[Bloomberg] China Drops Trade Target as Global Growth Uncertainty Increases
[Reuters] China's four biggest cities working on steps to cool housing market: minister
[WSJ] China’s Lowered Growth Target: What the World Can Expect
[NYT] In New Economic Plan, China Bets That Hard Choices Can Be Avoided
[BBC] Zaman newspaper: Defiant last edition as Turkey police raid
[Reuters] Turkish police fire tear gas at newspaper, EU officials lament press record
[UK Daily Mail] Tension mounts in South China Sea
Saturday, March 5, 2016
Friday, March 4, 2016
Friday Evening Links
[Reuters] China sets economic growth target of at or above 6.5 percent in five year plan
[Bloomberg] China Raises 2016 Deficit to 3% as Leaders Seek to Boost Growth
[Bloomberg] Exclusive: U.S. watchdog to probe Fed's lax oversight of Wall Street
[Washington Post] Everything you need to know about Britain leaving the European Union
[Bloomberg] China Raises 2016 Deficit to 3% as Leaders Seek to Boost Growth
[Bloomberg] Exclusive: U.S. watchdog to probe Fed's lax oversight of Wall Street
[Washington Post] Everything you need to know about Britain leaving the European Union
Weekly Commentary: Just the Facts (back next week)
For another acutely unstable market week:
The S&P500 jumped 2.7% (down 2.2% y-t-d), and the Dow rose 2.2% (down 2.4%). The Utilities were up 2.0% (up 8.7%). The Banks surged 6.2% (down 10.4%), and the Broker/Dealers jumped 5.8% (down 10.8%). The Transports rallied 3.3% (up 1.9%). The broader market again outperformed. The S&P 400 Midcaps surged 4.4% (unchanged), and the small cap Russell 2000 jumped 4.3% (down 4.8%). The Nasdaq100 gained 2.2% (down 5.8%), and the Morgan Stanley High Tech index increased 2.3% (down 6.7%). The Semiconductors jumped 4.2% (down 1.9%). The Biotechs ended the week up 4.0% (down 21.7%). Though bullion surging $36, the HUI gold index added 6.5% (up 54.7%).
Three-month Treasury bill rates ended the week at 26 bps. Two-year government yields rose eight bps to 0.87% (down 18bps y-t-d). Five-year T-note yields jumped 13 bps to 1.37% (down 38bps). Ten-year Treasury yields rose 13 bps to 1.87% (down 38bps). Long bond yields gained six bps to 2.70% (down 32bps).
Greek 10-year yields sank 64bps to 9.36% (up 204bps y-t-d). Ten-year Portuguese yields were unchanged at 3.05% (up 53bps). Italian 10-year yields slipped a basis point to 1.46% (down 13bps). Spain's 10-year yields declined two bps to 1.55% (down 22bps). German bund yields rose nine bps to 0.24% (down 38bps). French yields gained nine bps to 0.58% (down 41bps). The French to German 10-year bond spread narrowed one to to 34 bps. U.K. 10-year gilt yields jumped eight bps to 1.48% (down 48bps).
Japan's Nikkei equities index surged 5.1% (down 10.6% y-t-d). Japanese 10-year "JGB" yields rose three bps to negative 0.05% (down 31bps y-t-d). The German DAX equities index jumped 3.3% (down 8.6%). Spain's IBEX 35 equities index surged 5.5% (down 7.7%). Italy's FTSE MIB index rose 4.5% (down 14.7%). EM equities were mostly higher. Brazil's Bovespa index surged 18.0% (13.2%). Mexico's Bolsa gained 3.2% (up 4.4%). South Korea's Kospi index increased 1.8% (down 0.3%). India’s Sensex equities index surged 6.4% (down 5.6%). China’s Shanghai Exchange rallied 3.9% (down 18.8%). Turkey's Borsa Istanbul National 100 index gained 3.0% (up 7.6%). Russia's MICEX equities index rose 3.4% (up 6.6%).
Junk funds saw inflows surge to a record $5.0 billion (from Lipper).
Freddie Mac 30-year fixed mortgage rates added two bps to 3.64% (down 11bps y-o-y). Fifteen-year rates added a basis point to 2.94% (down 9bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates five bps higher to 3.84% (down 57bps).
Federal Reserve Credit last week declined $8.5bn to $4.439 TN. Over the past year, Fed Credit fell $9.5bn, or 0.2%. Fed Credit inflated $1.628 TN, or 58%, over the past 173 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt last week declined $3.2bn to an 11-month low $3.251 TN. "Custody holdings" were down $4.5bn y-o-y, or 0.1%.
M2 (narrow) "money" supply last week jumped $34.2bn to $12.498 TN. "Narrow money" expanded $639bn, or 5.4%, over the past year. For the week, Currency increased $1.7bn. Total Checkable Deposits fell $4.2bn, while Savings Deposits jumped $34.6bn. Small Time Deposits were little changed. Retail Money Funds increased $2.4bn.
Total money market fund assets surged $26.0bn to $2.804 TN. Money Funds rose $131bn y-o-y (4.9%).
Total Commercial Paper gained $6.4bn to $1.083 TN. CP expanded $84.2 billion y-o-y, or 8.4%.
Currency Watch:
The U.S. dollar index declined 0.9% this week to 97.22 (down 1.5% y-t-d). For the week on the upside, the Brazilian real increased 6.2%, the South African rand 5.1%, the Australian dollar 4.3%, the New Zealand dollar 2.9%, the Mexican peso 2.8%, the British pound 2.6%, the Norwegian krone 2.4%, the Canadian dollar 1.5%, the Swedish krona 1.0%, the euro 0.7%, the Swiss franc 0.4% and the Japanese yen 0.2%. The Chinese yuan increased 0.5% versus the dollar.
Commodities Watch:
March 4 – Bloomberg (Sabrina Willmer): “BlackRock Inc., the world’s largest money manager, temporarily suspended issuance of new shares in its iShares Gold Trust exchange traded product amid surging demand for gold, which requires that the firm register new shares. ‘This suspension does not affect the ability of retail and institutional investors to trade on stock exchanges,’ the… firm said… Retail and institutional investors will continue to be able to buy and sell shares in IAU.’ the firm said… BlackRock is taking the step because it has exhausted the amount of shares it has registered for.”
The Goldman Sachs Commodities Index surged 4.9% (up 1.0% y-t-d). Spot Gold gained 2.9% to $1,259 (up 18.6%). March Silver surged 6.7% to $15.69 (up 13.7%). April WTI Crude jumped $3.14 to $35.92 (down 3%). March Gasoline surged 31% (up 4.8%), while March Natural Gas sank 6.7% (down 29%). March Copper rallied 6.4% (up 5.9%). May Wheat gained 1.9% (down 2%). May Corn slipped 0.3% (unchanged).
The S&P500 jumped 2.7% (down 2.2% y-t-d), and the Dow rose 2.2% (down 2.4%). The Utilities were up 2.0% (up 8.7%). The Banks surged 6.2% (down 10.4%), and the Broker/Dealers jumped 5.8% (down 10.8%). The Transports rallied 3.3% (up 1.9%). The broader market again outperformed. The S&P 400 Midcaps surged 4.4% (unchanged), and the small cap Russell 2000 jumped 4.3% (down 4.8%). The Nasdaq100 gained 2.2% (down 5.8%), and the Morgan Stanley High Tech index increased 2.3% (down 6.7%). The Semiconductors jumped 4.2% (down 1.9%). The Biotechs ended the week up 4.0% (down 21.7%). Though bullion surging $36, the HUI gold index added 6.5% (up 54.7%).
Three-month Treasury bill rates ended the week at 26 bps. Two-year government yields rose eight bps to 0.87% (down 18bps y-t-d). Five-year T-note yields jumped 13 bps to 1.37% (down 38bps). Ten-year Treasury yields rose 13 bps to 1.87% (down 38bps). Long bond yields gained six bps to 2.70% (down 32bps).
Greek 10-year yields sank 64bps to 9.36% (up 204bps y-t-d). Ten-year Portuguese yields were unchanged at 3.05% (up 53bps). Italian 10-year yields slipped a basis point to 1.46% (down 13bps). Spain's 10-year yields declined two bps to 1.55% (down 22bps). German bund yields rose nine bps to 0.24% (down 38bps). French yields gained nine bps to 0.58% (down 41bps). The French to German 10-year bond spread narrowed one to to 34 bps. U.K. 10-year gilt yields jumped eight bps to 1.48% (down 48bps).
Japan's Nikkei equities index surged 5.1% (down 10.6% y-t-d). Japanese 10-year "JGB" yields rose three bps to negative 0.05% (down 31bps y-t-d). The German DAX equities index jumped 3.3% (down 8.6%). Spain's IBEX 35 equities index surged 5.5% (down 7.7%). Italy's FTSE MIB index rose 4.5% (down 14.7%). EM equities were mostly higher. Brazil's Bovespa index surged 18.0% (13.2%). Mexico's Bolsa gained 3.2% (up 4.4%). South Korea's Kospi index increased 1.8% (down 0.3%). India’s Sensex equities index surged 6.4% (down 5.6%). China’s Shanghai Exchange rallied 3.9% (down 18.8%). Turkey's Borsa Istanbul National 100 index gained 3.0% (up 7.6%). Russia's MICEX equities index rose 3.4% (up 6.6%).
Junk funds saw inflows surge to a record $5.0 billion (from Lipper).
Freddie Mac 30-year fixed mortgage rates added two bps to 3.64% (down 11bps y-o-y). Fifteen-year rates added a basis point to 2.94% (down 9bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates five bps higher to 3.84% (down 57bps).
Federal Reserve Credit last week declined $8.5bn to $4.439 TN. Over the past year, Fed Credit fell $9.5bn, or 0.2%. Fed Credit inflated $1.628 TN, or 58%, over the past 173 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt last week declined $3.2bn to an 11-month low $3.251 TN. "Custody holdings" were down $4.5bn y-o-y, or 0.1%.
M2 (narrow) "money" supply last week jumped $34.2bn to $12.498 TN. "Narrow money" expanded $639bn, or 5.4%, over the past year. For the week, Currency increased $1.7bn. Total Checkable Deposits fell $4.2bn, while Savings Deposits jumped $34.6bn. Small Time Deposits were little changed. Retail Money Funds increased $2.4bn.
Total money market fund assets surged $26.0bn to $2.804 TN. Money Funds rose $131bn y-o-y (4.9%).
Total Commercial Paper gained $6.4bn to $1.083 TN. CP expanded $84.2 billion y-o-y, or 8.4%.
Currency Watch:
The U.S. dollar index declined 0.9% this week to 97.22 (down 1.5% y-t-d). For the week on the upside, the Brazilian real increased 6.2%, the South African rand 5.1%, the Australian dollar 4.3%, the New Zealand dollar 2.9%, the Mexican peso 2.8%, the British pound 2.6%, the Norwegian krone 2.4%, the Canadian dollar 1.5%, the Swedish krona 1.0%, the euro 0.7%, the Swiss franc 0.4% and the Japanese yen 0.2%. The Chinese yuan increased 0.5% versus the dollar.
Commodities Watch:
March 4 – Bloomberg (Sabrina Willmer): “BlackRock Inc., the world’s largest money manager, temporarily suspended issuance of new shares in its iShares Gold Trust exchange traded product amid surging demand for gold, which requires that the firm register new shares. ‘This suspension does not affect the ability of retail and institutional investors to trade on stock exchanges,’ the… firm said… Retail and institutional investors will continue to be able to buy and sell shares in IAU.’ the firm said… BlackRock is taking the step because it has exhausted the amount of shares it has registered for.”
The Goldman Sachs Commodities Index surged 4.9% (up 1.0% y-t-d). Spot Gold gained 2.9% to $1,259 (up 18.6%). March Silver surged 6.7% to $15.69 (up 13.7%). April WTI Crude jumped $3.14 to $35.92 (down 3%). March Gasoline surged 31% (up 4.8%), while March Natural Gas sank 6.7% (down 29%). March Copper rallied 6.4% (up 5.9%). May Wheat gained 1.9% (down 2%). May Corn slipped 0.3% (unchanged).
Fixed-Income Bubble Watch:
March 1 – Financial Times (Gavin Jackson and Joseph Cotterill): “Investment banks are struggling to clear a backlog of debt they lent to companies and private equity to fund last year’s mergers and acquisitions boom. Private equity takeovers, which rely on large amounts of debt, have returned to the centre of the turmoil in credit markets, most recently the $6.5bn buyout of Solera, a US computer software company. To fund these deals banks make so-called bridge loans for a short period, which are then replaced by long-term debt such as junk bonds or syndicated leveraged loans. Banks risk being left with losses if these bridge loans are ‘hung’ and they are unable to sell the longer-term debt at a price they promised to the company.”
March 1 – Bloomberg (Cordell Eddings): “Global junk-bond defaults will rise to the highest level in seven years in 2016 as a prolonged downturn in commodity prices continues to wreak havoc on company profits and balance sheets, according to Moody’s… The ratings company forecasts that the speculative-grade default rate will reach 4% this year, up from 3.5% in 2015 and the highest level since 2009. The default rate for all of Moody’s-rated corporate issuers is estimated to rise to 2.1%, also a post-financial crisis high, from 1.7% last year. ‘Persistently low commodity prices, slowing economic expansion and widening high-yield spreads will send default rates higher in 2016,’ Moody’s credit analyst Sharon Ou wrote… Diminished credit quality ‘combined with the sharp increase in defaults and rising investor caution, indicate that the credit cycle is turning.’”
March 4 – Reuters (Jamie McGeever): “Goldman Sachs is cutting between five and 10% of staff in its fixed income and currency trading business, a source familiar with the matter said... Goldman employed 36,800 people at the end of 2015. But its FIC division is likely to feel the squeeze more than most because of the challenges posed by low interest rates and stricter regulations that have curbed profits in areas like fixed income trading… Revenue from FIC trading was $1.12 billion in the fourth quarter of last year, the lowest since the fourth quarter of 2008…”
Global Bubble Watch:
February 27 – Reuters (Gernot Heller and Adam Jourdan): “The world's top economies declared on Saturday that they need to look beyond ultra-low interest rates and printing money to shake the global economy out of its torpor… A communique from the Group of 20 (G20) finance ministers and central bankers flagged a series of risks to world growth, including volatile capital flows, a sharp fall in commodity prices and the potential ‘shock’ of a British exit from the EU. ‘The global recovery continues, but it remains uneven and falls short of our ambition for strong, sustainable and balanced growth,’ said the communique…”
February 28 – Financial Times (Attracta Mooney and Chris Newlands): “Investors pulled more than $60bn from mutual funds globally in January, marking the worst month of outflows since the height of the financial crisis. The outflows were most acute for European mutual funds, with investors redeeming €42.6bn ($47bn), according to Thompson Reuters Lipper.... January marked the worst start to a year for markets in at least two decades. More than $2.3tn was wiped off global stocks in the first week alone…”
U.S. Bubble Watch:
March 4 – Wall Street Journal (Aaron Back): “It isn’t just energy loans. Problems also are popping up in banks’ consumer-loan books, especially for autos. While still at an early stage and manageable, it is a risk bank investors should keep an eye on given how lending has boomed in this area… In last year’s fourth quarter, total net charge-offs at U.S. banks, the amount of bad loans that they wrote off, rose from a year earlier for the first time in 5½ years… Trouble in the oil patch was a big culprit. It caused charge-offs in banks’ commercial- and industrial-loan books to soar 43% from a year earlier… Even so, auto-loan write-offs have started accelerating. In the fourth quarter, rising 16% from a year earlier… And more trouble looks to be coming around the bend: Auto loans that are 30 to 89 days overdue rose to 1.82% of total auto loans in the fourth quarter, the highest level since 2011… Fitch Ratings warned last week that delinquencies of over 60 days on securities backed by subprime auto loans hit almost 5% in January. That is the highest since September 2009 and close to the record peak hit that same year.”
March 4 – Wall Street Journal (Rolfe Winkler and Scott Austin): “Mutual funds that helped fuel the technology boom are cutting the value of their startup investments at an accelerating pace and are making fewer new investments. These are ominous signs for Silicon Valley, where a flood of money into young companies pushed valuations skyward, and subsidized hiring sprees and advertising binges at scores of companies. The mutual-fund pullback threatens to deepen a wider downturn that has already led to falling valuations, shrinking ambitions and layoffs as the receding tide of capital forces startup companies of all kinds to focus on the bottom line rather than growth at any cost.”
March 4 – Reuters (Lucia Mutikani): “The U.S. trade deficit widened more than expected in January as a strong dollar and weak global demand helped to push exports to a more than five-and-a-half-year low… The… trade gap increased 2.2% to $45.7 billion. December's trade deficit was revised up to $44.7 billion from the previously reported $43.4 billion. Exports have declined for four straight months.”
March 3 – Bloomberg (Victoria Stilwell): “Growth in U.S. service industries slowed for a fourth straight month in February, prompting the first job cuts in two years. The Institute for Supply Management’s non-manufacturing index eased to 53.4 from 53.5 in January… The group’s employment measure dipped below the expansion threshold for the first time since February 2014.”
March 3 – Reuters (Bernie Woodall): “The average amount of a new-vehicle loan in the United States rose by $1,170 in the fourth quarter from a year earlier to a record high $29,551, and the average monthly payment was nearly $500, Experian Automotive said… Leases accounted for a record high 33.6% of new vehicles sold, said Experian automotive credit director Melinda Zabritski, primarily because monthly payments are lower.”
March 3 – Reuters: “House flipping - buying and reselling a home to make a quick buck - has risen in some hot housing markets, prompting concerns that local housing bubbles could be developing, according to a report… The report by RealtyTrac found that home flipping in 12 active metropolitan areas last year was above a peak set in 2005, just two years before the U.S. mortgage market started to collapse, leading to a banking crisis and the Great Recession. Profits generated by home flipping also hit a 10-year high, with home flippers netting an average $55,000 per sale before renovation and transaction costs.”
China Bubble Watch:
March 1 – Bloomberg: “China’s credit-rating outlook was lowered to negative from stable by Moody’s…, which cited rising government debt, falling currency reserves and uncertainty over the authorities’ ability to carry out reforms. The government’s fiscal strength is weakening and there’s a growing probability that it will need to shoulder some of the liabilities of local governments, policy banks and state-owned enterprises, the ratings company said… Declines in the nation’s foreign-exchange reserves amid capital outflows underscore policy, currency and growth risks, while failure to undertake reforms may undermine the credibility of policy makers, it said. Moody’s joined Standard & Poor’s in warning rising local debt has the potential to add pressure to the country’s rating.”
March 3 – Barron’s (Shuli Ren): “After lowering its credit outlook on the Chinese government yesterday, rating agency Moody’s cut 38 Chinese state-owned enterprises outlook to negative as well. Moody’s wrote: The change in the Chinese sovereign rating outlook to negative indicates that the central government and regional local governments’ (RLGs) capability to support their SOEs on a broad basis could be weaker than we had previously assessed. Moody’s believes that the continuing growth in contingent liabilities — along with stated government objectives to introduce more market discipline — suggests that support from the government and the banking system will increasingly be prioritized, based on the relative importance of each entity for the implementation of strategic national policy goals. Yesterday, Moody’s raised concerns that Chinese government’s debt has risen markedly to 32.5% in 2012 to 40.6% by the end of 2015.”
March 1 – Bloomberg: “After getting burned by the bursting of China’s stock-market bubble, Liu Yihui is seeking salvation from the country’s latest investment mania: big-city properties. The 35-year-old civil engineer dumped his equity holdings after losing 40% last year, using the proceeds to buy a 5 million yuan ($763,464) apartment in Shenzhen. Prices in the southern business hub have surged more than 50% over the past year, the fastest pace since at least 2011. ‘People are a bit crazy in this market, but what can you do?’ said Liu, who took on a mortgage to buy the apartment, an investment property that he’s renting out. ‘Stock returns were terrible, so I made up my mind to put my money in real estate.’”
March 2 – Bloomberg: “China’s monetary policies have encouraged investors to pour money into real estate, inflating prices in cities such as Beijing, Shanghai and Shenzhen and increasing the risk that bubbles could form, central bank policy adviser Bai Chongen said… At the same time, smaller property markets are struggling with excess inventory, making it difficult to craft a unified policy response and requiring careful coordination with fiscal measures, he said…"
March 3 – Financial Times (Don Weinland): “It looks like subprime derivatives on steroids: China hopes to bundle together billions of dollars’ worth of non-performing loans and eventually sell them to global investors. Such a massive securitisation programme would represent the latest tactic in China’s campaign to lift one of the biggest shadows cast over its slowing economy — a debt pile that is as big as 230% of GDP. It would whittle back debts at Chinese banks and move some of the risk outside the domestic financial system. According to official figures, such debts at the banks have reached Rmb1.27tn ($194bn), while analysts estimate the real number is likely to be many times higher… Demand for the scheme, however, is expected to be significantly more modest than supply. ‘How many global investors have been interested in the traditional [bad debt in China]?’ asked one Hong Kong-based investor with experience buying distressed debt in Asia. ‘Not many … is a more complicated version of this going to change that soon? No.’”
March 2 – Reuters (Kevin Yao): “China plans to target broad-based money supply growth of around 13% this year, sources said, a signal that further monetary policy easing is likely during a painful economic restructuring that could see millions of workers losing jobs. Top leaders have already pledged ‘supply-side structural reforms’ to tackle excess factory capacity and ‘zombie firms’, and are also expected to lean more on fiscal stimulus as they seek to avert a hard landing for the world's second-largest economy. ‘A 13% rise in M2 is sufficient for keeping liquidity flush in the near term, but we may see faster rises later this year as the central bank is likely to loosen policy further,’ said one of the sources.”
February 29 – Bloomberg: “China’s factory gauge extended its stretch of deteriorating conditions to a record seven months while a measure of services fell to the weakest in seven years, underscoring the challenge for policy makers as they seek to cut overcapacity in manufacturing without derailing growth.”
February 29 – Bloomberg (David Tweed and Ditas B Lopez): “Communist Party officials in Beijing have pledged to ‘seriously punish’ a retired property developer who criticized President Xi Jinping’s state media clampdown, urging other party members to learn from his example. Former Huayuan Property Co. Chairman Ren Zhiqiang ‘constantly issued illegal information and wrong opinions on the Internet, which caused a baneful influence and seriously damaged the image of the party,’ the party committee in Beijing’s Xicheng district said… Ren, a friend of party discipline chief Wang Qishan, was known for airing outspoken views to his more than 37 million Weibo followers before Internet regulators ordered his social media accounts closed Sunday. ‘As a Communist Party member, any comment that is not in line with the party’s policy and direction, no matter if published on the Internet or in the media, are not allowed by the party’s regulations,’ said the committee…”
February 28 – Financial Times (Don Weinland): “Beijing has mothballed two pioneering outbound investment schemes, according to people with knowledge of the situation, in its latest bid to stem capital outflows and shore up the renminbi. The halt in the allotment of quotas reflects fears over the massive amount of cash — some economists estimate up to $1tn last year — that has left the country through official and unofficial channels as economic growth slows and the renminbi continues to depreciate. The schemes were part of liberalisation moves designed to facilitate overseas investment in China and allow domestic funds to buy foreign securities.”
Central Bank Watch:
March 4 – Wall Street Journal (Tom Fearless): “The European Central Bank faces a dilemma as it considers boosting its roughly €1.5 trillion ($1.6 trillion) bond-purchase program next week: how to ensure it has enough bonds to buy without sparking legal tussles. The ECB is now buying about €60 billion a month of mainly eurozone government bonds, based on self-imposed rules that limit how much it can acquire from individual governments. But those rules mean the supply—particularly of low-risk German bonds—will be exhausted before the program ends next March, and sooner, if it is expanded next week… ECB President Mario Draghi has pledged to review the size and design of its stimulus at a two-day policy meeting starting Wednesday. Boosting its monthly bond purchases to €80 billion, as some economists expect, would exhaust its pool of eligible German government bonds before the end of the year, according to researchers at Bruegel, a Brussels think tank.”
EM Bubble Watch:
March 1 – Financial Times (Henny Sender): “Highly indebted companies across Asia are closely watching the direction of the US dollar. A case in point is Agile Property Holdings and the property developer must generate cash to repay its HK$3bn debt over 2016 while contending with flat sales and falling prices for the properties it sells in mainland China, where average prices are down 9%. For now, Standard & Poor’s has yet to revise down the developer’s credit rating… Not so fortunate is PT Energi Mega Persada, an Indonesian energy company. S&P downgraded its rating due to the refinancing risk on its sizeable short-term debt and fears that its internal resources will be insufficient to service its debt. These companies are two faces of the nearly $1tn in Asian emerging market corporate debt that is coming due through 2020 — almost half in the next two years alone. As emerging market borrowers try to reduce their debt loads, a disruptive economic cycle is among the principal fears of risk managers who contemplate a world of slow growth, low commodity prices, overcapacity and a lack of pricing power…”
February 29 – Bloomberg (Stefania Bianchi): “Gulf Cooperation Council countries may struggle to refinance $94 billion of debt in the next two years as the region faces slowing growth, rising rates and rating downgrades, according to HSBC… Oil-rich GCC states have to refinance $52 billion of bonds and $42 billion of syndicated loans, mostly in the United Arab Emirates and Qatar… The countries also face a fiscal and current account deficit of $395 billion over the period, it said.”
Brazil Watch:
March 4 – Bloomberg (Anna Edgerton): “As soon as police raided the home of former Brazil President Luiz Inacio Lula da Silva and questioned him early Friday, red-shirted activists of his Workers’ Party took to the streets. Fist fights broke out with police as well as with those applauding the detention -- a preview of the unrest that likely awaits Brazil and its embattled president. The second term of President Dilma Rousseff has been overwhelmed by twin crises -- an economy crippled by recession and a political establishment under siege by a massive corruption investigation. The probe of Lula, an iconic figure who chose Rousseff as his successor, escalates almost two years of mounting tension.”
March 1 – Financial Times (Gavin Jackson and Joseph Cotterill): “Investment banks are struggling to clear a backlog of debt they lent to companies and private equity to fund last year’s mergers and acquisitions boom. Private equity takeovers, which rely on large amounts of debt, have returned to the centre of the turmoil in credit markets, most recently the $6.5bn buyout of Solera, a US computer software company. To fund these deals banks make so-called bridge loans for a short period, which are then replaced by long-term debt such as junk bonds or syndicated leveraged loans. Banks risk being left with losses if these bridge loans are ‘hung’ and they are unable to sell the longer-term debt at a price they promised to the company.”
March 1 – Bloomberg (Cordell Eddings): “Global junk-bond defaults will rise to the highest level in seven years in 2016 as a prolonged downturn in commodity prices continues to wreak havoc on company profits and balance sheets, according to Moody’s… The ratings company forecasts that the speculative-grade default rate will reach 4% this year, up from 3.5% in 2015 and the highest level since 2009. The default rate for all of Moody’s-rated corporate issuers is estimated to rise to 2.1%, also a post-financial crisis high, from 1.7% last year. ‘Persistently low commodity prices, slowing economic expansion and widening high-yield spreads will send default rates higher in 2016,’ Moody’s credit analyst Sharon Ou wrote… Diminished credit quality ‘combined with the sharp increase in defaults and rising investor caution, indicate that the credit cycle is turning.’”
March 4 – Reuters (Jamie McGeever): “Goldman Sachs is cutting between five and 10% of staff in its fixed income and currency trading business, a source familiar with the matter said... Goldman employed 36,800 people at the end of 2015. But its FIC division is likely to feel the squeeze more than most because of the challenges posed by low interest rates and stricter regulations that have curbed profits in areas like fixed income trading… Revenue from FIC trading was $1.12 billion in the fourth quarter of last year, the lowest since the fourth quarter of 2008…”
Global Bubble Watch:
February 27 – Reuters (Gernot Heller and Adam Jourdan): “The world's top economies declared on Saturday that they need to look beyond ultra-low interest rates and printing money to shake the global economy out of its torpor… A communique from the Group of 20 (G20) finance ministers and central bankers flagged a series of risks to world growth, including volatile capital flows, a sharp fall in commodity prices and the potential ‘shock’ of a British exit from the EU. ‘The global recovery continues, but it remains uneven and falls short of our ambition for strong, sustainable and balanced growth,’ said the communique…”
February 28 – Financial Times (Attracta Mooney and Chris Newlands): “Investors pulled more than $60bn from mutual funds globally in January, marking the worst month of outflows since the height of the financial crisis. The outflows were most acute for European mutual funds, with investors redeeming €42.6bn ($47bn), according to Thompson Reuters Lipper.... January marked the worst start to a year for markets in at least two decades. More than $2.3tn was wiped off global stocks in the first week alone…”
U.S. Bubble Watch:
March 4 – Wall Street Journal (Aaron Back): “It isn’t just energy loans. Problems also are popping up in banks’ consumer-loan books, especially for autos. While still at an early stage and manageable, it is a risk bank investors should keep an eye on given how lending has boomed in this area… In last year’s fourth quarter, total net charge-offs at U.S. banks, the amount of bad loans that they wrote off, rose from a year earlier for the first time in 5½ years… Trouble in the oil patch was a big culprit. It caused charge-offs in banks’ commercial- and industrial-loan books to soar 43% from a year earlier… Even so, auto-loan write-offs have started accelerating. In the fourth quarter, rising 16% from a year earlier… And more trouble looks to be coming around the bend: Auto loans that are 30 to 89 days overdue rose to 1.82% of total auto loans in the fourth quarter, the highest level since 2011… Fitch Ratings warned last week that delinquencies of over 60 days on securities backed by subprime auto loans hit almost 5% in January. That is the highest since September 2009 and close to the record peak hit that same year.”
March 4 – Wall Street Journal (Rolfe Winkler and Scott Austin): “Mutual funds that helped fuel the technology boom are cutting the value of their startup investments at an accelerating pace and are making fewer new investments. These are ominous signs for Silicon Valley, where a flood of money into young companies pushed valuations skyward, and subsidized hiring sprees and advertising binges at scores of companies. The mutual-fund pullback threatens to deepen a wider downturn that has already led to falling valuations, shrinking ambitions and layoffs as the receding tide of capital forces startup companies of all kinds to focus on the bottom line rather than growth at any cost.”
March 4 – Reuters (Lucia Mutikani): “The U.S. trade deficit widened more than expected in January as a strong dollar and weak global demand helped to push exports to a more than five-and-a-half-year low… The… trade gap increased 2.2% to $45.7 billion. December's trade deficit was revised up to $44.7 billion from the previously reported $43.4 billion. Exports have declined for four straight months.”
March 3 – Bloomberg (Victoria Stilwell): “Growth in U.S. service industries slowed for a fourth straight month in February, prompting the first job cuts in two years. The Institute for Supply Management’s non-manufacturing index eased to 53.4 from 53.5 in January… The group’s employment measure dipped below the expansion threshold for the first time since February 2014.”
March 3 – Reuters (Bernie Woodall): “The average amount of a new-vehicle loan in the United States rose by $1,170 in the fourth quarter from a year earlier to a record high $29,551, and the average monthly payment was nearly $500, Experian Automotive said… Leases accounted for a record high 33.6% of new vehicles sold, said Experian automotive credit director Melinda Zabritski, primarily because monthly payments are lower.”
March 3 – Reuters: “House flipping - buying and reselling a home to make a quick buck - has risen in some hot housing markets, prompting concerns that local housing bubbles could be developing, according to a report… The report by RealtyTrac found that home flipping in 12 active metropolitan areas last year was above a peak set in 2005, just two years before the U.S. mortgage market started to collapse, leading to a banking crisis and the Great Recession. Profits generated by home flipping also hit a 10-year high, with home flippers netting an average $55,000 per sale before renovation and transaction costs.”
China Bubble Watch:
March 1 – Bloomberg: “China’s credit-rating outlook was lowered to negative from stable by Moody’s…, which cited rising government debt, falling currency reserves and uncertainty over the authorities’ ability to carry out reforms. The government’s fiscal strength is weakening and there’s a growing probability that it will need to shoulder some of the liabilities of local governments, policy banks and state-owned enterprises, the ratings company said… Declines in the nation’s foreign-exchange reserves amid capital outflows underscore policy, currency and growth risks, while failure to undertake reforms may undermine the credibility of policy makers, it said. Moody’s joined Standard & Poor’s in warning rising local debt has the potential to add pressure to the country’s rating.”
March 3 – Barron’s (Shuli Ren): “After lowering its credit outlook on the Chinese government yesterday, rating agency Moody’s cut 38 Chinese state-owned enterprises outlook to negative as well. Moody’s wrote: The change in the Chinese sovereign rating outlook to negative indicates that the central government and regional local governments’ (RLGs) capability to support their SOEs on a broad basis could be weaker than we had previously assessed. Moody’s believes that the continuing growth in contingent liabilities — along with stated government objectives to introduce more market discipline — suggests that support from the government and the banking system will increasingly be prioritized, based on the relative importance of each entity for the implementation of strategic national policy goals. Yesterday, Moody’s raised concerns that Chinese government’s debt has risen markedly to 32.5% in 2012 to 40.6% by the end of 2015.”
March 1 – Bloomberg: “After getting burned by the bursting of China’s stock-market bubble, Liu Yihui is seeking salvation from the country’s latest investment mania: big-city properties. The 35-year-old civil engineer dumped his equity holdings after losing 40% last year, using the proceeds to buy a 5 million yuan ($763,464) apartment in Shenzhen. Prices in the southern business hub have surged more than 50% over the past year, the fastest pace since at least 2011. ‘People are a bit crazy in this market, but what can you do?’ said Liu, who took on a mortgage to buy the apartment, an investment property that he’s renting out. ‘Stock returns were terrible, so I made up my mind to put my money in real estate.’”
March 2 – Bloomberg: “China’s monetary policies have encouraged investors to pour money into real estate, inflating prices in cities such as Beijing, Shanghai and Shenzhen and increasing the risk that bubbles could form, central bank policy adviser Bai Chongen said… At the same time, smaller property markets are struggling with excess inventory, making it difficult to craft a unified policy response and requiring careful coordination with fiscal measures, he said…"
March 3 – Financial Times (Don Weinland): “It looks like subprime derivatives on steroids: China hopes to bundle together billions of dollars’ worth of non-performing loans and eventually sell them to global investors. Such a massive securitisation programme would represent the latest tactic in China’s campaign to lift one of the biggest shadows cast over its slowing economy — a debt pile that is as big as 230% of GDP. It would whittle back debts at Chinese banks and move some of the risk outside the domestic financial system. According to official figures, such debts at the banks have reached Rmb1.27tn ($194bn), while analysts estimate the real number is likely to be many times higher… Demand for the scheme, however, is expected to be significantly more modest than supply. ‘How many global investors have been interested in the traditional [bad debt in China]?’ asked one Hong Kong-based investor with experience buying distressed debt in Asia. ‘Not many … is a more complicated version of this going to change that soon? No.’”
March 2 – Reuters (Kevin Yao): “China plans to target broad-based money supply growth of around 13% this year, sources said, a signal that further monetary policy easing is likely during a painful economic restructuring that could see millions of workers losing jobs. Top leaders have already pledged ‘supply-side structural reforms’ to tackle excess factory capacity and ‘zombie firms’, and are also expected to lean more on fiscal stimulus as they seek to avert a hard landing for the world's second-largest economy. ‘A 13% rise in M2 is sufficient for keeping liquidity flush in the near term, but we may see faster rises later this year as the central bank is likely to loosen policy further,’ said one of the sources.”
February 29 – Bloomberg: “China’s factory gauge extended its stretch of deteriorating conditions to a record seven months while a measure of services fell to the weakest in seven years, underscoring the challenge for policy makers as they seek to cut overcapacity in manufacturing without derailing growth.”
February 29 – Bloomberg (David Tweed and Ditas B Lopez): “Communist Party officials in Beijing have pledged to ‘seriously punish’ a retired property developer who criticized President Xi Jinping’s state media clampdown, urging other party members to learn from his example. Former Huayuan Property Co. Chairman Ren Zhiqiang ‘constantly issued illegal information and wrong opinions on the Internet, which caused a baneful influence and seriously damaged the image of the party,’ the party committee in Beijing’s Xicheng district said… Ren, a friend of party discipline chief Wang Qishan, was known for airing outspoken views to his more than 37 million Weibo followers before Internet regulators ordered his social media accounts closed Sunday. ‘As a Communist Party member, any comment that is not in line with the party’s policy and direction, no matter if published on the Internet or in the media, are not allowed by the party’s regulations,’ said the committee…”
February 28 – Financial Times (Don Weinland): “Beijing has mothballed two pioneering outbound investment schemes, according to people with knowledge of the situation, in its latest bid to stem capital outflows and shore up the renminbi. The halt in the allotment of quotas reflects fears over the massive amount of cash — some economists estimate up to $1tn last year — that has left the country through official and unofficial channels as economic growth slows and the renminbi continues to depreciate. The schemes were part of liberalisation moves designed to facilitate overseas investment in China and allow domestic funds to buy foreign securities.”
Central Bank Watch:
March 4 – Wall Street Journal (Tom Fearless): “The European Central Bank faces a dilemma as it considers boosting its roughly €1.5 trillion ($1.6 trillion) bond-purchase program next week: how to ensure it has enough bonds to buy without sparking legal tussles. The ECB is now buying about €60 billion a month of mainly eurozone government bonds, based on self-imposed rules that limit how much it can acquire from individual governments. But those rules mean the supply—particularly of low-risk German bonds—will be exhausted before the program ends next March, and sooner, if it is expanded next week… ECB President Mario Draghi has pledged to review the size and design of its stimulus at a two-day policy meeting starting Wednesday. Boosting its monthly bond purchases to €80 billion, as some economists expect, would exhaust its pool of eligible German government bonds before the end of the year, according to researchers at Bruegel, a Brussels think tank.”
EM Bubble Watch:
March 1 – Financial Times (Henny Sender): “Highly indebted companies across Asia are closely watching the direction of the US dollar. A case in point is Agile Property Holdings and the property developer must generate cash to repay its HK$3bn debt over 2016 while contending with flat sales and falling prices for the properties it sells in mainland China, where average prices are down 9%. For now, Standard & Poor’s has yet to revise down the developer’s credit rating… Not so fortunate is PT Energi Mega Persada, an Indonesian energy company. S&P downgraded its rating due to the refinancing risk on its sizeable short-term debt and fears that its internal resources will be insufficient to service its debt. These companies are two faces of the nearly $1tn in Asian emerging market corporate debt that is coming due through 2020 — almost half in the next two years alone. As emerging market borrowers try to reduce their debt loads, a disruptive economic cycle is among the principal fears of risk managers who contemplate a world of slow growth, low commodity prices, overcapacity and a lack of pricing power…”
February 29 – Bloomberg (Stefania Bianchi): “Gulf Cooperation Council countries may struggle to refinance $94 billion of debt in the next two years as the region faces slowing growth, rising rates and rating downgrades, according to HSBC… Oil-rich GCC states have to refinance $52 billion of bonds and $42 billion of syndicated loans, mostly in the United Arab Emirates and Qatar… The countries also face a fiscal and current account deficit of $395 billion over the period, it said.”
Brazil Watch:
March 4 – Bloomberg (Anna Edgerton): “As soon as police raided the home of former Brazil President Luiz Inacio Lula da Silva and questioned him early Friday, red-shirted activists of his Workers’ Party took to the streets. Fist fights broke out with police as well as with those applauding the detention -- a preview of the unrest that likely awaits Brazil and its embattled president. The second term of President Dilma Rousseff has been overwhelmed by twin crises -- an economy crippled by recession and a political establishment under siege by a massive corruption investigation. The probe of Lula, an iconic figure who chose Rousseff as his successor, escalates almost two years of mounting tension.”
Europe Watch:
February 27 – Reuters (Andy Bruce): “London Mayor Boris Johnson urged British government ministers to join the campaign to leave the European Union in a newspaper interview on Saturday, again defying Prime Minister and fellow Conservative David Cameron. A political showman who is widely thought to be keen to succeed Cameron, Johnson said he wanted to change the minds of the majority of cabinet ministers who favor voting to remain in the EU in a June 23 referendum on the issue.”
March 3 – Reuters (Caroline Copley): “The anti-immigrant Alternative for Germany (AfD) is poised to win almost 20% of the vote in a state election and match the ruling Social Democrats in another this month, highlighting the threat to mainstream parties from the migrant crisis.”
Geopolitical Watch:
March 2 – Reuters (David Tweed): “With a series of edicts, speeches and martial ceremonies, President Xi Jinping has over the past six months unveiled China’s biggest military overhaul since the aftermath of the Korean War. The plan seeks to transform the 2.3-million-member People’s Liberation Army, which features 21st-century hardware but an outdated, Soviet-inspired command structure, into a fighting force capable of winning a modern war. China is shifting from a ‘large country to a large and powerful one,’ Xi explained in November. The restructuring will be a major focus of the country’s new defense budget, which may be announced as soon as Friday as the annual National People’s Congress gets under way in Beijing.”
March 2 – Reuters (Andrea Shalal): “U.S. Defense Secretary Ash Carter… warned China against ‘aggressive’ actions in the South China Sea region, including the placement of surface-to-air missiles on a disputed island. ‘China must not pursue militarization in the South China Sea,’ Carter said in a wide-ranging speech at the Commonwealth Club in San Francisco. ‘Specific actions will have specific consequences.’ …He said China's behavior had fueled trilateral agreements that would have been ‘unthinkable’ even a few years ago.”
March 1 – Bloomberg (David Tweed and Ditas B Lopez): “China has stationed ships near a submerged reef in the South China Sea, blocking access by Philippine boats to fertile fishing grounds in the area as it steps up efforts to assert claims to more than 80% of one of the world’s busiest waterways. ‘Many’ Chinese coast guard boats and five warships were positioned around Quirino, or Jackson atoll, in the Spratly island chain, preventing Philippine boats from reaching their traditional fishery…”
March 2 – Reuters (Niharika Mandhana): “The U.S., India and Japan will conduct joint naval exercises in the northern waters of the Philippine Sea, an area close to the East and South China Seas where Beijing is locked in an increasingly tense standoff with Washington. The maneuvers are part of an annual event between the U.S. and Indian navies that, since 2014, has expanded to include Japan, signaling closer cooperation between the three countries that share concern about China’s military ambitions.”
March 3 – Bloomberg (Taylan Bilgic and Onur Ant): “Turkish authorities seized control of the media company that owns the country’s best-selling Zaman newspaper, a one-time supporter of President Recep Tayyip Erdogan that became one of his fiercest critics… Zaman is published by followers of U.S.-based cleric Fethullah Gulen, whom Erdogan blamed for instigating a 2013 corruption probe into the Turkish government that he said was an attempt to overthrow him. The paper’s seizure comes amid a broader crackdown on media…”
February 27 – Reuters (Andy Bruce): “London Mayor Boris Johnson urged British government ministers to join the campaign to leave the European Union in a newspaper interview on Saturday, again defying Prime Minister and fellow Conservative David Cameron. A political showman who is widely thought to be keen to succeed Cameron, Johnson said he wanted to change the minds of the majority of cabinet ministers who favor voting to remain in the EU in a June 23 referendum on the issue.”
March 3 – Reuters (Caroline Copley): “The anti-immigrant Alternative for Germany (AfD) is poised to win almost 20% of the vote in a state election and match the ruling Social Democrats in another this month, highlighting the threat to mainstream parties from the migrant crisis.”
Geopolitical Watch:
March 2 – Reuters (David Tweed): “With a series of edicts, speeches and martial ceremonies, President Xi Jinping has over the past six months unveiled China’s biggest military overhaul since the aftermath of the Korean War. The plan seeks to transform the 2.3-million-member People’s Liberation Army, which features 21st-century hardware but an outdated, Soviet-inspired command structure, into a fighting force capable of winning a modern war. China is shifting from a ‘large country to a large and powerful one,’ Xi explained in November. The restructuring will be a major focus of the country’s new defense budget, which may be announced as soon as Friday as the annual National People’s Congress gets under way in Beijing.”
March 2 – Reuters (Andrea Shalal): “U.S. Defense Secretary Ash Carter… warned China against ‘aggressive’ actions in the South China Sea region, including the placement of surface-to-air missiles on a disputed island. ‘China must not pursue militarization in the South China Sea,’ Carter said in a wide-ranging speech at the Commonwealth Club in San Francisco. ‘Specific actions will have specific consequences.’ …He said China's behavior had fueled trilateral agreements that would have been ‘unthinkable’ even a few years ago.”
March 1 – Bloomberg (David Tweed and Ditas B Lopez): “China has stationed ships near a submerged reef in the South China Sea, blocking access by Philippine boats to fertile fishing grounds in the area as it steps up efforts to assert claims to more than 80% of one of the world’s busiest waterways. ‘Many’ Chinese coast guard boats and five warships were positioned around Quirino, or Jackson atoll, in the Spratly island chain, preventing Philippine boats from reaching their traditional fishery…”
March 2 – Reuters (Niharika Mandhana): “The U.S., India and Japan will conduct joint naval exercises in the northern waters of the Philippine Sea, an area close to the East and South China Seas where Beijing is locked in an increasingly tense standoff with Washington. The maneuvers are part of an annual event between the U.S. and Indian navies that, since 2014, has expanded to include Japan, signaling closer cooperation between the three countries that share concern about China’s military ambitions.”
March 3 – Bloomberg (Taylan Bilgic and Onur Ant): “Turkish authorities seized control of the media company that owns the country’s best-selling Zaman newspaper, a one-time supporter of President Recep Tayyip Erdogan that became one of his fiercest critics… Zaman is published by followers of U.S.-based cleric Fethullah Gulen, whom Erdogan blamed for instigating a 2013 corruption probe into the Turkish government that he said was an attempt to overthrow him. The paper’s seizure comes amid a broader crackdown on media…”
Weekly Commentary: Just the Facts (back next week)
For another acutely unstable market week:
The S&P500 jumped 2.7% (down 2.2% y-t-d), and the Dow rose 2.2% (down 2.4%). The Utilities were up 2.0% (up 8.7%). The Banks surged 6.2% (down 10.4%), and the Broker/Dealers jumped 5.8% (down 10.8%). The Transports rallied 3.3% (up 1.9%). The broader market again outperformed. The S&P 400 Midcaps surged 4.4% (unchanged), and the small cap Russell 2000 jumped 4.3% (down 4.8%). The Nasdaq100 gained 2.2% (down 5.8%), and the Morgan Stanley High Tech index increased 2.3% (down 6.7%). The Semiconductors jumped 4.2% (down 1.9%). The Biotechs ended the week up 4.0% (down 21.7%). Though bullion surging $36, the HUI gold index added 6.5% (up 54.7%).
Three-month Treasury bill rates ended the week at 26 bps. Two-year government yields rose eight bps to 0.87% (down 18bps y-t-d). Five-year T-note yields jumped 13 bps to 1.37% (down 38bps). Ten-year Treasury yields rose 13 bps to 1.87% (down 38bps). Long bond yields gained six bps to 2.70% (down 32bps).
Greek 10-year yields sank 64bps to 9.36% (up 204bps y-t-d). Ten-year Portuguese yields were unchanged at 3.05% (up 53bps). Italian 10-year yields slipped a basis point to 1.46% (down 13bps). Spain's 10-year yields declined two bps to 1.55% (down 22bps). German bund yields rose nine bps to 0.24% (down 38bps). French yields gained nine bps to 0.58% (down 41bps). The French to German 10-year bond spread narrowed one to to 34 bps. U.K. 10-year gilt yields jumped eight bps to 1.48% (down 48bps).
Japan's Nikkei equities index surged 5.1% (down 10.6% y-t-d). Japanese 10-year "JGB" yields rose three bps to negative 0.05% (down 31bps y-t-d). The German DAX equities index jumped 3.3% (down 8.6%). Spain's IBEX 35 equities index surged 5.5% (down 7.7%). Italy's FTSE MIB index rose 4.5% (down 14.7%). EM equities were mostly higher. Brazil's Bovespa index surged 18.0% (13.2%). Mexico's Bolsa gained 3.2% (up 4.4%). South Korea's Kospi index increased 1.8% (down 0.3%). India’s Sensex equities index surged 6.4% (down 5.6%). China’s Shanghai Exchange rallied 3.9% (down 18.8%). Turkey's Borsa Istanbul National 100 index gained 3.0% (up 7.6%). Russia's MICEX equities index rose 3.4% (up 6.6%).
Junk funds saw inflows surge to a record $5.0 billion (from Lipper).
Freddie Mac 30-year fixed mortgage rates added two bps to 3.64% (down 11bps y-o-y). Fifteen-year rates added a basis point to 2.94% (down 9bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates five bps higher to 3.84% (down 57bps).
Federal Reserve Credit last week declined $8.5bn to $4.439 TN. Over the past year, Fed Credit fell $9.5bn, or 0.2%. Fed Credit inflated $1.628 TN, or 58%, over the past 173 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt last week declined $3.2bn to an 11-month low $3.251 TN. "Custody holdings" were down $4.5bn y-o-y, or 0.1%.
M2 (narrow) "money" supply last week jumped $34.2bn to $12.498 TN. "Narrow money" expanded $639bn, or 5.4%, over the past year. For the week, Currency increased $1.7bn. Total Checkable Deposits fell $4.2bn, while Savings Deposits jumped $34.6bn. Small Time Deposits were little changed. Retail Money Funds increased $2.4bn.
Total money market fund assets surged $26.0bn to $2.804 TN. Money Funds rose $131bn y-o-y (4.9%).
Total Commercial Paper gained $6.4bn to $1.083 TN. CP expanded $84.2 billion y-o-y, or 8.4%.
Currency Watch:
The U.S. dollar index declined 0.9% this week to 97.22 (down 1.5% y-t-d). For the week on the upside, the Brazilian real increased 6.2%, the South African rand 5.1%, the Australian dollar 4.3%, the New Zealand dollar 2.9%, the Mexican peso 2.8%, the British pound 2.6%, the Norwegian krone 2.4%, the Canadian dollar 1.5%, the Swedish krona 1.0%, the euro 0.7%, the Swiss franc 0.4% and the Japanese yen 0.2%. The Chinese yuan increased 0.5% versus the dollar.
Commodities Watch:
March 4 – Bloomberg (Sabrina Willmer): “BlackRock Inc., the world’s largest money manager, temporarily suspended issuance of new shares in its iShares Gold Trust exchange traded product amid surging demand for gold, which requires that the firm register new shares. ‘This suspension does not affect the ability of retail and institutional investors to trade on stock exchanges,’ the… firm said… Retail and institutional investors will continue to be able to buy and sell shares in IAU.’ the firm said… BlackRock is taking the step because it has exhausted the amount of shares it has registered for.”
The Goldman Sachs Commodities Index surged 4.9% (up 1.0% y-t-d). Spot Gold gained 2.9% to $1,259 (up 18.6%). March Silver surged 6.7% to $15.69 (up 13.7%). April WTI Crude jumped $3.14 to $35.92 (down 3%). March Gasoline surged 31% (up 4.8%), while March Natural Gas sank 6.7% (down 29%). March Copper rallied 6.4% (up 5.9%). May Wheat gained 1.9% (down 2%). May Corn slipped 0.3% (unchanged).
The S&P500 jumped 2.7% (down 2.2% y-t-d), and the Dow rose 2.2% (down 2.4%). The Utilities were up 2.0% (up 8.7%). The Banks surged 6.2% (down 10.4%), and the Broker/Dealers jumped 5.8% (down 10.8%). The Transports rallied 3.3% (up 1.9%). The broader market again outperformed. The S&P 400 Midcaps surged 4.4% (unchanged), and the small cap Russell 2000 jumped 4.3% (down 4.8%). The Nasdaq100 gained 2.2% (down 5.8%), and the Morgan Stanley High Tech index increased 2.3% (down 6.7%). The Semiconductors jumped 4.2% (down 1.9%). The Biotechs ended the week up 4.0% (down 21.7%). Though bullion surging $36, the HUI gold index added 6.5% (up 54.7%).
Three-month Treasury bill rates ended the week at 26 bps. Two-year government yields rose eight bps to 0.87% (down 18bps y-t-d). Five-year T-note yields jumped 13 bps to 1.37% (down 38bps). Ten-year Treasury yields rose 13 bps to 1.87% (down 38bps). Long bond yields gained six bps to 2.70% (down 32bps).
Greek 10-year yields sank 64bps to 9.36% (up 204bps y-t-d). Ten-year Portuguese yields were unchanged at 3.05% (up 53bps). Italian 10-year yields slipped a basis point to 1.46% (down 13bps). Spain's 10-year yields declined two bps to 1.55% (down 22bps). German bund yields rose nine bps to 0.24% (down 38bps). French yields gained nine bps to 0.58% (down 41bps). The French to German 10-year bond spread narrowed one to to 34 bps. U.K. 10-year gilt yields jumped eight bps to 1.48% (down 48bps).
Japan's Nikkei equities index surged 5.1% (down 10.6% y-t-d). Japanese 10-year "JGB" yields rose three bps to negative 0.05% (down 31bps y-t-d). The German DAX equities index jumped 3.3% (down 8.6%). Spain's IBEX 35 equities index surged 5.5% (down 7.7%). Italy's FTSE MIB index rose 4.5% (down 14.7%). EM equities were mostly higher. Brazil's Bovespa index surged 18.0% (13.2%). Mexico's Bolsa gained 3.2% (up 4.4%). South Korea's Kospi index increased 1.8% (down 0.3%). India’s Sensex equities index surged 6.4% (down 5.6%). China’s Shanghai Exchange rallied 3.9% (down 18.8%). Turkey's Borsa Istanbul National 100 index gained 3.0% (up 7.6%). Russia's MICEX equities index rose 3.4% (up 6.6%).
Junk funds saw inflows surge to a record $5.0 billion (from Lipper).
Freddie Mac 30-year fixed mortgage rates added two bps to 3.64% (down 11bps y-o-y). Fifteen-year rates added a basis point to 2.94% (down 9bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates five bps higher to 3.84% (down 57bps).
Federal Reserve Credit last week declined $8.5bn to $4.439 TN. Over the past year, Fed Credit fell $9.5bn, or 0.2%. Fed Credit inflated $1.628 TN, or 58%, over the past 173 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt last week declined $3.2bn to an 11-month low $3.251 TN. "Custody holdings" were down $4.5bn y-o-y, or 0.1%.
M2 (narrow) "money" supply last week jumped $34.2bn to $12.498 TN. "Narrow money" expanded $639bn, or 5.4%, over the past year. For the week, Currency increased $1.7bn. Total Checkable Deposits fell $4.2bn, while Savings Deposits jumped $34.6bn. Small Time Deposits were little changed. Retail Money Funds increased $2.4bn.
Total money market fund assets surged $26.0bn to $2.804 TN. Money Funds rose $131bn y-o-y (4.9%).
Total Commercial Paper gained $6.4bn to $1.083 TN. CP expanded $84.2 billion y-o-y, or 8.4%.
Currency Watch:
The U.S. dollar index declined 0.9% this week to 97.22 (down 1.5% y-t-d). For the week on the upside, the Brazilian real increased 6.2%, the South African rand 5.1%, the Australian dollar 4.3%, the New Zealand dollar 2.9%, the Mexican peso 2.8%, the British pound 2.6%, the Norwegian krone 2.4%, the Canadian dollar 1.5%, the Swedish krona 1.0%, the euro 0.7%, the Swiss franc 0.4% and the Japanese yen 0.2%. The Chinese yuan increased 0.5% versus the dollar.
Commodities Watch:
March 4 – Bloomberg (Sabrina Willmer): “BlackRock Inc., the world’s largest money manager, temporarily suspended issuance of new shares in its iShares Gold Trust exchange traded product amid surging demand for gold, which requires that the firm register new shares. ‘This suspension does not affect the ability of retail and institutional investors to trade on stock exchanges,’ the… firm said… Retail and institutional investors will continue to be able to buy and sell shares in IAU.’ the firm said… BlackRock is taking the step because it has exhausted the amount of shares it has registered for.”
The Goldman Sachs Commodities Index surged 4.9% (up 1.0% y-t-d). Spot Gold gained 2.9% to $1,259 (up 18.6%). March Silver surged 6.7% to $15.69 (up 13.7%). April WTI Crude jumped $3.14 to $35.92 (down 3%). March Gasoline surged 31% (up 4.8%), while March Natural Gas sank 6.7% (down 29%). March Copper rallied 6.4% (up 5.9%). May Wheat gained 1.9% (down 2%). May Corn slipped 0.3% (unchanged).
Fixed-Income Bubble Watch:
March 1 – Financial Times (Gavin Jackson and Joseph Cotterill): “Investment banks are struggling to clear a backlog of debt they lent to companies and private equity to fund last year’s mergers and acquisitions boom. Private equity takeovers, which rely on large amounts of debt, have returned to the centre of the turmoil in credit markets, most recently the $6.5bn buyout of Solera, a US computer software company. To fund these deals banks make so-called bridge loans for a short period, which are then replaced by long-term debt such as junk bonds or syndicated leveraged loans. Banks risk being left with losses if these bridge loans are ‘hung’ and they are unable to sell the longer-term debt at a price they promised to the company.”
March 1 – Bloomberg (Cordell Eddings): “Global junk-bond defaults will rise to the highest level in seven years in 2016 as a prolonged downturn in commodity prices continues to wreak havoc on company profits and balance sheets, according to Moody’s… The ratings company forecasts that the speculative-grade default rate will reach 4% this year, up from 3.5% in 2015 and the highest level since 2009. The default rate for all of Moody’s-rated corporate issuers is estimated to rise to 2.1%, also a post-financial crisis high, from 1.7% last year. ‘Persistently low commodity prices, slowing economic expansion and widening high-yield spreads will send default rates higher in 2016,’ Moody’s credit analyst Sharon Ou wrote… Diminished credit quality ‘combined with the sharp increase in defaults and rising investor caution, indicate that the credit cycle is turning.’”
March 4 – Reuters (Jamie McGeever): “Goldman Sachs is cutting between five and 10% of staff in its fixed income and currency trading business, a source familiar with the matter said... Goldman employed 36,800 people at the end of 2015. But its FIC division is likely to feel the squeeze more than most because of the challenges posed by low interest rates and stricter regulations that have curbed profits in areas like fixed income trading… Revenue from FIC trading was $1.12 billion in the fourth quarter of last year, the lowest since the fourth quarter of 2008…”
Global Bubble Watch:
February 27 – Reuters (Gernot Heller and Adam Jourdan): “The world's top economies declared on Saturday that they need to look beyond ultra-low interest rates and printing money to shake the global economy out of its torpor… A communique from the Group of 20 (G20) finance ministers and central bankers flagged a series of risks to world growth, including volatile capital flows, a sharp fall in commodity prices and the potential ‘shock’ of a British exit from the EU. ‘The global recovery continues, but it remains uneven and falls short of our ambition for strong, sustainable and balanced growth,’ said the communique…”
February 28 – Financial Times (Attracta Mooney and Chris Newlands): “Investors pulled more than $60bn from mutual funds globally in January, marking the worst month of outflows since the height of the financial crisis. The outflows were most acute for European mutual funds, with investors redeeming €42.6bn ($47bn), according to Thompson Reuters Lipper.... January marked the worst start to a year for markets in at least two decades. More than $2.3tn was wiped off global stocks in the first week alone…”
U.S. Bubble Watch:
March 4 – Wall Street Journal (Aaron Back): “It isn’t just energy loans. Problems also are popping up in banks’ consumer-loan books, especially for autos. While still at an early stage and manageable, it is a risk bank investors should keep an eye on given how lending has boomed in this area… In last year’s fourth quarter, total net charge-offs at U.S. banks, the amount of bad loans that they wrote off, rose from a year earlier for the first time in 5½ years… Trouble in the oil patch was a big culprit. It caused charge-offs in banks’ commercial- and industrial-loan books to soar 43% from a year earlier… Even so, auto-loan write-offs have started accelerating. In the fourth quarter, rising 16% from a year earlier… And more trouble looks to be coming around the bend: Auto loans that are 30 to 89 days overdue rose to 1.82% of total auto loans in the fourth quarter, the highest level since 2011… Fitch Ratings warned last week that delinquencies of over 60 days on securities backed by subprime auto loans hit almost 5% in January. That is the highest since September 2009 and close to the record peak hit that same year.”
March 4 – Wall Street Journal (Rolfe Winkler and Scott Austin): “Mutual funds that helped fuel the technology boom are cutting the value of their startup investments at an accelerating pace and are making fewer new investments. These are ominous signs for Silicon Valley, where a flood of money into young companies pushed valuations skyward, and subsidized hiring sprees and advertising binges at scores of companies. The mutual-fund pullback threatens to deepen a wider downturn that has already led to falling valuations, shrinking ambitions and layoffs as the receding tide of capital forces startup companies of all kinds to focus on the bottom line rather than growth at any cost.”
March 4 – Reuters (Lucia Mutikani): “The U.S. trade deficit widened more than expected in January as a strong dollar and weak global demand helped to push exports to a more than five-and-a-half-year low… The… trade gap increased 2.2% to $45.7 billion. December's trade deficit was revised up to $44.7 billion from the previously reported $43.4 billion. Exports have declined for four straight months.”
March 3 – Bloomberg (Victoria Stilwell): “Growth in U.S. service industries slowed for a fourth straight month in February, prompting the first job cuts in two years. The Institute for Supply Management’s non-manufacturing index eased to 53.4 from 53.5 in January… The group’s employment measure dipped below the expansion threshold for the first time since February 2014.”
March 3 – Reuters (Bernie Woodall): “The average amount of a new-vehicle loan in the United States rose by $1,170 in the fourth quarter from a year earlier to a record high $29,551, and the average monthly payment was nearly $500, Experian Automotive said… Leases accounted for a record high 33.6% of new vehicles sold, said Experian automotive credit director Melinda Zabritski, primarily because monthly payments are lower.”
March 3 – Reuters: “House flipping - buying and reselling a home to make a quick buck - has risen in some hot housing markets, prompting concerns that local housing bubbles could be developing, according to a report… The report by RealtyTrac found that home flipping in 12 active metropolitan areas last year was above a peak set in 2005, just two years before the U.S. mortgage market started to collapse, leading to a banking crisis and the Great Recession. Profits generated by home flipping also hit a 10-year high, with home flippers netting an average $55,000 per sale before renovation and transaction costs.”
China Bubble Watch:
March 1 – Bloomberg: “China’s credit-rating outlook was lowered to negative from stable by Moody’s…, which cited rising government debt, falling currency reserves and uncertainty over the authorities’ ability to carry out reforms. The government’s fiscal strength is weakening and there’s a growing probability that it will need to shoulder some of the liabilities of local governments, policy banks and state-owned enterprises, the ratings company said… Declines in the nation’s foreign-exchange reserves amid capital outflows underscore policy, currency and growth risks, while failure to undertake reforms may undermine the credibility of policy makers, it said. Moody’s joined Standard & Poor’s in warning rising local debt has the potential to add pressure to the country’s rating.”
March 3 – Barron’s (Shuli Ren): “After lowering its credit outlook on the Chinese government yesterday, rating agency Moody’s cut 38 Chinese state-owned enterprises outlook to negative as well. Moody’s wrote: The change in the Chinese sovereign rating outlook to negative indicates that the central government and regional local governments’ (RLGs) capability to support their SOEs on a broad basis could be weaker than we had previously assessed. Moody’s believes that the continuing growth in contingent liabilities — along with stated government objectives to introduce more market discipline — suggests that support from the government and the banking system will increasingly be prioritized, based on the relative importance of each entity for the implementation of strategic national policy goals. Yesterday, Moody’s raised concerns that Chinese government’s debt has risen markedly to 32.5% in 2012 to 40.6% by the end of 2015.”
March 1 – Bloomberg: “After getting burned by the bursting of China’s stock-market bubble, Liu Yihui is seeking salvation from the country’s latest investment mania: big-city properties. The 35-year-old civil engineer dumped his equity holdings after losing 40% last year, using the proceeds to buy a 5 million yuan ($763,464) apartment in Shenzhen. Prices in the southern business hub have surged more than 50% over the past year, the fastest pace since at least 2011. ‘People are a bit crazy in this market, but what can you do?’ said Liu, who took on a mortgage to buy the apartment, an investment property that he’s renting out. ‘Stock returns were terrible, so I made up my mind to put my money in real estate.’”
March 2 – Bloomberg: “China’s monetary policies have encouraged investors to pour money into real estate, inflating prices in cities such as Beijing, Shanghai and Shenzhen and increasing the risk that bubbles could form, central bank policy adviser Bai Chongen said… At the same time, smaller property markets are struggling with excess inventory, making it difficult to craft a unified policy response and requiring careful coordination with fiscal measures, he said…"
March 3 – Financial Times (Don Weinland): “It looks like subprime derivatives on steroids: China hopes to bundle together billions of dollars’ worth of non-performing loans and eventually sell them to global investors. Such a massive securitisation programme would represent the latest tactic in China’s campaign to lift one of the biggest shadows cast over its slowing economy — a debt pile that is as big as 230% of GDP. It would whittle back debts at Chinese banks and move some of the risk outside the domestic financial system. According to official figures, such debts at the banks have reached Rmb1.27tn ($194bn), while analysts estimate the real number is likely to be many times higher… Demand for the scheme, however, is expected to be significantly more modest than supply. ‘How many global investors have been interested in the traditional [bad debt in China]?’ asked one Hong Kong-based investor with experience buying distressed debt in Asia. ‘Not many … is a more complicated version of this going to change that soon? No.’”
March 2 – Reuters (Kevin Yao): “China plans to target broad-based money supply growth of around 13% this year, sources said, a signal that further monetary policy easing is likely during a painful economic restructuring that could see millions of workers losing jobs. Top leaders have already pledged ‘supply-side structural reforms’ to tackle excess factory capacity and ‘zombie firms’, and are also expected to lean more on fiscal stimulus as they seek to avert a hard landing for the world's second-largest economy. ‘A 13% rise in M2 is sufficient for keeping liquidity flush in the near term, but we may see faster rises later this year as the central bank is likely to loosen policy further,’ said one of the sources.”
February 29 – Bloomberg: “China’s factory gauge extended its stretch of deteriorating conditions to a record seven months while a measure of services fell to the weakest in seven years, underscoring the challenge for policy makers as they seek to cut overcapacity in manufacturing without derailing growth.”
February 29 – Bloomberg (David Tweed and Ditas B Lopez): “Communist Party officials in Beijing have pledged to ‘seriously punish’ a retired property developer who criticized President Xi Jinping’s state media clampdown, urging other party members to learn from his example. Former Huayuan Property Co. Chairman Ren Zhiqiang ‘constantly issued illegal information and wrong opinions on the Internet, which caused a baneful influence and seriously damaged the image of the party,’ the party committee in Beijing’s Xicheng district said… Ren, a friend of party discipline chief Wang Qishan, was known for airing outspoken views to his more than 37 million Weibo followers before Internet regulators ordered his social media accounts closed Sunday. ‘As a Communist Party member, any comment that is not in line with the party’s policy and direction, no matter if published on the Internet or in the media, are not allowed by the party’s regulations,’ said the committee…”
February 28 – Financial Times (Don Weinland): “Beijing has mothballed two pioneering outbound investment schemes, according to people with knowledge of the situation, in its latest bid to stem capital outflows and shore up the renminbi. The halt in the allotment of quotas reflects fears over the massive amount of cash — some economists estimate up to $1tn last year — that has left the country through official and unofficial channels as economic growth slows and the renminbi continues to depreciate. The schemes were part of liberalisation moves designed to facilitate overseas investment in China and allow domestic funds to buy foreign securities.”
Central Bank Watch:
March 4 – Wall Street Journal (Tom Fearless): “The European Central Bank faces a dilemma as it considers boosting its roughly €1.5 trillion ($1.6 trillion) bond-purchase program next week: how to ensure it has enough bonds to buy without sparking legal tussles. The ECB is now buying about €60 billion a month of mainly eurozone government bonds, based on self-imposed rules that limit how much it can acquire from individual governments. But those rules mean the supply—particularly of low-risk German bonds—will be exhausted before the program ends next March, and sooner, if it is expanded next week… ECB President Mario Draghi has pledged to review the size and design of its stimulus at a two-day policy meeting starting Wednesday. Boosting its monthly bond purchases to €80 billion, as some economists expect, would exhaust its pool of eligible German government bonds before the end of the year, according to researchers at Bruegel, a Brussels think tank.”
EM Bubble Watch:
March 1 – Financial Times (Henny Sender): “Highly indebted companies across Asia are closely watching the direction of the US dollar. A case in point is Agile Property Holdings and the property developer must generate cash to repay its HK$3bn debt over 2016 while contending with flat sales and falling prices for the properties it sells in mainland China, where average prices are down 9%. For now, Standard & Poor’s has yet to revise down the developer’s credit rating… Not so fortunate is PT Energi Mega Persada, an Indonesian energy company. S&P downgraded its rating due to the refinancing risk on its sizeable short-term debt and fears that its internal resources will be insufficient to service its debt. These companies are two faces of the nearly $1tn in Asian emerging market corporate debt that is coming due through 2020 — almost half in the next two years alone. As emerging market borrowers try to reduce their debt loads, a disruptive economic cycle is among the principal fears of risk managers who contemplate a world of slow growth, low commodity prices, overcapacity and a lack of pricing power…”
February 29 – Bloomberg (Stefania Bianchi): “Gulf Cooperation Council countries may struggle to refinance $94 billion of debt in the next two years as the region faces slowing growth, rising rates and rating downgrades, according to HSBC… Oil-rich GCC states have to refinance $52 billion of bonds and $42 billion of syndicated loans, mostly in the United Arab Emirates and Qatar… The countries also face a fiscal and current account deficit of $395 billion over the period, it said.”
Brazil Watch:
March 4 – Bloomberg (Anna Edgerton): “As soon as police raided the home of former Brazil President Luiz Inacio Lula da Silva and questioned him early Friday, red-shirted activists of his Workers’ Party took to the streets. Fist fights broke out with police as well as with those applauding the detention -- a preview of the unrest that likely awaits Brazil and its embattled president. The second term of President Dilma Rousseff has been overwhelmed by twin crises -- an economy crippled by recession and a political establishment under siege by a massive corruption investigation. The probe of Lula, an iconic figure who chose Rousseff as his successor, escalates almost two years of mounting tension.”
March 1 – Financial Times (Gavin Jackson and Joseph Cotterill): “Investment banks are struggling to clear a backlog of debt they lent to companies and private equity to fund last year’s mergers and acquisitions boom. Private equity takeovers, which rely on large amounts of debt, have returned to the centre of the turmoil in credit markets, most recently the $6.5bn buyout of Solera, a US computer software company. To fund these deals banks make so-called bridge loans for a short period, which are then replaced by long-term debt such as junk bonds or syndicated leveraged loans. Banks risk being left with losses if these bridge loans are ‘hung’ and they are unable to sell the longer-term debt at a price they promised to the company.”
March 1 – Bloomberg (Cordell Eddings): “Global junk-bond defaults will rise to the highest level in seven years in 2016 as a prolonged downturn in commodity prices continues to wreak havoc on company profits and balance sheets, according to Moody’s… The ratings company forecasts that the speculative-grade default rate will reach 4% this year, up from 3.5% in 2015 and the highest level since 2009. The default rate for all of Moody’s-rated corporate issuers is estimated to rise to 2.1%, also a post-financial crisis high, from 1.7% last year. ‘Persistently low commodity prices, slowing economic expansion and widening high-yield spreads will send default rates higher in 2016,’ Moody’s credit analyst Sharon Ou wrote… Diminished credit quality ‘combined with the sharp increase in defaults and rising investor caution, indicate that the credit cycle is turning.’”
March 4 – Reuters (Jamie McGeever): “Goldman Sachs is cutting between five and 10% of staff in its fixed income and currency trading business, a source familiar with the matter said... Goldman employed 36,800 people at the end of 2015. But its FIC division is likely to feel the squeeze more than most because of the challenges posed by low interest rates and stricter regulations that have curbed profits in areas like fixed income trading… Revenue from FIC trading was $1.12 billion in the fourth quarter of last year, the lowest since the fourth quarter of 2008…”
Global Bubble Watch:
February 27 – Reuters (Gernot Heller and Adam Jourdan): “The world's top economies declared on Saturday that they need to look beyond ultra-low interest rates and printing money to shake the global economy out of its torpor… A communique from the Group of 20 (G20) finance ministers and central bankers flagged a series of risks to world growth, including volatile capital flows, a sharp fall in commodity prices and the potential ‘shock’ of a British exit from the EU. ‘The global recovery continues, but it remains uneven and falls short of our ambition for strong, sustainable and balanced growth,’ said the communique…”
February 28 – Financial Times (Attracta Mooney and Chris Newlands): “Investors pulled more than $60bn from mutual funds globally in January, marking the worst month of outflows since the height of the financial crisis. The outflows were most acute for European mutual funds, with investors redeeming €42.6bn ($47bn), according to Thompson Reuters Lipper.... January marked the worst start to a year for markets in at least two decades. More than $2.3tn was wiped off global stocks in the first week alone…”
U.S. Bubble Watch:
March 4 – Wall Street Journal (Aaron Back): “It isn’t just energy loans. Problems also are popping up in banks’ consumer-loan books, especially for autos. While still at an early stage and manageable, it is a risk bank investors should keep an eye on given how lending has boomed in this area… In last year’s fourth quarter, total net charge-offs at U.S. banks, the amount of bad loans that they wrote off, rose from a year earlier for the first time in 5½ years… Trouble in the oil patch was a big culprit. It caused charge-offs in banks’ commercial- and industrial-loan books to soar 43% from a year earlier… Even so, auto-loan write-offs have started accelerating. In the fourth quarter, rising 16% from a year earlier… And more trouble looks to be coming around the bend: Auto loans that are 30 to 89 days overdue rose to 1.82% of total auto loans in the fourth quarter, the highest level since 2011… Fitch Ratings warned last week that delinquencies of over 60 days on securities backed by subprime auto loans hit almost 5% in January. That is the highest since September 2009 and close to the record peak hit that same year.”
March 4 – Wall Street Journal (Rolfe Winkler and Scott Austin): “Mutual funds that helped fuel the technology boom are cutting the value of their startup investments at an accelerating pace and are making fewer new investments. These are ominous signs for Silicon Valley, where a flood of money into young companies pushed valuations skyward, and subsidized hiring sprees and advertising binges at scores of companies. The mutual-fund pullback threatens to deepen a wider downturn that has already led to falling valuations, shrinking ambitions and layoffs as the receding tide of capital forces startup companies of all kinds to focus on the bottom line rather than growth at any cost.”
March 4 – Reuters (Lucia Mutikani): “The U.S. trade deficit widened more than expected in January as a strong dollar and weak global demand helped to push exports to a more than five-and-a-half-year low… The… trade gap increased 2.2% to $45.7 billion. December's trade deficit was revised up to $44.7 billion from the previously reported $43.4 billion. Exports have declined for four straight months.”
March 3 – Bloomberg (Victoria Stilwell): “Growth in U.S. service industries slowed for a fourth straight month in February, prompting the first job cuts in two years. The Institute for Supply Management’s non-manufacturing index eased to 53.4 from 53.5 in January… The group’s employment measure dipped below the expansion threshold for the first time since February 2014.”
March 3 – Reuters (Bernie Woodall): “The average amount of a new-vehicle loan in the United States rose by $1,170 in the fourth quarter from a year earlier to a record high $29,551, and the average monthly payment was nearly $500, Experian Automotive said… Leases accounted for a record high 33.6% of new vehicles sold, said Experian automotive credit director Melinda Zabritski, primarily because monthly payments are lower.”
March 3 – Reuters: “House flipping - buying and reselling a home to make a quick buck - has risen in some hot housing markets, prompting concerns that local housing bubbles could be developing, according to a report… The report by RealtyTrac found that home flipping in 12 active metropolitan areas last year was above a peak set in 2005, just two years before the U.S. mortgage market started to collapse, leading to a banking crisis and the Great Recession. Profits generated by home flipping also hit a 10-year high, with home flippers netting an average $55,000 per sale before renovation and transaction costs.”
China Bubble Watch:
March 1 – Bloomberg: “China’s credit-rating outlook was lowered to negative from stable by Moody’s…, which cited rising government debt, falling currency reserves and uncertainty over the authorities’ ability to carry out reforms. The government’s fiscal strength is weakening and there’s a growing probability that it will need to shoulder some of the liabilities of local governments, policy banks and state-owned enterprises, the ratings company said… Declines in the nation’s foreign-exchange reserves amid capital outflows underscore policy, currency and growth risks, while failure to undertake reforms may undermine the credibility of policy makers, it said. Moody’s joined Standard & Poor’s in warning rising local debt has the potential to add pressure to the country’s rating.”
March 3 – Barron’s (Shuli Ren): “After lowering its credit outlook on the Chinese government yesterday, rating agency Moody’s cut 38 Chinese state-owned enterprises outlook to negative as well. Moody’s wrote: The change in the Chinese sovereign rating outlook to negative indicates that the central government and regional local governments’ (RLGs) capability to support their SOEs on a broad basis could be weaker than we had previously assessed. Moody’s believes that the continuing growth in contingent liabilities — along with stated government objectives to introduce more market discipline — suggests that support from the government and the banking system will increasingly be prioritized, based on the relative importance of each entity for the implementation of strategic national policy goals. Yesterday, Moody’s raised concerns that Chinese government’s debt has risen markedly to 32.5% in 2012 to 40.6% by the end of 2015.”
March 1 – Bloomberg: “After getting burned by the bursting of China’s stock-market bubble, Liu Yihui is seeking salvation from the country’s latest investment mania: big-city properties. The 35-year-old civil engineer dumped his equity holdings after losing 40% last year, using the proceeds to buy a 5 million yuan ($763,464) apartment in Shenzhen. Prices in the southern business hub have surged more than 50% over the past year, the fastest pace since at least 2011. ‘People are a bit crazy in this market, but what can you do?’ said Liu, who took on a mortgage to buy the apartment, an investment property that he’s renting out. ‘Stock returns were terrible, so I made up my mind to put my money in real estate.’”
March 2 – Bloomberg: “China’s monetary policies have encouraged investors to pour money into real estate, inflating prices in cities such as Beijing, Shanghai and Shenzhen and increasing the risk that bubbles could form, central bank policy adviser Bai Chongen said… At the same time, smaller property markets are struggling with excess inventory, making it difficult to craft a unified policy response and requiring careful coordination with fiscal measures, he said…"
March 3 – Financial Times (Don Weinland): “It looks like subprime derivatives on steroids: China hopes to bundle together billions of dollars’ worth of non-performing loans and eventually sell them to global investors. Such a massive securitisation programme would represent the latest tactic in China’s campaign to lift one of the biggest shadows cast over its slowing economy — a debt pile that is as big as 230% of GDP. It would whittle back debts at Chinese banks and move some of the risk outside the domestic financial system. According to official figures, such debts at the banks have reached Rmb1.27tn ($194bn), while analysts estimate the real number is likely to be many times higher… Demand for the scheme, however, is expected to be significantly more modest than supply. ‘How many global investors have been interested in the traditional [bad debt in China]?’ asked one Hong Kong-based investor with experience buying distressed debt in Asia. ‘Not many … is a more complicated version of this going to change that soon? No.’”
March 2 – Reuters (Kevin Yao): “China plans to target broad-based money supply growth of around 13% this year, sources said, a signal that further monetary policy easing is likely during a painful economic restructuring that could see millions of workers losing jobs. Top leaders have already pledged ‘supply-side structural reforms’ to tackle excess factory capacity and ‘zombie firms’, and are also expected to lean more on fiscal stimulus as they seek to avert a hard landing for the world's second-largest economy. ‘A 13% rise in M2 is sufficient for keeping liquidity flush in the near term, but we may see faster rises later this year as the central bank is likely to loosen policy further,’ said one of the sources.”
February 29 – Bloomberg: “China’s factory gauge extended its stretch of deteriorating conditions to a record seven months while a measure of services fell to the weakest in seven years, underscoring the challenge for policy makers as they seek to cut overcapacity in manufacturing without derailing growth.”
February 29 – Bloomberg (David Tweed and Ditas B Lopez): “Communist Party officials in Beijing have pledged to ‘seriously punish’ a retired property developer who criticized President Xi Jinping’s state media clampdown, urging other party members to learn from his example. Former Huayuan Property Co. Chairman Ren Zhiqiang ‘constantly issued illegal information and wrong opinions on the Internet, which caused a baneful influence and seriously damaged the image of the party,’ the party committee in Beijing’s Xicheng district said… Ren, a friend of party discipline chief Wang Qishan, was known for airing outspoken views to his more than 37 million Weibo followers before Internet regulators ordered his social media accounts closed Sunday. ‘As a Communist Party member, any comment that is not in line with the party’s policy and direction, no matter if published on the Internet or in the media, are not allowed by the party’s regulations,’ said the committee…”
February 28 – Financial Times (Don Weinland): “Beijing has mothballed two pioneering outbound investment schemes, according to people with knowledge of the situation, in its latest bid to stem capital outflows and shore up the renminbi. The halt in the allotment of quotas reflects fears over the massive amount of cash — some economists estimate up to $1tn last year — that has left the country through official and unofficial channels as economic growth slows and the renminbi continues to depreciate. The schemes were part of liberalisation moves designed to facilitate overseas investment in China and allow domestic funds to buy foreign securities.”
Central Bank Watch:
March 4 – Wall Street Journal (Tom Fearless): “The European Central Bank faces a dilemma as it considers boosting its roughly €1.5 trillion ($1.6 trillion) bond-purchase program next week: how to ensure it has enough bonds to buy without sparking legal tussles. The ECB is now buying about €60 billion a month of mainly eurozone government bonds, based on self-imposed rules that limit how much it can acquire from individual governments. But those rules mean the supply—particularly of low-risk German bonds—will be exhausted before the program ends next March, and sooner, if it is expanded next week… ECB President Mario Draghi has pledged to review the size and design of its stimulus at a two-day policy meeting starting Wednesday. Boosting its monthly bond purchases to €80 billion, as some economists expect, would exhaust its pool of eligible German government bonds before the end of the year, according to researchers at Bruegel, a Brussels think tank.”
EM Bubble Watch:
March 1 – Financial Times (Henny Sender): “Highly indebted companies across Asia are closely watching the direction of the US dollar. A case in point is Agile Property Holdings and the property developer must generate cash to repay its HK$3bn debt over 2016 while contending with flat sales and falling prices for the properties it sells in mainland China, where average prices are down 9%. For now, Standard & Poor’s has yet to revise down the developer’s credit rating… Not so fortunate is PT Energi Mega Persada, an Indonesian energy company. S&P downgraded its rating due to the refinancing risk on its sizeable short-term debt and fears that its internal resources will be insufficient to service its debt. These companies are two faces of the nearly $1tn in Asian emerging market corporate debt that is coming due through 2020 — almost half in the next two years alone. As emerging market borrowers try to reduce their debt loads, a disruptive economic cycle is among the principal fears of risk managers who contemplate a world of slow growth, low commodity prices, overcapacity and a lack of pricing power…”
February 29 – Bloomberg (Stefania Bianchi): “Gulf Cooperation Council countries may struggle to refinance $94 billion of debt in the next two years as the region faces slowing growth, rising rates and rating downgrades, according to HSBC… Oil-rich GCC states have to refinance $52 billion of bonds and $42 billion of syndicated loans, mostly in the United Arab Emirates and Qatar… The countries also face a fiscal and current account deficit of $395 billion over the period, it said.”
Brazil Watch:
March 4 – Bloomberg (Anna Edgerton): “As soon as police raided the home of former Brazil President Luiz Inacio Lula da Silva and questioned him early Friday, red-shirted activists of his Workers’ Party took to the streets. Fist fights broke out with police as well as with those applauding the detention -- a preview of the unrest that likely awaits Brazil and its embattled president. The second term of President Dilma Rousseff has been overwhelmed by twin crises -- an economy crippled by recession and a political establishment under siege by a massive corruption investigation. The probe of Lula, an iconic figure who chose Rousseff as his successor, escalates almost two years of mounting tension.”
Europe Watch:
February 27 – Reuters (Andy Bruce): “London Mayor Boris Johnson urged British government ministers to join the campaign to leave the European Union in a newspaper interview on Saturday, again defying Prime Minister and fellow Conservative David Cameron. A political showman who is widely thought to be keen to succeed Cameron, Johnson said he wanted to change the minds of the majority of cabinet ministers who favor voting to remain in the EU in a June 23 referendum on the issue.”
March 3 – Reuters (Caroline Copley): “The anti-immigrant Alternative for Germany (AfD) is poised to win almost 20% of the vote in a state election and match the ruling Social Democrats in another this month, highlighting the threat to mainstream parties from the migrant crisis.”
Geopolitical Watch:
March 2 – Reuters (David Tweed): “With a series of edicts, speeches and martial ceremonies, President Xi Jinping has over the past six months unveiled China’s biggest military overhaul since the aftermath of the Korean War. The plan seeks to transform the 2.3-million-member People’s Liberation Army, which features 21st-century hardware but an outdated, Soviet-inspired command structure, into a fighting force capable of winning a modern war. China is shifting from a ‘large country to a large and powerful one,’ Xi explained in November. The restructuring will be a major focus of the country’s new defense budget, which may be announced as soon as Friday as the annual National People’s Congress gets under way in Beijing.”
March 2 – Reuters (Andrea Shalal): “U.S. Defense Secretary Ash Carter… warned China against ‘aggressive’ actions in the South China Sea region, including the placement of surface-to-air missiles on a disputed island. ‘China must not pursue militarization in the South China Sea,’ Carter said in a wide-ranging speech at the Commonwealth Club in San Francisco. ‘Specific actions will have specific consequences.’ …He said China's behavior had fueled trilateral agreements that would have been ‘unthinkable’ even a few years ago.”
March 1 – Bloomberg (David Tweed and Ditas B Lopez): “China has stationed ships near a submerged reef in the South China Sea, blocking access by Philippine boats to fertile fishing grounds in the area as it steps up efforts to assert claims to more than 80% of one of the world’s busiest waterways. ‘Many’ Chinese coast guard boats and five warships were positioned around Quirino, or Jackson atoll, in the Spratly island chain, preventing Philippine boats from reaching their traditional fishery…”
March 2 – Reuters (Niharika Mandhana): “The U.S., India and Japan will conduct joint naval exercises in the northern waters of the Philippine Sea, an area close to the East and South China Seas where Beijing is locked in an increasingly tense standoff with Washington. The maneuvers are part of an annual event between the U.S. and Indian navies that, since 2014, has expanded to include Japan, signaling closer cooperation between the three countries that share concern about China’s military ambitions.”
March 3 – Bloomberg (Taylan Bilgic and Onur Ant): “Turkish authorities seized control of the media company that owns the country’s best-selling Zaman newspaper, a one-time supporter of President Recep Tayyip Erdogan that became one of his fiercest critics… Zaman is published by followers of U.S.-based cleric Fethullah Gulen, whom Erdogan blamed for instigating a 2013 corruption probe into the Turkish government that he said was an attempt to overthrow him. The paper’s seizure comes amid a broader crackdown on media…”
February 27 – Reuters (Andy Bruce): “London Mayor Boris Johnson urged British government ministers to join the campaign to leave the European Union in a newspaper interview on Saturday, again defying Prime Minister and fellow Conservative David Cameron. A political showman who is widely thought to be keen to succeed Cameron, Johnson said he wanted to change the minds of the majority of cabinet ministers who favor voting to remain in the EU in a June 23 referendum on the issue.”
March 3 – Reuters (Caroline Copley): “The anti-immigrant Alternative for Germany (AfD) is poised to win almost 20% of the vote in a state election and match the ruling Social Democrats in another this month, highlighting the threat to mainstream parties from the migrant crisis.”
Geopolitical Watch:
March 2 – Reuters (David Tweed): “With a series of edicts, speeches and martial ceremonies, President Xi Jinping has over the past six months unveiled China’s biggest military overhaul since the aftermath of the Korean War. The plan seeks to transform the 2.3-million-member People’s Liberation Army, which features 21st-century hardware but an outdated, Soviet-inspired command structure, into a fighting force capable of winning a modern war. China is shifting from a ‘large country to a large and powerful one,’ Xi explained in November. The restructuring will be a major focus of the country’s new defense budget, which may be announced as soon as Friday as the annual National People’s Congress gets under way in Beijing.”
March 2 – Reuters (Andrea Shalal): “U.S. Defense Secretary Ash Carter… warned China against ‘aggressive’ actions in the South China Sea region, including the placement of surface-to-air missiles on a disputed island. ‘China must not pursue militarization in the South China Sea,’ Carter said in a wide-ranging speech at the Commonwealth Club in San Francisco. ‘Specific actions will have specific consequences.’ …He said China's behavior had fueled trilateral agreements that would have been ‘unthinkable’ even a few years ago.”
March 1 – Bloomberg (David Tweed and Ditas B Lopez): “China has stationed ships near a submerged reef in the South China Sea, blocking access by Philippine boats to fertile fishing grounds in the area as it steps up efforts to assert claims to more than 80% of one of the world’s busiest waterways. ‘Many’ Chinese coast guard boats and five warships were positioned around Quirino, or Jackson atoll, in the Spratly island chain, preventing Philippine boats from reaching their traditional fishery…”
March 2 – Reuters (Niharika Mandhana): “The U.S., India and Japan will conduct joint naval exercises in the northern waters of the Philippine Sea, an area close to the East and South China Seas where Beijing is locked in an increasingly tense standoff with Washington. The maneuvers are part of an annual event between the U.S. and Indian navies that, since 2014, has expanded to include Japan, signaling closer cooperation between the three countries that share concern about China’s military ambitions.”
March 3 – Bloomberg (Taylan Bilgic and Onur Ant): “Turkish authorities seized control of the media company that owns the country’s best-selling Zaman newspaper, a one-time supporter of President Recep Tayyip Erdogan that became one of his fiercest critics… Zaman is published by followers of U.S.-based cleric Fethullah Gulen, whom Erdogan blamed for instigating a 2013 corruption probe into the Turkish government that he said was an attempt to overthrow him. The paper’s seizure comes amid a broader crackdown on media…”
Friday's News Links
[Bloomberg] Payrolls in U.S. Surge While Wages Drop in Mixed Jobs Report
[Reuters] U.S. trade deficit widens as exports hit five-and-a-half-year low
[Reuters] Bank of America revs up auto loans business despite warning signs
[CNBC] Ex-Fed Plosser: Big rate catch up may be needed
[Reuters] Goldman Sachs cutting up to 10 percent of fixed income trading staff: source
[Bloomberg] From Schengen to ‘Brexit,’ Risks to the Euro Are Stacking Up
[WSJ] European Central Bank Faces Questions Over Which Bonds to Buy
[Bloomberg] Lula's Detention Rattles Brazil as Heat on Rousseff Increases
[Bloomberg] Brazil's Lula Targeted in Police Raid Into Corruption Scandal
[Bloomberg] Gold Snaps Back to Bull Market as Prices Surge on Haven Demand
[Bloomberg] BlackRock Temporarily Suspends Issuance of Gold Trust Shares
[Reuters] China's premier says economy faces greater difficulties in 2016: state radio
[FT] China plans securitisation to tackle banks’ bad debt burden
[WSJ] China Begins to Tackle Its ‘Zombie’ Factory Problem
[Bloomberg] Turkish Government Takes Over Best-Selling Newspaper
[Reuters] EU outlines plan to save open borders, cajoles Turkey
[Reuters] U.S. trade deficit widens as exports hit five-and-a-half-year low
[Reuters] Bank of America revs up auto loans business despite warning signs
[CNBC] Ex-Fed Plosser: Big rate catch up may be needed
[Reuters] Goldman Sachs cutting up to 10 percent of fixed income trading staff: source
[Bloomberg] From Schengen to ‘Brexit,’ Risks to the Euro Are Stacking Up
[WSJ] European Central Bank Faces Questions Over Which Bonds to Buy
[Bloomberg] Lula's Detention Rattles Brazil as Heat on Rousseff Increases
[Bloomberg] Brazil's Lula Targeted in Police Raid Into Corruption Scandal
[Bloomberg] Gold Snaps Back to Bull Market as Prices Surge on Haven Demand
[Bloomberg] BlackRock Temporarily Suspends Issuance of Gold Trust Shares
[Reuters] China's premier says economy faces greater difficulties in 2016: state radio
[FT] China plans securitisation to tackle banks’ bad debt burden
[WSJ] China Begins to Tackle Its ‘Zombie’ Factory Problem
[Bloomberg] Turkish Government Takes Over Best-Selling Newspaper
[Reuters] EU outlines plan to save open borders, cajoles Turkey
Thursday, March 3, 2016
Thursday Evening Links
[Bloomberg] North Korea leader at drill orders nuclear weapons use at any time: KCNA
[Bloomberg] Who's Running Brazil? Chaos Builds as Rousseff Ducks Her Allies
[Reuters] German anti-immigrant party gains ahead of important state votes: poll
[Bloomberg] Inside China’s Plan for a Military That Can Counter U.S. Muscle
[Bloomberg] Who's Running Brazil? Chaos Builds as Rousseff Ducks Her Allies
[Reuters] German anti-immigrant party gains ahead of important state votes: poll
[Bloomberg] Inside China’s Plan for a Military That Can Counter U.S. Muscle
Thursday's News Links
[Bloomberg] U.S. Stocks Retreat With Oil as Investors Await Economic Data
[Bloomberg] Slower Growth Prompts First U.S. Services Job Cuts Since 2014
[Reuters] Fed's Kaplan calls for patience on raising U.S. interest rates
[Reuters] Average U.S. new-vehicle loan hits record high in fourth quarter: Experian
[NBC] House 'Flipping' Skyrockets, Sparks Concern Over a Housing Bubble
[CNBC] I see bubbles bursting everywhere: Top academic
[Bloomberg] China Policy Moves Risk Property Price Bubble, PBOC Adviser Says
[Barron's] Moody’s Cut 38 China SOEs Outlook, Seeing Less Government Support
[Bloomberg] Macau's Economy Shrinks 20% in 2015 Amid Casino Gaming Slump
[Bloomberg] ECB Studies Stimulus Options That Won't End Up Hurting Banks
[WSJ] SunEdison’s Troubles Darken Prospects of Vivint Deal
[Bloomberg] Schaeuble Wades Into `Brexit' Debate With Show of German Emotion
[Reuters] EU's Tusk urges migrants to stop coming to Europe
[WSJ] U.S., India, Japan Plan Joint Naval Exercises Near South China Sea
[Bloomberg] Slower Growth Prompts First U.S. Services Job Cuts Since 2014
[Reuters] Fed's Kaplan calls for patience on raising U.S. interest rates
[Reuters] Average U.S. new-vehicle loan hits record high in fourth quarter: Experian
[NBC] House 'Flipping' Skyrockets, Sparks Concern Over a Housing Bubble
[CNBC] I see bubbles bursting everywhere: Top academic
[Bloomberg] China Policy Moves Risk Property Price Bubble, PBOC Adviser Says
[Barron's] Moody’s Cut 38 China SOEs Outlook, Seeing Less Government Support
[Bloomberg] Macau's Economy Shrinks 20% in 2015 Amid Casino Gaming Slump
[Bloomberg] ECB Studies Stimulus Options That Won't End Up Hurting Banks
[WSJ] SunEdison’s Troubles Darken Prospects of Vivint Deal
[Bloomberg] Schaeuble Wades Into `Brexit' Debate With Show of German Emotion
[Reuters] EU's Tusk urges migrants to stop coming to Europe
[WSJ] U.S., India, Japan Plan Joint Naval Exercises Near South China Sea
Wednesday, March 2, 2016
Wednesday's News Links
[Bloomberg] Emerging Markets Need Cathartic Crisis to Weed Out Bad Stocks
[Reuters] Sub-zero central banks may just chase inflation expectations lower
[Bloomberg] China's Real Estate Frenzy Is Back as Shenzhen Prices Surge 50%
[Bloomberg] Chinese State Firms' Debt Stress Flagged by Moody's Outlook Cut
[Bloomberg] China Blocks Philippine Fishermen in Disputed Waters, Mayor Sa
[Reuters] Sub-zero central banks may just chase inflation expectations lower
[Bloomberg] China's Real Estate Frenzy Is Back as Shenzhen Prices Surge 50%
[Bloomberg] Chinese State Firms' Debt Stress Flagged by Moody's Outlook Cut
[Bloomberg] China Blocks Philippine Fishermen in Disputed Waters, Mayor Sa
Tuesday, March 1, 2016
Tuesday's News Links
[Bloomberg] U.S. Stocks Rise With Emerging Markets Amid Data, China Stimulus
[Reuters] Fed's Dudley sees risks to U.S. economic outlook tilting to downside
[Bloomberg] Global Junk-Bond Default Rate to Rise to '09 Level, Moody's Says
[Reuters] U.S. construction spending jumps to eight-year high
[Reuters] China Feb factory activity shrinks more than expected, layoffs on the rise
[Bloomberg] Why China’s Economy Will Be So Hard to Fix
[CNBC] 'Brexit' could deal major economic, political blow to EU
[Reuters] Japan setting up panel to debate new spending: sources
[Bloomberg] Greece's Creditors Said to Face Impasse Over Bailout Terms
[FT] Debt backlog clogs M&A deal machine
[Bloomberg] World’s Billionaire Population Falls for the First Time Since Great Recession
[Bloomberg] Central Banks Extend Longest Gold-Buying Spree Since 1965: Chart
[Bloomberg] Communist Party Warns Outspoken Members With Tycoon's Punishment
[FT] Former BoE chief King predicts collapse of the eurozone
[Reuters] Fed's Dudley sees risks to U.S. economic outlook tilting to downside
[Bloomberg] Global Junk-Bond Default Rate to Rise to '09 Level, Moody's Says
[Reuters] U.S. construction spending jumps to eight-year high
[Reuters] China Feb factory activity shrinks more than expected, layoffs on the rise
[Bloomberg] Why China’s Economy Will Be So Hard to Fix
[CNBC] 'Brexit' could deal major economic, political blow to EU
[Reuters] Japan setting up panel to debate new spending: sources
[Bloomberg] Greece's Creditors Said to Face Impasse Over Bailout Terms
[FT] Debt backlog clogs M&A deal machine
[Bloomberg] World’s Billionaire Population Falls for the First Time Since Great Recession
[Bloomberg] Central Banks Extend Longest Gold-Buying Spree Since 1965: Chart
[Bloomberg] Communist Party Warns Outspoken Members With Tycoon's Punishment
[FT] Former BoE chief King predicts collapse of the eurozone
Monday, February 29, 2016
Monday Evening Links
[Bloomberg] China's PMI Reports Show Slowdown Deepening as Services Slip
[Bloomberg] China Reserve-Ratio Cut Signals Growth Is Priority Over Yuan
[FT] Markets face $1tn Asian EM debt worries
[Bloomberg] Valeant's $31 Billion of Debt May Be Cut From Ba3 by Moody's
[Bloomberg] Citi: There's Been a Worrisome Change in the Market for New Corporate Debt
[Bloomberg] Lula Under Investigation in Brazil Carwash Case, Prosecutor Says
[Bloomberg] China Reserve-Ratio Cut Signals Growth Is Priority Over Yuan
[FT] Markets face $1tn Asian EM debt worries
[Bloomberg] Valeant's $31 Billion of Debt May Be Cut From Ba3 by Moody's
[Bloomberg] Citi: There's Been a Worrisome Change in the Market for New Corporate Debt
[Bloomberg] Lula Under Investigation in Brazil Carwash Case, Prosecutor Says
Sunday, February 28, 2016
Monday's News Links
[Bloomberg] U.S. Stocks Erase Gains as Yen Advances With Treasuries, Gold
[Dow Jones] Dollar Drops Vs. Yen As Weak Data Feed Recession Fears
[Bloomberg] China Cuts Banks' Reserve Requirement Ratio
[Bloomberg] China Stocks Tumble Toward 15-Month Low as Stimulus Bets Unwind
[Bloomberg] Yen Set for Best Month Since 2008 on China Stocks, G-20 Meeting
[Bloomberg] Yuan Weakens for Seventh Day as PBOC Cuts Fixing, Dollar Climbs
[Bloomberg] It's Getting Harder for Currency Traders to Make Money, Market Veteran Says
[WSJ] Why Auto Lenders Are in for a Rougher Ride
[Reuters] New Year hangover: Strains show in China's factory heartland
[WSJ] How China’s Big Lending Push Comes Up Short
[FT] China halts overseas investment schemes
[Bloomberg] Jockeying Begins as China's State Firms Brace for Shakeup
[Bloomberg] Emerging Assets in Fourth Monthly Decline as China Rout Extends
[Bloomberg] Three Former Tepco Executives Indicted for Fukushima Negligence
[Dow Jones] Dollar Drops Vs. Yen As Weak Data Feed Recession Fears
[Bloomberg] China Cuts Banks' Reserve Requirement Ratio
[Bloomberg] China Stocks Tumble Toward 15-Month Low as Stimulus Bets Unwind
[Bloomberg] Yen Set for Best Month Since 2008 on China Stocks, G-20 Meeting
[Bloomberg] Yuan Weakens for Seventh Day as PBOC Cuts Fixing, Dollar Climbs
[Bloomberg] It's Getting Harder for Currency Traders to Make Money, Market Veteran Says
[WSJ] Why Auto Lenders Are in for a Rougher Ride
[Reuters] New Year hangover: Strains show in China's factory heartland
[WSJ] How China’s Big Lending Push Comes Up Short
[FT] China halts overseas investment schemes
[Bloomberg] Jockeying Begins as China's State Firms Brace for Shakeup
[Bloomberg] Emerging Assets in Fourth Monthly Decline as China Rout Extends
[Bloomberg] Three Former Tepco Executives Indicted for Fukushima Negligence
Sunday's News Links
[Bloomberg] Middle Eastern Stocks Rally as China Flags Scope for Stimulus
[Dow Jones] ECB Could Take Action on Low Inflation, Says Bank of France Governor--Report
[Bloomberg] The World's Most Popular Stock Picks Are Sinking
[WSJ] The New Oil-Storage Space: Railcars
[Bloomberg] Arab States Face $94 Billion Debt Crunch on Oil Slump, HSBC Says
[Washington Post] Chinese property mogul silenced for criticizing state media
[FT] Beijing muzzles tycoon critic known as The Cannon
[FT] Investors pull more than $60bn from mutual funds in January
[Dow Jones] ECB Could Take Action on Low Inflation, Says Bank of France Governor--Report
[Bloomberg] The World's Most Popular Stock Picks Are Sinking
[WSJ] The New Oil-Storage Space: Railcars
[Bloomberg] Arab States Face $94 Billion Debt Crunch on Oil Slump, HSBC Says
[Washington Post] Chinese property mogul silenced for criticizing state media
[FT] Beijing muzzles tycoon critic known as The Cannon
[FT] Investors pull more than $60bn from mutual funds in January
Saturday, February 27, 2016
Saturday's News Links
[Reuters] More yawns than yuan in China's late-night forex trade
[Reuters] G20 to say world needs to look beyond ultra-easy policy for growth
[Bloomberg] G-20 Wants Governments Doing More, and Central Banks Less
[NYT] G-20, Rejecting Major Policy Shifts, Plays Up Basic Strengths
[Bloomberg] Japan, Not China, Emerges as Currency Worry at G-20 Meeting
[Reuters] London mayor Boris Johnson urges UK cabinet to back Brexit, defying PM Cameron
[Bloomberg] Schaeuble Hints Germany May Be Ready to Give Greece Some Leeway
[Reuters] ASEAN says seriously concerned about rising South China Sea tensions
[Reuters] G20 to say world needs to look beyond ultra-easy policy for growth
[Bloomberg] G-20 Wants Governments Doing More, and Central Banks Less
[NYT] G-20, Rejecting Major Policy Shifts, Plays Up Basic Strengths
[Bloomberg] Japan, Not China, Emerges as Currency Worry at G-20 Meeting
[Reuters] London mayor Boris Johnson urges UK cabinet to back Brexit, defying PM Cameron
[Bloomberg] Schaeuble Hints Germany May Be Ready to Give Greece Some Leeway
[Reuters] ASEAN says seriously concerned about rising South China Sea tensions
Friday, February 26, 2016
Weekly Commentary: Just the Facts
For the Week:
The S&P500 gained 1.6% (down 4.7% y-t-d), and the Dow rose 1.5% (down 4.5%). The Utilities were little changed (up 6.5%). The Banks increased 1.3% (down 15.6%), and the Broker/Dealers rallied 2.9% (down 15.7%). The Transports gained 1.6% (down 1.4%). The broader market outperformed. The S&P 400 Midcaps jumped 2.6% (down 4.2%), and the small cap Russell 2000 rose 2.7% (down 8.7%). The Nasdaq100 gained 1.7% (down 7.8%), and the Morgan Stanley High Tech index jumped 3.5% (down 8.9%). The Semiconductors surged 3.2% (down 5.9%). The volatile Biotechs ended the week unchanged (down 24.7%). Though bullion was down $3, the HUI gold index added 1.8% (up 45.3%).
Three-month Treasury bill rates ended the week at 31 bps. Two-year government yields rose five bps to 0.79% (down 26bps y-t-d). Five-year T-note yields increased a basis point to 1.24% (down 51bps). Ten-year Treasury yields dipped a basis point to 1.74% (down 51bps). Long bond yields added three bps to 2.64% (down 38bps).
Greek 10-year yields fell 25 bps to 10.00% (up 268bps y-t-d). Ten-year Portuguese yields sank 35 bps to 3.05% (up 53bps). Italian 10-year yields fell nine bps to 1.47% (down 12bps). Spain's 10-year yields dropped 13 bps to 1.57% (down 20bps). German bund yields declined five bps to 0.15% (down 47bps). French yields fell six bps to 0.50% (down 49bps). The French to German 10-year bond spread narrowed one to 35 bps. U.K. 10-year gilt yields slipped a basis point to 1.40% (down 56bps).
Japan's Nikkei equities index recovered 1.4% (down 14.9% y-t-d). Japanese 10-year "JGB" yields fell eight bps to a record low negative 0.08% (down 41bps y-t-d). The German DAX equities index increased 1.3% (down 11.4%). Spain's IBEX 35 equities index gained 1.9% (down 12.5%). Italy's FTSE MIB index rose 3.4% (down 18.4%). EM equities were mixed. Brazil's Bovespa index was little changed (down 4.1%). Mexico's Bolsa added 0.2% (up 1.2%). South Korea's Kospi index increased 0.2% (down 2.1%). India’s Sensex equities index fell 2.3% (down 11.3%). China’s Shanghai Exchange dropped 3.2% (down 21.8%). Turkey's Borsa Istanbul National 100 index jumped 2.6% (up 4.5%). Russia's MICEX equities index gained 1.3% (up 3.1%).
Junk funds saw inflows surge to $2.7 billion (from Lipper). From Reuters (Trevor Hunnicutt) "Investment-grade corporate debt funds took in $142 million, offering relief from net withdrawals of $19 billion over the prior 13 weeks."
Freddie Mac 30-year fixed mortgage rates slipped three bps to a more than two-year low 3.62% (down 18bps y-o-y). Fifteen-year rates declined three bps to 2.93% (down 14bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down five bps to 3.70% (down 59bps).
Federal Reserve Credit last week declined $11.4bn to $4.448 TN. Over the past year, Fed Credit fell $11.7bn, or 0.3%. Fed Credit inflated $1.637 TN, or 58%, over the past 172 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt last week dropped $12.2bn to an 11-month low $3.254 TN. "Custody holdings" were down $12.2bn y-o-y, or 0.4%.
M2 (narrow) "money" supply last week recovered $48.8bn to $12.464 TN. "Narrow money" expanded $647bn, or 5.5%, over the past year. For the week, Currency increased $2.7bn. Total Checkable Deposits jumped $62.6bn, while Savings Deposits fell $15.2bn. Small Time Deposits were little changed. Retail Money Funds slipped $0.9bn.
Total money market fund assets jumped $15.1bn to $2.778 TN. Money Funds rose $87bn y-o-y (3.2%).
Total Commercial Paper fell $7.8bn to $1.076 TN. CP expanded $49.6 billion y-o-y, or 4.8%.
Currency Watch:
February 25 – Bloomberg (Lananh Nguyen): “The specter of shrinking liquidity gripping fixed-income desks globally is creeping its way into the world’s biggest, most liquid financial market. Amid conversations about central bank policy and algorithmic trading, it was concerns about diminishing liquidity -- or the prospects of it drying up entirely during times of market stress -- that dominated discussions this week at the TradeTech FX conference in Miami. Pension funds, hedge funds and other asset managers were seeking answers after a string of so-called flash crashes in recent months sent some of the world’s most-traded currencies plunging.”
The U.S. dollar index rallied 1.6% this week to 98.09 (down 0.6% y-t-d). For the week on the upside, the Canadian dollar increased 1.8% and the Brazilian real gained 0.5%. For the week on the downside, the South African rand declined 5.0%, the British pound 3.7%, the euro 1.8%, the Norwegian krone 1.5%, the Swedish krona 1.4%, the Japanese yen 1.2%, the Swiss franc 0.6% and the Australian dollar 0.3%. The Chinese yuan declined 0.3% versus the dollar.
Commodities Watch:
The Goldman Sachs Commodities Index rallied 2.1% (down 3.7% y-t-d). Spot Gold slipped 0.3% $1,223 (up 15.3%). March Silver dropped 4.2% to $14.71 (up 6.6%). April WTI Crude surged $3.14 to $32.78 (down 11.5%). March Gasoline rallied 6.0% (down 20%), while March Natural Gas lost 0.6% (down 24%). March Copper gained 1.9% (down 1%). May Wheat fell 3.1% (down 4%). May Corn dropped 2.6% (unchanged).
Fixed-Income Bubble Watch:
February 25 – Wall Street Journal (Sam Goldfarb and Liz Hoffman): “Goldman Sachs… is struggling to sell $2 billion in bonds backing the buyout of software firm Solera Holdings Inc., another sign of cracks in the market for the low-rated debt that has been a key driver of the takeover boom. Solera’s sale to Vista Equity Partners was one of the biggest leveraged buyouts of last year, at $6.5 billion including debt, and has been widely viewed as a test of the credit market. The bond sale comes at a time when U.S. junk-bond issuance has dropped more than 70% from a year ago and borrowing costs have increased... The pullback threatens a mergers-and-acquisitions boom that has been driven partly by cheap and available credit. It also comes as a wave of debt from the last buyout boom is coming due…”
February 21 – Wall Street Journal (Matt Wirz and Matt Jarzemsky): “Wall Street has long wondered what would happen if a wave of refinancing meets with a weakened junk-bond market. Toys “R” Us Inc. will be an early test case. The 68-year-old toy retailer is trying to replace $1.6 billion in junk-rated bonds coming due through 2018… Other heavily indebted borrowers face similar pressure to refinance amid risks of a prolonged swoon for the market. U.S. companies have a total of $1.32 trillion in junk debt maturing between now and 2020, according to Standard & Poor’s… That includes $92.3 billion coming due this year, followed by $160.9 billion in 2017 and $272.5 billion in 2018.”
February 25 – Bloomberg (Meenal Vamburkar and Cordell Eddings): “They have sold off hundreds of oil fields, eliminated thousands of jobs and slashed millions of dollars from capital spending and dividends. But in this unforgiving new world of $30-a-barrel oil, it’s barely been enough. As U.S. oil executives… take drastic measures to weather the worst slump in a generation and cling to their debt ratings, creditors are already writing some of them off. So much so that late last month, average borrowing costs for energy bonds with the lowest investment grades -- issues totaling $258 billion -- soared past those of the highest-rated U.S. junk borrowers for the first time. What’s more, debt issuance industry wide has all but ground to a halt after a record year in 2015.”
February 25 – Bloomberg (Asjylyn Loder, Donal Griffin and Jodi Xu Klein): “In less than a month, the U.S. oil bust could claim two of its biggest victims yet. Energy XXI Ltd. and SandRidge Energy Inc., oil and gas drillers with a combined $7.6 billion of debt, didn’t pay interest on their bonds last week. They have until the middle of next month to either pay the interest, work out a deal with their creditors or face a default that could tip them into bankruptcy… ‘We’re just beginning to see how bad 2016 is going to be,’ said Becky Roof, managing director… with consulting firm AlixPartners.”
February 23 – Reuters (Tom Hals): “Within weeks, two low-profile legal disputes may determine whether an unprecedented wave of bankruptcies expected to hit U.S. oil and gas producers this year will imperil the $500 billion pipeline sector as well. In the two court fights, U.S. energy producers are trying to use Chapter 11 bankruptcy protection to shed long-term contracts with the pipeline operators that gather and process shale gas before it is delivered to consumer markets.”
Global Bubble Watch:
February 24 – Reuters (Terry Wade and Anna Driver): “Germany's Minister of Finance Wolfgang Schaeuble said on Friday that the expansive fiscal and monetary policies implemented by governments to spur growth might have laid the foundation of the next economic crisis. Those debt-financed fiscal policies and accommodative monetary policies had been only moderately successful in promoting growth, with public and private debt levels in the world now too high, Schaeuble said. ‘Fiscal as well as monetary policies have reached their limits. If you want the real economy to grow there are no shortcuts which avoid reforms,’ Schaeuble said. ‘Talking about further stimulus just distracts from the real tasks at hand… We, therefore, do not agree on a G20 fiscal stimulus package as some argue in case outlook risks materialize… The debt-financed growth model has reached its limits. It is even causing new problems, raising debt, causing bubbles and excessive risk taking, zombifying the economy’.”
February 22 – Bloomberg (Matthew Philips): “One of the loudest creaking sounds coming from the markets right now is the global economy straining under a record pile of debt. The world has continued to borrow hand over fist since the financial crisis, adding nearly $60 trillion since 2007 in the process of pushing the worldwide debt load to $200 trillion, or nearly three times the size of the entire global economy. And that figure takes us only to 2014… But no matter how you measure, global debt levels are raising alarms over whether we're on the brink of another debt-fueled economic meltdown. The potential for disaster depends on how contagious a new round of defaults would prove and whether writedowns in one part of the world could cause losses in others. That's what happened in the last two major debt crises, which rippled through the global economy.”
February 25 – Wall Street Journal (Chuin-Wei Yap and Mark Magnier): “A surge of corporate bonds is adding to China’s already-high debt levels, amplifying risks to the economy as Beijing persistently encourages borrowing to fuel growth. The new rounds of corporate funding deepen anxieties among investors and analysts that China’s debt, already expanding at twice the pace of its gross domestic product, is feeding a nascent credit crisis… Corporate debt now amounts to 160% of China’s gross domestic product, compared with 98% in 2008, according to Standard & Poor’s… The level in the U.S. is 70%. Outstanding corporate bonds in China last year surged 25% to 14.6 trillion yuan ($2.2 trillion)…”
February 21 – Financial Times (Attracta Mooney and Madison Marriage): “Asset managers suffered record outflows from sovereign wealth funds in 2015 and have been warned to expect even greater redemptions this year as the oil price collapse drives governments to raid their state-owned investment vehicles. State funds pulled at least $46.5bn from asset managers in 2015 — far greater than the sovereign outflows recorded at the height of the financial crisis — in a bid to prop up their economies, according to… eVestment…”
U.S. Bubble Watch:
February 20 – Financial Times (Barney Jopson): “Fannie Mae, the state-sponsored U.S. mortgage backer, is at risk of needing a government bailout that could shake confidence in the housing finance market, senior officials have warned. Fannie Mae's chief executive and its regulator are sounding the alarm on a decline in the institution's capital cushion, which is on course to vanish in 2018, when it would have to ask the US Treasury for emergency funds. Their warnings highlight Washington's inaction on housing policy and its failure to reform the institution, which guarantees nearly $3 trillion of securities and enables 30-year fixed rate loans, following the last financial crisis.”
February 24 – Reuters (Terry Wade and Anna Driver): “Prices for mansions in Houston's swankiest neighborhood have tumbled in lock step with crude prices. The Houston Opera has offered free season tickets to patrons who lost their jobs in the oil bust. A fancy restaurant offers cut-price dinners. Twenty months into the worst oil price crash since the 1980s, well-heeled residents of the world's oil capital are among the hardest hit largely because tanking energy firm shares make up much of oil and gas executives' compensation… While Houston's economy is far more diversified now than in the 1980s when the city lost 13% of its jobs, it remains home to 5,000 energy-related firms and the fortunes of oil and gas executives are tied more than ever to the energy market.”
February 24 – Wall Street Journal (Katy McLaughlin): “Los Angeles’ luxury market is blazing—and it has nothing to do with droughts or fires. Median sale prices of single-family homes increased by 37% in Beverly Hills and 12% in Bel Air and Holmby Hills in 2015 compared with the year before, according to Jonathan Miller, a real-estate appraiser… Even in this heady market, some deals stand out. Josh Flagg, executive sales director at Rodeo Realty, sold three houses on behalf of clients last year—twice. In each instance, he sold the homes the second time for roughly $1 million more than the first time—even though no or few improvements were made to the properties, according to Mr. Flagg.”
February 26 – Wall Street Journal (Ryan Dezember and Matt Jarzemsky): “Blackstone Group LP co-founder and Chief Executive Stephen Schwarzman collected $799.2 million in 2015, up from $689.3 million in 2014, despite market turmoil that battered the firm’s stock and threatened to slow a frenzied stretch of selling that has driven big profits.”
February 23 – Reuters (Carmel Crimmins): “Cash-strapped energy firms are coming under increasing pressure from U.S. bank lenders and, on average, could see a 15% to 20% cut in their credit lines, the head of JP Morgan's commercial bank told investors… Until now, banks could be more lenient with their energy clients despite a prolonged slump in the price of oil, but Doug Petno, the head of JP Morgan's commercial bank, said that is changing. Moves, disclosed in securities filings, by oil and gas companies… to max out revolving credit lines - designed to cover short-term funding gaps - have prompted banks to take action.”
February 22 – Bloomberg (Matt Scully): “More borrowers with spotty credit are failing to make monthly car payments on time, a troubling sign for investors who have snapped up billions of dollars of securities backed by risky auto debt. Delinquencies on subprime auto loans packaged into bonds rose in January to 4.7%, a level not seen since 2010… What may be most troubling, however, is that the default rate is already climbing, up to 12.3% in January from 11.3% the prior month. That is the highest rate since 2010…”
China Bubble Watch:
February 24 – New York Times (Edward Wong and Neil Gough): “This month, Chinese banking officials omitted currency data from closely watched economic reports. Weeks earlier, Chinese regulators fined a journalist $23,000 for reposting a message that said a big securities firm had told elite clients to sell stock. Before that, officials pressed two companies to stop releasing early results from a survey of Chinese factories that often moved markets. Chinese leaders are taking increasingly bold steps to stop rising pessimism about turbulent markets and the slowing of the country’s growth. As financial and economic troubles threaten to undermine confidence in the Communist Party, Beijing is tightening the flow of economic information and even criminalizing commentary that officials believe could hurt stocks or the currency.”
February 25 – Bloomberg (Dexter Roberts): “China has had an overcapacity problem in its aluminum, chemical, cement, and steel industries for years. Now it’s reaching crisis levels. ‘The situation has gone so dramatically bad that action has to happen very soon,’ said Jörg Wuttke, president of the European Union Chamber of Commerce in China… That report’s conclusion: ‘The Chinese government’s current role in the economy is part of the problem,’ while overcapacity has become ‘an impediment to the party’s reform agenda.’ Many of the unneeded mills, smelters, and plants were built or expanded after China’s policymakers unleashed cheap credit during the global financial crisis in 2009. The situation in steel is especially dire. China produces more than double the steel of Japan, India, the U.S., and Russia—the four next-largest producers—combined…”
Central Bank Watch:
February 24 – Bloomberg (Jeanna Smialek and Lucy Meakin): “Mario Draghi has two weeks left to decide how to ramp up stimulus in a way that doesn’t upset either his colleagues or investors. When European Central Bank policy makers meet in Frankfurt from March 9-10, they’ll consider whether negative interest rates and 60 billion euros ($67bn) a month of debt purchases is enough to revive consumer prices… The ECB president has said there are no limits to how far policy makers will go within their mandate, yet sub-zero rates carry risks and expanding QE is easier said than done.”
February 24 – Bloomberg (Paul Gordon and Hans Nichols): “The European Central Bank must be wary of introducing fresh stimulus that could backfire and weaken the transmission of policy to the economy, Governing Council member Jens Weidmann said. ‘What matters for us is that we don’t produce counterproductive effects,’ Weidmann, who heads Germany’s Bundesbank, said… ‘If through the effect on, for instance, the stability of banks our measures produce the opposite of what we want then it wouldn’t be smart to embrace them in the first place.’”
February 24 – Reuters (John O'Donnell): “Bank profits will shrink if rock-bottom interest rates stay in place for too long, the head of Germany's central bank warned…, signaling that he favors an eventual change in tack. The remarks from the Bundesbank's influential president, Jens Weidmann, illustrate how seriously Germany is taking the fallout from years of low borrowing rates after a recent crash in bank stocks sucked in the country's flagship Deutsche Bank . ‘The low interest-rate environment particularly weighs on banks' earnings potential,’ Weidmann told journalists.... ‘The longer the low-interest-rate phase stays, the steeper interest rates fall, the ... smaller banks' profit,’ said Weidmann…”
Three-month Treasury bill rates ended the week at 31 bps. Two-year government yields rose five bps to 0.79% (down 26bps y-t-d). Five-year T-note yields increased a basis point to 1.24% (down 51bps). Ten-year Treasury yields dipped a basis point to 1.74% (down 51bps). Long bond yields added three bps to 2.64% (down 38bps).
Greek 10-year yields fell 25 bps to 10.00% (up 268bps y-t-d). Ten-year Portuguese yields sank 35 bps to 3.05% (up 53bps). Italian 10-year yields fell nine bps to 1.47% (down 12bps). Spain's 10-year yields dropped 13 bps to 1.57% (down 20bps). German bund yields declined five bps to 0.15% (down 47bps). French yields fell six bps to 0.50% (down 49bps). The French to German 10-year bond spread narrowed one to 35 bps. U.K. 10-year gilt yields slipped a basis point to 1.40% (down 56bps).
Japan's Nikkei equities index recovered 1.4% (down 14.9% y-t-d). Japanese 10-year "JGB" yields fell eight bps to a record low negative 0.08% (down 41bps y-t-d). The German DAX equities index increased 1.3% (down 11.4%). Spain's IBEX 35 equities index gained 1.9% (down 12.5%). Italy's FTSE MIB index rose 3.4% (down 18.4%). EM equities were mixed. Brazil's Bovespa index was little changed (down 4.1%). Mexico's Bolsa added 0.2% (up 1.2%). South Korea's Kospi index increased 0.2% (down 2.1%). India’s Sensex equities index fell 2.3% (down 11.3%). China’s Shanghai Exchange dropped 3.2% (down 21.8%). Turkey's Borsa Istanbul National 100 index jumped 2.6% (up 4.5%). Russia's MICEX equities index gained 1.3% (up 3.1%).
Junk funds saw inflows surge to $2.7 billion (from Lipper). From Reuters (Trevor Hunnicutt) "Investment-grade corporate debt funds took in $142 million, offering relief from net withdrawals of $19 billion over the prior 13 weeks."
Freddie Mac 30-year fixed mortgage rates slipped three bps to a more than two-year low 3.62% (down 18bps y-o-y). Fifteen-year rates declined three bps to 2.93% (down 14bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down five bps to 3.70% (down 59bps).
Federal Reserve Credit last week declined $11.4bn to $4.448 TN. Over the past year, Fed Credit fell $11.7bn, or 0.3%. Fed Credit inflated $1.637 TN, or 58%, over the past 172 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt last week dropped $12.2bn to an 11-month low $3.254 TN. "Custody holdings" were down $12.2bn y-o-y, or 0.4%.
M2 (narrow) "money" supply last week recovered $48.8bn to $12.464 TN. "Narrow money" expanded $647bn, or 5.5%, over the past year. For the week, Currency increased $2.7bn. Total Checkable Deposits jumped $62.6bn, while Savings Deposits fell $15.2bn. Small Time Deposits were little changed. Retail Money Funds slipped $0.9bn.
Total money market fund assets jumped $15.1bn to $2.778 TN. Money Funds rose $87bn y-o-y (3.2%).
Total Commercial Paper fell $7.8bn to $1.076 TN. CP expanded $49.6 billion y-o-y, or 4.8%.
Currency Watch:
February 25 – Bloomberg (Lananh Nguyen): “The specter of shrinking liquidity gripping fixed-income desks globally is creeping its way into the world’s biggest, most liquid financial market. Amid conversations about central bank policy and algorithmic trading, it was concerns about diminishing liquidity -- or the prospects of it drying up entirely during times of market stress -- that dominated discussions this week at the TradeTech FX conference in Miami. Pension funds, hedge funds and other asset managers were seeking answers after a string of so-called flash crashes in recent months sent some of the world’s most-traded currencies plunging.”
The U.S. dollar index rallied 1.6% this week to 98.09 (down 0.6% y-t-d). For the week on the upside, the Canadian dollar increased 1.8% and the Brazilian real gained 0.5%. For the week on the downside, the South African rand declined 5.0%, the British pound 3.7%, the euro 1.8%, the Norwegian krone 1.5%, the Swedish krona 1.4%, the Japanese yen 1.2%, the Swiss franc 0.6% and the Australian dollar 0.3%. The Chinese yuan declined 0.3% versus the dollar.
Commodities Watch:
The Goldman Sachs Commodities Index rallied 2.1% (down 3.7% y-t-d). Spot Gold slipped 0.3% $1,223 (up 15.3%). March Silver dropped 4.2% to $14.71 (up 6.6%). April WTI Crude surged $3.14 to $32.78 (down 11.5%). March Gasoline rallied 6.0% (down 20%), while March Natural Gas lost 0.6% (down 24%). March Copper gained 1.9% (down 1%). May Wheat fell 3.1% (down 4%). May Corn dropped 2.6% (unchanged).
Fixed-Income Bubble Watch:
February 25 – Wall Street Journal (Sam Goldfarb and Liz Hoffman): “Goldman Sachs… is struggling to sell $2 billion in bonds backing the buyout of software firm Solera Holdings Inc., another sign of cracks in the market for the low-rated debt that has been a key driver of the takeover boom. Solera’s sale to Vista Equity Partners was one of the biggest leveraged buyouts of last year, at $6.5 billion including debt, and has been widely viewed as a test of the credit market. The bond sale comes at a time when U.S. junk-bond issuance has dropped more than 70% from a year ago and borrowing costs have increased... The pullback threatens a mergers-and-acquisitions boom that has been driven partly by cheap and available credit. It also comes as a wave of debt from the last buyout boom is coming due…”
February 21 – Wall Street Journal (Matt Wirz and Matt Jarzemsky): “Wall Street has long wondered what would happen if a wave of refinancing meets with a weakened junk-bond market. Toys “R” Us Inc. will be an early test case. The 68-year-old toy retailer is trying to replace $1.6 billion in junk-rated bonds coming due through 2018… Other heavily indebted borrowers face similar pressure to refinance amid risks of a prolonged swoon for the market. U.S. companies have a total of $1.32 trillion in junk debt maturing between now and 2020, according to Standard & Poor’s… That includes $92.3 billion coming due this year, followed by $160.9 billion in 2017 and $272.5 billion in 2018.”
February 25 – Bloomberg (Meenal Vamburkar and Cordell Eddings): “They have sold off hundreds of oil fields, eliminated thousands of jobs and slashed millions of dollars from capital spending and dividends. But in this unforgiving new world of $30-a-barrel oil, it’s barely been enough. As U.S. oil executives… take drastic measures to weather the worst slump in a generation and cling to their debt ratings, creditors are already writing some of them off. So much so that late last month, average borrowing costs for energy bonds with the lowest investment grades -- issues totaling $258 billion -- soared past those of the highest-rated U.S. junk borrowers for the first time. What’s more, debt issuance industry wide has all but ground to a halt after a record year in 2015.”
February 25 – Bloomberg (Asjylyn Loder, Donal Griffin and Jodi Xu Klein): “In less than a month, the U.S. oil bust could claim two of its biggest victims yet. Energy XXI Ltd. and SandRidge Energy Inc., oil and gas drillers with a combined $7.6 billion of debt, didn’t pay interest on their bonds last week. They have until the middle of next month to either pay the interest, work out a deal with their creditors or face a default that could tip them into bankruptcy… ‘We’re just beginning to see how bad 2016 is going to be,’ said Becky Roof, managing director… with consulting firm AlixPartners.”
February 23 – Reuters (Tom Hals): “Within weeks, two low-profile legal disputes may determine whether an unprecedented wave of bankruptcies expected to hit U.S. oil and gas producers this year will imperil the $500 billion pipeline sector as well. In the two court fights, U.S. energy producers are trying to use Chapter 11 bankruptcy protection to shed long-term contracts with the pipeline operators that gather and process shale gas before it is delivered to consumer markets.”
Global Bubble Watch:
February 24 – Reuters (Terry Wade and Anna Driver): “Germany's Minister of Finance Wolfgang Schaeuble said on Friday that the expansive fiscal and monetary policies implemented by governments to spur growth might have laid the foundation of the next economic crisis. Those debt-financed fiscal policies and accommodative monetary policies had been only moderately successful in promoting growth, with public and private debt levels in the world now too high, Schaeuble said. ‘Fiscal as well as monetary policies have reached their limits. If you want the real economy to grow there are no shortcuts which avoid reforms,’ Schaeuble said. ‘Talking about further stimulus just distracts from the real tasks at hand… We, therefore, do not agree on a G20 fiscal stimulus package as some argue in case outlook risks materialize… The debt-financed growth model has reached its limits. It is even causing new problems, raising debt, causing bubbles and excessive risk taking, zombifying the economy’.”
February 22 – Bloomberg (Matthew Philips): “One of the loudest creaking sounds coming from the markets right now is the global economy straining under a record pile of debt. The world has continued to borrow hand over fist since the financial crisis, adding nearly $60 trillion since 2007 in the process of pushing the worldwide debt load to $200 trillion, or nearly three times the size of the entire global economy. And that figure takes us only to 2014… But no matter how you measure, global debt levels are raising alarms over whether we're on the brink of another debt-fueled economic meltdown. The potential for disaster depends on how contagious a new round of defaults would prove and whether writedowns in one part of the world could cause losses in others. That's what happened in the last two major debt crises, which rippled through the global economy.”
February 25 – Wall Street Journal (Chuin-Wei Yap and Mark Magnier): “A surge of corporate bonds is adding to China’s already-high debt levels, amplifying risks to the economy as Beijing persistently encourages borrowing to fuel growth. The new rounds of corporate funding deepen anxieties among investors and analysts that China’s debt, already expanding at twice the pace of its gross domestic product, is feeding a nascent credit crisis… Corporate debt now amounts to 160% of China’s gross domestic product, compared with 98% in 2008, according to Standard & Poor’s… The level in the U.S. is 70%. Outstanding corporate bonds in China last year surged 25% to 14.6 trillion yuan ($2.2 trillion)…”
February 21 – Financial Times (Attracta Mooney and Madison Marriage): “Asset managers suffered record outflows from sovereign wealth funds in 2015 and have been warned to expect even greater redemptions this year as the oil price collapse drives governments to raid their state-owned investment vehicles. State funds pulled at least $46.5bn from asset managers in 2015 — far greater than the sovereign outflows recorded at the height of the financial crisis — in a bid to prop up their economies, according to… eVestment…”
U.S. Bubble Watch:
February 20 – Financial Times (Barney Jopson): “Fannie Mae, the state-sponsored U.S. mortgage backer, is at risk of needing a government bailout that could shake confidence in the housing finance market, senior officials have warned. Fannie Mae's chief executive and its regulator are sounding the alarm on a decline in the institution's capital cushion, which is on course to vanish in 2018, when it would have to ask the US Treasury for emergency funds. Their warnings highlight Washington's inaction on housing policy and its failure to reform the institution, which guarantees nearly $3 trillion of securities and enables 30-year fixed rate loans, following the last financial crisis.”
February 24 – Reuters (Terry Wade and Anna Driver): “Prices for mansions in Houston's swankiest neighborhood have tumbled in lock step with crude prices. The Houston Opera has offered free season tickets to patrons who lost their jobs in the oil bust. A fancy restaurant offers cut-price dinners. Twenty months into the worst oil price crash since the 1980s, well-heeled residents of the world's oil capital are among the hardest hit largely because tanking energy firm shares make up much of oil and gas executives' compensation… While Houston's economy is far more diversified now than in the 1980s when the city lost 13% of its jobs, it remains home to 5,000 energy-related firms and the fortunes of oil and gas executives are tied more than ever to the energy market.”
February 24 – Wall Street Journal (Katy McLaughlin): “Los Angeles’ luxury market is blazing—and it has nothing to do with droughts or fires. Median sale prices of single-family homes increased by 37% in Beverly Hills and 12% in Bel Air and Holmby Hills in 2015 compared with the year before, according to Jonathan Miller, a real-estate appraiser… Even in this heady market, some deals stand out. Josh Flagg, executive sales director at Rodeo Realty, sold three houses on behalf of clients last year—twice. In each instance, he sold the homes the second time for roughly $1 million more than the first time—even though no or few improvements were made to the properties, according to Mr. Flagg.”
February 26 – Wall Street Journal (Ryan Dezember and Matt Jarzemsky): “Blackstone Group LP co-founder and Chief Executive Stephen Schwarzman collected $799.2 million in 2015, up from $689.3 million in 2014, despite market turmoil that battered the firm’s stock and threatened to slow a frenzied stretch of selling that has driven big profits.”
February 23 – Reuters (Carmel Crimmins): “Cash-strapped energy firms are coming under increasing pressure from U.S. bank lenders and, on average, could see a 15% to 20% cut in their credit lines, the head of JP Morgan's commercial bank told investors… Until now, banks could be more lenient with their energy clients despite a prolonged slump in the price of oil, but Doug Petno, the head of JP Morgan's commercial bank, said that is changing. Moves, disclosed in securities filings, by oil and gas companies… to max out revolving credit lines - designed to cover short-term funding gaps - have prompted banks to take action.”
February 22 – Bloomberg (Matt Scully): “More borrowers with spotty credit are failing to make monthly car payments on time, a troubling sign for investors who have snapped up billions of dollars of securities backed by risky auto debt. Delinquencies on subprime auto loans packaged into bonds rose in January to 4.7%, a level not seen since 2010… What may be most troubling, however, is that the default rate is already climbing, up to 12.3% in January from 11.3% the prior month. That is the highest rate since 2010…”
China Bubble Watch:
February 24 – New York Times (Edward Wong and Neil Gough): “This month, Chinese banking officials omitted currency data from closely watched economic reports. Weeks earlier, Chinese regulators fined a journalist $23,000 for reposting a message that said a big securities firm had told elite clients to sell stock. Before that, officials pressed two companies to stop releasing early results from a survey of Chinese factories that often moved markets. Chinese leaders are taking increasingly bold steps to stop rising pessimism about turbulent markets and the slowing of the country’s growth. As financial and economic troubles threaten to undermine confidence in the Communist Party, Beijing is tightening the flow of economic information and even criminalizing commentary that officials believe could hurt stocks or the currency.”
February 25 – Bloomberg (Dexter Roberts): “China has had an overcapacity problem in its aluminum, chemical, cement, and steel industries for years. Now it’s reaching crisis levels. ‘The situation has gone so dramatically bad that action has to happen very soon,’ said Jörg Wuttke, president of the European Union Chamber of Commerce in China… That report’s conclusion: ‘The Chinese government’s current role in the economy is part of the problem,’ while overcapacity has become ‘an impediment to the party’s reform agenda.’ Many of the unneeded mills, smelters, and plants were built or expanded after China’s policymakers unleashed cheap credit during the global financial crisis in 2009. The situation in steel is especially dire. China produces more than double the steel of Japan, India, the U.S., and Russia—the four next-largest producers—combined…”
Central Bank Watch:
February 24 – Bloomberg (Jeanna Smialek and Lucy Meakin): “Mario Draghi has two weeks left to decide how to ramp up stimulus in a way that doesn’t upset either his colleagues or investors. When European Central Bank policy makers meet in Frankfurt from March 9-10, they’ll consider whether negative interest rates and 60 billion euros ($67bn) a month of debt purchases is enough to revive consumer prices… The ECB president has said there are no limits to how far policy makers will go within their mandate, yet sub-zero rates carry risks and expanding QE is easier said than done.”
February 24 – Bloomberg (Paul Gordon and Hans Nichols): “The European Central Bank must be wary of introducing fresh stimulus that could backfire and weaken the transmission of policy to the economy, Governing Council member Jens Weidmann said. ‘What matters for us is that we don’t produce counterproductive effects,’ Weidmann, who heads Germany’s Bundesbank, said… ‘If through the effect on, for instance, the stability of banks our measures produce the opposite of what we want then it wouldn’t be smart to embrace them in the first place.’”
February 24 – Reuters (John O'Donnell): “Bank profits will shrink if rock-bottom interest rates stay in place for too long, the head of Germany's central bank warned…, signaling that he favors an eventual change in tack. The remarks from the Bundesbank's influential president, Jens Weidmann, illustrate how seriously Germany is taking the fallout from years of low borrowing rates after a recent crash in bank stocks sucked in the country's flagship Deutsche Bank . ‘The low interest-rate environment particularly weighs on banks' earnings potential,’ Weidmann told journalists.... ‘The longer the low-interest-rate phase stays, the steeper interest rates fall, the ... smaller banks' profit,’ said Weidmann…”
February 23 – Bloomberg (Toru Fujioka Masahiro Hidaka): “Almost three years after taking the helm at Japan’s central bank, Governor Haruhiko Kuroda has hinted that his view on the power of monetary policy has shifted, after an unprecedented stimulus program failed to achieve his inflation target. ‘It’s not that the monetary base alone will pull up inflation or inflation expectations promptly,’ Kuroda said in parliament… ‘We aim to raise prices through an increase in inflation expectations and a tighter gap in supply and demand under QQE,’ he said, referring to qualitative and quantitative easing measures.”
February 21 – Reuters (Leika Kihara): “Bank of Japan Governor Haruhiko Kuroda… blamed investors' ‘excessive’ risk aversion for persistent market volatility, and defended the central bank's decision to adopt a negative interest rate policy in the face of questions about its effectiveness. The BOJ chief also shrugged off criticism that the radical stimulus policy risked destabilizing Japan's banking system by squeezing returns on lending…”
EM Bubble Watch:
February 26 – Bloomberg (Nacha Cattan and Isabella Cota): “Mexico’s surging debt load is raising red flags for Deutsche Bank AG and Barclays Plc. The broadest measure of debt as a percentage of gross domestic product has swelled to 46% from 38% in President Enrique Pena Nieto’s first three years in office as plunging oil prices eroded government revenue and a weak peso made it more expensive to borrow in dollars… According to the Bank of International Settlements, the debt burden is the highest since 1995, during the so-called Tequila Crisis, when panicked investors sold off their short-term debt and sparked a peso depreciation. The International Monetary Fund estimates that the figure is at least as high as 1996.”
Brazil Watch:
February 23 – Bloomberg (David Biller): “Brazil’s annual inflation surprised analysts by accelerating in the month through mid-February after the central bank refrained from raising borrowing costs and the government proposed loosening its fiscal targets. Annual inflation… quickened to 10.84% -- its highest level since November 2003. Inflation accelerated to 1.42% from 0.92% a month earlier…”
February 24 – Bloomberg (Paula Sambo and Filipe Pacheco): “Brazil’s sovereign rating was cut to junk by Moody’s…, the last of the major ratings companies to strip the country of its investment grade, as President Dilma Rousseff struggles to shore up fiscal accounts amid deepening political turmoil.”
February 24 – Bloomberg (Filipe Pacheco and Chiara Vasarri): “Banco do Brasil SA is getting crushed in the bond market because of its government ties. Contingent-convertible notes issued by the state-controlled bank, which are vulnerable to being written down to zero if capital ratios fall too low, have fallen the most among 133 similar CoCo securities denominated in euros or dollars. The bank’s $1.64 billion of bonds sold in 2012 have tumbled 25% in 2016, seven times the average.”
Leveraged Speculation Watch:
February 25 – Bloomberg (Matthew Philips): “Assets managed by hedge funds globally last month fell to less than $3 trillion for the first time since the industry hit the milestone in May 2014, according to… eVestment. Investors pulled a net $21.5 billion, the most in the opening month of a year since 2009, while losses led to a $43.2 billion drop in assets under management. The industry managed $2.96 trillion at the end of January. Hedge funds that suffered losses last year were hit by redemptions worth $24.8 billion in January. Equity, fixed-income and multistrategy hedge funds suffered net outflows…”
February 23 – Bloomberg (Julie Verhage): “While hedge funds have slightly outperformed the S&P 500 so far in the dire start to 2016, it turns out stocks with the lowest amount of ownership by the industry are performing better than the ones it loves. According to the most recent ‘Hedge Fund Monitor’ from David Kostin, chief U.S. equity strategist for Goldman…, which analyzes 860 hedge funds with $1.6 trillion is gross equity positions, the most popular stocks have continued to lag the market. The stocks with the lowest concentration of hedge fund ownership beat the S&P 500 53% of the time, Kostin says. This year, the basket outperformed the broader index by 541 bps.”
Europe Watch:
February 20 – Bloomberg (Alex Morales and Robert Hutton): “Prime Minister David Cameron said he’ll hold a long-pledged referendum on the U.K.’s membership of the European Union on June 23, signaling the start of a four-month campaign that immediately exposed rifts in his Conservative Party. ‘Leaving Europe would threaten our economic and our national security,’ Cameron said… ‘The choice is in your hands, but my recommendation is clear. I believe that Britain will be safer, stronger, and better off in a reformed European Union.”
February 23 – Reuters (Marius Zaharia and Dhara Ranasinghe): “The European Central Bank could run out of government bonds to buy within a year if it does not relax its own restrictions on purchases, dealing a blow to its mission to boost growth in the euro zone and lift inflation. The central bank may have to consider measures such as scrapping its ban on buying bonds yielding less than its deposit rate or even extending the scheme to include corporate debt, particularly if it increases the size of the 60 billion euros ($66bn) a month program… Otherwise it risks running out of the bonds it can buy from some countries, including Germany… The quantitative easing (QE) scheme, launched in March last year, is restricted by several rules aimed at limiting its risks…”
Japan Watch:
February 21 – Reuters (Stanley White): “Growth in Japan's manufacturing activity slowed sharply in February as new export orders contracted at the fastest pace in three years… The Markit/Nikkei Flash Japan Manufacturing Purchasing Managers Index (PMI) fell to 50.2 in February on a seasonally adjusted basis from a final 52.3 in January.”
Geopolitical Watch:
February 23 – Reuters (David Brunnstrom and Arshad Mohammed): “China is ‘changing the operational landscape’ in the South China Sea by deploying missiles and radar as part of an effort to militarily dominate East Asia, a senior U.S. military official said… China is ‘clearly militarizing the South China (Sea),’ said Admiral Harry Harris, head of the U.S. Pacific Command, adding: ‘You'd have to believe in a flat Earth to think otherwise.’ Harris said he believed China's deployment of surface-to-air missiles on Woody Island in the South China Sea's Paracel chain, new radars on Cuarteron Reef in the Spratlys and its building of airstrips were ‘actions that are changing in my opinion the operational landscape in the South China Sea.’”
February 23 – Bloomberg (Anthony Capaccio): “The U.S. should deploy a new anti-ship missile made by Lockheed Martin Corp. as quickly as possible to counter improved Chinese and Russian naval capabilities in Asian waters, the top U.S. Pacific commander said. Lockheed’s air-launched Long Range Anti-Ship Missile is a ‘great capability we need to bring on line fast,’ Admiral Harry Harris told the Senate Armed Services Committee… He spoke hours before Secretary of State John Kerry was to meet at the State Department with China’s Foreign Minister Wang Yi, as each country has accused the other of escalating military tensions in the western Pacific.”
February 23 – Reuters (Idrees Ali): “The head of the U.S. Navy's Pacific Command told a congressional committee… he will carry out more, and more complex, freedom of navigation operations in the South China Sea. ‘We will be doing them more, and we'll be doing them with greater complexity in the future and as the Secretary has said, we'll fly, sail and operate wherever international law allows,’ Admiral Harry Harris told a House Armed Services Committee hearing, referring to U.S. Defense Secretary Ash Carter. ‘We must continue to operate in the South China Sea to demonstrate that that water space and the air above it is international,’ Harris reiterated to lawmakers…”
February 21 – Reuters (Leika Kihara): “Bank of Japan Governor Haruhiko Kuroda… blamed investors' ‘excessive’ risk aversion for persistent market volatility, and defended the central bank's decision to adopt a negative interest rate policy in the face of questions about its effectiveness. The BOJ chief also shrugged off criticism that the radical stimulus policy risked destabilizing Japan's banking system by squeezing returns on lending…”
EM Bubble Watch:
February 26 – Bloomberg (Nacha Cattan and Isabella Cota): “Mexico’s surging debt load is raising red flags for Deutsche Bank AG and Barclays Plc. The broadest measure of debt as a percentage of gross domestic product has swelled to 46% from 38% in President Enrique Pena Nieto’s first three years in office as plunging oil prices eroded government revenue and a weak peso made it more expensive to borrow in dollars… According to the Bank of International Settlements, the debt burden is the highest since 1995, during the so-called Tequila Crisis, when panicked investors sold off their short-term debt and sparked a peso depreciation. The International Monetary Fund estimates that the figure is at least as high as 1996.”
Brazil Watch:
February 23 – Bloomberg (David Biller): “Brazil’s annual inflation surprised analysts by accelerating in the month through mid-February after the central bank refrained from raising borrowing costs and the government proposed loosening its fiscal targets. Annual inflation… quickened to 10.84% -- its highest level since November 2003. Inflation accelerated to 1.42% from 0.92% a month earlier…”
February 24 – Bloomberg (Paula Sambo and Filipe Pacheco): “Brazil’s sovereign rating was cut to junk by Moody’s…, the last of the major ratings companies to strip the country of its investment grade, as President Dilma Rousseff struggles to shore up fiscal accounts amid deepening political turmoil.”
February 24 – Bloomberg (Filipe Pacheco and Chiara Vasarri): “Banco do Brasil SA is getting crushed in the bond market because of its government ties. Contingent-convertible notes issued by the state-controlled bank, which are vulnerable to being written down to zero if capital ratios fall too low, have fallen the most among 133 similar CoCo securities denominated in euros or dollars. The bank’s $1.64 billion of bonds sold in 2012 have tumbled 25% in 2016, seven times the average.”
Leveraged Speculation Watch:
February 25 – Bloomberg (Matthew Philips): “Assets managed by hedge funds globally last month fell to less than $3 trillion for the first time since the industry hit the milestone in May 2014, according to… eVestment. Investors pulled a net $21.5 billion, the most in the opening month of a year since 2009, while losses led to a $43.2 billion drop in assets under management. The industry managed $2.96 trillion at the end of January. Hedge funds that suffered losses last year were hit by redemptions worth $24.8 billion in January. Equity, fixed-income and multistrategy hedge funds suffered net outflows…”
February 23 – Bloomberg (Julie Verhage): “While hedge funds have slightly outperformed the S&P 500 so far in the dire start to 2016, it turns out stocks with the lowest amount of ownership by the industry are performing better than the ones it loves. According to the most recent ‘Hedge Fund Monitor’ from David Kostin, chief U.S. equity strategist for Goldman…, which analyzes 860 hedge funds with $1.6 trillion is gross equity positions, the most popular stocks have continued to lag the market. The stocks with the lowest concentration of hedge fund ownership beat the S&P 500 53% of the time, Kostin says. This year, the basket outperformed the broader index by 541 bps.”
Europe Watch:
February 20 – Bloomberg (Alex Morales and Robert Hutton): “Prime Minister David Cameron said he’ll hold a long-pledged referendum on the U.K.’s membership of the European Union on June 23, signaling the start of a four-month campaign that immediately exposed rifts in his Conservative Party. ‘Leaving Europe would threaten our economic and our national security,’ Cameron said… ‘The choice is in your hands, but my recommendation is clear. I believe that Britain will be safer, stronger, and better off in a reformed European Union.”
February 23 – Reuters (Marius Zaharia and Dhara Ranasinghe): “The European Central Bank could run out of government bonds to buy within a year if it does not relax its own restrictions on purchases, dealing a blow to its mission to boost growth in the euro zone and lift inflation. The central bank may have to consider measures such as scrapping its ban on buying bonds yielding less than its deposit rate or even extending the scheme to include corporate debt, particularly if it increases the size of the 60 billion euros ($66bn) a month program… Otherwise it risks running out of the bonds it can buy from some countries, including Germany… The quantitative easing (QE) scheme, launched in March last year, is restricted by several rules aimed at limiting its risks…”
Japan Watch:
February 21 – Reuters (Stanley White): “Growth in Japan's manufacturing activity slowed sharply in February as new export orders contracted at the fastest pace in three years… The Markit/Nikkei Flash Japan Manufacturing Purchasing Managers Index (PMI) fell to 50.2 in February on a seasonally adjusted basis from a final 52.3 in January.”
Geopolitical Watch:
February 23 – Reuters (David Brunnstrom and Arshad Mohammed): “China is ‘changing the operational landscape’ in the South China Sea by deploying missiles and radar as part of an effort to militarily dominate East Asia, a senior U.S. military official said… China is ‘clearly militarizing the South China (Sea),’ said Admiral Harry Harris, head of the U.S. Pacific Command, adding: ‘You'd have to believe in a flat Earth to think otherwise.’ Harris said he believed China's deployment of surface-to-air missiles on Woody Island in the South China Sea's Paracel chain, new radars on Cuarteron Reef in the Spratlys and its building of airstrips were ‘actions that are changing in my opinion the operational landscape in the South China Sea.’”
February 23 – Bloomberg (Anthony Capaccio): “The U.S. should deploy a new anti-ship missile made by Lockheed Martin Corp. as quickly as possible to counter improved Chinese and Russian naval capabilities in Asian waters, the top U.S. Pacific commander said. Lockheed’s air-launched Long Range Anti-Ship Missile is a ‘great capability we need to bring on line fast,’ Admiral Harry Harris told the Senate Armed Services Committee… He spoke hours before Secretary of State John Kerry was to meet at the State Department with China’s Foreign Minister Wang Yi, as each country has accused the other of escalating military tensions in the western Pacific.”
February 23 – Reuters (Idrees Ali): “The head of the U.S. Navy's Pacific Command told a congressional committee… he will carry out more, and more complex, freedom of navigation operations in the South China Sea. ‘We will be doing them more, and we'll be doing them with greater complexity in the future and as the Secretary has said, we'll fly, sail and operate wherever international law allows,’ Admiral Harry Harris told a House Armed Services Committee hearing, referring to U.S. Defense Secretary Ash Carter. ‘We must continue to operate in the South China Sea to demonstrate that that water space and the air above it is international,’ Harris reiterated to lawmakers…”
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