There are many things that proved not as impossible as I had believed. What was deemed acceptable monetary policy badly mutated. Mutant monetary management fundamentally altered the tolerance for debt and deficits. Finance and financial markets were similarly transformed, with yet to be appreciated consequences for (grossly simplifying here) Capitalism, societies and geopolitics.
So many changes, but I’m not changing. In my initial CBB I committed to “calling them as I see them and letting the chips fall where they may.” Let them fall.
“The Bubble will either further inflate or burst.” Regular readers will surely recognize this as what has become an annual ritual of my “Issues” pieces. Some might view it as a cop out; others reminded of Einstein’s definition of insanity. Yet Bubbles do have defined characteristics. They are at their core creatures of increasingly powerful momentum. Stimulus will intensity and broaden inflationary effects while enlarging the overall Bubble scope. Especially in the age of unshackled central banks, the timing of their demise is uncertain. Importantly, however, that they become progressively perilous over time remains a certainty.
This year’s “Bubble Will Inflate or Die” prognosis carries a significantly direr tone than in the past. From a Bubble Analysis perspective, 2019 was an absolute fiasco. Alarmed by faltering Bubbles, central bankers were panicked into prolonging the “Terminal Phase of Bubble Excess” through the reckless administration of additional stimulus. The ECB restarted QE before many even realized the previous program had been concluded. The Fed began the year abruptly abandoning “normalization” and then ended with $400 billion of Q4 QE. Rather than helicopter money, envision fleets of helicopters dropping buckets of propellant on columns of bonfires.
Central banks cut funding costs and afforded speculative financial markets hundreds of billions of additional liquidity. More importantly, global central bankers granted the type of guarantee markets had only dreamed of. Monetary policy will be used early and aggressively to backstop the markets, while no amount of excess would elicit any degree of monetary restraint. The Endless Punchbowl (with free salty snacks) – the “insurance rate cut”.
Bubble markets reacted with a vengeance. Global bond markets experienced a historic “melt-up” with yields collapsing over the summer. Global equities ended the year with a fit of panic buying. Bond and equities bears were squeezed to death. By their nature, speculative blow-offs create acute vulnerability. The final euphoric outburst ensures excessive underlying speculative leverage. Price momentum becomes unsustainable, with the inevitable reversal inciting de-risking/deleveraging dynamics. Some degree of illiquidity is unavoidable. Progressively powerful policy responses become necessary to suppress panic and crisis. Trapped.
The probability of a global crisis during 2020 is the highest since 2008. The nucleus of “The Bubble” in 2008 was in U.S. mortgage finance. “The Bubble” today is global, across virtually all financial assets (sovereign debt, stocks, corporate Credit, and derivatives), real estate (residential and commercial) and private businesses. From a Credit perspective, “The Bubble” has spread to – and corrupted - the foundation of global finance (central bank Credit and sovereign debt).
How can it end other than with a systemic crisis of confidence? Mispricing of U.S. government and corporate securities is unprecedented. The excesses in Chinese finance have moved far beyond any historical Bubble episode (Japan during the eighties and the U.S. mortgage finance Bubble mere kids’ stuff). All the punditry fuss over predicting a year-end S&P500 level seems especially pointless.
What really makes this so dangerous? Markets know that policymakers know the system is acutely fragile. Central bankers are not only trapped, the situation is so dire that they have no choice but to move early and aggressively to ensure Bubbles can’t begin deflating (no corrections or adjustments allowed).
January 5 – Reuters (Ismail Shakil): “New York Fed President John Williams said… it was important for the U.S. Federal Reserve to stick to its 2% inflation target and achieve it even as low global interest rates will likely continue… ‘There’s been a process of going through the stages of grief about a low neutral rate,’ Williams was quoted as saying… ‘These factors are basically the hand we’ve been dealt for the next five to 10 years.’ ‘If inflation continues to underrun our target levels like it has, this downward trend in inflation expectations will likely continue with inflation expectations falling well below target levels,’ he said.”
I’m reminded of a salient point from Adam Fergusson’s masterpiece, “When Money Dies: The Nightmare of Deficit Spending, Devaluation, and Hyperinflation in Weimar Germany:” Throughout the unfolding monetary, economic and social catastrophe, Reichsbank officials insisted they were responding to outside forces. They somehow remained oblivious to their central role.
My response to Fed President Williams’ “the hand we’ve been dealt” comment: You’ve not only been the dealer, but also the manufacturer and the stacker of the cards. Slot machine odds have been fixed by your coterie. You may now have issues with casino operations, its patrons and the consequences for the community - but you central bankers own it. And, of course, you will be keen to finger local government officials for the proliferation of crazed gamblers, pawn shops, bail bond outfits, unseemly motels, alcoholism and those run-down schools. Why the unwavering support for ever more commanding casinos?
January 9 – Wall Street Journal (James Mackintosh): “Tesla Inc. shares have doubled in three months, while General Electric Co. shares are up 44%. The pair are the two most valuable loss-making companies, part of a shockingly high proportion of listed companies that have been losing money—despite, or perhaps because of, the long bull market. While Tesla and GE couldn’t be more different, they are exemplars of two trends driving the rising number of loss makers. Tesla shows a desire by investors to back disruptive companies as they build their sales. GE represents a growing number of companies struggling to make money from traditional businesses… The combination of forces has pushed the percentage of listed companies in the U.S. losing money over 12 months to close to 40%, its highest level since the late 1990s outside of postrecession periods.”
“Mal-investment” is one of these invaluable “Austrian” concepts that is both wonderfully intuitive and exceptionally difficult to quantify (vitally important yet unfitting for econometric models). “Pushed the percentage of listed companies in the U.S. losing money over 12 months to close to 40%” is sufficient. Imagine the percentage come the next recession.
Stimulus, loose finance and Bubbles ensure market malfunction, price distortions, resource misallocation and malinvestment - all Issues 2020. This fateful experiment in late-cycle stimulus/Bubble extension is prolonging the boom in uneconomic enterprises and scores of businesses that will face dire circumstances when the Bubble inevitably bursts. On the one hand, any tightening of finance will expose cash flow and balance sheet vulnerabilities. On the other, today’s booming wealth-induced demand is unsustainable, exposing a mounting number of businesses to post-Bubble waning demand and altered spending patterns.
Last year provided a hint of underlying fragilities. Junk bonds, leveraged loans and IPOs all suffered convulsions as “risk off” and illiquidity made fleeting appearances. Tesla – the most valuable automobile manufacturer ever or bankruptcy candidate? A matter of market “risk on” or “risk off.” To what extent is Tesla a microcosm of Tech Bubble 2.0, the overall U.S. economy, China’s boom and the global Bubble?
There are New Paradigm sentiments reminiscent of the Q1 2000 “tech” Bubble Crescendo. After ending 1999 at 3,708 (following a one-year gain of 102%), the Nasdaq100 (NDX) surged another 30% to an all-time high 4,818 on March 24th. The NDX then traded as low as 3,107 in April, 2,897 in May and then down to 2,175 in December. Myths exposed and fallacies revealed. Much of the boom-time demand for technology components, products and services was a direct consequence of the industry’s investment Bubble. Speculative finance reversed, financial conditions tightened, uneconomic companies lost access to finance, and the Bubble burst (not before, of course, one final brutal short squeeze and derivatives-related melt-up).
Current bullishness may even exceed early-2000. Trust in central bankers is far greater. Market pundits highlight fundamentals supportive of an ongoing bull market. The longest economic expansion on record is poised to endure. After an unimpressive 2019, corporate profit growth is to accelerate. The global economy will perk up as the year progresses. Goldilocks with central bank guardianship.
But let’s not pretend that economic activity drives the securities markets. Investment-grade Credit default swaps (5yr Markit CDS) traded Friday at 43.7 bps, right at the low since before the crisis. High-yield CDS is near all-time lows. Goldman Sachs CDS closed the week at 52 bps, down from the 135 bps January 4, 2019 high. Trillion dollar plus (5% of GDP) annual fiscal deficits. Short-term rates at about 1.5%. Ten-year Treasury yields at 1.82%. Thirty-year mortgage rates at 3.64%. A Fed balance sheet exceeding $4.0 TN and inflating. Record stock prices. Why then wouldn’t the economy be expanding and corporate profits growing?
January 9 – Bloomberg (Molly Smith, Michael Gambale, and Hannah Benjamin): “Companies around the globe, concerned that heightened tensions between the U.S. and Iran could roil bond markets, are rushing to borrow cheaply while they still can. Investment-grade firms have sold more than $61 billion of notes in the U.S. through Thursday, double the same period in 2019… Borrowers from around the Asia Pacific region sold more than $28 billion in dollar notes this week, in a record start.”
January 10 – Bloomberg (Hannah Benjamin and Priscila Azevedo Rocha): “Europe’s bond market is wrapping up its biggest week ever, with over $100 billion of new debt sales underscoring its status as a major global funding vehicle. Issuers from China, Indonesia, Japan and the U.S. joined local borrowers in tapping Europe’s super-low funding costs and increasingly mature bond market, helping push sales for the week to 92.5 billion euros ($103bn).”
January 10 – Wall Street Journal (Frances Yoon): “Chinese property companies have kicked off 2020 by selling billions of dollars of longer-dated bonds, capitalizing on a hot market to reduce their heavy reliance on short-term funding. The country’s real-estate groups sold about $8 billion of dollar bonds in the first two weeks of January, according to credit strategists at ANZ.”
So long as financial conditions remain extraordinarily loose, I don’t know why the U.S. economy can’t surprise on the upside. With momentum building throughout 2019, expect some housing market “crazy” this year. “Tech Bubble 2.0” – growing only crazier. Los Angeles Times headline: “Taco Bell Offers $100,000 Salaries and Paid Sick Time.” Good to have that sick leave. Lavish cheap “money” on an overheated economy and one thing is a given: it will be borrowed and spent.
But when things go wrong they will really go wrong. Every passing month ensures maladjusted financial and economic systems only further hooked on unrelenting loose finance. I see a high probability of a 2020 financial accident. And I know most would say this is crazy talk. But we were close in the U.S. last September and January. China began to unravel in the early summer.
ETF Trends (Tom Lyndon): “Last year, fixed income ETFs took in $330 billion in new assets, the second-best year on record. Of that massive tally, bond ETFs accounted for a record $155 billion, prompting some market observers to say 2020 will be even better for bond ETFs. When 2019 came to a close, five of the top 10 ETFs in terms of new assets were bond funds and plenty of others in the fixed income space packed on assets as well.”
The Fed’s Q4 liquidity injections only exacerbated system fragility. Before celebrating apparent stability, our central bank should ponder the ramifications of colossal speculative flows. The liquidity flooding into bond ETFs increases the probability of a destabilizing reversal of flows and resulting illiquidity. The Fed’s $400 billion liquidity add only boosted systemic dependency. The Fed’s has its planned $60 billion monthly QE for the first half. Throw in another crisis scare and the Fed’s balance sheet rather quickly lunges toward $5.0 TN.
January 8 – Financial Times (Hung Tran): “Much attention has been focused on potential stresses in the US repo market. More attention should be paid to the FX swap market, which non-US banks and other entities have relied on for short-term US dollar funding. Recent changes in supply/demand conditions for US dollar funds in that market could make it more susceptible to stresses. In particular, emerging market banks have become more exposed to risk… Meanwhile, non-US banks have relied ever more on the $3.2tn-a-day FX swap market. According to the Bank for International Settlements (BIS), non-US banks have about $14tn of US dollar assets, not all of which are funded with liabilities such as deposits, loans and bond issuance. The FX funding gap — estimated by the IMF to be about $1.5tn — needs to be covered by borrowing in domestic currencies, swapped into US dollars.”
“Repo” markets, “FX swaps,” and money markets – at home and abroad – have all become one monumental trade. Last year’s instability was a harbinger of bigger issues to come. There has never been as much global leveraged speculation. How tens of Trillions of securities are financed and hundreds of Trillions of derivatives structured is in the realm of the murkiest of murky. How many Trillions of “carry trades” (borrow in low/negative rates to lever in higher-yielding securities) have accumulated – in yen, euro, Swiss, etc. How big is the “carry” in Chinese bonds? EM debt – local currency and Dollar-denominated? European peripheral bonds? How levered are trades in low-yielding Treasuries, bunds and JGBs? What is the scope of fixed-income derivatives leverage, with dynamic trading programs feeding buying on the upside – and liquidity crisis lying in wait for the downside?
Loose global finance papers over scores of festering issues. Key Issue 2020: China is a bigger accident in the making than it was this time last year. With accelerated growth of increasingly unsound Credit, systemic risk continues to rise exponentially. Upwards of $4 TN of additional Credit, another year of housing Bubble excess, uneconomic enterprises piling on more debt, resource misallocation and only deeper structural economic maladjustment.
China was forced to again hit the accelerator, and Beijing will be compelled again to move to rein in system Credit excess. Last year’s crack in the small banking sector was a harbinger of liquidity and confidence issues I expect to afflict China’s broader banking system. The repeatedly extended mortgage and apartment Bubbles ensure a dreadful Day of Reckoning. China’s consumer borrowing boom – 2019’s savior - is on borrowed time. And how long can the renminbi withstand such egregious financial and economic excess?
Global currency market instability is an Issue 2020: For the most part, currencies have been seductively sedate. Perilous fault lines lacking pressure relief beckon for caution. My own theory is that a systemic global Bubble with systematic liquidity excess fosters a dysfunctional steadiness. In a world of liquidity and speculative excess backstopped by “whatever it takes” central banking, market reversals have been quickly resolved by eager speculative flows. The traditional dynamic of “hot money” reversals, de-risking/deleveraging, crises of confidence and market dislocation is contained before barely getting started.
Yet it all creates a dynamic where an abrupt bout of risk aversion risks unleashing powerful pent-up global forces. For a while now, I’ve contemplated that this could end with a “seizing up” of global markets – a systemic de-risking/deleveraging dynamic and resulting globalized market illiquidity and dislocation. After witnessing 2019 markets dynamics – the extraordinary correlations between international bond, equities, and derivatives markets, along with interconnected money markets, (synchronized Bubbles) – I have ratcheted up the probability of the “seizing up” outcome. I know, central bankers are there to ensure it can’t materialize. They were there in force in 2019, and their actions only exacerbated excesses and worsened fragilities.
January 3 – Bloomberg (Emily Barrett, Ruth Carson, and Charlotte Ryan): “Investors have barely set foot in the new year before getting their first reminder of the risks -- the existential and the more-manageable -- that could derail their plans for 2020. The U.S. airstrike that killed one of Iran’s most powerful generals raised security alerts around the world, and added to anxieties that could dominate markets this year. Money managers blindsided by the 2016 Brexit vote and U.S. President Donald Trump’s election know the price of ignoring politics. Uncertainties stemming from these events are still unresolved -- trade relationships between the U.K. and European Union, and the U.S. and China still hang in the balance -- and other risks are emerging.”
Geopolitical risks - where to begin. From my analytical perspective, geopolitical risks in 2020 are the greatest since WWII. Not appreciated is the role that geopolitics have played of late in perpetuating Bubbles. In the increasingly heated battle for global supremacy, strongmen leaders Trump and Xi are keenly focused on the critical roles played by finance, the markets and economic growth. And I would add that the rise of the strongman leader globally is no coincidence – and it is undoubtedly linked to the instability and insecurities associated with decades of unsound money and Credit (with its recurring booms and busts, growing inequalities and myriad stresses).
Not only have geopolitical considerations perpetuated Bubble excess. As Bubbles have continued to inflate, geopolitical rivalries have grown only more intense. As was abundantly clear in 2019, the risk of confrontation has risen significantly. Meanwhile, highly inflated Bubbles greatly increase the risk of a geopolitical event sparking market dislocation. Don’t let the markets relatively calm response to the past week’s Iranian developments fool you into complacency. Markets are today extraordinarily vulnerable.
Geopolitical is a key Issue 2020. A U.S./Iranian military confrontation is a real possibility. Recent U.S./China calm could prove short-lived. An accident in the South China See is a possibility, as is a mishap with Russia’s increasingly aggressive military. The entire Middle East remains a precarious tinderbox. China could become more confrontational with Taiwan, drawing U.S. ire. There are as well scores of other potential flashpoints.
If there weren’t enough global uncertainties, there are pivotal U.S. elections in November. 2016 elections were crazy; expect crazier for 2020. The President is vulnerable, a vulnerability that would increase in the event of market, economic or climate shocks. Booming markets currently envisage a second Trump term. Things get interesting if a geopolitical event and market disruption throw the election into disarray. Abruptly, the pro-market Trump candidacy could find itself in trouble, boosting the odds for the democrat – potentially an anti-market candidate. With a deeply divided nation in such a volatile environment, November’s election could go down to the wire between two diametrically-opposed agendas.
It’s destined to be a fascinating year. If we’re lucky, I’ll be prognosticating about the risk of a bursting Bubble in Issues 2021. There will surely be unexpected developments that shape market and economic backdrops. There are some more obvious catalysts for piercing global Bubbles. Chinese Credit remains at the top of the list.
Despite today’s amazing bullishness, there is a lengthy list of EM vulnerabilities. There are cracks in India, Indonesia and Turkey, to name a few. Asian finance, in particular, is hopelessly unsound. The huge banking systems in Hong Kong and Singapore offer potential for negative surprises. Similar to Chinese finance, the “offshore” financial centers are accidents in the making. I wouldn’t bet against global money market problems. The world is one serious bout of “risk off” deleveraging away from exposing massive leverage and chicanery. It’s difficult for me to see the year pass without serious market liquidity issues. That’s the way I see Issues 2020. I restrained myself.
For the Week:
The S&P500 gained 0.9% (up 1.1% y-t-d), and the Dow rose 0.7% (up 1.0%). The Utilities increased 0.8% (down 0.4%). The Banks dropped 1.2% (down 2.0%), while the Broker/Dealers rose 1.4% (up 1.4%). The Transports added 0.6% (up 0.7%). The S&P 400 Midcaps slipped 0.2% (down 0.6%), and the small cap Russell 2000 dipped 0.2% (down 0.6%). The Nasdaq100 jumped 2.0% (up 2.7%). The Semiconductors gained 0.7% (up 0.9%). The Biotechs surged 4.3% (up 2.6%). Though bullion gained $10, the HUI gold index dropped 3.0% (down 4.5%).
Three-month Treasury bill rates ended the week at 1.50%. Two-year government yields rose four bps to 1.57% (unchanged y-t-d). Five-year T-note yields gained four bps to 1.63% (down 6bps). Ten-year Treasury yields increased three bps to 1.82% (down 10bps). Long bond yields added three bps to 2.28% (down 11bps). Benchmark Fannie Mae MBS yields slipped a basis point to 2.62% (down 9bps).
Greek 10-year yields fell five bps to 1.35% (down 9bps y-t-d). Ten-year Portuguese yields rose four bps to 0.39% (down 5bps). Italian 10-year yields slipped three bps to 1.32% (down 9bps). Spain's 10-year yields jumped six bps to 0.44% (down 3bps). German bund yields jumped eight bps to negative 0.20% (down 1bp). French yields increased two bps to 0.04% (down 7bps). The French to German 10-year bond spread narrowed six to 24 bps. U.K. 10-year gilt yields gained three bps to 0.77% (down 5bps). U.K.'s FTSE equities index declined 0.5% (up 0.6%).
Japan's Nikkei Equities Index gained 0.8% (up 0.8% y-t-d). Japanese 10-year "JGB" yields increased a basis point to zero (up 1bp y-t-d). France's CAC40 was little changed (up 1.0%). The German DAX equities index jumped 2.0% (up 1.8%). Spain's IBEX 35 equities index fell 0.8% (up 0.3%). Italy's FTSE MIB index rose 1.3% (up 2.2%). EM equities were mixed. Brazil's Bovespa index dropped 1.9% (down 0.1%), while Mexico's Bolsa was about unchanged (up 2.6%). South Korea's Kospi index gained 1.4% (up 0.4%). India's Sensex equities index increased 0.3% (up 0.8%). China's Shanghai Exchange added 0.3% (up 1.4%). Turkey's Borsa Istanbul National 100 index advanced 4.4% (up 3.7%). Russia's MICEX equities index rose 1.5% (up 2.6%).
Investment-grade bond funds saw inflows surge to $8.193 billion, and junk bond funds posted inflows of $1.121 billion (from Lipper).
Freddie Mac 30-year fixed mortgage rates dropped eight bps to 3.64% (down 81bps y-o-y). Fifteen-year rates fell nine bps to 3.07% (down 82bps). Five-year hybrid ARM rates sank 16 bps to 3.30% (down 53bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-year fixed rates down nine bps to 3.95% (down 45bps).
Federal Reserve Credit last week gained $6.9bn to $4.128 TN, with a 17-week gain of $401.7 billion. Over the past year, Fed Credit expanded $111.5bn, or 2.8%. Fed Credit inflated $1.317 Trillion, or 47%, over the past 374 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt gained $9.7 billion last week to $3.408 TN. "Custody holdings" increased $12.2 billion, or 0.4% y-o-y.
M2 (narrow) "money" supply gained $3.5bn last week to a record $15.428 TN. "Narrow money" surged $1.003 TN, or 7.0%, over the past year. For the week, Currency increased $1.5bn. Total Checkable Deposits dropped $43.5bn, while Savings Deposits surged $60.8bn. Small Time Deposits were little changed. Retail Money Funds declined $6.4bn.
Total money market fund assets added $5.7bn to $3.638 TN, with institutional money fund assets down $4.1bn to $2.258 TN. Total money funds gained $571bn y-o-y, or 18.6%.
Total Commercial Paper slipped $0.5bn to $1.126 TN. CP was up $53bn, or 4.9% year-over-year.
Currency Watch:
January 10 – Financial Times (Eva Szalay in London and Colby Smith): “Unusual patterns in the dollar during the latest flare-up in tensions between the US and Iran suggest that the currency may have lost its traditional role as a retreat in times of stress. Typically, the dollar jumps, along with gold, when bouts of geopolitical nerves strike. But after the US assassination of Iranian military commander Qassem Soleimani last week the currency barely budged… This flip in the traditional behaviour of the world’s most important reserve currency has left some market-watchers puzzled.”
For the week, the U.S. dollar index increased 0.5% to 97.356 (up 0.9% y-t-d). For the week on the upside, the Mexican peso increased 0.6%, the South Korean won 0.5%, and the Singapore dollar 0.1%. On the downside, the Japanese yen declined 1.2%, the Swedish krona 1.1%, the Brazilian real 1.0%, the Australian dollar 0.7%, the Norwegian krone 0.6%, the New Zealand dollar 0.5%, the South African rand 0.5%, the Canadian dollar 0.4%, the euro 0.4% and the British pound 0.2%. The Chinese renminbi increased 0.67% versus the dollar this week (up 0.63% y-t-d).
Commodities Watch:
The Bloomberg Commodities Index rallied 0.5% (up 0.9% y-t-d). Spot Gold gained 0.7% to $1,562 (up 2.9%). Silver slipped 0.3% to $18.105 (up 1.0%). WTI crude dropped $4.01 to $59.04 (down 3.3%). Gasoline sank 5.1% (down 2%), while Natural Gas rallied 3.4% (up 1%). Copper gained 1.0% (up 1%). Wheat jumped 1.8% (up 1%). Corn slipped 0.2% (down 1%).
Market Instability Watch:
January 5 – Bloomberg (Ranjeetha Pakiam and Justina Vasquez): “Gold surged to its highest since 2013 as rising tensions in the Middle East stoked demand for havens, with Goldman Sachs… seeing more room to run. Palladium extended gains to a fresh record. Bullion neared $1,600 an ounce after Tehran said it would no longer abide by any limits on its enrichment of uranium following the killing of General Qassem Soleimani.”
January 7 – Bloomberg (Claire Ballentine): “Welcome to the big time, bond ETFs. Long overlooked as the younger sibling of equity exchange-traded funds, strategies focused on corporate or government debt took in more than $150 billion in the U.S. last year, the most on record and just shy of the sum netted by their stock counterparts. It was the biggest annual leap for bond ETFs since 2014, boosting assets to more than $800 billion…”
January 7 – Wall Street Journal (Julia-Ambra Verlaine): “Low-rated U.S. companies are borrowing cash as 2020 kicks off, taking advantage of persistently low interest rates. Companies with junk ratings have sold $850 million of debt through Tuesday…That is on track to exceed issuance in the opening days of 2019, when high yield debt totaled $1.5 billion over the first two weeks of January… The U.S. high-yield market now totals around $1.2 trillion…, raising concerns that companies will struggle to repay investors if interest rates rise.”
Trump Administration Watch:
January 6 – Reuters (Jeff Mason): “U.S. President Donald Trump on Sunday stood by his threat to go after Iranian cultural sites, warning of a ‘major retaliation’ if Iran strikes back for the killing of one of its top military commanders… Asked about potential retaliation by Iran, Trump said: ‘If it happens, it happens. If they do anything, there will be major retaliation.’”
January 8 – Bloomberg (Sarah Ponczek): “President Donald Trump toned down rhetoric against Iran, fueling a rally in American stocks that took major benchmarks to fresh records. The rebound from an overnight rout that topped 1.5% has some investors breathing a sigh of relief, but another cohort point to mounting signs that the comeback is a sign of complacency among bulls. ‘This is a market looking through fundamental data, looking through corporate guidance and data points, looking through Fed guidance itself,’ Lisa Shalett, the chief investment officer at Morgan Stanley Wealth Management, told Bloomberg… ‘It is a market that wants to go up in the short term. That is what makes it so profoundly dangerous.’”
January 6 – Financial Times (Chloe Cornish and Andrew England): “When Donald Trump ordered the air strikes that killed Qassem Soleimani he took his highest-stakes gamble yet as he ramps up pressure on Iran and seeks to counter the Islamic regime’s regional influence. For years, Washington had viewed Soleimani as its arch-nemesis. The commander of Iran’s elite Quds force cultivated a network of Iranian proxies across the Middle East that the Trump administration accuses of attacking American targets and destabilising the region. But rather than weaken the influence of Tehran and its proxies in Iraq, the US president’s decision to eliminate Soleimani as he left Baghdad airport threatens to strengthen it, Iraqis and western analysts said. ‘Trump has accelerated Soleimani’s work in Iraq,’ said one Iraqi official. ‘They created a mess because they couldn’t understand Iraq.’”
January 9 – Reuters (Alexandra Alper and Doina Chiacu): “U.S. President Donald Trump… said his administration will start negotiating the Phase 2 U.S.-China trade agreement soon but that he might wait to complete any agreement until after November’s U.S. presidential election. ‘We’ll start negotiating right away Phase Two. It’ll take a little time,’ Trump told reporters… ‘I think I might want to wait to finish it till after the election because by doing that I think we can actually make a little bit better deal, maybe a lot better deal.’”
Federal Reserve Watch:
January 4 – Reuters (Howard Schneider): “The U.S. Federal Reserve still has enough clout to fight a future downturn, but policymakers should state in advance the mix of policies and policy promises they plan to use to get the most bang for their buck, former Fed chief Ben Bernanke said… In an address to the American Economics Association, Bernanke pushed back on the notion that central banks have lost influence over the economy, and laid out his thoughts about how the Fed in particular could change its monetary policy ‘framework’ to be sure that is not the case.”
January 9 – Bloomberg (Christopher Condon): “Former Treasury Secretary Lawrence Summers dismissed the optimism of former Federal Reserve Chairman Ben Bernanke, who recently said the central bank could likely fight off the next recession despite the low level of interest rates. Bernanke’s speech was ‘a kind of last hurrah for the central bankers,’ Summers said… ‘He argued that monetary policy will be able to do it the next time,’ Summers said. ‘I think that’s pretty unlikely given that in recessions we usually cut interest rates by 5 percentage points and interest rates today are below 2%.”
January 8 – Bloomberg (Craig Torres): “One of the Federal Reserve Board’s top economists said a U.S. recession could drive both short- and longer-term Treasury yields close to zero, limiting the tools the central bank has to aid the economy. Michael Kiley, a deputy director in the Fed Board’s financial stability unit, said even a moderate recession in the U.S. ‘may result in near-zero interest rates at long maturities, bringing U.S. experience closer to that seen in Europe and Japan.’ The research was published on the Fed Board’s website…”
January 9 – Wall Street Journal (Michael S. Derby): “In a speech in Madison, Wis., Federal Reserve Bank of St. Louis President James Bullard said, ‘The current baseline economic outlook for 2020 suggests a reasonable chance that the soft landing will be achieved’ after the central bank lowered interest rates three times in 2019 to cushion the economy against a possible downturn. He told reporters after his speech ‘we should wait and see what the effects are’ before tweaking monetary policy again. Speaking on Fox Business…, Federal Bank of Minneapolis President Neel Kashkari also said he sees no reason to alter the current course of monetary policy. He told the network he’d hold steady ‘for the foreseeable future, the next six months, next year, but it will depend.’ He added he would be in the camp of favoring ‘more accommodation’ if ‘inflation continues to weaken or inflation expectations continue to slide.’”
January 3 – Reuters (Ann Saphir and Howard Schneider): “The Federal Reserve could find itself fighting too-low inflation for years to come, San Francisco Federal Reserve President Mary Daly said…, and may need a new policy framework to lift inflation back up to the Fed’s 2% goal. ‘We don’t have a really good understanding of why it’s been so difficult to get inflation back up,’ Daly said at the annual American Economics Association meeting…”
U.S. Bubble Watch:
January 8 – New York Times (Jim Tankersley and Jeanna Smialek): “The mood among economic forecasters gathered for their annual meeting last weekend was dark. They warned one another about President Trump’s trade war, about government budget deficits and, repeatedly, about the inability of central banks to fully combat another recession should one sweep the globe anytime soon. Among the thousands of economists gathered for the profession’s annual meeting, there was little celebration of Mr. Trump’s economic policies, even though unemployment is at a 50-year low, wages are rising and the economy is experiencing its longest expansion on record. Underlying their sense of foreboding was a widespread sentiment that the current expansion is built on a potentially shaky combination of high deficits and low interest rates — and when it ends, as it is bound to do eventually, it could do so painfully.”
January 7 – CNBC (Jeff Cox): “The U.S. trade deficit fell more than expected in November ahead of negotiations with China that cooled the simmering tariff battle between the two sides. The shortfall in goods and services declined to $43.09 billion for the month, below the $43.6 estimate… That represented the lowest deficit since October 2016. That was down sharply from $46.9 billion in October…”
January 4 – New York Times (Neal E. Boudette): “The auto industry has been on a roll for a decade, and its resurgence shows few signs of coming to a halt — at least for now. Strong employment, low interest rates and robust consumer confidence combined last year to extend a record run of auto sales. Americans are also continuing to buy ever bigger cars, at prices escalating faster than the overall inflation rate. And they are taking on more debt to do so. Nationwide, automakers sold more than 17 million new cars and light trucks in 2019… It was the fifth straight year of sales exceeding that figure, a distinction never achieved before.”
January 5 – Wall Street Journal (Andrew Ackerman): “Times are good for U.S. banks. The industry is highly profitable, lending is up and the number of problem institutions—those found to have deficiencies in their businesses—is the lowest since early 2007, according to the Federal Deposit Insurance Corp. Unusually, not a single bank failed in 2018, and just four small lenders have gone under since the end of May 2019. Yet some bank analysts and former regulators say the very paucity of failures may be a sign that hidden risks are building. ‘It’s in the good times, when things seem very calm and when there are no bank failures, that the bad loans are made,’ former FDIC Vice Chairman Thomas Hoenig said…”
January 7 – CNBC (Diana Olick): “The average rate on the 30-year fixed mortgage fell to the lowest level since October this week, at 3.69%... That has an already competitive housing market heating up even more. Open houses, which are usually pretty rare the first week in January, were plentiful in markets across the nation this year, as buyers hope to get in before the competition gets even worse. Buyer sentiment in the housing market remained high in December, according to a monthly survey from Fannie Mae — the Home Purchase Sentiment Index.”
January 5 – Wall Street Journal (Nicole Friedman): “Home sales are slowing in wildfire-prone areas of California as insurers retreat from high-risk regions, say real-estate agents and homeowners. Insurance companies have continued to reduce their wildfire exposure in the past two years after paying more than $24 billion for California wildfire losses in 2017 and 2018. Home insurers have declined to renew policies for tens of thousands of homeowners across the state, and regulators expect more nonrenewals in the coming months. Real-estate agents say potential buyers are having difficulty obtaining insurance and are backing out of purchases or lowering their offers…”
January 6 – New York Times (Doug Cameron): “Boeing Co. is examining plans to raise more debt to bolster finances strained by the mounting fallout from the grounding and halted production of its 737 MAX… The aerospace giant isn’t running out of cash, but costs associated with the MAX crisis are rising, leading to the prospect of borrowing more money. Boeing plans to halt production of the plane this month, lowering some costs but pushing back the likely date at which payments for finished planes would resume.”
Fixed-Income Bubble Watch:
January 6 – Wall Street Journal (Paul J. Davies): “The market for low-rated corporate loans has suffered sharp declines in recent months, a sign of growing aversion to earnings shortfalls or other strains at indebted companies. In the U.S. at the start of December, some 2.5% of leveraged loans were trading at less than 70% of face value, the most since September 2016, according to S&P Global Market Intelligence’s LCD… Analysts and investors blame the loose credit standards that characterized the market in recent years, encouraged by strong demand from yield-hungry investors. The hunt for yield also fed a boom in new issuance of structured loan funds known as collateralized loan obligations, or CLOs, which have been the biggest group of lenders in recent years.”
January 10 – Wall Street Journal (Matt Wirz and Tom McGinty): “When Party City Holdco Inc. reported a large decline in quarterly earnings in November, holders of the retailer’s junk-rated debt scrambled to sell. Buyers were hard to find, and prices cratered by as much as 50% before recovering some of the loss… It was the largest price move since Party City issued the debt. Such violent price swings were commonplace last fall in the riskiest segment of the roughly $2.4 trillion market for corporate bonds and loans rated below investment-grade, analysis of trade data by the Journal shows, striking a sharp contrast to the relative calm in most markets at the time.”
January 6 – Associated Press (Dee-Ann Durbin): “The U.S. dairy industry, the largest in the world, is under severe pressure as the consumption habits of Americans shift. Borden Dairy Co. filed for bankruptcy protection, the second major U.S. dairy to do so in as many months. Borden produces nearly 500 million gallons of milk each year… It employs 3,300 people and runs 12 plants across the U.S.”
China Watch:
January 8 – Bloomberg (Emily Barrett, Ruth Carson, and Charlotte Ryan): “China’s Vice Premier Liu He, head of the country’s negotiation team in Sino-U.S. trade talks, will sign a ‘Phase 1’ deal in Washington next week, the commerce ministry said… Liu will visit Washington on Jan. 13-15, said Gao Feng, spokesman at the commerce ministry. Negotiating teams from both sides remain in close communication on the particular arrangements of the signing, Gao told reporters…”
January 7 – CNBC (Evelyn Cheng): “China remains vague on how much the country will increase purchases of U.S. farm goods, considered a critical part of a trade agreement with Washington. Han Jun, vice minister of agriculture and rural affairs, confirmed to Chinese financial news site Caixin that import quotas for wheat, corn and rice will not increase. ‘These are global quotas. We will not adjust them just for one country,’ Han told Caixin…”
January 4 – Bloomberg: “China pledged to step up measures to shore up its troubled banks and small businesses while continuing a crackdown on shadow banking and property speculation, in a difficult balancing act that risks exacerbating a build up in bad debt at its traditional lenders. As concerns mount over the state of China’s $45 trillion financial system, the nation’s central bank and its top financial regulator used the year’s first weekend to unveil fresh details on how to combat risks amid the slowest economic expansion in three decades. The People’s Bank of China, which has been reluctant to prime the stimulus pumps too much, said on Sunday that it would ‘resolutely win the battle’ against increasing financial risks, underscoring its role as a lender of last resort while directing local governments to step up front-line support.”
January 8 – Reuters (Lusha Zhang and Ryan Woo): “Soaring pork prices that nearly doubled in December over a year ago kept inflation at a seven-year high despite government efforts to ease meat shortages caused by a disease outbreak… Surging inflation adds to challenges for communist leaders who are trying to shore up slowing economic growth and resolve a tariff war with Washington. The price of pork rose 97% over a year earlier despite increased imports of China’s staple meat and the release of thousands of tons from government stockpiles. Food prices rose 17.4% and overall consumer inflation was 4.5%, well above the ruling Communist Party’s official target of 3%. That matched November’s inflation, the highest since 2012.”
January 8 – Bloomberg: “Car sales in China continued to fall in December, capping a second straight annual drop, though a slowing pace of declines suggests the world’s biggest market may be close to a bottom. Sales of sedans, sport utility vehicles, minivans and multipurpose vehicles fell 3.6% last month from a year earlier to 2.17 million units…”
January 9 – Bloomberg: “In what’s now become a new normal for the $815 billion-plus Chinese offshore-debt market, at least seven borrowers defaulted in 2019. About $3.6 billion of bonds went into default last year, up from $3.3 billion the year before… The 2019 tally spanned a state-owned commodity trader to a onetime Coca-Cola Co. acquisition target. And with nearly half of the supply of stressed bonds -- those with yields of at least 15% -- coming due this year, the ranks of defaulters is expected to swell.”
January 9 – Financial Times (Sun Yu): “When China’s bond issuers run into trouble, investors face an increasingly tough task in extracting any returns. Bond defaults across the world’s second-biggest economy are rising, with more borrowers failing either to repay creditors’ initial investments, or make regular interest payments. Typically, some investors can find a way to hold on to so-called distressed debt and recover scraps of cash… Now, though, returns are shrinking. In 2016, 46% of borrowers in default made some sort of principal or interest payments to bondholders, according to Wind… Last year, that total dropped to 13%.”
January 7 – Bloomberg (Shirley Zhao): “China’s Communist Party issued new rules for state-owned enterprises, giving it greater control of companies that span industries from energy to banking and telecommunications. Wholly or majority state-owned companies must ‘integrate party leadership into every part of company governance,’ according to rules published Sunday on the central government’s website.”
January 8 – Financial Times (Jamil Anderlini): “Of the official announcements posted on the website of China’s embassy in Sweden over the past year, nearly two thirds are vituperative attacks on individual Swedish journalists, politicians and other public figures. ‘Some people in Sweden shouldn’t expect to feel at ease after hurting the feelings of the Chinese people and the interests of the Chinese side,’ was one typical, mildly threatening, outburst. The embassy in Sweden has been the most aggressive exemplar of China’s new ‘wolf-style diplomacy’ over the past year or so. But it is far from the only one.”
January 6 – New York Times (Raymond Zhong): “At first glance, the bespectacled YouTuber railing against Taiwan’s president, Tsai Ing-wen, just seems like a concerned citizen making an appeal to his fellow Taiwanese. He speaks Taiwanese-accented Mandarin… His captions are written with the traditional Chinese characters used in Taiwan, not the simplified ones used in China. With outrage in his voice, he accuses Ms. Tsai of selling out “our beloved land of Taiwan” to Japan and the United States. The man, Zhang Xida, does not say in his videos whom he works for. But other websites and videos make it clear: He is a host for China National Radio… As Taiwan gears up for a major election this week, officials and researchers worry that China is experimenting with social media manipulation to sway the vote.”
January 8 – Wall Street Journal (Chun Han Wong and William Kazer): “Fallout from Hong Kong’s unrest is galvanizing resistance against China on another front: Taiwan. Protests in Hong Kong against Beijing’s encroachment have inspired widespread sympathy across the self-ruling island of Taiwan, a longstanding subject of tension in the region that is both claimed by Beijing and supported by the U.S. with arms sales and unofficial political ties. Sympathies in Taiwan for Hong Kong have transformed the political fortunes of the island’s leader, President Tsai Ing-wen, whose ruling party advocates a Taiwanese identity separate from China and is seen as traditionally pro-independence. She has vocally supported the Hong Kong protesters in her campaign for re-election this Saturday, contrasting herself with her main rival—who is seen as friendly with Beijing—by casting her administration as a bulwark against China’s authoritarian influence.”
Central Bank Watch:
January 5 – Bloomberg (Rich Miller and Christopher Condon): “The U.S. and the euro area face daunting economic challenges in a world of low inflation and interest rates and central banks alone don’t have the tools to cope. That’s the message delivered to the American Economic Association’s annual meeting… by former European Central Bank President Mario Draghi and ex-Federal Reserve Chair Janet Yellen. ‘I believe that for the euro area there is some risk of Japanification, but it is by no means a foregone conclusion’ if it acts comprehensively to avoid a deflationary malaise, Draghi said… ‘The euro area still has space to do this, but time is not infinite,’ he added.”
EM Watch:
January 6 – Bloomberg (Subhadip Sircar): “With credit growth at multi-year lows, Indian lenders have been binging on sovereign debt. With the government set to borrow more, the move is fraught with risk. Bond holdings as a proportion of aggregate deposits stood at about 29% in the two weeks ended Dec. 20, way higher than the 18.25% mandated by the central bank... That leaves banks exposed to losses if yields climb on higher federal borrowings.”
January 8 – Bloomberg: “India’s budget deficit could widen to 3.8% of gross domestic product in the current fiscal year, breaching a target of 3.3%... The law allows the government to exceed the target by as much as half a percentage point… The government can also miss its target if it faces acts of war, a collapse in farm output, or the economy is undergoing structural reforms with unanticipated fiscal implications.”
January 9 – Bloomberg (Divya Patil): “It’s the last thing India’s stricken credit markets need: a record debt bill. Companies must repay an unprecedented 5.9 trillion rupees ($83bn) of local notes this year, just as corporate defaults spike. Many firms are already struggling after economic growth slumped to its weakest since 2009.”
January 7 – Financial Times (Stephanie Findlay): “India’s economy is set to grow at 5% in the current financial year compared with a year earlier, its slowest pace in 11 years… Cooling private consumption, slowing industrial activity and stagnant investment have all hit the country’s growth… Over the past year New Delhi has made a series of reforms to combat a crisis in the shadow banking sector and counter the slowdown…”
January 9 – Bloomberg (Fathiya Dahrul and Harry Suhartono): “Policyholders at Indonesia’s state-owned PT Asuransi Jiwasraya are looking to the government to rescue the scandal-hit insurer, which has uncovered a $2 billion hole in its books. The crisis affects 17,000 buyers of investment products and 7 million clients, and may pose systemic risks, Indonesia’s audit board said…”
Europe Watch:
January 7 – Associated Press (Pan Pylas): “Inflation across the 19-country eurozone spiked to a six-month high in December even before the recent jump in oil prices in the wake of escalating U.S.-Iran tensions… Prices increased across the board during December, helping the annual rate of inflation to rise to 1.3% from the previous month’s 1%. Though inflation is at its highest level since June, when it was also 1.3%, it remains way below the European Central Bank’s goal of just below 2%.”
January 8 – Financial Times (Tommy Stubbington): “Eurozone governments are on course to raise less cash from bond investors in 2020 than any year since the financial crisis, even as the European Central Bank hoovers up fresh supply and borrowing costs hover near record lows. Analysts at JPMorgan estimate that net supply of euro-area sovereign bonds this year will come to €188bn, the lowest since 2008. That figure, based on issuance plans published by national debt agencies, is derived from €762bn of bond sales over the year, while €574bn of existing bonds mature. The drop in new borrowing, down about 4% from 2019, comes at a time when ultra-low bond yields… have cut the cost of funding for governments across the world, prompting calls for them to abandon restraint in spending.”
January 7 – Reuters (Michael Nienaber): “German industrial orders fell unexpectedly in November on weak foreign demand and a lack of major contracts…, suggesting that a manufacturing slump will continue to curtail growth in Europe’s largest economy… Contracts for German goods decreased by 1.3% from the previous month, posting the steepest drop since July…”
Japan Watch:
January 6 – Reuters (Daniel Leussink): “Japan’s services sector saw its deepest contraction in more than three years in December as business activity took a hit from weak demand at home and abroad… The final seasonally adjusted Jibun Bank Japan Services Purchasing Managers’ Index (PMI) fell to 49.4 in December from 50.3 in November…”
Global Bubble Watch:
January 8 – Reuters (David Lawder): “The World Bank… trimmed its global growth forecasts slightly for 2019 and 2020 due to a slower-than-expected recovery in trade and investment despite cooler trade tensions between the United States and China… In its latest Global Economic Prospects report, the World Bank shaved 0.2 percentage point off of growth for both years, with the 2019 global economic growth forecast at 2.4% and 2020 at 2.5%.”
January 6 – Financial Times (Monica Erickson): “Individuals and institutions alike have grown very fond of high-quality US corporate bonds, which are prized for their relative safety. But after a long rally, these bonds now pose greater risk than many may realise. The duration of this class of assets — its interest-rate risk — has increased to near record highs, while spreads over the yield of equivalent Treasuries have fallen to near record lows. A pick-up in interest rates, depending on its speed and longevity, could significantly push down prices across the market, which totals over $7tn, accounting for just over a quarter of the total US bonds outstanding. That could happen even without a deterioration in credit quality.”
January 8 – Reuters (Martin Petty and Colin Packham): “Australian authorities urged another mass evacuation across the heavily populated southeast on Thursday as a return of hot weather fanned huge bushfires threatening several towns and communities.”
Leveraged Speculation Watch:
January 7 – Bloomberg (Nishant Kumar): “Crispin Odey’s main hedge fund slumped to a fourth annual loss in the last five years as his bearish bets misfired amid the longest-running equities bull market in history. The Odey European Inc. hedge fund finished 2019 down 10.1% despite a late rally in December…”
January 7 – Bloomberg (Katherine Burton): “Ray Dalio suffered his first annual loss since 2000 in his most prominent fund. Bridgewater Associates Pure Alpha II fund fell 0.5% last year, even as many of his peers posted some of their best returns since 2008. It was the fourth time he has lost money in a calendar year since starting Pure Alpha II in 1991…”
January 7 – Bloomberg (Melissa Karsh): “Hedge funds rebounded in 2019, gaining 9% after posting a loss the year before. The results were nothing to celebrate -- the S&P 500 Index returned 32% last year in the longest-running bull market in history. Last year’s performance may put further pressure on an industry struggling to keep investors from bolting. Hedge funds saw $82 billion of outflows through November, more than twice the amount for all of 2018, according to eVestment data. The industry is now on pace to record more closures than startups for a fifth straight year, according to Hedge Fund Research Inc.”
Geopolitical Watch:
January 5 – Reuters (Parisa Hafezi): “Iran announced on Sunday it would abandon limitations on enriching uranium, taking a further step back from commitments to a 2015 nuclear deal with six major powers, but it would continue to cooperate with the U.N. nuclear watchdog… ‘Iran will continue its nuclear enrichment with no restrictions .... and based on its technical needs,’ a government statement cited by television said.”
January 8 – Reuters (Babak Dehghanpisheh and Ahmed Aboulenein): “Iran spurned U.S. President Donald Trump’s call for a new nuclear pact and its commanders threatened more attacks as the Middle East remained on edge following the U.S. killing of an Iranian general and Tehran’s retaliatory missile strikes. Potentially stepping up international pressure on Tehran, U.S. officials said they believed a Ukrainian passenger plane that crashed in Iran was brought down accidentally by Iranian air defenses hours after Iran launched its missiles attacks.”
January 3 – Reuters (Polina Ivanova): “Russia’s Foreign Minister Sergei Lavrov spoke with his Iranian counterpart Mohammad Javad Zarif over the phone on Friday to discuss the killing of Iran’s military chief Qassem Soleimani… ‘Lavrov expressed his condolences over the killing,’ the statement said. ‘The ministers stressed that such actions by the United States grossly violate the norms of international law.’”
January 4 – Reuters (Ryan Woo): “The United States should stop abusing the use of force and seek solutions via dialogue, China’s foreign minister said, after a U.S. air strike in Baghdad on Friday killed Iran’s most prominent military commander. The risky behavior of the U.S. military violates the basic norms of international relations and will worsen tensions and turbulence in the region, China’s Foreign Minister Wang Yi told his Iranian counterpart Mohammad Javad Zarif…”
January 6 – CNBC (Joanna Tan): “President Donald Trump threatened Sunday to slap sanctions on Iraq after its parliament passed a resolution calling for the government to expel foreign troops from the country. Tensions in the Middle East spiraled last week after Trump called for a U.S. airstrike in Baghdad that killed a top Iranian general, Qasem Soleimani. …The U.S. president said: ‘If they do ask us to leave, if we don’t do it in a very friendly basis, we will charge them sanctions like they’ve never seen before ever. It’ll make Iranian sanctions look somewhat tame.’ ‘We have a very extraordinarily expensive air base that’s there. It cost billions of dollars to build. Long before my time. We’re not leaving unless they pay us back for it,’ Trump said.”
The S&P500 gained 0.9% (up 1.1% y-t-d), and the Dow rose 0.7% (up 1.0%). The Utilities increased 0.8% (down 0.4%). The Banks dropped 1.2% (down 2.0%), while the Broker/Dealers rose 1.4% (up 1.4%). The Transports added 0.6% (up 0.7%). The S&P 400 Midcaps slipped 0.2% (down 0.6%), and the small cap Russell 2000 dipped 0.2% (down 0.6%). The Nasdaq100 jumped 2.0% (up 2.7%). The Semiconductors gained 0.7% (up 0.9%). The Biotechs surged 4.3% (up 2.6%). Though bullion gained $10, the HUI gold index dropped 3.0% (down 4.5%).
Three-month Treasury bill rates ended the week at 1.50%. Two-year government yields rose four bps to 1.57% (unchanged y-t-d). Five-year T-note yields gained four bps to 1.63% (down 6bps). Ten-year Treasury yields increased three bps to 1.82% (down 10bps). Long bond yields added three bps to 2.28% (down 11bps). Benchmark Fannie Mae MBS yields slipped a basis point to 2.62% (down 9bps).
Greek 10-year yields fell five bps to 1.35% (down 9bps y-t-d). Ten-year Portuguese yields rose four bps to 0.39% (down 5bps). Italian 10-year yields slipped three bps to 1.32% (down 9bps). Spain's 10-year yields jumped six bps to 0.44% (down 3bps). German bund yields jumped eight bps to negative 0.20% (down 1bp). French yields increased two bps to 0.04% (down 7bps). The French to German 10-year bond spread narrowed six to 24 bps. U.K. 10-year gilt yields gained three bps to 0.77% (down 5bps). U.K.'s FTSE equities index declined 0.5% (up 0.6%).
Japan's Nikkei Equities Index gained 0.8% (up 0.8% y-t-d). Japanese 10-year "JGB" yields increased a basis point to zero (up 1bp y-t-d). France's CAC40 was little changed (up 1.0%). The German DAX equities index jumped 2.0% (up 1.8%). Spain's IBEX 35 equities index fell 0.8% (up 0.3%). Italy's FTSE MIB index rose 1.3% (up 2.2%). EM equities were mixed. Brazil's Bovespa index dropped 1.9% (down 0.1%), while Mexico's Bolsa was about unchanged (up 2.6%). South Korea's Kospi index gained 1.4% (up 0.4%). India's Sensex equities index increased 0.3% (up 0.8%). China's Shanghai Exchange added 0.3% (up 1.4%). Turkey's Borsa Istanbul National 100 index advanced 4.4% (up 3.7%). Russia's MICEX equities index rose 1.5% (up 2.6%).
Investment-grade bond funds saw inflows surge to $8.193 billion, and junk bond funds posted inflows of $1.121 billion (from Lipper).
Freddie Mac 30-year fixed mortgage rates dropped eight bps to 3.64% (down 81bps y-o-y). Fifteen-year rates fell nine bps to 3.07% (down 82bps). Five-year hybrid ARM rates sank 16 bps to 3.30% (down 53bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-year fixed rates down nine bps to 3.95% (down 45bps).
Federal Reserve Credit last week gained $6.9bn to $4.128 TN, with a 17-week gain of $401.7 billion. Over the past year, Fed Credit expanded $111.5bn, or 2.8%. Fed Credit inflated $1.317 Trillion, or 47%, over the past 374 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt gained $9.7 billion last week to $3.408 TN. "Custody holdings" increased $12.2 billion, or 0.4% y-o-y.
M2 (narrow) "money" supply gained $3.5bn last week to a record $15.428 TN. "Narrow money" surged $1.003 TN, or 7.0%, over the past year. For the week, Currency increased $1.5bn. Total Checkable Deposits dropped $43.5bn, while Savings Deposits surged $60.8bn. Small Time Deposits were little changed. Retail Money Funds declined $6.4bn.
Total money market fund assets added $5.7bn to $3.638 TN, with institutional money fund assets down $4.1bn to $2.258 TN. Total money funds gained $571bn y-o-y, or 18.6%.
Total Commercial Paper slipped $0.5bn to $1.126 TN. CP was up $53bn, or 4.9% year-over-year.
Currency Watch:
January 10 – Financial Times (Eva Szalay in London and Colby Smith): “Unusual patterns in the dollar during the latest flare-up in tensions between the US and Iran suggest that the currency may have lost its traditional role as a retreat in times of stress. Typically, the dollar jumps, along with gold, when bouts of geopolitical nerves strike. But after the US assassination of Iranian military commander Qassem Soleimani last week the currency barely budged… This flip in the traditional behaviour of the world’s most important reserve currency has left some market-watchers puzzled.”
For the week, the U.S. dollar index increased 0.5% to 97.356 (up 0.9% y-t-d). For the week on the upside, the Mexican peso increased 0.6%, the South Korean won 0.5%, and the Singapore dollar 0.1%. On the downside, the Japanese yen declined 1.2%, the Swedish krona 1.1%, the Brazilian real 1.0%, the Australian dollar 0.7%, the Norwegian krone 0.6%, the New Zealand dollar 0.5%, the South African rand 0.5%, the Canadian dollar 0.4%, the euro 0.4% and the British pound 0.2%. The Chinese renminbi increased 0.67% versus the dollar this week (up 0.63% y-t-d).
Commodities Watch:
The Bloomberg Commodities Index rallied 0.5% (up 0.9% y-t-d). Spot Gold gained 0.7% to $1,562 (up 2.9%). Silver slipped 0.3% to $18.105 (up 1.0%). WTI crude dropped $4.01 to $59.04 (down 3.3%). Gasoline sank 5.1% (down 2%), while Natural Gas rallied 3.4% (up 1%). Copper gained 1.0% (up 1%). Wheat jumped 1.8% (up 1%). Corn slipped 0.2% (down 1%).
Market Instability Watch:
January 5 – Bloomberg (Ranjeetha Pakiam and Justina Vasquez): “Gold surged to its highest since 2013 as rising tensions in the Middle East stoked demand for havens, with Goldman Sachs… seeing more room to run. Palladium extended gains to a fresh record. Bullion neared $1,600 an ounce after Tehran said it would no longer abide by any limits on its enrichment of uranium following the killing of General Qassem Soleimani.”
January 7 – Bloomberg (Claire Ballentine): “Welcome to the big time, bond ETFs. Long overlooked as the younger sibling of equity exchange-traded funds, strategies focused on corporate or government debt took in more than $150 billion in the U.S. last year, the most on record and just shy of the sum netted by their stock counterparts. It was the biggest annual leap for bond ETFs since 2014, boosting assets to more than $800 billion…”
January 7 – Wall Street Journal (Julia-Ambra Verlaine): “Low-rated U.S. companies are borrowing cash as 2020 kicks off, taking advantage of persistently low interest rates. Companies with junk ratings have sold $850 million of debt through Tuesday…That is on track to exceed issuance in the opening days of 2019, when high yield debt totaled $1.5 billion over the first two weeks of January… The U.S. high-yield market now totals around $1.2 trillion…, raising concerns that companies will struggle to repay investors if interest rates rise.”
Trump Administration Watch:
January 6 – Reuters (Jeff Mason): “U.S. President Donald Trump on Sunday stood by his threat to go after Iranian cultural sites, warning of a ‘major retaliation’ if Iran strikes back for the killing of one of its top military commanders… Asked about potential retaliation by Iran, Trump said: ‘If it happens, it happens. If they do anything, there will be major retaliation.’”
January 8 – Bloomberg (Sarah Ponczek): “President Donald Trump toned down rhetoric against Iran, fueling a rally in American stocks that took major benchmarks to fresh records. The rebound from an overnight rout that topped 1.5% has some investors breathing a sigh of relief, but another cohort point to mounting signs that the comeback is a sign of complacency among bulls. ‘This is a market looking through fundamental data, looking through corporate guidance and data points, looking through Fed guidance itself,’ Lisa Shalett, the chief investment officer at Morgan Stanley Wealth Management, told Bloomberg… ‘It is a market that wants to go up in the short term. That is what makes it so profoundly dangerous.’”
January 6 – Financial Times (Chloe Cornish and Andrew England): “When Donald Trump ordered the air strikes that killed Qassem Soleimani he took his highest-stakes gamble yet as he ramps up pressure on Iran and seeks to counter the Islamic regime’s regional influence. For years, Washington had viewed Soleimani as its arch-nemesis. The commander of Iran’s elite Quds force cultivated a network of Iranian proxies across the Middle East that the Trump administration accuses of attacking American targets and destabilising the region. But rather than weaken the influence of Tehran and its proxies in Iraq, the US president’s decision to eliminate Soleimani as he left Baghdad airport threatens to strengthen it, Iraqis and western analysts said. ‘Trump has accelerated Soleimani’s work in Iraq,’ said one Iraqi official. ‘They created a mess because they couldn’t understand Iraq.’”
January 9 – Reuters (Alexandra Alper and Doina Chiacu): “U.S. President Donald Trump… said his administration will start negotiating the Phase 2 U.S.-China trade agreement soon but that he might wait to complete any agreement until after November’s U.S. presidential election. ‘We’ll start negotiating right away Phase Two. It’ll take a little time,’ Trump told reporters… ‘I think I might want to wait to finish it till after the election because by doing that I think we can actually make a little bit better deal, maybe a lot better deal.’”
Federal Reserve Watch:
January 4 – Reuters (Howard Schneider): “The U.S. Federal Reserve still has enough clout to fight a future downturn, but policymakers should state in advance the mix of policies and policy promises they plan to use to get the most bang for their buck, former Fed chief Ben Bernanke said… In an address to the American Economics Association, Bernanke pushed back on the notion that central banks have lost influence over the economy, and laid out his thoughts about how the Fed in particular could change its monetary policy ‘framework’ to be sure that is not the case.”
January 9 – Bloomberg (Christopher Condon): “Former Treasury Secretary Lawrence Summers dismissed the optimism of former Federal Reserve Chairman Ben Bernanke, who recently said the central bank could likely fight off the next recession despite the low level of interest rates. Bernanke’s speech was ‘a kind of last hurrah for the central bankers,’ Summers said… ‘He argued that monetary policy will be able to do it the next time,’ Summers said. ‘I think that’s pretty unlikely given that in recessions we usually cut interest rates by 5 percentage points and interest rates today are below 2%.”
January 8 – Bloomberg (Craig Torres): “One of the Federal Reserve Board’s top economists said a U.S. recession could drive both short- and longer-term Treasury yields close to zero, limiting the tools the central bank has to aid the economy. Michael Kiley, a deputy director in the Fed Board’s financial stability unit, said even a moderate recession in the U.S. ‘may result in near-zero interest rates at long maturities, bringing U.S. experience closer to that seen in Europe and Japan.’ The research was published on the Fed Board’s website…”
January 9 – Wall Street Journal (Michael S. Derby): “In a speech in Madison, Wis., Federal Reserve Bank of St. Louis President James Bullard said, ‘The current baseline economic outlook for 2020 suggests a reasonable chance that the soft landing will be achieved’ after the central bank lowered interest rates three times in 2019 to cushion the economy against a possible downturn. He told reporters after his speech ‘we should wait and see what the effects are’ before tweaking monetary policy again. Speaking on Fox Business…, Federal Bank of Minneapolis President Neel Kashkari also said he sees no reason to alter the current course of monetary policy. He told the network he’d hold steady ‘for the foreseeable future, the next six months, next year, but it will depend.’ He added he would be in the camp of favoring ‘more accommodation’ if ‘inflation continues to weaken or inflation expectations continue to slide.’”
January 3 – Reuters (Ann Saphir and Howard Schneider): “The Federal Reserve could find itself fighting too-low inflation for years to come, San Francisco Federal Reserve President Mary Daly said…, and may need a new policy framework to lift inflation back up to the Fed’s 2% goal. ‘We don’t have a really good understanding of why it’s been so difficult to get inflation back up,’ Daly said at the annual American Economics Association meeting…”
U.S. Bubble Watch:
January 8 – New York Times (Jim Tankersley and Jeanna Smialek): “The mood among economic forecasters gathered for their annual meeting last weekend was dark. They warned one another about President Trump’s trade war, about government budget deficits and, repeatedly, about the inability of central banks to fully combat another recession should one sweep the globe anytime soon. Among the thousands of economists gathered for the profession’s annual meeting, there was little celebration of Mr. Trump’s economic policies, even though unemployment is at a 50-year low, wages are rising and the economy is experiencing its longest expansion on record. Underlying their sense of foreboding was a widespread sentiment that the current expansion is built on a potentially shaky combination of high deficits and low interest rates — and when it ends, as it is bound to do eventually, it could do so painfully.”
January 7 – CNBC (Jeff Cox): “The U.S. trade deficit fell more than expected in November ahead of negotiations with China that cooled the simmering tariff battle between the two sides. The shortfall in goods and services declined to $43.09 billion for the month, below the $43.6 estimate… That represented the lowest deficit since October 2016. That was down sharply from $46.9 billion in October…”
January 4 – New York Times (Neal E. Boudette): “The auto industry has been on a roll for a decade, and its resurgence shows few signs of coming to a halt — at least for now. Strong employment, low interest rates and robust consumer confidence combined last year to extend a record run of auto sales. Americans are also continuing to buy ever bigger cars, at prices escalating faster than the overall inflation rate. And they are taking on more debt to do so. Nationwide, automakers sold more than 17 million new cars and light trucks in 2019… It was the fifth straight year of sales exceeding that figure, a distinction never achieved before.”
January 5 – Wall Street Journal (Andrew Ackerman): “Times are good for U.S. banks. The industry is highly profitable, lending is up and the number of problem institutions—those found to have deficiencies in their businesses—is the lowest since early 2007, according to the Federal Deposit Insurance Corp. Unusually, not a single bank failed in 2018, and just four small lenders have gone under since the end of May 2019. Yet some bank analysts and former regulators say the very paucity of failures may be a sign that hidden risks are building. ‘It’s in the good times, when things seem very calm and when there are no bank failures, that the bad loans are made,’ former FDIC Vice Chairman Thomas Hoenig said…”
January 7 – CNBC (Diana Olick): “The average rate on the 30-year fixed mortgage fell to the lowest level since October this week, at 3.69%... That has an already competitive housing market heating up even more. Open houses, which are usually pretty rare the first week in January, were plentiful in markets across the nation this year, as buyers hope to get in before the competition gets even worse. Buyer sentiment in the housing market remained high in December, according to a monthly survey from Fannie Mae — the Home Purchase Sentiment Index.”
January 5 – Wall Street Journal (Nicole Friedman): “Home sales are slowing in wildfire-prone areas of California as insurers retreat from high-risk regions, say real-estate agents and homeowners. Insurance companies have continued to reduce their wildfire exposure in the past two years after paying more than $24 billion for California wildfire losses in 2017 and 2018. Home insurers have declined to renew policies for tens of thousands of homeowners across the state, and regulators expect more nonrenewals in the coming months. Real-estate agents say potential buyers are having difficulty obtaining insurance and are backing out of purchases or lowering their offers…”
January 6 – New York Times (Doug Cameron): “Boeing Co. is examining plans to raise more debt to bolster finances strained by the mounting fallout from the grounding and halted production of its 737 MAX… The aerospace giant isn’t running out of cash, but costs associated with the MAX crisis are rising, leading to the prospect of borrowing more money. Boeing plans to halt production of the plane this month, lowering some costs but pushing back the likely date at which payments for finished planes would resume.”
Fixed-Income Bubble Watch:
January 6 – Wall Street Journal (Paul J. Davies): “The market for low-rated corporate loans has suffered sharp declines in recent months, a sign of growing aversion to earnings shortfalls or other strains at indebted companies. In the U.S. at the start of December, some 2.5% of leveraged loans were trading at less than 70% of face value, the most since September 2016, according to S&P Global Market Intelligence’s LCD… Analysts and investors blame the loose credit standards that characterized the market in recent years, encouraged by strong demand from yield-hungry investors. The hunt for yield also fed a boom in new issuance of structured loan funds known as collateralized loan obligations, or CLOs, which have been the biggest group of lenders in recent years.”
January 10 – Wall Street Journal (Matt Wirz and Tom McGinty): “When Party City Holdco Inc. reported a large decline in quarterly earnings in November, holders of the retailer’s junk-rated debt scrambled to sell. Buyers were hard to find, and prices cratered by as much as 50% before recovering some of the loss… It was the largest price move since Party City issued the debt. Such violent price swings were commonplace last fall in the riskiest segment of the roughly $2.4 trillion market for corporate bonds and loans rated below investment-grade, analysis of trade data by the Journal shows, striking a sharp contrast to the relative calm in most markets at the time.”
January 6 – Associated Press (Dee-Ann Durbin): “The U.S. dairy industry, the largest in the world, is under severe pressure as the consumption habits of Americans shift. Borden Dairy Co. filed for bankruptcy protection, the second major U.S. dairy to do so in as many months. Borden produces nearly 500 million gallons of milk each year… It employs 3,300 people and runs 12 plants across the U.S.”
China Watch:
January 8 – Bloomberg (Emily Barrett, Ruth Carson, and Charlotte Ryan): “China’s Vice Premier Liu He, head of the country’s negotiation team in Sino-U.S. trade talks, will sign a ‘Phase 1’ deal in Washington next week, the commerce ministry said… Liu will visit Washington on Jan. 13-15, said Gao Feng, spokesman at the commerce ministry. Negotiating teams from both sides remain in close communication on the particular arrangements of the signing, Gao told reporters…”
January 7 – CNBC (Evelyn Cheng): “China remains vague on how much the country will increase purchases of U.S. farm goods, considered a critical part of a trade agreement with Washington. Han Jun, vice minister of agriculture and rural affairs, confirmed to Chinese financial news site Caixin that import quotas for wheat, corn and rice will not increase. ‘These are global quotas. We will not adjust them just for one country,’ Han told Caixin…”
January 4 – Bloomberg: “China pledged to step up measures to shore up its troubled banks and small businesses while continuing a crackdown on shadow banking and property speculation, in a difficult balancing act that risks exacerbating a build up in bad debt at its traditional lenders. As concerns mount over the state of China’s $45 trillion financial system, the nation’s central bank and its top financial regulator used the year’s first weekend to unveil fresh details on how to combat risks amid the slowest economic expansion in three decades. The People’s Bank of China, which has been reluctant to prime the stimulus pumps too much, said on Sunday that it would ‘resolutely win the battle’ against increasing financial risks, underscoring its role as a lender of last resort while directing local governments to step up front-line support.”
January 8 – Reuters (Lusha Zhang and Ryan Woo): “Soaring pork prices that nearly doubled in December over a year ago kept inflation at a seven-year high despite government efforts to ease meat shortages caused by a disease outbreak… Surging inflation adds to challenges for communist leaders who are trying to shore up slowing economic growth and resolve a tariff war with Washington. The price of pork rose 97% over a year earlier despite increased imports of China’s staple meat and the release of thousands of tons from government stockpiles. Food prices rose 17.4% and overall consumer inflation was 4.5%, well above the ruling Communist Party’s official target of 3%. That matched November’s inflation, the highest since 2012.”
January 8 – Bloomberg: “Car sales in China continued to fall in December, capping a second straight annual drop, though a slowing pace of declines suggests the world’s biggest market may be close to a bottom. Sales of sedans, sport utility vehicles, minivans and multipurpose vehicles fell 3.6% last month from a year earlier to 2.17 million units…”
January 9 – Bloomberg: “In what’s now become a new normal for the $815 billion-plus Chinese offshore-debt market, at least seven borrowers defaulted in 2019. About $3.6 billion of bonds went into default last year, up from $3.3 billion the year before… The 2019 tally spanned a state-owned commodity trader to a onetime Coca-Cola Co. acquisition target. And with nearly half of the supply of stressed bonds -- those with yields of at least 15% -- coming due this year, the ranks of defaulters is expected to swell.”
January 9 – Financial Times (Sun Yu): “When China’s bond issuers run into trouble, investors face an increasingly tough task in extracting any returns. Bond defaults across the world’s second-biggest economy are rising, with more borrowers failing either to repay creditors’ initial investments, or make regular interest payments. Typically, some investors can find a way to hold on to so-called distressed debt and recover scraps of cash… Now, though, returns are shrinking. In 2016, 46% of borrowers in default made some sort of principal or interest payments to bondholders, according to Wind… Last year, that total dropped to 13%.”
January 7 – Bloomberg (Shirley Zhao): “China’s Communist Party issued new rules for state-owned enterprises, giving it greater control of companies that span industries from energy to banking and telecommunications. Wholly or majority state-owned companies must ‘integrate party leadership into every part of company governance,’ according to rules published Sunday on the central government’s website.”
January 8 – Financial Times (Jamil Anderlini): “Of the official announcements posted on the website of China’s embassy in Sweden over the past year, nearly two thirds are vituperative attacks on individual Swedish journalists, politicians and other public figures. ‘Some people in Sweden shouldn’t expect to feel at ease after hurting the feelings of the Chinese people and the interests of the Chinese side,’ was one typical, mildly threatening, outburst. The embassy in Sweden has been the most aggressive exemplar of China’s new ‘wolf-style diplomacy’ over the past year or so. But it is far from the only one.”
January 6 – New York Times (Raymond Zhong): “At first glance, the bespectacled YouTuber railing against Taiwan’s president, Tsai Ing-wen, just seems like a concerned citizen making an appeal to his fellow Taiwanese. He speaks Taiwanese-accented Mandarin… His captions are written with the traditional Chinese characters used in Taiwan, not the simplified ones used in China. With outrage in his voice, he accuses Ms. Tsai of selling out “our beloved land of Taiwan” to Japan and the United States. The man, Zhang Xida, does not say in his videos whom he works for. But other websites and videos make it clear: He is a host for China National Radio… As Taiwan gears up for a major election this week, officials and researchers worry that China is experimenting with social media manipulation to sway the vote.”
January 8 – Wall Street Journal (Chun Han Wong and William Kazer): “Fallout from Hong Kong’s unrest is galvanizing resistance against China on another front: Taiwan. Protests in Hong Kong against Beijing’s encroachment have inspired widespread sympathy across the self-ruling island of Taiwan, a longstanding subject of tension in the region that is both claimed by Beijing and supported by the U.S. with arms sales and unofficial political ties. Sympathies in Taiwan for Hong Kong have transformed the political fortunes of the island’s leader, President Tsai Ing-wen, whose ruling party advocates a Taiwanese identity separate from China and is seen as traditionally pro-independence. She has vocally supported the Hong Kong protesters in her campaign for re-election this Saturday, contrasting herself with her main rival—who is seen as friendly with Beijing—by casting her administration as a bulwark against China’s authoritarian influence.”
Central Bank Watch:
January 5 – Bloomberg (Rich Miller and Christopher Condon): “The U.S. and the euro area face daunting economic challenges in a world of low inflation and interest rates and central banks alone don’t have the tools to cope. That’s the message delivered to the American Economic Association’s annual meeting… by former European Central Bank President Mario Draghi and ex-Federal Reserve Chair Janet Yellen. ‘I believe that for the euro area there is some risk of Japanification, but it is by no means a foregone conclusion’ if it acts comprehensively to avoid a deflationary malaise, Draghi said… ‘The euro area still has space to do this, but time is not infinite,’ he added.”
EM Watch:
January 6 – Bloomberg (Subhadip Sircar): “With credit growth at multi-year lows, Indian lenders have been binging on sovereign debt. With the government set to borrow more, the move is fraught with risk. Bond holdings as a proportion of aggregate deposits stood at about 29% in the two weeks ended Dec. 20, way higher than the 18.25% mandated by the central bank... That leaves banks exposed to losses if yields climb on higher federal borrowings.”
January 8 – Bloomberg: “India’s budget deficit could widen to 3.8% of gross domestic product in the current fiscal year, breaching a target of 3.3%... The law allows the government to exceed the target by as much as half a percentage point… The government can also miss its target if it faces acts of war, a collapse in farm output, or the economy is undergoing structural reforms with unanticipated fiscal implications.”
January 9 – Bloomberg (Divya Patil): “It’s the last thing India’s stricken credit markets need: a record debt bill. Companies must repay an unprecedented 5.9 trillion rupees ($83bn) of local notes this year, just as corporate defaults spike. Many firms are already struggling after economic growth slumped to its weakest since 2009.”
January 7 – Financial Times (Stephanie Findlay): “India’s economy is set to grow at 5% in the current financial year compared with a year earlier, its slowest pace in 11 years… Cooling private consumption, slowing industrial activity and stagnant investment have all hit the country’s growth… Over the past year New Delhi has made a series of reforms to combat a crisis in the shadow banking sector and counter the slowdown…”
January 9 – Bloomberg (Fathiya Dahrul and Harry Suhartono): “Policyholders at Indonesia’s state-owned PT Asuransi Jiwasraya are looking to the government to rescue the scandal-hit insurer, which has uncovered a $2 billion hole in its books. The crisis affects 17,000 buyers of investment products and 7 million clients, and may pose systemic risks, Indonesia’s audit board said…”
Europe Watch:
January 7 – Associated Press (Pan Pylas): “Inflation across the 19-country eurozone spiked to a six-month high in December even before the recent jump in oil prices in the wake of escalating U.S.-Iran tensions… Prices increased across the board during December, helping the annual rate of inflation to rise to 1.3% from the previous month’s 1%. Though inflation is at its highest level since June, when it was also 1.3%, it remains way below the European Central Bank’s goal of just below 2%.”
January 8 – Financial Times (Tommy Stubbington): “Eurozone governments are on course to raise less cash from bond investors in 2020 than any year since the financial crisis, even as the European Central Bank hoovers up fresh supply and borrowing costs hover near record lows. Analysts at JPMorgan estimate that net supply of euro-area sovereign bonds this year will come to €188bn, the lowest since 2008. That figure, based on issuance plans published by national debt agencies, is derived from €762bn of bond sales over the year, while €574bn of existing bonds mature. The drop in new borrowing, down about 4% from 2019, comes at a time when ultra-low bond yields… have cut the cost of funding for governments across the world, prompting calls for them to abandon restraint in spending.”
January 7 – Reuters (Michael Nienaber): “German industrial orders fell unexpectedly in November on weak foreign demand and a lack of major contracts…, suggesting that a manufacturing slump will continue to curtail growth in Europe’s largest economy… Contracts for German goods decreased by 1.3% from the previous month, posting the steepest drop since July…”
Japan Watch:
January 6 – Reuters (Daniel Leussink): “Japan’s services sector saw its deepest contraction in more than three years in December as business activity took a hit from weak demand at home and abroad… The final seasonally adjusted Jibun Bank Japan Services Purchasing Managers’ Index (PMI) fell to 49.4 in December from 50.3 in November…”
Global Bubble Watch:
January 8 – Reuters (David Lawder): “The World Bank… trimmed its global growth forecasts slightly for 2019 and 2020 due to a slower-than-expected recovery in trade and investment despite cooler trade tensions between the United States and China… In its latest Global Economic Prospects report, the World Bank shaved 0.2 percentage point off of growth for both years, with the 2019 global economic growth forecast at 2.4% and 2020 at 2.5%.”
January 6 – Financial Times (Monica Erickson): “Individuals and institutions alike have grown very fond of high-quality US corporate bonds, which are prized for their relative safety. But after a long rally, these bonds now pose greater risk than many may realise. The duration of this class of assets — its interest-rate risk — has increased to near record highs, while spreads over the yield of equivalent Treasuries have fallen to near record lows. A pick-up in interest rates, depending on its speed and longevity, could significantly push down prices across the market, which totals over $7tn, accounting for just over a quarter of the total US bonds outstanding. That could happen even without a deterioration in credit quality.”
January 8 – Reuters (Martin Petty and Colin Packham): “Australian authorities urged another mass evacuation across the heavily populated southeast on Thursday as a return of hot weather fanned huge bushfires threatening several towns and communities.”
Leveraged Speculation Watch:
January 7 – Bloomberg (Nishant Kumar): “Crispin Odey’s main hedge fund slumped to a fourth annual loss in the last five years as his bearish bets misfired amid the longest-running equities bull market in history. The Odey European Inc. hedge fund finished 2019 down 10.1% despite a late rally in December…”
January 7 – Bloomberg (Katherine Burton): “Ray Dalio suffered his first annual loss since 2000 in his most prominent fund. Bridgewater Associates Pure Alpha II fund fell 0.5% last year, even as many of his peers posted some of their best returns since 2008. It was the fourth time he has lost money in a calendar year since starting Pure Alpha II in 1991…”
January 7 – Bloomberg (Melissa Karsh): “Hedge funds rebounded in 2019, gaining 9% after posting a loss the year before. The results were nothing to celebrate -- the S&P 500 Index returned 32% last year in the longest-running bull market in history. Last year’s performance may put further pressure on an industry struggling to keep investors from bolting. Hedge funds saw $82 billion of outflows through November, more than twice the amount for all of 2018, according to eVestment data. The industry is now on pace to record more closures than startups for a fifth straight year, according to Hedge Fund Research Inc.”
Geopolitical Watch:
January 5 – Reuters (Parisa Hafezi): “Iran announced on Sunday it would abandon limitations on enriching uranium, taking a further step back from commitments to a 2015 nuclear deal with six major powers, but it would continue to cooperate with the U.N. nuclear watchdog… ‘Iran will continue its nuclear enrichment with no restrictions .... and based on its technical needs,’ a government statement cited by television said.”
January 8 – Reuters (Babak Dehghanpisheh and Ahmed Aboulenein): “Iran spurned U.S. President Donald Trump’s call for a new nuclear pact and its commanders threatened more attacks as the Middle East remained on edge following the U.S. killing of an Iranian general and Tehran’s retaliatory missile strikes. Potentially stepping up international pressure on Tehran, U.S. officials said they believed a Ukrainian passenger plane that crashed in Iran was brought down accidentally by Iranian air defenses hours after Iran launched its missiles attacks.”
January 3 – Reuters (Polina Ivanova): “Russia’s Foreign Minister Sergei Lavrov spoke with his Iranian counterpart Mohammad Javad Zarif over the phone on Friday to discuss the killing of Iran’s military chief Qassem Soleimani… ‘Lavrov expressed his condolences over the killing,’ the statement said. ‘The ministers stressed that such actions by the United States grossly violate the norms of international law.’”
January 4 – Reuters (Ryan Woo): “The United States should stop abusing the use of force and seek solutions via dialogue, China’s foreign minister said, after a U.S. air strike in Baghdad on Friday killed Iran’s most prominent military commander. The risky behavior of the U.S. military violates the basic norms of international relations and will worsen tensions and turbulence in the region, China’s Foreign Minister Wang Yi told his Iranian counterpart Mohammad Javad Zarif…”
January 6 – CNBC (Joanna Tan): “President Donald Trump threatened Sunday to slap sanctions on Iraq after its parliament passed a resolution calling for the government to expel foreign troops from the country. Tensions in the Middle East spiraled last week after Trump called for a U.S. airstrike in Baghdad that killed a top Iranian general, Qasem Soleimani. …The U.S. president said: ‘If they do ask us to leave, if we don’t do it in a very friendly basis, we will charge them sanctions like they’ve never seen before ever. It’ll make Iranian sanctions look somewhat tame.’ ‘We have a very extraordinarily expensive air base that’s there. It cost billions of dollars to build. Long before my time. We’re not leaving unless they pay us back for it,’ Trump said.”
January 5 – Reuters (Ahmed Rasheed, Ahmed Aboulenein and Jeff Mason): “Iraq’s parliament called… for U.S. and other foreign troops to leave as a backlash grows against the U.S. killing of a top Iranian general, and President Donald Trump doubled down on threats to target Iranian cultural sites if Tehran retaliates. Deepening a crisis that has heightened fears of a major Middle East conflagration, Iran said it was taking another step back from commitments under a 2015 nuclear deal with six major powers.”
January 9 – Associated Press (Samya Kullab and Qassim Abdul-Zahra): “Iraq’s caretaker prime minister asked the U.S. secretary of state to start working out a road map for an American troop withdrawal from Iraq…, signaling his insistence on ending the U.S. military presence despite recent moves to de-escalate tensions between Iran and the U.S. Adel Abdul-Mahdi made the request… with Secretary of State Mike Pompeo… He also told Pompeo that recent U.S. strikes in Iraq were an unacceptable breach of Iraqi sovereignty and a violation of the two countries’ security agreements. The Iraqi leader asked Pompeo to ‘send delegates to Iraq to prepare a mechanism to carry out the parliament’s resolution regarding the withdrawal of foreign troops from Iraq’…”
January 8 – Financial Times (Kathrin Hille and Christian Shepherd): “There was a funfair atmosphere when Tainan Air Base in south Taiwan opened its doors to the public one Saturday morning in October. Multicoloured banners fluttered in the breeze, children pushed to get a front row spot and a ‘flying tigers’ team of pilots looped their planes overhead. But the motivation behind the display is deadly serious. Concerns are building in both Taipei and in the US — the unofficial guarantor of the island’s security — that China could be moving closer to launching the attack which it has been threatening for 70 years. ‘Militarily, the other side has been doing [its] homework for a couple of decades. The threat is real,’ says Enoch Wu, a Taiwanese former special forces office... ‘The [People’s Liberation Army] will achieve a certain credible capability to give that option to Beijing and say, here is that button you can push.’”
January 8 – Financial Times (Andrew England): “’Keep your hands off Libya’ was the blunt message delivered by Ghassan Salame, the frustrated UN envoy, when asked this week what he had to say to the foreign powers fuelling a civil war in the north African state. It is a sentiment shared by millions of Libyans whose devastated nation challenges war-torn Syria for the unwanted title of being home to the world’s most internationalised conflict. And there have been signs this week that it was about to get worse. On Sunday, Recep Tayyip Erdogan, Turkey’s president, announced that Turkish troops had been deployed to support the besieged UN-backed government in Tripoli. Hours later, General Khalifa Haftar, who triggered the conflict by launching an offensive on the Libyan capital in April, seized Sirte, a strategically and symbolically important port city. Both moves signalled a dangerous escalation.”
January 9 – Associated Press (Samya Kullab and Qassim Abdul-Zahra): “Iraq’s caretaker prime minister asked the U.S. secretary of state to start working out a road map for an American troop withdrawal from Iraq…, signaling his insistence on ending the U.S. military presence despite recent moves to de-escalate tensions between Iran and the U.S. Adel Abdul-Mahdi made the request… with Secretary of State Mike Pompeo… He also told Pompeo that recent U.S. strikes in Iraq were an unacceptable breach of Iraqi sovereignty and a violation of the two countries’ security agreements. The Iraqi leader asked Pompeo to ‘send delegates to Iraq to prepare a mechanism to carry out the parliament’s resolution regarding the withdrawal of foreign troops from Iraq’…”
January 8 – Financial Times (Kathrin Hille and Christian Shepherd): “There was a funfair atmosphere when Tainan Air Base in south Taiwan opened its doors to the public one Saturday morning in October. Multicoloured banners fluttered in the breeze, children pushed to get a front row spot and a ‘flying tigers’ team of pilots looped their planes overhead. But the motivation behind the display is deadly serious. Concerns are building in both Taipei and in the US — the unofficial guarantor of the island’s security — that China could be moving closer to launching the attack which it has been threatening for 70 years. ‘Militarily, the other side has been doing [its] homework for a couple of decades. The threat is real,’ says Enoch Wu, a Taiwanese former special forces office... ‘The [People’s Liberation Army] will achieve a certain credible capability to give that option to Beijing and say, here is that button you can push.’”
January 8 – Financial Times (Andrew England): “’Keep your hands off Libya’ was the blunt message delivered by Ghassan Salame, the frustrated UN envoy, when asked this week what he had to say to the foreign powers fuelling a civil war in the north African state. It is a sentiment shared by millions of Libyans whose devastated nation challenges war-torn Syria for the unwanted title of being home to the world’s most internationalised conflict. And there have been signs this week that it was about to get worse. On Sunday, Recep Tayyip Erdogan, Turkey’s president, announced that Turkish troops had been deployed to support the besieged UN-backed government in Tripoli. Hours later, General Khalifa Haftar, who triggered the conflict by launching an offensive on the Libyan capital in April, seized Sirte, a strategically and symbolically important port city. Both moves signalled a dangerous escalation.”