[Bloomberg] Global Stocks Keep Climbing as Treasuries Decline: Markets Wrap
[Reuters] Stocks on the march as 'Trump trades' bounce back
[Bloomberg] China’s Zombie Province Shows Trouble With Its Bond Market
[Bloomberg] China Central Bank Resumes Reverse Repo Sales After Six-Day Halt
[Bloomberg] Bookmakers’ Odds of a Le Pen Victory Surge to 1-in-3: Chart
[Bloomberg] Trump-Abe Rapport Won’t Stop Yen From Passing 100, JPMorgan Says
[Bloomberg] Singapore's Big Banks' Bad-Loan Woes May Be Getting Worse
[WSJ] Investors Have Second Thoughts About Trump Trade
[WSJ] IMF’s Stand on Greek Bailout Unnerves Europe
[FT] Donald Trump’s anger at Asian currency manipulators misses target
[FT] A failure to tell the truth imperils Greece and Europe
[Reuters] China upset at disputed islands mention in Japan-U.S. meeting
Sunday, February 12, 2017
Sunday Evening Links
[Bloomberg] Asia Extends Global Equity Rally as Yen Slides: Markets Wrap
[Reuters] Dollar gains after Trump-Abe meet, Asian shares firm
[Bloomberg] America’s Biggest Creditors Dump Treasuries in Warning to Trump
[Bloomberg] Japan 4th-Quarter GDP Rose 1.0% on Annualized Basis
[Bloomberg] Germany’s New Trump-Critic President Sees Stormy U.S. Ties Ahead
[CNBC] Trump administration is ‘complete insanity’ – and the markets are in a fantasy land: Stockman
[Reuters] Dollar gains after Trump-Abe meet, Asian shares firm
[Bloomberg] America’s Biggest Creditors Dump Treasuries in Warning to Trump
[Bloomberg] Japan 4th-Quarter GDP Rose 1.0% on Annualized Basis
[Bloomberg] Germany’s New Trump-Critic President Sees Stormy U.S. Ties Ahead
[CNBC] Trump administration is ‘complete insanity’ – and the markets are in a fantasy land: Stockman
Sunday's News Links
[Reuters] Greece, lenders risk euro zone instability if review talks drag on: EU's Dombrovskis
[Bloomberg] China’s Monetary Policy Is Looking Like Alphabet Soup
[Reuters] IMF's Lagarde says worried about European elections
[FT] Market questions: will the respite for French bonds last?
[Bloomberg] North Korean Nuclear Ambitions to Be Defining Issue for Trump
[Bloomberg] China’s Monetary Policy Is Looking Like Alphabet Soup
[Reuters] IMF's Lagarde says worried about European elections
[FT] Market questions: will the respite for French bonds last?
[Bloomberg] North Korean Nuclear Ambitions to Be Defining Issue for Trump
Saturday, February 11, 2017
Saturday's News Links
[AFP] Tsipras hits back at IMF, Germany over debt impasse
[Reuters] 'Significant uncertainty' about fiscal policy under Trump: Fed's Fischer
[Bloomberg] Fischer Says Fed Focused on Goals Amid Trump Policy Uncertainty
[Reuters] Greece says bailout deal close, but will not accept 'illogical' demands
[Reuters] Review: Defending America against the Fed
[NYT] A Tax Overhaul Would Be Great in Theory. Here’s Why It’s So Hard in Practice.
[WSJ] Vanguard Reaches $4 Trillion for First Time
[Reuters] China gets an early win off Trump, but many battles remain
[Reuters] 'Significant uncertainty' about fiscal policy under Trump: Fed's Fischer
[Bloomberg] Fischer Says Fed Focused on Goals Amid Trump Policy Uncertainty
[Reuters] Greece says bailout deal close, but will not accept 'illogical' demands
[Reuters] Review: Defending America against the Fed
[NYT] A Tax Overhaul Would Be Great in Theory. Here’s Why It’s So Hard in Practice.
[WSJ] Vanguard Reaches $4 Trillion for First Time
[Reuters] China gets an early win off Trump, but many battles remain
Friday, February 10, 2017
Weekly Commentary: Bubbles, Money and the VIX
February 10 - Financial Times (John Authers): “The Importance of Bubbles That Did Not Burst:”
“Is there really such a thing as a market bubble? I feel almost heretical answering this question. I and most readers have lived through two decades that were dominated by two vast investment bubbles and the attempt to deal with their consequences when they burst. Getting into definitions is beside the point. As US Supreme Court Justice Potter Stewart once said to define pornography: ‘I know it when I see it.’ And there is no point in arguing that the dotcom bubble that came to a head in 2000, or the credit bubble that burst seven years later, were not bubbles. I know a bubble when I see one, and they were bubbles. For those of my generation, spotting bubbles before they get too big, and thwarting them, seems to be vital for regulators and investors alike.”
“But in a great new compendium on financial history, several writers make the same points. The number of bubbles in history is very small. That makes it hard to draw any valid inferences from them. Further, definition is a real problem, and not just one for linguistic nitpickers. History’s acknowledged bubbles all have one critical factor in common; they burst. But that gives us a one-sided view. We need to look at those bubbles that did not burst and the crises that did not happen.”
We’re at the stage where there’s impassioned pushback against the Bubble Thesis. To most, it’s long been totally discredited. Even those sympathetic to Bubble analysis now question why the current backdrop cannot be sustained. “The number of bubbles in history is very small.” Most booms did not burst. So why then must the current boom end in crisis - when most don’t? It has become fashionable for writers to try to convince us that such an extraordinary backdrop need not end extraordinarily.
There’s great confusion that I wish could be clarified. I define Bubbles generally as “a self-reinforcing but inevitably unsustainable inflation.” There are numerous types of Bubbles. Most definitions and research (as was the case with the analysis cited by the FT’s Authers) focus specifically on asset prices (“an extreme acceleration in share prices. In one version, [Yale’s Will Goetzmann] required them to double in a year — which excluded the dotcom bubble and the Great Crash of 1929. To keep them in, he also tried a softer version where stocks doubled in three years”).
Behind every consequential Bubble is an inflation in underlying Credit. My analysis focuses on the nature of the monetary expansion responsible for the asset inflation. I’m less concerned with P/E ratios and valuation than I am Credit expansions and the nature of risk intermediation. Earnings are important, but more critical to the analysis is the degree to which they (and “fundamentals” more generally) are being inflated by monetary factors - and whether such inflation is sustainable or susceptible.
Credit Dynamics are key. Mr. Authers refers to the “dot.com” and “Credit” Bubbles. Yet the nineties Bubble was fueled by extraordinary expansions in GSE Credit, securitizations and corporate debt. Internet stocks inflated spectacularly, but in the grand scheme of the Bubble were rather inconsequential. The Bubble faltered initially in 2000 with the sharp reversal in technology stocks. Less embedded in memory is the near breakdown in corporate Credit back in 2002. The resulting aggressive Fed-induced reflation then spurred a doubling of mortgage Credit in just over six years. The transformation of risky Credit into perceived safe money-like securities (“Wall Street Alchemy”) was integral to both “tech” and “mortgage finance” Bubble periods. The fact that dot.com price inflation and overvaluation greatly exceeded that of home prices is meaningless.
When I initially titled my weekly writings the “Credit Bubble Bulletin” back in 1999, I anticipated that “Bubble” would remain in the title only on a short-term basis. And indeed, I thought the Bubble had burst in 2000/2001 and then again in 2008. But in both instances Credit Dynamics and resurgent monetary inflation made it clear to me that a more powerful Bubble had reemerged. Whether one prefers to date the beginning of the Great Credit Bubble 1992, 1987 or even 1971, it’s been inflating now for quite a long time. Too be sure, the expansion of government Credit over the past eight years puts mortgage Credit and other excesses to shame. I would argue that price distortions and risk misperceptions similarly overshadow those from the mortgage finance Bubble period.
Of course, the vast majority have become convinced that the boom is sustainable. Indeed, analysis these days is eerily reminiscent of “permanent plateau” jubilation from 1929. The bullish perspective sees an improving global economy and a powerful pro-growth agenda unfolding in the U.S. Worries about debt, China and such matters have turned stale. A contrary argument focuses on Credit Dynamics and the unsustainability of today’s unique monetary and market backdrops.
Over the years, I’ve made the point that a Bubble financed by junk bonds would not create a systemic issue. There are, after all, limits to the demand for high-risk debt. Long before such a boom could go to prolonged and dangerous extremes (imparting deep structural maladjustment), investors would shy away from increasingly unattractive Credit issued in clear excess. The boom would lose its monetary fuel.
I define contemporary “money” as a financial claim perceived as a safe and liquid store of (nominal) value. Money these days is Credit, but a special type of Credit. Unlike junk bonds, “money” enjoys essentially insatiable demand. As such, a boom fueled by “money” is a quite different animal than our above junk bond example. I would posit that a prolonged inflation of perceived safe “money” by its nature ensures far-reaching risk distortions. For one, Bubbles fueled by “money” appear especially sustainable, while a prolonged inflation of “money” virtually ensures a destabilizing crisis of confidence. Governments throughout history have abused money. Contemporary central bankers took it to a whole new level.
I referred to the “Moneyness of Credit” throughout the mortgage finance Bubble period, a boom financed largely by “AAA” money-like MBS, ABS and “repo” Credit. Back in 2009, with the arrival of enormous expansions of central bank Credit and fiscal deficits coupled with the Fed’s reflationary policies targeting the securities markets, I proffered the “global government finance Bubble” and the “Moneyness of Risk Assets.”
I understand the rationality of complacency. I appreciate that confidence runs high that this boom need not end badly. Those willing to bet on central banks have won, repeatedly. “Money” – to the tune of Trillions – has flowed with great abundance to managers and fund structures programmed to disregard risk. The consensus view holds that huge amounts of buying power await a market dip. Moreover, only “dips” at this point would side against the mighty bull.
There’s no mystery why the VIX ended the week near ten-year lows. And I don’t believe, as explained by an analyst on Bloomberg television, that improved global economic fundamentals explain unusually low implied equities market volatilities (VIX). The VIX clearly does not reflect global political and geopolitical uncertainties. Instead, it’s more a reflection of robust global “money” and Credit growth and the perception that central bankers will ensure ongoing monetary inflation while backstopping global securities markets. With impatient dip buyers - and central bankers not about to allow pullbacks to gain momentum - why not write put options and other derivative market “insurance”? Selling flood insurance during a drought. Central bankers have promised abundant liquidity and persistent loose financial conditions, while placing a floor under stock prices and a ceiling over market yields.
Returning to John Authers, when it comes to the current Bubble backdrop, I take exception to “I know it when I see it.” Rather, it’s the nature of Bubbles that the more conspicuous they appear the less systemic their impact. I point to the example of the conspicuous “tech” Bubble and much more systemic Bubble in “mortgage finance.” Even in the craziness of 2006 and early-2007, the truth of the matter is that few at the time recognized the Bubble.
Today’s Bubble is global, and it resides at the very heart of contemporary electronic “money.” This means, as we’ve already witnessed, that it can inflate almost indefinitely, at the discretion of a small group of central bankers and so long as their Credit is readily accepted. It’s unique in financial history, the consequence of the runaway global experiment in unfettered “money” and Credit. Even after tens of Trillions of issuance, the demand for central bank Credit (“money”) and (money-like) government debt is today as insatiable as ever. The downside is that this prolonged Bubble has inflated most assets across the globe. It has evolved to be deeply systemic on a global basis, with unprecedented distortions in risk perceptions and asset prices more generally.
There’s a reason why crises tend to erupt in the money markets. Panic quickly ensues when markets suddenly sense their perceived safe and liquid holdings are at risk. The VIX is low today because of the perception that global financial institutions remain flush with liquidity, buoyed by rising asset prices, and under the safekeeping of central bankers and government officials. The perception of moneyness pervades “repo” markets, and robust repo and securities financing markets convey easy access to liquidity for securities dealers and derivative players. The VIX is low because of extraordinary confidence in counterparties and the functioning of derivatives markets more generally. The VIX is low based on faith that Beijing will backstop China’s entire over-heated Credit system.
It’s worth recalling that a year ago bank stocks were under intense pressure around the world. For example, from 2015 highs to 2016 lows, Japanese bank stocks dropped almost 50%. Similar losses were shared by banks throughout Asia and Europe. Especially in early-2016, fears were mounting that a Credit crisis in China could unleash financial and economic stress around the globe. As a weak link in global finance, European banks were feeling the contagion. In short, there was heightened nervousness that risk was seeping back into the international daisy-chain of various bank liabilities. “Moneyness” – a now global phenomenon - was in jeopardy.
Well, “whatever it takes” – from strong-handed Chinese officials, from the inflationist BOJ and ECB, and from a dovish Fed - nipped potential crisis in the bud. Promises of a couple Trillion additional QE crushed global yields and kept the game going. Markets have inflated significantly over the past year. What will central banks do for an encore?
It is a principal thesis of Bubble Analysis that, once commenced, monetary inflations turn progressively difficult to control. Credit inflations raise myriad price levels throughout the economy and asset markets. Especially after years of inflating asset and securities markets, it will not be possible for global central bankers to walk away from QE without major consequences. The world is currently at peak QE, with major uncertainties surrounding future operations.
Europe, in particular, has begun to fret the effects of waning QE. I’ve highlighted the recent significant rise in sovereign yields in Portugal, Italy, Spain and Greece. I’ve noted the major widening of spreads between French and German bonds yields.
This week saw European bank stocks sink 2.4%. It’s worth highlighting the performance of the major French banks, with BNP Paribas (down 8.9%), Societe Generale (down 7.6%) and Credit Agricole (down 7.1%) posting notable declines. Italian banks were slammed 5.1%, increasing y-t-d losses to 6.6%. UniCredit led the list of widening bank CDS, followed by Banco Santander and Intesa Sanpaulo.
Similarly concerning, European sovereign spreads continued to widened. Safe haven German bund yields dropped nine bps to a five-week low 0.32%. The France to Germany 10-year yield spread widened seven to 74 bps, the widest going all the way back to tumultuous 2012. Italy’s spread widened 10 to 195 bps, trading this week at the widest level since early-2014. Spain was 11 wider to 138 bps, the widest since last June.
U.S. bank stocks also lagged this week’s market rally. But with Chinese and Asian banks enjoying strong gains, it might be too early to make much out of the return of European bank concerns. Yet it does have to start somewhere. ECB policies have encouraged Europe’s banks to (again) load up on government bonds at incredibly inflated prices. Now what?
Here in the U.S., markets this week took comfort in a relatively well-contained President Trump. He greeted Japanese Prime Minister Abe with a big, warm hug. He sent a letter to Chinese President Xi, stating that his Administration would honor the “One China” policy. While perhaps somewhat mollified by his correspondence, Chinese leadership must be deeply suspicious of Trump’s zeal for chumming around with Shinzo (Abe). But at least for now, our President was trying to get along with (most) folks. Markets got along well with the idea of “phenomenal” tax cuts.
For the Week:
The S&P500 added 0.8% (up 3.5% y-t-d), and the Dow gained 1.0% (up 2.6%). The Utilities rose 0.8% (up 1.0%). The Banks were unchanged (up 1.5%), while the Broker/Dealers added 0.6% (up 8.0%). The Transports jumped 1.6% (up 3.9%). The S&P 400 Midcaps (up 3.6%) and the small cap Russell 2000 (up 2.3%) both gained 0.8%. The Nasdaq100 advanced 1.3% (up 7.5%), and the Morgan Stanley High Tech index jumped 1.6% (up 8.9%). The Semiconductors were little changed (up 6.2%). The Biotechs gained 1.0% (up 8.5%). With bullion gaining $13, the HUI gold index rose 3.2% (up 20%).
Three-month Treasury bill rates ended the week at 53 bps. Two-year government yields slipped a basis point to 1.19% (unchanged y-t-d). Five-year T-note yields declined two bps to 1.89% (down 4bps). Ten-year Treasury yields fell five bps to 2.41% (down 4bps). Long bond yields gained three bps to 3.12% (up 5bps).
Greek 10-year yields fell 17 bps to 7.26% (up 24bps y-t-d). Ten-year Portuguese yields declined six bps to 4.12% (up 37bps). Italian 10-year yields added a basis point to 2.27% (up 46bps). Spain's 10-year yields gained two bps to 1.70% (up 32bps). German bund yields dropped nine bps to 0.32% (up 12bps). French yields declined two bps to 1.06% (up 38bps). The French to German 10-year bond spread widened seven to 74 bps. U.K. 10-year gilt yields fell 10 bps to 1.26% (up 2bps). U.K.'s FTSE equities index rose 1.0% (up 1.6%).
Japan's Nikkei 225 equities index jumped 2.4% (up 1.4% y-t-d). Japanese 10-year "JGB" yields slipped a basis point to 0.1% (up 5bps). The German DAX equities index was little changed (up 1.6%). Spain's IBEX 35 equities index declined 0.9% (up 0.3%). Italy's FTSE MIB index fell 1.3% (down 1.9%). EM equities were mixed. Brazil's Bovespa index gained 1.8% (up 9.8%). Mexico's Bolsa rose 1.2% (up 4.7%). South Korea's Kospi was about unchanged (up 2.4%). India’s Sensex equities index added 0.3% (up 6.4%). China’s Shanghai Exchange rose 1.8% (up 3.0%). Turkey's Borsa Istanbul National 100 index declined 1.0% (up 11.9%). Russia's MICEX equities index dropped 2.9% (down 3.2%).
Junk bond mutual funds saw inflows of $442 million (from Lipper).
Freddie Mac 30-year fixed mortgage rates dipped two bps to 4.17% (up 52bps y-o-y). Fifteen-year rates also declined two bps to 3.39% (up 44bps). The five-year hybrid ARM rate fell two bps to 3.21% (up 38bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down four bps to 4.27% (up 59bps).
Federal Reserve Credit last week added $1.6bn to $4.417 TN. Over the past year, Fed Credit contracted $29.8bn (down 0.7%). Fed Credit inflated $1.606 TN, or 57%, over the past 222 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt increased $3.8bn last week to $3.169 TN. "Custody holdings" were down $98bn y-o-y, or 3.0%.
M2 (narrow) "money" supply last week fell $16.8 billion to $13.282 TN. "Narrow money" expanded $795bn, or 6.4%, over the past year. For the week, Currency increased $0.2bn. Total Checkable Deposits declined $10.4bn, and Savings Deposits dipped $3.8bn. Small Time Deposits were little changed. Retail Money Funds slipped $2.6bn.
Total money market fund assets declined $3.2bn to $2.677 TN. Money Funds declined $79bn y-o-y (2.9%).
Total Commercial Paper was about unchanged at $965bn. CP declined $112bn y-o-y, or 10.4%.
Currency Watch:
The U.S. dollar index rallied 0.9% to 100.8 (down 1.6% y-t-d). For the week on the upside, the Brazilian real increased 0.3%, the Mexican peso 0.1% and the British pound 0.1%. For the week on the downside, the Norwegian krone declined 1.9%, the Swedish krona 1.7%, the New Zealand dollar 1.7%, the euro 1.3%, the Danish krone 1.3%, the Swiss franc 0.9%, the Singapore dollar 0.8%, the Japanese yen 0.5%, the South African rand 0.5%, the Canadian dollar 0.5%, the South Korean won 0.3% and the Australian dollar 0.1%. The Chinese yuan declined 0.16% versus the dollar (up 1.0% y-t-d).
Commodities Watch:
The Goldman Sachs Commodities Index gained 1.9% (up 2.3% y-t-d). Spot Gold rose 1.1% to $1,234 (up 7.1%). Silver surged 2.6% to $17.93 (up 12.2%). Crude added three cents to $53.86 (up 0.1%). Gasoline recovered 2.3% (down 4.9%), while Natural Gas slipped 0.9% (down 18.9%). Copper surged 5.8% (up 10.4%). Wheat jumped 4.4% (up 10%). Corn gained 2.5% (up 6.4%).
Trump Administration Watch:
February 10 – Fitch Rating: “The Trump Administration represents a risk to international economic conditions and global sovereign credit fundamentals, Fitch Ratings says. US policy predictability has diminished, with established international communication channels and relationship norms being set aside and raising the prospect of sudden, unanticipated changes in US policies with potential global implications. The primary risks to sovereign credits include the possibility of disruptive changes to trade relations, diminished international capital flows, limits on migration that affect remittances and confrontational exchanges between policymakers that contribute to heightened or prolonged currency and other financial market volatility.”
February 5 – Wall Street Journal (Nick Timiraos): “For an economy that isn’t in recession, the U.S. is facing one of the bleakest fiscal outlooks since World War II. One question that President Donald Trump will soon have to decide: How much is he willing to embrace even wider deficits? …Before Mr. Trump does anything, growing budget deficits are already on a course to push federal debt to record levels as a share of gross domestic product. That will make it extremely difficult to make good on promises to cut taxes and boost spending without spilling more red ink. Unlike past periods, deficits are swelling not because of an economic downturn or a short-term boost in discretionary spending, but because of the costs of caring for an aging population… Ten years ago, some 6,700 Americans turned 65 every day. The number is now 9,800 Americans, and it will rise to 11,700 by 2026.”
February 8 – Politico (Rachael Bade and Josh Dawsey): “President Donald Trump wants to rebuild the nation’s roads and bridges, boost military spending, slash taxes and build a ‘great wall.’ But Republicans on Capitol Hill have one question for him: How the heck will we pay for all of this? GOP lawmakers are fretting that Trump’s spending requests, due out in a month or so, will blow a gaping hole in the federal budget… Trump has signaled he’s serious about a $1 trillion infrastructure plan, as he promised on the campaign trail. He also wants Republicans to approve extra spending this spring to build a wall along the U.S. southern border and beef up the military — the combined price tag of which could reach $50 billion, insiders say. And that’s to say nothing of tax cuts, which the president’s team has suggested need not necessarily be paid for. Trump, meanwhile, has made clear he has little interest in tackling the biggest drivers of the national debt: entitlements.”
February 7 – Bloomberg (Steven T. Dennis and Elizabeth Dexheimer): “President Donald Trump’s pledge to dismantle the Dodd-Frank financial overhaul is colliding with the same reality as his pledge to gut Obamacare: The Republican majority in Congress can’t decide how to make it happen and Democrats are vowing to fight. Trump, who last month said Obamacare would be replaced ‘the same day or the same week’ or perhaps ‘the same hour,’ acknowledged Sunday that the health-care law isn’t going away anytime soon. ‘We should have something within the year and the following year,’ told Fox News’s Bill O’Reilly. The Dodd-Frank directive he signed Friday is hitting the same road block on Capitol Hill and at federal agencies.”
China Bubble Watch:
February 8 – Financial Times (Gabriel Wildau): “China’s central bank has quietly raised interest rates and tightened liquidity in recent days, fuelling speculation that the government’s policy focus has shifted from stimulating growth to addressing the risk from rising corporate debt. But economists say the recent rate rises are primarily aimed at deflating financial asset bubbles — especially in the bond market. Analysts still expect lending to increase rapidly this year, as authorities seek to ensure a strong economy in the run-up to a crucial leadership transition in November. At the same time, President Xi Jinping wants to ensure that the bond bubble does not explode spectacularly in an echo of the 2015 stock market bust.”
February 9 – Wall Street Journal (Rachel Rosenthal and Anjie Zheng): “Chinese companies are increasingly stepping in as lenders, as banks reduce their funding to struggling industries and the country’s mammoth bond market comes under strain. Company-to-company loans in China jumped by 20% last year to 13.2 trillion yuan ($1.92 trillion), according to research firm CEIC… This entrusted lending, so named because banks serve as middlemen, is now the fastest-growing major component of the country’s elaborate system of informal, or shadow, banking. The most recent surge came during the selloff in China’s $9.3 trillion bond market late last year. Big, cash-rich companies—mostly state-owned enterprises and some private companies—stepped in: New entrusted loans rose to 405.7 billion yuan ($59.02 billion) in December, more than double the month prior, …the highest monthly issuance in two years.”
February 7 – Bloomberg (Justina Lee): “China’s doors to foreign investors may be opening ever wider, but that’s not enough for many worried about finding an exit. Fourteen months after qualifying for official reserve-currency status, and after a series of steps opening up domestic markets to overseas funds, the take-up remains below estimates. For all China’s attraction as the second-largest economy with large and expanding domestic capital markets, regulators’ efforts to tamp down on outflows of money have stoked concerns. ‘There’s no return lower than not getting your money back,’ Brad Holzberger, chief money manager of QSuper… said… ‘We’re worried about understanding the transparency of decision making -- as well as property rights, rule of law, transmission of capital controls and those sorts of things.’”
February 9 – Reuters (Jake Spring): “China vehicle sales in January fell by the largest margin since 2015 for several global automakers, with General Motors Co and Ford Motor Co blaming the roll back of a tax cut on small-engined vehicles and the Lunar New Year holiday. Ford Motor said… its sales fell 32% year-on-year, while GM said sales dropped 24%... Toyota recorded a 18.7% drop in January sales, its largest decline since March 2015.”
Global Bubble Watch:
February 8 – Bloomberg (Birgit Jennen, Alessandro Speciale and Rainer Buergin): “Germany has abandoned a renewed effort to push the Group of 20 to rein in monetary stimulus, according to people familiar with the matter. German officials failed to convince counterparts that the G-20 should support language backing tighter monetary policy to promote global financial resilience, the people said… Germany had drafted it in a document as part of its presidency of the group this year, and will host finance chiefs next month in the spa town of Baden-Baden.”
February 9 – Reuters: “Germany's central bank is bringing home gold reserves stored in places like New York and Paris faster than planned… Stashed away at the height of the Cold War in safe havens well out of Moscow's reach, the 3,378-tonne, 120 billion-euro gold stockpile has become a symbol of Germany's economic ascent and a guardian of its stability. But with Europe stumbling from crisis to crisis, the German public has grown uneasy about keeping the gold abroad. Some even argue the world's second biggest bullion reserve may be needed to back a new deutschmark, should the euro zone break up.”
February 6 – Wall Street Journal (Min Zeng): “Political uncertainty in Europe sent investors piling into the harbor of U.S. Treasury bonds, German bunds and the U.K. gilts as government debt in France, Italy, Spain and Greece sold off. The yield on the 10-year French government bond rose to the highest since September 2015, with its premium relative to the 10-year German bund, the benchmark for debt markets in the eurozone, widening to the highest level since November 2012.”
February 8 – Financial Times (Thomas Hale): “The European Central Bank now holds more than €1.5tn of assets, which it has bought as part of purchases designed to kick-start the continent’s economy. Late last year, it announced it would extend purchases at the end of March, albeit reducing the rate from €80bn to €60bn a month. The scale of these purchases has dominated prices in credit markets across Europe, from government debt to covered bonds. But how have European markets been changed by the ECB, and how will they react if and when its dominance begins to recede? ‘There are not many debt markets that are not distorted in the euro area,’ says Joost Beaumont, an analyst at ABN Amro… One of the most significant distortions created from bulk buying of government bonds and other high quality debt has shown up in Europe’s repo market, a key part of the continent’s financial plumbing. Government bonds are used as collateral for repurchase or ‘repo’ trades — secured short-term loans between banks, investors and other market participants.”
February 7 – Financial Times (Elaine Moore and Robin Wigglesworth): “The advance of anti-euro politicians is prompting some eurozone investors to do something they have not felt the need to do for several years: pay close attention to the fine print of bond documents. As politicians calling for an exit from the European Economic and Monetary Union garner support in Italy, France and the Netherlands, concern over which euro-denominated sovereign bonds may be most at risk from a potential switch back into former national currencies is gradually becoming a talking point. Although eurozone government debt sold since January 2013 cannot be redenominated without bondholder approval, more than half the current €7tn in outstanding debt does not carry this safeguard clause.”
February 5 – Financial Times (Claire Jones, Javier Espinoza and Tom Hancock): “Chinese overseas deals worth almost $75bn were cancelled last year as a regulatory clampdown and restrictions on foreign exchange caused 30 acquisitions with European and US groups to fall through. The figures, which reveal a sevenfold rise in the value of cancelled deals from about $10bn in 2015, highlight a waning appetite for global dealmaking by the world’s second-largest economy. But despite more deals being abandoned, …Chinese direct investment into the US and Europe still more than doubled to a record $94.2bn in 2016.”
Brexit Watch:
February 7 – Financial Times (Jim Brunsden, Alex Barker and Claire Jones): “Europe’s leading central bankers are at loggerheads over one of the biggest economic judgments facing the continent: does a disorderly Brexit pose a financial stability risk? Mark Carney, Bank of England governor, fears a messy and severe Brexit could be a ‘Jenga’ moment that leads to the collapse of the legal architecture the underpins financial flows, hurting the City of London’s European customers even more than the UK itself. Mario Draghi, meanwhile, is largely unfazed. The European Central Bank chief has told negotiators from the remaining 27 EU nations that he is unworried about a highly mobile financial services industry that is used to adapting to new circumstances… Mr Carney’s argument centres on hedging. The fear is that without a post-Brexit market access deal, European banks and businesses would find it harder to tap Europe’s dominant derivatives market located in the City and find essential products to manage their balance sheet risks.”
Europe Watch:
February 8 – Wall Street Journal (Ian Talley): “The International Monetary Fund warned… that Greece once again risks a eurozone exit amid stalled bailout talks, sending the clearest signal yet the emergency lender isn’t likely to soon rejoin Europe’s failed efforts to fix the debt-weary nation. Fund officials said Athens and its European creditors must agree to much deeper economic overhauls and substantial debt relief before the fund considers contributing another cent. Two fund documents made public Tuesday reveal deep-seated skepticism that Europe’s latest financing program can fix the broken economy. Both the IMF’s annual review of Greece’s economy and a scathing assessment of its own second bailout to the deeply ailing economy underscore a third fund package is unlikely soon.”
February 8 – Financial Times (Jim Brunsden): “After months out of the spotlight, Greece’s international bailout programme is working its way back up bond traders’ list of worries. Yields on Greek sovereign debt are sharply up, reflecting concerns about splits between the eurozone and International Monetary Fund over the future of the programme and the sense that in an election-heavy year for Europe, the political window for an agreement is closing. Amid warnings from Athens that it will reject ‘the IMF’s absurd demands’ and disagreements this week within the fund’s executive board, eurozone finance ministers are under pressure to deliver a breakthrough at their next meeting on February 20. Greece’s international creditors, namely eurozone governments and the IMF, have markedly different opinions about the country’s economic situation and how to make its debt load manageable.”
February 7 – Reuters (John Geddie): “Investors in cash-strapped Greece appear to be losing faith in a pledge from European officials five years ago that the country's default would be a one-off. It was partly the strength of that promise that allowed Greece to make one of the fastest returns to markets of any defaulted sovereign, taking money from private investors in 2014 just two years after it had imposed hefty writedowns. The rationale for those who bought the bonds was simple: public creditors, which have lent Athens hundreds of billions of euros, but were spared in the 2012 restructuring, would have to take the next hit. Yet just months before the first instalment of the new debt falls due on July 17, a three-way quarrel between Greece, the EU and the International Monetary Fund, has triggered a fall in prices that suggests that logic might be flawed.”
February 7 – Reuters (Valentina Za): “The head of Italy's bank-bailout fund said… the country lacked a clear strategy for shifting 356 billion euros ($381bn) in problem loans. In an extraordinary outburst from a man picked by Rome to help tackle the problem, Alessandro Penati… said he felt ‘bitter and disillusioned’. His comments exposed tensions within the banking sector over Italy's rescue efforts. ‘There is no clear vision of the problem and no strategy,’ Penati said…, suggesting that he was virtually working alone on rescues that had revealed ‘horror stories’ within some banks.”
February 9 – Associated Press (Colleen Barry): “Italian bank UniCredit announced a heavy fourth-quarter loss Thursday of 13.6 billion euros ($14.5bn) as its new CEO moved to fortify the firm by cleaning up its portfolio of soured loans. Italy's largest bank by assets, UniCredit said that it incurred 13.2 billion euros in one-off expenses, which included a previously announced 8.1-billion-euro write-off on bad loans plus other charges such as contributions to an Italian fund to save weaker banks.”
February 7 – Bloomberg (Eleni Chrepa and Ian Wishart): “Greece’s two-year note yields neared 10% as a quarrel between the nation’s creditors over its fiscal targets boosted concern the country is running out of time to complete yet another review of its bailout program before Europe gears up for a busy election season beginning in March.”
“Is there really such a thing as a market bubble? I feel almost heretical answering this question. I and most readers have lived through two decades that were dominated by two vast investment bubbles and the attempt to deal with their consequences when they burst. Getting into definitions is beside the point. As US Supreme Court Justice Potter Stewart once said to define pornography: ‘I know it when I see it.’ And there is no point in arguing that the dotcom bubble that came to a head in 2000, or the credit bubble that burst seven years later, were not bubbles. I know a bubble when I see one, and they were bubbles. For those of my generation, spotting bubbles before they get too big, and thwarting them, seems to be vital for regulators and investors alike.”
“But in a great new compendium on financial history, several writers make the same points. The number of bubbles in history is very small. That makes it hard to draw any valid inferences from them. Further, definition is a real problem, and not just one for linguistic nitpickers. History’s acknowledged bubbles all have one critical factor in common; they burst. But that gives us a one-sided view. We need to look at those bubbles that did not burst and the crises that did not happen.”
We’re at the stage where there’s impassioned pushback against the Bubble Thesis. To most, it’s long been totally discredited. Even those sympathetic to Bubble analysis now question why the current backdrop cannot be sustained. “The number of bubbles in history is very small.” Most booms did not burst. So why then must the current boom end in crisis - when most don’t? It has become fashionable for writers to try to convince us that such an extraordinary backdrop need not end extraordinarily.
There’s great confusion that I wish could be clarified. I define Bubbles generally as “a self-reinforcing but inevitably unsustainable inflation.” There are numerous types of Bubbles. Most definitions and research (as was the case with the analysis cited by the FT’s Authers) focus specifically on asset prices (“an extreme acceleration in share prices. In one version, [Yale’s Will Goetzmann] required them to double in a year — which excluded the dotcom bubble and the Great Crash of 1929. To keep them in, he also tried a softer version where stocks doubled in three years”).
Behind every consequential Bubble is an inflation in underlying Credit. My analysis focuses on the nature of the monetary expansion responsible for the asset inflation. I’m less concerned with P/E ratios and valuation than I am Credit expansions and the nature of risk intermediation. Earnings are important, but more critical to the analysis is the degree to which they (and “fundamentals” more generally) are being inflated by monetary factors - and whether such inflation is sustainable or susceptible.
Credit Dynamics are key. Mr. Authers refers to the “dot.com” and “Credit” Bubbles. Yet the nineties Bubble was fueled by extraordinary expansions in GSE Credit, securitizations and corporate debt. Internet stocks inflated spectacularly, but in the grand scheme of the Bubble were rather inconsequential. The Bubble faltered initially in 2000 with the sharp reversal in technology stocks. Less embedded in memory is the near breakdown in corporate Credit back in 2002. The resulting aggressive Fed-induced reflation then spurred a doubling of mortgage Credit in just over six years. The transformation of risky Credit into perceived safe money-like securities (“Wall Street Alchemy”) was integral to both “tech” and “mortgage finance” Bubble periods. The fact that dot.com price inflation and overvaluation greatly exceeded that of home prices is meaningless.
When I initially titled my weekly writings the “Credit Bubble Bulletin” back in 1999, I anticipated that “Bubble” would remain in the title only on a short-term basis. And indeed, I thought the Bubble had burst in 2000/2001 and then again in 2008. But in both instances Credit Dynamics and resurgent monetary inflation made it clear to me that a more powerful Bubble had reemerged. Whether one prefers to date the beginning of the Great Credit Bubble 1992, 1987 or even 1971, it’s been inflating now for quite a long time. Too be sure, the expansion of government Credit over the past eight years puts mortgage Credit and other excesses to shame. I would argue that price distortions and risk misperceptions similarly overshadow those from the mortgage finance Bubble period.
Of course, the vast majority have become convinced that the boom is sustainable. Indeed, analysis these days is eerily reminiscent of “permanent plateau” jubilation from 1929. The bullish perspective sees an improving global economy and a powerful pro-growth agenda unfolding in the U.S. Worries about debt, China and such matters have turned stale. A contrary argument focuses on Credit Dynamics and the unsustainability of today’s unique monetary and market backdrops.
Over the years, I’ve made the point that a Bubble financed by junk bonds would not create a systemic issue. There are, after all, limits to the demand for high-risk debt. Long before such a boom could go to prolonged and dangerous extremes (imparting deep structural maladjustment), investors would shy away from increasingly unattractive Credit issued in clear excess. The boom would lose its monetary fuel.
I define contemporary “money” as a financial claim perceived as a safe and liquid store of (nominal) value. Money these days is Credit, but a special type of Credit. Unlike junk bonds, “money” enjoys essentially insatiable demand. As such, a boom fueled by “money” is a quite different animal than our above junk bond example. I would posit that a prolonged inflation of perceived safe “money” by its nature ensures far-reaching risk distortions. For one, Bubbles fueled by “money” appear especially sustainable, while a prolonged inflation of “money” virtually ensures a destabilizing crisis of confidence. Governments throughout history have abused money. Contemporary central bankers took it to a whole new level.
I referred to the “Moneyness of Credit” throughout the mortgage finance Bubble period, a boom financed largely by “AAA” money-like MBS, ABS and “repo” Credit. Back in 2009, with the arrival of enormous expansions of central bank Credit and fiscal deficits coupled with the Fed’s reflationary policies targeting the securities markets, I proffered the “global government finance Bubble” and the “Moneyness of Risk Assets.”
I understand the rationality of complacency. I appreciate that confidence runs high that this boom need not end badly. Those willing to bet on central banks have won, repeatedly. “Money” – to the tune of Trillions – has flowed with great abundance to managers and fund structures programmed to disregard risk. The consensus view holds that huge amounts of buying power await a market dip. Moreover, only “dips” at this point would side against the mighty bull.
There’s no mystery why the VIX ended the week near ten-year lows. And I don’t believe, as explained by an analyst on Bloomberg television, that improved global economic fundamentals explain unusually low implied equities market volatilities (VIX). The VIX clearly does not reflect global political and geopolitical uncertainties. Instead, it’s more a reflection of robust global “money” and Credit growth and the perception that central bankers will ensure ongoing monetary inflation while backstopping global securities markets. With impatient dip buyers - and central bankers not about to allow pullbacks to gain momentum - why not write put options and other derivative market “insurance”? Selling flood insurance during a drought. Central bankers have promised abundant liquidity and persistent loose financial conditions, while placing a floor under stock prices and a ceiling over market yields.
Returning to John Authers, when it comes to the current Bubble backdrop, I take exception to “I know it when I see it.” Rather, it’s the nature of Bubbles that the more conspicuous they appear the less systemic their impact. I point to the example of the conspicuous “tech” Bubble and much more systemic Bubble in “mortgage finance.” Even in the craziness of 2006 and early-2007, the truth of the matter is that few at the time recognized the Bubble.
Today’s Bubble is global, and it resides at the very heart of contemporary electronic “money.” This means, as we’ve already witnessed, that it can inflate almost indefinitely, at the discretion of a small group of central bankers and so long as their Credit is readily accepted. It’s unique in financial history, the consequence of the runaway global experiment in unfettered “money” and Credit. Even after tens of Trillions of issuance, the demand for central bank Credit (“money”) and (money-like) government debt is today as insatiable as ever. The downside is that this prolonged Bubble has inflated most assets across the globe. It has evolved to be deeply systemic on a global basis, with unprecedented distortions in risk perceptions and asset prices more generally.
There’s a reason why crises tend to erupt in the money markets. Panic quickly ensues when markets suddenly sense their perceived safe and liquid holdings are at risk. The VIX is low today because of the perception that global financial institutions remain flush with liquidity, buoyed by rising asset prices, and under the safekeeping of central bankers and government officials. The perception of moneyness pervades “repo” markets, and robust repo and securities financing markets convey easy access to liquidity for securities dealers and derivative players. The VIX is low because of extraordinary confidence in counterparties and the functioning of derivatives markets more generally. The VIX is low based on faith that Beijing will backstop China’s entire over-heated Credit system.
It’s worth recalling that a year ago bank stocks were under intense pressure around the world. For example, from 2015 highs to 2016 lows, Japanese bank stocks dropped almost 50%. Similar losses were shared by banks throughout Asia and Europe. Especially in early-2016, fears were mounting that a Credit crisis in China could unleash financial and economic stress around the globe. As a weak link in global finance, European banks were feeling the contagion. In short, there was heightened nervousness that risk was seeping back into the international daisy-chain of various bank liabilities. “Moneyness” – a now global phenomenon - was in jeopardy.
Well, “whatever it takes” – from strong-handed Chinese officials, from the inflationist BOJ and ECB, and from a dovish Fed - nipped potential crisis in the bud. Promises of a couple Trillion additional QE crushed global yields and kept the game going. Markets have inflated significantly over the past year. What will central banks do for an encore?
It is a principal thesis of Bubble Analysis that, once commenced, monetary inflations turn progressively difficult to control. Credit inflations raise myriad price levels throughout the economy and asset markets. Especially after years of inflating asset and securities markets, it will not be possible for global central bankers to walk away from QE without major consequences. The world is currently at peak QE, with major uncertainties surrounding future operations.
Europe, in particular, has begun to fret the effects of waning QE. I’ve highlighted the recent significant rise in sovereign yields in Portugal, Italy, Spain and Greece. I’ve noted the major widening of spreads between French and German bonds yields.
This week saw European bank stocks sink 2.4%. It’s worth highlighting the performance of the major French banks, with BNP Paribas (down 8.9%), Societe Generale (down 7.6%) and Credit Agricole (down 7.1%) posting notable declines. Italian banks were slammed 5.1%, increasing y-t-d losses to 6.6%. UniCredit led the list of widening bank CDS, followed by Banco Santander and Intesa Sanpaulo.
Similarly concerning, European sovereign spreads continued to widened. Safe haven German bund yields dropped nine bps to a five-week low 0.32%. The France to Germany 10-year yield spread widened seven to 74 bps, the widest going all the way back to tumultuous 2012. Italy’s spread widened 10 to 195 bps, trading this week at the widest level since early-2014. Spain was 11 wider to 138 bps, the widest since last June.
U.S. bank stocks also lagged this week’s market rally. But with Chinese and Asian banks enjoying strong gains, it might be too early to make much out of the return of European bank concerns. Yet it does have to start somewhere. ECB policies have encouraged Europe’s banks to (again) load up on government bonds at incredibly inflated prices. Now what?
Here in the U.S., markets this week took comfort in a relatively well-contained President Trump. He greeted Japanese Prime Minister Abe with a big, warm hug. He sent a letter to Chinese President Xi, stating that his Administration would honor the “One China” policy. While perhaps somewhat mollified by his correspondence, Chinese leadership must be deeply suspicious of Trump’s zeal for chumming around with Shinzo (Abe). But at least for now, our President was trying to get along with (most) folks. Markets got along well with the idea of “phenomenal” tax cuts.
For the Week:
The S&P500 added 0.8% (up 3.5% y-t-d), and the Dow gained 1.0% (up 2.6%). The Utilities rose 0.8% (up 1.0%). The Banks were unchanged (up 1.5%), while the Broker/Dealers added 0.6% (up 8.0%). The Transports jumped 1.6% (up 3.9%). The S&P 400 Midcaps (up 3.6%) and the small cap Russell 2000 (up 2.3%) both gained 0.8%. The Nasdaq100 advanced 1.3% (up 7.5%), and the Morgan Stanley High Tech index jumped 1.6% (up 8.9%). The Semiconductors were little changed (up 6.2%). The Biotechs gained 1.0% (up 8.5%). With bullion gaining $13, the HUI gold index rose 3.2% (up 20%).
Three-month Treasury bill rates ended the week at 53 bps. Two-year government yields slipped a basis point to 1.19% (unchanged y-t-d). Five-year T-note yields declined two bps to 1.89% (down 4bps). Ten-year Treasury yields fell five bps to 2.41% (down 4bps). Long bond yields gained three bps to 3.12% (up 5bps).
Greek 10-year yields fell 17 bps to 7.26% (up 24bps y-t-d). Ten-year Portuguese yields declined six bps to 4.12% (up 37bps). Italian 10-year yields added a basis point to 2.27% (up 46bps). Spain's 10-year yields gained two bps to 1.70% (up 32bps). German bund yields dropped nine bps to 0.32% (up 12bps). French yields declined two bps to 1.06% (up 38bps). The French to German 10-year bond spread widened seven to 74 bps. U.K. 10-year gilt yields fell 10 bps to 1.26% (up 2bps). U.K.'s FTSE equities index rose 1.0% (up 1.6%).
Japan's Nikkei 225 equities index jumped 2.4% (up 1.4% y-t-d). Japanese 10-year "JGB" yields slipped a basis point to 0.1% (up 5bps). The German DAX equities index was little changed (up 1.6%). Spain's IBEX 35 equities index declined 0.9% (up 0.3%). Italy's FTSE MIB index fell 1.3% (down 1.9%). EM equities were mixed. Brazil's Bovespa index gained 1.8% (up 9.8%). Mexico's Bolsa rose 1.2% (up 4.7%). South Korea's Kospi was about unchanged (up 2.4%). India’s Sensex equities index added 0.3% (up 6.4%). China’s Shanghai Exchange rose 1.8% (up 3.0%). Turkey's Borsa Istanbul National 100 index declined 1.0% (up 11.9%). Russia's MICEX equities index dropped 2.9% (down 3.2%).
Junk bond mutual funds saw inflows of $442 million (from Lipper).
Freddie Mac 30-year fixed mortgage rates dipped two bps to 4.17% (up 52bps y-o-y). Fifteen-year rates also declined two bps to 3.39% (up 44bps). The five-year hybrid ARM rate fell two bps to 3.21% (up 38bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down four bps to 4.27% (up 59bps).
Federal Reserve Credit last week added $1.6bn to $4.417 TN. Over the past year, Fed Credit contracted $29.8bn (down 0.7%). Fed Credit inflated $1.606 TN, or 57%, over the past 222 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt increased $3.8bn last week to $3.169 TN. "Custody holdings" were down $98bn y-o-y, or 3.0%.
M2 (narrow) "money" supply last week fell $16.8 billion to $13.282 TN. "Narrow money" expanded $795bn, or 6.4%, over the past year. For the week, Currency increased $0.2bn. Total Checkable Deposits declined $10.4bn, and Savings Deposits dipped $3.8bn. Small Time Deposits were little changed. Retail Money Funds slipped $2.6bn.
Total money market fund assets declined $3.2bn to $2.677 TN. Money Funds declined $79bn y-o-y (2.9%).
Total Commercial Paper was about unchanged at $965bn. CP declined $112bn y-o-y, or 10.4%.
Currency Watch:
The U.S. dollar index rallied 0.9% to 100.8 (down 1.6% y-t-d). For the week on the upside, the Brazilian real increased 0.3%, the Mexican peso 0.1% and the British pound 0.1%. For the week on the downside, the Norwegian krone declined 1.9%, the Swedish krona 1.7%, the New Zealand dollar 1.7%, the euro 1.3%, the Danish krone 1.3%, the Swiss franc 0.9%, the Singapore dollar 0.8%, the Japanese yen 0.5%, the South African rand 0.5%, the Canadian dollar 0.5%, the South Korean won 0.3% and the Australian dollar 0.1%. The Chinese yuan declined 0.16% versus the dollar (up 1.0% y-t-d).
Commodities Watch:
The Goldman Sachs Commodities Index gained 1.9% (up 2.3% y-t-d). Spot Gold rose 1.1% to $1,234 (up 7.1%). Silver surged 2.6% to $17.93 (up 12.2%). Crude added three cents to $53.86 (up 0.1%). Gasoline recovered 2.3% (down 4.9%), while Natural Gas slipped 0.9% (down 18.9%). Copper surged 5.8% (up 10.4%). Wheat jumped 4.4% (up 10%). Corn gained 2.5% (up 6.4%).
Trump Administration Watch:
February 10 – Fitch Rating: “The Trump Administration represents a risk to international economic conditions and global sovereign credit fundamentals, Fitch Ratings says. US policy predictability has diminished, with established international communication channels and relationship norms being set aside and raising the prospect of sudden, unanticipated changes in US policies with potential global implications. The primary risks to sovereign credits include the possibility of disruptive changes to trade relations, diminished international capital flows, limits on migration that affect remittances and confrontational exchanges between policymakers that contribute to heightened or prolonged currency and other financial market volatility.”
February 5 – Wall Street Journal (Nick Timiraos): “For an economy that isn’t in recession, the U.S. is facing one of the bleakest fiscal outlooks since World War II. One question that President Donald Trump will soon have to decide: How much is he willing to embrace even wider deficits? …Before Mr. Trump does anything, growing budget deficits are already on a course to push federal debt to record levels as a share of gross domestic product. That will make it extremely difficult to make good on promises to cut taxes and boost spending without spilling more red ink. Unlike past periods, deficits are swelling not because of an economic downturn or a short-term boost in discretionary spending, but because of the costs of caring for an aging population… Ten years ago, some 6,700 Americans turned 65 every day. The number is now 9,800 Americans, and it will rise to 11,700 by 2026.”
February 8 – Politico (Rachael Bade and Josh Dawsey): “President Donald Trump wants to rebuild the nation’s roads and bridges, boost military spending, slash taxes and build a ‘great wall.’ But Republicans on Capitol Hill have one question for him: How the heck will we pay for all of this? GOP lawmakers are fretting that Trump’s spending requests, due out in a month or so, will blow a gaping hole in the federal budget… Trump has signaled he’s serious about a $1 trillion infrastructure plan, as he promised on the campaign trail. He also wants Republicans to approve extra spending this spring to build a wall along the U.S. southern border and beef up the military — the combined price tag of which could reach $50 billion, insiders say. And that’s to say nothing of tax cuts, which the president’s team has suggested need not necessarily be paid for. Trump, meanwhile, has made clear he has little interest in tackling the biggest drivers of the national debt: entitlements.”
February 7 – Bloomberg (Steven T. Dennis and Elizabeth Dexheimer): “President Donald Trump’s pledge to dismantle the Dodd-Frank financial overhaul is colliding with the same reality as his pledge to gut Obamacare: The Republican majority in Congress can’t decide how to make it happen and Democrats are vowing to fight. Trump, who last month said Obamacare would be replaced ‘the same day or the same week’ or perhaps ‘the same hour,’ acknowledged Sunday that the health-care law isn’t going away anytime soon. ‘We should have something within the year and the following year,’ told Fox News’s Bill O’Reilly. The Dodd-Frank directive he signed Friday is hitting the same road block on Capitol Hill and at federal agencies.”
China Bubble Watch:
February 8 – Financial Times (Gabriel Wildau): “China’s central bank has quietly raised interest rates and tightened liquidity in recent days, fuelling speculation that the government’s policy focus has shifted from stimulating growth to addressing the risk from rising corporate debt. But economists say the recent rate rises are primarily aimed at deflating financial asset bubbles — especially in the bond market. Analysts still expect lending to increase rapidly this year, as authorities seek to ensure a strong economy in the run-up to a crucial leadership transition in November. At the same time, President Xi Jinping wants to ensure that the bond bubble does not explode spectacularly in an echo of the 2015 stock market bust.”
February 9 – Wall Street Journal (Rachel Rosenthal and Anjie Zheng): “Chinese companies are increasingly stepping in as lenders, as banks reduce their funding to struggling industries and the country’s mammoth bond market comes under strain. Company-to-company loans in China jumped by 20% last year to 13.2 trillion yuan ($1.92 trillion), according to research firm CEIC… This entrusted lending, so named because banks serve as middlemen, is now the fastest-growing major component of the country’s elaborate system of informal, or shadow, banking. The most recent surge came during the selloff in China’s $9.3 trillion bond market late last year. Big, cash-rich companies—mostly state-owned enterprises and some private companies—stepped in: New entrusted loans rose to 405.7 billion yuan ($59.02 billion) in December, more than double the month prior, …the highest monthly issuance in two years.”
February 7 – Bloomberg (Justina Lee): “China’s doors to foreign investors may be opening ever wider, but that’s not enough for many worried about finding an exit. Fourteen months after qualifying for official reserve-currency status, and after a series of steps opening up domestic markets to overseas funds, the take-up remains below estimates. For all China’s attraction as the second-largest economy with large and expanding domestic capital markets, regulators’ efforts to tamp down on outflows of money have stoked concerns. ‘There’s no return lower than not getting your money back,’ Brad Holzberger, chief money manager of QSuper… said… ‘We’re worried about understanding the transparency of decision making -- as well as property rights, rule of law, transmission of capital controls and those sorts of things.’”
February 9 – Reuters (Jake Spring): “China vehicle sales in January fell by the largest margin since 2015 for several global automakers, with General Motors Co and Ford Motor Co blaming the roll back of a tax cut on small-engined vehicles and the Lunar New Year holiday. Ford Motor said… its sales fell 32% year-on-year, while GM said sales dropped 24%... Toyota recorded a 18.7% drop in January sales, its largest decline since March 2015.”
Global Bubble Watch:
February 8 – Bloomberg (Birgit Jennen, Alessandro Speciale and Rainer Buergin): “Germany has abandoned a renewed effort to push the Group of 20 to rein in monetary stimulus, according to people familiar with the matter. German officials failed to convince counterparts that the G-20 should support language backing tighter monetary policy to promote global financial resilience, the people said… Germany had drafted it in a document as part of its presidency of the group this year, and will host finance chiefs next month in the spa town of Baden-Baden.”
February 9 – Reuters: “Germany's central bank is bringing home gold reserves stored in places like New York and Paris faster than planned… Stashed away at the height of the Cold War in safe havens well out of Moscow's reach, the 3,378-tonne, 120 billion-euro gold stockpile has become a symbol of Germany's economic ascent and a guardian of its stability. But with Europe stumbling from crisis to crisis, the German public has grown uneasy about keeping the gold abroad. Some even argue the world's second biggest bullion reserve may be needed to back a new deutschmark, should the euro zone break up.”
February 6 – Wall Street Journal (Min Zeng): “Political uncertainty in Europe sent investors piling into the harbor of U.S. Treasury bonds, German bunds and the U.K. gilts as government debt in France, Italy, Spain and Greece sold off. The yield on the 10-year French government bond rose to the highest since September 2015, with its premium relative to the 10-year German bund, the benchmark for debt markets in the eurozone, widening to the highest level since November 2012.”
February 8 – Financial Times (Thomas Hale): “The European Central Bank now holds more than €1.5tn of assets, which it has bought as part of purchases designed to kick-start the continent’s economy. Late last year, it announced it would extend purchases at the end of March, albeit reducing the rate from €80bn to €60bn a month. The scale of these purchases has dominated prices in credit markets across Europe, from government debt to covered bonds. But how have European markets been changed by the ECB, and how will they react if and when its dominance begins to recede? ‘There are not many debt markets that are not distorted in the euro area,’ says Joost Beaumont, an analyst at ABN Amro… One of the most significant distortions created from bulk buying of government bonds and other high quality debt has shown up in Europe’s repo market, a key part of the continent’s financial plumbing. Government bonds are used as collateral for repurchase or ‘repo’ trades — secured short-term loans between banks, investors and other market participants.”
February 7 – Financial Times (Elaine Moore and Robin Wigglesworth): “The advance of anti-euro politicians is prompting some eurozone investors to do something they have not felt the need to do for several years: pay close attention to the fine print of bond documents. As politicians calling for an exit from the European Economic and Monetary Union garner support in Italy, France and the Netherlands, concern over which euro-denominated sovereign bonds may be most at risk from a potential switch back into former national currencies is gradually becoming a talking point. Although eurozone government debt sold since January 2013 cannot be redenominated without bondholder approval, more than half the current €7tn in outstanding debt does not carry this safeguard clause.”
February 5 – Financial Times (Claire Jones, Javier Espinoza and Tom Hancock): “Chinese overseas deals worth almost $75bn were cancelled last year as a regulatory clampdown and restrictions on foreign exchange caused 30 acquisitions with European and US groups to fall through. The figures, which reveal a sevenfold rise in the value of cancelled deals from about $10bn in 2015, highlight a waning appetite for global dealmaking by the world’s second-largest economy. But despite more deals being abandoned, …Chinese direct investment into the US and Europe still more than doubled to a record $94.2bn in 2016.”
Brexit Watch:
February 7 – Financial Times (Jim Brunsden, Alex Barker and Claire Jones): “Europe’s leading central bankers are at loggerheads over one of the biggest economic judgments facing the continent: does a disorderly Brexit pose a financial stability risk? Mark Carney, Bank of England governor, fears a messy and severe Brexit could be a ‘Jenga’ moment that leads to the collapse of the legal architecture the underpins financial flows, hurting the City of London’s European customers even more than the UK itself. Mario Draghi, meanwhile, is largely unfazed. The European Central Bank chief has told negotiators from the remaining 27 EU nations that he is unworried about a highly mobile financial services industry that is used to adapting to new circumstances… Mr Carney’s argument centres on hedging. The fear is that without a post-Brexit market access deal, European banks and businesses would find it harder to tap Europe’s dominant derivatives market located in the City and find essential products to manage their balance sheet risks.”
Europe Watch:
February 8 – Wall Street Journal (Ian Talley): “The International Monetary Fund warned… that Greece once again risks a eurozone exit amid stalled bailout talks, sending the clearest signal yet the emergency lender isn’t likely to soon rejoin Europe’s failed efforts to fix the debt-weary nation. Fund officials said Athens and its European creditors must agree to much deeper economic overhauls and substantial debt relief before the fund considers contributing another cent. Two fund documents made public Tuesday reveal deep-seated skepticism that Europe’s latest financing program can fix the broken economy. Both the IMF’s annual review of Greece’s economy and a scathing assessment of its own second bailout to the deeply ailing economy underscore a third fund package is unlikely soon.”
February 8 – Financial Times (Jim Brunsden): “After months out of the spotlight, Greece’s international bailout programme is working its way back up bond traders’ list of worries. Yields on Greek sovereign debt are sharply up, reflecting concerns about splits between the eurozone and International Monetary Fund over the future of the programme and the sense that in an election-heavy year for Europe, the political window for an agreement is closing. Amid warnings from Athens that it will reject ‘the IMF’s absurd demands’ and disagreements this week within the fund’s executive board, eurozone finance ministers are under pressure to deliver a breakthrough at their next meeting on February 20. Greece’s international creditors, namely eurozone governments and the IMF, have markedly different opinions about the country’s economic situation and how to make its debt load manageable.”
February 7 – Reuters (John Geddie): “Investors in cash-strapped Greece appear to be losing faith in a pledge from European officials five years ago that the country's default would be a one-off. It was partly the strength of that promise that allowed Greece to make one of the fastest returns to markets of any defaulted sovereign, taking money from private investors in 2014 just two years after it had imposed hefty writedowns. The rationale for those who bought the bonds was simple: public creditors, which have lent Athens hundreds of billions of euros, but were spared in the 2012 restructuring, would have to take the next hit. Yet just months before the first instalment of the new debt falls due on July 17, a three-way quarrel between Greece, the EU and the International Monetary Fund, has triggered a fall in prices that suggests that logic might be flawed.”
February 7 – Reuters (Valentina Za): “The head of Italy's bank-bailout fund said… the country lacked a clear strategy for shifting 356 billion euros ($381bn) in problem loans. In an extraordinary outburst from a man picked by Rome to help tackle the problem, Alessandro Penati… said he felt ‘bitter and disillusioned’. His comments exposed tensions within the banking sector over Italy's rescue efforts. ‘There is no clear vision of the problem and no strategy,’ Penati said…, suggesting that he was virtually working alone on rescues that had revealed ‘horror stories’ within some banks.”
February 9 – Associated Press (Colleen Barry): “Italian bank UniCredit announced a heavy fourth-quarter loss Thursday of 13.6 billion euros ($14.5bn) as its new CEO moved to fortify the firm by cleaning up its portfolio of soured loans. Italy's largest bank by assets, UniCredit said that it incurred 13.2 billion euros in one-off expenses, which included a previously announced 8.1-billion-euro write-off on bad loans plus other charges such as contributions to an Italian fund to save weaker banks.”
February 7 – Bloomberg (Eleni Chrepa and Ian Wishart): “Greece’s two-year note yields neared 10% as a quarrel between the nation’s creditors over its fiscal targets boosted concern the country is running out of time to complete yet another review of its bailout program before Europe gears up for a busy election season beginning in March.”
February 7 – Bloomberg (David Goodman, Sid Verma, and Anooja Debnath): “’The consequences of a bad outcome may be severe.’ Some would call that an understatement. Marco Valli, the chief euro-area economist at UniCredit SpA in Milan, was reflecting on the chances of an upset in one of this year’s three major elections in Europe. The votes hold the real -- albeit unlikely -- prospect of installing at least one leader devoted to dragging her country out of both the single currency and the European Union. In the shadow of surprise victories for Donald Trump and the campaign for Britain to leave the EU, that’s throwing up a raft of new challenges for investors.”
February 7 – Financial Times (Claire Jones): “The president of the Bundesbank has decried US accusations that Germany is a currency manipulator, highlighting the risk of a clash between Washington and Berlin over Donald Trump’s protectionist rhetoric. Jens Weidmann rejected as ‘more than absurd’ US claims that Germany was deliberately weakening the euro to boost exports, stepping up a war of words between Europe and the US over trade. His criticism echoes an attack by Mario Draghi in Brussels on Monday, where the European Central Bank president pushed back on a range of Washington’s policies, from protectionism to plans to weaken financial regulation.”
February 5 – Reuters (Ingrid Melander): “France's far-right party leader Marine Le Pen… told thousands of flag-waving supporters chanting ‘This is our country!’ that she alone could protect them against Islamic fundamentalism and globalization if elected president in May. Buoyed by the election of President Donald Trump in the United States and by Britons' vote to leave the European Union, Le Pen's anti-immigration, anti-EU National Front (FN) hopes for similar populist momentum in France. In 144 ‘commitments’ published on Saturday, Le Pen says she would drastically curb migration, expel all illegal migrants and restrict certain rights now available to all residents, including free education, to French citizens. An FN government would also take France out of the euro zone, hold a referendum on EU membership, and slap taxes on imports and on the job contracts of foreigners.”
ECB Watch:
February 5 – Financial Times (Patrick McGee): “German finance minister Wolfgang Schäuble has blamed the European Central Bank for an exchange rate that is ‘too low’ for Germany, following criticism last week from US president Donald Trump’s top trade adviser. Mr Schäuble acknowledged… that the ECB had to set monetary policy for the eurozone as a whole, but said: ‘It is too loose for Germany.’ ‘The euro exchange rate is, strictly speaking, too low for the German economy’s competitive position… When ECB chief Mario Draghi embarked on the expansive monetary policy, I told him he would drive up Germany’s export surplus . . . I promised then not to publicly criticise this [policy] course. But then I don’t want to be criticised for the consequences of this policy.’”
February 6 – Bloomberg (Jeff Black and Jonathan Stearns): “Mario Draghi took the Trump administration to task, addressing recent assertions that Germany is a currency manipulator and warning against the rollback of post-crisis financial regulation. …The European Central Bank president responded to the charge by U.S. National Trade Council Director Peter Navarro and others that Germany is using a ‘grossly undervalued’ euro to gain an unfair trade advantage. ‘The ECB has not intervened in the foreign exchange markets since 2011,’ Draghi told European Union lawmakers… ‘Germany has a significant bilateral trade surplus with the U.S., a material current account surplus, but it has not engaged in persistent one-sided intervention in the foreign exchange market.’”
Fixed-Income Bubble Watch:
February 8 – Financial Times (Eric Platt): “Investors are piling into some of the riskiest bonds sold by US companies as they bet on President Donald Trump delivering on his promises of a stronger economy, lower taxes and less regulation. Demand for junk-rated bonds has driven yields on debt with the lowest quality credit rating down towards 10% as more than $10bn has flowed into funds that invest in the asset class since the start of December. Borrowings by triple-C rated groups, among the lowest tier of the high-yield universe, have risen nearly two-thirds from a year earlier when the average yield for this part of the junk market peaked at 21.7%... The current market rally has allowed the extension of credit to riskier borrowers at appealing terms, with high-yield groups raising a total of $41bn in the US so far this year… the greatest amount for a comparable period since 2013, according to Dealogic.”
February 5 – Financial Times (Robin Wigglesworth): “The US bond market is succumbing to the advances of passive investing, with exchange traded funds and index-trackers now controlling more than a fifth of the fixed-income market — and rising fast. ETFs have proven increasingly popular over the past decade, and absorbed more than $1bn a day globally last year… The shift towards passive investing is most advanced in equities, with now nearly 40% of US equity assets under management in the hands of ETFs and index-tracking funds. But there has been a similar but accelerating trend in the US bond market in recent years, pushing the share of passive vehicles to more than 20% of the total…”
U.S. Bubble Watch:
February 10 – Wall Street Journal (Sarah Krouse): “Indexing pioneer Vanguard Group has climbed to $4 trillion in assets for the first time, accentuating a loss of faith among investors in traditional money managers who handpick stocks. The record of $4.048 trillion, reached at the end of January, follows a year when Vanguard’s funds pulled in more new money than all of its competitors combined, according to one industry total. Of the $533 billion of net flows into all mutual funds and exchange-traded funds last year, 54%, or $289 billion, went to funds managed by Vanguard, according to… Morningstar Inc. The fund company’s own tally for the year was even higher, at $322.8 billion.”
February 9 – Bloomberg (Prashant Gopal): “Home price gains accelerated in the fourth quarter, with increases reported in 89% of U.S. metropolitan areas, as competition heated up for a record-low supply of listings… The median price of an existing single-family home rose from a year earlier in 158 of the 178 areas measured… In the third quarter, 87% of metropolitan areas had price increases. Thirty-one regions had gains of 10% of more in the three months through December, up from 25 in the third quarter.”
February 7 – CNBC (Diana Olick): “Rising mortgage rates, bigger jumps in home prices and still-moderate income growth are adding up to a triple threat for the housing market this spring. Home affordability fell to the lowest level in seven years at the end of 2016, and the ingredients for a reversal are not there anytime soon. It now takes 22.2% of median income to make the monthly principal and interest payment on the median priced home, according to… Black Knight Financial Services, which based the measure on borrowers using a 30-year fixed mortgage. That monthly payment on the median-priced home increased 10% in the fourth quarter alone…”
February 6 – Reuters (Megan Davies and Tenzin Pema): “A fiscal boost to the United States is more likely in 2018 than this year, according to Goldman Sachs economists, as ‘the balance of risks is somewhat less positive’ one month into the new year and as U.S. President Donald Trump's growth-boosting agenda could be offset by negative effects of restrictions on trade and immigration. Following the election, the positive shift in sentiment among investors suggested that the probability of tax cuts and easier regulation was higher than the probability of meaningful restrictions to trade and immigration... However, one month into the year, the balance of risk is ‘somewhat less positive in our view.’”
February 8 – Wall Street Journal (Jesse Newman and Patrick McGroarty): “The Farm Belt is hurtling toward a milestone: Soon there will be fewer than two million farms in America for the first time since pioneers moved westward after the Louisiana Purchase. Across the heartland, a multiyear slump in prices for corn, wheat and other farm commodities brought on by a glut of grain world-wide is pushing many farmers further into debt. Some are shutting down, raising concerns that the next few years could bring the biggest wave of farm closures since the 1980s. The U.S. share of the global grain market is less than half what it was in the 1970s. American farmers’ incomes will drop 9% in 2017… extending the steepest slide since the Great Depression into a fourth year. ‘You keep pinching and pinching and pretty soon there’s nothing left to pinch,’ said Craig Scott, a fifth-generation farmer in this Western Kansas town.”
February 7 – Bloomberg (Sho Chandra): “The U.S. trade deficit widened last year to the biggest since 2012 as exports fell more than imports, though a narrowing gap in December suggests demand is stabilizing overseas for American goods. For all of 2016, the deficit increased 0.4% to $502.3 billion…”
Federal Reserve Watch:
February 6 – Bloomberg (Jeanna Smialek): “Federal Reserve Bank of Philadelphia President Patrick Harker said the U.S. central bank’s March meeting is a live option for an interest rate increase if job market momentum holds up, growth continues and wages rise. ‘March is on the table. I would never take a meeting off the table, it depends on how the data evolve,’ Harker… told reporters… John Williams, his colleague from San Francisco and a non-voter this year, told Bloomberg last week that he sees the next meeting as a possible rate-hike candidate.”
February 9 – Bloomberg (Steve Matthews and Matthew Boesler): “Federal Reserve Bank of St. Louis President James Bullard said the central bank ought not rush to raising interest rates next month because uncertainty over the Trump administration’s fiscal policies clouds the U.S. economic outlook. ‘It is unlikely that fiscal uncertainty will be meaningfully resolved by the March meeting, which is only a few weeks away,’ Bullard, who doesn’t vote on policy this year, told reporters… ‘Why not wait until that gets resolved?’”
February 6 – Bloomberg (Liz McCormick and Matt Scully): “Almost a decade after it all began, the Federal Reserve is finally talking about unwinding its grand experiment in monetary policy. And when it happens, the knock-on effects in the bond market could pose a threat to the U.S. housing recovery. Just how big is hard to quantify. But over the past month, a number of Fed officials have openly discussed the need for the central bank to reduce its bond holdings… The talk has prompted some on Wall Street to suggest the Fed will start its drawdown as soon as this year, which has refocused attention on its $1.75 trillion stash of mortgage-backed securities. While the Fed also owns Treasuries as part of its $4.45 trillion of assets, its MBS holdings have long been a contentious issue, with some lawmakers criticizing the investments as beyond what’s needed to achieve the central bank’s mandate. Yet because the Fed is now the biggest source of demand for U.S. government-backed mortgage debt and owns a third of the market, any move is likely to boost costs for home buyers.”
February 6 – Reuters (Howard Schneider): “Loan officers at U.S. banks reported largely unchanged lending standards and slightly looser terms for business loans in the last three months of 2016, the Federal Reserve reported… in a quarterly survey. About a third of the 69 institutions surveyed, however, said they had ‘tightened somewhat’ the standards for commercial real estate construction and land development loans, and close to a fifth had tightened standards on loans secured by multifamily properties."
EM Watch:
February 9 – Bloomberg (Nacha Cattan and Michelle Davis): “Mexico’s central bank raised borrowing costs for a fourth straight meeting as President Donald Trump’s election undermined the peso and fuel prices soared, sending inflation spiraling above target. Banco de Mexico… increased the key rate by 50 bps to 6.25%, more than twice the level of December 2015.”
Leveraged Speculation Watch:
February 7 – Wall Street Journal (Chris Dieterich): “The biggest short bets just keep going wrong. The 50 stocks in the S&P 500 that hedge funds are shorting most often rallied 6% last month, while the benchmark index itself rose just 1.8%, according to… Credit Suisse. It’s the continuation of a brutal trend. Last year, the 50 stocks that show up the most frequently in hedge fund short books rose 37%, the biggest wrong-way move since Credit Suisse began tabulating the data in 2013. These strategies took it on the chin last year, as the average long/short hedge fund fell 3.4% in 2016. They managed a 1.3% gain in January, according to Credit Suisse.”
Geopolitical Watch:
February 6 – Wall Street Journal (Gerald F. Seib): “In a recent conversation, former Defense Secretary Robert Gates ticked off four areas most likely to produce the first national-security crisis for the new Trump administration: a confrontation with Iran in the Persian Gulf, a showdown with North Korea over its nuclear program, a clash with China in the South China Sea or an encounter with Russia in the Baltic Sea. The risk with China and Russia, he said, is of an ‘unintended incident that escalates.’ The danger with Iran and North Korea, by contrast, is an intentional provocation or challenge. As Team Trump begins just its third full week in office, confrontation with Iran has clearly moved to the top of that list of early potential flashpoints.”
February 8 – Reuters (Ben Blanchard): “The United States needs to brush up on its history about the South China Sea, as World War Two-related agreements mandated that all Chinese territories taken by Japan had to be returned to China, Chinese Foreign Minister Wang Yi said… China has been upset by previous comments from the new U.S. administration about the disputed waterway. In his Senate confirmation hearing, Secretary of State Rex Tillerson said China should not be allowed access to islands it has built there. The White House also vowed to defend ‘international territories’ in the strategic waterway.”
February 5 – New York Times (Jane Perlez): “China reacted with strong displeasure on Saturday to a promise by Defense Secretary Jim Mattis that the United States would defend two uninhabited islands in the East China Sea that Japan controls but China also claims as its own. Mr. Mattis, the first member of President Trump’s cabinet to visit East Asia, had told Japanese officials earlier Saturday that America’s defense obligations to Japan extended to the disputed rocky outposts, known in China as the Diaoyu and in Japan as the Senkaku. The chief spokesman for China’s Foreign Ministry, Lu Kang, accused Mr. Mattis of putting regional stability at risk and urged him to forgo what he called a Cold War mentality.”
February 7 – Financial Times (Claire Jones): “The president of the Bundesbank has decried US accusations that Germany is a currency manipulator, highlighting the risk of a clash between Washington and Berlin over Donald Trump’s protectionist rhetoric. Jens Weidmann rejected as ‘more than absurd’ US claims that Germany was deliberately weakening the euro to boost exports, stepping up a war of words between Europe and the US over trade. His criticism echoes an attack by Mario Draghi in Brussels on Monday, where the European Central Bank president pushed back on a range of Washington’s policies, from protectionism to plans to weaken financial regulation.”
February 5 – Reuters (Ingrid Melander): “France's far-right party leader Marine Le Pen… told thousands of flag-waving supporters chanting ‘This is our country!’ that she alone could protect them against Islamic fundamentalism and globalization if elected president in May. Buoyed by the election of President Donald Trump in the United States and by Britons' vote to leave the European Union, Le Pen's anti-immigration, anti-EU National Front (FN) hopes for similar populist momentum in France. In 144 ‘commitments’ published on Saturday, Le Pen says she would drastically curb migration, expel all illegal migrants and restrict certain rights now available to all residents, including free education, to French citizens. An FN government would also take France out of the euro zone, hold a referendum on EU membership, and slap taxes on imports and on the job contracts of foreigners.”
ECB Watch:
February 5 – Financial Times (Patrick McGee): “German finance minister Wolfgang Schäuble has blamed the European Central Bank for an exchange rate that is ‘too low’ for Germany, following criticism last week from US president Donald Trump’s top trade adviser. Mr Schäuble acknowledged… that the ECB had to set monetary policy for the eurozone as a whole, but said: ‘It is too loose for Germany.’ ‘The euro exchange rate is, strictly speaking, too low for the German economy’s competitive position… When ECB chief Mario Draghi embarked on the expansive monetary policy, I told him he would drive up Germany’s export surplus . . . I promised then not to publicly criticise this [policy] course. But then I don’t want to be criticised for the consequences of this policy.’”
February 6 – Bloomberg (Jeff Black and Jonathan Stearns): “Mario Draghi took the Trump administration to task, addressing recent assertions that Germany is a currency manipulator and warning against the rollback of post-crisis financial regulation. …The European Central Bank president responded to the charge by U.S. National Trade Council Director Peter Navarro and others that Germany is using a ‘grossly undervalued’ euro to gain an unfair trade advantage. ‘The ECB has not intervened in the foreign exchange markets since 2011,’ Draghi told European Union lawmakers… ‘Germany has a significant bilateral trade surplus with the U.S., a material current account surplus, but it has not engaged in persistent one-sided intervention in the foreign exchange market.’”
Fixed-Income Bubble Watch:
February 8 – Financial Times (Eric Platt): “Investors are piling into some of the riskiest bonds sold by US companies as they bet on President Donald Trump delivering on his promises of a stronger economy, lower taxes and less regulation. Demand for junk-rated bonds has driven yields on debt with the lowest quality credit rating down towards 10% as more than $10bn has flowed into funds that invest in the asset class since the start of December. Borrowings by triple-C rated groups, among the lowest tier of the high-yield universe, have risen nearly two-thirds from a year earlier when the average yield for this part of the junk market peaked at 21.7%... The current market rally has allowed the extension of credit to riskier borrowers at appealing terms, with high-yield groups raising a total of $41bn in the US so far this year… the greatest amount for a comparable period since 2013, according to Dealogic.”
February 5 – Financial Times (Robin Wigglesworth): “The US bond market is succumbing to the advances of passive investing, with exchange traded funds and index-trackers now controlling more than a fifth of the fixed-income market — and rising fast. ETFs have proven increasingly popular over the past decade, and absorbed more than $1bn a day globally last year… The shift towards passive investing is most advanced in equities, with now nearly 40% of US equity assets under management in the hands of ETFs and index-tracking funds. But there has been a similar but accelerating trend in the US bond market in recent years, pushing the share of passive vehicles to more than 20% of the total…”
U.S. Bubble Watch:
February 10 – Wall Street Journal (Sarah Krouse): “Indexing pioneer Vanguard Group has climbed to $4 trillion in assets for the first time, accentuating a loss of faith among investors in traditional money managers who handpick stocks. The record of $4.048 trillion, reached at the end of January, follows a year when Vanguard’s funds pulled in more new money than all of its competitors combined, according to one industry total. Of the $533 billion of net flows into all mutual funds and exchange-traded funds last year, 54%, or $289 billion, went to funds managed by Vanguard, according to… Morningstar Inc. The fund company’s own tally for the year was even higher, at $322.8 billion.”
February 9 – Bloomberg (Prashant Gopal): “Home price gains accelerated in the fourth quarter, with increases reported in 89% of U.S. metropolitan areas, as competition heated up for a record-low supply of listings… The median price of an existing single-family home rose from a year earlier in 158 of the 178 areas measured… In the third quarter, 87% of metropolitan areas had price increases. Thirty-one regions had gains of 10% of more in the three months through December, up from 25 in the third quarter.”
February 7 – CNBC (Diana Olick): “Rising mortgage rates, bigger jumps in home prices and still-moderate income growth are adding up to a triple threat for the housing market this spring. Home affordability fell to the lowest level in seven years at the end of 2016, and the ingredients for a reversal are not there anytime soon. It now takes 22.2% of median income to make the monthly principal and interest payment on the median priced home, according to… Black Knight Financial Services, which based the measure on borrowers using a 30-year fixed mortgage. That monthly payment on the median-priced home increased 10% in the fourth quarter alone…”
February 6 – Reuters (Megan Davies and Tenzin Pema): “A fiscal boost to the United States is more likely in 2018 than this year, according to Goldman Sachs economists, as ‘the balance of risks is somewhat less positive’ one month into the new year and as U.S. President Donald Trump's growth-boosting agenda could be offset by negative effects of restrictions on trade and immigration. Following the election, the positive shift in sentiment among investors suggested that the probability of tax cuts and easier regulation was higher than the probability of meaningful restrictions to trade and immigration... However, one month into the year, the balance of risk is ‘somewhat less positive in our view.’”
February 8 – Wall Street Journal (Jesse Newman and Patrick McGroarty): “The Farm Belt is hurtling toward a milestone: Soon there will be fewer than two million farms in America for the first time since pioneers moved westward after the Louisiana Purchase. Across the heartland, a multiyear slump in prices for corn, wheat and other farm commodities brought on by a glut of grain world-wide is pushing many farmers further into debt. Some are shutting down, raising concerns that the next few years could bring the biggest wave of farm closures since the 1980s. The U.S. share of the global grain market is less than half what it was in the 1970s. American farmers’ incomes will drop 9% in 2017… extending the steepest slide since the Great Depression into a fourth year. ‘You keep pinching and pinching and pretty soon there’s nothing left to pinch,’ said Craig Scott, a fifth-generation farmer in this Western Kansas town.”
February 7 – Bloomberg (Sho Chandra): “The U.S. trade deficit widened last year to the biggest since 2012 as exports fell more than imports, though a narrowing gap in December suggests demand is stabilizing overseas for American goods. For all of 2016, the deficit increased 0.4% to $502.3 billion…”
Federal Reserve Watch:
February 6 – Bloomberg (Jeanna Smialek): “Federal Reserve Bank of Philadelphia President Patrick Harker said the U.S. central bank’s March meeting is a live option for an interest rate increase if job market momentum holds up, growth continues and wages rise. ‘March is on the table. I would never take a meeting off the table, it depends on how the data evolve,’ Harker… told reporters… John Williams, his colleague from San Francisco and a non-voter this year, told Bloomberg last week that he sees the next meeting as a possible rate-hike candidate.”
February 9 – Bloomberg (Steve Matthews and Matthew Boesler): “Federal Reserve Bank of St. Louis President James Bullard said the central bank ought not rush to raising interest rates next month because uncertainty over the Trump administration’s fiscal policies clouds the U.S. economic outlook. ‘It is unlikely that fiscal uncertainty will be meaningfully resolved by the March meeting, which is only a few weeks away,’ Bullard, who doesn’t vote on policy this year, told reporters… ‘Why not wait until that gets resolved?’”
February 6 – Bloomberg (Liz McCormick and Matt Scully): “Almost a decade after it all began, the Federal Reserve is finally talking about unwinding its grand experiment in monetary policy. And when it happens, the knock-on effects in the bond market could pose a threat to the U.S. housing recovery. Just how big is hard to quantify. But over the past month, a number of Fed officials have openly discussed the need for the central bank to reduce its bond holdings… The talk has prompted some on Wall Street to suggest the Fed will start its drawdown as soon as this year, which has refocused attention on its $1.75 trillion stash of mortgage-backed securities. While the Fed also owns Treasuries as part of its $4.45 trillion of assets, its MBS holdings have long been a contentious issue, with some lawmakers criticizing the investments as beyond what’s needed to achieve the central bank’s mandate. Yet because the Fed is now the biggest source of demand for U.S. government-backed mortgage debt and owns a third of the market, any move is likely to boost costs for home buyers.”
February 6 – Reuters (Howard Schneider): “Loan officers at U.S. banks reported largely unchanged lending standards and slightly looser terms for business loans in the last three months of 2016, the Federal Reserve reported… in a quarterly survey. About a third of the 69 institutions surveyed, however, said they had ‘tightened somewhat’ the standards for commercial real estate construction and land development loans, and close to a fifth had tightened standards on loans secured by multifamily properties."
EM Watch:
February 9 – Bloomberg (Nacha Cattan and Michelle Davis): “Mexico’s central bank raised borrowing costs for a fourth straight meeting as President Donald Trump’s election undermined the peso and fuel prices soared, sending inflation spiraling above target. Banco de Mexico… increased the key rate by 50 bps to 6.25%, more than twice the level of December 2015.”
Leveraged Speculation Watch:
February 7 – Wall Street Journal (Chris Dieterich): “The biggest short bets just keep going wrong. The 50 stocks in the S&P 500 that hedge funds are shorting most often rallied 6% last month, while the benchmark index itself rose just 1.8%, according to… Credit Suisse. It’s the continuation of a brutal trend. Last year, the 50 stocks that show up the most frequently in hedge fund short books rose 37%, the biggest wrong-way move since Credit Suisse began tabulating the data in 2013. These strategies took it on the chin last year, as the average long/short hedge fund fell 3.4% in 2016. They managed a 1.3% gain in January, according to Credit Suisse.”
Geopolitical Watch:
February 6 – Wall Street Journal (Gerald F. Seib): “In a recent conversation, former Defense Secretary Robert Gates ticked off four areas most likely to produce the first national-security crisis for the new Trump administration: a confrontation with Iran in the Persian Gulf, a showdown with North Korea over its nuclear program, a clash with China in the South China Sea or an encounter with Russia in the Baltic Sea. The risk with China and Russia, he said, is of an ‘unintended incident that escalates.’ The danger with Iran and North Korea, by contrast, is an intentional provocation or challenge. As Team Trump begins just its third full week in office, confrontation with Iran has clearly moved to the top of that list of early potential flashpoints.”
February 8 – Reuters (Ben Blanchard): “The United States needs to brush up on its history about the South China Sea, as World War Two-related agreements mandated that all Chinese territories taken by Japan had to be returned to China, Chinese Foreign Minister Wang Yi said… China has been upset by previous comments from the new U.S. administration about the disputed waterway. In his Senate confirmation hearing, Secretary of State Rex Tillerson said China should not be allowed access to islands it has built there. The White House also vowed to defend ‘international territories’ in the strategic waterway.”
February 5 – New York Times (Jane Perlez): “China reacted with strong displeasure on Saturday to a promise by Defense Secretary Jim Mattis that the United States would defend two uninhabited islands in the East China Sea that Japan controls but China also claims as its own. Mr. Mattis, the first member of President Trump’s cabinet to visit East Asia, had told Japanese officials earlier Saturday that America’s defense obligations to Japan extended to the disputed rocky outposts, known in China as the Diaoyu and in Japan as the Senkaku. The chief spokesman for China’s Foreign Ministry, Lu Kang, accused Mr. Mattis of putting regional stability at risk and urged him to forgo what he called a Cold War mentality.”
Friday Evening Links
[Bloomberg] Stocks Rise to Records as Oil Gains, Bonds Slip: Markets Wrap
[Bloomberg] Trump Vows ‘Level Playing Field’ for U.S., Japan, China Currency
[Bloomberg] Greek Bailout Talks Set to Drag Past February Amid Standoff
[Bloomberg] Canada’s AAA Rating Is on Thin Ice
[WSJ] Vanguard Reaches $4 Trillion for First Time
[Reuters] Trump to Iran's Rouhani: Better be careful
[WSJ] Daniel Tarullo, Federal Reserve Regulatory Point Man, to Resign
[Bloomberg] Trump Vows ‘Level Playing Field’ for U.S., Japan, China Currency
[Bloomberg] Greek Bailout Talks Set to Drag Past February Amid Standoff
[Bloomberg] Canada’s AAA Rating Is on Thin Ice
[WSJ] Vanguard Reaches $4 Trillion for First Time
[Reuters] Trump to Iran's Rouhani: Better be careful
[WSJ] Daniel Tarullo, Federal Reserve Regulatory Point Man, to Resign
Thursday, February 9, 2017
Friday's News Links
[Bloomberg] Bonds Slump as Dollar Boosted by Trump Tax Pledge: Markets Wrap
[Bloomberg] Dollar Gains as Yen on the Defensive Before Trump-Abe Meeting
[Reuters] Fitch: The Trump Administration Poses Risks to Global Sovereigns
[Reuters] Euro zone, IMF agree on a common stance on Greece: official
[Bloomberg] China Exports Surge Ahead of Potential Challenge From Trump
[Bloomberg] China Faces Liquidity Test as $151 Billion Set to Exit System
[Bloomberg] Why China's Banks Are Feeling Squeezed
[Bloomberg] China Bitcoin Exchanges Halt Withdrawals After PBOC Talks
[Bloomberg] Le Pen May Get a Shock If She Tries to Pay French Debt in Francs
[WSJ] Vanguard Pulls In More Money Than Rivals Combined
[Reuters] Trump backs "One China" policy in call with China's Xi
[CNBC] As Trump hustles to nail down a tax overhaul, he faces the biggest federal debt surge since Truman
[SCMP] China ‘beefing up military’ on disputed islands in the South China Sea, says US think tank
[Bloomberg] Dollar Gains as Yen on the Defensive Before Trump-Abe Meeting
[Reuters] Fitch: The Trump Administration Poses Risks to Global Sovereigns
[Reuters] Euro zone, IMF agree on a common stance on Greece: official
[Bloomberg] China Exports Surge Ahead of Potential Challenge From Trump
[Bloomberg] China Faces Liquidity Test as $151 Billion Set to Exit System
[Bloomberg] Why China's Banks Are Feeling Squeezed
[Bloomberg] China Bitcoin Exchanges Halt Withdrawals After PBOC Talks
[Bloomberg] Le Pen May Get a Shock If She Tries to Pay French Debt in Francs
[WSJ] Vanguard Pulls In More Money Than Rivals Combined
[Reuters] Trump backs "One China" policy in call with China's Xi
[CNBC] As Trump hustles to nail down a tax overhaul, he faces the biggest federal debt surge since Truman
[SCMP] China ‘beefing up military’ on disputed islands in the South China Sea, says US think tank
Thursday Evening Links
[Reuters] Bank, energy stocks lift Wall St indexes to record highs
[Bloomberg] Mexico Raises Key Rate After Inflation Surges and Peso Stumbles
[Bloomberg] Fed’s Bullard Says Fiscal Uncertainty Should Delay Rate Increase
[Bloomberg] New GOP Memo Targets Stress Tests, CFPB in Dodd-Frank Changes
[Bloomberg] Home Prices Rose in 89% of U.S. Metro Areas in Fourth Quarter
[Bloomberg] Trump Promises Airlines New Infrastructure, Less Regulation
[Reuters] Greece optimistic of deal with lenders on reforms, debt, next week
[FT] Greek bonds sell off sharply as EU-IMF rift deepens
[Bloomberg] Mexico Raises Key Rate After Inflation Surges and Peso Stumbles
[Bloomberg] Fed’s Bullard Says Fiscal Uncertainty Should Delay Rate Increase
[Bloomberg] New GOP Memo Targets Stress Tests, CFPB in Dodd-Frank Changes
[Bloomberg] Home Prices Rose in 89% of U.S. Metro Areas in Fourth Quarter
[Bloomberg] Trump Promises Airlines New Infrastructure, Less Regulation
[Reuters] Greece optimistic of deal with lenders on reforms, debt, next week
[FT] Greek bonds sell off sharply as EU-IMF rift deepens
Wednesday, February 8, 2017
Thursday's News Links
[Bloomberg] Crude Gains Lift U.S. Stocks, Bond Rally Falters: Markets Wrap
[Reuters] U.S. jobless claims fall to near 43-year low
[CNBC] Should Greece stay or should it go? Analysts divided on whether Greece will exit euro
[AP] Italy's UniCredit bank posts massive $14.5 billion loss
[Reuters] Global automakers blame tax policy, Lunar New Year for China sales drop
[Reuters] China c.bank says warned bitcoin exchanges of closure risk on rule violations
[Bloomberg] Hong Kong's Frenzied Home Buyers Just Can't Be Stopped
[CNBC] Germany brings its gold stash home sooner than planned
[WSJ] Greece’s Never-Ending Fiscal Drama
[FT] Investors pile into risky bonds in bet on Trump economy
[WSJ] Chinese Companies Rush In With Nearly $2 Trillion Where Bankers Fear to Lend
[WSJ] Asia Central Bank Chiefs Worry About Trump Policies
[FT] Yen may be too hot to handle as Abe meets with Trump
[Reuters] U.S. jobless claims fall to near 43-year low
[CNBC] Should Greece stay or should it go? Analysts divided on whether Greece will exit euro
[AP] Italy's UniCredit bank posts massive $14.5 billion loss
[Reuters] Global automakers blame tax policy, Lunar New Year for China sales drop
[Reuters] China c.bank says warned bitcoin exchanges of closure risk on rule violations
[Bloomberg] Hong Kong's Frenzied Home Buyers Just Can't Be Stopped
[CNBC] Germany brings its gold stash home sooner than planned
[WSJ] Greece’s Never-Ending Fiscal Drama
[FT] Investors pile into risky bonds in bet on Trump economy
[WSJ] Chinese Companies Rush In With Nearly $2 Trillion Where Bankers Fear to Lend
[WSJ] Asia Central Bank Chiefs Worry About Trump Policies
[FT] Yen may be too hot to handle as Abe meets with Trump
Wednesday Evening Links
[Reuters] Wall Street closes little changed; banks weigh on Dow
[Reuters] Political jitters lift gold, dent euro and French debt
[Bloomberg] Dollar Policy Confusion Keeping Currency Traders Up at Night
[Bloomberg] Mortgage Ratings Blamed for Subprime Crisis Still Flawed, Ex-Insider Says
[NYT] Worries Grow Over Euro’s Fate as Debts Smolder in Italy and Greece
[WSJ] The Next American Farm Bust Is Upon Us
[Reuters] Political jitters lift gold, dent euro and French debt
[Bloomberg] Dollar Policy Confusion Keeping Currency Traders Up at Night
[Bloomberg] Mortgage Ratings Blamed for Subprime Crisis Still Flawed, Ex-Insider Says
[NYT] Worries Grow Over Euro’s Fate as Debts Smolder in Italy and Greece
[WSJ] The Next American Farm Bust Is Upon Us
Tuesday, February 7, 2017
Wednesday's News Links
[Bloomberg] Treasuries Gain With Gold as U.S. Stocks Retreat: Markets Wrap
[Bloomberg] Gold Reaches Three-Month High as Buyers Flock Back to Top ETF
[Bloomberg] China's Raising Rates. Good for the Yuan, Bad for Bonds
[Bloomberg] China's Currency Policy Approaches Breaking Point
[Reuters] China says United States should 'brush up on' South China Sea history
[NYT] How China Lost $1 Trillion
[Reuters] Investors fear "accident" as Greek debt repayment nears
[Politico] Hill Republicans quake at Trump's budget-busting wish list
[Bloomberg] India Signals End to Easing Cycle, Unexpectedly Holds Rates
[Bloomberg] Germany Abandons Push for G-20 Monetary Policy Restraint
[WSJ] IMF Revives Greek Euro-Exit Warning Amid Deadlocked Bailout Talks
[FT] Euro redenomination risk edges on to investors’ radar
[FT] Why is the eurozone back in crisis over Greece?
[FT] How the ECB’s purchases have changed European bond markets
[FT] China credit flood set to persist despite PBoC rate rises
[FT] The dollar: an orderly or disruptive appreciation?
[FT] Central bankers face off over impact of a disorderly Brexit
[Bloomberg] Gold Reaches Three-Month High as Buyers Flock Back to Top ETF
[Bloomberg] China's Raising Rates. Good for the Yuan, Bad for Bonds
[Bloomberg] China's Currency Policy Approaches Breaking Point
[Reuters] China says United States should 'brush up on' South China Sea history
[NYT] How China Lost $1 Trillion
[Reuters] Investors fear "accident" as Greek debt repayment nears
[Politico] Hill Republicans quake at Trump's budget-busting wish list
[Bloomberg] India Signals End to Easing Cycle, Unexpectedly Holds Rates
[Bloomberg] Germany Abandons Push for G-20 Monetary Policy Restraint
[WSJ] IMF Revives Greek Euro-Exit Warning Amid Deadlocked Bailout Talks
[FT] Euro redenomination risk edges on to investors’ radar
[FT] Why is the eurozone back in crisis over Greece?
[FT] How the ECB’s purchases have changed European bond markets
[FT] China credit flood set to persist despite PBoC rate rises
[FT] The dollar: an orderly or disruptive appreciation?
[FT] Central bankers face off over impact of a disorderly Brexit
Tuesday Evening Links
[Bloomberg] Reflation Trades Stall as Bonds Rise, Stocks Mixed: Markets Wrap
[Reuters] Wall Street edges higher as Nasdaq hits record
[CNBC] Houses are the least affordable they've been in seven years: Here's why
[Bloomberg] In Shadow of Le Pen and Brexit, Traders Redraw European Strategy
[Reuters] Greece hopes for breakthrough as funding stalemate persists
[Reuters] Italy's "bitter" bank rescue tsar bemoans strategy vacuum
[Reuters] U.S. government has itself to blame for dollar strength: Bundesbank
[NYT] Decade After Crisis, No Resolution for Fannie and Freddie
[NYT] Dodd-Frank Rollback May Fall Short of G.O.P. Hopes
[WSJ] Hedge Fund Short Bets Are Going the Wrong Way… Again
[FT] Experts back Trump’s tough line on trade with China
[FT] Bundesbank chief rejects ‘absurd’ claim of euro manipulation
[Reuters] Wall Street edges higher as Nasdaq hits record
[CNBC] Houses are the least affordable they've been in seven years: Here's why
[Bloomberg] In Shadow of Le Pen and Brexit, Traders Redraw European Strategy
[Reuters] Greece hopes for breakthrough as funding stalemate persists
[Reuters] Italy's "bitter" bank rescue tsar bemoans strategy vacuum
[Reuters] U.S. government has itself to blame for dollar strength: Bundesbank
[NYT] Decade After Crisis, No Resolution for Fannie and Freddie
[NYT] Dodd-Frank Rollback May Fall Short of G.O.P. Hopes
[WSJ] Hedge Fund Short Bets Are Going the Wrong Way… Again
[FT] Experts back Trump’s tough line on trade with China
[FT] Bundesbank chief rejects ‘absurd’ claim of euro manipulation
Monday, February 6, 2017
Tuesday's News Links
[Bloomberg] Dollar Jumps, Gold Falls as Demand for Havens Ebbs: Markets Wrap
[Bloomberg] Greek Two-Year Yields Approach 10% Amid IMF Standoff With EU
[Reuters] Euro, European bonds unnerved by French politics
[Bloomberg] Smaller December U.S. Trade Deficit Caps Worst Year in Four
[Bloomberg] China Reserves Edge Below $3 Trillion as Yuan Pressure Increases
[Bloomberg] Trump’s Dodd-Frank Do-Over Diverted to Slow Lane With Obamacare
[CNBC] By this measure, stocks are massively overvalued
[Bloomberg] As China’s Doors Open, Foreign Investors Worry About Exits
[Bloomberg] The PBOC’s Tools to Manage Monetary Policy: QuickTake Scorecard
[Bloomberg] Greek Two-Year Yields Approach 10% Amid IMF Standoff With EU
[Reuters] Euro, European bonds unnerved by French politics
[Bloomberg] Smaller December U.S. Trade Deficit Caps Worst Year in Four
[Bloomberg] China Reserves Edge Below $3 Trillion as Yuan Pressure Increases
[Bloomberg] Trump’s Dodd-Frank Do-Over Diverted to Slow Lane With Obamacare
[CNBC] By this measure, stocks are massively overvalued
[Bloomberg] As China’s Doors Open, Foreign Investors Worry About Exits
[Bloomberg] The PBOC’s Tools to Manage Monetary Policy: QuickTake Scorecard
Monday Evening Links
[Bloomberg] Asian Stocks Fall After Yen Climbs on Haven Demand: Markets Wrap
[Bloomberg] Treasuries Rise, U.S. Stocks Slip on Cautious Tone: Market Wrap
[Bloomberg] Philadelphia Fed’s Harker Says March Is on the Table for a Hike
[Reuters] Credit conditions for most business lending unchanged in fourth quarter : Fed
[Reuters] Goldman economists see more risks for U.S. economy
[Bloomberg] Goldman Sachs Economists Are Starting to Worry About President Trump
[Bloomberg] Draghi Rebuts Trump Lines on Currency Wars, Bank Rules
[WSJ] Investors Pile Into Treasurys, Bunds, Gilts as French Bonds Sell Off
[WSJ] SEC Faces Obstacles to Rolling Back Dodd-Frank Rules
[FT] Is Italy’s financial future resting on UniCredit?
[FT] Mario Draghi pushes back at Trump shake-up
[WSJ] For Donald Trump’s Team, Iran Moves Atop Confrontation List
[Bloomberg] Treasuries Rise, U.S. Stocks Slip on Cautious Tone: Market Wrap
[Bloomberg] Philadelphia Fed’s Harker Says March Is on the Table for a Hike
[Reuters] Credit conditions for most business lending unchanged in fourth quarter : Fed
[Reuters] Goldman economists see more risks for U.S. economy
[Bloomberg] Goldman Sachs Economists Are Starting to Worry About President Trump
[Bloomberg] Draghi Rebuts Trump Lines on Currency Wars, Bank Rules
[WSJ] Investors Pile Into Treasurys, Bunds, Gilts as French Bonds Sell Off
[WSJ] SEC Faces Obstacles to Rolling Back Dodd-Frank Rules
[FT] Is Italy’s financial future resting on UniCredit?
[FT] Mario Draghi pushes back at Trump shake-up
[WSJ] For Donald Trump’s Team, Iran Moves Atop Confrontation List
Sunday, February 5, 2017
Monday's News Links
[Bloomberg] Treasuries, Gold Rise as U.S. Stocks Slip With Oil: Market Wrap
[Bloomberg] European Bonds, Not the Euro, Take the Biggest Political Hit
[Bloomberg] France Yield Spread Nears Four-Year High as Political Risk Grows
[Reuters] Asia shares lag Wall St. gains, dollar becalmed
[Reuters] China services sector extends strong growth in January but pace eases: Caixin PMI
[Bloomberg] German Factory Orders Surge Most Since 2014 on Investment
[Reuters] Germany opposes unilateral tariffs on imports: Merkel
[Bloomberg] Investment Veteran Backs Gold on Risk of Trump Policy ‘Mistakes’
[Bloomberg] Foreigners Cut Chinese Bond Holdings First Time Since 2015
[Bloomberg] Five Charts That Say All Is Not Well in Markets
[Bloomberg] America’s Asia Allies May Face Biggest Currency Reversal
[WSJ] The Mortgage-Bond Whale That Everyone Is Suddenly Worried About
[WSJ] Tiger Hedge Funds Become Wall Street Prey
[WSJ] Mexico Teeters Between Its Recent U.S. Friendship and 170 Years of Hostility
[Bloomberg] European Bonds, Not the Euro, Take the Biggest Political Hit
[Bloomberg] France Yield Spread Nears Four-Year High as Political Risk Grows
[Reuters] Asia shares lag Wall St. gains, dollar becalmed
[Reuters] China services sector extends strong growth in January but pace eases: Caixin PMI
[Bloomberg] German Factory Orders Surge Most Since 2014 on Investment
[Reuters] Germany opposes unilateral tariffs on imports: Merkel
[Bloomberg] Investment Veteran Backs Gold on Risk of Trump Policy ‘Mistakes’
[Bloomberg] Foreigners Cut Chinese Bond Holdings First Time Since 2015
[Bloomberg] Five Charts That Say All Is Not Well in Markets
[Bloomberg] America’s Asia Allies May Face Biggest Currency Reversal
[WSJ] The Mortgage-Bond Whale That Everyone Is Suddenly Worried About
[WSJ] Tiger Hedge Funds Become Wall Street Prey
[WSJ] Mexico Teeters Between Its Recent U.S. Friendship and 170 Years of Hostility
Sunday Evening Links
[Bloomberg] Asian Stocks Advance as Banks Rally; Dollar Steady: Markets Wrap
[Bloomberg] Draghi Takes Case for QE to Brussels as Politics Keep Risks High
[Reuters] France's Le Pen launches election bid with vow to fight globalization
[FT] Overseas Chinese acquisitions worth $75bn cancelled last year
[FT] Passive investing continues march into US bond market
[Bloomberg] Draghi Takes Case for QE to Brussels as Politics Keep Risks High
[Reuters] France's Le Pen launches election bid with vow to fight globalization
[FT] Overseas Chinese acquisitions worth $75bn cancelled last year
[FT] Passive investing continues march into US bond market
Saturday, February 4, 2017
Saturday's News Links
[CNBC] US political, economic risks mounting against Trump's agenda, Goldman Sachs says
[Bloomberg] Germany’s Merkel Would Welcome South American Trade Deal With EU
[Bloomberg] France’s Marine Le Pen Unveils Presidential Platform Measures
[Politico] The method to President Trump's madness
[Reuters] Iran vows 'roaring missiles' if threatened, defies new sanctions
[NYT] China Assails U.S. Pledge to Defend Disputed Islands Controlled by Japan
[Bloomberg] Germany’s Merkel Would Welcome South American Trade Deal With EU
[Bloomberg] France’s Marine Le Pen Unveils Presidential Platform Measures
[Politico] The method to President Trump's madness
[Reuters] Iran vows 'roaring missiles' if threatened, defies new sanctions
[NYT] China Assails U.S. Pledge to Defend Disputed Islands Controlled by Japan
Friday, February 3, 2017
Weekly Commentary: The Wrath
It’s not the first time that a non-farm payrolls rally wiped away inklings of market anxiety. Coming early in the month – and on Fridays – the jobs report typically makes for interesting trading dynamics. By the end of another interesting week, the timely reemergence of “goldilocks” along with Trump The Deregulator were propelling stocks higher. Long forgotten were Monday’s “Stocks Fall Most in Month…” and “Trump Rally Hits Speed Bump on Immigration Concern.” Indeed, markets were grateful to let a number of developments slip from memory.
It’s still worth mentioning a few indicators that were beginning to lean away from “Risk On”. Prior to Friday’s jump, the powerful bank stock rally had stalled. The BKX was down almost 2% from Thursday to Thursday (Italian and Japanese banks down 3.4% and 2.9%). Small cap stocks have underperformed, with the Russell 2000 down slightly y-t-d as of Thursday’s close. Many “Trump Rally” stocks and trades have recently underperform. Equity fund flows were negative for three straight weeks. In high-yield debt, the rally had similarly lost momentum. Also noteworthy, Treasuries rallied only tepidly on Monday’s equity market selloff. European bonds continue to trade poorly (Greek yields up 33 bps; French spreads to bunds widened another 10bps). This week saw bullion jump $29. The dollar Index is now down 2.5% y-t-d.
The dollar/yen has for a while now been a key market indicator. After trading as low as 101.2 on election night market drama, Trump-induced king dollar euphoria had the dollar/yen surging to almost 119 by early January. The dollar/yen traded down to almost 112 on Thursday, to a two-month low. And similar to Treasuries, the dollar/yen these days struggles to participate during “Risk On” days. Trading slightly higher Friday, the yen jumped 2.2% against the dollar this week.
February 1 – Reuters (Sinead Carew and Jamie McGeever): “U.S. President Donald Trump and a top economics adviser on Tuesday unleashed a barrage of criticism against Germany, Japan and China, saying the three key U.S. trading partners were engaged in devaluing their currencies to the harm of American companies and consumers. The comments from Trump at the end of a White House meeting with pharmaceutical executives, as well as from trade adviser Peter Navarro…, were the starkest indication yet that the first-term Republican president is prepared to jettison two decades of ‘strong dollar’ policies advocated by predecessors dating back to the Clinton administration. The criticism also signals a weakening of the U.S. commitment to an agreement among the financial leaders of the world's top 20 economies, struck after the 2008 financial crisis, that countries would not pursue policies to target exchange rates for competitive purposes.”
February 2 – Nikkei Asian Review (Mikio Sugeno): “By accusing Germany and Japan of intentionally devaluing their currencies, the Donald Trump administration has attacked normal monetary policy designed to maintain healthy inflation, a dangerous step that could upend an understanding long shared by major economic powers. It was a moment Haruhiko Kuroda had been dreading. The Bank of Japan governor told reporters Tuesday after the central bank's two-day policy meeting that the new U.S. administration is still taking its first steps, and that the BOJ ‘will see how things play out.’ He knew anything he said could be misconstrued. Several hours later, the president called out China and Japan by name as having devalued their currencies over the course of years: ‘They play the money market, they play the devaluation market’ while the U.S. sits idly by, Trump said.”
This week offered some important clarity: Trump is no devotee of king dollar, while he views QE as a mechanism for currency devaluation. Oh, how the world is changing. Throughout the markets, king dollar has been integral to recent global risk embracement. I’ll assume global “Risk On” has been fueled in part by significant carry-trade speculative leveraging (short yen, euro, swissy instruments to provide financing for higher-yielding securities elsewhere). There are now major uncertainties that should ensure heightened currency market volatility going forward. This creates a less compelling risk vs. return calculus for carry trade leverage, increasing the probability that, once commenced, a de-risking/de-leveraging dynamic could become self-reinforcing.
February 3 – Bloomberg (Randall Jensen): “Asia’s two biggest central banks moved in opposite directions on Friday. In Beijing, the People’s Bank of China tightened monetary policy by raising the interest rates it charges in open market operations. In Tokyo, the Bank of Japan intervened in the bond market to reassert control over 10-year yields it has promised to anchor around zero… The backdrop: growing tensions with the U.S. as President Donald Trump accuses both China and Japan of unfair trading practices and keeping currencies low, and expectations the Federal Reserve is gearing up for multiple rate increases this year. ‘The world’s no longer synchronized, with the Fed’s tightening posing challenges for central bankers across Asia and beyond,’ said Frederic Neumann, co-head of Asian economic research at HSBC… ‘Asia’s got one foot on the gas, and one on the brake.’”
February 3 – Wall Street Journal (Shen Hong): “China’s central bank raised key interest rates in the money market Friday, reinforcing a shift toward tighter monetary policy aimed at deflating asset bubbles and reducing long-term financial risk. The latest effort by the People’s Bank of China follows a similar decision shortly before the weeklong Lunar New Year holiday to increase the borrowing cost on special loans to a select group of commercial lenders, a move widely interpreted as an effective policy interest-rate increase.”
February 2 – Bloomberg (Chikako Mogi and Masaki Kondo): “The Bank of Japan whipsawed markets as it fought to assert control over rising bond yields. The Japanese central bank first disappointed with a smaller-than-expected increase in bond purchases Friday morning, which spurred the 10-year yield and the yen to advance. Its unscheduled offer later to buy an unlimited amount of debt for some maturities sent rates and the currency falling. ‘The operation was a surprise aimed at definitely stopping the rise in yields,’ Takenobu Nakashima, quantitative strategist at Nomura… ‘What’s astonishing is that the BOJ is offering to buy at yields lower than where the markets are. In other words, the BOJ will pay to buy, showing that it wants to halt the yield even at its cost.’”
The overarching thesis for 2017 holds there's a high probability for a tightening of global monetary conditions that would catch inflated markets extraordinarily vulnerable. In short, the Crowded King Dollar Trade is exposed to Trump Administration antipathy toward dollar strength, with potential implications for market de-leveraging (waning liquidity). Secondly, the two major sources of global QE/liquidity – the ECB and BOJ – are more susceptible to policy reassessment than generally perceived by complacent markets. Both central banks are trapped in flawed policies, and both are poised to be on the receiving end of The Wrath of Trump. What’s more, the Japanese have traditionally accepted U.S. direction with obedience. (The BOJ must be wondering what happened to Bernanke’s “enrich thy neighbor”.) Third, Beijing officials seem seriously determined to try to rein in China’s out of control Credit Bubble. This increases the odds of a major Credit event unfolding in China in 2017, with all the associated policy, market and economic uncertainties.
When it comes to the late-stage of a major Credit Bubble, the analysis in a way simplifies: The Bubble bursts or it inflates to only more perilous extremes. Recalling 2007, well-entrenched Bubbles develop powerful momentum with the capacity to brush off even significant shocks. Such resilience works to bolster already powerful bullish market sentiment, associated flows and speculative impulses (and “inflationary biases” more generally). This dynamic helps explain why Bubbles can go to such extremes before catching almost everyone by surprise when they eventually falter. The VIX dropped 10% during Friday’s rally, punishing those that were tempted to play for a market reversal with cheap option trades. The VIX closed the week at 10.79, trading Friday at the lowest level since early 2007.
To be sure, option pricing fails to reflect political uncertainties. This week our President put many “on notice”, foe and friend alike. The Wrath list included Iran, China, Germany, Mexico, the ECB and BOJ, and even our dear friends in Australia. A U.S. television commentator quipped that it really takes a lot to get Australians upset with America, yet President Trump found a way. If the stock market had been under significant pressure this week, the rumblings questioning our President’s competence and emotional stability would have ratcheted up.
So many fascinating developments and perspectives:
February 2 – UK Independent (Ben Chu): “‘In many respects we’re coming to the last seconds of central bankers’ fifteen minutes of fame which is a good thing,’ Mr Carney told the Bank of England Inflation Report press conference, referencing Andy Warhol’s line about everyone in the world being famous for fifteen minutes in their lives in the future.”
And there was the Bloomberg article, “Finance Makes America Great, Say Larry Summers, Joe Ricketts.” “…Finance and economic life work best when they are based on openness, transparency, principle and are free from political motivation,’ Summers said, adding that independent central banks, strong currency, common rules, and ‘no ad hoc threats or bribes from public officials, no matter how powerful, are what make the market system function best… There’s something else you learn at the Museum of American Finance,’ Summers said. The U.S. is an exceptional nation ‘because of what it has strived to achieve for the last 75 years in the global system.’”
The problem is that finance doesn’t make America great. The global “system” today is nothing as imagined 75 years ago and, for good reason, most people in the world have little trust in international finance. Central banks are not independent and “finance and economic life” have been anything but free from “political motivation.” Instead, unfettered global finance and central bank-led inflationism have created serial booms and busts that evolved into today’s perilous financial, economic, social and geopolitical discord. The unprecedented inflation of finance is fundamental to the problem - and not, as should be abundantly obvious by now, constructive when it comes to finding a lasting solution.
I could only chuckle at the headline: “Dan Loeb: Trump Will Make Hedge Funds Great Again.” In a meeting with pharmaceutical executives earlier in the week, a delightful President Trump promised to slash regulation and red tape. But he just needs a little something in return from the industry: Dramatically Lower Prices. The Art of the Deal.
Our new President and his Administration are at this point an enigma. Folks are beginning to accept that he’s not going to change, which is none too comforting to many. Shock and dismay understate reactions both at home and abroad. Yet when it comes to financial markets, when anxiety begins to strike simply repeat, “de-regulation, tax cuts, de-regulation, tax cuts…” The President certainly has everyone’s attention, with Wall Street and corporate America having donned kid gloves.
But I don’t believe anyone is comfortable that they understand what the President and his inner circle really have in mind. Whatever it may be, they’re going to be in your face tough and idiosyncratic. How big of a conflict are they willing to accept early in the new Administration? At the end of the day, I suspect they don’t share the view that America will be made great again through hedge funds, inflated securities prices and ever greater quantities of “money” and Credit. Sure, they’ll play the game so long as they see it to their advantage.
Markets, of course, remain convinced that buoyant securities prices are more indispensable than ever - and that Trump will bluster but knows better than to mess with the markets or their benefactor, central banking. Not that they’re in any hurry to burst Bubbles, but the Trump folks have their own perspectives, ideas and ambitions. I suspect that Carney’s “15 minutes of fame” comment resonates within The Inner Circle. A new era has commenced, and these central bankers and Wall Street icons have occupied the limelight for too long already.
For the Week:
The S&P500 (up 2.6% y-t-d) and the Dow (up 1.6%) were little changed. The Utilities added 0.8% (up 0.2%). The volatile Banks increased 0.3% (up 1.5%), and the Broker/Dealers jumped 1.7% (up 7.4%). The Transports dropped 2.1% (up 2.2%). The S&P 400 Midcaps gained 0.6% (up 2.8%), and the small cap Russell 2000 increased 0.5% (up 1.5%). The Nasdaq100 (up 6.1%) and the Morgan Stanley High Tech index (up 7.2%) were about unchanged. The Semiconductors added 0.2% (up 6.3%). The Biotechs jumped 3.7% (up 7.4%). With bullion surging $29, the HUI gold index rose 4.6% (up 16.4%).
Three-month Treasury bill rates ended the week at 50 bps. Two-year government yields slipped two bps to 1.20% (up one basis point y-t-d). Five-year T-note yields fell four bps to 1.91% (down 2bps). Ten-year Treasury yields declined two bps to 2.46% (up 2bps). Long bond yields rose three bps to 3.09% (up two bps).
Greek 10-year yields surged 33 bps to 7.44% (up 42bps y-t-d). Ten-year Portuguese yields added three bps to 4.17% (up 43bps). Italian 10-year yields gained four bps to 2.27% (up 45bps). Spain's 10-year yields jumped 10 bps to 1.68% (up 30bps). German bund yields fell five bps to 0.41% (up 21bps). French yields rose five bps to 1.08% (up 40bps). The French to German 10-year bond spread widened another 10 to 67 bps. U.K. 10-year gilt yields fell 12 bps to 1.35% (up 12bps). U.K.'s FTSE equities index was little changed (up 0.6%).
Japan's Nikkei 225 equities index dropped 2.8% (down 1.0% y-t-d). Japanese 10-year "JGB" yields increased two bps to 0.10% (up 6bps). The German DAX equities index fell 1.4% (up 1.5%). Spain's IBEX 35 equities index slipped 0.4% (up 1.2%). Italy's FTSE MIB index declined 1.1% (down 0.6%). EM equities were mixed. Brazil's Bovespa index fell 1.6% (up 7.8%). Mexico's Bolsa dipped 0.4% (up 3.5%). South Korea's Kospi declined 0.5% (up 2.3%). India’s Sensex equities index gained 1.3% (up 6.1%). China’s Shanghai Exchange declined 0.6% (up 1.2%). Turkey's Borsa Istanbul National 100 index surged 5.4% (up 13.1%). Russia's MICEX equities index fell 1.7% (down 0.3%).
Junk bond mutual funds saw inflows of $413 million (from Lipper).
Freddie Mac 30-year fixed mortgage rates were unchanged at 4.19% (up 47bps y-o-y). Fifteen-year rates added a basis point to 3.41% (up 40bps). The five-year hybrid ARM rate added three bps to 3.23% (up 38bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates unchanged at 4.31% (up 54bps).
Federal Reserve Credit last week declined $4.1bn to $4.415 TN. Over the past year, Fed Credit contracted $29.8bn (down 0.7%). Fed Credit inflated $1.604 TN, or 57%, over the past 221 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt fell $5.3bn last week to $3.165 TN. "Custody holdings" were down $108bn y-o-y, or 3.3%.
M2 (narrow) "money" supply last week jumped $197 billion to a record $13.299 TN. "Narrow money" expanded $832bn, or 6.7%, over the past year. For the week, Currency increased $2.3bn. Total Checkable Deposits were about unchanged, while Savings Deposits rose $16.0bn. Small Time Deposits and Retail Money Funds were little changed.
Total money market fund assets declined $5.7bn to $2.680 TN. Money Funds declined $72bn y-o-y (2.6%).
Total Commercial Paper added $2.1bn to $965bn. CP declined $99.5bn y-o-y, or 9.3%.
Currency Watch:
February 1 – Wall Street Journal (Saumya Vaishampayan, Ian Talley and Chelsey Dulaney): “Major currencies are posting their largest swings in months, highlighting a growing difficulty for investors and traders to discern the likely path of Trump administration policy. The U.S. currency rallied in the weeks following Donald Trump’s election Nov. 8, reflecting in part investor expectations that deregulatory, tax-reduction and stimulus plans will push up U.S. growth. But since the New Year, the dollar has declined and volatility has picked up, driven by statements by administration officials that have been interpreted by investors as advocating a lower dollar.”
The U.S. dollar index declined 0.7% to 99.87 (down 2.5% y-t-d). For the week on the upside, the Mexican peso increased 2.6%, the Japanese yen 2.2%, the Australian dollar 1.7%, the Norwegian krone 1.6%, the South African rand 1.6%, the Singapore dollar 1.5%, the South Korean won 1.1%, the Taiwanese dollar 1.0%, the Canadian dollar 1.0%, the Swedish krona 1.0%, the euro 0.8%, the New Zealand dollar 0.8%, the Swiss franc 0.6% and the Brazilian real 0.6%. For the week on the downside, the British pound declined 0.6%. The Chinese yuan increased 0.2% versus the dollar (up 1.1% y-t-d).
Commodities Watch:
The Goldman Sachs Commodities Index added 0.7% (up 0.5% y-t-d). Spot Gold jumped 2.4% to $1,220 (up 5.9%). Silver gained 2.0% to $17.479 (up 9.4%). Crude increased 66 cents to $53.83 (unchanged). Gasoline rose 1.7% (down 7.0%), and Natural Gas dropped 8.8% (down 18%). Copper fell 2.7% (up 4.3%). Wheat gained 2.3% (up 5.5%). Corn added 0.8% (up 3.8%).
Trump Administration Watch:
February 2 – Reuters (Jamie McGeever): “If visibility and predictability are two foundations upon which stable financial markets are built, comments from the White House this week on the U.S. dollar suggest investors should brace for increased foreign exchange volatility. President Donald Trump and his top trade adviser waded into the debate over the currency's strength and the damage they say it is doing to U.S. competitiveness, drawing rebuffs from Germany and Japan and casting doubt over the strength of global cooperation on foreign exchange policy. On the one hand, this should come as little surprise. A key pillar of Trump's election campaign was to reinvigorate U.S. manufacturing and bring back what he sees as lost jobs. A weaker dollar would be instrumental to achieving that goal. But his desire to boost U.S. economic growth - via tax cuts, increased spending and encouraging U.S. firms to repatriate billions of dollars of cash held overseas - is consistent with higher interest rates and a stronger dollar.”
February 2 – Reuters (Parisa Hafezi): “President Donald Trump’s ‘America First’ policy aimed at shrinking the trade deficit represents a fundamental change in the country’s dollar strategy, says the former currency chief of Japan’s Ministry of Finance. The U.S. has traditionally favored a strong dollar to attract funds from abroad and reinvested the money overseas to reap returns from dividends and interest income, said Hiroshi Watanabe, president of the Institute for International Monetary Affairs… For this reason, the U.S. has sought to avoid weakening the dollar but this business model seems to be changing, he said. ‘What interests Trump is the size of the U.S. trade deficit, the amount of exports from the U.S., and not the exchange rate or whether the U.S. needs a strong dollar… While refraining from favoring a weak dollar, the U.S. Treasury Secretary may eventually say the dollar needn’t be strong.’”
January 31 – Bloomberg (Patrick Donahue and Arne Delfs): “Chancellor Angela Merkel rejected an accusation by President Donald Trump’s top trade adviser that Germany is gaming foreign-exchange markets as European leaders grapple with the new U.S. administration. Peter Navarro, the head of the White House National Trade Council, told the Financial Times that Germany’s excessive surplus is a sign of a ‘grossly undervalued’ currency. Merkel pushed back, saying the exchange rate was the province of the European Central Bank and that the German government has long upheld the ECB’s independence.”
February 1 – Financial Times (Shawn Donnan, Robin Harding and Katie Martin): “The Trump administration’s willingness to break with tradition and comment about currency valuations has raised fears that the US might lead the world into a new round of currency wars, angering and unnerving allies. Shinzo Abe, Japan’s prime minister, complained on Wednesday after Mr Trump attacked China and Japan for ‘play[ing] the devaluation market’. In response, Mr Abe told the Japanese parliament: ‘The kind of criticism they are making of yen manipulation is incorrect.’ The previous day Angela Merkel… denied that Berlin was seeking to influence the valuation of the euro — after a top Trump adviser… accused Berlin of exploiting a ‘grossly undervalued’ euro. The administration’s comments were the latest sign of a dramatic departure from past practice…”
February 1 – Reuters (Howard Schneider and David Lawder): “For seven years, the United States has fought to keep the euro zone intact, urging European officials toward action and supporting international bailout programs to keep the 17-nation currency union from cracking apart. That appears to have changed less than two weeks into Donald Trump's new administration. A sharp shift in tone toward Germany, casting the euro as fuel for that country's massive trade surplus, has raised concerns that the U.S. president's trade-centric world view may see the euro not as a geopolitical plus, but as another needless bit of multilateralism. While Trump has refrained from commenting directly on the euro, he praised Britain's decision to exit the European Union as a ‘great thing’ and predicted that others would leave the bloc as the result of an influx of refugees.”
February 2 – Bloomberg (David Tweed): “For the first time in decades, America’s oldest allies are questioning where Washington’s heart is. This week, President Donald Trump and his deputies hit out at some of America’s closest friends, blasting a ‘dumb’ refugee resettlement deal with Australia and accusing Japan and Germany of manipulating their currencies. Ties with Mexico have deteriorated to the point its government had to deny reports that Trump told President Enrique Pena Nieto he might send U.S. troops across the southern border. ‘When you hear about the tough phone calls I have, don’t worry about it,’ Trump said to an audience of religious and political leaders at the National Prayer Breakfast… ‘The world is in trouble -- but we’re going to straighten it out, OK? That’s what I do.’”
February 1 – Bloomberg (John Follain, Jeff Black, and Scott Hamilton): “World leaders aren’t taking Donald Trump’s trade barbs lying down. After the U.S. president said Germany and Japan are gaming foreign-exchange markets to win favorable trade terms, Japanese Prime Minister Shinzo Abe joined German Chancellor Angela Merkel… in pushing back and leading a global counter-charge to the accusations. ‘A massive clash is starting to emerge with Trump willing to get into major geopolitical spats with China and other countries to advance his ‘America First’ agenda,’ Mark Leonard, director of the European Council on Foreign Relations, said… The sparks that have dominated the initial days of Trump’s presidency have set the stage for increased tensions over global trade and currency regimes. Decades of economic ties are at stake.”
January 29 – Financial Times (Guy Chazan and Alex Barket): “The fate of European dual nationals banned from entering America — including leading British and German politicians — is set to become one of the first flashpoints of transatlantic relations in the Trump era. As Donald Trump stood by his ban on refugees and entry to the US from seven Muslim-majority countries, Angela Merkel, the German chancellor, on Sunday joined other world leaders in condemning the ban, saying it was no way to fight terrorism. The White House’s actions have caused alarm in Europe, where leaders see it as part of a broad offensive by Mr Trump against the world liberal order and the key common values underpinning transatlantic institutions that have ensured peace and security in Europe since the second world war.”
China Bubble Watch:
February 1 – Financial Times (Jamil Anderlini): “It reads like the plot of a bad thriller — a Chinese billionaire sits with his entourage of female bodyguards in his apartment in the Hong Kong Four Seasons in the early hours of Chinese new year’s eve. The women are employed not only to protect him but also to wipe the sweat from his brow and back. Suddenly, half a dozen public security agents from mainland China burst in, overpower the bodyguards, bundle the billionaire out of the luxury hotel and spirit him across the border to face the wrath of the Communist party. But this is not the script for a kung fu potboiler. The billionaire is Xiao Jianhua, one of China’s most politically connected and wealthy men, and his abduction from the heart of Hong Kong’s financial district last Friday has shaken the city to its core.”
Global Bubble Watch:
February 1 – Bloomberg (Marton Eder and Anooja Debnath): “Euro-region bonds handed investors the worst start to a year on record as heightened political risk across the currency bloc added to speculation the European Central Bank may bring its asset-purchase program to an abrupt halt in 2018. With general elections scheduled in France, Germany and the Netherlands this year amid an increase in support for anti-euro rhetoric, yields on French and Italian bonds climbed this week to their highest level relative to benchmark German debt since 2014. In the face of stronger growth and rising inflation, some investors aren’t listening to Mario Draghi when he says the ECB hasn’t considered tapering its bond-buying plan. Rising populism in the region’s biggest economies and speculation that the ECB’s stimulus plan may be nearing its endgame have clouded the horizon for bond investors…”
February 1 – Bloomberg (Randall Jensen): “Inflation across the world is beating analysts’ forecasts even before the potential effect from Donald Trump’s economic policies. The global Citi Inflation Surprise Index, which measures price surprises relative to market expectations, is at the highest in more than five years. The reading turned positive in December -- meaning inflation data were higher than expected -- for the first time since 2012.”
January 31 – Wall Street Journal (Mike Bird, Christopher Whittall and Ben Leubsdorf): “After years of fighting against deflation, the U.S., the eurozone and Japan show glimmerings of life in consumer prices and wages, evidence that an era of exceptionally low inflation is receding from the global economic landscape. Several factors are behind the move, including a rebound in energy prices, falling unemployment which is reducing slack in some labor markets, and central banks’ low-interest-rate policies that spur lending and economic growth.”
January 29 – Financial Times (Jennifer Hughes): “President Donald Trump’s inauguration and the early lunar new year holiday triggered a borrowing frenzy in Asia this month, with regional companies and governments selling record amounts of bonds in the international markets. Asian borrowers from Japan’s megabanks and India’s Vedanta mining group… have sold $51bn of debt to international investors, according to Dealogic…”
January 30 – Bloomberg (Maria Tadeo): “Euro-area economic confidence hit a six-year high in January, adding to signs of stronger growth and inflation that are fueling a debate about European Central Bank stimulus. An index of executive and consumer sentiment rose to 107.9. from 107.8 in December… That’s the highest reading since March 2011…”
Brexit Watch:
February 1 – Bloomberg (Fergal O'Brien): “U.K. factories saw costs rise at a record pace at the start of 2017, pointing to increasing upward pressure on inflation that could weigh on the economy this year. A measure of input prices in IHS Markit’s monthly Purchasing Managers Index jumped to the highest since the series began in 1992…”
Europe Watch:
January 31 – Reuters (Jan Strupczewski and Francesco Guarascio): “Inflation in the euro zone has risen to just below the European Central Bank's target, economic growth is accelerating at greater speed than in the United States, and unemployment has hit a more than seven-year low. Myriad data releases showed… that the 19-member currency bloc's economy is on the mend - a confirmation of recovery that will intensify political pressure on the European Central Bank to haul back its generous stimulus program… Inflation accelerated to 1.8% year-on-year in January…, up from 1.1% in December, leaving it just shy of the ECB's medium-term target of below but close to 2%. It was the highest rate since February 2013 and came after data in the past two days that showed prices rising in Germany, France and Spain, three of the bloc's four biggest economies.”
January 30 – Bloomberg (Carolynn Look): “German critics of the European Central Bank’s 2.28 trillion-euro ($2.4 TN) bond-buying program got a little bit more ammunition on Monday. Inflation in the euro area’s biggest economy was 1.9% in January, the highest rate since July 2013... Perhaps more importantly, it’s now roughly at the level that the ECB targets for the currency bloc as a whole, a signal for many Germans that the central bank for 19 nations needs to rein in stimulus.”
January 30 – Bloomberg (David Goodman and Anooja Debnath): “Europeans are more confident about their economy than they’ve been in nearly six years, but you wouldn’t know it by looking at the markets. Investors dumped bonds and stocks across the region on Monday, spurred by a confluence of risks that echoed the euro-zone debt crisis. French and Italian election campaigns stoked concerns over the rise of anti-euro political powers, while inflation in Germany signaled European Central Bank stimulus may not last much longer. Meantime, Greece, the catalyst for the original crisis, reached another crossroads with its creditors.”
January 30 – Bloomberg (Carolynn Look): “Germany is feeling cursed by its own economic strength. For eight years, the nation of 83 million people has been the euro area’s growth driver. Now it’s at the forefront of the currency bloc’s reflation -- early data on Monday showed annual price increases exceeding 2% in some states -- and dissatisfaction with the European Central Bank has morphed into frustration. Critics and media are slamming the institution’s monetary stance… as mainstream parties struggle to contain a surge in populism ahead of national elections. Finance Minister Wolfgang Schaeuble has warned that higher inflation could cause ‘political problems,’ and German monetary officials are urging their peers to start devising an exit strategy from unconventional stimulus.”
February 1 – Wall Street Journal (Tasos Vossos and Nektaria Stamouli): “Investors are dumping Greek bonds, fearing that Athens will be unable to pay debt that comes due this summer. The selloff comes as the Greek government is again at a standstill in negotiations with its creditors in the eurozone and at the International Monetary Fund. Athens needs to break the deadlock and secure more aid before about €6 billion ($6.5bn) in debt has to be repaid in July. Complicating matters is a scheduled IMF board meeting next week and a lack of clarity over what position the U.S.—which has the largest vote at the fund—will take under the Trump administration.”
January 30 – Reuters (Francesco Guarascio): “Greece will only receive more loans from the euro zone if the International Monetary Fund joins its latest aid program, the head of the bloc's bailout fund said… Greece needs a new tranche of financial aid under its 86 billion euro bailout by the third quarter of the year or it faces the risk of defaulting on its debts. Under the current program, Greece's third since 2010, loans have been disbursed by euro zone creditors without the formal participation of the IMF, although that has always been a requirement. But with elections coming in the Netherlands and Germany -- two of the most adamant supporters of the IMF role in the bailout, the creditors want to apply the agreed conditions for new loans to Athens more strictly.”
February 2 – Financial Times (Mehreen Khan): “More signs of rumblings in the eurozone bond markets. With investors starting to demand the highest premium in three years to hold French over German government bonds, the yield gap between Italy and Spain is also at its highest level since the depths of the eurozone’s debt crisis. Diverging political and economic fortunes in the eurozone’s southern economies have sent Italy’s 10-year yield spread with Spain to over 60 bps – the widest since 2012… The peripheral bond market moves are the latest sign that investors are beginning to differentiate between the riskiness of debt of the eurozone’s biggest governments in a key year of elections in the single currency area.”
January 31 – Financial Times (Mehreen Khan): “France’s far-right presidential candidate Marine le Pen will look to take the country out of the single currency area in six months, setting out a radical economic vision for the eurozone’s second largest economy should she be elected in May. Jean Messiha, an adviser to Ms Le Pen, has fleshed out the eurosceptic party’s promises to pursue a ‘Frexit’, claiming the French state would redenominate its more than €2tn outstanding debt into a new franc and ‘guarantee’ companies will still have access to the debt markets to help smooth the transition out of the euro. Ms Le Pen has long promised to restore monetary sovereignty to France, railing against the EU’s debt rules and prohibitions on government spending.”
Fixed-Income Bubble Watch:
January 30 – Reuters (Dhara Ranasinghe): “Inflation has a habit of creeping up on you. Just ask historians. From rates below zero less than a year ago, inflation across the developed world has risen in recent months toward central bank targets, largely driven by a rising oil price. And if history is any guide, bond markets had better beware. Paul Schmelzing, a visiting scholar at the Bank of England from Harvard University, has studied 800 years of bond markets history and says the most relevant parallel with today's environment is with the late 1960s under U.S. President Richard Nixon. The United States was emerging from a prolonged period of low inflation, the jobs market was tightening and a new pro-business president had raised expectations of fiscal expansion. It was a bruising time for bond investors. U.S. bonds lost 36% in real price terms between 1965 and 1970, while annual consumer price inflation more than tripled in the period, to 5.9% from 1.6%.”
February 1 – Financial Times (Eric Platt): “Trading volumes of US corporate debt hit a record level on Tuesday. More than $38bn worth of investment grade, high yield and convertible bonds swapped hands on Tuesday, surpassing a high water market set last March… The surge in trading follows a near record month of borrowing by companies through US capital markets. Banks and companies that hold investment grade credit ratings sold $177.9bn of debt in the US in January, the second highest monthly tally on record and less than $3bn below a peak set in May 2016, according to Dealogic.”
U.S. Bubble Watch:
February 2 – Bloomberg (Sho Chandra): “Worker productivity in the U.S. cooled in the fourth quarter following the biggest jump in two years, resuming the weak efficiency gains that have plagued the expansion. The measure of employee output per hour increased at a 1.3% annualized rate, after a revised 3.5% rise in the prior three months… Expenses per worker rose at a 1.7% pace. The latest slowdown -- following a third-quarter gain that ended the longest streak of productivity declines since 1979 -- underscores the challenge of developing a sustained pickup.”
February 2 – Reuters (Lucia Mutikani): “U.S. factory activity accelerated to more than a two-year high in January amid sustained gains in new orders and raw material costs… Other data on Wednesday showed private employers boosted hiring last month.”
January 31 – Reuters (Chuck Mikolajczak): “U.S. single-family home price increases accelerated at a faster pace than expected in November and rising mortgage rates coupled with potential economic growth could push them higher… The S&P CoreLogic Case-Shiller composite index of 20 metropolitan areas rose 5.3% in November on a year-over-year basis, up from a 5.1% climb in October.”
February 1 – Bloomberg (Jamie Butters and David Welch): “Toyota… led major carmakers reporting lower U.S. sales in January, even as an industry trying for another record year piled on discounts to keep showrooms busy. Deliveries fell about 11% for both Toyota and Fiat Chrysler Automobiles NV. Sales also dropped for General Motors Co. and Ford Motor Co., pacing a 1.8% decrease for the industry in January…”
February 1 – Wall Street Journal (Laura Kusisto): “Young Americans are losing confidence in their prospects for buying a home, suggesting that even with prices at all-time highs the dream of homeownership is losing its grip on some. The share of renters and people living with family members who believe now is a good time to buy declined to 55% in the fourth quarter of 2016 from 58% in the third quarter and 63% at the beginning of last year… Lawrence Yun, chief economist at the National Association of Realtors, blamed lack of affordability, a shortage of inventory, student debt and a perception that credit remains tight for potential buyers’ lack of confidence… Of the roughly 40% of people surveyed who don’t own a home and have student debt, more than half said they weren’t comfortable taking on a mortgage.”
January 31 – Financial Times (Alistair Gray): “An influential bankers lobby is pushing the Trump administration to tackle one of the thorniest unsolved problems from the financial crisis by overhauling the two giant businesses that back most US mortgages. Fannie Mae and Freddie Mac would be turned into privately owned utilities with returns to shareholders determined by regulators under proposals put forward by the Mortgage Bankers Association. The two groups would enjoy government support under the MBA’s plans — but so would rivals and new entrants, a structure proponents say would encourage competition.”
January 30 – Bloomberg (Michael McDonald): “U.S. college endowments suffered their biggest loss since the financial crisis, dragged down by global stocks, hedge funds and natural resources, according to an industry survey… The 1.9% average loss reported by the National Association of College and University Business Officers and money manager Commonfund…, for the year ended June 30, compared with a nearly 4% gain… in the S&P 500 Index. In the prior 12-month period, schools saw a 2.4% return on average.”
Federal Reserve Watch:
February 1 – New York Times (Binyamin Appelbaum): “The Federal Reserve is waiting for more information about the Trump administration’s economic plans, just like everyone else. After its first policy making meeting of the year, the Fed said on Wednesday that its economic outlook remained essentially unchanged since its previous meeting in December. The nation’s slow-and-steady economic expansion has continued, with little sign in the latest data that it is flagging or accelerating. And as expected, the Federal Open Market Committee… left the Fed’s benchmark interest rate unchanged. The question is what comes next.”
February 2 – Bloomberg (Steve Matthews): “A decade after the U.S. housing market collapsed, Federal Reserve officials are watching rising apartment towers as the next potential asset-price bubble, which could add to the debate about the pace of interest-rate hikes this year. Fed Chair Janet Yellen cited commercial real estate prices as ‘high’ in a speech at Stanford University on Jan. 19. That message has been echoed by Governor Jerome Powell, who warned ‘low rates may lead to a reach for yield,’ as well as Boston Fed President Eric Rosengren, who cited luxury housing in his city. While single-family housing prices have had a gradual recovery from the mortgage bust, commercial real estate is showing signs of being overheated in markets such as New York, San Francisco and Boston. Fed officials have mostly said they plan to address potential asset price bubbles with financial supervision, rather than by raising interest rates at a faster pace…”
January 29 – Wall Street Journal (Michael S. Derby): “While Federal Reserve officials ponder when to raise short-term interest rates again, they are beginning to wrestle with another big policy decision—whether this is the year to start shrinking their immense portfolio of mortgage and Treasury securities. The Fed has boosted its portfolio of long-term bonds and other assets to $4.45 trillion from less than $1 trillion in 2007… Officials believe the large portfolio has helped to spur economic growth by holding down long-term interest rates. With the economy closer to healed from the financial crisis and recession, the central bank has already begun raising short-term rates. Fed Chairwoman Janet Yellen has said the Fed would reduce the bondholdings once interest rate increases were ‘well under way.’ Many officials hope to get the portfolio back to some state of precrisis normalcy.”
February 1 – Reuters (Ann Saphir and Richard Leong): “Federal Reserve policymakers are putting markets on notice that the central bank's $4.5 trillion balance sheet is back on the agenda in an apparent effort to give investors time to prepare for changes rather than to signal any action is imminent. Policymakers want to minimize any volatility that slimming the Fed's massive balance sheet might cause, and have said they will only do so after interest rate increases are ‘well underway.’”
Japan Watch:
January 31 – Bloomberg (Toru Fujioka and Enda Curran): “Optimistic economic forecasts and monetary policy settings that haven’t changed since September lend an aura of calm and control to the Bank of Japan. The problem is, much of what’s been going right lately -- and a lot of what could go wrong this year -- are beyond its control. This was clear Tuesday when the central bank raised its projections for growth and maintained bullish price estimates, while warning that the risks to this picture are skewed to the downside… The BOJ said it would continue to buy bonds and other securities at the same pace it did last year, and left its key short-term and long-term policy rates unchanged…”
EM Watch:
January 31 – Bloomberg (David Biller): “Brazil’s unemployment rate unexpectedly rose to the highest on record at the end of 2016… The jobless rate was 12% in the fourth quarter, up from 11.9% in the three months ending in November…”
Geopolitical Watch:
February 2 – Reuters (Parisa Hafezi): “A top adviser to Supreme Leader Ayatollah Ali Khamenei said… Iran will not yield to ‘useless’ U.S. threats from ‘an inexperienced person’ over its ballistic missile program. U.S. President Donald Trump's national security adviser, Michael Flynn, said on Wednesday the United States was putting Iran on notice over its ‘destabilizing activity’ after it test-fired a ballistic missile. Trump echoed that language on Thursday, saying in a tweet ‘Iran has been formally put on notice’ after his administration said it was reviewing how to respond to the launch that Iran said was solely for defensive purposes.’”
February 2 – Reuters (Steve Holland and Matt Spetalnick): “The White House put Iran ‘on notice’ on Wednesday for test-firing a ballistic missile and said it was reviewing how to respond, taking an aggressive posture toward Tehran that could raise tensions in the region. While the exact implications of the U.S. threat were unclear, the new administration signaled that President Donald Trump intended to do more, possibly including imposing new sanctions, to curb what he sees as defiance of a nuclear deal negotiated in 2015 by then-President Barack Obama. The tough talk commits the administration to back up its rhetoric with action…”
January 31 – Reuters (Pavel Polityuk, Natalia Zinets, Katya Golubkova, Vladimir Soldatkin and Peter Hobson): “Ukraine and Russia blamed each other on Tuesday for a surge in fighting in eastern Ukraine in recent days that has led to the highest casualty toll in weeks and cut off power and water to thousands of civilians on the front line. The Ukrainian military and Russian-backed separatists accuse each other of launching offensives in the government-held industrial town of Avdiyivka and firing heavy artillery in defiance of the two-year-old Minsk ceasefire deal. Eight Ukrainian troops have been killed and 26 wounded since fighting intensified on Sunday…”
It’s still worth mentioning a few indicators that were beginning to lean away from “Risk On”. Prior to Friday’s jump, the powerful bank stock rally had stalled. The BKX was down almost 2% from Thursday to Thursday (Italian and Japanese banks down 3.4% and 2.9%). Small cap stocks have underperformed, with the Russell 2000 down slightly y-t-d as of Thursday’s close. Many “Trump Rally” stocks and trades have recently underperform. Equity fund flows were negative for three straight weeks. In high-yield debt, the rally had similarly lost momentum. Also noteworthy, Treasuries rallied only tepidly on Monday’s equity market selloff. European bonds continue to trade poorly (Greek yields up 33 bps; French spreads to bunds widened another 10bps). This week saw bullion jump $29. The dollar Index is now down 2.5% y-t-d.
The dollar/yen has for a while now been a key market indicator. After trading as low as 101.2 on election night market drama, Trump-induced king dollar euphoria had the dollar/yen surging to almost 119 by early January. The dollar/yen traded down to almost 112 on Thursday, to a two-month low. And similar to Treasuries, the dollar/yen these days struggles to participate during “Risk On” days. Trading slightly higher Friday, the yen jumped 2.2% against the dollar this week.
February 1 – Reuters (Sinead Carew and Jamie McGeever): “U.S. President Donald Trump and a top economics adviser on Tuesday unleashed a barrage of criticism against Germany, Japan and China, saying the three key U.S. trading partners were engaged in devaluing their currencies to the harm of American companies and consumers. The comments from Trump at the end of a White House meeting with pharmaceutical executives, as well as from trade adviser Peter Navarro…, were the starkest indication yet that the first-term Republican president is prepared to jettison two decades of ‘strong dollar’ policies advocated by predecessors dating back to the Clinton administration. The criticism also signals a weakening of the U.S. commitment to an agreement among the financial leaders of the world's top 20 economies, struck after the 2008 financial crisis, that countries would not pursue policies to target exchange rates for competitive purposes.”
February 2 – Nikkei Asian Review (Mikio Sugeno): “By accusing Germany and Japan of intentionally devaluing their currencies, the Donald Trump administration has attacked normal monetary policy designed to maintain healthy inflation, a dangerous step that could upend an understanding long shared by major economic powers. It was a moment Haruhiko Kuroda had been dreading. The Bank of Japan governor told reporters Tuesday after the central bank's two-day policy meeting that the new U.S. administration is still taking its first steps, and that the BOJ ‘will see how things play out.’ He knew anything he said could be misconstrued. Several hours later, the president called out China and Japan by name as having devalued their currencies over the course of years: ‘They play the money market, they play the devaluation market’ while the U.S. sits idly by, Trump said.”
This week offered some important clarity: Trump is no devotee of king dollar, while he views QE as a mechanism for currency devaluation. Oh, how the world is changing. Throughout the markets, king dollar has been integral to recent global risk embracement. I’ll assume global “Risk On” has been fueled in part by significant carry-trade speculative leveraging (short yen, euro, swissy instruments to provide financing for higher-yielding securities elsewhere). There are now major uncertainties that should ensure heightened currency market volatility going forward. This creates a less compelling risk vs. return calculus for carry trade leverage, increasing the probability that, once commenced, a de-risking/de-leveraging dynamic could become self-reinforcing.
February 3 – Bloomberg (Randall Jensen): “Asia’s two biggest central banks moved in opposite directions on Friday. In Beijing, the People’s Bank of China tightened monetary policy by raising the interest rates it charges in open market operations. In Tokyo, the Bank of Japan intervened in the bond market to reassert control over 10-year yields it has promised to anchor around zero… The backdrop: growing tensions with the U.S. as President Donald Trump accuses both China and Japan of unfair trading practices and keeping currencies low, and expectations the Federal Reserve is gearing up for multiple rate increases this year. ‘The world’s no longer synchronized, with the Fed’s tightening posing challenges for central bankers across Asia and beyond,’ said Frederic Neumann, co-head of Asian economic research at HSBC… ‘Asia’s got one foot on the gas, and one on the brake.’”
February 3 – Wall Street Journal (Shen Hong): “China’s central bank raised key interest rates in the money market Friday, reinforcing a shift toward tighter monetary policy aimed at deflating asset bubbles and reducing long-term financial risk. The latest effort by the People’s Bank of China follows a similar decision shortly before the weeklong Lunar New Year holiday to increase the borrowing cost on special loans to a select group of commercial lenders, a move widely interpreted as an effective policy interest-rate increase.”
February 2 – Bloomberg (Chikako Mogi and Masaki Kondo): “The Bank of Japan whipsawed markets as it fought to assert control over rising bond yields. The Japanese central bank first disappointed with a smaller-than-expected increase in bond purchases Friday morning, which spurred the 10-year yield and the yen to advance. Its unscheduled offer later to buy an unlimited amount of debt for some maturities sent rates and the currency falling. ‘The operation was a surprise aimed at definitely stopping the rise in yields,’ Takenobu Nakashima, quantitative strategist at Nomura… ‘What’s astonishing is that the BOJ is offering to buy at yields lower than where the markets are. In other words, the BOJ will pay to buy, showing that it wants to halt the yield even at its cost.’”
The overarching thesis for 2017 holds there's a high probability for a tightening of global monetary conditions that would catch inflated markets extraordinarily vulnerable. In short, the Crowded King Dollar Trade is exposed to Trump Administration antipathy toward dollar strength, with potential implications for market de-leveraging (waning liquidity). Secondly, the two major sources of global QE/liquidity – the ECB and BOJ – are more susceptible to policy reassessment than generally perceived by complacent markets. Both central banks are trapped in flawed policies, and both are poised to be on the receiving end of The Wrath of Trump. What’s more, the Japanese have traditionally accepted U.S. direction with obedience. (The BOJ must be wondering what happened to Bernanke’s “enrich thy neighbor”.) Third, Beijing officials seem seriously determined to try to rein in China’s out of control Credit Bubble. This increases the odds of a major Credit event unfolding in China in 2017, with all the associated policy, market and economic uncertainties.
When it comes to the late-stage of a major Credit Bubble, the analysis in a way simplifies: The Bubble bursts or it inflates to only more perilous extremes. Recalling 2007, well-entrenched Bubbles develop powerful momentum with the capacity to brush off even significant shocks. Such resilience works to bolster already powerful bullish market sentiment, associated flows and speculative impulses (and “inflationary biases” more generally). This dynamic helps explain why Bubbles can go to such extremes before catching almost everyone by surprise when they eventually falter. The VIX dropped 10% during Friday’s rally, punishing those that were tempted to play for a market reversal with cheap option trades. The VIX closed the week at 10.79, trading Friday at the lowest level since early 2007.
To be sure, option pricing fails to reflect political uncertainties. This week our President put many “on notice”, foe and friend alike. The Wrath list included Iran, China, Germany, Mexico, the ECB and BOJ, and even our dear friends in Australia. A U.S. television commentator quipped that it really takes a lot to get Australians upset with America, yet President Trump found a way. If the stock market had been under significant pressure this week, the rumblings questioning our President’s competence and emotional stability would have ratcheted up.
So many fascinating developments and perspectives:
February 2 – UK Independent (Ben Chu): “‘In many respects we’re coming to the last seconds of central bankers’ fifteen minutes of fame which is a good thing,’ Mr Carney told the Bank of England Inflation Report press conference, referencing Andy Warhol’s line about everyone in the world being famous for fifteen minutes in their lives in the future.”
And there was the Bloomberg article, “Finance Makes America Great, Say Larry Summers, Joe Ricketts.” “…Finance and economic life work best when they are based on openness, transparency, principle and are free from political motivation,’ Summers said, adding that independent central banks, strong currency, common rules, and ‘no ad hoc threats or bribes from public officials, no matter how powerful, are what make the market system function best… There’s something else you learn at the Museum of American Finance,’ Summers said. The U.S. is an exceptional nation ‘because of what it has strived to achieve for the last 75 years in the global system.’”
The problem is that finance doesn’t make America great. The global “system” today is nothing as imagined 75 years ago and, for good reason, most people in the world have little trust in international finance. Central banks are not independent and “finance and economic life” have been anything but free from “political motivation.” Instead, unfettered global finance and central bank-led inflationism have created serial booms and busts that evolved into today’s perilous financial, economic, social and geopolitical discord. The unprecedented inflation of finance is fundamental to the problem - and not, as should be abundantly obvious by now, constructive when it comes to finding a lasting solution.
I could only chuckle at the headline: “Dan Loeb: Trump Will Make Hedge Funds Great Again.” In a meeting with pharmaceutical executives earlier in the week, a delightful President Trump promised to slash regulation and red tape. But he just needs a little something in return from the industry: Dramatically Lower Prices. The Art of the Deal.
Our new President and his Administration are at this point an enigma. Folks are beginning to accept that he’s not going to change, which is none too comforting to many. Shock and dismay understate reactions both at home and abroad. Yet when it comes to financial markets, when anxiety begins to strike simply repeat, “de-regulation, tax cuts, de-regulation, tax cuts…” The President certainly has everyone’s attention, with Wall Street and corporate America having donned kid gloves.
But I don’t believe anyone is comfortable that they understand what the President and his inner circle really have in mind. Whatever it may be, they’re going to be in your face tough and idiosyncratic. How big of a conflict are they willing to accept early in the new Administration? At the end of the day, I suspect they don’t share the view that America will be made great again through hedge funds, inflated securities prices and ever greater quantities of “money” and Credit. Sure, they’ll play the game so long as they see it to their advantage.
Markets, of course, remain convinced that buoyant securities prices are more indispensable than ever - and that Trump will bluster but knows better than to mess with the markets or their benefactor, central banking. Not that they’re in any hurry to burst Bubbles, but the Trump folks have their own perspectives, ideas and ambitions. I suspect that Carney’s “15 minutes of fame” comment resonates within The Inner Circle. A new era has commenced, and these central bankers and Wall Street icons have occupied the limelight for too long already.
For the Week:
The S&P500 (up 2.6% y-t-d) and the Dow (up 1.6%) were little changed. The Utilities added 0.8% (up 0.2%). The volatile Banks increased 0.3% (up 1.5%), and the Broker/Dealers jumped 1.7% (up 7.4%). The Transports dropped 2.1% (up 2.2%). The S&P 400 Midcaps gained 0.6% (up 2.8%), and the small cap Russell 2000 increased 0.5% (up 1.5%). The Nasdaq100 (up 6.1%) and the Morgan Stanley High Tech index (up 7.2%) were about unchanged. The Semiconductors added 0.2% (up 6.3%). The Biotechs jumped 3.7% (up 7.4%). With bullion surging $29, the HUI gold index rose 4.6% (up 16.4%).
Three-month Treasury bill rates ended the week at 50 bps. Two-year government yields slipped two bps to 1.20% (up one basis point y-t-d). Five-year T-note yields fell four bps to 1.91% (down 2bps). Ten-year Treasury yields declined two bps to 2.46% (up 2bps). Long bond yields rose three bps to 3.09% (up two bps).
Greek 10-year yields surged 33 bps to 7.44% (up 42bps y-t-d). Ten-year Portuguese yields added three bps to 4.17% (up 43bps). Italian 10-year yields gained four bps to 2.27% (up 45bps). Spain's 10-year yields jumped 10 bps to 1.68% (up 30bps). German bund yields fell five bps to 0.41% (up 21bps). French yields rose five bps to 1.08% (up 40bps). The French to German 10-year bond spread widened another 10 to 67 bps. U.K. 10-year gilt yields fell 12 bps to 1.35% (up 12bps). U.K.'s FTSE equities index was little changed (up 0.6%).
Japan's Nikkei 225 equities index dropped 2.8% (down 1.0% y-t-d). Japanese 10-year "JGB" yields increased two bps to 0.10% (up 6bps). The German DAX equities index fell 1.4% (up 1.5%). Spain's IBEX 35 equities index slipped 0.4% (up 1.2%). Italy's FTSE MIB index declined 1.1% (down 0.6%). EM equities were mixed. Brazil's Bovespa index fell 1.6% (up 7.8%). Mexico's Bolsa dipped 0.4% (up 3.5%). South Korea's Kospi declined 0.5% (up 2.3%). India’s Sensex equities index gained 1.3% (up 6.1%). China’s Shanghai Exchange declined 0.6% (up 1.2%). Turkey's Borsa Istanbul National 100 index surged 5.4% (up 13.1%). Russia's MICEX equities index fell 1.7% (down 0.3%).
Junk bond mutual funds saw inflows of $413 million (from Lipper).
Freddie Mac 30-year fixed mortgage rates were unchanged at 4.19% (up 47bps y-o-y). Fifteen-year rates added a basis point to 3.41% (up 40bps). The five-year hybrid ARM rate added three bps to 3.23% (up 38bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates unchanged at 4.31% (up 54bps).
Federal Reserve Credit last week declined $4.1bn to $4.415 TN. Over the past year, Fed Credit contracted $29.8bn (down 0.7%). Fed Credit inflated $1.604 TN, or 57%, over the past 221 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt fell $5.3bn last week to $3.165 TN. "Custody holdings" were down $108bn y-o-y, or 3.3%.
M2 (narrow) "money" supply last week jumped $197 billion to a record $13.299 TN. "Narrow money" expanded $832bn, or 6.7%, over the past year. For the week, Currency increased $2.3bn. Total Checkable Deposits were about unchanged, while Savings Deposits rose $16.0bn. Small Time Deposits and Retail Money Funds were little changed.
Total money market fund assets declined $5.7bn to $2.680 TN. Money Funds declined $72bn y-o-y (2.6%).
Total Commercial Paper added $2.1bn to $965bn. CP declined $99.5bn y-o-y, or 9.3%.
Currency Watch:
February 1 – Wall Street Journal (Saumya Vaishampayan, Ian Talley and Chelsey Dulaney): “Major currencies are posting their largest swings in months, highlighting a growing difficulty for investors and traders to discern the likely path of Trump administration policy. The U.S. currency rallied in the weeks following Donald Trump’s election Nov. 8, reflecting in part investor expectations that deregulatory, tax-reduction and stimulus plans will push up U.S. growth. But since the New Year, the dollar has declined and volatility has picked up, driven by statements by administration officials that have been interpreted by investors as advocating a lower dollar.”
The U.S. dollar index declined 0.7% to 99.87 (down 2.5% y-t-d). For the week on the upside, the Mexican peso increased 2.6%, the Japanese yen 2.2%, the Australian dollar 1.7%, the Norwegian krone 1.6%, the South African rand 1.6%, the Singapore dollar 1.5%, the South Korean won 1.1%, the Taiwanese dollar 1.0%, the Canadian dollar 1.0%, the Swedish krona 1.0%, the euro 0.8%, the New Zealand dollar 0.8%, the Swiss franc 0.6% and the Brazilian real 0.6%. For the week on the downside, the British pound declined 0.6%. The Chinese yuan increased 0.2% versus the dollar (up 1.1% y-t-d).
Commodities Watch:
The Goldman Sachs Commodities Index added 0.7% (up 0.5% y-t-d). Spot Gold jumped 2.4% to $1,220 (up 5.9%). Silver gained 2.0% to $17.479 (up 9.4%). Crude increased 66 cents to $53.83 (unchanged). Gasoline rose 1.7% (down 7.0%), and Natural Gas dropped 8.8% (down 18%). Copper fell 2.7% (up 4.3%). Wheat gained 2.3% (up 5.5%). Corn added 0.8% (up 3.8%).
Trump Administration Watch:
February 2 – Reuters (Jamie McGeever): “If visibility and predictability are two foundations upon which stable financial markets are built, comments from the White House this week on the U.S. dollar suggest investors should brace for increased foreign exchange volatility. President Donald Trump and his top trade adviser waded into the debate over the currency's strength and the damage they say it is doing to U.S. competitiveness, drawing rebuffs from Germany and Japan and casting doubt over the strength of global cooperation on foreign exchange policy. On the one hand, this should come as little surprise. A key pillar of Trump's election campaign was to reinvigorate U.S. manufacturing and bring back what he sees as lost jobs. A weaker dollar would be instrumental to achieving that goal. But his desire to boost U.S. economic growth - via tax cuts, increased spending and encouraging U.S. firms to repatriate billions of dollars of cash held overseas - is consistent with higher interest rates and a stronger dollar.”
February 2 – Reuters (Parisa Hafezi): “President Donald Trump’s ‘America First’ policy aimed at shrinking the trade deficit represents a fundamental change in the country’s dollar strategy, says the former currency chief of Japan’s Ministry of Finance. The U.S. has traditionally favored a strong dollar to attract funds from abroad and reinvested the money overseas to reap returns from dividends and interest income, said Hiroshi Watanabe, president of the Institute for International Monetary Affairs… For this reason, the U.S. has sought to avoid weakening the dollar but this business model seems to be changing, he said. ‘What interests Trump is the size of the U.S. trade deficit, the amount of exports from the U.S., and not the exchange rate or whether the U.S. needs a strong dollar… While refraining from favoring a weak dollar, the U.S. Treasury Secretary may eventually say the dollar needn’t be strong.’”
January 31 – Bloomberg (Patrick Donahue and Arne Delfs): “Chancellor Angela Merkel rejected an accusation by President Donald Trump’s top trade adviser that Germany is gaming foreign-exchange markets as European leaders grapple with the new U.S. administration. Peter Navarro, the head of the White House National Trade Council, told the Financial Times that Germany’s excessive surplus is a sign of a ‘grossly undervalued’ currency. Merkel pushed back, saying the exchange rate was the province of the European Central Bank and that the German government has long upheld the ECB’s independence.”
February 1 – Financial Times (Shawn Donnan, Robin Harding and Katie Martin): “The Trump administration’s willingness to break with tradition and comment about currency valuations has raised fears that the US might lead the world into a new round of currency wars, angering and unnerving allies. Shinzo Abe, Japan’s prime minister, complained on Wednesday after Mr Trump attacked China and Japan for ‘play[ing] the devaluation market’. In response, Mr Abe told the Japanese parliament: ‘The kind of criticism they are making of yen manipulation is incorrect.’ The previous day Angela Merkel… denied that Berlin was seeking to influence the valuation of the euro — after a top Trump adviser… accused Berlin of exploiting a ‘grossly undervalued’ euro. The administration’s comments were the latest sign of a dramatic departure from past practice…”
February 1 – Reuters (Howard Schneider and David Lawder): “For seven years, the United States has fought to keep the euro zone intact, urging European officials toward action and supporting international bailout programs to keep the 17-nation currency union from cracking apart. That appears to have changed less than two weeks into Donald Trump's new administration. A sharp shift in tone toward Germany, casting the euro as fuel for that country's massive trade surplus, has raised concerns that the U.S. president's trade-centric world view may see the euro not as a geopolitical plus, but as another needless bit of multilateralism. While Trump has refrained from commenting directly on the euro, he praised Britain's decision to exit the European Union as a ‘great thing’ and predicted that others would leave the bloc as the result of an influx of refugees.”
February 2 – Bloomberg (David Tweed): “For the first time in decades, America’s oldest allies are questioning where Washington’s heart is. This week, President Donald Trump and his deputies hit out at some of America’s closest friends, blasting a ‘dumb’ refugee resettlement deal with Australia and accusing Japan and Germany of manipulating their currencies. Ties with Mexico have deteriorated to the point its government had to deny reports that Trump told President Enrique Pena Nieto he might send U.S. troops across the southern border. ‘When you hear about the tough phone calls I have, don’t worry about it,’ Trump said to an audience of religious and political leaders at the National Prayer Breakfast… ‘The world is in trouble -- but we’re going to straighten it out, OK? That’s what I do.’”
February 1 – Bloomberg (John Follain, Jeff Black, and Scott Hamilton): “World leaders aren’t taking Donald Trump’s trade barbs lying down. After the U.S. president said Germany and Japan are gaming foreign-exchange markets to win favorable trade terms, Japanese Prime Minister Shinzo Abe joined German Chancellor Angela Merkel… in pushing back and leading a global counter-charge to the accusations. ‘A massive clash is starting to emerge with Trump willing to get into major geopolitical spats with China and other countries to advance his ‘America First’ agenda,’ Mark Leonard, director of the European Council on Foreign Relations, said… The sparks that have dominated the initial days of Trump’s presidency have set the stage for increased tensions over global trade and currency regimes. Decades of economic ties are at stake.”
January 29 – Financial Times (Guy Chazan and Alex Barket): “The fate of European dual nationals banned from entering America — including leading British and German politicians — is set to become one of the first flashpoints of transatlantic relations in the Trump era. As Donald Trump stood by his ban on refugees and entry to the US from seven Muslim-majority countries, Angela Merkel, the German chancellor, on Sunday joined other world leaders in condemning the ban, saying it was no way to fight terrorism. The White House’s actions have caused alarm in Europe, where leaders see it as part of a broad offensive by Mr Trump against the world liberal order and the key common values underpinning transatlantic institutions that have ensured peace and security in Europe since the second world war.”
China Bubble Watch:
February 1 – Financial Times (Jamil Anderlini): “It reads like the plot of a bad thriller — a Chinese billionaire sits with his entourage of female bodyguards in his apartment in the Hong Kong Four Seasons in the early hours of Chinese new year’s eve. The women are employed not only to protect him but also to wipe the sweat from his brow and back. Suddenly, half a dozen public security agents from mainland China burst in, overpower the bodyguards, bundle the billionaire out of the luxury hotel and spirit him across the border to face the wrath of the Communist party. But this is not the script for a kung fu potboiler. The billionaire is Xiao Jianhua, one of China’s most politically connected and wealthy men, and his abduction from the heart of Hong Kong’s financial district last Friday has shaken the city to its core.”
Global Bubble Watch:
February 1 – Bloomberg (Marton Eder and Anooja Debnath): “Euro-region bonds handed investors the worst start to a year on record as heightened political risk across the currency bloc added to speculation the European Central Bank may bring its asset-purchase program to an abrupt halt in 2018. With general elections scheduled in France, Germany and the Netherlands this year amid an increase in support for anti-euro rhetoric, yields on French and Italian bonds climbed this week to their highest level relative to benchmark German debt since 2014. In the face of stronger growth and rising inflation, some investors aren’t listening to Mario Draghi when he says the ECB hasn’t considered tapering its bond-buying plan. Rising populism in the region’s biggest economies and speculation that the ECB’s stimulus plan may be nearing its endgame have clouded the horizon for bond investors…”
February 1 – Bloomberg (Randall Jensen): “Inflation across the world is beating analysts’ forecasts even before the potential effect from Donald Trump’s economic policies. The global Citi Inflation Surprise Index, which measures price surprises relative to market expectations, is at the highest in more than five years. The reading turned positive in December -- meaning inflation data were higher than expected -- for the first time since 2012.”
January 31 – Wall Street Journal (Mike Bird, Christopher Whittall and Ben Leubsdorf): “After years of fighting against deflation, the U.S., the eurozone and Japan show glimmerings of life in consumer prices and wages, evidence that an era of exceptionally low inflation is receding from the global economic landscape. Several factors are behind the move, including a rebound in energy prices, falling unemployment which is reducing slack in some labor markets, and central banks’ low-interest-rate policies that spur lending and economic growth.”
January 29 – Financial Times (Jennifer Hughes): “President Donald Trump’s inauguration and the early lunar new year holiday triggered a borrowing frenzy in Asia this month, with regional companies and governments selling record amounts of bonds in the international markets. Asian borrowers from Japan’s megabanks and India’s Vedanta mining group… have sold $51bn of debt to international investors, according to Dealogic…”
January 30 – Bloomberg (Maria Tadeo): “Euro-area economic confidence hit a six-year high in January, adding to signs of stronger growth and inflation that are fueling a debate about European Central Bank stimulus. An index of executive and consumer sentiment rose to 107.9. from 107.8 in December… That’s the highest reading since March 2011…”
Brexit Watch:
February 1 – Bloomberg (Fergal O'Brien): “U.K. factories saw costs rise at a record pace at the start of 2017, pointing to increasing upward pressure on inflation that could weigh on the economy this year. A measure of input prices in IHS Markit’s monthly Purchasing Managers Index jumped to the highest since the series began in 1992…”
Europe Watch:
January 31 – Reuters (Jan Strupczewski and Francesco Guarascio): “Inflation in the euro zone has risen to just below the European Central Bank's target, economic growth is accelerating at greater speed than in the United States, and unemployment has hit a more than seven-year low. Myriad data releases showed… that the 19-member currency bloc's economy is on the mend - a confirmation of recovery that will intensify political pressure on the European Central Bank to haul back its generous stimulus program… Inflation accelerated to 1.8% year-on-year in January…, up from 1.1% in December, leaving it just shy of the ECB's medium-term target of below but close to 2%. It was the highest rate since February 2013 and came after data in the past two days that showed prices rising in Germany, France and Spain, three of the bloc's four biggest economies.”
January 30 – Bloomberg (Carolynn Look): “German critics of the European Central Bank’s 2.28 trillion-euro ($2.4 TN) bond-buying program got a little bit more ammunition on Monday. Inflation in the euro area’s biggest economy was 1.9% in January, the highest rate since July 2013... Perhaps more importantly, it’s now roughly at the level that the ECB targets for the currency bloc as a whole, a signal for many Germans that the central bank for 19 nations needs to rein in stimulus.”
January 30 – Bloomberg (David Goodman and Anooja Debnath): “Europeans are more confident about their economy than they’ve been in nearly six years, but you wouldn’t know it by looking at the markets. Investors dumped bonds and stocks across the region on Monday, spurred by a confluence of risks that echoed the euro-zone debt crisis. French and Italian election campaigns stoked concerns over the rise of anti-euro political powers, while inflation in Germany signaled European Central Bank stimulus may not last much longer. Meantime, Greece, the catalyst for the original crisis, reached another crossroads with its creditors.”
January 30 – Bloomberg (Carolynn Look): “Germany is feeling cursed by its own economic strength. For eight years, the nation of 83 million people has been the euro area’s growth driver. Now it’s at the forefront of the currency bloc’s reflation -- early data on Monday showed annual price increases exceeding 2% in some states -- and dissatisfaction with the European Central Bank has morphed into frustration. Critics and media are slamming the institution’s monetary stance… as mainstream parties struggle to contain a surge in populism ahead of national elections. Finance Minister Wolfgang Schaeuble has warned that higher inflation could cause ‘political problems,’ and German monetary officials are urging their peers to start devising an exit strategy from unconventional stimulus.”
February 1 – Wall Street Journal (Tasos Vossos and Nektaria Stamouli): “Investors are dumping Greek bonds, fearing that Athens will be unable to pay debt that comes due this summer. The selloff comes as the Greek government is again at a standstill in negotiations with its creditors in the eurozone and at the International Monetary Fund. Athens needs to break the deadlock and secure more aid before about €6 billion ($6.5bn) in debt has to be repaid in July. Complicating matters is a scheduled IMF board meeting next week and a lack of clarity over what position the U.S.—which has the largest vote at the fund—will take under the Trump administration.”
January 30 – Reuters (Francesco Guarascio): “Greece will only receive more loans from the euro zone if the International Monetary Fund joins its latest aid program, the head of the bloc's bailout fund said… Greece needs a new tranche of financial aid under its 86 billion euro bailout by the third quarter of the year or it faces the risk of defaulting on its debts. Under the current program, Greece's third since 2010, loans have been disbursed by euro zone creditors without the formal participation of the IMF, although that has always been a requirement. But with elections coming in the Netherlands and Germany -- two of the most adamant supporters of the IMF role in the bailout, the creditors want to apply the agreed conditions for new loans to Athens more strictly.”
February 2 – Financial Times (Mehreen Khan): “More signs of rumblings in the eurozone bond markets. With investors starting to demand the highest premium in three years to hold French over German government bonds, the yield gap between Italy and Spain is also at its highest level since the depths of the eurozone’s debt crisis. Diverging political and economic fortunes in the eurozone’s southern economies have sent Italy’s 10-year yield spread with Spain to over 60 bps – the widest since 2012… The peripheral bond market moves are the latest sign that investors are beginning to differentiate between the riskiness of debt of the eurozone’s biggest governments in a key year of elections in the single currency area.”
January 31 – Financial Times (Mehreen Khan): “France’s far-right presidential candidate Marine le Pen will look to take the country out of the single currency area in six months, setting out a radical economic vision for the eurozone’s second largest economy should she be elected in May. Jean Messiha, an adviser to Ms Le Pen, has fleshed out the eurosceptic party’s promises to pursue a ‘Frexit’, claiming the French state would redenominate its more than €2tn outstanding debt into a new franc and ‘guarantee’ companies will still have access to the debt markets to help smooth the transition out of the euro. Ms Le Pen has long promised to restore monetary sovereignty to France, railing against the EU’s debt rules and prohibitions on government spending.”
Fixed-Income Bubble Watch:
January 30 – Reuters (Dhara Ranasinghe): “Inflation has a habit of creeping up on you. Just ask historians. From rates below zero less than a year ago, inflation across the developed world has risen in recent months toward central bank targets, largely driven by a rising oil price. And if history is any guide, bond markets had better beware. Paul Schmelzing, a visiting scholar at the Bank of England from Harvard University, has studied 800 years of bond markets history and says the most relevant parallel with today's environment is with the late 1960s under U.S. President Richard Nixon. The United States was emerging from a prolonged period of low inflation, the jobs market was tightening and a new pro-business president had raised expectations of fiscal expansion. It was a bruising time for bond investors. U.S. bonds lost 36% in real price terms between 1965 and 1970, while annual consumer price inflation more than tripled in the period, to 5.9% from 1.6%.”
February 1 – Financial Times (Eric Platt): “Trading volumes of US corporate debt hit a record level on Tuesday. More than $38bn worth of investment grade, high yield and convertible bonds swapped hands on Tuesday, surpassing a high water market set last March… The surge in trading follows a near record month of borrowing by companies through US capital markets. Banks and companies that hold investment grade credit ratings sold $177.9bn of debt in the US in January, the second highest monthly tally on record and less than $3bn below a peak set in May 2016, according to Dealogic.”
U.S. Bubble Watch:
February 2 – Bloomberg (Sho Chandra): “Worker productivity in the U.S. cooled in the fourth quarter following the biggest jump in two years, resuming the weak efficiency gains that have plagued the expansion. The measure of employee output per hour increased at a 1.3% annualized rate, after a revised 3.5% rise in the prior three months… Expenses per worker rose at a 1.7% pace. The latest slowdown -- following a third-quarter gain that ended the longest streak of productivity declines since 1979 -- underscores the challenge of developing a sustained pickup.”
February 2 – Reuters (Lucia Mutikani): “U.S. factory activity accelerated to more than a two-year high in January amid sustained gains in new orders and raw material costs… Other data on Wednesday showed private employers boosted hiring last month.”
January 31 – Reuters (Chuck Mikolajczak): “U.S. single-family home price increases accelerated at a faster pace than expected in November and rising mortgage rates coupled with potential economic growth could push them higher… The S&P CoreLogic Case-Shiller composite index of 20 metropolitan areas rose 5.3% in November on a year-over-year basis, up from a 5.1% climb in October.”
February 1 – Bloomberg (Jamie Butters and David Welch): “Toyota… led major carmakers reporting lower U.S. sales in January, even as an industry trying for another record year piled on discounts to keep showrooms busy. Deliveries fell about 11% for both Toyota and Fiat Chrysler Automobiles NV. Sales also dropped for General Motors Co. and Ford Motor Co., pacing a 1.8% decrease for the industry in January…”
February 1 – Wall Street Journal (Laura Kusisto): “Young Americans are losing confidence in their prospects for buying a home, suggesting that even with prices at all-time highs the dream of homeownership is losing its grip on some. The share of renters and people living with family members who believe now is a good time to buy declined to 55% in the fourth quarter of 2016 from 58% in the third quarter and 63% at the beginning of last year… Lawrence Yun, chief economist at the National Association of Realtors, blamed lack of affordability, a shortage of inventory, student debt and a perception that credit remains tight for potential buyers’ lack of confidence… Of the roughly 40% of people surveyed who don’t own a home and have student debt, more than half said they weren’t comfortable taking on a mortgage.”
January 31 – Financial Times (Alistair Gray): “An influential bankers lobby is pushing the Trump administration to tackle one of the thorniest unsolved problems from the financial crisis by overhauling the two giant businesses that back most US mortgages. Fannie Mae and Freddie Mac would be turned into privately owned utilities with returns to shareholders determined by regulators under proposals put forward by the Mortgage Bankers Association. The two groups would enjoy government support under the MBA’s plans — but so would rivals and new entrants, a structure proponents say would encourage competition.”
January 30 – Bloomberg (Michael McDonald): “U.S. college endowments suffered their biggest loss since the financial crisis, dragged down by global stocks, hedge funds and natural resources, according to an industry survey… The 1.9% average loss reported by the National Association of College and University Business Officers and money manager Commonfund…, for the year ended June 30, compared with a nearly 4% gain… in the S&P 500 Index. In the prior 12-month period, schools saw a 2.4% return on average.”
Federal Reserve Watch:
February 1 – New York Times (Binyamin Appelbaum): “The Federal Reserve is waiting for more information about the Trump administration’s economic plans, just like everyone else. After its first policy making meeting of the year, the Fed said on Wednesday that its economic outlook remained essentially unchanged since its previous meeting in December. The nation’s slow-and-steady economic expansion has continued, with little sign in the latest data that it is flagging or accelerating. And as expected, the Federal Open Market Committee… left the Fed’s benchmark interest rate unchanged. The question is what comes next.”
February 2 – Bloomberg (Steve Matthews): “A decade after the U.S. housing market collapsed, Federal Reserve officials are watching rising apartment towers as the next potential asset-price bubble, which could add to the debate about the pace of interest-rate hikes this year. Fed Chair Janet Yellen cited commercial real estate prices as ‘high’ in a speech at Stanford University on Jan. 19. That message has been echoed by Governor Jerome Powell, who warned ‘low rates may lead to a reach for yield,’ as well as Boston Fed President Eric Rosengren, who cited luxury housing in his city. While single-family housing prices have had a gradual recovery from the mortgage bust, commercial real estate is showing signs of being overheated in markets such as New York, San Francisco and Boston. Fed officials have mostly said they plan to address potential asset price bubbles with financial supervision, rather than by raising interest rates at a faster pace…”
January 29 – Wall Street Journal (Michael S. Derby): “While Federal Reserve officials ponder when to raise short-term interest rates again, they are beginning to wrestle with another big policy decision—whether this is the year to start shrinking their immense portfolio of mortgage and Treasury securities. The Fed has boosted its portfolio of long-term bonds and other assets to $4.45 trillion from less than $1 trillion in 2007… Officials believe the large portfolio has helped to spur economic growth by holding down long-term interest rates. With the economy closer to healed from the financial crisis and recession, the central bank has already begun raising short-term rates. Fed Chairwoman Janet Yellen has said the Fed would reduce the bondholdings once interest rate increases were ‘well under way.’ Many officials hope to get the portfolio back to some state of precrisis normalcy.”
February 1 – Reuters (Ann Saphir and Richard Leong): “Federal Reserve policymakers are putting markets on notice that the central bank's $4.5 trillion balance sheet is back on the agenda in an apparent effort to give investors time to prepare for changes rather than to signal any action is imminent. Policymakers want to minimize any volatility that slimming the Fed's massive balance sheet might cause, and have said they will only do so after interest rate increases are ‘well underway.’”
Japan Watch:
January 31 – Bloomberg (Toru Fujioka and Enda Curran): “Optimistic economic forecasts and monetary policy settings that haven’t changed since September lend an aura of calm and control to the Bank of Japan. The problem is, much of what’s been going right lately -- and a lot of what could go wrong this year -- are beyond its control. This was clear Tuesday when the central bank raised its projections for growth and maintained bullish price estimates, while warning that the risks to this picture are skewed to the downside… The BOJ said it would continue to buy bonds and other securities at the same pace it did last year, and left its key short-term and long-term policy rates unchanged…”
EM Watch:
January 31 – Bloomberg (David Biller): “Brazil’s unemployment rate unexpectedly rose to the highest on record at the end of 2016… The jobless rate was 12% in the fourth quarter, up from 11.9% in the three months ending in November…”
Geopolitical Watch:
February 2 – Reuters (Parisa Hafezi): “A top adviser to Supreme Leader Ayatollah Ali Khamenei said… Iran will not yield to ‘useless’ U.S. threats from ‘an inexperienced person’ over its ballistic missile program. U.S. President Donald Trump's national security adviser, Michael Flynn, said on Wednesday the United States was putting Iran on notice over its ‘destabilizing activity’ after it test-fired a ballistic missile. Trump echoed that language on Thursday, saying in a tweet ‘Iran has been formally put on notice’ after his administration said it was reviewing how to respond to the launch that Iran said was solely for defensive purposes.’”
February 2 – Reuters (Steve Holland and Matt Spetalnick): “The White House put Iran ‘on notice’ on Wednesday for test-firing a ballistic missile and said it was reviewing how to respond, taking an aggressive posture toward Tehran that could raise tensions in the region. While the exact implications of the U.S. threat were unclear, the new administration signaled that President Donald Trump intended to do more, possibly including imposing new sanctions, to curb what he sees as defiance of a nuclear deal negotiated in 2015 by then-President Barack Obama. The tough talk commits the administration to back up its rhetoric with action…”
January 31 – Reuters (Pavel Polityuk, Natalia Zinets, Katya Golubkova, Vladimir Soldatkin and Peter Hobson): “Ukraine and Russia blamed each other on Tuesday for a surge in fighting in eastern Ukraine in recent days that has led to the highest casualty toll in weeks and cut off power and water to thousands of civilians on the front line. The Ukrainian military and Russian-backed separatists accuse each other of launching offensives in the government-held industrial town of Avdiyivka and firing heavy artillery in defiance of the two-year-old Minsk ceasefire deal. Eight Ukrainian troops have been killed and 26 wounded since fighting intensified on Sunday…”
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