A confluence of developments helped reverse acute global de-risking/deleveraging dynamics. New in town, it has taken little time for the bond vigilantes to turn cocky. They quickly felled a Chancellor, a fiscal plan, and even a Prime Minister. They got into the heads of global central bankers.
UK 10-year gilt yields sank 58 bps this week to 3.78%, with yields down 116 bps from October 12th highs. After trading up to 4.40%, two-year UK yields were back down to 3.0% this week. The British pound rallied 2.8%. After trading below 1.07 versus the dollar on September 26th, the pound ended the week at 1.16.
There should be no downplaying the UK dislocation's impact on global markets. After rising last Friday to as high as 4.89%, Italian 10-year yields were back below 4.0% in late-Thursday trading. A Friday Financial Times headline: "ECB Convinces Markets it is About to Turn More Dovish." That didn't take long.
October 28 – Financial Times (Martin Arnold): "It has taken what seem like only slight changes in tone from Christine Lagarde, and the governing council she heads, to convince investors that the European Central Bank is on the verge of a dovish pivot. Markets on Thursday quickly took the ECB president's acknowledgment in a post-council meeting press conference that the eurozone was likely to be heading for recession — long a foregone conclusion for most economists — to mean that the region's rate-setters would ease the extent of rate rises."
Greek 10-year yields sank 56 bps this week to 4.48%. After trading to 5.12% last Friday, Greek yields opened this Friday's session at 4.35%. Spanish yields dropped 38 bps this week to 3.15%; Portuguese yields sank 37 bps to 3.08%; and French yields fell 36 bps to 2.61%. It's still taking some getting used to - crazy volatility even in the bund market. After rising as high as 2.53% last Friday, 10-year German yields traded down to 1.96% in late-Thursday trading (ending the week down 31 bps to 2.10%).
A section from the above FT article was good for a chuckle: "The fierce reaction, however, surprised some of the more hawkish members of the ECB governing council. 'I don't know what this is based on,' said one. 'There are still lots of things to worry about inflation. If we keep getting high inflation readings, we will need another strong response.'"
At least for now, markets seem convinced that the global central bank community has Blinked – just as they knew they would. The Bank of England restarted bond buying before QT even got off the ground. Ahead of the FOMC meeting "black out" period, Bullard, Evans, Daly and Kashkari all last week provided inklings of a Fed soon reassessing its hawkish tightening measures. And Wednesday's FT headline: "Bank of Canada Nearing End of Monetary Tightening, Says Governor."
October 26 – Financial Times (Jaren Kerr): "Canada's central bank is approaching the end of its monetary tightening cycle, its governor said… as policymakers increased the benchmark interest rate by less than economists had expected. The Bank of Canada raised its key interest rate 0.50 percentage points to 3.75%... Although Canada is one of the smaller G7 economies, it has moved more quickly to raise rates… As such, it is seen as something of a forerunner for other central banks that have raised rates aggressively this year and are now discussing when to slow down the pace of increases."
Markets were warmed up and ready to hear niceties from Madame Lagarde. And it didn't hurt that Chinese banks were Wednesday aggressively selling dollars to bolster the renminbi. Beijing had seen enough, which, at least in the near-term, assuaged another market worry. And with markets yearning for that warm, concerted global policy response feeling, surely the Bank of Japan's Haruhiko Kuroda wouldn't, as king of monetary largess, disappoint.
He didn't. "We don't plan to raise interest rates or head for an exit (from easy policy) any time soon." Not even a currency plumbing 32-year lows would elicit a little policy contemplation. Kuroda: "Based on macro-economic models, if the yen's decline is steady it would have a positive impact on the economy." Or that the effectiveness of extraordinary currency intervention measures (estimates as high as $70bn for three rounds of yen support) is in doubt. And how can credibility not be at stake when a central bank ratchets up debt monetization to hold a 25 bps bond yield ceiling? Kuroda: "I don't think yield curve control is behind the yen's drop… YCC is one way of pursuing monetary easing. It's not as if YCC has a different impact on currency moves than quantitative easing."
October 24 – Bloomberg (Toru Fujioka and Saburo Funabiki): "Japan likely conducted its biggest ever currency intervention to prop up the yen late Friday, based on Bank of Japan balance of payment figures and an estimate of flows by money broker Central Tanshi Co. The size of the suspected market action is estimated to be as much as 5.5 trillion yen ($36.8bn)…"
There's some crazy poo going down in Japanese policy circles. Clearly, they skipped reading the memo out of London - dictated by the "Vigilantes".
October 27 – Bloomberg (Yoshiaki Nohara): "Prime Minister Fumio Kishida announced a 71.6 trillion yen ($490bn) economic stimulus package to ease the impact of rising prices on consumers and companies, and support growth as he seeks to bolster sliding support for his year-old government. Fiscal spending will be 39 trillion yen with an extra budget of 29.1 trillion yen to fund the package, Kishida said... In addition to tackling inflation amplified by the cratering yen, the package will also offer companies more incentives to boost wages and help set up the economy to take advantage of the currency's weakness by boosting inbound tourism and exports and bringing factories back to Japan."
I feel for the Japanese people. I feel terribly for the Ukrainians, along with the Europeans. The Russian people don't deserve this. I feel for the Chinese, and my fellow Americans – although we are so fortunate compared to most of the world. I feel for humanity. Global policymaking has been such a disaster.
The Xi Jinping party continues to reverberate.
October 25 – Bloomberg (Hal Brands): "The results of China's 20th Communist Party Congress are in, and they aren't pretty — for China, the US and the world. Xi Jinping secured a historic third term as general secretary of the party while stacking the system with acolytes and dismissing prominent rivals. China is continuing its long march toward personalistic autocracy, a system in which Xi ruthlessly rules the party, the imperatives of political control trump those of economic growth, and the police state flourishes from Beijing to Xinjiang. Yet the most dangerous ramifications may come in foreign policy. Washington and its allies will face a ruler who can go fast and break things — and who may be prone to the catastrophic gambles that isolated strongmen so often make. The signs of Xi's dominance were omnipresent at the Party Congress."
October 24 – CNBC (Abigail Ng): "Hong Kong stocks and mainland China markets fell sharply Monday while other major Asia-Pacific markets rose. Hong Kong's Hang Seng index spiraled down 6.36% to 15,180.69, its lowest levels since April 2009, with the Hang Seng Tech index down more than 9%."
For the week, Hong Kong's Hang Seng index sank 8.3% – pushing y-t-d losses to 36.5%. The Shanghai Composite dropped 4%, with the growth-oriented ChiNext down 6.0%. The Hang Seng China Financials Index's 6.6% slump pushed 2022 losses to 29%, closing the week at the low since 2009.
Chinese developer stocks were slammed 7%, as the historic bond collapse further accelerated. Notably, Vanke CDS surged 230 this week to a record 941 bps. Until recently, China's number two developer was viewed as financially rock solid. Vanke CDS traded at about 200 bps in April. This week, Vanke bond yields surged almost six percentage points to 16.8%, after beginning the year at 3.0%. Yet Vanke appears a pristine Credit compared to number one, Country Garden, with yields (3 1/8 of' 25) closing Friday at 100%.
Country Garden bonds this week joined a packed club of bonds trading at less than 10 cents on the dollar. It's nothing short of astonishing to watch an industry with Trillions of liabilities collapse right before our eyes. Markets have made their judgment: it's going to be a wipeout.
Understandably, China systemic fears are escalating, as reflected in multi-year high CDS prices. Bank of China CDS spiked this week to a high of 159 bps, before closing Friday up four to 138 bps. Industrial and Commercial Bank CDS Tuesday spiked to 160 bps (ended the week up 8 to 144bps). China Construction Bank spiked to 159 bps (up one to 145bps). China Development Bank CDS rose to 151 bps (up 3 to 132 bps). China sovereign CDS traded up to 138 bps, the high since February 2016, before ending the week down one to 119 bps.
October 24 – Financial Times (Edward White and Mercedes Ruehl): "Wealthy Chinese are pulling the trigger on exit plans from their homeland as pessimism builds over the future of the world's second-largest economy under Xi Jinping and the ruling Chinese Communist party… Following the quinquennial party congress, the 69-year-old now has an ironclad grip on power and the potential to rule for the rest of his life. David Lesperance, a Europe-based lawyer who has worked with wealthy families in Hong Kong and China, says Xi extending his rule beyond two terms is a tipping point for the country's business elite… 'The family motto has always been: 'Keep a fast junk in the harbour with gold bars and a second set of papers'. The modern equivalent would be a private jet, a couple of passports and foreign bank accounts,' Lesperance says. 'That is the world we are in… it is tough stuff.'"
Between (panicked) wealthy Chinese, (distraught) international investors and (anxious) global speculators, there is clear potential for historic capital flight. China's "broad fiscal deficit" was at a record $980 billion through the first nine months of the year. System Credit continues to expand at a double-digit pace, as Chinese banks show little inclination to back away from aggressive lending (as directed by Beijing). And China's exports appear poised to slow. There are key factors pointing to acute currency vulnerability – trade surpluses and $3 TN of international reserves notwithstanding.
October 24 – Financial Times (Gideon Rachman): "It is an image that may define a generation. The sight of Hu Jintao, the former president of China, being ushered forcibly from the front row of the Communist party congress in Beijing was a piece of political theatre — sending a message of utter ruthlessness and total control by Xi Jinping. Xi loyalists now dominate all the top positions in the party. Who can doubt that the Chinese leader intends to rule for life and that he will bulldoze whoever stands in his way — whether at home or abroad? Such scenes from Beijing will reinforce the idea stated in the Biden administration's new National Security Strategy that: 'The PRC [People's Republic of China] presents America's most consequential geopolitical challenge.' At a time when Russia is waging war in Europe, it is striking that the US nonetheless identifies China as the bigger threat."
October 26 – Wall Street Journal (Chun Han Wong and Keith Zhai): "Chinese leader Xi Jinping is overhauling his foreign policy team with promotions for some of his most loyal and combative envoys, a move likely to embolden his diplomats' aggressive ethos in confronting the West. Qin Gang, Mr. Xi's handpicked envoy to the U.S. since July 2021, is a leading contender to become China's foreign minister in the spring... Known for his often brusque rhetoric in asserting Beijing's interests, the 56-year-old was appointed to the Communist Party's Central Committee as one of its 205 full members on Saturday—making him the first incumbent ambassador to be promoted directly to full membership of the elite body since the end of the Mao era."
Xi is filling his foreign policy team with loyalists and hawks. And it took a mere couple days to be alarmed by developments. The world can assume Xi has a plan for Taiwan, and the execution of that plan has begun.
October 25 – Bloomberg: "China said it had taken a historical step toward achieving unification with Taiwan, days after the ruling Communist Party concluded a congress that handed President Xi Jinping another five years in power. 'We're closer than ever in history -- and we're more confident and capable than ever -- to realizing national rejuvenation,' Taiwan Affairs Office spokesman Ma Xiaoguang told a regular news briefing... 'Similarly, we're also closer than ever in history -- as well as more confident and capable -- to realizing the complete reunification of the motherland.'"
October 28 – Wall Street Journal (Josh Chin, Ann M. Simmons and Wenxin Fan): "China's top diplomat signaled that Chinese leader Xi Jinping, fresh from extending his power for a norm-breaking third term, intends to double-down on his tight relationship with Russia's Vladimir Putin—driving an even deeper wedge between the two authoritarian rulers and the West. In a Thursday phone call with Russian counterpart Sergei Lavrov, Chinese Foreign Minister Wang Yi said Beijing wants to deepen its relationship with Moscow 'at all levels,' according to a readout published by China's Ministry of Foreign Affairs... China firmly supports the efforts of Mr. Putin 'to unite and lead the Russian people in overcoming difficulties' and 'further establish Russia's status as a major power on the international stage,' Mr. Wang said."
Xi doubling-down on his "no limits" partner Putin – a loathsome pariah for much of the world. This is not a partnership forged for world peace. Coupled with the above Taiwan comments, it was a week that should have the world fearing conflict.
A lot was disregarded this week, with markets – at least in the West – relieved by on edge central bankers and impending pivots. It was reminiscent of previous halcyon "bad news is good news" days. And there was bad news aplenty. Google's earnings miss and the slowing global ad market. Microsoft and weakening cloud growth. Texas Instruments and the big semiconductor companies warning of rapidly deteriorating business conditions. Intel and big cost cutting. Amazon and anemic cloud services and consumer spending.
While equities were being fueled by a decent short squeeze and unwind of hedges, there was important confirmation of the bursting Bubble thesis. And let there be no doubt that the cloud, media and ad spending, semiconductors and technology, and online retail were for years at the epicenter of Bubble excess – at the heart of a historic proliferation of uneconomic negative cash-flow enterprises. They've started to cut back. "Axe to cloud and datacenter spending." "Weaker-than-estimated advertising revenue as customers in the insurance, mortgages and cryptocurrencies industries tightened their ad budgets."
Moreover, there was more evidence that many housing markets have hit the wall. While I don't expect the economy to immediately fall of a cliff, this week had a "Bubble economy" inflection point element to it. Cost cutting.
To be sure, years of free "money" promoted epic resource misallocation and mal-investment. Economic adjustment is unavoidable. This week offered a pretty good example, to the tune of a $2.7 billion write-off.
October 26 – Bloomberg (Keith Naughton and Monica Raymunt): "Argo AI, the autonomous vehicle technology company backed by Ford Motor Co. and Volkswagen AG, is shutting down as the giant automakers shift their strategies for self-driving cars. Ford decided it needed to invest in driver-assistance technology that was more achievable in the near term rather than Argo's goal for driving with little human interaction… Ford's decision led VW to walk away, too… Ford and VW continue to cooperate on electric and commercial vehicles in the US and Europe. 'Profitable, fully autonomous vehicles at scale are a long way off and we won't necessarily have to create that technology ourselves,' Ford Chief Executive Officer Jim Farley said…"
For the Week:
The S&P500 jumped 4.0% (down 18.2% y-t-d), and the Dow rose 5.7% (down 9.6%). The Utilities surged 6.6% (down 7.1%). The Banks rallied 5.9% (down 20.9%), and the Broker/Dealers surged 7.2% (down 4.6%). The Transports jumped 7.0% (down 17.6%). The S&P 400 Midcaps rose 5.3% (down 14.3%), and the small cap Russell 2000 jumped 6.0% (down 17.7%). The Nasdaq100 gained 2.1% (down 29.3%). The Semiconductors rose 4.1% (down 38.3%). The Biotechs jumped 5.5% (down 10.5%). While bullion declined $13, the HUI gold equities index increased 1.4% (down 23.2%).
Three-month Treasury bill rates ended the week at 3.9525%. Two-year government yields declined six bps to 4.42% (up 369bps y-t-d). Five-year T-note yields dropped 16 bps to 4.19% (up 292bps). Ten-year Treasury yields sank 20 bps to 4.02% (up 250bps). Long bond yields fell 19 bps to 4.15% (up 224bps). Benchmark Fannie Mae MBS yields sank 27 bps to 5.74% (up 368bps).
Greek 10-year yields sank 56bps to 4.48% (up 316bps y-t-d). Italian yields collapsed 57 bps to 4.18% (up 300bps). Spain's 10-year yields fell 38 bps to 3.15% (up 259bps). German bund yields sank 31 bps to 2.10% (up 228bps). French yields fell 36 bps to 2.61% (up 242bps). The French to German 10-year bond spread narrowed about five to 51 bps. U.K. 10-year gilt yields sank 58 bps to 3.48% (up 251bps). U.K.'s FTSE equities index increased 1.1% (down 4.6% y-t-d).
Japan's Nikkei Equities Index increased 0.8% (down 5.9% y-t-d). Japanese 10-year "JGB" yields declined a basis point to 0.25% (up 18bps y-t-d). France's CAC40 rallied 3.9% (down 12.3%). The German DAX equities index recovered 4.0% (down 16.6%). Spain's IBEX 35 equities index surged 4.9% (down 9.1%). Italy's FTSE MIB index rose 4.5% (down 17.6%). EM equities were mixed. Brazil's Bovespa index dropped 4.5% (up 9.3%), while Mexico's Bolsa index rose 4.2% (down 5.9%). South Korea's Kospi index rallied 2.5% (down 23.8%). India's Sensex equities index increased 1.1% (up 2.9%). China's Shanghai Exchange Index sank 4.0% (down 19.9%). Turkey's Borsa Istanbul National 100 index declined 1.4% (up 108.8%). Russia's MICEX equities index recovered 6.1% (down 42.8%).
Investment-grade bond funds posted outflows of $363 million, while junk bond funds reported inflows of $2.796 billion (from Lipper).
Federal Reserve Credit dropped $19.4bn last week to $8.701 TN. Fed Credit was down $199bn from the June 22nd peak. Over the past 163 weeks, Fed Credit expanded $4.975 TN, or 133%. Fed Credit inflated $5.890 Trillion, or 210%, over the past 520 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt last week increased $2.0bn to $3.337 TN. "Custody holdings" were down $150bn, or 4.3%, y-o-y.
Total money market fund assets were little changed at $4.584 TN. Total money funds were up $25bn, or 0.6%, y-o-y.
Total Commercial Paper rose $13.6bn to $1.301 TN. CP was up $121bn, or 10.2%, over the past year.
Freddie Mac 30-year fixed mortgage rates jumped 14 bps to 7.08% (up 394bps y-o-y) - the high since April 2002. Fifteen-year rates rose 13 bps to 6.36% (up 399bps) - the high since July 2007. Five-year hybrid ARM rates surged 25 bps to 5.96% (up 340bps) - the high since November 2008. Bankrate's survey of jumbo mortgage borrowing costs had 30-year fixed rates down 11 bps to 7.07% (up 394bps).
Currency Watch:
October 25 – Financial Times (Hudson Lockett, William Langley and Cheng Leng): “China’s renminbi has hit its weakest level against the dollar since 2007 as concerns over President Xi Jinping’s appointment of a harder line leadership team and a struggling economy spread from equities to currency markets. The renminbi… fell as much as 0.6% on Tuesday to Rmb7.3084 per dollar. The fall came after the People’s Bank of China moved the midpoint of the currency’s trading band to the lowest level since the global financial crisis. China’s currency has lost 13% of its value in the year to date.”
October 26 – Reuters: “Major Chinese state-owned banks sold U.S. dollars in both onshore and offshore markets in late trade on Tuesday to prop up the weakening yuan… Such dollar selling comes as the Chinese currency is facing mounting downside pressure, with the onshore yuan hitting the weakest level since December 2007 and the value of yuan against currencies of its major trading partners at a five-month low. The selling of dollars by state banks in early U.S. trading hours lifted the yuan, said one of the sources, noting the action took place in both onshore and offshore markets.”
October 27 – Bloomberg: “After a months-long effort to prop up the yuan, the People’s Bank of China has cycled through most of its policy tools, leaving it with some tough choices. As the currency hovers near the weak end of a daily 2% trading band against the dollar, the specter of extreme measures -- however unlikely -- is growing. Already, there are signs that China is intervening in foreign-exchange markets, like Japan has done. A one-time revaluation and restricting the yuan’s range are other major tools.”
For the week, the U.S. Dollar Index fell 1.1% to 110.75 (up 15.8% y-t-d). For the week on the upside, the British pound increased 2.8%, the Swedish krona 2.1%, the Norwegian krone 2.0%, the South Korean won 1.3%, the euro 1.0%, the New Zealand dollar 1.0%, the Mexican peso 0.7%, the Australian dollar 0.5%, the Canadian dollar 0.3%, the Singapore dollar 0.3%, and the Swiss franc 0.2%. On the downside, the Brazilian real declined 2.5%, and the South African rand slipped 0.3%. The Chinese (onshore) renminbi declined 0.30% versus the dollar (down 12.36% y-t-d).
Commodities Watch:
October 23 – Bloomberg (Alfred Cang and Jack Farchy): “For the past 15 years, the center of gravity of the global copper market has been a row of warehouses in Shanghai’s free-trade zone where the Yangtze River meets the Pacific. Traders from London to Lima would obsess over the flows in and out of Shanghai’s huge bonded copper stockpile. It was the focal point for a multi-billion-dollar cash-for-copper trade, whereby Chinese companies would use metal as collateral for cheap financing… But now China’s bonded warehouses are all but empty. The once-frenetic flow of metal into the stockpile has come to a juddering halt as two dominant financiers of Chinese metals, JPMorgan… and ICBC Standard Bank Plc, have halted new business there. Numerous traders and bankers… said they believe the trade is dead for now…”
The Bloomberg Commodities Index increased 0.4% (up 12.7% y-t-d). Spot Gold declined 0.8% to $1,645 (down 10.1%). Silver dipped 0.8% to $19.23 (down 17.4%). WTI crude rallied $2.85 to $87.90 (up 17%). Gasoline surged 9.2% (up 30%), and Natural Gas gained 3.9% to $5.68 (up 52%). Copper declined 1.3% (down 23%). Wheat fell 2.5% (up 8%), and Corn slipped 0.5% (up 15%). Bitcoin jumped 7.6% this week, or $1,450, to $20,620 (down 55.5%).
Market Instability Watch:
October 24 – Reuters (Saqib Iqbal Ahmed and Carolina Mandl): “A surge in short-term options bets, rock-bottom equity allocations and tandem moves in individual stocks are exacerbating swings in U.S. equity markets that have surprised bulls and bears alike in recent weeks. One-month daily volatility for the S&P 500… has climbed to its highest level since early July. The index has logged 40 moves of over 2% in either direction this year, a number only surpassed during the height of the pandemic selloff in 2020 and, before that, the depths of the financial crisis of 2008-2009.”
October 25 – Financial Times (Robin Wigglesworth): “All monetary eyes are on Japan at the moment, where the central bank’s resolute commitment to mega-loose policy sticks out like a sore thumb. Deutsche Bank argues its yield curve control is now de facto dead. While most other central banks around the world have gotten their hike on in 2022, the Bank of Japan has stuck to its strategy of holding short term rates below zero and pinning the yield of the 10-year Japanese government bond market at or below 0.25%. The motivation is to finally break free of the deflationary miasma that has plagued Japan for a few decades now. But it has pretty much killed trading in JGBs, and led to the yen crapping the bed this year.”
October 24 – Bloomberg (Giulia Morpurgo, Neil Callanan, and Olivia Raimonde): “Junk bond sales are falling at an unprecedented rate globally…, a double blow to riskier companies in need of financing in the next few years. Issuance for high yield corporates plummeted 73% through Oct. 24 compared with the same period last year… The decline highlights how money managers have been avoiding the high-yield space even as yields soar, fearing that borrowers could be vulnerable to inflation and the looming economic downturn. Worries about potential default risk have left junk-rated borrowers struggling to access capital via public markets.”
October 28 – Reuters (Noele Illien, John O'Donnell and Davide Barbuscia): “After months of reflecting, Credit Suisse's chairman Axel Lehmann revealed an overhaul ‘to rebuild Credit Suisse as a strong ... bank with a firm foundation, rock-solid like our Swiss mountains’. It did not take long for the first cracks to appear. The announcement of the blueprint early on Thursday triggered a sell-off in the bank's stock that lobbed more than 2 billion Swiss francs ($2bn) off its market worth, almost a fifth of its value, taking its worth to less than 11 billion Swiss francs.”
October 26 – Financial Times (Nikou Asgari and Martin Arnold): “The eurozone’s repo and money markets are becoming more dysfunctional and threaten the European Central Bank’s ability to push its monetary policies, an influential trade group has warned. The International Capital Market Association… said it had become concerned about the functioning of Europe’s €10tn repo markets because of a scarcity of liquid assets, and excess liquidity in the region’s banking system. ICMA’s warning comes amid fears climbing global interest rates and poor trading conditions have heightened the risk of market instability… ‘Rising dysfunction in the market could imperil the transmission of monetary policy,’ ICMA wrote in a letter to the ECB’s director-general of market operations, signed by division heads at BlackRock, Axa Investment Managers, Barclays and UBS.”
UK Crisis Watch:
October 25 – Reuters (Kate Holton, Elizabeth Piper and Alistair Smout): “Rishi Sunak became Britain's third prime minister in two months… and pledged to lead the country out of a profound economic crisis and rebuild trust in politics. Sunak quickly reappointed Jeremy Hunt as his finance minister in a move designed to calm markets that had balked at his predecessor's debt-fuelled economic plans. The former hedge fund boss said he would unite the country and was expected to name a cabinet drawn from all wings of the party to end infighting and abrupt policy changes that have horrified investors and alarmed international allies.”
October 24 – Bloomberg (Alice Gledhill): “UK bonds posted some of their biggest gains on record as investors bet incoming Prime Minister Rishi Sunak will turn the page on weeks of turmoil dogging the nation’s markets and restore credibility to economic policy making. Short-dated notes led the rally with the two-year yield falling by the most since 1993 after Sunak -- a former chancellor who had issued a warning over Liz Truss’s ‘fairytale’ tax cuts -- emerged as the winner in the race to succeed her. The gains were supercharged as traders pared bets on future rate hikes.”
October 25 – Reuters (William James and Sachin Ravikumar): “Britain's new Prime Minister Rishi Sunak… delayed the announcement of a keenly awaited plan for repairing the country's public finances until Nov. 17, two-and-a-half weeks later than previously planned.”
October 23 – Financial Times (Patrick Jenkins): “To describe the ‘mini’ Budget of outgoing prime minister Liz Truss and outgone chancellor Kwasi Kwarteng as ill thought-out is almost a compliment. If they underestimated how spooked the markets would be by £45bn of unfunded tax cuts, they clearly had no notion at all about the collateral damage it would cause — to mortgages, to government and corporate borrowing costs and most alarmingly to the £1.4tn defined benefit pension system, via the now infamous ‘LDI’ hedging structures buried within many schemes. Happily, it seems that some of the harm caused by the dynamic duo’s ‘growth’ plan has receded… Unhappily, other financial scars run deeper.”
Bursting Bubble and Mania Watch:
October 25 – Reuters (Sheila Dang and Eva Mathews): “Google parent Alphabet Inc's disappointing ad sales sparked worries across the digital media sector… as advertisers cut back on their spending in the face of an economic slowdown. Alphabet called out slowing spending by advertisers on YouTube, said financial services spending was cooling on Google, and plans to cut hiring by more than half. The negative results shattered many expectations that Google, which is the world's largest digital advertising platform by market share, would remain strong in a weakening economy and reinforced worries on Wall Street that inflation will continue to hurt advertising spending.”
October 28 – Reuters (Tiyashi Datta, Jane Lanhee Lee and Chavi Mehta): “In a further sign that large companies may be girding against an imminent recession, U.S. tech giants Amazon.com, Microsoft and Intel said this week that customers were taking an axe to cloud and datacenter spending. Cloud services for years has been one of the largest and most dependable sources of growth for some of the biggest tech companies, including during the pandemic as people worked and studied from home… ‘The AWS slowdown is a clear sign that businesses are beginning to trim costs, so this will likely put more of a squeeze on Amazon's bottom line in the coming quarters,’ said Andrew Lipsman, principal analyst at Insider Intelligence.”
October 27 – Bloomberg (David Welch and Craig Trudell): “The autonomous-driving sector just endured a day that tech and automotive giants may well look back on the way Wall Street recalls March 16, 2008. Whereas the day Bear Stearns collapsed was an epochal event in the global financial crisis, when flawed assumptions about the value of mortgages pushed banks to the brink — and some over the precipice — Oct. 26, 2022, will go down as the date that seismic consequences emerged from years of faulty presumptions about driverless-vehicle technology. First came the shock that Argo AI, the startup Ford and Volkswagen had each seeded with multibillion-dollar investments, was shutting down. Within hours, Reuters reported that Tesla’s self-driving claims are under criminal investigation.”
October 23 – Financial Times (Chris Newlands): “It should come as no surprise that private credit has ballooned as an asset class over the past 20 years. A market with as many monikers as it has — five and counting — clearly always had the scope to get bigger. Whether known as private debt, non-bank lending, alternative lending, shadow lending, or private credit, the investment class has witnessed eye-popping growth... As other asset classes shrank during the global financial crisis, private credit took off. Banks battened down the hatches and reined in their lending to smaller and riskier borrowers, creating a funding gap that non-bank lenders readily stepped in to fill. The result has been the creation of a burgeoning asset class for investors. It grew from just $41bn in December 2000 to $311bn by December 2010, according to… Preqin. As of December 2021, it had swelled to $1.22tn.”
October 28 – Bloomberg (John Gittelsohn): “The cost of debt on commercial property has risen so fast that it’s now more expensive to finance many real estate deals than owners currently earn from rents. About $5.5 billion, or 28%, of new commercial mortgage-backed securities had negative leverage — where the cost of debt exceeded projected returns on investments — in the third quarter, according to… Moody’s Analytics. Only 8% of similar loans had negative leverage in the second quarter and barely 2% were negative in the third quarter of 2021.”
October 28 – Bloomberg (Paula Seligson): “Elon Musk is the new owner of Twitter Inc., ending months of uncertainty for Silicon Valley and shareholders. Yet for debt bankers on Wall Street, the drama is far from over, as they’ll need to convince investors that the Chief Twit’s ambitions for the company can justify its heavy debt load. With the $44 billion deal now closed, a Morgan Stanley-led cohort that provided about $13 billion of debt financing to help fund the acquisition of Twitter is now saddled with risky loans that they never intended to keep on their books. The banks now face the unenviable task of selling it off without realizing big losses -- and that’s not going to be easy.”
October 25 – Financial Times (Steve Johnson): “One year after its record-breaking launch, the world’s first exchange traded fund tracking the price of bitcoin has lost more of investors’ dollars than any other ETF debut. Asset manager ProShares launched its Bitcoin Strategy fund in October 2021, and it immediately became the most successful new ETF in history, amassing more than $1bn in its first week… Bitcoin enthusiasts proclaimed the launch as the moment when crypto joined the world’s biggest equities market and became enmeshed in mainstream investment strategies for retail and institutional buyers alike. But one year into its existence, the fund has lost money on an unprecedented scale... Its 70% share price drop also makes this the sixth-worst performing debut ETF of its kind of all time…”
October 25 – Bloomberg (Jessica Menton): “Bank of America Corp.’s clients poured money into US equities for the sixth consecutive week led by hedge funds and private clients, with the intake by single stocks nearing historic extremes. In the past three weeks, inflows into single stocks as a percentage of the S&P 500 Index’s market capitalization were in the 99th percentile of history since 2008…”
Ukraine War Watch:
October 28 – Reuters (David Ljunggren and Ronald Popeski): “President Volodymyr Zelenskiy on Thursday stood outside in the dark beside the wreckage of a downed drone and vowed that widespread Russian attacks on power plants would not break Ukrainian spirits… ‘Shelling will not break us - to hear the enemy's anthem on our land is scarier than the enemy's rockets in our sky. We are not afraid of the dark,’ he said.”
October 27 – Wall Street Journal (Ian Lovett): “Kyiv residents are facing prolonged blackouts, after Russian airstrikes again hit the Ukrainian electric system overnight, further degrading the country’s ability to keep the lights on. Yasno, a Ukrainian energy company, wrote… that Russia had again hit the power grid in the Kyiv region Wednesday night. Overall system capacity was now down 30% in the area, the company said. ‘The destruction is serious,’ Yasno wrote. ‘Almost half of Kyiv may remain without light.’”
October 27 – Reuters (Guy Faulconbridge): “President Vladimir Putin said… the world faced the most dangerous decade since World War Two as Western elites scrambled to prevent the inevitable crumbling of the global dominance of the United States and its allies. In one of his longest public appearances since he sent troops into Ukraine on Feb. 24, Putin signalled he had no regrets about what he calls ‘a special operation’ and accused the West of inciting the war and of playing a ‘dangerous, bloody and dirty’ game that was sowing chaos across the world. ‘The historical period of the West’s undivided dominance over world affairs is coming to an end,’ Putin… told the Valdai Discussion Club during a session entitled ‘A Post-Hegemonic World: Justice and Security for Everyone’. ‘We are standing at a historical frontier: Ahead is probably the most dangerous, unpredictable and, at the same time, important decade since the end of World War Two.’”
October 27 – Reuters (Joey Roulette): “A Russian official's threat this week to ‘strike’ Western satellites aiding Ukraine highlights an untested area of international law, raising concerns among space lawyers and industry executives about the safety of objects in orbit. ‘Quasi-civilian infrastructure may be a legitimate target for a retaliatory strike,’ senior foreign ministry official Konstantin Vorontsov told the United Nations…”
October 27 – Reuters (Steve Holland): “Any response on U.S. infrastructure will be met with a response, the White House said… after a senior Russian foreign ministry official said Western commercial satellites could become legitimate targets for Russia if they were involved in the war in Ukraine.”
October 24 – Financial Times (Henry Foy in Brussels, John Paul Rathbone in London, Max Seddon in Riga and Felicia Schwartz): “A flurry of phone calls from Russia’s defence minister Sergei Shoigu warning of an imminent ‘dirty bomb’ attack has sent alarm bells ringing in western capitals, where nervousness over Moscow’s threats to use nuclear weapons against Ukraine has been rising. The threat, which was condemned by the US, UK and France as an attempt to lay the ground for a ‘false flag’ attack blamed on Ukraine, has heightened fears that the eight month-long war will go nuclear… ‘Ukraine has neither the need nor the ability to use a dirty bomb. It is Russia that is losing. The worry is that Russia may use the claim that Ukraine is poised to use a dirty bomb as a pretext for its own preventive, escalatory attack,’ said Nigel Gould-Davies, senior fellow at the International Institute for Strategic Studies…”
October 23 – Reuters: “Russian Defence Minister Sergei Shoigu told his French counterpart in a telephone call… that the situation in Ukraine was rapidly deteriorating and trending towards ‘uncontrolled escalation’. In a phone call with French Defence Minister Sebastien Lecornu published by the Russian side, Shoigu said Moscow had concerns Ukraine could use a ‘dirty bomb’ in the conflict, without providing evidence to support the suggestion that Ukraine might use such a weapeon.”
U.S./Russia/China Watch:
October 26 – Bloomberg: “Russia carried out military exercises simulating a retaliatory nuclear strike as President Joe Biden warned Vladimir Putin that any use of a nuclear weapon would be an ‘incredibly serious mistake.’ Echoing Biden’s warning of grave consequences, US Secretary of State Antony Blinken said… that ‘we’ve communicated that very clearly and directly to the Russians, including President Putin.’ As Putin oversaw Russia’s drills, he was told by his defense chief that the maneuvers on Wednesday were meant to simulate a ‘massive nuclear strike’ in response to an attack…”
October 27 – Reuters (Nailia Bagirova and Olesya Astakhova): “Igor Sechin, chief executive of Russian oil giant Rosneft and one of Vladimir Putin's closest allies, on Thursday heaped praise on China's leaders and said Taiwan would return to its ‘native harbour’ on time. Sechin said that decisions taken by the 20th Communist Party Congress, which cemented Xi Jinping position as the most powerful Chinese leader since Mao Zedong, would provide for a new level of development for the country.”
October 24 – Associated Press (Joe McDonald): “The world faces the prospect of more tension with China over trade, security and human rights after Xi Jinping, the country’s most powerful leader in decades, awarded himself another term as leader of the ruling Communist Party. Xi has tightened control at home and is trying to use China’s economic heft to increase its influence abroad… Activists say Xi’s government wants to deflect criticism of abuses by changing the U.N.’s definition of human rights. Xi says ‘the world system is broken and China has answers,’ said William Callahan of the London School of Economics. ‘More and more, Xi Jinping is talking about the Chinese style as a universal model of the world order, which goes back to a Cold War kind of conflict.’”
Economic War/Iron Curtain Watch:
October 23 – Wall Street Journal (Karen Hao and Jemal R. Brinson): “The new U.S. restrictions on exports of chips and related items to China are aimed at using America’s strength in critical areas of the semiconductor supply chain to weaken China’s advanced-chip development. The semiconductor industry has long been an example of an integrated global supply chain. Over the years, the industry’s steep research and development costs and intensive capital expenditures have driven different countries to specialize in different steps of the chip-making process. Today no one country tends to do it all. ‘Everyone is very interdependent on each other,’ says Anne Hoecker, a partner in the semiconductor group at the management consulting firm Bain & Co. Still, the U.S. reigns in some of the most critical—and earliest—parts of the chain, especially those that require intense research and development.”
October 24 – Reuters: “China's exports to sanctions-hit Russia rose at a double-digit pace for the third consecutive month in September, bucking the trend of weakening external demand elsewhere amid the Russia-Ukraine war and a global economic slowdown… Shipments of Chinese goods to Russia rose 21.2% from a year earlier in dollar terms, slowing from a 26.5% increase in August yet outperforming China's overall export growth of 5.7% by a large margin, as interest rate hikes to curb red-hot inflation in major economies weakened demand for Chinese goods.”
Inflation Watch:
October 25 – Yahoo Finance (Ines Ferré): “Consumers could be paying at least 20% more on their heating bills this winter. Tight oil refining capacity and low stockpiles are expected to keep prices elevated during the colder months. ‘Our heating, oil inventories are very low. I mean the lowest, I think, that they've ever been. Does it mean that we're going to have run out of inventories? No, it means that we're going to have the potential for spikes, particularly in a cold winter,’ CIBC Private Wealth Senior Energy Trader Rebecca Babin told Yahoo Finance…”
October 23 – Wall Street Journal (Thomas Gryta and Drew FitzGerald): “Procter & Gamble Co. is ramping up advertising on premium brands. Verizon Communications Inc. is raising prices on wireless plans, while Whirlpool Corp. has slashed production of appliances. High levels of inflation in the U.S. and shifts in underlying demand are putting the spotlight on the strategies executives are taking to navigate a global economy where costs are rising and consumer appetite for some products has waned. The first batch of earnings reports from companies for the September quarter show that corporate profit margins are feeling the squeeze… With a fifth of the S&P 500 index already reporting, …Refinitiv projects quarterly earnings will decline 3.5% from a year ago, excluding the energy sector.”
Biden Administration Watch:
October 26 – Bloomberg (Jill R Shah and Carmen Arroyo): “US Secretary of State Antony Blinken accused China of undermining the decades-long status quo that has kept both nations from going to war over Taiwan, saying Beijing was trying to ‘speed up’ its seizure of the island. ‘What’s changed is this -- a decision by the government in Beijing that that status quo was no longer acceptable, that they wanted to speed up the process by which they would pursue reunification,’ Blinken said… ‘They also, I think, made decisions about how they would do that, including exerting more pressure on Taiwan, coercion -- making life difficult in a variety of ways on Taiwan in the hopes that that would speed reunification,’ Blinken said.”
October 25 – AFP: “Saudi Arabia's energy minister… blasted the release of emergency oil stocks as an attempt to ‘manipulate markets’, the latest apparent salvo in a spat with Washington over oil production. ‘People are depleting their emergency stocks, had depleted it, used it as a mechanism to manipulate markets while its profound purpose was to mitigate shortage of supply,’ Prince Abdulaziz bin Salman told an investor conference… ‘However, it is my profound duty to make it clear to the world that losing emergency stock may become painful in the months to come.’”
Federal Reserve Watch:
October 25 – Bloomberg (Enda Curran, Jana Randow and Jonnelle Marte): “Profits and losses aren’t usually thought of as a consideration for central banks, but rapidly mounting red ink at the Federal Reserve and many peers risks becoming more than just an accounting oddity… Falling bond prices, in turn, mean paper losses on the massive holdings that the Fed and others accumulated during their rescue efforts in recent years… ‘The problem with central bank losses are not the losses per se -- they can always be recapitalized -- but the political backlash central banks are likely to increasingly face,’ said Jerome Haegeli, chief economist at Swiss Re, who previously worked at Switzerland’s central bank.”
U.S. Bubble Watch:
October 27 – CNBC (Jeff Cox): “The U.S. economy posted its first period of positive growth for 2022 in the third quarter, at least temporarily easing recession fears… GDP, a sum of all the goods and services produced from July through September, increased at a 2.6% annualized pace for the period, according to the advance estimate… That reading follows consecutive negative quarters to start the year…”
October 25 – Wall Street Journal (Nicole Friedman): “Home prices posted their biggest month-on-month decline in more than a decade in August… The S&P CoreLogic Case-Shiller National Home Price Index, which measures average home prices in major metropolitan areas across the nation, fell 1.1% in August from July, the second straight month-over-month decline. The August decline was also the biggest month-on-month decrease since December 2011. The index rose 13% in the year that ended in August, down from a 15.6% annual rate the prior month… ‘With inventory rising so quickly and demand slowing so quickly, we have returned to a buyer’s market,’ said Ali Wolf, chief economist at… Zonda. ‘If mortgage rates are 6%-plus, in my mind, there’s no doubt that we’re going to see a downward adjustment to home prices.’”
October 26 – CNBC (Diana Olick): “Mortgage demand fell last week to nearly half what it was a year ago, according to the Mortgage Bankers Association, as rates hit their highest level in 21 years. Overall, demand for mortgages is at the lowest level since 1997. Mortgage applications to purchase a home dropped 2% from the prior week and were 42% lower than the same week in 2021. The annual comparison continues to jump each week, as fewer buyers either want or can afford to get into this very pricey housing market…”
October 26 – Reuters (Lindsay Dunsmuir): “The average interest rate on the most popular U.S. home loan rose to its highest level since 2001 as tightening financial conditions weigh on the housing sector… The average contract rate on a 30-year fixed-rate mortgage rose by 22 bps to 7.16% for the week ended Oct. 21 while the MBA's Market Composite Index, a measure of mortgage loan application volume, fell 1.7% from a week earlier. Mortgage application activity is at its slowest pace since 1997.”
October 26 – Reuters (Lucia Mutikani): “Sales of new U.S. single-family homes dropped in September…, more evidence that higher mortgage rates are choking the housing market. New home sales decreased 10.9% to a seasonally adjusted annual rate of 603,000 units last month… August's sales pace was revised down to 677,000 units from the previously reported 685,000 units… Sales plummeted 17.6% on a year-on-year basis in September. They peaked at a rate of 993,000 units in January 2021, which was the highest level since the end of 2006… The median new house price in September was $470,600, a 13.9% increase from a year ago. There were 462,000 new homes on the market at the end of last month, up from 457,000 units in August.”
October 28 – Bloomberg (Vince Golle): “US pending home sales sank last month by the most since the immediate aftermath of the pandemic, illustrating a swift and steep downturn for a housing market beset by soaring borrowing costs. The National Association of Realtors’ index of contract signings to purchase previously owned homes decreased 10.2% in September, the sharpest fall since April 2020…”
October 26 – Bloomberg (Ana Monteiro): “The US merchandise-trade deficit widened in September for the first time in six months as imports grew and some exports plunged. The shortfall widened 5.7% to $92.2 billion last month… Exports declined 1.5% to $177.6 billion. Imports rose to $269.8 billion, also the first increase since March.”
October 24 – Bloomberg (Vince Golle): “US business activity contracted in October for a fourth-straight month as concerns about inflation and sluggish demand weighed on the outlook. The S&P Global flash composite purchasing managers output index decreased 2.2 points to 47.3… Manufacturers and services providers’ views on the outlook also deteriorated in October, leading the composite future index to fall to its lowest level since September 2020. A measure of business activity at service providers slid to 46.6 in the month, marking the second-worst reading since May 2020. Firms attributed the decline to weak client demand, rising interest rates and stubborn inflation…”
October 25 – Bloomberg (Jenny Surane): “Visa Inc. saw spending growth slow the most since the depths of the pandemic as inflation weighs on consumers… Volume on the network rose 10.5% to $2.93 trillion in the fiscal fourth quarter, Visa said... That was shy of the 11% increase analysts… were expecting and a decrease from the 12% growth the firm reported for the previous three months. It was the slowest growth since Visa posted less than 5% for the first fiscal quarter of 2021.”
October 25 – Wall Street Journal (Will Parker): “After a long stretch of record-high rents, Americans are renting fewer apartments as demand in the third quarter fell to its lowest level in 13 years. Some renters are choosing to take on roommates, while others are boarding with family or friends. More people are opting to stay longer in their parents’ homes or moving back in…, according to a recent UBS survey. Apartment demand in the quarter, measured by the one-year change in the occupancy of units, was the lowest since 2009… Measured quarterly, the drop in demand was the worst of any third quarter—normally prime leasing season—in the more than 30 years RealPage has compiled the data.”
October 25 – Reuters (Jessica Menton): “Hyundai Motor Co global chief operating officer Jose Munoz… said the automaker's new $5.54 billion Georgia electric vehicle and battery plant could begin production in 2024 and eventually produce 500,000 vehicles annually… Munoz told reporters the plant will produce five or six models and could begin building vehicles as early as the third quarter of 2024.”
Fixed Income Watch:
October 28 – Bloomberg (Kevin Simauchi and Jeremy Hill): “A heap of distressed debt is expanding in the US corporate bond market and investors worry that a burst of defaults will follow. The amount of dollar-denominated bonds and loans trading at levels indicating distress is the largest since September 2020, reaching $271.3 billion last week after five straight weeks of growth… Companies that binged on low-cost borrowing in recent years are facing the prospect of refinancing at exorbitant yields -- if they can find any investors…”
October 26 – Bloomberg (Jill R Shah and Carmen Arroyo): “The current environment of ever-rising rates is pushing riskier US borrowers to buy themselves time by putting off looming debt maturities. Through a variety of tactics, sometimes labeled by market professionals as ‘amend and extend,’ companies are prolonging payment dates rather than try to sell junk-rated refinancing debt at exorbitant yields… ‘We expect to see a pick up in amend-to-extend activity as borrowers look to address near term maturities,’ said Scott Snell, portfolio manager at Tetragon Credit Partners… ‘It’s better for issuers to negotiate directly with existing lenders, who don’t want to push their companies into default.’”
October 28 – Bloomberg (Ronan Martin and Paul Cohen): “It was supposed to be the silver lining to a year of brutal losses. As bond-fund managers watched the market value of their portfolio decline rate hike after rate hike, one thing was certain: companies would soon have to return to the market offering juicier yields… Of the 1,555 investment-grade bonds worth over $1.3 trillion that have been sold in the US and Europe since Russia’s invasion of Ukraine, all but 137 are now trading below their offering price... It totals up to paper losses of nearly $106 billion for investors so far.”
China Watch:
October 24 – Bloomberg (Jeanny Yu and Abhishek Vishnoi): “Monday’s epic selloff in Chinese assets was front-page news from Hong Kong to London and New York. But for Chinese state media, it’s as if the rout never happened. Instead, the country’s top financial newspapers dedicated the bulk of their front pages to official news articles about President Xi Jinping. These included his meeting with top military leaders and Communist Party officials’ interpretation of Xi’s keynote report at the Party Congress… Chinese stocks sank by the most since 2008 in Hong Kong and the yuan fell to a 14-year-low on Monday amid concern Xi’s increased dominance over the nation’s top political bodies will be detrimental to the economy and private enterprise.”
October 23 – Financial Times (Tom Mitchell, Ryan McMorrow and Edward White): “President Xi Jinping tightened his grip on power… as the 20th Communist party congress concluded with the premature retirement of Premier Li Keqiang from his top party post and the ‘astonishing’ sight of Xi’s predecessor being escorted from the main stage. ‘The party’s achievements in the past hundred years are incomparably glorious,’ Xi said in his closing remarks... ‘The party is flourishing and we are fully confident and capable of creating new and greater miracles.’ More than 2,200 delegates to the week-long congress had approved a series of revisions to the party’s constitution that effectively proclaim Xi as Communist China’s most important leader since its revolutionary hero, Mao Zedong. The revisions recognise Xi, who will continue his reign as party leader and military commander-in-chief for at least another five years, as ‘the core of the whole party’.”
October 23 – Guardian (Helen Davidson, Emma Graham-Harrison and Verna Yu): “Xi Jinping has eliminated key rivals from China’s leadership and consolidated his grip on the country on the final day of a Communist party meeting at which former president Hu Jintao was led away unexpectedly from the main stage… The closing session of the 20th congress of the Chinese Communist party (CCP) ended a weekend of triumph for Xi that makes him China’s most powerful ruler since Mao Zedong. He has swept away the last norms of a political order built since Mao’s death to prevent a return to the worst excesses of rule by a single autocrat.”
October 28 – Bloomberg: “Investors hoped China would ease its stringent Covid Zero strategy once the pivotal Communist Party congress cemented President Xi Jinping’s grip on power. Instead, the opposite seems to be happening. Fresh lockdowns are being imposed from Wuhan, Covid’s original epicenter, to China’s industrial belt on the east coast. Schools and dining in at restaurants in the southern manufacturing powerhouse of Guangzhou have been suspended, while targeted shutdowns in the metropolises of Beijing and Shanghai continue, with apartment blocks and neighborhoods subject to stay-at-home orders if even a close contact of someone infected has visited.”
October 24 – Reuters (Medha Singh): “U.S.-listed shares of Chinese companies slumped on Monday after President Xi Jinping's new leadership team sparked investor concerns… Ecommerce giants Alibaba , JD.com as well as internet behemoth Baidu crashed between 14% and 17%...”
October 24 – Reuters (Yew Lun Tian and Tony Munroe): “China's Xi Jinping secured a precedent-breaking third leadership term on Sunday and introduced a top governing body stacked with loyalists, cementing his place as the country's most powerful ruler since Mao Zedong. Shanghai Communist Party chief Li Qiang followed Xi onto the stage at the Great Hall of the People as the new Politburo Standing Committee was introduced, putting him in line to become premier when Li Keqiang retires in March. The other members of the seven-man Standing Committee are Zhao Leji and Wang Huning, who return from the previous committee, and newcomers Cai Qi, Ding Xuexiang and Li Xi. Li Qiang is also new to the Standing Committee. All are seen by analysts to have close allegiance to Xi…”
October 25 – Bloomberg (Jeanny Yu and Abhishek Vishnoi): “Xi Jinping’s tightening grip on power is testing the resolve of investors in China. Those departing wiped out a staggering $447 billion the day after Xi broke China’s collective leadership, driving fears over the nation’s future growth model to a fever pitch. International money managers are ‘frustrated and angry,’ according to Bank of America. ‘Obviously the outlook is not good for China investments in view of the political changes,’ said Mark Mobius… ‘Given the Chinese political stance and the pushback from the US, we can only expect heightened tensions and possibly additional sanction in the technology arena. Not to mention other trade barriers.’”
October 24 – Reuters (Ryan Woo and Ellen Zhang): “China's economy rebounded at a faster-than-anticipated clip in the third quarter, but a more robust revival in the longer term will be challenged by persistent COVID-19 curbs, a prolonged property slump and global recession risks. Helped by a raft of government measures, the world's second-biggest economy expanded 3.9% in July-September from a year earlier…”
October 23 – Bloomberg: “China’s home prices sank for a 13th month in September… New-home prices in 70 cities, excluding state-subsidized housing, dropped 0.28% last month from August, when they fell 0.29%... The second-hand market fared worse, with existing-home prices declining 0.39%, the most since October 2014.”
October 26 – Bloomberg: “China’s broad fiscal deficit hit an all-time high in the first nine months of the year as Covid outbreaks and a housing market slump continue to erode government income. The deficit in the budgets for all levels of government was 7.16 trillion yuan ($980bn)... That is a record for any comparable period and is almost three times the 2.6 trillion yuan shortfall in January-September last year.”
October 23 – Bloomberg: “China’s export growth slowed in September, while imports remained weak as global demand cools. Exports in US dollar terms expanded 5.7% last month from a year earlier... That was slower than the 7.1% growth in August, but beat the 4% rise forecast by economists… Imports rose 0.3% in September from a year earlier, unchanged from August. The trade balance increased to $84.74 billion.”
October 25 – Reuters (Ryan Woo, Ellen Zhang and Bernard Orr): “China's economic growth is hitting an early speed bump in the fourth quarter as COVID-19 curbs and anxieties further tapped the brakes on travel and shipping, constraining consumption and commerce in the world's second-largest economy. Mobility statistics - from metro passenger traffic in cities and flight cancellations to domestic container handling at major ports - have worsened in October despite falling local coronavirus cases, suggesting COVID-19 preventive measures, or fear of those measures, are still stifling economic activity.”
October 25 – Bloomberg (Alice Huang): “One of China’s largest non-state conglomerates told analysts that it’s targeting to sell as much as $11 billion of assets within the next 12 months, amid efforts to bolster both its balance sheet and investor confidence… Shanghai-based Fosun, whose business spans from the Club Med resort chain to French fashion house Lanvin, has been under investor scrutiny regarding its liquidity since Moody’s… wrote in June about the company’s funding pressures.”
October 27 – Reuters (Josh Horwitz): “Optimism among U.S. businesses in China has hit record low levels, an annual survey showed…, as competitive, economic, and regulatory challenges compound the stresses already imposed by Beijing's ongoing zero-COVID policies. Just 55% of 307 companies surveyed by the American Chamber of Commerce in Shanghai and consultancy PwC China described themselves as optimistic about the five-year business outlook. The reading is the lowest in the survey's 23-year history and worse than in 2020, when COVID-19 first surfaced…”
October 23 – Financial Times (Primrose Riordan and Gloria Li): “Jiang Qing married the most powerful man in China, created revolutionary operas and was celebrated for bringing to life films by the country’s greatest directors. But she was also blamed for stoking the excesses of the Cultural Revolution as part of the ‘Gang of Four’ who controlled the Communist party during the turmoil. Fifty years later, no Chinese woman has managed to get any closer to power than Madame Mao, as she was better known after marrying Mao Zedong. When China’s 101-year-old Communist party unveiled the new members of the politburo, its second most senior leadership group under President Xi Jinping…, it was an exclusively male affair. In a break with a decades-long convention, no women were appointed to the new 24-member body.”
Central Banker Watch:
October 27 – Financial Times (Martin Arnold and Tommy Stubbington): “The European Central Bank has raised interest rates by 0.75 percentage points to their highest level since 2009, pledging to continue increasing borrowing costs in the coming months to tackle record eurozone inflation despite a looming recession in the region. The increase.. was in line with market expectations. But bond markets rallied and the euro fell as investors detected signs that the central bank was increasingly worried about a downturn and may stop raising rates earlier than expected.”
October 28 – Financial Times (Martin Arnold): “It has taken what seem like only slight changes in tone from Christine Lagarde, and the governing council she heads, to convince investors that the European Central Bank is on the verge of a dovish pivot. Markets on Thursday quickly took the ECB president’s acknowledgment in a post-council meeting press conference that the eurozone was likely to be heading for recession — long a foregone conclusion for most economists — to mean that the region’s rate-setters would ease the extent of rate rises.”
Global Bubble Watch:
October 22 – Bloomberg (Ishika Mookerjee): “Asia’s two tech-heavy economies South Korea and Taiwan are facing an uphill battle in trying to stem losses in what are already among the world’s worst-performing assets this year. They are hit particularly hard by a global growth slowdown and US chip restrictions. Authorities are stepping up actions, including introducing curbs on short selling, readying market stabilization funds to buy assets and intervening in currency markets in moves reminiscent of the early days of the pandemic. Korea is resuming corporate-bond purchases as yields surge and default risk spreads.”
October 24 – Bloomberg (Finbarr Flynn): “Concerns are starting to mount in Asia about real-estate financing, as surging global interest rates raise repayment concerns in a region already battered by China’s property debt crisis. South Korea will swiftly implement an enlarged liquidity program for its credit market, President Yoon Suk Yeol said…, after a rare default on commercial paper by a developer caused shock waves. In Vietnam, officials warned last week that some property businesses with ‘unhealthy financial positions’ and high debt levels are likely to face difficulties covering their bond payments.”
October 25 – Reuters (Wayne Cole): “Australian inflation raced to a 32-year high last quarter as the cost of home building and gas surged, a shock result that stoked pressure for a return to more aggressive rate hikes by the country's central bank… The consumer price index (CPI) jumped 1.8% in the September quarter, topping market forecasts of 1.6%. The annual rate shot up to 7.3%, from 6.1%, the highest since 1990 and almost three times the pace of wage growth.”
October 23 – Bloomberg (Ben Westcott and Swati Pandey): “Australian Treasurer Jim Chalmers is aiming to establish the new Labor government’s fiscal credibility in his budget update, mindful of the chaos generated by the UK’s shock announcements and a domestic backdrop of hot inflation and rising interest rates… Chalmers has sought to downplay expectations, saying his budget will be ‘solid’ and ‘sensible,’ delivering on Labor’s May election pledges and trying to pare back spending where possible. The government is acutely aware of the need to avoid adding to demand and making the Reserve Bank’s job harder.”
October 25 – Bloomberg (Swati Pandey and Ben Westcott): “Australia faces mounting debt and deficits in the years ahead even as Treasurer Jim Chalmers scrimped and saved in his first budget... The budget deficit will widen from 1.5% of gross domestic product this fiscal year to 2% of GDP in 2024-25, driven by higher spending on the nation’s disability insurance program and rising borrowing costs, Treasury figures showed.”
Europe Watch:
October 28 – Bloomberg (Jana Randow): “German inflation unexpectedly accelerated this month, following a trend already seen in France and Italy that will increase pressure on the European Central Bank to raise interest rates even as a recession looms. Consumer prices in Europe’s largest economy rose 11.6% from a year earlier -- far exceeding all estimates… Comparable rates were last recorded in the early 1950s in West Germany.”
October 24 – Bloomberg (Zoe Schneeweiss): “The euro area’s top two economies worsened in October, with the downturn in Germany intensifying and France failing to grow for the first time in 19 months. Flash purchasing manager indexes showed a composite reading of 44.1 for Germany -- down from 45.7 -- while the French gauge slipped to the 50 threshold that separates expansion from contraction. Both were worse than analysts had anticipated.”
October 22 – Reuters (Angelo Amante and Giuseppe Fonte): “Giorgia Meloni was sworn in as Italy's first woman prime minister… alongside her cabinet team, giving the country its most right-wing government since World War Two. She takes office at an especially fraught moment, with Italy's debt-laden economy once again heading into recession, firms buckling under the weight of soaring energy bills, and splits within her coalition over the war in Ukraine.”
October 24 – Reuters (Krisztina and Krisztina Fenyo): “Thousands of Hungarians including teachers and students marched through Budapest… to protest against the government, demanding higher wages for teachers and a curb on surging inflation that is eroding incomes. Walking across a bridge over the Danube, protesters held up banners like ‘Orban get lost’ and ‘No teachers, no future,’ a few hours after nationalist Prime Minister Viktor Orban pledged to preserve economic stability and maintain a cap on household energy bills even as the EU slides into an ‘economic crisis’.”
EM Crisis Watch:
October 27 – Financial Times (Bryan Harris, Michael Pooler and Michael Stott): “As one of Brazil’s most bitterly fought election campaigns draws to a close, far-right president Jair Bolsonaro and his challenger, veteran leftist Luiz Inácio Lula da Silva, agree on one thing: the future of one of the world’s largest democracies is at stake. Lula, who was president of Brazil from 2003 to 2010, leads a broad coalition of the centre and left that has united behind the idea that a second term for Bolsonaro would do irreversible damage to the country’s institutions and spur a slide towards strongman rule. For Bolsonaro and his conservative supporters in agribusiness, the evangelical churches and the army and police, a Lula victory would set Brazil on the path towards the style of socialism in Cuba or Venezuela and erode traditional values. The result of Sunday’s vote hangs on a knife’s edge after a campaign marred by mudslinging and political violence.”
October 24 – Reuters (Khanh Vu and Phuong Nguyen): “Vietnam's central bank… said it would raise its policy rates by 100 bps, the second increase in a month, in a move to head off inflation risks, maintain stability and protect its banking system… The refinancing rate will be increased to 6.0% and the discount rate to 4.5%... Like most of its neighbours, Vietnam has faced upward pressure on inflation and has seen its currency take a hit in recent months, with the dong losing 9% against the dollar this year.”
October 26 – Reuters (Anthony Esposito and Ana Isabel Martinez): “Bank of Mexico board member Gerardo Esquivel cautioned against increasing the monetary policy rate to ‘excessively’ restrictive levels as the economy remains weak, saying the bank's current rate-hiking cycle could end with rates between 10%-10.25%.”
Japan Watch:
October 28 – Reuters (Leika Kihara): “The Bank of Japan kept ultra-low interest rates… and maintained its dovish guidance, cementing its status as an outlier among global central banks tightening monetary policy… The central bank also announced plans to increase the frequency of its bond buying next month, doubling down on efforts to defend its ultra-loose monetary policy. BOJ Governor Haruhiko Kuroda said Japan was making some progress toward achieving his 2% inflation target, as rising prices heighten the chance more firms will increase wages next year. But he said the central bank was nowhere near raising interest rates, with inflation likely to fall short of its 2% target for years to come.”
October 27 – Reuters (Takahiko Wada and Leika Kihara): “Core consumer prices in Japan's capital, a leading indicator of nationwide figures, rose 3.4% in October from a year earlier…, marking the fastest annual pace since 1989 in a sign of broadening inflationary pressure. The rise in the Tokyo core consumer price index (CPI)… exceeded a median market forecast for a 3.1% gain and followed a 2.8% gain in September.”
October 26 – Reuters (Junko Fujita): “The Bank of Japan increased the amount of bonds it was planning to buy in the day's operations on Wednesday, affirming its commitment to defend its ultra-low interest rate policy amid a recent surge in yields. The market immediately reacted to the move, with the 30-year JGB yield falling 12.5 bps to 1.445%, its lowest since Oct. 12…”
October 24 – Bloomberg (Isabel Reynolds): “A poll showed more than half of Japanese want the Bank of Japan’s ultra-easy monetary policy reviewed as the yen struggles close to a three-decade low against the dollar, worsening inflation on essential imports. In a national survey…, the Mainichi newspaper found 55% of respondents said BOJ policy should be reviewed, 22% said it should not and 22% said they didn’t know.”
Social, Political, Environmental, Cybersecurity Instability Watch:
October 25 – Reuters (Rami Ayyub): “U.S. students have suffered historic learning setbacks with math and reading scores falling to their lowest levels since before the COVID-19 pandemic, national exam results… showed, the latest sign of the damage school closures wrought on children. Math scores saw their largest drop on record, a trend consistent across most U.S. states and almost all demographic groups, according to the National Assessment of Educational Progress (NAEP), also known as the ‘Nation's Report Card’… Reading scores declined for most jurisdictions, though not as dramatically as in math.”
October 25 – Bloomberg: “China’s Three Gorges Dam is an awe-inspiring sight, a vast barrier across the Yangtze River that contains enough concrete to fill seven Wembley Stadiums and more steel than eight Empire State Buildings. Its turbines could singlehandedly power the Philippines. But this summer, the world’s largest power plant was eerily quiet. On a late August visit to the facility, water on both sides of the dam was still. There was no sign of the white spray that usually rises from the spillway or roar of water emerging from the turbines. Scorching temperatures and a drought upstream have reduced the reservoir to a bare minimum, drastically reducing the plant’s ability to generate electricity. The water woes of China’s iconic mega-dam are part of a global hydropower crisis that is being made worse by global warming. From California to Germany, heatwaves and droughts have shrunk rivers that feed reservoirs.”
October 22 – Fortune (Erin Prater): “What happens in New York doesn’t stay in New York—not during a pandemic, anyway. As scientists speculate what an autumn COVID wave might look like in the U.S., all eyes are on the Empire State. That’s because it’s considered a ‘bellwether’ when it comes to viral conditions… Right now, New York is seeing mounting cases of the extremely transmissible, immune-evasive BQ family of COVID variants, which includes BQ.1 and BQ.1.1. Experts tell Fortune that because such variants are thriving there, they’re likely to thrive elsewhere in the country too. BQ variants—along with XBB variants surging in other parts of the world—are believed to be the most immune-evasive strains of COVID yet. The jury is still out on how severe these strains are, but there are early reports that monoclonal antibody treatments, reserved for high-risk patients, can’t stand up to them.”
October 26 – Reuters (Nancy Lapid): “U.S. doctors are warning that a surge in cases of respiratory syncytial virus (RSV) is coinciding with an increase in COVID transmission and an earlier-than-normal flu season, raising the specter of a ‘tripledemic’ of respiratory illness this winter. In particular, RSV infections among young children are reportedly filling some U.S. hospitals to capacity. ‘We are already seeing patients testing positive for more than one virus,’ said pediatrician Dr. Ira Wardono of Providence Cedars-Sinai Tarzana Medical Center…”
Leveraged Speculation Watch:
October 25 – Bloomberg (Richard Henderson): “Hedge funds have cut portfolio leverage this year in a conservative turn that has sucked borrowed money from global markets, adding selling pressure to stocks and bonds. Net leverage, a measure of industry risk appetite that takes into account long versus short positions, has fallen almost 20 percentage points to a year low of 66%, according to… Goldman Sachs… Separate figures from Morgan Stanley’s prime brokerage show a similar decline to 41% among US long-short equity hedge funds, a level reached on only a small number of occasions over the past decade.”
Geopolitical Watch:
October 23 – Reuters (Jeanny Kao and Yimou Lee): “Taiwan is working to increase energy inventories in a move to boost the island's resilience in the event of a crisis, a deputy economy minister said, as China stepped up military pressure to try to force Taiwan to accept Chinese rule. China's blockade drills around Taiwan in August after a visit to Taipei by U.S. House Speaker Nancy Pelosi have heightened concerns on the island about the prospect of an attack by its giant neighbor…”
October 24 – Reuters (Soo-Hyang Choi and Hyonhee Shin): “North and South Korea exchanged warning shots off the west coast on Monday, accusing each other of breaching their maritime borders amid heightened military tension. The South's Joint Chiefs of Staff (JCS) said it broadcast warnings and fired warning shots to see off a North Korean merchant vessel that crossed the Northern Limit Line (NLL), the de facto sea boundary…”
October 26 – Reuters (Kiyoshi Takenaka): “South Korea said… it had agreed with the United States and Japan that a resumption of nuclear testing by North Korea would have to be met with an ‘unparalleled’ response. Washington and its allies believe North Korea could be about to resume nuclear bomb testing for the first time since 2017… South Korean First Vice Foreign Minister Cho Hyun-dong discussed the issue with his Japanese counterpart Takeo Mori and U.S. Deputy Secretary of State Wendy Sherman in Tokyo.”
October 25 – Financial Times (John Paul Rathbone): “The likelihood that Russia would resort to using a nuclear weapon in its war on Ukraine was ‘higher than a couple of months ago’ and ‘requires full attention’, a top European spy chief has warned. Mikk Marran, head of Estonia’s foreign intelligence service, said the use of a nuclear weapon was one of Russian president Vladimir Putin’s ‘potential scenarios for escalation’. The recent series of calls from Moscow officials alleging Ukraine was preparing a ‘dirty bomb’… for use on the battlefield was ‘out of pattern’, he warned. ‘The likelihood of [Russia] going nuclear is certainly more than zero and higher than a couple of months ago,’ Marran said…”
The S&P500 jumped 4.0% (down 18.2% y-t-d), and the Dow rose 5.7% (down 9.6%). The Utilities surged 6.6% (down 7.1%). The Banks rallied 5.9% (down 20.9%), and the Broker/Dealers surged 7.2% (down 4.6%). The Transports jumped 7.0% (down 17.6%). The S&P 400 Midcaps rose 5.3% (down 14.3%), and the small cap Russell 2000 jumped 6.0% (down 17.7%). The Nasdaq100 gained 2.1% (down 29.3%). The Semiconductors rose 4.1% (down 38.3%). The Biotechs jumped 5.5% (down 10.5%). While bullion declined $13, the HUI gold equities index increased 1.4% (down 23.2%).
Three-month Treasury bill rates ended the week at 3.9525%. Two-year government yields declined six bps to 4.42% (up 369bps y-t-d). Five-year T-note yields dropped 16 bps to 4.19% (up 292bps). Ten-year Treasury yields sank 20 bps to 4.02% (up 250bps). Long bond yields fell 19 bps to 4.15% (up 224bps). Benchmark Fannie Mae MBS yields sank 27 bps to 5.74% (up 368bps).
Greek 10-year yields sank 56bps to 4.48% (up 316bps y-t-d). Italian yields collapsed 57 bps to 4.18% (up 300bps). Spain's 10-year yields fell 38 bps to 3.15% (up 259bps). German bund yields sank 31 bps to 2.10% (up 228bps). French yields fell 36 bps to 2.61% (up 242bps). The French to German 10-year bond spread narrowed about five to 51 bps. U.K. 10-year gilt yields sank 58 bps to 3.48% (up 251bps). U.K.'s FTSE equities index increased 1.1% (down 4.6% y-t-d).
Japan's Nikkei Equities Index increased 0.8% (down 5.9% y-t-d). Japanese 10-year "JGB" yields declined a basis point to 0.25% (up 18bps y-t-d). France's CAC40 rallied 3.9% (down 12.3%). The German DAX equities index recovered 4.0% (down 16.6%). Spain's IBEX 35 equities index surged 4.9% (down 9.1%). Italy's FTSE MIB index rose 4.5% (down 17.6%). EM equities were mixed. Brazil's Bovespa index dropped 4.5% (up 9.3%), while Mexico's Bolsa index rose 4.2% (down 5.9%). South Korea's Kospi index rallied 2.5% (down 23.8%). India's Sensex equities index increased 1.1% (up 2.9%). China's Shanghai Exchange Index sank 4.0% (down 19.9%). Turkey's Borsa Istanbul National 100 index declined 1.4% (up 108.8%). Russia's MICEX equities index recovered 6.1% (down 42.8%).
Investment-grade bond funds posted outflows of $363 million, while junk bond funds reported inflows of $2.796 billion (from Lipper).
Federal Reserve Credit dropped $19.4bn last week to $8.701 TN. Fed Credit was down $199bn from the June 22nd peak. Over the past 163 weeks, Fed Credit expanded $4.975 TN, or 133%. Fed Credit inflated $5.890 Trillion, or 210%, over the past 520 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt last week increased $2.0bn to $3.337 TN. "Custody holdings" were down $150bn, or 4.3%, y-o-y.
Total money market fund assets were little changed at $4.584 TN. Total money funds were up $25bn, or 0.6%, y-o-y.
Total Commercial Paper rose $13.6bn to $1.301 TN. CP was up $121bn, or 10.2%, over the past year.
Freddie Mac 30-year fixed mortgage rates jumped 14 bps to 7.08% (up 394bps y-o-y) - the high since April 2002. Fifteen-year rates rose 13 bps to 6.36% (up 399bps) - the high since July 2007. Five-year hybrid ARM rates surged 25 bps to 5.96% (up 340bps) - the high since November 2008. Bankrate's survey of jumbo mortgage borrowing costs had 30-year fixed rates down 11 bps to 7.07% (up 394bps).
Currency Watch:
October 25 – Financial Times (Hudson Lockett, William Langley and Cheng Leng): “China’s renminbi has hit its weakest level against the dollar since 2007 as concerns over President Xi Jinping’s appointment of a harder line leadership team and a struggling economy spread from equities to currency markets. The renminbi… fell as much as 0.6% on Tuesday to Rmb7.3084 per dollar. The fall came after the People’s Bank of China moved the midpoint of the currency’s trading band to the lowest level since the global financial crisis. China’s currency has lost 13% of its value in the year to date.”
October 26 – Reuters: “Major Chinese state-owned banks sold U.S. dollars in both onshore and offshore markets in late trade on Tuesday to prop up the weakening yuan… Such dollar selling comes as the Chinese currency is facing mounting downside pressure, with the onshore yuan hitting the weakest level since December 2007 and the value of yuan against currencies of its major trading partners at a five-month low. The selling of dollars by state banks in early U.S. trading hours lifted the yuan, said one of the sources, noting the action took place in both onshore and offshore markets.”
October 27 – Bloomberg: “After a months-long effort to prop up the yuan, the People’s Bank of China has cycled through most of its policy tools, leaving it with some tough choices. As the currency hovers near the weak end of a daily 2% trading band against the dollar, the specter of extreme measures -- however unlikely -- is growing. Already, there are signs that China is intervening in foreign-exchange markets, like Japan has done. A one-time revaluation and restricting the yuan’s range are other major tools.”
For the week, the U.S. Dollar Index fell 1.1% to 110.75 (up 15.8% y-t-d). For the week on the upside, the British pound increased 2.8%, the Swedish krona 2.1%, the Norwegian krone 2.0%, the South Korean won 1.3%, the euro 1.0%, the New Zealand dollar 1.0%, the Mexican peso 0.7%, the Australian dollar 0.5%, the Canadian dollar 0.3%, the Singapore dollar 0.3%, and the Swiss franc 0.2%. On the downside, the Brazilian real declined 2.5%, and the South African rand slipped 0.3%. The Chinese (onshore) renminbi declined 0.30% versus the dollar (down 12.36% y-t-d).
Commodities Watch:
October 23 – Bloomberg (Alfred Cang and Jack Farchy): “For the past 15 years, the center of gravity of the global copper market has been a row of warehouses in Shanghai’s free-trade zone where the Yangtze River meets the Pacific. Traders from London to Lima would obsess over the flows in and out of Shanghai’s huge bonded copper stockpile. It was the focal point for a multi-billion-dollar cash-for-copper trade, whereby Chinese companies would use metal as collateral for cheap financing… But now China’s bonded warehouses are all but empty. The once-frenetic flow of metal into the stockpile has come to a juddering halt as two dominant financiers of Chinese metals, JPMorgan… and ICBC Standard Bank Plc, have halted new business there. Numerous traders and bankers… said they believe the trade is dead for now…”
The Bloomberg Commodities Index increased 0.4% (up 12.7% y-t-d). Spot Gold declined 0.8% to $1,645 (down 10.1%). Silver dipped 0.8% to $19.23 (down 17.4%). WTI crude rallied $2.85 to $87.90 (up 17%). Gasoline surged 9.2% (up 30%), and Natural Gas gained 3.9% to $5.68 (up 52%). Copper declined 1.3% (down 23%). Wheat fell 2.5% (up 8%), and Corn slipped 0.5% (up 15%). Bitcoin jumped 7.6% this week, or $1,450, to $20,620 (down 55.5%).
Market Instability Watch:
October 24 – Reuters (Saqib Iqbal Ahmed and Carolina Mandl): “A surge in short-term options bets, rock-bottom equity allocations and tandem moves in individual stocks are exacerbating swings in U.S. equity markets that have surprised bulls and bears alike in recent weeks. One-month daily volatility for the S&P 500… has climbed to its highest level since early July. The index has logged 40 moves of over 2% in either direction this year, a number only surpassed during the height of the pandemic selloff in 2020 and, before that, the depths of the financial crisis of 2008-2009.”
October 25 – Financial Times (Robin Wigglesworth): “All monetary eyes are on Japan at the moment, where the central bank’s resolute commitment to mega-loose policy sticks out like a sore thumb. Deutsche Bank argues its yield curve control is now de facto dead. While most other central banks around the world have gotten their hike on in 2022, the Bank of Japan has stuck to its strategy of holding short term rates below zero and pinning the yield of the 10-year Japanese government bond market at or below 0.25%. The motivation is to finally break free of the deflationary miasma that has plagued Japan for a few decades now. But it has pretty much killed trading in JGBs, and led to the yen crapping the bed this year.”
October 24 – Bloomberg (Giulia Morpurgo, Neil Callanan, and Olivia Raimonde): “Junk bond sales are falling at an unprecedented rate globally…, a double blow to riskier companies in need of financing in the next few years. Issuance for high yield corporates plummeted 73% through Oct. 24 compared with the same period last year… The decline highlights how money managers have been avoiding the high-yield space even as yields soar, fearing that borrowers could be vulnerable to inflation and the looming economic downturn. Worries about potential default risk have left junk-rated borrowers struggling to access capital via public markets.”
October 28 – Reuters (Noele Illien, John O'Donnell and Davide Barbuscia): “After months of reflecting, Credit Suisse's chairman Axel Lehmann revealed an overhaul ‘to rebuild Credit Suisse as a strong ... bank with a firm foundation, rock-solid like our Swiss mountains’. It did not take long for the first cracks to appear. The announcement of the blueprint early on Thursday triggered a sell-off in the bank's stock that lobbed more than 2 billion Swiss francs ($2bn) off its market worth, almost a fifth of its value, taking its worth to less than 11 billion Swiss francs.”
October 26 – Financial Times (Nikou Asgari and Martin Arnold): “The eurozone’s repo and money markets are becoming more dysfunctional and threaten the European Central Bank’s ability to push its monetary policies, an influential trade group has warned. The International Capital Market Association… said it had become concerned about the functioning of Europe’s €10tn repo markets because of a scarcity of liquid assets, and excess liquidity in the region’s banking system. ICMA’s warning comes amid fears climbing global interest rates and poor trading conditions have heightened the risk of market instability… ‘Rising dysfunction in the market could imperil the transmission of monetary policy,’ ICMA wrote in a letter to the ECB’s director-general of market operations, signed by division heads at BlackRock, Axa Investment Managers, Barclays and UBS.”
UK Crisis Watch:
October 25 – Reuters (Kate Holton, Elizabeth Piper and Alistair Smout): “Rishi Sunak became Britain's third prime minister in two months… and pledged to lead the country out of a profound economic crisis and rebuild trust in politics. Sunak quickly reappointed Jeremy Hunt as his finance minister in a move designed to calm markets that had balked at his predecessor's debt-fuelled economic plans. The former hedge fund boss said he would unite the country and was expected to name a cabinet drawn from all wings of the party to end infighting and abrupt policy changes that have horrified investors and alarmed international allies.”
October 24 – Bloomberg (Alice Gledhill): “UK bonds posted some of their biggest gains on record as investors bet incoming Prime Minister Rishi Sunak will turn the page on weeks of turmoil dogging the nation’s markets and restore credibility to economic policy making. Short-dated notes led the rally with the two-year yield falling by the most since 1993 after Sunak -- a former chancellor who had issued a warning over Liz Truss’s ‘fairytale’ tax cuts -- emerged as the winner in the race to succeed her. The gains were supercharged as traders pared bets on future rate hikes.”
October 25 – Reuters (William James and Sachin Ravikumar): “Britain's new Prime Minister Rishi Sunak… delayed the announcement of a keenly awaited plan for repairing the country's public finances until Nov. 17, two-and-a-half weeks later than previously planned.”
October 23 – Financial Times (Patrick Jenkins): “To describe the ‘mini’ Budget of outgoing prime minister Liz Truss and outgone chancellor Kwasi Kwarteng as ill thought-out is almost a compliment. If they underestimated how spooked the markets would be by £45bn of unfunded tax cuts, they clearly had no notion at all about the collateral damage it would cause — to mortgages, to government and corporate borrowing costs and most alarmingly to the £1.4tn defined benefit pension system, via the now infamous ‘LDI’ hedging structures buried within many schemes. Happily, it seems that some of the harm caused by the dynamic duo’s ‘growth’ plan has receded… Unhappily, other financial scars run deeper.”
Bursting Bubble and Mania Watch:
October 25 – Reuters (Sheila Dang and Eva Mathews): “Google parent Alphabet Inc's disappointing ad sales sparked worries across the digital media sector… as advertisers cut back on their spending in the face of an economic slowdown. Alphabet called out slowing spending by advertisers on YouTube, said financial services spending was cooling on Google, and plans to cut hiring by more than half. The negative results shattered many expectations that Google, which is the world's largest digital advertising platform by market share, would remain strong in a weakening economy and reinforced worries on Wall Street that inflation will continue to hurt advertising spending.”
October 28 – Reuters (Tiyashi Datta, Jane Lanhee Lee and Chavi Mehta): “In a further sign that large companies may be girding against an imminent recession, U.S. tech giants Amazon.com, Microsoft and Intel said this week that customers were taking an axe to cloud and datacenter spending. Cloud services for years has been one of the largest and most dependable sources of growth for some of the biggest tech companies, including during the pandemic as people worked and studied from home… ‘The AWS slowdown is a clear sign that businesses are beginning to trim costs, so this will likely put more of a squeeze on Amazon's bottom line in the coming quarters,’ said Andrew Lipsman, principal analyst at Insider Intelligence.”
October 27 – Bloomberg (David Welch and Craig Trudell): “The autonomous-driving sector just endured a day that tech and automotive giants may well look back on the way Wall Street recalls March 16, 2008. Whereas the day Bear Stearns collapsed was an epochal event in the global financial crisis, when flawed assumptions about the value of mortgages pushed banks to the brink — and some over the precipice — Oct. 26, 2022, will go down as the date that seismic consequences emerged from years of faulty presumptions about driverless-vehicle technology. First came the shock that Argo AI, the startup Ford and Volkswagen had each seeded with multibillion-dollar investments, was shutting down. Within hours, Reuters reported that Tesla’s self-driving claims are under criminal investigation.”
October 23 – Financial Times (Chris Newlands): “It should come as no surprise that private credit has ballooned as an asset class over the past 20 years. A market with as many monikers as it has — five and counting — clearly always had the scope to get bigger. Whether known as private debt, non-bank lending, alternative lending, shadow lending, or private credit, the investment class has witnessed eye-popping growth... As other asset classes shrank during the global financial crisis, private credit took off. Banks battened down the hatches and reined in their lending to smaller and riskier borrowers, creating a funding gap that non-bank lenders readily stepped in to fill. The result has been the creation of a burgeoning asset class for investors. It grew from just $41bn in December 2000 to $311bn by December 2010, according to… Preqin. As of December 2021, it had swelled to $1.22tn.”
October 28 – Bloomberg (John Gittelsohn): “The cost of debt on commercial property has risen so fast that it’s now more expensive to finance many real estate deals than owners currently earn from rents. About $5.5 billion, or 28%, of new commercial mortgage-backed securities had negative leverage — where the cost of debt exceeded projected returns on investments — in the third quarter, according to… Moody’s Analytics. Only 8% of similar loans had negative leverage in the second quarter and barely 2% were negative in the third quarter of 2021.”
October 28 – Bloomberg (Paula Seligson): “Elon Musk is the new owner of Twitter Inc., ending months of uncertainty for Silicon Valley and shareholders. Yet for debt bankers on Wall Street, the drama is far from over, as they’ll need to convince investors that the Chief Twit’s ambitions for the company can justify its heavy debt load. With the $44 billion deal now closed, a Morgan Stanley-led cohort that provided about $13 billion of debt financing to help fund the acquisition of Twitter is now saddled with risky loans that they never intended to keep on their books. The banks now face the unenviable task of selling it off without realizing big losses -- and that’s not going to be easy.”
October 25 – Financial Times (Steve Johnson): “One year after its record-breaking launch, the world’s first exchange traded fund tracking the price of bitcoin has lost more of investors’ dollars than any other ETF debut. Asset manager ProShares launched its Bitcoin Strategy fund in October 2021, and it immediately became the most successful new ETF in history, amassing more than $1bn in its first week… Bitcoin enthusiasts proclaimed the launch as the moment when crypto joined the world’s biggest equities market and became enmeshed in mainstream investment strategies for retail and institutional buyers alike. But one year into its existence, the fund has lost money on an unprecedented scale... Its 70% share price drop also makes this the sixth-worst performing debut ETF of its kind of all time…”
October 25 – Bloomberg (Jessica Menton): “Bank of America Corp.’s clients poured money into US equities for the sixth consecutive week led by hedge funds and private clients, with the intake by single stocks nearing historic extremes. In the past three weeks, inflows into single stocks as a percentage of the S&P 500 Index’s market capitalization were in the 99th percentile of history since 2008…”
Ukraine War Watch:
October 28 – Reuters (David Ljunggren and Ronald Popeski): “President Volodymyr Zelenskiy on Thursday stood outside in the dark beside the wreckage of a downed drone and vowed that widespread Russian attacks on power plants would not break Ukrainian spirits… ‘Shelling will not break us - to hear the enemy's anthem on our land is scarier than the enemy's rockets in our sky. We are not afraid of the dark,’ he said.”
October 27 – Wall Street Journal (Ian Lovett): “Kyiv residents are facing prolonged blackouts, after Russian airstrikes again hit the Ukrainian electric system overnight, further degrading the country’s ability to keep the lights on. Yasno, a Ukrainian energy company, wrote… that Russia had again hit the power grid in the Kyiv region Wednesday night. Overall system capacity was now down 30% in the area, the company said. ‘The destruction is serious,’ Yasno wrote. ‘Almost half of Kyiv may remain without light.’”
October 27 – Reuters (Guy Faulconbridge): “President Vladimir Putin said… the world faced the most dangerous decade since World War Two as Western elites scrambled to prevent the inevitable crumbling of the global dominance of the United States and its allies. In one of his longest public appearances since he sent troops into Ukraine on Feb. 24, Putin signalled he had no regrets about what he calls ‘a special operation’ and accused the West of inciting the war and of playing a ‘dangerous, bloody and dirty’ game that was sowing chaos across the world. ‘The historical period of the West’s undivided dominance over world affairs is coming to an end,’ Putin… told the Valdai Discussion Club during a session entitled ‘A Post-Hegemonic World: Justice and Security for Everyone’. ‘We are standing at a historical frontier: Ahead is probably the most dangerous, unpredictable and, at the same time, important decade since the end of World War Two.’”
October 27 – Reuters (Joey Roulette): “A Russian official's threat this week to ‘strike’ Western satellites aiding Ukraine highlights an untested area of international law, raising concerns among space lawyers and industry executives about the safety of objects in orbit. ‘Quasi-civilian infrastructure may be a legitimate target for a retaliatory strike,’ senior foreign ministry official Konstantin Vorontsov told the United Nations…”
October 27 – Reuters (Steve Holland): “Any response on U.S. infrastructure will be met with a response, the White House said… after a senior Russian foreign ministry official said Western commercial satellites could become legitimate targets for Russia if they were involved in the war in Ukraine.”
October 24 – Financial Times (Henry Foy in Brussels, John Paul Rathbone in London, Max Seddon in Riga and Felicia Schwartz): “A flurry of phone calls from Russia’s defence minister Sergei Shoigu warning of an imminent ‘dirty bomb’ attack has sent alarm bells ringing in western capitals, where nervousness over Moscow’s threats to use nuclear weapons against Ukraine has been rising. The threat, which was condemned by the US, UK and France as an attempt to lay the ground for a ‘false flag’ attack blamed on Ukraine, has heightened fears that the eight month-long war will go nuclear… ‘Ukraine has neither the need nor the ability to use a dirty bomb. It is Russia that is losing. The worry is that Russia may use the claim that Ukraine is poised to use a dirty bomb as a pretext for its own preventive, escalatory attack,’ said Nigel Gould-Davies, senior fellow at the International Institute for Strategic Studies…”
October 23 – Reuters: “Russian Defence Minister Sergei Shoigu told his French counterpart in a telephone call… that the situation in Ukraine was rapidly deteriorating and trending towards ‘uncontrolled escalation’. In a phone call with French Defence Minister Sebastien Lecornu published by the Russian side, Shoigu said Moscow had concerns Ukraine could use a ‘dirty bomb’ in the conflict, without providing evidence to support the suggestion that Ukraine might use such a weapeon.”
U.S./Russia/China Watch:
October 26 – Bloomberg: “Russia carried out military exercises simulating a retaliatory nuclear strike as President Joe Biden warned Vladimir Putin that any use of a nuclear weapon would be an ‘incredibly serious mistake.’ Echoing Biden’s warning of grave consequences, US Secretary of State Antony Blinken said… that ‘we’ve communicated that very clearly and directly to the Russians, including President Putin.’ As Putin oversaw Russia’s drills, he was told by his defense chief that the maneuvers on Wednesday were meant to simulate a ‘massive nuclear strike’ in response to an attack…”
October 27 – Reuters (Nailia Bagirova and Olesya Astakhova): “Igor Sechin, chief executive of Russian oil giant Rosneft and one of Vladimir Putin's closest allies, on Thursday heaped praise on China's leaders and said Taiwan would return to its ‘native harbour’ on time. Sechin said that decisions taken by the 20th Communist Party Congress, which cemented Xi Jinping position as the most powerful Chinese leader since Mao Zedong, would provide for a new level of development for the country.”
October 24 – Associated Press (Joe McDonald): “The world faces the prospect of more tension with China over trade, security and human rights after Xi Jinping, the country’s most powerful leader in decades, awarded himself another term as leader of the ruling Communist Party. Xi has tightened control at home and is trying to use China’s economic heft to increase its influence abroad… Activists say Xi’s government wants to deflect criticism of abuses by changing the U.N.’s definition of human rights. Xi says ‘the world system is broken and China has answers,’ said William Callahan of the London School of Economics. ‘More and more, Xi Jinping is talking about the Chinese style as a universal model of the world order, which goes back to a Cold War kind of conflict.’”
Economic War/Iron Curtain Watch:
October 23 – Wall Street Journal (Karen Hao and Jemal R. Brinson): “The new U.S. restrictions on exports of chips and related items to China are aimed at using America’s strength in critical areas of the semiconductor supply chain to weaken China’s advanced-chip development. The semiconductor industry has long been an example of an integrated global supply chain. Over the years, the industry’s steep research and development costs and intensive capital expenditures have driven different countries to specialize in different steps of the chip-making process. Today no one country tends to do it all. ‘Everyone is very interdependent on each other,’ says Anne Hoecker, a partner in the semiconductor group at the management consulting firm Bain & Co. Still, the U.S. reigns in some of the most critical—and earliest—parts of the chain, especially those that require intense research and development.”
October 24 – Reuters: “China's exports to sanctions-hit Russia rose at a double-digit pace for the third consecutive month in September, bucking the trend of weakening external demand elsewhere amid the Russia-Ukraine war and a global economic slowdown… Shipments of Chinese goods to Russia rose 21.2% from a year earlier in dollar terms, slowing from a 26.5% increase in August yet outperforming China's overall export growth of 5.7% by a large margin, as interest rate hikes to curb red-hot inflation in major economies weakened demand for Chinese goods.”
Inflation Watch:
October 25 – Yahoo Finance (Ines Ferré): “Consumers could be paying at least 20% more on their heating bills this winter. Tight oil refining capacity and low stockpiles are expected to keep prices elevated during the colder months. ‘Our heating, oil inventories are very low. I mean the lowest, I think, that they've ever been. Does it mean that we're going to have run out of inventories? No, it means that we're going to have the potential for spikes, particularly in a cold winter,’ CIBC Private Wealth Senior Energy Trader Rebecca Babin told Yahoo Finance…”
October 23 – Wall Street Journal (Thomas Gryta and Drew FitzGerald): “Procter & Gamble Co. is ramping up advertising on premium brands. Verizon Communications Inc. is raising prices on wireless plans, while Whirlpool Corp. has slashed production of appliances. High levels of inflation in the U.S. and shifts in underlying demand are putting the spotlight on the strategies executives are taking to navigate a global economy where costs are rising and consumer appetite for some products has waned. The first batch of earnings reports from companies for the September quarter show that corporate profit margins are feeling the squeeze… With a fifth of the S&P 500 index already reporting, …Refinitiv projects quarterly earnings will decline 3.5% from a year ago, excluding the energy sector.”
Biden Administration Watch:
October 26 – Bloomberg (Jill R Shah and Carmen Arroyo): “US Secretary of State Antony Blinken accused China of undermining the decades-long status quo that has kept both nations from going to war over Taiwan, saying Beijing was trying to ‘speed up’ its seizure of the island. ‘What’s changed is this -- a decision by the government in Beijing that that status quo was no longer acceptable, that they wanted to speed up the process by which they would pursue reunification,’ Blinken said… ‘They also, I think, made decisions about how they would do that, including exerting more pressure on Taiwan, coercion -- making life difficult in a variety of ways on Taiwan in the hopes that that would speed reunification,’ Blinken said.”
October 25 – AFP: “Saudi Arabia's energy minister… blasted the release of emergency oil stocks as an attempt to ‘manipulate markets’, the latest apparent salvo in a spat with Washington over oil production. ‘People are depleting their emergency stocks, had depleted it, used it as a mechanism to manipulate markets while its profound purpose was to mitigate shortage of supply,’ Prince Abdulaziz bin Salman told an investor conference… ‘However, it is my profound duty to make it clear to the world that losing emergency stock may become painful in the months to come.’”
Federal Reserve Watch:
October 25 – Bloomberg (Enda Curran, Jana Randow and Jonnelle Marte): “Profits and losses aren’t usually thought of as a consideration for central banks, but rapidly mounting red ink at the Federal Reserve and many peers risks becoming more than just an accounting oddity… Falling bond prices, in turn, mean paper losses on the massive holdings that the Fed and others accumulated during their rescue efforts in recent years… ‘The problem with central bank losses are not the losses per se -- they can always be recapitalized -- but the political backlash central banks are likely to increasingly face,’ said Jerome Haegeli, chief economist at Swiss Re, who previously worked at Switzerland’s central bank.”
U.S. Bubble Watch:
October 27 – CNBC (Jeff Cox): “The U.S. economy posted its first period of positive growth for 2022 in the third quarter, at least temporarily easing recession fears… GDP, a sum of all the goods and services produced from July through September, increased at a 2.6% annualized pace for the period, according to the advance estimate… That reading follows consecutive negative quarters to start the year…”
October 25 – Wall Street Journal (Nicole Friedman): “Home prices posted their biggest month-on-month decline in more than a decade in August… The S&P CoreLogic Case-Shiller National Home Price Index, which measures average home prices in major metropolitan areas across the nation, fell 1.1% in August from July, the second straight month-over-month decline. The August decline was also the biggest month-on-month decrease since December 2011. The index rose 13% in the year that ended in August, down from a 15.6% annual rate the prior month… ‘With inventory rising so quickly and demand slowing so quickly, we have returned to a buyer’s market,’ said Ali Wolf, chief economist at… Zonda. ‘If mortgage rates are 6%-plus, in my mind, there’s no doubt that we’re going to see a downward adjustment to home prices.’”
October 26 – CNBC (Diana Olick): “Mortgage demand fell last week to nearly half what it was a year ago, according to the Mortgage Bankers Association, as rates hit their highest level in 21 years. Overall, demand for mortgages is at the lowest level since 1997. Mortgage applications to purchase a home dropped 2% from the prior week and were 42% lower than the same week in 2021. The annual comparison continues to jump each week, as fewer buyers either want or can afford to get into this very pricey housing market…”
October 26 – Reuters (Lindsay Dunsmuir): “The average interest rate on the most popular U.S. home loan rose to its highest level since 2001 as tightening financial conditions weigh on the housing sector… The average contract rate on a 30-year fixed-rate mortgage rose by 22 bps to 7.16% for the week ended Oct. 21 while the MBA's Market Composite Index, a measure of mortgage loan application volume, fell 1.7% from a week earlier. Mortgage application activity is at its slowest pace since 1997.”
October 26 – Reuters (Lucia Mutikani): “Sales of new U.S. single-family homes dropped in September…, more evidence that higher mortgage rates are choking the housing market. New home sales decreased 10.9% to a seasonally adjusted annual rate of 603,000 units last month… August's sales pace was revised down to 677,000 units from the previously reported 685,000 units… Sales plummeted 17.6% on a year-on-year basis in September. They peaked at a rate of 993,000 units in January 2021, which was the highest level since the end of 2006… The median new house price in September was $470,600, a 13.9% increase from a year ago. There were 462,000 new homes on the market at the end of last month, up from 457,000 units in August.”
October 28 – Bloomberg (Vince Golle): “US pending home sales sank last month by the most since the immediate aftermath of the pandemic, illustrating a swift and steep downturn for a housing market beset by soaring borrowing costs. The National Association of Realtors’ index of contract signings to purchase previously owned homes decreased 10.2% in September, the sharpest fall since April 2020…”
October 26 – Bloomberg (Ana Monteiro): “The US merchandise-trade deficit widened in September for the first time in six months as imports grew and some exports plunged. The shortfall widened 5.7% to $92.2 billion last month… Exports declined 1.5% to $177.6 billion. Imports rose to $269.8 billion, also the first increase since March.”
October 24 – Bloomberg (Vince Golle): “US business activity contracted in October for a fourth-straight month as concerns about inflation and sluggish demand weighed on the outlook. The S&P Global flash composite purchasing managers output index decreased 2.2 points to 47.3… Manufacturers and services providers’ views on the outlook also deteriorated in October, leading the composite future index to fall to its lowest level since September 2020. A measure of business activity at service providers slid to 46.6 in the month, marking the second-worst reading since May 2020. Firms attributed the decline to weak client demand, rising interest rates and stubborn inflation…”
October 25 – Bloomberg (Jenny Surane): “Visa Inc. saw spending growth slow the most since the depths of the pandemic as inflation weighs on consumers… Volume on the network rose 10.5% to $2.93 trillion in the fiscal fourth quarter, Visa said... That was shy of the 11% increase analysts… were expecting and a decrease from the 12% growth the firm reported for the previous three months. It was the slowest growth since Visa posted less than 5% for the first fiscal quarter of 2021.”
October 25 – Wall Street Journal (Will Parker): “After a long stretch of record-high rents, Americans are renting fewer apartments as demand in the third quarter fell to its lowest level in 13 years. Some renters are choosing to take on roommates, while others are boarding with family or friends. More people are opting to stay longer in their parents’ homes or moving back in…, according to a recent UBS survey. Apartment demand in the quarter, measured by the one-year change in the occupancy of units, was the lowest since 2009… Measured quarterly, the drop in demand was the worst of any third quarter—normally prime leasing season—in the more than 30 years RealPage has compiled the data.”
October 25 – Reuters (Jessica Menton): “Hyundai Motor Co global chief operating officer Jose Munoz… said the automaker's new $5.54 billion Georgia electric vehicle and battery plant could begin production in 2024 and eventually produce 500,000 vehicles annually… Munoz told reporters the plant will produce five or six models and could begin building vehicles as early as the third quarter of 2024.”
Fixed Income Watch:
October 28 – Bloomberg (Kevin Simauchi and Jeremy Hill): “A heap of distressed debt is expanding in the US corporate bond market and investors worry that a burst of defaults will follow. The amount of dollar-denominated bonds and loans trading at levels indicating distress is the largest since September 2020, reaching $271.3 billion last week after five straight weeks of growth… Companies that binged on low-cost borrowing in recent years are facing the prospect of refinancing at exorbitant yields -- if they can find any investors…”
October 26 – Bloomberg (Jill R Shah and Carmen Arroyo): “The current environment of ever-rising rates is pushing riskier US borrowers to buy themselves time by putting off looming debt maturities. Through a variety of tactics, sometimes labeled by market professionals as ‘amend and extend,’ companies are prolonging payment dates rather than try to sell junk-rated refinancing debt at exorbitant yields… ‘We expect to see a pick up in amend-to-extend activity as borrowers look to address near term maturities,’ said Scott Snell, portfolio manager at Tetragon Credit Partners… ‘It’s better for issuers to negotiate directly with existing lenders, who don’t want to push their companies into default.’”
October 28 – Bloomberg (Ronan Martin and Paul Cohen): “It was supposed to be the silver lining to a year of brutal losses. As bond-fund managers watched the market value of their portfolio decline rate hike after rate hike, one thing was certain: companies would soon have to return to the market offering juicier yields… Of the 1,555 investment-grade bonds worth over $1.3 trillion that have been sold in the US and Europe since Russia’s invasion of Ukraine, all but 137 are now trading below their offering price... It totals up to paper losses of nearly $106 billion for investors so far.”
China Watch:
October 24 – Bloomberg (Jeanny Yu and Abhishek Vishnoi): “Monday’s epic selloff in Chinese assets was front-page news from Hong Kong to London and New York. But for Chinese state media, it’s as if the rout never happened. Instead, the country’s top financial newspapers dedicated the bulk of their front pages to official news articles about President Xi Jinping. These included his meeting with top military leaders and Communist Party officials’ interpretation of Xi’s keynote report at the Party Congress… Chinese stocks sank by the most since 2008 in Hong Kong and the yuan fell to a 14-year-low on Monday amid concern Xi’s increased dominance over the nation’s top political bodies will be detrimental to the economy and private enterprise.”
October 23 – Financial Times (Tom Mitchell, Ryan McMorrow and Edward White): “President Xi Jinping tightened his grip on power… as the 20th Communist party congress concluded with the premature retirement of Premier Li Keqiang from his top party post and the ‘astonishing’ sight of Xi’s predecessor being escorted from the main stage. ‘The party’s achievements in the past hundred years are incomparably glorious,’ Xi said in his closing remarks... ‘The party is flourishing and we are fully confident and capable of creating new and greater miracles.’ More than 2,200 delegates to the week-long congress had approved a series of revisions to the party’s constitution that effectively proclaim Xi as Communist China’s most important leader since its revolutionary hero, Mao Zedong. The revisions recognise Xi, who will continue his reign as party leader and military commander-in-chief for at least another five years, as ‘the core of the whole party’.”
October 23 – Guardian (Helen Davidson, Emma Graham-Harrison and Verna Yu): “Xi Jinping has eliminated key rivals from China’s leadership and consolidated his grip on the country on the final day of a Communist party meeting at which former president Hu Jintao was led away unexpectedly from the main stage… The closing session of the 20th congress of the Chinese Communist party (CCP) ended a weekend of triumph for Xi that makes him China’s most powerful ruler since Mao Zedong. He has swept away the last norms of a political order built since Mao’s death to prevent a return to the worst excesses of rule by a single autocrat.”
October 28 – Bloomberg: “Investors hoped China would ease its stringent Covid Zero strategy once the pivotal Communist Party congress cemented President Xi Jinping’s grip on power. Instead, the opposite seems to be happening. Fresh lockdowns are being imposed from Wuhan, Covid’s original epicenter, to China’s industrial belt on the east coast. Schools and dining in at restaurants in the southern manufacturing powerhouse of Guangzhou have been suspended, while targeted shutdowns in the metropolises of Beijing and Shanghai continue, with apartment blocks and neighborhoods subject to stay-at-home orders if even a close contact of someone infected has visited.”
October 24 – Reuters (Medha Singh): “U.S.-listed shares of Chinese companies slumped on Monday after President Xi Jinping's new leadership team sparked investor concerns… Ecommerce giants Alibaba , JD.com as well as internet behemoth Baidu crashed between 14% and 17%...”
October 24 – Reuters (Yew Lun Tian and Tony Munroe): “China's Xi Jinping secured a precedent-breaking third leadership term on Sunday and introduced a top governing body stacked with loyalists, cementing his place as the country's most powerful ruler since Mao Zedong. Shanghai Communist Party chief Li Qiang followed Xi onto the stage at the Great Hall of the People as the new Politburo Standing Committee was introduced, putting him in line to become premier when Li Keqiang retires in March. The other members of the seven-man Standing Committee are Zhao Leji and Wang Huning, who return from the previous committee, and newcomers Cai Qi, Ding Xuexiang and Li Xi. Li Qiang is also new to the Standing Committee. All are seen by analysts to have close allegiance to Xi…”
October 25 – Bloomberg (Jeanny Yu and Abhishek Vishnoi): “Xi Jinping’s tightening grip on power is testing the resolve of investors in China. Those departing wiped out a staggering $447 billion the day after Xi broke China’s collective leadership, driving fears over the nation’s future growth model to a fever pitch. International money managers are ‘frustrated and angry,’ according to Bank of America. ‘Obviously the outlook is not good for China investments in view of the political changes,’ said Mark Mobius… ‘Given the Chinese political stance and the pushback from the US, we can only expect heightened tensions and possibly additional sanction in the technology arena. Not to mention other trade barriers.’”
October 24 – Reuters (Ryan Woo and Ellen Zhang): “China's economy rebounded at a faster-than-anticipated clip in the third quarter, but a more robust revival in the longer term will be challenged by persistent COVID-19 curbs, a prolonged property slump and global recession risks. Helped by a raft of government measures, the world's second-biggest economy expanded 3.9% in July-September from a year earlier…”
October 23 – Bloomberg: “China’s home prices sank for a 13th month in September… New-home prices in 70 cities, excluding state-subsidized housing, dropped 0.28% last month from August, when they fell 0.29%... The second-hand market fared worse, with existing-home prices declining 0.39%, the most since October 2014.”
October 26 – Bloomberg: “China’s broad fiscal deficit hit an all-time high in the first nine months of the year as Covid outbreaks and a housing market slump continue to erode government income. The deficit in the budgets for all levels of government was 7.16 trillion yuan ($980bn)... That is a record for any comparable period and is almost three times the 2.6 trillion yuan shortfall in January-September last year.”
October 23 – Bloomberg: “China’s export growth slowed in September, while imports remained weak as global demand cools. Exports in US dollar terms expanded 5.7% last month from a year earlier... That was slower than the 7.1% growth in August, but beat the 4% rise forecast by economists… Imports rose 0.3% in September from a year earlier, unchanged from August. The trade balance increased to $84.74 billion.”
October 25 – Reuters (Ryan Woo, Ellen Zhang and Bernard Orr): “China's economic growth is hitting an early speed bump in the fourth quarter as COVID-19 curbs and anxieties further tapped the brakes on travel and shipping, constraining consumption and commerce in the world's second-largest economy. Mobility statistics - from metro passenger traffic in cities and flight cancellations to domestic container handling at major ports - have worsened in October despite falling local coronavirus cases, suggesting COVID-19 preventive measures, or fear of those measures, are still stifling economic activity.”
October 25 – Bloomberg (Alice Huang): “One of China’s largest non-state conglomerates told analysts that it’s targeting to sell as much as $11 billion of assets within the next 12 months, amid efforts to bolster both its balance sheet and investor confidence… Shanghai-based Fosun, whose business spans from the Club Med resort chain to French fashion house Lanvin, has been under investor scrutiny regarding its liquidity since Moody’s… wrote in June about the company’s funding pressures.”
October 27 – Reuters (Josh Horwitz): “Optimism among U.S. businesses in China has hit record low levels, an annual survey showed…, as competitive, economic, and regulatory challenges compound the stresses already imposed by Beijing's ongoing zero-COVID policies. Just 55% of 307 companies surveyed by the American Chamber of Commerce in Shanghai and consultancy PwC China described themselves as optimistic about the five-year business outlook. The reading is the lowest in the survey's 23-year history and worse than in 2020, when COVID-19 first surfaced…”
October 23 – Financial Times (Primrose Riordan and Gloria Li): “Jiang Qing married the most powerful man in China, created revolutionary operas and was celebrated for bringing to life films by the country’s greatest directors. But she was also blamed for stoking the excesses of the Cultural Revolution as part of the ‘Gang of Four’ who controlled the Communist party during the turmoil. Fifty years later, no Chinese woman has managed to get any closer to power than Madame Mao, as she was better known after marrying Mao Zedong. When China’s 101-year-old Communist party unveiled the new members of the politburo, its second most senior leadership group under President Xi Jinping…, it was an exclusively male affair. In a break with a decades-long convention, no women were appointed to the new 24-member body.”
Central Banker Watch:
October 27 – Financial Times (Martin Arnold and Tommy Stubbington): “The European Central Bank has raised interest rates by 0.75 percentage points to their highest level since 2009, pledging to continue increasing borrowing costs in the coming months to tackle record eurozone inflation despite a looming recession in the region. The increase.. was in line with market expectations. But bond markets rallied and the euro fell as investors detected signs that the central bank was increasingly worried about a downturn and may stop raising rates earlier than expected.”
October 28 – Financial Times (Martin Arnold): “It has taken what seem like only slight changes in tone from Christine Lagarde, and the governing council she heads, to convince investors that the European Central Bank is on the verge of a dovish pivot. Markets on Thursday quickly took the ECB president’s acknowledgment in a post-council meeting press conference that the eurozone was likely to be heading for recession — long a foregone conclusion for most economists — to mean that the region’s rate-setters would ease the extent of rate rises.”
Global Bubble Watch:
October 22 – Bloomberg (Ishika Mookerjee): “Asia’s two tech-heavy economies South Korea and Taiwan are facing an uphill battle in trying to stem losses in what are already among the world’s worst-performing assets this year. They are hit particularly hard by a global growth slowdown and US chip restrictions. Authorities are stepping up actions, including introducing curbs on short selling, readying market stabilization funds to buy assets and intervening in currency markets in moves reminiscent of the early days of the pandemic. Korea is resuming corporate-bond purchases as yields surge and default risk spreads.”
October 24 – Bloomberg (Finbarr Flynn): “Concerns are starting to mount in Asia about real-estate financing, as surging global interest rates raise repayment concerns in a region already battered by China’s property debt crisis. South Korea will swiftly implement an enlarged liquidity program for its credit market, President Yoon Suk Yeol said…, after a rare default on commercial paper by a developer caused shock waves. In Vietnam, officials warned last week that some property businesses with ‘unhealthy financial positions’ and high debt levels are likely to face difficulties covering their bond payments.”
October 25 – Reuters (Wayne Cole): “Australian inflation raced to a 32-year high last quarter as the cost of home building and gas surged, a shock result that stoked pressure for a return to more aggressive rate hikes by the country's central bank… The consumer price index (CPI) jumped 1.8% in the September quarter, topping market forecasts of 1.6%. The annual rate shot up to 7.3%, from 6.1%, the highest since 1990 and almost three times the pace of wage growth.”
October 23 – Bloomberg (Ben Westcott and Swati Pandey): “Australian Treasurer Jim Chalmers is aiming to establish the new Labor government’s fiscal credibility in his budget update, mindful of the chaos generated by the UK’s shock announcements and a domestic backdrop of hot inflation and rising interest rates… Chalmers has sought to downplay expectations, saying his budget will be ‘solid’ and ‘sensible,’ delivering on Labor’s May election pledges and trying to pare back spending where possible. The government is acutely aware of the need to avoid adding to demand and making the Reserve Bank’s job harder.”
October 25 – Bloomberg (Swati Pandey and Ben Westcott): “Australia faces mounting debt and deficits in the years ahead even as Treasurer Jim Chalmers scrimped and saved in his first budget... The budget deficit will widen from 1.5% of gross domestic product this fiscal year to 2% of GDP in 2024-25, driven by higher spending on the nation’s disability insurance program and rising borrowing costs, Treasury figures showed.”
Europe Watch:
October 28 – Bloomberg (Jana Randow): “German inflation unexpectedly accelerated this month, following a trend already seen in France and Italy that will increase pressure on the European Central Bank to raise interest rates even as a recession looms. Consumer prices in Europe’s largest economy rose 11.6% from a year earlier -- far exceeding all estimates… Comparable rates were last recorded in the early 1950s in West Germany.”
October 24 – Bloomberg (Zoe Schneeweiss): “The euro area’s top two economies worsened in October, with the downturn in Germany intensifying and France failing to grow for the first time in 19 months. Flash purchasing manager indexes showed a composite reading of 44.1 for Germany -- down from 45.7 -- while the French gauge slipped to the 50 threshold that separates expansion from contraction. Both were worse than analysts had anticipated.”
October 22 – Reuters (Angelo Amante and Giuseppe Fonte): “Giorgia Meloni was sworn in as Italy's first woman prime minister… alongside her cabinet team, giving the country its most right-wing government since World War Two. She takes office at an especially fraught moment, with Italy's debt-laden economy once again heading into recession, firms buckling under the weight of soaring energy bills, and splits within her coalition over the war in Ukraine.”
October 24 – Reuters (Krisztina and Krisztina Fenyo): “Thousands of Hungarians including teachers and students marched through Budapest… to protest against the government, demanding higher wages for teachers and a curb on surging inflation that is eroding incomes. Walking across a bridge over the Danube, protesters held up banners like ‘Orban get lost’ and ‘No teachers, no future,’ a few hours after nationalist Prime Minister Viktor Orban pledged to preserve economic stability and maintain a cap on household energy bills even as the EU slides into an ‘economic crisis’.”
EM Crisis Watch:
October 27 – Financial Times (Bryan Harris, Michael Pooler and Michael Stott): “As one of Brazil’s most bitterly fought election campaigns draws to a close, far-right president Jair Bolsonaro and his challenger, veteran leftist Luiz Inácio Lula da Silva, agree on one thing: the future of one of the world’s largest democracies is at stake. Lula, who was president of Brazil from 2003 to 2010, leads a broad coalition of the centre and left that has united behind the idea that a second term for Bolsonaro would do irreversible damage to the country’s institutions and spur a slide towards strongman rule. For Bolsonaro and his conservative supporters in agribusiness, the evangelical churches and the army and police, a Lula victory would set Brazil on the path towards the style of socialism in Cuba or Venezuela and erode traditional values. The result of Sunday’s vote hangs on a knife’s edge after a campaign marred by mudslinging and political violence.”
October 24 – Reuters (Khanh Vu and Phuong Nguyen): “Vietnam's central bank… said it would raise its policy rates by 100 bps, the second increase in a month, in a move to head off inflation risks, maintain stability and protect its banking system… The refinancing rate will be increased to 6.0% and the discount rate to 4.5%... Like most of its neighbours, Vietnam has faced upward pressure on inflation and has seen its currency take a hit in recent months, with the dong losing 9% against the dollar this year.”
October 26 – Reuters (Anthony Esposito and Ana Isabel Martinez): “Bank of Mexico board member Gerardo Esquivel cautioned against increasing the monetary policy rate to ‘excessively’ restrictive levels as the economy remains weak, saying the bank's current rate-hiking cycle could end with rates between 10%-10.25%.”
Japan Watch:
October 28 – Reuters (Leika Kihara): “The Bank of Japan kept ultra-low interest rates… and maintained its dovish guidance, cementing its status as an outlier among global central banks tightening monetary policy… The central bank also announced plans to increase the frequency of its bond buying next month, doubling down on efforts to defend its ultra-loose monetary policy. BOJ Governor Haruhiko Kuroda said Japan was making some progress toward achieving his 2% inflation target, as rising prices heighten the chance more firms will increase wages next year. But he said the central bank was nowhere near raising interest rates, with inflation likely to fall short of its 2% target for years to come.”
October 27 – Reuters (Takahiko Wada and Leika Kihara): “Core consumer prices in Japan's capital, a leading indicator of nationwide figures, rose 3.4% in October from a year earlier…, marking the fastest annual pace since 1989 in a sign of broadening inflationary pressure. The rise in the Tokyo core consumer price index (CPI)… exceeded a median market forecast for a 3.1% gain and followed a 2.8% gain in September.”
October 26 – Reuters (Junko Fujita): “The Bank of Japan increased the amount of bonds it was planning to buy in the day's operations on Wednesday, affirming its commitment to defend its ultra-low interest rate policy amid a recent surge in yields. The market immediately reacted to the move, with the 30-year JGB yield falling 12.5 bps to 1.445%, its lowest since Oct. 12…”
October 24 – Bloomberg (Isabel Reynolds): “A poll showed more than half of Japanese want the Bank of Japan’s ultra-easy monetary policy reviewed as the yen struggles close to a three-decade low against the dollar, worsening inflation on essential imports. In a national survey…, the Mainichi newspaper found 55% of respondents said BOJ policy should be reviewed, 22% said it should not and 22% said they didn’t know.”
Social, Political, Environmental, Cybersecurity Instability Watch:
October 25 – Reuters (Rami Ayyub): “U.S. students have suffered historic learning setbacks with math and reading scores falling to their lowest levels since before the COVID-19 pandemic, national exam results… showed, the latest sign of the damage school closures wrought on children. Math scores saw their largest drop on record, a trend consistent across most U.S. states and almost all demographic groups, according to the National Assessment of Educational Progress (NAEP), also known as the ‘Nation's Report Card’… Reading scores declined for most jurisdictions, though not as dramatically as in math.”
October 25 – Bloomberg: “China’s Three Gorges Dam is an awe-inspiring sight, a vast barrier across the Yangtze River that contains enough concrete to fill seven Wembley Stadiums and more steel than eight Empire State Buildings. Its turbines could singlehandedly power the Philippines. But this summer, the world’s largest power plant was eerily quiet. On a late August visit to the facility, water on both sides of the dam was still. There was no sign of the white spray that usually rises from the spillway or roar of water emerging from the turbines. Scorching temperatures and a drought upstream have reduced the reservoir to a bare minimum, drastically reducing the plant’s ability to generate electricity. The water woes of China’s iconic mega-dam are part of a global hydropower crisis that is being made worse by global warming. From California to Germany, heatwaves and droughts have shrunk rivers that feed reservoirs.”
October 22 – Fortune (Erin Prater): “What happens in New York doesn’t stay in New York—not during a pandemic, anyway. As scientists speculate what an autumn COVID wave might look like in the U.S., all eyes are on the Empire State. That’s because it’s considered a ‘bellwether’ when it comes to viral conditions… Right now, New York is seeing mounting cases of the extremely transmissible, immune-evasive BQ family of COVID variants, which includes BQ.1 and BQ.1.1. Experts tell Fortune that because such variants are thriving there, they’re likely to thrive elsewhere in the country too. BQ variants—along with XBB variants surging in other parts of the world—are believed to be the most immune-evasive strains of COVID yet. The jury is still out on how severe these strains are, but there are early reports that monoclonal antibody treatments, reserved for high-risk patients, can’t stand up to them.”
October 26 – Reuters (Nancy Lapid): “U.S. doctors are warning that a surge in cases of respiratory syncytial virus (RSV) is coinciding with an increase in COVID transmission and an earlier-than-normal flu season, raising the specter of a ‘tripledemic’ of respiratory illness this winter. In particular, RSV infections among young children are reportedly filling some U.S. hospitals to capacity. ‘We are already seeing patients testing positive for more than one virus,’ said pediatrician Dr. Ira Wardono of Providence Cedars-Sinai Tarzana Medical Center…”
Leveraged Speculation Watch:
October 25 – Bloomberg (Richard Henderson): “Hedge funds have cut portfolio leverage this year in a conservative turn that has sucked borrowed money from global markets, adding selling pressure to stocks and bonds. Net leverage, a measure of industry risk appetite that takes into account long versus short positions, has fallen almost 20 percentage points to a year low of 66%, according to… Goldman Sachs… Separate figures from Morgan Stanley’s prime brokerage show a similar decline to 41% among US long-short equity hedge funds, a level reached on only a small number of occasions over the past decade.”
Geopolitical Watch:
October 23 – Reuters (Jeanny Kao and Yimou Lee): “Taiwan is working to increase energy inventories in a move to boost the island's resilience in the event of a crisis, a deputy economy minister said, as China stepped up military pressure to try to force Taiwan to accept Chinese rule. China's blockade drills around Taiwan in August after a visit to Taipei by U.S. House Speaker Nancy Pelosi have heightened concerns on the island about the prospect of an attack by its giant neighbor…”
October 24 – Reuters (Soo-Hyang Choi and Hyonhee Shin): “North and South Korea exchanged warning shots off the west coast on Monday, accusing each other of breaching their maritime borders amid heightened military tension. The South's Joint Chiefs of Staff (JCS) said it broadcast warnings and fired warning shots to see off a North Korean merchant vessel that crossed the Northern Limit Line (NLL), the de facto sea boundary…”
October 26 – Reuters (Kiyoshi Takenaka): “South Korea said… it had agreed with the United States and Japan that a resumption of nuclear testing by North Korea would have to be met with an ‘unparalleled’ response. Washington and its allies believe North Korea could be about to resume nuclear bomb testing for the first time since 2017… South Korean First Vice Foreign Minister Cho Hyun-dong discussed the issue with his Japanese counterpart Takeo Mori and U.S. Deputy Secretary of State Wendy Sherman in Tokyo.”
October 25 – Financial Times (John Paul Rathbone): “The likelihood that Russia would resort to using a nuclear weapon in its war on Ukraine was ‘higher than a couple of months ago’ and ‘requires full attention’, a top European spy chief has warned. Mikk Marran, head of Estonia’s foreign intelligence service, said the use of a nuclear weapon was one of Russian president Vladimir Putin’s ‘potential scenarios for escalation’. The recent series of calls from Moscow officials alleging Ukraine was preparing a ‘dirty bomb’… for use on the battlefield was ‘out of pattern’, he warned. ‘The likelihood of [Russia] going nuclear is certainly more than zero and higher than a couple of months ago,’ Marran said…”
