Wednesday, October 28, 2020

Wednesday Evening Links

[CNBC] Dow futures rise 200 points after Wall Street’s worst sell-off in months

[Yahoo/Bloomberg] S&P 500 Tumbles in Worst Stock Rout in Four Months: Markets Wrap

[Reuters] Wall Street sinks 3%, Dow at late July lows as pandemic surges

[Reuters] Treasuries -Yields flat in spite of major stock sell-off

[Reuters] Oil plunges over 5% to four-month low as pandemic surges, U.S. crude output soars

[Reuters] U.S. dollar gains on surge in COVID-19 cases, lockdowns in Europe

[Yahoo/Bloomberg] Market Pain May Just Be Getting Started

[AP] Blowout US economic growth in summer is already fading

[AP] Europe and US facing new round of shutdowns amid virus surge

[CNBC] Coronavirus live updates: French President Emmanuel Macron imposes new nationwide lockdown as coronavirus cases surge

[Reuters] Hospitals in Wisconsin, Texas under strain as COVID-19 cases surge

[CNBC] Dr. Anthony Fauci says U.S. is in a ‘bad position’ as daily coronavirus cases hit record highs

[Yahoo/Bloomberg] New Orleans Braces for Most Powerful Hurricane Since Katrina

[Bloomberg] Dudley: The Fed Is Really Running Out of Firepower

[WSJ] U.S. States Face Biggest Cash Crisis Since the Great Depression

[FT] Germany and France impose fresh curbs to slow Covid-19 spread


Wednesday Afternoon Links

[Yahoo/Bloomberg] S&P 500 Tumbles in Worst Rout in Almost Two Months: Markets Wrap

[Yahoo/Bloomberg] VIX Spikes to Highest Since June With Economy Threat Growing

[Reuters] S&P 500, Dow sink to late-Sept lows on virus woes

[Reuters] Oil Sinks With Rising U.S. Oil Stockpiles Adding to Virus Woes

[Reuters] Vote and virus: volatile markets bring reminder of March turmoil

[CNBC] Covid cases, hospitalizations continue to surge as U.S. reaches ‘critical point’ in pandemic

[Yahoo/Bloomberg] Merkel Imposes Toughest German Restrictions Since Lockdown

[Reuters] Germany to go into circuit-break lockdown as virus cases surge

[Yahoo/Bloomberg] Traders Ditch Defensive Quant ETFs as 2020 Turmoil Drags On

[Yahoo/Bloomberg] Zeta Threatens to Hit New Orleans With Powerful Wind, Floods


Tuesday, October 27, 2020

Wednesday's News Links

[Yahoo/Bloomberg] S&P 500 Drops 2%, Europe Sinks to Five-Month Low: Markets Wrap

[Reuters] Global stocks sink as coronavirus lockdowns loom

[Yahoo/Bloomberg] Oil Slumps With Europe’s Coronavirus Restrictions Growing

[Yahoo/Bloomberg] Europe Is Leading the Way Down in Markets Gripped By Covid Fears

[Reuters] Trump or Biden's big economic challenge: millions of struggling Americans

[Reuters] U.S. goods trade deficit shrinks in September

[CNBC] Homebuyer demand may have peaked as mortgage applications eke out a weekly gain

[Reuters] Factbox: These states could decide the U.S. presidential election

[Yahoo/Bloomberg] Germany Moves to Shutter Bars and Restaurants for One Month

[AP] Germany, France gear up for new lockdowns as virus surges

[CNBC] Coronavirus live updates: U.S. hits new average daily high of 71,832 cases, up 21% from last week

[Yahoo/Bloomberg] Turkish Central Bank to Reckon With Inflation as Lira Casts Pall

[Bloomberg] Hedge Funds That Planned for U.S. Election Chaos See a Blue Wave

[Bloomberg] China’s Recovery Shows Mixed Signals as Global Outlook Dims

[Bloomberg] China’s Failing Small Banks Are Becoming a Big Problem

[FT] The precarious global debt picture

[FT] Lagarde’s deflation dilemma: virus piles stimulus pressure on ECB

[FT] India takes its tussle with China to the high seas

Tuesday Evening Links

[CNBC] Dow futures fall 150 points as Wall Street grapples with rising Covid-19 cases, earnings

[Reuters] Stocks stumble, dollar dips on COVID-19, U.S. election anxiety

[Yahoo/Bloomberg] Pre-Election Stimulus Hopes Fade With Two Sides Trading Blame

[CNBC] Coronavirus live updates: Chicago reinstates indoor dining limits; health-care workers criticize Trump’s Michigan rally

[Reuters] Greenlight's Einhorn says tech stocks in bubble, hit top in September

[Yahoo/Bloomberg] Fast-Moving California Fires Threaten Million-Dollar Homes

Tuesday Afternoon Links

[Reuters] S&P 500, Dow slip on earnings worries, stimulus uncertainty

[Reuters] European stocks hit one-month low as virus fears dominate

[Reuters] Oil rise nearly 2% on U.S. Gulf shutdowns, outlook weak

[Yahoo/Bloomberg] White House Ditches Pre-Election Stimulus Hope, Sees Weeks to Go

[Reuters] Trump concedes no coronavirus relief deal before November 3 election

[CNBC] Coronavirus live updates: NYC mayor issues warning for holiday travel as hospitalizations rise in 36 states

[CNBC] Covid hospitalizations rising in 36 states as U.S. hits another record for average new cases

[CNBC] States will need billions to distribute the Covid vaccine as federal funding falls short

[Bloomberg] China’s Inexorable Rise to Superpower Is History Repeating Itself

[WSJ] France Emerges as Covid-19 Epicenter as Cases Surge Across Europe

Monday, October 26, 2020

Tuesday's News Links

[Reuters] Wall Street set for bounceback after COVID-19 keeps Europe in the red

[CNBC] Stock futures rise as market tries to rebound from Monday’s big sell-off

[Reuters] Dollar struggles as U.S. election uncertainty offsets COVID-19 concerns

[Reuters] White House says COVID-19 aid deal seen 'in coming weeks'

[CNBC] Home prices in August see biggest gains in more than two years, S&P Case Shiller says

[Reuters] U.S. core capital goods orders beat expectations in September

[CNBC] Millions poised to lose unemployment benefits in ‘enormous cliff’ at year’s end

[CNBC] Coronavirus live updates: U.S. reports average daily high of 69,967 cases, up 20% from last week

[Reuters] German minister warns of 20,000 new daily virus cases within days

[Reuters] Protests flare in Italian cities against COVID-19 restrictions

[Reuters] Wave of new COVID-19 cases crashes across U.S. and Europe as winter looms

[AP] California braces for more fire danger from winds

[Reuters] Europe swept by COVID wave amid anger at new curbs

[Yahoo/Bloomberg] Why Evergrande’s Investors Can’t Afford to Force a Default

[CNBC] Chinese companies are leading the global IPO rush amid a ‘flight from uncertainty’

[Yahoo/Bloomberg] Turkey Tweaks Key Banking Ratio to Slow Credit After Lira Plunge

[Reuters] U.S. warns of threat posed by China, signs military pact with India

[WSJ] Struggling Rental Market Could Usher in Next American Housing Crisis

[WSJ] Lenders Cracking Down on Mall Owners Behind on the Mortgage

[WSJ] Study Shows Covid-19 Antibodies Waning Over Time, Suggesting Immunity Might Wear Off

[FT] The US shale industry’s top priority: win back Wall Street

[FT] Beijing and Wall Street deepen ties despite geopolitical rivalry

[FT] Eurozone banks rein in lending due to pandemic worries

[FT] Austerity vs populism tensions overhang LatAm debt markets

Monday Evening Links

[Yahoo/Bloomberg] Asian Stocks to Track U.S. Lower as Virus Spreads: Markets Wrap

[CNBC] Stock futures flat after market sell-off amid uptick in Covid cases

[Reuters] Wall Street closes down on soaring virus cases, U.S. stimulus worries

[Reuters] Mexican, Colombian pesos lead Latam FX declines as oil prices slide

[Reuters] Pelosi optimistic of COVID-19 relief deal before Nov. 3 U.S. elections-aide

[CNBC] Coronavirus live updates: U.S. cases hit daily record, WHO says controlling Covid may require ‘sacrifice’

[Reuters] Protests flare in Italian cities against COVID-19 restrictions

[Bloomberg] Why China Evergrande’s Investors Can’t Afford to Force a Default

[FT] Hospitalisation of Covid patients surges across US

Monday Afternoon Links

[CNBC] Dow falls more than 700 points as average daily coronavirus cases hit record high

[Yahoo/Bloomberg] S&P 500 Heads for Its Biggest Rout in Seven Weeks: Markets Wrap

[Yahoo/Bloomberg] Oil Falls With Dimming Stimulus Chances and Surging Virus Cases

[Reuters] White House adviser Kudlow says COVID-19 aid talks to continue on Monday

[Reuters] U.S. new home sales drop; record low mortgage rates underpinning demand

[CNBC] Average daily new coronavirus cases in U.S. hit all-time high, Gottlieb warns of ‘exponential spread’

[Yahoo/Bloomberg] Fires Erupt in California Amid High Winds, Forcing Evacuations

[Reuters] Merkel plans 'lockdown light' to slow infection wave in Germany - Bild

[Reuters] Turkish leader backs boycott of French goods over cartoon row

Sunday, October 25, 2020

Monday's News Links

[Reuters] Stocks dip on surging virus cases, stimulus doubts

[Yahoo/Bloomberg] Tech Leads Retreat in Stocks; Dollar Strengthens: Markets Wrap

[Reuters] Turkish lira hits new lows on policy, geopolitical concerns

[Yahoo/Bloomberg] Oil Slumps Below $39 on Surging Virus and Stimulus Stalemate

[CNBC] Coronavirus live updates: U.S. hits record average daily high of 68,767 new cases

[Reuters] Vaccine hopes rise as Oxford jab prompts immune response among old as well as young adults

[Yahoo/Bloomberg] China to Sanction Boeing, Raytheon Over Arms Sales to Taiwan

[Yahoo/Bloomberg] Bond Defaults Deliver 99% Losses in New Era of U.S. Bankruptcies

[AP] Chinese leaders focus on tech as they make 5-year plan

[CNBC] China’s top leaders meet this week to plan for the next five years. Here’s what to expect

[Reuters] Emerging markets' dollar debt tops $4 trillion for first time, BIS says

[Yahoo/Bloomberg] Risks Abound for Emerging Markets in Final Week Before U.S. Vote

[Reuters] COVID-19 pandemic deals body blow to quant models, study shows

[Reuters] Factbox: Nagorno-Karabakh - old tensions behind renewed fighting

[Bloomberg] Hedge Fund Giants Lose Their Appeal as Havens in Global Turmoil

[WSJ] Pandemic Fatigue Is Real—And It’s Spreading

[WSJ] Corporate Defaults Slow, Lifting Debt Market

[FT] Chinese leadership meets to set policy direction for next 5 years

[FT] Italy and Spain introduce sweeping new pandemic measures

[FT] China’s Covid triumphalism could be premature

[FT] UAE vs Turkey: the regional rivalries pitting MBZ against Erdogan

Sunday Evening Links

[CNBC] Dow futures fall 150 points after U.S. coronavirus cases surge to record high 

[Yahoo/Bloomberg] U.S. Futures Slip; Asia Stocks Set for Muted Open: Markets Wrap

[Reuters] U.S. COVID-19 aid bill talks continue, Pelosi says

[AP] Fear and anxiety spike in virus hot spots across US

[Yahoo/Bloomberg] Winds Send California Fire Risk Soaring, Forcing Blackouts

[WSJ] Europe Imposes New Covid-19 Restrictions as Second Wave Accelerates

[FT] US state governors grapple with surge in Covid cases

Sunday's News Links

[Yahoo/Bloomberg] Saudi Index Drops Most Since May in Final-Hour Slump: Inside EM

[AP] Surging coronavirus colors White House race in closing days

[Reuters] U.S. disease expert Fauci says vaccine verdict due by early December

[Yahoo/Bloomberg] The Big Short in Treasuries Is Showing Some Pre-Election Cracks

[AP] Spain orders nationwide curfew to stem worsening outbreak

[Reuters] Italy orders bars and restaurants to close early as COVID rates surge

[Bloomberg] Time to Reset Expectations for World Economy With Virus Untamed

[FT] The world must prepare for a contested US election

Friday, October 23, 2020

Weekly Commentary: The New Massive

A most pivotal election is now only 10 days away. Joe Biden has a commanding lead in the polls. Moreover, betting sites are indicating rising odds of the Democrats taking control of the Senate (PredictIt: 64% Dems vs. 41% Republicans). The Democratic “clean sweep” scenario has become a distinct possibility.

U.S. daily COVID cases have spiked to over 80,000, with Friday setting a new single-day record. Unlike the first two “waves,” the surge in new infections is not dominated by particular metropolitan areas or a few large states. COVID has methodically dispersed throughout the heartland, with rural America in the crosshairs. This is a particularly troubling development for small town hospitals and healthcare systems facing limited capacity and scarce resources. Ominously, outbreaks have slammed many northern states early in the winter season. Over the coming weeks, the virus can be expected to shadow cooler weather advancing south.

Meanwhile, odds have tanked for stimulus legislation to be wrapped up prior to the election. Bloomberg: “Pelosi, Mnuchin Trade Blame as Stimulus Negotiations Stall.” The President’s chief of staff remains hopeful for a deal, though signs are not positive. An aid to Nancy Pelosi commented Friday evening that the Speaker also remains hopeful for a deal “soon”. Perhaps willing to be more candid, Secretary Mnuchin blamed the stalemate on Pelosi being “dug in.”

At this point, the Democrats have an incentive to dig in and hold out. If they don’t get the stimulus package they desire right now, they’re increasingly confident of moving forward when they gain control of the purse strings.

October 19 – Bloomberg (Brian Sozzi): “Break out those shovels, picks and the debit cards if a blue wave of Democrats washes into D.C. come Election Day. Goldman Sachs said… in a new note that a blue wave could lead to a whopping $2.5 trillion new stimulus plan. ‘This would likely include a stimulus package in Q1, followed by infrastructure and climate legislation. In this scenario, we would expect legislation expanding health and other benefits, financed by tax increases, to pass in Q3,’ explained Goldman’s Jan Hatzius.”

As crazy as it may sound, might Goldman’s “whopping” $2.5 TN stimulus forecast prove “conservative”? There’s a not unlikely scenario that would spur even grander spending plans. Would a Democratic “clean sweep” mean no meaningful stimulus legislation during the lame duck session? And in the event of a severe COVID winter, how voracious might the appetite for stimulus spending be by late-January?

October 21 – Financial Times (Stephen King): “In a world in which government debt is rapidly rising, it’s hardly surprising that there’s growing interest among investors in Modern Monetary Theory. After all, one of its central claims is that budget deficits are, from a financing perspective, an irrelevance. So long as increased government borrowing doesn’t lead to inflation — and, at the moment, there really isn’t much of it around — we can all afford to relax. As Stephanie Kelton notes in her book The Deficit Myth, governments with access to a printing press are ‘currency issuers’ (exceptions include, most obviously, members of the eurozone). As such, all their spending could, in principle, be financed via the creation of cash. Taxes may serve other purposes — the redistribution of income and wealth, the discouragement of ‘sinful’ behaviour — but, in the world of MMT, they serve no useful macroeconomic role.”

We’re drifting ever deeper into dangerous territory. The economy sopped up last year’s $3.1 TN federal deficit like water into a dry sponge. The conventional narrative holds that the pre-COVID economy was robust and healthy. It was neither. Instead, years of loose finance cultivated a “Bubble Economy” - a maladjusted structure that evolved into a ferocious Credit Glutton. This has become much more than some theoretical precept from Austrian economics. It’s a pressing reality, with momentous ramifications for politics, the markets and American society more generally.

Especially in the “clean sweep” scenario, it’s not inconceivable the federal government follows up last year’s 15% of GDP deficit with another 15%. My baseline deficit guesstimate would be annual deficits over the next few years in excess of 10% of GDP.

The analysis is turning quite intriguing. Humdrum is how I would characterize today’s popular “big stimulus is good for stocks” narrative. The system has commenced a grand experiment in New Massive deficit spending. This follows years of very large (formerly known as “massive”) deficits. And, of course, this fiscal experiment follows on the heels of the Fed’s decade-long QE experiment - that this year supplanted previous “massive” balance sheet growth with the New Massive.

Ten-year Treasury yields jumped nine bps this week to 0.84%, the high since June 8th. The dollar index declined 1.0% this week, trading Wednesday to the low since September 2nd. Thirty-year “long bond” Treasury yields traded as high as 1.69% in Friday trading, the high going back to March 19th.

I’ll assume a Democratic-controlled Washington – in a crisis backdrop - would likely ensure upwards of a $3 TN stimulus program – just to get started. COVID has pushed many over the edge – and it’s poised to push only harder. Millions have lost their jobs and scores of businesses have failed. Many organizations are in the process of going bust. Large numbers of state and local governments are being pushed to the brink. Many so-called “blue” cities and states came into the pandemic already financially challenged. But few state and local governments will come out of this crisis unscathed. Many colleges and universities and scores of hospitals – to the brink. Schools across the country will need assistance.

A tragedy of a black hole of financial need. Traditionally, there would be budgets, priorities and compromises. Market discipline would be lurking – the old “bond vigilantes.” James Carville from the early-nineties: “I used to think that if there was reincarnation, I wanted to come back as the president or the pope or as a .400 baseball hitter. But now I would like to come back as the bond market. You can intimidate everybody.”

There is an optimistic view: with economic recovery so far exceeding expectations, the longer fiscal stimulus is delayed the less of it that will be needed. But I fear there’s a major shoe still to drop. Over recent months, bubbling markets generated some forceful economic tailwinds. Wealth effects have boosted confidence and spending. More importantly, the loosest financial conditions imaginable have supported a record $1.4 TN of corporate debt issuance. Easy Credit Availability has supported economic activity – funding new investment as well as keeping vulnerable companies afloat. The booming MBS market and record low mortgage rates have pushed strong housing markets into Bubble territory.

All bets are off when markets falter. Sinking securities markets would see a hit to perceived wealth and confidence – while a tightening of financial conditions would choke a structurally frail economic structure. Recovery would give way to another economic leg down, with a further hit to employment, state and local finances, and general hardship throughout the economy. Such a scenario would see even greater financial shortfalls and resulting federal deficits. And what is California’s fiscal position following a financial markets downturn? In such a circumstance, where might a Democratic controlled Washington draw the line on spending? New Massive spending, deficits and Treasury issuance.

Massive new supply risks a Treasury market backlash – and we’re already seeing some backup in long-term yields. And I do appreciate the bullish view the Federal Reserve would simply step in to buy all the Treasuries necessary to ensure yields remain pegged at minimal rates.

I just don’t believe this would be a slam dunk for the Fed. For one, confidence in the dollar has begun to wane. Significantly expanding QE risks unleashing dollar and market instability. Analyzing the potential course of policymaking - New Massive fiscal and current account deficits along with potential for general U.S. instability - a crisis of confidence in the dollar cannot be ruled out.

Importantly, Federal Reserve QE resolve has yet to be tested by either dollar or Treasury market instability. A combination of both would surely have the Fed moving more gingerly on QE than markets currently anticipate.

How might a momentous political shift in Washington impact the Federal Reserve? The Fed has bestowed Washington a blank checkbook. Going forward, how might Republicans view enormous handouts to the troubled blue states that are being monetized by the Fed?

It was inevitable – and pushed forward by the pandemic: The Federal Reserve interjected itself into the deepening divide of social and political acrimony - and conflict. From 2008 to the present, the Federal Reserve has faced no serious pushback to its QE experiment. This may be about to change. I can see the Republican Party emerging from a traumatic election with a much more suspicious eye toward Federal Reserve “money printing” and deficit monetization.

I expect strong Republican pushback when it appears the Fed is monetizing the Democrats' state and local government bailouts and liberal agenda. While Republicans in such a scenario would have limited legislative recourse, the Fed does not want to be in the middle of such a hostile partisan clash. The Federal Reserve will be taking significant institutional risk, with the conservative media and a major segment of the populace adopting a critical view of the Fed’s non-traditional policy course.

For now, markets are distorted and dysfunctional. There are huge costs associated with the markets’ failure to discipline even the most egregious excess. Systemic stress is mounting rapidly, and a destabilizing bout of Market Discipline Lies in Wait. The Treasury market is vulnerable. At least for now, market faith in the almighty power of the Fed’s balance sheet holds firm.

But what about the dollar, a complex global market beyond the Fed’s control? And Washington is doing everything imaginable to put the dollar’s global reserve currency status in serious jeopardy. Almost 30 years of persistent Current Account Deficits. The New Massive ensures dollar vulnerability. Twin Deficits (fiscal and Current Account). Fed holdings expanding almost $3.2 TN over the past year. M2 “money” supply inflating $3.6 TN in the last 52 weeks.

The dollar is really lucky it has a bunch of marred competitors. But I’d still rank dollar instability near the top of the list of potential recipients of market discipline in the event of a Democratic “clean sweep.”


For the Week:

The S&P500 declined 0.5% (up 7.3% y-t-d), and the Dow fell 0.9% (down 0.7%). The Utilities added 0.9% (down 2.4%). The Banks rallied 3.7% (down 28.6%), and the Broker/Dealers increased 0.4% (up 5.5%). The Transports added 0.4% (up 9.0%). The S&P 400 Midcaps gained 0.9% (down 2.3%), and the small cap Russell 2000 increased 0.4% (down 1.7%). The Nasdaq100 fell 1.3% (up 33.9%). The Semiconductors dropped 1.6% (up 27.6%). The Biotechs lost 1.9% (up 6.1%). Though bullion added $3, the HUI gold index dropped 2.9% (up 33.8%).

Three-month Treasury bill rates ended the week at 0.085%. Two-year government yields added a basis point to 0.16% (down 141bps y-t-d). Five-year T-note yields rose six bps to 0.38% (down 131bps). Ten-year Treasury yields jumped 10 bps to 0.84% (down 107bps). Long bond yields gained 11 bps to 1.64% (down 75bps). Benchmark Fannie Mae MBS yields increased five bps to 1.41% (down 130bps).

Greek 10-year yields jumped 14 bps to 0.92% (down 51bps y-t-d). Ten-year Portuguese yields rose six bps to 0.17% (down 27bps). Italian 10-year yields jumped 11 bps to 0.76% (down 65bps). Spain's 10-year yields gained seven bps to 0.20% (down 27bps). German bund yields rose five bps to negative 0.57% (down 39bps). French yields gained five bps to negative 0.30% (down 42bps). The French to German 10-year bond spread was unchanged at 27 bps. U.K. 10-year gilt yields jumped 10 bps to 0.28% (down 54bps). U.K.'s FTSE equities index fell 1.0% (down 22.3%).

Japan's Nikkei Equities Index increased 0.5% (down 0.6% y-t-d). Japanese 10-year "JGB" yields added two bps to 0.04% (up 5bps y-t-d). France's CAC40 slipped 0.5% (down 17.9%). The German DAX equities index sank 2.0% (down 4.6%). Spain's IBEX 35 equities index rallied 0.6% (down 27.8%). Italy's FTSE MIB index declined 0.5% (down 18.0%). EM equities were mixed. Brazil's Bovespa index jumped 3.0% (down 12.4%), and Mexico's Bolsa gained 2.2% (down 11.1%). South Korea's Kospi index increased 0.8% (up 7.4%). India's Sensex equities index rose 1.8% (down 1.4%). China's Shanghai Exchange dropped 1.7% (up 7.5%). Turkey's Borsa Istanbul National 100 index slipped 0.2% (up 4.1%). Russia's MICEX equities index recovered 0.6% (down 7.5%).

Investment-grade bond funds saw inflows of $6.757 billion, and junk bond funds posted positive flows of $151 million (from Lipper).

Freddie Mac 30-year fixed mortgage rates slipped a basis point to a record low 2.80% (down 95bps y-o-y). Fifteen-year rates declined two bps to an all-time low 2.33% (down 85bps). Five-year hybrid ARM rates fell three bps to 2.87% (down 53bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-year fixed rates up three bps to 3.09% (down 102bps).

Federal Reserve Credit last week surged $65.5bn to $7.111 TN. Over the past year, Fed Credit expanded $3.178 TN, or 80.8%. Fed Credit inflated $4.300 Trillion, or 153%, over the past 415 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt last week declined $7.7bn to $3.403 TN. "Custody holdings" were down $16.7bn, or 0.5%, y-o-y.

M2 (narrow) "money" supply surged $106bn last week to a record $18.795 TN, with an unprecedented 33-week gain of $3.287 TN. "Narrow money" surged $3.639 TN, or 24%, over the past year. For the week, Currency increased $3.2bn. Total Checkable Deposits jumped $92.8bn, and Savings Deposits gained $19.4bn. Small Time Deposits fell $6.4bn. Retail Money Funds declined $2.8bn.

Total money market fund assets declined $7.6bn to $4.356 TN. Total money funds surged $870bn y-o-y, or 25%.

Total Commercial Paper gained $11.4bn to $974bn. CP was down $114bn, or 10.5% year-over-year.

Currency Watch:

For the week, the U.S. dollar index declined 1.0% to 92.745 (down 3.9% y-t-d). For the week on the upside, the South African rand increased 2.4%, the Norwegian krone 1.5%, the New Zealand dollar 1.4%, the Mexican peso 1.3%, the South Korean won 1.3%, the euro 1.2%, the Swiss franc 1.2%, the Swedish krona 1.2%, the British pound 1.0%, the Australian dollar 0.8%, the Japanese yen 0.7%, and the Canadian dollar 0.5%. The Chinese renminbi increased 0.16% versus the dollar this week (up 4.13% y-t-d).

Commodities Watch:

October 20 – Bloomberg (Javier Blas, Grant Smith, Dina Khrennikova and Salma El Wardany): “The OPEC+ alliance warned of a ‘precarious’ outlook as a resurgent coronavirus pandemic hurts oil demand, dropping further hints about a potential change of policy next month. Unless the coalition changes tack, it will add almost 2 million barrels a day from January. But increasingly traders have warned the market cannot absorb so much oil. Without tipping their hand, Saudi Arabia and Russia showed their unity at an OPEC+ Joint Ministerial Monitoring Committee meeting…”

The Bloomberg Commodities Index increased 0.2% (down 9.1% y-t-d). Spot Gold was up slightly to $1,902 (up 25.3%). Silver gained 1.1% to $24.675 (up 37.7%). WTI crude dropped $1.03 to $39.85 (down 35%). Gasoline sank 2.6% (down 33%), while Natural Gas surged 7.1% (up 36%). Copper gained 2.0% (up 12%). Wheat rose 1.2% (up 13%). Corn surged 4.3% (up 8%).

Coronavirus Watch:

October 23 – New York Times: “The number of people hospitalized with the coronavirus in the United States has risen 40% in the past month, while the number of new cases approaches record levels and deaths continue to creep up in several heartland states. More than 75,000 cases of the coronavirus were announced in the United States on Thursday, the second-highest daily total nationwide since the pandemic began. Some 41,000 people are now hospitalized across the country, including many in the Midwest and the Mountain West, according to the Covid Tracking Project.”

October 19 – Reuters (Holly Ellyatt): “The number of reported coronavirus cases around the world has hit 40 million, according to… Johns Hopkins University. The grim milestone of 40,050,902 confirmed cases on Monday comes as various parts of Europe and the U.S. struggle to deal with an alarming surge in infections. The dreaded ‘second wave’ began in August in Europe, following the relaxation of national lockdowns implemented in spring.”

October 20 – Bloomberg (David R Baker and Jonathan Levin): “Even as public attention focuses on the coronavirus outbreak in the Midwest, the pandemic is quietly gathering force in a region that has already suffered greatly -- the South. By absolute numbers, the region remains the national center of the pandemic. More people are hospitalized with Covid-19 across the South than in any other part of the U.S… It’s a big gap, with 17,216 now being treated in Southern hospitals, compared with 10,351 in the Midwest and 6,377 in the West. The Northeast, site of this year’s deadliest coronavirus outbreak, now has 3,405 people hospitalized.”

October 21 – Bloomberg: “Illinois, Ohio, Utah and North Dakota reported daily records, as states from Florida to New Jersey reported jumps in infections. In Chicago, a night-time curfew will be imposed for non-essential businesses starting on Friday… The seven-day average of U.S. deaths on Wednesday hit the highest in a month… The nation recorded 994 confirmed and probable deaths, pushing the seven-day average to 757, signs of the start of a third ascent. The surge in U.S. cases mirrors those seen in the Europe, where governments have started deploying curfews and other restrictions more widely.”

October 22 – Bloomberg (Rudy Ruitenberg): “Governments around Europe began to deploy curfews more widely, as the coronavirus pandemic gained momentum across the continent, with France reporting more than 40,000 new cases for the first time. Daily virus cases are hitting records around Europe… Against that backdrop, authorities are expanding a curfew beyond large cities, with some 46 million people told to stay at home from 9 p.m. to 6 a.m… ‘In France, like everywhere in Europe, the second wave is here,’ Prime Minister Jean Castex said. ‘The situation is grave.’ Ordering people to stay home is emerging as a weapon against the spread of the virus, as governments seek to avoid the full lockdowns…”

October 20 – Bloomberg (Emma Court): “Public skepticism about coronavirus vaccines and enthusiasm on the right for so-called herd immunity are colliding as the U.S. outbreak is worsening, developments that could dash hopes for containing Covid-19 in the months ahead. Herd immunity aims instead to expose more people to the coronavirus, to build protection broadly in the population. It’s been roundly denounced by mainstream experts, who say it promises still more sickness and death. Still, the concept has surfaced in the White House, due to the increasing influence of Trump medical advisor Scott Atlas. It was backed this month by a group of academics in a treatise titled the Great Barrington Declaration.”

October 20 – Bloomberg (Naomi Kresge): “Many people’s hopes for a speedy coronavirus vaccine are still too high, Roche Holding AG Chief Executive Officer Severin Schwan warned, adding to the chorus of drug industry leaders trying to temper expectations. It is ‘completely unrealistic’ to expect a Covid-19 vaccine to be widely available by the end of this year, and most people probably won’t have access to a shot until the second half of 2021, Schwan said… Companies need time to test the candidates in enough people to be sure they’re safe and then scale up production, he said.”

October 18 – Bloomberg (James Paton and Sybilla Gross): “Eddie Rice is a believer in vaccines. The Melbourne locksmith has received jabs in the past and understands that they go through rigorous testing before they’re rolled out. This time, as researchers sprint ahead with potential shots to protect the world against Covid-19, he’s not so sure. ‘This is a pretty unique one, just because it’s going to be so quick,’ said Rice, 29. ‘I don’t know enough of the science to know 100% that it’s safe.’ Governments and drugmakers have long faced skepticism, and even hostility, from a small but vocal group of anti-vaccination campaigners. In the battle against the coronavirus, they may also run into reluctance from a broader swath of the population — people like Rice who would normally be on board. Fading trust in governments, political interference and the dash to create a shot in record time are sowing doubts.”

October 20 – Wall Street Journal (Margherita Stancati and Dasl Yoon): “While a surge in coronavirus infections is forcing U.S. states and European countries to shut down bars, open field hospitals and limit social gatherings to small groups of people, such measures are becoming distant memories in much of Asia. For months now, life across Asia, where the virus first emerged, has mostly returned to normal… While China, Japan, South Korea, Singapore and Hong Kong, combined, have been recording fewer than 1,000 cases a day since September, the U.S. alone was reporting more than 56,000 cases a day…”

Market Instability Watch:

October 20 – Bloomberg (Vivien Lou Chen and Katherine Greifeld): “The hunt for new hedges is in full gear. While much has been made about the search for yield in a world of ultra-low interest rates, valuations in the U.S. Treasury market also leave very little room for price gains to counteract losses should the high-flying stock market turn lower. It’s a dilemma that could reshape the classic investing strategy of 60% stocks and 40% bonds as the Federal Reserve holds rates near zero for the foreseeable future. Many investors have no choice but to stick with Treasuries because of fund mandates, or they do so since they’re unconvinced it’s worth taking a chance on something else. Yet others are exploring riskier assets -- from options to currencies -- to supplement or fill the role of portfolio protection that U.S. government debt played for decades, a trend that highlights the dangers that the Fed’s rates policy can create.”

October 19 – Financial Times (Laurence Fletcher, Eric Platt and Colby Smith): “Investors are running increasingly weighty bets that long-term US government bond prices are about to fall, anticipating that a Democratic win at next month’s US election and progress against Covid-19 could dent the haven assets. So-called ‘curve steepener’ bets, which profit if long-term yields rise faster than short-term yields, have reached the highest level in a decade, according to John Normand, strategist at JPMorgan… Some hedge funds and other investors have taken short positions using futures contracts tied to 10-year and 30-year Treasuries. Others have bought put options to bet against exchange traded funds that track the price of the bonds…”

October 20 – Bloomberg (Edward Bolingbroke): “Positioning in futures linked to longer-dated Treasuries has reached extreme levels in the run-up to the U.S. election on Nov. 3. The long position that asset managers have built in the Treasury bond future -- a contract that’s tied to debt maturing in 15-to-25 years -- has increased to be the largest on record… Meanwhile leveraged funds had the biggest-ever net short.”

October 19 – Reuters (Saqib Iqbal Ahmed and April Joyner): “Investors are once again chasing upside in shares of tech companies after a sharp sell-off in U.S. equities last month… Despite last week’s market dip, the tech-heavy Nasdaq remains around 3% away from its record high. Traders - many of them retail investors - have plowed back into call options, used to position for gains in shares.”

October 20 – Bloomberg (Naomi Kresge): “The surge in blank-check company deals is a sign of unfettered speculation and investors may see lackluster returns from these offerings, legendary short-seller Jim Chanos said. ‘We are going to blow through the records of 1999 and 2000 in terms of new issuance,’ Chanos said at Grant’s Interest Rate Observer’s fall conference... ‘We are now seeing speculation in all its glory come back.’”

Global Bubble Watch:

October 20 – Wall Street Journal (Anna Hirtenstein): “Borrowing costs for Europe’s riskiest governments are hitting record lows as investors bet on newfound European political cohesion… Yields on 10-year benchmark debt of Italy and Greece dropped to all-time lows last week, both well under 1%. In a sign inventors see fewer risks among eurozone members, Southern European yields have converged to the narrowest point in years with those of Germany, considered the safest in the region. Greece’s borrowing costs shrank to the tightest point relative to Germany since 2009 last week…”

October 20 – Wall Street Journal (Simon Clark): “Moody’s… downgraded the credit ratings of three banks in the U.K. following a cut to the nation’s sovereign debt rating last week. The credit-rating firm reduced the long-term issuer ratings of the U.K. units of HSBC Holdings PLC, Lloyds Banking Group PLC and Banco Santander one notch to A1… Moody’s cut the U.K. sovereign debt rating last week one notch to Aa3 with a stable outlook citing the nation’s weakening economic and fiscal strength…”

October 23 – Bloomberg (Fabiana Batista, Agnieszka de Sousa and Mai Ngoc Chau): “Wild weather is wreaking havoc on crops around the world, sending their prices skyrocketing. On wheat farms in the U.S. and Russia, it’s a drought that’s ruining harvests. The soybean fields of Brazil are bone dry too, touched by little more than the occasional shower. In Vietnam, Malaysia and Indonesia, the problem is the exact opposite. Torrential downpours are causing flooding in rice fields and stands of oil palm trees. The sudden emergence of these supply strains is a big blow to a global economy that has been struggling to regain its footing after the shock of the Covid-19 lockdowns. As prices soar on everything from sugar to cooking oil, millions of working-class families that had already been forced to scale back food purchases in the pandemic are being thrust deeper into financial distress.”

October 20 – Bloomberg (Emily Cadman and Charlie Wells): “In the world’s big financial centers — from New York to Toronto to London to Sydney — rents for inner-city apartments are plunging. International students who normally bolster demand are stuck at home and young renters — the most mobile group in real estate — are finding fewer reasons to pay a premium to live in what is, for now, no longer the center of things. ‘You’re daft if you aren’t negotiating lower rent right now,’ said Tim Lawless, Asia Pacific head of research for… CoreLogic Inc. ‘Supply is high and occupancy has fallen off a cliff.’”

October 20 – Financial Times (George Steer and Thomas Hale): “The cost of shipping goods from Asia to the US has soared in the past month as American companies seek to restock depleted inventories ahead of the holiday season and prepare for the pandemic to worsen over the winter. Container shipping lines had cancelled hundreds of sailings in the early months of the pandemic… But the reinstatement of services has yet to restore balance in a market responsible for about 90% of global trade. Long term rates to the US west coast jumped by 12.7% over the weekend following a 37.2% increase on October 1… Prices now stand 63.4% higher than on the same day in 2019.”

Trump Administration Watch:

October 23 – Bloomberg (Justin Sink and Misyrlena Egkolfopoulou): “White House economic director Larry Kudlow said ‘the ball’s not moving much right now’ on negotiations over an additional round of federal stimulus, even as coronavirus cases spike in parts of the country raising the prospect of further shutdowns. ‘It’s very difficult,’ Kudlow said Friday…, adding that there are still a number of issues dividing the White House and Democrats. ‘The clock is ticking, as you know.’”

October 19 – Associated Press (Andrew Taylor): “Washington negotiations on a huge COVID-19 relief bill took a modest step forward on Tuesday, though time is running out and Senate Majority Leader Mitch McConnell, President Donald Trump’s most powerful Senate ally, is pressing the White House against going forward… McConnell made his remarks during a private lunch with fellow Republicans on Tuesday… The Kentucky Republican appears worried that an agreement between Pelosi and Mnuchin would drive a wedge between Republicans, forcing them to choose whether to support a Pelosi-blessed deal with Trump that would violate conservative positions they’ve stuck with for months. Many Republicans say they can’t vote for another huge Pelosi-brokered agreement.”

October 20 – Reuters (David Morgan): “Republicans are running short of time, money and options to stop Democrats from winning a majority of seats in the U.S. Senate, and with them full control of Congress… President Donald Trump’s slide in opinion polls is weighing on Senate Republicans in 10 competitive races, while Democrats are playing defense over two seats, increasing the odds of Trump’s Republicans losing their 53-47 majority on Nov. 3.”

October 22 – Associated Press (Eric Tucker): “U.S. officials said… that Russian hackers have targeted the networks of dozens of state and local governments in the United States in recent days, stealing data from at least two servers. The warning, less than two weeks before the election, amplified fears of the potential for tampering with the vote and undermining confidence in the results. The alert describes an onslaught of recent activity from Russian state-sponsored hacking groups in against state and local networks, some of which were successfully compromised. The advisory from the FBI and the Department of Homeland Security’s cybersecurity agency functions as a reminder of Russia’s potent capabilities and ongoing interference in the election even after U.S. officials publicly called out Iran…”

October 19 – Reuters (Lisandra Paraguassu, Anthony Boadle, Humeyra Pamuk and Andrea Shalal): “U.S. Secretary of State Mike Pompeo warned… that as the United States and Brazil reinforce their business partnership, they need to reduce their dependence on imports from China for their own security… ‘To the extent we can find ways that we can increase the trade between our two countries, we can ... decrease each of our two nations’ dependence for critical items’ coming from China, he said.”

Federal Reserve Watch:

October 17 – Financial Times (James Politi): “Senior Federal Reserve officials are calling for tougher financial regulation to prevent the US central bank’s low interest-rate policies from giving rise to excessive risk-taking and asset bubbles in the markets. The push reflects concerns that the Fed’s ultra-loose monetary policy… risks becoming a double-edge sword, encouraging behaviour detrimental to economic recovery and creating pressure for additional bailouts. It also highlights fears at the Fed that the financial system remains vulnerable to new shocks… Eric Rosengren, president of the Federal Reserve Bank of Boston, told the Financial Times that the Fed lacked sufficient tools to ‘stop firms and households’ from taking on ‘excessive leverage’ and called for a ‘rethink’ on ‘financial stability’ issues in the US. ‘If you want to follow a monetary policy . . . that applies low interest rates for a long time, you want robust financial supervisory authority in order to be able to restrict the amount of excessive risk-taking occurring at the same time,’ he said. ‘[Otherwise] you’re much more likely to get into a situation where the interest rates can be low for long but be counterproductive.’”

October 20 – Wall Street Journal (Paul Kiernan): “The market turmoil triggered by the coronavirus pandemic early this year uncovered weaknesses in the U.S. financial system that regulators are seeking to fix, said Randal Quarles, the Federal Reserve’s vice chairman for supervision. ‘While swift and decisive policy action succeeded in calming markets, this does not mean that our work is complete,’ Mr. Quarles said… ‘The Covid event revealed a banking system that withstood this shock quite well with limited official sector support, and a nonbank system that was significantly more fragile.’”

October 19 – Bloomberg (Rich Miller): “The Federal Reserve and other central banks will eventually discover that breaking up isn’t easy after partnering with their governments and the financial markets to avert a pandemic-driven depression. Investors and lawmakers enamored with cheap money may well balk when monetary authorities try to throttle back their quantitative easing and other stimulus measures. ‘They are increasingly on what I call a no-exit paradigm,’ Allianz SE chief economic adviser and Bloomberg Opinion columnist Mohamed El-Erian said…”

October 21 – Reuters (Ann Saphir and Jonnelle Marte): “The stronger-than-expected U.S. economic rebound from coronavirus lows could set up an early test for the Federal Reserve’s new pledge to keep interest rates near zero and its increased tolerance for inflation. A compilation of surveys and interviews conducted in September and early October by the Fed’s 12 regional banks shows the economy recovering at a ‘slight to modest pace’ as consumers bought homes and increased spending.”

October 21 – Reuters (Ann Saphir): “St. Louis Federal Reserve Bank President James Bullard… repeated his view that U.S. businesses are largely adapting to life amid COVID-19 and the U.S. economy is on track to better-than-trend growth even without further fiscal stimulus. ‘In terms of the aggregate resources it seems like we should have enough’ fiscal aid to bolster growth until the first quarter of next year, when any further need could be reassessed, Bullard said…”

October 19 – Reuters (Jonnelle Marte): “It will be a while before the U.S. economy is fully recovered and before the Federal Reserve will raise interest rates or remove the support it is providing financial markets, Atlanta Federal Reserve Bank President Raphael Bostic said… ‘On balance, I am comfortable with our current policy stance,’ Bostic said… ‘As I have detailed today, though the U.S. economy continues to show clear signs of recovery, there remain significant portions where the recovery has been weak or nonexistent.’”

U.S. Bubble Watch:

October 20 – CNBC (Yen Nee Lee): “A Democratic sweep in the coming U.S. elections will likely unleash more fiscal stimulus, but it could also cause the Federal Reserve to hike interest rates earlier than expected, said a Morgan Stanley portfolio manager. The first rate hike by the Fed could be brought forward from around 2024-2025 to 2023-2024 — depending on how other policies, such as taxation, turn out in the event of a ‘blue wave,’ said Jim Caron, a senior member of Morgan Stanley Investment Management’s global fixed income team.”

October 22 – Financial Times (Gillian Tett): “In early 2020 Francis Suarez, mayor of Miami, Florida, was basking in a boom. His city was thriving and seeing buoyant revenues from property sales and taxes. No longer. When Covid-19 struck the US, Mr Suarez became the first American mayor to test positive for coronavirus. He soon recovered from the disease, but Miami’s fiscal health has not. ‘We had a $20m surplus going into Covid and $25m deficit after — and started the fiscal year [in October] with a $35m deficit,’ he told me…. He is not alone. ‘I am in a situation where I have spent down our reserve funds . . . cut every dime and nickel we can,’ said Bill Peduto, mayor of Pittsburgh... ‘But we are still facing a $75m deficit out of a $600m budget.’ Jenny Durkan, mayor of Seattle, Washington, echoed: ‘Our revenues have been decimated. Without help we are facing depressionary conditions.’”

October 21 – Bloomberg (Shruti Date Singh): “Mayor Lori Lightfoot… will lay out how she plans to close the largest budget gap in Chicago’s history as Covid-19’s resurgence threatens to hobble the junk-rated city’s recovery in the years ahead. Spending cuts, increases to property taxes, pension obligation bonds and debt refinancings have all been under consideration to close the record $1.2 billion deficit for fiscal 2021… That comes after a nearly $800 million gap this year.”

October 22 – CNBC (Diana Olick): “Sales of existing homes rose a higher-than-expected 9.4% in September to a seasonally adjusted annualized rate of 6.54 million units… Sales were up 20.9% annually. Sales could be more robust if there were more homes available. The inventory of homes for sale fell 19.2% annually to just 1.47 million homes for sale at the end of September. At the current sales pace that represents a 2.7-month supply. That is the lowest since the Realtors began tracking this metric in 1982. Tight supply continues to push prices higher. The median price of an existing home sold in September was $311,800, a 14.8% gain compared with September 2019. That is a new high for this series, dating back to 1968. It is also an all-time high when adjusted for inflation.”

October 20 – Reuters (Lucia Mutikani): “U.S. single-family homebuilding raced to a more than 13-year high in September, cementing the housing market’s status as the star of the economic recovery amid record-low mortgage rates and a migration to the suburbs and low-density areas in search of more room for home offices and schooling. The report… also showed building permits and housing completions scaling levels last seen in 2007.”

October 21 – Bloomberg (John Gittelsohn): “U.S. home loan originations are forecast to total $3.18 trillion this year, the most since 2003, as low rates fuel a continued surge in refinancing and purchases, according to the Mortgage Bankers Association. Housing activity has soared since the onset of the Covid-19 pandemic, driven by record-low interest rates and a desire for more space to quarantine.”

October 21 – Bloomberg (Marcy Nicholson): “Americans are coughing up $4,600 more on average to buy their dream home than six months ago -- thanks to a record run-up in prices for a once-cheap plywood substitute. Prices are on a tear for those bonded wood-chip sheets commonly used as sheathing for walls, floors and roofs in new home construction. Oriented Strand Board, or OSB, has long been used as a low-cost alternative to plywood, but the product now fetches a higher price… ‘It’s difficult to get, the lead times are out,’ said Lorne Winship, general manager at Pacific Homes…, adding that the premium over plywood is ‘absolutely crazy.’”

October 22 – Reuters (Ankit Ajmera and Sanjana Shivdas): “U.S. home sales to Chinese buyers may plunge as much as 60% this year, according to a U.S. real estate industry body, as the travel curbs imposed to thwart the coronavirus counter the impact of a surge in the yuan against the dollar. Rich Chinese buyers seeking to put away years of export-earned dollars have become the biggest foreign contributor to the U.S. housing market over the past decade. Deal numbers, however, dropped sank a total of 62% over the last two years to $11.5 billion in the year to last March…”

October 20 – Bloomberg (Kevin Crowley and David Wethe): “There is no more dramatic sign of the U.S. shale industry’s fall from grace than one of the best in the business being sold off for less than a third of its peak value. Concho Resources Inc., an early explorer… once-coveted oil riches that was worth $32 billion just two years ago, is selling for $9.7 billion in stock. ConocoPhillips is paying a meager 15% premium over Concho’s closing price on Oct. 13… Concho is not alone: More than half of the shale deals this year came with a premium of less than 10% over stock prices that had already plunged in the past couple of years…”

October 20 – Reuters (David Shepardson and Diane Bartz): “The U.S. sued Google…, accusing the $1 trillion company of illegally using its market muscle to hobble rivals in the biggest challenge to the power and influence of Big Tech in decades. The Justice Department lawsuit could lead to the break-up of an iconic company that has become all but synonymous with the internet and assumed a central role in the day-to-day lives of billions of people around the globe. Such an outcome is far from assured, however, and the case is likely to take years to resolve. The lawsuit marks the first time the U.S. has cracked down on a major tech company since it sued Microsoft Corp for anti-competitive practices in 1998.”

October 21 – Wall Street Journal (Eliot Brown): “Early this summer, electric-vehicle startups Hyliion Inc., Fisker Inc. and Lordstown Motors Corp. were tiny companies with staff numbers measuring in the dozens. Two had built little more than a prototype. None have reported any revenue. Today, they are valued at more than $3 billion apiece by stock-market investors. A frenzy has hit the sector. Buoyed by the surge in the stock price of electric-vehicle pioneer Tesla Inc. and a rush of blank-check companies that take startups public, investors are hoping to find the future titans of an auto market transformed by a shift away from the internal-combustion engine.”

October 17 – Wall Street Journal (James Mackintosh): “Spotting asset bubbles is hard because there is almost always a good underlying reason for what’s going on. Canals, railways and the internet really were going to revolutionize the economy. The mistake with bubbles is that prices disconnect from what the new development will justify… Today there are two obvious bubble candidates, and as usual, both come with good underlying reasons for their success. Big Tech’s high profits and growth prospects make it a beneficiary of lockdown and of low-forever interest rates, justifying a high valuation. As usual, the question is how high is too high. The boom in cash shells, or special-purpose acquisition companies, also known as SPACs, is in some ways more troubling.”

October 21 – Reuters (Lisa Baertlein, Richa Naidu and Nivedita Balu): “This time last year, shoppers on Chicago’s Magnificent Mile were waiting for Louis Vuitton to debut its whimsical holiday window decorations. Now those same windows are hidden behind a wall of wood panels painted bright orange… As security experts warn that the U.S. presidential election could spark renewed civil unrest, those stores remain clad in plywood as retailers seek to keep property and employees safe in the event street violence flares anew.”

October 19 – Wall Street Journal (Michael Wursthorn and Mischa Frankl-Duval): “Jesper Lannung lost more than $100,000 in August after getting trapped in a zombie investment product. An exchange-traded note that he bet against was delisted over the summer by Credit Suisse Group, relegating the note to the highly illiquid over-the-counter market. Mr. Lannung, a 38-year-old event planner… who layered a speculative trade on an already complex product, was forced to cover his short position after the note inexplicably surged in price. The swing was so dramatic that regulators eventually halted trading. Credit Suisse then liquidated the note and brought its share price back to reality. Those actions, however, were too late to protect some investors including Mr. Lannung.”

Fixed Income Watch:

October 18 – Financial Times (Robin Wigglesworth): “Half a century ago, two starlets of economics argued that whether companies funded themselves with debt or equity was irrelevant. One legacy of that insight is becoming clearer in the wreckage of corporate failures mounting in the wake of the pandemic. Franco Modigliani and Merton Miller both later won the Nobel Prize in economics, partly thanks to their groundbreaking work on what became known as the ‘M & M theorem’. Until then most companies had assumed that too much debt would affect the value of the firm, so their paper was a counterintuitive bombshell. Their initial findings only held in a world without ‘frictions’ — such as taxes, imperfect information and inefficient markets… It eventually helped lay the intellectual groundwork for a dramatic erosion of corporate creditworthiness.”

October 23 – Bloomberg (Sally Bakewell and Davide Scigliuzzo): “Times are tough at SeaWorld… But they’re even tougher at GeckoParx, a few hours down the Florida Turnpike. Both amusement parks were forced to close temporarily when the coronavirus pandemic struck. Despite setback after setback, SeaWorld Entertainment Inc. — a publicly traded corporation — easily secured something that every business needs: credit. It borrowed almost $730 million in the capital markets. And smaller GeckoParx? It’s shutting its doors after burning through nearly all of its money. The gulf between big companies that have ready access to credit and just about everyone else got wider in the fallout of the Covid-19 crisis, as the Federal Reserve blew open capital markets and pledged to keep interest rates low as long as needed.”

October 20 – Reuters (Karen Pierog): “A yield-hungry U.S. municipal market brushed aside Illinois’ massive fiscal challenges and snapped up $850 million of general obligations bonds the state sold… Illinois pays the market’s biggest yield penalty among states, but the spread for its bonds over Municipal Market Data’s (MMD) benchmark triple-A yield scale, which widened ahead of the issue, narrowed post-sale.”

October 21 – Wall Street Journal (Miriam Gottfried): “The market for leveraged buyouts has sprung back to life after private-equity firms finished triaging their coronavirus-stricken portfolio companies and shifted attention back to their mounting cash piles. Buyout firms spent the bulk of the second quarter battened down as they assessed the economic damage of the shutdown on the companies they own… Those in need conserved cash, drew down revolving-credit facilities or sought rescue financing. That trend reversed itself in the three months ended Sept. 30 as firms struck $146 billion of new deals globally, up from a feeble $53.3 billion in the second quarter and $103.8 billion in the third quarter of 2019, according to Dealogic. In the opening weeks of the fourth quarter, $17.4 billion of buyouts have already been announced.”

October 22 – Wall Street Journal (Heather Gillers): “The decimated municipal-bond insurance industry is having a renaissance. Weakened by Covid-19, state and local borrowers are using insurance at their highest rates in more than a decade. This type of upfront protection offers a promise from insurance companies to pay investors if the municipality defaults. Overall, the share of newly issued muni debt carrying insurance reached 7.13% in the second quarter and was 6.8% in the third quarter, up from an average of 4.72% in the decade before the pandemic… Fueling the trend is a drop in local government creditworthiness that has left public officials looking for ways to keep down borrowing costs.”

October 19 – Bloomberg (Justina Lee): “Many of the biggest quant strategies in the stock market these days are plagued by doubt and debate. In fixed income, they just got a $25 trillion endorsement. Almost every respondent in Invesco Ltd.’s annual survey of institutional and wholesale investors said they think factor investing can be applied to the world of fixed income. The proportion of believers in this systematic approach -- which picks assets based on characteristics like how cheap or profitable they are -- has jumped to 95% from 74% last year… In 2018, that stood at just 59%.”

October 20 – Bloomberg (Amanda Albright): “Empty dorms are putting pressure on U.S. colleges to help investors in the approximately $14 billion student housing debt market, adding to the strain on schools already reeling from the pandemic. West Virginia State University, already hit with a 10% enrollment drop, plans to give money to a school foundation so it can meet its bond covenants for residence hall debt.”

China Watch:

October 21 – Reuters (Gabriel Crossley and Ben Blanchard): “China threatened… to retaliate against the latest U.S. arms sale to Chinese-claimed Taiwan, as the island welcomed the weapons package but said it was not looking to get into an arms race with Beijing… Responding the U.S. approval of a potential $1.8 billion arms sale to Taiwan, China’s Foreign Ministry spokesman Zhao Lijian said during a daily news briefing that such sales should stop. The sales ‘seriously interfere with China’s internal affairs, seriously damage China’s sovereignty and security interests, send a seriously wrong signal to Taiwan independence forces, and severely damage China-U.S. relations and peace and stability in the Taiwan Strait,’ he said.”

October 19 – Financial Times (Gideon Rachman): “The idea that a US election can be shaken up by an ‘October surprise’ is a well-worn staple of political commentary. Less discussed is the danger that, if China takes advantage of political confusion in the US to make a move on Taiwan, international affairs could be convulsed by a November or December surprise. The din of the American campaign is drowning out increasingly aggressive words and actions by China, as it threatens to use military force to combat what it regards as intolerable ‘separatism’ by Taiwan, which is, de facto, an independent state, but claimed by Beijing. Chinese military aircraft now regularly cross the median line between Taiwan and the mainland, forcing the Taiwanese air force to scramble.”

October 22 – Bloomberg: “China is going all out in remembrance of its participation against the U.S. in the Korean War, sending a message to Washington that it’s not intimidated by American military might. President Xi Jinping took part in a ceremony Friday in Beijing marking the 70th anniversary since its army took up fighting in a conflict China’s government describes as the ‘War to Resist U.S. Aggression and Aid Korea.’ The war ‘shatters the legend that the U.S. Army is not defeatable,’ Xi said in an address at the Great Hall of the People… ‘The Korean War shows that the Chinese people should not be provoked. If you make trouble, be prepared to bear the consequences.’”

October 22 – Wall Street Journal (Chao Deng and Liza Lin): “The wave of nationalism sweeping through China, amplified by party propaganda, the political ambitions of Xi Jinping and the country’s success in containing Covid-19, is taking a darker turn, with echoes of the country’s Maoist past. Angry mobs online have swarmed any criticism of China’s leaders or a perceived lack of loyalty to the country. Targets are being harassed and silenced. Some have lost their jobs. Among those who have been attacked this year are public figures who have raised questions about officials’ early handling of the coronavirus. They include a writer from Wuhan named Fang Fang, who wrote online about the struggles of local residents and accused government officials of being slow to respond to the outbreak.”

October 17 – Reuters (David Shepardson and Andrea Shalal): “The Chinese government has warned Washington it may detain Americans in China in response to the Justice Department’s prosecution of Chinese military-affiliated scholars, the Wall Street Journal reported…”

October 19 – Bloomberg: “What sort of science fiction does Xi Jinping like? How can China’s weathermen use the president’s political philosophy to improve their forecasts? In what ways can ‘Xi Thought’ help prepare the country for the next big earthquake? These are the sorts of questions Communist Party cadres are now pondering as they prepare for the next big milestone in the president’s effort to cement control: Elevating Xi Thought alongside Maoism. The esoteric concept is expected to be written into the five-year development blueprint that will be unveiled after party meetings later this month. Everyone from diplomats to executives to sci-fi writers are under pressure to incorporate the broad, often fuzzy tenets of Xi Thought into their policies.”

October 21 – Reuters (Binbin Huang, Cheng Leng and Ryan Woo): “China will strike a balance between stabilising economic growth and preventing risks, even as debt was allowed to temporarily rise this year to support the coronavirus-hit economy, the head of the central bank Yi Gang said… Bank lending in the first nine months totalled 16.26 trillion yuan ($2.44 trillion) as policymakers looked to reboot economic activity, beating a previous peak of 13.63 trillion yuan in the same period last year. ‘Monetary policy needs to guard the ‘gates’ of money supply, and properly smooth out fluctuations in the macro leverage ratio, and keep it on a reasonable track in the long run,’ Yi said.”

October 18 – CNBC (Evelyn Cheng): “China’s economy recovered further from the coronavirus in the third quarter… The world’s second-largest economy reported third-quarter GDP growth on the low end of expectations, up 4.9% from a year ago. That brings growth for the first three quarters of the year to 0.7% from a year ago. Chinese economists expected GDP growth of 5.2% in the third quarter… Retail sales rose 3.3% in September, for a 0.9% increase in the third quarter. For the first nine months of the year, retail sales contracted 7.2%.”

October 19 – Reuters (Liangping Gao, Lusha Zhang and Ryan Woo): “New home prices in China grew at their slowest pace in over 4-1/2 years as tightening measures in some big cities helped cool the property market despite a broader economic recovery. New home prices in China also grew at a slightly slower monthly pace in September…, while the number of cities reporting monthly price increases for new homes fell… On an annual basis, home prices rose 4.6% in September, the slowest pace since February 2016, and versus a 4.8% expansion in August.”

October 22 – Wall Street Journal (Serena Ng): “China’s credit-rating firms are doling out more triple-A bond ratings, a trend that has continued this year in spite of the coronavirus pandemic and greater borrowing by companies… As of mid-October, more than 18.3 trillion yuan, equivalent to $2.7 trillion, in outstanding yuan-denominated bonds issued by companies and financial institutions in mainland China had the highest possible rating from the country’s credit raters… Bonds with triple-A grades currently make up 57% of all the onshore Chinese corporate debt that is outstanding. The proportion of top-rated debt has climbed in recent years. In 2015, about 37.5% of corporate debt in mainland China was rated triple-A.”

October 20 – Wall Street Journal (Joanne Chiu): “China is claiming a record proportion of global initial public offerings and other debuts… So far this year, exchanges in Shanghai and Shenzhen have hosted more than $47.5 billion of IPOs and listings for firms that have shares already trading elsewhere, Refinitiv data shows. That is already the highest annual tally compared with any full year since 2010 and an unprecedented 27% of the global total... If deals in Hong Kong by Chinese companies are added, the proportion rises to 43%.”

Central Bank Watch:

October 19 – Reuters (Leika Kihara and Takahiko Wada): “Japan’s central bank is expected to cut its growth and price forecasts for the current fiscal year at next week’s rate review…, as the coronavirus pandemic weighs on the economic recovery… The main reason for the downward revision in growth is the bigger-than-expected economic slump in April-June and soft consumption during the summer, the source said.”

EM Watch:

October 19 – Reuters (Jamie McGeever): “Brazil is at an ‘inflection point’ where less public spending rather than more will deliver stronger economic growth, central bank president Roberto Campos Neto said…, warning that fiscal concerns are harming financial conditions and investment. Economy Minister Paulo Guedes also said… ‘transitory’ spending must not morph into ‘inexcusable’ permanent spending in coming years, adding that the economy is likely to shrink by a smaller-than-expected 4% this year.”

October 19 – Bloomberg (Divya Patil and Anil Poonia): “Signs of a recovery for India’s troubled shadow banks have taken a step backward as concerns reemerged about the true impact of the pandemic on the lenders. Average spreads on the lenders’ AAA rated five-year bonds rose for the first time in four months in September. Of three other gauges tracking shadow bank sector health compiled by Bloomberg, two including banking system liquidity and outstanding debt weakened, while a share performance index stayed put.”

October 23 – Bloomberg (Jorgelina do Rosario and Ignacio Olivera Doll): “Argentina’s battle to control its currency is upending South America’s second-largest economy, wreaking havoc on everything from household finances to the production and sale of common goods. Measures including taxes on greenback purchases and demands that some companies restructure their dollar-denominated debts have misfired, propelling the gap between the official and the black market exchange rates to the widest since 1989 while failing to boost international reserves.”

Europe Watch:

October 18 – Financial Times (Martin Arnold and Sam Fleming): “Eurozone governments plan to go deeper into the red than ever before this year, racking up budget deficits of close to €1tn as they splash out on emergency measures to counter the coronavirus crisis. Draft budget plans published by member states… indicate the 19-country bloc will slide to an aggregate fiscal deficit of €976bn, equal to 8.9% of gross domestic product this year… That means this year’s budget deficits would be almost 10 times higher than last year’s levels and the commission’s forecasts for this year. Governments estimated their deficits would stay high even when their economies rebound in 2021, when they expect an aggregate shortfall of just under €700bn, or 6% of GDP.”

October 22 – Wall Street Journal (Paul Hannon): “Government borrowing in the eurozone surged this spring to its highest levels since the creation of the currency union… The combined budget deficits of eurozone governments surged to 11.6% of gross domestic product, more than four times the 2.5% deficit recorded in the first quarter, and well above the 7% deficit recorded in the first quarter of 2010, which was the largest seen in the wake of the global financial crisis. The European Union’s statistics agency said… government debt totaled 95.1% of GDP, more than reversing six years of progress in reducing borrowing from the previous peak of 94% of annual economic output.”

October 21 – Reuters (David Milliken and Andy Bruce): “Britain’s government borrowing in the first half of the financial year was more than six times higher than before the COVID pandemic…, taking public debt to its highest since 1960. Public borrowing in September alone totalled 36.101 billion pounds ($46.90bn), above all forecasts… The increased borrowing took total public debt further above the 2 trillion pound mark to 2.060 trillion pounds or 103.5% of GDP, its highest on this measure since 1960…”

October 23 – Reuters (Jonathan Cable): “Euro zone economic activity slipped back into decline this month as a second wave of the coronavirus sweeps across the continent, heightening expectations for a double-dip recession… IHS Markit’s Flash Composite Purchasing Managers’ Index, seen as a good gauge of economic health, fell to 49.4 from September’s final reading of 50.4.”

October 21 – Reuters (Mark John): “Over half the small and medium-sized companies which together provide jobs for two-thirds of European workers fear for their survival in the coming 12 months, according to a survey released by management consultancy McKinsey…”

October 20 – Bloomberg (John Ainger, James Hirai and Priscila Azevedo Rocha): “The European Union’s first offering of social bonds drew orders of more than 233 billion euros ($275bn), likely to be the biggest ever for any debt deal. The bloc’s 17-billion-euro, two-part sale was nearly 14 times subscribed.”

Leveraged Speculation Watch:

October 21 – Reuters (Maiya Keidan): “Hedge funds added $13 billion of assets between the start of July and end of September, the first time the industry has generated net inflows in any quarter since 2018, data from… Hedge Fund Research (HFR) showed. Total assets managed by the hedge fund industry rose to $3.31 trillion at end-September, with macro strategies receiving $7.2 billion and trend-following strategies gaining $3.2 billion…”

October 19 – Bloomberg (Gregor Stuart Hunter): “Hedge funds have pulled back from one of the biggest short positions in U.S. tech stocks in over a decade, in a near-record buying spree of Nasdaq futures last week. Net speculative positions in Nasdaq 100 mini contracts surged by the most in more than 13 years in the week through Oct. 13…The increase was the second biggest on record in data going back to 1999 and left speculators net long the futures for the first time since the beginning of last month. The buying frenzy comes after fast-money accounts had driven net short bets to the highest since before the financial crisis during September.”

Geopolitical Watch:

October 18 – South China Morning Post (Minnie Chan): “Beijing is stepping up the militarisation of its southeast coast as it prepares for a possible invasion of Taiwan, military observers and sources have said. The People’s Liberation Army has been upgrading its missile bases, and one Beijing-based military source said it has deployed its most advanced hypersonic missile the DF-17 to the area.”

October 19 – Financial Times (Christian Shepherd and Xinning Liu): “History has become the latest battlefront between Beijing and Washington after a sharp rise in nationalism and anti-American sentiment around the 70th anniversary of China entering the Korean war. The three years of conflict on the Korean peninsula, beginning with North Korea invading the South in June 1950 and ending in July 1953 with an armistice, are a central plank of the People’s Republic of China’s founding mythology. …China regularly celebrates the ‘war to resist American aggression and aid [North] Korea’ with great fanfare. This year, official propaganda has played up the US role in the war to a greater degree, an emphasis that had fallen out of vogue in the decades immediately following China’s entry into the World Trade Organization. ‘There is a clear flare-up of anti-American sentiment,’ said Ma Zhao, a history professor at Washington University…”

October 22 – Reuters (Ryan Woo, Judy Hua, Lusha Zhang, Liangping Gao, and Gabriel Crossley): “Seventy years after Chinese troops entered the Korean War to fight against U.S. troops, President Xi Jinping said… that China will never allow its sovereignty, security and development interests to be undermined. Xi did not directly refer to the present-day United States… Taiwan has a become a growing point of contention and military tension. ‘Let the world know that ‘the people of China are now organised, and are not to be trifled with’,’ Xi said at the Great Hall of the People, quoting Mao Zedong, the founding father of the People’s Republic of China.”

October 22 – Associated Press (Vladimir Isachenkov): “Russian President Vladimir Putin said… there is no need for a Russia-China military alliance now, but noted it could be forged in the future. Putin’s statement signaled deepening ties between Moscow and Beijing amid growing tensions in their relations with the United States…. Asked… whether a military union between Moscow and Beijing was possible, Putin replied that ‘we don’t need it, but, theoretically, it’s quite possible to imagine it.’ Russia and China have hailed their ‘strategic partnership,’ but so far rejected any talk about the possibility of their forming a military alliance.”

October 22 – Wall Street Journal (Stu Woo): “The world is paying a high price for the technological Cold War between its two greatest powers. The U.S.-China conflict has already upended the tech industry in both countries, disrupting giant hardware manufacturers, computer-chip designers and even social-media services. Now the broader consequences are becoming clear, as the actions of Beijing and Washington reverberate across rural America, Europe and other corners of the world. Bearing the brunt of the costs are the telecommunications and semiconductor sectors, where the Trump administration has blocked leading Chinese companies from the U.S. market and restricted exports by American businesses to China. Companies anticipate billions of dollars in potential costs overall, from lost business or from replacing Chinese telecom equipment. But the effects go far beyond tech companies’ bottom lines.”

Friday Evening Links

[Reuters] S&P, Nasdaq close higher as stimulus talks in spotlight

[Reuters] Oil falls about 2% on Libyan output, COVID-19 demand concerns

[The Hill] Finger-pointing picks up in COVID-19 relief fight

[Reuters] Threats to U.S. Treasury market liquidity still exist, Fed says

[CNBC] U.S. reports more than 71,600 new Covid cases as new infections near record highs and hospitalizations rise

[Yahoo/Bloomberg] U.S. Cases Surge Past 70,000; France Tops Record: Virus Update

[CNBC] Coronavirus live updates: AstraZeneca, J&J resume vaccine trials as U.S. nears record highs for new cases

[Reuters] China's purchases of U.S. farm goods at 71% of target under trade deal: U.S.

[Yahoo/Bloomberg] California Braces for Fires, Outages in Season’s Worst Winds

[WSJ] U.S. Government Bonds Yields Remain Near Highest Level Since June

[FT] Pandemic makes world’s billionaires — and their advisers — richer

[FT] Risky PIK deals pitched by private equity to yield-hungry investors