Saturday, November 12, 2016

Weekly Commentary: What a Week

The S&P500 jumped 2.3% Monday in what appeared growing confidence that Hillary Clinton was on the verge of becoming the next POTUS (buoyed by Director of the FBI Comey’s statement). It’s worth noting that Monday trading saw both the Financials (XLF) and the Industrials (XLI) jump 2.5%, only to be bettered by the Biotechs’ (BTK) 4.1% surge. EM equities (EEM) rose 3.6% Monday. Election day trading was then relatively quiet, with the S&P500 adding 0.3% Tuesday.

After closing Tuesday’s session at 2,135.50, S&P 500 futures jumped to 2,151 in evening trading on exit polling and early reports from Florida that appeared favorable for Clinton. Futures, however, reversed course as it became increasingly apparent that Donald Trump was performing better than expected, especially in Florida, Pennsylvania, Michigan and Wisconsin. By midnight on the East Coast, S&P futures were “limit down” 5%. DJIA futures had reversed a full thousand points, and Nasdaq futures had fallen almost 6%.

The huge move in U.S. equity futures was outdone by a stunning 14% collapse in the Mexican peso. In a span of a couple hours, the U.S. dollar/Mexican peso moved from 18.205 to a record high 20.78. After trading near 17,400 (futures) in overnight trading, the DJIA closed Wednesday’s session up 257 points (1.4%) to 18,590. Financial, industrial and biotech stocks, in particular, were in melt-up mode. The Banks (BKX) closed Wednesday trading up 4.9% - then added another 3.8% Thursday, before ending the week up 12.7%. The Broker/Dealers (XBD) surged 5.9% and 3.7%, with a gain for the week of 14.8%. Again not to be outdone, the Biotechs (BTK) spiked 9.2% higher Wednesday and 17% on the week. The Industrials (XLI) gained 2.3% both on Wednesday and Thursday, closing out the week 8.1% higher.

As exuberance took over, the broader market dramatically outperformed. The small caps (RTY) traded higher all five sessions this week, with Wednesday’s 3.1% rise the strongest in a noteworthy 10.3% weekly advance. The mid-caps (MID) gained 1.9% Wednesday and 5.7% for the week. The DJIA traded to a record high this week, with the S&P500, small caps and mid-caps just shy of all-time highs

There are different perspectives through which to interpret this week’s extraordinary market action. The bullish viewpoint will take a casual look at U.S. stock performance and see overwhelming confirmation that the bull trend remains intact. And with news and analysis, as always, following market direction, rather quickly we’re deluged with material professing a bullish outlook courtesy of a Trump Presidency and Republican House and Senate. Apparently the country is now on the verge of a major infrastructure investment program, positive healthcare reform, corporate tax reform, and a dismantling of Dodd-Frank financial regulation (for starters). In particular, a focus on infrastructure and de-regulation implies a Trump Administration lot likely to place confrontation with the Yellen Federal Reserve (or the securities markets) high on their priority list.

From my perspective, it was anything but a so-called “bullish” week. I saw alarming evidence of dysfunctional markets. There was also further confirmation of a bursting bond Bubble. Indeed, there was strong support for the view of a faltering global securities Bubble – even in the face of surging U.S. stock prices.

Let’s return to election late-night. I doubt traders and the more sophisticated market operators will easily forget what almost transpired. It’s worth noting that while S&P500 futures and the Mexican peso were collapsing, the Japanese yen was in melt-up. In just over two hours, the dollar/yen moved from 105.47 to 101.22 – an almost 4% move. Meanwhile, EM and higher-yielding currencies were under intense selling pressure – the Brazilian real, South African rand, Turkish lira, Colombian peso, Australian dollar and New Zealand dollar (to name a few). At the same time, gold surged from $1,270 to $1,338. Crude sank 4%. Global markets were on the brink of a serious speculative de-leveraging episode.

There had been significant hedging across global markets going into the U.S. election. Especially after Monday, the markets viewed a Trump win a low probability. With markets shaky of late, along with an approaching historic political event, enormous derivative positions had accumulated in various markets. In the event of a surprising outcome, those that had written (sold) market “insurance” would be forced to aggressively (“dynamically”) hedge their losses by selling/shorting into already weak markets – perhaps even with major markets highly illiquid (or already halted limit down).

When a marketplace significantly hedges against a perceived low-probability event – and the unexpected actually occurs – contemporary markets face dislocation. Markets simply can’t hedge themselves. To offload risk, someone has to be on the other side of hedging trades – and these days that someone generally has a sophisticated trading model requiring selling/shorting to build positions capable of generating the necessary cash-flow to offset derivative losses. Significant derivative-related selling risks a ('87 “Black Monday”) portfolio insurance debacle of selling betting selling, begetting illiquidity and panic.

Tuesday’s election outcome was at the cusp of creating a very serious test for global derivatives markets. It was not, however, meant to be, as another one of those well-timed miraculous reversals transformed potential panic selling into manic buyers’ panic. Instead of those on the wrong side of derivative trades forced to sell into illiquid markets, it became a frenzy of bearish hedges and speculations unwinds. Another memorable short squeeze.

It’s no coincidence that this week’s melt-up was most acute in sectors that were 2016 underperformers - and generally under-owned (financials, biotechs and industrials). Moreover, many of this week’s top performing stocks were heavily shorted. To be sure, there is no quicker way to trading profits than to jump on a bearish theme that suddenly has a plausible bullish story. It’s spectacular Buyers’ Panic as the desperate shorts, the opportunistic “wise guys” and the trend-following/performance-chasing Crowd brawl over a limited supply of available securities. A destabilizing (downside) systemic liquidity event was avoided Wednesday, which ensured sporadic upside dislocations in various stocks, sector ETFs and “king dollar” more generally.

November 9 – Bloomberg (Lu Wang): “You need to go all the way back to the dark days of 2008 to find a stock market reversal to rival that of the last 12 hours, in which S&P 500 Index futures erased a 5% loss triggered by Donald Trump’s surprise presidential election win. Bigger turnarounds only happened three times before, twice in the final months of 2008 and the other in October 1987…”

It’s no coincidence that Wednesday’s wild reversal ranks right up there with three previous major volatility events – two in late 2008 and the other in October 1987. Fragile fundamental underpinnings foster unstable market dynamics – i.e. significant shorting, hedging and speculation. And there’s no more breathtaking market advance than a major bear market rally.

It’s also worth noting that the favored technology stocks underperformed this week. The Morgan Stanley High Tech Index actually declined 1.5% post-election (up 1.6% for the week). The Nasdaq 100 (NDX) fell 1.1% post-election (up 2.0% for the week). The favorite – and previously outperforming – Utilities dropped 4.2% this week.

It’s such an extraordinary backdrop. I believe the pierced global Bubble continues to flounder, but the policy responses of $2.0 TN annual global QE, near zero rates and record Chinese Credit growth have created major Bubble Anomalies. Surely, all the QE-related global liquidity excess has created aberrant market behavior (on full display this week).

On the one hand, central bank liquidity backstops have thus far allayed fears of “Risk Off” de-leveraging quickly evolving into a systemic liquidity event. On the other, the massive pool of global speculative finance (including hedge funds, ETFs, SWF and trend-followers more generally) foments a liquidity backdrop with extraordinary flow volatility between various sectors and markets. Underlying market instability has made it difficult for fund managers perform (absolute and relative to indices). In particular, this backdrop has ensured that hedges don’t perform well at all. Intense performance pressure then makes it imperative both to rotate quickly into the outperformers and to avoid missing general market rallies.

While resilient U.S. stock prices captured bullish imaginations, this week saw global bond markets get rocked. If not for QE, I believe surging yields and attendant de-leveraging would have spelled major problems for securities markets more generally. Instead, too much speculative “money” chases the outperforming stocks, sectors, asset classes and countries. Importantly, this week’s exuberance at the U.S. “Core” came at the expense of a vulnerable “Periphery.”

Mexico was close to meltdown. The Mexican peso sank 8.7% this week to a record low. Mexican 10-year dollar bond yields surged 74 bps to 3.98%, with peso bond yields surging 95 bps to a multi-year high 7.25%. Mexican stocks dropped 3.7%. The Mexico ETF (EWW) sank 17.9% post-election, with a 12.2% loss for the week. Gold dropped 5.9% this week, while Copper surged 10.8%. Despite all the focus on inflation, crude declined 1.5% to a multi-week low.

EM came under intense selling pressure starting Wednesday. The EEM ETF sank 7.8% post-election (down 3.8% for the week). In the currencies this week, the South African rand fell 5.3%, the Brazilian real 4.9%, the Polish zloty 4.6%, the Hungarian forint 3.6%, the Russian ruble 3.3%, the Romanian leu 3.0% and the Turkish lira 2.8%. China's currency declined 0.8% vs. the dollar, the biggest weekly decline since January.

In EM equities, Brazil’s Bovespa index dropped 3.9%, the Argentine Merval 3.5%, India’s Sensex 2.5%, Indonesia’s Jakarta Composite 5.2%, South Korea’s Kospi 0.9%, Taiwan’s TAIEX Index 2.1% and Thailand’s Thai 50 1.4%.

Yet the bursting Bubble thesis saw the clearest confirmation in surging global bond yields. EM bonds were just clobbered. Brazil real bond yields jumped 67 bps to 12.02%, with yields up 30 bps in Colombia (7.55%) and 47 bps in Argentina (16.07%). Eastern Europe bonds were also under pressure. This week saw yields surge 27 bps in Poland (3.32%), 32 bps in Hungary (3.38%) and 28 bps in Romania (3.33%). Russian ruble yields surged 43 bps to a five-month high 8.88%. Turkey’s 10-year bond yields jumped 31 bps to a 10-month high 10.10%. South African yields surged a notable 50 bps to a five-month high 9.15%. Yields surged 58 bps in Indonesia to a four-month high 4.12%. Malaysian yields jumped 25 bps to 3.88%. EM ETFs saw outflows of $1.8 billion over the past week, reducing y-t-d flows to $26.3bn (from Bloomberg). It was a rout.

“Developed” bonds didn’t fare much better. Australian ten-year yields surged 22 bps to 2.56%, the high since April. New Zealand yields jumped 26 bps (3.03%) and South Korea’s rose 22 bps (1.94%). Canadian 10-year yields rose 20 bps to a six-month high 1.43%.

European bonds were under heavy selling pressure. German 10-year yields rose “only” 18 bps, as spreads widened significantly throughout the Eurozone. French yields surged 28 bps, Netherlands 21 bps, Spain 21 bps and Portugal 19 bps. Ominously, Italian yields jumped 27 bps, back above 2% for the first time since July 2015. The Italian to German 10-year bond spread widened to a two-year high 171 bps.

Perhaps ominous as well, 10-year Treasury yields surged 37 bps this week to 2.15%, the high since January. Long-bond yields rose 38 bps to an almost 2016 high 2.94%. It was a case of so-called “risk-free” securities showing their true colors. The TLT (Treasury ETF) dropped 7.4% this week, wiping out most of its 2016 return. The popular AGG (IShares Core U.S. Aggregate Bond ETF) and BND (Vanguard Total Bond Market ETF) dropped 1.8% and 1.9%. Corporate high-yield (HYG) and investment-grade (LQD) EFTs this week declined 1.8% and 2.3%, respectively.

Headlines from the FT: “What is the Trump Reflation Trade?” and “’Trumpflation’ Risk Rattles Bond Markets.” From Bloomberg: “Goldman Warns Bond-Market Carnage Threatens Global Reflation.” “Bonds Plunge by $1 Trillion This Week as Trump Seen Game Changer.” And from the Wall Street Journal: “The All-Powerful Bond Market Is Getting Rocked by Trump.”

I guess we’re now in the political “honeymoon” period, one I fear will be short-lived. It would be more gratifying to be optimistic. But watching the global bond Bubble begin to unravel leaves me apprehensive. I fear this week’s wild market instability could portend some type of financial accident. There were some large losses suffered throughout the markets this week.

Inflationary biases were already percolating before the election. It’s worth noting that M2 “money” supply expanded $941bn, or 7.7%, over the past year. The Fed – and global central bankers – have brought new meaning to “behind the curve.” And as speculative markets trade inflation’s revival, the job of the Fed (and global central bankers) becomes a whole lot more challenging. Do they raise rates to help dampen fledgling inflation psychology and support faltering bond markets? Or, instead, will the prospect of a real central bank tightening cycle further weigh on bond market confidence? Hard to imagine halcyon markets in a world devoid of QE and near-zero rates.

Actually, bond trading is bringing back unpleasant memories of early 1994. Yet 2009-2016 Bubble excess makes 1991-1993 looks pretty inconsequential. And this time it’s global. Systemic. Look closely this week and one can see some weak links: Mexico, Brazil, South Africa, Indonesia, Poland, Hungary, Argentina, EM generally, Ireland and Italy. Italian bond yields are all the way back to 2%. It’s worth recalling that they traded at 7% in early-2012.


For the Week:

The S&P500 jumped 3.8% (up 5.9% y-t-d), and the Dow surged 5.4% (up 8.2%). The Utilities dropped 4.2% (up 6.8%). The Banks advanced 12.7% (up 13.1%), and the Broker/Dealers jumped 14.8% (up 7.7%). The Transports rose 6.2% (up 14.2%). The broader market was exceptionally strong. The S&P 400 Midcaps gained 5.7% (up 11.8%), and the small cap Russell 2000 surged 10.2% (up 12.9%). The Nasdaq100 added 1.8% (up 3.5%), and the Morgan Stanley High Tech index increased 1.6% (up 10.1%). The Semiconductors rallied 4.3% (up 26.2%). The Biotechs spiked 17.1% higher (down 11.4%). With bullion sinking $77, the HUI gold index fell 17.1% (up 62.1%).

Three-month Treasury bill rates ended the week at 47 bps. Two-year government yields rose 14 bps to 0.92% (down 13bps y-t-d). Five-year T-note yields surged 33 bps to 1.56% (down 19bps). Ten-year Treasury yields jumped 37 bps to 2.15% (down 10bps). Long bond yields surged 38 bps to 2.94% (down 8bps).

Greek 10-year yields dropped 59 bps to 7.03% (down 29bps y-t-d). Ten-year Portuguese yields rose 19 bps to 3.45% (up 93bps). Italian 10-year yields surged 27 bps to 2.02% (up 43bps). Spain's 10-year yields gained 21 bps to 1.47% (down 30bps). German bund yields rose 18 bps to 0.31% (down 31bps). French yields surged 28 to 0.74% (down 25bps). The French to German 10-year bond spread widened 10 to 43 bps. U.K. 10-year gilt yields jumped 23 bps to 1.36% (down 60bps). U.K.'s FTSE equities index added 0.6% (up 7.8%).

Japan's Nikkei 225 equities index rallied 2.8% (down 8.7% y-t-d). Japanese 10-year "JGB" yields rose three bps to negative 0.04% (down 30bps y-t-d). The German DAX equities index rose 4.0% (down 0.7%). Spain's IBEX 35 equities index declined 1.7% (down 9.5%). Italy's FTSE MIB index recovered 3.0% (down 21.5%). EM equities were mixed. Brazil's Bovespa index fell 3.9% (up 37%). Mexico's Bolsa dropped 3.7% (up 4.7%). South Korea's Kospi slipped 0.1% (up 1.2%). India’s Sensex equities fell 1.7% (up 2.7%). China’s Shanghai Exchange gained 2.3% (down 9.7%). Turkey's Borsa Istanbul National 100 index rallied 1.2% (up 4.8%). Russia's MICEX equities index jumped 3.5% (up 15.4%).

Junk bond mutual funds saw outflows of $669 million (from Lipper).

Freddie Mac 30-year fixed mortgage rates increased three bps last week to a five-month high 3.57% (down 41bps y-o-y). Fifteen-year rates rose five bps to 2.89% (down 31bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down a basis point to 3.73% (down 26bps).

Federal Reserve Credit last week expanded $2.0bn to $4.415 TN. Over the past year, Fed Credit contracted $38.5bn (0.9%). Fed Credit inflated $1.604 TN, or 57%, over the past 209 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt fell $9.0bn last week to another six-year low $3.111 TN. "Custody holdings" were down $192bn y-o-y, or 5.8%.

M2 (narrow) "money" supply last week rose $26.4bn to a record $13.183 TN. "Narrow money" expanded $941bn, or 7.7%, over the past year. For the week, Currency increased $2.8bn. Total Checkable Deposits declined $17.3bn, while Savings Deposits jumped $36bn. Small Time Deposits were little changed. Retail Money Funds expanded $5.4bn.

Total money market fund assets gained $5.9bn to a 10-week high $2.683 TN. Money Funds declined $31.1bn y-o-y (1.1%).

Total Commercial Paper was little changed at $908bn. CP declined $141bn y-o-y, or 13.4%.

Currency Watch:

The U.S. dollar index jumped 2.2% to 99.06 (up 0.4% y-t-d). For the week on the upside, the British pound increased 0.6%. For the week on the downside, the Mexican peso declined 8.7%, the South African rand 5.3%, the Brazilian real 4.9%, the Japanese yen 3.3%, the Norwegian krone 2.8%, the New Zealand dollar 2.7%, the Danish krone 2.6%, the euro 2.6%, the Singapore dollar 2.1%, the Swiss franc 2.0%, the South Korean won 1.7%, the Australian dollar 1.7%, the Swedish krona 1.6% and the Canadian dollar 1.0%. The Chinese yuan declined 0.8% versus the dollar (down 4.7% y-t-d).

Commodities Watch:

The Goldman Sachs Commodities Index added 0.6% (up 12.7% y-t-d). Spot Gold sank 5.9% to $1,228 (up 16%). Silver fell 5.8% to $17.37 (up 26%). Crude declined another 66 cents to $43.41 (up 17%). Gasoline dropped 5.3% (up 3%), and Natural Gas fell 5.1% (up 12%). Copper surged 10.8% (up 18%). Wheat declined 2.7% (down 14%). Corn fell 2.4% (down 5.2%).

China Bubble Watch:

November 11 – Reuters (Kevin Yao): “Chinese banks extended 651.3 billion yuan ($95.56 billion) in new yuan loans in October, below analysts' expectations and down sharply from 1.22 trillion yuan in September. Broad M2 money supply (M2) grew 11.6% from a year earlier, the central bank said on Friday, slightly above forecasts. Outstanding yuan loans grew by 13.1% by month-end on an annual basis.”

November 7 – Wall Street Journal (Saumya Vaishampayan and Lingling Wei): “The specter of capital flight is back in China. More money is leaving the world’s No. 2 economy again, threatening Beijing’s strategy of letting its currency weaken in a controlled fashion. In the latest evidence of a surge in outflows, China’s foreign reserves plunged $45.7 billion in October from the previous month to $3.12 trillion… That is the largest drop since January, suggesting that outflows could be edging back up to the record-breaking levels of late last year and early this year. As much as $78 billion may have left China in September, according to Goldman Sachs…, the largest amount since the $100 billion-plus the firm estimates left the country in December and again in January.”

November 10 – Reuters (Elias Glenn): “Regulators in China have told banks new home mortgage loans in November must be below those issued in October, Shanghai Securities Journal reported…, as Beijing looks to curb rising leverage in the housing sector. Mortgages accounted for 35% of loans in the first half of 2016, but analysts estimate that jumped to 71% in July and August as frantic buying kick in thanks to rapidly rising prices. China's banking regulator previously asked lenders to step up risk management of property loans amid record gains in house prices that have raised concerns of price bubbles and ballooning debts. China's new home prices rose in September at the fastest rate on record… Outstanding mortgage loans to individuals rose 33.4% to 17.93 trillion yuan ($2.65 trillion) from a year ago by the end of September…”

November 6 – Bloomberg: “The push by China’s policy makers to rein in property bubbles looks to be getting traction, according to early indicators from the nation’s biggest cities. Beijing home sales volume plunged 41% year-on-year last month while Shanghai’s slumped 18%, …after new purchase restrictions and tightened mortgage lending. Transactions fell 50% in smaller cities. Now policy makers must balance deflating property prices with safeguarding the expansion.”

November 7 – Bloomberg: “China’s policy makers are playing catch-up as investors get more creative in evading capital controls. The authorities are taking a series of steps to plug loopholes, such as a potential plan to curb transactions that use the bitcoin digital currency to take funds out of the country, as well as a statement from UnionPay Co. limiting mainlanders from using its cards to buy insurance in Hong Kong. These add to more traditional measures, including an order seen as asking mainland banks to reduce foreign-exchange sales… ‘The People’s Bank of China is doing this now because data show capital outflow pressures remain significant and there are no signs of a reversal,’ said Ken Cheung, a currency strategist at Mizuho Bank… ‘It looks like the government will block outflow channels as and when they find them. This will slow the yuan’s internationalization and discourage foreign investment due to concern money will get locked up once invested.’”

November 7 – Financial Times (Gabriel Wildau): “China’s securitisation market has blossomed this year as authorities embrace financial innovation, with bankers packaging an eclectic mix of assets from dance ticket revenues to bridge tolls. Beijing approved the country’s first securitisation deals in 2005, but the programme was halted in 2008 after regulators observed the damage wreaked by risky mortgage securities in the US. The programme was revived in 2012, starting primarily with vanilla assets such as corporate loans, home mortgages and auto loans. This year, activity has shifted to corporate receivables, and issuance has soared. Banks and non-financial companies together completed 384 securitisation deals in the first nine months of 2016, up from 327 deals for all of 2015… Non-bank deals have accounted for 284 of this year’s total. In value terms, deals totalled Rmb584bn ($86bn) through the end of September, close to 2015’s full-year… ‘Almost every conceivable asset from anyone can be securitised. This makes the market far more diverse than in the US and Europe,’ says Pang Yang, chief executive of China Securitization Analytics… ‘For many companies, this is the only way they can raise capital at the moment.’”

November 8 – Bloomberg: “China’s $3.2 trillion corporate bond market is already starting to reel from rising interbank borrowing costs, and the traditional year-end funding crunch hasn’t even started yet. The yield premium for five-year AA rated notes over the sovereign climbed 10 bps in October as money market rates surged to an 18-month high. Worse may be yet to come as lenders tend to hoard cash for year-end regulatory checks, prompting the overnight repurchase rate fixing to rise in December in four of the past five years, including a 33 bps jump in the last month of 2015… Any disruption in the market could make it harder for companies to refinance as 4.1 trillion yuan ($605bn) of bonds coming due next year.”

November 7 – Bloomberg: “China’s passenger-vehicle sales climbed for an eighth consecutive month as consumers rushed to buy small-engine autos ahead of a tax cut due to expire at year-end, boosting deliveries at local carmakers… Retail sales of cars, sport utility and multipurpose vehicles increased 20% to 2.22 million units last month…”

November 8 – Bloomberg: “China’s exports fell for a seventh month, leaving policy makers reliant on domestic growth engines to hit their economic expansion goals. Overseas shipments dropped 7.3% from a year earlier in October in dollar terms. Imports slipped 1.4%. Trade surplus widened to $49.1 billion. A depreciation of about 9% in the yuan since August 2015 has cushioned the blow from tepid global demand, but failed to give shipments a sustained boost. Rising input costs and surging wages have flattened exporter profit margins…”

November 7 – New York Times (Paul Mozur): “In August, business groups around the world petitioned China to rethink a proposed cybersecurity law that they said would hurt foreign companies and further separate the country from the internet. On Monday, China passed that law — a sign that when it comes to the internet, China will go its own way. The new rules… are part of a broader effort to better define how the internet is managed inside China’s borders. Officials say the rules will help stop cyberattacks and help prevent acts of terrorism, while critics say they will further erode internet freedom. Business groups worry that parts of the law — such as required security checks on companies in industries like finance and communications, and mandatory in-country data storage — will make foreign operations more expensive or lock them out altogether.”

November 7 – Reuters (Venus Wu): “More than 1,000 Hong Kong lawyers dressed in black marched through the heart of the city in silence on Tuesday to condemn a move by China that effectively bars two elected pro-independence lawmakers from taking their seats in the legislature. The former British colony returned to China in 1997 under a ‘one country, two systems’ agreement that ensured its freedoms, including a separate legal system. But Beijing has ultimate control and some Hong Kong people are concerned it is increasingly interfering to head off dissent.”

Europe Watch:

November 9 – Bloomberg (Anooja Debnath): “The anti-establishment whirlwind is headed for Italy now that it has sent Donald Trump to the White House. Italian government bonds slid in the wake of Trump’s stunning victory, reflecting worries that Prime Minister Matteo Renzi will lose a referendum on political reform, scheduled for Dec. 4. ‘If protest votes are ‘a thing,’ then the next opportunity for the electorate to express how fed up they are with conventional politics’ is for the Italians, Kit Juckes, …strategist at Societe Generale SA, wrote…”

November 7 – Reuters (Francesco Canepa): “The most prominent hawk on the European Central Bank's board defended the bank’s ultra-loose monetary policy on Monday, but added that she was skeptical of further interest rate cuts or other forms of easing. Sabine Lautenschlaeger's comments were likely to be read as an indication she might oppose extending the ECB's monthly bond-buying program much beyond its March deadline - a decision the ECB will make at its meeting in a month's time.”

November 11 – Reuters (Kevin Yao): “Germany's financial watchdog warned against a loosening of post-financial crisis bank regulations... Felix Hufeld, president of Germany's top financial regulator Bafin, made the call at an industry conference days after the election of Donald Trump, who has said he would scrap some financial rules to help U.S. businesses if he became president… ‘Barely 10 years after the start of the financial crisis I once more hear the bugle calls of deregulation,’ Hufeld said…”

Fixed-Income Bubble Watch:

November 10 – Financial Times (Elaine Moore): “Donald Trump has come under criticism for his lack of specifics on policy in the campaign. But in his victory speech after his upset in the US presidential election, he made one very specific promise: to invest in American infrastructure. ‘We are going to fix our inner cities and rebuild our highways, bridges, tunnels, airports, schools, hospitals,’ Mr Trump said. ‘We’re going to rebuild our infrastructure, which will become, by the way, second to none. And we will put millions of our people to work as we rebuild it.’ By singling out a public works programme, the president-elect has raised expectations in bond markets of government stimulus that would not only raise debt levels but spur growth and inflation — testing a three-decade rally that drove yields to record lows.”

November 10 – Wall Street Journal (Christopher Whittall and Sam Goldfarb): “A selloff in government bonds picked up more momentum Thursday, spreading across the world as investors reacted to the prospect of increased fiscal stimulus under a Donald Trump presidency. Investors are now asking whether Mr. Trump’s victory marks a turning point for fixed-income markets that have been on lengthy bull run. In recent trading, the yield on the benchmark 10-year U.S. Treasury note was 2.118%... That came on the back of the biggest one-day jump in the 10-year yield in over three years Wednesday.”

Global Bubble Watch:

November 9 – Bloomberg (Lu Wang): “You need to go all the way back to the dark days of 2008 to find a stock market reversal to rival that of the last 12 hours, in which S&P 500 Index futures erased a 5% loss triggered by Donald Trump’s surprise presidential election win. Bigger turnarounds only happened three times before, twice in the final months of 2008 and the other in October 1987…”

November 10 – Bloomberg (Lilian Karunungan and Anooja Debnath): “Investors saw $337 billion wiped off the value of securities that comprise an index of global bonds in a single day Wednesday following Donald Trump’s election as President, the flipside of global upswing in stocks and commodities. While Trump’s spending plans have pushed equities, raw materials and the dollar higher, bonds have declined on speculation he’ll need to sell more debt and on concern faster growth will lead to a surge in inflation, which erodes the value of fixed-income securities. The selloff deepened on Thursday, pushing 10-year Treasuries down for a fourth day and sending yields in Italy to the highest level since September 2015.”

November 6 – Financial Times (Mary Childs): “The exchange-traded fund industry has ballooned to more than $3.2tn in assets, surpassing the $2.97tn held in hedge funds, as investors pile into low-cost offerings to capture the multiyear market rally. Scepticism about the high-fee hedge fund industry has grown from its years of underperforming benchmarks, leading investors to migrate to cheaper options such as ETFs. These products have proved popular in large part because of their low fees… and the fact they are treated differently for tax purposes, enabling them to avoid capital gains distributions.”

U.S. Bubble Watch:

November 7 – Reuters (Eliza Ronalds-Hannon and Liz McCormick): “Barack Obama will go down in history as having sold more Treasuries and at lower interest rates than any U.S. president. He’s also leaving a debt burden that threatens to hamstring his successor. Obama’s administration benefited from some unprecedented advantages that helped it grapple with the longest recession since the 1930s. The Federal Reserve kept rates at historically low levels, partly by becoming the single biggest holder of Treasuries. The U.S. could also rely on insatiable demand from international investors, led by China deploying its hoard of reserves. Global buyers added $3 trillion of Treasuries, doubling ownership to a record.”

November 8 – Wall Street Journal (Aaron Back): “After the auto-lending boom of recent years, signs of trouble are starting to pop up. Total auto loans outstanding in the U.S. reached $1.1 trillion in the second quarter… Auto-loan originations in the period were $149 billion, close to the record $151 billion in the third quarter of last year. There are two major risks: One is that borrowers will prove less creditworthy than expected, giving rise to defaults and write-offs. The second is that used-car prices will fall by more than lenders anticipated… There were worrying signs on both fronts Monday. Auto and consumer lender OneMain Holdings said it now expects its net charge-off ratio to rise to 7.2% to 7.6% in 2017... Its shares fell by nearly 39% on Tuesday. Separately, rental car giant Hertz Global Holdings took a $39 million charge to its estimate of the residual value of its car fleet. Its shares fell by 23% on Tuesday.”

November 7 – New York Times (Leslie Picker): “Wall Street bonuses are expected to decline for the third consecutive year, reflecting a period of busted mergers, limited trading activity and muted hedge fund returns. The payouts are projected to be from 5 to 10% lower this year, according to an annual report… by Johnson Associates… Bonuses fell about the same amount last year from 2014.”

Federal Reserve Watch:

November 9 – Wall Street Journal (Kate Davidson and Jon Hilsenrath): “The central bank has been insulated from congressional critics for the past eight years by an Obama administration that quietly supported its aggressive efforts to spur economic growth. In Donald Trump, the Federal Reserve will face a president who has expressed varying views about its policies… in addition to divergent views about Fed Chairwoman Janet Yellen. Mr. Trump’s comments in the final days of his campaign suggested he might not feel bound by the tradition of recent presidents staying mum on monetary policy. He might also be willing to work with the GOP-controlled Congress to rewrite the laws governing the Fed’s structure and disclosures, possibly embracing proposals central bank officials have seen as threats to their policy-making independence.”

Leveraged Speculator Watch:

November 11 – Bloomberg (Taylor Hall): “Ray Dalio’s $150 billion Bridgewater Associates has received approval to invest in China’s onshore bond market… The world’s largest hedge fund manager will trade the fixed-income securities via the China Interbank Bond Market through the firm’s All Weather product structure, making them the first global hedge fund manager approved to access and trade the CIBM…”