Friday, January 31, 2020

Weekly Commentary: The First Major Pandemic Scare

January 31 – Bloomberg: “Chinese officials took issue with U.S. comments about the country’s response to the coronavirus outbreak, and promised they would bring the infection under control. ‘U.S. comments are inconsistent with the facts and inappropriate.’ Chinese Ministry of Foreign Affairs Spokeswoman Hua Chunying said… ‘The World Health Organization ‘called on countries to avoid adopting travel bans. Yet shortly afterward, the U.S. went in the opposite direction, and started a very bad turn. It is so unkind.’”

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…”

Friday Evening Links

[CNBC] Coronavirus live updates: 7th US case confirmed, mandatory quarantines, national health emergency

[CNBC] Dow drops 600 points as worries grow about the economic impact of the coronavirus

[Reuters] Wall Street tumbles as virus outbreak raises growth fears

[Reuters] Gold on track for best month in five as virus stifles risk appetite

[Reuters] China raps 'mean' U.S. for travel warning as virus toll reaches 213

[Reuters] Pilots, flight attendants demand flights to China stop as virus fear mounts worldwide

[Reuters] Joy and sadness: how the world is reacting on Brexit Day

Thursday, January 30, 2020

Friday's News LInks

[CNBC] Dow drops 450 points as airlines halt service to China due to coronavirus

[CNBC] Coronavirus live updates: US raises travel warning, Singapore bans Chinese travelers as outbreak spreads

[Reuters] U.S. and others tighten curbs on travel to China, virus toll hits 213

[Reuters] U.S. warns citizens against travel to China as virus toll tops 200

[CNBC] Goldman Sachs expects coronavirus outbreak to weigh on US economic growth this quarter

[Reuters] Surge in virus infections stokes fear in cities flanking China's Wuhan

[Reuters] Japan's fourth-quarter factory output falls at fastest pace on record

[Reuters] Shock drop in Italian and French economies amid wider European worries

[AP] Eurozone economy records worst year since 2013

[Reuters] Wars and viruses: Are robots less prone to market panic?

[Reuters] State of emergency declared as bushfire threatens Australian capital

[Bloomberg] China’s Financial Markets Will Reopen to a Barrage of Selling

[Bloomberg] At Least Two-Thirds of China Economy to Stay Shut Next Week

[Bloomberg] Coronavirus Is More Dangerous for the Global Economy Than SARS

[Bloomberg] China’s Factories Were Struggling Even Before the Virus Worsened

[WSJ] Coronavirus Quarantine Will Ripple Through Global Manufacturing

[FT] Coronavirus: closure of Russia-China border sparks trade fears

[FT] Why hedge funds are still searching for the next big thing

Thursday Evening Links

[CNBC] Coronavirus live updates: China says death toll hits 213, confirmed cases rise to 9,692

[Reuters] Dow rises more than 100 points in late comeback, erases a 244-point drop

[Reuters] China virus fears accelerates tumble in euro zone bond yields

[AP] UN agency declares global emergency over virus from China

[CNBC] Coronavirus live updates: CDC confirms first person-to-person transmission of coronavirus in US

[Reuters] Policymakers fret over risk to global growth from China virus outbreak

[Reuters] U.S. farm bankruptcies hit an eight-year high: court data

[Bloomberg] Coronavirus May Drag China GDP Down to 4.5% in First Quarter

[Bloomberg] Homeownership Rate in the U.S. Climbs to Highest Since 2013

[Bloomberg] Bernie Sanders Adviser Says U.S. Can Safely Add $500 Billion to Deficit

[WSJ] Coronavirus Triggers Damage Control From Governments, Companies

[FT] Coronavirus wreaks havoc on tech supply chain

[FT] Tett: Reasons to worry about our addiction to loose money

Wednesday, January 29, 2020

Thursday's News Links

[Reuters] Stocks down, safe havens up on China virus worries

[Reuters] Oil falls 2% on spread of China virus

[Reuters] Copper slides to five-month low on China demand angst

[CNBC] US fourth-quarter GDP rose 2.1% and full-year closes with a 2.3% gain

[CNBC] Coronavirus live updates: Russia closes China border as outbreak tops 7,900 cases with 170 deaths

[Reuters] Factbox: What to watch from the WHO statement on the new coronavirus

[Reuters] Heatwave and high winds bring renewed wildfire threat in Australia

[Bloomberg] Powell Paves Way for Possible Dovish Shift in Inflation Strategy

[Bloomberg] Death Toll Climbs to 170 and Economic Threat Grows: Virus Update

[Bloomberg] China’s Yuan Tumble Past 7 May See Less Disruption This Time

[Bloomberg] China Dollar Bond Euphoria Seen Waning Amid Virus Jitters

[Bloomberg] Chinese No Longer Welcome as Coronavirus Fear Grips World

[Bloomberg] German Inflation Accelerates to Strongest Level in Nine Months

[FT] Analysts fear the market is hooked on Fed support

[FT] Negative-yielding debt sends investors scurrying into gold

[FT] Coronavirus outbreak poses challenge for China’s centralised political system

Wednesday Evening Links

[Reuters] Global stocks gain on solid results, but virus keeps safe-havens alive

[Reuters] Treasuries - Yields fall on virus concerns, Fed leaves rates unchanged

[CNBC] Coronavirus live updates: China says death toll rises to 170 as cases rise beyond 7,700

[Reuters] China virus evacuations begin as death toll rises at outbreak epicenter

[Reuters] Fed leaves rates unchanged, offers no new guidance on balance sheet

[Reuters] What's next for the Federal Reserve's balance sheet?

[CNBC] Fed boosts interest rate on bank reserves

[CNBC] Coronavirus live updates: Outbreak is ‘grave concern’ as infections spread beyond China

[Reuters] WHO to reconsider declaring global emergency as China virus evacuations begin

[Reuters] Explainer: What the U.S. Federal Reserve is watching this year

[Reuters] U.S. fourth quarter goods trade deficit widens, prompting growth forecast cuts

[Bloomberg] 10-Year-Old Boy Raises Fears Wuhan Virus Could Spread Undetected

[WSJ] Federal Reserve Holds Benchmark Rate Steady

[FT] Coronavirus crisis hits global businesses in China

Tuesday, January 28, 2020

Wednesday News Links

[Reuters] Wall St. gains as Apple, Boeing take focus off coronavirus

[Reuters] Buoyed by company earnings, world markets look past virus

[Reuters] Gold gains as virus concerns linger, investors await Fed

[Reuters] Oil gains amid assessment of China virus impact, possible OPEC supply cuts

[Reuters] Fed likely to keep interest rates on hold, focus on balance sheet

[CNBC] Coronavirus live updates: Coronavirus outbreak tops 6,000 cases in China, exceeding SARS epidemic

[AP] Airlines suspend China flights, cut services on virus fears

[Reuters] U.S., Japan pull nationals from China virus city, huge economic hit forecast

[Reuters] U.S. goods trade deficit widens as imports rebound

[CNBC] Weekly mortgage applications surge over 7% as rates fall on coronavirus fears

[CNBC] Boeing posts first annual loss in more than two decades

[MSN] Coronavirus: China has quarantined 50 million people. Experts worry that might backfire

[AP] In snub to US, Britain will allow Huawei in 5G networks

[Bloomberg] Virus Blow to China’s Economy to Be Worse than SARS, Nomura Says

[Bloomberg] Asia’s Foreign Bond Bid Matches China’s ‘Savings Glut’ Era Peak

[Bloomberg] BOJ Board Members Hint at Rising Concern Over Negative Rates

[Bloomberg] Vietnam’s Inflation Surges to 6-Year High, Exports Plunge

[Bloomberg] China Accuses U.S. of ‘Ill Intentions’ in South China Sea

[FT] US energy ‘junk’ bonds hammered by oil plunge

Tuesday Evening Links

[Reuters] Wall Street rebounds as Apple surges ahead of earnings

[Reuters] China's Hubei province, center of virus outbreak, confirms 25 new deaths

[CNBC] White House tells airlines it may suspend all China-US flights amid coronavirus outbreak

[CNBC] US budget deficit to break $1 trillion in fiscal 2020, CBO says

[CNBC] Coronavirus, repo market and the reserve rate: What to watch this week from the Fed

[Reuters] United cancels flights to China as Facebook, others avoid travel on virus fears

[MSN/LA Times] Tears, fear and panic grip China as coronavirus spreads

[Bloomberg] CBO Boosts Economic Growth Forecast, Sees $1 Trillion Deficit

[Bloomberg] Richmond Fed Manufacturing Gauge Surges to Best Level Since 2018

[Bloomberg] It’s the Worst Start to the Year for Carry Traders Since 2015

[WSJ] Reasons Abound for Markets to Worry About the Election

[WSJ] Fed Adds $84.7 Billion in New Money to Markets, But Overall Liquidity Stable

[FT] US budget deficit forecast to blow out by mid-century

Monday, January 27, 2020

Tuesday's News Links

[Reuters] Wall Street recovers from Monday rout on tech, financial support

[Reuters] China says death toll from coronavirus rises to 106, confirmed cases hits 4,515

[CNBC] Home price gains continued to heat up in November

[CNBC] Consumer confidence jumps as job-market outlook improves

[Reuters] U.S. core capital goods orders post biggest drop in eight months

[Yahoo/Bloomberg] The ‘Not QE’ Debate Looms Large Over Fed Decision

[Reuters] U.S. stock rally faces major test as China virus spreads

[Reuters] Japan warns about risks to economy from China virus outbreak

[Reuters] China sure of slaying 'devil' virus, Hong Kong to cut links

[Reuters] Confusion and lost time: how testing woes slowed China's coronavirus response

[Bloomberg] Gold Parades Haven Status With Rally to Highest Close Since ‘13

[Bloomberg] Virus Poses New Threat to Economy’s Fragile Stabilization

[Bloomberg] Six Strategists on What’s Next for Markets as Virus Fears Spread

[WSJ] With Rates on Hold, Fed Faces Decisions on Its Balance Sheet

[WSJ] What to Know About the New Chinese Coronavirus

[FT] Investors seek clarity from Fed on balance sheet expansion

[FT] Markets are much too complacent over the risk of inflation

[FT] Why some big investors have had enough of hedge funds

Monday Evening Links

[CNBC] Dow posts worst day since October and turns negative for the year as coronavirus fears grow

[Reuters] Treasuries - Yields at three-month lows, yield curve flattens as coronavirus spreads

[Reuters] Safe havens up, Aussie, yuan weaken as coronavirus toll rises

[Reuters] Oil sinks to three-month lows as coronavirus raises demand fears

[Reuters] U.S. stock rally faces major test as China virus spreads

[Reuters] Coronavirus weighs on US leveraged loan market

[Reuters] U.S. CDC says no new confirmed cases of coronavirus, 110 under investigation

[Reuters] U.S. State Department warns against visiting China, citing coronavirus

[Forbes] The Coronavirus Is A Black Swan Event That May Have Serious Repercussions For The U.S. Economy And Job Market

[AP] Fed seems content with low rates but confronts challenges

[Bloomberg] Honda Evacuates, Starbucks Stores Shut: Virus Impact on Business

[Bloomberg] World’s Pile of Negative Debt Surges by the Most Since 2016

Sunday, January 26, 2020

Monday's News Links

[Reuters] China virus fears push stocks to two-week low, safe havens gain

[Reuters] Gold gains 1% as virus fears fan growth worries

[Reuters] Oil extends declines as fears grow over China virus

[Reuters] Chinese premier visits virus epicenter as death toll hits 80

[Reuters] China county offers reward for identifying people from virus-hit Wuhan

[Reuters] Mongolia shuts universities, border crossings to halt virus spread

[Reuters] U.S. new home sales drop for third straight month in December

[MarketWatch] Fed starts some tricky communications with financial markets this week

[Reuters] Fed's first hurdle in 2020: Dispensing with 'QE Lite'

[Reuters] German government to raise 2020 economic growth forecast to 1.1%: sources

[Bloomberg] China’s Financial Markets Likely to Stay Shut on Extended Break

[Bloomberg] Safe Havens Shine as Spreading Virus Spurs Rush to Buy Gold

[Bloomberg] Crop Futures Slump as Spreading Virus Threatens Chinese Demand

[Bloomberg] Debt Clock Ticks as Lebanon Deploys Troops Before Budget Debate

[WSJ] Deadly Infection Keeps Chinese Consumers From Spending

[WSJ] Wuhan Mayor Says Beijing Rules Partially Responsible for Lack of Transparency

[FT] Stress index sinks to new low as Fed sedates markets

[FT] China’s top lithium producer struggles under debt load

Sunday Evening Links

[Reuters] Stocks drop as new coronavirus fears escalate

[Reuters] U.S. stock futures fall 1 percent as coronavirus fears spread

[Reuters] Yen jumps, yuan slumps on worries China struggling to contain virus

[Reuters] China's death toll from coronavirus rises to 80: government statement

[CNBC] Fifth US case of coronavirus confirmed in Arizona, health officials say

[Bloomberg] Stocks Tumble With Oil; Yen Climbs With Treasuries: Markets Wrap

[Bloomberg] Gold Extends Surge as Virus Spread Spurs Rush to Haven Assets

[Bloomberg] Peak Permian Is Approaching Faster Than You Think

[WSJ] China Urges Calm Over Virus During ‘Critical Period’

Sunday's News Links

[Reuters] China scrambles to contain 'strengthening' virus

[CNBC] Third US case of coronavirus confirmed in California, health officials say

[Reuters] Latest on the coronavirus spreading in China and beyond

[Reuters] Canada identifies first case of coronavirus

[CNBC] How coronavirus is beginning to hit China’s economy

[Bloomberg] China Mulls Extending Holiday and Warns Virus Spreading Fast

[Bloomberg] Emerging Markets on Edge as Viral Outbreak Spreads from China

[NYT] Effects of Coronavirus Begin Echoing Far From Wuhan Epicenter

[WSJ] China Orders Centralized Response to Virus Outbreak as Alert Level Rises

Friday, January 24, 2020

Weekly Commentary: Coronavirus and the End of Boom and Bust

The market week began with cases of the coronavirus jumping to 222, including four outside China. China’s National Health Commission confirmed human-to-human virus transmission. By Friday, more than 1,200 infections had been confirmed, with 41 deaths (8,420 under observation according to the Washington Post). China on Thursday suspended flights and travel out of Wuhan, a city of 11 million. The virus has quickly spread to Taiwan, Japan, South Korea, Thailand, Malaysia, Vietnam, Pakistan, Nepal, France, Australia and the United States.

China has moved to quarantine 13 cities involving an estimated 46 million, according to Bloomberg “the first large-scale quarantine in modern times.” From Bloomberg (Lisa Du): “‘The containment of a city hasn’t been done in the history of international public health policy,’ said Shigeru Omi, who headed the World Health Organization’s Western Pacific Region during the SARS outbreak in the early 2000s. ‘It’s a balance between respecting freedom of movement of people, and also prevention of further disease and public interest. It’s not a simple sort of thing; it’s very complex.’” Included in the 46 million are foreign nationals now unable to leave China.

A 1,000-bed emergency hospital is to be constructed in ten days in overwhelmed Wuhan, as 400 military doctors are deployed to support local providers. In Beijing and throughout the country, officials have cancelled “Year of the Rat” Chinese New Year’s celebrations. Beijing’s Forbidden City is closed to tourist until further notice. Across China, there is fear of going to markets, restaurants, movies and public events.

Nations around the globe have isolated ill patients awaiting coronavirus test results. That this scare is coming at the height of flu and cold season in the U.S. and other northern hemisphere countries adds further complication to a rapidly escalating crisis.

Florida Senator Rick Scott is urging the Trump administration to declare a public health emergency. Missouri Senator Josh Hawley has called for the administration to impose a temporary travel ban on flights from China. The coronavirus has the potential to turn highly disruptive to the Chinese economy, with wide-ranging effects on global markets and economies.

The Shanghai Composite dropped 2.8% in Thursday trading, and was down 3.2% for the week. Hong Kong’s Hang Seng index fell 3.8%, with the Hang Seng China Financials Index sinking 4.9%. For the most part, Asian equities ended the week with modest losses. Financial stocks were under pressure around the globe.

My Bubble thesis views China as the marginal source of both global Credit and demand for commodities (and much else). Any development posing risk to China’s vulnerable Bubble rather quickly becomes a pressing global issue. It’s worth noting the Bloomberg Commodities Index dropped 3.1% this week. WTI crude sank 7.4%, while Copper was hit for 5.7%. Nickel fell 6.9%, Tin 5.4% and Zinc 3.6%. China’s renminbi declined 1.2% versus the dollar. In spite of notable investor optimism and attendant financial flows, EM currencies reversed lower this week.

Global safe haven bonds appeared to believe the week’s developments were a big deal. Ten-year Treasury yields dropped 14 bps to a three-month low 1.685%, and German bund yields fell 12 bps to negative 0.34%. The two-year versus 10-year Treasury spread declined almost eight bps this week to a six-week low 18.5 bps (after ending 2019 at 34bps). The market now prices in a 41% probability of a rate cut by the July 29th FOMC meeting, up from the previous week’s 29%. While on the subject of safe havens, gold bucked this week's commodities market selloff to gain 0.9% to $1,572.

U.S. stocks were under moderate pressure in early Thursday trading.  By the close, the S&P500 was positive for the session and back near record highs. The situation turned more concerning by Friday. The S&P500 ended the session down 0.9%, with a loss for the week of 1.0%. The Bank index dropped almost 2% in Friday trading.

January 22 – Reuters: “U.S. home sales jumped to their highest level in nearly two years in December, the latest indication that lower mortgage rates are helping the housing market to regain its footing after hitting a soft patch in 2018. …Existing home sales increased 3.6% to a seasonally adjusted annual rate of 5.54 million units last month, the highest level since February 2018. November’s sales pace was unrevised at 5.35 million units… Existing home sales, which make up about 90% of U.S. home sales, surged 10.0% on a year-on-year basis in December. For all of 2019, sales were unchanged at 5.34 million units.”

Between the impeachment trial and the coronavirus, noteworthy housing data received scant attention. Housing and mortgage finance in 2020 will reemerge as prominent factors in U.S. Bubble Analysis, especially if global developments continue to pressure market yields (and mortgage rates) lower. While December Existing Home Sales (seasonally-adjusted) were the strongest in almost two years, more notable was the decline in available inventory to 3.0 months. This was down from November’s 3.7 months (and September’s 4.1) to the lowest level in the 20-year history of the data series. The chief economist for the National Association of Realtors stated, “America is facing a dire housing shortage condition.” Little wonder home price gains have begun to accelerate.

January 17 – Bloomberg (Prashant Gopal): “U.S. home prices rose the most in 19 months in December, fueled by low mortgage rates and the tightest supply on record, according to Redfin. Prices jumped 6.9% from a year earlier to a median of $312,500, the biggest annual increase since May 2018… Values fell in just two of the 85 largest metropolitan areas Redfin tracks: New York, with a 2.4% decline, and San Francisco, down 1.7%... Some of the most-affordable cities in Redfin’s study had the biggest price gains, led by Memphis, Tennessee, with a 16% jump. The inventory of available homes for sale nationwide tumbled 15% from a year earlier. There were fewer properties for sale last month than at any time since at least December 2012…”

January 21 – CNBC (Diana Olick): “Homebuilding took a sharp turn higher to end 2019, but it is far from enough to satisfy the current demand. The U.S. housing market is short nearly 4 million homes, according to new analysis from realtor.com. Analyzing U.S. census data, the report showed that the 5.9 million single-family homes built between 2012 and 2019 do not offset the 9.8 million new households formed during that time. Even with an above average pace of construction, it would take builders between four and five years to get back to a balanced market. The shortfall today can be blamed on the epic housing crash of more than a decade ago… With loans available to even the riskiest buyers, builders responded by putting up 1.7 million single-family homes at the peak of the construction boom in 2005, according to the U.S. census. That was about 5 million more than the 20-year average.”

January 23 – Wall Street Journal (James Mackintosh): “The Davos consensus can be a powerful counter-indicator, but this year it is worrying me for all the wrong reasons. Two years ago the elite assembled for the World Economic Forum in the Alps strongly believed in global growth, and were completely wrong. A year ago they were concerned, and again entirely wrong as markets subsequently soared. This year the problem is that I find myself sharing the consensus view, justifying high stock valuations on the basis of easy monetary policy. It is a deeply uncomfortable place to be.”

Bob Prince, Co-CIO of Bridgewater Associates (in a Bloomberg Television interview from Davos): “2018 I think was a lesson learned. The tightening of central banks all around the world wasn’t intended to cause a downturn – wasn’t intended to cause what it did. But I think lessons were learned from that. And I think it was really a marker that we’ve probably seen the end of the boom and bust cycle.”

Bloomberg’s Tom Keene: “Is it the end of the hedge fund business in modeling portfolios off the guestimates of what central banks will do?”

Prince: “That won’t play much of a role nearly as it has. You remember the eighties when we sat and waited for the money supply numbers. We’ve come a long way since then… Now we talk 25 plus [bps Fed rate increase] – 25 minus. We’re not even going to get 25 plus or minus and we have negative yields. That idea of the boom/bust cycle – and that history that we’ve been in for decades – is really driven by shifts in credit and monetary policy. But you’re in a situation now where the Fed is in a box. They can’t tighten, and they can’t ease – nor can other central banks, particularly the reserve currencies. And so where do you go from here? It’s not going to look like it has.”

Bloomberg’s Jonathan Ferro: “Bob, you just said it twice – and I’m still surprised. And you said it before the interview started… It’s the end of the boom/bust cycle?”

Prince: “As we know it.”

Ferro: “There was a man called Gordon Brown, former Chancellor of the United Kingdom, a famous scene in Parliament of him standing up and saying, “It’s the end of the boom/bust,” and it was right before the financial crisis. It’s the end of the boom/bust cycle? What does that mean?”

Prince: “Cycles in growth are caused by the boom and bust in Credit. Credit expansion, Credit contraction. And those expansions and contractions of Credit are largely driven by changes in monetary policy. And so we’re in a situation today where with interest-rates is close to zero and secular deflationary forces, you’re not going to get a tightening of monetary policy. They learned that lesson last year and got the unintended effects of that. You’re not going to get a tightening, and one of the reasons you’re not going to get a tightening is because they can’t ease. If you can’t ease you don’t want to tighten to cause a problem for yourself that you can’t get out of. Therefore, you’re in a box; you don’t tighten, and you don’t ease.”

Keene: “It sounds like you read (Ray) Dalio’s book.”

Prince: “We work together” (laughter).

Ferro: “…What are the investment implications…”

Prince: “The nature of the economic environment is changing. So, we are converging on something – a slow growth environment, I’d say close to stagnation – approaching stagnation. That’s why interest rates are at zero. That’s why real interest rates are negative – is because central banks have to make cash very unattractive…, but also they have to make bonds unattractive. Central banks have taken cash and bonds and they’ve made it a funding vehicle – not an investment vehicle. And they’re trying to keep that rate low so that money goes from bonds to assets.”

Noland: I’m always fascinated when highly intelligent market professionals say peculiar things. I’m still not over Ray Dalio’s concept of “beautiful deleveraging” from some years back. When I first heard Prince’s comments, I thought immediately of the eminent American economist Irving Fisher and his infamous, “Stock prices have reached what looks like a permanently high plateau” - just days ahead of the great 1929 stock market crash.

But there is an analytical framework behind Prince’s view worthy of discussion. I’m with him completely when it comes to, “Cycles in growth are caused by the boom and bust in Credit.” In a historical context, I can accept “those expansions and contractions of Credit are largely driven by changes in monetary policy.” I agree “you’re not going to get a tightening of monetary policy.” Prince says central banks are “in a box,” while I prefer “trapped.”

But it is as if Mr. Prince is suggesting there is now some type of equilibrium condition that precludes a boom and bust dynamic. I would counter that central banks are locked in a position of administering extreme monetary stimulus, fueling a runaway boom that will end in a historic bust. Markets clearly expect ongoing aggressive stimulus (QE) from all the major global central banks.

And I don’t buy into the popular “rates are near zero because of stagnation” argument. The Fed cut rates three times in 2019 due to market fragility and the risk of a faltering Bubble - that had little to do with U.S. economic performance. Global rates are where they are because of acute global Bubble-related fragilities and resulting extreme monetary stimulus. Low global market yields (and negative real yields) are more a Bubble Dynamic than a reflection of deflationary forces. A historic boom/bust dynamic has global bond markets anticipating enormous prospective central bank bond purchases (QE).

The critical question: Can runaway booms descend into busts without a tightening of monetary policy? The answer seems a rather obvious “absolutely”. I don’t believe the Fed’s timid tightening measures in 1999 and early 2000 precipitated the bursting of the Internet and technology Bubble. The Fed was cutting rates aggressively into 2002, yet that didn’t arrest the bust in corporate Credit. I would strongly argue the Fed’s even more cautious 2006/2007 rate increases were not the catalyst for the bursting of the mortgage finance Bubble. In reality, in the face of strengthening Bubble Dynamics, financial conditions loosened significantly as the Fed tiptoed along with its so-called “tightening” cycle.

The Fed emerged from the 1994 tightening cycle recognizing that contemporary finance – with its hedge funds, speculative leverage, derivatives and Wall Street securitized finance and proprietary trading– carried an elemental propensity for excess and instability. That was effectively the end of Federal Reserve policy tightening cycles. From then on, it was cautious little “baby steps” to ensure the Fed wouldn’t upset the markets.

The “tech” and mortgage finance booms were left to inflate free from central bank restraint. Uncommonly painful busts were inevitable. Today’s most protracted all-encompassing global boom has not only been left free to inflate, central bankers continue their multi-trillion spending spree to pressure nonstop inflation. I do agree: when this fiasco runs its course, it certainly won’t be boom and bust “as we know it.”

January 21 – CNBC (Yun Li): “Billionaire investor Paul Tudor Jones said the stock market today is reminiscent of the latter stages of the bull market in 1999 that saw a giant surge that ultimately ended with the popping of the dot-com bubble. ‘We are just again in this craziest monetary and fiscal mix in history. It’s so explosive. It defies imagination,’ Jones said… ‘It reminds me a lot of the early ’99. In early ’99 we had 1.6% PCE, 2.3% CPI. We have the exact same metrics today.’ ‘The difference is fed funds were 4.75%; today it’s 1.62%. And back then we had budget surplus and we’ve got a 5% budget deficit,’ Jones added. ‘Crazy times.’”


For the Week:

The S&P500 declined 1.0% (up 2.0% y-t-d), and the Dow fell 1.2% (up 1.6%). The Utilities jumped 2.5% (up 5.9%). The Banks sank 2.9% (down 5.0%), and the Broker/Dealers fell 2.5% (up 1.4%). The Transports slumped 1.9% (up 1.5%). The S&P 400 Midcaps fell 1.5% (up 0.1%), and the small cap Russell 2000 dropped 2.2% (down 0.4%). The Nasdaq100 slipped 0.4% (up 4.7%). The Semiconductors added 0.4% (up 4.0%). The Biotechs sank 4.3% (down 2.2%). With bullion jumping $14, the HUI gold index rallied 3.4% (down 2.2%).

Three-month Treasury bill rates ended the week at 1.495%. Two-year government yields declined six bps to 1.50% (down 7bps y-t-d). Five-year T-note yields dropped 12 bps to 1.51% (down 19bps). Ten-year Treasury yields sank 14 bps to 1.685% (down 23bps). Long bond yields fell 15 bps to 2.13% (down 26bps). Benchmark Fannie Mae MBS yields dropped 14 bps to 2.48% (down 23bps).

Greek 10-year yields fell 11 bps to 1.29% (down 14bps y-t-d). Ten-year Portuguese yields dropped 12 bps to 0.38% (down 6bps). Italian 10-year yields sank 14 bps to 1.23% (down 18bps). Spain's 10-year yields fell 12 bps to 0.35% (down 12bps). German bund yields sank 12 bps to negative 0.34% (down 15bps). French yields fell 12 bps to negative 0.07% (down 19bps). The French to German 10-year bond spread was little changed at 27 bps. U.K. 10-year gilt yields declined seven bps to 0.56% (down 26bps). U.K.'s FTSE equities index fell 1.2% (up 0.6%).

Japan's Nikkei Equities Index declined 0.9% (up 0.7% y-t-d). Japanese 10-year "JGB" yields declined two bps to negative 0.02% (down 1bp y-t-d). France's CAC40 lost 1.3% (up 0.8%). The German DAX equities index added 0.4% (up 2.5%). Spain's IBEX 35 equities index fell 1.2% (up 0.1%). Italy's FTSE MIB index declined 0.7% (up 2.0%). EM equities were mostly lower. Brazil's Bovespa index was little changed (up 2.4%), while Mexico's Bolsa dropped 1.5% (up 3.7%). South Korea's Kospi index slipped 0.2% (up 2.2%). India's Sensex equities index declined 0.8% (up 0.9%). China's Shanghai Exchange sank 3.2% (down 2.4%). Turkey's Borsa Istanbul National 100 index added 0.5% (up 6.7%). Russia's MICEX equities index fell 1.6% (up 3.3%).

Investment-grade bond funds saw inflows of $4.186 billion, and junk bond funds posted inflows of $719 million (from Lipper).

Freddie Mac 30-year fixed mortgage rates fell five bps to 3.60% (down 85bps y-o-y). Fifteen-year rates declined five bps to 3.04% (down 84bps). Five-year hybrid ARM rates sank 11 bps to 3.28% (down 62bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-year fixed rates down four bps to 3.95% (down 51bps).

Federal Reserve Credit last week declined $18.5bn to $4.114 TN, with a 19-week gain of $388 billion. Over the past year, Fed Credit expanded $103.5bn, or 2.6%. Fed Credit inflated $1.303 Trillion, or 46%, over the past 376 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt declined $6.6 billion last week to $3.413 TN. "Custody holdings" increased $4.7 billion, or 0.1%, y-o-y.

M2 (narrow) "money" supply surged $46.3bn last week to a record $15.397 TN. "Narrow money" surged $969 billion, or 6.7%, over the past year. For the week, Currency increased $3.0bn. Total Checkable Deposits slipped $1.1bn, while Savings Deposits jumped $34.8bn. Small Time Deposits declined $1.7bn. Retail Money Funds rose $11.3bn.

Total money market fund assets added $3.5bn to $3.634 TN, with institutional money fund assets down $6.6bn to $2.255 TN. Total money funds gained $582bn y-o-y, or 19.1%.

Total Commercial Paper declined $6.3bn to $1.115 TN. CP was up $46.4bn, or 4.3% year-over-year.

Currency Watch:

January 22 – Financial Times (Tom Roderick): “Policymakers in Hong Kong have been riding their luck. They can be thankful for a dovish US Federal Reserve, which cut rates three times last year. That reduced the pressure on the Hong Kong dollar at a time of deepening political crisis in the Chinese territory. As the Hong Kong Monetary Authority runs out of options, the question is how long its currency can hold the line. For the past 37 years, the city has run a managed peg, tying the Hong Kong currency to the US dollar. Currently the greenback trades in a narrow band between HK$7.75-7.85. And given that the currencies are pegged, one should expect differences in market interest rates to be marginal.”

For the week, the U.S. dollar index added 0.3% to 97.853 (up 1.4% y-t-d). For the week on the upside, the Japanese yen increased 0.8%, the South African rand 0.5% and the British pound 0.4%. On the downside, the Norwegian krone declined 1.5%, the South Korean won 0.8%, the Australian dollar 0.7%, the Mexican peso 0.7%, the euro 0.6%, the Canadian dollar 0.6%, the Swedish krona 0.5%, the Brazilian real 0.5%, the Swiss franc 0.4%, the Singapore dollar 0.3%, and the New Zealand dollar 0.1%. The Chinese renminbi declined 1.19% versus the dollar this week (up 0.3% y-t-d).

Commodities Watch:

The Bloomberg Commodities Index sank 3.1% (down 4.4% y-t-d). Spot Gold rallied 0.9% to $1,572 (up 3.5%). Silver added 0.2% to $18.113 (up 1.1%). WTI crude sank $4.35 to $54.19 (down 11%). Gasoline dropped 7.6% (down 10%), and Natural Gas fell 5.8% (down 14%). Copper sank 5.7% (down 4%). Wheat increased 0.5% (up 3%). Corn declined 0.5% (unchanged).

Market Instability Watch:

January 24 – Reuters (Gertrude Chavez-Dreyfuss): “The New York Federal Reserve on Friday accepted all $55.3 billion in three-day bids from primary dealers at a repurchase agreement (repo) operation, aimed at maintaining the federal funds rate within the target range.”

January 24 – Reuters (Thyagaraju Adinarayan): “Global equity and bond funds saw more inflows in the week to Wednesday and the ‘irrational bullish phase’ in markets was likely to continue in the first-quarter if the U.S. Fed continued to pump-in liquidity, BofA said… Bond funds attracted $16.2 billion and equities sucked in $8.5 billion last week even as concerns over the spread of a deadly virus in China rattled markets, BofA said citing EPFR data. At $4 billion, emerging market equity funds saw their biggest inflows in 57 weeks.”

January 24 – Bloomberg (Brian Chappatta): “‘Worrisome.’ ‘Dangerous and aggressive.’ ‘Abuse of documentation.’ ‘Peak greed.’ These are just a few of the ways investors and analysts have described the riskiest corners of the debt markets in the past few days. From the U.S. to Europe, whether in collateralized loan obligations or junk bonds, the feeling that the reach for yield in fixed income is fast approaching a breaking point is becoming too powerful to ignore. It’s perhaps best encapsulated by a quote in the Wall Street Journal from Luca Cazzulani, a senior fixed-income strategist at UniCredit: ‘Investors are not really interested in safety, they are quite keen on yield.’

January 19 – Wall Street Journal (Paul J. Davies): “Global banks’ use of funding from markets rather than from customer deposits has grown rapidly in recent years, mostly in the form of short-term funding, which was a central problem of the 2008 financial crisis… However, that growing use has been spread unevenly around the globe. Banks in the U.S., U.K. and Canada have become among the biggest lenders into short-term financing markets, while banks in France and Japan are now the biggest borrowers after rapid growth in all these markets in 2017 and 2018. Short-term market funding is risky because it can suddenly disappear when lenders—typically money-market funds, fund managers or cash-rich banks—get concerned about the creditworthiness of borrowers, who can then be forced into a fire-sale of assets if the lenders pull back.”

January 21 – Associated Press (Elaine Kurtenbach): “News that a new virus that has afflicted hundreds of people in central China can spread between humans has rattled financial markets and raised concern it might wallop the economy just as it might be regaining momentum. Health authorities across Asia have been stepping up surveillance and other precautions to prevent a repeat of the disruptions and deaths during the 2003 SARS crisis, which caused $40 billion to $50 billion in losses from reduced travel and spending.”

January 22 – Bloomberg (Ken McCallum): “After years of falling debt yields and new technologies enabling one-click purchases of complex financial products, mom and pop investors around the world are making bets that put them at danger of getting burned. In South Korea, regulators are investigating sales of derivative-linked products that caused individuals to lose almost all their invested money. Chinese savers have ignored government warnings about possible losses on so-called wealth management products. In India, shadow banks whose woes have triggered a credit crisis have sold bonds to the public. The list goes on.”

January 23 – Bloomberg (Luke Kawa and Lananh Nguyen): “In 30 years at the premier U.S. options exchange, Ed Tilly has never seen an election sow more anxiety than the 2020 presidential race. The chief executive officer of Cboe Global Markets Inc. made the observation… Thursday. Tilly highlighted elevated demand for protection around important dates in the primary campaign and general vote showing up in the term structure of implied volatility.”

Trump Administration Watch:

January 21 – Reuters (Shubham Kalia): “The Phase 2 trade deal with China would not necessarily be a ‘big bang’ that removes all existing tariffs, U.S. Treasury Secretary Steven Mnuchin told the Wall Street Journal… ‘We may do 2A and some of the tariffs come off. We can do this sequentially along the way,’ he added. Mnuchin also warned that Italy and Britain will face U.S. tariffs if they proceed with a tax on digital companies like Alphabet Inc's Google and Facebook…”

January 23 – CNBC (Jeff Cox): “The White House has started work on a second round of tax cuts even as the budget deficit continues to grow, Treasury Secretary Steven Mnuchin said… ‘The president has asked us to start working on what we call ‘tax 2.0,’ and that will be additional tax cuts,” Mnuchin told CNBC... ‘They’ll be tax cuts for the middle class, and we’ll also be looking at other incentives to stimulate economic growth.’ Talk of election-year tax cuts comes amid a swelling budget deficit that eclipsed $1 trillion for the 2019 calendar year. In addition, the total government debt recently passed $23 trillion, despite President Donald Trump’s promises that economic growth would wipe out the deficit and pull down the federal IOU.”

January 23 – Reuters (Susan Heavey and Doina Chiacu): “Treasury Secretary Steven Mnuchin said… the U.S. government cannot sustain federal deficits growing at current levels and will have to slow the rate of spending. As he acknowledged the administration of Republican President Donald Trump was considering additional tax cuts to stimulate the economy, Mnuchin blamed government spending - and Democrats in Congress - for the federal deficit.”

January 22 – CNBC (Mike Calia): “President Donald Trump told CNBC… that U.S. economic growth would have been closer to 4% if it weren’t for the lingering effect of Federal Reserve rate hikes… The president also suggested that the stock market would be even higher than its already record-setting highs if the Fed hadn’t raised rates so quickly before cutting them three times during 2019. ‘Now, with all of that, had we not done the big raise on interest, I think we would have been close to 4%,’ Trump said of the U.S. gross domestic product. ‘And I – I could see 5,000 to 10,000 points more on the Dow. But that was a killer when they raised the rate. It was just a big mistake.’”

January 22 – Bloomberg (Alfred Cang, Javier Blas, and Isis Almeida): “Donald Trump’s trade truce with Beijing included a pledge to buy billions of dollars of U.S. foodstuffs over the next two years, reopening one of the most important export markets for America’s farm belt. ‘The farmers are really happy with the new China Trade Deal,’ the president tweeted the day after a signing ceremony in the White House. The euphoria is fading fast. The dispute with Washington exposed Beijing’s vulnerability when it comes to food imports -- especially the soybeans needed to feed its massive herd of livestock -- and the Communist Party leadership will now do all it can to wean itself off the U.S. ‘Anytime you have a disruption in your supply chain, and especially with something as sensitive as food, they have to diversify their supply chain,’ said David MacLennan, chief executive of Cargill…”

January 22 – Reuters (Aziz El Yaakoubi and Ahmed Rasheed): “Iranian-backed Shi’ite factions have exhorted Iraqis to turn out for a ‘million-strong’ march on Friday aimed at whipping up anti-American sentiment as the United States’ struggle with Iran plays out on the streets of Baghdad. Those behind the rally have two goals in mind - to pressure Washington to pull its troops out of Iraq, and to eclipse the mass anti-government protests that have challenged their grip on power.”

January 21 – Reuters (Stephanie Nebehay): “North Korea said… it was no longer bound by commitments to halt nuclear and missile testing, blaming the United States’ failure to meet a year-end deadline for nuclear talks and ‘brutal and inhumane’ U.S. sanctions. North Korean leader Kim Jong Un set an end-December deadline for denuclearization talks with the United States and White House national security adviser Robert O’Brien said at the time the United States had opened channels of communication.”

Federal Reserve Watch:

January 17 – Bloomberg (Jesse Hamilton): “The Federal Reserve is shifting its focus from writing and revising rules aimed at limiting risk in the banking system to a concentration on how lenders interpret the restrictions, the agency’s supervision chief said… ‘Supervisors promote good risk management and thus help banks preemptively avert excessive risk-taking that would be costly and inefficient to correct after the fact,’ Quarles said. ‘Where banks fall materially out of compliance with a regulatory framework or act in a manner that poses a threat to their safety and soundness, supervisors can act rapidly to address the failures.’”

U.S. Bubble Watch:

January 24 – Dow Jones (Orla McCaffrey): “The mortgage market in 2019 had its best year since the height of the precrisis boom, the latest sign that housing is firming up after showing signs of weakness early last year. Lenders extended $2.4 trillion in home loans last year, the most since 2006, according to… Inside Mortgage Finance. That was also a 46% increase from 2018.”

January 21 – Wall Street Journal (Jean Eaglesham): “A brewing battle over how to treat more than $5.5 trillion in assets on company books is pitting investors against businesses, investment advisers against academics and even banks against their own trade association. At issue is an accounting term known as goodwill, which is the premium a company pays when it buys another for more than the value of its net assets. An unprecedented five-year boom in mergers and acquisitions has added urgency over how to account for the financial concept. When Amazon.com Inc. bought Whole Foods Market Inc. for $13.7 billion in 2017, the e-commerce giant paid $9 billion more than the value of the supermarket’s stores and other net assets. That amount was added to Amazon’s books as goodwill.”

Fixed-Income Bubble Watch:

January 21 – Financial Times (Joe Rennison, Robert Armstrong and Robin Wigglesworth): “When Josh Barrickman became known as the new ‘bond king’, his colleagues teased the taciturn fund manager by leaving paper crowns from Burger King at his desk. The low-key Ohio native may not have the high profile of bond market stars such as Bill Gross but he has earned his title. The fund he runs, the Vanguard Total Bond Market, is the world’s biggest fixed income fund, with $247bn in assets under management. The fund’s table-topping position exemplifies the revolution under way in the $9tn US bond market. Unlike the freewheeling, actively-managed Total Return fund once run by Mr Gross, Vanguard’s flagship bond fund is a passive, index-tracking fund. It takes a smaller fee from investors and tries to track the market, not beat it.”

January 24 – Bloomberg (Lisa Lee and Olivia Raimonde): “Investors, eager to snatch up higher-
yielding corporate debt, are buying even the leveraged loans they shied away from for most of 2019. Some of the riskiest companies are now jumping at the opportunity to borrow. Private equity firms are piling bigger loads of debt onto buyout targets. Junk-rated corporations, including one that exited bankruptcy not long ago, are managing to cut interest rates on loans at the fastest pace since November 2017 by one measure… Money managers are looking to buy new loans now that the chances of recession seem to be falling and the Federal Reserve is evidently on hold.”

January 20 – Wall Street Journal (Anna Hirtenstein and Pat Minczeski): “U.S. blue-chip companies raised an unprecedented sum in eurozone debt markets last year, reflecting the region’s ultralow interest rates and global investors’ thirst for securities issued by highly rated companies. Coca-Cola Co. and International Business Machines Corp. were among the companies that raised a total of €101.7 billion ($113.5bn)—a record… by selling corporate bonds denominated in euros in the past year, according to… Dealogic. That was more than double the €42.2 billion raised the previous year…”

January 23 – Bloomberg (Laura Benitez): “One of the riskiest corners of the European bond market is enjoying its busiest January ever as companies rush to grab ultra-cheap yields and some of the more dubious instruments popular ahead of the financial crisis resurface. Junk-rated borrowers lined up close to 7 billion euros of issuance into the market this week, with sales nearing the 10 billion euro mark ($11bn) this month… ‘We’re definitely in peak greed territory,’ Olivier Monnoyeur, a portfolio manager at BNP Paribas Asset Management… ‘We’ve seen this movie before, and it doesn’t end well.’”

China Watch:

January 24 – Reuters (Judy Hua and Cate Cadell): “China shut part of the Great Wall and suspended public transport in 10 cities, stranding millions of people at the start of the Lunar New Year holiday… as authorities rush to contain a virus that has killed 26 people and infected more than 800. The World Health Organization (WHO) has declared the new coronavirus an “emergency in China” but stopped short of declaring it of international concern.”

January 23 – Bloomberg: “China is struggling to contain rising public anger over its response to a spreading coronavirus even as it took unprecedented steps to slow the outbreak, restricting travel for 40 million people on the eve of Lunar New Year.”

January 22 – Bloomberg (Jeanny Yu): “From a gas supplier to a shopping mall operator, stocks with ties to the Chinese city at the heart of a virus outbreak are falling. Wuhan Department Store Group Co., which operates several malls in Wuhan, lost 3.1% to head for a weekly drop of 16%. Hubei Heyuan Gas Co., which generates all of its revenue from Hubei province, extended its two-day drop to 10%, the biggest on record.”

January 20 – Bloomberg: “Most of China’s provinces are expecting slower economic growth in 2020, underlining the nationwide trend which is expected to result in a tweaking of the formal goal when the legislature meets in March. Twenty-two of 31 major cities, provinces and autonomous regions have so far cut their 2020 target for gross domestic product expansion… Twelve provinces, which made up 42% of China’s economic output at the end of September last year, expect growth at around 6% or lower this year. Another nine provinces forecast their economy would expand between 6%-6.5% this year.”

January 21 – Wall Street Journal (Chao Deng): “For years, China’s small banks had a field day. They lent to overstretched borrowers, disguised loans as investment products and fueled their business with short-term funds. One chairman dined out on delicacies like sea cucumber while ramping up lending to politically connected borrowers. Some banks funneled money to their own shareholders, others hid debt with financial engineering and haven’t reported complete information for years. Regulators used a light touch, eager to keep credit flowing to areas ignored by big national lenders. The country’s years of rapid economic growth papered over shoddy practices. Now, the bill is coming due. China’s growth rate is down by more than half from its peak a decade ago, nonperforming loans have expanded and the government is reining in banking risk. China is confronting a bank cleanup that could require hundreds of billions of dollars in bailouts.”

January 19 – Reuters (Shen Yan and Brenda Goh): “China expects the country’s vehicle sales to remain at around 25 million units in 2020, and could be flat or decline, Industry Minister Miao Wei said…”

January 22 – Bloomberg: “Investors will be closely watching HNA Group Co. as $500 million of dollar bonds mature this week, testing the debt-laden Chinese conglomerate’s repayment ability. A $200 million bond issued by HNA Group International will come due Jan. 23, while its $300 million note is set to mature a day later…”

January 20 – Reuters (Akshay Balan and Donny Kwok): “Moody’s downgraded Hong Kong’s credit rating one notch to ‘Aa3’ from ‘Aa2’ …, saying its view on the strength in the Chinese-ruled city’s institutions and governance is ‘lower than previously estimated.’ …‘The absence of tangible plans to address either the political or economic and social concerns of the Hong Kong population that have come to the fore in the past nine months may reflect weaker inherent institutional capacity than Moody’s had previously assessed,’ the agency said…”

Central Bank Watch:

January 22 – Financial Times (Martin Arnold and Mehreen Khan): “Every good central banker needs a legacy. Mario Draghi, the former head of the European Central Bank, is widely credited with rescuing the eurozone from a debt crisis. Today his successor, Christine Lagarde, will kick off the search for a defining cause of her own. Ms Lagarde will launch the second strategic review in the 20-year history of the ECB — a process that she has said will last until December as it turns ‘every stone’ in search of ways to fine tune its monetary policy toolkit.”

January 23 – Financial Times (David Crow): “Eurozone bank executives have launched a fresh lobbying push to convince policymakers of the dangers of long-term negative interest rates, warning they will hurt savers and pensioners while fuelling price bubbles in riskier assets. Bank chief executives have spent the past two years trying to force the European Central Bank to reverse its negative interest rates, which were first introduced in 2014. Other European central banks including Switzerland and Denmark also have negative rates. Rates below zero have slashed the amount that the region’s lenders earn from bread-and-butter lending and crushed their profit margins.”

January 20 – Reuters (Leika Kihara and Takahiko Wada): “The Bank of Japan nudged up its economic growth forecasts… and was cautiously optimistic about the global outlook, though it said ongoing risks meant it was far too soon to consider scaling down its massive stimulus program. The central bank signaled an expected domestic boost from a government fiscal spending package and Governor Haruhiko Kuroda, citing the U.S.-China Phase 1 trade deal, said overseas risks have subsided somewhat.”

January 20 – Reuters (Marc Jones and John Revill): “Central banks can’t be expected to save the world from climate change, a new book by the Bank for International Settlement said…, urging instead global co-ordination ranging from government policy to financial regulation. The book, titled ‘the Green Swan’, in a play on the idea of ‘black swan’ events, warned of the potentially seismic effects of climate change on the world’s financial system.”

EM Watch:

January 21 – Wall Street Journal (Santiago Pérez and Ryan Dube): “A far-left governor of Argentina’s most populous province is rattling investors with plans to hold off paying back foreign debt, raising fears that his faction of the ruling Peronist coalition could push the rest of the federal government into a messy new debt default. Axel Kicillof, Argentina’s former finance minister and new governor of Buenos Aires province, has given creditors until Wednesday night to accept a three-month delay in the repayment of $250 million in foreign debt issued by the Buenos Aires province due this coming Sunday. Prices of those bonds plunged after his announcement last week… The move comes as Argentina’s federal government prepares for negotiations with creditors to try to restructure more than $100 billion in debt that the government says it can’t repay.”

January 19 – Financial Times (Colby Smith and Robin Wigglesworth): “The developing world’s rapidly swelling corporate debt market is an accident waiting to happen, according to a prominent emerging-markets hedge fund that says a lack of liquidity could lead to violent price declines in a crisis. In a letter to investors…, Gramercy Funds Management wrote that the risk of sudden dislocations has been increased by a wave of bond buying by mutual funds and exchange traded funds that allow investors to pull out money quickly. ‘We are convinced that ‘liquid markets’ are not necessarily liquid,’ Robert Koenigsberger, chief investment officer, wrote… ‘The ‘perfect dislocation storm’ [is] waiting to happen.’”

January 19 – Bloomberg (Paul Wallace): “The yield on Lebanon’s next Eurobond to mature rocketed to more than 200% last week as the government’s prospects of avoiding a default diminished. Fitch… warned it may downgrade the country if it pushed ahead with a plan to get local holders of $1.2 billion of debt due on March 9 to swap into longer-dated bonds, instead of repaying it. The Arab nation has been wracked by protests since October over corruption and worsening living standards.”

January 22 – Reuters (Karin Strohecker, Tom Arnold and Tom Perry): “Lebanon’s new government faces huge upcoming debt repayments and a currency peg at breaking point, but it may already have run out of the hard cash firepower it needs to tackle these problems. The heavily indebted country faces hefty bond repayments coming up in March and April, when $1.34 billion and $842 million of interest and principal respectively come due. Analysts expect the central bank to be able to foot the bill, for now, though some in Beirut believe a rescheduling or restructuring is preferable.”

India Watch:

January 21 – Associated Press (Sheikh Saaliq): “A decision by the International Monetary Fund to downgrade its economic growth forecast for India is adding to pressure on Indian Prime Minister Narendra Modi over his policies. Opposition leaders and economists… blasted the government for failing to deliver on promises to reform the economy and keep growth on track. On Monday, the IMF slashed its growth estimate for the current fiscal year to 4.8% from 6.1% in the last fiscal year. It said India’s slowing growth was the single biggest drag on its global growth forecast in the past two years.”

January 21 – Bloomberg (Subhadip Sircar): “Global funds have turned net sellers of India’s sovereign bonds for the first time in four months, as expectations grow of a wider budget deficit. Foreign investors sold 110.2 billion rupees ($1.5bn) of government bonds so far in January, set for its first sell-off in four months, according to… Clearing Corp. of India… An increasing number of analysts predict that Prime Minister Narendra Modi will again announce a record borrowing plan at the Feb. 1 budget.”

January 23 – Bloomberg (Kartik Goyal): “A bond fund manager who correctly predicted that India’s central bank would introduce a U.S. Federal Reserve style Operation Twist, now says that the nation needs more foreign capital to fund its record borrowing. India’s borrowing may rise to 7.6 trillion rupees ($107bn) for the fiscal year starting April. 1, according to Suyash Choudhary, head of fixed income at IDFC Asset Management Co.”

January 22 – Bloomberg (Jeanette Rodrigues and Haslinda Amin): “The head of India’s biggest lender said he’s certain ‘some solutions will emerge’ to steady Yes Bank Ltd., which has been on a prolonged quest to raise new capital. ‘Yes Bank is a significant player in the market with an almost $40 billion balance sheet,’ State Bank of India Chairman Rajnish Kumar told Bloomberg… ‘I have a feeling that it will not be allowed to fail,’ he added. Kumar’s statement follows speculation that the government, which controls State Bank of India, may ask the lender to play a role in bailiing out the private-sector Yes Bank.”

Europe Watch:

January 21 – Reuters (Angelo Amante and Gavin Jones): “Luigi Di Maio stepped down… as leader of Italy’s co-governing 5-Star movement, as it seeks to stem a wave of defections that threatens the government’s parliamentary majority. While his decision is not expected to bring down the government, it underscores deep divisions within 5-Star and injects further uncertainty into already fractious relations with its coalition partner, the center-left Democratic Party (PD).”

January 22 – Bloomberg (William Shaw and James Hirai): “The prospect of a comeback for the populist Italian firebrand Matteo Salvini was hanging over markets… after a key political rival stepped down, raising the chances of an early election that could pave the way for him to pursue his euroskeptic agenda. The resignation of Luigi Di Maio as leader of the Five Star Movement has unsettled investors wary of another standoff between Italy and the European Union. Bonds fell as much as eight basis points on fears about the government’s stability but then recovered as the fragile coalition held together.”

Japan Watch:

January 22 – Reuters (Tetsushi Kajimoto): “Japan’s exports fell for a 13th straight month in December, hurt by U.S.-bound shipments of cars, construction and mining machinery, suggesting weak external demand is likely to remain a drag on the trade-reliant economy for a while longer. The 6.3% year-on-year fall in exports was worse than a 4.2% decrease expected… It followed a revised 7.9% year-on-year decline in the previous month…”

Global Bubble Watch:

January 19 – Reuters (George Obulutsa): “The world’s richest 2,153 people controlled more money than the poorest 4.6 billion combined in 2019, while unpaid or underpaid work by women and girls adds three times more to the global economy each year than the technology industry, Oxfam said…”

January 20 – Wall Street Journal (Stu Woo and Asa Fitch): “In terms of technology, the world had been unifying for years. Now it is reverting back to the likes of the VHS-versus-Betamax era, with much bigger consequences. Imagine two countries with completely different sets of hardware and software for the internet, electronic devices, telecommunications, and even social media and dating apps. That is the direction the U.S. and China are headed in—a world where the two global powers have mutually exclusive technology systems. The wedge being driven between the two countries alarms tech’s biggest names…”

January 17 – Financial Times (Jennifer Ablan): “Everything worked in 2019. US stocks, junk bonds, silver, oil, bitcoin and even Greece-focused exchange traded funds posted stunning gains, boosted by easy central bank policies. Now new risks lurk, as the US Federal Reserve continues to keep interest rates low and pursue monthly liquidity injections, as well as purchases of Treasury bills at a similar magnitude as previous rounds of quantitative easing. Such efforts have helped to send nearly every asset class into ‘bubbly’ territory. But a growing band of voices on Wall Street is warning of a possible consequence of this ever-looser monetary policy: inflation, which could dominate headlines this year for the first time in many. Jeffrey Gundlach, chief executive of DoubleLine Capital, said it was a remarkable day for financial markets in late October, when Fed chair Jay Powell said he would need to see a ‘really significant move up in inflation that’s persistent, before we would even consider raising rates to address inflation concerns’.”

January 19 – Bloomberg (Jacqueline Poh and Ruth McGavin): “The whole financial world is working to move away from Libor and other interbank lending benchmarks, which for decades have been used to set borrowing costs on bonds and loans, as well as products ranging from derivatives to credit cards. Since 2018, more than $150 billion worth of bonds have been sold using rates set by a new generation of benchmarks. The syndicated loan market is lagging far behind, with at least $12 trillion of deals needing to be replaced or rewritten so they follow a Libor alternative. There are no easy fixes in sight despite potential deadlines as early as this year.”

January 23 – Reuters (Matthew Green): “Australia’s bushfires are contributing to one of the biggest annual increases in the concentration of carbon dioxide in the Earth’s atmosphere since record-keeping began more than 60 years ago, according to a forecast… by Britain’s Met Office…”

Leveraged Speculation Watch:

January 22 – CNBC (Fred Imbert): “Billionaire hedge fund manager Seth Klarman is warning this rally that has taken stocks to record highs could soon end. Klarman, who runs Baupost Group in Boston, wrote in a letter to investors that the ‘the rocket fuel that has propelled markets in 2019 will run out,’ according to a Bloomberg News report.”

January 22 – Bloomberg (Melissa Karsh): “Hedge funds suffered almost $98 billion in net outflows in 2019, the most in three years, as managers trailed the stock market rally. Investors pulled more than $16 billion from the industry in December alone, capping a year that saw the longest stretch of monthly client withdrawals since the 2008 financial crisis, according to… eVestment. The redemptions equal about 3% of industry assets and are almost triple the $37.2 billion in outflows seen in 2018. Hedge funds are under pressure as investors revolt after years of high fees and lackluster performance.”

January 19 – Bloomberg (Nishant Kumar): “Billionaire money managers Chris Hohn and Stephen Mandel led hedge fund gains last year as surging markets helped the $3 trillion market post its best performance in a decade. The industry racked up gains worth $178 billion after fees, according to… LCH Investments, a fund of hedge funds. Hohn’s TCI Fund Management made $8.4 billion for clients, while Mandel’s Lone Pine Capital enriched investors by $7.3 billion.”

Geopolitical Watch:

January 21 – Financial Times (Kathrin Hille): “Taiwan’s identity as an independent democracy crystallised with the landslide re-election of President Tsai Ing-wen on a platform to defend the country’s institutions against China. Ms Tsai’s victory has even sparked a heated debate within the defeated Kuomintang (KMT), the opposition party which once ruled China, over how it can recast its policy towards the mighty neighbour to become palatable to voters again. Ms Tsai has called on Beijing to face reality over Taiwan. But for the Chinese Communist party (CCP) some things cannot be allowed to change, including the goal that Taiwan… must come under its control.”

January 21 – Financial Times (James Politi): “Last month, Robert Zoellick, former president of the World Bank and US trade representative, addressed a group of top US executives with business in China with a warning and a challenge. …With Cui Tiankai, China’s ambassador to the US, in the audience, Mr Zoellick asked if the gathering was ‘ready’ for a slide into US-China conflict. ‘The 20th century painted a shocking picture of industrial-age destruction; do not assume that the cyber era of the 21st century is immune to crack-ups or catastrophes of equal or even greater scale,’ Mr Zoellick said. ‘You need to decide whether you think the United States can still co-operate with China to mutual benefit while managing differences, and if so, how.’ His words captured the fears — particularly within parts of Washington’s economic and foreign policy establishment — that US President Donald Trump’s trade war against Beijing has paved the way for an irreversible ‘decoupling’ of the world’s two largest economies.”

January 19 – Wall Street Journal (Kathryn Dill and Kurt Wilberding): “Worries about income inequality, jobs disappearing due to automation and environmental sustainability are all feeding wide-scale distrust in capitalism as the world knows it, according to a new study… Edelman, a public-relations firm, conducted its 20th annual analysis of public trust in major institutions, surveying 34,000 people in 27 countries and Hong Kong. The data reveal both skepticism about those institutions—including government, business, the media and nongovernmental organizations—and a hunger for leadership on important issues. Anxiety about future employment prospects, wage gaps between the rich and middle class and corruption have made many people question the very systems of capitalism and democracy, the study found.”

January 19 – Bloomberg (Dave Graham): “Mexico should move to deepen its economic ties with China after U.S. congressional approval of a new North American trade deal, a senior Mexican official said… Jesus Seade, the deputy foreign minister for North America and Mexico’s top trade negotiator, said that as the second year of President Andres Manuel Lopez Obrador’s six-year term got underway, boosting economic ties with China was vital.”