Please join Doug Noland and David McAlvany Thursday, October 22nd, at 4:00pm Eastern/ 2:00pm Mountain time for the Tactical Short Q3 recap conference call, “Managing Short Exposure in Extreme Uncertainty.” Click here to register.
The President is diagnosed with COVID-19, with rapidly worsening symptoms prompting a Friday evening Marine One flight to Walter Reed Medical Center. By Monday, he is back to the White House apparently feeling spryer than when he was a man 20 years younger. Reversing course on Tuesday, the President abruptly calls off stimulus negotiations “until after the election.” Negotiations were back on Wednesday, with the administration pursuing piecemeal stimulus (airlines, individual stimulus checks). By midweek the President was referring to his COVID infection as “a blessing from God.”
Thursday President Trump was calling for a “skinny” stimulus package. Friday morning saw the White House suddenly “open to going with something bigger,” and by lunchtime Larry Kudlow was on Fox News saying, “The President has approved a revised package. He would like to do a deal.” Appearing with Rush Limbaugh later in the afternoon, it was “I would like to see a bigger stimulus package, frankly, than either the Democrats or the Republicans are offering.” A little Weird.Meanwhile, Senate Majority Leader McConnell on Friday stated passage of stimulus legislation was unlikely prior to the election. If the week wasn’t Weird enough, with 54 million watching, a fly lands on the vice president’s head during the VP debate and - to the delight of comedians everywhere - made itself at home for a full two minutes.
At least for now, for the markets it's Weirder the Better. The S&P500 gained 3.8% this week, its strongest advance in three months. The Banks (BKX) jumped 6.4%, and the Transports rose 5.0%. Curiously, the Utilities gained 4.8%. The broader market outperformed. The small cap Russell 2000 surged 6.4%, with an 11-session rise of 12.8%. The S&P400 Mid-Cap Index gained 4.9% for the week and 11.4% over 11 sessions. Jumping 8.0% this week, the Semiconductors ended the week at all-time highs. The Biotechs (BTK) advanced 5.7%.
Post the presidential debate and the President’s COVID infection, Joe Biden has further extended his lead in the polls. The possibility of a “blue wave” has become real – and markets are fine with it (why do I sense markets would be just as fine with a big Trump lead?). An almost certain reversal of President Trump’s large corporate tax cut (in the event of a Biden win) is apparently more than offset by prospects for mammoth fiscal stimulus. Senator Harris’s more conciliatory comments regarding China stirred the imagination of a more constructive U.S. tone for fraught U.S./China relations.
News, analysis and punditry (i.e. “the narrative”) invariably follow market direction. The notion of a “blue wave” would not have been so comforting to the markets a few months back. Traditionally, higher taxes and redistribution policies were anathema to equities. Treasury and bond markets would in the past have fiercely protested today’s massive structural deficit spending (as far as the eye can see).
I hold out some hope markets have not completely turned history on its head. The formidable Biden lead raises the odds of a decisive election-night outcome, averting the awful scenario of a contested election, a drawn-out court fight and potentially violent protests across the country.
I have posited the U.S. election is history’s single largest event for market hedging (“Brexit” not as clearly an individual event). The possibility of an unwind of hedges creates uncertainty and the distinct possibility of confounding market reactions to election developments.
With Biden’s lead appearing increasingly insurmountable (with less than four weeks to go), we can assume there was this week significant buying associated with the partial reversal of market hedges. Especially in such a highly speculative market environment, the prospect of an unwind of a massive hedging position stokes speculative zeal (to get ahead of this train). Throw in prospects for yet another brutal short squeeze and one can explain the impetus behind this week’s manic markets.
It’s worth noting stocks this week surged 5.0% in Mexico, 3.7% in Brazil, 4.7% in India, and 2.6% in China (CSI 300). In EM currencies, Brazil’s real rallied 2.8%, Mexico’s peso 2.3%, Russia’s ruble 1.8% and Poland’s zloty 1.7%. China’s renminbi surged 1.58% in Friday trading, in what Bloomberg called “its biggest rally in more than 13 years.” From U.S. small caps and Utilities to EM equities and currencies, market operators have been attempting to identify vulnerable markets that would be expected to suffer in the event of U.S. election mayhem (with traditional hedges, including Treasuries and equities put options, less than appealing).
Well, “par for the course” in the Age of Market Dysfunction. This trade has blown up in everyone’s face. Markets these days are much more a reflection of speculative dynamics than underlying fundamentals.
October 5 – Associated Press (Andrew Taylor): “New, eye-popping federal budget figures… show an enormous $3.1 trillion deficit in the just-completed fiscal year, a record swelled by coronavirus relief spending that pushed the tally of red ink to three times that of last year. The Congressional Budget Office released the unofficial 2020 figures…, saying the deficit equaled 15% of the U.S. economy, a huge gap that was the largest since the government undertook massive borrowing to finance the final year of World War II. The government spent $6.6 trillion last year and borrowed 48 cents of every dollar it spent, CBO said. The numbers amount to a 47% increase in spending, led by $578 billion for the Paycheck Protection Program for smaller businesses, and a $443 billion increase in unemployment benefits over the past six months alone.”
Will the bond market remain okay with the “blue wave” scenario? Is a repeat of this year’s stunning $3.1 TN (15% of GDP!) fiscal deficit possible? My baseline would be annual deficits approaching 10% of GDP for the next few years – although a fiscal 2021 deficit again exceeding $3 TN is a distinct possibility in the event of multiple stimulus bills from a new administration working together with a Democratically controlled House and Senate.
The stock market now relishes the thought of ongoing massive deficit spending. This is to feed incomes and corporate earnings, all without the traditional fear of rising policy rates, surging bond yields and general market instability. “Crowding out” is the latest time-honored concept relegated to history’s ash heap.
How did enormous deficits become integral to the stock market miracle? Why does the Treasury market not shudder at the prospect of unending Trillions of new supply?
Federal Reserve Credit expanded $3.294 TN over the past 56 weeks. Multiple Fed officials this week made it clear the Fed was willing and able to continue this experiment in unbridled Federal Reserve “money” creation.
October 6 – CNBC (Jeff Cox): “Federal Reserve Chairman Jerome Powell called… for continued aggressive fiscal and monetary stimulus for an economic recovery that he said still has ‘a long way to go.’ Noting progress made in job creation, goods consumption and business formation, among other areas, Powell said that now would be the wrong time for policymakers to take their foot off the gas. Doing so, he said, could ‘lead to a weak recovery, creating unnecessary hardship for households and businesses’ and thwart a rebound that thus far has progressed more quickly than expected. ‘By contrast, the risks of overdoing it seem, for now, to be smaller,’ Powell added… ‘Even if policy actions ultimately prove to be greater than needed, they will not go to waste. The recovery will be stronger and move faster if monetary policy and fiscal policy continue to work side by side to provide support to the economy until it is clearly out of the woods.’”
Chairman Powell made his contribution to Weird Week. For the record, note Powell's endorsement of massive fiscal deficits just as the Treasury had closed the books on fiscal 2020 (with a deficit surpassing $3 TN) and with election day only a few weeks away. In a key week for stimulus negotiations, the Fed solidified its now tight fraternity with fiscal policy. This transformational development did not go unnoticed by the Wall Street Journal editorial board.
October 7 – Wall Street Journal (Editorial Board): “Federal Reserve officials understandably, and righteously, invoked their need for independence last year when President Trump berated them on Twitter to keep interest rates low. But what if the Fed itself decides to compromise its independence by snatching an ever-greater role in fiscal policy that is usually reserved for elected officials? That’s the question teed up by Jerome Powell’s extraordinary political intervention on Tuesday into the coronavirus relief talks. The Fed Chairman delivered a speech… in which he urged Congress to pass what he called more ‘policy intervention,’ both fiscal and monetary. Mr. Powell didn’t mention specific fiscal measures. But the speech… was clearly made with an intention to influence debates on Capitol Hill. This put him publicly on the side of House Speaker Nancy Pelosi, who wants to spend $2.2 trillion more on all and sundry federal programs. It’s important to understand how unusual this is. The Fed’s job is monetary policy and financial regulation.”
Monetization has become the Fed’s primary job – and it would appear at this point a lifetime appointment. Why is the bond market not in a tizzy over the prospect of a “blue wave” and years of massive Treasury supply? Because of the assumption the Fed will sop up whatever quantity necessary to peg bond yields at extremely low levels (prices in the stratosphere). Markets may today celebrate the prospect of massive cost-free 2021 fiscal spending. But there is an immense institutional price to be paid for the Federal Reserve as it presents the appearance of siding with the Democrats and redistribution policies.
With the Fed having bestowed Washington a blank checkbook, how will Republicans now view enormous handouts for the troubled blue states? It was inevitable – and certainly spurred on by COVID: The Federal Reserve has interjected itself into the deep divide of social and political acrimony and conflict. From 2008 to the present, the Federal Reserve faced no serious pushback to its QE experiment. Why do I imagine the Republican Party emerging from a traumatic election as born-again monetary conservatives?
The country is struggling – many of our citizens and businesses are suffering. But at this point I’m leery that potential benefits justify the enormous risks associated with unchecked fiscal and monetary stimulus. A deeper and more problematic crisis awaits when this runaway Bubble has finally run its course. And don’t for a second succumb to the notion that more “money” and spending will resolve problems. I fear the nightmare scenario where market confidence in the Fed and Washington falters right when the system is in the throes of a bursting financial Bubble.
The World Health Organization Friday reported a one-day record 350,766 global COVID infections. The rate of new cases doubled in a week in England to record highs. France reported a record 19,000 infections on Wednesday. Germany and Italy posted their largest increases since March. Spain’s government imposed an emergency lockdown on Madrid. Friday saw one-day infection records in Russia, Ukraine and Poland. WHO’s Dr. Mike Ryan summed it up: “This virus is clearly showing that it has a lot of life left in it.”
According to Bloomberg, “the seven-day average of new [U.S.] cases climbed to 46,824 on Thursday, the most since Aug. 19… Thursday’s single-day total of 56,145 was the second-highest since the June-August Sun Belt surge.” According to Johns Hopkins data, 28 states are demonstrating rising infection trends while only two are showing declines. Trends are troubling, COVID fatigue is an issue, and we’re heading into the winter months.
Much remains unclear. When does a vaccine become widely available? What percentage of the population will be willing to be vaccinated? How effective will the vaccine prove to be? At this point, a return to a semblance of normalcy still seems months away. Even with another major shot of stimulus, long-term unemployment will be a serious issue. Business failures will continue to mount. And it's difficult to envisage a scenario where Credit losses don’t mount.
October 6 – Reuters (Marc Jones): “The COVID-19 shock will double company default rates across the United States and Europe over the next 9 months, ratings agency S&P Global said…, although it noted that the record downgrade pace of recent months was now slowing. S&P predicted U.S. corporate default rates would rise to 12.5% from 6.2% and saw Europe’s rate going to 8.5% from 3.8%. This year’s crisis has already seen more than 2,000 companies’ or countries’ ratings or ‘outlook’ scores cut and nearly $400 billion worth of debt drop into ‘junk’ territory, but in the months ahead focus will shift to defaults and survival. Alexandra Dimitrijevic, S&P’s Global Head of Research, said that with the number of firms on downgrade warnings at record levels -- 37% of the companies S&P rates and 30% of the banks -- and credit quality dropping, default rates are set to jump.”
A 12.5% U.S. corporate default rate would be incongruous with record stock prices. It would certainly conflict with current corporate bond yields (and ETF share prices). Why the extraordinary divergence between ebullient markets and a depressing spike in corporate defaults?
In spite of the dismal Credit backdrop for many companies, overall financial conditions remain extraordinarily loose. Weird. The vast majority of companies today enjoy ultra-easy access to cheap finance – compliments of bountiful monetary and fiscal stimulus. Yet the system is acutely vulnerable to any de-risking/deleveraging dynamic and attendant tightening of financial conditions.
How might this play out around the election? The dollar should be vulnerable to prospects for ongoing egregious monetary and fiscal stimulus. One would think massive supply on the horizon makes Treasuries susceptible, although bonds glare at the Weird stock market and see a Bubble very much on borrowed time. One of these days, instability in the dollar and Treasury market might have the Fed thinking twice about boundless QE. A clean sweep by the Dems could prove more of a test than currently anticipated by an irrationally exuberant stock market.
For the Week:
The S&P500 jumped 3.8% (up 7.6% y-t-d), and the Dow rose 3.3% (up 0.2%). The Utilities jumped 4.8% (up 4.8%). The Banks surged 6.4% (down 29.8%), and the Broker/Dealers rose 4.1% (up 2.1%). The Transports advanced 5.0% (up 8.8%). The S&P 400 Midcaps jumped 4.9% (down 3.2%), and the small cap Russell 2000 surged 6.4% (down 1.9%). The Nasdaq100 advanced 4.2% (up 34.3%). The Semiconductors surged 8.0% (up 29.7%). The Biotechs rallied 5.7% (up 10.2%). With bullion rising $31, the HUI gold index rose 4.8% (up 40.6%).
Three-month Treasury bill rates ended the week at 0.0925%. Two-year government yields gained two bps to 0.16% (down 141bps y-t-d). Five-year T-note yields rose five bps to 0.34% (down 135bps). Ten-year Treasury yields jumped seven bps to 0.77% (down 114bps). Long bond yields rose nine bps to 1.57% (down 82bps). Benchmark Fannie Mae MBS yields added a basis point to 1.40% (down 131bps).
Greek 10-year yields sank 12 bps to 0.86% (down 57bps y-t-d). Ten-year Portuguese yields fell four bps to 0.18% (down 26bps). Italian 10-year yields dropped six bps to 0.72% (down 69bps). Spain's 10-year yields fell five bps to 0.18% (down 29bps). German bund yields added a basis point to negative 0.53% (down 34bps). French yields slipped one basis point to negative 0.27% (down 38bps). The French to German 10-year bond spread narrowed two to 26 bps. U.K. 10-year gilt yields rose three bps to 0.28% (down 54bps). U.K.'s FTSE equities index gained 1.9% (down 20.2%).
Japan's Nikkei Equities Index rallied 2.6% (down 0.2% y-t-d). Japanese 10-year "JGB" yields increased a basis point to 0.04% (up 5bps y-t-d). France's CAC40 rose 2.5% (down 17.3%). The German DAX equities index jumped 2.9% (down 1.5%). Spain's IBEX 35 equities index advanced 2.9% (down 27.2%). Italy's FTSE MIB index gained 2.8% (down 16.6%). EM equities were mostly higher. Brazil's Bovespa index rallied 3.7% (down 15.7%), and Mexico's Bolsa surged 5.0% (down 11.6%). South Korea's Kospi index rose 2.8% (up 8.8%). India's Sensex equities index surged 4.7% (down 1.8%). China's Shanghai Exchange increased 1.7% (up 7.3%). Turkey's Borsa Istanbul National 100 index rallied 1.8% (up 1.9%). Russia's MICEX equities index dipped 0.6% (down 7.0%).
The S&P500 jumped 3.8% (up 7.6% y-t-d), and the Dow rose 3.3% (up 0.2%). The Utilities jumped 4.8% (up 4.8%). The Banks surged 6.4% (down 29.8%), and the Broker/Dealers rose 4.1% (up 2.1%). The Transports advanced 5.0% (up 8.8%). The S&P 400 Midcaps jumped 4.9% (down 3.2%), and the small cap Russell 2000 surged 6.4% (down 1.9%). The Nasdaq100 advanced 4.2% (up 34.3%). The Semiconductors surged 8.0% (up 29.7%). The Biotechs rallied 5.7% (up 10.2%). With bullion rising $31, the HUI gold index rose 4.8% (up 40.6%).
Three-month Treasury bill rates ended the week at 0.0925%. Two-year government yields gained two bps to 0.16% (down 141bps y-t-d). Five-year T-note yields rose five bps to 0.34% (down 135bps). Ten-year Treasury yields jumped seven bps to 0.77% (down 114bps). Long bond yields rose nine bps to 1.57% (down 82bps). Benchmark Fannie Mae MBS yields added a basis point to 1.40% (down 131bps).
Greek 10-year yields sank 12 bps to 0.86% (down 57bps y-t-d). Ten-year Portuguese yields fell four bps to 0.18% (down 26bps). Italian 10-year yields dropped six bps to 0.72% (down 69bps). Spain's 10-year yields fell five bps to 0.18% (down 29bps). German bund yields added a basis point to negative 0.53% (down 34bps). French yields slipped one basis point to negative 0.27% (down 38bps). The French to German 10-year bond spread narrowed two to 26 bps. U.K. 10-year gilt yields rose three bps to 0.28% (down 54bps). U.K.'s FTSE equities index gained 1.9% (down 20.2%).
Japan's Nikkei Equities Index rallied 2.6% (down 0.2% y-t-d). Japanese 10-year "JGB" yields increased a basis point to 0.04% (up 5bps y-t-d). France's CAC40 rose 2.5% (down 17.3%). The German DAX equities index jumped 2.9% (down 1.5%). Spain's IBEX 35 equities index advanced 2.9% (down 27.2%). Italy's FTSE MIB index gained 2.8% (down 16.6%). EM equities were mostly higher. Brazil's Bovespa index rallied 3.7% (down 15.7%), and Mexico's Bolsa surged 5.0% (down 11.6%). South Korea's Kospi index rose 2.8% (up 8.8%). India's Sensex equities index surged 4.7% (down 1.8%). China's Shanghai Exchange increased 1.7% (up 7.3%). Turkey's Borsa Istanbul National 100 index rallied 1.8% (up 1.9%). Russia's MICEX equities index dipped 0.6% (down 7.0%).
Investment-grade bond funds saw inflows of $7.026 billion, and junk bond funds posted positive flows of $4.014 billion (from Lipper).
Freddie Mac 30-year fixed mortgage rates slipped one basis point to 2.87% (down 70bps y-o-y). Fifteen-year rates added a basis point to 2.37% (down 68bps). Five-year hybrid ARM rates declined one basis point to 2.89% (down 46bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-year fixed rates down three bps to 3.08% (down 92bps).
Federal Reserve Credit last week gained $3.3bn to $7.020 TN. Over the past year, Fed Credit expanded $3.110 TN, or 80%. Fed Credit inflated $4.209 Trillion, or 150%, over the past 413 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt last week declined $1.7bn to $3.410 TN. "Custody holdings" were down $8.3bn, or 0.2%, y-o-y.
M2 (narrow) "money" supply dropped $67.5bn last week to $18.653 TN, with an unprecedented 31-week gain of $3.145 TN. "Narrow money" surged $3.548 TN, or 23.5%, over the past year. For the week, Currency increased $3.9bn. Total Checkable Deposits sank $70bn, while Savings Deposits gained $8.9bn. Small Time Deposits declined $5.4bn. Retail Money Funds fell $4.8bn.
Total money market fund assets declined $21.6bn to $4.382 TN. Total money funds surged $913bn y-o-y, or 26.3%.
Total Commercial Paper recovered $19.0bn to $964bn. CP was down $128bn, or 11.7% year-over-year.
Currency Watch:
October 4 – Financial Times (Stephen Roach): “The riddle once posed in the 1960s by former French finance minister (eventually president) Valéry Giscard d’Estaing is about to be solved. Giscard bemoaned a US that took advantage of its privileged position as the world’s dominant reserve currency and drew freely on the rest of the world to support its over-extended standard of living. That privilege is about to be withdrawn. A crash in the dollar is likely and it could fall by as much as 35% by the end of 2021. The reason: a lethal interplay between a collapse in domestic saving and a gaping current account deficit. In the second quarter of 2020, net domestic saving — depreciation-adjusted saving of households, businesses and the government sector — plunged back into negative territory for the first time since the global financial crisis. At -1.2% in the second quarter, net domestic saving as a share of national income was fully 4.1 percentage points below the first quarter, the steepest quarterly plunge in records that go back to 1947.”
For the week, the U.S. dollar index declined 0.8% to 93.03 (down 3.6% y-t-d). For the week on the upside, the Brazilian real increased 2.8%, the Mexican peso 2.3%, the Norwegian krone 2.0%, the Swedish krona 1.8%, the Canadian dollar 1.4%, the South Korean won 1.4%, the Australian dollar 1.1%, the Swiss franc 1.1%, the euro 0.9%, the British pound 0.8%, the Singapore dollar 0.7%, the New Zealand dollar 0.4%, and the South African rand 0.4%. For the week on the downside, the Japanese yen dipped 0.3%. The Chinese renminbi surged 1.44% versus the dollar this week (up 4.01% y-t-d).
Commodities Watch:
The Bloomberg Commodities Index jumped 4.9% (down 9.4% y-t-d). Spot Gold rose 1.6% to $1,930 (up 27.2%). Silver surged 4.5% to $25.108 (up 40.1%). WTI crude rallied $3.55 to $40.60 (down 34%). Gasoline jumped 7.1% (down 39%), and Natural Gas surged 12.4% (up 25%). Copper rose 3.5% (up 10%). Wheat gained 3.6% (up 6%). Corn jumped 4.0% (up 2%).
Coronavirus Watch:
October 5 – Bloomberg (Jonathan Levin and Kristen V Brown): “Covid-19 is spreading again across most of the U.S., hammering rural America and smaller cities and raising anxiety in New York, as experts warn that school reopenings and colder weather may cause the situation to rapidly deteriorate. In 34 states, the seven-day average of new cases is higher now than it was a month ago. Although the virus has waned in populous states including California and Florida, it is wreaking unprecedented havoc in the Midwest and making an incipient return in parts of the Northeast.”
October 6 – CNBC (Amanda Macias): “The Pentagon said… that top military leaders are self-quarantining after one of the Coast Guard service chiefs tested positive for the coronavirus. Coast Guard Vice Commandant Adm. Charles Ray tested positive for coronavirus on Monday after experiencing mild symptoms of the disease over the weekend.”
Market Instability Watch:
October 7 – Bloomberg (Sam Potter and Anchalee Worrachate): “Investors made the 2020 presidential elections the most-expensive event to hedge in history. In less than a week, they’ve discovered there’s a lot more than just the vote to worry about. From President Donald Trump’s coronavirus diagnosis to his tweet announcing an end to stimulus talks and the House threatening to breakup tech giants, surprises keep landing on Wall Street -- and it’s putting traders on edge. The Cboe Volatility Index… has risen for six straight sessions and was flirting with a seventh on Wednesday. A similar gauge for U.S. Treasuries just surged after weeks of calm. The S&P 500 has posted a dozen moves of more than 1% in the past month, yet the benchmark has gone nowhere.”
October 6 – Financial Times (Colby Smith and Tommy Stubbington): “Investors are facing a conundrum in the run-up to what is expected to be a uniquely turbulent US presidential election: how to insulate their portfolios from a stock market sell-off. Traditional safe assets have recently served investors poorly as an equity hedge, with government bonds barely moving and gold prices falling during September’s stock market wobble. Ahead of a potentially disputed result on November 3, fund managers are casting around for new harbours to shelter from a potential storm. Popular strategies include short-selling currencies that mirror stock movements; derivatives that provide insurance against falls; and emerging market bonds that offer a higher yielding, though riskier, hedge for equity holdings.”
October 8 – Financial Times (Colby Smith and Richard Henderson): “Investors are waking up to the risk of a decline in long-term US government bond prices, in anticipation of a more robust economic recovery and hefty additional government spending after November’s presidential election. The $20tn Treasuries market had grown sleepy in the months since the Federal Reserve slashed policy rates to zero to tackle the financial effects of coronavirus. Expected volatility, as measured by the ICE BofA Move Index, hovered around record lows, and the benchmark 10-year Treasury yield barely budged from about 0.6%... But Treasuries have broken free from that slumber in recent days, with long-dated Treasury yields rising sharply since the start of the month to their highest levels since June.”
October 3 – Wall Street Journal (James Mackintosh): “September hurt shareholders, not only because stocks fell but also because the things they’d bought to protect their portfolios also fell. From the S&P 500’s high on the 2nd of the month, stocks, Treasurys, gold, bitcoin and the VIX volatility index all dropped. This total failure of hedging is unusual, but investors need to get used to the idea that Treasurys no longer provide the ballast for a portfolio. It wasn’t just the normal pattern of asset returns that broke down… High-quality stocks, companies with strong balance sheets and reliable profits, fell by more than the market. Smaller companies beat bigger companies.”
October 4 – Bloomberg (Stephen Spratt and John Ainger): “Goldman Sachs… is shaking up the most popular Treasury trade out there. The Wall Street giant recommended in an Oct. 2 note that investors short 10-year U.S. bonds versus their two- and 30-year counterparts, a position that will benefit if 10-year yields rise more than the other two tenors. Traders have been piling into straightforward bets on steepening, a scenario that has received additional support as polls and betting websites indicate former Vice President Joe Biden’s odds of beating President Donald Trump are improving, burnishing the outlook for more stimulus.”
Global Bubble Watch:
October 6 – Financial Times (Stefan Wagstyl): “The world’s billionaires have seen their fortunes soar to record levels during the Covid-19 pandemic, as many doubled down on risk in choppy financial markets and profited from the tech boom. Their collective wealth hit $10.2tn this summer, exceeding the previous high set in 2017, according to a widely followed annual study from Swiss bank UBS. The total number of billionaires reached 2,189, up from 2,158 in 2017.”
October 7 – Reuters: “Billionaire wealth reached record high levels amid the COVID-19 pandemic, a report by UBS and PwC found, as a rally in stock prices and gains in technology and healthcare helped the wealth of the world's richest break the $10 trillion mark. The report, covering over 2,000 billionaires representing some 98% of the cohort's total wealth, found billionaire wealth grew by more than a quarter during the early months of the pandemic to reach $10.2 trillion in July, breaking the previous record of $8.9 trillion at the end of 2019. The figure represents a five- to ten-fold rise over the past 25 years… Between April 7 and July 31 this year, billionaires across every industry covered by the study saw their wealth rise by double digits, with billionaires in the technology, healthcare and industrial sectors leading the pack with 36%-44% gains.”
October 5 – Financial Times (Chris Giles): “The IMF has issued a rallying call to rich countries around the world to increase public investment and spark a strong economic recovery from the coronavirus pandemic. Advanced economies should worry less about their public debt, but instead take advantage of historically low borrowing costs to increase spending on infrastructure maintenance immediately, the IMF said in a report… “
October 7 – Reuters (Matthew Green, Kate Abnett): “Last month was the world’s hottest September on record, with unusually high temperatures recorded off Siberia, in the Middle East, and in parts of South America and Australia, the European Union’s Copernicus Climate Change Service said… Extending a long-term warming trend caused by emissions of heat-trapping gases, high temperatures this year have played a major role in disasters from fires in California and the Arctic to floods in Asia, scientists say. ‘As we go into an even warmer world, certain extremes are likely to happen more often and be more intense,’ Copernicus senior scientist Freja Vamborg told Reuters…”
October 6 – Bloomberg (Leika Kihara): “Bank of Japan Governor Haruhiko Kuroda said… climate change is among the biggest challenges facing the global economy, joining a growing debate about how policymakers should address the growth risks posed by global warming. Kuroda… said some regions in Asia are particularly vulnerable to the economic consequences of natural disasters resulting from climate change. ‘Climate change, how to realise a green economy ... These issues are really huge and I must say the most challenging issues faced by the global economy,’ Kuroda said…”
Trump Administration Watch:
October 8 – Reuters (Richard Cowan): “U.S. President Donald Trump on Thursday said talks with Congress have restarted over further COVID-19 economic relief and that there was a good chance a deal could be reached, but gave no other details about a possible agreement. ‘Now they are starting to work out,’ he told Fox Business Network in a telephone interview about talks, after he cut off negotiations via a post on Twitter earlier this week.”
October 6 – Bloomberg (Amanda Albright and Shruti Singh): “President Donald Trump’s decision to halt coronavirus stimulus talks with Congress means America’s pandemic-stricken states and cities aren’t likely to get any financial help soon, virtually ensuring additional rounds of spending cuts, layoffs and tax increases that will deal a fresh hit to any economic recovery… ‘America’s cities, towns and villages are reeling from the financial impact of the pandemic while continuing to expend significant resources to combat ongoing cases of COVID-19, recover from natural disasters and provide essentials services to their residents,’ Clarence Anthony, chief executive officer of the National League of Cities, said… ‘We can expect severe economic consequences from the failed negotiations, including more businesses closing and more public and private sector layoffs.’”
October 7 – Bloomberg (Nick Wadhams, Saleha Mohsin, and Jennifer Jacobs): “The Trump administration is exploring restrictions on billionaire Jack Ma’s Ant Group as well as Tencent Holdings Ltd. over concerns that their digital payment platforms threaten U.S. national security, according to people familiar…, a move that risks infuriating China and disrupting what could be the world’s largest initial public offering. Debate over how and whether to restrict Ant Group’s and Tencent’s payment systems has accelerated among senior U.S. officials in recent weeks though a final decision isn’t imminent…”
Federal Reserve Watch:
October 3 – Bloomberg (Christopher Condon): “Federal Reserve Bank of Boston President Eric Rosengren said the long period of low interest rates before the coronavirus pandemic is contributing to the depth of the current recession. ‘The slow build-up of risk in the low-interest-rate environment that preceded the current recession likely will make the economic recovery from the pandemic more difficult,’ Rosengren said in the text of a speech he’ll deliver Thursday… ‘The increased risk build-up, such as the reaching-for-yield behavior in commercial real estate or increased corporate leverage, make economic downturns including this one more severe,’ he said.”
October 7 – Bloomberg (Catarina Saraiva): “Federal Reserve officials were challenged… to make big policy changes to combat economic and racial inequality. In response, the presidents of the Atlanta, Boston and Minneapolis reserve banks pledged to shake up some long-held practices -- including adding more minority and labor voices to its Beige Book… Ursula Burns, the former CEO of Xerox Holdings Corp., said the U.S. central bank, the largest and arguably most influential in the world, isn’t serving all Americans. ‘The Federal Reserve as the economic policy instrument in this country absolutely has to know, be passionate about, be interested in not just the wealthiest or the median, but all the people,’ Burns said… Believing it’s not the Fed’s job to help solve economic problems along racial lines is ‘ducking’ the issue, she said…”
October 7 – Financial Times (James Politi and Colby Smith): “Federal Reserve officials offered few additional clues to investors on the implementation of the central bank’s new monetary policy guidance, saying it was not an ‘unconditional commitment’ to keeping interest rates low regardless of economic conditions. At last month’s FOMC meeting, the US central bank said it would not increase interest rates until the economy had reached full employment, and inflation had reached 2% and was on track to exceed that target for some time.”
October 7 – Reuters (Ann Saphir): “The Federal Reserve’s new pledge to keep interest rates at zero until inflation is on track to ‘moderately’ exceed 2% has come under fire for being overly vague and leaving too much up to U.S. central bankers’ judgment, but that is exactly the point, a key author of the pledge said… ‘Moderate isn’t a number ... it’s a guard rail’ against expectations that the Fed would tolerate very high or persistently high inflation, New York Fed President John Williams said... ‘It’s also about proportionality,’ he added… ‘There’s flexibility, and there’s some discretion around that,’ Williams said. ‘It is specific to the circumstances, and I would also say it is specific to where the economy is.’”
October 5 – Reuters (Ann Saphir): “Chicago Federal Reserve Bank President Charles Evans… said he expects U.S. inflation to reach 2% by 2023 and wants to push it to 2.5% to offset years of below-target price rises. The Fed ‘needs to have an ‘in it to win it’ attitude toward our inflation objective,’ Evans said at a virtual meeting of the National Association for Business Economics. ‘We’ve got to overshoot for sure,’ he told Bloomberg TV later. ‘I would be quite pleased if could get inflation, core inflation, up to 2.5% for a time.’”
October 7 – Reuters (Ann Saphir): “The U.S. central bank has room to expand its balance sheet, but with long-term borrowing costs already low, what businesses and households really need is more government grants and aid, Chicago Federal Reserve Bank President Charles Evans said… ‘I think we have the capacity to do more asset purchases,’ Evans told reporters. The Fed could also ease financial conditions by weighting its purchases to more longer-term securities, he said. But though there will come a time when the Fed will need to give more explicit guidance on the pace and type of its asset purchases, Evans said he is comfortable with the Fed’s current guidance that focuses on the path of interest rates.”
October 5 – Bloomberg (Matthew Boesler): “Federal Reserve Bank of Chicago President Charles Evans said he would welcome 2.5% inflation in the U.S. for a time in order to average out the current period in which price pressures are running below the central bank’s 2% target. ‘I think we have to cross over, beyond 2%, with some momentum,’ Evans said… ‘I would be quite pleased if we could get core inflation up to 2.5% for a time.”
U.S. Bubble Watch:
October 5 – Wall Street Journal (Eric Morath, Theo Francis and Justin Baer): “A two-track recovery is emerging from the country’s pandemic-driven economic contraction. Some workers, companies and regions show signs of coming out fine or even stronger. The rest are mired in a deep decline with an uncertain path ahead. Just months ago, economists were predicting a V-shaped recovery… What has developed is more like a K. On the upper arm of the K are well-educated and well-off people, businesses tied to the digital economy or supplying domestic necessities, and regions such as tech-forward Western cities. By and large, they are prospering. On the bottom arm are lower-wage workers with fewer credentials, old-line businesses and regions tied to tourism and public gatherings. They can expect to bear years-long scars from the crisis. The divergence helps explain the striking disconnect of a stock market and household wealth near record highs, while lines stretch at food banks and applications for jobless benefits continue to grow.”
October 3 – New York Times (Jeanna Smialek, Ben Casselman and Gillian Friedman): “The United States economy is facing a tidal wave of long-term unemployment as millions of people who lost jobs early in the pandemic remain out of work six months later and job losses increasingly turn permanent. The Labor Department said… 2.4 million people had been out of work for 27 weeks or more, the threshold it uses to define long-term joblessness. An even bigger surge is on the way: Nearly five million people are approaching long-term joblessness over the next two months. The same report showed that even as temporary layoffs were on the decline, permanent job losses were rising sharply.”
October 7 – The Hill (Niv Elis): “The number of people who have joined the ranks of long-term unemployment has spiked to a record high in a worrying sign of the economic recovery’s health. …The number of people out of work for more than 27 weeks increased to 2.4 million in September, an increase of 32.5% from the previous month. There are 4.9 million people who have been unemployed between 15 and 26 weeks. Workers who have been separated from their jobs for more than 6 months typically have a more difficult time getting back to work even once the economy improves. ‘Last week we saw the biggest spike in long-term unemployment since they started measuring long-term unemployment,’ said Michele Evermore, senior researcher and policy analyst at the National Employment Law Project.”
October 7 – Reuters (Karen Pierog and Maria Caspani): “U.S. state and city leaders are grappling with whether to delay tough budget decisions in the wake of President Donald Trump’s shutdown of negotiations on a comprehensive stimulus package ahead of the Nov. 3 election. Democratic New York Governor Andrew Cuomo told reporters… he was holding off on actions to close a $14.5 billion budget deficit on his belief that Democrats will win the White House and control of the U.S. Senate and will pass federal aid. ‘The only way to get close to closing that deficit within the state’s abilities, you would have to do a tax increase. You would have to cut expenses. And you would have to borrow,’ Cuomo said. ‘This would do tremendous economic damage to the state.’”
October 5 – Reuters (Dan Burns): “U.S. commercial bankruptcy filings are up 33% so far this year with new cases in September surging by 78% from a year earlier as the recession triggered by the COVID-19 pandemic hits small businesses… Chapter 11 bankruptcy filings totaled 747 last month, up from 420 a year earlier and from 525 in August, legal services firm Epiq said… Year-to-date filings total 5,529, a third higher than in the first three quarters of 2019. ‘These commercial filings are primarily small businesses that do not have access to capital or stimulus,” Deirdre O’Connor, managing director of corporate restructuring at Epiq, said… ‘Unfortunately, those bankruptcies will continue to rise in the current economic environment.’”
October 6 – Reuters (Dan Burns): “The U.S. trade deficit surged in August to the largest in 14 years with imports climbing again, suggesting that trade could be a drag on economic growth in the third quarter. The… trade deficit jumped 5.9% to $67.1 billion, the widest since August 2006… Imports increased by 3.2% to $239 billion. Goods imports rose $6.5 billion to $203 billion. Exports increased 2.2% to $171.9 billion. Goods exports rose $3.5 billion to $119.1 billion. The closely watched trade deficit with China decreased $1.9 billion to $26.4 billion in August.”
October 8 – Reuters (Dan Burns): “The number of Americans filing new claims for jobless benefits inched down last week, signaling the U.S. labor market is making little fresh headway in getting millions of people back on the job after being out of work due to COVID-19 disruptions. Initial claims for state unemployment benefits totaled a seasonally adjusted 840,000 for the week ended Oct. 3… The number of people continuing to draw benefits after their initial claim for assistance fell to 10.976 million in the week ended Sept. 26 from 11.979 million the week before.”
October 5 – Reuters (Lucia Mutikani): “U.S. services industry activity picked up in September, pulling above a level that prevailed before the COVID-19 pandemic struck the nation, amid increases in new orders and employment. The Institute for Supply Management (ISM) said… its non-manufacturing activity index rose to a reading of 57.8 last month from 56.9 in August… The ISM survey’s measure of new orders for the services industry increased to a reading of 61.5 in September after dropping to 56.8 in August.”
October 7 – CNBC (Diana Olick): “Mortgage rates moved even lower last week after setting multiple record lows in recent months, spurring more borrowers to call their lenders and apply for a refinance… Refinance application volume, which is most sensitive to weekly rate moves, rose 8% for the week and was 50% higher than a year ago… Applications for a mortgage to purchase a home fell 2% for the week but were 21% higher than a year ago.”
October 7 – Yahoo Finance (Myles Udland): “The resilience of the U.S. consumer has been a consistent theme in the Morning Brief over the last several weeks. But the country’s youngest consumers are hunkering down during the pandemic. And their outlays have never been so low. Analysts at Piper Sandler on Tuesday released their latest semi-annual survey of U.S. teens, which found that teen spending fell to a record low during the fall. As of the firm’s fall survey, annual teen spending averaged just $2,150, down 5% from the spring, 9% from last year, and eclipses the previous survey low recorded in the fall of 2011.”
October 7 – Reuters (Nandita Bose and Diane Bartz): “A U.S. House of Representatives panel looking into abuses of market power by four big technology companies found they used ‘killer acquisitions’ to smite rivals, charged exorbitant fees and forced small businesses into ‘oppressive’ contracts in the name of profit. The antitrust subcommittee of the Judiciary Committee recommended that Alphabet Inc's Google, Apple Inc, Amazon.com and Facebook - with a combined market value of over $5 trillion - should not both control and compete in related businesses. The panel’s report broadly recommended structural separations but stopped short of saying a specific company should be broken up. The scathing 449-page report… suggested expansive changes to antitrust law and described dozens of instances where the companies misused their power.”
October 7 – Bloomberg (Joe Nocera): “Silicon Valley has long been in the camp of the Democrats — a place where candidates could reliably raise lots of money, deliver keynotes at technology conferences and pick the brains of the tech elite over dinner. This year, however, the most powerful of those executives should probably be rooting for Donald Trump’s reelection. If Joe Biden wins the presidency — and the Democrats take the Senate — it’s going to be lights out for Big Tech. Not literally of course. But the antitrust sword that has been hanging over the four tech monopolies… is far more likely to drop if the Democrats are in charge…”
October 5 – New York Times (Conor Dougherty): “Businesses shuttered by the pandemic are slowly reopening, but technology complexes are quiet, their workers carrying on from home indefinitely. The smoke-filled skies had started to clear, but new fires have arrived in a fierce wildfire season that shows the intensifying effects of climate change. Now California and its $3 trillion economy are confronting a profound question: How much will go back to normal, and how much has been permanently changed? This is still the home of 40 million people, Hollywood, Silicon Valley and the country’s largest farming industry and port complex. In August, amid the pandemic, Apple became a $2 trillion company, just two years after hitting $1 trillion. But the message from the recent calamities is clear. If California is to continue leading the nation’s economy deep into the future, its leaders and residents will have to rethink where and how the state grows.”
October 4 – Associated Press (Jocelyn Gecker and Suman Naishadham): “In a year that has already brought apocalyptic skies and smothering smoke to the West Coast, California set a grim new record Sunday when officials announced that the wildfires of 2020 have now scorched a record 4 million acres — in a fire season that is far from over. The unprecedented figure… is more than double the previous record for the most land burned in a single year in California. ‘The 4 million mark is unfathomable. It boggles the mind, and it takes your breath away,’ said Scott McLean, a spokesman for the California Department of Forestry and Fire Protection… ‘And that number will grow.’”
October 6 – Wall Street Journal (Peter Grant): “The technology boom elevated San Francisco office rents to the highest levels in the country. Now during the pandemic, these buildings are suffering the biggest rent declines. A number of big tech firms are exploring cheaper cities or allowing their employees to work at home, setting the stage for an extended downturn in the office market. San Francisco office rents fell 4% from the end of March to the end of September… San Francisco office owners signed only 700,000 square feet in new leasing deals in the third quarter, down about 81% from 3.6 million square feet during the same period in 2019.”
October 5 – Reuters: “Illinois is ‘almost guaranteed’ a credit rating downgrade to junk if its voters next month reject a constitutional amendment allowing the state to tax high-income residents more, a Citi research report said… However, Citi argued against non-investment-grade ratings for any U.S. state given the greater flexibility of states to weather fiscal crises than most U.S. corporations. Illinois is the lowest-rated state at a notch above junk, with negative outlooks from all three major credit rating agencies.”
October 5 – Wall Street Journal (R.T. Watson): “The second-largest cinema chain in the U.S. is closing all of its locations nationwide after reopening in August, escalating the pandemic-driven crisis facing the entertainment industry. Cineworld Group PLC’s Regal Entertainment Group’s decision to suspend operations at its more than 500 locations… follows a cascade of postponements for big-budget Hollywood films…”
October 7 – Bloomberg (Josh Saul and Leslie Patton): “Lenders are having a hard time unloading distressed and bankrupt restaurants, and it’s small wonder. After all, who wants to buy an eatery in the middle of a pandemic when you don’t know whether you can be open or how many people you can seat? California Pizza Kitchen… canceled an auction to sell itself after no buyers bid for the company, making its bankers the likely new owners. Ruby Tuesday Inc. went bankrupt Wednesday and plans to hand itself over to its lenders. With federal stimulus talks shelved and colder weather putting an end to outdoor dining, the industry’s pain may start to get even worse in the coming months.”
Fixed Income Watch:
October 5 – Bloomberg (Amanda Albright): “A surge in bond sales from America’s states and cities is accelerating, threatening to put pressure on a market where yields are hovering not far from the lowest in at least six decades. Some $16 billion in debt is set to sell this week, the most since December 2019… AllianceBernstein analysts said that issuance this month could hit $64 billion, which they said would mark an October record…”
October 5 – Bloomberg (Christopher Maloney): “The growing use of property inspection waivers (PIW) over the past two years by Fannie Mae and Freddie Mac has increased certain risks that investors and stakeholders need to be aware of, writes Wells Fargo MBS analysts led by Vipul Jain. PIW allows a lender to approve a mortgage without needing to conduct a home appraisal. Fannie Mae started the program in December 2016 and Freddie Mac soon followed. A PIW was used for 68% of UMBS30 non-cash out refis in September.”
October 7 – Bloomberg (Kelsey Butler): “Private credit funds are looking to raise a record $295 billion, up 54% from the $192 billion targeted in January, research firm Preqin Ltd. Said… The number of private debt funds on the road is also at a record 521, up from 436 in the same period, with established players increasingly looking to raise larger funds…”
October 6 – Bloomberg (Sridhar Natarajan): “Goldman Sachs… boosted the size of a new credit fund to $14 billion in what is shaping up to be one of the largest debut investment vehicles ever raised. The bank, which set out with a target of $5 billion to $10 billion, is now expecting to finish fundraising with a $14 billion war chest to pour into companies in need of fresh liquidity.”
China Watch:
October 6 – CNBC (Weizhen Tan): “Rising debt of Chinese property developers are in the spotlight again, as liquidity issues at top developer China Evergrande trigger investor concerns. China’s property prices rebounded quickly as the economy reopened after the worst of the pandemic passed. Still, authorities are expected to officially rein in on borrowing costs of developers — outlining rules that cap the ratios of their debt in relation to their cash flows, assets and capital levels… Analysts warn it’s also raised the pressure on the developers’ ability to repay their debts in the bond markets going into 2021. China’s property developers are among the biggest junk bond issuers in Asia, with a total of $46.23 billion being issued last year — double that of 2018…”
October 8 – Reuters (Gabriel Crossley): “The recovery in China’s service sector activity extended into a fifth straight month in September, an industry survey showed on Friday, with hiring increasing for the second month in a row. The Caixin/Markit services Purchasing Managers’ Index (PMI) rose to 54.8 from August’s 54.0, the highest reading since June and staying well above the 50-mark that separates monthly growth from contraction.”
Central Bank Watch:
October 6 – Reuters (Howard Schneider and Balazs Koranyi): “Top U.S. and European central bankers… called for renewed government spending to support families and businesses as the battle against the coronavirus-triggered recession enters a newly critical phase. Hopes for new fiscal support in the United States, however, were dealt a serious blow when President Donald Trump abruptly canceled ongoing negotiations with Democrats in the U.S. House of Representatives. The growth in new COVID-19 cases is again accelerating in parts of the United States and Europe, raising the prospect of new restrictions on commerce even as whole industries and millions of households are still reeling from those imposed in the spring during the first viral wave, and local governments struggle to make up for lost tax revenue.”
October 6 – Wall Street Journal (Thorold Barker and Tom Fairless): “European Central Bank President Christine Lagarde said the bank is ready to inject fresh monetary stimulus to support the eurozone’s stuttering economic recovery from the Covid-19 pandemic, including by cutting a key interest rate further below zero. …Ms. Lagarde warned that Europe’s economic recovery looks ‘a little bit more shaky’ amid a second wave of infections in countries like France and Spain. She said output wouldn’t return to pre-Covid levels until the end of 2022, and the world’s central banks would need to continue to provide stimulus to support government spending. ‘We are prepared to use all the tools that will produce the most effective, efficient, and proportionate outcome,’ Ms. Lagarde said.”
EM Watch:
October 7 – Financial Times (Laura Pitel and Katrina Manson): “The Turkish lira hit a new low after the US warned it was ‘deeply concerned’ at reports Turkey planned to test a Russian S-400 air defence system purchased from Moscow. The embattled currency fell more than 1% to 7.885 against the dollar following the strongly-worded statement from Washington…”
October 5 – Bloomberg (Sydney Maki): “Emerging-market governments and companies sold about $600 billion in dollar- and euro-denominated bonds in the first three quarters of 2020, a record for the period… The sales were led by China and its peers in emerging Asian economies…”
October 5 – Financial Times (Jonathan Wheatley and Valentina Romei): “The vast wave of monetary stimulus that has kept emerging economies afloat since the coronavirus pandemic hit earlier this year has begun to ebb, just as pressure mounts on these countries to finance their recovery and their huge build-up of debt. The combination risks creating a damaging spiral of falling currencies and rising borrowing costs, triggering debt crises and defaults, economists have warned. ‘External financial conditions have stopped loosening and maybe tightened over the past month,’ said Adam Wolfe, emerging markets economist at Absolute Strategy Research. Foreign investors have become net sellers of emerging market stocks and bonds in recent weeks… The reversal of capital flows will make domestic funding conditions tougher for many countries, Mr Wolfe said.”
October 5 – Bloomberg (Andrew Rosati): “The International Monetary Fund said the Brazilian economy faces ‘exceptionally high and multifaceted’ risks as it continues to grapple with the coronavirus pandemic and its impact on the country’s debt dynamics. ‘There is an unusually high degree of uncertainty over how the pandemic will evolve and the expiry of fiscal support at the end of the year will add pressure on the already-wide output gap,’ IMF staff wrote… The… institution expects Brazil’s economy to shrink by 5.8% in 2020 and expand by 2.8% in 2021. But Brazil’s economy remains fragile amid rising levels of public debt used to finance the stimulus and a growing fiscal deficit, currently forecast at 12% of gross domestic product.”
Europe Watch:
October 5 – Reuters (Jonathan Cable): “The euro zone’s economic recovery faltered in September with growing evidence sectors and countries in the bloc are diverging as a resurgence of the coronavirus forces the reimposition of restrictions on activity… Monday’s purchasing managers’ surveys showed services activity, which accounts for around two-thirds of the bloc’s GDP, slammed into reverse after sister surveys last week suggested factories was enjoying something of a revival.”
October 7 – Bloomberg (John Ainger and Michael Msika): “Spain’s growing list of risks is starting to make investors nervous. The nation’s debt is lagging a regional rally that has driven the rate on Italian bonds -- long regarded as the pariah of Europe and among the highest yielding -- close to a record low. That’s narrowed the gap between Spanish and Italian yields to the smallest in more than two years. Citigroup Inc. this month recommended selling Spanish bonds versus their Portuguese peers, citing growing fiscal worries, renewed separatist tensions in the region of Catalonia, and the prospect of a credit downgrade…”
Leveraged Speculation Watch:
October 8 – CNBC (Hugh Son): “Former Goldman Sachs CEO Lloyd Blankfein sees speculative elements across markets for stocks and bonds. Blankfein… said Thursday on Squawk Box that low interest rates were essentially creating free money for big institutional investors… ‘Money is close to a free commodity,’ Blankfein said. ‘And when something is free, you tend not to husband it, you tend to overuse it like it’s a free good… The wash of money is clearly creating bubble elements… You look at SPACs, and how much money is available on the basis of someone’s reputation, as opposed to a business plan… People are lending to what historically have been viewed as weak credits for very little money… People are lending to the U.S. Treasury for today, 80 bps, but for a long time for 60 bps for 10 years, as if there would never be inflation again.’”
October 6 – Bloomberg (Jeanny Yu): “Hedge funds betting against the fortunes of China Evergrande Group got a reminder of why the indebted developer was once Hong Kong’s most painful short. After steadily reducing wagers against Evergrande shares in recent months, hedge funds and other short sellers rushed back into the trade last week -- just in time to get burned. They nearly doubled short interest in Evergrande’s stock on Sept. 29, a day before the developer rallied 19% on abating concerns over a cash crunch, data compiled by IHS Markit Ltd. showed.”
Geopolitical Watch:
October 7 – U.S. News and World Report (Paul D. Shinkman): “China… levied new threats at Taiwan and appears poised to escalate its military efforts to bring to heel what it considers a renegade province, following an attempt by the island nation's opposition party to bring it into closer cooperation with the U.S. Beijing was already angered by Secretary of State Mike Pompeo's ongoing tour through Asia to shore up support for containing China before the Taiwanese Kuomintang Party… launched a new effort for the government there to reestablish diplomatic ties with the U.S. ‘The only way forward is for the mainland to fully prepare itself for war and to give Taiwan secessionist forces a decisive punishment at any time,’ Hu Xijin, editor-in-chief of the Chinese state-sponsored Global Times, wrote.... ‘As the secessionist forces' arrogance continues to swell, the historical turning point is getting closer.’”
October 7 – Reuters (David Brunnstrom, Ben Blanchard and Yimou Lee): “The U.S. national security adviser warned China… against any attempt to take Taiwan by force, saying amphibious landings were notoriously difficult and there was a lot of ambiguity about how the United States would respond. Robert O’Brien told an event at the University of Nevada in Las Vegas that China was engaged in a massive naval buildup probably not seen since Germany’s attempt to compete with Britain’s Royal Navy prior to World War One. ‘Part of that is to give them the ability to push us back out of the Western Pacific, and allow them to engage in an amphibious landing in Taiwan… The problem with that is that amphibious landings are notoriously difficult… It’s not an easy task, and there’s also a lot of ambiguity about what the United States would do in response to an attack by China on Taiwan,’ he added…”
October 4 – Financial Times (Gideon Rachman): “From Stettin in the Baltic to Trieste in the Adriatic, an ‘iron curtain’ has descended across the continent.’ Winston Churchill’s speech in Fulton, Missouri, in March 1946 is remembered as a key moment in the outbreak of the cold war. ‘If future historians are ever looking for a speech that marked the beginning of a second cold war — this time between America and China — they may point to an address by Mike Pence delivered at Washington’s Hudson Institute in October 2018. ‘China wants nothing less than to push the United States of America from the western Pacific . . . But they will fail,’ the vice-president declared. ‘We will not be intimidated and we will not stand down.’ Pointing to China’s political system, Mr Pence argued: ‘A country that oppresses its own people rarely stops there.’ For students of the first cold war between the US and the USSR, some of this sounded eerily and worryingly familiar.”
October 5 – Reuters (Humeyra Pamuk and Sakura Murakami): “U.S. Secretary of State Mike Pompeo visited Japan… to rally support from Washington’s closest allies in Asia, calling for deeper collaboration with Japan, India and Australia as a bulwark against China’s growing regional influence… In comments before the start of a meeting of the Quad grouping of the four nations’ foreign ministers, Pompeo spoke in typically unsparing terms against Beijing’s ruling Chinese Communist Party. That was in contrast to his three counterparts, all of whom avoided calling out China directly. ‘As partners in this Quad, it is more critical now than ever that we collaborate to protect our people and partners from the CCP’s exploitation, corruption and coercion,’ Pompeo said… ‘We see it in the South and East China Seas, the Mekong, the Himalayas, the Taiwan Strait.’”
October 5 – Wall Street Journal (Alistair MacDonald): “The U.S. government is ramping up efforts to secure minerals critical to modern technology but whose supply is dominated by China—a stranglehold that miners warn could take years to break. In recent years, the U.S. and other Western nations have invested in projects and approved licenses to mine these resources—essential for the production of electric vehicles, cellphones and wind turbines—an effort these countries are now accelerating given how far they still trail China. Last week President Trump signed an executive order declaring a national emergency and authorizing the use of the Defense Production Act to speed the development of mines.”
October 5 – Reuters (Olzhas Auyezov): “Opposition groups took control of most of Kyrgyzstan’s government apparatus on Tuesday after storming buildings during post-election protests, but the president clung to power as unrest risked tipping the Central Asian state into chaos.”
October 7 – Reuters (Nailia Bagirova, Nvard Hovhannisyan, and John Irish): “France, the United States and Russia will step up efforts to end fighting between Azeri and ethnic Armenian forces in the South Caucasus by holding talks in Geneva on Thursday, as fears of a regional war grow.”
Freddie Mac 30-year fixed mortgage rates slipped one basis point to 2.87% (down 70bps y-o-y). Fifteen-year rates added a basis point to 2.37% (down 68bps). Five-year hybrid ARM rates declined one basis point to 2.89% (down 46bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-year fixed rates down three bps to 3.08% (down 92bps).
Federal Reserve Credit last week gained $3.3bn to $7.020 TN. Over the past year, Fed Credit expanded $3.110 TN, or 80%. Fed Credit inflated $4.209 Trillion, or 150%, over the past 413 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt last week declined $1.7bn to $3.410 TN. "Custody holdings" were down $8.3bn, or 0.2%, y-o-y.
M2 (narrow) "money" supply dropped $67.5bn last week to $18.653 TN, with an unprecedented 31-week gain of $3.145 TN. "Narrow money" surged $3.548 TN, or 23.5%, over the past year. For the week, Currency increased $3.9bn. Total Checkable Deposits sank $70bn, while Savings Deposits gained $8.9bn. Small Time Deposits declined $5.4bn. Retail Money Funds fell $4.8bn.
Total money market fund assets declined $21.6bn to $4.382 TN. Total money funds surged $913bn y-o-y, or 26.3%.
Total Commercial Paper recovered $19.0bn to $964bn. CP was down $128bn, or 11.7% year-over-year.
Currency Watch:
October 4 – Financial Times (Stephen Roach): “The riddle once posed in the 1960s by former French finance minister (eventually president) Valéry Giscard d’Estaing is about to be solved. Giscard bemoaned a US that took advantage of its privileged position as the world’s dominant reserve currency and drew freely on the rest of the world to support its over-extended standard of living. That privilege is about to be withdrawn. A crash in the dollar is likely and it could fall by as much as 35% by the end of 2021. The reason: a lethal interplay between a collapse in domestic saving and a gaping current account deficit. In the second quarter of 2020, net domestic saving — depreciation-adjusted saving of households, businesses and the government sector — plunged back into negative territory for the first time since the global financial crisis. At -1.2% in the second quarter, net domestic saving as a share of national income was fully 4.1 percentage points below the first quarter, the steepest quarterly plunge in records that go back to 1947.”
For the week, the U.S. dollar index declined 0.8% to 93.03 (down 3.6% y-t-d). For the week on the upside, the Brazilian real increased 2.8%, the Mexican peso 2.3%, the Norwegian krone 2.0%, the Swedish krona 1.8%, the Canadian dollar 1.4%, the South Korean won 1.4%, the Australian dollar 1.1%, the Swiss franc 1.1%, the euro 0.9%, the British pound 0.8%, the Singapore dollar 0.7%, the New Zealand dollar 0.4%, and the South African rand 0.4%. For the week on the downside, the Japanese yen dipped 0.3%. The Chinese renminbi surged 1.44% versus the dollar this week (up 4.01% y-t-d).
Commodities Watch:
The Bloomberg Commodities Index jumped 4.9% (down 9.4% y-t-d). Spot Gold rose 1.6% to $1,930 (up 27.2%). Silver surged 4.5% to $25.108 (up 40.1%). WTI crude rallied $3.55 to $40.60 (down 34%). Gasoline jumped 7.1% (down 39%), and Natural Gas surged 12.4% (up 25%). Copper rose 3.5% (up 10%). Wheat gained 3.6% (up 6%). Corn jumped 4.0% (up 2%).
Coronavirus Watch:
October 5 – Bloomberg (Jonathan Levin and Kristen V Brown): “Covid-19 is spreading again across most of the U.S., hammering rural America and smaller cities and raising anxiety in New York, as experts warn that school reopenings and colder weather may cause the situation to rapidly deteriorate. In 34 states, the seven-day average of new cases is higher now than it was a month ago. Although the virus has waned in populous states including California and Florida, it is wreaking unprecedented havoc in the Midwest and making an incipient return in parts of the Northeast.”
October 6 – CNBC (Amanda Macias): “The Pentagon said… that top military leaders are self-quarantining after one of the Coast Guard service chiefs tested positive for the coronavirus. Coast Guard Vice Commandant Adm. Charles Ray tested positive for coronavirus on Monday after experiencing mild symptoms of the disease over the weekend.”
Market Instability Watch:
October 7 – Bloomberg (Sam Potter and Anchalee Worrachate): “Investors made the 2020 presidential elections the most-expensive event to hedge in history. In less than a week, they’ve discovered there’s a lot more than just the vote to worry about. From President Donald Trump’s coronavirus diagnosis to his tweet announcing an end to stimulus talks and the House threatening to breakup tech giants, surprises keep landing on Wall Street -- and it’s putting traders on edge. The Cboe Volatility Index… has risen for six straight sessions and was flirting with a seventh on Wednesday. A similar gauge for U.S. Treasuries just surged after weeks of calm. The S&P 500 has posted a dozen moves of more than 1% in the past month, yet the benchmark has gone nowhere.”
October 6 – Financial Times (Colby Smith and Tommy Stubbington): “Investors are facing a conundrum in the run-up to what is expected to be a uniquely turbulent US presidential election: how to insulate their portfolios from a stock market sell-off. Traditional safe assets have recently served investors poorly as an equity hedge, with government bonds barely moving and gold prices falling during September’s stock market wobble. Ahead of a potentially disputed result on November 3, fund managers are casting around for new harbours to shelter from a potential storm. Popular strategies include short-selling currencies that mirror stock movements; derivatives that provide insurance against falls; and emerging market bonds that offer a higher yielding, though riskier, hedge for equity holdings.”
October 8 – Financial Times (Colby Smith and Richard Henderson): “Investors are waking up to the risk of a decline in long-term US government bond prices, in anticipation of a more robust economic recovery and hefty additional government spending after November’s presidential election. The $20tn Treasuries market had grown sleepy in the months since the Federal Reserve slashed policy rates to zero to tackle the financial effects of coronavirus. Expected volatility, as measured by the ICE BofA Move Index, hovered around record lows, and the benchmark 10-year Treasury yield barely budged from about 0.6%... But Treasuries have broken free from that slumber in recent days, with long-dated Treasury yields rising sharply since the start of the month to their highest levels since June.”
October 3 – Wall Street Journal (James Mackintosh): “September hurt shareholders, not only because stocks fell but also because the things they’d bought to protect their portfolios also fell. From the S&P 500’s high on the 2nd of the month, stocks, Treasurys, gold, bitcoin and the VIX volatility index all dropped. This total failure of hedging is unusual, but investors need to get used to the idea that Treasurys no longer provide the ballast for a portfolio. It wasn’t just the normal pattern of asset returns that broke down… High-quality stocks, companies with strong balance sheets and reliable profits, fell by more than the market. Smaller companies beat bigger companies.”
October 4 – Bloomberg (Stephen Spratt and John Ainger): “Goldman Sachs… is shaking up the most popular Treasury trade out there. The Wall Street giant recommended in an Oct. 2 note that investors short 10-year U.S. bonds versus their two- and 30-year counterparts, a position that will benefit if 10-year yields rise more than the other two tenors. Traders have been piling into straightforward bets on steepening, a scenario that has received additional support as polls and betting websites indicate former Vice President Joe Biden’s odds of beating President Donald Trump are improving, burnishing the outlook for more stimulus.”
Global Bubble Watch:
October 6 – Financial Times (Stefan Wagstyl): “The world’s billionaires have seen their fortunes soar to record levels during the Covid-19 pandemic, as many doubled down on risk in choppy financial markets and profited from the tech boom. Their collective wealth hit $10.2tn this summer, exceeding the previous high set in 2017, according to a widely followed annual study from Swiss bank UBS. The total number of billionaires reached 2,189, up from 2,158 in 2017.”
October 7 – Reuters: “Billionaire wealth reached record high levels amid the COVID-19 pandemic, a report by UBS and PwC found, as a rally in stock prices and gains in technology and healthcare helped the wealth of the world's richest break the $10 trillion mark. The report, covering over 2,000 billionaires representing some 98% of the cohort's total wealth, found billionaire wealth grew by more than a quarter during the early months of the pandemic to reach $10.2 trillion in July, breaking the previous record of $8.9 trillion at the end of 2019. The figure represents a five- to ten-fold rise over the past 25 years… Between April 7 and July 31 this year, billionaires across every industry covered by the study saw their wealth rise by double digits, with billionaires in the technology, healthcare and industrial sectors leading the pack with 36%-44% gains.”
October 5 – Financial Times (Chris Giles): “The IMF has issued a rallying call to rich countries around the world to increase public investment and spark a strong economic recovery from the coronavirus pandemic. Advanced economies should worry less about their public debt, but instead take advantage of historically low borrowing costs to increase spending on infrastructure maintenance immediately, the IMF said in a report… “
October 7 – Reuters (Matthew Green, Kate Abnett): “Last month was the world’s hottest September on record, with unusually high temperatures recorded off Siberia, in the Middle East, and in parts of South America and Australia, the European Union’s Copernicus Climate Change Service said… Extending a long-term warming trend caused by emissions of heat-trapping gases, high temperatures this year have played a major role in disasters from fires in California and the Arctic to floods in Asia, scientists say. ‘As we go into an even warmer world, certain extremes are likely to happen more often and be more intense,’ Copernicus senior scientist Freja Vamborg told Reuters…”
October 6 – Bloomberg (Leika Kihara): “Bank of Japan Governor Haruhiko Kuroda said… climate change is among the biggest challenges facing the global economy, joining a growing debate about how policymakers should address the growth risks posed by global warming. Kuroda… said some regions in Asia are particularly vulnerable to the economic consequences of natural disasters resulting from climate change. ‘Climate change, how to realise a green economy ... These issues are really huge and I must say the most challenging issues faced by the global economy,’ Kuroda said…”
Trump Administration Watch:
October 8 – Reuters (Richard Cowan): “U.S. President Donald Trump on Thursday said talks with Congress have restarted over further COVID-19 economic relief and that there was a good chance a deal could be reached, but gave no other details about a possible agreement. ‘Now they are starting to work out,’ he told Fox Business Network in a telephone interview about talks, after he cut off negotiations via a post on Twitter earlier this week.”
October 6 – Bloomberg (Amanda Albright and Shruti Singh): “President Donald Trump’s decision to halt coronavirus stimulus talks with Congress means America’s pandemic-stricken states and cities aren’t likely to get any financial help soon, virtually ensuring additional rounds of spending cuts, layoffs and tax increases that will deal a fresh hit to any economic recovery… ‘America’s cities, towns and villages are reeling from the financial impact of the pandemic while continuing to expend significant resources to combat ongoing cases of COVID-19, recover from natural disasters and provide essentials services to their residents,’ Clarence Anthony, chief executive officer of the National League of Cities, said… ‘We can expect severe economic consequences from the failed negotiations, including more businesses closing and more public and private sector layoffs.’”
October 7 – Bloomberg (Nick Wadhams, Saleha Mohsin, and Jennifer Jacobs): “The Trump administration is exploring restrictions on billionaire Jack Ma’s Ant Group as well as Tencent Holdings Ltd. over concerns that their digital payment platforms threaten U.S. national security, according to people familiar…, a move that risks infuriating China and disrupting what could be the world’s largest initial public offering. Debate over how and whether to restrict Ant Group’s and Tencent’s payment systems has accelerated among senior U.S. officials in recent weeks though a final decision isn’t imminent…”
Federal Reserve Watch:
October 3 – Bloomberg (Christopher Condon): “Federal Reserve Bank of Boston President Eric Rosengren said the long period of low interest rates before the coronavirus pandemic is contributing to the depth of the current recession. ‘The slow build-up of risk in the low-interest-rate environment that preceded the current recession likely will make the economic recovery from the pandemic more difficult,’ Rosengren said in the text of a speech he’ll deliver Thursday… ‘The increased risk build-up, such as the reaching-for-yield behavior in commercial real estate or increased corporate leverage, make economic downturns including this one more severe,’ he said.”
October 7 – Bloomberg (Catarina Saraiva): “Federal Reserve officials were challenged… to make big policy changes to combat economic and racial inequality. In response, the presidents of the Atlanta, Boston and Minneapolis reserve banks pledged to shake up some long-held practices -- including adding more minority and labor voices to its Beige Book… Ursula Burns, the former CEO of Xerox Holdings Corp., said the U.S. central bank, the largest and arguably most influential in the world, isn’t serving all Americans. ‘The Federal Reserve as the economic policy instrument in this country absolutely has to know, be passionate about, be interested in not just the wealthiest or the median, but all the people,’ Burns said… Believing it’s not the Fed’s job to help solve economic problems along racial lines is ‘ducking’ the issue, she said…”
October 7 – Financial Times (James Politi and Colby Smith): “Federal Reserve officials offered few additional clues to investors on the implementation of the central bank’s new monetary policy guidance, saying it was not an ‘unconditional commitment’ to keeping interest rates low regardless of economic conditions. At last month’s FOMC meeting, the US central bank said it would not increase interest rates until the economy had reached full employment, and inflation had reached 2% and was on track to exceed that target for some time.”
October 7 – Reuters (Ann Saphir): “The Federal Reserve’s new pledge to keep interest rates at zero until inflation is on track to ‘moderately’ exceed 2% has come under fire for being overly vague and leaving too much up to U.S. central bankers’ judgment, but that is exactly the point, a key author of the pledge said… ‘Moderate isn’t a number ... it’s a guard rail’ against expectations that the Fed would tolerate very high or persistently high inflation, New York Fed President John Williams said... ‘It’s also about proportionality,’ he added… ‘There’s flexibility, and there’s some discretion around that,’ Williams said. ‘It is specific to the circumstances, and I would also say it is specific to where the economy is.’”
October 5 – Reuters (Ann Saphir): “Chicago Federal Reserve Bank President Charles Evans… said he expects U.S. inflation to reach 2% by 2023 and wants to push it to 2.5% to offset years of below-target price rises. The Fed ‘needs to have an ‘in it to win it’ attitude toward our inflation objective,’ Evans said at a virtual meeting of the National Association for Business Economics. ‘We’ve got to overshoot for sure,’ he told Bloomberg TV later. ‘I would be quite pleased if could get inflation, core inflation, up to 2.5% for a time.’”
October 7 – Reuters (Ann Saphir): “The U.S. central bank has room to expand its balance sheet, but with long-term borrowing costs already low, what businesses and households really need is more government grants and aid, Chicago Federal Reserve Bank President Charles Evans said… ‘I think we have the capacity to do more asset purchases,’ Evans told reporters. The Fed could also ease financial conditions by weighting its purchases to more longer-term securities, he said. But though there will come a time when the Fed will need to give more explicit guidance on the pace and type of its asset purchases, Evans said he is comfortable with the Fed’s current guidance that focuses on the path of interest rates.”
October 5 – Bloomberg (Matthew Boesler): “Federal Reserve Bank of Chicago President Charles Evans said he would welcome 2.5% inflation in the U.S. for a time in order to average out the current period in which price pressures are running below the central bank’s 2% target. ‘I think we have to cross over, beyond 2%, with some momentum,’ Evans said… ‘I would be quite pleased if we could get core inflation up to 2.5% for a time.”
U.S. Bubble Watch:
October 5 – Wall Street Journal (Eric Morath, Theo Francis and Justin Baer): “A two-track recovery is emerging from the country’s pandemic-driven economic contraction. Some workers, companies and regions show signs of coming out fine or even stronger. The rest are mired in a deep decline with an uncertain path ahead. Just months ago, economists were predicting a V-shaped recovery… What has developed is more like a K. On the upper arm of the K are well-educated and well-off people, businesses tied to the digital economy or supplying domestic necessities, and regions such as tech-forward Western cities. By and large, they are prospering. On the bottom arm are lower-wage workers with fewer credentials, old-line businesses and regions tied to tourism and public gatherings. They can expect to bear years-long scars from the crisis. The divergence helps explain the striking disconnect of a stock market and household wealth near record highs, while lines stretch at food banks and applications for jobless benefits continue to grow.”
October 3 – New York Times (Jeanna Smialek, Ben Casselman and Gillian Friedman): “The United States economy is facing a tidal wave of long-term unemployment as millions of people who lost jobs early in the pandemic remain out of work six months later and job losses increasingly turn permanent. The Labor Department said… 2.4 million people had been out of work for 27 weeks or more, the threshold it uses to define long-term joblessness. An even bigger surge is on the way: Nearly five million people are approaching long-term joblessness over the next two months. The same report showed that even as temporary layoffs were on the decline, permanent job losses were rising sharply.”
October 7 – The Hill (Niv Elis): “The number of people who have joined the ranks of long-term unemployment has spiked to a record high in a worrying sign of the economic recovery’s health. …The number of people out of work for more than 27 weeks increased to 2.4 million in September, an increase of 32.5% from the previous month. There are 4.9 million people who have been unemployed between 15 and 26 weeks. Workers who have been separated from their jobs for more than 6 months typically have a more difficult time getting back to work even once the economy improves. ‘Last week we saw the biggest spike in long-term unemployment since they started measuring long-term unemployment,’ said Michele Evermore, senior researcher and policy analyst at the National Employment Law Project.”
October 7 – Reuters (Karen Pierog and Maria Caspani): “U.S. state and city leaders are grappling with whether to delay tough budget decisions in the wake of President Donald Trump’s shutdown of negotiations on a comprehensive stimulus package ahead of the Nov. 3 election. Democratic New York Governor Andrew Cuomo told reporters… he was holding off on actions to close a $14.5 billion budget deficit on his belief that Democrats will win the White House and control of the U.S. Senate and will pass federal aid. ‘The only way to get close to closing that deficit within the state’s abilities, you would have to do a tax increase. You would have to cut expenses. And you would have to borrow,’ Cuomo said. ‘This would do tremendous economic damage to the state.’”
October 5 – Reuters (Dan Burns): “U.S. commercial bankruptcy filings are up 33% so far this year with new cases in September surging by 78% from a year earlier as the recession triggered by the COVID-19 pandemic hits small businesses… Chapter 11 bankruptcy filings totaled 747 last month, up from 420 a year earlier and from 525 in August, legal services firm Epiq said… Year-to-date filings total 5,529, a third higher than in the first three quarters of 2019. ‘These commercial filings are primarily small businesses that do not have access to capital or stimulus,” Deirdre O’Connor, managing director of corporate restructuring at Epiq, said… ‘Unfortunately, those bankruptcies will continue to rise in the current economic environment.’”
October 6 – Reuters (Dan Burns): “The U.S. trade deficit surged in August to the largest in 14 years with imports climbing again, suggesting that trade could be a drag on economic growth in the third quarter. The… trade deficit jumped 5.9% to $67.1 billion, the widest since August 2006… Imports increased by 3.2% to $239 billion. Goods imports rose $6.5 billion to $203 billion. Exports increased 2.2% to $171.9 billion. Goods exports rose $3.5 billion to $119.1 billion. The closely watched trade deficit with China decreased $1.9 billion to $26.4 billion in August.”
October 8 – Reuters (Dan Burns): “The number of Americans filing new claims for jobless benefits inched down last week, signaling the U.S. labor market is making little fresh headway in getting millions of people back on the job after being out of work due to COVID-19 disruptions. Initial claims for state unemployment benefits totaled a seasonally adjusted 840,000 for the week ended Oct. 3… The number of people continuing to draw benefits after their initial claim for assistance fell to 10.976 million in the week ended Sept. 26 from 11.979 million the week before.”
October 5 – Reuters (Lucia Mutikani): “U.S. services industry activity picked up in September, pulling above a level that prevailed before the COVID-19 pandemic struck the nation, amid increases in new orders and employment. The Institute for Supply Management (ISM) said… its non-manufacturing activity index rose to a reading of 57.8 last month from 56.9 in August… The ISM survey’s measure of new orders for the services industry increased to a reading of 61.5 in September after dropping to 56.8 in August.”
October 7 – CNBC (Diana Olick): “Mortgage rates moved even lower last week after setting multiple record lows in recent months, spurring more borrowers to call their lenders and apply for a refinance… Refinance application volume, which is most sensitive to weekly rate moves, rose 8% for the week and was 50% higher than a year ago… Applications for a mortgage to purchase a home fell 2% for the week but were 21% higher than a year ago.”
October 7 – Yahoo Finance (Myles Udland): “The resilience of the U.S. consumer has been a consistent theme in the Morning Brief over the last several weeks. But the country’s youngest consumers are hunkering down during the pandemic. And their outlays have never been so low. Analysts at Piper Sandler on Tuesday released their latest semi-annual survey of U.S. teens, which found that teen spending fell to a record low during the fall. As of the firm’s fall survey, annual teen spending averaged just $2,150, down 5% from the spring, 9% from last year, and eclipses the previous survey low recorded in the fall of 2011.”
October 7 – Reuters (Nandita Bose and Diane Bartz): “A U.S. House of Representatives panel looking into abuses of market power by four big technology companies found they used ‘killer acquisitions’ to smite rivals, charged exorbitant fees and forced small businesses into ‘oppressive’ contracts in the name of profit. The antitrust subcommittee of the Judiciary Committee recommended that Alphabet Inc's Google, Apple Inc, Amazon.com and Facebook - with a combined market value of over $5 trillion - should not both control and compete in related businesses. The panel’s report broadly recommended structural separations but stopped short of saying a specific company should be broken up. The scathing 449-page report… suggested expansive changes to antitrust law and described dozens of instances where the companies misused their power.”
October 7 – Bloomberg (Joe Nocera): “Silicon Valley has long been in the camp of the Democrats — a place where candidates could reliably raise lots of money, deliver keynotes at technology conferences and pick the brains of the tech elite over dinner. This year, however, the most powerful of those executives should probably be rooting for Donald Trump’s reelection. If Joe Biden wins the presidency — and the Democrats take the Senate — it’s going to be lights out for Big Tech. Not literally of course. But the antitrust sword that has been hanging over the four tech monopolies… is far more likely to drop if the Democrats are in charge…”
October 5 – New York Times (Conor Dougherty): “Businesses shuttered by the pandemic are slowly reopening, but technology complexes are quiet, their workers carrying on from home indefinitely. The smoke-filled skies had started to clear, but new fires have arrived in a fierce wildfire season that shows the intensifying effects of climate change. Now California and its $3 trillion economy are confronting a profound question: How much will go back to normal, and how much has been permanently changed? This is still the home of 40 million people, Hollywood, Silicon Valley and the country’s largest farming industry and port complex. In August, amid the pandemic, Apple became a $2 trillion company, just two years after hitting $1 trillion. But the message from the recent calamities is clear. If California is to continue leading the nation’s economy deep into the future, its leaders and residents will have to rethink where and how the state grows.”
October 4 – Associated Press (Jocelyn Gecker and Suman Naishadham): “In a year that has already brought apocalyptic skies and smothering smoke to the West Coast, California set a grim new record Sunday when officials announced that the wildfires of 2020 have now scorched a record 4 million acres — in a fire season that is far from over. The unprecedented figure… is more than double the previous record for the most land burned in a single year in California. ‘The 4 million mark is unfathomable. It boggles the mind, and it takes your breath away,’ said Scott McLean, a spokesman for the California Department of Forestry and Fire Protection… ‘And that number will grow.’”
October 6 – Wall Street Journal (Peter Grant): “The technology boom elevated San Francisco office rents to the highest levels in the country. Now during the pandemic, these buildings are suffering the biggest rent declines. A number of big tech firms are exploring cheaper cities or allowing their employees to work at home, setting the stage for an extended downturn in the office market. San Francisco office rents fell 4% from the end of March to the end of September… San Francisco office owners signed only 700,000 square feet in new leasing deals in the third quarter, down about 81% from 3.6 million square feet during the same period in 2019.”
October 5 – Reuters: “Illinois is ‘almost guaranteed’ a credit rating downgrade to junk if its voters next month reject a constitutional amendment allowing the state to tax high-income residents more, a Citi research report said… However, Citi argued against non-investment-grade ratings for any U.S. state given the greater flexibility of states to weather fiscal crises than most U.S. corporations. Illinois is the lowest-rated state at a notch above junk, with negative outlooks from all three major credit rating agencies.”
October 5 – Wall Street Journal (R.T. Watson): “The second-largest cinema chain in the U.S. is closing all of its locations nationwide after reopening in August, escalating the pandemic-driven crisis facing the entertainment industry. Cineworld Group PLC’s Regal Entertainment Group’s decision to suspend operations at its more than 500 locations… follows a cascade of postponements for big-budget Hollywood films…”
October 7 – Bloomberg (Josh Saul and Leslie Patton): “Lenders are having a hard time unloading distressed and bankrupt restaurants, and it’s small wonder. After all, who wants to buy an eatery in the middle of a pandemic when you don’t know whether you can be open or how many people you can seat? California Pizza Kitchen… canceled an auction to sell itself after no buyers bid for the company, making its bankers the likely new owners. Ruby Tuesday Inc. went bankrupt Wednesday and plans to hand itself over to its lenders. With federal stimulus talks shelved and colder weather putting an end to outdoor dining, the industry’s pain may start to get even worse in the coming months.”
Fixed Income Watch:
October 5 – Bloomberg (Amanda Albright): “A surge in bond sales from America’s states and cities is accelerating, threatening to put pressure on a market where yields are hovering not far from the lowest in at least six decades. Some $16 billion in debt is set to sell this week, the most since December 2019… AllianceBernstein analysts said that issuance this month could hit $64 billion, which they said would mark an October record…”
October 5 – Bloomberg (Christopher Maloney): “The growing use of property inspection waivers (PIW) over the past two years by Fannie Mae and Freddie Mac has increased certain risks that investors and stakeholders need to be aware of, writes Wells Fargo MBS analysts led by Vipul Jain. PIW allows a lender to approve a mortgage without needing to conduct a home appraisal. Fannie Mae started the program in December 2016 and Freddie Mac soon followed. A PIW was used for 68% of UMBS30 non-cash out refis in September.”
October 7 – Bloomberg (Kelsey Butler): “Private credit funds are looking to raise a record $295 billion, up 54% from the $192 billion targeted in January, research firm Preqin Ltd. Said… The number of private debt funds on the road is also at a record 521, up from 436 in the same period, with established players increasingly looking to raise larger funds…”
October 6 – Bloomberg (Sridhar Natarajan): “Goldman Sachs… boosted the size of a new credit fund to $14 billion in what is shaping up to be one of the largest debut investment vehicles ever raised. The bank, which set out with a target of $5 billion to $10 billion, is now expecting to finish fundraising with a $14 billion war chest to pour into companies in need of fresh liquidity.”
China Watch:
October 6 – CNBC (Weizhen Tan): “Rising debt of Chinese property developers are in the spotlight again, as liquidity issues at top developer China Evergrande trigger investor concerns. China’s property prices rebounded quickly as the economy reopened after the worst of the pandemic passed. Still, authorities are expected to officially rein in on borrowing costs of developers — outlining rules that cap the ratios of their debt in relation to their cash flows, assets and capital levels… Analysts warn it’s also raised the pressure on the developers’ ability to repay their debts in the bond markets going into 2021. China’s property developers are among the biggest junk bond issuers in Asia, with a total of $46.23 billion being issued last year — double that of 2018…”
October 8 – Reuters (Gabriel Crossley): “The recovery in China’s service sector activity extended into a fifth straight month in September, an industry survey showed on Friday, with hiring increasing for the second month in a row. The Caixin/Markit services Purchasing Managers’ Index (PMI) rose to 54.8 from August’s 54.0, the highest reading since June and staying well above the 50-mark that separates monthly growth from contraction.”
Central Bank Watch:
October 6 – Reuters (Howard Schneider and Balazs Koranyi): “Top U.S. and European central bankers… called for renewed government spending to support families and businesses as the battle against the coronavirus-triggered recession enters a newly critical phase. Hopes for new fiscal support in the United States, however, were dealt a serious blow when President Donald Trump abruptly canceled ongoing negotiations with Democrats in the U.S. House of Representatives. The growth in new COVID-19 cases is again accelerating in parts of the United States and Europe, raising the prospect of new restrictions on commerce even as whole industries and millions of households are still reeling from those imposed in the spring during the first viral wave, and local governments struggle to make up for lost tax revenue.”
October 6 – Wall Street Journal (Thorold Barker and Tom Fairless): “European Central Bank President Christine Lagarde said the bank is ready to inject fresh monetary stimulus to support the eurozone’s stuttering economic recovery from the Covid-19 pandemic, including by cutting a key interest rate further below zero. …Ms. Lagarde warned that Europe’s economic recovery looks ‘a little bit more shaky’ amid a second wave of infections in countries like France and Spain. She said output wouldn’t return to pre-Covid levels until the end of 2022, and the world’s central banks would need to continue to provide stimulus to support government spending. ‘We are prepared to use all the tools that will produce the most effective, efficient, and proportionate outcome,’ Ms. Lagarde said.”
EM Watch:
October 7 – Financial Times (Laura Pitel and Katrina Manson): “The Turkish lira hit a new low after the US warned it was ‘deeply concerned’ at reports Turkey planned to test a Russian S-400 air defence system purchased from Moscow. The embattled currency fell more than 1% to 7.885 against the dollar following the strongly-worded statement from Washington…”
October 5 – Bloomberg (Sydney Maki): “Emerging-market governments and companies sold about $600 billion in dollar- and euro-denominated bonds in the first three quarters of 2020, a record for the period… The sales were led by China and its peers in emerging Asian economies…”
October 5 – Financial Times (Jonathan Wheatley and Valentina Romei): “The vast wave of monetary stimulus that has kept emerging economies afloat since the coronavirus pandemic hit earlier this year has begun to ebb, just as pressure mounts on these countries to finance their recovery and their huge build-up of debt. The combination risks creating a damaging spiral of falling currencies and rising borrowing costs, triggering debt crises and defaults, economists have warned. ‘External financial conditions have stopped loosening and maybe tightened over the past month,’ said Adam Wolfe, emerging markets economist at Absolute Strategy Research. Foreign investors have become net sellers of emerging market stocks and bonds in recent weeks… The reversal of capital flows will make domestic funding conditions tougher for many countries, Mr Wolfe said.”
October 5 – Bloomberg (Andrew Rosati): “The International Monetary Fund said the Brazilian economy faces ‘exceptionally high and multifaceted’ risks as it continues to grapple with the coronavirus pandemic and its impact on the country’s debt dynamics. ‘There is an unusually high degree of uncertainty over how the pandemic will evolve and the expiry of fiscal support at the end of the year will add pressure on the already-wide output gap,’ IMF staff wrote… The… institution expects Brazil’s economy to shrink by 5.8% in 2020 and expand by 2.8% in 2021. But Brazil’s economy remains fragile amid rising levels of public debt used to finance the stimulus and a growing fiscal deficit, currently forecast at 12% of gross domestic product.”
Europe Watch:
October 5 – Reuters (Jonathan Cable): “The euro zone’s economic recovery faltered in September with growing evidence sectors and countries in the bloc are diverging as a resurgence of the coronavirus forces the reimposition of restrictions on activity… Monday’s purchasing managers’ surveys showed services activity, which accounts for around two-thirds of the bloc’s GDP, slammed into reverse after sister surveys last week suggested factories was enjoying something of a revival.”
October 7 – Bloomberg (John Ainger and Michael Msika): “Spain’s growing list of risks is starting to make investors nervous. The nation’s debt is lagging a regional rally that has driven the rate on Italian bonds -- long regarded as the pariah of Europe and among the highest yielding -- close to a record low. That’s narrowed the gap between Spanish and Italian yields to the smallest in more than two years. Citigroup Inc. this month recommended selling Spanish bonds versus their Portuguese peers, citing growing fiscal worries, renewed separatist tensions in the region of Catalonia, and the prospect of a credit downgrade…”
Leveraged Speculation Watch:
October 8 – CNBC (Hugh Son): “Former Goldman Sachs CEO Lloyd Blankfein sees speculative elements across markets for stocks and bonds. Blankfein… said Thursday on Squawk Box that low interest rates were essentially creating free money for big institutional investors… ‘Money is close to a free commodity,’ Blankfein said. ‘And when something is free, you tend not to husband it, you tend to overuse it like it’s a free good… The wash of money is clearly creating bubble elements… You look at SPACs, and how much money is available on the basis of someone’s reputation, as opposed to a business plan… People are lending to what historically have been viewed as weak credits for very little money… People are lending to the U.S. Treasury for today, 80 bps, but for a long time for 60 bps for 10 years, as if there would never be inflation again.’”
October 6 – Bloomberg (Jeanny Yu): “Hedge funds betting against the fortunes of China Evergrande Group got a reminder of why the indebted developer was once Hong Kong’s most painful short. After steadily reducing wagers against Evergrande shares in recent months, hedge funds and other short sellers rushed back into the trade last week -- just in time to get burned. They nearly doubled short interest in Evergrande’s stock on Sept. 29, a day before the developer rallied 19% on abating concerns over a cash crunch, data compiled by IHS Markit Ltd. showed.”
Geopolitical Watch:
October 7 – U.S. News and World Report (Paul D. Shinkman): “China… levied new threats at Taiwan and appears poised to escalate its military efforts to bring to heel what it considers a renegade province, following an attempt by the island nation's opposition party to bring it into closer cooperation with the U.S. Beijing was already angered by Secretary of State Mike Pompeo's ongoing tour through Asia to shore up support for containing China before the Taiwanese Kuomintang Party… launched a new effort for the government there to reestablish diplomatic ties with the U.S. ‘The only way forward is for the mainland to fully prepare itself for war and to give Taiwan secessionist forces a decisive punishment at any time,’ Hu Xijin, editor-in-chief of the Chinese state-sponsored Global Times, wrote.... ‘As the secessionist forces' arrogance continues to swell, the historical turning point is getting closer.’”
October 7 – Reuters (David Brunnstrom, Ben Blanchard and Yimou Lee): “The U.S. national security adviser warned China… against any attempt to take Taiwan by force, saying amphibious landings were notoriously difficult and there was a lot of ambiguity about how the United States would respond. Robert O’Brien told an event at the University of Nevada in Las Vegas that China was engaged in a massive naval buildup probably not seen since Germany’s attempt to compete with Britain’s Royal Navy prior to World War One. ‘Part of that is to give them the ability to push us back out of the Western Pacific, and allow them to engage in an amphibious landing in Taiwan… The problem with that is that amphibious landings are notoriously difficult… It’s not an easy task, and there’s also a lot of ambiguity about what the United States would do in response to an attack by China on Taiwan,’ he added…”
October 4 – Financial Times (Gideon Rachman): “From Stettin in the Baltic to Trieste in the Adriatic, an ‘iron curtain’ has descended across the continent.’ Winston Churchill’s speech in Fulton, Missouri, in March 1946 is remembered as a key moment in the outbreak of the cold war. ‘If future historians are ever looking for a speech that marked the beginning of a second cold war — this time between America and China — they may point to an address by Mike Pence delivered at Washington’s Hudson Institute in October 2018. ‘China wants nothing less than to push the United States of America from the western Pacific . . . But they will fail,’ the vice-president declared. ‘We will not be intimidated and we will not stand down.’ Pointing to China’s political system, Mr Pence argued: ‘A country that oppresses its own people rarely stops there.’ For students of the first cold war between the US and the USSR, some of this sounded eerily and worryingly familiar.”
October 5 – Reuters (Humeyra Pamuk and Sakura Murakami): “U.S. Secretary of State Mike Pompeo visited Japan… to rally support from Washington’s closest allies in Asia, calling for deeper collaboration with Japan, India and Australia as a bulwark against China’s growing regional influence… In comments before the start of a meeting of the Quad grouping of the four nations’ foreign ministers, Pompeo spoke in typically unsparing terms against Beijing’s ruling Chinese Communist Party. That was in contrast to his three counterparts, all of whom avoided calling out China directly. ‘As partners in this Quad, it is more critical now than ever that we collaborate to protect our people and partners from the CCP’s exploitation, corruption and coercion,’ Pompeo said… ‘We see it in the South and East China Seas, the Mekong, the Himalayas, the Taiwan Strait.’”
October 5 – Wall Street Journal (Alistair MacDonald): “The U.S. government is ramping up efforts to secure minerals critical to modern technology but whose supply is dominated by China—a stranglehold that miners warn could take years to break. In recent years, the U.S. and other Western nations have invested in projects and approved licenses to mine these resources—essential for the production of electric vehicles, cellphones and wind turbines—an effort these countries are now accelerating given how far they still trail China. Last week President Trump signed an executive order declaring a national emergency and authorizing the use of the Defense Production Act to speed the development of mines.”
October 5 – Reuters (Olzhas Auyezov): “Opposition groups took control of most of Kyrgyzstan’s government apparatus on Tuesday after storming buildings during post-election protests, but the president clung to power as unrest risked tipping the Central Asian state into chaos.”
October 7 – Reuters (Nailia Bagirova, Nvard Hovhannisyan, and John Irish): “France, the United States and Russia will step up efforts to end fighting between Azeri and ethnic Armenian forces in the South Caucasus by holding talks in Geneva on Thursday, as fears of a regional war grow.”