). The Nasdaq100 added 0.3% (up 6.1%), and the Morgan Stanley High Tech index gained 1.2% (up 11.2%). The Semiconductors surged 3.9% (up 25.9%). The Biotechs declined 2.1% (down 11.6%). With bullion down $26, the HUI gold index fell 1.7% (up 108%).

Three-month Treasury bill rates ended the week at 28 bps. Two-year government yields slipped a basis point to 0.76% (down 29bps y-t-d). Five-year T-note yields declined a basis point to 1.15% (down 60bps). Ten-year Treasury yields fell three bps to 1.59% (down 66bps). Long bond yields declined three bps to 2.32% (down 70bps).

Greek 10-year yields dropped 13 bps to 8.10% (up 78bps y-t-d). Ten-year Portuguese yields declined five bps to 3.30% (up 78bps). Italian 10-year yields dipped three bps to 1.18% (down 41bps). Spain's 10-year yields fell eight bps to a record low 0.88% (down 89bps). German bund yields declined four bps to negative 0.12% (down 74bps). French yields slipped three bps to 0.18% (down 81bps). The French to German 10-year bond spread widened one to 30 bps. U.K. 10-year gilt yields added a basis point to 0.74% (down 122bps). U.K.'s FTSE equities index was little changed (up 10.5%).

Japan's Nikkei 225 equities index fell 1.8% (down 13.6% y-t-d). Japanese 10-year "JGB" yields dropped five bps to negative 0.10% (down 36bps y-t-d). The German DAX equities index declined 1.1% (down 2.2%). Spain's IBEX 35 equities index slipped 0.5% (down 8.0%). Italy's FTSE MIB index slipped 0.3% (down 23%). EM equities were lower. Brazil's Bovespa index lost 0.6% (up 35%). Mexico's Bolsa declined 1.1% (up 9.9%). South Korea's Kospi slipped 0.5% (up 4.2%). India’s Sensex equities sank 2.8% (up 6.7%). China’s Shanghai Exchange declined 1.0% (down 15.1%). Turkey's Borsa Istanbul National 100 index sank 4.1% (up 6.6%). Russia's MICEX equities index fell 1.7% (up 12.3%).

Junk bond mutual funds saw inflows surge to $2.0 billion (from Lipper).

Freddie Mac 30-year fixed mortgage rates dropped six bps to 3.42% (down 43bps y-o-y). Fifteen-year rates declined four bps to 2.72% (down 35bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down nine bps to 3.54% (down 33bps).

Federal Reserve Credit last week declined $1.6bn to $4.425 TN. Over the past year, Fed Credit contracted $6.8bn. Fed Credit inflated $1.614 TN, or 57%, over the past 203 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt dropped $6.8bn last week to a six-year low $3.144 TN. "Custody holdings" were down $190bn y-o-y, or 5.7%.

M2 (narrow) "money" supply last week expanded $10.9bn to a record $13.089 TN. "Narrow money" expanded $865bn, or 7.1%, over the past year. For the week, Currency increased $1.0bn. Total Checkable Deposits dropped $27.8bn, while Savings Deposits jumped $41.3bn. Small Time Deposits were about unchanged. Retail Money Funds fell $3.4bn.

Total money market fund assets increased $10.5bn to $2.680 TN. Money Funds increased $12bn y-o-y (0.4%).

Total Commercial Paper recovered $3.9bn to $947bn. CP declined $11bn y-o-y, or 1.2%.

Currency Watch:

September 29 – Bloomberg (Kyoungwha Kim): “Hedging against further declines in Asia’s worst-performing currency has become so expensive that some global investors are throwing in the towel on yuan bonds. The cost of swapping dollars for China’s currency has risen above the yields on onshore sovereign notes as depreciation extends into a third year. Daily trading in yuan derivatives, which accounts for more than 40% of the total for the currency, slumped 30% from three years earlier…”

The U.S. dollar index was little changed at 95.42 (down 3.3% y-t-d). For the week on the upside, the Mexican peso increased 2.0%, the Norwegian krone 1.6%, the New Zealand dollar 0.6%, the Australian dollar 0.5%, the Canadian dollar 0.3%, and the euro 0.1%. For the week on the downside, the Brazilian real declined 0.6%, the Swedish krona 0.4%, the Japanese yen 0.3%, and the Swiss franc 0.1%. The Chinese yuan was unchanged versus the dollar (down 2.7% y-t-d).

Commodities Watch:

The Goldman Sachs Commodities Index surged 3.7% (up 16.9% y-t-d). Spot Gold dropped 1.9% to $1,316 (up 24%). Silver sank 2.7% to $19.25 (up 40%). Volatile Crude jumped $3.76 to $48.24 (up 30%). Gasoline surged 8.0% (up 17%), while Natural Gas declined 1.7% (up 24%). Copper added 0.4% (up 4%). Wheat slipped 0.7% (down 15%). Corn was about unchanged (down 6%).

China Bubble Watch:

September 29 – Bloomberg: “Even amid the slowest economic growth in a quarter century, China’s homeowners are enjoying returns that put other asset classes to shame - on paper, anyway. Home prices rose the most in six years last month, defying new policies to curb excessive speculation in big cities and government warnings about asset bubbles. While gains have been most pronounced in big cities like Shenzhen, where home prices are up about 60% in the past year, smaller cities such as Xiamen have also seen runaway growth, where prices have risen more than 38%.”

September 29 – Bloomberg (Luke Kawa): “Speculative buyers have eschewed Chinese stocks in favor of property, prompting even the chief economist at the central bank of the world's second largest economy to declare that housing was in a ‘bubble.’ But when strategists at UBS AG recently compiled a list of bubblicious housing markets, there weren't any selections from mainland China due to the lack of reliable data on the subject… But Deutsche Bank AG Chief China Economist Zhiwei Zhang thinks he's pinpointed ‘a clear sign of a bubble’ in the market… After analyzing how much developers were willing to spend to win land auctions in 10 major Chinese cities in which values are already up 23% year-over-year, the economist found that the business case for these bids evaporates unless property prices continue to increase.”

September 25 – Bloomberg: “China’s smaller banks have never been more reliant on each other for funding, prompting rating companies to warn of contagion risks in any crisis. Wholesale funds, including those raised in the interbank market, accounted for a record 34% of small- and medium-sized bank financing as of June 30, compared with 29% on Jan. 31 last year, Moody’s… estimated… Shanghai Pudong Development Bank Co.’s first-half earnings showed its short-term borrowings and repurchase agreements surged by 75% in the past three years, while its consumer deposits rose just 24%.”

September 25 – Bloomberg (Alfred Liu): “China’s banking regulator told the nation’s city banks to learn the lesson of the global financial crisis and get back to their traditional businesses, building pressure for the lenders to curb opaque shadow financing. ‘City commercial banks should change as soon as possible the situation of allocating more funds into investing than lending, and developing their off-balance-sheet businesses too fast,’ Shang Fulin, the chairman of the China Banking Regulatory Commission, said… Dotted across China from Harbin in the north to the tropical island of Hainan in the south, the nation’s more than 130 city commercial banks have piled into shadow lending just as bad loans are rising. Shang’s comments add to efforts by the government to contain the risks.”

September 28 – Bloomberg: “China is turning Japanese. That’s the increasingly held view of observers comparing China’s frenzied real-estate market with the epic bust that more than two decades ago hobbled one of its biggest economic rivals. While the two scenarios aren’t a carbon copy, similarities between China’s record credit boom in recent years and Japan’s bubble era have been made at various times… What’s triggering concern is a surge in total debt since 2008 to 2.5 times gross domestic product, as authorities unleashed cheap bank loans to shore up China’s expansion. Now, much of the credit is finding its way into property -- helping fuel a 33% surge in house prices in major cities from a year ago. Meantime, regulators have been slow to force banks to recognize bad loans and to shut zombie companies. The government has put off a string of corporate defaults this year in an effort to sustain confidence.”

September 30 – Bloomberg (Lukanyo Mnyanda and Liz McCormick): “China’s capital city told home buyers to put more money as down payment as part of a wider effort by the world’s second-biggest economy to rein in prices and cool the property market. The Beijing administration raised the down payment for first-time purchasers to a minimum 35% of the price, from the 30% earlier, while it increased it to at least 50% for second-time buyers… The decision by Beijing came a day after similar measures by Hangzhou…”

September 27 – Bloomberg (Lianting Tu, Viren Vaghela and Carrie Hong): “China’s wealthy are flocking to investment products that buy bank capital securities and soup up returns by using borrowed funds. Elm BV, a special purpose vehicle used by UBS Group AG, has sold 3.7 billion yuan ($555 million) of structured notes in 18 offerings since 2015 with yields as high as 15%... Goldman Sachs Group Inc., Societe Generale SA and Guotai Junan Securities Hong Kong Ltd. have also designed such products, which often use leverage to invest in U.S. currency capital securities. Chinese banks sold at least $27.7 billion of Basel III notes offshore since the first issuance in 2014.”

Europe Watch:

September 24 – Bloomberg (Patrick Donahue): “German Finance Minister Wolfgang Schaeuble has urged lawmakers to take a tough stance with European Central Bank President Mario Draghi when he goes before legislators in the lower house of parliament next week, Bild reported. Schaeuble told lawmakers… to push Draghi to defend the central bank’s low interest rates when he speaks to them on Sept. 28… Schaeuble expressed irritation at Draghi’s criticism of Germany’s trade surplus, saying it’s the ECB that’s at fault…”

September 28 – Bloomberg (Carolynn Look, Patrick Donahue and Alessandro Speciale): “Mario Draghi acknowledged the pain European Central Bank policies are bringing to some of Europe’s savers and banks while vowing to press on with his efforts to bring back inflation. ‘The volume of these concerns, the vocality of these concerns is definitely higher in Germany,’ the ECB president told a press conference at the end of an almost two-hour closed-doors meeting with German lawmakers in Berlin… ‘That doesn’t make any difference to us really in the sense that we are sensitive, we do share these concerns and we are also aware that it is only in reaching our objective of price stability that these concerns can be addressed forever.’”

September 27 – Reuters (Francois Murphy and Francesco Canepa): “Political support for Europe's oversized banking sector must stop, a top official at Germany's central bank said…, comparing banks to dinosaurs facing a threat of extinction. Concerns about German banks are mounting, with top lender Deutsche Bank forced to reassure investors this week that it did not need government support… Andreas Dombret, the Bundesbank board member in charge of supervision, said banks' deficiencies should be tackled and the sector should be allowed to shrink further. ‘Political support for the banking sector must finally come to an end - something that unfortunately I've only seen to a limited extent,’ he told an audience… ‘Crucially, we cannot discuss away the structural deficiencies of the banking sector.’”

September 26 – Bloomberg (John Follain): “Prime Minister Matteo Renzi picked Dec. 4 for a referendum on constitutional changes that aims to streamline the way Italy is run, setting the clock ticking on a ballot that will seal his political fate. In a vote with echoes of the Brexit referendum that cost David Cameron his job, Renzi’s push for ‘the mother of all reforms’ is being closely watched by financial markets because it feeds political instability just as the third-biggest economy in the euro area struggles to boost sluggish growth.”

September 27 – Bloomberg (Marianna Duarte De Aragao): “Renewed turmoil in Europe’s banking shares is splitting the region’s bond market. Securities from higher-rated nations climbed as investor uneasiness about Deutsche Bank AG’s financial footing sparked demand for the safest assets at the expense of those from more indebted nations. Germany’s 10-year bond yield fell to the lowest since July and Finland’s dipped below zero for the first time. The euro area’s periphery missed out on the rally as traders focused on political risk in these nations.”

September 29 – Reuters (Jonathan Gould): “Germany's Commerzbank will cut more than a fifth of its workforce and suspend its dividend as it tackles the challenges of low interest rates, weak profits and the shift to online banking. Germany's second biggest lender said… it plans to cut 9,600 of its 45,000 full-time positions, a more drastic move than the 10% staff reduction at larger rival Deutsche Bank, which remains under pressure for deeper cost cuts.”

September 29 – Financial Times (Eric Platt): “Redemptions from European equity funds have approached $100bn as investors race out of an asset class rattled by the uncertain health of the continent’s financial sector. Funds invested in European stocks suffered $1.9bn of withdrawals in the week to September 28, the 34th consecutive week of outflows…”

September 29 – Wall Street Journal (Tom Fairless): “It’s absurd to ask Germany’s government to spend more to bolster eurozone growth, German Central Bank President Jens Weidmann said…, rejecting growing pressure on Berlin to loosen its purse strings. Speaking in the German capital, Mr. Weidmann said a fiscal stimulus program in Germany was unnecessary given the nation’s robust economy, and would have few positive effects for other countries anyway.”

Brexit Watch:

September 25 – Financial Times (Stefan Wagstyl and Alex Barker): “Germany is growing increasingly exasperated with Britain’s bravado over Brexit, prompting a rethink in Berlin over how hard to push London during negotiations on leaving the EU. Top officials, ministers and diplomats in Berlin are anxious that Chancellor Angela Merkel’s desire to maintain good relations with Britain should not be seen as a green light for unrealistic UK negotiating demands... The hardening mood is a warning that Germany’s relative patience and equanimity with Britain is not endless. A top EU diplomat signalled that other EU states might retaliate if British politicians persisted with their rhetoric.”

September 25 – Wall Street Journal (: Patrick Jenkins, George Parker and Laura Noonan): “Senior financiers are alarmed at growing political momentum behind a so-called ‘hard Brexit’ that they fear will erode business confidence, trigger corporate departures and damage the City of London. Leading bankers who have held talks with government ministers have told the Financial Times they believe Theresa May, the prime minister, will end up taking Britain out of the EU’s single market and customs union. They fear policy is being shaped by pro-Brexit ministers like Liam Fox, international trade secretary, who said in July that Britain would probably leave the customs union, and Brexit minister David Davis, who says it is ‘improbable’ that Britain would stay in the single market.”

Fixed-Income Bubble Watch:

September 26 – Bloomberg (Ian C Sayson and Maria Levitov): “They’ve long been one of the most reliable sources of demand for U.S. government debt. But these days, foreign central banks have become yet another worry for investors in the world’s most important bond market. Holders like China and Japan have culled their stakes in Treasuries for three consecutive quarters, the most sustained pullback on record… The decline has accelerated in the past three months, coinciding with the recent backup in U.S. bond yields… Overseas creditors have played a key role in financing America’s debt as the U.S. borrowed heavily in the aftermath of the financial crisis to revive the economy. Since 2008, foreigners have more than doubled their investments in Treasuries and now own about $6.25 trillion. Central banks have led the way… The amount of U.S. government debt held in custody at the Fed has decreased by $78 billion this quarter, following a decline of almost $100 billion over the first six months of the year.”

September 27 – Financial Times (Eric Platt): “A global debt binge driven by record-low borrowing costs is bypassing risky US companies as investors reveal the limits to their desire for high-yielding securities. Companies with some of the lowest credit ratings have sold less than $12bn of debt in the US this year, the slowest pace since 2009, a sharp contrast to the reception Wall Street has given the highest-quality companies, according to… Dealogic… More than $5tn of debt has been sold both by companies and sovereigns this year, the busiest on record, as central banks in Europe and Japan pump stimulus through markets in an effort to spur economic activity and rekindle inflation.”

September 29 – Bloomberg (Yumi Ikeda): “Overseas investors cut their holdings of Japanese bonds at the fastest pace since at least 2014 last week as debt matured. They sold a net 2.8 trillion yen ($28bn) in bonds during the week ended Sept. 23… It was the third consecutive week that non-Japanese investors, who hold about 5% of the nation’s government bonds, pared their holdings.”

Global Bubble Watch:

September 29 – Bloomberg (Patrick Donahue): “Amid mounting concern about Deutsche Bank AG’s ability to withstand pending legal penalties, about 10 hedge funds that do business with the German lender have moved to reduce their financial exposure… The funds, a small subset of the more than 800 clients in the bank’s hedge fund business, have moved part of their listed derivatives holdings to other firms this week, according to an internal bank document…”

September 28 – Reuters (Arno Schuetze): “The German government denied that it was working on a rescue of Deutsche Bank after a newspaper report about such plans fueled fears over the future of the biggest lender in Europe's largest economy. European Central Bank President Mario Draghi said that the bank's low interest rate policies were not to blame for the German group's problems but declined comment on whether the state should step in to help.”

September 28 – Reuters (Jamie McGeever): “Trading in Deutsche Bank's so-called 'CoCo' bonds in September has soared to levels more than seven times those of the previous month as Germany's biggest lender struggles to allay investors' concerns over its funding needs. Speculation is mounting that the German government will provide some sort of support for the country's biggest lender, which faces a $14 billion U.S. fine and whose shares on Tuesday fell to a record-low of 10.18 euros… Contingent convertible bonds, known as CoCos, are converted into equity when a bank's capital level falls below a certain threshold.”

September 28 – New York Times (Landon Thomas Jr.): “In a market full of crowded trades, few have become as fashionable as the bet that Deutsche Bank’s stock price will keep on falling. Hedge funds, large and small, are shorting the stock. Long-term institutional investors are dumping their positions. And Wall Street’s secretive but influential community of independent research providers has been proclaiming for months that Germany’s largest bank does not have enough cash to survive. Even Tidjane Thiam, the chief executive of Credit Suisse, which itself has been the target of hedge funds, said at a conference on Wednesday that Europe’s banks were ‘not really investable.’”

September 29 – Bloomberg (Andrew Mayeda): “The growing role of shadow banks in the global financial system is enhancing the potency of monetary policy, according to the International Monetary Fund. Some economists have argued that the decline in traditional bank lending has dampened the impact of changes in interest rates by central banks. But in a paper released Thursday, the IMF said the opposite is true: the transmission of monetary policy actually appears to be slightly stronger in countries with large shadow banking sectors… Shadow banks -- or ‘non-banks’ as the IMF refers to them -- have played a growing role in providing liquidity since the global financial crisis, as weakened balance sheets and tougher regulations have forced conventional banks to restrict lending… The IMF noted the ‘remarkable’ growth of asset-management firms since the financial crisis.”

September 27 – Bloomberg (Anooja Debnath): “Investors are paying for the privilege of bailing European countries out of their various crises. The European Stability Mechanism, which acts as the euro region’s financial backstop, sold nine-year bonds, the longest-maturity debt they’ve issued at a negative yield. That shows how keen money managers are to find somewhere safe to invest their money -- even if this means they get back less on maturity than they paid in… More than half of the $6.4 trillion of securities on the Bloomberg Eurozone Sovereign Bond Index currently have negative yields.”

September 30 – Bloomberg (Chris Anstey): “Former U.S. Treasury Secretary Lawrence Summers floated the idea of continuous purchases of stocks as a potential ingredient in a recipe for the developed world to strengthen economies struggling with subdued growth and inflation. Among the proposals that deserve ‘serious reflection’ is the purchase of a ‘wider range of assets on a sustained and continuing basis,’ Summers said in a lecture at a Bank of Japan conference…”

September 27 – Bloomberg (Natalie Obiko Pearson and Katia Dmitrieva): “Vancouver, London and Stockholm rank as the cities most at risk of a housing bubble after a surge in prices in the past five years, according to a UBS Group AG analysis of 18 financial centers. Sydney, Munich and Hong Kong are also facing stretched valuations, UBS said... San Francisco ranked as the most overvalued housing market in the U.S., while not yet at bubble risk… House prices in the near-bubble cities have increased on average by almost 50% since 2011, compared with less than 15% in other financial centers, UBS said.”

September 26 – Bloomberg (Susanne Barton and Chikako Mogi): “A weaker currency, once the cure-all for ailing economies around the world, isn’t the panacea it once was. Just look at Japan, where the yen plunged 28% in the two years through 2014, yet net exports to America still fell by 10%. Or at the U.K., where the pound’s 19% tumble in the two years through 2009 couldn’t stave off a 26% decline in shipments to the U.S. In fact, since the turn of the century, the ability of exchange-rate movements to affect trade and growth in major economies has fallen by more than half, according to Goldman Sachs…”

U.S. Bubble Watch:

September 25 – Wall Street Journal (Corrie Driebusch): “The third quarter was supposed to be when earnings growth returned to U.S. companies. Not anymore. Companies in the S&P 500 are now expected to report an earnings decline for the sixth consecutive quarter in the coming weeks, according to analysts polled by FactSet. That slump would be the longest since FactSet began tracking the data in 2008… As recently as three months ago, analysts estimated U.S. corporate earnings growth would return to positive territory by the third quarter. As of Friday, they were predicting a 2.3% contraction from the year-earlier period.”

September 25 – Wall Street Journal (Nick Timiraos): “Donald Trump and Hillary Clinton are likely to recite their varied promises for fresh government spending at Monday’s first presidential debate. One reality they’re unlikely to note: Whoever wins in November will enjoy far less latitude to spend money or cut taxes than any president since World War II. Not since Harry Truman will a new leader enter office with a higher debt-to-GDP ratio. And for the first time in decades, the new president will face the specter of widening deficits despite a growing economy. ‘The next president, no doubt, is going to be very constrained,’ said Rep. Charlie Dent, a Pennsylvania Republican who sits on the House appropriations committee…”

September 27 – Bloomberg (Patricia Laya): “Consumer confidence rose in September to the highest level since before the last recession on optimism about the labor market, according to… the… Conference Board… Confidence index increased to 104.1 (forecast was 99.0), the highest since August 2007, from a revised 101.8. Present conditions gauge rose to 128.5, also highest since August 2007, from 125.3…”

September 29 – Bloomberg (Sid Verma and Luke Kawa): “Calculating risk is a calculated risk. Take low-volatility exchange-traded funds, which have gobbled up huge inflows over the past two years as investors seek exposure to U.S. stocks that won't exhibit price swings that are greater than the underlying market. However, low-volatility equity products failed that test earlier in the month… Here's one such example that underscores the swift reversal of fortunes: A basket of large-cap U.S. stocks compiled by Credit Suisse Group AG that has had the lowest realized volatility over the past year, has also had a higher volatility than the market at large over the past month — a development that has taken root just 3% of the time over the last 25 years.”

Federal Reserve Watch:

September 29 – Reuters (Jason Lange and Lindsay Dunsmuir): “The Federal Reserve might be able to help the U.S. economy in a future downturn if it could buy stocks and corporate bonds, Fed Chair Janet Yellen said… Speaking… with bankers in Kansas City, Yellen said the issue was not a pressing one right now and pointed out the U.S. central bank is currently barred by law from buying corporate assets. But the Fed's current toolkit might be insufficient in a downturn if it were to ‘reach the limits in terms of purchasing safe assets like longer-term government bonds.’”

September 28 – Bloomberg (Rebecca Spalding): “Traders see barely more than coin-flip odds that the Federal Reserve will raise interest rates by December, even as Chair Janet Yellen reiterated Wednesday that most members of its policy-setting committee expect a hike this year… ‘They say they’re data-dependent but in September they couldn’t even point to any data that suggest they should stand pat,’ Charles Plosser, former president of the Philadelphia Fed, said… ‘That does damage, I think, to their credibility about them being data-dependent.”

Central Bank Watch:

September 28 – Reuters (Jamie McGeever): “Armenia does not often take the global financial spotlight but a routine rate cut by the tiny former Soviet republic this week marked a global milestone - the 200th case of policy easing worldwide since the start of last year. Fifty seven central banks have cut rates or pumped stimulus into their economies since January 1, 2015…, highlighting the continued fragility of the global economy eight years after the financial crisis.”

Japan Watch:

September 29 – Reuters (Leika Kihara): “Bank of Japan Governor Haruhiko Kuroda said… the central bank will pursue the most appropriate yield curve to achieve its 2% inflation target. He also said the central bank is ready to ease policy further by cutting its short- and long-term interest rate targets, or expanding risky asset purchases. If necessary, the BOJ can also choose to expand the monetary base faster, Kuroda said. ‘Our new framework centered on yield curve control can respond to (economic) situations more flexibly compared with our past framework. As a result, our policies become more sustainable,’ Kuroda said… Kuroda said he did not see signs of excessive risk-taking or overheating in financial activity as a result of the central bank's ultra-loose monetary policy.”

EM Watch:

September 29 – Bloomberg (Eric Martin and Nacha Cattan): “Mexico raised borrowing costs for the third time this year on concern that the peso’s tumble to a record low may fuel faster inflation and threaten to roil the nation’s financial markets. Banco de Mexico increased the overnight rate a half point to 4.75% on Thursday, the highest level since 2009.”

September 26 – Bloomberg (Ian C Sayson and Maria Levitov): “Emerging-market assets fell for a second day, led by a plunge in Turkish stocks after Moody’s… cut the country’s credit rating to junk, underscoring political risks in developing nations. Turkish equities fell the most in the world and yields on the nation’s 10-year bonds surged…”

September 26 – Financial Times (Mehul Srivastava): “Turkish stocks fell more than 4% on Monday — their worst drop since a failed coup — after Moody’s cut the country’s credit rating to junk status. The decision, which also prompted a sharp fall in the lira, followed a similar move by S&P Global Ratings… The downgrade… prompted a furious government reaction, with President Recep Tayyip Erdogan’s chief adviser, Yigit Bulut, telling state-run television he considered the decision akin to the failed coup on July 15.”

September 25 – Bloomberg (Alaa Shahine, Stefania Bianchi and Zainab Fattah): “Saudi Arabia’s central bank stepped up efforts to support lenders in the Arab world’s biggest economy as they grapple with the effects of low oil prices… The Saudi Arabian Monetary Agency… is giving banks about 20 billion riyals ($5.3bn) of time deposits ‘on behalf of government entities.’ It’s also introducing seven-day and 28-day repurchase agreements, as part of its ‘supportive monetary policy.’”

September 26 – Bloomberg (Y-Sing Liau and Ian C Sayson): “The Philippine peso sank to a seven-year low and stocks declined as investors pulled money from the nation’s assets amid concerns about President Rodrigo Duterte’s policies. Global funds sold Philippine stocks for a 23rd straight day amid nervousness about the fallout from Duterte’s anti-drug war and his outbursts against the U.S. and the United Nations.”

Leveraged Speculator Watch:

September 28 – Bloomberg (Katia Porzecanski): “Hedge funds are facing the most challenging time Tiger Management’s Julian Robertson said he’s seen in an investing career spanning several decades, and the industry pioneer cautioned that their days of charging hefty fees may be over. ‘That type of business hasn’t worked lately, and it’s a tough business,’ Robertson, 84, said… ‘It’s tougher to be a hedge fund investor than ever before.’”

September 26 – Wall Street Journal (Juliet Chung): “The hedge-fund business is getting so tough that two of its biggest names are taking radical steps. Europe’s Brevan Howard Asset Management LLP plans to charge 0% fees for some investors. New York stalwart Perry Capital LLC is going further. It is shutting down. The disclosures Monday are among the starkest signs yet of the pressure facing the industry. Hedge funds have minted billionaires by charging investors ‘two-and-twenty,’ 2% of assets invested and a 20% cut of any profits generated. But after years of falling short of the market, many funds are finding that fee structure a hard sell… The $2.9 trillion industry has underperformed broader financial markets since 2009. This year, hedge funds were, on average, up 3% through July, less than half the S&P 500’s total return…”

September 26 – Bloomberg (Katia Porzecanski and Katherine Burton): “Richard Perry, one of the biggest names in hedge funds, is calling it quits after 28 years. Perry, 61, is winding down his… flagship fund as the industry confronts one of the most tumultuous periods in its history. In a letter to investors…, he said his style of investing no longer worked. ‘Although I continue to believe very strongly in our investments, process and team, the industry and market headwinds against us have been strong, and the timing for success in our positions too unpredictable’…”

September 29 – Bloomberg (Nishant Kumar and Nejra Cehic): “Hedge fund veteran Richard Perry’s decision to quit after almost three decades betting on the success or failure of mergers and acquisitions couldn’t have come at a worse time for money managers following comparable strategies. Event-driven hedge funds speculating on corporate deals and restructurings are falling out of fashion, with investors withdrawing $31 billion from managers this year, the most of any hedge-fund strategy, according to… eVestment, and more funds are closing than opening… Speculating on M&A is becoming too hard, with more than 200 deals worth $251 billion collapsing this year, after $1.2 trillion were pulled in 2015. Companies have spent $2 trillion on acquisitions in 2016, 14% lower than the same period last year…”

September 29 – Reuters (Richard Leong and Jennifer Ablan): “The Federal Reserve and Bank of Japan's actions last week have given a second wind to an alternative investment strategy that relies on cheap money and low market volatility to produce outsized returns. Risk parity trades, which involve borrowing to take long positions in both stocks and bonds, have been favored by some big hedge funds and other institutional investors starved for yield by eight years of record low global interest rates. The funds had a rough 2015 when volatility spiked because of concerns about China's economy and tumbling oil prices… Since January, however, they have bounced back as volatility has fallen, delivering on balance returns more than twice as high as the mid-single-digit total returns from this year's sputtering U.S. equity and fixed-income markets.”

September 26 – Bloomberg (Oshrat Carmiel and Katia Porzecanski): “The lonely $250,000 S-Class coupe at Mercedes-Benz of Greenwich says it all. For six months, it’s been sitting in the showroom, shimmering in vain while models priced at only $70,000 fly out the door. ‘We haven’t had anyone come in and look at it,’ says Joey Licari, a sales consultant at the dealership... ‘I feel like normally they would, maybe a few years ago.’ Such is the state of affairs in Greenwich, the leafy Connecticut town famous for its cluster of hedge funds and the titans of Wall Street… The rich are being maddeningly frugal, as Barry Sternlicht complained when he assailed his former hometown as possibly the country’s worst housing market. ‘You can’t give away a house in Greenwich,’ the head of Starwood Capital Group said…”

Geopolitical Watch:

September 29 – Reuters (Jonathan Landay, John Walcott and Matt Spetalnick): “Obama administration officials have begun considering tougher responses to the Russian-backed Syrian government assault on Aleppo, including military options, as rising tensions with Moscow diminish hopes for diplomatic solutions from the Middle East to Ukraine and cyberspace, U.S. officials said… The new discussions were being held at ‘staff level,’ and have yet to produce any recommendations… But the deliberations coincide with Secretary of State John Kerry threatening to halt diplomacy with Russia on Syria and holding Moscow responsible for dropping incendiary bombs on rebel areas of Aleppo…”

September 26 – BBC: “Russia has criticised the US and UK for using ‘unacceptable’ tone and rhetoric in speeches on Syria at the UN, after being accused of ‘barbarism’. On Sunday, US permanent representative Samantha Power said Russian and Syrian forces were ‘laying waste’ to besieged rebel-held areas of the city of Aleppo.”

September 29 – Reuters (Sanjeev Miglani and Asad Hashim): “Indian officials said elite troops crossed into Pakistan-ruled Kashmir on Thursday and killed suspected militants preparing to infiltrate and carry out attacks on major cities, in a surprise raid that raised tensions between the nuclear-armed rivals. Pakistan said two of its soldiers had been killed in exchanges of fire, but denied India had made any targeted strikes across the de facto frontier that runs through the disputed Himalayan territory. Indian special forces crossed the heavily militarized border by foot just after midnight and hit about half a dozen ‘launching pads’, where the suspected militants were preparing to sneak across…”

September 29 – AFP: “China… warned Japan against ‘playing with fire’ in the contested waters of the South China Sea, after Tokyo announced it may patrol alongside the US in the region. China also sent fighter planes for the first time over a strait near Japan on Monday as part of a group of more than 40 jets headed to train in the West Pacific. The move followed remarks by Japanese Defence Minister Tomomi Inada this month that Tokyo would increase its engagement in the South China Sea through joint training with the US Navy…”

September 26 – Bloomberg (Ting Shi and Isabel Reynolds): “Japan scrambled jets Sunday after a fleet of Chinese aircraft flew into a strategically important strait near disputed islands in the East China Sea. Japan sent out the jets after eight of the Chinese planes crossed back and forth over waters between Okinawa’s main island and Miyako-jima island near Taiwan… While the Chinese planes didn’t cross into Japanese airspace, it was the first time that Japan saw Chinese fighter jets in the Miyako Strait…”

September 24 – Yahoo (Daniel Roberts): “If you still doubted the importance of stronger digital security to businesses even after the now-infamous Sony Pictures hack of 2014, Tom Ridge’s comments at the Concordia Summit… might convince you. The former… secretary of the Department of Homeland Security was part of a panel on cybersecurity, and opened his remarks by mentioning recent incidents in New York, New Jersey, and Paris. ‘Notwithstanding the pain and horror associated with a physical attack,’ Ridge said, ‘the potential for physical, human, and psychic impact with a cyber attack, I think, is far more serious.’”

September 28 – Wall Street Journal (Damian Paletta): “U.S. officials are increasingly confident that the hacker Guccifer 2.0 is part of a network of individuals and groups kept at arm’s length by Russia to mask its involvement in cyberintrusions such as the theft of thousands of Democratic Party documents, according to people familiar with the matter. While the hacker denies working on behalf of the Russian government, U.S. officials and independent security experts say the syndicate is one of the most striking elements of what looks like an intensifying Russian campaign to target prominent American athletes, party officials and military leaders.”