[Bloomberg] Qatar Banks Can Survive Gulf, Foreign Funds Withdrawal, S&P Says
[Reuters] Dollar shortages hit Qatar exchange houses as foreign banks scale back ties
[Bloomberg] Puerto Rico Warns It May Grab Sales-Taxes Claimed by Bondholders
[Reuters] Russia says tells U.S. not to strike Syrian pro-government forces again
[NYT] China’s New Bridges: Rising High, but Buried in Debt
[WSJ] Fed’s Effort to Guide Markets Falls Short
[FT] Theresa May is ‘dead woman walking’, says George Osborne
[FT] Poor inflation readings unlikely to deter Federal Reserve
[The Hill] Trump, Russia and Comey: Where it all stands
Saturday, June 10, 2017
Saturday's News Links
[Reuters] British PM fights for survival ahead of Brexit talks
[Bloomberg] May Fights to Keep Job as Top Aides Resign
[BBC] Theresa May's Top Two Aids Quit
[CNBC] The five biggest tech stocks lost nearly $100 billion in value on Friday
[Reuters] Italy's Renzi sees elections at natural end of legislature in 2018
[Bloomberg] Washington's Never Seen Anything Like the Comey Crisis. Or Has It?
[Bloomberg] May Fights to Keep Job as Top Aides Resign
[BBC] Theresa May's Top Two Aids Quit
[CNBC] The five biggest tech stocks lost nearly $100 billion in value on Friday
[Reuters] Italy's Renzi sees elections at natural end of legislature in 2018
[Bloomberg] Washington's Never Seen Anything Like the Comey Crisis. Or Has It?
Friday, June 9, 2017
Weekly Commentary: Crowded Longs, Shorts and a New Z1
It was a week that saw Mario Draghi cling stubbornly to ultra-dovish monetary policy, the UK’s Brexit strategy thrown into even greater disarray after Prime Minister Theresa May’s failed election gambit, and the former Director of the FBI essentially testify that our President is a scoundrel. And then there’s the Middle East…
In the midst of it all, after trading at a 24-year low 9.37 Friday morning, an abrupt reversal had the VIX ending the week at 10.70. Looking at the S&P500’s slight (0.3%) decline for the week, one might be tempted to think comfortably “boring.” Market internals, though, were anything but boring or comforting. Friday’s session saw the Nasdaq 100 (NDX) swing wildly. After trading to an all-time high 5,898 in the first hour of U.S. trading, the index sank over 4.0% to 5,658 before closing the session down 2.44% at 5,742. Amazon traded in an intraday range of 1,013 to 927. Looking at “FANG” plus Microsoft and Apple, major market cap was evaporating in a hurry. By the end of Friday’s session, Facebook had declined 3.3%, Apple 3.9%, Amazon 3.2%, Microsoft 2.3%, Netflix 4.7% and Google 3.4%. The semiconductors (SOX) traded at a multi-year high 1,149 early in Friday’s session, then sank 7.0% before recovering somewhat to close the day down 4.3% at 1,090. Biotech (BTK) rose 1.5% in the morning to an all-time high and then closed the session slightly lower.
Yet it was not just Friday - and not only tech. After trading Tuesday morning at a low of 88.38, bank stocks (BKX) surged over 6% before closing the week up 4.9% to 93.79. The broker/dealers jumped 3.6% this week. The small cap Russell 2000 traded Tuesday morning at a low of 1,387 before rallying 3.3% to end the week with a gain of 1.2%.
It was an unpleasant day and week for the Momentum Crowd all crowded into outperforming technology stocks. It was even worse for those long momentum and short the underperformers. Long tech versus short financials had been a big winner until the late-week “rip your face off” – with Friday trading seeing bank stocks up 2.3% and the Morgan Stanley High Tech Index down 3.0%. Long big technology against short small caps had also been easy money – until the last few sessions. This week saw the NDX drop 2.4%, while the small cap Russell 2000 gained 1.2%. And it’s worth noting some of Friday’s winners: Dillards (10.2%), Urban Outfitters (7.8%), J.C. Penny (6.8%) and Barnes & Noble (6.0%) - all heavily shorted in the despised retail sector. Moreover, the session's leading gainers in the S&P500 – including Kohl’s (7.2%), Chesapeake Energy (4.9%), Nordstrom (5.7%), Tractor Supply Company (4.7%) and Murphy Oil 4.7% – are popular short targets. It was a rotten day and a poor week for many long/short strategies.
As for the ECB decision and the UK election, I’ll this evening posit the briefest of thoughts. Mario Draghi has been kicking the can down the road since 2012, and he clearly is in no mood to see what happens when his leg turns weary. We’ll apparently have to wait until later in the year to have a clearer understanding of the ECB’s stimulus program end-game. The Wall Street Journal ran an interesting pre-meeting article – with the catchy headline “ECB Critic Holds His Tongue as Race Nears for Bank’s Top Job” - discussing how the Germans have set their sights on the end of Draghi’s term in 2019.
June 7 – Wall Street Journal (Tom Fairless): “Jens Weidmann, the German central-bank chief who made his name by loudly attacking the European Central Bank’s crisis-fighting efforts, has become a quiet defender of the ECB against its German critics. The shift has been subtle. Mr. Weidmann still criticizes the bank’s radical stimulus measures. But his tone has softened as evidence accumulates that the ECB’s policies are working—and as the race to become the institution’s next president approaches. ‘There is currently no doubt that an expansionary monetary policy stance is appropriate,’ Mr. Weidmann said…, while suggesting he might not agree with his colleagues on the details. Only five years ago, he was boasting of clashes with fellow policy makers, and comparing easy-money policies to drugs and alcohol. As ECB officials gather Wednesday and Thursday in Estonia, what was once a bitter argument over the bank’s far-reaching monetary stimulus is expected instead to be a pragmatic discussion about whether to start reducing it.”
And why the big surprise over the dismal Conservative party showing in the UK election? Has there been any brightening in the underlying dour public mood? Folks suddenly content with the “establishment,” “elites” and the status quo? Feelings the “system” is working more fairly? Market and media complacency returned after Emmanuel Macron’s huge market-pleasing victory in the French presidential election. I would suggest the Mr. Macron owes his presidency and apparent mandate to Mario Draghi. I wouldn’t, however, wager on a long honeymoon period – let along some new golden age in French (and European) policy management. The political instability that had pundits fretting coming into 2017 is merely in a bit of remission. Wait until the ECB tap goes dry and the Draghi Bubble bursts.
Closer to home, there was a new Federal Reserve “flow of funds” Z.1 report this week. From my perspective, interesting data raised more questions than were answered.
Certainly not inconsistent with downshifting GDP (Q1 1.2% vs. Q4 2.1%), Credit growth somewhat fell off a cliff. Total Non-Financial Debt (NFD) growth slowed to a 1.4% pace in Q1, down from Q4 2016’s 2.8% to the slowest expansion in years. In seasonally-adjusted and annualized (SAAR) dollars, NFD expanded $676bn in Q1, down from $1.338 TN in Q4 and $2.406 TN in Q1 2016. Seeing such data, I would normally be chronicling a dramatic tightening of Credit Availability and financial conditions. It’s yet another example of these being the most abnormal of times.
Household mortgage Credit expanded at a 3.0% rate during Q1, second only to Q4’s 3.2% going all the way back to the pre-crisis era. Consumer (non-mortgage) Credit expanded at a 6.5% pace, matching Q4 (strongest since Q3 ’15). Corporate borrowings bounced back strongly from Q4’s abrupt stall (0.2%). Q1’s 6.9% growth rate surpassed Q3’s 6.3% and was the strongest expansion of Corporate borrowings since Q1 ’16 (10.7%). Data just don’t speak to a tightening of Credit conditions.
Q1 saw Federal government borrowings contract at a 3.3% pace and State & Local borrowings fall at a 3.5% rate. It was this atypical decline in government Credit that largely explains Q1’s tepid overall Credit expansion. At least at the federal level, a significant drawdown in deposits helps to explain the one-quarter hiatus from market borrowings. A Q2 bounce back in government borrowings should push system Credit growth significantly higher.
To see booming securities markets in the face of 1.2% pace NFD growth is strange indeed. But while overall Non-Financial borrowings slowed to a crawl, the financial sector seemed to be frantically scurrying about. The Domestic Financial Sector’s “Net Acquisition of Financial Assets” surged an unusual SAAR $4.840 TN (vs. Q4’s $291bn and Q3’s $2.716 TN). After three straight quarters of contraction, Net Interbank Assets expanded an extraordinary SAAR $1.589 TN. The Financial Sector also increased Miscellaneous Assets SAAR $1.811 TN, while expanding Debt Securities holdings SAAR $452bn and Fed Funds and Repos SAAR $158bn.
Depository Institutions’ Loans expanded a robust SAAR $924bn during Q1, up from Q4’s SAAR $595bn but somewhat below Q1 ‘16’s booming $1.241 TN. Clearly, booming asset markets had much more to do with a booming financial sector than a robust real economy. It would be quite unusual for booming markets not to provide some degree of economic stimulus, though bubbling markets create myriad fragilities.
Securities markets remain the epicenter of this cycle’s historic inflation. Q1 saw Equities increase a nominal $939bn to a record $40.755 TN. This boosted Equities as a percent of GDP to a record 214%. This compares to the previous peak levels from 2007 and 1999 of 181% and 202%. Total Debt Securities increased nominal $320bn during Q1 to a record $41.464 TN. Debt Securities-to-GDP at a near-record 218% has been relatively stable over recent quarters. Total (Debt and Equities) Securities ended Q1 at a record $82.220 TN and a record 432% of GDP. This compares to the cyclical peaks of 379% at Q3 2007 and 359% at Q1 2000.
The Household Balance Sheet continues to be a centerpiece of U.S. Bubble Economy analysis. U.S. Household Assets ended Q1 at a record $110 TN, increasing $2.383 TN during the quarter. And with Household Liabilities up $36 billion (to $15.152 TN), Household Net Worth surged another (remarkable) $2.347 TN during the quarter to a record $94.835 TN. It’s worth noting that Household Net Worth has now inflated $39.1 TN, or 70%, since Q1 2009.
Over the past year, Net Worth inflated $7.259 TN, or 8.3%, one of the largest one-year gains on record. By major component, Household Financial Assets increased $1.781 TN during Q1 to a record $77.115 TN, with a notable one-year rise of $5.734 TN (8.0%). At 125% of GDP, Real Estate holdings gained $499bn during the quarter to a record $26.866 TN, with a large one-year rise of $1.794 TN (7.2%).
Q1 Household Net Worth reached a record 498% of GDP. For comparison, Net Worth/GDP ended the (“decade of greed”) eighties at 379%, Bubble year 1999 at 446% and peak mortgage finance Bubble 2007 at 461%. Unless something dramatic unfolds over the next few weeks, Net Worth/GDP will have cruised through 500% during Q2. It’s worth noting that Household Total Equities (equities and mutual funds) holdings have doubled from 2009 levels to approach the record 129% of GDP from year-end 1999.
Helping to offset tepid domestic Credit, Rest of World (ROW) had strong Q1 flows into U.S. financial assets. At SAAR $1.200 TN, Q1 ROW flows compare to an outflow of SAAR $187bn in Q4 and an inflow of SAAR $501bn in Q1 2016. Curiously, Treasury purchases (SAAR $344bn) dominated flows into U.S. debt securities and were the strongest since 2014. Purchases of U.S. corporates slowed to SAAR $132bn, down from Q4’s SAAR $433bn. After big Q4 outflows (SAAR $480bn), ROW increased U.S. equities holdings SAAR $219bn during Q1. It’s difficult to comprehend that ROW holdings of U.S. financial assets have grown to almost $25 TN, inflating about ten-fold from the mid-nineties.
Returning to the markets, players will spend the weekend pondering whether Friday’s tech swoon was a mere flash in the pan or the beginning of something more serious. That intense selling manifested from market dynamics rather than in response to some news event might make it more difficult to spin. Rotations have become a common feature of this speculative marketplace, and the bulls will spin rotations positively. This week saw previous underperformers gain momentum, while the highflyer Wall Street darlings saw melt-ups rather abruptly indicate potential trouble below. When the Crowded Trade phenomenon has finally reached the top of the food chain – to a select group of speculative favorite megacaps - a big rotation away from the darlings will present a formidable market challenge. From my vantage point, such dynamics are consistent with equities (and risk markets) working toward putting in a major top.
In the midst of it all, after trading at a 24-year low 9.37 Friday morning, an abrupt reversal had the VIX ending the week at 10.70. Looking at the S&P500’s slight (0.3%) decline for the week, one might be tempted to think comfortably “boring.” Market internals, though, were anything but boring or comforting. Friday’s session saw the Nasdaq 100 (NDX) swing wildly. After trading to an all-time high 5,898 in the first hour of U.S. trading, the index sank over 4.0% to 5,658 before closing the session down 2.44% at 5,742. Amazon traded in an intraday range of 1,013 to 927. Looking at “FANG” plus Microsoft and Apple, major market cap was evaporating in a hurry. By the end of Friday’s session, Facebook had declined 3.3%, Apple 3.9%, Amazon 3.2%, Microsoft 2.3%, Netflix 4.7% and Google 3.4%. The semiconductors (SOX) traded at a multi-year high 1,149 early in Friday’s session, then sank 7.0% before recovering somewhat to close the day down 4.3% at 1,090. Biotech (BTK) rose 1.5% in the morning to an all-time high and then closed the session slightly lower.
Yet it was not just Friday - and not only tech. After trading Tuesday morning at a low of 88.38, bank stocks (BKX) surged over 6% before closing the week up 4.9% to 93.79. The broker/dealers jumped 3.6% this week. The small cap Russell 2000 traded Tuesday morning at a low of 1,387 before rallying 3.3% to end the week with a gain of 1.2%.
It was an unpleasant day and week for the Momentum Crowd all crowded into outperforming technology stocks. It was even worse for those long momentum and short the underperformers. Long tech versus short financials had been a big winner until the late-week “rip your face off” – with Friday trading seeing bank stocks up 2.3% and the Morgan Stanley High Tech Index down 3.0%. Long big technology against short small caps had also been easy money – until the last few sessions. This week saw the NDX drop 2.4%, while the small cap Russell 2000 gained 1.2%. And it’s worth noting some of Friday’s winners: Dillards (10.2%), Urban Outfitters (7.8%), J.C. Penny (6.8%) and Barnes & Noble (6.0%) - all heavily shorted in the despised retail sector. Moreover, the session's leading gainers in the S&P500 – including Kohl’s (7.2%), Chesapeake Energy (4.9%), Nordstrom (5.7%), Tractor Supply Company (4.7%) and Murphy Oil 4.7% – are popular short targets. It was a rotten day and a poor week for many long/short strategies.
As for the ECB decision and the UK election, I’ll this evening posit the briefest of thoughts. Mario Draghi has been kicking the can down the road since 2012, and he clearly is in no mood to see what happens when his leg turns weary. We’ll apparently have to wait until later in the year to have a clearer understanding of the ECB’s stimulus program end-game. The Wall Street Journal ran an interesting pre-meeting article – with the catchy headline “ECB Critic Holds His Tongue as Race Nears for Bank’s Top Job” - discussing how the Germans have set their sights on the end of Draghi’s term in 2019.
June 7 – Wall Street Journal (Tom Fairless): “Jens Weidmann, the German central-bank chief who made his name by loudly attacking the European Central Bank’s crisis-fighting efforts, has become a quiet defender of the ECB against its German critics. The shift has been subtle. Mr. Weidmann still criticizes the bank’s radical stimulus measures. But his tone has softened as evidence accumulates that the ECB’s policies are working—and as the race to become the institution’s next president approaches. ‘There is currently no doubt that an expansionary monetary policy stance is appropriate,’ Mr. Weidmann said…, while suggesting he might not agree with his colleagues on the details. Only five years ago, he was boasting of clashes with fellow policy makers, and comparing easy-money policies to drugs and alcohol. As ECB officials gather Wednesday and Thursday in Estonia, what was once a bitter argument over the bank’s far-reaching monetary stimulus is expected instead to be a pragmatic discussion about whether to start reducing it.”
And why the big surprise over the dismal Conservative party showing in the UK election? Has there been any brightening in the underlying dour public mood? Folks suddenly content with the “establishment,” “elites” and the status quo? Feelings the “system” is working more fairly? Market and media complacency returned after Emmanuel Macron’s huge market-pleasing victory in the French presidential election. I would suggest the Mr. Macron owes his presidency and apparent mandate to Mario Draghi. I wouldn’t, however, wager on a long honeymoon period – let along some new golden age in French (and European) policy management. The political instability that had pundits fretting coming into 2017 is merely in a bit of remission. Wait until the ECB tap goes dry and the Draghi Bubble bursts.
Closer to home, there was a new Federal Reserve “flow of funds” Z.1 report this week. From my perspective, interesting data raised more questions than were answered.
Certainly not inconsistent with downshifting GDP (Q1 1.2% vs. Q4 2.1%), Credit growth somewhat fell off a cliff. Total Non-Financial Debt (NFD) growth slowed to a 1.4% pace in Q1, down from Q4 2016’s 2.8% to the slowest expansion in years. In seasonally-adjusted and annualized (SAAR) dollars, NFD expanded $676bn in Q1, down from $1.338 TN in Q4 and $2.406 TN in Q1 2016. Seeing such data, I would normally be chronicling a dramatic tightening of Credit Availability and financial conditions. It’s yet another example of these being the most abnormal of times.
Household mortgage Credit expanded at a 3.0% rate during Q1, second only to Q4’s 3.2% going all the way back to the pre-crisis era. Consumer (non-mortgage) Credit expanded at a 6.5% pace, matching Q4 (strongest since Q3 ’15). Corporate borrowings bounced back strongly from Q4’s abrupt stall (0.2%). Q1’s 6.9% growth rate surpassed Q3’s 6.3% and was the strongest expansion of Corporate borrowings since Q1 ’16 (10.7%). Data just don’t speak to a tightening of Credit conditions.
Q1 saw Federal government borrowings contract at a 3.3% pace and State & Local borrowings fall at a 3.5% rate. It was this atypical decline in government Credit that largely explains Q1’s tepid overall Credit expansion. At least at the federal level, a significant drawdown in deposits helps to explain the one-quarter hiatus from market borrowings. A Q2 bounce back in government borrowings should push system Credit growth significantly higher.
To see booming securities markets in the face of 1.2% pace NFD growth is strange indeed. But while overall Non-Financial borrowings slowed to a crawl, the financial sector seemed to be frantically scurrying about. The Domestic Financial Sector’s “Net Acquisition of Financial Assets” surged an unusual SAAR $4.840 TN (vs. Q4’s $291bn and Q3’s $2.716 TN). After three straight quarters of contraction, Net Interbank Assets expanded an extraordinary SAAR $1.589 TN. The Financial Sector also increased Miscellaneous Assets SAAR $1.811 TN, while expanding Debt Securities holdings SAAR $452bn and Fed Funds and Repos SAAR $158bn.
Depository Institutions’ Loans expanded a robust SAAR $924bn during Q1, up from Q4’s SAAR $595bn but somewhat below Q1 ‘16’s booming $1.241 TN. Clearly, booming asset markets had much more to do with a booming financial sector than a robust real economy. It would be quite unusual for booming markets not to provide some degree of economic stimulus, though bubbling markets create myriad fragilities.
Securities markets remain the epicenter of this cycle’s historic inflation. Q1 saw Equities increase a nominal $939bn to a record $40.755 TN. This boosted Equities as a percent of GDP to a record 214%. This compares to the previous peak levels from 2007 and 1999 of 181% and 202%. Total Debt Securities increased nominal $320bn during Q1 to a record $41.464 TN. Debt Securities-to-GDP at a near-record 218% has been relatively stable over recent quarters. Total (Debt and Equities) Securities ended Q1 at a record $82.220 TN and a record 432% of GDP. This compares to the cyclical peaks of 379% at Q3 2007 and 359% at Q1 2000.
The Household Balance Sheet continues to be a centerpiece of U.S. Bubble Economy analysis. U.S. Household Assets ended Q1 at a record $110 TN, increasing $2.383 TN during the quarter. And with Household Liabilities up $36 billion (to $15.152 TN), Household Net Worth surged another (remarkable) $2.347 TN during the quarter to a record $94.835 TN. It’s worth noting that Household Net Worth has now inflated $39.1 TN, or 70%, since Q1 2009.
Over the past year, Net Worth inflated $7.259 TN, or 8.3%, one of the largest one-year gains on record. By major component, Household Financial Assets increased $1.781 TN during Q1 to a record $77.115 TN, with a notable one-year rise of $5.734 TN (8.0%). At 125% of GDP, Real Estate holdings gained $499bn during the quarter to a record $26.866 TN, with a large one-year rise of $1.794 TN (7.2%).
Q1 Household Net Worth reached a record 498% of GDP. For comparison, Net Worth/GDP ended the (“decade of greed”) eighties at 379%, Bubble year 1999 at 446% and peak mortgage finance Bubble 2007 at 461%. Unless something dramatic unfolds over the next few weeks, Net Worth/GDP will have cruised through 500% during Q2. It’s worth noting that Household Total Equities (equities and mutual funds) holdings have doubled from 2009 levels to approach the record 129% of GDP from year-end 1999.
Helping to offset tepid domestic Credit, Rest of World (ROW) had strong Q1 flows into U.S. financial assets. At SAAR $1.200 TN, Q1 ROW flows compare to an outflow of SAAR $187bn in Q4 and an inflow of SAAR $501bn in Q1 2016. Curiously, Treasury purchases (SAAR $344bn) dominated flows into U.S. debt securities and were the strongest since 2014. Purchases of U.S. corporates slowed to SAAR $132bn, down from Q4’s SAAR $433bn. After big Q4 outflows (SAAR $480bn), ROW increased U.S. equities holdings SAAR $219bn during Q1. It’s difficult to comprehend that ROW holdings of U.S. financial assets have grown to almost $25 TN, inflating about ten-fold from the mid-nineties.
Returning to the markets, players will spend the weekend pondering whether Friday’s tech swoon was a mere flash in the pan or the beginning of something more serious. That intense selling manifested from market dynamics rather than in response to some news event might make it more difficult to spin. Rotations have become a common feature of this speculative marketplace, and the bulls will spin rotations positively. This week saw previous underperformers gain momentum, while the highflyer Wall Street darlings saw melt-ups rather abruptly indicate potential trouble below. When the Crowded Trade phenomenon has finally reached the top of the food chain – to a select group of speculative favorite megacaps - a big rotation away from the darlings will present a formidable market challenge. From my vantage point, such dynamics are consistent with equities (and risk markets) working toward putting in a major top.
For the Week:
The S&P500 slipped 0.3% (up 8.6% y-t-d), while the Dow added 0.3% (up 7.6%). The Utilities lost 1.1% (up 9.2%). The Banks surged 4.9% (up 2.2%), and the Broker/Dealers jumped 3.6% (up 8.1%). The Transports were unchanged (up 3.1%). The S&P 400 Midcaps added 0.4% (up 5.8%), and the small cap Russell 2000 jumped 1.2% (up 4.8%). The wild Nasdaq100 dropped 2.4% (up 18.1%), and the Morgan Stanley High Tech index fell 2.0% (up 21.3%). The Semiconductors declined 1.2% (up 20.3%). The Biotechs slipped 0.8% (up 19.0%). Though bullion gave back $13, the HUI gold index recovered 2.5% (up 7.7%).
Three-month Treasury bill rates ended the week at 98 bps. Two-year government yields rose five bps to 1.34% (up 15bps y-t-d). Five-year T-note yields gained five bps to 1.77% (down 16bps). Ten-year Treasury yields increased four bps to 2.20% (down 24bps). Long bond yields advanced five bps to 2.86% (down 21bps).
Greek 10-year yields slipped five bps to 5.94% (down 108bps y-t-d). Ten-year Portuguese yields dipped two bps to 3.02% (down 73bps). Italian 10-year yields sank 17 bps to 2.09% (up 28bps). Spain's 10-year yields fell 13 bps to 1.44% (up 6bps). German bund yields slipped a basis point to 0.26% (up 6bps). French yields fell six bps to 0.65% (down 3bps). The French to German 10-year bond spread narrowed five to 39 bps. U.K. 10-year gilt yields declined three bps to 1.01% (down 23bps). U.K.'s FTSE equities index slipped 0.3% (up 5.4%).
Japan's Nikkei 225 equities index declined 0.8% (up 4.7% y-t-d). Japanese 10-year "JGB" yields were about unchanged at 0.056% (up 2bps). France's CAC40 fell 0.8% (up 9.0%). The German DAX equities index was about unchanged (up 11.6%). Spain's IBEX 35 equities index added 0.7% (up 17.4%). Italy's FTSE MIB index gained 0.9% (up 9.8%). EM equities were mixed. Brazil's Bovespa index declined 0.5% (up 3.3%) and Mexico's Bolsa lost 0.5% (up 7.5%). South Korea's Kospi added 0.4% (up 17.5%). India’s Sensex equities index was unchanged (up 17.4%). China’s Shanghai Exchange rallied 1.7% (1.8%). Turkey's Borsa Istanbul National 100 index was little changed (up 26.6%). Russia's MICEX equities index was about unchanged (down 15.6%).
Junk bond mutual funds saw inflows of $586 million (from Lipper).
Freddie Mac 30-year fixed mortgage rates fell five bps to 3.89% (up 29bps y-o-y). Fifteen-year rates decline three bps to 3.16% (up 29bps). The five-year hybrid ARM rate was unchanged at 3.11% (up 29bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down three bps to a seven-month low 3.99% (up 28bps).
Federal Reserve Credit last week increased $1.3bn to $4.422 TN. Over the past year, Fed Credit declined $0.7bn. Fed Credit inflated $1.611 TN, or 57%, over the past 239 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt surged $21.0bn last week to $3.259 TN. "Custody holdings" were up $17bn y-o-y, 0.5%.
M2 (narrow) "money" supply last week slipped $3.5bn to $13.520 TN. "Narrow money" expanded $769bn, or 6.0%, over the past year. For the week, Currency increased $2.1bn. Total Checkable Deposits declined $20.4bn, while Savings Deposits gained $16.2bn. Small Time Deposits added $1.0bn. Retail Money Funds declined $2.7bn.
Total money market fund assets gained $5.5bn to $2.659 TN. Money Funds fell $66bn y-o-y (2.4%).
Total Commercial Paper added $3.2bn to $996.9bn. CP declined $55bn y-o-y, or 5.3%.
Currency Watch:
The U.S. dollar index recovered 0.6% to 97.274 (down 5.0% y-t-d). For the week on the upside, the Mexican peso increased 2.8%, the Australian dollar 1.1%, the New Zealand dollar 1.0%, the Canadian dollar 0.1%, and the Japanese yen 0.1%. For the week on the downside, the Brazilian real declined 1.6%, the British pound 1.1%, the Swedish krona 1.1%, the South African rand 1.0%, the Norwegian krone 1.0%, the euro 0.7%, the Swiss franc 0.7%, the Singapore dollar 0.3% and the South Korean won 0.1%. The Chinese renminbi gained 0.18% versus the dollar this week (up 2.16% y-t-d).
The S&P500 slipped 0.3% (up 8.6% y-t-d), while the Dow added 0.3% (up 7.6%). The Utilities lost 1.1% (up 9.2%). The Banks surged 4.9% (up 2.2%), and the Broker/Dealers jumped 3.6% (up 8.1%). The Transports were unchanged (up 3.1%). The S&P 400 Midcaps added 0.4% (up 5.8%), and the small cap Russell 2000 jumped 1.2% (up 4.8%). The wild Nasdaq100 dropped 2.4% (up 18.1%), and the Morgan Stanley High Tech index fell 2.0% (up 21.3%). The Semiconductors declined 1.2% (up 20.3%). The Biotechs slipped 0.8% (up 19.0%). Though bullion gave back $13, the HUI gold index recovered 2.5% (up 7.7%).
Three-month Treasury bill rates ended the week at 98 bps. Two-year government yields rose five bps to 1.34% (up 15bps y-t-d). Five-year T-note yields gained five bps to 1.77% (down 16bps). Ten-year Treasury yields increased four bps to 2.20% (down 24bps). Long bond yields advanced five bps to 2.86% (down 21bps).
Greek 10-year yields slipped five bps to 5.94% (down 108bps y-t-d). Ten-year Portuguese yields dipped two bps to 3.02% (down 73bps). Italian 10-year yields sank 17 bps to 2.09% (up 28bps). Spain's 10-year yields fell 13 bps to 1.44% (up 6bps). German bund yields slipped a basis point to 0.26% (up 6bps). French yields fell six bps to 0.65% (down 3bps). The French to German 10-year bond spread narrowed five to 39 bps. U.K. 10-year gilt yields declined three bps to 1.01% (down 23bps). U.K.'s FTSE equities index slipped 0.3% (up 5.4%).
Japan's Nikkei 225 equities index declined 0.8% (up 4.7% y-t-d). Japanese 10-year "JGB" yields were about unchanged at 0.056% (up 2bps). France's CAC40 fell 0.8% (up 9.0%). The German DAX equities index was about unchanged (up 11.6%). Spain's IBEX 35 equities index added 0.7% (up 17.4%). Italy's FTSE MIB index gained 0.9% (up 9.8%). EM equities were mixed. Brazil's Bovespa index declined 0.5% (up 3.3%) and Mexico's Bolsa lost 0.5% (up 7.5%). South Korea's Kospi added 0.4% (up 17.5%). India’s Sensex equities index was unchanged (up 17.4%). China’s Shanghai Exchange rallied 1.7% (1.8%). Turkey's Borsa Istanbul National 100 index was little changed (up 26.6%). Russia's MICEX equities index was about unchanged (down 15.6%).
Junk bond mutual funds saw inflows of $586 million (from Lipper).
Freddie Mac 30-year fixed mortgage rates fell five bps to 3.89% (up 29bps y-o-y). Fifteen-year rates decline three bps to 3.16% (up 29bps). The five-year hybrid ARM rate was unchanged at 3.11% (up 29bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down three bps to a seven-month low 3.99% (up 28bps).
Federal Reserve Credit last week increased $1.3bn to $4.422 TN. Over the past year, Fed Credit declined $0.7bn. Fed Credit inflated $1.611 TN, or 57%, over the past 239 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt surged $21.0bn last week to $3.259 TN. "Custody holdings" were up $17bn y-o-y, 0.5%.
M2 (narrow) "money" supply last week slipped $3.5bn to $13.520 TN. "Narrow money" expanded $769bn, or 6.0%, over the past year. For the week, Currency increased $2.1bn. Total Checkable Deposits declined $20.4bn, while Savings Deposits gained $16.2bn. Small Time Deposits added $1.0bn. Retail Money Funds declined $2.7bn.
Total money market fund assets gained $5.5bn to $2.659 TN. Money Funds fell $66bn y-o-y (2.4%).
Total Commercial Paper added $3.2bn to $996.9bn. CP declined $55bn y-o-y, or 5.3%.
Currency Watch:
The U.S. dollar index recovered 0.6% to 97.274 (down 5.0% y-t-d). For the week on the upside, the Mexican peso increased 2.8%, the Australian dollar 1.1%, the New Zealand dollar 1.0%, the Canadian dollar 0.1%, and the Japanese yen 0.1%. For the week on the downside, the Brazilian real declined 1.6%, the British pound 1.1%, the Swedish krona 1.1%, the South African rand 1.0%, the Norwegian krone 1.0%, the euro 0.7%, the Swiss franc 0.7%, the Singapore dollar 0.3% and the South Korean won 0.1%. The Chinese renminbi gained 0.18% versus the dollar this week (up 2.16% y-t-d).
Commodities Watch:
The Goldman Sachs Commodities Index declined 1.2% (down 7.2% y-t-d). Spot Gold retreated 1.0% to $1,267 (up 9.9%). Silver dropped 1.7% to $17.223 (up 7.8%). Crude sank another $1.83 to $45.83 (down 15%). Gasoline lost 4.8% (down 10%), while Natural Gas recovered 1.3% (down 19%). Copper jumped 2.9% (up 6%). Wheat rallied 3.8% (up 9%). Corn rose 4.0% (up 10%).
Trump Administration Watch:
June 6 – Wall Street Journal (Kristina Peterson, Stephanie Armour and Louise Radnofsky): “Republican senators left their first decision-making meeting on overhauling the nation’s health-care system Tuesday deeply divided over the fate of Medicaid, a fissure that threatens to thwart their ambitions to dismantle the Affordable Care Act. The divide among Senate Republicans over Medicaid was wide enough that some GOP lawmakers and aides said they now believe it may be impossible to broker a deal to unwind the health law known as Obamacare. Some senators are already preparing to move to another goal, an overhaul of the tax code. ‘It’s more likely to fail than not,’ Sen. Lindsey Graham (R., S.C.) said of the health bill… ‘We need to bring this to an end and move to taxes.’”
June 6 – Financial Times (Robin Wigglesworth and Ben McLannahan): “Investors are growing more sceptical that the Trump administration will be able to nurture an economic bounce, with Treasury yields and the US dollar sagging to new post-election lows and the US equity market increasingly dependent on technology stocks to maintain its highs. The 10-year Treasury yield dipped as low as 2.13% on Tuesday, its lowest since the immediate post-election surge in November.”
China Bubble Watch:
June 3 – New York Times (Ryan McMorrow): “When a Chinese tech company with global ambitions began to run short of cash last year, it sought billions of dollars from new investors. One of them was a music teacher. Li Shenghong, who teaches out of a mall storefront in southern China, was already a fan of the smartphones and televisions sold by the company, an internet-and-gadgets conglomerate called LeEco. When LeEco also began selling investment products online, Mr. Li snapped them up, even though the company said little about where the money would go. ‘Whenever I have leftover money from my salary, I’ll invest it,’ Mr. Li said, explaining that he had invested $7,000 in the company. ‘My spare change? I put it in.’ LeEco, buffeted by rapid expansion, has turned to murky and potentially risky ways to stay afloat, including tapping China’s shadowy informal banking system, which many people believe threatens the Chinese economy.”
June 4 – Wall Street Journal (Chao Deng and Lingling Wei): “China’s crackdown on debt is driving some companies to a murkier form of financing as it gets harder to secure bank loans or tap the bond market. New loans from so-called trusts, firms that raise money from individuals and corporations to plow into riskier areas of the economy, reached 882.3 billion yuan ($129.5 billion) in the first four months of this year…, nearly five times as much as the same period in 2016. Trust firms, which often charge borrowers higher rates than banks, occupy a middle ground between banking and asset management. They are licensed and loosely regulated by China’s banking watchdog, but they lack some of banks’ protections, such as government deposit insurance, and they have more flexibility to invest in risky areas than banks do.”
The Goldman Sachs Commodities Index declined 1.2% (down 7.2% y-t-d). Spot Gold retreated 1.0% to $1,267 (up 9.9%). Silver dropped 1.7% to $17.223 (up 7.8%). Crude sank another $1.83 to $45.83 (down 15%). Gasoline lost 4.8% (down 10%), while Natural Gas recovered 1.3% (down 19%). Copper jumped 2.9% (up 6%). Wheat rallied 3.8% (up 9%). Corn rose 4.0% (up 10%).
Trump Administration Watch:
June 6 – Wall Street Journal (Kristina Peterson, Stephanie Armour and Louise Radnofsky): “Republican senators left their first decision-making meeting on overhauling the nation’s health-care system Tuesday deeply divided over the fate of Medicaid, a fissure that threatens to thwart their ambitions to dismantle the Affordable Care Act. The divide among Senate Republicans over Medicaid was wide enough that some GOP lawmakers and aides said they now believe it may be impossible to broker a deal to unwind the health law known as Obamacare. Some senators are already preparing to move to another goal, an overhaul of the tax code. ‘It’s more likely to fail than not,’ Sen. Lindsey Graham (R., S.C.) said of the health bill… ‘We need to bring this to an end and move to taxes.’”
June 6 – Financial Times (Robin Wigglesworth and Ben McLannahan): “Investors are growing more sceptical that the Trump administration will be able to nurture an economic bounce, with Treasury yields and the US dollar sagging to new post-election lows and the US equity market increasingly dependent on technology stocks to maintain its highs. The 10-year Treasury yield dipped as low as 2.13% on Tuesday, its lowest since the immediate post-election surge in November.”
China Bubble Watch:
June 3 – New York Times (Ryan McMorrow): “When a Chinese tech company with global ambitions began to run short of cash last year, it sought billions of dollars from new investors. One of them was a music teacher. Li Shenghong, who teaches out of a mall storefront in southern China, was already a fan of the smartphones and televisions sold by the company, an internet-and-gadgets conglomerate called LeEco. When LeEco also began selling investment products online, Mr. Li snapped them up, even though the company said little about where the money would go. ‘Whenever I have leftover money from my salary, I’ll invest it,’ Mr. Li said, explaining that he had invested $7,000 in the company. ‘My spare change? I put it in.’ LeEco, buffeted by rapid expansion, has turned to murky and potentially risky ways to stay afloat, including tapping China’s shadowy informal banking system, which many people believe threatens the Chinese economy.”
June 4 – Wall Street Journal (Chao Deng and Lingling Wei): “China’s crackdown on debt is driving some companies to a murkier form of financing as it gets harder to secure bank loans or tap the bond market. New loans from so-called trusts, firms that raise money from individuals and corporations to plow into riskier areas of the economy, reached 882.3 billion yuan ($129.5 billion) in the first four months of this year…, nearly five times as much as the same period in 2016. Trust firms, which often charge borrowers higher rates than banks, occupy a middle ground between banking and asset management. They are licensed and loosely regulated by China’s banking watchdog, but they lack some of banks’ protections, such as government deposit insurance, and they have more flexibility to invest in risky areas than banks do.”
June 6 – Wall Street Journal (Shen Hong): “A sharp rise in the cost of borrowing in China’s bond markets is the latest sign of conflict between Beijing’s effort to rein in financial-system risk and its long-term goal of modernizing the economy. In a little-noticed shift, Chinese companies in recent weeks have been able to take out medium-term bank loans at a lower interest rate than bond investors demand. The average yield on AAA-rated five-year corporate bonds, currently 4.90%, has been above the central bank’s corresponding benchmark lending rate of 4.75% since May 3… The highly unusual reversal—it hadn’t happened since records began in 2006—is largely down to Chinese regulators’ attempts to tamp down speculation by investment funds that borrow heavily to leverage their bets.”
June 5 – Reuters (Yawen Chen and Ryan Woo): “Activity in China's services sector expanded at the fastest pace in fourth months in May thanks to a surge in new orders, a private business survey showed, helping to offset worries about unexpected weakness in manufacturing. The Caixin/Markit services purchasing managers' index (PMI) rose to 52.8 in May from April's 51.5, breaking a four-month decline and marking the highest reading since January.”
June 7 – Reuters (Yawen Chen and Kevin Yao): “China's foreign exchange reserves rose in May for a fourth consecutive month and by more than markets had expected, as stringent capital control measures and a weakening in the dollar helped staunch outflows. Reserves rose $24 billion in May to a seven-month high of $3.054 trillion, compared with an increase of $21 billion in April… It was the first time since June 2014 that reserves climbed for four months in a row, and the biggest gain since reserves moved back above the closely watched $3 trillion level in February.”
June 7 – Bloomberg: “China’s overseas shipments accelerated from a year earlier in May, aided by more buoyant global demand, and robust imports signaled resilience in the domestic economy. Exports rose 8.7% in May in dollar terms, more than the 7.2% increase forecast… Imports surged 14.8% in dollar terms, more than the 8.3% forecast. The trade surplus widened to $40.81 billion.”
Europe Watch:
June 7 – Reuters (Jesús Aguado and Francesco Guarascio): “European authorities stepped in to avert a collapse of Spain's Banco Popular following a run on the bank, orchestrating a last-minute rescue on Wednesday by Santander, the country's biggest lender. Owners of Popular bonds faces losses of some 2 billion euros, while Santander will ask its shareholders for around 7 billion euros ($7.9bn) of capital to absorb Spain's sixth biggest bank.”
June 7 – Reuters (Francesco Guarascio and Stefano Bernabei): “European Union regulators believe their rescue of Spanish lender Banco Popular has strengthened the case for intervening in Italy's two weakest lenders, but expect it will be harder to use the same approach, a senior EU official said… EU regulators arranged for Spain's biggest bank, Santander, to take over Banco Popular, but only after wiping out the investments of the troubled lender's shareholders and junior creditors -- a move welcomed by financial markets which saw it as a possible template for other EU banking crises.”
June 8 – Reuters (Gavin Jones): “A proposed Italian electoral law that looked set to usher in early elections has lost the support of major parties, sending shares and bonds higher and easing nerves among investors wary of yet more political uncertainty in Europe. ‘The accord on the electoral law is dead,’ Emanuele Fiano, a deputy from the ruling Democratic Party… told reporters after his group lost a parliamentary vote on a proposed amendment.”
June 8 – Bloomberg (Carolynn Look): “German industrial production rose more than analysts predicted, with a fourth consecutive increase in manufacturing adding to signs of underlying strength in Europe’s largest economy. Output… jumped 0.8% in April after an upwardly revised drop of 0.1%... The typically volatile measure compares with a median estimate for a 0.5% gain in a Bloomberg survey. Production was up 2.9% from a year earlier.”
June 7 – Financial Times (Mehreen Khan): “Things are on the up for the eurozone economy. With growth accelerating, unemployment steadily falling, and inflation at comfortable levels, the European Central Bank should be resting easy that its more than two-year stimulus experiment is bearing dividend after years of concerns about the eurozone’s political stability. But there are still some worries for the central bank of 19 eurozone countries. Among them is a growing headache over the implementation of its QE measures and more specifically, a shortage of available German bonds. Latest data from the central bank’s QE holdings show the ECB fell short of its monthly target for German bond purchases for the second month in a row in May, raising concerns about the longevity of the aggressive stimulus policies in place since 2015.”
Brexit Watch:
June 9 – Reuters (David Milliken and Kate Holton): “British Prime Minister Theresa May said she would lead a minority government backed by a small Northern Irish party after she lost an election gamble days before the start of talks on Britain's departure from the European Union. May called the snap election confident her Conservative Party would increase its majority and strengthen her hand in the Brexit talks. Instead, Thursday's vote damaged her authority and made her negotiating position more vulnerable to criticism.”
Global Bubble Watch:
June 6 – Bloomberg (Miles Weiss): “High up in a New York City skyscraper, China’s biggest bank is playing in the shadows of American finance. The prize for Industrial & Commercial Bank of China Ltd. isn’t stocks, bonds or currencies. It’s the grease in the wheels of all those markets: repurchase agreements. By exploiting a loophole in rules intended to keep U.S. banks from getting ‘too big to fail,’ the state-owned ICBC has become a go-to dealer in repos in just a few short years, alongside longtime powerhouses like Goldman Sachs… The short-term loans allow investors to borrow money by lending securities, serving a vital role in day-to-day trading on Wall Street. ICBC’s rise reflects not only China’s global ambitions in high finance, but also how post-crisis rules have let a whole host of new players profit from the murky world of shadow banking, largely beyond the reach of bank regulators.”
June 5 – Bloomberg (Noah Smith): “In the comic strip Calvin and Hobbes, Calvin asks his dad how engineers determine the weight limit on bridges. The dad answers that they do this by driving heavier and heavier trucks over the bridge until it breaks, then rebuild the bridge after discovering what it took to break it. This isn’t how engineers actually figure out the safety specifications of bridges -- since they know a lot about how physics works, they can predict how much it would take to break a bridge without actually breaking it. But the same isn't true in the financial world. No one knows the basic laws that govern asset markets, so there’s a tendency to use new technologies until they fail, then start over. Calvin’s dad was effectively describing the process by which we test financial innovation. Mortgage-backed bonds are a good example… In the years since the crisis, financial markets have started to be transformed by a new innovation -- exchange-traded funds.”
June 6 – Financial Times (Robin Wigglesworth): “Is leverage, the poison that brought the global economy to its knees less than a decade ago, creeping back into financial markets? The global economy is enjoying a rare spell of broad if not strong growth, financial markets are tranquil, corporate earnings are buoyant, and monetary policy remains supportive. As a result, the MSCI World equity index sits at a record, up more than 11% so far this year, while bond markets are becalmed. Yet some investors, analysts and economists fret that beneath the calm surface there are some worrying cross-currents that could turn the sea choppy once more. In particular, signs that leverage — in the form of borrowed money or derivatives when they are used to amplify bets on asset prices — is creeping up. ‘The low volatility frightens me, because I know what it does to people’s behaviour,’ says Robert Frey, chief investment officer at FQS, a fund-of-hedge-funds… He compares it to building a flimsy oceanfront house because there have been no storms recently. ‘Eventually a hurricane will hit and the house will fall down.’”
June 7 – Bloomberg (Beth Jinks and Simone Foxman): “Billionaire investor Paul Singer said ‘distorted’ monetary and regulatory policies have increased risks for investors almost a decade after the financial crisis.’I am very concerned about where we are,’ Singer said… ‘What we have today is a global financial system that’s just about as leveraged -- and in many cases more leveraged -- than before 2008, and I don’t think the financial system is more sound.’ Years of low rates have eroded the effectiveness of central banks to contend with downturns, Singer said…”
June 7 – Bloomberg (Enda Curran): “Central bankers and investors are grappling with a $100 trillion question: why consumer price inflation remains so low in most parts of the world even as economic growth quickens. Compounding the riddle, question marks are now emerging over the one part of the global inflation picture that had been moving higher -- producer prices. That’s because two engines of that turnaround -- China’s resurgent factories and prospects for tax-cut fueled stimulus under President Donald Trump -- are showing signs of fading. Which way the inflation mystery unravels is crucial for the global monetary policy outlook and the world’s $100 trillion bond market.”
June 5 – Bloomberg (Greg Quinn and Erik Hertzberg): “Toronto’s housing fever is showing signs of cooling as price gains slowed and new listings surged in May, the first full month reflecting a new tax on foreign buyers and a crisis at mortgage lender Home Capital Group Inc. The number of new listings soared 49% last month from a year earlier to 25,837, the biggest increase since 2010… The average price rose 15% to C$863,910 ($640,076), compared with annual gains of 25% in April and 33% in March. The benchmark price index, which measures more typical mid-priced homes, rose 29%, also down from a 32% gain in April.”
June 7 – Wall Street Journal (James Glynn): “Data analyst Ben Reid recently took out a 25-year loan on a home outside Sydney despite a frothy housing market in Australia, believing in the market’s staying power. Payments on the $500,000 mortgage will consume about half his take-home pay. ‘I’d like a new car in the next couple of years but not sure where that cash will come from,’ said Mr. Reid… Big personal debts and spending worries like Mr. Reid’s are a gathering storm over Australia’s economy, threatening a 25-year streak without recession. Growth rose an anemic 0.3% in the first quarter.., putting annual growth on track to be the weakest since September 2009… Australian household debt has risen to a record 212% of income, according to the latest available data… That’s the fourth-highest globally…”
June 7 – Wall Street Journal (Lynn Cook): “American oil exports are emerging as a disruptive new force in global markets. The U.S. exported 1 million barrels of oil a day during some months so far this year—double the pace of 2016—and is on track to average that amount for all of 2017... In another era, a domestic glut and low prices, currently hovering under $50 a barrel, might have caused companies to slow the pace of drilling. But since Congress lifted a ban on oil exports at the end of 2015, shipments out of Texas and Louisiana have skyrocketed, taking the fruits of the U.S. fracking revolution to new markets.”
Federal Reserve Watch:
June 5 – CNBC (Jeff Cox): “President Donald Trump appears ready to remake the Federal Reserve in an image that will be considerably different than what investors have known for many years. The president is prepared to nominate Randal Quarles and Marvin Goodfriend to two of three vacancies at the central bank, according to multiple press accounts… Quarles likely would assume the role vacated by Daniel Tarullo to oversee the nation's banking system… Should Trump nominate the two men and they receive confirmation, it will represent the first steps in a possible substantial remaking of a Fed that has practiced ultra-loose monetary policy for the past decade but has been tight on banking regulations. Trump will have the opportunity to name one more person now, then can fill two even more critical vacancies in 2018 — that of Chair Janet Yellen and Vice Chair Stanley Fischer. If the Quarles and Goodfriend moves are indicators of what's to come, things could start getting less comfortable for Yellen. Both are considered solidly conservative, in line with the Republican president and Congress but perhaps not with Yellen.”
U.S. Bubble Watch:
June 7 – New York Times (Landon Thomas Jr.): “Facebook. Amazon. Apple. Netflix. Google. Not only do they dominate our daily lives, but as their stocks continue to soar, these technology giants may also dictate our financial futures. In the last three years, their share prices have risen far faster than the major market indexes — Amazon leads the way, up 206%; Apple trails the pack with a 67% gain — as investors of virtually every stripe have piled into these companies. But this gold-rush mentality, reminiscent of investor frenzies for Nifty 50 stocks in the late 1970s and the dot-com boom and bust at the end of the last century, is giving investors pause… ‘There is valuation anxiety out there, that is for sure,’ said Ed Yardeni, an independent investment strategist… ‘No one is feeling totally comfortable holding stocks that are this expensive.’”
June 4 – Wall Street Journal (Lev Borodovsky, Ben Eisen and Tom DeStefano): “By now it’s no epiphany that technology stocks are in favor. Apple recently passed $800 billion in market value for the first time, and both Amazon.com and Alphabet, the parent of Google, are each hovering around the rarely seen $1,000-a-share level. What you may not know is that by one measure, the 2017 tech-stock rally is already at levels last seen in 2000. The S&P technology sector accounts for nearly a quarter of the S&P 500’s market value. The last time that happened was 1999.”
June 6 – CNBC (Diana Olick): “This spring may be one of the hottest sellers' markets in history, but even off-the-chart-demand can't put every potential buyer in a home of their own. If the house is too expensive for the region's demand, it won't sell. That is becoming the case in more and more neighborhoods this spring — and is likely behind the first sign that big price gains are starting to shrink. Home values rose a healthy 6.9% in April compared with April 2016, …but that is a drop from the 7.1% annual gain in March… ‘I think we are beginning to see it in selected markets,’ said Frank Nothaft, CoreLogic's chief economist. ‘You just can't have house prices grow at 7% year after year, when income growth is 2-3% a year.’”
June 6 – Bloomberg (Vince Golle): “If you’re building or renovating a home in the U.S. these days, you’ve got plenty of company. Americans’ spending on residential construction projects -- from the pouring of foundations to home improvement -- just hammered out its strongest three-month period since 1994. Solid job growth, low borrowing costs and a recovery in home equity since the market crash a decade ago are generating momentum… While a report… showed a 2.9% drop in April outlays for improvements from the prior month, such spending was still 32.3% higher than it was a year ago.”
June 6 – Bloomberg (Sho Chandra): “An increase in U.S. job openings in April to a record high indicates demand for workers remains strong in the world’s largest economy while the supply is tightening, a Labor Department report showed… Number of positions waiting to be filled rose by 259k to 6.044m (est. 5.75m), from revised 5.785m in March, according to Job Openings and Labor Turnover Survey, or JOLTS…”
June 6 – Bloomberg (Patricia Laya): “Chief executive officers of some of the largest U.S. companies are becoming even more sanguine about sales and spending, a good omen for the economy after a lackluster first-quarter expansion, according to a quarterly survey from the Business Roundtable… Main index gained 0.6 point to 93.9, highest since 2Q 2014…”
June 7 – Bloomberg (John Gittelsohn and Erik Schatzker): “U.S. markets are at their highest risk levels since before the 2008 financial crisis because investors are paying a high price for the chances they’re taking, according to Bill Gross, manager of the $2 billion Janus Henderson Global Unconstrained Bond Fund. ‘Instead of buying low and selling high, you’re buying high and crossing your fingers,’ Gross, 73, said… Central bank policies for low-and negative-interest rates are artificially driving up asset prices while creating little growth in the real economy and punishing individual savers, banks and insurance companies, according to Gross.”
June 6 – Bloomberg (Matt Scully): “After bingeing on credit for a half decade, U.S. consumers may finally be feeling the hangover. Americans faced with lackluster income growth have been financing more of their spending with debt instead. There are early signs that loan burdens are growing unsustainably large for borrowers with lower incomes. Household borrowings have surged to a record $12.73 trillion, and the percentage of debt that is overdue has risen for two consecutive quarters.”
Japan Watch:
June 8 – Bloomberg (Toru Fujioka and Masahiro Hidaka): “The Bank of Japan is re-calibrating its communications to acknowledge that it is thinking about how to handle a future exit from monetary stimulus, without giving the impression that this is on the agenda anytime soon, according to people with knowledge of discussions… With inflation still far below target, the BOJ is contending with increasing debate about exit in markets, the media and among some lawmakers. Officials realize it’s unrealistic and unconstructive to try to remain silent on the issue and the BOJ now wants to make it known that it’s conducting simulations internally on how an exit could play out… Governor Haruhiko Kuroda, who has been called before parliament 18 times this year, was grilled by lawmakers last month on his thinking about post-stimulus policy. Kuroda responded by saying he would carefully consider external communications…”
EM Watch:
June 3 – Reuters (Anthony Boadle and Lisandra Paraguassú): “Former Brazilian lawmaker Rodrigo Rocha Loures, a close aide and friend of President Michel Temer, was arrested at his home on Saturday in a corruption investigation that also targets the president... In a police video released in May, Loures was seen running out of a Sao Paulo restaurant carrying a bag with 500,000 reais ($154,000) in cash that prosecutors say was a bribe from the owners of the world's largest meatpacker JBS SA. Plea bargain testimony by two executives of JBS's holding company J&F Investimentos SA implicated Temer and other politicians in graft…”
June 6 – Bloomberg (Arabile Gumede, Amogelang Mbatha, and Aarti Bhana): “South Africa’s economy fell into a recession for the first time since 2009 after it contracted for a second straight quarter in the first three months of the year as all bar two industries shrank. Gross domestic product receded an annualized 0.7% in the first quarter from a contraction of 0.3% in the previous three months…”
June 8 – Reuters (Andrew Torchia): “Standard & Poor's downgraded Qatar's debt… as the riyal currency fell to an 11-year low amid signs that portfolio investment funds were flowing out of the country because of Doha's diplomatic rift with other Arab states. S&P cut its long-term rating of Qatar by one notch to AA- from AA and put the rating on CreditWatch with negative implications…”
Leveraged Speculator Watch:
June 5 – Bloomberg (Miles Weiss and Katherine Burton): “The walls keep closing in on John Paulson. A decade after Paulson shot to fame betting on the collapse of the U.S. housing market, the hedge-fund mogul is struggling to persuade investors to stick with him after a string of missteps on everything from gold to European bonds to drug stocks. Since the end of 2015 alone, assets at Paulson & Co. have fallen by $6 billion from losses and client withdrawals. The decline, underscored in the firm’s most recent regulatory filing, leaves Paulson and his employees with just $2 billion in client money.”
Geopolitical Watch:
June 5 – Financial Times (Erika Solomon): “Qatar paid up to $1bn to release members of the Gulf state's royal family who were kidnapped in Iraq while on a hunting trip, according to people involved in the hostage deal — one of the triggers behind Gulf states' dramatic decision to cut ties with Doha. Commanders of militant groups and government officials in the region told the Financial Times that Doha spent the money in a transaction that secured the release of 26 members of a Qatari falconry party in southern Iraq and about 50 militants captured by jihadis in Syria. By their telling, Qatar paid off two of the most frequently blacklisted forces of the Middle East in one fell swoop: an al-Qaeda affiliate fighting in Syria and Iranian security officials. The deal, which was concluded in April, heightened concerns among Qatar's neighbours about the small gas-rich state's role in a region plagued by conflict and bitter rivalries.”
June 5 – Reuters (Yawen Chen and Ryan Woo): “Activity in China's services sector expanded at the fastest pace in fourth months in May thanks to a surge in new orders, a private business survey showed, helping to offset worries about unexpected weakness in manufacturing. The Caixin/Markit services purchasing managers' index (PMI) rose to 52.8 in May from April's 51.5, breaking a four-month decline and marking the highest reading since January.”
June 7 – Reuters (Yawen Chen and Kevin Yao): “China's foreign exchange reserves rose in May for a fourth consecutive month and by more than markets had expected, as stringent capital control measures and a weakening in the dollar helped staunch outflows. Reserves rose $24 billion in May to a seven-month high of $3.054 trillion, compared with an increase of $21 billion in April… It was the first time since June 2014 that reserves climbed for four months in a row, and the biggest gain since reserves moved back above the closely watched $3 trillion level in February.”
June 7 – Bloomberg: “China’s overseas shipments accelerated from a year earlier in May, aided by more buoyant global demand, and robust imports signaled resilience in the domestic economy. Exports rose 8.7% in May in dollar terms, more than the 7.2% increase forecast… Imports surged 14.8% in dollar terms, more than the 8.3% forecast. The trade surplus widened to $40.81 billion.”
Europe Watch:
June 7 – Reuters (Jesús Aguado and Francesco Guarascio): “European authorities stepped in to avert a collapse of Spain's Banco Popular following a run on the bank, orchestrating a last-minute rescue on Wednesday by Santander, the country's biggest lender. Owners of Popular bonds faces losses of some 2 billion euros, while Santander will ask its shareholders for around 7 billion euros ($7.9bn) of capital to absorb Spain's sixth biggest bank.”
June 7 – Reuters (Francesco Guarascio and Stefano Bernabei): “European Union regulators believe their rescue of Spanish lender Banco Popular has strengthened the case for intervening in Italy's two weakest lenders, but expect it will be harder to use the same approach, a senior EU official said… EU regulators arranged for Spain's biggest bank, Santander, to take over Banco Popular, but only after wiping out the investments of the troubled lender's shareholders and junior creditors -- a move welcomed by financial markets which saw it as a possible template for other EU banking crises.”
June 8 – Reuters (Gavin Jones): “A proposed Italian electoral law that looked set to usher in early elections has lost the support of major parties, sending shares and bonds higher and easing nerves among investors wary of yet more political uncertainty in Europe. ‘The accord on the electoral law is dead,’ Emanuele Fiano, a deputy from the ruling Democratic Party… told reporters after his group lost a parliamentary vote on a proposed amendment.”
June 8 – Bloomberg (Carolynn Look): “German industrial production rose more than analysts predicted, with a fourth consecutive increase in manufacturing adding to signs of underlying strength in Europe’s largest economy. Output… jumped 0.8% in April after an upwardly revised drop of 0.1%... The typically volatile measure compares with a median estimate for a 0.5% gain in a Bloomberg survey. Production was up 2.9% from a year earlier.”
June 7 – Financial Times (Mehreen Khan): “Things are on the up for the eurozone economy. With growth accelerating, unemployment steadily falling, and inflation at comfortable levels, the European Central Bank should be resting easy that its more than two-year stimulus experiment is bearing dividend after years of concerns about the eurozone’s political stability. But there are still some worries for the central bank of 19 eurozone countries. Among them is a growing headache over the implementation of its QE measures and more specifically, a shortage of available German bonds. Latest data from the central bank’s QE holdings show the ECB fell short of its monthly target for German bond purchases for the second month in a row in May, raising concerns about the longevity of the aggressive stimulus policies in place since 2015.”
Brexit Watch:
June 9 – Reuters (David Milliken and Kate Holton): “British Prime Minister Theresa May said she would lead a minority government backed by a small Northern Irish party after she lost an election gamble days before the start of talks on Britain's departure from the European Union. May called the snap election confident her Conservative Party would increase its majority and strengthen her hand in the Brexit talks. Instead, Thursday's vote damaged her authority and made her negotiating position more vulnerable to criticism.”
Global Bubble Watch:
June 6 – Bloomberg (Miles Weiss): “High up in a New York City skyscraper, China’s biggest bank is playing in the shadows of American finance. The prize for Industrial & Commercial Bank of China Ltd. isn’t stocks, bonds or currencies. It’s the grease in the wheels of all those markets: repurchase agreements. By exploiting a loophole in rules intended to keep U.S. banks from getting ‘too big to fail,’ the state-owned ICBC has become a go-to dealer in repos in just a few short years, alongside longtime powerhouses like Goldman Sachs… The short-term loans allow investors to borrow money by lending securities, serving a vital role in day-to-day trading on Wall Street. ICBC’s rise reflects not only China’s global ambitions in high finance, but also how post-crisis rules have let a whole host of new players profit from the murky world of shadow banking, largely beyond the reach of bank regulators.”
June 5 – Bloomberg (Noah Smith): “In the comic strip Calvin and Hobbes, Calvin asks his dad how engineers determine the weight limit on bridges. The dad answers that they do this by driving heavier and heavier trucks over the bridge until it breaks, then rebuild the bridge after discovering what it took to break it. This isn’t how engineers actually figure out the safety specifications of bridges -- since they know a lot about how physics works, they can predict how much it would take to break a bridge without actually breaking it. But the same isn't true in the financial world. No one knows the basic laws that govern asset markets, so there’s a tendency to use new technologies until they fail, then start over. Calvin’s dad was effectively describing the process by which we test financial innovation. Mortgage-backed bonds are a good example… In the years since the crisis, financial markets have started to be transformed by a new innovation -- exchange-traded funds.”
June 6 – Financial Times (Robin Wigglesworth): “Is leverage, the poison that brought the global economy to its knees less than a decade ago, creeping back into financial markets? The global economy is enjoying a rare spell of broad if not strong growth, financial markets are tranquil, corporate earnings are buoyant, and monetary policy remains supportive. As a result, the MSCI World equity index sits at a record, up more than 11% so far this year, while bond markets are becalmed. Yet some investors, analysts and economists fret that beneath the calm surface there are some worrying cross-currents that could turn the sea choppy once more. In particular, signs that leverage — in the form of borrowed money or derivatives when they are used to amplify bets on asset prices — is creeping up. ‘The low volatility frightens me, because I know what it does to people’s behaviour,’ says Robert Frey, chief investment officer at FQS, a fund-of-hedge-funds… He compares it to building a flimsy oceanfront house because there have been no storms recently. ‘Eventually a hurricane will hit and the house will fall down.’”
June 7 – Bloomberg (Beth Jinks and Simone Foxman): “Billionaire investor Paul Singer said ‘distorted’ monetary and regulatory policies have increased risks for investors almost a decade after the financial crisis.’I am very concerned about where we are,’ Singer said… ‘What we have today is a global financial system that’s just about as leveraged -- and in many cases more leveraged -- than before 2008, and I don’t think the financial system is more sound.’ Years of low rates have eroded the effectiveness of central banks to contend with downturns, Singer said…”
June 7 – Bloomberg (Enda Curran): “Central bankers and investors are grappling with a $100 trillion question: why consumer price inflation remains so low in most parts of the world even as economic growth quickens. Compounding the riddle, question marks are now emerging over the one part of the global inflation picture that had been moving higher -- producer prices. That’s because two engines of that turnaround -- China’s resurgent factories and prospects for tax-cut fueled stimulus under President Donald Trump -- are showing signs of fading. Which way the inflation mystery unravels is crucial for the global monetary policy outlook and the world’s $100 trillion bond market.”
June 5 – Bloomberg (Greg Quinn and Erik Hertzberg): “Toronto’s housing fever is showing signs of cooling as price gains slowed and new listings surged in May, the first full month reflecting a new tax on foreign buyers and a crisis at mortgage lender Home Capital Group Inc. The number of new listings soared 49% last month from a year earlier to 25,837, the biggest increase since 2010… The average price rose 15% to C$863,910 ($640,076), compared with annual gains of 25% in April and 33% in March. The benchmark price index, which measures more typical mid-priced homes, rose 29%, also down from a 32% gain in April.”
June 7 – Wall Street Journal (James Glynn): “Data analyst Ben Reid recently took out a 25-year loan on a home outside Sydney despite a frothy housing market in Australia, believing in the market’s staying power. Payments on the $500,000 mortgage will consume about half his take-home pay. ‘I’d like a new car in the next couple of years but not sure where that cash will come from,’ said Mr. Reid… Big personal debts and spending worries like Mr. Reid’s are a gathering storm over Australia’s economy, threatening a 25-year streak without recession. Growth rose an anemic 0.3% in the first quarter.., putting annual growth on track to be the weakest since September 2009… Australian household debt has risen to a record 212% of income, according to the latest available data… That’s the fourth-highest globally…”
June 7 – Wall Street Journal (Lynn Cook): “American oil exports are emerging as a disruptive new force in global markets. The U.S. exported 1 million barrels of oil a day during some months so far this year—double the pace of 2016—and is on track to average that amount for all of 2017... In another era, a domestic glut and low prices, currently hovering under $50 a barrel, might have caused companies to slow the pace of drilling. But since Congress lifted a ban on oil exports at the end of 2015, shipments out of Texas and Louisiana have skyrocketed, taking the fruits of the U.S. fracking revolution to new markets.”
Federal Reserve Watch:
June 5 – CNBC (Jeff Cox): “President Donald Trump appears ready to remake the Federal Reserve in an image that will be considerably different than what investors have known for many years. The president is prepared to nominate Randal Quarles and Marvin Goodfriend to two of three vacancies at the central bank, according to multiple press accounts… Quarles likely would assume the role vacated by Daniel Tarullo to oversee the nation's banking system… Should Trump nominate the two men and they receive confirmation, it will represent the first steps in a possible substantial remaking of a Fed that has practiced ultra-loose monetary policy for the past decade but has been tight on banking regulations. Trump will have the opportunity to name one more person now, then can fill two even more critical vacancies in 2018 — that of Chair Janet Yellen and Vice Chair Stanley Fischer. If the Quarles and Goodfriend moves are indicators of what's to come, things could start getting less comfortable for Yellen. Both are considered solidly conservative, in line with the Republican president and Congress but perhaps not with Yellen.”
U.S. Bubble Watch:
June 7 – New York Times (Landon Thomas Jr.): “Facebook. Amazon. Apple. Netflix. Google. Not only do they dominate our daily lives, but as their stocks continue to soar, these technology giants may also dictate our financial futures. In the last three years, their share prices have risen far faster than the major market indexes — Amazon leads the way, up 206%; Apple trails the pack with a 67% gain — as investors of virtually every stripe have piled into these companies. But this gold-rush mentality, reminiscent of investor frenzies for Nifty 50 stocks in the late 1970s and the dot-com boom and bust at the end of the last century, is giving investors pause… ‘There is valuation anxiety out there, that is for sure,’ said Ed Yardeni, an independent investment strategist… ‘No one is feeling totally comfortable holding stocks that are this expensive.’”
June 4 – Wall Street Journal (Lev Borodovsky, Ben Eisen and Tom DeStefano): “By now it’s no epiphany that technology stocks are in favor. Apple recently passed $800 billion in market value for the first time, and both Amazon.com and Alphabet, the parent of Google, are each hovering around the rarely seen $1,000-a-share level. What you may not know is that by one measure, the 2017 tech-stock rally is already at levels last seen in 2000. The S&P technology sector accounts for nearly a quarter of the S&P 500’s market value. The last time that happened was 1999.”
June 6 – CNBC (Diana Olick): “This spring may be one of the hottest sellers' markets in history, but even off-the-chart-demand can't put every potential buyer in a home of their own. If the house is too expensive for the region's demand, it won't sell. That is becoming the case in more and more neighborhoods this spring — and is likely behind the first sign that big price gains are starting to shrink. Home values rose a healthy 6.9% in April compared with April 2016, …but that is a drop from the 7.1% annual gain in March… ‘I think we are beginning to see it in selected markets,’ said Frank Nothaft, CoreLogic's chief economist. ‘You just can't have house prices grow at 7% year after year, when income growth is 2-3% a year.’”
June 6 – Bloomberg (Vince Golle): “If you’re building or renovating a home in the U.S. these days, you’ve got plenty of company. Americans’ spending on residential construction projects -- from the pouring of foundations to home improvement -- just hammered out its strongest three-month period since 1994. Solid job growth, low borrowing costs and a recovery in home equity since the market crash a decade ago are generating momentum… While a report… showed a 2.9% drop in April outlays for improvements from the prior month, such spending was still 32.3% higher than it was a year ago.”
June 6 – Bloomberg (Sho Chandra): “An increase in U.S. job openings in April to a record high indicates demand for workers remains strong in the world’s largest economy while the supply is tightening, a Labor Department report showed… Number of positions waiting to be filled rose by 259k to 6.044m (est. 5.75m), from revised 5.785m in March, according to Job Openings and Labor Turnover Survey, or JOLTS…”
June 6 – Bloomberg (Patricia Laya): “Chief executive officers of some of the largest U.S. companies are becoming even more sanguine about sales and spending, a good omen for the economy after a lackluster first-quarter expansion, according to a quarterly survey from the Business Roundtable… Main index gained 0.6 point to 93.9, highest since 2Q 2014…”
June 7 – Bloomberg (John Gittelsohn and Erik Schatzker): “U.S. markets are at their highest risk levels since before the 2008 financial crisis because investors are paying a high price for the chances they’re taking, according to Bill Gross, manager of the $2 billion Janus Henderson Global Unconstrained Bond Fund. ‘Instead of buying low and selling high, you’re buying high and crossing your fingers,’ Gross, 73, said… Central bank policies for low-and negative-interest rates are artificially driving up asset prices while creating little growth in the real economy and punishing individual savers, banks and insurance companies, according to Gross.”
June 6 – Bloomberg (Matt Scully): “After bingeing on credit for a half decade, U.S. consumers may finally be feeling the hangover. Americans faced with lackluster income growth have been financing more of their spending with debt instead. There are early signs that loan burdens are growing unsustainably large for borrowers with lower incomes. Household borrowings have surged to a record $12.73 trillion, and the percentage of debt that is overdue has risen for two consecutive quarters.”
Japan Watch:
June 8 – Bloomberg (Toru Fujioka and Masahiro Hidaka): “The Bank of Japan is re-calibrating its communications to acknowledge that it is thinking about how to handle a future exit from monetary stimulus, without giving the impression that this is on the agenda anytime soon, according to people with knowledge of discussions… With inflation still far below target, the BOJ is contending with increasing debate about exit in markets, the media and among some lawmakers. Officials realize it’s unrealistic and unconstructive to try to remain silent on the issue and the BOJ now wants to make it known that it’s conducting simulations internally on how an exit could play out… Governor Haruhiko Kuroda, who has been called before parliament 18 times this year, was grilled by lawmakers last month on his thinking about post-stimulus policy. Kuroda responded by saying he would carefully consider external communications…”
EM Watch:
June 3 – Reuters (Anthony Boadle and Lisandra Paraguassú): “Former Brazilian lawmaker Rodrigo Rocha Loures, a close aide and friend of President Michel Temer, was arrested at his home on Saturday in a corruption investigation that also targets the president... In a police video released in May, Loures was seen running out of a Sao Paulo restaurant carrying a bag with 500,000 reais ($154,000) in cash that prosecutors say was a bribe from the owners of the world's largest meatpacker JBS SA. Plea bargain testimony by two executives of JBS's holding company J&F Investimentos SA implicated Temer and other politicians in graft…”
June 6 – Bloomberg (Arabile Gumede, Amogelang Mbatha, and Aarti Bhana): “South Africa’s economy fell into a recession for the first time since 2009 after it contracted for a second straight quarter in the first three months of the year as all bar two industries shrank. Gross domestic product receded an annualized 0.7% in the first quarter from a contraction of 0.3% in the previous three months…”
June 8 – Reuters (Andrew Torchia): “Standard & Poor's downgraded Qatar's debt… as the riyal currency fell to an 11-year low amid signs that portfolio investment funds were flowing out of the country because of Doha's diplomatic rift with other Arab states. S&P cut its long-term rating of Qatar by one notch to AA- from AA and put the rating on CreditWatch with negative implications…”
Leveraged Speculator Watch:
June 5 – Bloomberg (Miles Weiss and Katherine Burton): “The walls keep closing in on John Paulson. A decade after Paulson shot to fame betting on the collapse of the U.S. housing market, the hedge-fund mogul is struggling to persuade investors to stick with him after a string of missteps on everything from gold to European bonds to drug stocks. Since the end of 2015 alone, assets at Paulson & Co. have fallen by $6 billion from losses and client withdrawals. The decline, underscored in the firm’s most recent regulatory filing, leaves Paulson and his employees with just $2 billion in client money.”
Geopolitical Watch:
June 5 – Financial Times (Erika Solomon): “Qatar paid up to $1bn to release members of the Gulf state's royal family who were kidnapped in Iraq while on a hunting trip, according to people involved in the hostage deal — one of the triggers behind Gulf states' dramatic decision to cut ties with Doha. Commanders of militant groups and government officials in the region told the Financial Times that Doha spent the money in a transaction that secured the release of 26 members of a Qatari falconry party in southern Iraq and about 50 militants captured by jihadis in Syria. By their telling, Qatar paid off two of the most frequently blacklisted forces of the Middle East in one fell swoop: an al-Qaeda affiliate fighting in Syria and Iranian security officials. The deal, which was concluded in April, heightened concerns among Qatar's neighbours about the small gas-rich state's role in a region plagued by conflict and bitter rivalries.”
June 7 – Financial Times (Monavar Khalaj and Erika Solomon): “Iran’s Revolutionary Guards ratcheted up the tensions with Saudi Arabia as it accused Tehran’s regional rival of involvement in Wednesday’s double terrorist attack in the capital… Gunmen and suicide bombers launched simultaneous attacks on the parliament building in Tehran and the nearby shrine of Ayatollah Ruhollah Khomeini, the Islamic Republic’s founder. The attacks were claimed by Isis, in what would be the jihadi group’s first significant strike in the Islamic Republic. However a statement from the Revolutionary Guards linked the ‘brutal attack’ to Donald Trump’s visit last month to Riyadh, where the US president singled out Iran for fuelling ‘the fires of sectarian conflict and terror’.”
June 4 – Reuters: “China has expressed its strong dissatisfaction with what it labeled ‘irresponsible remarks’ on the South China Sea by U.S. Secretary of Defense James Mattis during a security forum at the weekend. Mattis accused China of having contempt for other nations' interests and disregarding international law. He told the annual Shangri-La Dialogue in Singapore that the construction and militarization of artificial islands in the South China Sea undermined regional stability.”
Thursday, June 8, 2017
Friday's News Links
[Bloomberg] Pound Drops on U.K. Vote; Global Impact Limited: Markets Wrap
[Reuters] Britain's pound dives after UK election shock, lifting main FTSE shares
[Reuters] May to form fragile government after UK election debacle, uncertainty over Brexit talks
[CNBC] UK heading for hung parliament; Corbyn calls for May to step down
[Reuters] As Brexit talks loom, shock UK election leaves May hanging by a thread
[Bloomberg] Bond Market's Fast Money Bets on the Fed Hiking in June and December
[Bloomberg] Markets Can't Shake Low Volatility Grip, Despite Risk-Rich Week
[Bloomberg] Central Banks Poised to Start Rowing in One Direction Again
[Reuters] China tightens grip on yuan to head off economic risks
[Bloomberg] China's Factory Inflation Cools Again as Commodity Prices Ease
[Reuters] Italy's Renzi says not hopeful of reaching new electoral pact with parties
[FT] Global bond funds enjoy largest weekly inflow since 2015
[Reuters] Feud over Qatar deepens conflicts across Arab world
[Reuters] China says it is vigilant as two U.S. bombers fly over South China Sea
[WSJ] North Korea Dreams of Turning Out the Lights
[Reuters] Britain's pound dives after UK election shock, lifting main FTSE shares
[Reuters] May to form fragile government after UK election debacle, uncertainty over Brexit talks
[CNBC] UK heading for hung parliament; Corbyn calls for May to step down
[Reuters] As Brexit talks loom, shock UK election leaves May hanging by a thread
[Bloomberg] Bond Market's Fast Money Bets on the Fed Hiking in June and December
[Bloomberg] Markets Can't Shake Low Volatility Grip, Despite Risk-Rich Week
[Bloomberg] Central Banks Poised to Start Rowing in One Direction Again
[Reuters] China tightens grip on yuan to head off economic risks
[Bloomberg] China's Factory Inflation Cools Again as Commodity Prices Ease
[Reuters] Italy's Renzi says not hopeful of reaching new electoral pact with parties
[FT] Global bond funds enjoy largest weekly inflow since 2015
[Reuters] Feud over Qatar deepens conflicts across Arab world
[Reuters] China says it is vigilant as two U.S. bombers fly over South China Sea
[WSJ] North Korea Dreams of Turning Out the Lights
Thursday Evening Links
[Bloomberg] Pound Drops as U.K. Exit Poll Unnerves Investors: Markets Wrap
[Reuters] May's grip on power in doubt as UK election heads for stalemate
[Reuters] Stunning blow for May as UK exit poll points to no clear winner
[FT] Exit polls show disaster for Theresa May as voters punish Tories
[Bloomberg] U.S. Stocks at Records Amid Comey as Euro Weakens: Markets Wrap
[Bloomberg] China's Banks Brace for June Cash Squeeze as Funding Costs Jump
[Bloomberg] U.S. Households Just Added $2.35 Trillion in Wealth in the First Quarter
[Bloomberg] Kuroda Says Japan Still a ‘Long Way’ From Meeting Inflation Goal
[Reuters] FBI ex-head accuses White House of lies, does not say Trump obstructed justice
[Bloomberg] No One Has Ever Made a Corruption Machine Like This One
[Reuters] May's grip on power in doubt as UK election heads for stalemate
[Reuters] Stunning blow for May as UK exit poll points to no clear winner
[FT] Exit polls show disaster for Theresa May as voters punish Tories
[Bloomberg] U.S. Stocks at Records Amid Comey as Euro Weakens: Markets Wrap
[Bloomberg] China's Banks Brace for June Cash Squeeze as Funding Costs Jump
[Bloomberg] U.S. Households Just Added $2.35 Trillion in Wealth in the First Quarter
[Bloomberg] Kuroda Says Japan Still a ‘Long Way’ From Meeting Inflation Goal
[Reuters] FBI ex-head accuses White House of lies, does not say Trump obstructed justice
[Bloomberg] No One Has Ever Made a Corruption Machine Like This One
Wednesday, June 7, 2017
Thursday's News Links
[Bloomberg] ECB Saps Euro Strength as Vote Unnerves U.K.: Markets Wrap
[Bloomberg] ECB Drops Guidance on Rate Cuts in Step Toward Stimulus Exit
[Reuters] ECB keeps money taps open but drops reference to rate cuts
[Reuters] Britons vote in election seen strengthening May's Brexit hand
[Bloomberg] Jobless Claims in U.S. Resume Decline Amid Tight Labor Market
[Bloomberg] BOJ Is Said to Mull How to Communicate Eventual Stimulus Exit
[Bloomberg] German Industrial Production Rises in Sign of Strong Recovery
[Reuters] ECB to keep taps open as economic outlook uncertain
[Bloomberg] Is China in Lock-Step With the Fed? Keep Watch Next Week
[Reuters] Italy ruling party says deal on new electoral law 'dead', markets rally
[Bloomberg] Elliott's Singer Warns System May Be More Leveraged Than 2008
[Bloomberg] China’s Exports Rise in May as Global Trade Outlook Brightens
[Bloomberg] India's Rising Temperatures Are Deadly: Study
[WSJ] House Set to Pass Bill Rolling Back Wall Street Rules
[FT] ECB rules out rate cut but confirms QE until year end
[FT] $16tn US retirement sector faces radical overhaul
[Bloomberg] ECB Drops Guidance on Rate Cuts in Step Toward Stimulus Exit
[Reuters] ECB keeps money taps open but drops reference to rate cuts
[Reuters] Britons vote in election seen strengthening May's Brexit hand
[Bloomberg] Jobless Claims in U.S. Resume Decline Amid Tight Labor Market
[Bloomberg] BOJ Is Said to Mull How to Communicate Eventual Stimulus Exit
[Bloomberg] German Industrial Production Rises in Sign of Strong Recovery
[Reuters] ECB to keep taps open as economic outlook uncertain
[Bloomberg] Is China in Lock-Step With the Fed? Keep Watch Next Week
[Reuters] Italy ruling party says deal on new electoral law 'dead', markets rally
[Bloomberg] Elliott's Singer Warns System May Be More Leveraged Than 2008
[Bloomberg] China’s Exports Rise in May as Global Trade Outlook Brightens
[Bloomberg] India's Rising Temperatures Are Deadly: Study
[WSJ] House Set to Pass Bill Rolling Back Wall Street Rules
[FT] ECB rules out rate cut but confirms QE until year end
[FT] $16tn US retirement sector faces radical overhaul
Wednesday Evening Links
[Bloomberg] An Unusually Packed Thursday Will Test Markets
[Bloomberg] U.S. Stocks Rise, Treasuries Slide With Crude Oil: Markets Wrap
[Reuters] Oil dives 5 percent on surprise build in U.S. crude, gasoline stocks
[Reuters] Qatar debt rating downgraded by S&P as riyal hits 11-year low
[Reuters] Exclusive: EU in stronger position to tackle Italy after Spain bank rescue - source
[Bloomberg] Bill Gross Says Market Risk Is Highest Since Pre-2008 Crisis
[NYT] 5 Big Tech Stocks Build Market Euphoria, and Jitters
[FT] Revolutionary Guards blame Saudi Arabia for Tehran terror attack
[Bloomberg] U.S. Stocks Rise, Treasuries Slide With Crude Oil: Markets Wrap
[Reuters] Oil dives 5 percent on surprise build in U.S. crude, gasoline stocks
[Reuters] Qatar debt rating downgraded by S&P as riyal hits 11-year low
[Reuters] Exclusive: EU in stronger position to tackle Italy after Spain bank rescue - source
[Bloomberg] Bill Gross Says Market Risk Is Highest Since Pre-2008 Crisis
[NYT] 5 Big Tech Stocks Build Market Euphoria, and Jitters
[FT] Revolutionary Guards blame Saudi Arabia for Tehran terror attack
Tuesday, June 6, 2017
Wednesday's News Links
[Bloomberg] U.S. Stocks Rise With Dollar, Treasuries Slump: Markets Wrap
[Investing.com] Euro Drops Sharply As ECB Said To Cut Inflation Outlook
[Reuters] ECB triggers overnight Santander rescue of Spain's Banco Popular
[Bloomberg] ECB Said to Cut Inflation Outlook After Energy Prices Slide
[Reuters] European bank bailout soothes anxious markets
[Bloomberg] Gold Makes Run Toward $1,300 as Risk Flares From U.K. to Mideast
[Bloomberg] Thursday Triple Whammy Has Funds On Edge: AMP's Short Real, Amundi's Long Euro
[Bloomberg] Gulf Banks to Cut Qatar Exposure as Wider Sanctions Seen
[Reuters] Political leaders hunt for votes on last day of tumultuous British election campaign
[Reuters] China May forex reserves rise more than expected on weaker dollar, capital controls
[Bloomberg] The World’s $100 Trillion Question: Why Is Inflation So Low?
[Bloomberg, El-Erian] What the ECB Will Do This Week
[FT] Leverage poised to make a comeback on calm markets
[FT] Investor doubts about Trump agenda weigh on dollar
[FT] Why the UK election matters to rest of the world
[FT] The ECB’s German bonds headache
[WSJ] GOP Senators’ Medicaid Clash Jeopardizes Health Deal
[WSJ] Spring Rally in Stocks, Bonds, Gold and Bitcoin Unnerves Investors
[WSJ] Millions of Young People Shut Out of the Housing Market
[WSJ] China Market Squeeze Starts to Strangle Small Businesses
[WSJ] U.S. Oil Exports Double, Reshaping Vast Global Markets
[WSJ] ECB Critic Holds His Tongue as Race Nears for Bank’s Top Job
[WSJ] Australians Have So Much Debt They’re Becoming Afraid to Spend
[Investing.com] Euro Drops Sharply As ECB Said To Cut Inflation Outlook
[Reuters] ECB triggers overnight Santander rescue of Spain's Banco Popular
[Bloomberg] ECB Said to Cut Inflation Outlook After Energy Prices Slide
[Reuters] European bank bailout soothes anxious markets
[Bloomberg] Gold Makes Run Toward $1,300 as Risk Flares From U.K. to Mideast
[Bloomberg] Thursday Triple Whammy Has Funds On Edge: AMP's Short Real, Amundi's Long Euro
[Bloomberg] Gulf Banks to Cut Qatar Exposure as Wider Sanctions Seen
[Reuters] Political leaders hunt for votes on last day of tumultuous British election campaign
[Reuters] China May forex reserves rise more than expected on weaker dollar, capital controls
[Bloomberg] The World’s $100 Trillion Question: Why Is Inflation So Low?
[Bloomberg, El-Erian] What the ECB Will Do This Week
[FT] Leverage poised to make a comeback on calm markets
[FT] Investor doubts about Trump agenda weigh on dollar
[FT] Why the UK election matters to rest of the world
[FT] The ECB’s German bonds headache
[WSJ] GOP Senators’ Medicaid Clash Jeopardizes Health Deal
[WSJ] Spring Rally in Stocks, Bonds, Gold and Bitcoin Unnerves Investors
[WSJ] Millions of Young People Shut Out of the Housing Market
[WSJ] China Market Squeeze Starts to Strangle Small Businesses
[WSJ] U.S. Oil Exports Double, Reshaping Vast Global Markets
[WSJ] ECB Critic Holds His Tongue as Race Nears for Bank’s Top Job
[WSJ] Australians Have So Much Debt They’re Becoming Afraid to Spend
Tuesday Afternoon Links
[Bloomberg] U.S. Stocks Fall With Dollar as Treasuries Rise: Markets Wrap
[Bloomberg] How Financial Vulnerability Helped to Curb Global Productivity
[Bloomberg] U.S. Job Openings Hit Record High in April, Topping 6 Million
[Bloomberg] U.S. CEO Sentiment at Three-Year High Is Good Omen for Economy
[Bloomberg] How Financial Vulnerability Helped to Curb Global Productivity
[Bloomberg] U.S. Job Openings Hit Record High in April, Topping 6 Million
[Bloomberg] U.S. CEO Sentiment at Three-Year High Is Good Omen for Economy
Monday, June 5, 2017
Tuesday's News Links
[Bloomberg] Havens Rally as Risk Events Stack Up; Oil Swings: Markets Wrap
[Reuters] Dollar hits seven-month low, stocks, oil retreat as caution reigns
[Reuters] Qatari riyal under pressure as Saudi, UAE banks delay Qatar deals
[Bloomberg] Five Questions About the Fed's $4.5 Trillion Balance Sheet
[Bloomberg] Trump’s America Is Facing a $13 Trillion Consumer Debt Hangover
[Bloomberg] Americans Are Pouring Money Into Their Homes Like It's the 1990s
[CNBC] Fast-rising home prices finally hit a wall
[Bloomberg] China's Banks Are Reshaping the Sovereign Dollar-Bond Market
[Bloomberg] How China’s Biggest Bank Became Wall Street’s Go-To Shadow Lender
[Bloomberg] Is the World Overdoing Low Interest Rates?
[Bloomberg] South Africa Has Second Recession in Eight Years
[Bloomberg] Noble Group's Misery Deepens as Shares Sink to Lowest Since 2000
[CNBC/FT] The $1bn hostage deal that enraged Qatar’s Gulf rivals
[FT] The ECB and tapering: a challenge that will not go away
[WSJ] One Market Gauge Is Signaling Fed Should Continue to Tighten Policy
[Reuters] Dollar hits seven-month low, stocks, oil retreat as caution reigns
[Reuters] Qatari riyal under pressure as Saudi, UAE banks delay Qatar deals
[Bloomberg] Five Questions About the Fed's $4.5 Trillion Balance Sheet
[Bloomberg] Trump’s America Is Facing a $13 Trillion Consumer Debt Hangover
[Bloomberg] Americans Are Pouring Money Into Their Homes Like It's the 1990s
[CNBC] Fast-rising home prices finally hit a wall
[Bloomberg] China's Banks Are Reshaping the Sovereign Dollar-Bond Market
[Bloomberg] How China’s Biggest Bank Became Wall Street’s Go-To Shadow Lender
[Bloomberg] Is the World Overdoing Low Interest Rates?
[Bloomberg] South Africa Has Second Recession in Eight Years
[Bloomberg] Noble Group's Misery Deepens as Shares Sink to Lowest Since 2000
[CNBC/FT] The $1bn hostage deal that enraged Qatar’s Gulf rivals
[FT] The ECB and tapering: a challenge that will not go away
[WSJ] One Market Gauge Is Signaling Fed Should Continue to Tighten Policy
Monday Evening Links
[Bloomberg] Asian Stocks Face Mixed Start as Oil, Dollar Drop: Markets Wrap
[Reuters] Wall Street dips; 2017's laggards tick up, Apple slips
[CNBC] Trump set to make first moves at completely revamping the Federal Reserve
[Bloomberg] Banker Robert Jones Said to Be on Trump List for Fed Governor
[Bloomberg] Bad News Bears Throw in Towel
[FT] Fed weighs benign impact of rate rises on markets
[FT] Corporate casualties will rise as China and US tighten policy
[Reuters] Wall Street dips; 2017's laggards tick up, Apple slips
[CNBC] Trump set to make first moves at completely revamping the Federal Reserve
[Bloomberg] Banker Robert Jones Said to Be on Trump List for Fed Governor
[Bloomberg] Bad News Bears Throw in Towel
[FT] Fed weighs benign impact of rate rises on markets
[FT] Corporate casualties will rise as China and US tighten policy
Sunday, June 4, 2017
Monday's News LInks
[Bloomberg] U.S. Stocks Fluctuate on Data as Oil, Dollar Slump: Markets Wrap
[Bloomberg] Qatari Markets Rocked as Four Arab Nations Cut Diplomatic Ties
[Reuters] China services sector expands at fastest pace in four months in May: Caixin PMI
[Bloomberg] Draghi Seen Taking Slowest Possible Path Out of ECB Stimulus
[Bloomberg] Markets Face Three Big Geopolitical Risks This Week
[Bloomberg] IMF warns U.S. fiscal uncertainty, China's credit growth pose risk to Asia
[Bloomberg] The Fed Has Another Bond Market Conundrum
[Bloomberg] Alphabet Shares Follow in Amazon's Footsteps and Top $1,000
[Bloomberg] It's Smart to Worry About ETFs
[Bloomberg] Toronto Home Price Gains Slow as New Listings Surge 49% in May
[Bloomberg] John Paulson Is Struggling to Hold On to Client Money
[Reuters] China upset at Mattis' 'irresponsible remarks' on South China Sea
[CNBC] Saudi Arabia, Bahrain, UAE and Egypt cut diplomatic ties with Qatar
[WSJ] China’s Debt Crackdown Is Driving Borrowers Into Riskier Territory
[WSJ] ECB’s Path to Unwinding Easy Monetary Policies Proves Thorny
[Bloomberg] Qatari Markets Rocked as Four Arab Nations Cut Diplomatic Ties
[Reuters] China services sector expands at fastest pace in four months in May: Caixin PMI
[Bloomberg] Draghi Seen Taking Slowest Possible Path Out of ECB Stimulus
[Bloomberg] Markets Face Three Big Geopolitical Risks This Week
[Bloomberg] IMF warns U.S. fiscal uncertainty, China's credit growth pose risk to Asia
[Bloomberg] The Fed Has Another Bond Market Conundrum
[Bloomberg] Alphabet Shares Follow in Amazon's Footsteps and Top $1,000
[Bloomberg] It's Smart to Worry About ETFs
[Bloomberg] Toronto Home Price Gains Slow as New Listings Surge 49% in May
[Bloomberg] John Paulson Is Struggling to Hold On to Client Money
[Reuters] China upset at Mattis' 'irresponsible remarks' on South China Sea
[CNBC] Saudi Arabia, Bahrain, UAE and Egypt cut diplomatic ties with Qatar
[WSJ] China’s Debt Crackdown Is Driving Borrowers Into Riskier Territory
[WSJ] ECB’s Path to Unwinding Easy Monetary Policies Proves Thorny
Sunday's News Links
[Bloomberg] May's Journey to Zero Tolerance as Terror Dominates Election
[Bloomberg] Merkel's Chief of Staff Says EU to Join China, India on Climate
[NYT] Trump Plans to Shift Infrastructure Funding to Cities, States and Business
[WSJ] The Tech Sector Catches Fire
[WSJ] Chinese Companies Move Deeper Into Shadow Banking
[FT] Support grows in China for 1989 Tiananmen crackdown
[FT] US allies in Asia dismayed by ‘America First’
[Politico] America’s CEOs fall out of love with Trump
[Bloomberg] Merkel's Chief of Staff Says EU to Join China, India on Climate
[NYT] Trump Plans to Shift Infrastructure Funding to Cities, States and Business
[WSJ] The Tech Sector Catches Fire
[WSJ] Chinese Companies Move Deeper Into Shadow Banking
[FT] Support grows in China for 1989 Tiananmen crackdown
[FT] US allies in Asia dismayed by ‘America First’
[Politico] America’s CEOs fall out of love with Trump
Saturday, June 3, 2017
Saturday's News Links
[Reuters] Close aide to Brazil's leader Temer arrested in corruption inquiry
[Reuters] Banco Popular head tells staff to stay calm, source says ECB meet planned
[Reuters] As large cap gets larger, can the tech rally continue?
[CNBC] US oil production will keep growing even as drillers' costs rise, analysts say
[Reuters] China's broadcast regulator, tightening control of content, promotes 'core socialist values'
[Reuters] Mattis praises China's efforts on North Korea, dials up pressure on South China Sea
[NYT] Here’s How a Chinese Tech Firm Borrowed $2.1 Billion in a Hurry
[FT] One of Trump’s potential Fed picks is a huge fan of negative interest rates
[Reuters] Banco Popular head tells staff to stay calm, source says ECB meet planned
[Reuters] As large cap gets larger, can the tech rally continue?
[CNBC] US oil production will keep growing even as drillers' costs rise, analysts say
[Reuters] China's broadcast regulator, tightening control of content, promotes 'core socialist values'
[Reuters] Mattis praises China's efforts on North Korea, dials up pressure on South China Sea
[NYT] Here’s How a Chinese Tech Firm Borrowed $2.1 Billion in a Hurry
[FT] One of Trump’s potential Fed picks is a huge fan of negative interest rates
Friday, June 2, 2017
Weekly Commentary: Liquidity Trade
It’s not quite 1999 at this point, but it’s been moving in that direction. In about five months’ time, the Nasdaq 100 (NDX) has posted a gain of 20.5%. NDX stocks with greater than 50% y-t-d gains include Vertex Pharmaceuticals (74%), Activision (64%), Tesla (60%), JD.com (58%), Wynn Resorts (54%), CSX (53%), Autodesk (52%), Liberty Ventures (51%) and Lam Research (50%). Amazon’s 34% 2017 rise has increased market capitalization to $481bn (P/E 189). Apple’s 33% gain pushed its market cap to $806bn. Facebook has gained 33% y-t-d, Google 26%, and Netflix 32%.
There’s an interesting similarity to the 1999 backdrop: A Federal Reserve (and global central bank community) way too timid in implementing a “tightening cycle” despite bubbling asset markets. Fed funds began 1999 at 4.75%, after rates were slashed 75 bps late in 1998 in response to the Russia/LTCM financial crisis. Despite clearly overheated securities markets, rates ended 1999 at 5.5% - the same level they were for much of 1998. The Fed was content to let the speculative Bubble run, with memories of the previous year’s near financial meltdown clear in their minds. Moreover, Y2K uncertainties provided a convenient excuse to accommodate the raging Bubble.
There’s at least one huge difference to 1999. The 10-year Treasury yield began ‘99 at 4.65% and ended the year at 6.44%. Ten-year yields ended Friday’s session at 2.16%, down 29 bps so far in 2017 and near lows since the election. Astounding amounts of government debt have been issued globally since 1999. Radical central bank measures ensured prices of these securities inflated to unprecedented levels (even in the face of endless supply). Historically low yields are a global phenomenon. German bund yields closed the week at 27 bps and French yields closed at 71 bps. It’s worth noting some current 10-year sovereign debt yields: negative 27 bps in Switzerland, 31 bps in Finland, 40 bps in Sweden, 48 bps in Netherlands, 53 bps in Denmark, 54 bps in Austria and 64 bps in Belgium.
MSCI's all-country world stock index ended the week at a record high. Both the UK FTSE (up 5.7% y-t-d) and German DAX (up 11.7%) equities indices traded Friday at new highs. European equities have been powering higher. The French CAC 40 has gained 9.9% y-t-d, Spain’s IBEX 35 16.6%, and Italy’s MIB 8.8%.
June 2 – Bloomberg (Katherine Chiglinsky): “Mohamed El-Erian, Allianz SE’s chief economic adviser, said the rally in stocks and high-yield bonds is part of a ‘liquidity trade,’ based on optimism that central bank stimulus efforts and the accumulation of corporate profits will sustain market gains. ‘That is what you’re betting on,’ El-Erian said Friday in an interview on Bloomberg Television. ‘You’re not betting on the Trump rally anymore. You’re not betting on the reflation trade anymore.’”
The “Trump Trade” provided convenient cover for what has been for some time a strengthening speculative Liquidity Trade. The histrionic bond market reaction to the weaker payroll data was telling. The long-bond surged a full point, with yields dropping five bps to the lows since November. If the issue were a weakening economy, one was challenged to see it in the reaction within the risk markets. Investment-grade corporate debt (LQD) gained about 0.5% Friday to trade to the high since November. Even junk debt (HYG) posted a small gain to trade to an almost 18-month high. The NDX jumped 1.1% Friday, with the Nasdaq Composite up 1.0% - both to record highs. The Semiconductors gained 1.0% (near year-2000 highs), and the Morgan Stanley High Tech index rose almost 1% to an all-time high. The Biotechs rose 1.9% to a 2017 high (up 20% y-t-d).
It’s worth noting that gold gained 1% on Liquidity Trade Friday, increasing 2017 gains to a notable 11%. Crude’s 1.5% Friday decline (down 4.3% for the week) was not inconsistent with Liquidity Trade dynamics. Shale exploration and extraction are thriving on easy “money.” And when it comes to Liquidity analysis, Bitcoin has earned a place at the table. Bitcoin rose $160 this week to $2,430, boosting its y-t-d gain to a remarkable 155%.
A Friday ZeroHedge article asked the relevant question: “BoJ, ECB Balance Sheets Exceed the Fed’s For First Time Ever - What Happens Next?” The over $1.0 TN global QE injections during the first four months of the year argue for “Peak QE.” The ZeroHedge article includes a chart of the G3 (Fed, BOJ, ECB) balance sheet that correlates closely with U.S. stocks going back to 2009. It’s worth noting that G3 balance sheets will soon reach $14.0 TN, up from less than $6.0 TN in early-2009 (after initial crisis-period QE). “Now what?”, indeed. Near zero rates and unprecedented “money printing” have inflated asset price Bubbles around the globe. What happens when stimulus is removed? This is by now a conspicuous problem, though markets are confident that central bankers have no stomach for finding out how big of a problem. The Liquidity Trade is premised on global central bankers being trapped in ultra-easy “money” (including ongoing printing).
May 30 – Bloomberg (Jeanna Smialek and Matthew Boesler): “Federal Reserve Governor Lael Brainard said soft inflation could cause her to reassess the path forward for monetary policy should it linger, even as the global economic outlook brightens and U.S. growth looks poised to rebound. ‘If the soft inflation data persist, that would be concerning and, ultimately, could lead me to reassess the appropriate path of policy,’ Brainard said… ‘I see some tension between signs that the economy is in the neighborhood of full employment and indications that the tentative progress we had seen on inflation may be slowing,’ Brainard said. ‘If the tension between the progress on employment and the lack of progress on inflation persists, it may lead me to reassess the expected path of the federal funds rate in the future, although it is premature to make that call today.”
This is exactly the type of dovish diffidence that feeds market speculation. The Fed needs to find a backbone and move forward in the direction of normalization without reacting to the normal ebb and flow of securities markets, inflation data and economic performance. Moreover, central bankers should jettison this notion of no tolerance for recessions or bear markets – both precious Capitalistic system cleansing mechanisms. Clearly, central bankers have come to exert profound effects on securities and asset prices. Recent history has as well demonstrated that their capacity to manipulate an index of consumer prices is suspect at best. Prolonging ultra-easy money will surely exacerbate global overcapacity (i.e. additional Chinese capacity and U.S. shale investment).
Especially after Friday’s weaker-than-expected payroll data, the markets will question whether the Fed is about to flinch. Expectations are growing that the FOMC will pull back from an already incredibly cautious rate hike cycle – one that to this point has completely failed to “tighten” financial conditions. Indeed, conditions have further loosened.
I’ve read and listened to analyses warning against the Fed committing a major policy error by tightening into a weakening economy. Yet the Federal Reserve's mistake was waiting way too long to commence the normalization process. At this point, there is great risk in the Fed accommodating late-cycle excesses - including the global securities markets’ Liquidity Trade. Only a meaningful amount of pain will impact what has become a major inflationary/speculative psychology enveloping global securities markets. The Fed needs to bite the bullet and push rates higher.
Discussions continue regarding the Federal Reserve’s decision to shrink its balance sheet. Similar to rate discussions, the markets (for good reason) believe the Fed will refrain from measures that actually tighten financial conditions and impinge booming securities markets. If queried, most sophisticated market professionals would likely respond that they expect the next major change in the Fed’s holdings to be on the upside (another round of QE). Some Fed officials see selling assets as a positive measure that would help reduce excessive monetary accommodation. At this point, balance sheet discussions appear to be backfiring. Believing that the Fed will likely pause rate increases while reducing assets both slowly and very modestly, the markets now see potential Fed balance sheet operations as a bullish development that ensures no actual tightening of financial conditions for many months to come.
Next Thursday’s ECB meeting is widely expected to see a contentious debate regarding the process for winding down extraordinary QE and rate measures. Euro zone economies and inflation trends have bounced back. Ultra-loose financial conditions have worked their magic, although Draghi does not want any change in ECB stimulus to upset the Liquidity Trade. The Germans and others have long ago seen enough and seek to establish a timeline for winding down QE.
The markets assume Draghi will, once again, win the day. This week also saw happenings in China that embolden those believing that Beijing will also continue to win the day, month and year.
May 31 – Bloomberg: “The offshore yuan jumped the most in four months as funding costs surged amid speculation policy makers were supporting the currency in the wake of a surprise sovereign rating downgrade… ‘The sharp gain in the offshore yuan is partially due to the unwinding of short yuan positions because the high offshore yuan funding cost has made the currency too expensive to short,’ said Stephen Innes, senior Asia-Pacific currency trader at Oanda Corp… ‘Bears with short yuan positions would need to cut their exposure.’ The overnight yuan interbank rate in Hong Kong, known as Hibor, surged 15.7 percentage points on Wednesday to 21.08%, the highest since Jan. 6, while the offshore yuan’s overnight deposit rate jumped to 60%.”
May 31 – Bloomberg: “China is dishing out a tough lesson to currency traders and strategists alike: don’t bet against the yuan. The currency jumped its highest level in seven months offshore, extending Wednesday’s gain of 1.2%, despite analyst forecasts for declines this quarter. Surging interbank rates are squeezing bears by driving up the cost of short positions. The rally, which broke months of calm against the dollar, comes as a rebuke to Moody’s…, which downgraded China’s sovereign debt rating last week. The government has made its displeasure clear, calling the move ‘absolutely groundless.’”
On the back of the People’s Bank of China’s forceful interventions, the renminbi traded this week to the strongest level since November. Speculative markets have come to welcome heavy-handed Chinese intervention. The assumption is that Chinese officials are absolutely determined to hold bursting Bubble dynamics at bay.
China is not the only macro worry. Italian bank stocks were hit 4.3% this week. Talk of early elections also pressured Italian bonds. With yields rising 16 bps, the Italian to bund yield spread widened a notable 22 bps this week to a six-week high. It’s also worth mentioning the 4.3% fall in crude and the 9.4% drubbing in natural gas. And there’s the ongoing strength in the yen. The Japanese currency rose 0.8% this week (up 5.9% y-t-d) and has been notably resilient in the face of advancing equities and risk markets. I tend to believe that various macro risks continue to play a prevailing role in stubbornly low global bond yields, a backdrop that along with timid central bankers fuels dangerously speculative risk markets across the globe.
For the Week:
The S&P500 gained 1.0% (up 8.9% y-t-d), and the Dow added 0.6% (up 7.3%). The Utilities rose 1.7% (up 9.2%). The Banks fell 1.6% (down 2.6%), while the Broker/Dealers increased 0.4% (up 4.3%). The Transports rose 1.7% (up 3.2%). The S&P 400 Midcaps gained 1.4% (up 5.5%), and the small cap Russell 2000 jumped 1.7% (up 3.6%). The Nasdaq100 advanced 1.6% (up 20.9%), and the Morgan Stanley High Tech index jumped 2.0% (up 23.8%). The Semiconductors rose 1.7% (up 21.7%). The Biotechs surged 3.4% (up 20%). While bullion gained $12, the HUI gold index fell 1.6% (up 5.0%).
Three-month Treasury bill rates ended the week at 95 bps. Two-year government yields slipped a basis point to 1.29% (up 10bps y-t-d). Five-year T-note yields fell seven bps to 1.72% (down 21bps). Ten-year Treasury yields dropped nine bps to 2.16% (down 29bps). Long bond yields fell 10 bps to 2.81% (down 26bps).
Greek 10-year yields rose eight bps to 5.99% (down 103bps y-t-d). Ten-year Portuguese yields dropped 11 bps to 3.04% (down 71bps). Italian 10-year yields jumped 16 bps to 2.26% (up 45bps). Spain's 10-year yields increased three bps to 1.57% (up 19bps). German bund yields fell six bps to 0.27% (up 7bps). French yields declined five bps to 0.71% (up 3bps). The French to German 10-year bond spread widened one to 44 bps. U.K. 10-year gilt yields added three bps to 1.04% (down 20bps). U.K.'s FTSE equities index was unchanged (up 5.7%).
Japan's Nikkei 225 equities index surged 2.5% (up 5.6% y-t-d). Japanese 10-year "JGB" yields added a basis point to 0.055% (up 2bps). France's CAC40 was little changed (up 9.9%). The German DAX equities index jumped 1.8% (up 11.7%). Spain's IBEX 35 equities index was unchanged (up 16.6%). Italy's FTSE MIB index declined 1.3% (up 8.8%). EM equities were mixed. Brazil's Bovespa index dropped 2.5% (up 3.8%). Mexico's Bolsa declined 0.7% (up 8.1%). South Korea's Kospi added 0.7% (up 17%). India’s Sensex equities index gained 0.8% (up 17.5%). China’s Shanghai Exchange was little unchanged (unchanged). Turkey's Borsa Istanbul National 100 index rose 1.4% (up 26.5%). Russia's MICEX equities index sank 2.7% (down 15.7%).
Junk bond mutual funds saw inflows of $521 million (from Lipper).
Freddie Mac 30-year fixed mortgage rates slipped a basis point to 3.94% (up 28bps y-o-y). Fifteen-year rates were unchanged at 3.19% (up 27bps). The five-year hybrid ARM rate rose four bps to 3.11% (up 23bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down four bps to a seven-month low 4.02% (up 26bps).
Federal Reserve Credit last week declined $13.7bn to $4.421 TN. Over the past year, Fed Credit declined $0.9bn. Fed Credit inflated $1.610 TN, or 57%, over the past 238 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt declined $6.7bn last week to $3.238 TN. "Custody holdings" were up $8bn y-o-y, or 0.2%.
M2 (narrow) "money" supply last week jumped $37.7bn to a record $13.523 TN. "Narrow money" expanded $759bn, or 6.3%, over the past year. For the week, Currency increased $2.5bn. Total Checkable Deposits rose $17.7bn, and Savings Deposits gained $19.3bn. Small Time Deposits added $0.7bn. Retail Money Funds declined $2.1bn.
Total money market fund assets increased $5.0bn to $2.654 TN. Money Funds fell $80bn y-o-y (2.9%).
Total Commercial Paper gained $6.4bn to $994bn. CP declined $73bn y-o-y, or 6.8%.
Currency Watch:
The U.S. dollar index declined 0.7% to 96.72 (down 5.6% y-t-d). For the week on the upside, the New Zealand dollar increased 1.2%, the Swiss franc 1.1%, the euro 0.9%, the Japanese yen 0.8%, the Swedish krona 0.8%, the British pound 0.7%, the South African rand 0.5% and the Brazilian real 0.5%. For the week on the downside, the Mexican peso declined 0.9%, the Norwegian krone 0.5%, the Canadian dollar 0.3%, and the South Korean won 0.1%. The Chinese renminbi gained 0.67% versus the dollar this week (up 2.0% y-t-d).
Commodities Watch:
The Goldman Sachs Commodities Index dropped 2.9% (down 6.1% y-t-d). Spot Gold gained 1.0% to $1,279 (up 11%). Silver rose 1.2% to $17.53 (up 9.7%). Crude dropped $2.14 to $47.66 (down 12%). Gasoline fell 4.0% (down 6%), and Natural Gas sank 9.4% (down 20%). Copper increased 0.3% (up 3%). Wheat declined 2.0% (up 5%). Corn slipped 0.4% (up 6%).
Trump Administration Watch:
May 27 – Reuters (John Irish and Crispian Balmer): “Under pressure from Group of Seven allies, U.S. President Donald Trump backed a pledge to fight protectionism on Saturday, but refused to endorse a global climate change accord… The summit of G7 wealthy nations pitted Trump against the leaders of Germany, France, Britain, Italy, Canada and Japan on several issues, with European diplomats frustrated at having to revisit questions they had hoped were long settled. However, diplomats stressed there was broad agreement on an array of foreign policy problems, including the renewal of a threat to slap further economic sanctions on Russia if its interference in neighboring Ukraine demanded it.”
May 30 – Bloomberg (Arne Delfs and Patrick Donahue): “President Donald Trump blasted Germany anew over trade and defense, ratcheting up a dispute with Chancellor Angela Merkel that risks getting personal and undermining a trans-Atlantic bond that is the bedrock of U.S.-European relations. Trump’s comments came in an early-morning tweet… issued just as Merkel hosted Indian Prime Minister Narendra Modi in Berlin… Modi suggested that India will adhere to the Paris climate accords, while Trump makes up his mind. ‘We have a MASSIVE trade deficit with Germany, plus they pay FAR LESS than they should on NATO & military,’ the U.S. president posted on Twitter. ‘This will change.’”
May 29 – Wall Street Journal (Richard Rubin): “The boldest ideas for changing the nation’s tax code are either dead or on political life support, as the Republican effort in Congress to reshape the tax system moves much more slowly than lawmakers and their allies in business had hoped. The clear winner, so far, is the status quo. Republicans, who control both chambers, are scouring the tax code, searching for ways to offset the deep rate cuts they desire. But their proposals for border adjustment—which would tax imports—and for ending the business interest deduction and making major changes to individual tax breaks for health and retirement have all hit resistance within the party. The only big revenue-raising provision with anything close to Republican consensus is repealing the deduction for state and local taxes, and that idea faces objections from blue-state lawmakers in the party. The GOP’s dreams have collided with interest-group lobbying and the tax system’s reality.”
China Bubble Watch:
May 28 – Financial Times (Leo Lewis, Tom Mitchell and Yuan Yang): “There are few things studied as closely by the Chinese Communist party as how to avoid the fate of its Soviet counterpart. In an internal meeting after he assumed power in 2012, President Xi Jinping said no one in the Soviet Union had been ‘man enough’ to stand up to Mikhail Gorbachev and glasnost. But for Mr Xi another historical event from the same era may warrant more immediate attention. It is just over 30 years since Japan began inflating a property and stock market bubble whose implosion ravaged public confidence, cowed corporations and scarred an economy for decades. China’s priority today is to avoid that fate. It is not a new concern for Beijing. In 2010, as China’s overall indebtedness was approaching 200% of gross domestic product, Mr Xi, then the country’s vice-president, asked scholars at the Central Party School to research the subject… A subsequent paper outlined some of the lessons of the Japanese bubble, including the need for Beijing to raise awareness of financial risks, safeguard ‘economic sovereignty’ and not give in to pressure to change its currency policy. Seven years on, China’s total debt is 250% of GDP and climbing, officials are trying to rein in sky-high real estate prices and the government is still grappling with the aftermath of a stock market bubble that burst in 2015.”
May 29 – Financial Times (Don Weinland and Gabriel Wildau): “A crackdown on China’s $9.4tn shadow banking business is hitting bank share prices and rattling bond markets. The country’s new top banking regulator has already taken several shots at stemming the rapid growth of off-balance-sheet lending at banks since taking control in February. The central bank has also tightened liquidity in the financial system, sparking angst earlier this year. A flurry of rules to discourage banks from using borrowed money to invest in bonds have been issued by the regulator. The sell-off that has followed has pushed bond yields to two-year highs and even led to a rarely seen inversion of the yield curve. The moves have also dented the share prices of Chinese banks — among the world’s largest by market capitalization… ‘It’s been very clear . . . that regulators want to stamp out some of this [shadow banking] activity,’ says the Asia head of a securities unit at a global bank. ‘During that time there’s been lots of inquiries from investors and some concern on what that will look like.’”
June 1 – Financial Times (Gabriel Wildau): “China’s currency headed for its biggest two-day gain against the dollar since January on Thursday afternoon, as the central bank apparently intervened to support the renminbi amid tepid market demand for the Chinese currency. Traders said that large state-owned banks sold dollars aggressively on Wednesday and Thursday. Such concerted trading is usually viewed as a sign that these institutions are acting on behalf of the central bank to prop up demand for the renminbi. The People’s Bank of China’s currency-trading arm last week announced a change to the way it sets renminbi’s daily fix, which is intended to guide trading in the spot market. The change granted the PBoC greater flexibility to push back against what it called ‘irrational expectations’ and guide the renminbi stronger, even when market forces are pushing the other way.”
May 31 – Bloomberg: “A private gauge of Chinese manufacturing fell back into contractionary territory in May, adding to recent evidence that the economy’s strong start to 2017 is leveling off. Caixin Media and Markit Economics manufacturing purchasing managers’ index fell to 49.6 from 50.3 in April, the lowest reading since June 2016 and below the 50.1 median estimate…”
May 29 – Bloomberg (Paul Panckhurst): “Snaking queues of thousands of prospective apartment buyers in Hong Kong signaled authorities have made no progress in cooling a red-hot property market, where prices are at records. People were lining up on Friday and over the weekend at Victoria Skye, a luxury project at the former airport site of Kai Tak, and at the Ocean Pride development by Cheung Kong Property Holdings Ltd. and MTR Corp. ‘Successive moves by the government in recent memory to cool the property market only resulted in it becoming crazier,’ The Standard newspaper said in an editorial… ‘The result is a sea of madness.’”
Europe Watch:
May 30 – Bloomberg (Stefania Spezzati and Blaise Robinson): “Italian markets shuddered at the emerging prospect of early elections. Investors dumped stocks and government debt after ruling Democratic Party leader Matteo Renzi signaled the possibility of a vote in September or October, more than six months ahead of schedule. That pushed the nation’s bond-yield spread over Germany to its highest in almost four weeks today, and the benchmark FTSE MIB stock index to its biggest two-day drop in more than five weeks on Monday, led by banks.”
May 29 – Bloomberg (Alessandro Speciale): “The euro area still needs expansive monetary stimulus to restore stable inflation even as its economy accelerates, European Central Bank President Mario Draghi said. ‘We remain firmly convinced that an extraordinary amount of monetary policy support, including through our forward guidance, is still necessary,’ Draghi told lawmakers… ‘Domestic cost pressures, notably from wages, are still insufficient to support a durable and self-sustaining convergence of inflation toward our medium-term objective.’”
May 31 – Reuters (Balazs Koranyi): “With the euro zone recovery gaining strength, inflation would continue to rise even if the European Central Bank reduced stimulus, Bundesbank President Jens Weidmann said… The comments suggest that Weidmann, a long-time critic of the ECB's exceptional stimulus, considers inflation self- sustaining, one of ECB President Mario Draghi's top criteria before the policy can be removed. ‘The strengthening of the economic recovery makes it increasingly likely that the rise in inflation we have seen since August 2016 is not just a flash in the pan, but that we would have higher inflation rates compared to previous years even under a reduced degree of monetary policy accommodation,’ Weidmann said.”
May 31 – Reuters (Balazs Koranyi and Francesco Canepa): “European Central Bank policymakers are set to take a more benign view of the economy when they meet on June 8 and will even discuss dropping some of their pledges to ramp up stimulus if needed, four sources with direct knowledge of the discussions told Reuters. With economic growth clearly shifting into higher gear, rate setters are ready to acknowledge the improvement by dropping a long-standing reference to downside risks in the bank's post-meeting opening statement, calling risks largely balanced... Growth indicators have been outperforming expectations all year. But they disagree on how quickly the ECB should change its policy stance, including its guidance, with countries on the currency bloc's periphery fearing that a sharp shift in its communication could induce self-defeating market turbulence, they added. ‘After the French election the political risk is clearly down and economic indicators are by and large positive, so it's time to acknowledge this,’ said one Governing Council member…”
June 1 – Bloomberg (Piotr Skolimowski and Alessandro Speciale): “The European Central Bank is starting to debate whether to reflect the euro area’s improving economic prospects in its policy guidance, Bundesbank President Jens Weidmann said. Speaking just hours before the ECB begins its self-imposed quiet period ahead of next week’s monetary policy meeting, Weidmann said the strengthening recovery makes it increasingly likely that the rise in the inflation rate isn’t ‘just a flash in the pan.’ Inflation would still accelerate more than in the previous years even if some of the stimulus were removed, he said, adding the ECB should consider the impact of its policies on bank profitability.”
May 30 – Wall Street Journal (Tom Fairless): “A Berlin-based law professor has filed a cease-and-desist request aimed at quickly ending Germany’s involvement in bond purchases by the European Central Bank, a surprise legal move that underlines mounting German anger over the ECB’s easy-money policies. The request for a legal injunction, sent to Germany’s top court, shows the lengths to which some Germans are prepared to go to derail a €2.3 trillion ($2.57 trillion) stimulus program they accuse of subsidizing southern European governments and hurting German savers, pensioners and smaller companies.”
There’s an interesting similarity to the 1999 backdrop: A Federal Reserve (and global central bank community) way too timid in implementing a “tightening cycle” despite bubbling asset markets. Fed funds began 1999 at 4.75%, after rates were slashed 75 bps late in 1998 in response to the Russia/LTCM financial crisis. Despite clearly overheated securities markets, rates ended 1999 at 5.5% - the same level they were for much of 1998. The Fed was content to let the speculative Bubble run, with memories of the previous year’s near financial meltdown clear in their minds. Moreover, Y2K uncertainties provided a convenient excuse to accommodate the raging Bubble.
There’s at least one huge difference to 1999. The 10-year Treasury yield began ‘99 at 4.65% and ended the year at 6.44%. Ten-year yields ended Friday’s session at 2.16%, down 29 bps so far in 2017 and near lows since the election. Astounding amounts of government debt have been issued globally since 1999. Radical central bank measures ensured prices of these securities inflated to unprecedented levels (even in the face of endless supply). Historically low yields are a global phenomenon. German bund yields closed the week at 27 bps and French yields closed at 71 bps. It’s worth noting some current 10-year sovereign debt yields: negative 27 bps in Switzerland, 31 bps in Finland, 40 bps in Sweden, 48 bps in Netherlands, 53 bps in Denmark, 54 bps in Austria and 64 bps in Belgium.
MSCI's all-country world stock index ended the week at a record high. Both the UK FTSE (up 5.7% y-t-d) and German DAX (up 11.7%) equities indices traded Friday at new highs. European equities have been powering higher. The French CAC 40 has gained 9.9% y-t-d, Spain’s IBEX 35 16.6%, and Italy’s MIB 8.8%.
June 2 – Bloomberg (Katherine Chiglinsky): “Mohamed El-Erian, Allianz SE’s chief economic adviser, said the rally in stocks and high-yield bonds is part of a ‘liquidity trade,’ based on optimism that central bank stimulus efforts and the accumulation of corporate profits will sustain market gains. ‘That is what you’re betting on,’ El-Erian said Friday in an interview on Bloomberg Television. ‘You’re not betting on the Trump rally anymore. You’re not betting on the reflation trade anymore.’”
The “Trump Trade” provided convenient cover for what has been for some time a strengthening speculative Liquidity Trade. The histrionic bond market reaction to the weaker payroll data was telling. The long-bond surged a full point, with yields dropping five bps to the lows since November. If the issue were a weakening economy, one was challenged to see it in the reaction within the risk markets. Investment-grade corporate debt (LQD) gained about 0.5% Friday to trade to the high since November. Even junk debt (HYG) posted a small gain to trade to an almost 18-month high. The NDX jumped 1.1% Friday, with the Nasdaq Composite up 1.0% - both to record highs. The Semiconductors gained 1.0% (near year-2000 highs), and the Morgan Stanley High Tech index rose almost 1% to an all-time high. The Biotechs rose 1.9% to a 2017 high (up 20% y-t-d).
It’s worth noting that gold gained 1% on Liquidity Trade Friday, increasing 2017 gains to a notable 11%. Crude’s 1.5% Friday decline (down 4.3% for the week) was not inconsistent with Liquidity Trade dynamics. Shale exploration and extraction are thriving on easy “money.” And when it comes to Liquidity analysis, Bitcoin has earned a place at the table. Bitcoin rose $160 this week to $2,430, boosting its y-t-d gain to a remarkable 155%.
A Friday ZeroHedge article asked the relevant question: “BoJ, ECB Balance Sheets Exceed the Fed’s For First Time Ever - What Happens Next?” The over $1.0 TN global QE injections during the first four months of the year argue for “Peak QE.” The ZeroHedge article includes a chart of the G3 (Fed, BOJ, ECB) balance sheet that correlates closely with U.S. stocks going back to 2009. It’s worth noting that G3 balance sheets will soon reach $14.0 TN, up from less than $6.0 TN in early-2009 (after initial crisis-period QE). “Now what?”, indeed. Near zero rates and unprecedented “money printing” have inflated asset price Bubbles around the globe. What happens when stimulus is removed? This is by now a conspicuous problem, though markets are confident that central bankers have no stomach for finding out how big of a problem. The Liquidity Trade is premised on global central bankers being trapped in ultra-easy “money” (including ongoing printing).
May 30 – Bloomberg (Jeanna Smialek and Matthew Boesler): “Federal Reserve Governor Lael Brainard said soft inflation could cause her to reassess the path forward for monetary policy should it linger, even as the global economic outlook brightens and U.S. growth looks poised to rebound. ‘If the soft inflation data persist, that would be concerning and, ultimately, could lead me to reassess the appropriate path of policy,’ Brainard said… ‘I see some tension between signs that the economy is in the neighborhood of full employment and indications that the tentative progress we had seen on inflation may be slowing,’ Brainard said. ‘If the tension between the progress on employment and the lack of progress on inflation persists, it may lead me to reassess the expected path of the federal funds rate in the future, although it is premature to make that call today.”
This is exactly the type of dovish diffidence that feeds market speculation. The Fed needs to find a backbone and move forward in the direction of normalization without reacting to the normal ebb and flow of securities markets, inflation data and economic performance. Moreover, central bankers should jettison this notion of no tolerance for recessions or bear markets – both precious Capitalistic system cleansing mechanisms. Clearly, central bankers have come to exert profound effects on securities and asset prices. Recent history has as well demonstrated that their capacity to manipulate an index of consumer prices is suspect at best. Prolonging ultra-easy money will surely exacerbate global overcapacity (i.e. additional Chinese capacity and U.S. shale investment).
Especially after Friday’s weaker-than-expected payroll data, the markets will question whether the Fed is about to flinch. Expectations are growing that the FOMC will pull back from an already incredibly cautious rate hike cycle – one that to this point has completely failed to “tighten” financial conditions. Indeed, conditions have further loosened.
I’ve read and listened to analyses warning against the Fed committing a major policy error by tightening into a weakening economy. Yet the Federal Reserve's mistake was waiting way too long to commence the normalization process. At this point, there is great risk in the Fed accommodating late-cycle excesses - including the global securities markets’ Liquidity Trade. Only a meaningful amount of pain will impact what has become a major inflationary/speculative psychology enveloping global securities markets. The Fed needs to bite the bullet and push rates higher.
Discussions continue regarding the Federal Reserve’s decision to shrink its balance sheet. Similar to rate discussions, the markets (for good reason) believe the Fed will refrain from measures that actually tighten financial conditions and impinge booming securities markets. If queried, most sophisticated market professionals would likely respond that they expect the next major change in the Fed’s holdings to be on the upside (another round of QE). Some Fed officials see selling assets as a positive measure that would help reduce excessive monetary accommodation. At this point, balance sheet discussions appear to be backfiring. Believing that the Fed will likely pause rate increases while reducing assets both slowly and very modestly, the markets now see potential Fed balance sheet operations as a bullish development that ensures no actual tightening of financial conditions for many months to come.
Next Thursday’s ECB meeting is widely expected to see a contentious debate regarding the process for winding down extraordinary QE and rate measures. Euro zone economies and inflation trends have bounced back. Ultra-loose financial conditions have worked their magic, although Draghi does not want any change in ECB stimulus to upset the Liquidity Trade. The Germans and others have long ago seen enough and seek to establish a timeline for winding down QE.
The markets assume Draghi will, once again, win the day. This week also saw happenings in China that embolden those believing that Beijing will also continue to win the day, month and year.
May 31 – Bloomberg: “The offshore yuan jumped the most in four months as funding costs surged amid speculation policy makers were supporting the currency in the wake of a surprise sovereign rating downgrade… ‘The sharp gain in the offshore yuan is partially due to the unwinding of short yuan positions because the high offshore yuan funding cost has made the currency too expensive to short,’ said Stephen Innes, senior Asia-Pacific currency trader at Oanda Corp… ‘Bears with short yuan positions would need to cut their exposure.’ The overnight yuan interbank rate in Hong Kong, known as Hibor, surged 15.7 percentage points on Wednesday to 21.08%, the highest since Jan. 6, while the offshore yuan’s overnight deposit rate jumped to 60%.”
May 31 – Bloomberg: “China is dishing out a tough lesson to currency traders and strategists alike: don’t bet against the yuan. The currency jumped its highest level in seven months offshore, extending Wednesday’s gain of 1.2%, despite analyst forecasts for declines this quarter. Surging interbank rates are squeezing bears by driving up the cost of short positions. The rally, which broke months of calm against the dollar, comes as a rebuke to Moody’s…, which downgraded China’s sovereign debt rating last week. The government has made its displeasure clear, calling the move ‘absolutely groundless.’”
On the back of the People’s Bank of China’s forceful interventions, the renminbi traded this week to the strongest level since November. Speculative markets have come to welcome heavy-handed Chinese intervention. The assumption is that Chinese officials are absolutely determined to hold bursting Bubble dynamics at bay.
China is not the only macro worry. Italian bank stocks were hit 4.3% this week. Talk of early elections also pressured Italian bonds. With yields rising 16 bps, the Italian to bund yield spread widened a notable 22 bps this week to a six-week high. It’s also worth mentioning the 4.3% fall in crude and the 9.4% drubbing in natural gas. And there’s the ongoing strength in the yen. The Japanese currency rose 0.8% this week (up 5.9% y-t-d) and has been notably resilient in the face of advancing equities and risk markets. I tend to believe that various macro risks continue to play a prevailing role in stubbornly low global bond yields, a backdrop that along with timid central bankers fuels dangerously speculative risk markets across the globe.
For the Week:
The S&P500 gained 1.0% (up 8.9% y-t-d), and the Dow added 0.6% (up 7.3%). The Utilities rose 1.7% (up 9.2%). The Banks fell 1.6% (down 2.6%), while the Broker/Dealers increased 0.4% (up 4.3%). The Transports rose 1.7% (up 3.2%). The S&P 400 Midcaps gained 1.4% (up 5.5%), and the small cap Russell 2000 jumped 1.7% (up 3.6%). The Nasdaq100 advanced 1.6% (up 20.9%), and the Morgan Stanley High Tech index jumped 2.0% (up 23.8%). The Semiconductors rose 1.7% (up 21.7%). The Biotechs surged 3.4% (up 20%). While bullion gained $12, the HUI gold index fell 1.6% (up 5.0%).
Three-month Treasury bill rates ended the week at 95 bps. Two-year government yields slipped a basis point to 1.29% (up 10bps y-t-d). Five-year T-note yields fell seven bps to 1.72% (down 21bps). Ten-year Treasury yields dropped nine bps to 2.16% (down 29bps). Long bond yields fell 10 bps to 2.81% (down 26bps).
Greek 10-year yields rose eight bps to 5.99% (down 103bps y-t-d). Ten-year Portuguese yields dropped 11 bps to 3.04% (down 71bps). Italian 10-year yields jumped 16 bps to 2.26% (up 45bps). Spain's 10-year yields increased three bps to 1.57% (up 19bps). German bund yields fell six bps to 0.27% (up 7bps). French yields declined five bps to 0.71% (up 3bps). The French to German 10-year bond spread widened one to 44 bps. U.K. 10-year gilt yields added three bps to 1.04% (down 20bps). U.K.'s FTSE equities index was unchanged (up 5.7%).
Japan's Nikkei 225 equities index surged 2.5% (up 5.6% y-t-d). Japanese 10-year "JGB" yields added a basis point to 0.055% (up 2bps). France's CAC40 was little changed (up 9.9%). The German DAX equities index jumped 1.8% (up 11.7%). Spain's IBEX 35 equities index was unchanged (up 16.6%). Italy's FTSE MIB index declined 1.3% (up 8.8%). EM equities were mixed. Brazil's Bovespa index dropped 2.5% (up 3.8%). Mexico's Bolsa declined 0.7% (up 8.1%). South Korea's Kospi added 0.7% (up 17%). India’s Sensex equities index gained 0.8% (up 17.5%). China’s Shanghai Exchange was little unchanged (unchanged). Turkey's Borsa Istanbul National 100 index rose 1.4% (up 26.5%). Russia's MICEX equities index sank 2.7% (down 15.7%).
Junk bond mutual funds saw inflows of $521 million (from Lipper).
Freddie Mac 30-year fixed mortgage rates slipped a basis point to 3.94% (up 28bps y-o-y). Fifteen-year rates were unchanged at 3.19% (up 27bps). The five-year hybrid ARM rate rose four bps to 3.11% (up 23bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down four bps to a seven-month low 4.02% (up 26bps).
Federal Reserve Credit last week declined $13.7bn to $4.421 TN. Over the past year, Fed Credit declined $0.9bn. Fed Credit inflated $1.610 TN, or 57%, over the past 238 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt declined $6.7bn last week to $3.238 TN. "Custody holdings" were up $8bn y-o-y, or 0.2%.
M2 (narrow) "money" supply last week jumped $37.7bn to a record $13.523 TN. "Narrow money" expanded $759bn, or 6.3%, over the past year. For the week, Currency increased $2.5bn. Total Checkable Deposits rose $17.7bn, and Savings Deposits gained $19.3bn. Small Time Deposits added $0.7bn. Retail Money Funds declined $2.1bn.
Total money market fund assets increased $5.0bn to $2.654 TN. Money Funds fell $80bn y-o-y (2.9%).
Total Commercial Paper gained $6.4bn to $994bn. CP declined $73bn y-o-y, or 6.8%.
Currency Watch:
The U.S. dollar index declined 0.7% to 96.72 (down 5.6% y-t-d). For the week on the upside, the New Zealand dollar increased 1.2%, the Swiss franc 1.1%, the euro 0.9%, the Japanese yen 0.8%, the Swedish krona 0.8%, the British pound 0.7%, the South African rand 0.5% and the Brazilian real 0.5%. For the week on the downside, the Mexican peso declined 0.9%, the Norwegian krone 0.5%, the Canadian dollar 0.3%, and the South Korean won 0.1%. The Chinese renminbi gained 0.67% versus the dollar this week (up 2.0% y-t-d).
Commodities Watch:
The Goldman Sachs Commodities Index dropped 2.9% (down 6.1% y-t-d). Spot Gold gained 1.0% to $1,279 (up 11%). Silver rose 1.2% to $17.53 (up 9.7%). Crude dropped $2.14 to $47.66 (down 12%). Gasoline fell 4.0% (down 6%), and Natural Gas sank 9.4% (down 20%). Copper increased 0.3% (up 3%). Wheat declined 2.0% (up 5%). Corn slipped 0.4% (up 6%).
Trump Administration Watch:
May 27 – Reuters (John Irish and Crispian Balmer): “Under pressure from Group of Seven allies, U.S. President Donald Trump backed a pledge to fight protectionism on Saturday, but refused to endorse a global climate change accord… The summit of G7 wealthy nations pitted Trump against the leaders of Germany, France, Britain, Italy, Canada and Japan on several issues, with European diplomats frustrated at having to revisit questions they had hoped were long settled. However, diplomats stressed there was broad agreement on an array of foreign policy problems, including the renewal of a threat to slap further economic sanctions on Russia if its interference in neighboring Ukraine demanded it.”
May 30 – Bloomberg (Arne Delfs and Patrick Donahue): “President Donald Trump blasted Germany anew over trade and defense, ratcheting up a dispute with Chancellor Angela Merkel that risks getting personal and undermining a trans-Atlantic bond that is the bedrock of U.S.-European relations. Trump’s comments came in an early-morning tweet… issued just as Merkel hosted Indian Prime Minister Narendra Modi in Berlin… Modi suggested that India will adhere to the Paris climate accords, while Trump makes up his mind. ‘We have a MASSIVE trade deficit with Germany, plus they pay FAR LESS than they should on NATO & military,’ the U.S. president posted on Twitter. ‘This will change.’”
May 29 – Wall Street Journal (Richard Rubin): “The boldest ideas for changing the nation’s tax code are either dead or on political life support, as the Republican effort in Congress to reshape the tax system moves much more slowly than lawmakers and their allies in business had hoped. The clear winner, so far, is the status quo. Republicans, who control both chambers, are scouring the tax code, searching for ways to offset the deep rate cuts they desire. But their proposals for border adjustment—which would tax imports—and for ending the business interest deduction and making major changes to individual tax breaks for health and retirement have all hit resistance within the party. The only big revenue-raising provision with anything close to Republican consensus is repealing the deduction for state and local taxes, and that idea faces objections from blue-state lawmakers in the party. The GOP’s dreams have collided with interest-group lobbying and the tax system’s reality.”
China Bubble Watch:
May 28 – Financial Times (Leo Lewis, Tom Mitchell and Yuan Yang): “There are few things studied as closely by the Chinese Communist party as how to avoid the fate of its Soviet counterpart. In an internal meeting after he assumed power in 2012, President Xi Jinping said no one in the Soviet Union had been ‘man enough’ to stand up to Mikhail Gorbachev and glasnost. But for Mr Xi another historical event from the same era may warrant more immediate attention. It is just over 30 years since Japan began inflating a property and stock market bubble whose implosion ravaged public confidence, cowed corporations and scarred an economy for decades. China’s priority today is to avoid that fate. It is not a new concern for Beijing. In 2010, as China’s overall indebtedness was approaching 200% of gross domestic product, Mr Xi, then the country’s vice-president, asked scholars at the Central Party School to research the subject… A subsequent paper outlined some of the lessons of the Japanese bubble, including the need for Beijing to raise awareness of financial risks, safeguard ‘economic sovereignty’ and not give in to pressure to change its currency policy. Seven years on, China’s total debt is 250% of GDP and climbing, officials are trying to rein in sky-high real estate prices and the government is still grappling with the aftermath of a stock market bubble that burst in 2015.”
May 29 – Financial Times (Don Weinland and Gabriel Wildau): “A crackdown on China’s $9.4tn shadow banking business is hitting bank share prices and rattling bond markets. The country’s new top banking regulator has already taken several shots at stemming the rapid growth of off-balance-sheet lending at banks since taking control in February. The central bank has also tightened liquidity in the financial system, sparking angst earlier this year. A flurry of rules to discourage banks from using borrowed money to invest in bonds have been issued by the regulator. The sell-off that has followed has pushed bond yields to two-year highs and even led to a rarely seen inversion of the yield curve. The moves have also dented the share prices of Chinese banks — among the world’s largest by market capitalization… ‘It’s been very clear . . . that regulators want to stamp out some of this [shadow banking] activity,’ says the Asia head of a securities unit at a global bank. ‘During that time there’s been lots of inquiries from investors and some concern on what that will look like.’”
June 1 – Financial Times (Gabriel Wildau): “China’s currency headed for its biggest two-day gain against the dollar since January on Thursday afternoon, as the central bank apparently intervened to support the renminbi amid tepid market demand for the Chinese currency. Traders said that large state-owned banks sold dollars aggressively on Wednesday and Thursday. Such concerted trading is usually viewed as a sign that these institutions are acting on behalf of the central bank to prop up demand for the renminbi. The People’s Bank of China’s currency-trading arm last week announced a change to the way it sets renminbi’s daily fix, which is intended to guide trading in the spot market. The change granted the PBoC greater flexibility to push back against what it called ‘irrational expectations’ and guide the renminbi stronger, even when market forces are pushing the other way.”
May 31 – Bloomberg: “A private gauge of Chinese manufacturing fell back into contractionary territory in May, adding to recent evidence that the economy’s strong start to 2017 is leveling off. Caixin Media and Markit Economics manufacturing purchasing managers’ index fell to 49.6 from 50.3 in April, the lowest reading since June 2016 and below the 50.1 median estimate…”
May 29 – Bloomberg (Paul Panckhurst): “Snaking queues of thousands of prospective apartment buyers in Hong Kong signaled authorities have made no progress in cooling a red-hot property market, where prices are at records. People were lining up on Friday and over the weekend at Victoria Skye, a luxury project at the former airport site of Kai Tak, and at the Ocean Pride development by Cheung Kong Property Holdings Ltd. and MTR Corp. ‘Successive moves by the government in recent memory to cool the property market only resulted in it becoming crazier,’ The Standard newspaper said in an editorial… ‘The result is a sea of madness.’”
Europe Watch:
May 30 – Bloomberg (Stefania Spezzati and Blaise Robinson): “Italian markets shuddered at the emerging prospect of early elections. Investors dumped stocks and government debt after ruling Democratic Party leader Matteo Renzi signaled the possibility of a vote in September or October, more than six months ahead of schedule. That pushed the nation’s bond-yield spread over Germany to its highest in almost four weeks today, and the benchmark FTSE MIB stock index to its biggest two-day drop in more than five weeks on Monday, led by banks.”
May 29 – Bloomberg (Alessandro Speciale): “The euro area still needs expansive monetary stimulus to restore stable inflation even as its economy accelerates, European Central Bank President Mario Draghi said. ‘We remain firmly convinced that an extraordinary amount of monetary policy support, including through our forward guidance, is still necessary,’ Draghi told lawmakers… ‘Domestic cost pressures, notably from wages, are still insufficient to support a durable and self-sustaining convergence of inflation toward our medium-term objective.’”
May 31 – Reuters (Balazs Koranyi): “With the euro zone recovery gaining strength, inflation would continue to rise even if the European Central Bank reduced stimulus, Bundesbank President Jens Weidmann said… The comments suggest that Weidmann, a long-time critic of the ECB's exceptional stimulus, considers inflation self- sustaining, one of ECB President Mario Draghi's top criteria before the policy can be removed. ‘The strengthening of the economic recovery makes it increasingly likely that the rise in inflation we have seen since August 2016 is not just a flash in the pan, but that we would have higher inflation rates compared to previous years even under a reduced degree of monetary policy accommodation,’ Weidmann said.”
May 31 – Reuters (Balazs Koranyi and Francesco Canepa): “European Central Bank policymakers are set to take a more benign view of the economy when they meet on June 8 and will even discuss dropping some of their pledges to ramp up stimulus if needed, four sources with direct knowledge of the discussions told Reuters. With economic growth clearly shifting into higher gear, rate setters are ready to acknowledge the improvement by dropping a long-standing reference to downside risks in the bank's post-meeting opening statement, calling risks largely balanced... Growth indicators have been outperforming expectations all year. But they disagree on how quickly the ECB should change its policy stance, including its guidance, with countries on the currency bloc's periphery fearing that a sharp shift in its communication could induce self-defeating market turbulence, they added. ‘After the French election the political risk is clearly down and economic indicators are by and large positive, so it's time to acknowledge this,’ said one Governing Council member…”
June 1 – Bloomberg (Piotr Skolimowski and Alessandro Speciale): “The European Central Bank is starting to debate whether to reflect the euro area’s improving economic prospects in its policy guidance, Bundesbank President Jens Weidmann said. Speaking just hours before the ECB begins its self-imposed quiet period ahead of next week’s monetary policy meeting, Weidmann said the strengthening recovery makes it increasingly likely that the rise in the inflation rate isn’t ‘just a flash in the pan.’ Inflation would still accelerate more than in the previous years even if some of the stimulus were removed, he said, adding the ECB should consider the impact of its policies on bank profitability.”
May 30 – Wall Street Journal (Tom Fairless): “A Berlin-based law professor has filed a cease-and-desist request aimed at quickly ending Germany’s involvement in bond purchases by the European Central Bank, a surprise legal move that underlines mounting German anger over the ECB’s easy-money policies. The request for a legal injunction, sent to Germany’s top court, shows the lengths to which some Germans are prepared to go to derail a €2.3 trillion ($2.57 trillion) stimulus program they accuse of subsidizing southern European governments and hurting German savers, pensioners and smaller companies.”
Brexit Watch:
May 31 – Reuters (Guy Faulconbridge and Paul Sandle): “Prime Minister Theresa May could lose control of parliament in Britain's June 8 election, according to a projection by polling company YouGov, raising the prospect of political turmoil just as formal Brexit talks begin. The YouGov model suggested May would lose 20 seats and her 17-seat working majority in the 650-seat British parliament, though other models show May winning a big majority of as much as 142 seats and a Kantar poll showed her lead widening. If the YouGov model turns out to be accurate, May would be well short of the 326 seats needed to form a government tasked with the complicated talks…”
June 1 – Reuters (Guy Faulconbridge and Kylie MacLellan): “British Prime Minister Theresa May's gamble on a snap election was under question on Thursday after a YouGov opinion poll showed her Conservative Party's lead had fallen to a fresh low of 3 percentage points just a week before voting begins. A failure to win the June 8 election with a large majority would weaken May just as formal Brexit talks are due to begin while the loss of her majority in parliament would pitch British politics into turmoil. In the strongest signal yet that the election is much closer than previously thought, May's lead has collapsed from 24 points since she surprised both rivals and financial markets on April 18 by calling the election…”
Global Bubble Watch:
May 31 – Bloomberg (Emily Cadman): “Australian house prices fell in May for the first time in 17 months, in an early sign lending restrictions are starting to damp demand. Home values in Australia’s state and territory capitals fell 1.1% last month from April… Still, prices across the combined capitals were 8.3% higher than a year ago. The monthly decline comes after regulators tightened lending curbs amid fears of a housing bubble, and the nation’s banks raised interest rates -- especially for interest-only loans which are popular with property investors seeking to take advantage of tax breaks.”
May 29 – CNBC (Arjun Kharpal): “Nearly $4 billion has been wiped off of the value of bitcoin in the past four days after a correction that has seen the cryptocurrency's price fall almost 19% from its recent record high. On May 24, bitcoin hit an all-time high of $2.791.69. But on Monday, the digital currency was trading at an intra-day high of $2,267.73, marking a more than $520 drop or 18.7% decline since the record high…”
Federal Reserve Watch:
May 31 – Reuters (Jonathan Spicer): “The Federal Reserve sent a strong signal… that it will raise interest rates this month and soon begin shedding some of its $4.5 trillion in bond holdings, despite some weak recent U.S. inflation readings. Fed Governor Jerome Powell, an influential policymaker and among the last to speak publicly before a mid-June policy meeting, said the U.S. economy was ‘healthy’ and the central bank should continue to edge toward a more normal footing after nearly a decade of crisis-era stimulus.”
May 30 – Wall Street Journal (Nick Timiraos): “Federal Reserve officials are set to raise short-term interest rates at their meeting in two weeks but could defer the following expected rate move in September if Congress roils markets by delaying action on raising the federal government’s debt ceiling. The possibility that Congress and the White House might have trouble reaching agreement in September to raise the federal debt limit and approve government funding for the year beginning Oct. 1 has surfaced as a new source of uncertainty in recent weeks. Since raising rates in March, many officials have said they probably would want to lift rates twice more, likely in June and September. After that, some officials have said they might pause rate increases to start the process of slowly shrinking the Fed’s $4.5 trillion portfolio of bonds and other assets at year-end before resuming rate increases in 2018.”
May 30 – Bloomberg (Jeanna Smialek and Matthew Boesler): “Federal Reserve Governor Lael Brainard said soft inflation could cause her to reassess the path forward for monetary policy should it linger, even as the global economic outlook brightens and U.S. growth looks poised to rebound. ‘If the soft inflation data persist, that would be concerning and, ultimately, could lead me to reassess the appropriate path of policy,’ Brainard said… She said her baseline expectation is that ‘it likely will be appropriate soon to adjust the federal funds rate’ and start shrinking the balance sheet.”
May 29 – Bloomberg (Alessandro Speciale): “Federal Reserve Bank of San Francisco President John Williams sees a ‘much smaller’ Fed balance sheet in about five years, at the end of an unwinding process that could start with a ‘baby step’ later this year. ‘How big will the balance sheet be five years from now, when this has all happened?’ Williams said… ‘That is something we haven’t decided on. It will be much smaller than today.’ Policy makers are coalescing around a plan for gradually reducing the central bank’s $4.5 trillion in assets with a predictable process aimed at minimizing market reactions.”
May 31 – Reuters (Piotr Skolimowski and Alessandro Speciale): “San Francisco Federal Reserve Bank President John C. Williams said… he sees a total of three interest rate increases for this year as his baseline scenario, but views four hikes as also being appropriate if the U.S. economy gets an unexpected boost. ‘There is potential for upside occurrences in the economy. One big question mark is if there is big fiscal stimulus or other changes in the outlook that we see the economy is doing better than we thought,’ said Williams…”
U.S. Bubble Watch:
May 29 – Financial Times (Dambisa Moyo): “Virtually every class of US debt — sovereign, corporate, unsecured household/personal, auto loans and student debt — is at record highs. Americans now owe $1tn in credit card debt, and a roughly equivalent amount of student loans and auto-loans which, like the subprime mortgage quality that set off the 2008 financial crisis, are of largely low credit quality (and therefore high risk). US companies have added $7.8tn of debt since 2010 and their ability to cover interest payments is at its weakest since 2008… With total public and private debt obligations estimated at 350% of gross domestic product, the US Congressional Budget Office has recently described the path of US debt (and deficits) as almost doubling over the next 30 years. But this is not just a US phenomenon. Globally, the picture is similarly precarious, with debt stubbornly high in Europe, rising in Asia and surging across broader emerging markets. A decade on from the beginning of the financial crisis, the world has the makings of a fresh debt crisis.”
May 30 – Bloomberg (Dani Burger): “Investment managers are doubling down on the hottest stocks of 2017 -- and it’s paying off. Funds tracked by Bank of America Corp. own the highest percentage of technology stocks on record compared to their benchmark. It’s a sector that’s carried U.S. stocks to new highs, leading the S&P 500 Index with a nearly 20% gain in 2017. And it’s giving active managers a boost they haven’t seen in more than two years.”
May 29 – Financial Times (Ben McLannahan): “Big banks are throttling back from the $1.2tn US car loan market, fearing that consumers have taken on more debt than they can handle. Lenders piled into the sector in the years after the financial crisis, as low defaults and an improving economy encouraged them to focus on a market that performed relatively well as mortgages soured. Total loans across the industry rose to $1.17tn at the end of the first quarter… up almost 70% from a trough in 2010. But data released last week by the Federal Deposit Insurance Corporation showed the first sequential drop in car loans outstanding at commercial banks in at least six years.”
May 30 – CNBC (Lauren Thomas): “U.S. home prices rose slightly less than what was anticipated for the month of March, according to new data from the S&P/Case-Shiller U.S. National Home Price Index. But the gains were enough to reach a 33-month high, climbing at the strongest rate in nearly three years. This, as inventory of homes for sale remains ‘unusually low,’ the group said. The national home price index increased 5.8% in March… Meanwhile, the widely tracked 20-city home price index rose 5.9% from a year ago in March, the most since July 2014. The latest data… shows that home prices continued their impressive rise, across the country, over the past 12 months. Home prices had hit a record in September, and the pace of growth accelerated ever since then.”
May 31 – Bloomberg (Elizabeth Campbell): “Illinois leaders will blow past a deadline that will leave the state careening toward the third straight year without a budget. The Illinois House isn’t voting on a budget on Wednesday, which means the gridlock-prone government won’t pass a spending plan by midnight. That means approving a budget -- a usually routine task that has eluded the state for 700 days -- will become even more difficult because a three-fifths majority will be required… ‘We are probably approaching that point of impaired ability to function at basic level,’ said John Humphrey, the Chicago-based head of credit research for Gurtin Municipal Bond Management…”
May 31 – Reuters (Lucia Mutikani): “Contracts to buy previously owned U.S. homes fell for a second straight month in April amid a supply squeeze, but the housing market recovery remains supported by a strong labor market. The National Association of Realtors said… its Pending Home Sales Index, based on contracts signed last month, dropped 1.3% to 109.8… Coming on the heels of recent data showing a drop in home building and sales of both new and previously owned homes, the decrease in contracts suggests a moderation in housing activity.”
Japan Watch:
May 29 – Bloomberg (Keiko Ujikane): “Japan’s jobless rate remained at the lowest in more than two decades last month, and retail sales rose from March, climbing for a fourth month. Retail sales rose 1.4% from March, and were up 3.2% compared to April last year. The unemployment rate for April was 2.8%, the same as the forecast.”
May 30 – Bloomberg (Keiko Ujikane): “Japan’s industrial output rebounded in April, hitting the highest level since 2008, as overseas demand continued to support the nation’s economic recovery. Industrial production increased 4.0% (forecast +4.2%) in April from March, when it fell 1.9%.”
May 31 – Reuters (Leika Kihara): “Bank of Japan board member Yutaka Harada said… he expected inflation to accelerate as the country's jobless rate approached 2%. ‘Inflation accelerates sharply when the jobless rate approaches 2%. Japan's jobless rate has already fallen to 2.8%. If this trend continues and the jobless rate falls further, there's no doubt prices will rise,’ Harada said…”
EM Watch:
May 29 – Bloomberg (Natasha Doff): “Investors reaping handsome returns on emerging-market currencies this year might do well to heed a warning once made by Harvard economist Jeffrey Frankel, who likened carry trading to ‘picking up pennies in front of a steam roller.’ Economic theory -- and history -- suggest the strategy of borrowing where interest rates are low to invest in high-yielding currencies is prone to the risk of a sharp reversal when too many investors pile into the trade. Strategists at Bank of America Merrill Lynch warned last week that sentiment on emerging-market currencies is already reaching ‘exuberant levels.’ Saxo Bank A/S’s chief currency strategist says now is the time to take profits. Investors from BlackRock Inc. to Man Group Plc have poured money into emerging-market currencies this year to profit from interest as high as 12% compared with rates close to zero in the U.S. and European Union. The strategy has produced an average return of 7.5% since the beginning of the year…”
Geopolitical Watch:
June 2 – Bloomberg (Jennifer A Dlouhy): “The response to President Donald Trump’s announcement he was exiting the Paris climate accord and wanted to renegotiate on his terms was immediate: The leaders of France, Germany and Italy said no. On Wall Street, corporate executives pilloried the businessman president. Goldman Sachs’ CEO tweeted for the first time, calling the move a setback for the world. Tesla Inc.’s Elon Musk and Bob Iger of Walt Disney Co. quit a White House advisory council in protest. Even the mayor of Pittsburgh -- a city Trump highlighted as a beneficiary of his decision to turn his back on the global pact -- vowed to abide by the Paris agreement. Trump’s decision leaves him more alienated than ever, isolated on the world stage and increasingly embattled at home.”
May 31 – Reuters (Guy Faulconbridge and Paul Sandle): “Prime Minister Theresa May could lose control of parliament in Britain's June 8 election, according to a projection by polling company YouGov, raising the prospect of political turmoil just as formal Brexit talks begin. The YouGov model suggested May would lose 20 seats and her 17-seat working majority in the 650-seat British parliament, though other models show May winning a big majority of as much as 142 seats and a Kantar poll showed her lead widening. If the YouGov model turns out to be accurate, May would be well short of the 326 seats needed to form a government tasked with the complicated talks…”
June 1 – Reuters (Guy Faulconbridge and Kylie MacLellan): “British Prime Minister Theresa May's gamble on a snap election was under question on Thursday after a YouGov opinion poll showed her Conservative Party's lead had fallen to a fresh low of 3 percentage points just a week before voting begins. A failure to win the June 8 election with a large majority would weaken May just as formal Brexit talks are due to begin while the loss of her majority in parliament would pitch British politics into turmoil. In the strongest signal yet that the election is much closer than previously thought, May's lead has collapsed from 24 points since she surprised both rivals and financial markets on April 18 by calling the election…”
Global Bubble Watch:
May 31 – Bloomberg (Emily Cadman): “Australian house prices fell in May for the first time in 17 months, in an early sign lending restrictions are starting to damp demand. Home values in Australia’s state and territory capitals fell 1.1% last month from April… Still, prices across the combined capitals were 8.3% higher than a year ago. The monthly decline comes after regulators tightened lending curbs amid fears of a housing bubble, and the nation’s banks raised interest rates -- especially for interest-only loans which are popular with property investors seeking to take advantage of tax breaks.”
May 29 – CNBC (Arjun Kharpal): “Nearly $4 billion has been wiped off of the value of bitcoin in the past four days after a correction that has seen the cryptocurrency's price fall almost 19% from its recent record high. On May 24, bitcoin hit an all-time high of $2.791.69. But on Monday, the digital currency was trading at an intra-day high of $2,267.73, marking a more than $520 drop or 18.7% decline since the record high…”
Federal Reserve Watch:
May 31 – Reuters (Jonathan Spicer): “The Federal Reserve sent a strong signal… that it will raise interest rates this month and soon begin shedding some of its $4.5 trillion in bond holdings, despite some weak recent U.S. inflation readings. Fed Governor Jerome Powell, an influential policymaker and among the last to speak publicly before a mid-June policy meeting, said the U.S. economy was ‘healthy’ and the central bank should continue to edge toward a more normal footing after nearly a decade of crisis-era stimulus.”
May 30 – Wall Street Journal (Nick Timiraos): “Federal Reserve officials are set to raise short-term interest rates at their meeting in two weeks but could defer the following expected rate move in September if Congress roils markets by delaying action on raising the federal government’s debt ceiling. The possibility that Congress and the White House might have trouble reaching agreement in September to raise the federal debt limit and approve government funding for the year beginning Oct. 1 has surfaced as a new source of uncertainty in recent weeks. Since raising rates in March, many officials have said they probably would want to lift rates twice more, likely in June and September. After that, some officials have said they might pause rate increases to start the process of slowly shrinking the Fed’s $4.5 trillion portfolio of bonds and other assets at year-end before resuming rate increases in 2018.”
May 30 – Bloomberg (Jeanna Smialek and Matthew Boesler): “Federal Reserve Governor Lael Brainard said soft inflation could cause her to reassess the path forward for monetary policy should it linger, even as the global economic outlook brightens and U.S. growth looks poised to rebound. ‘If the soft inflation data persist, that would be concerning and, ultimately, could lead me to reassess the appropriate path of policy,’ Brainard said… She said her baseline expectation is that ‘it likely will be appropriate soon to adjust the federal funds rate’ and start shrinking the balance sheet.”
May 29 – Bloomberg (Alessandro Speciale): “Federal Reserve Bank of San Francisco President John Williams sees a ‘much smaller’ Fed balance sheet in about five years, at the end of an unwinding process that could start with a ‘baby step’ later this year. ‘How big will the balance sheet be five years from now, when this has all happened?’ Williams said… ‘That is something we haven’t decided on. It will be much smaller than today.’ Policy makers are coalescing around a plan for gradually reducing the central bank’s $4.5 trillion in assets with a predictable process aimed at minimizing market reactions.”
May 31 – Reuters (Piotr Skolimowski and Alessandro Speciale): “San Francisco Federal Reserve Bank President John C. Williams said… he sees a total of three interest rate increases for this year as his baseline scenario, but views four hikes as also being appropriate if the U.S. economy gets an unexpected boost. ‘There is potential for upside occurrences in the economy. One big question mark is if there is big fiscal stimulus or other changes in the outlook that we see the economy is doing better than we thought,’ said Williams…”
U.S. Bubble Watch:
May 29 – Financial Times (Dambisa Moyo): “Virtually every class of US debt — sovereign, corporate, unsecured household/personal, auto loans and student debt — is at record highs. Americans now owe $1tn in credit card debt, and a roughly equivalent amount of student loans and auto-loans which, like the subprime mortgage quality that set off the 2008 financial crisis, are of largely low credit quality (and therefore high risk). US companies have added $7.8tn of debt since 2010 and their ability to cover interest payments is at its weakest since 2008… With total public and private debt obligations estimated at 350% of gross domestic product, the US Congressional Budget Office has recently described the path of US debt (and deficits) as almost doubling over the next 30 years. But this is not just a US phenomenon. Globally, the picture is similarly precarious, with debt stubbornly high in Europe, rising in Asia and surging across broader emerging markets. A decade on from the beginning of the financial crisis, the world has the makings of a fresh debt crisis.”
May 30 – Bloomberg (Dani Burger): “Investment managers are doubling down on the hottest stocks of 2017 -- and it’s paying off. Funds tracked by Bank of America Corp. own the highest percentage of technology stocks on record compared to their benchmark. It’s a sector that’s carried U.S. stocks to new highs, leading the S&P 500 Index with a nearly 20% gain in 2017. And it’s giving active managers a boost they haven’t seen in more than two years.”
May 29 – Financial Times (Ben McLannahan): “Big banks are throttling back from the $1.2tn US car loan market, fearing that consumers have taken on more debt than they can handle. Lenders piled into the sector in the years after the financial crisis, as low defaults and an improving economy encouraged them to focus on a market that performed relatively well as mortgages soured. Total loans across the industry rose to $1.17tn at the end of the first quarter… up almost 70% from a trough in 2010. But data released last week by the Federal Deposit Insurance Corporation showed the first sequential drop in car loans outstanding at commercial banks in at least six years.”
May 30 – CNBC (Lauren Thomas): “U.S. home prices rose slightly less than what was anticipated for the month of March, according to new data from the S&P/Case-Shiller U.S. National Home Price Index. But the gains were enough to reach a 33-month high, climbing at the strongest rate in nearly three years. This, as inventory of homes for sale remains ‘unusually low,’ the group said. The national home price index increased 5.8% in March… Meanwhile, the widely tracked 20-city home price index rose 5.9% from a year ago in March, the most since July 2014. The latest data… shows that home prices continued their impressive rise, across the country, over the past 12 months. Home prices had hit a record in September, and the pace of growth accelerated ever since then.”
May 31 – Bloomberg (Elizabeth Campbell): “Illinois leaders will blow past a deadline that will leave the state careening toward the third straight year without a budget. The Illinois House isn’t voting on a budget on Wednesday, which means the gridlock-prone government won’t pass a spending plan by midnight. That means approving a budget -- a usually routine task that has eluded the state for 700 days -- will become even more difficult because a three-fifths majority will be required… ‘We are probably approaching that point of impaired ability to function at basic level,’ said John Humphrey, the Chicago-based head of credit research for Gurtin Municipal Bond Management…”
May 31 – Reuters (Lucia Mutikani): “Contracts to buy previously owned U.S. homes fell for a second straight month in April amid a supply squeeze, but the housing market recovery remains supported by a strong labor market. The National Association of Realtors said… its Pending Home Sales Index, based on contracts signed last month, dropped 1.3% to 109.8… Coming on the heels of recent data showing a drop in home building and sales of both new and previously owned homes, the decrease in contracts suggests a moderation in housing activity.”
Japan Watch:
May 29 – Bloomberg (Keiko Ujikane): “Japan’s jobless rate remained at the lowest in more than two decades last month, and retail sales rose from March, climbing for a fourth month. Retail sales rose 1.4% from March, and were up 3.2% compared to April last year. The unemployment rate for April was 2.8%, the same as the forecast.”
May 30 – Bloomberg (Keiko Ujikane): “Japan’s industrial output rebounded in April, hitting the highest level since 2008, as overseas demand continued to support the nation’s economic recovery. Industrial production increased 4.0% (forecast +4.2%) in April from March, when it fell 1.9%.”
May 31 – Reuters (Leika Kihara): “Bank of Japan board member Yutaka Harada said… he expected inflation to accelerate as the country's jobless rate approached 2%. ‘Inflation accelerates sharply when the jobless rate approaches 2%. Japan's jobless rate has already fallen to 2.8%. If this trend continues and the jobless rate falls further, there's no doubt prices will rise,’ Harada said…”
EM Watch:
May 29 – Bloomberg (Natasha Doff): “Investors reaping handsome returns on emerging-market currencies this year might do well to heed a warning once made by Harvard economist Jeffrey Frankel, who likened carry trading to ‘picking up pennies in front of a steam roller.’ Economic theory -- and history -- suggest the strategy of borrowing where interest rates are low to invest in high-yielding currencies is prone to the risk of a sharp reversal when too many investors pile into the trade. Strategists at Bank of America Merrill Lynch warned last week that sentiment on emerging-market currencies is already reaching ‘exuberant levels.’ Saxo Bank A/S’s chief currency strategist says now is the time to take profits. Investors from BlackRock Inc. to Man Group Plc have poured money into emerging-market currencies this year to profit from interest as high as 12% compared with rates close to zero in the U.S. and European Union. The strategy has produced an average return of 7.5% since the beginning of the year…”
Geopolitical Watch:
June 2 – Bloomberg (Jennifer A Dlouhy): “The response to President Donald Trump’s announcement he was exiting the Paris climate accord and wanted to renegotiate on his terms was immediate: The leaders of France, Germany and Italy said no. On Wall Street, corporate executives pilloried the businessman president. Goldman Sachs’ CEO tweeted for the first time, calling the move a setback for the world. Tesla Inc.’s Elon Musk and Bob Iger of Walt Disney Co. quit a White House advisory council in protest. Even the mayor of Pittsburgh -- a city Trump highlighted as a beneficiary of his decision to turn his back on the global pact -- vowed to abide by the Paris agreement. Trump’s decision leaves him more alienated than ever, isolated on the world stage and increasingly embattled at home.”
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