Monday, November 12, 2018

Monday Afternoon Links

[Reuters] Nasdaq falls 2 percent as Apple, chip stocks hit by weak forecasts

[Reuters] Dollar hits 16-month high; tech woes crunch stocks

[CNBC] Goldman shares head for the worst drop in 7 years as Malaysia seeks refunds on doomed deal

[Reuters] General Electric seeks 'urgent' asset sales to cut debt: CEO

[FT] Italian banks step in to rescue struggling Carige

Monday's News Links

[BloombergQ] Stocks Retreat as Dollar Strengthens; Oil Rebounds: Markets Wrap

[Reuters] Italian yields rise on Carige's woes, budget deadline

[Reuters] 'King dollar' reigns supreme in world of slowing growth, European risks

[Reuters] Yuan extends losses after worst week in 4 mths, Fed outlook supports dollar

[Reuters] Italy's bond yields extend rise, gap over Germany widest in almost 2 weeks

[BloombergQ] Euro Slides to 16-Month Low, Pound Sinks as EU Risks Reignite

[BloombergQ] China Rate-Cut Chatter Becomes Louder as Growth Risks Gather

[BloombergQ] China Says Lending Targets Shouldn't Override Due Diligence

[BloombergQ] What's a Private Company? China Banks Grapple With Lending Rules

[Reuters] Japan PM Abe calls for public works spending plan to help economy

[NYT] Trump’s Nafta Plan Could Be Upended by Democrats’ House Takeover

[WSJ] Dollar Surges Amid Political Turbulence Abroad

[WSJ] U.S. on a Course to Spend More on Debt Than Defense

[FT] Global leverage, examined

[FT] Turkish banks report rise in bad loans

[FT] China’s Xi Jinping revives Maoist call for ‘self-reliance’

[FT] China extends crackdown on labour protests as activism spreads

[FT] Chinese government faces peer-to-peer lending scandals dilemma

Saturday, November 10, 2018

Saturday's News Links

[Reuters] Take Five: Trump to Italy, world markets themes for the week ahead

[BloombergQ] China’s Central Bank Ready to Tackle ‘Profound’ Economic Changes

[BloombergQ] Italy Considers Tweaks to Budget Ahead of EU Deadline

[Reuters] Fox says Britain may not get a deal with the EU

[Reuters] Trump, Macron agree on European defense after Trump's 'very insulting' comment

[BloombergQ] Deadly California Wildfires Force Hundreds of Thousands to Flee

Weekly Commentary: Back to Fundamentals

The Dow (DJIA) jumped 545 points (2.1%) in Wednesday's post-midterms trading. The S&P500's 2.1% rise was overshadowed by the Nasdaq Comp's 2.6% and the Nasdaq100's 3.1% advances. Healthcare stocks surged, with the S&P500 Healthcare Index up 2.9% (Healthcare Supplies index jumping 4.5%). Led by Amazon's 6.9% (113 points!) surge, the S&P Internet Retail Index gained 6.1%. From October 29th trading lows to Wednesday's highs, the S&P500 rallied 8.1% and the Nasdaq100 jumped 9.6%.

The post-election bullish battle cry was a resolute "back to fundamentals!" With the market surging, analysts were proclaiming "reduced uncertainty" and "the best possible outcome for the markets." The President and Nancy Pelosi both adopted restrained tones and spoke of efforts to cooperate on important bipartisan legislation. Prospects for a market-pleasing infrastructure spending bill have improved. What's more, a positive spin was put on the return of Washington gridlock. Less Treasury issuance would support lower market yields generally, ensuring the U.S. economic expansion maintains ample room to run. The weaker post-election dollar was said to be constructive for global liquidity.

The EEM emerging market ETF rose 1.9% Wednesday, pushing the rally from October 29th lows to 11.0%. The South African rand and Indonesian rupiah gained 1.5%, as most EM currencies temporarily benefited from the weaker dollar.

Wednesday provided a good example of news and analysis following market direction. Stocks were up, so election results must have been positive. I would tend to see Wednesday trading as heavily impacted by the unwind of hedges - and yet another short squeeze. After trading as high as 20.6 in Tuesday trading, the VIX (equities volatility) index ended Wednesday's session at 16.36, an almost one-month low.

Market weakness in the weeks leading up to the midterms created an unusual backdrop. A pivotal election combined with a vulnerable market backdrop ensured a double-dose of hedging activity heading into Tuesday. And with the election having avoided "tail risk" outcomes (blue wave with Democratic control of both houses, or Republicans maintaining full control), post-election trading saw a significant reversal of risk hedges and bearish speculations.

It did not, however, take long for the joyful "gridlock is good" rally to face a reality check. The President's tweet: "If the Democrats think they are going to waste Taxpayer Money investigating us at the House level, then we will likewise be forced to consider investigating them for all of the leaks of Classified Information, and much else, at the Senate level. Two can play that game!" NYT: "Jeff Sessions is Forced Out as Attorney General as Trump Installs Loyalist." And then came Friday's (post-election) barbs from the director of the White House's National Trade Council:

November 9 - Bloomberg (Andrew Mayeda and Shawn Donnan): "White House trade adviser Peter Navarro warned Wall Street bankers and hedge-fund managers to back down from their push for President Donald Trump to strike a quick trade deal with China's Xi Jinping. 'As part of a Chinese government influence operation, these globalist billionaires are putting a full-court press on the White House in advance of the G-20 in Argentina,' Navarro said… Their mission is to 'pressure this President into some kind of deal' but instead they're weakening his negotiating position and 'no good can come of this.' Navarro said investors should be re-directing their 'billions' of dollars into helping rebuild areas hit by manufacturing job losses. 'Wall Street, get out of those negotiations. Bring your Goldman Sachs money to Dayton, Ohio, and invest in America.'"

As another extraordinary market week came to its conclusion, the bulls "Back to Fundamentals" mantra from Wednesday was being hijacked by the bear camp. From my analytical perspective, the outcome of the midterms wasn't going to materially alter the Bursting Global Bubble Thesis. Global financial conditions continue to tighten. Very serious issues associated with China's faltering Bubble remain unresolved. Italy's political, financial and economic problems won't be disentangled anytime soon. And the midterms weren't going to solve the more pressing issues in the U.S., certainly including inflated asset and speculative Bubbles and a Federal Reserve determined to stay on a policy normalization course.

November 8 - Wall Street Journal (Justin Lahart): "Anybody who thought the Federal Reserve might scale back its plans for future rate increases after all the recent turmoil in the stock market has to be disappointed. The Fed on Thursday left interest rates unchanged, and it didn't change much else. The statement it put out following its two-day meeting contained only minor tweaks from its September statement. It noted that the unemployment rate had declined since its September meeting (as opposed to 'stayed low'), and that business investment has 'moderated from its rapid pace earlier in the year' (rather than 'grown strongly'). The two things roughly offset each other and both have been clear from the data."

WSJ: "Treasury Bond Auction Draws Weakest Demand in Nearly a Decade." Thursday's 30-year auction incited spiteful name calling: "weak," "sloppy," and "nasty." It's worth noting that 10-year Treasury yields traded to 3.25% election night, the high going back to April 2011. Benchmark MBS yields ended Thursday at 4.10%, also a high since 2011. Ten-year Treasuries enjoyed a little relief late in the week as equities reversed lower, ending Friday at 3.18% (3 bps lower for the week).

Dollar post-election weakness reversed sharply into week's end. After trading down to 95.678 Wednesday, the U.S. dollar index surpassed 97 on Friday before closing the week up 0.4% to 96.901. After closing at 41.63 on Wednesday, emerging market equities (EEM) sank almost 5% to close the week at 39.80.

Perhaps more noteworthy from a global liquidity and "risk off" perspective, EM bonds came under renewed pressure this week. Brazilian 10-year (local currency) bond yields jumped 27 bps (to 10.41%). Russian yields surged 31 bps (8.91%) and Mexican yields 23 bps to a multiyear high (8.85%). Ominously, Mexico's 10-year (peso) yields are up almost 100 bps in six weeks. Brazil, Russia and Mexico dollar-denominated bond yields also turned higher, seemingly ending eight weeks of relative bond market calm.

After a recent modest pullback, Italian 10-year yields jumped eight bps this week to 3.40% (Italian CDS up 11 to 270 bps). With German bund yields declining two bps (0.41%), the Italian to German 10-year sovereign spread widened 10 bps to 299 bps. European periphery bonds notably underperformed, with spreads to bunds widening 11 bps in Greece, eight bps in Portugal and five bps for Spain.

For me, Back to Fundamentals means a return of "Periphery to Core Crisis Dynamics" - rising yields, widening Credit spreads, de-risking/deleveraging, faltering global liquidity and, to be sure, China.

November 9 - Bloomberg: "China aims to boost large banks' loans to private companies to at least one-third of new corporate lending, said Guo Shuqing, chairman of the China Banking and Insurance Regulatory Commission. Shares of lenders retreat on the mainland and in Hong Kong. Guo's comments are the latest attempt by authorities to try to improve funding access for China's non-state companies… It's the first time financial regulators have given targets on private lending, a reflection that earlier efforts haven't triggered the necessary credit activity… The target for small and medium-sized banks is higher, at two-thirds of new corporate loans, Guo said…"

November 9 - Bloomberg (Tian Chen): "Chief economists at Chinese brokerage firms should make efforts to guide market expectations and also effectively promote and analyze government policies, says the head of the nation's top securities regulator. Economists should properly understand, interpret and promote President Xi Jinping's remarks on supporting private companies, Liu Shiyu, chairman of the China Securities Regulatory Commission, said at a meeting with economists this month. The analysts should cherish the reputation of the industry, improve their ability to conduct research and properly use their influence on the public, Liu said…"

Beijing faces the critical issue of a deeply maladjusted economic structure that, at this point, requires in the neighborhood of $3.5 TN of annual (and sustained) system Credit growth to keep the Bubble from deflating. Moreover, the last thing China's incredibly inflated banking system needs is rapid growth in risky late-cycle lending. Determined to rein in non-bank "shadow" lending, Beijing faces no good alternatives. Granted, Chinese officials have the capacity to recapitalize their banking system down the road. And markets to this point have been comfortable with the implicit Beijing guarantee of banking system liquidity and solvency.

There is, however, a very serious problem brewing: Systemic risk expands exponentially during the "Terminal Phase" of excess, as rising quantities of increasingly risky loans imperil the entire financial system. The past two years have seen extremely rapid (speculative "blow-off") Credit growth in two particularly problematic sectors: lending against equities and apartments - both at inflated prices. There will come a point when the market begins to question the validity of Beijing's banking system fortification. This type of waning confidence could initially manifest in the currency market.

November 7 - Reuters (Kevin Yao and Fang Cheng): "China's foreign exchange reserves fell more than expected to an 18-month low in October amid rising U.S. trade frictions, suggesting authorities may be slowly stepping up interventions to keep the yuan from breaking through a key support level. Reserves fell by $33.93 billion in October to $3.053 trillion… The drop was the biggest monthly decline since December 2016, and compared with a fall of $22.69 billion in September."

November 9 - Bloomberg: "Chinese President Xi Jinping's mantra that homes should be for living in is falling on deaf ears, with tens of millions of apartments and houses standing empty across the country. Soon-to-be-published research will show roughly 22% of China's urban housing stock is unoccupied, according to Professor Gan Li, who runs the main nationwide study. That adds up to more than 50 million empty homes, he said. The nightmare scenario for policy makers is that owners of unoccupied dwellings rush to sell if cracks start appearing in the property market, causing prices to spiral."

Contemplating an economy with 50 million empty apartments entangles the mind. Granted, this is not a new issue. For years, a steady flow of workers vacating the countryside for booming urban centers has provided seemingly endless housing demand. But after a decade (or two) of cheap Credit and booming mortgage lending growth, China now confronts an inescapable comeuppance: a historic speculative Bubble with prospects for declining prices, a speculative bust, massive oversupply and an acutely vulnerable financial sector.

The Shanghai Composited dropped 2.9% this week (down 21.4% y-t-d). China's CSI Financials index sank 4.3%, and Hong Kong's Hang Seng Financials fell 2.9%. China's renminbi dropped 0.95% this week vs. the dollar, increasing y-t-d losses to 6.47%. Copper sank 4.7%, increasing y-t-d losses to 19%. It's stunning how quickly crude and commodities indices erased what were until recently decent 2018 gains. Everywhere, it seems, Perceived Wealth is Vanishing into Thin Air. What is it that Warren Buffett says about "when the tide goes out"?

November 9 - Bloomberg (Saijel Kishan): "After beleaguered hedge fund managers had their worst month in seven years, many are bracing for an industry D-Day: Nov. 15. That's the deadline for investors to put managers on notice to get some -- or all -- of their money at year end. If history is any guide, the rush for the exits will be swift and accelerate. Clients have already pulled $11.1 billion even before funds fell into the red for the year. The last time the industry careened toward annual losses was in 2015…The fallout: clients withdrew $77.2 billion between the fourth quarter of that year and the first quarter of 2017 -- the biggest withdrawals since the global financial crisis. Investors can cash out of most hedge funds quarterly after giving 45 days notice."

"Hedge Funds Face Reckoning After Worst Month Since 2011," was the headline to the above Bloomberg article. Other notable headlines this week included: MarketWatch: "Hedge Funds Are on Pace for the Worst Annual Year Since Lehman Brothers." WSJ: "Quants are Facing a Crisis of Confidence;" "Quant King D.E. Shaw Finds Stock-Picking Can Be Difficult;" and "Tech Swoon Stings Hedge Funds." Also from Bloomberg: "Hedge Fund 'Hotels' Burned Managers Who Sought Refuge in October." And from the FT: "Hedge Funds Overly Optimistic on Risk, SocGen Finds."

Odds are mounting that de-risking/deleveraging dynamics attain destabilizing momentum. Many hedge funds now have losses for the year, which forces managers to take down both risk and leverage in anticipation of year-end outflows. I believe deleveraging is having a growing impact on marketplace liquidity around the world - and across asset classes. Yields are rising and spreads are widening throughout global fixed-income. Unstable equities markets around the globe are indicating a fragile liquidity backdrop. And this week's $2.68 (4.3%) drop in WTI has all the appearances of a major leveraged speculating community panic liquidation (portending challenges for the - to this point - resilient junk bond market).

Bloomberg this week posed a most-pertinent question: "When will funding squeezes impact the Fed?" The market continues to focus on building rate pressures throughout the money markets, with added concern now that year-end funding issues are coming to the fore. The system is, after all, in its first experimental unwind (QT or "quantitative tightening") of some of the Fed's QE holdings. Market analysis is only further challenged by the enormous issuance of T-bills necessary to fund ballooning fiscal deficits. Three-month LIBOR added another two basis points this week to a decade high 2.61%. The effective Fed Funds rate (2.20%) remains stubbornly near the top of the Fed's target range (2-2.25%). There are also hints of waning liquidity in the mortgage marketplace. Furthermore, ebbing foreign demand at Treasury auctions is an increasing concern.

At this point, conventional analysis has yet to factor in the liquidity impact from speculative deleveraging - in terms of money market rates, fixed-income yields and the risk markets more generally. The degree to which speculative leverage has accumulated over this long cycle is The Momentous Unknowable. Indeed, there's a portentous lack of transparency for something of such vital importance. For the most part, the contemporary realm of speculative leveraging operates outside of traditional banking. As such, this issue was just too convenient for the Bernanke Fed and global central bankers to ignore as they collapsed borrowing costs, flooded the world with liquidity and committed to market liquidity backstops.

At this point, I seriously doubt the Fed has a solid grasp of the (direct and indirect) sources of the Trillions of global liquidity that have flooded into U.S. securities and asset markets over the past decade. I take them at their word that they don't discern the degree of leverage that would typically indicate a Bubble. Yet this has been the most atypical of global Bubbles. I am not convinced the Fed knows where to look for the leverage most germane to today's global Bubble. And, I'm compelled to add, the whole world seems oblivious. Speculative deleveraging is not on the Fed's radar, and this is a problem for the markets.

For the Week:

The S&P500 gained 2.1% (up 4.0% y-t-d), and the Dow rose 2.8% (up 5.1%). The Utilities gained 2.7% (up 3.3%). The Banks increased 1.8% (down 5.2%), and the Broker/Dealers rose 2.0% (up 1.3%). The Transports gained 1.5% (down 0.9%). The S&P 400 Midcaps increased 1.1% (down 0.9%), while the small cap Russell 2000 was little changed (up 0.9%). The Nasdaq100 advanced 1.1% (up 10.0%). The Semiconductors declined 0.8% (down 1.9%). The Biotechs dropped 2.4% (up 11.0%). With bullion dropping $23, the HUI gold index fell 4.0% (down 25.4%).

Three-month Treasury bill rates ended the week at 2.30%. Two-year government yields added two bps to 2.93% (up 104bps y-t-d). Five-year T-note yields were unchanged at 3.04% (up 83bps). Ten-year Treasury yields declined three bps to 3.18% (up 78bps). Long bond yields fell seven bps to 3.39% (up 64bps). Benchmark Fannie Mae MBS yields slipped two bps to 4.06% (up 107bps).

Greek 10-year yields jumped nine bps to 4.36% (up 29bps y-t-d). Ten-year Portuguese yields rose six bps to 1.94% (unchanged). Italian 10-year yields jumped eight bps to 3.40% (up 139bps). Spain's 10-year yields added three bps to 1.60% (up 3bps). German bund yields declined two bps to 0.41% (down 2bps). French yields were unchanged at 0.79% (unchanged). The French to German 10-year bond spread widened two to 38 bps. U.K. 10-year gilt yields were unchanged at 1.49% (up 30bps). U.K.'s FTSE equities index increased 0.2% (down 7.6%).

Japan's Nikkei 225 equities index was little changed (down 2.3% y-t-d). Japanese 10-year "JGB" yields slipped about a basis point to 0.12% (up 8bps). France's CAC40 was about unchanged (down 3.9%). The German DAX equities index was little changed (down 10.7%). Spain's IBEX 35 equities index rallied 1.6% (down 9.1%). Italy's FTSE MIB index declined 0.7% (down 11.9%). EM equities were mostly lower. Brazil's Bovespa index fell 3.1% (up 12.1%), and Mexico's Bolsa dropped 2.6% (down 10.3%). South Korea's Kospi index declined 0.5% (down 15.5%). India's Sensex equities index increased 0.4% (up 3.2%). China's Shanghai Exchange sank 2.9% (down 21.4%). Turkey's Borsa Istanbul National 100 index fell 1.4% (down 19.5%). Russia's MICEX equities index gained 1.1% (up 13.9%).

Investment-grade bond funds saw inflows of $1.849 billion, and junk bond funds posted inflows of $1.040 billion (from Lipper).

Freddie Mac 30-year fixed mortgage rates jumped 11 bps to 4.94% (up 104bps y-o-y). Fifteen-year rates jumped 10 bps to 4.33% (up 109bps). Five-year hybrid ARM rates rose 10 bps to 4.14% (up 92bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates up four bps to 4.83% (up 73bps).

Federal Reserve Credit last week declined $19.2bn to $4.102 TN. Over the past year, Fed Credit contracted $316bn, or 7.2%. Fed Credit inflated $1.291 TN, or 43%, over the past 314 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt increased $0.6bn last week to $3.415 TN. "Custody holdings" were up $42bn y-o-y, or 1.2%.

M2 (narrow) "money" supply added $6.2bn last week to a record $14.293 TN. "Narrow money" gained $548bn, or 4.0%, over the past year. For the week, Currency increased $1.2bn. Total Checkable Deposits fell $30.2bn, while Savings Deposits rose $25.7bn. Small Time Deposits increased $4.8bn. Retail Money Funds gained $4.8bn.

Total money market fund assets jumped $23.2bn to $2.908 TN. Money Funds gained $167bn y-o-y, or 6.1%.

Total Commercial Paper slipped $3.4bn to $1.084 TN. CP gained $32bn y-o-y, or 3.1%.

Currency Watch:

The U.S. dollar index added 0.4% to 96.901 (up 5.2% y-t-d). For the week on the upside, the New Zealand dollar increased 1.1% and the Australian dollar gained 0.5%. For the week on the downside, the Brazilian real declined 0.8%, the Norwegian krone 0.8%, the Canadian dollar 0.8%, the Mexican peso 0.6%, the South Korean won 0.6%, the Japanese yen 0.6%, the euro 0.5%, the South African rand 0.4%, the Singapore dollar 0.3%, the Swiss franc 0.2% and the Swedish krona 0.2%. The Chinese renminbi declined 0.95% versus the dollar this week (down 6.47% y-t-d).

Commodities Watch:

November 6 - Wall Street Journal (Amrith Ramkumar and David Hodari): "A prolonged period of underinvestment by commodity producers is setting the stage for large price increases in raw-materials markets, say bullish investors who focus on the metals and energy industries. Prices of copper, nickel and aluminum could soar past prior records-more than 40% above current levels-in the coming years, say the portfolio managers. Such a development would likely transform markets marked in recent years by soft prices and tepid investor interest. Global miners are spending a third of what they did five years ago on new projects. They're on track to invest roughly $40 billion for the third straight year-down from more than $120 billion five years ago and $80 billion almost a decade ago, according to… Wood Mackenzie."

The Goldman Sachs Commodities Index fell 1.7% (up 0.2% y-t-d). Spot Gold dropped 1.9% to $1,210 (down 7.2%). Silver fell 4.1% to $14.14 (down 18%). Crude sank another $2.68 to $60.19 (little changed). Gasoline sank 4.8% (down 10%), while Natural Gas surged 12.9% (up 26%). Copper dropped 4.7% (down 19%). Wheat declined 1.3% (up 18%). Corn slipped 0.4% (up 5%).

Market Dislocation Watch:

November 7 - Bloomberg (Trevor Hunnicutt): "U.S. fund investors fled bonds at the fastest pace since 2013 in the final week of October, worried about rising interest rates and tightening monetary policy, Investment Company Institute (ICI) data showed… More than $18.5 billion of mutual fund and exchange-traded fund assets flowed out the debt market during the week ended Oct. 31, the most since the 'Taper Tantrum' panic of June 2013, when markets worried about the U.S. Federal Reserve planning to stop buying bonds."

November 6 - Wall Street Journal (Jon Sindreu): "Risk-parity funds are one of Wall Street's favorite boogeymen during stock selloffs like the recent one. In this case, though, the worry should be in bonds, not stocks. The S&P 500 was down 6.9% in October, its worst month since September 2011. Many investors were unsure why and blamed funds that follow rigid rules requiring them to sell into a downturn. Unlike in the February selloff, though, risk-parity funds didn't have many stocks to sell. Instead, it is their large stash of bonds that investors should fear. Risk-parity funds have grown to manage about $175 billion since their inception in 1996… Unlike traditional investors who put a fixed allocation to stocks or bonds, they base allocations on the volatility of each asset class, often using debt to adjust risk. Since bonds are statistically less risky, that is where borrowed money is put to more use."

November 8 - CNBC (Thomas Franck): "The stock market's biggest buying force is on track to post a historic November as corporations resume a rapid pace of share buybacks after third-quarter earnings announcements. 'November is shaping up to be the strongest buyback month on record,' J.P. Morgan quantitative strategist Marko Kolanovic wrote… In the past four weeks as earnings announcements wound down, buybacks have averaged $3.3 billion daily, with the number of announcements running at the fastest pace in the past three years, according to TrimTabs…"

Trump Administration Watch:

November 5 - Reuters (Steve Holland): "U.S. President Donald Trump said… that China has hurt the United States economically but was ready to make a deal on trade and he was open to a fair agreement. 'We've tariffed $250 billion, taxed them, of their product coming into the United States and we have plenty more to go, but they want to make a deal and if we can make the right deal, a deal that's fair, we'll do that. Otherwise we won't do it,' Trump said…"

November 7 - Wall Street Journal (Chester Dawson): "The Democratic Party's success in capturing the House of Representatives is expected to complicate President Trump's push to negotiate new trade deals and cut regulation for industries such as autos and energy, policy analysts and market strategists say. 'You're not going to see any further major legislative changes. There's not going to be another tax cut and no major policy revisions for business,' said Terry Haines, senior political strategist at… Evercore ISI. 'But at the same time, nothing passed under Trump gets rolled back.' The GOP will also face new hurdles on tax-cutting initiatives set in motion last year that have boosted business profits and helped to lift consumer confidence. House Democrats are likely to push for tax increases-including possibly raising the corporate tax rate as part of a budget deal-and block Republican efforts to make permanent new individual income tax cuts passed last year, economists and policy analysts say."

November 9 - Wall Street Journal (Richard Rubin): "Democrats will aim to reverse tax cuts for high-income households when they take the House majority, setting up a clash with Republicans that will color fiscal debates over the next two years, including prospects for a bipartisan deal to improve the nation's infrastructure. Both sides have signaled they want a spending program to improve the nation's roads, bridges, tunnels and other public works, but disagree on how to fund it. Last year, Senate Democrats proposed a $1 trillion infrastructure plan, financed largely by rolling back cuts in the corporate and top individual tax rates. Republicans are sure to reject that idea."

Federal Reserve Watch:

November 4 - Financial Times (Steven Scheer): "A fear of negative interest rates kept the Federal Reserve from raising rates earlier than some policymakers had hoped, former Fed vice chairman Stanley Fischer said… 'The possibility of having a negative interest rate frightened the heck out of everybody who had to set the interest rate,' Fischer, who served as vice chair for 3-1/2 years until last October, told a farewell conference…"

U.S. Bubble Watch:

November 7 - Wall Street Journal (Reid J. Epstein and Janet Hook): "The midterm elections brought to a head a decadelong realignment of the U.S.'s major political parties, with Democrats winning contests in and around major cities while Republicans carried rural and small-town America. The result-Democrats gained 27 GOP-held House seats to take the majority, with 17 races still undecided as of Wednesday evening, while Republicans added two seats to their Senate majority, with three still unsettled-was less a wave than the continuation of a slow-moving lava flow that began following Barack Obama's election in 2008. Just as rural white voters fled the Democratic Party after Mr. Obama took office, educated suburbanites abandoned the GOP after President Trump's election. Those trends continued Tuesday, and will not only alter the governing coalitions in Washington but also will change how and where candidates engage with the American electorate."

November 8 - Reuters (John Kemp): "The U.S. government's finances are on an unsustainable trajectory and are likely to worsen further after the mid-term elections… The U.S. federal government's outlays exceeded its receipts by $779 billion in Fiscal Year 2018… The budget deficit would have been even worse at $823 billion if certain outlays had not been brought forward and recorded in the previous financial year because the first day of Fiscal 2018 fell on a weekend. Even so, the deficit increased to 3.8% of gross domestic product, up from 3.5% the previous year, and the highest since Fiscal 2013, when the economy was still recovering from the global financial crisis. Government receipts increased by just $14 billion (less than 1%) while outlays rose by $127 billion (around 3%), worsening the deficit by $113 billion compared with the previous year."

November 4 - Wall Street Journal (Theo Francis): "U.S. companies said they are tempering the effects of escalating tariffs with China through price increases or changes to their supply chains, but they warn investors that the picture could worsen next year. Tariffs have slowed U.S. timber and grain exports, raised the cost of imported clothes hangers and heavy-equipment materials, and compressed profit margins for computer chip and tool makers, among other effects, according to an analysis of results and comments from the roughly 75% of S&P 500 companies that have reported third-quarter earnings. 'The negative impact is pretty widespread across the S&P 500,' said Binky Chadha, chief U.S. equity and global strategist at Deutsche Bank. Still, he said, the overall effect so far is mostly modest."

November 9 - Reuters (Jason Lange): "U.S. producer prices rose more than expected in October and at their fastest pace in six years but measures of underlying price pressure cooled… Prices paid by producers rose 0.6% in October, the biggest gain since September 2012, with much of the increase fueled by a jump in costs for energy and trade services… Producer prices outside food, energy and trade services rose 0.2% in October, down from a 0.4% gain in September. Compared to a year earlier, these core prices were up 2.8%..."

November 4 - Wall Street Journal (Corrie Driebusch and Maureen Farrell): "Tech entrepreneurs who for years were reluctant to wade into the public stock market have been jumping in lately with both feet. As their shares outperform, newly public tech companies have been returning to the market to sell more stock at a nearly unprecedented clip. About 44% of the so-called follow-on stock offerings from U.S.-listed technology companies in the first 10 months of the year have come within 180 days of an initial public offering. That would be the second-highest yearly percentage since Dealogic began collecting data in 1995. In a sign of the big pops tech companies have come to expect, they are selling just 17% of themselves on average in IPOs this year, the smallest proportion on record. Technology shares that debuted on U.S. exchanges this year are up 22% on average through the end of October… Overall, proceeds from share sales this year by already-public tech companies are the highest they have been since 2000."

November 7 - CNBC (Diana Olick): "Rising interest rates are now clearly taking their toll on potential homebuyers. Total mortgage application volume fell 4% last week from a week earlier and plunged 16% from a year ago, according to the Mortgage Bankers Association… Mortgage applications to purchase a home led the volume lower, falling 5% for the week to the lowest level in two years. Purchase applications were 0.2% lower than a year ago."

November 6 - Bloomberg Businessweek (Heather Perlberg): "The Taube twins, Seth and Brook, make money the old-school bankers' way: They lend it. But the Taubes don't run a bank. What they run are business development companies, firms that ply the booming trade of private loans. BDCs have been around since the 1990s. Similar to closed- end mutual funds or real estate investment trusts, they usually trade as stocks, but each one is essentially a portfolio of investments. In the case of BDCs, the investments are loans to companies. Lately, they've spread like kudzu as investors' appetite for private lending has grown. About 90 of them now sit atop a combined $97 billion. That's more than double their assets five years ago. The pitch for private debt is simple. Many banks have been pulling back on loans, while pension funds, endowments, hedge funds, and the like have plenty of money to play with. So why not have investors lend money to businesses directly?"

November 4 - CNBC (Stephanie Landsman): "David Stockman warns a 40% stock market plunge is closing in on Wall Street. Stockman, who served as President Reagan's Office of Management and Budget director, has long warned of a deep downturn that would shake Wall Street's most bullish investors. He believes the early rumblings of that epic downturn are finally here. It comes as the S&P 500 Index tries to rebound from its worst month since 2011. 'No one has outlawed recessions. We're within a year or two of one, he said… He added that: 'fair value of the S&P going into the next recession is well below 2000, 1500 - way below where we are today.'"

China Watch:

November 4 - Bloomberg: "If Chinese President Xi Jinping is getting ready to make big concessions to the U.S., his much anticipated speech at a Shanghai trade fair didn't show it. Xi hit back against President Donald Trump's 'America First' policies... with some of his most pointed language yet, denouncing 'law of the jungle' and 'beggar-thy-neighbor' trade practices. At the same time, he didn't outline any new proposals that would suggest he was prepared to meet Trump's demands, such as halting forced technology transfers or rolling back support for state-owned enterprises… 'All countries should strive to improve their business environment and solve their own problems,' Xi told the inaugural China International Import Expo, which featured more than 3,600 companies from 172 countries, regions and organizations. 'They shouldn't always whitewash themselves and blame others, or act like a flashlight that only exposes others, but not themselves.'"

November 7 - Reuters (Ben Blanchard and Philip Wen): "China wants to resolve problems with the United States through talks but it must respect China's choice of development path and interests, President Xi Jinping said… ahead of a meeting with the U.S. leader in Argentina… China and the United States should correctly judge each other's strategic intentions, and while China wanted to resolve problems via talks, the United States should respect China's choice of development path and legitimate interests, Xi added. Xi said attention should be paid to 'the increase in negative voices related to China in the United States', without elaborating."

November 6 - Bloomberg (David Tweed, Enda Curran and Alfred Cang): "A top Chinese official's offer of trade talks with the U.S… did little to assuage concerns that the world's two largest economies were headed for a confrontation that could disrupt the global order. Chinese Vice President Wang Qishan -- a long-time ally of President Xi Jinping -- told Bloomberg's New Economy Forum in Singapore that Beijing remained ready to discuss solutions to its trade war with the U.S. But Wang also warned that China wouldn't again be 'bullied and oppressed by imperialist powers,' underscoring fears by business and political leaders on hand that rising nationalism in both countries would be harder to manage."

November 7 - Reuters (Lusha Zhang and Ryan Woo): "China reported much stronger-than-expected exports for October as shippers rushed goods to the United States, its biggest trading partner, racing to beat higher tariff rates due to kick in at the start of next year… China's exports rose 15.6% last month from a year earlier…, picking up from September's 14.5% and beating analysts' forecasts for a modest slowdown to 11%."

November 9 - Associated Press (Joe McDonald): "China's auto sales sank for a fourth month in October as an unexpectedly painful slump in the global industry's biggest market deepened. Purchases of SUVs, sedans and minivans contracted 13% from a year earlier to just over 2 million units… Sales for the 10 months through October fell 1% from a year earlier to 19.3 million vehicles. That was well below forecasts of growth in mid-single digits after last year's anemic 1.4% expansion."

November 6 - Bloomberg (Annie Lee): "Foreign banks' mainland China exposure exceeded $2 trillion for the first time in first half of the year but… growth slowed compared with 18.3% for the whole of 2017, when tight onshore credit conditions encouraged offshore borrowing… The rise in foreign bank's mainland China exposure remains risk despite the slowdown, Fitch said… Hong Kong banks' overall mainland China exposure, which accounts for almost half of all the foreign banks, rose by 2.3% in 1H18 and their lending to private mainland entities rose by 12.1% during this period, Fitch said…"

November 4 - Wall Street Journal (Stella Yifan Xie and Chao Deng): "China's central bank is placing new regulations on the financial sector to tame runaway growth, beginning with five conglomerates including Ant Financial Services Group, as Beijing signals its resolve to curb risk even as economic growth slows. Ant Financial, the world's most valuable financial technology startup, retail and property giant Suning Commerce Group and three government-backed firms-China Merchants Group, Shanghai International Group and Beijing Financial Holdings Group-will face stricter capital-reserve requirements and risk-management rules under a pilot program… The new rules are expected to be rolled out for all financial holding firms during the first half of 2019…"

November 6 - Bloomberg: "More signs have emerged that China's housing market is cooling, with sales in the secondary market, land purchases by developers and contracted sales at the biggest builders all falling last month… Sales of existing homes, which are quarantined from the government curbs on the new home market, last month plunged to a four-year low in 10 major cities… Lackluster sales will likely weigh on existing-home prices in coming months, Shanghai-based analyst Wang Zhaojin said. In September, new-home price growth slowed for the first time in seven months. Cash-strapped developers are also pulling back. Land sales in 40 cities tracked by CRIC fell 0.5% in the first 10 months from the same period a year ago, a sharp contrast to the previous two years when land sales surged about 40%. With builders facing a record $18 billion of bond maturities in the first quarter of 2019, the cooling in the land market is set to intensify."

November 4 - Financial Times (Alice Woodhouse): "Growth in China's services sector slowed in October, coming in at a 13-month low according to a private survey. The Caixin-Markit services purchasing managers' index fell to 50.8 in October from 53.1 in September, falling closer to the 50-point level separating expansion from contraction. That was the lowest reading since September 2017. New business recorded the first stagnation in almost 10 years as respondents noted subdued demand. Companies reported a less optimistic outlook for the coming 12 months, with the lowest level of confidence reported since July."

November 7 - Bloomberg: "Chinese brokerages are boosting capital to protect against a market plunge that threatens the value of $640 billion worth of shares pledged as collateral. Securities firms have extended more than a third of China's stock-backed loans, which may go sour and force lenders to offload the shares. To cushion themselves, at least three of the country's biggest brokerages have announced capital raising plans in recent months, joining the nation's big banks in strengthening buffers. Questions surrounding the stability of brokerages has been a key concern for investors as China's stock market has plunged 20% this year."

November 7 - Bloomberg (Selcuk Gokoluk): "In the span of just 11 months, China went from having no distressed dollar-denominated corporate bonds to having more than any other emerging market. The world's second-biggest economy has 15 bonds whose option-adjusted spreads over U.S. Treasuries were above 1,000 bps as of Nov. 6… That's more than all the other nations on the gauge, combined. An ongoing trade war and slower economic growth after years of breakneck expansion are straining the nation's highly-leveraged corporate sector. Property developers in particular are facing surging borrowing costs as refinancing pressures intensify amid the government's effort to rein in real estate prices."

EM Watch:

November 9 - Bloomberg (Justin Villamil): "Mexican assets extended declines as investors grow increasingly concerned that the incoming president's administration will be a drag on businesses and the economy. The benchmark stock index fell to the lowest level in 2 ½ years, the currency slumped and borrowing costs climbed a day after a lawmaker from President-elect Andres Manuel Lopez Obrador's left-wing Morena party surprised investors by proposing to cut certain bank commissions."

November 5 - Bloomberg (Marc Champion): "Turkey's consumer inflation accelerated more than expected last month as the weak lira continued to fuel price gains. The inflation rate rose to 25.2% from 24.5% in September, above the median estimate of 25%... The annual inflation figure remains highest since June 2003."

Central Bank Watch:

November 3 - Bloomberg (Mihir Sharma): "Is central bank independence the next casualty of the age of populism? In the U.S., President Donald Trump has declared that the Federal Reserve is 'going loco.' He blames Fed Chairman Jerome Powell for threatening 'his' recovery and for market volatility... In India, reports emerged this week that the government might invoke a never-before-used section of the law governing the Reserve Bank of India to force it to reverse course on some recent controversial policies. The government wants the central bank to loosen lending restrictions… and turn over more of its cash reserves, presumably to fund populist spending ahead of next year's elections… Meanwhile, in Europe, the populists who have seized power in Italy spent the past week attacking European Central Bank President Mario Draghi, a fellow Italian, after he warned that Italy's borrowing costs would escalate unless it kept to euro-zone fiscal restrictions. Luigi di Maio, the head of the populist Five Star Movement and Italy's deputy prime minister, complained that Draghi was 'poisoning the atmosphere.'"

November 4 - Reuters (Leika Kihara): "Bank of Japan Governor Haruhiko Kuroda reiterated that policy makers will be more mindful of the rising cost of prolonged stimulus, though the central bank chief ruled out the chance of a near-term interest rate hike. Kuroda said there was 'no reason' now for the BOJ to follow in the footsteps of its U.S. counterpart in normalising policy with inflation still distant from its 2% target. 'The BOJ fully recognises that, by continuing monetary easing, financial institutions' strength will be cumulatively affected.. Although these risks are judged as not significant at this point ... the BOJ will scrutinise developments and encourage financial institutions to take action as necessary,' he said."

Italy Watch:

November 6 - Wall Street Journal (Federica Cocco): "Italian business executives are sounding the alarm. The composite purchasing managers' index that tracks both services and manufacturing sectors in the Italian economy fell to 49.3 in October, the lowest reading since November 2013 and below the 50 mark that separates growth from contraction."

Europe Watch:

November 4 - Financial Times (Miles Johnson and Davide Ghiglione): "Italy's deputy prime minister believes Rome's controversial spending plans will become 'a recipe' for reviving European growth and that the continent is ready to abandon austerity and embrace the deficit-busting approach of US president Donald Trump. Luigi Di Maio, leader of the Five Star Movement, Italy's largest political party, said he believed dialogue with Brussels would resolve the fight brewing over Rome's budget ahead of European elections next year, which he said would show electoral support for austerity policies had been exhausted. 'If the recipe works here, it will be said at a European level: we should apply the recipe of Italy to all other countries,' Mr Di Maio said…"

Global Bubble Watch:

November 6 - Bloomberg (Enda Curran, Michelle Jamrisko and Michael Heath): "The world economy faces risks ranging from surging non-financial corporate debt to U.S. fights with creditors and the potential for a new global dividing line. Those concerns dominated the second day of the Bloomberg New Economy Forum in Singapore…, where former Federal Reserve Chair Janet Yellen warned the U.S. might struggle to cope with lending risks that have spread beyond banks. Larry Fink, chairman of BlackRock Inc., questioned the wisdom of the U.S.'s fights with lenders who fund 40% of its budget deficit. And in the starkest warning of the day, former Treasury Secretary Hank Paulson said an 'economic iron curtain' could emerge as the U.S. and China throw up trade walls. 'Washington now strikes many people as attempting to disrupt all aspects of China's external economic relationships,' Paulson said… 'This risks setting Washington up for a new round of battles with its allies and partners -- the very partners it needs to help alter Chinese behavior.'"

November 3 - Bloomberg (Enda Curran, Alessandro Speciale and Rich Miller): "The world's major economies that entered 2018 accelerating in sync risk entering 2019 decelerating in sync. The shift is being led by China, where the economy's weakest performance since 2009 is set to worsen unless a peace can be struck in the trade war with the U.S. Factory readings from Asia already show a fallout, with Taiwan, Thailand and Malaysia slipping into contraction territory. The euro-area too is losing momentum, expanding in the third quarter at half the pace of the prior three months as Italy and Germany stagnated. That comes just as inflation is picking up, setting up a complex 2019 for European Central Bank policy makers who have pledged to dial down monetary support."

Japan Watch:

November 4 - Financial Times (Robin Harding): "Haruhiko Kuroda, governor of the Bank of Japan, has sent his clearest signal yet that the years of massive monetary stimulus are over and his next move will be towards tighter monetary policy. Speaking to business leaders in Nagoya, Mr Kuroda said Japan was 'no longer in a stage where decisively implementing a large-scale policy to overcome deflation was judged as the most appropriate policy conduct'. His remarks highlight the BoJ's steady shift towards a tightening bias on monetary policy. It has tapered off its asset purchases - while still proclaiming it wants to buy ¥80tn a year - and in July it raised the effective ceiling on 10-year bond yields from 0.1 to 0.2%."

Fixed Income Bubble Watch:

November 6 - Bloomberg (Brian Chappatta): "You know a market is hot when investors fret over losses that would look like a rounding error just about anywhere else. The $1.3 trillion U.S. leveraged-loan market snapped a 14-month win streak in October, falling 0.03%, according to the S&P/LSTA Leveraged Loan Total Return Index. Apparently that was enough to spook investors into thinking the party's over. Retail buyers pulled $1.5 billion from leveraged-loan funds in the week through Oct. 31, the fifth-largest exodus ever… Mutual funds lost almost $1 billion. In the Invesco Senior Loan exchange-traded fund, known by its ticker BKLN, short interest built up to an unprecedented level after it suffered its biggest outflow ever."

November 5 - Wall Street Journal (Daniel Kruger): "Asian investors are proving less and less eager to buy U.S. government bonds, even as the Treasury Department prepares to sell $1.3 trillion of new debt in the new fiscal year. Foreigners increased their holdings of Treasurys by $78 billion in the first eight months of this calendar year… That is just over half of what they bought in the same period last year. Holdings have particularly stagnated in a number of emerging Asian economies-including South Korea, Singapore, Thailand and Taiwan-which have prized U.S. government debt as a capital bulwark since the 1997 Asian currency crisis. Many observers assume the U.S. has no trouble finding demand for its debt in the vast pool of world-wide governments, financial institutions, mutual funds and individual investors who want to own the world's major risk-free asset. Yet the Treasury is finding fewer buyers in some parts of the world, leaving domestic investors such as mutual funds to pick up the slack."

November 7 - Wall Street Journal (Matt Wirz and Cezary Podkul): "Wall Street financiers are reviving a complex transaction seldom seen since the financial crisis: collateralized debt obligations. Issuance of corporate debt CDOs has tripled this year to at least $3.8 billion, according to… S&P Global Market Intelligence. While still a small market, the increase shows investors are embracing complexity in pursuit of returns by reviving a type of financial engineering largely dormant since the crisis."

Leveraged Speculation Watch:

November 7 - Wall Street Journal (Lindsay Fortado): "Hedge funds suffered their worst month in October in seven years as equity strategies were hit by a sell-off in technology stocks. Hedge Fund Research's index that tracks all strategies was down about 3%, its worst monthly decline since September 2011… That brings the index's performance to negative 1% for the year. HFR's equity hedge fund index fell 4.25% in October - its worst performance in nearly three years - while the index that tracks funds that invest in technology stocks fared the worst, with a decline of 4.7%."

November 2 - Wall Street Journal (Juliet Chung and Rachael Levy): "Hedge funds that rode the technology wave up are getting bruised on the way down. Tiger Global Management posted a 9.4% net loss in its tech-focused hedge fund last month… the fund is up roughly 10% net for the year through October… Less specialized hedge funds were hit as well. Soroban Capital Partners was down 9% for the month, while Glenview Capital Management and Melvin Capital Management lost 11% and 15%... Suvretta Capital Management lost 8.1% in October… Third Point's losses of 6.7% to 6.9% in its funds-a loss of roughly $1 billion in a month-have taken it into the red for the year."

November 4 - Financial Times (Chris Flood): "Shifts in hedge fund positions are watched by other institutional investors as important short-term directional market signals, particularly when the outlook for an asset class is unclear. Société Générale, the French investment bank, has for the first time combined into a single indicator measures of hedge fund positioning across equities, bonds, currencies and commodities. The new SG multi-asset risk indicator, or Mari for short, is designed to help calibrate just how optimistic or cautious overall positioning by hedge fund managers compares with history. Mari suggests that risk appetite among hedge fund managers has cooled from the extreme levels early this year, while still high by historical standards. 'Hedge funds' risk-on positioning strikes us as far too optimistic. As a consequence, we expect further downside,' said Arthur van Slooten, a strategist with Société Générale…"

November 6 - Bloomberg (Lu Wang): "The crowd has yet to disperse. At the end of the worst month in seven years, hedge funds showed few signs they've soured on the technology and consumer stocks at the heart of the sell-off. The opposite, in fact: Goldman Sachs data show those groups were the most heavily bought in the last five days of October. Client notes from a handful of prime brokerages shed light on how much trauma was endured by big traders during October's downdraft, in which the S&P 500 slid 6.9%. To date, while data suggests they yanked leverage as stocks fell, there's scant evidence the carnage has altered their opinion on which stocks to own."

Geopolitics Watch:

November 6 - Wall Street Journal (Greg Ip): "Few people have championed U.S. engagement with China as forcefully or successfully as Henry Paulson, first at Goldman Sachs…, later as Treasury Secretary, and now as elder statesman. So when Mr. Paulson concludes engagement is failing and an 'economic Iron Curtain' may soon descend between the two, it's a sobering statement of the perilous state of relations between the two economic superpowers. In a speech…, Mr. Paulson warns China its behavior has alienated American friends and unified the American public against it. He is less critical of the U.S. but nonetheless believes it has unrealistic expectations of China and of its own allies. If neither changes course, the result will be 'a long winter in U.S.-China relations' and 'systemic risk of monumental proportions.'"

November 6 - Financial Times (Henry Paulson): "Over the course of my 50-year career, with the exception of the 2008 financial crisis, I have never seen the public and private sectors buffeted by so much risk. These new risks are not financial, but they are unprecedented in their character, not just their scope. Businesses face heightened political risks. While this is not new, in the past such risks simply shaped the context in which global firms operated. Successful companies could navigate through them. Now, politics threatens to disturb the foundations of the global system. Governments, meanwhile, confront unprecedented business risk because the private sector generates so much disruptive innovation."

November 5 - Bloomberg (Marc Champion): "Fu Ying recalls vividly how, as a young woman, she'd get woken by sirens in the middle of the night for drills to practice for a Soviet invasion. It was the time of China's traumatic Cultural Revolution and, although the farm she'd been sent to was more than 200 miles from the border, the threat seemed imminent-strong enough, it turned out, to throw Maoist China into the arms of its capitalist nemesis, the U.S. Today's world could hardly look more different. The U.S.-China realignment that began with President Richard Nixon's 1972 visit to Beijing has been reversed in the most consequential geopolitical shift since the fall of the Berlin Wall. China and Russia are now as close as at any time in their 400 years of shared history. The U.S., meanwhile, has targeted both countries with sanctions and China with a trade war. 'There is no sense of threat from Russia. We feel comfortable back-to-back,' says Fu, now chairwoman of the Foreign Affairs Committee of China's National People's Congress…"

November 5 - Reuters (Lesley Wroughton and Parisa Hafezi): "The United States… restored sanctions targeting Iran's oil, banking and transportation sectors and threatened more action to stop its 'outlaw' policies, steps the Islamic Republic called economic warfare and vowed to defy… Trump's moves target Iran's main source of revenue - its oil exports - as well as its financial sector, essentially making 50 Iranian banks and their subsidiaries off limits to foreign banks on pain of losing access to the U.S. financial system."

November 3 - Reuters (Tim Kelly): "U.S. fighter jets darted over the Western Pacific on Saturday as the nuclear powered USS Ronald Reagan aircraft carrier joined Japanese destroyers and a Canadian warship for the biggest combat readiness war game ever staged in and around Japan."

Friday, November 9, 2018

Friday Evening Links

[Reuters] Oil slide, China worries jolt Wall Street

[BloombergQ] Oil Falls 10th Day, Longest Losing Streak Ever as OPEC Gathers

[Reuters] White House adviser Navarro to Wall Street: Stay out of U.S.-China trade talks

[CNBC] At least 75,000 homes in Southern California at risk from massive fires

[Reuters] In high-level talks, U.S. presses China to halt militarization of South China Sea

Friday's News Links

[BloombergQ] Stocks Fall on Oil, China Concerns; Dollar Gains: Markets Wrap

[Reuters] China stocks fall further, financials top drag

[Reuters] Treasuries-U.S. yields trim fall as producer prices jump in Oct

[Reuters] Emerging Markets-Strong dollar pressures Latam FX, Brazil stocks lower

[Reuters] Energy, services fuel jump in U.S. producer prices

[Reuters] Fed officials point to vulnerabilities behind hot U.S. labor market

[Reuters] China's producer inflation slows again in October on ebbing domestic demand

[Reuters] In China, response to pledged share meltdown stirs concern

[BloombergQ] A Fifth of China’s Homes Are Empty. That’s 50 Million Apartments

[AP] China auto sales fall in October, deepening slump

[CNBC] China's Xi tries to reassure the country's worried private companies

[Reuters] How Mattis is trying to keep U.S.-China tensions from boiling over

[NYT] At China’s Internet Conference, a Darker Side of Tech Emerges

[NYT] U.S. and China Are Playing ‘Game of Chicken’ in South China Sea

[WSJ] Fed Holds Rates Steady, Signals More Rate Increases Ahead

[WSJ] Fed Doesn’t Budge

[BloombergSub] China Lays Out Banks' Lending Targets for Private Companies

[WSJ] Democratic House Win Sets Up Clash Over Trump Tax Cuts

[FT] Economy takes a back seat in US midterm elections

[FT] Seattle property suffers from sell-off

[FT] China’s fracking push leaves trail of dirty water woes

[BloombergSub] Quants Are Facing a Crisis of Confidence

Thursday, November 8, 2018

Thursday Evening Links

[Reuters] Asia stocks sag as Fed tempers Wall St. rally, dollar firm

[BloombergQ] Stocks Pull Back as Dollar Strengthens After Fed: Markets Wrap

[Reuters] Dollar jumps after strong economy keeps Fed on track for December hike

[Reuters] Italian govt bond yields rise on government infighting, growth revisions

[CNBC] Fed unwavering in message that interest rates will keep going higher

[CNBC] Fed leaves rates unchanged, notes slowing in business investment

[CNBC] Here's what changed in the new Fed statement

[CNBC] Interest rates could hit new decade high even if Fed does nothing at its meeting

[BloombergQ] Wall Street’s New Risk Machine

[Reuters] U.S. 30-year mortgage rates jump to 7-year high - Freddie Mac

[CNBC] The bull market's biggest buyer is back — companies are buying back stock at a record pace this month

[BloombergQ] Visa Headaches Discourage Foreign Applicants to U.S. B-Schools

[WSJ] Quant King D.E. Shaw Finds Stock-Picking Can Be Difficult

[FT] Investors start to fret about ballooning US public debt

Thursday's News Links

[Reuters] Wall Street dips as weak earnings dampen surge from midterm elections

[Reuters] World stocks score longest winning run of 2018 ahead of Fed

[AP] Fed is set to keep rates on hold before a hike later in the year

[Reuters] China October export growth surprisingly strong in race to beat higher U.S. tariffs

[Reuters] Respect our choices, China's Xi says ahead of Trump G20 meeting

[Reuters] Democrat-led House seen backing Trump’s China trade war, scrutinizing talks with allies

[BloombergQ] Wall Street Says Fed Is in Denial About $4 Trillion Dilemma

[Reuters] U.S. government's borrowing binge poses global risks: Kemp

[WSJ] Federal Reserve Likely to Keep Interest Rates Steady

[WSJ] Volatility Heightens Focus on Fed Statement

[FT] Washington unnerved by China’s ‘military-civil fusion’ on AI

[BloombergSub] China Has More Distressed Corporate Debt Than All of EM Combined

[BloombergSub] Big China Brokers Seek to Raise Capital as Default Risks Linger

Wednesday, November 7, 2018

Wednesday Evening Links

[Reuters] Post-election Wall Street surge leads Asia higher, dollar off lows

[Reuters] Wall Street jumps 2 percent amid relief after U.S. midterm elections

[Reuters] Health stocks up on U.S. vote; insurers hit records

[Reuters] Fed likely on steady course even as U.S. political landscape shifts

[Reuters] Investors pull $18.5 billion from U.S. bond funds in one week: ICI

[WSJ] What the Midterm Election Shows: America’s Two Parties Live In Divergent Worlds

[WSJ] Democratic House Threatens Trump’s Business Agenda

[WSJ] Hedge Funds Revive the Junk Bond CDO

[FT] October was worst month for hedge funds in 7 years

Wednesday's News Links

[Reuters] Stocks Climb as Investors Cheer On U.S. Gridlock: Markets Wrap

[Reuters] Money Markets-U.S. three-month LIBOR climbs to decade high

[BloombergQ] The Treasury Market Has a Big Chicken-and-Egg Problem

[CNBC] After midterms, Trump's economic programs appear safe, but new tensions could cause market volatility

[Reuters] China Oct FX reserves drop to 18-month low as pressure on yuan grows

[CNBC] Mortgage applications drop to 4-year low as interest rates hit 8-year high 

[BloombergQ] Yellen Leads Chorus of Concern Over Risks Facing Global Economy

[BloombergQ] Paulson Warns of ‘Economic Iron Curtain’ Between U.S., China

[WSJ] Ten Takeaways From the 2018 Midterm Elections

[WSJ] Once an Optimist on U.S.-China Relations, Henry Paulson Delivers a Sobering Message

[FT] China spends $32bn to protect renminbi from trade war

[FT] Paulson: We are living in an age of unprecedented risks

[FT] Record share buybacks should be raising alarms

Tuesday, November 6, 2018

Tuesday Evening Links

[CNBC] Stock futures rise on hope Republicans performing better than expected in midterms

[CNBC] This map shows where the Senate and House majorities could be won and lost

[Reuters] Wall Street gains as investors look to U.S. elections

[BloombergQ] Oil Heads For 8-Month Low as Specter of Global Shortage Fades

[Reuters] Republican strategists sweat over suburban, women votes in mid-terms

[BloombergQ] Midterms May Spur Increased U.S. Fiscal Spending, Not Gridlock

[CNBC] If Democrats win the House, history says the stock market will struggle next year

[Reuters] Key governor races will shape America's future politics

[BloombergQ] Goldman Says Hedge Funds Dove Right Back Into Tech at Rout's End

[BloombergQ] Only in Leveraged Loans Is a 0.03% Loss Reason to Panic

Tuesday's News Links

[BloombergQ] U.S. Stocks Climb as Dollar Slips Amid Election: Markets Wrap

[Reuters] Oil prices down on Iran sanction exemptions, demand concerns

[Reuters] Money Markets-Dollar LIBOR resumes rise ahead of Fed meeting

[CNBC] Here's what every major Wall Street firm expects from the election and how to play it

[ABC] Election Day 2018 LIVE: Americans head to the polls in historic contest, with Trump presidency at forefront

[BloombergQ] China Still Ready to Talk Trade With Trump, Xi's No. 2 Says

[CNBC] Beijing is ready for talks with the US to resolve trade issues: China's vice president

[BloombergQ] Wage Gains of 3% Taking Hold as U.S. Employers ‘Need to Pay Up’

[Reuters] 'We're heading for no deal Brexit,' Northern Ireland DUP lawmaker says

[Reuters] Eurogroup meeting consolidates Italy budget standoff, pushes yields higher

[BloombergQ] El-Erian: Diverging Economies Will Keep Driving Markets

[WSJ] Trump Agenda on the Line as Voters Head to the Polls

[WSJ] Not Just Midterms: Investors Bracing for Packed November Calendar

[WSJ] Market Boogeyman May Come for Bonds, Not Stocks

[WSJ] Where to Find Treasury Buyers? Not Asia

[WSJ] Supply Crunch Looms in Commodities Markets

[FT] What the midterms will mean for US policy: three scenarios

[FT] Italian PMI falls to lowest level since 2013

[FT] QE end holds few fears for German bond market

[BloombergSub] Trump’s Trade War Is Making Russia and China Comrades Again

Monday, November 5, 2018

Monday Evening Links

[CNBC] Asia stocks up in morning trade; investors await US midterm elections

[Reuters] Wall Street boosted by financials, energy, defensive sectors

[Reuters] Trump says China wants to make a deal on trade, he wants right deal

[CNBC] Midterm election outcome could be 'glowing good news' or 'disaster' for markets

[CNBC] Corporate profits are reaching their peak and history shows that's bad news for the stock market

[Reuters] Italy tells euro zone peers working on compromise over budget: official

[FT] Italy’s recipe for another eurozone financial crisis

Monday's News Links

[BloombergQ] Tech Slump Drags on U.S. Stocks as Crude Rallies: Markets Wrap

[Reuters] Investors slam brakes on stocks rally as trade, Fed worries dominate

[BloombergQ] Italy's Bonds Drop as Leaders Defiant Before Eurogroup Meeting

[Reuters] Oil prices fall as U.S. grants Iran sanction waivers to major importers

[BloombergQ] Both Parties Brace for Surprises as Midterm Campaign Goes Down to the Wire

[BloombergQ] Xi's Swipes at Trump Show China Standing Its Ground in Trade War

[CNBC] Xi Jinping Criticizes ‘Law of Jungle’ in Veiled Swipe at Trump

[CNBC] China's Xi again talks up commitment to 'free trade'

[Reuters] Kuroda concedes BOJ's easy policy hurting banks, but rules out rate hike

[CNBC] David Stockman: Epic downturn is here, brace for 40% market plunge

[BloombergQ] Turkish Inflation Climbs as Lira Slump Feeds Into Prices

[Reuters] U.S. imposes more sanctions on Iran, Tehran decries 'bullying'

[NYT] China Seeks Allies as Trump’s Trade War Mounts. It Won’t Be Easy.

[WSJ] Key Races to Watch in Tuesday’s Midterm Elections

[WSJ] Fading Hopes for U.S.-China Trade Truce Hit Markets

[WSJ] From Farms to Pharma, What the Midterms Mean for Business

[WSJ] Companies Feel the Tariff Pinch

[FT] Must-read stories to understand the US midterm elections

[FT] China’s Xi Jinping hits out at ‘law of the jungle’ trade policies

[FT] China services PMI slips to 13-month low

[FT] Hedge funds overly optimistic on risk, SocGen finds

[FT] BoJ governor Kuroda hints at monetary tightening

Saturday, November 3, 2018

Saturday's News Links

[BloombergQ] Where the Midterm Race Stands Days Before U.S. Vote: Election Countdown

[CNBC] Red Wave, Blue Wave: What could happen to markets if Republicans win big or lose big on Tuesday

[BloombergQ] Can Central Banks Survive the Age of Populism?

[BloombergQ] Hedge Fund ‘Hotels’ Burned Managers Who Sought Refuge in October

[Reuters] U.S. carrier leads warships in biggest ever Japan defense war game

[NYT] How the Economic Lives of the Middle Class Have Changed Since 2016, by the Numbers

[WSJ] Tech Swoon Stings Hedge Funds

[FT] Investors face high stakes in US midterm elections

Weekly Commentary: MBS and the Core

The Dow (DJIA) traded as low as 24,122 in late-Monday afternoon trading. By Friday's open, the Dow had rallied 1,457 points, or 6.0%, to 25,579. Relatively speaking, the Dow was a tame kitten. From Monday's intraday lows, the Nasdaq100 rallied as much at 7.8%. The Semiconductors won this week's Wild Animal competition, rallying 12.7% (week's lows to highs). At 11.9%, the Biotechs were a close second. The Homebuilders (XHB) rallied as much as 11.3% before ending the week with a gain of 7.3%.

A couple obvious questions come to mind: Bear market rally or just another "buy the dip, don't be one" opportunity for a market again ready to scale new heights? Is President Trump now ready to strike a trade deal with China - or was he just goosing markets ahead of the midterms?

Let's start with the markets. They certainly had the likeness of a classic "rip your face off" bear market rally. The Goldman Sachs Most Short index surged 9.0% off Monday lows. For the week, this index rose 6.1%, showing off a negative 2.5 beta versus the S&P500's return (6.1%/2.4%). In the semiconductor space, heavily shorted On Semiconductor, NXP Semiconductor, AMD and Micron Technology gained 23.9%, 18.5%, 14.8% and 13.9%, respectively. A long list of heavily shorted retail stocks gained double-digits, as the Retail index (XRT) surged 4.3% for the week.

There were a number of heavily shorted biotech stocks that posted 20% plus gains for the week. A bunch of regional banks rose between five and nine percent. And I'd be remiss for not mentioning (everyone's favorite short) Tesla. In just 10 sessions, Tesla rallied (38%) from a low of $253 to Friday's $346 close.

It's certainly worth noting that short squeeze dynamics were not limited to U.S. equities. Let's start at the epicenter of global crisis dynamics, the big banks. Hong Kong's Hang Seng (Chinese) Financials index rallied as much as 8.3% off the week's lows, to end the week up 6.3%. Japan's TOPIX Bank index rallied 5.4% for a weekly gain of 3.9%. Italian banks rose 6.1% this week. European banks (STOXX600) rallied 7.4% off Monday lows, to post a weekly rise of 5.4%. Deutsche Bank recovered almost 11% to finish the week up 8.8%.

The Wildness definitely included the emerging markets. The popular EEM ETF rallied as much as 10% off of Monday's lows to end the week up 5.6%. Major stock indices were up 7.0% in Argentina, 6.8% in South Africa, 5.0% in India, 4.4% in Taiwan and 4.0% in Turkey. Brazil's Ibovespa index gained 3.4% this week, boosting gains from June trading lows to 25%. Curiously, the Brazilian real declined 1.6% this week. Overall for the week, key EM currencies were caught up in the global short squeeze. The Argentine peso jumped 3.8%, the Turkish lira 3.0%, the South African rand 2.1%, the South Korean won 1.8%, the Indonesian rupiah 1.8%, and the Indian rupee 1.4%. Down 3.3%, the Mexican peso was the glaring exception.

Ten-year Treasury yields traded as low as 3.06% in nervous Monday trading. And while yields ended the week significantly higher, it's worth noting that the October 5th closing high of 3.23% was only 17 bps higher than Monday's "risk off" low yield. That's a meager pullback in yields considering the drubbing global equities were taking.

There's a number of possible explanations for the recent stickiness of Treasury yields, including: 1) Inflationary pressures have attained more momentum than in the recent past. 2) Global de-risking/deleveraging is impacting global market liquidity more generally, with effects even in safe haven sovereign debt markets. 3) U.S. fixed-income markets have succumbed to deleveraging and resulting waning liquidity. 4) Markets now don't expect the Fed to respond to "risk off" dynamics as early or aggressively as in the past. 5) The U.S. economy maintains significant momentum, especially in terms of tight labor markets.

Ten-year Treasury yields jumped eight bps Friday on the back of stronger-than-expect payrolls data. At 3.21%, yields are only two bps below the seven-year highs posted a month ago. October's 250,000 job gains were a full 50,000 above expectations, as tight labor markets turn tighter by the day. After 10 months, y-t-d job gains of 2,125,000 are running 18% above comparable 2017. October's 32,000 added manufacturing jobs were double expectations, with 2018's 227,000 added manufacturing jobs 64% above comparable 2017. Last month's 3.7% unemployment rate compares to October 2017's 4.1%. And October's 3.1% y-o-y gain in Average Hourly Earnings was the strongest since April 2009 - and compares to the year ago 2.3%. If I were a bond, I'd be on edge.

November 2 - Bloomberg (Christopher Maloney): "The bloodbath last month in the mortgage-bond market points to what the future may be like without Federal Reserve hand holding. Investors are now wondering if anyone will step in to stop the bleeding. Returns on mortgage-backed securities in October lagged Treasuries by 37 bps, the most since November 2016… Last month's weakness coincided with the Fed ending its mortgage purchases as it winds down the $1.7 trillion MBS portfolio it amassed since the financial crisis to support the market… In a situation rarely seen over the last four decades, there isn't going to be a government entity -- which before the financial crisis included Fannie Mae and Freddie Mac -- at hand to provide liquidity for mortgage-backed securities…"

Benchmark MBS yields jumped 10 bps Friday to 4.06%, the high going back to April 2011. Yields surged 16 bps this week and are now up 108 bps y-t-d.

My thesis holds that the global Bubble has been pierced at the "Periphery." After erupting at the "Periphery," de-risking, deleveraging and Contagion have been gravitating toward the "Core." Sinking MBS prices (spiking yields) confirm my view that "Periphery to Core Crisis Dynamics" have now attained important momentum at the "Core."

My assumption has been that a most-prolonged period of ultra-low rates and QE liquidity backstops has heavily incentivized leveraged speculation around the world. Globally, levered "carry trade" strategies (borrow cheap in one currency to purchase higher-yielding securities elsewhere) have proliferated. It's worth noting that the NY Fed's holdings on behalf of foreign (chiefly central bank) owners of Treasuries/Agencies dropped $19.8bn last week (to a 3-month low $3.414 TN), the biggest decline since April. I see this as likely evidence of speculative de-leveraging, capital flight, and foreign central bank purchases (dollar sales) to support their currencies. For years now, speculative international flows to EM were at least partially recycled into U.S. markets (including central bank purchases of Treasuries and Agencies). It would appear these flows have slowed significantly - and perhaps are at risk of reversing as global deleveraging gains further momentum.

I believe huge speculative leverage has accumulated here at home as well. I have posited that higher-yielding corporate Credit has been as bastion of speculative excess. And going all the way back to the early-nineties, the mortgage arena has been treasured by a flourishing leveraged speculating community. The MBS marketplace has generally been highly liquid, with securities easily financed in the booming "repurchase agreement" ("repo") market.

The above Bloomberg article noted a "situation rarely seen over the last four decades." The market is questioning the source of market liquidity going forward. This has become a pressing issue now that the Fed has begun liquidating its MBS portfolio. The predicament is compounded by the GSE's unsound financial position, one that limits their capacity to provide a powerful liquidity backstop as they did throughout the nineties and for much of the mortgage finance Bubble period (until their growth was impeded by revelations of accounting fraud).

If it is correct that de-risking/deleveraging dynamics have reached the "Core," the MBS marketplace faces challenges. In particular, as the hedge funds suffer mounting losses elsewhere (i.e. stocks, global markets, corporate Credit…), they will turn more averse to risk generally, including a vulnerable MBS marketplace. And as the speculator community moves to de-risk in MBS, it is not obvious who will step up to buy. Alternatively, as they hedge MBS interest-rate risk by shorting Treasuries, this places additional selling pressure on a Treasuries marketplace already facing massive issuance and formidable Fed liquidations.

Mortgage-backed securities are a problematic instrument. When yields drop, borrowers refinance and become more likely to purchase new homes. MBS owners get their money back much sooner than they would prefer (with lower reinvestment yields).  When yields rise, MBS duration increases as borrowers hold their attractive mortgages longer.  MBS holders are stuck for longer.

Over recent decades, this fundamental MBS weakness was more than offset by two critical factors: One, the GSE's eagerness to purchase securities, especially during deleveraging/crisis backdrops. Second, the Fed's willingness to aggressively cut interest-rates in the event of "risk off" marketplace liquidity issues (or, better yet, to buy $1.8 TN of MBS). With rates and yields currently rising, MBS vulnerability is obvious. Meanwhile, traditional offsetting liquidity advantages (GSEs and Fed) are anything but readily apparent going forward.

After the mortgage finance Bubble collapse, it was only natural to anticipate a significant widening of risk premiums throughout the mortgage complex. I expected a fundamental repricing of mortgage Credit, but this was not to be. The Fed slashed short-term borrowing costs to zero and expanded its balance sheet to $4.5 TN, including the purchase of $1.8 TN of mortgage-backed securities. Moreover, after a period of shrinkage, the GSEs again began expanding their mortgage holdings. Between expanding Fed and GSE holdings and the relatively weak household demand for mortgage borrowings, mortgage borrowing costs collapsed.

MBS yields averaged 7.75% during the nineties, and then sank to 6.00% during 2000 through 2007. Well, benchmark MBS yields averaged an extraordinary 3.25% between 2009 and 2017. This pricing anomaly might have finally run its course, with major ramifications for the mortgage marketplace, overall securities market liquidity and the general economy. For a very long time, the MBS marketplace acted as both a key source of marketplace liquidity and a centerpiece of government (Treasury and Federal Reserve) policy activism. The Fed's post-crash efforts to collapse borrowing costs both significantly reduced household mortgage payments, while enriching the holders of mortgage securities. But now losses for levered holders of MBS are mounting, including for the Fed and the barely capitalized GSEs. Payback Time.

I don't want to dismiss the importance of the unfolding U.S. and China trade war - or possible successful negotiations. A trade agreement would be market positive. The markets were buoyed this week by constructive comments from President Trump and Chinese officials. Commentators were, however, understandably skeptical of the timing just days before the midterms. Yet it doesn't take highly speculative "oversold" markets much to be incited into a decent short squeeze.

At the same time, I don't believe the U.S./China trade spat has been the major force behind global de-risking/deleveraging. Stated differently, this dispute worsened the situation but was not the catalyst behind the bursting of the global Bubble. Indeed, from a de-risking/deleveraging perspective, Friday's yield jump was ominous. Fixed-income investors and speculators have no doubt been hoping that "risk off" would provide some relief on the market yield front. With an equities short squeeze and strong payrolls data, the pressure just became too intense.

MBS yields have broken out to the upside, with corporate and Treasury yields close behind. Equity market players are certainly hoping a trade deal is in the works. Fixed-income players not so much. And it is within fixed-income on a global basis that problematic leverage lurks. Leveraged "risk parity" strategies saw some relief from this week's equities rally, but they must look at rising market yields with increasing trepidation.

We're now only days from the midterms. It's an especially difficult event to handicap from a market standpoint. Red wave or blue wave? I don't recall midterm elections where the outcome had the potential to be so market moving. Blue wave - big. Red wave - big. Making things all the more interesting, there has been major market instability heading into the elections. This ensures there have been major shorting and hedging efforts - to hedge/speculate both on the markets and midterm outcomes.

I'll assume large quantities of put options and derivative protection have been purchased. In the event of a red wave, there is ample firepower for an unwind of hedges and short covering to spark a rally. In the event of a blue wave, a market downdraft would see aggressive hedge-related selling by players caught on the wrong side of derivative protection previously sold. The stock market response to the anticipated blue House and red Senate split decision is not clear at all. But maybe equities have become a diversion. In a week where the focus was on short squeezes and tantalizing equities rallies, perhaps the more decisive development was in surging MBS and corporate yields.

For the Week:

The S&P500 rose 2.4% (up 1.8% y-t-d), and the Dow gained 2.4% (up 2.2%). The Utilities slipped 0.6% (up 0.6%). The Banks surged 4.8% (down 6.9%), and the Broker/Dealers rallied 5.4% (down 0.6%). The Transports jumped 4.0% (down 2.3%). The S&P 400 Midcaps rose 3.7% (down 2.0%), and the small cap Russell 2000 surged 4.3% (up 0.8%). The Nasdaq100 gained 1.6% (up 8.9%). The Semiconductors surged 7.5% (down 1.1%). The Biotechs jumped 5.8% (up 13.7%). With bullion about unchanged, the HUI gold index rallied 3.3% (down 22.3%).

Three-month Treasury bill rates ended the week at 2.27%. Two-year government yields rose 10 bps to 2.91% (up 102bps y-t-d). Five-year T-note yields gained 13 bps to 3.04% (up 83bps). Ten-year Treasury yields jumped 14 bps to 3.21% (up 81bps). Long bond yields rose 15 bps to 3.46% (up 72bps). Benchmark Fannie Mae MBS yields surged 16 bps to 4.08% (up 112bps).

Greek 10-year yields were unchanged at 4.27% (up 20bps y-t-d). Ten-year Portuguese yields slipped two bps to 1.88% (down 6bps). Italian 10-year yields dropped 13 bps to 3.32% (up 131bps). Spain's 10-year yields added a basis point to 1.57% (up 1bp). German bund yields jumped eight bps to 0.43% (unchanged). French yields gained five bps to 0.79% (unchanged). The French to German 10-year bond spread narrowed three to 36 bps. U.K. 10-year gilt yields rose 11 bps to 1.49% (up 30bps). U.K.'s FTSE equities index rallied 2.2% (down 7.1%).

Japan's Nikkei 225 equities index rallied 5.0% (down 2.3% y-t-d). Japanese 10-year "JGB" yields increased two bps to 0.13% (up 8bps). France's CAC40 recovered 2.7% (down 4.0%). The German DAX equities index jumped 3.1% (down 10.6%). Spain's IBEX 35 equities index rose 3.0% (down 10.5%). Italy's FTSE MIB index rallied 3.8% (down 11.3%). EM equities were mostly higher. Brazil's Bovespa index gained 3.4% (up 15.7%), while Mexico's Bolsa declined 1.0% (down 7.9%). South Korea's Kospi index recovered 3.4% (down 15.1%). India's Sensex equities index rallied 5.0% (up 2.8%). China's Shanghai Exchange jumped 3.0% (down 19.1%). Turkey's Borsa Istanbul National 100 index surged 4.0% (down 18.4%). Russia's MICEX equities index jumped 3.7% (up 12.7%).

Investment-grade bond funds were hit with outflows of $3.753 billion, and junk bond funds saw outflows of $1.043 billion (from Lipper).

Freddie Mac 30-year fixed mortgage rates slipped three bps to 4.83% (up 89bps y-o-y). Fifteen-year rates declined six bps to 4.23% (up 96bps). Five-year hybrid ARM rates dropped 10 bps to 4.04% (up 81bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down three bps to 4.79% (up 61bps).

Federal Reserve Credit last week declined $15.3bn to $4.121 TN. Over the past year, Fed Credit contracted $300bn, or 6.8%. Fed Credit inflated $1.310 TN, or 47%, over the past 313 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt dropped $19.8bn last week to $3.415 TN. "Custody holdings" were up $49bn y-o-y, or 1.4%.

M2 (narrow) "money" supply jumped $25.5bn last week to a record $14.287 TN. "Narrow money" gained $541bn, or 3.9%, over the past year. For the week, Currency increased $1.9bn. Total Checkable Deposits rose $29.4bn, while Savings Deposits declined $16.6bn. Small Time Deposits increased $3.7bn. Retail Money Funds gained $7.1bn.

Total money market fund assets added $2.7bn to $2.884 TN. Money Funds gained $155bn y-o-y, or 5.7%.

Total Commercial Paper slipped $0.6bn to $1.087 TN. CP gained $39.7bn y-o-y, or 3.8%.

Currency Watch:

October 30 - Bloomberg (Keith Bradsher): "As the United States and China swap threats and mete out increasingly punishing tariffs, the world is watching to see whether Beijing turns to one of its most potent economic weapons. It involves the number 7. China's currency, the renminbi, has been gradually losing value since mid-April, and on Tuesday it was at its weakest point in a decade. If the currency weakens any further, it could fall below the psychologically important level of 7 renminbi to the dollar. The last time it took more than 7 renminbi to buy a dollar was in May 2008, as the world was slipping into a financial crisis."

October 30 - Bloomberg (Tian Chen): "How much further will China's currency slide after it touched the weakest level in a decade on Tuesday? The answer may depend in large part on whether Beijing can keep capital outflows under control. Official figures released over the past few weeks suggest money is increasingly leaving China's borders, a reminder that motivated citizens and companies still have ways to get their cash out despite a tightening of capital controls after the country's shock devaluation in 2015. While there's little to suggest a stampede for the exits is imminent, the risk increases with every tick lower in the yuan."

The U.S. dollar index was little changed at 96.484 (up 4.7% y-t-d). For the week on the upside, the New Zealand dollar increased 2.2%, the South African rand 2.1%, the South Korean won 1.8%, the Australian dollar 1.5%, the British pound 1.1%, the Swedish krona 0.8% and the Singapore dollar 0.3%. For the week on the downside, the Mexican peso declined 3.3%, the Brazilian real 1.6%, the Japanese yen 1.1%, the Swiss franc 0.7%, the Norwegian krone 0.2% and the euro 0.1%. The Chinese renminbi rallied 0.77% versus the dollar this week (down 5.57% y-t-d).

Commodities Watch:

October 30 - Bloomberg (Ranjeetha Pakiam): "Goldman Sachs… says that 'fear' has made a comeback and gold is benefiting as stocks slide and investors fret more about the possibility that the U.S. economy may tumble back into recession. Bullion's recent advance 'happened on the back of the market sell-off and spike in volatility,' analysts including Mikhail Sprogis and Jeffrey Currie, wrote… 'In our view, it represents a rebound in fear-related demand for gold with ETFs beginning to build after several months of declines.'"

The Goldman Sachs Commodities Index dropped 3.1% (up 1.9% y-t-d). Spot Gold was little changed at $1,233 (down 5.4%). Silver was about unchanged at $14.475 (down 14%). Crude sank another $4.73 to $62.87 (up 4%). Gasoline dropped 6.3% (down 5%), while Natural Gas rallied 2.9% (up 12%). Copper jumped 2.5% (down 15%). Wheat added 0.7% (up 19%). Corn gained 1.0% (up 6%).

Market Dislocation Watch:

October 31 - Reuters (Lewis Krauskopf): "Gridlock, Blue Sweep or Red Repeat? Wall Street is closely watching the U.S. midterm Congressional elections next week, as policy decisions that could sway the economy, corporate decision-making and consumer spending hinge on the results. Should his fellow Republicans maintain or extend their grip on Congress, President Donald Trump may be emboldened to pursue more of his political agenda, including further tax reforms. By contrast, Democratic gains that allow the party to control the House of Representatives, and possibly the Senate, could stifle Trump's policy aims and perhaps lead to attempts to impeach him."

October 30 - Reuters (Richard Leong): "A measure of strain in U.S. money markets grew to its widest level in 2-1/2 months on Tuesday as a gauge of interbank borrowing costs increased for a 10th straight session to a fresh decade high. The London interbank offered rate for banks to borrow three-month dollars from each other climbed 1.4 bps to 2.54100%, the highest since October 2008. LIBOR is the rate benchmark for $200 trillion of dollar-denominated financial products, mainly interest rate swaps and floating-rate loans."

Trump Administration Watch:

November 2 - Bloomberg (Brendan Scott): "As recently as Sunday, Donald Trump was telling supporters China was "not ready" to cut a deal to end their trade war. Last night, he decided it is. The U.S. president ordered Cabinet officials to draft terms for an agreement between the world's two largest economies, Jenny Leonard, Saleha Mohsin and Jennifer Jacobs report. The breakthrough came after Trump's "long and very good" phone call with Chinese counterpart Xi Jinping - their first confirmed conversation in six months. 'They want to make a deal,' Trump told a rally… 'He wants to do it.' Global markets rallied on the news. But Chinese state media said the call came at Trump's request, suggesting another catalyst: the Congressional midterm elections on Tuesday. In the campaign's final weeks, Trump has unveiled a flurry of proposals few expect to pan out, including cutting middle-class taxes and ending birthright citizenship."

November 1 - Reuters (Joseph Campbell and Susan Heavey): "U.S. President Donald Trump on Thursday said trade discussions with China were 'moving along nicely' and that he planned to meet with Chinese President Xi Jinping at the upcoming G-20 summit, after the two had a 'very good' talk. Earlier on Thursday, Chinese Premier Li Keqiang told a group of visiting U.S. politicians that China and the United States could overcome their differences and get relations back on track if they worked together in a spirit of mutual respect."

October 30 - Reuters (John Ruwitch and Ben Blanchard): "U.S. President Donald Trump said he thinks there will be 'a great deal' with China on trade, but warned that he has billions of dollars worth of new tariffs ready to go if a deal isn't possible. 'I think that we will make a great deal with China and it has to be great, because they've drained our country,' Trump told FOX News Channel's 'The Ingraham Angle'…"

October 29 - Bloomberg (Jenny Leonard and Jennifer Jacobs): "The U.S. is preparing to announce by early December tariffs on all remaining Chinese imports if talks next month between presidents Donald Trump and Xi Jinping fail to ease the trade war, three people familiar with the matter said. An early-December announcement of a new product list would mean the effective date -- after a 60-day public comment period -- may coincide with China's Lunar New Year holiday in early February. The list would apply to the imports from the Asian nation that aren't already covered by previous rounds of tariffs -- which may be $257 billion using last year's import figures, according to two of the people."

October 30 - Bloomberg (Randall Woods): "The U.S. Treasury Department said government borrowing this year will more than double from 2017 to $1.34 trillion as the Trump administration finances a rising budget deficit. Specifically, the department expects to issue $425 billion in net marketable debt from October through December, lower than the $440 billion estimated in July... The Treasury sees an end-of-December cash balance of $410 billion, compared with its previous forecast of $390 billion. From July through September, the Treasury said it issued $353 billion in net marketable debt, compared with its earlier prediction of $329 billion in borrowing."

October 31 - Bloomberg (Saleha Mohsin and Liz Capo McCormick): "The U.S. Treasury Department announced debt sales will surpass levels last seen when the country was digging out of its worst economic crisis since the Great Depression. This time around, fiscal stimulus is adding fuel to an already growing economy. A ballooning budget shortfall -- fueled by tax cuts, spending hikes and an aging population -- is driving the U.S. Treasury to raise its long-term debt issuance at its quarterly refunding auctions to $83 billion from $78 billion three months ago… The need for the Treasury to raise auction sizes for a fourth straight quarter is also partially driven by the Federal Reserve's decision not to replace some of its Treasury holdings when they mature as it winds down crisis-era stimulus measures."

Federal Reserve Watch:

October 29 - Bloomberg (Christopher Anstey): "The Federal Reserve isn't likely to come to the rescue of stock investors this time around, given the likelihood of persistent inflationary pressures, Morgan Stanley's cross-asset strategy team warned. 'The Fed and other developed market central banks are in a fundamentally different place than 2010-17,' Morgan Stanley strategists led by Andrew Sheets…wrote… With core inflation picking up, 'this makes it materially more difficult to sound dovish while remaining consistent with a mandate' to contain price gains…'"

October 30 - Bloomberg (Craig Torres, Lisa Lee and Jesse Hamilton): "Daniel Tarullo, the former Federal Reserve governor who transformed the way the U.S. central bank supervises Wall Street banks, called on regulators to scrutinize risky corporate lending markets and publish the results. 'We know more leveraged lending is being done outside the prudentially-regulated institutions,' Tarullo said… That raises questions about who owns this debt,' where the risks are and what funding streams 'would have the potential to be cut off and result in a fire sale.'"

October 31 - Reuters (Sarah Foster and Rich Miller): "Former Federal Reserve Chair Janet Yellen said she's concerned President Donald Trump's complaints about U.S. monetary policy may undermine confidence in the central bank as she expressed support for more interest-rate increases to keep the economy on track. 'It's important that the public have confidence in the Fed,' she said… 'I think it's appropriate for the Fed to be raising rates' some more and 'I have confidence in my successor and his colleagues.' 'Nothing is ever set in stone and I would watch developments very carefully. But at this point it seems to be that at least a couple of more interest rate increases are going to be necessary to stabilize growth at a sustainable pace' and stabilize the labor market so that it doesn't overheat, she said."

U.S. Bubble Watch:

November 2 - Reuters (Lucia Mutikani): "U.S. job growth rebounded sharply in October and wages recorded their largest annual gain in 9-1/2 years, pointing to further labor market tightening that could encourage the Federal Reserve to raise interest rates again in December. The Labor Department's closely watched monthly employment report on Friday also showed the unemployment rate was steady at a 49-year low of 3.7% as 711,000 people entered the labor force, in a sign of confidence in the jobs market."

October 30 - Bloomberg (Bruce Einhorn): "The next round in the U.S.-China trade war could be the costliest one yet for American consumers. The U.S. is said to be preparing to announce tariffs on all remaining Chinese imports by early December, and the impact at the checkout counter may be as much as 10 times higher than earlier rounds of levies, according to a report from Citigroup economists. 'Amid tight labor markets and higher input costs, we think there is a risk that firms decide to pass through some of the costs to consumers,' analysts Cesar Rojas, Catherine Mann and Veronica Clark wrote… 'The additional tariffs on China have the potential to boost inflation even more than what we currently anticipate.'"

October 31 - CNBC (Jeff Cox): "Employment costs rose more than expected in the third quarter in a sign that more inflation could be brewing in the U.S. economy. The Labor Department's employment cost index rose 0.8% for the period, ahead of the estimate of 0.7% from economists surveyed by Refinitiv. Wages and salaries rose 0.9%, well ahead of expectations for 0.5%. Benefit costs were up 0.4%. On a yearly basis, wages and salaries jumped 3.1%, the biggest increase in 10 years."

October 31 - CNBC (Jeff Cox): "Companies continued to hire at a brisk pace in October, with private payrolls rising by a better-than-expected 227,000, according to a report… from ADP and Moody's Analytics. Economists surveyed by Refinitiv had expected growth of 189,000 after September's 218,000, which was revised lower from an initial count of 230,000. Gains came primarily from the services sector, which added 189,000 positions. Construction and manufacturing added 17,000 each."

October 31 - Wall Street Journal (Austen Hufford and Annie Gasparro): "U.S. companies are raising prices on everything from plane tickets to paint, passing on to customers higher costs for fuel, metal and food after years of low inflation. Clorox Co. said it raised prices in the latest quarter on such products as cat litter, and Coca-Cola Co. reported higher prices for the quarter. Other goods makers, as well as airlines, also have announced price increases over the past week. The higher prices have effectively ended a long period of low inflation that led the Federal Reserve to keep short-term interest rates near zero for years. 'We think 2019 will be more inflationary than we have seen historically since the recession,' Kellogg Co. Chief Executive Steve Cahillane said…"

October 29 - Wall Street Journal (Jon Hilsenrath and Harriet Torry): "What if that was as good as it gets? The Commerce Department reported… that U.S. gross domestic product expanded at a 3.5% annual rate in the third quarter. Coming off a 4.2% growth rate in the second quarter, it marked one of the best six-month stretches for the U.S. economy in the past decade. However, private analysts and the Federal Reserve say a slowdown is looming. Economists surveyed by The Wall Street Journal estimate the growth rate will slow to 2.5% by the first quarter of next year and 2.3% by the third quarter of 2019. The Fed is expecting growth to slow further to a 1.8% rate by 2021."

October 29 - Wall Street Journal (AnnaMaria Andriotis): "Two of the biggest credit-card issuers are tightening lending standards, an unusual move in a strong economy that may signal longer-term concerns about consumers' financial health. Capital One… and Discover… said last week they have become more cautious in how they're handling credit limits. The two lenders said they don't currently see signs of deterioration in consumers' ability to pay their debts but do question how much longer the economic recovery will last. 'In so many ways, one can't help but be struck by…just how good the economy [at] this point is,' Capital One Chief Executive Richard Fairbank said… 'And in some ways, it almost feels too good to be true.'"

October 30 - CNBC (Diana Olick): "Mortgage interest rates didn't begin their recent surge until the start of September, but home prices were already feeling pressure, as fewer people could afford what was for sale. Nationally, prices rose 5.8% in August compared with August 2017, according to the S&P CoreLogic Case-Shiller home prices index. That is less than the 6% annual gain in July. The index's 10-City Composite rose 5.1% annually, down from 5.5% in the previous month. The 20-City Composite posted a 5.5% year-over-year gain, down from 5.9% in the previous month."

October 30 - CNBC (Diana Olick): "Higher mortgage rates and overheated home prices hit Southern California home sales hard in September. The number of new and existing houses and condominiums sold during the month plummeted nearly 18% compared with September 2017, according to CoreLogic. That was the slowest September pace since 2007… Sales have been falling on an annual basis for much of this year… 'The double whammy of higher prices and rising mortgage rates has priced out some would-be buyers and prompted others to take a wait-and-see stance,' said Andrew LePage, a CoreLogic analyst…"

October 31 - CNBC (Diana Olick): "Home sales in the San Francisco Bay area have been falling for months, but in September buyers pulled back in an even bigger way. Sales of both new and existing homes plunged nearly 19% compared with September 2017, according to CoreLogic. It marked the slowest September sales pace since 2007 and twice the annual drop seen in August."

October 30 - MarketWatch (Andrea Riquier): "Housing-market headwinds are keeping American homeowners in their properties for the longest stretches on record, in a sharp distortion of the mobility Americans have for decades prized. Across the country, homes that sold in the third quarter of this year had been owned an average of 8.23 years, according to… Attom Data Solutions. That's almost double the length of time a home sold in 2000, when Attom's data begin, had been owned."

October 28 - Financial Times (Alistair Gray): "Landlords have pushed up rents for US retailers to new post-crisis highs in spite of the competitive onslaught from Amazon, with asking figures in the hotspots such as Miami rising more than 10% in the past year. The 4% average rise… is the latest sign that confidence in bricks and mortar stores is recovering, especially in better-off parts of the country… Supply has begun to tighten even in shopping malls… The proportion of mall units either vacant or coming up for lease declined for the first quarter in seven, to 5.8%."

China Watch:

October 31 - Bloomberg: "China's leadership signaled that further stimulus measures are being planned, as disappointing economic data showed that the current piecemeal approach isn't working. The nation's economic situation is changing, downward pressure is increasing, and the government needs to take timely steps to counter this, according to a statement from a Politburo meeting Wednesday chaired by President Xi Jinping… With those pressing constraints, officials have added modest policy support so far, ranging from tax cuts to regulatory relief, rather than repeating the fiscal firepower seen after a previous slowdown. Investors seem unpersuaded by the drip-feed approach with the yuan hovering around a decade low and stocks sliding."

October 31 - Reuters (Stella Qiu, Ryan Woo and Lusha Zhang): "China's manufacturing sector in October expanded at its weakest pace in over two years, hurt by slowing domestic and external demand, in a sign of deepening cracks in the economy from an intensifying trade war with the United States… The official PMI - which gives global investors their first look at business conditions in China at the start of the last quarter of the year - fell to 50.2 in October, the lowest since July 2016 and down from 50.8 in September."

October 29 - Bloomberg: "China's state-sponsored push to dominate technologies of the future is one of the biggest stumbling blocks to prospects for resolution to the U.S. trade war… Officials from both sides are pessimistic about chances for a breakthrough when Donald Trump and Xi Jinping meet on the sidelines of the Group of 20 summit in Buenos Aires on Nov. 30-Dec. 1. While Trump is still dangling the threat of additional levies, Xi is digging in for a protracted conflict by cushioning the impact on growth and showing no signs he's willing to compromise plans to strengthen his nation's technological prowess."

October 26 - Reuters (Samuel Shen and John Ruwitch): "China's banking and insurance regulator has urged lenders in Beijing to avoid forced liquidation of pledged shares, as part of efforts to help stabilize the country's stock market, Chinese financial magazine Yicai reported… The Beijing branch of the China Banking and Insurance Regulatory Commission (CBIRC) said unrealized losses or lending risks associated with shares that banks hold as collateral against loans will not be part of regulatory inspections…"

October 29 - Bloomberg: "China's securities regulator said the market misinterpreted recent news about five state-backed funds liquidating their stock holdings, assuring investors that 'relevant institutions' have actually increased their positions. The rare government comments about China's 'national team' of state investors, delivered in a brief statement on the China Securities Regulatory Commission's website…, follow a $3.2 trillion selloff in local shares that has rattled investor confidence in Asia's largest economy."

October 30 - Bloomberg: "It's never been easy to figure out where China's government ends and the private sector begins, but the dividing line is getting increasingly blurry as the nation's stock market sinks. At least 47 non-state companies in China have disclosed plans to sell stakes to government-backed investors in 2018… The pace of such deals accelerated in recent months as the country's $3.2 trillion equity rout squeezed company founders who pledged their stakes as collateral for loans. Faced with margin calls and cut off from the banking system, some entrepreneurs have had little choice but to accept state money."

October 29 - Reuters (Sue-Lin Wong): "More than 70% of U.S. firms operating in southern China are considering delaying further investment there and moving some or all of their manufacturing to other countries as the trade war bites into profits, a business survey showed… Sixty-four percent of the companies said they were considering relocating production lines to outside of China, but only 1% said they had any plans to establish manufacturing bases in North America."

October 30 - Financial Times (Gabriel Wildau): "The People's Bank of China will issue Rmb20bn ($2.9bn) in central bank bills in Hong Kong's offshore renminbi market, part of China's efforts to support the offshore renminbi bond market by providing an interest-rate benchmark. The issuance will also serve to support the renminbi exchange rate by soaking up offshore renminbi (CNH) liquidity, raising the borrowing costs for investors who want to borrow CNH in order to bet on renminbi depreciation."

EM Watch:

October 28 - Bloomberg (Raymond Colitt, David Biller and Bruce Douglas): "Jair Bolsonaro swept to power in Brazil's presidential election Sunday, marking a hard pivot to the right that promises to open up the resource-rich economy to private investment, strengthen ties to the U.S. and unleash an aggressive crackdown on epidemic crime. The former army captain trounced Fernando Haddad, a leftist former Sao Paulo mayor whose Workers' Party became synonymous with graft, winning 55% of the vote to Haddad's 45% with almost all votes counted."

October 29 - Bloomberg (Justin Villamil): "Mexico's peso and 10-year dollar sovereign bonds fell to four-month lows after incoming president Andres Manuel Lopez Obrador canceled a $13 billion airport project for the capital, even though a third of it had already been built. The country's stocks also declined, hitting their lowest point since February 2016. AMLO, as the president-elect is known, ditched the project after almost 70% of 1.07 million people who participated in a national referendum voted against the airport, among the nation's biggest infrastructure projects. 'Markets are voting with their feet,' said Greg Lesko, a money manager at Deltec Asset Management… There's 'no positive read through on this. AMLO used a phony referendum to get what he wanted.'"

October 30 - Reuters (Rodrigo Viga Gaier): "Brazil would only sell foreign reserves in the event of a speculative attack that drives its currency nearer to 5 to the dollar, the main economic adviser to President-elect Jair Bolsonaro said… Newspaper Valor Econômico had reported on Tuesday that Paulo Guedes, whom Bolsonaro has tapped as his economy minister, proposed reducing foreign reserves to pay off debt."

October 31 - Financial Times (Laura Pitel): "Turkey's food price inflation will soar to almost 30% by the end of the year, the country's central bank governor forecasted… as he was forced to announce a sharp shift in expectations. Unveiling the bank's quarterly inflation report, Murat Cetinkaya said year-on-year food price inflation was expected to hit 29.5% by the end of 2018, upping the bank's previous forecast of 13%. The figures are alarming for Recep Tayyip Erdogan, the Turkish president, who faces local elections in March next year in which the cost of living is likely to prey on many voters' minds."

Central Bank Watch:

November 1 - Reuters (David Milliken and Alistair Smout): "The Bank of England hinted at slightly faster future rises in interest rates if Brexit goes smoothly, but warned all bets were off if next March brought a 'disruptive' departure from the EU… Bank of England Governor Mark Carney said a disruptive no-deal Brexit was not the central bank's main assumption but if there was a shock to the economy, it was not possible to say if rates would need to rise or fall in response."

October 31 - Reuters (Manoj Kumar, Suvashree Choudhury, Tanvi Mehta, Chris Thomas and Krishna N. Das): "India's government affirmed its belief in central bank autonomy…, calling it 'essential' in a bid to calm investors worried by a heated public row with the Reserve Bank of India. Indian stocks and bonds fell and the rupee weakened earlier in the day amid reports that RBI Governor Urjit Patel may consider resigning given the breakdown in relations. The media reports also said the government had invoked never-before-used powers to issue directions to the central bank governor on matters 'of public interest', related to support for the financial sector and small companies."

Italy Watch:

October 30 - Bloomberg (Kevin Costelloe and Lorenzo Totaro): "Italy's economy stalled for the first time in almost four years, putting pressure on the populist government's ambitious spending plans. The government acknowledged that the unexpected stagnation in the third quarter was a concern. Deputy Finance Minister Massimo Garavaglia said… it signals the need for more public and private investment at a time when cooling global trade has hit exports."

Europe Watch:

October 29 - Financial Times (Guy Chazan): "Angela Merkel's decision to stand down as leader of the Christian Democratic Union and not run again as chancellor in 2021 ushers in a new age in German politics: the pre-post-Merkel era. Her move was designed to quell rising discontent in her party and set it on a path of renewal, while allowing Ms Merkel to retain the reins of power as chancellor - a strategy her supporters in the CDU appeared willing to endorse."

October 30 - Financial Times (Claire Jones and Cat Rutter Pooley): "The eurozone is growing at its slowest pace for more than four years, raising the pressure on the European Central Bank to reassess whether the bloc's economy has enough fuel in the tank to cope with plans to end the institution's crisis-era stimulus. Growth in the third quarter was just 0.2%... - far weaker than the 0.4% expected. The annual pace of growth in gross domestic product was also slower than anticipated, at 1.7% during the three months to September, compared with expectations of a 1.8% rise."

October 31 - Financial Times (Clair Jones): "Inflation in the eurozone hit 2.2% in October, the swiftest rate since December 2012, on the back of the surge in energy prices. The year on year rate accelerated from 2.1% in the previous month… Energy prices rose 10.6% over the past 12 months, leading to the rise in the headline figure…"

Global Bubble Watch:

October 30 - Bloomberg (Ruth David): "Dealmakers, flush from what could be a record year for mergers and acquisitions, are watching for signs that growing protectionism and anti-globalization movements will dampen some cross-border transactions. The U.S. trade dispute with China, the U.K.'s decision to leave the European Union and security concerns around technology assets could all affect M&A in the future, panelists said at the XBMA conference… Their concerns come against the backdrop of a vigorous market for deals. Global M&A spending has hit $2.7 trillion already this year, up 26% from the same period in 2017… It's tied with 2015 as the top year for deals since 2007."

October 26 - Barron's (Fang Block): "The exponential growth of the super-rich Chinese boosted global billionaire wealth to US$8.9 trillion last year, a 19% increase from 2016 and the highest level in history, according to a UBS report… China minted two billionaires every week in 2017, with the total number from the country reaching 373. Their combined wealth expanded by 39% year-over-year to US$1.12 trillion. For context, there were only 16 billionaires in China in 2006. 'China is currently the leading country for entrepreneurs to create wealth. Nowhere else has the combination of the world's largest population, supportive government policies, rapidly liberalizing economy, and technology innovation,' says John Mathews, head of ultra-high-net worth Americas at UBS Global Wealth Management. Globally, there were 2,158 billionaires in 2017, up 179 from a year ago. The Asia Pacific region accounts for 711 billionaires, already surpassing the 682 in the Americas."

October 30 - Bloomberg: "Tycoons ranging from an Indian telecom billionaire to Singapore's king of massage chairs are delaying initial public offerings as a rout in emerging-market stocks deepens. Billionaire Sunil Mittal's Bharti Airtel Ltd. is postponing a planned listing of its $8 billion African wireless unit by about half a year… Last week, Singapore entrepreneur Ron Sim confirmed delaying plans to relist the owner of Osim, Asia's biggest massage chair maker, in Hong Kong. STX Entertainment, the U.S. film studio backed by Chinese tech tycoon Pony Ma's Tencent Holdings Ltd., is also shelving a proposed listing in the city. The volatility threatens what's been a banner year for listings out of Asia, with companies raising funds at the fastest pace in eight years… Asian firms have completed $81.3 billion of first-time share sales this year, up from $71.6 billion during the same period in 2017..."

October 28 - Financial Times (Owen Walker): "Investors fled from actively managed funds at the highest rate for seven years over the summer, dashing stockpickers' hopes of staging a comeback in more volatile trading conditions. Active funds… have lost market share to automated passive funds over the past two decades. This has sparked a crisis for investment companies that rely on the higher fee revenues they receive from active funds… Investors, however, pulled more than $86bn from active funds globally in the third quarter during a choppy period for markets, while they continued to invest in index trackers, according to Morningstar data."

Japan Watch:

October 31 - Wall Street Journal (Megumi Fujikawa): "The Bank of Japan kept its ultra-easy monetary policy in place and cited U.S.-China trade tensions as one of the biggest risks for the Japanese economy. 'As protectionist moves and trade friction between the U.S. and China escalate, we pay the most attention to the downside risk that they could pose to their own countries and also global trade and the world economy,' said BOJ Gov. Haruhiko Kuroda… The BOJ's policy board voted 7-2 on Wednesday to maintain its main policies, including setting short-term interest rates at minus 0.1% and the target for the 10-year Japanese government bond yield at around zero. The BOJ reiterated that it would keep 'extremely' low interest rates 'for an extended period.'"

Fixed Income Bubble Watch:

November 1 - Wall Street Journal (Joseph Wallace): "Companies are finding it harder to issue new debt, as the volatility battering global stocks adds to existing concerns in credit markets. Corporate bond prices have declined throughout the year and October's global market rout triggered massive outflows from credit funds. U.S. investment-grade issuance slipped 34% from September, according to… Dealogic, while high-yield issuance was down 50% from October last year. Even before October's selloff, American companies had been raising less money. By the end of September, total investment-grade issuance in 2018 was down 12% compared with the first nine months of last year, and high-yield issuance had fallen by almost a third. The value of new investment-grade corporate bonds in Europe was 75% lower in October than in September and down 40% from October 2017. High-yield issuance slumped 82% from a year ago."

October 29 - Financial Times (Colby Smith): "One of the year's best performing asset classes is starting to draw heat from regulators. Over the past month the booming $1.3tn market for leveraged loans, or those extended to highly indebted companies that are then often packaged up and sold to investors as bonds, has faced a tide of criticism from central bankers and financial watchdogs. Former Federal Reserve chair Janet Yellen warned last week of the 'systemic risks' rising from the loans, echoing concern from current Fed officials, central banks in the UK and Australia as well as the Bank for International Settlements about a market that has become a popular source of funding for leveraged buyouts and is now bigger than that for junk bonds. Official fears are being amplified by hollowing out of protections for investors who ultimately end up owning the loans…"

Leveraged Speculation Watch:

October 31 - Bloomberg (Saijel Kishan and Suzy Waite): "October's stock rout is inflicting the most pain on equity and quant hedge funds. As the U.S. stock market headed for its worst month in seven years, equity funds have slumped 6.8% through Monday, Morgan Stanley's prime brokerage group said… That brings the year's losses to 5.9%. The global turmoil has tripped up the $3 trillion hedge fund industry, wiping out what little money they had made in 2018 -- a year that has seen managers including Highfields Capital's Jon Jacobson and Tourbillon Capital's Jason Karp announce plans to exit the business. The losses also show the difficulties that most managers face in navigating episodic market turbulence. By contrast, macro managers sidestepped the mess and profited from price swings."

Geopolitics Watch:

October 31 - Financial Times (Kathrin Hille, Emily Feng and Katrina Manson): "When General Wei Fenghe, China's defence minister, took to the stage at the Xiangshan security forum organised by the People's Liberation Army…, he assured delegations from 64 countries that China's military 'has always been a staunch defender of world peace'. Yet in the same breath he issued a sharp warning: 'Taiwan is China's core interest,' Gen Wei said. 'On these issues, it's extremely dangerous to challenge China's bottom line repeatedly. If anyone tries to separate Taiwan from China, China's military will take action at all costs.'"

October 31 - Reuters (Jess Macy Yu and Ben Blanchard): "Efforts to decide self-ruled Taiwan's future by 'other than peaceful means' are a grave concern to the United States, a senior American diplomat said…, amid renewed tension between China and the island it considers a wayward province. Washington does not have diplomatic ties with Taipei, but is its main arms supplier and strongest international backer. This month, Taiwan President Tsai Ing-wen vowed to boost national security and said her government would not submit to Chinese suppression."

October 30 - Reuters (Fanny Potkin): "Chief of U.S. Naval Operations Admiral John Richardson said… the United States and China 'will meet each other more and more on the high seas' after a Chinese warship came close to a U.S. ship in the disputed South China Sea… The U.S. mission was the latest attempt to counter what Washington sees as Beijing's efforts to limit freedom of navigation in the strategic waters, where Chinese, Japanese and some Southeast Asian navies operate. China's relationship with the Russian navy should be watched 'with interest' as it grows, said Richardson…"