The World Health Organization (WHO) declared the coronavirus outbreak an international public-health emergency, while praising China’s virus containment efforts during its Thursday afternoon press briefing. The DJIA rallied 260 points, apparently on WHO officials’ opposition to travel bans and trade restrictions.
This is an extraordinarily complex developing crisis. Understandably, Beijing fears economic hardship could be pushed into an intractable downward spiral by the world essentially quarantining the entire Chinese nation. Meanwhile, Beijing has taken unprecedented Draconian measures to quarantine 60 million of its citizens. Photographs are circulating of roads surrounding Wuhan and neighboring cities blocked by large boulders and impassible mounds of dirt.
The number of confirmed coronavirus infections jumped 34% on Tuesday, 27% Wednesday, 26% Thursday and 22% on Friday. Almost reaching 12,000, the outbreak has escalated much more rapidly and has already surpassed the SARS peak. If cases expand 15% daily over the next two weeks, the number of infections would quickly surpass 80,000. The official tally of coronavirus cases is likely but a fraction of those actually infected.
January 29 – Bloomberg (Jason Gale): “The case of a 10-year-old boy who was diagnosed with the Wuhan coronavirus even though he showed no symptoms is raising concern that people may be spreading the virus undetected by the front-line screening methods implemented to contain the epidemic. The boy was part of a family who visited relatives in the central Chinese city over the New Year. While his parents and grandparents fell ill and were treated after they returned to their hometown, the 10-year-old appeared healthy and was only diagnosed with the virus after his parents insisted he too was tested, his doctors said, adding that he ‘was shedding virus without symptoms.’”
Friday's U.S. Coronavirus Taskforce press briefing was not comforting. A U.S. public health emergency was declared, with significant travel restrictions imposed for travelers from China. U.S. citizens returning from China are now subject to quarantine, while “foreign nationals” that have been in China within the previous 14 days will be denied entry. Risk to the U.S. public is said to be low. However, the Taskforce covered a list of factors that made the situation extraordinary, including asymptomatic virus transmission and issues with the accuracy of current coronavirus testing. CNBC: “CDC issues mandatory quarantine for first time in more than 50 years to Wuhan passengers in California.”
Hopefully, China's herculean efforts are successful in rapidly getting their outbreak under control. In the meantime, this pandemic is replete with great uncertainty. It will surely be months before pilots and flight attendants feel safe flying into China. Tourists, business travelers, students and academics will avoid visiting for some time. WHO and Chinese officials are wishful thinking if they actually believe travel and trade won’t face large-scale disruptions. Investment – business and financial – will be on hold. If things go poorly, a run on China’s financial assets and currency can’t be ruled out.
An assortment of Bloomberg headlines: “At Least Two-Thirds of China Economy to Stay Shut Next Week.” “China Plant Closures to Accelerate, IHS says.” “Shipping Rates Plunge 90% as Coronavirus Paralyzes Cargoes.” “Singapore’s Ban on Chinese Visitors to Have Severe Impact.” Other headlines: “Delta, United and American Airlines are Suspending All Flights Between the U.S. and Mainland China.” “There Could be More than 75,000 Cases of Coronavirus in China, Researchers Say.” “Coronavirus Outbreak Tests World’s Dependence on China.” “Trump Administration Temporarily Bars Foreigners Who Visited China.”
Welcome to The First Major Pandemic Scare for – after a most freakishly protracted boom – a highly integrated world. Moreover, unprecedented monetary stimulus, debt growth, financial flows and speculation ensure unmatched latent financial fragility – in China and globally. Throw in unparalleled mal- and over-investment and other economic imbalances and the world today confronts lurking economic fragilities. Central banks have ensured that markets (trading at near all-time highs) are keen to disregard myriad risks. This dynamic has greatly exacerbated the risk of global financial and economic disruption.
January 31 – Wall Street Journal (Mike Bird): “As the spread of the new coronavirus in China causes more factory shutdowns, the effect on global industrial supply chains could linger for years. China now makes up more than twice the share of global merchandise exports it did in 2003, when the SARS virus hit. Guangdong province alone exported more in 2018 than China did as a whole 17 years ago. Manufacturers already gripe about the effect of the Lunar New Year holiday… on their business as Chinese factories shutter. But the public health response to the virus this year effectively means extending the holiday. China’s industrial output could be running at a similarly low level for a much longer period.”
January 30 – Financial Times (Kathrin Hille, Mercedes Ruehl and Christian Shepherd): “The Wuhan coronavirus is wreaking havoc within the global technology supply chain, as many Chinese provinces extend the new year holiday in an effort to contain the spread of the deadly disease. Underlining the concerns for the tech industry, Taiwan’s Hon Hai Precision Industry, which is also known as Foxconn and makes the majority of the world’s iPhones, suffered its biggest share price fall in almost 20 years on Thursday.”
Markets celebrated this week’s stellar earnings reports from the technology heavyweights. Stock prices at record highs envisage nothing but booming earnings as far as the eye can see. That’s fine, but there is today major uncertainty with respect to global supply chains – technology and otherwise. And does Chinese consumer demand bounce right back as everyone assumes? Business investment?
I closely monitor China’s monthly Credit data. Bank loans to China’s Households rose 15.5% over the past year, 37% in two years and 139% in five. This data series doesn’t go back to the 2003 SARS outbreak. Yet Household borrowings surged almost 13-fold since 2007 to about $8.0 TN. The Chinese consumer not only has much more debt than ever before, she and he have unprecedented exposure to inflated apartment prices, securities markets and financial instruments more generally.
With expectations now incredibly inflated, there is maximum vulnerability these days to a rather precipitous reassessment. Even before this outbreak, the economy, apartment prices, Chinese finance and policymaking were all increasingly susceptible to a crisis of confidence. At this point, I’m skeptical Humpty Dumpty can be so simply restored. As a society, there exists all the essential elements for a period of troubling insecurity.
Chinese markets are to open Monday. We can assume the People’s Bank of China and the so-called “national team” will be playing tough defense. We’ll have to wait a couple weeks for the data, but it will be interesting to see the virus impact on Chinese Credit. Traditionally, January is by far the largest lending month of the year. Last January saw a remarkable $680 billion increase in “All-System” Aggregate Finance. I would expect much slower lending growth and problematic interruptions in the flow of finance, especially to heavily impacted cities and regions. This could prove a backbreaker for scores of struggling businesses (and banks?).
A few facts courtesy of Friday’s Bloomberg Businessweek article, “Coronavirus Is More Dangerous for the Global Economy Than SARS.” Looking back, SARS “knocked two full percentage points off China’s economic growth, which dipped from 11.1% in the first quarter of 2003 to 9.1% the following quarter. With the outbreak contained, growth recovered to 10% in the third quarter.” The “types of industries that were most affected by government-imposed bans on travel and other measures to contain the outbreak—such as retail, restaurants, entertainment, and tourism—accounted for 42% of gross domestic product. Since then, services industries’ share of GDP has risen to 54%.” “Back in 2003, China’s GDP was an insignificant 4% of the global total. That share now stands at 17%...”
“Virus May Drag China GDP to 4.5%...”, read a Friday Bloomberg headline. Other estimates have growth slowing to 5.0%.” Yet a full-fledged economic contraction seems a high probability. At least that’s what industrial commodities prices are suggesting. Copper dropped 6.2% this week and 9.8% for the “worst month since 2015.” Nickel fell 5.5% this week, Palladium 5.7%, Platinum 4.5%, Lead 7.2%, Tin 5.9%, Zinc 7.1% and Aluminum 3.6%. Crude (WTI) sank 4.2% this week, pushing the January decline to 15.4%. Ominously, the commodities self-off broadened this week. Coffee sank 6.8%, Wheat 3.4%, Soybeans 3.3%, Cotton 2.7% and Corn 1.5%.
There were ominous moves in global equities. Hong Kong’s China Financials Index sank 7.1%, boosting January losses to 10.4%. Taiwan’s TAIEX equities index fell 4.9%. South Korea’s KOSPI index sank 6.5%. The Jakarta Composite was down 4.9%. The Bangkok SET slumped 3.6%, and the Philippines PSE index dropped 5.5%. Germany’s DAX index fell 4.4%, and UK’s FTSE 100 dropped 4.0%. Brazil’s Bovespa index sank 3.9%.
From a global perspective, dire market signals continue to blare from sovereign safe haven bonds. Ten-year Treasury yields dropped another 10 bps this week to 1.51%, the low since September 4th. German bund yields fell 10 bps to negative 0.43%, and French 10-year yields were down 10 bps to negative 0.18%. Japanese JGB yields declined five bps to negative 0.07%. For the month, Treasury yields were down 41 bps and bund yields dropped 25 bps. In the realm of the wacky, Italian 10-year yields sank 30 bps this week (48bps for the month) to 0.94%.
Bond markets are increasingly anticipating a potent solution of antiviral central bank stimulus administered to neutralize the Novel Wuhan Coronavirus (2019- nCoV). Once eradicated, central bankers can move expeditiously to counteract CO2 and climate change. Untold QE will be available in the event of political or geopolitical instability. Formations of bazookas will be primed for any equities correction. Pundits reckon the Fed will be ready to respond in the event of a 5% market pullback. It’s good to have insurance against giving back any more than a fraction of last year’s huge gains. Not sure why a slug of monetary stimulus couldn’t do the trick for homelessness, placate Middle East strife and even bridge the divide between increasingly Balkanized societies and nations.
January 29 – Bloomberg (Rich Miller, Christopher Condon, and Matthew Boesler): “Federal Reserve Chairman Jerome Powell signaled that the central bank would pull out the stops to combat a global disinflationary downdraft, foreshadowing a potential shift toward an easier monetary policy over time. Speaking to reporters… after the Fed left its benchmark interest rate unchanged, Powell said he is intent on evading the downward spiral in inflation and inflation expectations that’s bedeviled other countries. ‘We have seen this dynamic play out in other economies around the world, and we are determined to avoid it here in the U.S.,’ he said.”
I vividly recall talk of economic depression in the aftermath of the 1987 stock market crash. Deflation was a major worry in the early nineties after the collapse of various late-eighties Bubbles (S&Ls, coastal real estate, junk bonds, M&A, etc.). Global policymakers were fretting deflationary forces after the 1995 Mexico collapse, SE Asia in ’97 and Russia/LTCM in 1998. The Fed was ready to resort to “helicopter money” and the “government printing press” to counteract the powerful forces of deflation after the collapse of the “tech” Bubble early in the new Millennium. And it’s now been 11 years of history’s most radical monetary stimulus to fight deflationary forces since the collapse of the last Bubble.
It all amounts to the greatest misdiagnosis in the history of central banking. The predominant risk has not been – and is not today – disinflation or deflation. Bubbles remain the overriding risk – and further inflation only intensifies historic Bubble risk. To be sure, foolhardy policy measures that work to neutralize Bubble deflation only ensure larger and more threatening Bubbles. Last year’s Monetary Fiasco unleashed precarious “blow-off” speculative excess – stocks, bonds, corporate Credit and structured finance.
The entire world inflated into the proverbial Bubble in Search of a Pin. At the epicenter of the global Bubble, trouble in China has been headlining my list of potential catalysts. The coronavirus outbreak poses a clear and present danger of pushing China into a dangerous predicament. The most alarming aspect of all this: few contemplate China as a catalyst because virtually everyone remains oblivious to Global Bubble Risk. How about those fantastic earnings from Apple, Tesla, Microsoft and Amazon…
For the Week:
The S&P500 dropped 2.1% (down 0.2% y-t-d), and the Dow fell 2.5% (down 1.0%). The Utilities gained 0.9% (up 6.9%). The Banks slumped 2.7% (down 7.6%), and the Broker/Dealers declined 1.4% (unchanged). The Transports sank 4.5% (down 3.1%). The S&P 400 Midcaps fell 2.8% (down 2.7%), and the small cap Russell 2000 dropped 2.9% (down 3.3%). The Nasdaq100 declined 1.6% (up 3.0%). The Semiconductors sank 7.0% (down 3.2%). The Biotechs fell 2.5% (down 4.7%). Though bullion was up $18, the HUI gold stock index declined 0.8% (down 3.0%).
Three-month Treasury bill rates ended the week at 1.51%. Two-year government yields sank 18 bps to 1.31% (down 26bps y-t-d). Five-year T-note yields fell 19 bps to 1.31% (down 38bps). Ten-year Treasury yields dropped 18 bps to 1.51% (down 41bps). Long bond yields declined 13 bps to 2.00% (down 39bps). Benchmark Fannie Mae MBS yields dropped 11 bps to 2.38% (down 34bps).
Greek 10-year yields fell 14 bps to 1.16% (down 28bps y-t-d). Ten-year Portuguese yields declined 11 bps to 0.27% (down 18bps). Italian 10-year yields sank 30 bps to 0.94% (down 48bps). Spain's 10-year yields fell 11 bps to 0.24% (down 23bps). German bund yields dropped 10 bps to negative 0.43% (down 25bps). French yields fell 10 bps to negative 0.18% (down 29bps). The French to German 10-year bond spread was little changed at 25 bps. U.K. 10-year gilt yields declined four bps to 0.52% (down 30bps). U.K.'s FTSE equities index sank 4.0% (down 3.4%).
Japan's Nikkei Equities Index slumped 2.6% (down 1.9% y-t-d). Japanese 10-year "JGB" yields declined five bps to negative 0.07% (down 6bps y-t-d). France's CAC40 dropped 3.6% (down 2.9%). The German DAX equities index sank 4.4% (down 2.0%). Spain's IBEX 35 equities index fell 2.0% (down 1.9%). Italy's FTSE MIB index dropped 3.1% (down 1.1%). EM equities were under pressure. Brazil's Bovespa index sank 3.9% (down 1.6%), and Mexico's Bolsa declined 2.3% (up 1.3%). South Korea's Kospi index was clobbered 5.7% (down 3.6%). India's Sensex equities index fell 2.1% (down 1.2%). China's Shanghai Exchange will open back up Monday (down 2.4%). Turkey's Borsa Istanbul National 100 index dropped 2.5% (up 4.1%). Russia's MICEX equities index fell 2.2% (up 1.0%).
Investment-grade bond funds saw inflows of $4.382 billion, while junk bond funds posted outflows of $2.869 billion (from Lipper).
Freddie Mac 30-year fixed mortgage rates dropped nine bps to 3.51% (down 95bps y-o-y). Fifteen-year rates declined four bps to 3.00% (down 89bps). Five-year hybrid ARM rates fell four bps to 3.24% (down 72bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-year fixed rates down 21 bps to 3.74% (down 66bps).
Federal Reserve Credit last week added $0.9bn to $4.115 TN, with a 20-week gain of $388 billion. Over the past year, Fed Credit expanded $114bn, or 2.9%. Fed Credit inflated $1.304 Trillion, or 46%, over the past 377 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt surged $21.2 billion last week to $3.434 TN. "Custody holdings" increased $20.3 billion, or 0.6%, y-o-y.
M2 (narrow) "money" supply surged $62.3bn last week to a record $15.460 TN. "Narrow money" surged $1.023 TN, or 7.1%, over the past year. For the week, Currency increased $1.9bn. Total Checkable Deposits jumped $28.1bn, and Savings Deposits expanded $26.3bn. Small Time Deposits slipped $1.8bn. Retail Money Funds rose $7.8bn.
Total money market fund assets declined $12.8bn to $3.621 TN, with institutional money fund assets declining $6.6bn to $2.273 TN. Total money funds surged $583bn y-o-y, or 19.2%.
Total Commercial Paper gained $4.4bn to $1.119 TN. CP was up $40.9bn, or 3.8% year-over-year.
Currency Watch:
For the week, the U.S. dollar index declined 0.5% to 97.39 (up 0.9% y-t-d). For the week on the upside, the British pound increased 1.0%, the Japanese yen 0.9%, the Swiss franc 0.9%, and the euro 0.6%. On the downside, the South African rand declined 4.2%, the Brazilian real 2.3%, the New Zealand dollar 2.2%, the Australian dollar 2.1%, the South Korean won 1.9, the Norwegian krone 1.7%, the Singapore dollar 1.0%, the Canadian dollar 0.7%, the Swedish krona 0.6% and the Mexican peso 0.3%. The Chinese off-shore renminbi declined 0.97% versus the dollar this week (down 0.52% y-t-d).
Commodities Watch:
January 27 – Bloomberg (Ranjeetha Pakiam): “Gold is once again showcasing its long-standing reputation as an effective haven in troubled times, trading near the highest close in more than six years on rising concern over the economic and human impact of China’s deadly coronavirus.”
January 29 – Financial Times (Henry Sanderson): “Investors around the world are hurrying back to bullion. Holdings in gold-backed exchange traded funds have risen to their highest levels in seven years, following $19.2bn in inflows last year. Analysts say interest has picked up for a variety of reasons, including fears over slowdowns in big economies, rising geopolitical risks and an apparent loss of faith in traditional ‘haven’ assets such as Japan’s yen. But chief among them is a giant mound of negative-yielding debt, now tipping the scales at more than $13tn. If buyers of bonds are being asked to pay for the privilege of holding them to maturity, then the appeal of gold — which yields nothing but also costs nothing to hold on to — is burnished.”
January 26 – Bloomberg (James Poole): “Crop futures traded in Chicago sank as China’s death toll from the coronavirus surged amid government reports that the infection was spreading more quickly, threatening demand in the world’s largest consumer of agricultural commodities and the biggest soybean importer. Soybeans dropped below $9 a bushel for the first time since early December and have lost more than 6% this month. Corn was down over 1% and wheat fell 2% as selling gripped global financial markets in a deepening risk-off mood.”
The Bloomberg Commodities Index dropped 3.2% (down 7.5% y-t-d). Spot Gold advanced 1.1% to $1,589 (up 4.7%). Silver slipped 0.6% to $18.012 (up 0.5%). WTI crude dropped $2.63 to $51.56 (down 15.6%). Gasoline declined 0.9% (down 11%), and Natural Gas fell 2.4% (down 16%). Copper sank 6.2% (down 10%). Wheat dropped 3.4% (down 1%). Corn fell 1.5% (down 2%).
Market Instability Watch:
January 30 – Bloomberg (Sofia Horta e Costa and Tian Chen): “Every other market has already reacted to the deadly virus threatening China’s economy. Soon it will be China’s turn, and it’s likely to be brutal. Stocks and commodities will almost certainly sink when financial markets reopen Monday for the first time since Jan. 23, while bond yields will drop. For equities, the declines are likely to be exacerbated by the amount of leverage in the market -- near the highest in 11 months. That could create a downward spiral where steep losses become steeper as traders face margin calls.”
January 27 – Bloomberg (Sam Potter and John Ainger): “The global rush for safer assets has fueled a huge jump in the world’s stockpile of negative-yielding bonds, snapping months of decline in the value of subzero debt. The pool of securities with a yield below zero surged by $1.16 trillion last week, the largest weekly increase since at least 2016 when Bloomberg began tracking the data daily. Another injection looked certain on Monday, as investors worldwide ditched riskier assets and piled into bonds amid mounting fears over a deadly virus spreading from China.”
January 27 – Bloomberg: “China’s financial markets will remain closed until next Monday after authorities extended the Lunar New Year break by three days as they grapple with the worsening virus crisis. Trading will resume Feb. 3, the Shanghai and Shenzhen stock exchanges said. Shanghai authorities separately advised that companies shouldn’t start work until at least Feb. 9.”
January 26 – Reuters (Ghaida Ghantous): “Lebanon’s central bank said on Saturday there would be no ‘haircut’ on deposits at banks due to the country’s financial crisis, responding to concerns voiced by a prominent Arab billionaire about risks to foreign investments there.”
January 29 – Bloomberg (Annie Lee): “The sizzling start to the year for Chinese company dollar bond sales risks fading as the coronavirus epidemic darkens investor mood. Bond offerings have totaled about $27 billion so far this month, the busiest pace in January ever even before the Lunar New Year holiday…”
January 28 – Wall Street Journal (James Mackintosh): “The world’s business elite is convinced that Donald Trump will win a second term in the White House in November, and investors seem to believe there’s little risk they will end up victims of the U.S. election. In reality, investors face triple uncertainty about the outcome—and should be concerned. The election is highly likely to be close, because modern America is split down the middle—and that makes it inherently uncertain. The Democratic candidate isn’t yet chosen, and could be radical. And a victory by Mr. Trump might not provide the relief that investors expect. Discussions with CEOs and executives from the U.S. and Europe at the World Economic Forum in Davos last week showed great confidence that Mr. Trump will win.”
China Watch:
January 30 – Bloomberg: “More than a dozen Chinese provinces announced an extension of the current Lunar New Year holiday by more than a week as the nation attempts to halt the spread of the novel coronavirus that has killed hundreds of people and sickened thousands. Fourteen provinces and cities have said businesses need not start operations until at least the second week of February. They accounted for almost 69% of China’s gross domestic product in 2019… The 14 provinces included in the extended holiday were the source of 78% of China’s exports in December last year… Those same provinces account for 90% of copper smelting, at least 60% of steel production, 65% of crude oil refining and 40% of coal output.”
January 31 – Bloomberg (Tara Patel, Masatsugu Horie and Chester Dawson): “Forget about clinging to hopes that China, the world’s largest car market, will recover from its unprecedented two-year slump anytime soon. Though concrete estimates on the financial toll of the coronavirus outbreak are still scarce, signs are emerging that the final cost will far outweigh that of the 2003 SARS epidemic, when China’s auto market was one-sixth the size it is today and smaller than that of Japan. Companies from Tesla Inc. to Volkswagen AG and Toyota Motor Corp. have warned they anticipate disruptions, while a top parts supplier predicted automakers will cut China production 15% this quarter. China’s car sales were already heading for the lowest in at least five years before the current outbreak…”
January 27 – Wall Street Journal (James T. Areddy): “China was counting on consumers to underpin its already slowing economy. Now, authorities are advising people to stay home, and many residents are too frightened anyway to eat out, shop, see movies or travel as a deadly virus passes person to person. Anxiety may be spreading faster than the coronavirus that emerged from the central Chinese city of Wuhan in recent weeks. That adds risks to what was already expected to be a very challenging year for the economy in China. Many services core to China’s consumer boom are grinding to a halt as people forgo plans to spend money during the country’s biggest annual holiday…”
January 29 – Bloomberg (Eric Lam): “Rising food costs in China have added to the country’s growing list of concerns as authorities struggle to contain the impact of a rapidly spreading viral outbreak. The China Shouguang vegetable price index, a daily indicator of the nation’s produce, surged 4.9% to its highest level in almost four years at 195.45… The surge in vegetable costs is another strain on household budgets already stretched by elevated pork prices from swine fever. Adding to inflation pressures, consumers and businesses alike may seek to hoard essential items in response to efforts to contain the virus, said Sean Darby, global equity strategist with Jefferies… ‘The shock of supply chains being disrupted will probably lead to households and businesses ‘overstocking’ in anticipation of further transport restrictions,’ Darby said… ‘This can cause a ‘run’ on essential items as well as critical parts and components -- potentially leading to a spike in inflation.’”
January 30 – Financial Times (Christian Shepherd and Sue-Lin Wong): “When the mayor of Wuhan was asked on China’s state broadcaster why he had not disclosed the severity of the coronavirus outbreak in his city, he replied that his hands were tied by laws that required him to seek authorisation from Beijing. ‘I hope everyone can understand why there wasn’t timely disclosure,’ Zhou Xianwang said in the unusually frank interview… ‘After I received information, I needed authorisation before making it public,’ he explained. In a country that insists on political unity, the interview stands as a rare example of stresses between central and local government breaking into the open, as China’s response to the deadly respiratory virus becomes one of the biggest challenges to Xi Jinping’s presidency since he took power in 2012.”
January 29 – New York Times (Li Yuan): “With anger rising over the response to the coronavirus outbreak, even some with ties to China's leaders have called for acknowledging divisions, not papering them over. From the outside, China's Communist Party appears powerful and effective. It has tightened its control over Chinese politics and culture, the economy and everyday life, projecting the image of a gradually unifying society. The coronavirus outbreak has blown up that facade. Staff members at prestigious Union Hospital in Wuhan, the city at the center of the outbreak, have joined others around China in begging online for medical supplies. Videos show patients in Wuhan beseeching medical staff for treatment. Residents of Wuhan and its province, Hubei, are being chased off planes and ousted from hotels and villages. Online critics are comparing current leaders unfavorably with past ones… As cracks show in China's veneer of stability, even some with ties to the party leadership are calling for those in power to shine light on divisions rather than papering them over.”
January 29 – Bloomberg (Eric Pfanner): “Airlines halt flights from China. Schools in Europe uninvite exchange students. Restaurants in South Korea turn away Chinese customers. As a deadly virus spreads beyond China, governments, businesses and educational institutions are struggling to find the right response. Safeguarding public health is a priority. How to do that without stigmatizing the entire population of the country where the outbreak began -- and where nearly a fifth of all humans reside -- is the challenge.”
January 31 – Bloomberg (Alfred Liu): “China’s banking system is facing greater risks than it seems as some bigger regional lenders are under pressure just like their smaller counterparts. ‘Some of the relatively larger stress-tested banks could require sizable recapitalization,’ said S&P Global Ratings credit analyst Ming Tan, citing tests conducted by the People’s Bank of China. China’s vast network of regional banks is under pressure amid the slowest economic growth in three decades and rising loan defaults.”
January 26 – Financial Times (Henry Sanderson and Don Weinland): “China’s largest lithium producer is struggling to repay debt that helped finance an aggressive overseas expansion, the latest Chinese company to hit setbacks going global. Tianqi Lithium is facing mounting pressure to repay part of a $3.5bn loan from state-owned Citic Bank this year, which it used to buy a 24% stake in Chilean lithium producer SQM in May 2018. The global lithium market has been hit by rising supply from new mines…”
Trump Administration Watch:
January 27 – Reuters (Lisa Lambert and Makini Brice): “The U.S. State Department on Monday warned against visiting China and said Americans should not travel to the Hubei province, given that the province's city of Wuhan is ground zero for a new deadly coronavirus.”
Federal Reserve Watch:
January 29 – CNBC (Jeff Cox): “While the Federal Reserve kept its benchmark rate steady, it did make an adjustment… to the interest it pays on funds stored at the central bank. The Fed boosted the interest on excess reserves rate 5 bps to 1.6% even as it kept the benchmark funds rate in a target range of 1.5% to 1.75%. Fed officials characterize the moves on the IOER as technical adjustments, though markets are watching the situation because it also is a reflection of where the funds rate trades while the central bank figures out the level where it needs to keep its balance sheet.”
January 29 – Reuters (Jonnelle Marte): “The Federal Reserve will keep injecting cash into the banking system and buying billions of dollars of Treasury bills for a few more months, but it aims to start dialing back on both in the second quarter, Chair Jerome Powell said… Since mid-October, the Fed has been buying $60 billion a month of T-bills, and reserve levels have risen by more than $270 billion since then to roughly $1.67 trillion. Powell said… officials expect to reach an ‘ample’ level of reserves, where the market is less reliant on the Fed, at some point in the second quarter.”
January 27 – Associated Press (Christopher Rugaber): “For the first time in years, Federal Reserve officials will hold their latest policy meeting this week feeling broadly satisfied with where interest rates are and with seemingly no inclination to change them anytime soon. Chairman Jerome Powell has expressed a sense of gratification with Fed policy, thanks to a steady if unspectacular economy driven by a robust job market. The unemployment rate is at a 50-year low. Economic growth remains solid if modest at a roughly 2% annual rate. With inflation low, the Fed could potentially stand pat for months.”
U.S. Bubble Watch:
January 28 – Financial Times (Brendan Greeley): “The US will rack up budget deficits totalling $13.1tn over the coming decade and continuing to rise to levels ‘unprecedented in US history’, according to projections from the non-partisan Congressional Budget Office. In its twice-yearly report…, the CBO predicted a budget shortfall of $1tn in 2020, or 4.6% of gross domestic product, and set out a deteriorating longer-term picture based on recent changes to the tax code and the ageing US population. ‘Not since World War II has the country seen deficits during times of low unemployment that are as large as those we project, nor, in the past century, has it experienced large deficits for as long as we project,’ CBO director Phillip Swagel said…”
January 28 – CNBC (Jeff Cox): “The U.S. budget deficit likely will break the $1 trillion barrier in 2020, the first time that has happened since 2012, according to Congressional Budget Office estimates… After passing that mark this year, the deficit is expected to average $1.3 trillion between 2021-30, rising from 4.6% of GDP to 5.4% over the period. That’s well above the long-term average since around the end of World War II. The deficit since then has not topped 4% of GDP for more than five consecutive years, averaging just 1.5% over the period. As part of a spending pattern that the CBO deemed unsustainable, the national debt is expected to hit $31.4 trillion by 2030.”
January 24 – Financial Times (Joe Rennison and Colby Smith): “Stress in US financial markets has dropped to its lowest level on record, according to a widely-watched index, after the Federal Reserve sought to ease strains in short-term borrowing with a huge injection of cash. The St Louis Fed financial stress index fell to minus 1.6 for the week ending January 17, it said this week — the lowest reading since the index was created at the end of 1993. The measure has been negative for several years but has lurched lower in recent months, as the US central bank has tried to boost the amount of cash in the financial system following an unusual bout of volatility in the overnight repo market, where investors borrow cash in exchange for high-quality collateral like US Treasuries.”
January 29 – Reuters (Lucia Mutikani): “The U.S. goods trade deficit rose sharply in December as imports rebounded and businesses became more cautious on accumulating inventory, prompting some economists to cut their fourth quarter economic growth estimates. …The goods trade gap, which had dropped for three straight months due to declining imports, surged 8.5% to $68.3 billion last month.”
January 28 – CNBC (Fred Imbert): “Consumer confidence in the U.S. grew more than expected in January as the outlook around the labor market improved, …The Conference Board showed. The Board’s consumer confidence index rose to 131.6 this month from 126.5 in December. Economists… expected consumer confidence to rise to 128… The data… showed 49% of consumers think U.S. jobs are ‘plentiful,’ up from 46.5%. Those saying jobs are ‘hard to get’ decreased to 11.6% from 13%.”
January 29 – CNBC (Diana Olick): “Mortgage rates fell to their lowest level since November, and that sent current borrowers and potential homebuyers rushing to their lenders… Mortgage applications to purchase a home increased 5% for the week and were a strong 17% higher than a year ago. Housing demand is incredibly strong right now, and real estate agents are reporting seeing much higher buyer traffic than normal. The spring season appears to have started very early. The only thing standing in the way of more home sales is the tight supply…”
January 28 – CNBC (Diana Olick): “After cooling for much of last year, home price gains are accelerating again. Nationally, prices increased 3.5% annually in November, up from 3.2% in October, according to… S&P CoreLogic Case-Shiller… ‘With the month’s 3.5% increase in the national composite index, home prices are currently 59% above the trough reached in February 2012, and 15% above their pre-financial crisis peak,’ said Craig J. Lazzara, managing director… at S&P Dow Jones Indices. ‘November’s results were broad-based, with gains in every city in our 20-city composite.’”
January 27 – Reuters (Lucia Mutikani): “Sales of new U.S. single-family homes unexpectedly fell in December, likely held down by a shortage of more affordable homes, but the housing market remains supported by lower mortgage rates… New home sales slipped 0.4% to a seasonally adjusted annual rate of 694,000 units last, with sales in the South dropping to more than a one-year low.”
January 29 – Bloomberg (Max Reyes): “Contract signings to purchase U.S. previously owned homes unexpectedly slumped in December, depressed by fewer listings of properties and representing a blemish after a recent spate of positive housing-market news. An index of pending home sales decreased 4.9% from the month prior, the largest decline since May 2010… ‘Due to the shortage of affordable homes, home sales growth will only rise by around 3%,’ Lawrence Yun, chief economist at the NAR, said…, adding that mortgage rates will probably hold below 4% for most of the year. ‘Home prices and even rents are increasing too rapidly, and more inventory would help correct the problem and slow price gains.’”
January 28 – Bloomberg (Katia Dmitrieva): “Stronger-than-expected U.S. economic growth that’s pushed the jobless rate to a five-decade low will contribute to an uptick in inflation this year, according to the Congressional Budget Office. The CBO, in its budget and economic outlook through 2030, expects gross domestic product to rise 2.2% this year, up 0.1 percentage point from its August estimate. A measure of prices excluding food and energy is projected to increase 2.2%, just above the Federal Reserve’s goal. At the same time, the U.S. budget deficit will exceed $1 trillion in the fiscal year that ends in September, similar to the agency’s previous forecast.”
January 28 – Reuters (Lucia Mutikani): “New orders for key U.S.-made capital goods dropped by the most in eight months in December and shipments were weak, suggesting business investment contracted further in the fourth quarter and was a drag on economic growth.”
January 30 – Reuters (P.J. Huffstutter): “U.S. farm bankruptcy rates jumped 20% in 2019 - to an eight-year high - as financial woes in the U.S. agricultural economy continued in spite of massive federal bail-out funding, according to federal court data.”
January 28 – Bloomberg (Vince Golle): “The Federal Reserve Bank of Richmond’s regional manufacturing index surged at the start of 2020 as rebounds in sales and orders offered signs of stabilization in an otherwise beleaguered factory sector. The gauge jumped to 20 in January, the highest since September 2018, from minus 5 a month earlier… It marked the largest monthly advance since March 2016.”
January 30 – Bloomberg (Matthew Boesler): “The U.S. government could be pumping half a trillion dollars of extra deficit spending into the economy each year without risking a jump in inflation, according to the economist who’s become the public face of Modern Monetary Theory. ‘We could safely increase the deficit, let’s say by another $500 billion or so, before we begin to see inflation accelerating to something that we would consider problematic,’ Stephanie Kelton, a professor at Stony Brook University in New York…, told Bloomberg…”
Fixed-Income Bubble Watch:
January 29 – Financial Times (Joe Rennison and Jennifer Ablan): “Junk-rated energy bonds have plummeted after the spread of coronavirus hit oil prices, highlighting the strains on a sector that already led US defaults last year. …Laredo Petroleum’s $600m bond, which was priced at 100 cents on the dollar in mid-January, dropped to as low as 90 cents after just a week of trading. Meanwhile, the yield on a widely watched junk-rated energy bond index run by Ice Data Services jumped 0.77 percentage points to a high of 9.02% this week, reflecting a broad sell-off in lower quality debt from the sector.”
January 28 – Bloomberg (Brian Smith): “The U.S. high-grade primary market was back to business as usual on Tuesday after a two-day deal hiatus. After electing to stand down Monday as coronavirus containment concerns roiled risk assets, four companies printed $6.225 billion Tuesday… Today’s haul brings monthly volume to $129.3b, surpassing 2018 for the second largest January on record. As has largely been the case all year, robust investor appetite translated into upsized deals and minimal to negative relative borrowing costs.”
January 30 – Bloomberg (Davide Scigliuzzo): “Tilman Fertitta is looking to take advantage of red-hot investor demand for leveraged loans to finance a $200 million payday. Fertitta’s Golden Nugget Inc., the company on top of his hotel and casino empire, is seeking to finance the dividend as part of a broader refinancing deal. The payout is double what the billionaire had initially targeted and it’s going to cost less than originally expected…”
January 30 – Bloomberg (James Hirai and Hannah Benjamin): “It sounds like a tough sales pitch: buy this debt to lose money for the next decade. Yet for bankers helping Austria raise money this week, it proved smart business -- investors threw more than 30 billion euros ($33bn) at the country as they vied for a chunk of the world’s first syndicated 10-year government bond to carry a negative yield. The order deluge meant Austria joined the likes of Spain and Italy in setting demand records this month as investors chase the safety of bonds.”
January 27 – Reuters (Kristen Haunss): “Concerns over an outbreak of the coronavirus weighed on the US$1.2trn US leveraged loan market Monday, with secondary prices dipping slightly amid volatility across markets. Prices on leveraged loans to companies that could be affected by an outbreak, which was first identified in Wuhan, China, were down about a half-point to a point, according to traders, with travel-related industries hit the hardest.”
Brexit Watch:
January 31 – Reuters (John Chalmers): “Britain’s Union Jack was removed from lines of EU member state flags at the European Council and European Parliament buildings in Brussels on Friday evening ahead of the United Kingdom’s exit from the bloc at midnight. Britain will become the first country to quit the European Union after 47 years in the club, leaving 27 member states that will now regard it as a third country. Two solemn-looking officials, a man and a woman, took less than a minute to take down the flag in the cavernous entrance to the European Council, which represents national leaders and sets EU policy. They took away the flagstand, folded the Union Jack twice into a rectangle and walked without comment out of a door.”
Central Bank Watch:
January 30 – Financial Times (Gillian Tett): “Earlier this week, the Japanese government nominated Seiji Adachi to the board of the Bank of Japan. The news made few waves outside Japan, since Mr Adachi is little known. However, global investors should pay attention. Mr Adachi is a renowned ‘reflationist’ who favours massive monetary expansion. So his selection suggests that after two decades of eye-poppingly loose monetary policy, the BoJ is set to double down in 2020. That is remarkable. Moreover, Japan is not alone. This week the Federal Reserve left US rates unchanged, after three cuts last year. However, Jay Powell, Fed chair, gave such dovish signals in his press conference amid a pattern of reasonable US growth that markets expect another rate cut later this year.”
January 28 – Bloomberg (Toru Fujioka): “Concern at the Bank of Japan over the effectiveness of prolonged low interest rates appears to be growing, with one board member indicating that a policy review may be needed, a summary of views from the central bank’s January meeting signaled.”
EM Watch:
January 27 – Bloomberg (Dana Khraiche): “Lebanese lawmakers approved a 2020 budget plan with a crucial Eurobond payment weeks away, leaving it to the new government to decide on whether to pay creditors or save what’s left of the country’s reserves… The market is on edge before a $1.2 billion Eurobond that comes due on March 9 as Lebanon’s political struggles and the absence of external funding have sent its default risk soaring.”
January 28 – Bloomberg (Nguyen Dieu Tu Uyen): “Vietnam’s inflation accelerated to its highest in more than six years in January, while exports plunged, putting the economy on an uncertain footing at the beginning of the year. Consumer prices rose 6.4% in January from a year ago, the fastest pace since August 2013…”
India Watch:
January 31 – Bloomberg (Abhijit Roy Chowdhury and Vrishti Beniwal): “The top economic adviser to India’s government favors relaxing the budget deficit target to boost economic growth from an 11-year low. India’s fiscal deficit is seen slipping to 3.8% of gross domestic product in the year to March, against a budgeted 3.3%, as the slowdown lowered revenue collections and the government provided a tax stimulus to spur investments.”
Europe Watch:
January 31 – Reuters (Gavin Jones and Leigh Thomas): “The economies of France and Italy, respectively the euro zone’s second and third largest, shrank unexpectedly in the last quarter of 2019 causing GDP growth for the 19 countries sharing the single currency to miss forecasts… Gross domestic product in the 19 countries sharing the euro rose 0.1% quarter-on-quarter for a 1.0% year-on-year gain…”
January 30 – Bloomberg (Piotr Skolimowski): “German inflation accelerated to a nine-month high at the start of 2020 amid mounting signs that the economy started to stabilize. The rate climbed to 1.6% in January, slightly below economists’ expectations. The pickup follows reports showing German unemployment unexpectedly fell this month and European manufacturers turned more optimistic.”
January 27 – Reuters (Michael Nienaber, Holger Hansen und Christian Kraemer): “The German government expects Europe’s largest economy to grow by 1.1% this year, up from a previous estimate of 1.0%...”
Japan Watch:
January 28 – Reuters (Yoshifumi Takemoto, Kaori Kaneko and Ritsuko Ando): “Japanese Economy Minister Yasutoshi Nishimura warned… that corporate profits and factory production might take a hit from the coronavirus outbreak in China that has rattled global markets and chilled confidence.”
January 30 – Reuters (Kaori Kaneko): “Japan’s factory output fell at the fastest pace on record in October-December amid sluggish demand at home and abroad, reinforcing views the economy likely contracted in the fourth quarter… Factory output fell 4.0% in October-December, the fastest pace of decline since comparable data began in 2013…”
Global Bubble Watch:
January 28 – Bloomberg (Cecile Gutscher): “Add carry trades to the growing list of investing strategies hit by the coronavirus panic. Deutsche Bank AG’s G10 FX Carry Basket Index is on course for a near 3% loss in January, the worst start to a year since 2015. The gauge posted its steepest decline in almost 12 months on Monday as the global advance of the deadly Chinese virus spurred a fierce dash for havens. Meanwhile, a Bloomberg currency index that measures returns from eight emerging markets, funded by short positions in the greenback, has fallen 1.6% in January…”
January 28 – Bloomberg (Chris Anstey): “Japan and a clutch of industrialized east Asian economies are increasingly snapping up overseas bonds, in such magnitude that it may be storing up financial risk, according to Oxford Economics. ‘The increase in cross-border portfolio allocation might create a further buildup of vulnerabilities, especially among some Asian pension funds and life insurers,’ Guillermo Tolosa and Giuliano Simoncelli wrote… Japan, Taiwan, Singapore and Hong Kong snapped up $330 billion of foreign bonds in the first nine months of 2019, a similar pace to China’s peak years of 2006-08…”
Leveraged Speculation Watch:
January 27 – Financial Times (Laurence Fletcher): “Pension funds and endowments have been the backbone of the hedge fund industry for much of the past decade. But many of these institutional investors are now turning away from the $3tn-in-assets sector, dismayed by high fees and relatively lacklustre returns… The reshuffle comes after years of largely uninspiring performance from the hedge fund sector. Managers have underperformed the S&P 500 stock index every year since 2009, both in rising and falling markets. Last year provided hedge funds with their best returns in a decade, but they were still well behind the market.”
Geopolitical Watch:
January 28 – Bloomberg (Philip Heijmans and Lucille Liu): “China’s armed forces accused the U.S. of ‘ill intentions’ in the South China Sea after an American warship entered waters near the contested Spratly Islands last week. ‘The U.S. ship’s deliberate provocation during the traditional lunar Chinese New Year festival, which harbored ill intentions, is a naked act of navigational hegemony,’ Senior Colonel Li Huamin, spokesman for the People’s Liberation Army’s… said… ‘China has indisputable sovereignty over the South China Sea and its islands, and no matter how the U.S. deliberately schemes, comes up with new tricks, provokes and stirs up trouble, its efforts will be fruitless.’”
January 29 – Associated Press (Kelvin Chan and Danica Kirka): “Britain decided… to let Chinese tech giant Huawei have a limited role supplying new high-speed network equipment to wireless carriers, ignoring the U.S. government’s warnings that it would sever intelligence sharing if the company was not banned. Britain’s decision is the first by a major U.S. ally in Europe, and follows intense lobbying from the Trump administration… It sets up a diplomatic clash with the Americans…”
The S&P500 dropped 2.1% (down 0.2% y-t-d), and the Dow fell 2.5% (down 1.0%). The Utilities gained 0.9% (up 6.9%). The Banks slumped 2.7% (down 7.6%), and the Broker/Dealers declined 1.4% (unchanged). The Transports sank 4.5% (down 3.1%). The S&P 400 Midcaps fell 2.8% (down 2.7%), and the small cap Russell 2000 dropped 2.9% (down 3.3%). The Nasdaq100 declined 1.6% (up 3.0%). The Semiconductors sank 7.0% (down 3.2%). The Biotechs fell 2.5% (down 4.7%). Though bullion was up $18, the HUI gold stock index declined 0.8% (down 3.0%).
Three-month Treasury bill rates ended the week at 1.51%. Two-year government yields sank 18 bps to 1.31% (down 26bps y-t-d). Five-year T-note yields fell 19 bps to 1.31% (down 38bps). Ten-year Treasury yields dropped 18 bps to 1.51% (down 41bps). Long bond yields declined 13 bps to 2.00% (down 39bps). Benchmark Fannie Mae MBS yields dropped 11 bps to 2.38% (down 34bps).
Greek 10-year yields fell 14 bps to 1.16% (down 28bps y-t-d). Ten-year Portuguese yields declined 11 bps to 0.27% (down 18bps). Italian 10-year yields sank 30 bps to 0.94% (down 48bps). Spain's 10-year yields fell 11 bps to 0.24% (down 23bps). German bund yields dropped 10 bps to negative 0.43% (down 25bps). French yields fell 10 bps to negative 0.18% (down 29bps). The French to German 10-year bond spread was little changed at 25 bps. U.K. 10-year gilt yields declined four bps to 0.52% (down 30bps). U.K.'s FTSE equities index sank 4.0% (down 3.4%).
Japan's Nikkei Equities Index slumped 2.6% (down 1.9% y-t-d). Japanese 10-year "JGB" yields declined five bps to negative 0.07% (down 6bps y-t-d). France's CAC40 dropped 3.6% (down 2.9%). The German DAX equities index sank 4.4% (down 2.0%). Spain's IBEX 35 equities index fell 2.0% (down 1.9%). Italy's FTSE MIB index dropped 3.1% (down 1.1%). EM equities were under pressure. Brazil's Bovespa index sank 3.9% (down 1.6%), and Mexico's Bolsa declined 2.3% (up 1.3%). South Korea's Kospi index was clobbered 5.7% (down 3.6%). India's Sensex equities index fell 2.1% (down 1.2%). China's Shanghai Exchange will open back up Monday (down 2.4%). Turkey's Borsa Istanbul National 100 index dropped 2.5% (up 4.1%). Russia's MICEX equities index fell 2.2% (up 1.0%).
Investment-grade bond funds saw inflows of $4.382 billion, while junk bond funds posted outflows of $2.869 billion (from Lipper).
Freddie Mac 30-year fixed mortgage rates dropped nine bps to 3.51% (down 95bps y-o-y). Fifteen-year rates declined four bps to 3.00% (down 89bps). Five-year hybrid ARM rates fell four bps to 3.24% (down 72bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-year fixed rates down 21 bps to 3.74% (down 66bps).
Federal Reserve Credit last week added $0.9bn to $4.115 TN, with a 20-week gain of $388 billion. Over the past year, Fed Credit expanded $114bn, or 2.9%. Fed Credit inflated $1.304 Trillion, or 46%, over the past 377 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt surged $21.2 billion last week to $3.434 TN. "Custody holdings" increased $20.3 billion, or 0.6%, y-o-y.
M2 (narrow) "money" supply surged $62.3bn last week to a record $15.460 TN. "Narrow money" surged $1.023 TN, or 7.1%, over the past year. For the week, Currency increased $1.9bn. Total Checkable Deposits jumped $28.1bn, and Savings Deposits expanded $26.3bn. Small Time Deposits slipped $1.8bn. Retail Money Funds rose $7.8bn.
Total money market fund assets declined $12.8bn to $3.621 TN, with institutional money fund assets declining $6.6bn to $2.273 TN. Total money funds surged $583bn y-o-y, or 19.2%.
Total Commercial Paper gained $4.4bn to $1.119 TN. CP was up $40.9bn, or 3.8% year-over-year.
Currency Watch:
For the week, the U.S. dollar index declined 0.5% to 97.39 (up 0.9% y-t-d). For the week on the upside, the British pound increased 1.0%, the Japanese yen 0.9%, the Swiss franc 0.9%, and the euro 0.6%. On the downside, the South African rand declined 4.2%, the Brazilian real 2.3%, the New Zealand dollar 2.2%, the Australian dollar 2.1%, the South Korean won 1.9, the Norwegian krone 1.7%, the Singapore dollar 1.0%, the Canadian dollar 0.7%, the Swedish krona 0.6% and the Mexican peso 0.3%. The Chinese off-shore renminbi declined 0.97% versus the dollar this week (down 0.52% y-t-d).
Commodities Watch:
January 27 – Bloomberg (Ranjeetha Pakiam): “Gold is once again showcasing its long-standing reputation as an effective haven in troubled times, trading near the highest close in more than six years on rising concern over the economic and human impact of China’s deadly coronavirus.”
January 29 – Financial Times (Henry Sanderson): “Investors around the world are hurrying back to bullion. Holdings in gold-backed exchange traded funds have risen to their highest levels in seven years, following $19.2bn in inflows last year. Analysts say interest has picked up for a variety of reasons, including fears over slowdowns in big economies, rising geopolitical risks and an apparent loss of faith in traditional ‘haven’ assets such as Japan’s yen. But chief among them is a giant mound of negative-yielding debt, now tipping the scales at more than $13tn. If buyers of bonds are being asked to pay for the privilege of holding them to maturity, then the appeal of gold — which yields nothing but also costs nothing to hold on to — is burnished.”
January 26 – Bloomberg (James Poole): “Crop futures traded in Chicago sank as China’s death toll from the coronavirus surged amid government reports that the infection was spreading more quickly, threatening demand in the world’s largest consumer of agricultural commodities and the biggest soybean importer. Soybeans dropped below $9 a bushel for the first time since early December and have lost more than 6% this month. Corn was down over 1% and wheat fell 2% as selling gripped global financial markets in a deepening risk-off mood.”
The Bloomberg Commodities Index dropped 3.2% (down 7.5% y-t-d). Spot Gold advanced 1.1% to $1,589 (up 4.7%). Silver slipped 0.6% to $18.012 (up 0.5%). WTI crude dropped $2.63 to $51.56 (down 15.6%). Gasoline declined 0.9% (down 11%), and Natural Gas fell 2.4% (down 16%). Copper sank 6.2% (down 10%). Wheat dropped 3.4% (down 1%). Corn fell 1.5% (down 2%).
Market Instability Watch:
January 30 – Bloomberg (Sofia Horta e Costa and Tian Chen): “Every other market has already reacted to the deadly virus threatening China’s economy. Soon it will be China’s turn, and it’s likely to be brutal. Stocks and commodities will almost certainly sink when financial markets reopen Monday for the first time since Jan. 23, while bond yields will drop. For equities, the declines are likely to be exacerbated by the amount of leverage in the market -- near the highest in 11 months. That could create a downward spiral where steep losses become steeper as traders face margin calls.”
January 27 – Bloomberg (Sam Potter and John Ainger): “The global rush for safer assets has fueled a huge jump in the world’s stockpile of negative-yielding bonds, snapping months of decline in the value of subzero debt. The pool of securities with a yield below zero surged by $1.16 trillion last week, the largest weekly increase since at least 2016 when Bloomberg began tracking the data daily. Another injection looked certain on Monday, as investors worldwide ditched riskier assets and piled into bonds amid mounting fears over a deadly virus spreading from China.”
January 27 – Bloomberg: “China’s financial markets will remain closed until next Monday after authorities extended the Lunar New Year break by three days as they grapple with the worsening virus crisis. Trading will resume Feb. 3, the Shanghai and Shenzhen stock exchanges said. Shanghai authorities separately advised that companies shouldn’t start work until at least Feb. 9.”
January 26 – Reuters (Ghaida Ghantous): “Lebanon’s central bank said on Saturday there would be no ‘haircut’ on deposits at banks due to the country’s financial crisis, responding to concerns voiced by a prominent Arab billionaire about risks to foreign investments there.”
January 29 – Bloomberg (Annie Lee): “The sizzling start to the year for Chinese company dollar bond sales risks fading as the coronavirus epidemic darkens investor mood. Bond offerings have totaled about $27 billion so far this month, the busiest pace in January ever even before the Lunar New Year holiday…”
January 28 – Wall Street Journal (James Mackintosh): “The world’s business elite is convinced that Donald Trump will win a second term in the White House in November, and investors seem to believe there’s little risk they will end up victims of the U.S. election. In reality, investors face triple uncertainty about the outcome—and should be concerned. The election is highly likely to be close, because modern America is split down the middle—and that makes it inherently uncertain. The Democratic candidate isn’t yet chosen, and could be radical. And a victory by Mr. Trump might not provide the relief that investors expect. Discussions with CEOs and executives from the U.S. and Europe at the World Economic Forum in Davos last week showed great confidence that Mr. Trump will win.”
China Watch:
January 30 – Bloomberg: “More than a dozen Chinese provinces announced an extension of the current Lunar New Year holiday by more than a week as the nation attempts to halt the spread of the novel coronavirus that has killed hundreds of people and sickened thousands. Fourteen provinces and cities have said businesses need not start operations until at least the second week of February. They accounted for almost 69% of China’s gross domestic product in 2019… The 14 provinces included in the extended holiday were the source of 78% of China’s exports in December last year… Those same provinces account for 90% of copper smelting, at least 60% of steel production, 65% of crude oil refining and 40% of coal output.”
January 31 – Bloomberg (Tara Patel, Masatsugu Horie and Chester Dawson): “Forget about clinging to hopes that China, the world’s largest car market, will recover from its unprecedented two-year slump anytime soon. Though concrete estimates on the financial toll of the coronavirus outbreak are still scarce, signs are emerging that the final cost will far outweigh that of the 2003 SARS epidemic, when China’s auto market was one-sixth the size it is today and smaller than that of Japan. Companies from Tesla Inc. to Volkswagen AG and Toyota Motor Corp. have warned they anticipate disruptions, while a top parts supplier predicted automakers will cut China production 15% this quarter. China’s car sales were already heading for the lowest in at least five years before the current outbreak…”
January 27 – Wall Street Journal (James T. Areddy): “China was counting on consumers to underpin its already slowing economy. Now, authorities are advising people to stay home, and many residents are too frightened anyway to eat out, shop, see movies or travel as a deadly virus passes person to person. Anxiety may be spreading faster than the coronavirus that emerged from the central Chinese city of Wuhan in recent weeks. That adds risks to what was already expected to be a very challenging year for the economy in China. Many services core to China’s consumer boom are grinding to a halt as people forgo plans to spend money during the country’s biggest annual holiday…”
January 29 – Bloomberg (Eric Lam): “Rising food costs in China have added to the country’s growing list of concerns as authorities struggle to contain the impact of a rapidly spreading viral outbreak. The China Shouguang vegetable price index, a daily indicator of the nation’s produce, surged 4.9% to its highest level in almost four years at 195.45… The surge in vegetable costs is another strain on household budgets already stretched by elevated pork prices from swine fever. Adding to inflation pressures, consumers and businesses alike may seek to hoard essential items in response to efforts to contain the virus, said Sean Darby, global equity strategist with Jefferies… ‘The shock of supply chains being disrupted will probably lead to households and businesses ‘overstocking’ in anticipation of further transport restrictions,’ Darby said… ‘This can cause a ‘run’ on essential items as well as critical parts and components -- potentially leading to a spike in inflation.’”
January 30 – Financial Times (Christian Shepherd and Sue-Lin Wong): “When the mayor of Wuhan was asked on China’s state broadcaster why he had not disclosed the severity of the coronavirus outbreak in his city, he replied that his hands were tied by laws that required him to seek authorisation from Beijing. ‘I hope everyone can understand why there wasn’t timely disclosure,’ Zhou Xianwang said in the unusually frank interview… ‘After I received information, I needed authorisation before making it public,’ he explained. In a country that insists on political unity, the interview stands as a rare example of stresses between central and local government breaking into the open, as China’s response to the deadly respiratory virus becomes one of the biggest challenges to Xi Jinping’s presidency since he took power in 2012.”
January 29 – New York Times (Li Yuan): “With anger rising over the response to the coronavirus outbreak, even some with ties to China's leaders have called for acknowledging divisions, not papering them over. From the outside, China's Communist Party appears powerful and effective. It has tightened its control over Chinese politics and culture, the economy and everyday life, projecting the image of a gradually unifying society. The coronavirus outbreak has blown up that facade. Staff members at prestigious Union Hospital in Wuhan, the city at the center of the outbreak, have joined others around China in begging online for medical supplies. Videos show patients in Wuhan beseeching medical staff for treatment. Residents of Wuhan and its province, Hubei, are being chased off planes and ousted from hotels and villages. Online critics are comparing current leaders unfavorably with past ones… As cracks show in China's veneer of stability, even some with ties to the party leadership are calling for those in power to shine light on divisions rather than papering them over.”
January 29 – Bloomberg (Eric Pfanner): “Airlines halt flights from China. Schools in Europe uninvite exchange students. Restaurants in South Korea turn away Chinese customers. As a deadly virus spreads beyond China, governments, businesses and educational institutions are struggling to find the right response. Safeguarding public health is a priority. How to do that without stigmatizing the entire population of the country where the outbreak began -- and where nearly a fifth of all humans reside -- is the challenge.”
January 31 – Bloomberg (Alfred Liu): “China’s banking system is facing greater risks than it seems as some bigger regional lenders are under pressure just like their smaller counterparts. ‘Some of the relatively larger stress-tested banks could require sizable recapitalization,’ said S&P Global Ratings credit analyst Ming Tan, citing tests conducted by the People’s Bank of China. China’s vast network of regional banks is under pressure amid the slowest economic growth in three decades and rising loan defaults.”
January 26 – Financial Times (Henry Sanderson and Don Weinland): “China’s largest lithium producer is struggling to repay debt that helped finance an aggressive overseas expansion, the latest Chinese company to hit setbacks going global. Tianqi Lithium is facing mounting pressure to repay part of a $3.5bn loan from state-owned Citic Bank this year, which it used to buy a 24% stake in Chilean lithium producer SQM in May 2018. The global lithium market has been hit by rising supply from new mines…”
Trump Administration Watch:
January 27 – Reuters (Lisa Lambert and Makini Brice): “The U.S. State Department on Monday warned against visiting China and said Americans should not travel to the Hubei province, given that the province's city of Wuhan is ground zero for a new deadly coronavirus.”
Federal Reserve Watch:
January 29 – CNBC (Jeff Cox): “While the Federal Reserve kept its benchmark rate steady, it did make an adjustment… to the interest it pays on funds stored at the central bank. The Fed boosted the interest on excess reserves rate 5 bps to 1.6% even as it kept the benchmark funds rate in a target range of 1.5% to 1.75%. Fed officials characterize the moves on the IOER as technical adjustments, though markets are watching the situation because it also is a reflection of where the funds rate trades while the central bank figures out the level where it needs to keep its balance sheet.”
January 29 – Reuters (Jonnelle Marte): “The Federal Reserve will keep injecting cash into the banking system and buying billions of dollars of Treasury bills for a few more months, but it aims to start dialing back on both in the second quarter, Chair Jerome Powell said… Since mid-October, the Fed has been buying $60 billion a month of T-bills, and reserve levels have risen by more than $270 billion since then to roughly $1.67 trillion. Powell said… officials expect to reach an ‘ample’ level of reserves, where the market is less reliant on the Fed, at some point in the second quarter.”
January 27 – Associated Press (Christopher Rugaber): “For the first time in years, Federal Reserve officials will hold their latest policy meeting this week feeling broadly satisfied with where interest rates are and with seemingly no inclination to change them anytime soon. Chairman Jerome Powell has expressed a sense of gratification with Fed policy, thanks to a steady if unspectacular economy driven by a robust job market. The unemployment rate is at a 50-year low. Economic growth remains solid if modest at a roughly 2% annual rate. With inflation low, the Fed could potentially stand pat for months.”
U.S. Bubble Watch:
January 28 – Financial Times (Brendan Greeley): “The US will rack up budget deficits totalling $13.1tn over the coming decade and continuing to rise to levels ‘unprecedented in US history’, according to projections from the non-partisan Congressional Budget Office. In its twice-yearly report…, the CBO predicted a budget shortfall of $1tn in 2020, or 4.6% of gross domestic product, and set out a deteriorating longer-term picture based on recent changes to the tax code and the ageing US population. ‘Not since World War II has the country seen deficits during times of low unemployment that are as large as those we project, nor, in the past century, has it experienced large deficits for as long as we project,’ CBO director Phillip Swagel said…”
January 28 – CNBC (Jeff Cox): “The U.S. budget deficit likely will break the $1 trillion barrier in 2020, the first time that has happened since 2012, according to Congressional Budget Office estimates… After passing that mark this year, the deficit is expected to average $1.3 trillion between 2021-30, rising from 4.6% of GDP to 5.4% over the period. That’s well above the long-term average since around the end of World War II. The deficit since then has not topped 4% of GDP for more than five consecutive years, averaging just 1.5% over the period. As part of a spending pattern that the CBO deemed unsustainable, the national debt is expected to hit $31.4 trillion by 2030.”
January 24 – Financial Times (Joe Rennison and Colby Smith): “Stress in US financial markets has dropped to its lowest level on record, according to a widely-watched index, after the Federal Reserve sought to ease strains in short-term borrowing with a huge injection of cash. The St Louis Fed financial stress index fell to minus 1.6 for the week ending January 17, it said this week — the lowest reading since the index was created at the end of 1993. The measure has been negative for several years but has lurched lower in recent months, as the US central bank has tried to boost the amount of cash in the financial system following an unusual bout of volatility in the overnight repo market, where investors borrow cash in exchange for high-quality collateral like US Treasuries.”
January 29 – Reuters (Lucia Mutikani): “The U.S. goods trade deficit rose sharply in December as imports rebounded and businesses became more cautious on accumulating inventory, prompting some economists to cut their fourth quarter economic growth estimates. …The goods trade gap, which had dropped for three straight months due to declining imports, surged 8.5% to $68.3 billion last month.”
January 28 – CNBC (Fred Imbert): “Consumer confidence in the U.S. grew more than expected in January as the outlook around the labor market improved, …The Conference Board showed. The Board’s consumer confidence index rose to 131.6 this month from 126.5 in December. Economists… expected consumer confidence to rise to 128… The data… showed 49% of consumers think U.S. jobs are ‘plentiful,’ up from 46.5%. Those saying jobs are ‘hard to get’ decreased to 11.6% from 13%.”
January 29 – CNBC (Diana Olick): “Mortgage rates fell to their lowest level since November, and that sent current borrowers and potential homebuyers rushing to their lenders… Mortgage applications to purchase a home increased 5% for the week and were a strong 17% higher than a year ago. Housing demand is incredibly strong right now, and real estate agents are reporting seeing much higher buyer traffic than normal. The spring season appears to have started very early. The only thing standing in the way of more home sales is the tight supply…”
January 28 – CNBC (Diana Olick): “After cooling for much of last year, home price gains are accelerating again. Nationally, prices increased 3.5% annually in November, up from 3.2% in October, according to… S&P CoreLogic Case-Shiller… ‘With the month’s 3.5% increase in the national composite index, home prices are currently 59% above the trough reached in February 2012, and 15% above their pre-financial crisis peak,’ said Craig J. Lazzara, managing director… at S&P Dow Jones Indices. ‘November’s results were broad-based, with gains in every city in our 20-city composite.’”
January 27 – Reuters (Lucia Mutikani): “Sales of new U.S. single-family homes unexpectedly fell in December, likely held down by a shortage of more affordable homes, but the housing market remains supported by lower mortgage rates… New home sales slipped 0.4% to a seasonally adjusted annual rate of 694,000 units last, with sales in the South dropping to more than a one-year low.”
January 29 – Bloomberg (Max Reyes): “Contract signings to purchase U.S. previously owned homes unexpectedly slumped in December, depressed by fewer listings of properties and representing a blemish after a recent spate of positive housing-market news. An index of pending home sales decreased 4.9% from the month prior, the largest decline since May 2010… ‘Due to the shortage of affordable homes, home sales growth will only rise by around 3%,’ Lawrence Yun, chief economist at the NAR, said…, adding that mortgage rates will probably hold below 4% for most of the year. ‘Home prices and even rents are increasing too rapidly, and more inventory would help correct the problem and slow price gains.’”
January 28 – Bloomberg (Katia Dmitrieva): “Stronger-than-expected U.S. economic growth that’s pushed the jobless rate to a five-decade low will contribute to an uptick in inflation this year, according to the Congressional Budget Office. The CBO, in its budget and economic outlook through 2030, expects gross domestic product to rise 2.2% this year, up 0.1 percentage point from its August estimate. A measure of prices excluding food and energy is projected to increase 2.2%, just above the Federal Reserve’s goal. At the same time, the U.S. budget deficit will exceed $1 trillion in the fiscal year that ends in September, similar to the agency’s previous forecast.”
January 28 – Reuters (Lucia Mutikani): “New orders for key U.S.-made capital goods dropped by the most in eight months in December and shipments were weak, suggesting business investment contracted further in the fourth quarter and was a drag on economic growth.”
January 30 – Reuters (P.J. Huffstutter): “U.S. farm bankruptcy rates jumped 20% in 2019 - to an eight-year high - as financial woes in the U.S. agricultural economy continued in spite of massive federal bail-out funding, according to federal court data.”
January 28 – Bloomberg (Vince Golle): “The Federal Reserve Bank of Richmond’s regional manufacturing index surged at the start of 2020 as rebounds in sales and orders offered signs of stabilization in an otherwise beleaguered factory sector. The gauge jumped to 20 in January, the highest since September 2018, from minus 5 a month earlier… It marked the largest monthly advance since March 2016.”
January 30 – Bloomberg (Matthew Boesler): “The U.S. government could be pumping half a trillion dollars of extra deficit spending into the economy each year without risking a jump in inflation, according to the economist who’s become the public face of Modern Monetary Theory. ‘We could safely increase the deficit, let’s say by another $500 billion or so, before we begin to see inflation accelerating to something that we would consider problematic,’ Stephanie Kelton, a professor at Stony Brook University in New York…, told Bloomberg…”
Fixed-Income Bubble Watch:
January 29 – Financial Times (Joe Rennison and Jennifer Ablan): “Junk-rated energy bonds have plummeted after the spread of coronavirus hit oil prices, highlighting the strains on a sector that already led US defaults last year. …Laredo Petroleum’s $600m bond, which was priced at 100 cents on the dollar in mid-January, dropped to as low as 90 cents after just a week of trading. Meanwhile, the yield on a widely watched junk-rated energy bond index run by Ice Data Services jumped 0.77 percentage points to a high of 9.02% this week, reflecting a broad sell-off in lower quality debt from the sector.”
January 28 – Bloomberg (Brian Smith): “The U.S. high-grade primary market was back to business as usual on Tuesday after a two-day deal hiatus. After electing to stand down Monday as coronavirus containment concerns roiled risk assets, four companies printed $6.225 billion Tuesday… Today’s haul brings monthly volume to $129.3b, surpassing 2018 for the second largest January on record. As has largely been the case all year, robust investor appetite translated into upsized deals and minimal to negative relative borrowing costs.”
January 30 – Bloomberg (Davide Scigliuzzo): “Tilman Fertitta is looking to take advantage of red-hot investor demand for leveraged loans to finance a $200 million payday. Fertitta’s Golden Nugget Inc., the company on top of his hotel and casino empire, is seeking to finance the dividend as part of a broader refinancing deal. The payout is double what the billionaire had initially targeted and it’s going to cost less than originally expected…”
January 30 – Bloomberg (James Hirai and Hannah Benjamin): “It sounds like a tough sales pitch: buy this debt to lose money for the next decade. Yet for bankers helping Austria raise money this week, it proved smart business -- investors threw more than 30 billion euros ($33bn) at the country as they vied for a chunk of the world’s first syndicated 10-year government bond to carry a negative yield. The order deluge meant Austria joined the likes of Spain and Italy in setting demand records this month as investors chase the safety of bonds.”
January 27 – Reuters (Kristen Haunss): “Concerns over an outbreak of the coronavirus weighed on the US$1.2trn US leveraged loan market Monday, with secondary prices dipping slightly amid volatility across markets. Prices on leveraged loans to companies that could be affected by an outbreak, which was first identified in Wuhan, China, were down about a half-point to a point, according to traders, with travel-related industries hit the hardest.”
Brexit Watch:
January 31 – Reuters (John Chalmers): “Britain’s Union Jack was removed from lines of EU member state flags at the European Council and European Parliament buildings in Brussels on Friday evening ahead of the United Kingdom’s exit from the bloc at midnight. Britain will become the first country to quit the European Union after 47 years in the club, leaving 27 member states that will now regard it as a third country. Two solemn-looking officials, a man and a woman, took less than a minute to take down the flag in the cavernous entrance to the European Council, which represents national leaders and sets EU policy. They took away the flagstand, folded the Union Jack twice into a rectangle and walked without comment out of a door.”
Central Bank Watch:
January 30 – Financial Times (Gillian Tett): “Earlier this week, the Japanese government nominated Seiji Adachi to the board of the Bank of Japan. The news made few waves outside Japan, since Mr Adachi is little known. However, global investors should pay attention. Mr Adachi is a renowned ‘reflationist’ who favours massive monetary expansion. So his selection suggests that after two decades of eye-poppingly loose monetary policy, the BoJ is set to double down in 2020. That is remarkable. Moreover, Japan is not alone. This week the Federal Reserve left US rates unchanged, after three cuts last year. However, Jay Powell, Fed chair, gave such dovish signals in his press conference amid a pattern of reasonable US growth that markets expect another rate cut later this year.”
January 28 – Bloomberg (Toru Fujioka): “Concern at the Bank of Japan over the effectiveness of prolonged low interest rates appears to be growing, with one board member indicating that a policy review may be needed, a summary of views from the central bank’s January meeting signaled.”
EM Watch:
January 27 – Bloomberg (Dana Khraiche): “Lebanese lawmakers approved a 2020 budget plan with a crucial Eurobond payment weeks away, leaving it to the new government to decide on whether to pay creditors or save what’s left of the country’s reserves… The market is on edge before a $1.2 billion Eurobond that comes due on March 9 as Lebanon’s political struggles and the absence of external funding have sent its default risk soaring.”
January 28 – Bloomberg (Nguyen Dieu Tu Uyen): “Vietnam’s inflation accelerated to its highest in more than six years in January, while exports plunged, putting the economy on an uncertain footing at the beginning of the year. Consumer prices rose 6.4% in January from a year ago, the fastest pace since August 2013…”
India Watch:
January 31 – Bloomberg (Abhijit Roy Chowdhury and Vrishti Beniwal): “The top economic adviser to India’s government favors relaxing the budget deficit target to boost economic growth from an 11-year low. India’s fiscal deficit is seen slipping to 3.8% of gross domestic product in the year to March, against a budgeted 3.3%, as the slowdown lowered revenue collections and the government provided a tax stimulus to spur investments.”
Europe Watch:
January 31 – Reuters (Gavin Jones and Leigh Thomas): “The economies of France and Italy, respectively the euro zone’s second and third largest, shrank unexpectedly in the last quarter of 2019 causing GDP growth for the 19 countries sharing the single currency to miss forecasts… Gross domestic product in the 19 countries sharing the euro rose 0.1% quarter-on-quarter for a 1.0% year-on-year gain…”
January 30 – Bloomberg (Piotr Skolimowski): “German inflation accelerated to a nine-month high at the start of 2020 amid mounting signs that the economy started to stabilize. The rate climbed to 1.6% in January, slightly below economists’ expectations. The pickup follows reports showing German unemployment unexpectedly fell this month and European manufacturers turned more optimistic.”
January 27 – Reuters (Michael Nienaber, Holger Hansen und Christian Kraemer): “The German government expects Europe’s largest economy to grow by 1.1% this year, up from a previous estimate of 1.0%...”
Japan Watch:
January 28 – Reuters (Yoshifumi Takemoto, Kaori Kaneko and Ritsuko Ando): “Japanese Economy Minister Yasutoshi Nishimura warned… that corporate profits and factory production might take a hit from the coronavirus outbreak in China that has rattled global markets and chilled confidence.”
January 30 – Reuters (Kaori Kaneko): “Japan’s factory output fell at the fastest pace on record in October-December amid sluggish demand at home and abroad, reinforcing views the economy likely contracted in the fourth quarter… Factory output fell 4.0% in October-December, the fastest pace of decline since comparable data began in 2013…”
Global Bubble Watch:
January 28 – Bloomberg (Cecile Gutscher): “Add carry trades to the growing list of investing strategies hit by the coronavirus panic. Deutsche Bank AG’s G10 FX Carry Basket Index is on course for a near 3% loss in January, the worst start to a year since 2015. The gauge posted its steepest decline in almost 12 months on Monday as the global advance of the deadly Chinese virus spurred a fierce dash for havens. Meanwhile, a Bloomberg currency index that measures returns from eight emerging markets, funded by short positions in the greenback, has fallen 1.6% in January…”
January 28 – Bloomberg (Chris Anstey): “Japan and a clutch of industrialized east Asian economies are increasingly snapping up overseas bonds, in such magnitude that it may be storing up financial risk, according to Oxford Economics. ‘The increase in cross-border portfolio allocation might create a further buildup of vulnerabilities, especially among some Asian pension funds and life insurers,’ Guillermo Tolosa and Giuliano Simoncelli wrote… Japan, Taiwan, Singapore and Hong Kong snapped up $330 billion of foreign bonds in the first nine months of 2019, a similar pace to China’s peak years of 2006-08…”
Leveraged Speculation Watch:
January 27 – Financial Times (Laurence Fletcher): “Pension funds and endowments have been the backbone of the hedge fund industry for much of the past decade. But many of these institutional investors are now turning away from the $3tn-in-assets sector, dismayed by high fees and relatively lacklustre returns… The reshuffle comes after years of largely uninspiring performance from the hedge fund sector. Managers have underperformed the S&P 500 stock index every year since 2009, both in rising and falling markets. Last year provided hedge funds with their best returns in a decade, but they were still well behind the market.”
Geopolitical Watch:
January 28 – Bloomberg (Philip Heijmans and Lucille Liu): “China’s armed forces accused the U.S. of ‘ill intentions’ in the South China Sea after an American warship entered waters near the contested Spratly Islands last week. ‘The U.S. ship’s deliberate provocation during the traditional lunar Chinese New Year festival, which harbored ill intentions, is a naked act of navigational hegemony,’ Senior Colonel Li Huamin, spokesman for the People’s Liberation Army’s… said… ‘China has indisputable sovereignty over the South China Sea and its islands, and no matter how the U.S. deliberately schemes, comes up with new tricks, provokes and stirs up trouble, its efforts will be fruitless.’”
January 29 – Associated Press (Kelvin Chan and Danica Kirka): “Britain decided… to let Chinese tech giant Huawei have a limited role supplying new high-speed network equipment to wireless carriers, ignoring the U.S. government’s warnings that it would sever intelligence sharing if the company was not banned. Britain’s decision is the first by a major U.S. ally in Europe, and follows intense lobbying from the Trump administration… It sets up a diplomatic clash with the Americans…”
