[Bloomberg] Unexpected Election Outcome Begets Unexpected Winners and Losers
[Bloomberg] France’s Bonds Feel Election Jitters as Trump Spurs Market Split
[LA Times] Trump hammered the Federal Reserve as a candidate. As president, he could quickly reshape it
[Reuters] Trump may already have a plan ready to revamp Dodd-Frank
[Bloomberg] India’s Largest Bank Gets $7 Billion in Deposits as ATMs Run Dry
[NYT] With Trump in Power, the Fed Gets Ready for a Reckoning
[WSJ] Donald Trump Win Has Investors Selling in Emerging Markets
[FT] Emerging market currencies fall most in 5 years
[FT] Henry Kaufman says Trump will help kill 30-year bond rally
[Reuters] South Korea's Park faces resignation calls at huge protest rally
[Reuters] Turkey halts activities of 370 groups as purge widens
Saturday, November 12, 2016
Friday, November 11, 2016
Weekly Commentary: What a Week
The S&P500 jumped 2.3% Monday in what appeared growing confidence that Hillary Clinton was on the verge of becoming the next POTUS (buoyed by Director of the FBI Comey’s statement). It’s worth noting that Monday trading saw both the Financials (XLF) and the Industrials (XLI) jump 2.5%, only to be bettered by the Biotechs’ (BTK) 4.1% surge. EM equities (EEM) rose 3.6% Monday. Election day trading was then relatively quiet, with the S&P500 adding 0.3% Tuesday.
After closing Tuesday’s session at 2,135.50, S&P 500 futures jumped to 2,151 in evening trading on exit polling and early reports from Florida that appeared favorable for Clinton. Futures, however, reversed course as it became increasingly apparent that Donald Trump was performing better than expected, especially in Florida, Pennsylvania, Michigan and Wisconsin. By midnight on the East Coast, S&P futures were “limit down” 5%. DJIA futures had reversed a full thousand points, and Nasdaq futures had fallen almost 6%.
The huge move in U.S. equity futures was outdone by a stunning 14% collapse in the Mexican peso. In a span of a couple hours, the U.S. dollar/Mexican peso moved from 18.205 to a record high 20.78. After trading near 17,400 (futures) in overnight trading, the DJIA closed Wednesday’s session up 257 points (1.4%) to 18,590. Financial, industrial and biotech stocks, in particular, were in melt-up mode. The Banks (BKX) closed Wednesday trading up 4.9% - then added another 3.8% Thursday, before ending the week up 12.7%. The Broker/Dealers (XBD) surged 5.9% and 3.7%, with a gain for the week of 14.8%. Again not to be outdone, the Biotechs (BTK) spiked 9.2% higher Wednesday and 17% on the week. The Industrials (XLI) gained 2.3% both on Wednesday and Thursday, closing out the week 8.1% higher.
After closing Tuesday’s session at 2,135.50, S&P 500 futures jumped to 2,151 in evening trading on exit polling and early reports from Florida that appeared favorable for Clinton. Futures, however, reversed course as it became increasingly apparent that Donald Trump was performing better than expected, especially in Florida, Pennsylvania, Michigan and Wisconsin. By midnight on the East Coast, S&P futures were “limit down” 5%. DJIA futures had reversed a full thousand points, and Nasdaq futures had fallen almost 6%.
The huge move in U.S. equity futures was outdone by a stunning 14% collapse in the Mexican peso. In a span of a couple hours, the U.S. dollar/Mexican peso moved from 18.205 to a record high 20.78. After trading near 17,400 (futures) in overnight trading, the DJIA closed Wednesday’s session up 257 points (1.4%) to 18,590. Financial, industrial and biotech stocks, in particular, were in melt-up mode. The Banks (BKX) closed Wednesday trading up 4.9% - then added another 3.8% Thursday, before ending the week up 12.7%. The Broker/Dealers (XBD) surged 5.9% and 3.7%, with a gain for the week of 14.8%. Again not to be outdone, the Biotechs (BTK) spiked 9.2% higher Wednesday and 17% on the week. The Industrials (XLI) gained 2.3% both on Wednesday and Thursday, closing out the week 8.1% higher.
As exuberance took over, the broader market dramatically outperformed. The small caps (RTY) traded higher all five sessions this week, with Wednesday’s 3.1% rise the strongest in a noteworthy 10.3% weekly advance. The mid-caps (MID) gained 1.9% Wednesday and 5.7% for the week. The DJIA traded to a record high this week, with the S&P500, small caps and mid-caps just shy of all-time highs
There are different perspectives through which to interpret this week’s extraordinary market action. The bullish viewpoint will take a casual look at U.S. stock performance and see overwhelming confirmation that the bull trend remains intact. And with news and analysis, as always, following market direction, rather quickly we’re deluged with material professing a bullish outlook courtesy of a Trump Presidency and Republican House and Senate. Apparently the country is now on the verge of a major infrastructure investment program, positive healthcare reform, corporate tax reform, and a dismantling of Dodd-Frank financial regulation (for starters). In particular, a focus on infrastructure and de-regulation implies a Trump Administration lot likely to place confrontation with the Yellen Federal Reserve (or the securities markets) high on their priority list.
From my perspective, it was anything but a so-called “bullish” week. I saw alarming evidence of dysfunctional markets. There was also further confirmation of a bursting bond Bubble. Indeed, there was strong support for the view of a faltering global securities Bubble – even in the face of surging U.S. stock prices.
Let’s return to election late-night. I doubt traders and the more sophisticated market operators will easily forget what almost transpired. It’s worth noting that while S&P500 futures and the Mexican peso were collapsing, the Japanese yen was in melt-up. In just over two hours, the dollar/yen moved from 105.47 to 101.22 – an almost 4% move. Meanwhile, EM and higher-yielding currencies were under intense selling pressure – the Brazilian real, South African rand, Turkish lira, Colombian peso, Australian dollar and New Zealand dollar (to name a few). At the same time, gold surged from $1,270 to $1,338. Crude sank 4%. Global markets were on the brink of a serious speculative de-leveraging episode.
There had been significant hedging across global markets going into the U.S. election. Especially after Monday, the markets viewed a Trump win a low probability. With markets shaky of late, along with an approaching historic political event, enormous derivative positions had accumulated in various markets. In the event of a surprising outcome, those that had written (sold) market “insurance” would be forced to aggressively (“dynamically”) hedge their losses by selling/shorting into already weak markets – perhaps even with major markets highly illiquid (or already halted limit down).
When a marketplace significantly hedges against a perceived low-probability event – and the unexpected actually occurs – contemporary markets face dislocation. Markets simply can’t hedge themselves. To offload risk, someone has to be on the other side of hedging trades – and these days that someone generally has a sophisticated trading model requiring selling/shorting to build positions capable of generating the necessary cash-flow to offset derivative losses. Significant derivative-related selling risks a ('87 “Black Monday”) portfolio insurance debacle of selling betting selling, begetting illiquidity and panic.
Tuesday’s election outcome was at the cusp of creating a very serious test for global derivatives markets. It was not, however, meant to be, as another one of those well-timed miraculous reversals transformed potential panic selling into manic buyers’ panic. Instead of those on the wrong side of derivative trades forced to sell into illiquid markets, it became a frenzy of bearish hedges and speculations unwinds. Another memorable short squeeze.
There are different perspectives through which to interpret this week’s extraordinary market action. The bullish viewpoint will take a casual look at U.S. stock performance and see overwhelming confirmation that the bull trend remains intact. And with news and analysis, as always, following market direction, rather quickly we’re deluged with material professing a bullish outlook courtesy of a Trump Presidency and Republican House and Senate. Apparently the country is now on the verge of a major infrastructure investment program, positive healthcare reform, corporate tax reform, and a dismantling of Dodd-Frank financial regulation (for starters). In particular, a focus on infrastructure and de-regulation implies a Trump Administration lot likely to place confrontation with the Yellen Federal Reserve (or the securities markets) high on their priority list.
From my perspective, it was anything but a so-called “bullish” week. I saw alarming evidence of dysfunctional markets. There was also further confirmation of a bursting bond Bubble. Indeed, there was strong support for the view of a faltering global securities Bubble – even in the face of surging U.S. stock prices.
Let’s return to election late-night. I doubt traders and the more sophisticated market operators will easily forget what almost transpired. It’s worth noting that while S&P500 futures and the Mexican peso were collapsing, the Japanese yen was in melt-up. In just over two hours, the dollar/yen moved from 105.47 to 101.22 – an almost 4% move. Meanwhile, EM and higher-yielding currencies were under intense selling pressure – the Brazilian real, South African rand, Turkish lira, Colombian peso, Australian dollar and New Zealand dollar (to name a few). At the same time, gold surged from $1,270 to $1,338. Crude sank 4%. Global markets were on the brink of a serious speculative de-leveraging episode.
There had been significant hedging across global markets going into the U.S. election. Especially after Monday, the markets viewed a Trump win a low probability. With markets shaky of late, along with an approaching historic political event, enormous derivative positions had accumulated in various markets. In the event of a surprising outcome, those that had written (sold) market “insurance” would be forced to aggressively (“dynamically”) hedge their losses by selling/shorting into already weak markets – perhaps even with major markets highly illiquid (or already halted limit down).
When a marketplace significantly hedges against a perceived low-probability event – and the unexpected actually occurs – contemporary markets face dislocation. Markets simply can’t hedge themselves. To offload risk, someone has to be on the other side of hedging trades – and these days that someone generally has a sophisticated trading model requiring selling/shorting to build positions capable of generating the necessary cash-flow to offset derivative losses. Significant derivative-related selling risks a ('87 “Black Monday”) portfolio insurance debacle of selling betting selling, begetting illiquidity and panic.
Tuesday’s election outcome was at the cusp of creating a very serious test for global derivatives markets. It was not, however, meant to be, as another one of those well-timed miraculous reversals transformed potential panic selling into manic buyers’ panic. Instead of those on the wrong side of derivative trades forced to sell into illiquid markets, it became a frenzy of bearish hedges and speculations unwinds. Another memorable short squeeze.
It’s no coincidence that this week’s melt-up was most acute in sectors that were 2016 underperformers - and generally under-owned (financials, biotechs and industrials). Moreover, many of this week’s top performing stocks were heavily shorted. To be sure, there is no quicker way to trading profits than to jump on a bearish theme that suddenly has a plausible bullish story. It’s spectacular Buyers’ Panic as the desperate shorts, the opportunistic “wise guys” and the trend-following/performance-chasing Crowd brawl over a limited supply of available securities. A destabilizing (downside) systemic liquidity event was avoided Wednesday, which ensured sporadic upside dislocations in various stocks, sector ETFs and “king dollar” more generally.
November 9 – Bloomberg (Lu Wang): “You need to go all the way back to the dark days of 2008 to find a stock market reversal to rival that of the last 12 hours, in which S&P 500 Index futures erased a 5% loss triggered by Donald Trump’s surprise presidential election win. Bigger turnarounds only happened three times before, twice in the final months of 2008 and the other in October 1987…”
It’s no coincidence that Wednesday’s wild reversal ranks right up there with three previous major volatility events – two in late 2008 and the other in October 1987. Fragile fundamental underpinnings foster unstable market dynamics – i.e. significant shorting, hedging and speculation. And there’s no more breathtaking market advance than a major bear market rally.
It’s also worth noting that the favored technology stocks underperformed this week. The Morgan Stanley High Tech Index actually declined 1.5% post-election (up 1.6% for the week). The Nasdaq 100 (NDX) fell 1.1% post-election (up 2.0% for the week). The favorite – and previously outperforming – Utilities dropped 4.2% this week.
It’s such an extraordinary backdrop. I believe the pierced global Bubble continues to flounder, but the policy responses of $2.0 TN annual global QE, near zero rates and record Chinese Credit growth have created major Bubble Anomalies. Surely, all the QE-related global liquidity excess has created aberrant market behavior (on full display this week).
On the one hand, central bank liquidity backstops have thus far allayed fears of “Risk Off” de-leveraging quickly evolving into a systemic liquidity event. On the other, the massive pool of global speculative finance (including hedge funds, ETFs, SWF and trend-followers more generally) foments a liquidity backdrop with extraordinary flow volatility between various sectors and markets. Underlying market instability has made it difficult for fund managers perform (absolute and relative to indices). In particular, this backdrop has ensured that hedges don’t perform well at all. Intense performance pressure then makes it imperative both to rotate quickly into the outperformers and to avoid missing general market rallies.
While resilient U.S. stock prices captured bullish imaginations, this week saw global bond markets get rocked. If not for QE, I believe surging yields and attendant de-leveraging would have spelled major problems for securities markets more generally. Instead, too much speculative “money” chases the outperforming stocks, sectors, asset classes and countries. Importantly, this week’s exuberance at the U.S. “Core” came at the expense of a vulnerable “Periphery.”
Mexico was close to meltdown. The Mexican peso sank 8.7% this week to a record low. Mexican 10-year dollar bond yields surged 74 bps to 3.98%, with peso bond yields surging 95 bps to a multi-year high 7.25%. Mexican stocks dropped 3.7%. The Mexico ETF (EWW) sank 17.9% post-election, with a 12.2% loss for the week. Gold dropped 5.9% this week, while Copper surged 10.8%. Despite all the focus on inflation, crude declined 1.5% to a multi-week low.
EM came under intense selling pressure starting Wednesday. The EEM ETF sank 7.8% post-election (down 3.8% for the week). In the currencies this week, the South African rand fell 5.3%, the Brazilian real 4.9%, the Polish zloty 4.6%, the Hungarian forint 3.6%, the Russian ruble 3.3%, the Romanian leu 3.0% and the Turkish lira 2.8%. China's currency declined 0.8% vs. the dollar, the biggest weekly decline since January.
In EM equities, Brazil’s Bovespa index dropped 3.9%, the Argentine Merval 3.5%, India’s Sensex 2.5%, Indonesia’s Jakarta Composite 5.2%, South Korea’s Kospi 0.9%, Taiwan’s TAIEX Index 2.1% and Thailand’s Thai 50 1.4%.
Yet the bursting Bubble thesis saw the clearest confirmation in surging global bond yields. EM bonds were just clobbered. Brazil real bond yields jumped 67 bps to 12.02%, with yields up 30 bps in Colombia (7.55%) and 47 bps in Argentina (16.07%). Eastern Europe bonds were also under pressure. This week saw yields surge 27 bps in Poland (3.32%), 32 bps in Hungary (3.38%) and 28 bps in Romania (3.33%). Russian ruble yields surged 43 bps to a five-month high 8.88%. Turkey’s 10-year bond yields jumped 31 bps to a 10-month high 10.10%. South African yields surged a notable 50 bps to a five-month high 9.15%. Yields surged 58 bps in Indonesia to a four-month high 4.12%. Malaysian yields jumped 25 bps to 3.88%. EM ETFs saw outflows of $1.8 billion over the past week, reducing y-t-d flows to $26.3bn (from Bloomberg). It was a rout.
“Developed” bonds didn’t fare much better. Australian ten-year yields surged 22 bps to 2.56%, the high since April. New Zealand yields jumped 26 bps (3.03%) and South Korea’s rose 22 bps (1.94%). Canadian 10-year yields rose 20 bps to a six-month high 1.43%.
European bonds were under heavy selling pressure. German 10-year yields rose “only” 18 bps, as spreads widened significantly throughout the Eurozone. French yields surged 28 bps, Netherlands 21 bps, Spain 21 bps and Portugal 19 bps. Ominously, Italian yields jumped 27 bps, back above 2% for the first time since July 2015. The Italian to German 10-year bond spread widened to a two-year high 171 bps.
Perhaps ominous as well, 10-year Treasury yields surged 37 bps this week to 2.15%, the high since January. Long-bond yields rose 38 bps to an almost 2016 high 2.94%. It was a case of so-called “risk-free” securities showing their true colors. The TLT (Treasury ETF) dropped 7.4% this week, wiping out most of its 2016 return. The popular AGG (IShares Core U.S. Aggregate Bond ETF) and BND (Vanguard Total Bond Market ETF) dropped 1.8% and 1.9%. Corporate high-yield (HYG) and investment-grade (LQD) EFTs this week declined 1.8% and 2.3%, respectively.
Headlines from the FT: “What is the Trump Reflation Trade?” and “’Trumpflation’ Risk Rattles Bond Markets.” From Bloomberg: “Goldman Warns Bond-Market Carnage Threatens Global Reflation.” “Bonds Plunge by $1 Trillion This Week as Trump Seen Game Changer.” And from the Wall Street Journal: “The All-Powerful Bond Market Is Getting Rocked by Trump.”
I guess we’re now in the political “honeymoon” period, one I fear will be short-lived. It would be more gratifying to be optimistic. But watching the global bond Bubble begin to unravel leaves me apprehensive. I fear this week’s wild market instability could portend some type of financial accident. There were some large losses suffered throughout the markets this week.
Inflationary biases were already percolating before the election. It’s worth noting that M2 “money” supply expanded $941bn, or 7.7%, over the past year. The Fed – and global central bankers – have brought new meaning to “behind the curve.” And as speculative markets trade inflation’s revival, the job of the Fed (and global central bankers) becomes a whole lot more challenging. Do they raise rates to help dampen fledgling inflation psychology and support faltering bond markets? Or, instead, will the prospect of a real central bank tightening cycle further weigh on bond market confidence? Hard to imagine halcyon markets in a world devoid of QE and near-zero rates.
Actually, bond trading is bringing back unpleasant memories of early 1994. Yet 2009-2016 Bubble excess makes 1991-1993 looks pretty inconsequential. And this time it’s global. Systemic. Look closely this week and one can see some weak links: Mexico, Brazil, South Africa, Indonesia, Poland, Hungary, Argentina, EM generally, Ireland and Italy. Italian bond yields are all the way back to 2%. It’s worth recalling that they traded at 7% in early-2012.
For the Week:
The S&P500 jumped 3.8% (up 5.9% y-t-d), and the Dow surged 5.4% (up 8.2%). The Utilities dropped 4.2% (up 6.8%). The Banks advanced 12.7% (up 13.1%), and the Broker/Dealers jumped 14.8% (up 7.7%). The Transports rose 6.2% (up 14.2%). The broader market was exceptionally strong. The S&P 400 Midcaps gained 5.7% (up 11.8%), and the small cap Russell 2000 surged 10.2% (up 12.9%). The Nasdaq100 added 1.8% (up 3.5%), and the Morgan Stanley High Tech index increased 1.6% (up 10.1%). The Semiconductors rallied 4.3% (up 26.2%). The Biotechs spiked 17.1% higher (down 11.4%). With bullion sinking $77, the HUI gold index fell 17.1% (up 62.1%).
November 9 – Bloomberg (Lu Wang): “You need to go all the way back to the dark days of 2008 to find a stock market reversal to rival that of the last 12 hours, in which S&P 500 Index futures erased a 5% loss triggered by Donald Trump’s surprise presidential election win. Bigger turnarounds only happened three times before, twice in the final months of 2008 and the other in October 1987…”
It’s no coincidence that Wednesday’s wild reversal ranks right up there with three previous major volatility events – two in late 2008 and the other in October 1987. Fragile fundamental underpinnings foster unstable market dynamics – i.e. significant shorting, hedging and speculation. And there’s no more breathtaking market advance than a major bear market rally.
It’s also worth noting that the favored technology stocks underperformed this week. The Morgan Stanley High Tech Index actually declined 1.5% post-election (up 1.6% for the week). The Nasdaq 100 (NDX) fell 1.1% post-election (up 2.0% for the week). The favorite – and previously outperforming – Utilities dropped 4.2% this week.
It’s such an extraordinary backdrop. I believe the pierced global Bubble continues to flounder, but the policy responses of $2.0 TN annual global QE, near zero rates and record Chinese Credit growth have created major Bubble Anomalies. Surely, all the QE-related global liquidity excess has created aberrant market behavior (on full display this week).
On the one hand, central bank liquidity backstops have thus far allayed fears of “Risk Off” de-leveraging quickly evolving into a systemic liquidity event. On the other, the massive pool of global speculative finance (including hedge funds, ETFs, SWF and trend-followers more generally) foments a liquidity backdrop with extraordinary flow volatility between various sectors and markets. Underlying market instability has made it difficult for fund managers perform (absolute and relative to indices). In particular, this backdrop has ensured that hedges don’t perform well at all. Intense performance pressure then makes it imperative both to rotate quickly into the outperformers and to avoid missing general market rallies.
While resilient U.S. stock prices captured bullish imaginations, this week saw global bond markets get rocked. If not for QE, I believe surging yields and attendant de-leveraging would have spelled major problems for securities markets more generally. Instead, too much speculative “money” chases the outperforming stocks, sectors, asset classes and countries. Importantly, this week’s exuberance at the U.S. “Core” came at the expense of a vulnerable “Periphery.”
Mexico was close to meltdown. The Mexican peso sank 8.7% this week to a record low. Mexican 10-year dollar bond yields surged 74 bps to 3.98%, with peso bond yields surging 95 bps to a multi-year high 7.25%. Mexican stocks dropped 3.7%. The Mexico ETF (EWW) sank 17.9% post-election, with a 12.2% loss for the week. Gold dropped 5.9% this week, while Copper surged 10.8%. Despite all the focus on inflation, crude declined 1.5% to a multi-week low.
EM came under intense selling pressure starting Wednesday. The EEM ETF sank 7.8% post-election (down 3.8% for the week). In the currencies this week, the South African rand fell 5.3%, the Brazilian real 4.9%, the Polish zloty 4.6%, the Hungarian forint 3.6%, the Russian ruble 3.3%, the Romanian leu 3.0% and the Turkish lira 2.8%. China's currency declined 0.8% vs. the dollar, the biggest weekly decline since January.
In EM equities, Brazil’s Bovespa index dropped 3.9%, the Argentine Merval 3.5%, India’s Sensex 2.5%, Indonesia’s Jakarta Composite 5.2%, South Korea’s Kospi 0.9%, Taiwan’s TAIEX Index 2.1% and Thailand’s Thai 50 1.4%.
Yet the bursting Bubble thesis saw the clearest confirmation in surging global bond yields. EM bonds were just clobbered. Brazil real bond yields jumped 67 bps to 12.02%, with yields up 30 bps in Colombia (7.55%) and 47 bps in Argentina (16.07%). Eastern Europe bonds were also under pressure. This week saw yields surge 27 bps in Poland (3.32%), 32 bps in Hungary (3.38%) and 28 bps in Romania (3.33%). Russian ruble yields surged 43 bps to a five-month high 8.88%. Turkey’s 10-year bond yields jumped 31 bps to a 10-month high 10.10%. South African yields surged a notable 50 bps to a five-month high 9.15%. Yields surged 58 bps in Indonesia to a four-month high 4.12%. Malaysian yields jumped 25 bps to 3.88%. EM ETFs saw outflows of $1.8 billion over the past week, reducing y-t-d flows to $26.3bn (from Bloomberg). It was a rout.
“Developed” bonds didn’t fare much better. Australian ten-year yields surged 22 bps to 2.56%, the high since April. New Zealand yields jumped 26 bps (3.03%) and South Korea’s rose 22 bps (1.94%). Canadian 10-year yields rose 20 bps to a six-month high 1.43%.
European bonds were under heavy selling pressure. German 10-year yields rose “only” 18 bps, as spreads widened significantly throughout the Eurozone. French yields surged 28 bps, Netherlands 21 bps, Spain 21 bps and Portugal 19 bps. Ominously, Italian yields jumped 27 bps, back above 2% for the first time since July 2015. The Italian to German 10-year bond spread widened to a two-year high 171 bps.
Perhaps ominous as well, 10-year Treasury yields surged 37 bps this week to 2.15%, the high since January. Long-bond yields rose 38 bps to an almost 2016 high 2.94%. It was a case of so-called “risk-free” securities showing their true colors. The TLT (Treasury ETF) dropped 7.4% this week, wiping out most of its 2016 return. The popular AGG (IShares Core U.S. Aggregate Bond ETF) and BND (Vanguard Total Bond Market ETF) dropped 1.8% and 1.9%. Corporate high-yield (HYG) and investment-grade (LQD) EFTs this week declined 1.8% and 2.3%, respectively.
Headlines from the FT: “What is the Trump Reflation Trade?” and “’Trumpflation’ Risk Rattles Bond Markets.” From Bloomberg: “Goldman Warns Bond-Market Carnage Threatens Global Reflation.” “Bonds Plunge by $1 Trillion This Week as Trump Seen Game Changer.” And from the Wall Street Journal: “The All-Powerful Bond Market Is Getting Rocked by Trump.”
I guess we’re now in the political “honeymoon” period, one I fear will be short-lived. It would be more gratifying to be optimistic. But watching the global bond Bubble begin to unravel leaves me apprehensive. I fear this week’s wild market instability could portend some type of financial accident. There were some large losses suffered throughout the markets this week.
Inflationary biases were already percolating before the election. It’s worth noting that M2 “money” supply expanded $941bn, or 7.7%, over the past year. The Fed – and global central bankers – have brought new meaning to “behind the curve.” And as speculative markets trade inflation’s revival, the job of the Fed (and global central bankers) becomes a whole lot more challenging. Do they raise rates to help dampen fledgling inflation psychology and support faltering bond markets? Or, instead, will the prospect of a real central bank tightening cycle further weigh on bond market confidence? Hard to imagine halcyon markets in a world devoid of QE and near-zero rates.
Actually, bond trading is bringing back unpleasant memories of early 1994. Yet 2009-2016 Bubble excess makes 1991-1993 looks pretty inconsequential. And this time it’s global. Systemic. Look closely this week and one can see some weak links: Mexico, Brazil, South Africa, Indonesia, Poland, Hungary, Argentina, EM generally, Ireland and Italy. Italian bond yields are all the way back to 2%. It’s worth recalling that they traded at 7% in early-2012.
For the Week:
The S&P500 jumped 3.8% (up 5.9% y-t-d), and the Dow surged 5.4% (up 8.2%). The Utilities dropped 4.2% (up 6.8%). The Banks advanced 12.7% (up 13.1%), and the Broker/Dealers jumped 14.8% (up 7.7%). The Transports rose 6.2% (up 14.2%). The broader market was exceptionally strong. The S&P 400 Midcaps gained 5.7% (up 11.8%), and the small cap Russell 2000 surged 10.2% (up 12.9%). The Nasdaq100 added 1.8% (up 3.5%), and the Morgan Stanley High Tech index increased 1.6% (up 10.1%). The Semiconductors rallied 4.3% (up 26.2%). The Biotechs spiked 17.1% higher (down 11.4%). With bullion sinking $77, the HUI gold index fell 17.1% (up 62.1%).
Three-month Treasury bill rates ended the week at 47 bps. Two-year government yields rose 14 bps to 0.92% (down 13bps y-t-d). Five-year T-note yields surged 33 bps to 1.56% (down 19bps). Ten-year Treasury yields jumped 37 bps to 2.15% (down 10bps). Long bond yields surged 38 bps to 2.94% (down 8bps).
Greek 10-year yields dropped 59 bps to 7.03% (down 29bps y-t-d). Ten-year Portuguese yields rose 19 bps to 3.45% (up 93bps). Italian 10-year yields surged 27 bps to 2.02% (up 43bps). Spain's 10-year yields gained 21 bps to 1.47% (down 30bps). German bund yields rose 18 bps to 0.31% (down 31bps). French yields surged 28 to 0.74% (down 25bps). The French to German 10-year bond spread widened 10 to 43 bps. U.K. 10-year gilt yields jumped 23 bps to 1.36% (down 60bps). U.K.'s FTSE equities index added 0.6% (up 7.8%).
Japan's Nikkei 225 equities index rallied 2.8% (down 8.7% y-t-d). Japanese 10-year "JGB" yields rose three bps to negative 0.04% (down 30bps y-t-d). The German DAX equities index rose 4.0% (down 0.7%). Spain's IBEX 35 equities index declined 1.7% (down 9.5%). Italy's FTSE MIB index recovered 3.0% (down 21.5%). EM equities were mixed. Brazil's Bovespa index fell 3.9% (up 37%). Mexico's Bolsa dropped 3.7% (up 4.7%). South Korea's Kospi slipped 0.1% (up 1.2%). India’s Sensex equities fell 1.7% (up 2.7%). China’s Shanghai Exchange gained 2.3% (down 9.7%). Turkey's Borsa Istanbul National 100 index rallied 1.2% (up 4.8%). Russia's MICEX equities index jumped 3.5% (up 15.4%).
Junk bond mutual funds saw outflows of $669 million (from Lipper).
Freddie Mac 30-year fixed mortgage rates increased three bps last week to a five-month high 3.57% (down 41bps y-o-y). Fifteen-year rates rose five bps to 2.89% (down 31bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down a basis point to 3.73% (down 26bps).
Federal Reserve Credit last week expanded $2.0bn to $4.415 TN. Over the past year, Fed Credit contracted $38.5bn (0.9%). Fed Credit inflated $1.604 TN, or 57%, over the past 209 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt fell $9.0bn last week to another six-year low $3.111 TN. "Custody holdings" were down $192bn y-o-y, or 5.8%.
M2 (narrow) "money" supply last week rose $26.4bn to a record $13.183 TN. "Narrow money" expanded $941bn, or 7.7%, over the past year. For the week, Currency increased $2.8bn. Total Checkable Deposits declined $17.3bn, while Savings Deposits jumped $36bn. Small Time Deposits were little changed. Retail Money Funds expanded $5.4bn.
Total money market fund assets gained $5.9bn to a 10-week high $2.683 TN. Money Funds declined $31.1bn y-o-y (1.1%).
Total Commercial Paper was little changed at $908bn. CP declined $141bn y-o-y, or 13.4%.
Currency Watch:
The U.S. dollar index jumped 2.2% to 99.06 (up 0.4% y-t-d). For the week on the upside, the British pound increased 0.6%. For the week on the downside, the Mexican peso declined 8.7%, the South African rand 5.3%, the Brazilian real 4.9%, the Japanese yen 3.3%, the Norwegian krone 2.8%, the New Zealand dollar 2.7%, the Danish krone 2.6%, the euro 2.6%, the Singapore dollar 2.1%, the Swiss franc 2.0%, the South Korean won 1.7%, the Australian dollar 1.7%, the Swedish krona 1.6% and the Canadian dollar 1.0%. The Chinese yuan declined 0.8% versus the dollar (down 4.7% y-t-d).
Commodities Watch:
The Goldman Sachs Commodities Index added 0.6% (up 12.7% y-t-d). Spot Gold sank 5.9% to $1,228 (up 16%). Silver fell 5.8% to $17.37 (up 26%). Crude declined another 66 cents to $43.41 (up 17%). Gasoline dropped 5.3% (up 3%), and Natural Gas fell 5.1% (up 12%). Copper surged 10.8% (up 18%). Wheat declined 2.7% (down 14%). Corn fell 2.4% (down 5.2%).
China Bubble Watch:
November 11 – Reuters (Kevin Yao): “Chinese banks extended 651.3 billion yuan ($95.56 billion) in new yuan loans in October, below analysts' expectations and down sharply from 1.22 trillion yuan in September. Broad M2 money supply (M2) grew 11.6% from a year earlier, the central bank said on Friday, slightly above forecasts. Outstanding yuan loans grew by 13.1% by month-end on an annual basis.”
November 7 – Wall Street Journal (Saumya Vaishampayan and Lingling Wei): “The specter of capital flight is back in China. More money is leaving the world’s No. 2 economy again, threatening Beijing’s strategy of letting its currency weaken in a controlled fashion. In the latest evidence of a surge in outflows, China’s foreign reserves plunged $45.7 billion in October from the previous month to $3.12 trillion… That is the largest drop since January, suggesting that outflows could be edging back up to the record-breaking levels of late last year and early this year. As much as $78 billion may have left China in September, according to Goldman Sachs…, the largest amount since the $100 billion-plus the firm estimates left the country in December and again in January.”
November 10 – Reuters (Elias Glenn): “Regulators in China have told banks new home mortgage loans in November must be below those issued in October, Shanghai Securities Journal reported…, as Beijing looks to curb rising leverage in the housing sector. Mortgages accounted for 35% of loans in the first half of 2016, but analysts estimate that jumped to 71% in July and August as frantic buying kick in thanks to rapidly rising prices. China's banking regulator previously asked lenders to step up risk management of property loans amid record gains in house prices that have raised concerns of price bubbles and ballooning debts. China's new home prices rose in September at the fastest rate on record… Outstanding mortgage loans to individuals rose 33.4% to 17.93 trillion yuan ($2.65 trillion) from a year ago by the end of September…”
November 6 – Bloomberg: “The push by China’s policy makers to rein in property bubbles looks to be getting traction, according to early indicators from the nation’s biggest cities. Beijing home sales volume plunged 41% year-on-year last month while Shanghai’s slumped 18%, …after new purchase restrictions and tightened mortgage lending. Transactions fell 50% in smaller cities. Now policy makers must balance deflating property prices with safeguarding the expansion.”
November 7 – Bloomberg: “China’s policy makers are playing catch-up as investors get more creative in evading capital controls. The authorities are taking a series of steps to plug loopholes, such as a potential plan to curb transactions that use the bitcoin digital currency to take funds out of the country, as well as a statement from UnionPay Co. limiting mainlanders from using its cards to buy insurance in Hong Kong. These add to more traditional measures, including an order seen as asking mainland banks to reduce foreign-exchange sales… ‘The People’s Bank of China is doing this now because data show capital outflow pressures remain significant and there are no signs of a reversal,’ said Ken Cheung, a currency strategist at Mizuho Bank… ‘It looks like the government will block outflow channels as and when they find them. This will slow the yuan’s internationalization and discourage foreign investment due to concern money will get locked up once invested.’”
November 7 – Financial Times (Gabriel Wildau): “China’s securitisation market has blossomed this year as authorities embrace financial innovation, with bankers packaging an eclectic mix of assets from dance ticket revenues to bridge tolls. Beijing approved the country’s first securitisation deals in 2005, but the programme was halted in 2008 after regulators observed the damage wreaked by risky mortgage securities in the US. The programme was revived in 2012, starting primarily with vanilla assets such as corporate loans, home mortgages and auto loans. This year, activity has shifted to corporate receivables, and issuance has soared. Banks and non-financial companies together completed 384 securitisation deals in the first nine months of 2016, up from 327 deals for all of 2015… Non-bank deals have accounted for 284 of this year’s total. In value terms, deals totalled Rmb584bn ($86bn) through the end of September, close to 2015’s full-year… ‘Almost every conceivable asset from anyone can be securitised. This makes the market far more diverse than in the US and Europe,’ says Pang Yang, chief executive of China Securitization Analytics… ‘For many companies, this is the only way they can raise capital at the moment.’”
November 8 – Bloomberg: “China’s $3.2 trillion corporate bond market is already starting to reel from rising interbank borrowing costs, and the traditional year-end funding crunch hasn’t even started yet. The yield premium for five-year AA rated notes over the sovereign climbed 10 bps in October as money market rates surged to an 18-month high. Worse may be yet to come as lenders tend to hoard cash for year-end regulatory checks, prompting the overnight repurchase rate fixing to rise in December in four of the past five years, including a 33 bps jump in the last month of 2015… Any disruption in the market could make it harder for companies to refinance as 4.1 trillion yuan ($605bn) of bonds coming due next year.”
November 7 – Bloomberg: “China’s passenger-vehicle sales climbed for an eighth consecutive month as consumers rushed to buy small-engine autos ahead of a tax cut due to expire at year-end, boosting deliveries at local carmakers… Retail sales of cars, sport utility and multipurpose vehicles increased 20% to 2.22 million units last month…”
November 8 – Bloomberg: “China’s exports fell for a seventh month, leaving policy makers reliant on domestic growth engines to hit their economic expansion goals. Overseas shipments dropped 7.3% from a year earlier in October in dollar terms. Imports slipped 1.4%. Trade surplus widened to $49.1 billion. A depreciation of about 9% in the yuan since August 2015 has cushioned the blow from tepid global demand, but failed to give shipments a sustained boost. Rising input costs and surging wages have flattened exporter profit margins…”
November 7 – New York Times (Paul Mozur): “In August, business groups around the world petitioned China to rethink a proposed cybersecurity law that they said would hurt foreign companies and further separate the country from the internet. On Monday, China passed that law — a sign that when it comes to the internet, China will go its own way. The new rules… are part of a broader effort to better define how the internet is managed inside China’s borders. Officials say the rules will help stop cyberattacks and help prevent acts of terrorism, while critics say they will further erode internet freedom. Business groups worry that parts of the law — such as required security checks on companies in industries like finance and communications, and mandatory in-country data storage — will make foreign operations more expensive or lock them out altogether.”
November 7 – Reuters (Venus Wu): “More than 1,000 Hong Kong lawyers dressed in black marched through the heart of the city in silence on Tuesday to condemn a move by China that effectively bars two elected pro-independence lawmakers from taking their seats in the legislature. The former British colony returned to China in 1997 under a ‘one country, two systems’ agreement that ensured its freedoms, including a separate legal system. But Beijing has ultimate control and some Hong Kong people are concerned it is increasingly interfering to head off dissent.”
Europe Watch:
November 9 – Bloomberg (Anooja Debnath): “The anti-establishment whirlwind is headed for Italy now that it has sent Donald Trump to the White House. Italian government bonds slid in the wake of Trump’s stunning victory, reflecting worries that Prime Minister Matteo Renzi will lose a referendum on political reform, scheduled for Dec. 4. ‘If protest votes are ‘a thing,’ then the next opportunity for the electorate to express how fed up they are with conventional politics’ is for the Italians, Kit Juckes, …strategist at Societe Generale SA, wrote…”
November 7 – Reuters (Francesco Canepa): “The most prominent hawk on the European Central Bank's board defended the bank’s ultra-loose monetary policy on Monday, but added that she was skeptical of further interest rate cuts or other forms of easing. Sabine Lautenschlaeger's comments were likely to be read as an indication she might oppose extending the ECB's monthly bond-buying program much beyond its March deadline - a decision the ECB will make at its meeting in a month's time.”
Greek 10-year yields dropped 59 bps to 7.03% (down 29bps y-t-d). Ten-year Portuguese yields rose 19 bps to 3.45% (up 93bps). Italian 10-year yields surged 27 bps to 2.02% (up 43bps). Spain's 10-year yields gained 21 bps to 1.47% (down 30bps). German bund yields rose 18 bps to 0.31% (down 31bps). French yields surged 28 to 0.74% (down 25bps). The French to German 10-year bond spread widened 10 to 43 bps. U.K. 10-year gilt yields jumped 23 bps to 1.36% (down 60bps). U.K.'s FTSE equities index added 0.6% (up 7.8%).
Japan's Nikkei 225 equities index rallied 2.8% (down 8.7% y-t-d). Japanese 10-year "JGB" yields rose three bps to negative 0.04% (down 30bps y-t-d). The German DAX equities index rose 4.0% (down 0.7%). Spain's IBEX 35 equities index declined 1.7% (down 9.5%). Italy's FTSE MIB index recovered 3.0% (down 21.5%). EM equities were mixed. Brazil's Bovespa index fell 3.9% (up 37%). Mexico's Bolsa dropped 3.7% (up 4.7%). South Korea's Kospi slipped 0.1% (up 1.2%). India’s Sensex equities fell 1.7% (up 2.7%). China’s Shanghai Exchange gained 2.3% (down 9.7%). Turkey's Borsa Istanbul National 100 index rallied 1.2% (up 4.8%). Russia's MICEX equities index jumped 3.5% (up 15.4%).
Junk bond mutual funds saw outflows of $669 million (from Lipper).
Freddie Mac 30-year fixed mortgage rates increased three bps last week to a five-month high 3.57% (down 41bps y-o-y). Fifteen-year rates rose five bps to 2.89% (down 31bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down a basis point to 3.73% (down 26bps).
Federal Reserve Credit last week expanded $2.0bn to $4.415 TN. Over the past year, Fed Credit contracted $38.5bn (0.9%). Fed Credit inflated $1.604 TN, or 57%, over the past 209 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt fell $9.0bn last week to another six-year low $3.111 TN. "Custody holdings" were down $192bn y-o-y, or 5.8%.
M2 (narrow) "money" supply last week rose $26.4bn to a record $13.183 TN. "Narrow money" expanded $941bn, or 7.7%, over the past year. For the week, Currency increased $2.8bn. Total Checkable Deposits declined $17.3bn, while Savings Deposits jumped $36bn. Small Time Deposits were little changed. Retail Money Funds expanded $5.4bn.
Total money market fund assets gained $5.9bn to a 10-week high $2.683 TN. Money Funds declined $31.1bn y-o-y (1.1%).
Total Commercial Paper was little changed at $908bn. CP declined $141bn y-o-y, or 13.4%.
Currency Watch:
The U.S. dollar index jumped 2.2% to 99.06 (up 0.4% y-t-d). For the week on the upside, the British pound increased 0.6%. For the week on the downside, the Mexican peso declined 8.7%, the South African rand 5.3%, the Brazilian real 4.9%, the Japanese yen 3.3%, the Norwegian krone 2.8%, the New Zealand dollar 2.7%, the Danish krone 2.6%, the euro 2.6%, the Singapore dollar 2.1%, the Swiss franc 2.0%, the South Korean won 1.7%, the Australian dollar 1.7%, the Swedish krona 1.6% and the Canadian dollar 1.0%. The Chinese yuan declined 0.8% versus the dollar (down 4.7% y-t-d).
Commodities Watch:
The Goldman Sachs Commodities Index added 0.6% (up 12.7% y-t-d). Spot Gold sank 5.9% to $1,228 (up 16%). Silver fell 5.8% to $17.37 (up 26%). Crude declined another 66 cents to $43.41 (up 17%). Gasoline dropped 5.3% (up 3%), and Natural Gas fell 5.1% (up 12%). Copper surged 10.8% (up 18%). Wheat declined 2.7% (down 14%). Corn fell 2.4% (down 5.2%).
China Bubble Watch:
November 11 – Reuters (Kevin Yao): “Chinese banks extended 651.3 billion yuan ($95.56 billion) in new yuan loans in October, below analysts' expectations and down sharply from 1.22 trillion yuan in September. Broad M2 money supply (M2) grew 11.6% from a year earlier, the central bank said on Friday, slightly above forecasts. Outstanding yuan loans grew by 13.1% by month-end on an annual basis.”
November 7 – Wall Street Journal (Saumya Vaishampayan and Lingling Wei): “The specter of capital flight is back in China. More money is leaving the world’s No. 2 economy again, threatening Beijing’s strategy of letting its currency weaken in a controlled fashion. In the latest evidence of a surge in outflows, China’s foreign reserves plunged $45.7 billion in October from the previous month to $3.12 trillion… That is the largest drop since January, suggesting that outflows could be edging back up to the record-breaking levels of late last year and early this year. As much as $78 billion may have left China in September, according to Goldman Sachs…, the largest amount since the $100 billion-plus the firm estimates left the country in December and again in January.”
November 10 – Reuters (Elias Glenn): “Regulators in China have told banks new home mortgage loans in November must be below those issued in October, Shanghai Securities Journal reported…, as Beijing looks to curb rising leverage in the housing sector. Mortgages accounted for 35% of loans in the first half of 2016, but analysts estimate that jumped to 71% in July and August as frantic buying kick in thanks to rapidly rising prices. China's banking regulator previously asked lenders to step up risk management of property loans amid record gains in house prices that have raised concerns of price bubbles and ballooning debts. China's new home prices rose in September at the fastest rate on record… Outstanding mortgage loans to individuals rose 33.4% to 17.93 trillion yuan ($2.65 trillion) from a year ago by the end of September…”
November 6 – Bloomberg: “The push by China’s policy makers to rein in property bubbles looks to be getting traction, according to early indicators from the nation’s biggest cities. Beijing home sales volume plunged 41% year-on-year last month while Shanghai’s slumped 18%, …after new purchase restrictions and tightened mortgage lending. Transactions fell 50% in smaller cities. Now policy makers must balance deflating property prices with safeguarding the expansion.”
November 7 – Bloomberg: “China’s policy makers are playing catch-up as investors get more creative in evading capital controls. The authorities are taking a series of steps to plug loopholes, such as a potential plan to curb transactions that use the bitcoin digital currency to take funds out of the country, as well as a statement from UnionPay Co. limiting mainlanders from using its cards to buy insurance in Hong Kong. These add to more traditional measures, including an order seen as asking mainland banks to reduce foreign-exchange sales… ‘The People’s Bank of China is doing this now because data show capital outflow pressures remain significant and there are no signs of a reversal,’ said Ken Cheung, a currency strategist at Mizuho Bank… ‘It looks like the government will block outflow channels as and when they find them. This will slow the yuan’s internationalization and discourage foreign investment due to concern money will get locked up once invested.’”
November 7 – Financial Times (Gabriel Wildau): “China’s securitisation market has blossomed this year as authorities embrace financial innovation, with bankers packaging an eclectic mix of assets from dance ticket revenues to bridge tolls. Beijing approved the country’s first securitisation deals in 2005, but the programme was halted in 2008 after regulators observed the damage wreaked by risky mortgage securities in the US. The programme was revived in 2012, starting primarily with vanilla assets such as corporate loans, home mortgages and auto loans. This year, activity has shifted to corporate receivables, and issuance has soared. Banks and non-financial companies together completed 384 securitisation deals in the first nine months of 2016, up from 327 deals for all of 2015… Non-bank deals have accounted for 284 of this year’s total. In value terms, deals totalled Rmb584bn ($86bn) through the end of September, close to 2015’s full-year… ‘Almost every conceivable asset from anyone can be securitised. This makes the market far more diverse than in the US and Europe,’ says Pang Yang, chief executive of China Securitization Analytics… ‘For many companies, this is the only way they can raise capital at the moment.’”
November 8 – Bloomberg: “China’s $3.2 trillion corporate bond market is already starting to reel from rising interbank borrowing costs, and the traditional year-end funding crunch hasn’t even started yet. The yield premium for five-year AA rated notes over the sovereign climbed 10 bps in October as money market rates surged to an 18-month high. Worse may be yet to come as lenders tend to hoard cash for year-end regulatory checks, prompting the overnight repurchase rate fixing to rise in December in four of the past five years, including a 33 bps jump in the last month of 2015… Any disruption in the market could make it harder for companies to refinance as 4.1 trillion yuan ($605bn) of bonds coming due next year.”
November 7 – Bloomberg: “China’s passenger-vehicle sales climbed for an eighth consecutive month as consumers rushed to buy small-engine autos ahead of a tax cut due to expire at year-end, boosting deliveries at local carmakers… Retail sales of cars, sport utility and multipurpose vehicles increased 20% to 2.22 million units last month…”
November 8 – Bloomberg: “China’s exports fell for a seventh month, leaving policy makers reliant on domestic growth engines to hit their economic expansion goals. Overseas shipments dropped 7.3% from a year earlier in October in dollar terms. Imports slipped 1.4%. Trade surplus widened to $49.1 billion. A depreciation of about 9% in the yuan since August 2015 has cushioned the blow from tepid global demand, but failed to give shipments a sustained boost. Rising input costs and surging wages have flattened exporter profit margins…”
November 7 – New York Times (Paul Mozur): “In August, business groups around the world petitioned China to rethink a proposed cybersecurity law that they said would hurt foreign companies and further separate the country from the internet. On Monday, China passed that law — a sign that when it comes to the internet, China will go its own way. The new rules… are part of a broader effort to better define how the internet is managed inside China’s borders. Officials say the rules will help stop cyberattacks and help prevent acts of terrorism, while critics say they will further erode internet freedom. Business groups worry that parts of the law — such as required security checks on companies in industries like finance and communications, and mandatory in-country data storage — will make foreign operations more expensive or lock them out altogether.”
November 7 – Reuters (Venus Wu): “More than 1,000 Hong Kong lawyers dressed in black marched through the heart of the city in silence on Tuesday to condemn a move by China that effectively bars two elected pro-independence lawmakers from taking their seats in the legislature. The former British colony returned to China in 1997 under a ‘one country, two systems’ agreement that ensured its freedoms, including a separate legal system. But Beijing has ultimate control and some Hong Kong people are concerned it is increasingly interfering to head off dissent.”
Europe Watch:
November 9 – Bloomberg (Anooja Debnath): “The anti-establishment whirlwind is headed for Italy now that it has sent Donald Trump to the White House. Italian government bonds slid in the wake of Trump’s stunning victory, reflecting worries that Prime Minister Matteo Renzi will lose a referendum on political reform, scheduled for Dec. 4. ‘If protest votes are ‘a thing,’ then the next opportunity for the electorate to express how fed up they are with conventional politics’ is for the Italians, Kit Juckes, …strategist at Societe Generale SA, wrote…”
November 7 – Reuters (Francesco Canepa): “The most prominent hawk on the European Central Bank's board defended the bank’s ultra-loose monetary policy on Monday, but added that she was skeptical of further interest rate cuts or other forms of easing. Sabine Lautenschlaeger's comments were likely to be read as an indication she might oppose extending the ECB's monthly bond-buying program much beyond its March deadline - a decision the ECB will make at its meeting in a month's time.”
November 11 – Reuters (Kevin Yao): “Germany's financial watchdog warned against a loosening of post-financial crisis bank regulations... Felix Hufeld, president of Germany's top financial regulator Bafin, made the call at an industry conference days after the election of Donald Trump, who has said he would scrap some financial rules to help U.S. businesses if he became president… ‘Barely 10 years after the start of the financial crisis I once more hear the bugle calls of deregulation,’ Hufeld said…”
Fixed-Income Bubble Watch:
November 10 – Financial Times (Elaine Moore): “Donald Trump has come under criticism for his lack of specifics on policy in the campaign. But in his victory speech after his upset in the US presidential election, he made one very specific promise: to invest in American infrastructure. ‘We are going to fix our inner cities and rebuild our highways, bridges, tunnels, airports, schools, hospitals,’ Mr Trump said. ‘We’re going to rebuild our infrastructure, which will become, by the way, second to none. And we will put millions of our people to work as we rebuild it.’ By singling out a public works programme, the president-elect has raised expectations in bond markets of government stimulus that would not only raise debt levels but spur growth and inflation — testing a three-decade rally that drove yields to record lows.”
November 10 – Wall Street Journal (Christopher Whittall and Sam Goldfarb): “A selloff in government bonds picked up more momentum Thursday, spreading across the world as investors reacted to the prospect of increased fiscal stimulus under a Donald Trump presidency. Investors are now asking whether Mr. Trump’s victory marks a turning point for fixed-income markets that have been on lengthy bull run. In recent trading, the yield on the benchmark 10-year U.S. Treasury note was 2.118%... That came on the back of the biggest one-day jump in the 10-year yield in over three years Wednesday.”
Fixed-Income Bubble Watch:
November 10 – Financial Times (Elaine Moore): “Donald Trump has come under criticism for his lack of specifics on policy in the campaign. But in his victory speech after his upset in the US presidential election, he made one very specific promise: to invest in American infrastructure. ‘We are going to fix our inner cities and rebuild our highways, bridges, tunnels, airports, schools, hospitals,’ Mr Trump said. ‘We’re going to rebuild our infrastructure, which will become, by the way, second to none. And we will put millions of our people to work as we rebuild it.’ By singling out a public works programme, the president-elect has raised expectations in bond markets of government stimulus that would not only raise debt levels but spur growth and inflation — testing a three-decade rally that drove yields to record lows.”
November 10 – Wall Street Journal (Christopher Whittall and Sam Goldfarb): “A selloff in government bonds picked up more momentum Thursday, spreading across the world as investors reacted to the prospect of increased fiscal stimulus under a Donald Trump presidency. Investors are now asking whether Mr. Trump’s victory marks a turning point for fixed-income markets that have been on lengthy bull run. In recent trading, the yield on the benchmark 10-year U.S. Treasury note was 2.118%... That came on the back of the biggest one-day jump in the 10-year yield in over three years Wednesday.”
Global Bubble Watch:
November 9 – Bloomberg (Lu Wang): “You need to go all the way back to the dark days of 2008 to find a stock market reversal to rival that of the last 12 hours, in which S&P 500 Index futures erased a 5% loss triggered by Donald Trump’s surprise presidential election win. Bigger turnarounds only happened three times before, twice in the final months of 2008 and the other in October 1987…”
November 10 – Bloomberg (Lilian Karunungan and Anooja Debnath): “Investors saw $337 billion wiped off the value of securities that comprise an index of global bonds in a single day Wednesday following Donald Trump’s election as President, the flipside of global upswing in stocks and commodities. While Trump’s spending plans have pushed equities, raw materials and the dollar higher, bonds have declined on speculation he’ll need to sell more debt and on concern faster growth will lead to a surge in inflation, which erodes the value of fixed-income securities. The selloff deepened on Thursday, pushing 10-year Treasuries down for a fourth day and sending yields in Italy to the highest level since September 2015.”
November 6 – Financial Times (Mary Childs): “The exchange-traded fund industry has ballooned to more than $3.2tn in assets, surpassing the $2.97tn held in hedge funds, as investors pile into low-cost offerings to capture the multiyear market rally. Scepticism about the high-fee hedge fund industry has grown from its years of underperforming benchmarks, leading investors to migrate to cheaper options such as ETFs. These products have proved popular in large part because of their low fees… and the fact they are treated differently for tax purposes, enabling them to avoid capital gains distributions.”
U.S. Bubble Watch:
November 7 – Reuters (Eliza Ronalds-Hannon and Liz McCormick): “Barack Obama will go down in history as having sold more Treasuries and at lower interest rates than any U.S. president. He’s also leaving a debt burden that threatens to hamstring his successor. Obama’s administration benefited from some unprecedented advantages that helped it grapple with the longest recession since the 1930s. The Federal Reserve kept rates at historically low levels, partly by becoming the single biggest holder of Treasuries. The U.S. could also rely on insatiable demand from international investors, led by China deploying its hoard of reserves. Global buyers added $3 trillion of Treasuries, doubling ownership to a record.”
November 8 – Wall Street Journal (Aaron Back): “After the auto-lending boom of recent years, signs of trouble are starting to pop up. Total auto loans outstanding in the U.S. reached $1.1 trillion in the second quarter… Auto-loan originations in the period were $149 billion, close to the record $151 billion in the third quarter of last year. There are two major risks: One is that borrowers will prove less creditworthy than expected, giving rise to defaults and write-offs. The second is that used-car prices will fall by more than lenders anticipated… There were worrying signs on both fronts Monday. Auto and consumer lender OneMain Holdings said it now expects its net charge-off ratio to rise to 7.2% to 7.6% in 2017... Its shares fell by nearly 39% on Tuesday. Separately, rental car giant Hertz Global Holdings took a $39 million charge to its estimate of the residual value of its car fleet. Its shares fell by 23% on Tuesday.”
November 7 – New York Times (Leslie Picker): “Wall Street bonuses are expected to decline for the third consecutive year, reflecting a period of busted mergers, limited trading activity and muted hedge fund returns. The payouts are projected to be from 5 to 10% lower this year, according to an annual report… by Johnson Associates… Bonuses fell about the same amount last year from 2014.”
Federal Reserve Watch:
November 9 – Wall Street Journal (Kate Davidson and Jon Hilsenrath): “The central bank has been insulated from congressional critics for the past eight years by an Obama administration that quietly supported its aggressive efforts to spur economic growth. In Donald Trump, the Federal Reserve will face a president who has expressed varying views about its policies… in addition to divergent views about Fed Chairwoman Janet Yellen. Mr. Trump’s comments in the final days of his campaign suggested he might not feel bound by the tradition of recent presidents staying mum on monetary policy. He might also be willing to work with the GOP-controlled Congress to rewrite the laws governing the Fed’s structure and disclosures, possibly embracing proposals central bank officials have seen as threats to their policy-making independence.”
Leveraged Speculator Watch:
November 11 – Bloomberg (Taylor Hall): “Ray Dalio’s $150 billion Bridgewater Associates has received approval to invest in China’s onshore bond market… The world’s largest hedge fund manager will trade the fixed-income securities via the China Interbank Bond Market through the firm’s All Weather product structure, making them the first global hedge fund manager approved to access and trade the CIBM…”
November 9 – Bloomberg (Lu Wang): “You need to go all the way back to the dark days of 2008 to find a stock market reversal to rival that of the last 12 hours, in which S&P 500 Index futures erased a 5% loss triggered by Donald Trump’s surprise presidential election win. Bigger turnarounds only happened three times before, twice in the final months of 2008 and the other in October 1987…”
November 10 – Bloomberg (Lilian Karunungan and Anooja Debnath): “Investors saw $337 billion wiped off the value of securities that comprise an index of global bonds in a single day Wednesday following Donald Trump’s election as President, the flipside of global upswing in stocks and commodities. While Trump’s spending plans have pushed equities, raw materials and the dollar higher, bonds have declined on speculation he’ll need to sell more debt and on concern faster growth will lead to a surge in inflation, which erodes the value of fixed-income securities. The selloff deepened on Thursday, pushing 10-year Treasuries down for a fourth day and sending yields in Italy to the highest level since September 2015.”
November 6 – Financial Times (Mary Childs): “The exchange-traded fund industry has ballooned to more than $3.2tn in assets, surpassing the $2.97tn held in hedge funds, as investors pile into low-cost offerings to capture the multiyear market rally. Scepticism about the high-fee hedge fund industry has grown from its years of underperforming benchmarks, leading investors to migrate to cheaper options such as ETFs. These products have proved popular in large part because of their low fees… and the fact they are treated differently for tax purposes, enabling them to avoid capital gains distributions.”
U.S. Bubble Watch:
November 7 – Reuters (Eliza Ronalds-Hannon and Liz McCormick): “Barack Obama will go down in history as having sold more Treasuries and at lower interest rates than any U.S. president. He’s also leaving a debt burden that threatens to hamstring his successor. Obama’s administration benefited from some unprecedented advantages that helped it grapple with the longest recession since the 1930s. The Federal Reserve kept rates at historically low levels, partly by becoming the single biggest holder of Treasuries. The U.S. could also rely on insatiable demand from international investors, led by China deploying its hoard of reserves. Global buyers added $3 trillion of Treasuries, doubling ownership to a record.”
November 8 – Wall Street Journal (Aaron Back): “After the auto-lending boom of recent years, signs of trouble are starting to pop up. Total auto loans outstanding in the U.S. reached $1.1 trillion in the second quarter… Auto-loan originations in the period were $149 billion, close to the record $151 billion in the third quarter of last year. There are two major risks: One is that borrowers will prove less creditworthy than expected, giving rise to defaults and write-offs. The second is that used-car prices will fall by more than lenders anticipated… There were worrying signs on both fronts Monday. Auto and consumer lender OneMain Holdings said it now expects its net charge-off ratio to rise to 7.2% to 7.6% in 2017... Its shares fell by nearly 39% on Tuesday. Separately, rental car giant Hertz Global Holdings took a $39 million charge to its estimate of the residual value of its car fleet. Its shares fell by 23% on Tuesday.”
November 7 – New York Times (Leslie Picker): “Wall Street bonuses are expected to decline for the third consecutive year, reflecting a period of busted mergers, limited trading activity and muted hedge fund returns. The payouts are projected to be from 5 to 10% lower this year, according to an annual report… by Johnson Associates… Bonuses fell about the same amount last year from 2014.”
Federal Reserve Watch:
November 9 – Wall Street Journal (Kate Davidson and Jon Hilsenrath): “The central bank has been insulated from congressional critics for the past eight years by an Obama administration that quietly supported its aggressive efforts to spur economic growth. In Donald Trump, the Federal Reserve will face a president who has expressed varying views about its policies… in addition to divergent views about Fed Chairwoman Janet Yellen. Mr. Trump’s comments in the final days of his campaign suggested he might not feel bound by the tradition of recent presidents staying mum on monetary policy. He might also be willing to work with the GOP-controlled Congress to rewrite the laws governing the Fed’s structure and disclosures, possibly embracing proposals central bank officials have seen as threats to their policy-making independence.”
Leveraged Speculator Watch:
November 11 – Bloomberg (Taylor Hall): “Ray Dalio’s $150 billion Bridgewater Associates has received approval to invest in China’s onshore bond market… The world’s largest hedge fund manager will trade the fixed-income securities via the China Interbank Bond Market through the firm’s All Weather product structure, making them the first global hedge fund manager approved to access and trade the CIBM…”
Thursday, November 10, 2016
Friday's News Links
[Bloomberg] Stocks, Bonds, Commodities Slump as Traders Weigh U.S. Election
[Bloomberg] Trump Butterfly Effect Routs Currencies, Bonds as Copper Surges
[Bloomberg] Carry Trades Collapse as Emerging-Market Yield Advantage Shrinks
[Bloomberg] Italy’s Bonds Tumble as Trump Win Boosts Referendum Concern
[Reuters] Asian shares stumble as soaring U.S. bond yields fuel outflow worries
[Bloomberg] China’s Yuan Set for Steepest Weekly Loss Since January Turmoil
[Bloomberg] Rupiah Plunges Most Since 2011 Prompting Central Bank to Step In
[Bloomberg] Bonds Plunge by $1 Trillion This Week as Trump Seen Game Changer
[Bloomberg] Copper Explodes Above $6,000 With Prices Set for Best Week Ever
[Bloomberg] Fischer Says Fed Getting Close to Reaching Goals, Raising Rates
[Reuters] China Oct new yuan loans 651.3 bln yuan, below forecasts
[Reuters] China's household debt a growing risk to economy
[Bloomberg] These Charts Show the Huge Stampede out of Emerging Markets
[Dow Jones] Bundesbank''s Weidmann Urges Calm After Trump Election
[Reuters] German watchdog warns against financial deregulation after Trump win
[WSJ] The All-Powerful Bond Market Is Getting Rocked by Trump
[Financial Times] Fuse is lit on bond markets time-bomb
[FT] The sell-off in EM FX just got real
[WSJ] New Populism and Silicon Valley on a Collision Course
[WSJ] Farmland Prices Fall in Much of Central U.S.
[Reuters] China's Xi vows zero tolerance for separatist movements
[Bloomberg] Trump Butterfly Effect Routs Currencies, Bonds as Copper Surges
[Bloomberg] Carry Trades Collapse as Emerging-Market Yield Advantage Shrinks
[Bloomberg] Italy’s Bonds Tumble as Trump Win Boosts Referendum Concern
[Reuters] Asian shares stumble as soaring U.S. bond yields fuel outflow worries
[Bloomberg] China’s Yuan Set for Steepest Weekly Loss Since January Turmoil
[Bloomberg] Rupiah Plunges Most Since 2011 Prompting Central Bank to Step In
[Bloomberg] Bonds Plunge by $1 Trillion This Week as Trump Seen Game Changer
[Bloomberg] Copper Explodes Above $6,000 With Prices Set for Best Week Ever
[Bloomberg] Fischer Says Fed Getting Close to Reaching Goals, Raising Rates
[Reuters] China Oct new yuan loans 651.3 bln yuan, below forecasts
[Reuters] China's household debt a growing risk to economy
[Bloomberg] These Charts Show the Huge Stampede out of Emerging Markets
[Dow Jones] Bundesbank''s Weidmann Urges Calm After Trump Election
[Reuters] German watchdog warns against financial deregulation after Trump win
[WSJ] The All-Powerful Bond Market Is Getting Rocked by Trump
[Financial Times] Fuse is lit on bond markets time-bomb
[FT] The sell-off in EM FX just got real
[WSJ] New Populism and Silicon Valley on a Collision Course
[WSJ] Farmland Prices Fall in Much of Central U.S.
[Reuters] China's Xi vows zero tolerance for separatist movements
Thursday Evening Links
[Bloomberg] Emerging Asia Currencies Drop as Fed Rate-Hike Bets Sink Bonds
[Bloomberg] Dow Average Rallies to Record as Treasuries Slide on Trump Bets
[Bloomberg] Tech Stocks Are Getting Crushed
[FXStreet] Brazilian real tumbles to lowest since June
[Bloomberg] Wells Fargo Leads Banks Up as Trump Win Seen Curbing Warren
[Bloomberg] Trump Rotation Has Small Caps Beating S&P 500 Most in Five Years
[Bloomberg] Trump’s Transition Team Pledges to Dismantle Dodd-Frank Act
[Bloomberg] Warren Says She Would Work With Trump on Bank-Industry Policies
[Bloomberg] Wall Street Hopes Trump Makes Structured Finance Great Again
[Bloomberg] Trump Outlines Health-Care Plan, Including Repealing Obamacare
[Reuters] Investors, economists brace for new dangerous game: parsing Trump's words
[Reuters] From avocados to autos, Mexican businesses fear tough times with Trump
[Bloomberg] Dow Average Rallies to Record as Treasuries Slide on Trump Bets
[Bloomberg] Tech Stocks Are Getting Crushed
[FXStreet] Brazilian real tumbles to lowest since June
[Bloomberg] Wells Fargo Leads Banks Up as Trump Win Seen Curbing Warren
[Bloomberg] Trump Rotation Has Small Caps Beating S&P 500 Most in Five Years
[Bloomberg] Trump’s Transition Team Pledges to Dismantle Dodd-Frank Act
[Bloomberg] Warren Says She Would Work With Trump on Bank-Industry Policies
[Bloomberg] Wall Street Hopes Trump Makes Structured Finance Great Again
[Bloomberg] Trump Outlines Health-Care Plan, Including Repealing Obamacare
[Reuters] Investors, economists brace for new dangerous game: parsing Trump's words
[Reuters] From avocados to autos, Mexican businesses fear tough times with Trump
Wednesday, November 9, 2016
Thursday's News Links
[Bloomberg] U.S. Stocks Extend Rally, Send Dow to Record Amid Trump Bets
[Bloomberg] Stocks Surge With Metals as Trump Win Revitalizes Growth Outlook
[MarketWatch] Treasury selloff stretches to 4th day
[Bloomberg] Yuan Falls to Six-Year Low Amid Concern Trump Will Target China
[Bloomberg] Italian, French Bonds Feel Pain in Europe as Rout Spreads: Chart
[Bloomberg] Trump’s $337 Billion Bond Upset Casts Shadow on Rallying Stocks
[Reuters] China banks given hard cap for November home loans-report
[WSJ] Donald Trump’s Surprise Victory Sent Global Markets on a 12-Hour Thrill Ride
[WSJ] Trump’s Win Brings New Era of Uncertainty for the Fed
[WSJ] The All-Powerful Bond Market Is Getting Rocked by Trump
[FT] What is the Trump reflation trade?
[FT] ‘Trumpflation’ risk rattles bond markets
[NYT] Republicans in Congress Plan Swift Action on Agenda With Donald Trump
[Bloomberg] Stocks Surge With Metals as Trump Win Revitalizes Growth Outlook
[MarketWatch] Treasury selloff stretches to 4th day
[Bloomberg] Yuan Falls to Six-Year Low Amid Concern Trump Will Target China
[Bloomberg] Italian, French Bonds Feel Pain in Europe as Rout Spreads: Chart
[Bloomberg] Trump’s $337 Billion Bond Upset Casts Shadow on Rallying Stocks
[Reuters] China banks given hard cap for November home loans-report
[WSJ] Donald Trump’s Surprise Victory Sent Global Markets on a 12-Hour Thrill Ride
[WSJ] Trump’s Win Brings New Era of Uncertainty for the Fed
[WSJ] The All-Powerful Bond Market Is Getting Rocked by Trump
[FT] What is the Trump reflation trade?
[FT] ‘Trumpflation’ risk rattles bond markets
[NYT] Republicans in Congress Plan Swift Action on Agenda With Donald Trump
Wednesday Evening Links
[Bloomberg] Asian Stocks Rebound After Selloff as Markets Reassess Trump Win
[Bloomberg] U.S. Stocks Surge as Banks, Drugmakers Rally Amid Trump Victory
[Reuters] Wall Street surges after Trump wins White House
[Dow Jones] 10-year Treasury Yield Above 2% In ''fear Trade'' As Trump Presidency Looms
[Bloomberg] Dow’s 1,172-Point Round Trip Just Misses Post-Election Record
[CNBC] Bond yields on fire as market anticipates more inflation, growth
[Bloomberg] Trump Day-One Winners and Losers Piling Up Fast Across the Globe
[Bloomberg] Today's S&P 500 Reversal Is the Biggest Since 2008 Crisis: Chart
[NYT] Trump Victory Could Prompt Fed to Raise Rates More Quickly
[FT] Flight to safety unwinds after Trump win
[WSJ] Silicon Valley Braces for Uncertainty After Donald Trump’s Victory
[Bloomberg] U.S. Stocks Surge as Banks, Drugmakers Rally Amid Trump Victory
[Reuters] Wall Street surges after Trump wins White House
[Dow Jones] 10-year Treasury Yield Above 2% In ''fear Trade'' As Trump Presidency Looms
[Bloomberg] Dow’s 1,172-Point Round Trip Just Misses Post-Election Record
[CNBC] Bond yields on fire as market anticipates more inflation, growth
[Bloomberg] Trump Day-One Winners and Losers Piling Up Fast Across the Globe
[Bloomberg] Today's S&P 500 Reversal Is the Biggest Since 2008 Crisis: Chart
[NYT] Trump Victory Could Prompt Fed to Raise Rates More Quickly
[FT] Flight to safety unwinds after Trump win
[WSJ] Silicon Valley Braces for Uncertainty After Donald Trump’s Victory
Tuesday, November 8, 2016
Wednesday's News Links
[Bloomberg] Market Turmoil Eases as Investors Weigh Trump’s Plan for Economy
[Bloomberg] Treasuries Plunge as Traders Boost Inflation Bets on Trump Win
[Reuters] Gold has biggest rally since Brexit as Trump leads White House race
[Bloomberg] Mexico Peso Plunges Past 20 Per Dollar to Record Low Amid Vote
[Bloomberg] Trump’s Lead Triggers Emerging-Market Selloff as Peso Nosedives
[Bloomberg] Asia Bond Risk Surges as Trump’s Edge in Vote Recalls Brexit
[Bloomberg] December Fed Rate-Hike Odds Fall Below 50% as Trump Leads Polls
[Bloomberg] Gold Seller Running Out of Bars, Coins in London After Trump Win
[Reuters] Wall Street elite stunned at Trump triumph
[Bloomberg] Italy’s Next in the Crosshairs for Anti-Establishment Wave
[WSJ] Warning Light Flashes on Auto Loans
[Bloomberg] Treasuries Plunge as Traders Boost Inflation Bets on Trump Win
[Reuters] Gold has biggest rally since Brexit as Trump leads White House race
[Bloomberg] Mexico Peso Plunges Past 20 Per Dollar to Record Low Amid Vote
[Bloomberg] Trump’s Lead Triggers Emerging-Market Selloff as Peso Nosedives
[Bloomberg] Asia Bond Risk Surges as Trump’s Edge in Vote Recalls Brexit
[Bloomberg] December Fed Rate-Hike Odds Fall Below 50% as Trump Leads Polls
[Bloomberg] Gold Seller Running Out of Bars, Coins in London After Trump Win
[Reuters] Wall Street elite stunned at Trump triumph
[Bloomberg] Italy’s Next in the Crosshairs for Anti-Establishment Wave
[WSJ] Warning Light Flashes on Auto Loans
Tuesday Evening Links
[Bloomberg] Asian Stocks Advance as Investors Brace for U.S. Election Result
[Bloomberg] Stocks Advance, Bonds Fall as Americans Vote; Dollar Fluctuates
[Bloomberg] Ominous Sign for China Debt as Cash Crunch Bites
[Reuters] Banks warn clients to brace for FX volatility after U.S. vote
[Bloomberg] Prosiris’s Billion-Dollar Hedge Fund Plunges to $284 Million
[Bloomberg] Stocks Advance, Bonds Fall as Americans Vote; Dollar Fluctuates
[Bloomberg] Ominous Sign for China Debt as Cash Crunch Bites
[Reuters] Banks warn clients to brace for FX volatility after U.S. vote
[Bloomberg] Prosiris’s Billion-Dollar Hedge Fund Plunges to $284 Million
Monday, November 7, 2016
Tuesday's News Links
[Bloomberg] Stocks, Bonds, Dollar Little Changed as Americans Cast Ballots
[Reuters] Asian shares edge up as investors cautiously optimistic on Clinton win
[Bloomberg] Yuan Heads Toward Six-Year Low as Capital Outflows Fuel Weakness
[Bloomberg] U.S. Election Guide to Markets: What to Watch Once It’s All Over
[Reuters] Tuesday Morning Briefing: Election Day: You made it!
[Bloomberg] China’s Exports Drop for a Seventh Month on Tepid Global Demand
[Bloomberg] China Car Sales Surge 20% as Consumers Beat Expiring Tax Cut
[Reuters] China central bank to keep liquidity ample, curb asset bubbles
[Bloomberg] This Election Has One Sure Thing: A More Dysfunctional Congress
[FT] China’s securitisation market blossoms
[Bloomberg] Anxiety in Manila as Duterte Blasts U.S., Embraces China
[Reuters] Hong Kong lawyers march to condemn China's legal 'interference'
[Bloomberg] Earth Just Experienced the Hottest Five Years on Record
[Reuters] Asian shares edge up as investors cautiously optimistic on Clinton win
[Bloomberg] Yuan Heads Toward Six-Year Low as Capital Outflows Fuel Weakness
[Bloomberg] U.S. Election Guide to Markets: What to Watch Once It’s All Over
[Reuters] Tuesday Morning Briefing: Election Day: You made it!
[Bloomberg] China’s Exports Drop for a Seventh Month on Tepid Global Demand
[Bloomberg] China Car Sales Surge 20% as Consumers Beat Expiring Tax Cut
[Reuters] China central bank to keep liquidity ample, curb asset bubbles
[Bloomberg] This Election Has One Sure Thing: A More Dysfunctional Congress
[FT] China’s securitisation market blossoms
[Bloomberg] Anxiety in Manila as Duterte Blasts U.S., Embraces China
[Reuters] Hong Kong lawyers march to condemn China's legal 'interference'
[Bloomberg] Earth Just Experienced the Hottest Five Years on Record
Monday Evening Links
[Reuters] Wall St. soars as FBI clears Clinton ahead of Election Day
[Bloomberg] China's Investors Get Creative About Capital Controls
[Reuters] ECB's Lautenschlaeger 'skeptical' of further policy easing
[Bloomberg] Markets Mimic Pre-Brexit Conditions Before U.S. Election: Chart
[WSJ] Yuan Weakness Spurs Fresh Surge in China Outflows
[AP] The Latest: US upset over China's Hong Kong intervention
[Bloomberg] China's Investors Get Creative About Capital Controls
[Reuters] ECB's Lautenschlaeger 'skeptical' of further policy easing
[Bloomberg] Markets Mimic Pre-Brexit Conditions Before U.S. Election: Chart
[WSJ] Yuan Weakness Spurs Fresh Surge in China Outflows
[AP] The Latest: US upset over China's Hong Kong intervention
Sunday, November 6, 2016
Monday's News Links
[Bloomberg] Global Stocks Rally With Commodities as Clinton Gets FBI Boost
[Reuters] Asia stocks bounce as optimism over Clinton grows; dollar strong
[Bloomberg] U.S. Stock Futures Jump as FBI Letter Seen Aiding Clinton Chance
[Bloomberg] Yuan Slumps Most in a Month After Central Bank Weakens Fixing
[Bloomberg] China's Foreign-Exchange Reserves Drop to Lowest Since 2011
[Bloomberg] China Names New Finance Minister to Replace Veteran Lou Jiwei
[Bloomberg] Obama’s Successor Inherits Bond Market at Epic Turning Point
[Bloomberg] China Bars Independence Supporters From Hong Kong Legislature
[NYT] Wall Street Bonuses Are Expected to Sink for 3rd Straight Year
[FT] ETFs attract more than $3.2tn to pass hedge funds
[WSJ] Hong Kong Protesters Clash With Police as China Plans Political Intervention
[NYT] China’s Internet Controls Will Get Stricter, to Dismay of Foreign Business
[WSJ] Italy Approaches a Constitutional Reckoning
[Reuters] China moves to bar Hong Kong activists as fears grow over intervention
[Bloomberg] Turkey's treatment of dismissed officials reminiscent of Nazis: Luxembourg
[Reuters] Asia stocks bounce as optimism over Clinton grows; dollar strong
[Bloomberg] U.S. Stock Futures Jump as FBI Letter Seen Aiding Clinton Chance
[Bloomberg] Yuan Slumps Most in a Month After Central Bank Weakens Fixing
[Bloomberg] China's Foreign-Exchange Reserves Drop to Lowest Since 2011
[Bloomberg] China Names New Finance Minister to Replace Veteran Lou Jiwei
[Bloomberg] Obama’s Successor Inherits Bond Market at Epic Turning Point
[Bloomberg] China Bars Independence Supporters From Hong Kong Legislature
[NYT] Wall Street Bonuses Are Expected to Sink for 3rd Straight Year
[FT] ETFs attract more than $3.2tn to pass hedge funds
[WSJ] Hong Kong Protesters Clash With Police as China Plans Political Intervention
[NYT] China’s Internet Controls Will Get Stricter, to Dismay of Foreign Business
[WSJ] Italy Approaches a Constitutional Reckoning
[Reuters] China moves to bar Hong Kong activists as fears grow over intervention
[Bloomberg] Turkey's treatment of dismissed officials reminiscent of Nazis: Luxembourg
Saturday, November 5, 2016
Saturday's News Links
[NYT] ‘We Almost Have Riots’: Tensions Flare in Silicon Valley Over Growth
[CNBC] Alarm grows as smart home technology and hacking risks proliferate
[WSJ] Central Banks Facing Challenges From Political Events
[AP] Tens of thousands in South Korea call for president to quit
[Reuters] Hong Kong lawmakers-elect who called for independence threatened China's security: state TV
[CNBC] Alarm grows as smart home technology and hacking risks proliferate
[WSJ] Central Banks Facing Challenges From Political Events
[AP] Tens of thousands in South Korea call for president to quit
[Reuters] Hong Kong lawmakers-elect who called for independence threatened China's security: state TV
Friday, November 4, 2016
Weekly Commentary: The Upshot of Inflationism
As a determined analyst, I’m as committed as ever to remaining “fiercely independent.” This must at least partially explain why I’ve tended to consider myself politically “independent.” Political party ideologies undoubtedly engender biases and compromise objectivity. With the two major parties now in such a muddle, an “independent” affiliation almost wins by default. I recall years ago when I was first introduced to the notion of “the evil party and the stupid party” in a discussion about our two-party system. That conversation doesn’t seem as deeply cynical these days.
I’m left to daydream of a party committed to a smaller and less obtrusive federal government, strong national defense, fiscal responsibility, social tolerance and attentiveness to the environment. It doesn’t seem all that outlandish. Yet there’s one more thing – perhaps the most vital of all: I aspire to be associated with a political movement committed to sound money and Credit. Why all the clamor over guns when unbridled finance is so much more destructive?
This election cycle has been a national disgrace. It finally comes to an end Tuesday, when a deeply divided nation heads to the polls. I recall having a tinge of hope eight years ago that there was a commitment to more inter-party cooperation and less partisan vitriol. There’s not even lip service this time around. As an optimist, I would like to believe that a period of healing commences Wednesday. The analyst inside knows things will continue to worsen before they get better.
Our nation and the world are paying a very heavy price for a failed experiment in Inflationism. At this point, economic stagnation, wealth redistribution and inequality, financial insecurity and corruption are rather obvious consequences. “Money” and Credit have inflated, right along with government, securities markets, financial institutions, corporate influence and greed.
Along the way, there have been many subtle effects. To this day the majority still cling to the view that central bankers are essential to the solution - rather than the problem. But they are at the very root of disturbing national and international, economic, financial, societal and geopolitical degeneration.
For close to 30 years now, central bank policies have nurtured serial inflationary booms and busts. It’s a backdrop that has repeatedly forced investors, homebuyers and others into serious harm’s way. Buy or you’ll be left behind. Get aboard before it’s too late. It’s a system that systematically targets the unsophisticated and less affluent to take on a tenuous debt position to buy homes, cars and things in the name of promoting economic growth. It’s a system that devalues the wealth of savers. Somehow it’s regressed into a system with a policy objective to coerce savers and the risk averse, to ensure their buying power instead inflates the value of risky securities market assets.
We’re witnessing the repercussions of a prolonged bad cycle of playing with society’s psyche: inflating untenable expectations, only to see them crushed by the fist of bursting Bubbles. Central bankers then simply press on to the more egregious extremes necessary to reflate expectations. Apparently, big corporate “media” has been fine with all of this. Indeed, the “media” have been instrumental to Washington and Wall Street propaganda campaigns.
I’m left to daydream of a party committed to a smaller and less obtrusive federal government, strong national defense, fiscal responsibility, social tolerance and attentiveness to the environment. It doesn’t seem all that outlandish. Yet there’s one more thing – perhaps the most vital of all: I aspire to be associated with a political movement committed to sound money and Credit. Why all the clamor over guns when unbridled finance is so much more destructive?
This election cycle has been a national disgrace. It finally comes to an end Tuesday, when a deeply divided nation heads to the polls. I recall having a tinge of hope eight years ago that there was a commitment to more inter-party cooperation and less partisan vitriol. There’s not even lip service this time around. As an optimist, I would like to believe that a period of healing commences Wednesday. The analyst inside knows things will continue to worsen before they get better.
Our nation and the world are paying a very heavy price for a failed experiment in Inflationism. At this point, economic stagnation, wealth redistribution and inequality, financial insecurity and corruption are rather obvious consequences. “Money” and Credit have inflated, right along with government, securities markets, financial institutions, corporate influence and greed.
Along the way, there have been many subtle effects. To this day the majority still cling to the view that central bankers are essential to the solution - rather than the problem. But they are at the very root of disturbing national and international, economic, financial, societal and geopolitical degeneration.
For close to 30 years now, central bank policies have nurtured serial inflationary booms and busts. It’s a backdrop that has repeatedly forced investors, homebuyers and others into serious harm’s way. Buy or you’ll be left behind. Get aboard before it’s too late. It’s a system that systematically targets the unsophisticated and less affluent to take on a tenuous debt position to buy homes, cars and things in the name of promoting economic growth. It’s a system that devalues the wealth of savers. Somehow it’s regressed into a system with a policy objective to coerce savers and the risk averse, to ensure their buying power instead inflates the value of risky securities market assets.
We’re witnessing the repercussions of a prolonged bad cycle of playing with society’s psyche: inflating untenable expectations, only to see them crushed by the fist of bursting Bubbles. Central bankers then simply press on to the more egregious extremes necessary to reflate expectations. Apparently, big corporate “media” has been fine with all of this. Indeed, the “media” have been instrumental to Washington and Wall Street propaganda campaigns.
Ironically, it was free market ideologue Alan Greenspan that set in motion dynamics that evolved into Washington assuming commanding roles throughout the economy and financial markets. Every boom turned bust justified an even more “activist” reflation – fueling even bigger and more vulnerable Bubbles. Each Bubble begot even deeper structural impairment. And with each boom and bust the cumulative toll of victims expanded: lost jobs and careers; lost wealth along with insecurity; shrinking real incomes; repossessed homes and cars; bankruptcies and all the accompanying personal and family hardship.
Meanwhile, the fortunate and well-connected became millionaires and some even billionaires (helped if one operated a hedge fund). Over time, it turned more obvious the system was unfair (at best). Our government and central bank assured the discontents that they would redistribute wealth more equitably. Good times were right around the corner. Rest assured, the crisis was an aberration.
Propaganda went into overdrive – and the BS took on a life of its own: The economy, policymaking and the markets were fundamentally sound. Contemporary central banking was “enlightened.” Yet year after year the situation only worsened. Even with the stated unemployment rate back to 5% and stocks returning to record highs, disenchantment with the “system” grew. Interestingly, the “average” person seemed to better grasp the true merits of zero rates and money printing than PhD economists.
Today a strong majority of Americans believe the country is “moving in the wrong direction.” A disturbingly large percentage no longer trust government, don’t trust “big business” or the media, and have little faith in the Federal Reserve or our institutions more generally. They fear our great nation is in terminal decline – and our leaders (govt, business, finance, academia, etc.) refuse to acknowledge there’s a serious problem, let alone do something about it. We fear an increasingly hostile world; we fear for the future. Insecurity – economic, financial and geopolitical – abounds. We worry our children won’t have same opportunities. And of course such a backdrop creates an incubator for anxiety, anger, racism and xenophobia. “When Money Dies.”
The two main candidates espouse two polarized views of the world. There’s the anti-establishment movement tapping into widespread frustration. The system is broken. And there’s the establishment candidate that takes a more promising view: “We are from the government and we’re here to help you.” One sees Washington as a corrupt swamp that needs draining. The other espouses the view that Washington must right the wrongs of an unjust world.
The fact of the matter is that “the establishment” has made an incredible mess of things – and that’s Republican and Democrat alike, (too often difficult to differentiate). Over the years the media has performed dismally, failing to hold our policymakers accountable. For too long the media has succumbed to historical revisionism, content to whitewash festering problems. Where were the tough questions for Greenspan, Bernanke and Yellen? Where was tenacious investigative journalism with regards to Fannie and Freddie? (Why did no one go to jail?) Why no vigorous scrutiny of all the Wall Street nonsense – until after the Bubble burst and it was too late?
Even after decades of one boom and bust cycle after another, the media retain a strong bias in support of central bank activism. History is clear: inflation is problematic and, in the end, unethical and terribly destructive. Yet, amazingly, to this day the vast majority of journalists remain pro-inflationism.
I argued that with “mad as hell…” having finally reached a majority, Brexit could be viewed as an important inflection point. Power had swung decisively away from the so-called “establishment” (government, media, securities markets, etc.). No matter Tuesday’s outcome, this dynamic is gathering momentum at home and abroad.
For the record, I have already voted for one of the two deeply flawed candidates. I cast my vote for change. As an analyst of Bubbles, I am absolutely convinced that the sooner problems are recognized and addressed the better. There’s never a convenient time to rein in monetary inflation, and it’s extremely unfortunate that this dangerous ideology has gone unchecked for so long. At this point, there will no easy way out of history’s greatest global financial Bubble. The inflationists will continue to claim that they just need additional time – and that the costs of staying the course are low. Nonsense. One can’t overstate the costs associated with more of the same.
This week’s trading seemed to confirm that markets have again entered a high-risk period. “Risk Off” has gained momentum, with global risk markets closely correlated on the downside. Stocks suffered almost across the board - the U.S., Asia, Europe and EM. Japan’s Nikkei fell 3.2%, as the yen rallied 1.6%. Notably, European equities came under heavy selling pressure. Italian stocks (MIB) were slammed 5.8%, and Spanish equities lost 4.5%. Germany’s DAX dropped 4.1% and France’s CAC 40 fell 3.8%. UK stocks were under pressure as well, with the FTSE 100 sinking 4.3%. European bank stocks sank 4.9%, led by the 8.9% decline in Italian banks.
Italian 10-year yields surged 17 bps to a 13-month high 1.75%. Moreover, the Italian to German 10-year bond spread widened 20 to a two-year high 162 bps. Heavily indebted and economically fragile Italy remains vulnerable to risk aversion and any tightening of global finance. With “Risk Off” taking hold, the last thing Italy needed was a group of earthquakes to go with heightened political uncertainty surrounding their December 4 referendum. Also, this week saw Italy’s jobless rate increase to a seven-month high 11.7%.
“Risk Off” heavily impacted EM this week. EEM (EM equities ETF) dropped 2.7% this week, trading to its lowest level since mid-September. Bloomberg: “Erdogan Crackdown Has Turkey on Edge as Kurd Leaders Jailed.” Turkish stocks were hit 5.2%, as the lira dropped 1.6% to another record low. Stocks fell 4.2% and 2.7% in Brazil and Mexico. Indian stocks were down 2.4%.
Meanwhile, the fortunate and well-connected became millionaires and some even billionaires (helped if one operated a hedge fund). Over time, it turned more obvious the system was unfair (at best). Our government and central bank assured the discontents that they would redistribute wealth more equitably. Good times were right around the corner. Rest assured, the crisis was an aberration.
Propaganda went into overdrive – and the BS took on a life of its own: The economy, policymaking and the markets were fundamentally sound. Contemporary central banking was “enlightened.” Yet year after year the situation only worsened. Even with the stated unemployment rate back to 5% and stocks returning to record highs, disenchantment with the “system” grew. Interestingly, the “average” person seemed to better grasp the true merits of zero rates and money printing than PhD economists.
Today a strong majority of Americans believe the country is “moving in the wrong direction.” A disturbingly large percentage no longer trust government, don’t trust “big business” or the media, and have little faith in the Federal Reserve or our institutions more generally. They fear our great nation is in terminal decline – and our leaders (govt, business, finance, academia, etc.) refuse to acknowledge there’s a serious problem, let alone do something about it. We fear an increasingly hostile world; we fear for the future. Insecurity – economic, financial and geopolitical – abounds. We worry our children won’t have same opportunities. And of course such a backdrop creates an incubator for anxiety, anger, racism and xenophobia. “When Money Dies.”
The two main candidates espouse two polarized views of the world. There’s the anti-establishment movement tapping into widespread frustration. The system is broken. And there’s the establishment candidate that takes a more promising view: “We are from the government and we’re here to help you.” One sees Washington as a corrupt swamp that needs draining. The other espouses the view that Washington must right the wrongs of an unjust world.
The fact of the matter is that “the establishment” has made an incredible mess of things – and that’s Republican and Democrat alike, (too often difficult to differentiate). Over the years the media has performed dismally, failing to hold our policymakers accountable. For too long the media has succumbed to historical revisionism, content to whitewash festering problems. Where were the tough questions for Greenspan, Bernanke and Yellen? Where was tenacious investigative journalism with regards to Fannie and Freddie? (Why did no one go to jail?) Why no vigorous scrutiny of all the Wall Street nonsense – until after the Bubble burst and it was too late?
Even after decades of one boom and bust cycle after another, the media retain a strong bias in support of central bank activism. History is clear: inflation is problematic and, in the end, unethical and terribly destructive. Yet, amazingly, to this day the vast majority of journalists remain pro-inflationism.
I argued that with “mad as hell…” having finally reached a majority, Brexit could be viewed as an important inflection point. Power had swung decisively away from the so-called “establishment” (government, media, securities markets, etc.). No matter Tuesday’s outcome, this dynamic is gathering momentum at home and abroad.
For the record, I have already voted for one of the two deeply flawed candidates. I cast my vote for change. As an analyst of Bubbles, I am absolutely convinced that the sooner problems are recognized and addressed the better. There’s never a convenient time to rein in monetary inflation, and it’s extremely unfortunate that this dangerous ideology has gone unchecked for so long. At this point, there will no easy way out of history’s greatest global financial Bubble. The inflationists will continue to claim that they just need additional time – and that the costs of staying the course are low. Nonsense. One can’t overstate the costs associated with more of the same.
This week’s trading seemed to confirm that markets have again entered a high-risk period. “Risk Off” has gained momentum, with global risk markets closely correlated on the downside. Stocks suffered almost across the board - the U.S., Asia, Europe and EM. Japan’s Nikkei fell 3.2%, as the yen rallied 1.6%. Notably, European equities came under heavy selling pressure. Italian stocks (MIB) were slammed 5.8%, and Spanish equities lost 4.5%. Germany’s DAX dropped 4.1% and France’s CAC 40 fell 3.8%. UK stocks were under pressure as well, with the FTSE 100 sinking 4.3%. European bank stocks sank 4.9%, led by the 8.9% decline in Italian banks.
Italian 10-year yields surged 17 bps to a 13-month high 1.75%. Moreover, the Italian to German 10-year bond spread widened 20 to a two-year high 162 bps. Heavily indebted and economically fragile Italy remains vulnerable to risk aversion and any tightening of global finance. With “Risk Off” taking hold, the last thing Italy needed was a group of earthquakes to go with heightened political uncertainty surrounding their December 4 referendum. Also, this week saw Italy’s jobless rate increase to a seven-month high 11.7%.
“Risk Off” heavily impacted EM this week. EEM (EM equities ETF) dropped 2.7% this week, trading to its lowest level since mid-September. Bloomberg: “Erdogan Crackdown Has Turkey on Edge as Kurd Leaders Jailed.” Turkish stocks were hit 5.2%, as the lira dropped 1.6% to another record low. Stocks fell 4.2% and 2.7% in Brazil and Mexico. Indian stocks were down 2.4%.
Bloomberg: “U.S. Stocks Post Longest Slide Since 1980…” A bit dramatic, but some fear (and a lot of hedging) has returned to U.S. equities. The VIX traded to the highs (22) since June. Selling was broad-based – big-, medium- and small-caps. And while Treasuries enjoyed a modest safe haven bid, it did not reverse selling pressure overhanging the beloved dividend stocks. The Nasdaq 100 (NDX) fell 2.9%, as the Crowded technology space begins to unravel.
According to Lipper, junk bond funds suffered $4.1bn of outflows this past week (largest since August 2014). Credit spreads widened meaningfully this week. And while spreads are not yet at alarming levels, increasingly it appears a widening trend has taken hold.
Tuesday evening – and likely late into the night – will be fascinating history in the making. Odds remain firmly in favor of a Clinton victory (as they were against Brexit heading into the June 23 vote). Unless the Democrats surprise with a clean sweep, there will likely be a relief rally partially fueled by an unwind of bearish hedges. But the race is clearly tightening. A Trump win would stun the markets at home and abroad, perhaps with that problematic combination of sinking stocks, rising yields, widening spreads and currency market instability. That would spell serious liquidity issues.
For the Week:
The S&P500 fell 1.9% (up 2.0% y-t-d), and the Dow declined 1.5% (up 2.7%). The Utilities lost 1.1% (up 11.5%). The Banks declined 1.6% (up 0.4%), and the Broker/Dealers dropped 2.3% (down 6.1%). The Transports gained 0.7% (up 7.5%). The S&P 400 Midcaps fell 1.4% (up 5.7%), and the small cap Russell 2000 dropped 2.0% (up 2.4%). The Nasdaq100 sank 2.9% (up 1.6%), and the Morgan Stanley High Tech index dropped 2.2% (up 8.4%). The Semiconductors fell 2.0% (up 21%). The Biotechs lost another 2.6% (down 24.3%). With bullion jumping $30, the HUI gold index surged 5.0% (up 95.5%).
According to Lipper, junk bond funds suffered $4.1bn of outflows this past week (largest since August 2014). Credit spreads widened meaningfully this week. And while spreads are not yet at alarming levels, increasingly it appears a widening trend has taken hold.
Tuesday evening – and likely late into the night – will be fascinating history in the making. Odds remain firmly in favor of a Clinton victory (as they were against Brexit heading into the June 23 vote). Unless the Democrats surprise with a clean sweep, there will likely be a relief rally partially fueled by an unwind of bearish hedges. But the race is clearly tightening. A Trump win would stun the markets at home and abroad, perhaps with that problematic combination of sinking stocks, rising yields, widening spreads and currency market instability. That would spell serious liquidity issues.
For the Week:
The S&P500 fell 1.9% (up 2.0% y-t-d), and the Dow declined 1.5% (up 2.7%). The Utilities lost 1.1% (up 11.5%). The Banks declined 1.6% (up 0.4%), and the Broker/Dealers dropped 2.3% (down 6.1%). The Transports gained 0.7% (up 7.5%). The S&P 400 Midcaps fell 1.4% (up 5.7%), and the small cap Russell 2000 dropped 2.0% (up 2.4%). The Nasdaq100 sank 2.9% (up 1.6%), and the Morgan Stanley High Tech index dropped 2.2% (up 8.4%). The Semiconductors fell 2.0% (up 21%). The Biotechs lost another 2.6% (down 24.3%). With bullion jumping $30, the HUI gold index surged 5.0% (up 95.5%).
Three-month Treasury bill rates ended the week at 37 bps. Two-year government yields fell seven bps to 0.78% (down 27bps y-t-d). Five-year T-note yields dropped nine bps to 1.23% (down 52bps). Ten-year Treasury yields declined seven bps to 1.78% (down 47bps). Long bond yields fell six bps to 2.56% (down 46bps).
Greek 10-year yields sank 59 bps to 7.62% (up 30bps y-t-d). Ten-year Portuguese yields declined five bps to 3.26% (up 74bps). Italian 10-year yields surged 17 bps to 1.75% (up 16bps). Spain's 10-year yields added three bps to 1.26% (down 51bps). German bund yields declined three bps to 0.13% (down 49bps). French yields were unchanged at 0.46% (down 53bps). The French to German 10-year bond spread widened three to 33 bps. U.K. 10-year gilt yields fell 13 bps to 1.13% (down 83bps). U.K.'s FTSE equities index sank 4.3% (up 7.2%).
Japan's Nikkei 225 equities index fell 3.2% (down 11.2% y-t-d). Japanese 10-year "JGB" yields slipped a basis point to negative 0.07% (down 26bps y-t-d). The German DAX equities index sank 4.1% (down 4.5%). Spain's IBEX 35 equities index dropped 4.5% (down 7.9%). Italy's FTSE MIB index was clobbered 5.8% (down 23.8%). EM equities were mostly under pressure. Brazil's Bovespa index sank 4.2% (up 42%). Mexico's Bolsa was hit 2.7% (up 8.6%). South Korea's Kospi declined 1.9% (up 1.1%). India’s Sensex equities dropped 2.4% (up 4.4%). China’s Shanghai Exchange increased 0.7% (down 11.7%). Turkey's Borsa Istanbul National 100 index was hammered 5.2% (up 3.5%). Russia's MICEX equities index declined 1.0% (up 11.4%).
Junk bond mutual funds saw outflows of a remarkable $4.1bn (from Lipper) - the "largest outflow since August 2014."
Freddie Mac 30-year fixed mortgage rates jumped seven bps last week to an almost five-month high 3.54% (down 33bps y-o-y). Fifteen-year rates rose six bps to 2.84% (down 25bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates up seven bps to 3.74% (down 13bps).
Federal Reserve Credit last week declined $17.3bn to $4.413 TN. Over the past year, Fed Credit contracted $39bn (0.9%). Fed Credit inflated $1.602 TN, or 57%, over the past 208 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt fell $4.9bn last week to a six-year low $3.120 TN. "Custody holdings" were down $163bn y-o-y, or 5.0%.
M2 (narrow) "money" supply last week surged another $40.4bn to $13.156 TN. "Narrow money" expanded $941bn, or 7.7%, over the past year. For the week, Currency increased $0.5bn. Total Checkable Deposits jumped $48bn, while Savings Deposits fell $15bn. Small Time Deposits slipped $0.8bn. Retail Money Funds gained $7.7bn.
Total money market fund assets jumped $26.2bn to a 10-week high $2.677 TN. Money Funds declined $25bn y-o-y (0.9%).
Total Commercial Paper increased $4.3bn to $907bn. CP declined $150bn y-o-y, or 14.2%.
Currency Watch:
November 4 – Wall Street Journal (Alex Frangos): “Markets have grown more accustomed to the slow-motion decline in the value of the Chinese yuan. The currency’s next milestone, however, may usher in a more challenging period. China’s currency has fallen nearly 4% against the dollar this year, with a chunk of that move taking place over the past month… Beijing has spent more than $500 billion in reserves to manage the yuan’s slide over the past two years on a balance-of-payments basis. Still, the yuan has slipped from 6.06 a dollar to above 6.75. That is getting close to 6.82, the level around which the yuan was pegged for an extended period from 2008 until 2010… The two years in which the yuan was stuck around 6.82 was also the period of the largest inflows into the Chinese economy, to the tune of $764 billion, noted Kevin Lai of Daiwa Securities. Quantitative easing in the U.S. was in full effect and trillions flowed to emerging markets, especially China. Individuals and companies that borrowed in dollars or brought money in as a carry trade may have hung on until now…”
The U.S. dollar index dropped 1.5% to 96.9 (down 1.8% y-t-d). For the week on the upside, the British pound increased 2.7%, the New Zealand dollar 2.3%, the Swiss franc 2.0%, the South African rand 1.9%, the Japanese yen 1.6%, the euro 1.4%, the Danish krone 1.4%, the Norwegian krone 1.3%, the Australian dollar 1.0%, the Swedish krone 0.7%, the Singapore dollar 0.6% and the South Korean won 0.1%. For the week on the downside, the Brazilian real declined 1.1% and the Mexican peso slipped 0.2%. The Chinese yuan recovered 0.2% versus the dollar (down 3.9% y-t-d).
Commodities Watch:
November 1 – Reuters (Julie Verhage and Sid Verma): “There's one certain winner of next week's presidential election, according to HSBC…: investors in gold. Although they deem a Donald Trump victory more supportive for the price of the metal than a win by Hillary Clinton, the bank's Chief Precious Metals Analyst James Steel says it'll enjoy at least an 8% jump whoever wins the race. Both candidates have espoused trade policies that could stimulate demand, with gold offering a potential ‘protection against protectionism,’ he says.”
The Goldman Sachs Commodities Index sank 5.7% (up 12% y-t-d). Spot Gold jumped 2.3% to $1,305 (up 23%). Silver rallied 3.8% to $18.43 (up 34%). Crude sank $4.59 to $44.07 (up 19%). Gasoline dropped 6.1% (up 9%), and Natural Gas slipped 0.4% (up 18%). Copper gained 3.1% (up 6%). Wheat increased 1.4% (down 12%). Corn fell 1.8% (down 3%).
China Bubble Watch:
November 2 – Reuters (Kevin Yao): “China's growing debt and property risks have touched off an internal debate over whether China should tolerate growth as low as 6% in 2017 to allow more room for painful reforms aimed at reducing industrial overcapacity and indebtedness. The government has said economic growth of at least 6.5% is needed each year through to 2020 to meet a previously stated goal of doubling GDP and per capita income by 2020 from 2010 levels. It aims for 6.5-7% growth this year. Many advisers expect the government to stick to this year's target in 2017, or at best change the wording to ‘around 6.5%’ to allow for a slightly lower expansion rate next year. But some advisers say maintaining growth above 6.5% is unrealistic because it will force the government to keep up costly economic stimulus measures that have stoked concerns about a sharp rise in credit and the property market.”
November 3 – Bloomberg (Sid Verma and Narae Kim): “Brace yourself. Beijing was embroiled in a spate of frenzied dollar-selling last month as capital outflows and a depreciating yuan saw foreign-exchange reserves tumble by $80 billion, resuming 2015's sharp declines in the country's monetary war chest after a period of relative stability between February and September this year. That's the prediction of analysts Khoon Goh of Australia & New Zealand Banking Group Ltd, and Jens Nordvig of Exante Data LLC…, who reckon markets have underestimated the likely scale of currency intervention by the People's Bank of China in light of the fall of the yuan relative to the dollar.”
November 2 – Bloomberg (Tracy Alloway): “That's a statement published this week by the National Association of Financial Market Institutional Investors. It heralds the start of trading, in China, of credit-default swaps (CDS), or derivatives used by investors to protect against default by companies and other entities… Setting aside the question of whether these new instruments will be deployed in large enough sums to make a difference to investors, there are other looming problems. For instance, there is a thorny issue highlighted by a recent note from Goldman Sachs… Just who, asks Goldman Analyst Kenneth Ho, is selling CDS protection on Chinese corporates? Credit-default swaps represent a binary bet on a company's creditworthiness, with the buyer of protection paying premiums to a protection-seller in return for an insurance-like payout should the bonds sour… And while the Chinese government is clearly keen on transferring credit risk through the use of such instruments, one wonders just who they are transferring risk to. ‘Although such products will provide lenders with a tool to hedge their credit exposures by purchasing CDS protection, it is unclear who will be the seller of the protection, and if the sellers are other financial institutions, the credit risks are merely transferred to other parts of the financial sector,’ writes Ho.”
November 2 – Financial Times (Gabriel Wildau): “Chinese hedge funds are providing margin finance for leveraged bets on the country’s booming commodity futures market, in an echo of the practices that led to last year's stock market boom and bust. Futures prices for the so-called ferrous complex of steel, iron ore, coking coal and coke have risen sharply this year as Chinese fiscal and monetary stimulus has produced a revival of construction activity… Rising commodity prices have in turn fuelled speculation in the futures markets… Commodity trading has surged in China as retail investors, rich individuals and wealth managers use the sector as a quick and easy way to place leveraged bets… Some hedge funds are also using structured investment products to provide margin loans to investors looking to ride the futures boom. Hedge funds generally buy the senior tranche, which promises a fixed return. Others buy the subordinate tranche, putting up some of their money as margin and borrowing funds from the senior tranche to enlarge the investment.”
November 2 – Bloomberg: “China’s export growth to emerging markets that helped it weather the global financial crisis has fallen away, adding to the drag on manufacturers as demand from advanced economies fails to pick up the slack. Exports to developing nations fell 6% in the second quarter while those to fuel-exporting countries in the Middle East and beyond flat-lined after a 22% plunge in the first three months.”
November 4 – Wall Street Journal (Saumya Vaishampayan, Gregor Stuart Hunter and Chao Deng): “Chinese investors looking for a refuge from the weakening yuan are turning to bitcoin. Total trading in the virtual currency reached 47 million bitcoins last week, the highest-ever level based on data going back to 2011. Prices meanwhile hit a more-than four-month high of $742.46 on Wednesday, according to CoinDesk data. The vast majority of the action has been taking place in China, the world’s second-largest economy, with bitcoin trading on three Chinese exchanges accounting for 98% of global volume in the past month.”
Europe Watch:
November 3 – Reuters (Balazs Koranyi and Francesco Canepa): “European Central Bank policymaker Jens Weidmann called… for ‘patience’ with bank monetary policy, warning that extraordinary stimulus loses its effect over time while increasing stability risk. ‘All in all, the risks of ultra-loose monetary policy are becoming increasingly clear,’ he told a business forum… ‘It is important to give the measures taken enough time to have an impact on the inflation rate… This focus on the medium term – alongside the fact that the euro area is still struggling to overcome the longer-term economic implications of the biggest economic shock since World War II – underscores the merits of patience.’”
November 3 – Bloomberg (Rainer Buergin): “’Monetary policy has to the greatest possible extent reached the limits of its possibilities, with all the risks and side effects,” German Finance Minister Wolfgang Schaeuble says at a conference… ‘We have a common currency now, but this common currency mustn’t undermine incentives for necessary reforms’ in the euro area…”
November 3 – Bloomberg (Rainer Buergin): “German government’s council of economic advisers says ‘the extent of monetary easing in the euro area is no longer appropriate given the region’s economic recovery.” ECB policy ‘threatens financial stability’… ‘The ECB should slow down its bond purchases and end them earlier’…”
Greek 10-year yields sank 59 bps to 7.62% (up 30bps y-t-d). Ten-year Portuguese yields declined five bps to 3.26% (up 74bps). Italian 10-year yields surged 17 bps to 1.75% (up 16bps). Spain's 10-year yields added three bps to 1.26% (down 51bps). German bund yields declined three bps to 0.13% (down 49bps). French yields were unchanged at 0.46% (down 53bps). The French to German 10-year bond spread widened three to 33 bps. U.K. 10-year gilt yields fell 13 bps to 1.13% (down 83bps). U.K.'s FTSE equities index sank 4.3% (up 7.2%).
Japan's Nikkei 225 equities index fell 3.2% (down 11.2% y-t-d). Japanese 10-year "JGB" yields slipped a basis point to negative 0.07% (down 26bps y-t-d). The German DAX equities index sank 4.1% (down 4.5%). Spain's IBEX 35 equities index dropped 4.5% (down 7.9%). Italy's FTSE MIB index was clobbered 5.8% (down 23.8%). EM equities were mostly under pressure. Brazil's Bovespa index sank 4.2% (up 42%). Mexico's Bolsa was hit 2.7% (up 8.6%). South Korea's Kospi declined 1.9% (up 1.1%). India’s Sensex equities dropped 2.4% (up 4.4%). China’s Shanghai Exchange increased 0.7% (down 11.7%). Turkey's Borsa Istanbul National 100 index was hammered 5.2% (up 3.5%). Russia's MICEX equities index declined 1.0% (up 11.4%).
Junk bond mutual funds saw outflows of a remarkable $4.1bn (from Lipper) - the "largest outflow since August 2014."
Freddie Mac 30-year fixed mortgage rates jumped seven bps last week to an almost five-month high 3.54% (down 33bps y-o-y). Fifteen-year rates rose six bps to 2.84% (down 25bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates up seven bps to 3.74% (down 13bps).
Federal Reserve Credit last week declined $17.3bn to $4.413 TN. Over the past year, Fed Credit contracted $39bn (0.9%). Fed Credit inflated $1.602 TN, or 57%, over the past 208 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt fell $4.9bn last week to a six-year low $3.120 TN. "Custody holdings" were down $163bn y-o-y, or 5.0%.
M2 (narrow) "money" supply last week surged another $40.4bn to $13.156 TN. "Narrow money" expanded $941bn, or 7.7%, over the past year. For the week, Currency increased $0.5bn. Total Checkable Deposits jumped $48bn, while Savings Deposits fell $15bn. Small Time Deposits slipped $0.8bn. Retail Money Funds gained $7.7bn.
Total money market fund assets jumped $26.2bn to a 10-week high $2.677 TN. Money Funds declined $25bn y-o-y (0.9%).
Total Commercial Paper increased $4.3bn to $907bn. CP declined $150bn y-o-y, or 14.2%.
Currency Watch:
November 4 – Wall Street Journal (Alex Frangos): “Markets have grown more accustomed to the slow-motion decline in the value of the Chinese yuan. The currency’s next milestone, however, may usher in a more challenging period. China’s currency has fallen nearly 4% against the dollar this year, with a chunk of that move taking place over the past month… Beijing has spent more than $500 billion in reserves to manage the yuan’s slide over the past two years on a balance-of-payments basis. Still, the yuan has slipped from 6.06 a dollar to above 6.75. That is getting close to 6.82, the level around which the yuan was pegged for an extended period from 2008 until 2010… The two years in which the yuan was stuck around 6.82 was also the period of the largest inflows into the Chinese economy, to the tune of $764 billion, noted Kevin Lai of Daiwa Securities. Quantitative easing in the U.S. was in full effect and trillions flowed to emerging markets, especially China. Individuals and companies that borrowed in dollars or brought money in as a carry trade may have hung on until now…”
The U.S. dollar index dropped 1.5% to 96.9 (down 1.8% y-t-d). For the week on the upside, the British pound increased 2.7%, the New Zealand dollar 2.3%, the Swiss franc 2.0%, the South African rand 1.9%, the Japanese yen 1.6%, the euro 1.4%, the Danish krone 1.4%, the Norwegian krone 1.3%, the Australian dollar 1.0%, the Swedish krone 0.7%, the Singapore dollar 0.6% and the South Korean won 0.1%. For the week on the downside, the Brazilian real declined 1.1% and the Mexican peso slipped 0.2%. The Chinese yuan recovered 0.2% versus the dollar (down 3.9% y-t-d).
Commodities Watch:
November 1 – Reuters (Julie Verhage and Sid Verma): “There's one certain winner of next week's presidential election, according to HSBC…: investors in gold. Although they deem a Donald Trump victory more supportive for the price of the metal than a win by Hillary Clinton, the bank's Chief Precious Metals Analyst James Steel says it'll enjoy at least an 8% jump whoever wins the race. Both candidates have espoused trade policies that could stimulate demand, with gold offering a potential ‘protection against protectionism,’ he says.”
The Goldman Sachs Commodities Index sank 5.7% (up 12% y-t-d). Spot Gold jumped 2.3% to $1,305 (up 23%). Silver rallied 3.8% to $18.43 (up 34%). Crude sank $4.59 to $44.07 (up 19%). Gasoline dropped 6.1% (up 9%), and Natural Gas slipped 0.4% (up 18%). Copper gained 3.1% (up 6%). Wheat increased 1.4% (down 12%). Corn fell 1.8% (down 3%).
China Bubble Watch:
November 2 – Reuters (Kevin Yao): “China's growing debt and property risks have touched off an internal debate over whether China should tolerate growth as low as 6% in 2017 to allow more room for painful reforms aimed at reducing industrial overcapacity and indebtedness. The government has said economic growth of at least 6.5% is needed each year through to 2020 to meet a previously stated goal of doubling GDP and per capita income by 2020 from 2010 levels. It aims for 6.5-7% growth this year. Many advisers expect the government to stick to this year's target in 2017, or at best change the wording to ‘around 6.5%’ to allow for a slightly lower expansion rate next year. But some advisers say maintaining growth above 6.5% is unrealistic because it will force the government to keep up costly economic stimulus measures that have stoked concerns about a sharp rise in credit and the property market.”
November 3 – Bloomberg (Sid Verma and Narae Kim): “Brace yourself. Beijing was embroiled in a spate of frenzied dollar-selling last month as capital outflows and a depreciating yuan saw foreign-exchange reserves tumble by $80 billion, resuming 2015's sharp declines in the country's monetary war chest after a period of relative stability between February and September this year. That's the prediction of analysts Khoon Goh of Australia & New Zealand Banking Group Ltd, and Jens Nordvig of Exante Data LLC…, who reckon markets have underestimated the likely scale of currency intervention by the People's Bank of China in light of the fall of the yuan relative to the dollar.”
November 2 – Bloomberg (Tracy Alloway): “That's a statement published this week by the National Association of Financial Market Institutional Investors. It heralds the start of trading, in China, of credit-default swaps (CDS), or derivatives used by investors to protect against default by companies and other entities… Setting aside the question of whether these new instruments will be deployed in large enough sums to make a difference to investors, there are other looming problems. For instance, there is a thorny issue highlighted by a recent note from Goldman Sachs… Just who, asks Goldman Analyst Kenneth Ho, is selling CDS protection on Chinese corporates? Credit-default swaps represent a binary bet on a company's creditworthiness, with the buyer of protection paying premiums to a protection-seller in return for an insurance-like payout should the bonds sour… And while the Chinese government is clearly keen on transferring credit risk through the use of such instruments, one wonders just who they are transferring risk to. ‘Although such products will provide lenders with a tool to hedge their credit exposures by purchasing CDS protection, it is unclear who will be the seller of the protection, and if the sellers are other financial institutions, the credit risks are merely transferred to other parts of the financial sector,’ writes Ho.”
November 2 – Financial Times (Gabriel Wildau): “Chinese hedge funds are providing margin finance for leveraged bets on the country’s booming commodity futures market, in an echo of the practices that led to last year's stock market boom and bust. Futures prices for the so-called ferrous complex of steel, iron ore, coking coal and coke have risen sharply this year as Chinese fiscal and monetary stimulus has produced a revival of construction activity… Rising commodity prices have in turn fuelled speculation in the futures markets… Commodity trading has surged in China as retail investors, rich individuals and wealth managers use the sector as a quick and easy way to place leveraged bets… Some hedge funds are also using structured investment products to provide margin loans to investors looking to ride the futures boom. Hedge funds generally buy the senior tranche, which promises a fixed return. Others buy the subordinate tranche, putting up some of their money as margin and borrowing funds from the senior tranche to enlarge the investment.”
November 2 – Bloomberg: “China’s export growth to emerging markets that helped it weather the global financial crisis has fallen away, adding to the drag on manufacturers as demand from advanced economies fails to pick up the slack. Exports to developing nations fell 6% in the second quarter while those to fuel-exporting countries in the Middle East and beyond flat-lined after a 22% plunge in the first three months.”
November 4 – Wall Street Journal (Saumya Vaishampayan, Gregor Stuart Hunter and Chao Deng): “Chinese investors looking for a refuge from the weakening yuan are turning to bitcoin. Total trading in the virtual currency reached 47 million bitcoins last week, the highest-ever level based on data going back to 2011. Prices meanwhile hit a more-than four-month high of $742.46 on Wednesday, according to CoinDesk data. The vast majority of the action has been taking place in China, the world’s second-largest economy, with bitcoin trading on three Chinese exchanges accounting for 98% of global volume in the past month.”
Europe Watch:
November 3 – Reuters (Balazs Koranyi and Francesco Canepa): “European Central Bank policymaker Jens Weidmann called… for ‘patience’ with bank monetary policy, warning that extraordinary stimulus loses its effect over time while increasing stability risk. ‘All in all, the risks of ultra-loose monetary policy are becoming increasingly clear,’ he told a business forum… ‘It is important to give the measures taken enough time to have an impact on the inflation rate… This focus on the medium term – alongside the fact that the euro area is still struggling to overcome the longer-term economic implications of the biggest economic shock since World War II – underscores the merits of patience.’”
November 3 – Bloomberg (Rainer Buergin): “’Monetary policy has to the greatest possible extent reached the limits of its possibilities, with all the risks and side effects,” German Finance Minister Wolfgang Schaeuble says at a conference… ‘We have a common currency now, but this common currency mustn’t undermine incentives for necessary reforms’ in the euro area…”
November 3 – Bloomberg (Rainer Buergin): “German government’s council of economic advisers says ‘the extent of monetary easing in the euro area is no longer appropriate given the region’s economic recovery.” ECB policy ‘threatens financial stability’… ‘The ECB should slow down its bond purchases and end them earlier’…”
November 2 – Bloomberg (Jeff Black): “Grim mutterings about European Central Bank policy can probably be heard echoing around the skyscrapers of Frankfurt's financial district on any given day: Low interest rates, tough supervision, no bonds left out there to buy, etcetera. David Folkerts-Landau, chief economist of Deutsche Bank AG has taken those concerns to a whole new level, and has just published an excoriating attack on ECB policy. The research note is entitled ‘The Dark Sides of QE.’ Here’s a taste: ‘While European central bankers commend themselves for the scale and originality of monetary policy since 2012, this self-praise appears increasingly unwarranted,’ he writes, going on to conclude that the ‘ECB is stuck ... between an unfavorable equilibrium of low growth, high unemployment and zero reform momentum on the one hand and growing risks to core country balance sheets on the other.’ Folkerts-Landau lists a number of the dastardly deeds of the ECB’s 80 billion-euro ($89 billion) a month asset-purchase program, which, lest we forget, has so far achieved its aim of preventing a spiral of deflation in the euro area: Bond prices have lost their signaling function; national balance sheets risk being overburdened; savers are being penalized; asset bubbles are forming.”
November 1 – Reuters (Abhinav Ramnarayan): “Italy's borrowing costs hit eight-month highs on Tuesday with investors focused on political risks and stuttering banking sector reforms there as anxiety about other lower-rated euro zone nations has eased… The gap between Italian and Spanish 10-year borrowing costs - viewed as a key indicator of political risk - rose on Monday to 41.4 basis points, its highest since 2012… Concern about Italy centres on a referendum on Dec. 4 in which voters will decide whether to approve Prime Minister Matteo Renzi's programme of constitutional reforms to reduce the role of the Senate and the powers of regional governments.”
November 1 – Reuters (Jan Strupczewski): “Italy's response to the European Commission's concerns regarding its 2017 draft budget assumptions has not been constructive, an EU official said…, as Rome tries to avoid belt-tightening measures ahead of a Dec. 4 referendum. Instead of cutting its structural budget deficit, Prime Minister Matteo Renzi's government plans to increase it, citing challenges like the migration crisis, post-earthquake reconstruction and lower-than-expected economic growth.”
Brexit Watch:
November 3 – Bloomberg (Michael Holden): “A British court ruled… that the government needs parliamentary approval to start the process of leaving the European Union, potentially delaying Prime Minister Theresa May's Brexit plans. The government said it would appeal against the ruling by England's High Court, and Britain's Supreme Court is expected to consider the appeal early next month. A spokeswoman for May said the prime minister still planned to launch talks on the terms of Brexit by the end of March and added: ‘We have no intention of letting this derail our timetable.’”
Fixed-Income Bubble Watch:
November 1 – Wall Street Journal (Chris Dieterich): “The bond market's October retreat fueled record withdrawals from some popular exchange-traded funds, the latest sign of investor anxiety over inflation. Investors pulled $998 million last Thursday from iShares iBoxx High Yield Corporate Bond ETF, the oldest and largest junk-bond ETF. That is the largest daily withdrawal on record… Investors also pulled $1.7 billion last week from the iShares iBoxx $ Investment Grade Corporate Bond ETF, the biggest weekly outflow since its inception in 2002… Some 46% of the U.S. investment-grade market, or $2.7 trillion, is controlled by funds and SMAs.”
November 4 – Wall Street Journal (Claire Boston, Sally Bakewell and Rachel Evans): “The worst debt-market slump in seven months is starting to disrupt bond sales by risky companies as investors retreat from funds that buy the debt. Construction company Tutor Perini Corp. pulled a $500 million speculative-grade bond offering because of ‘adverse market conditions’... That left Wall Street underwriters without a junk-rated sale for the second day this week… Yields on high-yield bonds jumped for six straight days to 6.5% on Thursday -- their highest in three months…”
November 3 – Bloomberg (Selcuk Gokoluk): “Companies are selling fewer bonds for capital expenditure even as European Central Bank stimulus measures designed to boost the economy spur record issuance, according to Fitch Ratings. Borrowers are using the proceeds to fund mergers and refinance debt instead of investing in factories and equipment, Fitch analysts Michael Larsson and Roelof Steenkamp wrote…”
Global Bubble Watch:
October 31 – Reuters (Eric Platt): “A surge of blockbuster takeovers and buyouts has provided renewed ammunition for the corporate bond market, supplying fresh kindling in what is already set to be a record year of debt issuance. Bankers and investors are eyeing a wave of potential bond offerings to finance mergers that will see the likes of telecom behemoth AT&T, chipmaker Qualcomm, fibre optic group CenturyLink and cigarette company British American Tobacco lever up… Companies and banks have already issued $1.4tn of debt in the US this year, a record pace, according to Dealogic. Acquisitions and share buybacks have been among the largest determinants of those borrowings over the last decade, with the former accounting for $241bn of 2016’s haul… Global bond offerings are up 9% from last year at $5.8tn, and bankers say a new all time high could be set before year end.”
November 2 – Financial Times (Emiko Terazono): “When Michael Farmer, founding partner of metals hedge fund Red Kite, this week blasted high-frequency traders who use powerful computers to execute orders at ultrafast speeds, he spoke for many in the commodities world. ‘High-frequency trading appears to have no other purpose than to make money from the trading of other participants by jumping ahead of them,’ said Mr Farmer, in his keynote address at the LME Week dinner. Unfortunately for Mr Farmer, commodities, like other areas of finance, face an era of digitally driven hyperliquid markets when data moves in terabytes and decisions are made in milliseconds. Call it the commoditisation of commodity trading.”
U.S. Bubble Watch:
November 2 – Wall Street Journal (AnnaMaria Andriotis): “Banks no longer reign over the mortgage market. They accounted for less than half of the mortgage dollars extended to borrowers during the third quarter—the first quarter banks, credit unions and other depository institutions have fallen below that threshold in more than 30 years, according to Inside Mortgage Finance. Taking their place are nonbank lenders more willing to make riskier loans banks now shun… Many of the loans these lenders are originating are effectively guaranteed by the U.S. government… Among the top 50 mortgage lenders, nonbanks extended 51.4% of loan dollars in the third quarter, up from 46% for all of last year, 19% in 2012 and 9% in 2009… The two biggest nonbank mortgage lenders are Quicken Loans Inc. and PennyMac… Many nonbanks are courting borrowers who can’t get approved by banks, which have favored customers with pristine credit.”
November 1 – Reuters (Jan Strupczewski): “Italy's response to the European Commission's concerns regarding its 2017 draft budget assumptions has not been constructive, an EU official said…, as Rome tries to avoid belt-tightening measures ahead of a Dec. 4 referendum. Instead of cutting its structural budget deficit, Prime Minister Matteo Renzi's government plans to increase it, citing challenges like the migration crisis, post-earthquake reconstruction and lower-than-expected economic growth.”
Brexit Watch:
November 3 – Bloomberg (Michael Holden): “A British court ruled… that the government needs parliamentary approval to start the process of leaving the European Union, potentially delaying Prime Minister Theresa May's Brexit plans. The government said it would appeal against the ruling by England's High Court, and Britain's Supreme Court is expected to consider the appeal early next month. A spokeswoman for May said the prime minister still planned to launch talks on the terms of Brexit by the end of March and added: ‘We have no intention of letting this derail our timetable.’”
Fixed-Income Bubble Watch:
November 1 – Wall Street Journal (Chris Dieterich): “The bond market's October retreat fueled record withdrawals from some popular exchange-traded funds, the latest sign of investor anxiety over inflation. Investors pulled $998 million last Thursday from iShares iBoxx High Yield Corporate Bond ETF, the oldest and largest junk-bond ETF. That is the largest daily withdrawal on record… Investors also pulled $1.7 billion last week from the iShares iBoxx $ Investment Grade Corporate Bond ETF, the biggest weekly outflow since its inception in 2002… Some 46% of the U.S. investment-grade market, or $2.7 trillion, is controlled by funds and SMAs.”
November 4 – Wall Street Journal (Claire Boston, Sally Bakewell and Rachel Evans): “The worst debt-market slump in seven months is starting to disrupt bond sales by risky companies as investors retreat from funds that buy the debt. Construction company Tutor Perini Corp. pulled a $500 million speculative-grade bond offering because of ‘adverse market conditions’... That left Wall Street underwriters without a junk-rated sale for the second day this week… Yields on high-yield bonds jumped for six straight days to 6.5% on Thursday -- their highest in three months…”
November 3 – Bloomberg (Selcuk Gokoluk): “Companies are selling fewer bonds for capital expenditure even as European Central Bank stimulus measures designed to boost the economy spur record issuance, according to Fitch Ratings. Borrowers are using the proceeds to fund mergers and refinance debt instead of investing in factories and equipment, Fitch analysts Michael Larsson and Roelof Steenkamp wrote…”
Global Bubble Watch:
October 31 – Reuters (Eric Platt): “A surge of blockbuster takeovers and buyouts has provided renewed ammunition for the corporate bond market, supplying fresh kindling in what is already set to be a record year of debt issuance. Bankers and investors are eyeing a wave of potential bond offerings to finance mergers that will see the likes of telecom behemoth AT&T, chipmaker Qualcomm, fibre optic group CenturyLink and cigarette company British American Tobacco lever up… Companies and banks have already issued $1.4tn of debt in the US this year, a record pace, according to Dealogic. Acquisitions and share buybacks have been among the largest determinants of those borrowings over the last decade, with the former accounting for $241bn of 2016’s haul… Global bond offerings are up 9% from last year at $5.8tn, and bankers say a new all time high could be set before year end.”
November 2 – Financial Times (Emiko Terazono): “When Michael Farmer, founding partner of metals hedge fund Red Kite, this week blasted high-frequency traders who use powerful computers to execute orders at ultrafast speeds, he spoke for many in the commodities world. ‘High-frequency trading appears to have no other purpose than to make money from the trading of other participants by jumping ahead of them,’ said Mr Farmer, in his keynote address at the LME Week dinner. Unfortunately for Mr Farmer, commodities, like other areas of finance, face an era of digitally driven hyperliquid markets when data moves in terabytes and decisions are made in milliseconds. Call it the commoditisation of commodity trading.”
U.S. Bubble Watch:
November 2 – Wall Street Journal (AnnaMaria Andriotis): “Banks no longer reign over the mortgage market. They accounted for less than half of the mortgage dollars extended to borrowers during the third quarter—the first quarter banks, credit unions and other depository institutions have fallen below that threshold in more than 30 years, according to Inside Mortgage Finance. Taking their place are nonbank lenders more willing to make riskier loans banks now shun… Many of the loans these lenders are originating are effectively guaranteed by the U.S. government… Among the top 50 mortgage lenders, nonbanks extended 51.4% of loan dollars in the third quarter, up from 46% for all of last year, 19% in 2012 and 9% in 2009… The two biggest nonbank mortgage lenders are Quicken Loans Inc. and PennyMac… Many nonbanks are courting borrowers who can’t get approved by banks, which have favored customers with pristine credit.”
Federal Reserve Watch:
November 2 – Bloomberg (Christopher Condon): “Federal Reserve policy makers left interest rates unchanged while saying the argument for higher borrowing costs strengthened further amid accelerating inflation, reinforcing expectations for a hike next month. ‘The committee judges that the case for an increase in the federal funds rate has continued to strengthen but decided, for the time being, to wait for some further evidence of continued progress toward its objectives,’ the Federal Open Market Committee said… following a two-day meeting in Washington. The decision was 8-2. Fed officials revealed growing confidence that inflation is on track to reach their 2% target.”
Japan Watch:
November 1 – Wall Street Journal (Takashi Nakamichi and Megumi Fujikawa): “The Bank of Japan has given up its starring role in Abenomics, for now. After refitting its tool kit in September, the central bank opted Tuesday to leave policy unchanged, despite sharply cutting its inflation forecasts. And the bank doesn’t look likely to act in the coming months either as it backpedals to a less clear goal of maintaining ‘momentum’ toward its 2% inflation target. At its policy meeting, the central bank kept its new anchor for 10-year government bond yields at zero. It also left its target for a short-term interest rate on some commercial bank deposits at minus 0.1%. The BOJ acknowledged it had fallen further behind its schedule to generate 2% inflation. Its new forecast tips the annual inflation rate to reach 2% around fiscal 2018, which ends in March 2019… Mr. Kuroda’s BOJ has nearly tripled the amount of cash in the banking sector to over 400 trillion yen ($3.8 trillion) in addition to pushing the deposit rate below zero. But the latest inflation figures showed a seventh straight month of price falls…”
November 2 – Bloomberg (Yoshiaki Nohara): “The Bank of Japan is signaling that Prime Minister Shinzo Abe’s government needs to do more to help achieve 2% inflation and revive the economy, former BOJ board member Sayuri Shirai said… The central bank’s message was that it is now up to Abe’s government to do more, according to Shirai... ‘The BOJ sent a signal that the BOJ has done everything they could and already achieved very accommodative monetary environment and it’s now time for the government to do something to increase aggregate demand,’ Shirai, …professor of economics at Keio University, said…”
EM Watch:
November 3 – Reuters (Helen Reid): “Emerging markets will see net capital outflows in 2017 for the fourth year in a row but the projected outflows of $206 billion will be much less than the $373 billion expected this year, the Institute for International Finance said… The group, one of the most authoritative trackers of capital flows to and from the developing world, predicts $769 billion in private non-resident inflows into emerging markets in 2017, up from this year's $640 billion, a reflection of improving flows to banks, stocks and bonds. However, these inflows will be offset by money sent offshore by residents of developing countries, especially China which accounts for much of the $206 billion net capital flight, the IIF said. Net capital flight was as high as $739 billion last year.”
November 1 – Wall Street Journal (Kwanwoo Jun and In-Soo Nam): “South Korea plans to spend $9.6 billion on ships from local yards to stave off the collapse of its shipbuilding industry, the latest evidence of the wrenching impact of a prolonged slump in global trade. For decades, shipbuilding has been a driving force of the South Korean economy. The country is home to the world’s three biggest shipbuilders measured by order volume, and last year ships accounted for 7.6% of South Korea’s exports… A glut of container ships in the water and not enough cargo to fill them in the past few years has led to record-low freight rates, hammering the industry and prompting owners to further cut or push back new ship orders.”
November 3 – Reuters (Lin Noueihed, Eric Knecht and Ahmed Aboulenein): “Egypt floated its currency on Thursday and said it would make a final push to secure a $12 billion IMF loan within days as it seeks to overhaul its dollar-starved economy and unlock foreign investment. Egypt initially devalued the pound by about a third early on Thursday, taking it from its previous peg of 8.8 to the dollar to an initial guidance rate of 13 before allowing the currency to drift down to about 14.65 at a special dollar auction.”
Leveraged Speculator Watch:
November 4 – Wall Street Journal (Gregory Zuckerman): “John Paulson’s subprime trade led to historic fortune. His drug-company investments? Big losses and plunging assets. Mr. Paulson’s hedge-fund firm, Paulson & Co., is suffering painful losses this year, extending a period of uneven performance that has left the firm managing about $12 billion, down from $38 billion in 2011. Behind the recent difficulties: A big, faulty bet on pharmaceutical companies, as well as excessive caution about the broader market, according to people close to the matter.”
November 2 – Bloomberg (Nishant Kumar): “Losses at Leda Braga’s computer-driven hedge fund this year are running at about twice the level suffered by a macro fund run by billionaire Alan Howard. Yet, while Braga has raised money, investors have pulled billions of dollars from Howard’s fund. The divergence is a sign of the sweeping changes underway in the $3 trillion global hedge fund industry, where investors are shunning flesh and blood traders and putting their faith, and hard cash, in algorithms to bet on macro economic trends. Star traders are losing clients after years of poor returns in a near-zero-rate environment, with managers finding it tough to read economic indicators, predict markets and get an edge in an era of widespread access to information. Investors are turning to model-driven funds in the hope that machines, detached from all emotional bias, are better placed to make money or protect their capital should markets turn volatile. ‘There is a general skepticism about the ability of discretionary macro managers to make money with rates at zero,’ said Michele Gesualdi, who oversees $3 billion as the chief investment officer at Kairos Investment Management… ‘Investors understand trend following and think this is more predictable.’ Funds that use mathematical models have raised $21 billion this year, according to… eVestment, while the rest of the industry suffered $60 billion of withdrawals.”
Geopolitical Watch:
November 1 – Reuters (Tulay Karadeniz, Can Sezer and Daren Butler): “Turkey's military has begun deploying tanks and other armored vehicles to the town of Silopi near the Iraqi border, in a move the defense minister said… was related to the fight against terrorism and developments across the border. Fikri Isik said Turkey had ‘no obligation’ to wait behind its borders and would do what was necessary if Kurdistan Workers Party (PKK) militants took a foothold in northwest Iraq's Sinjar region… ‘We will not allow the threat to Turkey to increase,’ he told broadcaster A Haber…”
November 3 – Reuters (Ece Toksabay, Tuvan Gumrukcu and Madeline Chambers): “Turkish President Tayyip Erdogan said… Germany had become a haven for terrorists and would be ‘judged by history’, accusing it of failing to root out supporters of a U.S.-based cleric Ankara blames for July's failed military coup. Erdogan said Germany had long harbored militants from the Kurdistan Workers Party (PKK), which has waged a three-decade insurgency for Kurdish autonomy, and far-leftists from the DHKP-C… ‘We don't have any expectations from Germany but you will be judged in history for abetting terrorism ... Germany has become an important haven for terrorists’…”
November 2 – NBC News (Cynthia McFadden, Tracy Connor and William M. Arkin): “In his battle with the United States, Vladimir Putin has a new target — Microsoft. The Kremlin is backing a plan to rid government offices and state-controlled companies of all foreign software, starting with Moscow city government replacing Microsoft products with Russian ones, according to a senior U.S. intelligence official. The Russians have also moved toward blocking LinkedIn, the U.S.-based networking site that Microsoft is in the process of buying.”
November 2 – Bloomberg (Christopher Condon): “Federal Reserve policy makers left interest rates unchanged while saying the argument for higher borrowing costs strengthened further amid accelerating inflation, reinforcing expectations for a hike next month. ‘The committee judges that the case for an increase in the federal funds rate has continued to strengthen but decided, for the time being, to wait for some further evidence of continued progress toward its objectives,’ the Federal Open Market Committee said… following a two-day meeting in Washington. The decision was 8-2. Fed officials revealed growing confidence that inflation is on track to reach their 2% target.”
Japan Watch:
November 1 – Wall Street Journal (Takashi Nakamichi and Megumi Fujikawa): “The Bank of Japan has given up its starring role in Abenomics, for now. After refitting its tool kit in September, the central bank opted Tuesday to leave policy unchanged, despite sharply cutting its inflation forecasts. And the bank doesn’t look likely to act in the coming months either as it backpedals to a less clear goal of maintaining ‘momentum’ toward its 2% inflation target. At its policy meeting, the central bank kept its new anchor for 10-year government bond yields at zero. It also left its target for a short-term interest rate on some commercial bank deposits at minus 0.1%. The BOJ acknowledged it had fallen further behind its schedule to generate 2% inflation. Its new forecast tips the annual inflation rate to reach 2% around fiscal 2018, which ends in March 2019… Mr. Kuroda’s BOJ has nearly tripled the amount of cash in the banking sector to over 400 trillion yen ($3.8 trillion) in addition to pushing the deposit rate below zero. But the latest inflation figures showed a seventh straight month of price falls…”
November 2 – Bloomberg (Yoshiaki Nohara): “The Bank of Japan is signaling that Prime Minister Shinzo Abe’s government needs to do more to help achieve 2% inflation and revive the economy, former BOJ board member Sayuri Shirai said… The central bank’s message was that it is now up to Abe’s government to do more, according to Shirai... ‘The BOJ sent a signal that the BOJ has done everything they could and already achieved very accommodative monetary environment and it’s now time for the government to do something to increase aggregate demand,’ Shirai, …professor of economics at Keio University, said…”
EM Watch:
November 3 – Reuters (Helen Reid): “Emerging markets will see net capital outflows in 2017 for the fourth year in a row but the projected outflows of $206 billion will be much less than the $373 billion expected this year, the Institute for International Finance said… The group, one of the most authoritative trackers of capital flows to and from the developing world, predicts $769 billion in private non-resident inflows into emerging markets in 2017, up from this year's $640 billion, a reflection of improving flows to banks, stocks and bonds. However, these inflows will be offset by money sent offshore by residents of developing countries, especially China which accounts for much of the $206 billion net capital flight, the IIF said. Net capital flight was as high as $739 billion last year.”
November 1 – Wall Street Journal (Kwanwoo Jun and In-Soo Nam): “South Korea plans to spend $9.6 billion on ships from local yards to stave off the collapse of its shipbuilding industry, the latest evidence of the wrenching impact of a prolonged slump in global trade. For decades, shipbuilding has been a driving force of the South Korean economy. The country is home to the world’s three biggest shipbuilders measured by order volume, and last year ships accounted for 7.6% of South Korea’s exports… A glut of container ships in the water and not enough cargo to fill them in the past few years has led to record-low freight rates, hammering the industry and prompting owners to further cut or push back new ship orders.”
November 3 – Reuters (Lin Noueihed, Eric Knecht and Ahmed Aboulenein): “Egypt floated its currency on Thursday and said it would make a final push to secure a $12 billion IMF loan within days as it seeks to overhaul its dollar-starved economy and unlock foreign investment. Egypt initially devalued the pound by about a third early on Thursday, taking it from its previous peg of 8.8 to the dollar to an initial guidance rate of 13 before allowing the currency to drift down to about 14.65 at a special dollar auction.”
Leveraged Speculator Watch:
November 4 – Wall Street Journal (Gregory Zuckerman): “John Paulson’s subprime trade led to historic fortune. His drug-company investments? Big losses and plunging assets. Mr. Paulson’s hedge-fund firm, Paulson & Co., is suffering painful losses this year, extending a period of uneven performance that has left the firm managing about $12 billion, down from $38 billion in 2011. Behind the recent difficulties: A big, faulty bet on pharmaceutical companies, as well as excessive caution about the broader market, according to people close to the matter.”
November 2 – Bloomberg (Nishant Kumar): “Losses at Leda Braga’s computer-driven hedge fund this year are running at about twice the level suffered by a macro fund run by billionaire Alan Howard. Yet, while Braga has raised money, investors have pulled billions of dollars from Howard’s fund. The divergence is a sign of the sweeping changes underway in the $3 trillion global hedge fund industry, where investors are shunning flesh and blood traders and putting their faith, and hard cash, in algorithms to bet on macro economic trends. Star traders are losing clients after years of poor returns in a near-zero-rate environment, with managers finding it tough to read economic indicators, predict markets and get an edge in an era of widespread access to information. Investors are turning to model-driven funds in the hope that machines, detached from all emotional bias, are better placed to make money or protect their capital should markets turn volatile. ‘There is a general skepticism about the ability of discretionary macro managers to make money with rates at zero,’ said Michele Gesualdi, who oversees $3 billion as the chief investment officer at Kairos Investment Management… ‘Investors understand trend following and think this is more predictable.’ Funds that use mathematical models have raised $21 billion this year, according to… eVestment, while the rest of the industry suffered $60 billion of withdrawals.”
Geopolitical Watch:
November 1 – Reuters (Tulay Karadeniz, Can Sezer and Daren Butler): “Turkey's military has begun deploying tanks and other armored vehicles to the town of Silopi near the Iraqi border, in a move the defense minister said… was related to the fight against terrorism and developments across the border. Fikri Isik said Turkey had ‘no obligation’ to wait behind its borders and would do what was necessary if Kurdistan Workers Party (PKK) militants took a foothold in northwest Iraq's Sinjar region… ‘We will not allow the threat to Turkey to increase,’ he told broadcaster A Haber…”
November 3 – Reuters (Ece Toksabay, Tuvan Gumrukcu and Madeline Chambers): “Turkish President Tayyip Erdogan said… Germany had become a haven for terrorists and would be ‘judged by history’, accusing it of failing to root out supporters of a U.S.-based cleric Ankara blames for July's failed military coup. Erdogan said Germany had long harbored militants from the Kurdistan Workers Party (PKK), which has waged a three-decade insurgency for Kurdish autonomy, and far-leftists from the DHKP-C… ‘We don't have any expectations from Germany but you will be judged in history for abetting terrorism ... Germany has become an important haven for terrorists’…”
November 2 – NBC News (Cynthia McFadden, Tracy Connor and William M. Arkin): “In his battle with the United States, Vladimir Putin has a new target — Microsoft. The Kremlin is backing a plan to rid government offices and state-controlled companies of all foreign software, starting with Moscow city government replacing Microsoft products with Russian ones, according to a senior U.S. intelligence official. The Russians have also moved toward blocking LinkedIn, the U.S.-based networking site that Microsoft is in the process of buying.”
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