Saturday, June 10, 2017

Weekly Commentary: Crowded Longs, Shorts and a New Z1

It was a week that saw Mario Draghi cling stubbornly to ultra-dovish monetary policy, the UK’s Brexit strategy thrown into even greater disarray after Prime Minister Theresa May’s failed election gambit, and the former Director of the FBI essentially testify that our President is a scoundrel. And then there’s the Middle East…

In the midst of it all, after trading at a 24-year low 9.37 Friday morning, an abrupt reversal had the VIX ending the week at 10.70. Looking at the S&P500’s slight (0.3%) decline for the week, one might be tempted to think comfortably “boring.” Market internals, though, were anything but boring or comforting. Friday’s session saw the Nasdaq 100 (NDX) swing wildly. After trading to an all-time high 5,898 in the first hour of U.S. trading, the index sank over 4.0% to 5,658 before closing the session down 2.44% at 5,742. Amazon traded in an intraday range of 1,013 to 927. Looking at “FANG” plus Microsoft and Apple, major market cap was evaporating in a hurry. By the end of Friday’s session, Facebook had declined 3.3%, Apple 3.9%, Amazon 3.2%, Microsoft 2.3%, Netflix 4.7% and Google 3.4%. The semiconductors (SOX) traded at a multi-year high 1,149 early in Friday’s session, then sank 7.0% before recovering somewhat to close the day down 4.3% at 1,090. Biotech (BTK) rose 1.5% in the morning to an all-time high and then closed the session slightly lower.

Yet it was not just Friday - and not only tech. After trading Tuesday morning at a low of 88.38, bank stocks (BKX) surged over 6% before closing the week up 4.9% to 93.79. The broker/dealers jumped 3.6% this week. The small cap Russell 2000 traded Tuesday morning at a low of 1,387 before rallying 3.3% to end the week with a gain of 1.2%.

It was an unpleasant day and week for the Momentum Crowd all crowded into outperforming technology stocks. It was even worse for those long momentum and short the underperformers. Long tech versus short financials had been a big winner until the late-week “rip your face off” – with Friday trading seeing bank stocks up 2.3% and the Morgan Stanley High Tech Index down 3.0%. Long big technology against short small caps had also been easy money – until the last few sessions. This week saw the NDX drop 2.4%, while the small cap Russell 2000 gained 1.2%. And it’s worth noting some of Friday’s winners: Dillards (10.2%), Urban Outfitters (7.8%), J.C. Penny (6.8%) and Barnes & Noble (6.0%) - all heavily shorted in the despised retail sector. Moreover, the session's leading gainers in the S&P500 – including Kohl’s (7.2%), Chesapeake Energy (4.9%), Nordstrom (5.7%), Tractor Supply Company (4.7%) and Murphy Oil 4.7% – are popular short targets. It was a rotten day and a poor week for many long/short strategies.

As for the ECB decision and the UK election, I’ll this evening posit the briefest of thoughts. Mario Draghi has been kicking the can down the road since 2012, and he clearly is in no mood to see what happens when his leg turns weary. We’ll apparently have to wait until later in the year to have a clearer understanding of the ECB’s stimulus program end-game. The Wall Street Journal ran an interesting pre-meeting article – with the catchy headline “ECB Critic Holds His Tongue as Race Nears for Bank’s Top Job” - discussing how the Germans have set their sights on the end of Draghi’s term in 2019.

June 7 – Wall Street Journal (Tom Fairless): “Jens Weidmann, the German central-bank chief who made his name by loudly attacking the European Central Bank’s crisis-fighting efforts, has become a quiet defender of the ECB against its German critics. The shift has been subtle. Mr. Weidmann still criticizes the bank’s radical stimulus measures. But his tone has softened as evidence accumulates that the ECB’s policies are working—and as the race to become the institution’s next president approaches. ‘There is currently no doubt that an expansionary monetary policy stance is appropriate,’ Mr. Weidmann said…, while suggesting he might not agree with his colleagues on the details. Only five years ago, he was boasting of clashes with fellow policy makers, and comparing easy-money policies to drugs and alcohol. As ECB officials gather Wednesday and Thursday in Estonia, what was once a bitter argument over the bank’s far-reaching monetary stimulus is expected instead to be a pragmatic discussion about whether to start reducing it.”

And why the big surprise over the dismal Conservative party showing in the UK election? Has there been any brightening in the underlying dour public mood? Folks suddenly content with the “establishment,” “elites” and the status quo? Feelings the “system” is working more fairly? Market and media complacency returned after Emmanuel Macron’s huge market-pleasing victory in the French presidential election. I would suggest the Mr. Macron owes his presidency and apparent mandate to Mario Draghi. I wouldn’t, however, wager on a long honeymoon period – let along some new golden age in French (and European) policy management. The political instability that had pundits fretting coming into 2017 is merely in a bit of remission. Wait until the ECB tap goes dry and the Draghi Bubble bursts.

Closer to home, there was a new Federal Reserve “flow of funds” Z.1 report this week. From my perspective, interesting data raised more questions than were answered.

Certainly not inconsistent with downshifting GDP (Q1 1.2% vs. Q4 2.1%), Credit growth somewhat fell off a cliff. Total Non-Financial Debt (NFD) growth slowed to a 1.4% pace in Q1, down from Q4 2016’s 2.8% to the slowest expansion in years. In seasonally-adjusted and annualized (SAAR) dollars, NFD expanded $676bn in Q1, down from $1.338 TN in Q4 and $2.406 TN in Q1 2016. Seeing such data, I would normally be chronicling a dramatic tightening of Credit Availability and financial conditions. It’s yet another example of these being the most abnormal of times.

Household mortgage Credit expanded at a 3.0% rate during Q1, second only to Q4’s 3.2% going all the way back to the pre-crisis era. Consumer (non-mortgage) Credit expanded at a 6.5% pace, matching Q4 (strongest since Q3 ’15). Corporate borrowings bounced back strongly from Q4’s abrupt stall (0.2%). Q1’s 6.9% growth rate surpassed Q3’s 6.3% and was the strongest expansion of Corporate borrowings since Q1 ’16 (10.7%). Data just don’t speak to a tightening of Credit conditions.

Q1 saw Federal government borrowings contract at a 3.3% pace and State & Local borrowings fall at a 3.5% rate. It was this atypical decline in government Credit that largely explains Q1’s tepid overall Credit expansion. At least at the federal level, a significant drawdown in deposits helps to explain the one-quarter hiatus from market borrowings. A Q2 bounce back in government borrowings should push system Credit growth significantly higher.

To see booming securities markets in the face of 1.2% pace NFD growth is strange indeed. But while overall Non-Financial borrowings slowed to a crawl, the financial sector seemed to be frantically scurrying about. The Domestic Financial Sector’s “Net Acquisition of Financial Assets” surged an unusual SAAR $4.840 TN (vs. Q4’s $291bn and Q3’s $2.716 TN). After three straight quarters of contraction, Net Interbank Assets expanded an extraordinary SAAR $1.589 TN. The Financial Sector also increased Miscellaneous Assets SAAR $1.811 TN, while expanding Debt Securities holdings SAAR $452bn and Fed Funds and Repos SAAR $158bn.

Depository Institutions’ Loans expanded a robust SAAR $924bn during Q1, up from Q4’s SAAR $595bn but somewhat below Q1 ‘16’s booming $1.241 TN. Clearly, booming asset markets had much more to do with a booming financial sector than a robust real economy. It would be quite unusual for booming markets not to provide some degree of economic stimulus, though bubbling markets create myriad fragilities.

Securities markets remain the epicenter of this cycle’s historic inflation. Q1 saw Equities increase a nominal $939bn to a record $40.755 TN. This boosted Equities as a percent of GDP to a record 214%. This compares to the previous peak levels from 2007 and 1999 of 181% and 202%. Total Debt Securities increased nominal $320bn during Q1 to a record $41.464 TN. Debt Securities-to-GDP at a near-record 218% has been relatively stable over recent quarters. Total (Debt and Equities) Securities ended Q1 at a record $82.220 TN and a record 432% of GDP. This compares to the cyclical peaks of 379% at Q3 2007 and 359% at Q1 2000.

The Household Balance Sheet continues to be a centerpiece of U.S. Bubble Economy analysis. U.S. Household Assets ended Q1 at a record $110 TN, increasing $2.383 TN during the quarter. And with Household Liabilities up $36 billion (to $15.152 TN), Household Net Worth surged another (remarkable) $2.347 TN during the quarter to a record $94.835 TN. It’s worth noting that Household Net Worth has now inflated $39.1 TN, or 70%, since Q1 2009.

Over the past year, Net Worth inflated $7.259 TN, or 8.3%, one of the largest one-year gains on record. By major component, Household Financial Assets increased $1.781 TN during Q1 to a record $77.115 TN, with a notable one-year rise of $5.734 TN (8.0%). At 125% of GDP, Real Estate holdings gained $499bn during the quarter to a record $26.866 TN, with a large one-year rise of $1.794 TN (7.2%).

Q1 Household Net Worth reached a record 498% of GDP. For comparison, Net Worth/GDP ended the (“decade of greed”) eighties at 379%, Bubble year 1999 at 446% and peak mortgage finance Bubble 2007 at 461%. Unless something dramatic unfolds over the next few weeks, Net Worth/GDP will have cruised through 500% during Q2. It’s worth noting that Household Total Equities (equities and mutual funds) holdings have doubled from 2009 levels to approach the record 129% of GDP from year-end 1999.

Helping to offset tepid domestic Credit, Rest of World (ROW) had strong Q1 flows into U.S. financial assets. At SAAR $1.200 TN, Q1 ROW flows compare to an outflow of SAAR $187bn in Q4 and an inflow of SAAR $501bn in Q1 2016. Curiously, Treasury purchases (SAAR $344bn) dominated flows into U.S. debt securities and were the strongest since 2014. Purchases of U.S. corporates slowed to SAAR $132bn, down from Q4’s SAAR $433bn. After big Q4 outflows (SAAR $480bn), ROW increased U.S. equities holdings SAAR $219bn during Q1. It’s difficult to comprehend that ROW holdings of U.S. financial assets have grown to almost $25 TN, inflating about ten-fold from the mid-nineties.

Returning to the markets, players will spend the weekend pondering whether Friday’s tech swoon was a mere flash in the pan or the beginning of something more serious. That intense selling manifested from market dynamics rather than in response to some news event might make it more difficult to spin. Rotations have become a common feature of this speculative marketplace, and the bulls will spin rotations positively. This week saw previous underperformers gain momentum, while the highflyer Wall Street darlings saw melt-ups rather abruptly indicate potential trouble below. When the Crowded Trade phenomenon has finally reached the top of the food chain – to a select group of speculative favorite megacaps - a big rotation away from the darlings will present a formidable market challenge. From my vantage point, such dynamics are consistent with equities (and risk markets) working toward putting in a major top.


For the Week:

The S&P500 slipped 0.3% (up 8.6% y-t-d), while the Dow added 0.3% (up 7.6%). The Utilities lost 1.1% (up 9.2%). The Banks surged 4.9% (up 2.2%), and the Broker/Dealers jumped 3.6% (up 8.1%). The Transports were unchanged (up 3.1%). The S&P 400 Midcaps added 0.4% (up 5.8%), and the small cap Russell 2000 jumped 1.2% (up 4.8%). The wild Nasdaq100 dropped 2.4% (up 18.1%), and the Morgan Stanley High Tech index fell 2.0% (up 21.3%). The Semiconductors declined 1.2% (up 20.3%). The Biotechs slipped 0.8% (up 19.0%). Though bullion gave back $13, the HUI gold index recovered 2.5% (up 7.7%).

Three-month Treasury bill rates ended the week at 98 bps. Two-year government yields rose five bps to 1.34% (up 15bps y-t-d). Five-year T-note yields gained five bps to 1.77% (down 16bps). Ten-year Treasury yields increased four bps to 2.20% (down 24bps). Long bond yields advanced five bps to 2.86% (down 21bps).

Greek 10-year yields slipped five bps to 5.94% (down 108bps y-t-d). Ten-year Portuguese yields dipped two bps to 3.02% (down 73bps). Italian 10-year yields sank 17 bps to 2.09% (up 28bps). Spain's 10-year yields fell 13 bps to 1.44% (up 6bps). German bund yields slipped a basis point to 0.26% (up 6bps). French yields fell six bps to 0.65% (down 3bps). The French to German 10-year bond spread narrowed five to 39 bps. U.K. 10-year gilt yields declined three bps to 1.01% (down 23bps). U.K.'s FTSE equities index slipped 0.3% (up 5.4%).

Japan's Nikkei 225 equities index declined 0.8% (up 4.7% y-t-d). Japanese 10-year "JGB" yields were about unchanged at 0.056% (up 2bps). France's CAC40 fell 0.8% (up 9.0%). The German DAX equities index was about unchanged (up 11.6%). Spain's IBEX 35 equities index added 0.7% (up 17.4%). Italy's FTSE MIB index gained 0.9% (up 9.8%). EM equities were mixed. Brazil's Bovespa index declined 0.5% (up 3.3%) and Mexico's Bolsa lost 0.5% (up 7.5%). South Korea's Kospi added 0.4% (up 17.5%). India’s Sensex equities index was unchanged (up 17.4%). China’s Shanghai Exchange rallied 1.7% (1.8%). Turkey's Borsa Istanbul National 100 index was little changed (up 26.6%). Russia's MICEX equities index was about unchanged (down 15.6%).

Junk bond mutual funds saw inflows of $586 million (from Lipper).

Freddie Mac 30-year fixed mortgage rates fell five bps to 3.89% (up 29bps y-o-y). Fifteen-year rates decline three bps to 3.16% (up 29bps). The five-year hybrid ARM rate was unchanged at 3.11% (up 29bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down three bps to a seven-month low 3.99% (up 28bps).

Federal Reserve Credit last week increased $1.3bn to $4.422 TN. Over the past year, Fed Credit declined $0.7bn. Fed Credit inflated $1.611 TN, or 57%, over the past 239 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt surged $21.0bn last week to $3.259 TN. "Custody holdings" were up $17bn y-o-y, 0.5%.

M2 (narrow) "money" supply last week slipped $3.5bn to $13.520 TN. "Narrow money" expanded $769bn, or 6.0%, over the past year. For the week, Currency increased $2.1bn. Total Checkable Deposits declined $20.4bn, while Savings Deposits gained $16.2bn. Small Time Deposits added $1.0bn. Retail Money Funds declined $2.7bn.

Total money market fund assets gained $5.5bn to $2.659 TN. Money Funds fell $66bn y-o-y (2.4%).

Total Commercial Paper added $3.2bn to $996.9bn. CP declined $55bn y-o-y, or 5.3%.

Currency Watch:

The U.S. dollar index recovered 0.6% to 97.274 (down 5.0% y-t-d). For the week on the upside, the Mexican peso increased 2.8%, the Australian dollar 1.1%, the New Zealand dollar 1.0%, the Canadian dollar 0.1%, and the Japanese yen 0.1%. For the week on the downside, the Brazilian real declined 1.6%, the British pound 1.1%, the Swedish krona 1.1%, the South African rand 1.0%, the Norwegian krone 1.0%, the euro 0.7%, the Swiss franc 0.7%, the Singapore dollar 0.3% and the South Korean won 0.1%. The Chinese renminbi gained 0.18% versus the dollar this week (up 2.16% y-t-d).

Commodities Watch:

The Goldman Sachs Commodities Index declined 1.2% (down 7.2% y-t-d). Spot Gold retreated 1.0% to $1,267 (up 9.9%). Silver dropped 1.7% to $17.223 (up 7.8%). Crude sank another $1.83 to $45.83 (down 15%). Gasoline lost 4.8% (down 10%), while Natural Gas recovered 1.3% (down 19%). Copper jumped 2.9% (up 6%). Wheat rallied 3.8% (up 9%). Corn rose 4.0% (up 10%).

Trump Administration Watch:

June 6 – Wall Street Journal (Kristina Peterson, Stephanie Armour and Louise Radnofsky): “Republican senators left their first decision-making meeting on overhauling the nation’s health-care system Tuesday deeply divided over the fate of Medicaid, a fissure that threatens to thwart their ambitions to dismantle the Affordable Care Act. The divide among Senate Republicans over Medicaid was wide enough that some GOP lawmakers and aides said they now believe it may be impossible to broker a deal to unwind the health law known as Obamacare. Some senators are already preparing to move to another goal, an overhaul of the tax code. ‘It’s more likely to fail than not,’ Sen. Lindsey Graham (R., S.C.) said of the health bill… ‘We need to bring this to an end and move to taxes.’”

June 6 – Financial Times (Robin Wigglesworth and Ben McLannahan): “Investors are growing more sceptical that the Trump administration will be able to nurture an economic bounce, with Treasury yields and the US dollar sagging to new post-election lows and the US equity market increasingly dependent on technology stocks to maintain its highs. The 10-year Treasury yield dipped as low as 2.13% on Tuesday, its lowest since the immediate post-election surge in November.”

China Bubble Watch:

June 3 – New York Times (Ryan McMorrow): “When a Chinese tech company with global ambitions began to run short of cash last year, it sought billions of dollars from new investors. One of them was a music teacher. Li Shenghong, who teaches out of a mall storefront in southern China, was already a fan of the smartphones and televisions sold by the company, an internet-and-gadgets conglomerate called LeEco. When LeEco also began selling investment products online, Mr. Li snapped them up, even though the company said little about where the money would go. ‘Whenever I have leftover money from my salary, I’ll invest it,’ Mr. Li said, explaining that he had invested $7,000 in the company. ‘My spare change? I put it in.’ LeEco, buffeted by rapid expansion, has turned to murky and potentially risky ways to stay afloat, including tapping China’s shadowy informal banking system, which many people believe threatens the Chinese economy.”

June 4 – Wall Street Journal (Chao Deng and Lingling Wei): “China’s crackdown on debt is driving some companies to a murkier form of financing as it gets harder to secure bank loans or tap the bond market. New loans from so-called trusts, firms that raise money from individuals and corporations to plow into riskier areas of the economy, reached 882.3 billion yuan ($129.5 billion) in the first four months of this year…, nearly five times as much as the same period in 2016. Trust firms, which often charge borrowers higher rates than banks, occupy a middle ground between banking and asset management. They are licensed and loosely regulated by China’s banking watchdog, but they lack some of banks’ protections, such as government deposit insurance, and they have more flexibility to invest in risky areas than banks do.”

June 6 – Wall Street Journal (Shen Hong): “A sharp rise in the cost of borrowing in China’s bond markets is the latest sign of conflict between Beijing’s effort to rein in financial-system risk and its long-term goal of modernizing the economy. In a little-noticed shift, Chinese companies in recent weeks have been able to take out medium-term bank loans at a lower interest rate than bond investors demand. The average yield on AAA-rated five-year corporate bonds, currently 4.90%, has been above the central bank’s corresponding benchmark lending rate of 4.75% since May 3… The highly unusual reversal—it hadn’t happened since records began in 2006—is largely down to Chinese regulators’ attempts to tamp down speculation by investment funds that borrow heavily to leverage their bets.”

June 5 – Reuters (Yawen Chen and Ryan Woo): “Activity in China's services sector expanded at the fastest pace in fourth months in May thanks to a surge in new orders, a private business survey showed, helping to offset worries about unexpected weakness in manufacturing. The Caixin/Markit services purchasing managers' index (PMI) rose to 52.8 in May from April's 51.5, breaking a four-month decline and marking the highest reading since January.”

June 7 – Reuters (Yawen Chen and Kevin Yao): “China's foreign exchange reserves rose in May for a fourth consecutive month and by more than markets had expected, as stringent capital control measures and a weakening in the dollar helped staunch outflows. Reserves rose $24 billion in May to a seven-month high of $3.054 trillion, compared with an increase of $21 billion in April… It was the first time since June 2014 that reserves climbed for four months in a row, and the biggest gain since reserves moved back above the closely watched $3 trillion level in February.”

June 7 – Bloomberg: “China’s overseas shipments accelerated from a year earlier in May, aided by more buoyant global demand, and robust imports signaled resilience in the domestic economy. Exports rose 8.7% in May in dollar terms, more than the 7.2% increase forecast… Imports surged 14.8% in dollar terms, more than the 8.3% forecast. The trade surplus widened to $40.81 billion.”

Europe Watch:

June 7 – Reuters (Jesús Aguado and Francesco Guarascio): “European authorities stepped in to avert a collapse of Spain's Banco Popular following a run on the bank, orchestrating a last-minute rescue on Wednesday by Santander, the country's biggest lender. Owners of Popular bonds faces losses of some 2 billion euros, while Santander will ask its shareholders for around 7 billion euros ($7.9bn) of capital to absorb Spain's sixth biggest bank.”

June 7 – Reuters (Francesco Guarascio and Stefano Bernabei): “European Union regulators believe their rescue of Spanish lender Banco Popular has strengthened the case for intervening in Italy's two weakest lenders, but expect it will be harder to use the same approach, a senior EU official said… EU regulators arranged for Spain's biggest bank, Santander, to take over Banco Popular, but only after wiping out the investments of the troubled lender's shareholders and junior creditors -- a move welcomed by financial markets which saw it as a possible template for other EU banking crises.”

June 8 – Reuters (Gavin Jones): “A proposed Italian electoral law that looked set to usher in early elections has lost the support of major parties, sending shares and bonds higher and easing nerves among investors wary of yet more political uncertainty in Europe. ‘The accord on the electoral law is dead,’ Emanuele Fiano, a deputy from the ruling Democratic Party… told reporters after his group lost a parliamentary vote on a proposed amendment.”

June 8 – Bloomberg (Carolynn Look): “German industrial production rose more than analysts predicted, with a fourth consecutive increase in manufacturing adding to signs of underlying strength in Europe’s largest economy. Output… jumped 0.8% in April after an upwardly revised drop of 0.1%... The typically volatile measure compares with a median estimate for a 0.5% gain in a Bloomberg survey. Production was up 2.9% from a year earlier.”

June 7 – Financial Times (Mehreen Khan): “Things are on the up for the eurozone economy. With growth accelerating, unemployment steadily falling, and inflation at comfortable levels, the European Central Bank should be resting easy that its more than two-year stimulus experiment is bearing dividend after years of concerns about the eurozone’s political stability. But there are still some worries for the central bank of 19 eurozone countries. Among them is a growing headache over the implementation of its QE measures and more specifically, a shortage of available German bonds. Latest data from the central bank’s QE holdings show the ECB fell short of its monthly target for German bond purchases for the second month in a row in May, raising concerns about the longevity of the aggressive stimulus policies in place since 2015.”

Brexit Watch:

June 9 – Reuters (David Milliken and Kate Holton): “British Prime Minister Theresa May said she would lead a minority government backed by a small Northern Irish party after she lost an election gamble days before the start of talks on Britain's departure from the European Union. May called the snap election confident her Conservative Party would increase its majority and strengthen her hand in the Brexit talks. Instead, Thursday's vote damaged her authority and made her negotiating position more vulnerable to criticism.”

Global Bubble Watch:

June 6 – Bloomberg (Miles Weiss): “High up in a New York City skyscraper, China’s biggest bank is playing in the shadows of American finance. The prize for Industrial & Commercial Bank of China Ltd. isn’t stocks, bonds or currencies. It’s the grease in the wheels of all those markets: repurchase agreements. By exploiting a loophole in rules intended to keep U.S. banks from getting ‘too big to fail,’ the state-owned ICBC has become a go-to dealer in repos in just a few short years, alongside longtime powerhouses like Goldman Sachs… The short-term loans allow investors to borrow money by lending securities, serving a vital role in day-to-day trading on Wall Street. ICBC’s rise reflects not only China’s global ambitions in high finance, but also how post-crisis rules have let a whole host of new players profit from the murky world of shadow banking, largely beyond the reach of bank regulators.”

June 5 – Bloomberg (Noah Smith): “In the comic strip Calvin and Hobbes, Calvin asks his dad how engineers determine the weight limit on bridges. The dad answers that they do this by driving heavier and heavier trucks over the bridge until it breaks, then rebuild the bridge after discovering what it took to break it. This isn’t how engineers actually figure out the safety specifications of bridges -- since they know a lot about how physics works, they can predict how much it would take to break a bridge without actually breaking it. But the same isn't true in the financial world. No one knows the basic laws that govern asset markets, so there’s a tendency to use new technologies until they fail, then start over. Calvin’s dad was effectively describing the process by which we test financial innovation. Mortgage-backed bonds are a good example… In the years since the crisis, financial markets have started to be transformed by a new innovation -- exchange-traded funds.”

June 6 – Financial Times (Robin Wigglesworth): “Is leverage, the poison that brought the global economy to its knees less than a decade ago, creeping back into financial markets? The global economy is enjoying a rare spell of broad if not strong growth, financial markets are tranquil, corporate earnings are buoyant, and monetary policy remains supportive. As a result, the MSCI World equity index sits at a record, up more than 11% so far this year, while bond markets are becalmed. Yet some investors, analysts and economists fret that beneath the calm surface there are some worrying cross-currents that could turn the sea choppy once more. In particular, signs that leverage — in the form of borrowed money or derivatives when they are used to amplify bets on asset prices — is creeping up. ‘The low volatility frightens me, because I know what it does to people’s behaviour,’ says Robert Frey, chief investment officer at FQS, a fund-of-hedge-funds… He compares it to building a flimsy oceanfront house because there have been no storms recently. ‘Eventually a hurricane will hit and the house will fall down.’”

June 7 – Bloomberg (Beth Jinks and Simone Foxman): “Billionaire investor Paul Singer said ‘distorted’ monetary and regulatory policies have increased risks for investors almost a decade after the financial crisis.’I am very concerned about where we are,’ Singer said… ‘What we have today is a global financial system that’s just about as leveraged -- and in many cases more leveraged -- than before 2008, and I don’t think the financial system is more sound.’ Years of low rates have eroded the effectiveness of central banks to contend with downturns, Singer said…”

June 7 – Bloomberg (Enda Curran): “Central bankers and investors are grappling with a $100 trillion question: why consumer price inflation remains so low in most parts of the world even as economic growth quickens. Compounding the riddle, question marks are now emerging over the one part of the global inflation picture that had been moving higher -- producer prices. That’s because two engines of that turnaround -- China’s resurgent factories and prospects for tax-cut fueled stimulus under President Donald Trump -- are showing signs of fading. Which way the inflation mystery unravels is crucial for the global monetary policy outlook and the world’s $100 trillion bond market.”

June 5 – Bloomberg (Greg Quinn and Erik Hertzberg): “Toronto’s housing fever is showing signs of cooling as price gains slowed and new listings surged in May, the first full month reflecting a new tax on foreign buyers and a crisis at mortgage lender Home Capital Group Inc. The number of new listings soared 49% last month from a year earlier to 25,837, the biggest increase since 2010… The average price rose 15% to C$863,910 ($640,076), compared with annual gains of 25% in April and 33% in March. The benchmark price index, which measures more typical mid-priced homes, rose 29%, also down from a 32% gain in April.”

June 7 – Wall Street Journal (James Glynn): “Data analyst Ben Reid recently took out a 25-year loan on a home outside Sydney despite a frothy housing market in Australia, believing in the market’s staying power. Payments on the $500,000 mortgage will consume about half his take-home pay. ‘I’d like a new car in the next couple of years but not sure where that cash will come from,’ said Mr. Reid… Big personal debts and spending worries like Mr. Reid’s are a gathering storm over Australia’s economy, threatening a 25-year streak without recession. Growth rose an anemic 0.3% in the first quarter.., putting annual growth on track to be the weakest since September 2009… Australian household debt has risen to a record 212% of income, according to the latest available data… That’s the fourth-highest globally…”

June 7 – Wall Street Journal (Lynn Cook): “American oil exports are emerging as a disruptive new force in global markets. The U.S. exported 1 million barrels of oil a day during some months so far this year—double the pace of 2016—and is on track to average that amount for all of 2017... In another era, a domestic glut and low prices, currently hovering under $50 a barrel, might have caused companies to slow the pace of drilling. But since Congress lifted a ban on oil exports at the end of 2015, shipments out of Texas and Louisiana have skyrocketed, taking the fruits of the U.S. fracking revolution to new markets.”

Federal Reserve Watch:

June 5 – CNBC (Jeff Cox): “President Donald Trump appears ready to remake the Federal Reserve in an image that will be considerably different than what investors have known for many years. The president is prepared to nominate Randal Quarles and Marvin Goodfriend to two of three vacancies at the central bank, according to multiple press accounts… Quarles likely would assume the role vacated by Daniel Tarullo to oversee the nation's banking system… Should Trump nominate the two men and they receive confirmation, it will represent the first steps in a possible substantial remaking of a Fed that has practiced ultra-loose monetary policy for the past decade but has been tight on banking regulations. Trump will have the opportunity to name one more person now, then can fill two even more critical vacancies in 2018 — that of Chair Janet Yellen and Vice Chair Stanley Fischer. If the Quarles and Goodfriend moves are indicators of what's to come, things could start getting less comfortable for Yellen. Both are considered solidly conservative, in line with the Republican president and Congress but perhaps not with Yellen.”

U.S. Bubble Watch:

June 7 – New York Times (Landon Thomas Jr.): “Facebook. Amazon. Apple. Netflix. Google. Not only do they dominate our daily lives, but as their stocks continue to soar, these technology giants may also dictate our financial futures. In the last three years, their share prices have risen far faster than the major market indexes — Amazon leads the way, up 206%; Apple trails the pack with a 67% gain — as investors of virtually every stripe have piled into these companies. But this gold-rush mentality, reminiscent of investor frenzies for Nifty 50 stocks in the late 1970s and the dot-com boom and bust at the end of the last century, is giving investors pause… ‘There is valuation anxiety out there, that is for sure,’ said Ed Yardeni, an independent investment strategist… ‘No one is feeling totally comfortable holding stocks that are this expensive.’”

June 4 – Wall Street Journal (Lev Borodovsky, Ben Eisen and Tom DeStefano): “By now it’s no epiphany that technology stocks are in favor. Apple recently passed $800 billion in market value for the first time, and both Amazon.com and Alphabet, the parent of Google, are each hovering around the rarely seen $1,000-a-share level. What you may not know is that by one measure, the 2017 tech-stock rally is already at levels last seen in 2000. The S&P technology sector accounts for nearly a quarter of the S&P 500’s market value. The last time that happened was 1999.”

June 6 – CNBC (Diana Olick): “This spring may be one of the hottest sellers' markets in history, but even off-the-chart-demand can't put every potential buyer in a home of their own. If the house is too expensive for the region's demand, it won't sell. That is becoming the case in more and more neighborhoods this spring — and is likely behind the first sign that big price gains are starting to shrink. Home values rose a healthy 6.9% in April compared with April 2016, …but that is a drop from the 7.1% annual gain in March… ‘I think we are beginning to see it in selected markets,’ said Frank Nothaft, CoreLogic's chief economist. ‘You just can't have house prices grow at 7% year after year, when income growth is 2-3% a year.’”

June 6 – Bloomberg (Vince Golle): “If you’re building or renovating a home in the U.S. these days, you’ve got plenty of company. Americans’ spending on residential construction projects -- from the pouring of foundations to home improvement -- just hammered out its strongest three-month period since 1994. Solid job growth, low borrowing costs and a recovery in home equity since the market crash a decade ago are generating momentum… While a report… showed a 2.9% drop in April outlays for improvements from the prior month, such spending was still 32.3% higher than it was a year ago.”

June 6 – Bloomberg (Sho Chandra): “An increase in U.S. job openings in April to a record high indicates demand for workers remains strong in the world’s largest economy while the supply is tightening, a Labor Department report showed… Number of positions waiting to be filled rose by 259k to 6.044m (est. 5.75m), from revised 5.785m in March, according to Job Openings and Labor Turnover Survey, or JOLTS…”

June 6 – Bloomberg (Patricia Laya): “Chief executive officers of some of the largest U.S. companies are becoming even more sanguine about sales and spending, a good omen for the economy after a lackluster first-quarter expansion, according to a quarterly survey from the Business Roundtable… Main index gained 0.6 point to 93.9, highest since 2Q 2014…”

June 7 – Bloomberg (John Gittelsohn and Erik Schatzker): “U.S. markets are at their highest risk levels since before the 2008 financial crisis because investors are paying a high price for the chances they’re taking, according to Bill Gross, manager of the $2 billion Janus Henderson Global Unconstrained Bond Fund. ‘Instead of buying low and selling high, you’re buying high and crossing your fingers,’ Gross, 73, said… Central bank policies for low-and negative-interest rates are artificially driving up asset prices while creating little growth in the real economy and punishing individual savers, banks and insurance companies, according to Gross.”

June 6 – Bloomberg (Matt Scully): “After bingeing on credit for a half decade, U.S. consumers may finally be feeling the hangover. Americans faced with lackluster income growth have been financing more of their spending with debt instead. There are early signs that loan burdens are growing unsustainably large for borrowers with lower incomes. Household borrowings have surged to a record $12.73 trillion, and the percentage of debt that is overdue has risen for two consecutive quarters.”

Japan Watch:

June 8 – Bloomberg (Toru Fujioka and Masahiro Hidaka): “The Bank of Japan is re-calibrating its communications to acknowledge that it is thinking about how to handle a future exit from monetary stimulus, without giving the impression that this is on the agenda anytime soon, according to people with knowledge of discussions… With inflation still far below target, the BOJ is contending with increasing debate about exit in markets, the media and among some lawmakers. Officials realize it’s unrealistic and unconstructive to try to remain silent on the issue and the BOJ now wants to make it known that it’s conducting simulations internally on how an exit could play out… Governor Haruhiko Kuroda, who has been called before parliament 18 times this year, was grilled by lawmakers last month on his thinking about post-stimulus policy. Kuroda responded by saying he would carefully consider external communications…”

EM Watch:

June 3 – Reuters (Anthony Boadle and Lisandra Paraguassú): “Former Brazilian lawmaker Rodrigo Rocha Loures, a close aide and friend of President Michel Temer, was arrested at his home on Saturday in a corruption investigation that also targets the president... In a police video released in May, Loures was seen running out of a Sao Paulo restaurant carrying a bag with 500,000 reais ($154,000) in cash that prosecutors say was a bribe from the owners of the world's largest meatpacker JBS SA. Plea bargain testimony by two executives of JBS's holding company J&F Investimentos SA implicated Temer and other politicians in graft…”

June 6 – Bloomberg (Arabile Gumede, Amogelang Mbatha, and Aarti Bhana): “South Africa’s economy fell into a recession for the first time since 2009 after it contracted for a second straight quarter in the first three months of the year as all bar two industries shrank. Gross domestic product receded an annualized 0.7% in the first quarter from a contraction of 0.3% in the previous three months…”

June 8 – Reuters (Andrew Torchia): “Standard & Poor's downgraded Qatar's debt… as the riyal currency fell to an 11-year low amid signs that portfolio investment funds were flowing out of the country because of Doha's diplomatic rift with other Arab states. S&P cut its long-term rating of Qatar by one notch to AA- from AA and put the rating on CreditWatch with negative implications…”

Leveraged Speculator Watch:

June 5 – Bloomberg (Miles Weiss and Katherine Burton): “The walls keep closing in on John Paulson. A decade after Paulson shot to fame betting on the collapse of the U.S. housing market, the hedge-fund mogul is struggling to persuade investors to stick with him after a string of missteps on everything from gold to European bonds to drug stocks. Since the end of 2015 alone, assets at Paulson & Co. have fallen by $6 billion from losses and client withdrawals. The decline, underscored in the firm’s most recent regulatory filing, leaves Paulson and his employees with just $2 billion in client money.”

Geopolitical Watch:

June 5 – Financial Times (Erika Solomon): “Qatar paid up to $1bn to release members of the Gulf state's royal family who were kidnapped in Iraq while on a hunting trip, according to people involved in the hostage deal — one of the triggers behind Gulf states' dramatic decision to cut ties with Doha. Commanders of militant groups and government officials in the region told the Financial Times that Doha spent the money in a transaction that secured the release of 26 members of a Qatari falconry party in southern Iraq and about 50 militants captured by jihadis in Syria. By their telling, Qatar paid off two of the most frequently blacklisted forces of the Middle East in one fell swoop: an al-Qaeda affiliate fighting in Syria and Iranian security officials. The deal, which was concluded in April, heightened concerns among Qatar's neighbours about the small gas-rich state's role in a region plagued by conflict and bitter rivalries.”

June 7 – Financial Times (Monavar Khalaj and Erika Solomon): “Iran’s Revolutionary Guards ratcheted up the tensions with Saudi Arabia as it accused Tehran’s regional rival of involvement in Wednesday’s double terrorist attack in the capital… Gunmen and suicide bombers launched simultaneous attacks on the parliament building in Tehran and the nearby shrine of Ayatollah Ruhollah Khomeini, the Islamic Republic’s founder. The attacks were claimed by Isis, in what would be the jihadi group’s first significant strike in the Islamic Republic. However a statement from the Revolutionary Guards linked the ‘brutal attack’ to Donald Trump’s visit last month to Riyadh, where the US president singled out Iran for fuelling ‘the fires of sectarian conflict and terror’.”

June 4 – Reuters: “China has expressed its strong dissatisfaction with what it labeled ‘irresponsible remarks’ on the South China Sea by U.S. Secretary of Defense James Mattis during a security forum at the weekend. Mattis accused China of having contempt for other nations' interests and disregarding international law. He told the annual Shangri-La Dialogue in Singapore that the construction and militarization of artificial islands in the South China Sea undermined regional stability.”