Weekly Commentary: About Resuscitation and Reinstatement

“Shock and awe” is not quite what it used to be. It still carries a punch, especially for traders long the Japanese yen or short EM and stocks. The yen surged 2% against the dollar (more vs. EM) Friday on the Bank of Japan’s (BOJ) surprising move to negative interest rates. BOJ Governor Haruhiko Kuroda has a penchant for startling the markets. Less than two weeks ago he stated that the BOJ would not consider adopting negative rates. It wasn’t all that long ago that central bankers treasured credibility.

For seven years, I’ve viewed global rate policies akin to John Law’s (1720 France) desperate move to hold his faltering paper money and Credit scheme (Mississippi Bubble period) together by devaluing competing hard currencies (zero and now negative rates devalue “money”). It somewhat delayed the devastating day of reckoning. Postponement made it better for a fortunate few and a lot worse for everyone else.

Last week saw dovish crisis management vociferation from the ECB’s Draghi. Now the BOJ adopts a crisis management stance. The week also had talk of some deal to reduce global crude supply. Meanwhile, the Bank of China injected a weekly record $105 billion of new liquidity. Nonetheless, the Shanghai Composite sank 6.1% to a 13-month low. There was desperation in the air – along with a heck of a short squeeze and general market mayhem.

Markets these days have every reason to question the efficacy of global monetary management. It’s certainly reasonable to be skeptical of OPEC - too many producers desperate for liquidity. The Chinese are flailing - conspicuously. As for the BOJ’s move, it does confirm the gravity of global financial instability. It as well supports the view that, even within the central bank community, confidence in the benefits of QE has waned.

After three years of unthinkable BOJ government debt purchases, Japanese inflation expectations have receded and the economy has weakened. Lowering rates slightly to negative 10 bps (for new reserve deposits) passed by a slim five to four vote margin. With the historic global QE experiment having badly strayed from expectations, there is today no consensus as to what to try next.

Kuroda remains keenly focused on the yen. After orchestrating a major currency devaluation, there now seems little tolerance for even a modest rally. The popular consensus view sees BOJ policymaking through the perspective of competitive currency devaluation, with the objectives of bolstering exports and countering deflationary forces. I suspect Kuroda’s (fresh from Davos) current yen fixation is more out of fear that a strengthening Japanese currency risks spurring unwinds of myriad variations of yen “carry trades” (short/borrowing in yen to finance higher-yielding securities globally) – de-leveraging that is in the process of wreaking havoc on global securities markets.

Notable Bloomberg headlines: (Thursday) “S&P 1500 Short Interest Is at Its Highest Level in Three Years.” (Friday): “Hedge Funds Boost Yen Bets to 4-Year High Days Before BOJ Shock.”

Bearish sentiment is elevated. Recent global tumult has spurred significant amounts of hedging across the financial markets. And, clearly, betting on “risk off” has of late proved rewarding (and gaining adherents). Draghi and Kuroda retain the power to incite short squeezes and the reversal of risk hedges. And central bankers can prod short-term traders to cover shorts and return to the long side. Yet the key issue is whether global central banks can propel another rally such as the 12% multi-week gains experienced off of August lows. Can policy measures resuscitate bull market psychology and reestablish the global Credit boom?

Subtly perhaps, yet the world has changed meaningfully in the five short months since the August “flash crash”. After exerting intense pressure and direct threats – not to mention the “national team’s” hundreds of billions of market support - Chinese equities traded this week below August lows. It’s worth noting that Hong Kong’s Hang Seng China Financials Index now trades significantly below August lows.

Bank stock weakness is anything but an Asian phenomenon. European bank stocks this week dropped to three-year lows. Even with Friday’s 2.7% rally, U.S. bank stocks (BKX) declined 12.6% in January (broker/dealers down 15.3%). European banks were hit even harder. The STOXX Europe 600 Bank Index has a y-t-d loss of 14.6%. This index is 31% below August highs and about 11% below August lows.

January 28 – Bloomberg (Sonia Sirletti and John Follain): “Banca Monte dei Paschi di Siena SpA led a slump in Italian banking shares after Italy’s long-sought deal on bad debts with the European Union disappointed investors. Monte dei Paschi, bailed out twice since 2009, fell 10%... in Milan trading, bringing losses this year to 45%. The eight biggest decliners among the 46 members of the Stoxx Europe 600 Banks Index were Italian lenders on Thursday. The agreement struck with the EU, which allows banks to offload soured loans after buying a state guarantee, is unlikely to clean up the financial system as fast as some in the markets had hoped, investors said. The plan stops well short of the cleanups organized in Spain and Ireland during the financial crisis. ‘The uncertainty in the Italian banking system will persist,’ said Emanuele Vizzini, who manages 3.5 billion euros ($3.8bn) as chief investment officer at Investitori Sgr in Milan. ‘The deal may help banks to offload part of their bad debt, but for sure doesn’t solve the problem, in particular for the weakest banks, which may need recapitalization.’”

Even with Friday’s 3.3% rally, the FTSE Italia All-Shares Bank index lost 22.8% in January. UniCredit, Italy’s largest bank, has a y-t-d decline of 31%. One is left to ponder where Italian sovereign yields would trade these days without Draghi.

When market optimism prevails and the world is readily embracing risk and leverage, the greatest speculative returns are amassed playing “at the margin.” “Risk on” ensures the perception of liquidity abundance, along with faith in the power of central banks and their monetary tools. In a world where liquidity is flowing, Credit is expanding and markets are bubbling, European securities markets provide attractive targets. And booming markets feed the perception that Europe’s economic recovery is sound and sustainable. It all became powerfully self-reinforcing.

But when cycles shift it’s those operating “at the margin” – i.e. junk bonds and high-beta stocks; leveraged companies, industries, economies and regions; leveraged financial institutions – that have the rug is so abruptly yanked out from under stability.

The thesis is that a momentous inflection point has been reached in a multi-decade global Credit cycle. A Monday Bloomberg headline: “So Yes, the Oil Crash Looks a Lot Like Subprime.” Others have noted the recent tight correlations between crude and equities prices. Let me suggest that the oil market provides the best proxy for the global Credit cycle. And it’s faltering global Credit that has been weighing harshly on commodities, equities and corporate Credit, while the bullish consensus bemoans that stocks have been way overreacting to modest economic slowdowns in the U.S. and throughout Europe.

A few months back the global bull market still appeared largely intact. Markets remained confident in central bankers and their monetary tools. Debt issuance was booming and the Credit Cycle seemed to sustain an upward trajectory. The global banking industry enjoyed an outwardly robust appearance – and was even to benefit from rate normalization in the U.S. and elsewhere. “Risk on” was secure, or so it appeared.

But it was the last (policy-induced) gasp of speculative excess, a “blow off” top that enticed more “money” into “developed world” stocks and corporate Credit. Meanwhile, finance was fleeing commodities, high-yield, China and EM even more aggressively. In reality, the Credit Cycle had turned – QE, negative rates, China “national team,” “whatever it takes” Draghi and a dovish Fed notwithstanding.

In newfound global Credit Cycle realities, highly leveraged China is an unfolding pileup. Vulnerability has precipitously emerged throughout the global banking system. European banks – luxuriating so popularly “at the margin” until recently – again appear acutely fragile. Recalling 2012, the European periphery is back in the crosshairs. A “bad bank” plan for the troubled Italian banking sector – that seemed doable back during “risk on” – seems less than workable with a backdrop of “risk off,” speculative de-leveraging and faltering global Credit.

Italy’s financial institutions and economy are acutely susceptible to weak securities markets and tightened Credit conditions. Italy is not alone. Greek yields surged 180 bps this month. Portuguese 10-year yields jumped 34 bps. For more than three years, “whatever it takes” monetary management has inflated securities market Bubbles. In the process, Bubble Dynamics have work surreptitiously to inflate financial and economic vulnerabilities.

It’s worth noting that Italian equities dropped 2.0% this week. Friday from Bloomberg: “Eighth Week of Europe Corporate-Debt Outflows Shows Limits of QE.” According to the article (Selcuk Gokoluk), $3.5 billion flowed out of investment-grade funds the past week. There is also heightened concern for the German economy’s exposure to China, not to mention the pressing immigrant issue and attendant political instability. There is as well increased focus on European financial and economic exposure to EM. European bank stock performance has been telling. Of the behemoth European banks, Deutsche Bank lost almost 26% of its value in January. BNP Paribas was down 16%, Credit Agricole 15%, Barclays 18%, Societe Generale 17% and Royal Bank of Scotland 17%.

This week saw 10-year bund yields sink to one-year lows. UK Gilt yields dropped to 10-month lows. It’s also worth noting the equities markets benefitting the most from Kuroda’s surprise and speculative dynamics. Brazilian equities gained 6.2% this week, with Mexico up 4.8%, Russia 3.9% and Turkey 4.6%. In the currencies, the beneficiaries were Brazil (up 2.3% this week), Mexico (2.8%), Russia (3.3%), South Africa (3.5%) and Malaysia (3.4%). It would appear that all the big gainers had oversized short positions.

I have been programmed over the years to take every short squeeze seriously. They often take on a life of their own. But back to the pressing issue: Can policy measures resuscitate bull market psychology and reestablish the global Credit boom? I do not expect either a resurgent bull market or a reemerging Credit boom. In truth, negative rates are a feeble tool in the face of global de-risking/de-leveraging dynamics. They are not confidence inspiring.

Dovish policy surprises do still afford a capable weapon to clobber those positioning for “risk off,” in the process somewhat restraining the forces of market dislocation. However, inciting squeezes and administering market punishment are not conducive to market stability or confidence. There’s a strong argument to be made that such a backdrop only compounds the challenge for the struggling global leveraged speculating community. Mainly, negative rates in theory are a tool to spur flows into risk assets and supposedly bolster securities markets. The irony is that negative rates are damaging to bank profitability. And as the Credit downturn gathers momentum, banking profits – and solvency – will be a pressing systemic issue.



For the Week:

The S&P500 rallied 1.7% (down 5.1% y-t-d), and the Dow jumped 2.3% (down 5.5%). The Utilities surged 3.9% (up 5.3%). The Banks rose 2.6% (down 12.6%), while the Broker/Dealers slipped 0.3% (down 15.3%). The Transports rallied 1.9% (down 8.0%). The S&P 400 Midcaps gained 2.3% (down 5.8%), and the small cap Russell 2000 recovered 1.4% (down 8.8%). The Nasdaq100 increased 0.5% (down 6.8%), while the Morgan Stanley High Tech index slipped 0.4% (down 9.1%). The Semiconductors jumped 2.6% (down 7.5%). The Biotechs were slammed 9.6% (down 24%). With bullion up $20, the HUI gold index surged 13.1% (up 8.7%).

Three-month Treasury bill rates ended the week at 31 bps. Two-year government yields fell 10 bps to 0.77% (down 28bps y-t-d). Five-year T-note yields sank 15 bps to 1.33% (down 42bps). Ten-year Treasury yields dropped 13 bps to 1.92% (down 33bps). Long bond yields fell eight bps to 2.74% (down 28bps).

Greek 10-year yields jumped 33 bps to 9.12% (up 180bps y-t-d). Ten-year Portuguese yields dropped 15 bps to 2.86% (up 34bps). Italian 10-year yields fell 16 bps to 1.41% (down 18bps). Spain's 10-year yields dropped 21 bps to 1.51% (down 26bps). German bund yields declined 16 bps to a nine-month low 0.32% (down 30bps). French yields fell 17 bps to 0.63% (down 36bps). The French to German 10-year bond spread narrowed one to 31 bps. U.K. 10-year gilt yields declined 15 bps to 1.56% (down 40bps).

Japan's Nikkei equities index rallied 3.3% (down 8.0% y-t-d). Japanese 10-year "JGB" yields dropped 13 bps to a record low 0.09% (down 17bps y-t-d). The German DAX equities index increased 0.3% (down 8.8%). Spain's IBEX 35 equities index recovered 1.1% (down 7.6%). Italy's FTSE MIB index fell 2.0% (down 12.9%). EM equities were mostly higher. Brazil's Bovespa index surged 6.2% (down 5.8%). Mexico's Bolsa jumped 4.8% (up 1.5%). South Korea's Kospi index rallied 1.7% (down 2.5%). India’s Sensex equities index recovered 1.8% (down 4.8%). China’s Shanghai Exchange sank another 6.1% (down 22.6%). Turkey's Borsa Istanbul National 100 index jumped 4.6% (up 2.4%). Russia's MICEX equities index rose 3.9% (up 1.3%).

Junk funds saw inflows of $883 million (from Lipper). Notably, investment-grade bond funds saw their tenth consecutive week of outflows ($1.187bn).

Freddie Mac 30-year fixed mortgage rates slipped two bps to 3.79% (up 13bps y-o-y). Fifteen-year rates declined three bps to 3.07% (up 9bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down four bps to 3.83% (down 42bps).

Federal Reserve Credit last week declined $4.9bn to $4.451 TN. Over the past year, Fed Credit fell $17.5bn, or 0.4%. Fed Credit inflated $1.632 TN, or 58%, over the past 168 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt last week added $1.1bn to $3.267 TN. "Custody holdings" were down $3.8bn y-o-y, or 0.1%.

M2 (narrow) "money" supply gained $8.5bn to a record $12.409 TN. "Narrow money" expanded $707bn, or 6.0%, over the past year. For the week, Currency increased $2.3bn. Total Checkable Deposits fell $17.5bn, while Savings Deposits jumped $22.5bn. Small Time Deposits were little changed. Retail Money Funds were about unchanged.

Total money market fund assets jumped $13.8bn to $2.757 TN. Money Funds rose $55bn y-o-y (2.0%).

Total Commercial Paper rose $9.5bn to $1.061 TN. CP expanded $54bn y-o-y, or 5.3%.

Currency Watch:

January 25 – Financial Times (Tom Mitchell): “When the Bank of Japan’s governor said that capital controls could prove ‘useful’ to Beijing in its efforts to calm fears about China’s currency and monetary policy, he was going against international — and recent Chinese — orthodoxy. But Haruhiko Kuroda was also shining a spotlight on the impossible trinity that Beijing now faces: the ability to manage interest rates and the exchange rate while simultaneously moving towards a free capital account. Beijing officially maintains that it has no plans to roll back capital account reforms… But reluctance at the People’s Bank of China to loosen liquidity and anecdotal evidence of tighter foreign exchange management suggests that behind closed doors it, too, shares Mr Kuroda’s concerns. ‘December was a shock,’ says one person who advises Chinese policymakers. ‘The reserves loss has changed the game.’ That multibillion-dollar loss provided a graphic illustration of the cost of buoying the currency while maintaining porous capital borders. China’s foreign exchange reserves have fallen about $700bn to $3.3tn over the past year, including a record $108bn drop in December.”

January 28 – Bloomberg (Alaa Shahine): “Saudi Arabia’s central bank net foreign assets tumbled in December as the kingdom draws down on reserves amid the plunge in oil prices. Reserves fell $19.4 billion to $608.4 billion. The kingdom posted a budget deficit of about 15% of economic output in 2015.”

The U.S. dollar index was unchanged this week at 99.53 (up 0.9% y-t-d). For the week on the upside, the South African rand increased 3.5%, the Brazilian real 2.3%, the Mexican peso 1.8%, the Australian dollar 1.2%, the Canadian dollar 1.0%, the Norwegian krone 0.7%, the euro 0.3% and the Swedish krona 0.1%. For the week on the downside, the Japanese yen declined 2.0%, the Swiss franc 0.7%, the New Zealand dollar 0.1% and the British pound 0.1%. The Chinese yuan was unchanged versus the dollar.

Commodities Watch:

January 27 – Bloomberg (Bonnie Cao and Rachel Butt): “Yu Yongding, a former adviser to the People’s Bank of China, has a bold idea to stem the yuan’s slump: Let it float. Policy makers should stop intervening in the currency market and preserve foreign reserves, Yu, a former academic member of the central bank’s monetary policy committee, wrote… an opinion piece on Project Syndicate… In transitioning to the new regime, the PBOC should target the yuan against a basket of currencies within a band of 7.5% or even 15%, allowing market forces to determine the value of the exchange rate within the range, Yu said.”

January 27 – Bloomberg (Ranjeetha Pakiam): “China will press on with gold purchases this year and the central bank will probably scoop up more than 200 metric tons as the country seeks to diversify its reserves, according to an estimate from Barclays Plc. Bullion purchases by the People’s Bank of China in recent months have been very steady, which is ‘particularly impressive given that China’s total forex reserve has recorded large declines,’ analyst Feifei Li said…”

The Goldman Sachs Commodities Index rallied 3.6% (down 3.5% y-t-d). Spot Gold gained 1.8% to a three-month high $1,118 (up 5.4%). March Silver rose 1.7% to $14.26 (up 3.3%). March WTI Crude jumped $1.37 to $33.62 (down 9%). February Gasoline recovered 4.6% (down 11%), and February Natural Gas jumped 8.0% (down 1.7%). March Copper rallied 3.2% (down 3%). March Wheat increased 0.8% (up 2%). March Corn added 0.5% (up 4%).

Fixed-Income Bubble Watch:

January 23 – New York Times (Mary Williams Walsh): “Negotiations to restructure roughly $9 billion of the debt of Puerto Rico’s power company collapsed late Friday, raising the prospect of the biggest default yet in Puerto Rico’s deepening debt crisis. The creditors blamed the utility, the Puerto Rico Electric Power Authority, or Prepa, for scuttling the talks… But Prepa said it was the creditors’ fault for trying to impose a requirement that Prepa had already rejected. Prepa is one of the largest single issuers of Puerto Rico’s $72 billion in debt, most of it in the form of municipal bonds, which are widely held through mutual funds and other investment firms.”

January 24 – Financial Times (Eric Platt and Ed Crooks): “The value of debt issued by junk-rated US energy companies has plummeted to the lowest level for more than two decades, sending a warning signal about the outlook for the North American oil industry. The average high-yield energy bond has slid to just 56 cents on the dollar, below levels touched during the financial crisis in 2008-09, as investors brace for a wave of bankruptcies.”

January 25 – Bloomberg (Liz McCormick and Alexandra Scaggs): “In today’s bond market, there’s plenty of hand-wringing about liquidity, or rather, the lack of it. But it’s become so pervasive that even in the market for U.S. Treasuries -- the deepest and most liquid on the planet -- buyers are gravitating to the newest, easiest-to-sell debt. This year, investors are paying almost twice the average premium to own the most-recently auctioned 10-year notes, known as ‘on-the-run’ securities, instead of ‘off-the-run’ ones issued just a few months earlier… Part of it can be explained by the turmoil in financial markets, which has boosted demand for haven assets. At the same time, selling by emerging-market central banks, which typically own older Treasuries, to shore up their economies has also widened the gap in prices.”

January 26 – Bloomberg (Saleha Mohsin): “As some of the world’s best-known investment banks blame tougher capital rules for contributing to the lack of liquidity in financial markets, the world’s biggest sovereign wealth fund has a different take. The argument is ‘an excuse for something else,’ Oeyvind Schanke, chief investment officer of asset strategies at Norway’s $790 billion fund, said… One week after bank executives met in Davos, Switzerland…, Norway’s wealth fund is questioning a tendency to blame regulators. ‘New regulations have reduced volume on a normal day because you don’t have that type of market-making activity from the investment banks and other large players,’ Schanke said. ‘But in times of big movements they wouldn’t be there anyway. 2008 is a perfect example. You didn’t have any tough regulation in 2008, but somehow the fixed-income market froze up -- which you would have expected because this type of activity is to facilitate normal trading days.’”

Global Bubble Watch:

January 28 – Bloomberg (Sally Bakewell): “There’s been endless speculation in recent weeks about whether the U.S., and the whole world for that matter, are about to sink into recession. Underpinning much of the angst is an unprecedented $29 trillion corporate bond binge that has left many companies more indebted than ever. Whether this debt overhang proves to be a catalyst for recession or not, one thing is clear in talking to credit-market observers: It’s a problem that won’t go away any time soon. Strains are emerging in just about every corner of the global credit market. Credit-rating downgrades account for the biggest chunk of ratings actions since 2009; corporate leverage is at a 12-year high; and perhaps most worrisome, growing numbers of companies -- one third globally -- are failing to generate high enough returns on investments to cover their cost of funding. Pooled together into a single snapshot, the data points show how the seven-year-old global growth model based on cheap credit from central banks is running out of steam. ‘We’ve never been in a cycle quite like this,’ said Bonnie Baha, a money manager at DoubleLine Capital…, which oversees $80 billion. ‘It’s setting up for an unhappy turn.’”

January 28 – Financial Times (Gavin Jackson): “Global capital markets have had their slowest start to the year for more than a decade… Worldwide only $416bn of debt has been sold this year — the lowest total since the equivalent period in 2002, according to Thomson Reuters. There has been $21.7bn of new equity sold, the lowest since 2009… In the current febrile market environment, where investors have sought havens, sovereigns and institutions regarded as the strongest have continued selling debt. Governments and supranational agencies accounted for 32.6% of the market this year — the highest proportion for more than a decade. Moreover, a 10th of overall bond issuance was accounted for by one jumbo deal: the $46bn offering by brewer Anheuser-Busch InBev… In the junk bond market $10.4bn has been raised this year in 18 deals, the lowest activity since 2009…”

January 23 – Reuters: “Angela Merkel was missing from Davos this year, but the German leader's optimistic mantra ‘we can do this’ echoed through the snowy resort in the Swiss Alps. China's economic slowdown? Manageable. Plunging financial markets? Temporary. And Europe's refugee crisis? A big challenge, but one which will ultimately push the bloc's members closer together, audiences were told over and over again. Beneath the veneer of can-do optimism at the World Economic Forum, however, was a creeping concern that the politicians, diplomats and central bankers who flock each year to this gathering of the global elite are at the mercy of geopolitical and economic forces beyond their control. At the top of the lengthy list of worries was Europe, whose policymakers remain deeply divided in their approach to the refugee crisis at a time when the bloc faces a host of other threats, from Islamic extremism and the rise of far-right populists, to a possible British exit from the European Union.”

January 29 – Bloomberg (Selcuk Gokoluk): “Investors pulled money out of European corporate bond funds for an eighth week, as concerns about global growth outweigh efforts by the region’s central bank to boost investment through quantitative easing. More than $1.2 billion was withdrawn from speculative-grade funds in the week ended Jan. 27, according to a Bank of America Corp. note to clients, citing EPFR Global data. Investors took $3.5 billion from investment-grade funds. The European Central Bank’s purchases of sovereign debt are no longer driving investors into higher-yielding corporate bonds because China’s slowdown and low commodity prices have sapped appetite for risk… ‘It’s obviously not working,’ said Barnaby Martin, a European credit strategist at Bank of America. ‘We have had an outflow problem in European credit for a number of months now.’”

January 27 – Financial Times (Jonathan Wheatley and Shawn Donnan): “When Haruhiko Kuroda, governor of the Bank of Japan, suggested last week that China should use capital controls to support its currency, it was as if he had broken a taboo. Asked if she approved, Christine Lagarde, managing director of the International Monetary Fund… dodged the question — although she did agree that it would be unwise for Beijing to burn through its foreign exchange reserves to support the renminbi. Her circumspection was not surprising. Policymakers talk of capital controls at their peril: merely to mention them can send jittery investors rushing for the exit… Nevertheless, more and more policymakers are suggesting the use of unorthodox methods. Days before Mr Kuroda spoke at Davos, Agustín Carstens, the widely-respected governor of Mexico’s central bank, told the Financial Times it might soon be time for emerging market central bankers ‘to become unconventional’. The reason lies in the recent, unprecedented outflows of capital from emerging markets (EMs). The Institute of International Finance… estimates that total net capital outflows from EMs amounted to $735bn last year, the first year of net outflows since 1988.”

January 27 – Bloomberg (Aleksandra Gjorgievska and Sally Bakewell): “Bond sales by companies worldwide slowed to an 11-year low in January as investors shunned risk… About $333 billion of debt has been issued so far this month, the least for a January since 2005, when $299 billion of securities were sold… That’s despite the biggest day ever for bond sales in the U.S. on Jan. 13 when Anheuser-Busch InBev NV sold $46 billion of bonds to fund its takeover of SABMiller Plc. The deal was the second-largest dollar-denominated debt deal on record.”

January 25 – Bloomberg (Tracy Alloway): “One year ago, analysts at Bank of America Merrill Lynch drew a parallel between the subprime mortgage crash and the disorderly fall in the price of oil. Led by Chris Flanagan, a veteran of the securitization space, the team drew attention to Markit's ABX Index, better known as the mother of all synthetic subprime credit indexes… Fast-forward to today and the BofAML analysts provide an update to their previous thesis, which was that the downward spiral in the price of oil was shaping up to look a lot like the negative trend that engulfed the subprime space circa the year 2007. Here's what they say: ‘The pattern of the decline in the price of oil that began in mid-2014 is remarkably similar to the 2007-2009 pattern of the price decline of ABX, the credit derivative index that referenced subprime mortgages and, ultimately, the U.S. housing market… Both the duration of the decline (1.5+ years) and the scale of the decline (100 neighborhood starting price down to the sub-30 neighborhood) are similar. Given that both housing and oil prices were fueled to spectacular heights in the two periods by massive credit expansion, it’s probably more than just coincidence that the respective ‘bubble’ bursting patterns are so similar.’”

January 26 – Bloomberg (Chinmei Sung Regina Tan): “Taiwanese bank clients who bought leveraged structured products that bet on a rising Chinese yuan are struggling to honor losses on their positions after the currency sunk… Fitch Ratings said in December that a large drop in the yuan could see around $2 billion of losses on such notes. The weaker yuan, which has declined 6% since a surprise August devaluation, is heightening risks for Taiwanese banks as Chinese market volatility roils markets across the globe.”

U.S. Bubble Watch:

January 25 – Wall Street Journal (Richard Teitelbaum): “As global stock indexes tumble, market logic dictates companies should ramp up share repurchases. If history is any guide, that won’t happen. The irony is that companies tend to buy back shares when their coffers are full. That’s also typically when their stock prices are high—precisely when they should be selling, not buying, shares… ‘If you’re flush with cash, you may want to buy back stock; when you don’t have cash, not so much,’ said Steven Fazzari, professor of economics at Washington University… ‘It’s an interesting contradiction.’ What’s more, there are reasons to expect finance chiefs to pinch pennies now. ‘CFOs are going to be very cautious about spending the cash they have,’ said Douglas Skinner, professor of accounting at the University of Chicago’s Booth School of Business… In 2007, share repurchases hit a record $723 billion… Then the financial crisis struck In 2009… Buybacks that year fell to $155 billion.”

January 26 – Bloomberg (Sho Chandra): “Home prices in 20 U.S. cities rose at a faster pace in the year ended November, underscoring the shortage of supply amid steady demand. The S&P/Case-Shiller index of property values in 20 cities increased 5.8% from a year earlier, the biggest advance since July 2014…”

January 28 – CNBC (Tom DiChristopher): “Dealmaking in America's oil patch plunged to a five-year low in the fourth quarter as corporations preserved cash in the face of falling crude prices and tight capital markets. The U.S. energy sector announced 42 deals worth $50 million or more for a total of $31.6 billion in mergers and acquisitions in the closing months of 2015, according to PricewaterhouseCoopers. For the full year, 179 deals worth a combined $196.1 billion were announced, down from 278 deals worth $304.4 billion in 2014.”

January 25 – Bloomberg (Scott Moritz): “Sprint Corp., the nation’s fourth-largest wireless carrier, is eliminating 2,500 jobs, or about 7% of its total workforce, and closing several call centers as part of a plan to cut $2.5 billion in costs… ‘We are in the process of significantly taking costs out of the business so the transformation of the company will be sustainable for the long-term,’ the company said…”

China Bubble Watch:

January 25 – Bloomberg: “China’s capital outflows jumped in December, with the estimated 2015 total reaching $1 trillion, underscoring the scale of the battle facing policy makers trying to hold up the yuan amid slower economic growth and slumping stocks. Outflows increased to $158.7 billion in December, the second-highest monthly outflow of the year after September’s $194.3 billion… The total for the year soared more than seven times from $134.3 billion in the whole of 2014 to a record for Bloomberg Intelligence data dating back to 2006.”

January 26 – Financial Times (James Kynge): “Default risks for a pile of $15tn in Chinese corporate debt are rising to their highest levels since the 2008 financial crisis as sluggish demand, weak pricing and high leverage sap the dynamism of the country’s most powerful companies. Rating agencies that assess credit risks among China’s top corporations are predicting a jump in bond repayment defaults this year as they add more companies to their watch lists for downgrades, ratings executives say. Standard & Poor’s estimates that the number of bond defaults will rise to double digits this year, a record, up from nine last year… The rating agency has put 15% of its rated portfolio of 240 Chinese companies on watch — the most since the 2008 financial crisis and nearly double the 8% of a year ago, says Christopher Lee, S&P’s chief ratings officer for Asia-Pacific. ‘Credit quality has deteriorated further in the past four weeks,’ he says. ‘I would say that the percentage of corporates with a negative ratings outlook would be trending towards 18%. We see further pressure on ratings and outlooks for the rest of the year.’”

January 28 – Bloomberg: “China’s central bank used this week’s two money-market operations to add the most funds to the financial system in three years, helping to prevent a cash crunch as money demand picks up before the week-long Lunar New Year holiday. The People’s Bank of China said it auctioned 340 billion yuan ($52bn) of reverse-repurchase agreements on Thursday, after offering 440 billion yuan two days earlier. The week’s net injection of 590 billion yuan so far was the biggest since February 2013… Policy makers are trying to keep borrowing costs from rising as they contend with the slowest economic growth in a quarter century and record capital outflows…”

January 24 – Wall Street Journal (Lingling Wei): “China’s central bank faces a tough balancing act, trying to ease credit in the financial system without adding to pressures weakening the Chinese currency. Concerns about the yuan and the annual cash crunch ahead of next month’s Lunar New Year holiday dominated a meeting held by the People’s Bank of China on Tuesday… Central bank officials delayed using a traditional credit-easing tool for fear that it could add more downward pressure on the yuan, according to the minutes and the executives. Instead, to meet the rising cash needs from banks, the central bank turned to short-term and medium-term loan facilities to pump about 1.6 trillion yuan ($243bn) of temporary liquidity into the banking system in the past week. The decision highlights the bank’s deepening dilemma in helping to cushion the slowing Chinese economy.”

January 26 – Financial Times (James Kynge): “Over-invoicing of Chinese imports ramped up in December as capital flight intensified amid market turmoil and continued depreciation of the renminbi. Inflating the value of imports from Hong Kong to China is commonly used to move cash out of the country and the method has come back into favour as authorities in China clamp down on official channels of taking cash abroad. Imports from Hong Kong to China jumped 64% year on year in December, according to China customs data. The same numbers released by Hong Kong customs officials showed just a 0.9% increase, indicating the mainland figures were greatly overvalued.”

January 26 – Reuters (Kevin Yao): “China's state media has warned billionaire investor George Soros against betting on falls in the value of the Chinese yuan and Hong Kong dollar… ‘Soros’ challenge against the renminbi (yuan) and Hong Kong dollar is unlikely to succeed, there is no doubt about that,’ the People's Daily overseas edition said in a front-page opinion piece… The Xinhua news agency also warned against speculation on China's stocks and currency, saying that smart, far-sighted investors should seize the opportunities from China's economic restructuring. ‘Some people believe that the Chinese capital market is experiencing a major crisis, of which they try to take advantage with speculative actions and even vicious shorting activities,’ Xinhua said… China has been constantly improving its market regulatory system and legal system, it said. ‘As a result, reckless speculation and vicious shorting will face higher trading costs and possibly severe legal consequences.’”

January 26 – Bloomberg: “China’s central bank gave guidance two weeks ago to some Chinese banks in Hong Kong to suspend offshore yuan lending to curb short selling and tighten liquidity, said people with knowledge of the matter. The People’s Bank of China told banks including BOC Hong Kong (Holdings) Ltd. and Industrial & Commercial Bank of China (Asia) on Jan. 11 to curb lending unless necessary… PBOC also asked some Chinese banks and companies to collect information about short-selling orders in the offshore yuan market from Jan. 1, after noticing volatility at the end of last year, said two of the people.”

Central Bank Watch:

January 25 – Bloomberg (Alessandro Speciale and Jana Randow): “Mario Draghi hit back at critics of his policies, saying the European Central Bank must fulfill its inflation mandate in order to maintain its credibility. ‘Meeting our objective is about credibility,’ the ECB president said… ‘If a central bank sets an objective, it can’t just move the goalposts when it misses it.’ ECB policy makers have less than seven weeks until a March 10 meeting when they’ll decide whether their 1.5 trillion-euro ($1.6 trillion) bond-purchase plan and negative interest rates are enough to meet their inflation goal of just under 2%.”

Brazil Watch:

January 28 – Bloomberg (Francisco Marcelino): “Banco Bradesco SA, Latin America’s second-largest bank by market value, reported a 27% jump in provisions for bad loans in the fourth-quarter and said the total would rise again this year. The set-aside for soured debt increased to 4.19 billion reais ($1bn) in the fourth quarter from 3.31 billion reais a year earlier, Osasco, Brazil-based Bradesco said… Borrowers nationwide are having trouble paying their obligations on time as Brazil’s unemployment rate rises and the central bank boosts interest rates to tame inflation. Debt overdue more than 90 days rose to 3.4% in December from 2.7% a year earlier… At Bradesco, the figure increased to 4.1% from 3.5%.”

January 27 – Bloomberg (Ben Bartenstein): “Goldman Sachs… said the crisis in Brazil will get worse before it gets better after the bank last year warned that Latin America’s largest economy was being dragged into a depression. ‘Brazil is a mess,’ Alberto Ramos, the chief Latin America economist at Goldman Sachs, said… ‘Number 10 used to mean Pele. Now it’s inflation rate, unemployment rate and the popularity rate of the president.’”

EM Bubble Watch:

January 28 – Bloomberg (Rene Vollgraaff and Amogelang Mbatha): “South Africa’s central bank ramped up its policy tightening by raising the benchmark rate by half a percentage point, worried that inflation pressures from a weaker rand will spread more broadly in the economy. The repurchase rate was increased to 6.75%...”

January 25 – Reuters (Jason Bush and Alexander Winning): “Russia's economy contracted by 3.7% in 2015…, with a slew of activity indicators suggesting the slump is far from over. Russia is struggling to dig itself out of recession at a time when the price of oil, its main export, has seen a renewed plunge and as concerns about the global economy intensify… Retail sales were down 15.3% year-on-year in December, in line with forecasts…”

January 26 – Bloomberg (Zulfugar Agayev): “Azerbaijan shuttered almost a tenth of the nation’s lenders in the past week as authorities struggle to restore trust in the national currency after imposing capital controls and devaluing the manat twice last year. The regulator in the capital, Baku, said there’ll be more closures to come… The lenders couldn’t meet their obligations to creditors and their management wasn’t “reliable or prudential,” the central bank said… The cleanup has left Azerbaijan with 39 banks.”

Leveraged Speculation Watch:

January 29 – Bloomberg (Rachel Evans and Andrea Wong): “Hedge funds boosted wagers on yen strength to the highest since 2012 this week, just days before the Bank of Japan’s monetary policy meeting sent the currency tumbling by the most in a year. Large speculators lifted net bets on the yen to 50,026 contracts in the week ending Jan. 26, up from 37,653 a week earlier. That’s the highest since February 2012, Commodity Futures Trading Commission data show.”

January 27 – Bloomberg (Nishant Kumar): “The number of hedge fund companies started in 2015 dropped to 223, the lowest since 2002, according to… industry tracker Preqin. Volatile markets combined with slumps in commodities and equities to undermine the confidence of potential new entrants, Preqin said in its global hedge fund report released Tuesday. As many as 6,020 hedge fund firms managed $3.2 trillion in assets globally.”

January 27 – Bloomberg (Anna-Louise Jackson): “Remember how investors piled into financial stocks betting higher interest rates would stoke an earnings renaissance? A month later, that big long is a big short. The Standard & Poor’s 500 Financials Index has tumbled almost 12% in 2016, putting it on track for its worst month in almost seven years. The group… is neck-and-neck with commodity stocks for the biggest slide among 10 industries since Federal Reserve policy makers met Dec. 16… It’s been a rapid change of heart since then… Financials were the most-favored group among large-cap managers as of Oct. 31, according to… Goldman Sachs… An exchange-traded fund tracking the stocks attracted the second-highest cash flows in the month leading up to the rate liftoff. Now those expectations may be making the rout worse… The KBW Bank Index, which includes several regional institutions, has slumped almost 24% from a July high…”

Europe Watch:

January 26 – Bloomberg (Arne Delfs and Patrick Donahue): “German Chancellor Angela Merkel’s Bavarian allies risk breaking up her coalition over refugee policy, a senior Social Democratic lawmaker said, signaling growing tension within her government as Europe struggles to limit the influx of asylum seekers. Thomas Oppermann, the Social Democratic Party’s lower-house floor leader, said the threat would arise if the Christian Social Union pursues its challenge against Merkel’s open-door policy in Germany’s highest court. While both parties are partners in Merkel’s government, CSU head Horst Seehofer has pressed the chancellor for months to reverse her stance and cap migration.”

January 25 – Bloomberg (Luca Casiraghi and Paula Sambo): “European investors focused on risks from China to the east should also be looking west. More than half of the region’s worst-performing junk bonds in euros over the past year were sold by companies with operations in Brazil, exceeding those with even indirect exposure to China… Bonds sold by French retailer Casino Guichard-Perrachon SA and Spanish engineering firm Grupo Isolux Corsan SA, both with links to Latin America’s largest economy, are among 10 billion euros ($11bn) of securities with the biggest losses. European firms piled into emerging markets as they sought to mitigate the sovereign debt crisis at home.”

Japan Watch:

January 29 – Financial Times (Robin Harding): “When all the data pointed to a monetary easing by the Bank of Japan last October, governor Haruhiko Kuroda sat on his hands and was adamant about one thing in particular: there was no chance of cutting short-term interest rates. ‘We have not considered an [interest on reserves] cut and I see no likelihood of changing this view in the near future,’ said Mr Kuroda, whose tenure at the BoJ is defined by his effort to escape Japan’s two decades of on-and-off deflation. On Friday, Mr Kuroda surprised everyone by cutting Japanese interest rates to minus 0.1%.”

Geopolitical Watch:

January 28 – Wall Street Journal (Alan Culllison): “Libya is emerging as a new destination of choice for extremists, as both Islamic State and al Qaeda have used the chaos since the overthrow of Moammar Gadhafi to seize territory and parts of the economy, a report by a security consulting firm said. Wednesday’s report warned that Libya could become a dangerous new base for terrorist groups because of the country’s ungoverned hinterlands, long, porous borders and huge oil reserves. Already, the absence of law and proliferation of weapons and violence in Libya ‘have allowed violent extremist groups such as the Islamic State and al Qaeda to thrive,’ said the report by The Soufan Group… The report noted that both groups ‘are both utilizing Libya as a safe haven from which to launch operations against neighboring countries.’”

Weekly Commentary: About Resuscitation and Reinstatement

“Shock and awe” is not quite what it used to be. It still carries a punch, especially for traders long the Japanese yen or short EM and stocks. The yen surged 2% against the dollar (more vs. EM) Friday on the Bank of Japan’s (BOJ) surprising move to negative interest rates. BOJ Governor Haruhiko Kuroda has a penchant for startling the markets. Less than two weeks ago he stated that the BOJ would not consider adopting negative rates. It wasn’t all that long ago that central bankers treasured credibility.

For seven years, I’ve viewed global rate policies akin to John Law’s (1720 France) desperate move to hold his faltering paper money and Credit scheme (Mississippi Bubble period) together by devaluing competing hard currencies (zero and now negative rates devalue “money”). It somewhat delayed the devastating day of reckoning. Postponement made it better for a fortunate few and a lot worse for everyone else.

Last week saw dovish crisis management vociferation from the ECB’s Draghi. Now the BOJ adopts a crisis management stance. The week also had talk of some deal to reduce global crude supply. Meanwhile, the Bank of China injected a weekly record $105 billion of new liquidity. Nonetheless, the Shanghai Composite sank 6.1% to a 13-month low. There was desperation in the air – along with a heck of a short squeeze and general market mayhem.

Markets these days have every reason to question the efficacy of global monetary management. It’s certainly reasonable to be skeptical of OPEC - too many producers desperate for liquidity. The Chinese are flailing - conspicuously. As for the BOJ’s move, it does confirm the gravity of global financial instability. It as well supports the view that, even within the central bank community, confidence in the benefits of QE has waned.

After three years of unthinkable BOJ government debt purchases, Japanese inflation expectations have receded and the economy has weakened. Lowering rates slightly to negative 10 bps (for new reserve deposits) passed by a slim five to four vote margin. With the historic global QE experiment having badly strayed from expectations, there is today no consensus as to what to try next.

Kuroda remains keenly focused on the yen. After orchestrating a major currency devaluation, there now seems little tolerance for even a modest rally. The popular consensus view sees BOJ policymaking through the perspective of competitive currency devaluation, with the objectives of bolstering exports and countering deflationary forces. I suspect Kuroda’s (fresh from Davos) current yen fixation is more out of fear that a strengthening Japanese currency risks spurring unwinds of myriad variations of yen “carry trades” (short/borrowing in yen to finance higher-yielding securities globally) – de-leveraging that is in the process of wreaking havoc on global securities markets.

Notable Bloomberg headlines: (Thursday) “S&P 1500 Short Interest Is at Its Highest Level in Three Years.” (Friday): “Hedge Funds Boost Yen Bets to 4-Year High Days Before BOJ Shock.”

Bearish sentiment is elevated. Recent global tumult has spurred significant amounts of hedging across the financial markets. And, clearly, betting on “risk off” has of late proved rewarding (and gaining adherents). Draghi and Kuroda retain the power to incite short squeezes and the reversal of risk hedges. And central bankers can prod short-term traders to cover shorts and return to the long side. Yet the key issue is whether global central banks can propel another rally such as the 12% multi-week gains experienced off of August lows. Can policy measures resuscitate bull market psychology and reestablish the global Credit boom?

Subtly perhaps, yet the world has changed meaningfully in the five short months since the August “flash crash”. After exerting intense pressure and direct threats – not to mention the “national team’s” hundreds of billions of market support - Chinese equities traded this week below August lows. It’s worth noting that Hong Kong’s Hang Seng China Financials Index now trades significantly below August lows.

Bank stock weakness is anything but an Asian phenomenon. European bank stocks this week dropped to three-year lows. Even with Friday’s 2.7% rally, U.S. bank stocks (BKX) declined 12.6% in January (broker/dealers down 15.3%). European banks were hit even harder. The STOXX Europe 600 Bank Index has a y-t-d loss of 14.6%. This index is 31% below August highs and about 11% below August lows.

January 28 – Bloomberg (Sonia Sirletti and John Follain): “Banca Monte dei Paschi di Siena SpA led a slump in Italian banking shares after Italy’s long-sought deal on bad debts with the European Union disappointed investors. Monte dei Paschi, bailed out twice since 2009, fell 10%... in Milan trading, bringing losses this year to 45%. The eight biggest decliners among the 46 members of the Stoxx Europe 600 Banks Index were Italian lenders on Thursday. The agreement struck with the EU, which allows banks to offload soured loans after buying a state guarantee, is unlikely to clean up the financial system as fast as some in the markets had hoped, investors said. The plan stops well short of the cleanups organized in Spain and Ireland during the financial crisis. ‘The uncertainty in the Italian banking system will persist,’ said Emanuele Vizzini, who manages 3.5 billion euros ($3.8bn) as chief investment officer at Investitori Sgr in Milan. ‘The deal may help banks to offload part of their bad debt, but for sure doesn’t solve the problem, in particular for the weakest banks, which may need recapitalization.’”

Even with Friday’s 3.3% rally, the FTSE Italia All-Shares Bank index lost 22.8% in January. UniCredit, Italy’s largest bank, has a y-t-d decline of 31%. One is left to ponder where Italian sovereign yields would trade these days without Draghi.

When market optimism prevails and the world is readily embracing risk and leverage, the greatest speculative returns are amassed playing “at the margin.” “Risk on” ensures the perception of liquidity abundance, along with faith in the power of central banks and their monetary tools. In a world where liquidity is flowing, Credit is expanding and markets are bubbling, European securities markets provide attractive targets. And booming markets feed the perception that Europe’s economic recovery is sound and sustainable. It all became powerfully self-reinforcing.

But when cycles shift it’s those operating “at the margin” – i.e. junk bonds and high-beta stocks; leveraged companies, industries, economies and regions; leveraged financial institutions – that have the rug is so abruptly yanked out from under stability.

The thesis is that a momentous inflection point has been reached in a multi-decade global Credit cycle. A Monday Bloomberg headline: “So Yes, the Oil Crash Looks a Lot Like Subprime.” Others have noted the recent tight correlations between crude and equities prices. Let me suggest that the oil market provides the best proxy for the global Credit cycle. And it’s faltering global Credit that has been weighing harshly on commodities, equities and corporate Credit, while the bullish consensus bemoans that stocks have been way overreacting to modest economic slowdowns in the U.S. and throughout Europe.

A few months back the global bull market still appeared largely intact. Markets remained confident in central bankers and their monetary tools. Debt issuance was booming and the Credit Cycle seemed to sustain an upward trajectory. The global banking industry enjoyed an outwardly robust appearance – and was even to benefit from rate normalization in the U.S. and elsewhere. “Risk on” was secure, or so it appeared.

But it was the last (policy-induced) gasp of speculative excess, a “blow off” top that enticed more “money” into “developed world” stocks and corporate Credit. Meanwhile, finance was fleeing commodities, high-yield, China and EM even more aggressively. In reality, the Credit Cycle had turned – QE, negative rates, China “national team,” “whatever it takes” Draghi and a dovish Fed notwithstanding.

In newfound global Credit Cycle realities, highly leveraged China is an unfolding pileup. Vulnerability has precipitously emerged throughout the global banking system. European banks – luxuriating so popularly “at the margin” until recently – again appear acutely fragile. Recalling 2012, the European periphery is back in the crosshairs. A “bad bank” plan for the troubled Italian banking sector – that seemed doable back during “risk on” – seems less than workable with a backdrop of “risk off,” speculative de-leveraging and faltering global Credit.

Italy’s financial institutions and economy are acutely susceptible to weak securities markets and tightened Credit conditions. Italy is not alone. Greek yields surged 180 bps this month. Portuguese 10-year yields jumped 34 bps. For more than three years, “whatever it takes” monetary management has inflated securities market Bubbles. In the process, Bubble Dynamics have work surreptitiously to inflate financial and economic vulnerabilities.

It’s worth noting that Italian equities dropped 2.0% this week. Friday from Bloomberg: “Eighth Week of Europe Corporate-Debt Outflows Shows Limits of QE.” According to the article (Selcuk Gokoluk), $3.5 billion flowed out of investment-grade funds the past week. There is also heightened concern for the German economy’s exposure to China, not to mention the pressing immigrant issue and attendant political instability. There is as well increased focus on European financial and economic exposure to EM. European bank stock performance has been telling. Of the behemoth European banks, Deutsche Bank lost almost 26% of its value in January. BNP Paribas was down 16%, Credit Agricole 15%, Barclays 18%, Societe Generale 17% and Royal Bank of Scotland 17%.

This week saw 10-year bund yields sink to one-year lows. UK Gilt yields dropped to 10-month lows. It’s also worth noting the equities markets benefitting the most from Kuroda’s surprise and speculative dynamics. Brazilian equities gained 6.2% this week, with Mexico up 4.8%, Russia 3.9% and Turkey 4.6%. In the currencies, the beneficiaries were Brazil (up 2.3% this week), Mexico (2.8%), Russia (3.3%), South Africa (3.5%) and Malaysia (3.4%). It would appear that all the big gainers had oversized short positions.

I have been programmed over the years to take every short squeeze seriously. They often take on a life of their own. But back to the pressing issue: Can policy measures resuscitate bull market psychology and reestablish the global Credit boom? I do not expect either a resurgent bull market or a reemerging Credit boom. In truth, negative rates are a feeble tool in the face of global de-risking/de-leveraging dynamics. They are not confidence inspiring.

Dovish policy surprises do still afford a capable weapon to clobber those positioning for “risk off,” in the process somewhat restraining the forces of market dislocation. However, inciting squeezes and administering market punishment are not conducive to market stability or confidence. There’s a strong argument to be made that such a backdrop only compounds the challenge for the struggling global leveraged speculating community. Mainly, negative rates in theory are a tool to spur flows into risk assets and supposedly bolster securities markets. The irony is that negative rates are damaging to bank profitability. And as the Credit downturn gathers momentum, banking profits – and solvency – will be a pressing systemic issue.



For the Week:

The S&P500 rallied 1.7% (down 5.1% y-t-d), and the Dow jumped 2.3% (down 5.5%). The Utilities surged 3.9% (up 5.3%). The Banks rose 2.6% (down 12.6%), while the Broker/Dealers slipped 0.3% (down 15.3%). The Transports rallied 1.9% (down 8.0%). The S&P 400 Midcaps gained 2.3% (down 5.8%), and the small cap Russell 2000 recovered 1.4% (down 8.8%). The Nasdaq100 increased 0.5% (down 6.8%), while the Morgan Stanley High Tech index slipped 0.4% (down 9.1%). The Semiconductors jumped 2.6% (down 7.5%). The Biotechs were slammed 9.6% (down 24%). With bullion up $20, the HUI gold index surged 13.1% (up 8.7%).

Three-month Treasury bill rates ended the week at 31 bps. Two-year government yields fell 10 bps to 0.77% (down 28bps y-t-d). Five-year T-note yields sank 15 bps to 1.33% (down 42bps). Ten-year Treasury yields dropped 13 bps to 1.92% (down 33bps). Long bond yields fell eight bps to 2.74% (down 28bps).

Greek 10-year yields jumped 33 bps to 9.12% (up 180bps y-t-d). Ten-year Portuguese yields dropped 15 bps to 2.86% (up 34bps). Italian 10-year yields fell 16 bps to 1.41% (down 18bps). Spain's 10-year yields dropped 21 bps to 1.51% (down 26bps). German bund yields declined 16 bps to a nine-month low 0.32% (down 30bps). French yields fell 17 bps to 0.63% (down 36bps). The French to German 10-year bond spread narrowed one to 31 bps. U.K. 10-year gilt yields declined 15 bps to 1.56% (down 40bps).

Japan's Nikkei equities index rallied 3.3% (down 8.0% y-t-d). Japanese 10-year "JGB" yields dropped 13 bps to a record low 0.09% (down 17bps y-t-d). The German DAX equities index increased 0.3% (down 8.8%). Spain's IBEX 35 equities index recovered 1.1% (down 7.6%). Italy's FTSE MIB index fell 2.0% (down 12.9%). EM equities were mostly higher. Brazil's Bovespa index surged 6.2% (down 5.8%). Mexico's Bolsa jumped 4.8% (up 1.5%). South Korea's Kospi index rallied 1.7% (down 2.5%). India’s Sensex equities index recovered 1.8% (down 4.8%). China’s Shanghai Exchange sank another 6.1% (down 22.6%). Turkey's Borsa Istanbul National 100 index jumped 4.6% (up 2.4%). Russia's MICEX equities index rose 3.9% (up 1.3%).

Junk funds saw inflows of $883 million (from Lipper). Notably, investment-grade bond funds saw their tenth consecutive week of outflows ($1.187bn).

Freddie Mac 30-year fixed mortgage rates slipped two bps to 3.79% (up 13bps y-o-y). Fifteen-year rates declined three bps to 3.07% (up 9bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down four bps to 3.83% (down 42bps).

Federal Reserve Credit last week declined $4.9bn to $4.451 TN. Over the past year, Fed Credit fell $17.5bn, or 0.4%. Fed Credit inflated $1.632 TN, or 58%, over the past 168 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt last week added $1.1bn to $3.267 TN. "Custody holdings" were down $3.8bn y-o-y, or 0.1%.

M2 (narrow) "money" supply gained $8.5bn to a record $12.409 TN. "Narrow money" expanded $707bn, or 6.0%, over the past year. For the week, Currency increased $2.3bn. Total Checkable Deposits fell $17.5bn, while Savings Deposits jumped $22.5bn. Small Time Deposits were little changed. Retail Money Funds were about unchanged.

Total money market fund assets jumped $13.8bn to $2.757 TN. Money Funds rose $55bn y-o-y (2.0%).

Total Commercial Paper rose $9.5bn to $1.061 TN. CP expanded $54bn y-o-y, or 5.3%.

Currency Watch:

January 25 – Financial Times (Tom Mitchell): “When the Bank of Japan’s governor said that capital controls could prove ‘useful’ to Beijing in its efforts to calm fears about China’s currency and monetary policy, he was going against international — and recent Chinese — orthodoxy. But Haruhiko Kuroda was also shining a spotlight on the impossible trinity that Beijing now faces: the ability to manage interest rates and the exchange rate while simultaneously moving towards a free capital account. Beijing officially maintains that it has no plans to roll back capital account reforms… But reluctance at the People’s Bank of China to loosen liquidity and anecdotal evidence of tighter foreign exchange management suggests that behind closed doors it, too, shares Mr Kuroda’s concerns. ‘December was a shock,’ says one person who advises Chinese policymakers. ‘The reserves loss has changed the game.’ That multibillion-dollar loss provided a graphic illustration of the cost of buoying the currency while maintaining porous capital borders. China’s foreign exchange reserves have fallen about $700bn to $3.3tn over the past year, including a record $108bn drop in December.”

January 28 – Bloomberg (Alaa Shahine): “Saudi Arabia’s central bank net foreign assets tumbled in December as the kingdom draws down on reserves amid the plunge in oil prices. Reserves fell $19.4 billion to $608.4 billion. The kingdom posted a budget deficit of about 15% of economic output in 2015.”

The U.S. dollar index was unchanged this week at 99.53 (up 0.9% y-t-d). For the week on the upside, the South African rand increased 3.5%, the Brazilian real 2.3%, the Mexican peso 1.8%, the Australian dollar 1.2%, the Canadian dollar 1.0%, the Norwegian krone 0.7%, the euro 0.3% and the Swedish krona 0.1%. For the week on the downside, the Japanese yen declined 2.0%, the Swiss franc 0.7%, the New Zealand dollar 0.1% and the British pound 0.1%. The Chinese yuan was unchanged versus the dollar.

Commodities Watch:

January 27 – Bloomberg (Bonnie Cao and Rachel Butt): “Yu Yongding, a former adviser to the People’s Bank of China, has a bold idea to stem the yuan’s slump: Let it float. Policy makers should stop intervening in the currency market and preserve foreign reserves, Yu, a former academic member of the central bank’s monetary policy committee, wrote… an opinion piece on Project Syndicate… In transitioning to the new regime, the PBOC should target the yuan against a basket of currencies within a band of 7.5% or even 15%, allowing market forces to determine the value of the exchange rate within the range, Yu said.”

January 27 – Bloomberg (Ranjeetha Pakiam): “China will press on with gold purchases this year and the central bank will probably scoop up more than 200 metric tons as the country seeks to diversify its reserves, according to an estimate from Barclays Plc. Bullion purchases by the People’s Bank of China in recent months have been very steady, which is ‘particularly impressive given that China’s total forex reserve has recorded large declines,’ analyst Feifei Li said…”

The Goldman Sachs Commodities Index rallied 3.6% (down 3.5% y-t-d). Spot Gold gained 1.8% to a three-month high $1,118 (up 5.4%). March Silver rose 1.7% to $14.26 (up 3.3%). March WTI Crude jumped $1.37 to $33.62 (down 9%). February Gasoline recovered 4.6% (down 11%), and February Natural Gas jumped 8.0% (down 1.7%). March Copper rallied 3.2% (down 3%). March Wheat increased 0.8% (up 2%). March Corn added 0.5% (up 4%).

Fixed-Income Bubble Watch:

January 23 – New York Times (Mary Williams Walsh): “Negotiations to restructure roughly $9 billion of the debt of Puerto Rico’s power company collapsed late Friday, raising the prospect of the biggest default yet in Puerto Rico’s deepening debt crisis. The creditors blamed the utility, the Puerto Rico Electric Power Authority, or Prepa, for scuttling the talks… But Prepa said it was the creditors’ fault for trying to impose a requirement that Prepa had already rejected. Prepa is one of the largest single issuers of Puerto Rico’s $72 billion in debt, most of it in the form of municipal bonds, which are widely held through mutual funds and other investment firms.”

January 24 – Financial Times (Eric Platt and Ed Crooks): “The value of debt issued by junk-rated US energy companies has plummeted to the lowest level for more than two decades, sending a warning signal about the outlook for the North American oil industry. The average high-yield energy bond has slid to just 56 cents on the dollar, below levels touched during the financial crisis in 2008-09, as investors brace for a wave of bankruptcies.”

January 25 – Bloomberg (Liz McCormick and Alexandra Scaggs): “In today’s bond market, there’s plenty of hand-wringing about liquidity, or rather, the lack of it. But it’s become so pervasive that even in the market for U.S. Treasuries -- the deepest and most liquid on the planet -- buyers are gravitating to the newest, easiest-to-sell debt. This year, investors are paying almost twice the average premium to own the most-recently auctioned 10-year notes, known as ‘on-the-run’ securities, instead of ‘off-the-run’ ones issued just a few months earlier… Part of it can be explained by the turmoil in financial markets, which has boosted demand for haven assets. At the same time, selling by emerging-market central banks, which typically own older Treasuries, to shore up their economies has also widened the gap in prices.”

January 26 – Bloomberg (Saleha Mohsin): “As some of the world’s best-known investment banks blame tougher capital rules for contributing to the lack of liquidity in financial markets, the world’s biggest sovereign wealth fund has a different take. The argument is ‘an excuse for something else,’ Oeyvind Schanke, chief investment officer of asset strategies at Norway’s $790 billion fund, said… One week after bank executives met in Davos, Switzerland…, Norway’s wealth fund is questioning a tendency to blame regulators. ‘New regulations have reduced volume on a normal day because you don’t have that type of market-making activity from the investment banks and other large players,’ Schanke said. ‘But in times of big movements they wouldn’t be there anyway. 2008 is a perfect example. You didn’t have any tough regulation in 2008, but somehow the fixed-income market froze up -- which you would have expected because this type of activity is to facilitate normal trading days.’”

Global Bubble Watch:

January 28 – Bloomberg (Sally Bakewell): “There’s been endless speculation in recent weeks about whether the U.S., and the whole world for that matter, are about to sink into recession. Underpinning much of the angst is an unprecedented $29 trillion corporate bond binge that has left many companies more indebted than ever. Whether this debt overhang proves to be a catalyst for recession or not, one thing is clear in talking to credit-market observers: It’s a problem that won’t go away any time soon. Strains are emerging in just about every corner of the global credit market. Credit-rating downgrades account for the biggest chunk of ratings actions since 2009; corporate leverage is at a 12-year high; and perhaps most worrisome, growing numbers of companies -- one third globally -- are failing to generate high enough returns on investments to cover their cost of funding. Pooled together into a single snapshot, the data points show how the seven-year-old global growth model based on cheap credit from central banks is running out of steam. ‘We’ve never been in a cycle quite like this,’ said Bonnie Baha, a money manager at DoubleLine Capital…, which oversees $80 billion. ‘It’s setting up for an unhappy turn.’”

January 28 – Financial Times (Gavin Jackson): “Global capital markets have had their slowest start to the year for more than a decade… Worldwide only $416bn of debt has been sold this year — the lowest total since the equivalent period in 2002, according to Thomson Reuters. There has been $21.7bn of new equity sold, the lowest since 2009… In the current febrile market environment, where investors have sought havens, sovereigns and institutions regarded as the strongest have continued selling debt. Governments and supranational agencies accounted for 32.6% of the market this year — the highest proportion for more than a decade. Moreover, a 10th of overall bond issuance was accounted for by one jumbo deal: the $46bn offering by brewer Anheuser-Busch InBev… In the junk bond market $10.4bn has been raised this year in 18 deals, the lowest activity since 2009…”

January 23 – Reuters: “Angela Merkel was missing from Davos this year, but the German leader's optimistic mantra ‘we can do this’ echoed through the snowy resort in the Swiss Alps. China's economic slowdown? Manageable. Plunging financial markets? Temporary. And Europe's refugee crisis? A big challenge, but one which will ultimately push the bloc's members closer together, audiences were told over and over again. Beneath the veneer of can-do optimism at the World Economic Forum, however, was a creeping concern that the politicians, diplomats and central bankers who flock each year to this gathering of the global elite are at the mercy of geopolitical and economic forces beyond their control. At the top of the lengthy list of worries was Europe, whose policymakers remain deeply divided in their approach to the refugee crisis at a time when the bloc faces a host of other threats, from Islamic extremism and the rise of far-right populists, to a possible British exit from the European Union.”

January 29 – Bloomberg (Selcuk Gokoluk): “Investors pulled money out of European corporate bond funds for an eighth week, as concerns about global growth outweigh efforts by the region’s central bank to boost investment through quantitative easing. More than $1.2 billion was withdrawn from speculative-grade funds in the week ended Jan. 27, according to a Bank of America Corp. note to clients, citing EPFR Global data. Investors took $3.5 billion from investment-grade funds. The European Central Bank’s purchases of sovereign debt are no longer driving investors into higher-yielding corporate bonds because China’s slowdown and low commodity prices have sapped appetite for risk… ‘It’s obviously not working,’ said Barnaby Martin, a European credit strategist at Bank of America. ‘We have had an outflow problem in European credit for a number of months now.’”

January 27 – Financial Times (Jonathan Wheatley and Shawn Donnan): “When Haruhiko Kuroda, governor of the Bank of Japan, suggested last week that China should use capital controls to support its currency, it was as if he had broken a taboo. Asked if she approved, Christine Lagarde, managing director of the International Monetary Fund… dodged the question — although she did agree that it would be unwise for Beijing to burn through its foreign exchange reserves to support the renminbi. Her circumspection was not surprising. Policymakers talk of capital controls at their peril: merely to mention them can send jittery investors rushing for the exit… Nevertheless, more and more policymakers are suggesting the use of unorthodox methods. Days before Mr Kuroda spoke at Davos, Agustín Carstens, the widely-respected governor of Mexico’s central bank, told the Financial Times it might soon be time for emerging market central bankers ‘to become unconventional’. The reason lies in the recent, unprecedented outflows of capital from emerging markets (EMs). The Institute of International Finance… estimates that total net capital outflows from EMs amounted to $735bn last year, the first year of net outflows since 1988.”

January 27 – Bloomberg (Aleksandra Gjorgievska and Sally Bakewell): “Bond sales by companies worldwide slowed to an 11-year low in January as investors shunned risk… About $333 billion of debt has been issued so far this month, the least for a January since 2005, when $299 billion of securities were sold… That’s despite the biggest day ever for bond sales in the U.S. on Jan. 13 when Anheuser-Busch InBev NV sold $46 billion of bonds to fund its takeover of SABMiller Plc. The deal was the second-largest dollar-denominated debt deal on record.”

January 25 – Bloomberg (Tracy Alloway): “One year ago, analysts at Bank of America Merrill Lynch drew a parallel between the subprime mortgage crash and the disorderly fall in the price of oil. Led by Chris Flanagan, a veteran of the securitization space, the team drew attention to Markit's ABX Index, better known as the mother of all synthetic subprime credit indexes… Fast-forward to today and the BofAML analysts provide an update to their previous thesis, which was that the downward spiral in the price of oil was shaping up to look a lot like the negative trend that engulfed the subprime space circa the year 2007. Here's what they say: ‘The pattern of the decline in the price of oil that began in mid-2014 is remarkably similar to the 2007-2009 pattern of the price decline of ABX, the credit derivative index that referenced subprime mortgages and, ultimately, the U.S. housing market… Both the duration of the decline (1.5+ years) and the scale of the decline (100 neighborhood starting price down to the sub-30 neighborhood) are similar. Given that both housing and oil prices were fueled to spectacular heights in the two periods by massive credit expansion, it’s probably more than just coincidence that the respective ‘bubble’ bursting patterns are so similar.’”

January 26 – Bloomberg (Chinmei Sung Regina Tan): “Taiwanese bank clients who bought leveraged structured products that bet on a rising Chinese yuan are struggling to honor losses on their positions after the currency sunk… Fitch Ratings said in December that a large drop in the yuan could see around $2 billion of losses on such notes. The weaker yuan, which has declined 6% since a surprise August devaluation, is heightening risks for Taiwanese banks as Chinese market volatility roils markets across the globe.”

U.S. Bubble Watch:

January 25 – Wall Street Journal (Richard Teitelbaum): “As global stock indexes tumble, market logic dictates companies should ramp up share repurchases. If history is any guide, that won’t happen. The irony is that companies tend to buy back shares when their coffers are full. That’s also typically when their stock prices are high—precisely when they should be selling, not buying, shares… ‘If you’re flush with cash, you may want to buy back stock; when you don’t have cash, not so much,’ said Steven Fazzari, professor of economics at Washington University… ‘It’s an interesting contradiction.’ What’s more, there are reasons to expect finance chiefs to pinch pennies now. ‘CFOs are going to be very cautious about spending the cash they have,’ said Douglas Skinner, professor of accounting at the University of Chicago’s Booth School of Business… In 2007, share repurchases hit a record $723 billion… Then the financial crisis struck In 2009… Buybacks that year fell to $155 billion.”

January 26 – Bloomberg (Sho Chandra): “Home prices in 20 U.S. cities rose at a faster pace in the year ended November, underscoring the shortage of supply amid steady demand. The S&P/Case-Shiller index of property values in 20 cities increased 5.8% from a year earlier, the biggest advance since July 2014…”

January 28 – CNBC (Tom DiChristopher): “Dealmaking in America's oil patch plunged to a five-year low in the fourth quarter as corporations preserved cash in the face of falling crude prices and tight capital markets. The U.S. energy sector announced 42 deals worth $50 million or more for a total of $31.6 billion in mergers and acquisitions in the closing months of 2015, according to PricewaterhouseCoopers. For the full year, 179 deals worth a combined $196.1 billion were announced, down from 278 deals worth $304.4 billion in 2014.”

January 25 – Bloomberg (Scott Moritz): “Sprint Corp., the nation’s fourth-largest wireless carrier, is eliminating 2,500 jobs, or about 7% of its total workforce, and closing several call centers as part of a plan to cut $2.5 billion in costs… ‘We are in the process of significantly taking costs out of the business so the transformation of the company will be sustainable for the long-term,’ the company said…”

China Bubble Watch:

January 25 – Bloomberg: “China’s capital outflows jumped in December, with the estimated 2015 total reaching $1 trillion, underscoring the scale of the battle facing policy makers trying to hold up the yuan amid slower economic growth and slumping stocks. Outflows increased to $158.7 billion in December, the second-highest monthly outflow of the year after September’s $194.3 billion… The total for the year soared more than seven times from $134.3 billion in the whole of 2014 to a record for Bloomberg Intelligence data dating back to 2006.”

January 26 – Financial Times (James Kynge): “Default risks for a pile of $15tn in Chinese corporate debt are rising to their highest levels since the 2008 financial crisis as sluggish demand, weak pricing and high leverage sap the dynamism of the country’s most powerful companies. Rating agencies that assess credit risks among China’s top corporations are predicting a jump in bond repayment defaults this year as they add more companies to their watch lists for downgrades, ratings executives say. Standard & Poor’s estimates that the number of bond defaults will rise to double digits this year, a record, up from nine last year… The rating agency has put 15% of its rated portfolio of 240 Chinese companies on watch — the most since the 2008 financial crisis and nearly double the 8% of a year ago, says Christopher Lee, S&P’s chief ratings officer for Asia-Pacific. ‘Credit quality has deteriorated further in the past four weeks,’ he says. ‘I would say that the percentage of corporates with a negative ratings outlook would be trending towards 18%. We see further pressure on ratings and outlooks for the rest of the year.’”

January 28 – Bloomberg: “China’s central bank used this week’s two money-market operations to add the most funds to the financial system in three years, helping to prevent a cash crunch as money demand picks up before the week-long Lunar New Year holiday. The People’s Bank of China said it auctioned 340 billion yuan ($52bn) of reverse-repurchase agreements on Thursday, after offering 440 billion yuan two days earlier. The week’s net injection of 590 billion yuan so far was the biggest since February 2013… Policy makers are trying to keep borrowing costs from rising as they contend with the slowest economic growth in a quarter century and record capital outflows…”

January 24 – Wall Street Journal (Lingling Wei): “China’s central bank faces a tough balancing act, trying to ease credit in the financial system without adding to pressures weakening the Chinese currency. Concerns about the yuan and the annual cash crunch ahead of next month’s Lunar New Year holiday dominated a meeting held by the People’s Bank of China on Tuesday… Central bank officials delayed using a traditional credit-easing tool for fear that it could add more downward pressure on the yuan, according to the minutes and the executives. Instead, to meet the rising cash needs from banks, the central bank turned to short-term and medium-term loan facilities to pump about 1.6 trillion yuan ($243bn) of temporary liquidity into the banking system in the past week. The decision highlights the bank’s deepening dilemma in helping to cushion the slowing Chinese economy.”

January 26 – Financial Times (James Kynge): “Over-invoicing of Chinese imports ramped up in December as capital flight intensified amid market turmoil and continued depreciation of the renminbi. Inflating the value of imports from Hong Kong to China is commonly used to move cash out of the country and the method has come back into favour as authorities in China clamp down on official channels of taking cash abroad. Imports from Hong Kong to China jumped 64% year on year in December, according to China customs data. The same numbers released by Hong Kong customs officials showed just a 0.9% increase, indicating the mainland figures were greatly overvalued.”

January 26 – Reuters (Kevin Yao): “China's state media has warned billionaire investor George Soros against betting on falls in the value of the Chinese yuan and Hong Kong dollar… ‘Soros’ challenge against the renminbi (yuan) and Hong Kong dollar is unlikely to succeed, there is no doubt about that,’ the People's Daily overseas edition said in a front-page opinion piece… The Xinhua news agency also warned against speculation on China's stocks and currency, saying that smart, far-sighted investors should seize the opportunities from China's economic restructuring. ‘Some people believe that the Chinese capital market is experiencing a major crisis, of which they try to take advantage with speculative actions and even vicious shorting activities,’ Xinhua said… China has been constantly improving its market regulatory system and legal system, it said. ‘As a result, reckless speculation and vicious shorting will face higher trading costs and possibly severe legal consequences.’”

January 26 – Bloomberg: “China’s central bank gave guidance two weeks ago to some Chinese banks in Hong Kong to suspend offshore yuan lending to curb short selling and tighten liquidity, said people with knowledge of the matter. The People’s Bank of China told banks including BOC Hong Kong (Holdings) Ltd. and Industrial & Commercial Bank of China (Asia) on Jan. 11 to curb lending unless necessary… PBOC also asked some Chinese banks and companies to collect information about short-selling orders in the offshore yuan market from Jan. 1, after noticing volatility at the end of last year, said two of the people.”

Central Bank Watch:

January 25 – Bloomberg (Alessandro Speciale and Jana Randow): “Mario Draghi hit back at critics of his policies, saying the European Central Bank must fulfill its inflation mandate in order to maintain its credibility. ‘Meeting our objective is about credibility,’ the ECB president said… ‘If a central bank sets an objective, it can’t just move the goalposts when it misses it.’ ECB policy makers have less than seven weeks until a March 10 meeting when they’ll decide whether their 1.5 trillion-euro ($1.6 trillion) bond-purchase plan and negative interest rates are enough to meet their inflation goal of just under 2%.”

Brazil Watch:

January 28 – Bloomberg (Francisco Marcelino): “Banco Bradesco SA, Latin America’s second-largest bank by market value, reported a 27% jump in provisions for bad loans in the fourth-quarter and said the total would rise again this year. The set-aside for soured debt increased to 4.19 billion reais ($1bn) in the fourth quarter from 3.31 billion reais a year earlier, Osasco, Brazil-based Bradesco said… Borrowers nationwide are having trouble paying their obligations on time as Brazil’s unemployment rate rises and the central bank boosts interest rates to tame inflation. Debt overdue more than 90 days rose to 3.4% in December from 2.7% a year earlier… At Bradesco, the figure increased to 4.1% from 3.5%.”

January 27 – Bloomberg (Ben Bartenstein): “Goldman Sachs… said the crisis in Brazil will get worse before it gets better after the bank last year warned that Latin America’s largest economy was being dragged into a depression. ‘Brazil is a mess,’ Alberto Ramos, the chief Latin America economist at Goldman Sachs, said… ‘Number 10 used to mean Pele. Now it’s inflation rate, unemployment rate and the popularity rate of the president.’”

EM Bubble Watch:

January 28 – Bloomberg (Rene Vollgraaff and Amogelang Mbatha): “South Africa’s central bank ramped up its policy tightening by raising the benchmark rate by half a percentage point, worried that inflation pressures from a weaker rand will spread more broadly in the economy. The repurchase rate was increased to 6.75%...”

January 25 – Reuters (Jason Bush and Alexander Winning): “Russia's economy contracted by 3.7% in 2015…, with a slew of activity indicators suggesting the slump is far from over. Russia is struggling to dig itself out of recession at a time when the price of oil, its main export, has seen a renewed plunge and as concerns about the global economy intensify… Retail sales were down 15.3% year-on-year in December, in line with forecasts…”

January 26 – Bloomberg (Zulfugar Agayev): “Azerbaijan shuttered almost a tenth of the nation’s lenders in the past week as authorities struggle to restore trust in the national currency after imposing capital controls and devaluing the manat twice last year. The regulator in the capital, Baku, said there’ll be more closures to come… The lenders couldn’t meet their obligations to creditors and their management wasn’t “reliable or prudential,” the central bank said… The cleanup has left Azerbaijan with 39 banks.”

Leveraged Speculation Watch:

January 29 – Bloomberg (Rachel Evans and Andrea Wong): “Hedge funds boosted wagers on yen strength to the highest since 2012 this week, just days before the Bank of Japan’s monetary policy meeting sent the currency tumbling by the most in a year. Large speculators lifted net bets on the yen to 50,026 contracts in the week ending Jan. 26, up from 37,653 a week earlier. That’s the highest since February 2012, Commodity Futures Trading Commission data show.”

January 27 – Bloomberg (Nishant Kumar): “The number of hedge fund companies started in 2015 dropped to 223, the lowest since 2002, according to… industry tracker Preqin. Volatile markets combined with slumps in commodities and equities to undermine the confidence of potential new entrants, Preqin said in its global hedge fund report released Tuesday. As many as 6,020 hedge fund firms managed $3.2 trillion in assets globally.”

January 27 – Bloomberg (Anna-Louise Jackson): “Remember how investors piled into financial stocks betting higher interest rates would stoke an earnings renaissance? A month later, that big long is a big short. The Standard & Poor’s 500 Financials Index has tumbled almost 12% in 2016, putting it on track for its worst month in almost seven years. The group… is neck-and-neck with commodity stocks for the biggest slide among 10 industries since Federal Reserve policy makers met Dec. 16… It’s been a rapid change of heart since then… Financials were the most-favored group among large-cap managers as of Oct. 31, according to… Goldman Sachs… An exchange-traded fund tracking the stocks attracted the second-highest cash flows in the month leading up to the rate liftoff. Now those expectations may be making the rout worse… The KBW Bank Index, which includes several regional institutions, has slumped almost 24% from a July high…”

Europe Watch:

January 26 – Bloomberg (Arne Delfs and Patrick Donahue): “German Chancellor Angela Merkel’s Bavarian allies risk breaking up her coalition over refugee policy, a senior Social Democratic lawmaker said, signaling growing tension within her government as Europe struggles to limit the influx of asylum seekers. Thomas Oppermann, the Social Democratic Party’s lower-house floor leader, said the threat would arise if the Christian Social Union pursues its challenge against Merkel’s open-door policy in Germany’s highest court. While both parties are partners in Merkel’s government, CSU head Horst Seehofer has pressed the chancellor for months to reverse her stance and cap migration.”

January 25 – Bloomberg (Luca Casiraghi and Paula Sambo): “European investors focused on risks from China to the east should also be looking west. More than half of the region’s worst-performing junk bonds in euros over the past year were sold by companies with operations in Brazil, exceeding those with even indirect exposure to China… Bonds sold by French retailer Casino Guichard-Perrachon SA and Spanish engineering firm Grupo Isolux Corsan SA, both with links to Latin America’s largest economy, are among 10 billion euros ($11bn) of securities with the biggest losses. European firms piled into emerging markets as they sought to mitigate the sovereign debt crisis at home.”

Japan Watch:

January 29 – Financial Times (Robin Harding): “When all the data pointed to a monetary easing by the Bank of Japan last October, governor Haruhiko Kuroda sat on his hands and was adamant about one thing in particular: there was no chance of cutting short-term interest rates. ‘We have not considered an [interest on reserves] cut and I see no likelihood of changing this view in the near future,’ said Mr Kuroda, whose tenure at the BoJ is defined by his effort to escape Japan’s two decades of on-and-off deflation. On Friday, Mr Kuroda surprised everyone by cutting Japanese interest rates to minus 0.1%.”

Geopolitical Watch:

January 28 – Wall Street Journal (Alan Culllison): “Libya is emerging as a new destination of choice for extremists, as both Islamic State and al Qaeda have used the chaos since the overthrow of Moammar Gadhafi to seize territory and parts of the economy, a report by a security consulting firm said. Wednesday’s report warned that Libya could become a dangerous new base for terrorist groups because of the country’s ungoverned hinterlands, long, porous borders and huge oil reserves. Already, the absence of law and proliferation of weapons and violence in Libya ‘have allowed violent extremist groups such as the Islamic State and al Qaeda to thrive,’ said the report by The Soufan Group… The report noted that both groups ‘are both utilizing Libya as a safe haven from which to launch operations against neighboring countries.’”

Friday Evening Links

[Bloomberg] Hedge Funds Boost Yen Bets to 4-Year High Days Before BOJ Shock

[Bloomberg] Apollo LBO Pipeline `Dried Up' as Lending Shut Down, Harris Says

[Bloomberg] Kaplan Says Fed Needs Time to Assess Impact of Market Turmoil

[WSJ] Central Banks Go to New Lengths to Boost Economies