[Bloomberg] Stocks Tumble in Biggest Weekly Decline Since 2016: Markets Wrap
[Reuters] China warns US it will defend own trade interests
[CNBC] Top economists and business leaders weigh in on the risks of a US-China trade war
[CNBC] Conservatives rip Trump for signing massive spending bill that ignores many of their priorities
[Bloomberg] San Francisco Fed's Williams Is N.Y. Fed Frontrunner, WSJ Says
[NYT] For the U.S. and China, a Technology Cold War That’s Freezing Over
[FT] Trade war risk dominates investors’ radar screens
Saturday, March 24, 2018
Friday, March 23, 2018
Weekly Commentary: Regime Change
Deutsche Bank (DB) dropped 13% this week to a 15-month low. DB is now down 28% y-t-d. European banks (STOXX) sank 5.0% this week. Hong Kong (Hang Seng) Financials were down 4.9%. Japan's TOPIX Bank index fell 3.3%. In the U.S., banks (BKX) were slammed 8.0%, the "worst loss in two years." The Broker/Dealers (XLF) fell 7.3%.
It was also an active week in Washington. The Powell Federal Reserve raised short-term interest rates, and the new Chairman completed his first news conference. President Trump announced trade sanctions against China. There was more shuffling within the administration, including John Bolton replacing National Security Advisor H.R. McMaster.
Let's start with the FOMC meeting. Analysts - along with the markets - were somewhat split between "hawkish" and "dovish." As expected, the Fed boosted short rates 25 bps. On the dovish side, the Fed's "dot plot" showed a median expectation of three rate increases in 2018 versus pre-meeting average market expectations of 3.5 - and fears of four hikes. The Fed upgraded its view of GDP prospects and lowered its forecast of the expected unemployment rate. Steady as she blows for normalization - markets not so much.
Chairman Powell did nothing overtly to rattle the markets. The message, at least for the near-term, was continuity. He was clear and concise. There were, however, important subtleties.
A couple of headlines worth noting: From the Financial Times: "Jay Powell Plays it Safe in Federal Reserve Debut." From Bloomberg, "Powell Disses Dots Again as He Stresses Limit of Fed's Knowledge" and "Powell Debuts as Show-Me Fed Chair in Shift From Theory, Models."
Jerome Powell faces an extraordinary challenge as Fed Chairman. If he does not move quickly and aggressively to flood the global financial system with liquidity upon the onset of financial crisis, history books will surely have him tarred and feathered. Greenspan, Bernanke and Yellen hold responsibility for history's greatest Bubble. Yet it will be on Powell's watch when the Fed faces the harsh consequences. In the end, he'll be left with little alternative than more QE and zero rates - surely deemed too little too late in hindsight. Winless.
I've been impressed with our new Fed Chairman. For the first time in (at least) a couple decades, I can listen intently to the head of the Federal Reserve (testimony and press conferences) without that recurring urge to roll my eyes. I feel respectful.
Alan Greenspan was the master of obfuscation. His conversations seemed guided by some game theory, and I was too often left pondering what went unsaid - and why. Greenspan's ego, free-market ideology and personal ambitions over time fostered an overly-powerful cult status. With direction from an intellectual advocate, market pricing mechanisms can be all the more awe-inspiring. The wonder of bolstering securities markets with a few enlightened words or, when necessary, 25 bps. No unelected individual should ever assume such power. And when a central banker is idolized in real time, he's surely too accommodative. As financial innovation quickened and Bubble Dynamics took hold, Greenspan became incapable of correcting - or even admitting - mistakes.
Ben Bernanke had his own issues. Dr. Bernanke's formidable biases revolved around his academic research and unconventional theories. His limited experience with the markets only heightened the insecurities facing anyone replacing "The Maestro." Bernanke had spent much of his academic career fashioning his theory that the Fed's failure to print money after the 1929 crash was the prevailing cause of the Great Depression. A seemingly modest man had become convinced he'd unearthed the "Holy Grail of Economics". He promised Milton Friedman on his 90th birthday that the Fed had learned from its catastrophic mistake and wouldn't allow it to happen again. The opportunity presented itself early in his term as chairman, and Bernanke unleashed history's greatest monetary experiment. His radical reflationary doctrine captivated - and then changed - the world.
The Wall Street Journal's Jon Hilzenrath once referred to Bernanke as a "gun slinger." This monetary cowboy was incapable of unbiased analysis and decision-making. As his inflationary experiment mutated beyond short-term crisis management measures, Bernanke increasingly dug in his heels. In the throes of untested monetary doctrine, he turned defensive and "100% certain" of too many things.
For traders, it's seeing a losing short-term trade morph into a long-term "investment." With everything invested in his runaway global experiment, Dr. Bernanke lost touch with reality - not to mention monetary conventions. He turned hostage to the financial markets, somehow promising that he would not tolerate any tightening of financial conditions - let alone a bear market, recession or crisis. What unfolded was a complete breakdown of responsible central banking.
Chair Yellen followed too comfortably in Dr. Bernanke's footsteps. The unassuming market darling that wouldn't dare do anything that might rock the boat; another seasoned academic with a theoretical framework that essentially posed no risk to raging market Bubbles. Gratified that unemployment was declining as core consumer inflation stayed below target, she discerned nothing problematic unfolding in the markets or economy that might risk future crisis. In the final analysis, it was a four-year term notable for a complete failure to tighten financial conditions when the backdrop beckoned for significant tightening measures. No "gun slinger", but a competent and pleasant enabler of vicious "Terminal Phase" Bubble excess.
This history rehash is to emphasize the stark contrast between Chairman Powell and his predecessors. He's from a completely different mold. For the first time in decades, the Fed Chairman is not beholden to ideology, academic theory nor activist monetary doctrine. This allows straightforward answers to questions. No obfuscation necessary - no extoling nor canonizing. Academic dogma need not eclipse studious observation and common sense. Powell respects the institution. And I believe his leadership will promote a soberer perspective, clearer analysis and sounder policy from our central bank.
While pundits underscore "continuity," the markets must contemplate what this means for the Greenspan/Bernanke/Yellen "market put". Of course, the Powell Fed's support will be there in the event of crisis. But the timing: how much time - and market value - will pass before central banks come to the rescue? Does Powell appreciate how previous Fed policies nurtured dangerous securities market excess? Would the Chairman prefer to return to more traditional central bank management - hesitant to resort to QE, rate cuts and other tools of market intervention? Would he rather let markets deal with volatility without members of the Fed jumping to render vocal support?
The implied government guarantee of GSE obligations was a root cause of the mortgage finance Bubble. Washington was content to let the markets operate as if the Fed and Treasury would always be there with a backstop. For years now, there has been an implied guarantee that global central bankers would freely offer liquidity backstops to financial markets. Markets inflated, which implicitly increased the scope of this implied guarantee. Meanwhile, responsible central bankers, more appreciative of mounting risks, should be compelled against further emboldening Bubble markets. Implicit guarantees must be reined in.
I believe Chairman Powell understands the dangerous role the "Fed put" has played over the years. His bias would be to wean the markets off central bank liquidity, excessively low interest rates and aggressive "activist" market intervention. Markets would be healthier standing on their own - to reacquaint themselves with risk and prudence.
In Wednesday's press conference, Chairman Powell was notable for downplaying the "dot plots" and underscoring the limitations of Fed forecasts. It was subtle, but my thoughts drifted back to ECB President Trichet's "We do not pre-commit." The Fed Chairman was cautious and adept, as he commenced the process of dialing back market expectations for certainty, accommodation and unconditional support from our central bank. Fixated on continuity, markets have thus far been unable to focus on Regime Change. Policy doctrine is changing, creating major uncertainty for a marketplace increasingly coming to terms with myriad mounting risks.
March 21 - Bloomberg (Alex Harris and Liz McCormick): "From Riyadh to Sydney, short-term funding markets worldwide are starting to feel the effects of soaring U.S. dollar Libor rates. The surge in recent weeks in this key global short-term financing indicator may have a mostly technical explanation, meaning it's probably not flashing warning signals like it was during the credit crunch or the European sovereign debt crisis. Nonetheless, it's still making funding more costly for some borrowers outside the U.S. The three-month London interbank funding rate rose to 2.27% Wednesday, the highest since 2008. The concern is that the Libor blowout may have more room to run, a prospect that borrowers and policy makers in various markets are just beginning to grapple with."
The Libor/OIS interbank Credit spread widened further this week, indicative of tightening liquidity conditions. It's my view that risk premiums are now generally rising partially on concerns for the Fed and global central bank liquidity backstops. For years, the implied central bank market backstop worked to depress the cost of all varieties of market "insurance" - from the VIX in U.S. equities, to hedging costs in global equities, corporate Credit, sovereign debt and, last but certainly not least, the currencies. The scope of Bubbles has inflated tremendously, while confidence in the future efficacy of central bank support measures has just begun to wane. The cost of market protection is now rising rapidly, with profound ramifications for myriad interrelated global Bubbles.
March 23 - Bloomberg (Molly Smith and Austin Weinstein): "U.S. companies are finding that the flow from the foreign-money spigot is slowing. Foreigners showed signs of being net sellers of U.S. investment-grade corporate debt this week, according to Bank of America… Any selling pressure comes after international investors bought just $38 billion of U.S. investment-grade corporate debt in the fourth quarter, according to UBS…, the least since the beginning of 2016… Overseas money managers are a key pillar for the market, having bought more than $1.4 trillion of the securities since 2013, UBS said. With the dollar extending losses after plunging last year and hedging costs near decade-highs by one measure, overseas investors have fewer reasons to buy… The securities are on track for their worst first quarter since 1994… For many foreign investors, rising hedging costs are eating into or erasing the extra yield to be earned from a U.S. corporate bond. European investors must sacrifice around 2.7 percentage points in annual yield to hedge using rolling three-month forwards for a year when buying in U.S. dollars and hedging back to euros, data compiled by Bloomberg show. The Japanese have to forfeit about 2.4 percentage points when hedging back to yen, around the highest level since 2008… 'The math just doesn't work anymore,' said Josh Lohmeier, head of U.S. investment-grade credit at Aviva Investors… 'It's driving away foreign investors that hedge.'"
The rising cost of hedging, widening Credit spreads, waning demand for corporate Credit and abating general market liquidity now pose a major challenge for vulnerable global markets. No longer will it be so easy to dismiss risk. And with various risks now coming into clearer view on a daily basis, markets must confront the harsh reality of significantly higher hedging costs across the spectrum of risk markets.
The Washington spectacle has finally become a major market issue. Tariffs and trade wars do matter, at this point more from a financial standpoint than economic. Members of the Trump cabinet matter. The composition of Trump's foreign policy team matters. The nature and strategies of his advisors and attorneys matter. The mid-terms will matter, perhaps profoundly. It is said that the President is becoming more comfortable in the job - and ready to call the shots. Markets are increasingly uncomfortable.
With fragilities surfacing, global markets have turned increasingly vulnerable. The threat of foreign selling of U.S. Treasuries, corporate debt, equities and dollar balances is now real and consequential - just as liquidity becomes a festering issue. The stock market is sliding - prices along with its standing on the President's priority list.
Initially spooked by steel and aluminum trade tariffs, markets were relieved by prospects they'd be watered down. Markets had remained surprisingly relaxed at the prospect of tariffs and trade measures directed at China. Suddenly, markets are spooked at the thought that the President's issue with China might go way beyond U.S. trade deficits and manufacturing jobs. Is the unspoken objective to rein in China's global superpower ambitions?
March 23 - Financial Times (Shawn Donnan): "Viewed from the standpoint of big business and classical economics, Donald Trump's increasingly protectionist trade policy has looked like a collection of impetuous acts of economic self-harm in recent weeks. But is there political method in the economic madness? Ordering new tariffs on up to $60bn in Chinese imports on Thursday, Mr Trump declared that his administration was out to punish Beijing for its systematic theft of American intellectual property and reverse the loss of US factory jobs. 'We're doing things for this country that should have been done for many, many years,' he declared. The president then added: 'It's probably one of the reasons I was elected; maybe one of the main reasons.' … 'I don't agree with President Trump on a whole lot, but today I want to give him a big pat on the back. He is doing the right thing when it comes to China,' said Chuck Schumer, a long-time China hawk who leads the minority Democrats in the Senate."
March 22 - New York Times (Carlos Tejada): "Arranged marriages. Whispered warnings. Outright theft. For years, American companies have complained that the Chinese government finds ways to get them to hand over their most valuable trade secrets. Those companies - which usually complain anonymously, fearing Chinese retribution - have found a sympathetic ear in the Trump administration. American trade officials on Thursday cited those practices as a major motivation for their plans to levy tariffs and penalties on $60 billion in Chinese imports and to take a tougher stance on the vast and lucrative trade relationship between the two countries. The report outlines in blunt terms how intellectual property - everything from product designs and sensitive data to general know-how - has become a point of contention in global trade relations, joining longstanding areas of dispute like steel."
March 20 - Financial Times (Charles Clover, Lucy Hornby, Sherry Fei Ju and Xinning Liu): "Xi Jinping has promised that China will 'ride the mighty east wind of the new era' and 'charge forward with a full tank', in a patriotic speech that parted decisively with the previous era of caution in Beijing's foreign relations. The president's nationalistic message came in closing remarks to the National People's Congress, the rubber stamp legislature, which this month confirmed changes to the constitution that would allow Mr Xi to rule for life. He used the occasion to outline his vision for China's peaceful 'rejuvenation' as a world power, but also to warn against foreign plots. 'All acts and tricks to split China are doomed to failure and will be condemned by the people and punished by history,' he said, alluding to Beijing's longstanding goal of taking back the breakaway territory of Taiwan."
Beijing has been getting prepared. For what, is an open question. China's initial response to Trump Tariffs has been restrained. Like many of us, they're surely working to comprehend what he's really up to. The President has rather hastily assembled a hawkish foreign policy team. To be sure, Beijing will not stick to modest measures if they suspect Trump's Chinese ambitions go beyond measured trade adjustments. They have big levers to pull: Treasuries, U.S. securities, Taiwan, and currency devaluation, to name a few. Beijing has taken measures to exert significant control over China's markets and economy. I'll assume Beijing believes China is better prepared to manage through global market turbulence than their adversary.
It was also an active week in Washington. The Powell Federal Reserve raised short-term interest rates, and the new Chairman completed his first news conference. President Trump announced trade sanctions against China. There was more shuffling within the administration, including John Bolton replacing National Security Advisor H.R. McMaster.
Let's start with the FOMC meeting. Analysts - along with the markets - were somewhat split between "hawkish" and "dovish." As expected, the Fed boosted short rates 25 bps. On the dovish side, the Fed's "dot plot" showed a median expectation of three rate increases in 2018 versus pre-meeting average market expectations of 3.5 - and fears of four hikes. The Fed upgraded its view of GDP prospects and lowered its forecast of the expected unemployment rate. Steady as she blows for normalization - markets not so much.
Chairman Powell did nothing overtly to rattle the markets. The message, at least for the near-term, was continuity. He was clear and concise. There were, however, important subtleties.
A couple of headlines worth noting: From the Financial Times: "Jay Powell Plays it Safe in Federal Reserve Debut." From Bloomberg, "Powell Disses Dots Again as He Stresses Limit of Fed's Knowledge" and "Powell Debuts as Show-Me Fed Chair in Shift From Theory, Models."
Jerome Powell faces an extraordinary challenge as Fed Chairman. If he does not move quickly and aggressively to flood the global financial system with liquidity upon the onset of financial crisis, history books will surely have him tarred and feathered. Greenspan, Bernanke and Yellen hold responsibility for history's greatest Bubble. Yet it will be on Powell's watch when the Fed faces the harsh consequences. In the end, he'll be left with little alternative than more QE and zero rates - surely deemed too little too late in hindsight. Winless.
I've been impressed with our new Fed Chairman. For the first time in (at least) a couple decades, I can listen intently to the head of the Federal Reserve (testimony and press conferences) without that recurring urge to roll my eyes. I feel respectful.
Alan Greenspan was the master of obfuscation. His conversations seemed guided by some game theory, and I was too often left pondering what went unsaid - and why. Greenspan's ego, free-market ideology and personal ambitions over time fostered an overly-powerful cult status. With direction from an intellectual advocate, market pricing mechanisms can be all the more awe-inspiring. The wonder of bolstering securities markets with a few enlightened words or, when necessary, 25 bps. No unelected individual should ever assume such power. And when a central banker is idolized in real time, he's surely too accommodative. As financial innovation quickened and Bubble Dynamics took hold, Greenspan became incapable of correcting - or even admitting - mistakes.
Ben Bernanke had his own issues. Dr. Bernanke's formidable biases revolved around his academic research and unconventional theories. His limited experience with the markets only heightened the insecurities facing anyone replacing "The Maestro." Bernanke had spent much of his academic career fashioning his theory that the Fed's failure to print money after the 1929 crash was the prevailing cause of the Great Depression. A seemingly modest man had become convinced he'd unearthed the "Holy Grail of Economics". He promised Milton Friedman on his 90th birthday that the Fed had learned from its catastrophic mistake and wouldn't allow it to happen again. The opportunity presented itself early in his term as chairman, and Bernanke unleashed history's greatest monetary experiment. His radical reflationary doctrine captivated - and then changed - the world.
The Wall Street Journal's Jon Hilzenrath once referred to Bernanke as a "gun slinger." This monetary cowboy was incapable of unbiased analysis and decision-making. As his inflationary experiment mutated beyond short-term crisis management measures, Bernanke increasingly dug in his heels. In the throes of untested monetary doctrine, he turned defensive and "100% certain" of too many things.
For traders, it's seeing a losing short-term trade morph into a long-term "investment." With everything invested in his runaway global experiment, Dr. Bernanke lost touch with reality - not to mention monetary conventions. He turned hostage to the financial markets, somehow promising that he would not tolerate any tightening of financial conditions - let alone a bear market, recession or crisis. What unfolded was a complete breakdown of responsible central banking.
Chair Yellen followed too comfortably in Dr. Bernanke's footsteps. The unassuming market darling that wouldn't dare do anything that might rock the boat; another seasoned academic with a theoretical framework that essentially posed no risk to raging market Bubbles. Gratified that unemployment was declining as core consumer inflation stayed below target, she discerned nothing problematic unfolding in the markets or economy that might risk future crisis. In the final analysis, it was a four-year term notable for a complete failure to tighten financial conditions when the backdrop beckoned for significant tightening measures. No "gun slinger", but a competent and pleasant enabler of vicious "Terminal Phase" Bubble excess.
This history rehash is to emphasize the stark contrast between Chairman Powell and his predecessors. He's from a completely different mold. For the first time in decades, the Fed Chairman is not beholden to ideology, academic theory nor activist monetary doctrine. This allows straightforward answers to questions. No obfuscation necessary - no extoling nor canonizing. Academic dogma need not eclipse studious observation and common sense. Powell respects the institution. And I believe his leadership will promote a soberer perspective, clearer analysis and sounder policy from our central bank.
While pundits underscore "continuity," the markets must contemplate what this means for the Greenspan/Bernanke/Yellen "market put". Of course, the Powell Fed's support will be there in the event of crisis. But the timing: how much time - and market value - will pass before central banks come to the rescue? Does Powell appreciate how previous Fed policies nurtured dangerous securities market excess? Would the Chairman prefer to return to more traditional central bank management - hesitant to resort to QE, rate cuts and other tools of market intervention? Would he rather let markets deal with volatility without members of the Fed jumping to render vocal support?
The implied government guarantee of GSE obligations was a root cause of the mortgage finance Bubble. Washington was content to let the markets operate as if the Fed and Treasury would always be there with a backstop. For years now, there has been an implied guarantee that global central bankers would freely offer liquidity backstops to financial markets. Markets inflated, which implicitly increased the scope of this implied guarantee. Meanwhile, responsible central bankers, more appreciative of mounting risks, should be compelled against further emboldening Bubble markets. Implicit guarantees must be reined in.
I believe Chairman Powell understands the dangerous role the "Fed put" has played over the years. His bias would be to wean the markets off central bank liquidity, excessively low interest rates and aggressive "activist" market intervention. Markets would be healthier standing on their own - to reacquaint themselves with risk and prudence.
In Wednesday's press conference, Chairman Powell was notable for downplaying the "dot plots" and underscoring the limitations of Fed forecasts. It was subtle, but my thoughts drifted back to ECB President Trichet's "We do not pre-commit." The Fed Chairman was cautious and adept, as he commenced the process of dialing back market expectations for certainty, accommodation and unconditional support from our central bank. Fixated on continuity, markets have thus far been unable to focus on Regime Change. Policy doctrine is changing, creating major uncertainty for a marketplace increasingly coming to terms with myriad mounting risks.
March 21 - Bloomberg (Alex Harris and Liz McCormick): "From Riyadh to Sydney, short-term funding markets worldwide are starting to feel the effects of soaring U.S. dollar Libor rates. The surge in recent weeks in this key global short-term financing indicator may have a mostly technical explanation, meaning it's probably not flashing warning signals like it was during the credit crunch or the European sovereign debt crisis. Nonetheless, it's still making funding more costly for some borrowers outside the U.S. The three-month London interbank funding rate rose to 2.27% Wednesday, the highest since 2008. The concern is that the Libor blowout may have more room to run, a prospect that borrowers and policy makers in various markets are just beginning to grapple with."
The Libor/OIS interbank Credit spread widened further this week, indicative of tightening liquidity conditions. It's my view that risk premiums are now generally rising partially on concerns for the Fed and global central bank liquidity backstops. For years, the implied central bank market backstop worked to depress the cost of all varieties of market "insurance" - from the VIX in U.S. equities, to hedging costs in global equities, corporate Credit, sovereign debt and, last but certainly not least, the currencies. The scope of Bubbles has inflated tremendously, while confidence in the future efficacy of central bank support measures has just begun to wane. The cost of market protection is now rising rapidly, with profound ramifications for myriad interrelated global Bubbles.
March 23 - Bloomberg (Molly Smith and Austin Weinstein): "U.S. companies are finding that the flow from the foreign-money spigot is slowing. Foreigners showed signs of being net sellers of U.S. investment-grade corporate debt this week, according to Bank of America… Any selling pressure comes after international investors bought just $38 billion of U.S. investment-grade corporate debt in the fourth quarter, according to UBS…, the least since the beginning of 2016… Overseas money managers are a key pillar for the market, having bought more than $1.4 trillion of the securities since 2013, UBS said. With the dollar extending losses after plunging last year and hedging costs near decade-highs by one measure, overseas investors have fewer reasons to buy… The securities are on track for their worst first quarter since 1994… For many foreign investors, rising hedging costs are eating into or erasing the extra yield to be earned from a U.S. corporate bond. European investors must sacrifice around 2.7 percentage points in annual yield to hedge using rolling three-month forwards for a year when buying in U.S. dollars and hedging back to euros, data compiled by Bloomberg show. The Japanese have to forfeit about 2.4 percentage points when hedging back to yen, around the highest level since 2008… 'The math just doesn't work anymore,' said Josh Lohmeier, head of U.S. investment-grade credit at Aviva Investors… 'It's driving away foreign investors that hedge.'"
The rising cost of hedging, widening Credit spreads, waning demand for corporate Credit and abating general market liquidity now pose a major challenge for vulnerable global markets. No longer will it be so easy to dismiss risk. And with various risks now coming into clearer view on a daily basis, markets must confront the harsh reality of significantly higher hedging costs across the spectrum of risk markets.
The Washington spectacle has finally become a major market issue. Tariffs and trade wars do matter, at this point more from a financial standpoint than economic. Members of the Trump cabinet matter. The composition of Trump's foreign policy team matters. The nature and strategies of his advisors and attorneys matter. The mid-terms will matter, perhaps profoundly. It is said that the President is becoming more comfortable in the job - and ready to call the shots. Markets are increasingly uncomfortable.
With fragilities surfacing, global markets have turned increasingly vulnerable. The threat of foreign selling of U.S. Treasuries, corporate debt, equities and dollar balances is now real and consequential - just as liquidity becomes a festering issue. The stock market is sliding - prices along with its standing on the President's priority list.
Initially spooked by steel and aluminum trade tariffs, markets were relieved by prospects they'd be watered down. Markets had remained surprisingly relaxed at the prospect of tariffs and trade measures directed at China. Suddenly, markets are spooked at the thought that the President's issue with China might go way beyond U.S. trade deficits and manufacturing jobs. Is the unspoken objective to rein in China's global superpower ambitions?
March 23 - Financial Times (Shawn Donnan): "Viewed from the standpoint of big business and classical economics, Donald Trump's increasingly protectionist trade policy has looked like a collection of impetuous acts of economic self-harm in recent weeks. But is there political method in the economic madness? Ordering new tariffs on up to $60bn in Chinese imports on Thursday, Mr Trump declared that his administration was out to punish Beijing for its systematic theft of American intellectual property and reverse the loss of US factory jobs. 'We're doing things for this country that should have been done for many, many years,' he declared. The president then added: 'It's probably one of the reasons I was elected; maybe one of the main reasons.' … 'I don't agree with President Trump on a whole lot, but today I want to give him a big pat on the back. He is doing the right thing when it comes to China,' said Chuck Schumer, a long-time China hawk who leads the minority Democrats in the Senate."
March 22 - New York Times (Carlos Tejada): "Arranged marriages. Whispered warnings. Outright theft. For years, American companies have complained that the Chinese government finds ways to get them to hand over their most valuable trade secrets. Those companies - which usually complain anonymously, fearing Chinese retribution - have found a sympathetic ear in the Trump administration. American trade officials on Thursday cited those practices as a major motivation for their plans to levy tariffs and penalties on $60 billion in Chinese imports and to take a tougher stance on the vast and lucrative trade relationship between the two countries. The report outlines in blunt terms how intellectual property - everything from product designs and sensitive data to general know-how - has become a point of contention in global trade relations, joining longstanding areas of dispute like steel."
March 20 - Financial Times (Charles Clover, Lucy Hornby, Sherry Fei Ju and Xinning Liu): "Xi Jinping has promised that China will 'ride the mighty east wind of the new era' and 'charge forward with a full tank', in a patriotic speech that parted decisively with the previous era of caution in Beijing's foreign relations. The president's nationalistic message came in closing remarks to the National People's Congress, the rubber stamp legislature, which this month confirmed changes to the constitution that would allow Mr Xi to rule for life. He used the occasion to outline his vision for China's peaceful 'rejuvenation' as a world power, but also to warn against foreign plots. 'All acts and tricks to split China are doomed to failure and will be condemned by the people and punished by history,' he said, alluding to Beijing's longstanding goal of taking back the breakaway territory of Taiwan."
Beijing has been getting prepared. For what, is an open question. China's initial response to Trump Tariffs has been restrained. Like many of us, they're surely working to comprehend what he's really up to. The President has rather hastily assembled a hawkish foreign policy team. To be sure, Beijing will not stick to modest measures if they suspect Trump's Chinese ambitions go beyond measured trade adjustments. They have big levers to pull: Treasuries, U.S. securities, Taiwan, and currency devaluation, to name a few. Beijing has taken measures to exert significant control over China's markets and economy. I'll assume Beijing believes China is better prepared to manage through global market turbulence than their adversary.
There's a general complacency deeply embedded in U.S. financial markets. No toxic securities Bubble at the brink. There is no Lehman vulnerable to a run and swift collapse. Interestingly, however, from the global financial markets Bubble perspective, there is Deutsche Bank and its double-digit stock decline this week. It seems to be the first place global players look when risk begins to be an issue, financial conditions start to tighten and risk premiums escalate. DB operates, after all, in the core of global derivatives markets and securities finance.
Derivatives lurk at the epicenter of global financial crisis risk. It's right here where global central bank policies have fomented the greatest distortions and associated fragilities: The perception - the implied guarantees - of liquid and continuous markets. And when DB's stock is sinking (down 13%) and its CDS is blowing out (33bps this week!), then the issue of counterparty risk and derivative market dislocation begins to creep into market psychology (and positioning).
Greed to Fear. "Risk On" shifting to "Risk Off." This week had the feel of de-risking/de-leveraging dynamics gathering important momentum. This was no VIX (24.87 close) accident. It was a general widening of Credit spreads, waning liquidity and overall market instability. Dollar weakness reemerged this week, which sparked a nice safe haven bid in gold and the precious metals. Crude surged. Curiously, it also awakened a bit of safe haven buying for Treasuries (pushing corporate Credit spreads wider).
I couldn't help but to ponder the possibility that the rising cost of hedging dollar risk is a game changer for U.S. corporate debt. There's a huge amount of leverage there, along with big foreign ownership. It's certainly not a strong position for instigating tariffs and risking trade wars. It's instead a backdrop increasingly susceptible to panic selling, liquidity shocks and derivative issues.
Derivatives lurk at the epicenter of global financial crisis risk. It's right here where global central bank policies have fomented the greatest distortions and associated fragilities: The perception - the implied guarantees - of liquid and continuous markets. And when DB's stock is sinking (down 13%) and its CDS is blowing out (33bps this week!), then the issue of counterparty risk and derivative market dislocation begins to creep into market psychology (and positioning).
Greed to Fear. "Risk On" shifting to "Risk Off." This week had the feel of de-risking/de-leveraging dynamics gathering important momentum. This was no VIX (24.87 close) accident. It was a general widening of Credit spreads, waning liquidity and overall market instability. Dollar weakness reemerged this week, which sparked a nice safe haven bid in gold and the precious metals. Crude surged. Curiously, it also awakened a bit of safe haven buying for Treasuries (pushing corporate Credit spreads wider).
I couldn't help but to ponder the possibility that the rising cost of hedging dollar risk is a game changer for U.S. corporate debt. There's a huge amount of leverage there, along with big foreign ownership. It's certainly not a strong position for instigating tariffs and risking trade wars. It's instead a backdrop increasingly susceptible to panic selling, liquidity shocks and derivative issues.
For the Week:
The S&P500 sank 6.0% (down 3.2% y-t-d), and the Dow fell 5.7% (up 4.8%). The Utilities declined 2.0% (down 7.2%). The Banks sank 8.0% (down 2.6%), and the Broker/Dealers lost 7.3% (up 3.8%). The Transports fell 4.9% (down 4.2%). The S&P 400 Midcaps dropped 5.3% (down 3.2%), and the small cap Russell 2000 declined 4.8% (down 1.7%). The Nasdaq100 was hit 7.3% (up 1.7%).The Semiconductors sank 6.9% (up 5.7%). The Biotechs dropped 6.9% (up 5.7%). With bullion surging $33, the HUI gold index jumped 3.3% (down 8.0%).
Three-month Treasury bill rates ended the week at 1.69%. Two-year government yields fell four bps to 2.26% (up 37bps y-t-d). Five-year T-note yields declined four bps to 2.60% (up 39bps). Ten-year Treasury yields fell three bps to 2.81% (up 41bps). Long bond yields declined two bps to 3.06% (up 32bps).
Greek 10-year yields jumped 19 bps to 4.36% (up 29bps y-t-d). Ten-year Portuguese yields slipped three bps to 1.72% (down 22bps). Italian 10-year yields dropped 11 bps to 1.88% (down 14bps). Spain's 10-year yields fell 11 bps to 1.27% (down 30bps). German bund yields declined four bps to 0.53% (up 10bps). French yields fell six bps to 0.76% (down 3bps). The French to German 10-year bond spread narrowed another two to 23 bps. U.K. 10-year gilt yields increased two bps to 1.45% (up 26bps). U.K.'s FTSE equities index dropped 3.4% (down 10.0%).
Japan's Nikkei 225 equities index sank 4.9% (down 9.4% y-t-d). Japanese 10-year "JGB" yields declined a basis point to 0.02% (down 2bps). France's CAC40 fell 3.5% (down 4.1%). The German DAX equities index sank 4.1% (down 8.0%). Spain's IBEX 35 equities index dropped 3.8% (down 6.5%). Italy's FTSE MIB index declined 2.5% (up 2.0%). EM traded lower but notably outperformed "developed." Brazil's Bovespa index slipped 0.6% (up 10.4%), and Mexico's Bolsa declined 2.0% (down 5.8%). South Korea's Kospi index fell 3.1% (down 2.1%). India’s Sensex equities index lost 1.7% (down 4.3%). China’s Shanghai Exchange dropped 3.6% (down 4.7%). Turkey's Borsa Istanbul National 100 index dipped 0.5% (up 1.1%). Russia's MICEX equities index slipped 0.4% (up 8.3%).
Investment-grade bond funds saw inflows of $3.484 billion, while junk bond funds suffered outflows of $1.174 billion (from Lipper).
Freddie Mac 30-year fixed mortgage rates added a basis point to 4.45% (up 22bps y-o-y). Fifteen-year rates increased one basis point to 3.91% (up 47bps). Five-year hybrid ARM rates added a basis point to 3.68%, the high since April 2011 (up 44bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates up three bps to 4.60% (up 38bps).
Federal Reserve Credit last week increased $2.1bn to $4.362 TN. Over the past year, Fed Credit contracted $74.7bn, or 1.7%. Fed Credit inflated $1.551 TN, or 55%, over the past 281 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt dropped $12.2bn last week to $3.440 TN. "Custody holdings" were up $228bn y-o-y, or 7.1%.
M2 (narrow) "money" supply rose $9.3bn last week to a record $13.914 TN. "Narrow money" gained $527bn, or 3.9%, over the past year. For the week, Currency increased $2.0bn. Total Checkable Deposits rose $9.5bn, while savings Deposits declined $5.4bn. Small Time Deposits added $3.2bn. Retail Money Funds were unchanged.
The S&P500 sank 6.0% (down 3.2% y-t-d), and the Dow fell 5.7% (up 4.8%). The Utilities declined 2.0% (down 7.2%). The Banks sank 8.0% (down 2.6%), and the Broker/Dealers lost 7.3% (up 3.8%). The Transports fell 4.9% (down 4.2%). The S&P 400 Midcaps dropped 5.3% (down 3.2%), and the small cap Russell 2000 declined 4.8% (down 1.7%). The Nasdaq100 was hit 7.3% (up 1.7%).The Semiconductors sank 6.9% (up 5.7%). The Biotechs dropped 6.9% (up 5.7%). With bullion surging $33, the HUI gold index jumped 3.3% (down 8.0%).
Three-month Treasury bill rates ended the week at 1.69%. Two-year government yields fell four bps to 2.26% (up 37bps y-t-d). Five-year T-note yields declined four bps to 2.60% (up 39bps). Ten-year Treasury yields fell three bps to 2.81% (up 41bps). Long bond yields declined two bps to 3.06% (up 32bps).
Greek 10-year yields jumped 19 bps to 4.36% (up 29bps y-t-d). Ten-year Portuguese yields slipped three bps to 1.72% (down 22bps). Italian 10-year yields dropped 11 bps to 1.88% (down 14bps). Spain's 10-year yields fell 11 bps to 1.27% (down 30bps). German bund yields declined four bps to 0.53% (up 10bps). French yields fell six bps to 0.76% (down 3bps). The French to German 10-year bond spread narrowed another two to 23 bps. U.K. 10-year gilt yields increased two bps to 1.45% (up 26bps). U.K.'s FTSE equities index dropped 3.4% (down 10.0%).
Japan's Nikkei 225 equities index sank 4.9% (down 9.4% y-t-d). Japanese 10-year "JGB" yields declined a basis point to 0.02% (down 2bps). France's CAC40 fell 3.5% (down 4.1%). The German DAX equities index sank 4.1% (down 8.0%). Spain's IBEX 35 equities index dropped 3.8% (down 6.5%). Italy's FTSE MIB index declined 2.5% (up 2.0%). EM traded lower but notably outperformed "developed." Brazil's Bovespa index slipped 0.6% (up 10.4%), and Mexico's Bolsa declined 2.0% (down 5.8%). South Korea's Kospi index fell 3.1% (down 2.1%). India’s Sensex equities index lost 1.7% (down 4.3%). China’s Shanghai Exchange dropped 3.6% (down 4.7%). Turkey's Borsa Istanbul National 100 index dipped 0.5% (up 1.1%). Russia's MICEX equities index slipped 0.4% (up 8.3%).
Investment-grade bond funds saw inflows of $3.484 billion, while junk bond funds suffered outflows of $1.174 billion (from Lipper).
Freddie Mac 30-year fixed mortgage rates added a basis point to 4.45% (up 22bps y-o-y). Fifteen-year rates increased one basis point to 3.91% (up 47bps). Five-year hybrid ARM rates added a basis point to 3.68%, the high since April 2011 (up 44bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates up three bps to 4.60% (up 38bps).
Federal Reserve Credit last week increased $2.1bn to $4.362 TN. Over the past year, Fed Credit contracted $74.7bn, or 1.7%. Fed Credit inflated $1.551 TN, or 55%, over the past 281 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt dropped $12.2bn last week to $3.440 TN. "Custody holdings" were up $228bn y-o-y, or 7.1%.
M2 (narrow) "money" supply rose $9.3bn last week to a record $13.914 TN. "Narrow money" gained $527bn, or 3.9%, over the past year. For the week, Currency increased $2.0bn. Total Checkable Deposits rose $9.5bn, while savings Deposits declined $5.4bn. Small Time Deposits added $3.2bn. Retail Money Funds were unchanged.
Total money market fund assets gained $4.9bn to $2.825 TN. Money Funds gained $171bn y-o-y, or 6.5%.
Total Commercial Paper dropped $15.6bn to $1.065 TN. CP gained $100bn y-o-y, or 10.4%.
Currency Watch:
The U.S. dollar index declined 0.9% to 89.436 (down 2.9% y-o-y). For the week on the upside, the South African rand increased 1.9%, the Canadian dollar 1.6%, the British pound 1.4%, the Japanese yen 1.2%, the Mexican peso 0.9%, the euro 0.5%, the Swiss franc 0.5%, the New Zealand dollar 0.2%, and the Singapore dollar 0.2%. For the week on the downside, the South Korean won declined 1.5%, the Brazilian real 1.0%, the Swedish krona 0.7%, the Norwegian krone 0.6% and the Australian dollar 0.2%. The Chinese renminbi gained 0.3% versus the dollar this week (up 3.02% y-t-d).
Commodities Watch:
The Goldman Sachs Commodities Index jumped 2.4% (up 2.9% y-t-d). Spot Gold rose 2.5% to $1,347 (up 3.4%). Silver gained 1.9% to $16.582 (down 3.3%). Crude surged $3.54 to $65.88 (up 9%). Gasoline jumped 4.5% (up 13%), while Natural Gas fell 3.6% (down 12%). Copper sank 3.7% (down 9%). Wheat declined 1.6% (up 8%). Corn fell 1.4% (up 8%).
Market Dislocation Watch:
March 21 - Wall Street Journal (Asjylyn Loder): "A record $45 billion in inflows into exchange-traded funds last week appeared, at first blush, to be a sign that investors had overcome their fears and returned to U.S. stocks in earnest. But more than half of that money - $23 billion - has already come right back out, according to FactSet. That's because much of last week's inflows came from an unusual alignment of market events rather than a surge of bullish sentiment. The March 16 expiration of futures and options on stocks and stock indexes, a quarterly collision that traders call 'quad witching,' was an important factor. The witching hour coincided with the rebalancing of hundreds of stock indexes, including changes to indexes underlying popular ETFs that invest in dividend-paying companies."
March 21 - Bloomberg (Jan-Henrik Foerster, Steven Arons, and Nicholas Comfort): "Europe's investment banks were upbeat after a spike in volatility at the start of the year promised to revive their battered trading units. By Wednesday, their exuberance had disappeared as quickly as it came. Deutsche Bank AG cautioned that its securities unit was facing headwinds this quarter from a stronger euro and higher funding costs for the business… Tidjane Thiam, the head of Credit Suisse Group AG who a month earlier declared his investment bank was alive and well, spoke of a 'very confused' first quarter that left clients once again sitting on the sidelines. 'January was a strong month, February was strange and March is a bit all over the place,' Thiam summed it up…"
March 20 - Bloomberg (David McLaughlin, Ben Brody, and Billy House): "Facebook Inc. is drawing scrutiny from the main U.S. privacy watchdog and half a dozen congressional committees over how the personal data of 50 million users was obtained by a data analytics firm… Facebook said it would conduct staff-level briefings of six committees Tuesday and Wednesday. That includes meetings with the House and Senate Judiciary Committees, as well as the commerce and intelligence committees of both chambers. The U.S. Federal Trade Commission is also probing whether Facebook violated terms of a 2011 consent decree over its handling of personal user data that was transferred to Cambridge Analytica without users' knowledge, according to a person familiar with the matter. The FTC will be sending a letter to the company, another person said."
Trump Administration Watch:
March 21 - CNBC (Yian Mui): "Republicans and Democrats struck a preliminary agreement Wednesday on some major points of contention in a bill to fund the government, a source familiar with the bill told CNBC. The deadline for passing the spending bill that would keep the government running through September is midnight Friday… Under the agreement, spending on opioid treatment, prevention and research would increase by nearly $3 billion and on infrastructure by $10 billion. It also would authorize $1.57 billion in new border security funding, most of which would go toward technology."
March 21 - Reuters (David Lawder): "U.S. Treasury Secretary Steven Mnuchin said… his agency has prepared U.S. investment restrictions on China for President Donald Trump to consider as part of his upcoming announcements on intellectual property actions against Beijing. 'We have worked on options for his consideration,' Mnuchin told Reuters…"
March 20 - CNBC (Jacob Pramuk): "Proposals for a second part of the Republican tax-reform plan could be released as early as April 15, Rep. Mark Meadows said… Possible tweaks unveiled on Tax Day could include making individual tax cuts permanent or indexing capital gains for inflation, said the chairman of the conservative House Freedom Caucus. 'There's been real talks,' the Republican… added. A rollout of additional tax changes this year would come as Republicans try to hold off Democratic momentum and keep a majority in the House. The GOP aims to use its tax plan passed in December as a midterm appeal to voters, but it has so far not shown conclusive results as a selling point."
March 20 - Associated Press (Johnson Lai and Yanan Wang): "A senior U.S. diplomat said at an event in Taipei… that the United States wishes to 'bolster Taiwan's ability to defend its democracy' after President Donald Trump signed a new law promoting official exchanges between the two sides that has drawn protests from Beijing. 'We wish to strengthen our ties with the Taiwan people and to bolster Taiwan's ability to defend its democracy,' said State Department official Alex Wong. 'Our commitment to these goals has never been stronger.'"
March 20 - Reuters (Twinnie Siu and Fabian Hamacher): "The United States' commitment to Taiwan has never been stronger and the island is an inspiration to the rest of the Indo-Pacific region, U.S. Deputy Assistant Secretary of State Alex Wong said…, in comments certain to anger Beijing. Wong was speaking during a visit to Taipei at a time of increased hostility between the self-ruled island and Beijing and just a day after Chinese President Xi Jinping issued his strongest warning against Taiwan separatism to date."
March 19 - Wall Street Journal (Margherita Stancati and Dion Nissenbaum): "Crown Prince Mohammed bin Salman arrives Monday in Washington, D.C., bringing the brash foreign policy that has shaped Saudi Arabia's more muscular stance in the Middle East to counter archenemy Iran. The Trump administration and lawmakers now need to weigh whether to support the prince's more confrontational approach with Iran and risk sparking a regional conflict, or seek to moderate his diplomacy."
Federal Reserve Watch:
March 21 - Financial Times (Sam Fleming): "The Federal Reserve lifted short-term interest rates by a quarter-point and forecast that rates will rise higher than expected in the coming years as its new chairman Jay Powell responds to strengthening growth at home and abroad. The US central bank raised the target range for the federal funds rate by a quarter point to 1.5-1.75% as it predicted inflation would accelerate in the coming months. The Fed's median forecast for interest rates at the end of 2018 was left unchanged, but its projections pointed to an extra increase in 2019 with more tightening to come in 2020. 'The economic outlook has strengthened in recent months,' the Fed said… 'The Committee expects that, with further gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace in the medium term and labour market conditions will remain strong.'"
March 21 - Bloomberg (Craig Torres): "Federal Reserve officials, meeting for the first time under Chairman Jerome Powell, raised the benchmark lending rate a quarter-point and forecast a steeper path of hikes in 2019 and 2020, citing an improving economic outlook. Policy makers continued to project a total of three increases this year. 'The economic outlook has strengthened in recent months,' the policy-setting Federal Open Market Committee said in a statement… Officials repeated previous language that they anticipate 'further gradual adjustments in the stance of monetary policy.' The upward revision in their rate path suggests Fed officials are looking through soft first-quarter economic reports and expect a lift this year and next from tax cuts passed by Republicans in December."
March 21 - Bloomberg (Craig Torres and Christopher Condon): "Federal Reserve Chairman Jerome Powell showed he will be guided by the U.S. economy's performance rather than the theories and models relied upon by his predecessors to set monetary policy for the past three decades. Fresh from overseeing his first policy-setting meeting and its first interest rate hike of 2018, Powell signaled he won't try to guess the limits of the labor market or the growth-boosting effects of Republican tax cuts. His message: He'll know the economy is changing when he sees it. For now, his Fed is on track to raise rates at least twice more this year and possibly three times."
U.S. Bubble Watch:
March 21 - Reuters (Jason Lange): "The U.S. current account deficit widened slightly more than expected in the fourth quarter, amid an increase in goods imports. … the current account deficit, which measures the flow of goods, services and investments into and out of the country, widened by $26.7 billion to $128.2 billion, or 2.6 percent of national economic output."
March 22 - Bloomberg (Shelly Hagan): "Americans' outlook for the economy climbed in March for a third straight month to match the highest level since 2002, data from the Bloomberg Consumer Comfort Index showed… Monthly gauge of economic expectations increased to 56 from 54.5 39% of respondents said economy 'getting better,' the biggest share since March 2002 and up from 38% a month earlier; was 30% in December."
March 21 - Bloomberg (Katia Dmitrieva): "Sales of previously-owned U.S. homes rose more than expected in the first gain in three months, indicating that job gains and tax cuts are supporting demand despite low supply, National Association of Realtors data showed… Contract closings increased 3% m/m to 5.54m annual rate (est. 5.4m)… Median sales price rose 5.9% y/y to $241,700. Inventory of available properties declined 8.1% y/y to 1.59m; lowest for Feb. in data going back to 1999."
March 21 - Bloomberg (Noah Buhayar): "Homebuyers in the U.S. have plenty to grouse about these days. Prices have climbed steeply in many metro areas, mortgage rates are rising and inventory is thin. But for people looking to purchase their first home, it's ugly out there. 'Starter homes have become scarcer, pricier, smaller, older and more likely in need of some TLC' than they were six years ago, the real estate website Trulia reported… It's grim all over. American homes are at their least affordable in the report's history. But the median listing price of available starter homes has risen 9.6% in the past year, easily beating out the trade-up and premium categories, while starter-home supply has fallen to a new low this quarter… Perhaps the most striking finding is that the very buyers who are typically least able to plunk down a lot of money are confronted with the least affordable homes."
March 22 - CNBC (Diana Olick): "The critical housing shortage is now taking its toll on renters. Potential buyers are having an increasingly difficult time finding a home they can afford, so they are renting longer. That's pushing rental demand higher and rent prices along with it. The median rent in the United State rose 2.8% over the past year to $1,445, the fastest pace of appreciation since May 2016, according to Zillow. Rents are rising fastest in some expected markets, like Seattle and Sacramento, California, and in some unexpected places, including Minneapolis and Atlanta."
March 21 - Bloomberg (Jordan Yadoo): "As interest rates rise, U.S. homeowners are losing their incentive to refinance. Applications to refinance a home loan fell 4.5% last week, according to… the Mortgage Bankers Association. That sent the refinancing share of total mortgage activity to 38.5%, the lowest since September 2008."
March 21 - Wall Street Journal (Theo Francis and Joann S. Lublin): "The chief executives of America's biggest companies are on track for another banner year of compensation, fueled by a soaring stock market and an improving economy. Median pay for the chief executives of 133 of the largest U.S. companies reached an all-time high of $11.6 million in 2017, up from $11.2 million in 2016… Total pay-including salary, cash incentives, equity, perquisites and more-rose at least 9.9% for half the executives, the fastest annual growth since 2014, while about a quarter of the executives received raises of 25% or more."
March 22 - Wall Street Journal (Rachel Louise Ensign): "Americans are parking more money with the biggest banks than ever before, cementing the firms' dominance of the financial industry less than a decade after the crisis. The three largest U.S. banks have added more than $2.4 trillion in domestic deposits over the past 10 years-a 180% increase… That amount exceeds what the top eight banks had in such deposits combined in 2007. The outsize gain began when the trio of lenders- JPMorgan., Bank of America Corp. and Wells Fargo & Co.-did huge deals during the crisis. Their heft has continued to increase in recent years as consumers opt to put their money at the behemoths over smaller U.S. banks."
March 21 - Bloomberg (Anders Melin and Dana Hull): "Here's what Tesla Inc. shareholders just bought for $2.6 billion: a stronger guarantee that Elon Musk will stick around for at least the next decade. Investors… approved what may be the largest compensation deal in history for its chief executive officer, pegged on ambitions to turn Tesla into one of the world's largest companies as it ventures beyond solar panels and electric cars. If successful, the award could end up being worth more than $50 billion…"
China Watch:
March 20 - Associated Press (Gillian Wong and Christopher Bodeen): "President Xi Jinping vowed… to protect 'every inch' of China's territory, improve the lives of its people and promote the resurgence of Chinese culture and creativity as he kicked off his second term… Xi, China's most powerful leader in decades, sounded a stark warning clearly directed at the government of self-ruled Taiwan, which Beijing claims as its territory, and advocates of independence in the southern Chinese city of Hong Kong. 'Every inch of our great motherland absolutely cannot and absolutely will not be separated from China,' Xi declared in his speech before the nearly 3,000 members of the National People's Congress. 'All acts and tricks to split the motherland are doomed to failure and will be condemned by the people and punished by history!' he said."
March 20 - Bloomberg: "China's national parliament gave its rubber stamp of approval to a dizzying overhaul that will reverberate through the world's second-largest economy for years. They restructured almost every cabinet-level ministry, created a powerful new anti-graft agency, repealed presidential term limits and appointed Xi's closest advisers to key positions. The revamp immediately gives Xi a much freer hand to direct policy as the economy is slowing, debt is mounting and U.S. President Donald Trump is threatening higher tariffs… Over the long term, his power play will be more consequential: Xi can either turn China into a global juggernaut or set the stage for a destabilizing succession crisis. 'He's clearly convinced that the only way to make China great is to lead it from the top -- power has to be centralized, people have to be extremely loyal to the party,' said David Zweig, a political science professor at the Hong Kong University of Science and Technology. 'He could be the source of long term collapse in the system, if he doesn't invigorate it or carry out the necessary changes.'"
March 21 - Wall Street Journal (Lingling Wei, Yoko Kubota and Liza Lin): "China is preparing to hit back at trade offensives from Washington with tariffs aimed at President Donald Trump's support base, including levies targeting U.S. agricultural exports from Farm Belt states, according to people familiar… The plans are part of a strategy that has taken shape in recent weeks as China seeks to avert tariffs by warning of possible repercussions and offering incentives to the U.S., including better access to China's markets, especially in the financial sector. China's President Xi Jinping has taken this carrot-and-stick approach in an effort to avoid a trade war, these people said."
March 2019 - Reuters: "Chinese President Xi Jinping warned self-ruled Taiwan… that it will face the 'punishment of history' for any attempt at separatism, offering his strongest warning yet to the island claimed by China as its sacred territory. Taiwan is one of China's most sensitive issues and a potentially dangerous military flashpoint. China's hostility towards Taiwan has risen since the 2016 election of President Tsai Ing-wen from the pro-independence Democratic Progressive Party… China has been infuriated by President Donald Trump's signing into law legislation last week that encourages the United States to send senior officials to Taiwan to meet Taiwanese counterparts and vice versa."
March 21 - Reuters (Ben Blanchard and Brenda Goh): "China blamed U.S. export restrictions for its record trade surplus with the United States, but expressed hope that a solution can be found to settle trade issues between the world's two biggest economies as U.S. tariffs loom. Beijing was bracing on Thursday for an announcement from U.S. President Donald Trump of tariffs of as much as $60 billion on Chinese imports, raising fears that the two countries could be sliding towards a trade war."
Total Commercial Paper dropped $15.6bn to $1.065 TN. CP gained $100bn y-o-y, or 10.4%.
Currency Watch:
The U.S. dollar index declined 0.9% to 89.436 (down 2.9% y-o-y). For the week on the upside, the South African rand increased 1.9%, the Canadian dollar 1.6%, the British pound 1.4%, the Japanese yen 1.2%, the Mexican peso 0.9%, the euro 0.5%, the Swiss franc 0.5%, the New Zealand dollar 0.2%, and the Singapore dollar 0.2%. For the week on the downside, the South Korean won declined 1.5%, the Brazilian real 1.0%, the Swedish krona 0.7%, the Norwegian krone 0.6% and the Australian dollar 0.2%. The Chinese renminbi gained 0.3% versus the dollar this week (up 3.02% y-t-d).
Commodities Watch:
The Goldman Sachs Commodities Index jumped 2.4% (up 2.9% y-t-d). Spot Gold rose 2.5% to $1,347 (up 3.4%). Silver gained 1.9% to $16.582 (down 3.3%). Crude surged $3.54 to $65.88 (up 9%). Gasoline jumped 4.5% (up 13%), while Natural Gas fell 3.6% (down 12%). Copper sank 3.7% (down 9%). Wheat declined 1.6% (up 8%). Corn fell 1.4% (up 8%).
Market Dislocation Watch:
March 21 - Wall Street Journal (Asjylyn Loder): "A record $45 billion in inflows into exchange-traded funds last week appeared, at first blush, to be a sign that investors had overcome their fears and returned to U.S. stocks in earnest. But more than half of that money - $23 billion - has already come right back out, according to FactSet. That's because much of last week's inflows came from an unusual alignment of market events rather than a surge of bullish sentiment. The March 16 expiration of futures and options on stocks and stock indexes, a quarterly collision that traders call 'quad witching,' was an important factor. The witching hour coincided with the rebalancing of hundreds of stock indexes, including changes to indexes underlying popular ETFs that invest in dividend-paying companies."
March 21 - Bloomberg (Jan-Henrik Foerster, Steven Arons, and Nicholas Comfort): "Europe's investment banks were upbeat after a spike in volatility at the start of the year promised to revive their battered trading units. By Wednesday, their exuberance had disappeared as quickly as it came. Deutsche Bank AG cautioned that its securities unit was facing headwinds this quarter from a stronger euro and higher funding costs for the business… Tidjane Thiam, the head of Credit Suisse Group AG who a month earlier declared his investment bank was alive and well, spoke of a 'very confused' first quarter that left clients once again sitting on the sidelines. 'January was a strong month, February was strange and March is a bit all over the place,' Thiam summed it up…"
March 20 - Bloomberg (David McLaughlin, Ben Brody, and Billy House): "Facebook Inc. is drawing scrutiny from the main U.S. privacy watchdog and half a dozen congressional committees over how the personal data of 50 million users was obtained by a data analytics firm… Facebook said it would conduct staff-level briefings of six committees Tuesday and Wednesday. That includes meetings with the House and Senate Judiciary Committees, as well as the commerce and intelligence committees of both chambers. The U.S. Federal Trade Commission is also probing whether Facebook violated terms of a 2011 consent decree over its handling of personal user data that was transferred to Cambridge Analytica without users' knowledge, according to a person familiar with the matter. The FTC will be sending a letter to the company, another person said."
Trump Administration Watch:
March 21 - CNBC (Yian Mui): "Republicans and Democrats struck a preliminary agreement Wednesday on some major points of contention in a bill to fund the government, a source familiar with the bill told CNBC. The deadline for passing the spending bill that would keep the government running through September is midnight Friday… Under the agreement, spending on opioid treatment, prevention and research would increase by nearly $3 billion and on infrastructure by $10 billion. It also would authorize $1.57 billion in new border security funding, most of which would go toward technology."
March 21 - Reuters (David Lawder): "U.S. Treasury Secretary Steven Mnuchin said… his agency has prepared U.S. investment restrictions on China for President Donald Trump to consider as part of his upcoming announcements on intellectual property actions against Beijing. 'We have worked on options for his consideration,' Mnuchin told Reuters…"
March 20 - CNBC (Jacob Pramuk): "Proposals for a second part of the Republican tax-reform plan could be released as early as April 15, Rep. Mark Meadows said… Possible tweaks unveiled on Tax Day could include making individual tax cuts permanent or indexing capital gains for inflation, said the chairman of the conservative House Freedom Caucus. 'There's been real talks,' the Republican… added. A rollout of additional tax changes this year would come as Republicans try to hold off Democratic momentum and keep a majority in the House. The GOP aims to use its tax plan passed in December as a midterm appeal to voters, but it has so far not shown conclusive results as a selling point."
March 20 - Associated Press (Johnson Lai and Yanan Wang): "A senior U.S. diplomat said at an event in Taipei… that the United States wishes to 'bolster Taiwan's ability to defend its democracy' after President Donald Trump signed a new law promoting official exchanges between the two sides that has drawn protests from Beijing. 'We wish to strengthen our ties with the Taiwan people and to bolster Taiwan's ability to defend its democracy,' said State Department official Alex Wong. 'Our commitment to these goals has never been stronger.'"
March 20 - Reuters (Twinnie Siu and Fabian Hamacher): "The United States' commitment to Taiwan has never been stronger and the island is an inspiration to the rest of the Indo-Pacific region, U.S. Deputy Assistant Secretary of State Alex Wong said…, in comments certain to anger Beijing. Wong was speaking during a visit to Taipei at a time of increased hostility between the self-ruled island and Beijing and just a day after Chinese President Xi Jinping issued his strongest warning against Taiwan separatism to date."
March 19 - Wall Street Journal (Margherita Stancati and Dion Nissenbaum): "Crown Prince Mohammed bin Salman arrives Monday in Washington, D.C., bringing the brash foreign policy that has shaped Saudi Arabia's more muscular stance in the Middle East to counter archenemy Iran. The Trump administration and lawmakers now need to weigh whether to support the prince's more confrontational approach with Iran and risk sparking a regional conflict, or seek to moderate his diplomacy."
Federal Reserve Watch:
March 21 - Financial Times (Sam Fleming): "The Federal Reserve lifted short-term interest rates by a quarter-point and forecast that rates will rise higher than expected in the coming years as its new chairman Jay Powell responds to strengthening growth at home and abroad. The US central bank raised the target range for the federal funds rate by a quarter point to 1.5-1.75% as it predicted inflation would accelerate in the coming months. The Fed's median forecast for interest rates at the end of 2018 was left unchanged, but its projections pointed to an extra increase in 2019 with more tightening to come in 2020. 'The economic outlook has strengthened in recent months,' the Fed said… 'The Committee expects that, with further gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace in the medium term and labour market conditions will remain strong.'"
March 21 - Bloomberg (Craig Torres): "Federal Reserve officials, meeting for the first time under Chairman Jerome Powell, raised the benchmark lending rate a quarter-point and forecast a steeper path of hikes in 2019 and 2020, citing an improving economic outlook. Policy makers continued to project a total of three increases this year. 'The economic outlook has strengthened in recent months,' the policy-setting Federal Open Market Committee said in a statement… Officials repeated previous language that they anticipate 'further gradual adjustments in the stance of monetary policy.' The upward revision in their rate path suggests Fed officials are looking through soft first-quarter economic reports and expect a lift this year and next from tax cuts passed by Republicans in December."
March 21 - Bloomberg (Craig Torres and Christopher Condon): "Federal Reserve Chairman Jerome Powell showed he will be guided by the U.S. economy's performance rather than the theories and models relied upon by his predecessors to set monetary policy for the past three decades. Fresh from overseeing his first policy-setting meeting and its first interest rate hike of 2018, Powell signaled he won't try to guess the limits of the labor market or the growth-boosting effects of Republican tax cuts. His message: He'll know the economy is changing when he sees it. For now, his Fed is on track to raise rates at least twice more this year and possibly three times."
U.S. Bubble Watch:
March 21 - Reuters (Jason Lange): "The U.S. current account deficit widened slightly more than expected in the fourth quarter, amid an increase in goods imports. … the current account deficit, which measures the flow of goods, services and investments into and out of the country, widened by $26.7 billion to $128.2 billion, or 2.6 percent of national economic output."
March 22 - Bloomberg (Shelly Hagan): "Americans' outlook for the economy climbed in March for a third straight month to match the highest level since 2002, data from the Bloomberg Consumer Comfort Index showed… Monthly gauge of economic expectations increased to 56 from 54.5 39% of respondents said economy 'getting better,' the biggest share since March 2002 and up from 38% a month earlier; was 30% in December."
March 21 - Bloomberg (Katia Dmitrieva): "Sales of previously-owned U.S. homes rose more than expected in the first gain in three months, indicating that job gains and tax cuts are supporting demand despite low supply, National Association of Realtors data showed… Contract closings increased 3% m/m to 5.54m annual rate (est. 5.4m)… Median sales price rose 5.9% y/y to $241,700. Inventory of available properties declined 8.1% y/y to 1.59m; lowest for Feb. in data going back to 1999."
March 21 - Bloomberg (Noah Buhayar): "Homebuyers in the U.S. have plenty to grouse about these days. Prices have climbed steeply in many metro areas, mortgage rates are rising and inventory is thin. But for people looking to purchase their first home, it's ugly out there. 'Starter homes have become scarcer, pricier, smaller, older and more likely in need of some TLC' than they were six years ago, the real estate website Trulia reported… It's grim all over. American homes are at their least affordable in the report's history. But the median listing price of available starter homes has risen 9.6% in the past year, easily beating out the trade-up and premium categories, while starter-home supply has fallen to a new low this quarter… Perhaps the most striking finding is that the very buyers who are typically least able to plunk down a lot of money are confronted with the least affordable homes."
March 22 - CNBC (Diana Olick): "The critical housing shortage is now taking its toll on renters. Potential buyers are having an increasingly difficult time finding a home they can afford, so they are renting longer. That's pushing rental demand higher and rent prices along with it. The median rent in the United State rose 2.8% over the past year to $1,445, the fastest pace of appreciation since May 2016, according to Zillow. Rents are rising fastest in some expected markets, like Seattle and Sacramento, California, and in some unexpected places, including Minneapolis and Atlanta."
March 21 - Bloomberg (Jordan Yadoo): "As interest rates rise, U.S. homeowners are losing their incentive to refinance. Applications to refinance a home loan fell 4.5% last week, according to… the Mortgage Bankers Association. That sent the refinancing share of total mortgage activity to 38.5%, the lowest since September 2008."
March 21 - Wall Street Journal (Theo Francis and Joann S. Lublin): "The chief executives of America's biggest companies are on track for another banner year of compensation, fueled by a soaring stock market and an improving economy. Median pay for the chief executives of 133 of the largest U.S. companies reached an all-time high of $11.6 million in 2017, up from $11.2 million in 2016… Total pay-including salary, cash incentives, equity, perquisites and more-rose at least 9.9% for half the executives, the fastest annual growth since 2014, while about a quarter of the executives received raises of 25% or more."
March 22 - Wall Street Journal (Rachel Louise Ensign): "Americans are parking more money with the biggest banks than ever before, cementing the firms' dominance of the financial industry less than a decade after the crisis. The three largest U.S. banks have added more than $2.4 trillion in domestic deposits over the past 10 years-a 180% increase… That amount exceeds what the top eight banks had in such deposits combined in 2007. The outsize gain began when the trio of lenders- JPMorgan., Bank of America Corp. and Wells Fargo & Co.-did huge deals during the crisis. Their heft has continued to increase in recent years as consumers opt to put their money at the behemoths over smaller U.S. banks."
March 21 - Bloomberg (Anders Melin and Dana Hull): "Here's what Tesla Inc. shareholders just bought for $2.6 billion: a stronger guarantee that Elon Musk will stick around for at least the next decade. Investors… approved what may be the largest compensation deal in history for its chief executive officer, pegged on ambitions to turn Tesla into one of the world's largest companies as it ventures beyond solar panels and electric cars. If successful, the award could end up being worth more than $50 billion…"
China Watch:
March 20 - Associated Press (Gillian Wong and Christopher Bodeen): "President Xi Jinping vowed… to protect 'every inch' of China's territory, improve the lives of its people and promote the resurgence of Chinese culture and creativity as he kicked off his second term… Xi, China's most powerful leader in decades, sounded a stark warning clearly directed at the government of self-ruled Taiwan, which Beijing claims as its territory, and advocates of independence in the southern Chinese city of Hong Kong. 'Every inch of our great motherland absolutely cannot and absolutely will not be separated from China,' Xi declared in his speech before the nearly 3,000 members of the National People's Congress. 'All acts and tricks to split the motherland are doomed to failure and will be condemned by the people and punished by history!' he said."
March 20 - Bloomberg: "China's national parliament gave its rubber stamp of approval to a dizzying overhaul that will reverberate through the world's second-largest economy for years. They restructured almost every cabinet-level ministry, created a powerful new anti-graft agency, repealed presidential term limits and appointed Xi's closest advisers to key positions. The revamp immediately gives Xi a much freer hand to direct policy as the economy is slowing, debt is mounting and U.S. President Donald Trump is threatening higher tariffs… Over the long term, his power play will be more consequential: Xi can either turn China into a global juggernaut or set the stage for a destabilizing succession crisis. 'He's clearly convinced that the only way to make China great is to lead it from the top -- power has to be centralized, people have to be extremely loyal to the party,' said David Zweig, a political science professor at the Hong Kong University of Science and Technology. 'He could be the source of long term collapse in the system, if he doesn't invigorate it or carry out the necessary changes.'"
March 21 - Wall Street Journal (Lingling Wei, Yoko Kubota and Liza Lin): "China is preparing to hit back at trade offensives from Washington with tariffs aimed at President Donald Trump's support base, including levies targeting U.S. agricultural exports from Farm Belt states, according to people familiar… The plans are part of a strategy that has taken shape in recent weeks as China seeks to avert tariffs by warning of possible repercussions and offering incentives to the U.S., including better access to China's markets, especially in the financial sector. China's President Xi Jinping has taken this carrot-and-stick approach in an effort to avoid a trade war, these people said."
March 2019 - Reuters: "Chinese President Xi Jinping warned self-ruled Taiwan… that it will face the 'punishment of history' for any attempt at separatism, offering his strongest warning yet to the island claimed by China as its sacred territory. Taiwan is one of China's most sensitive issues and a potentially dangerous military flashpoint. China's hostility towards Taiwan has risen since the 2016 election of President Tsai Ing-wen from the pro-independence Democratic Progressive Party… China has been infuriated by President Donald Trump's signing into law legislation last week that encourages the United States to send senior officials to Taiwan to meet Taiwanese counterparts and vice versa."
March 21 - Reuters (Ben Blanchard and Brenda Goh): "China blamed U.S. export restrictions for its record trade surplus with the United States, but expressed hope that a solution can be found to settle trade issues between the world's two biggest economies as U.S. tariffs loom. Beijing was bracing on Thursday for an announcement from U.S. President Donald Trump of tariffs of as much as $60 billion on Chinese imports, raising fears that the two countries could be sliding towards a trade war."
March 21 - Bloomberg: "As China's President Xi Jinping steps up efforts to rein in excessive borrowing, the nation's corporate bond market faces rising default risks as weaker firms and local borrowers struggle to roll over obligations. The latest salvo came last month, when the top economic planning body said it will step up scrutiny of the public works-related assets held by companies seeking to sell bonds. The National Development and Reform Commission, or NDRC, also said it would further regulate bond sales by public-private partnership projects."
March 21 - Bloomberg: "It seemed like a good idea at the time, but now an incentive that helped sell $668 billion of corporate bonds to Chinese investors is coming back to haunt borrowers. They're embedded put options, a feature that lets debt holders demand repayment, typically after interest rates rise. With borrowing costs ticking higher amid Beijing's squeeze on debt, one company has already defaulted this month after investors requested they be paid back early. Ratings companies are warning there's more to come with China accounting for about 69% of all the puttable notes worldwide… 'We expect onshore bond defaults to rise this year as liquidity tightening and high funding cost are hurting weak companies' refinancing,' said Christopher Lee, managing director of corporate ratings at S&P Global Ratings… 'Bondholders may be increasingly likely to exercise their put options as credit quality of the issuers deteriorate.'"
March 20 - Bloomberg (Carrie Hong): "China's dollar-bond market has gone from strength to strength in recent years, but a sign is now emerging that the voracious domestic demand that spurred record issuance is starting to wane. The riskiest type of bank bonds, known as additional Tier 1 notes or AT1s and which were popular for their higher yields, are now sliding. AT1s sold by the Postal Savings Bank of China, China Zheshang Bank Co. and Bank of Zhengzhou Co. have fallen by at least 2 cents on the dollar since the start of the month. Behind the drop is a concerted effort by Chinese policy makers to rein in leverage, which has put in the cross-hairs the shadow banking units that borrowed to invest in securities including AT1s."
Global Bubble Watch:
March 21 - Financial Times (Eric Platt and James Fontanella-Khan): "Global dealmaking this year crossed the $1tn mark on Tuesday, the fastest it has ever reached that level, as a wave of consolidation spreads across the US and activity in the UK, China, Germany and Japan accelerates. Buoyed by quickening economic growth and strong business confidence, bankers have cut a string of $10bn-plus deals in 2018. Tax cuts passed in Washington last year have provided an accelerant, as boardrooms reassess the amount of capital they can plough into acquisitions… Dealmaking is up more than 50% from a year ago and 12% higher than at the same point in 2007, which remains the high water mark for mergers and acquisitions with deals totalling more than $4.6tn announced in the year…"
March 20 - Reuters (Sujata Rao): "Global investors were crowded into so-called FAANG and BAT tech shares in March and continue to cling to equity holdings despite fears of trade wars and growth slowdown, Bank of America Merrill Lynch's latest monthly survey showed… The survey of fund managers running $579 billion worldwide was conducted March 9-15 and showed that investors were likely heavily exposed to tech shares, just before Monday's Wall Street plunge that was triggered by calls for more regulation on giant technology firms."
March 21 - Bloomberg: "It seemed like a good idea at the time, but now an incentive that helped sell $668 billion of corporate bonds to Chinese investors is coming back to haunt borrowers. They're embedded put options, a feature that lets debt holders demand repayment, typically after interest rates rise. With borrowing costs ticking higher amid Beijing's squeeze on debt, one company has already defaulted this month after investors requested they be paid back early. Ratings companies are warning there's more to come with China accounting for about 69% of all the puttable notes worldwide… 'We expect onshore bond defaults to rise this year as liquidity tightening and high funding cost are hurting weak companies' refinancing,' said Christopher Lee, managing director of corporate ratings at S&P Global Ratings… 'Bondholders may be increasingly likely to exercise their put options as credit quality of the issuers deteriorate.'"
March 20 - Bloomberg (Carrie Hong): "China's dollar-bond market has gone from strength to strength in recent years, but a sign is now emerging that the voracious domestic demand that spurred record issuance is starting to wane. The riskiest type of bank bonds, known as additional Tier 1 notes or AT1s and which were popular for their higher yields, are now sliding. AT1s sold by the Postal Savings Bank of China, China Zheshang Bank Co. and Bank of Zhengzhou Co. have fallen by at least 2 cents on the dollar since the start of the month. Behind the drop is a concerted effort by Chinese policy makers to rein in leverage, which has put in the cross-hairs the shadow banking units that borrowed to invest in securities including AT1s."
Global Bubble Watch:
March 21 - Financial Times (Eric Platt and James Fontanella-Khan): "Global dealmaking this year crossed the $1tn mark on Tuesday, the fastest it has ever reached that level, as a wave of consolidation spreads across the US and activity in the UK, China, Germany and Japan accelerates. Buoyed by quickening economic growth and strong business confidence, bankers have cut a string of $10bn-plus deals in 2018. Tax cuts passed in Washington last year have provided an accelerant, as boardrooms reassess the amount of capital they can plough into acquisitions… Dealmaking is up more than 50% from a year ago and 12% higher than at the same point in 2007, which remains the high water mark for mergers and acquisitions with deals totalling more than $4.6tn announced in the year…"
March 20 - Reuters (Sujata Rao): "Global investors were crowded into so-called FAANG and BAT tech shares in March and continue to cling to equity holdings despite fears of trade wars and growth slowdown, Bank of America Merrill Lynch's latest monthly survey showed… The survey of fund managers running $579 billion worldwide was conducted March 9-15 and showed that investors were likely heavily exposed to tech shares, just before Monday's Wall Street plunge that was triggered by calls for more regulation on giant technology firms."
March 22 - Financial Times (Kate Allen): "The world's poorest countries are increasing their borrowing at a worrying pace and face the mounting risk of debt crises, the IMF has warned. Since 2013, the median ratio of public debt to gross domestic product in low-income countries has risen 13 percentage points to hit 47% in 2017… The research found that 40% of low-income developing countries face 'significant debt-related challenges', up from 21% just five years ago."
March 21 - Bloomberg (Ksenia Galouchko): "Veteran investor Jim Rogers is already predicting the worst bear market for stocks in his lifetime. And that's before you figure in a trade war. 'The next bear market is going to be the worst in my lifetime -- just because of the debt -- but if we also have a trade war, it's going to be worse than a disaster,' Rogers… said… 'I'm extremely concerned. I've read enough history and been through enough markets to know that trade wars are usually a disaster.'"
Fixed-Income Bubble Watch:
March 22 - Financial Times (Alex Scaggs): "Before Campbell Soup sold $5bn of debt this month to fund its purchase of US snack-food maker Snyder's-Lance, its chief financial officer told analysts that the company's prized investment-grade status was safe. But it is only just. The deal prompted rating agencies to downgrade Campbell to the tier above junk. While… Campbell is more indebted than most of its peers, the era of ultra-low interest rates has left it plenty of company in the riskiest segment of the investment grade market as corporate America's borrowings have ballooned. The chunk of the market rated at triple B - the group of ratings just above junk - now accounts for 48% of the investment-grade market… What is more, these corporate borrowers have piled on debt. triple B-rated issuers were slightly below 3 times levered in 2017, according to Citigroup, up from just about 2.5 times in 2015."
Europe Watch:
March 19 - Reuters (Gabriela Baczynska and Alastair Macdonald): "Britain and the European Union agreed… to a transition period to avoid a 'cliff edge' Brexit next year - though only after London accepted a potential solution for Northern Ireland's land border that may face stiff opposition at home. The pound surged on confirmation that Britain would remain effectively a non-voting EU member for 21 months until the end of 2020. Some business leaders, however, echoed a warning from EU negotiator Michel Barnier that the deal is legally binding only if London agrees the whole withdrawal treaty by next March."
Leveraged Speculator Watch:
March 19 - Bloomberg (Hema Parmar, Katia Porzecanski, and Katherine Burton): "Billionaire John Paulson can trace his loss of assets and senior executives to a familiar refrain: poor performance. Paulson is now re-focusing his firm on his founding strategy -- merger arbitrage -- despite some disastrous returns in recent years. The Paulson Partners Enhanced fund, which uses borrowed money to double down, sunk 23% in the first two months of 2018…, after plunging about 70% over the past four years. The losses come amid a fund revamp at Paulson's namesake firm, once one of the biggest in the industry."
March 19 - Bloomberg (Alastair Marsh, Nishant Kumar, and Sridhar Natarajan): "In December, Shahraab Ahmad shared with his hedge fund clients the principle that helped him trounce peers for two turbulent decades: steer clear of the crowd. He'd turned $50 million into an operation with more than $700 million over three years and delivered market-beating returns, earning a reputation as one of the hottest hands in the business. Until last month. The 41-year-old veteran, who started at JPMorgan Chase & Co.'s pioneering credit-derivatives business in 1999, was caught out by a market turn that gave him what could be the biggest drubbing of his career. Ahmad's London-based Decca Fund lost 21%, or $147 million, in the month of February, following its wrong-way bet on volatility."
Geopolitical Watch:
March 21 - Financial Times (Eric Platt and James Fontanella-Khan): "The US has reaffirmed its support for Taiwan's security just after China, which regards Taiwan as its own territory, escalated military activities near the self-ruled island. Taiwan's defence forces scrambled aircrafts and vessels this week after China's aircraft carrier, the Liaoning, entered waters in the Taiwan Strait that are part of Taiwan's air defence identification zone. Speaking in Taipei…, Alex Wong, deputy assistant secretary in the State Department's Bureau of East Asian and Pacific Affairs, stressed that it was embedded in US law to strengthen Taiwan's ability to defend its 'hard won democracy'. The US 'commitment to the Taiwan people, to their security, to their democracy, has never been stronger,' Mr Wong said. 'The United States has been, is, and always will be Taiwan's closest friend and partner.'"
March 21 - Reuters (Ben Blanchard): "A widely read Chinese state-run newspaper said… China should prepare for military action over self-ruled Taiwan, and pressure Washington over cooperation on North Korea, after the United States passed a law to boost ties with Taiwan. Beijing was infuriated after U.S. President Donald Trump signed legislation last week that encourages the United States to send senior officials to Taiwan to meet Taiwanese counterparts and vice versa."
March 21 - Bloomberg (Ksenia Galouchko): "Veteran investor Jim Rogers is already predicting the worst bear market for stocks in his lifetime. And that's before you figure in a trade war. 'The next bear market is going to be the worst in my lifetime -- just because of the debt -- but if we also have a trade war, it's going to be worse than a disaster,' Rogers… said… 'I'm extremely concerned. I've read enough history and been through enough markets to know that trade wars are usually a disaster.'"
Fixed-Income Bubble Watch:
March 22 - Financial Times (Alex Scaggs): "Before Campbell Soup sold $5bn of debt this month to fund its purchase of US snack-food maker Snyder's-Lance, its chief financial officer told analysts that the company's prized investment-grade status was safe. But it is only just. The deal prompted rating agencies to downgrade Campbell to the tier above junk. While… Campbell is more indebted than most of its peers, the era of ultra-low interest rates has left it plenty of company in the riskiest segment of the investment grade market as corporate America's borrowings have ballooned. The chunk of the market rated at triple B - the group of ratings just above junk - now accounts for 48% of the investment-grade market… What is more, these corporate borrowers have piled on debt. triple B-rated issuers were slightly below 3 times levered in 2017, according to Citigroup, up from just about 2.5 times in 2015."
Europe Watch:
March 19 - Reuters (Gabriela Baczynska and Alastair Macdonald): "Britain and the European Union agreed… to a transition period to avoid a 'cliff edge' Brexit next year - though only after London accepted a potential solution for Northern Ireland's land border that may face stiff opposition at home. The pound surged on confirmation that Britain would remain effectively a non-voting EU member for 21 months until the end of 2020. Some business leaders, however, echoed a warning from EU negotiator Michel Barnier that the deal is legally binding only if London agrees the whole withdrawal treaty by next March."
Leveraged Speculator Watch:
March 19 - Bloomberg (Hema Parmar, Katia Porzecanski, and Katherine Burton): "Billionaire John Paulson can trace his loss of assets and senior executives to a familiar refrain: poor performance. Paulson is now re-focusing his firm on his founding strategy -- merger arbitrage -- despite some disastrous returns in recent years. The Paulson Partners Enhanced fund, which uses borrowed money to double down, sunk 23% in the first two months of 2018…, after plunging about 70% over the past four years. The losses come amid a fund revamp at Paulson's namesake firm, once one of the biggest in the industry."
March 19 - Bloomberg (Alastair Marsh, Nishant Kumar, and Sridhar Natarajan): "In December, Shahraab Ahmad shared with his hedge fund clients the principle that helped him trounce peers for two turbulent decades: steer clear of the crowd. He'd turned $50 million into an operation with more than $700 million over three years and delivered market-beating returns, earning a reputation as one of the hottest hands in the business. Until last month. The 41-year-old veteran, who started at JPMorgan Chase & Co.'s pioneering credit-derivatives business in 1999, was caught out by a market turn that gave him what could be the biggest drubbing of his career. Ahmad's London-based Decca Fund lost 21%, or $147 million, in the month of February, following its wrong-way bet on volatility."
Geopolitical Watch:
March 21 - Financial Times (Eric Platt and James Fontanella-Khan): "The US has reaffirmed its support for Taiwan's security just after China, which regards Taiwan as its own territory, escalated military activities near the self-ruled island. Taiwan's defence forces scrambled aircrafts and vessels this week after China's aircraft carrier, the Liaoning, entered waters in the Taiwan Strait that are part of Taiwan's air defence identification zone. Speaking in Taipei…, Alex Wong, deputy assistant secretary in the State Department's Bureau of East Asian and Pacific Affairs, stressed that it was embedded in US law to strengthen Taiwan's ability to defend its 'hard won democracy'. The US 'commitment to the Taiwan people, to their security, to their democracy, has never been stronger,' Mr Wong said. 'The United States has been, is, and always will be Taiwan's closest friend and partner.'"
March 21 - Reuters (Ben Blanchard): "A widely read Chinese state-run newspaper said… China should prepare for military action over self-ruled Taiwan, and pressure Washington over cooperation on North Korea, after the United States passed a law to boost ties with Taiwan. Beijing was infuriated after U.S. President Donald Trump signed legislation last week that encourages the United States to send senior officials to Taiwan to meet Taiwanese counterparts and vice versa."
Thursday, March 22, 2018
Friday's News Links
[Bloomberg] Stocks Fluctuate as Trump Fuels Tension; Oil Rises: Markets Wrap
[Bloomberg] Gold’s ‘Good Week’ Gets Better as Trade War Ignites Haven Demand
[Bloomberg] Oil Gains as Trump Picks Iran Hawk Bolton as Security Adviser
[Bloomberg] Trump Threatens Spending Bill Veto, Raising Prospect of Shutdown
[CNBC] China responds to Trump tariffs with proposed list of 128 US products to target
[Bloomberg] From Boeing to Soybeans, China Has a Long Retaliation List
[Reuters] China urges U.S. to 'pull back from brink' as Trump unveils tariffs
[Reuters] U.S. accuses China of stealing patents in WTO complaint
[Bloomberg] U.S. Corporate Borrowers Have an Overseas Investor Problem
[Reuters] Rising U.S. bank funding costs: Five pressure points for markets
[Bloomberg] High-Yield Outflows Begin to Take a Toll on New Issuance Market
[Bloomberg] Half Last Week's Record Stock Inflows Just Got Yanked Back Out
[Bloomberg] Canadian Inflation Accelerates to Fastest Pace in Three Years
[Reuters] Exclusive: U.S. warship sails near disputed islands in South China Sea, officials say
[CNBC] The US and its Asia Pacific allies are boosting security ties — that could upset China
[Reuters] For super-hawk Bolton, 'Surrender is Not An Option'
[NYT] Beg, Borrow or Steal: How Trump Says China Takes Technology
[WSJ] House Passes Mammoth Spending Bill
[WSJ] Money Markets Are Messed Up, With Real Consequences
[WSJ] Happy Bipartisan Budget Blowout Day
[WSJ] ‘Rolldown’ Shows Why the Bond Market Is an Unfriendly Place to Hide
[WSJ] Volatility Swings Reach New Milestone
[FT] US tariffs target China industrial policy, not trade deficit
[Bloomberg] Gold’s ‘Good Week’ Gets Better as Trade War Ignites Haven Demand
[Bloomberg] Oil Gains as Trump Picks Iran Hawk Bolton as Security Adviser
[Bloomberg] Trump Threatens Spending Bill Veto, Raising Prospect of Shutdown
[CNBC] China responds to Trump tariffs with proposed list of 128 US products to target
[Bloomberg] From Boeing to Soybeans, China Has a Long Retaliation List
[Reuters] China urges U.S. to 'pull back from brink' as Trump unveils tariffs
[Reuters] U.S. accuses China of stealing patents in WTO complaint
[Bloomberg] U.S. Corporate Borrowers Have an Overseas Investor Problem
[Reuters] Rising U.S. bank funding costs: Five pressure points for markets
[Bloomberg] High-Yield Outflows Begin to Take a Toll on New Issuance Market
[Bloomberg] Half Last Week's Record Stock Inflows Just Got Yanked Back Out
[Bloomberg] Canadian Inflation Accelerates to Fastest Pace in Three Years
[Reuters] Exclusive: U.S. warship sails near disputed islands in South China Sea, officials say
[CNBC] The US and its Asia Pacific allies are boosting security ties — that could upset China
[Reuters] For super-hawk Bolton, 'Surrender is Not An Option'
[NYT] Beg, Borrow or Steal: How Trump Says China Takes Technology
[WSJ] House Passes Mammoth Spending Bill
[WSJ] Money Markets Are Messed Up, With Real Consequences
[WSJ] Happy Bipartisan Budget Blowout Day
[WSJ] ‘Rolldown’ Shows Why the Bond Market Is an Unfriendly Place to Hide
[WSJ] Volatility Swings Reach New Milestone
[FT] US tariffs target China industrial policy, not trade deficit
Thursday Evening Links
[Bloomberg] Asia Stocks Brace for Losses; Yen Climbs Past 105: Market Wrap
[Bloomberg] China Plans Reciprocal Tariffs on U.S. Products
[Bloomberg] Stocks Drop Most in Six Weeks on Trade War Tension: Markets Wrap
[CNBC] Trump slaps China with tariffs on up to $60 billion in imports: 'This is the first of many'
[Bloomberg] Chinese Ambassador Warns of ‘Trade War’ Over Trump Tariffs
[Bloomberg] Trump Replaces McMaster With Bolton as National Security Adviser
[Bloomberg] U.S. House Passes Spending Bill as Senators Consider Forcing a Shutdown
[CNBC] House passes $1.3 trillion spending bill as Congress scrambles to avoid government shutdown
[MarketWatch] Trump, Xi enter rockier phase as U.S.-China trade fight heats up
[Bloomberg] Surging Money Rates 10,000 Miles From Fed Flag Warning for RBA
[CNBC] The market is having a hard time adjusting to a new day at the Fed
[Bloomberg] Human Driver Could Have Avoided Fatal Uber Crash, Experts Say
[NYT] Trump’s Trade Threats Put China’s Leader on the Spot
[Bloomberg] China Plans Reciprocal Tariffs on U.S. Products
[Bloomberg] Stocks Drop Most in Six Weeks on Trade War Tension: Markets Wrap
[CNBC] Trump slaps China with tariffs on up to $60 billion in imports: 'This is the first of many'
[Bloomberg] Chinese Ambassador Warns of ‘Trade War’ Over Trump Tariffs
[Bloomberg] Trump Replaces McMaster With Bolton as National Security Adviser
[Bloomberg] U.S. House Passes Spending Bill as Senators Consider Forcing a Shutdown
[CNBC] House passes $1.3 trillion spending bill as Congress scrambles to avoid government shutdown
[MarketWatch] Trump, Xi enter rockier phase as U.S.-China trade fight heats up
[Bloomberg] Surging Money Rates 10,000 Miles From Fed Flag Warning for RBA
[CNBC] The market is having a hard time adjusting to a new day at the Fed
[Bloomberg] Human Driver Could Have Avoided Fatal Uber Crash, Experts Say
[NYT] Trump’s Trade Threats Put China’s Leader on the Spot
Wednesday, March 21, 2018
Thursday's News Links
[Bloomberg] Stocks Drop, Bonds Rally as Trade Tensions Rise: Markets Wrap
[Bloomberg] Trump to Announce $50 Billion in China Tariffs, Sources Say
[CNBC] US vows to defend farmers from possible China trade action against soybeans
[Reuters] China blames U.S. for staggering trade surplus as tariffs loom
[Bloomberg] Congress Rushes Toward Spending Vote to Prevent Shutdown
[CNBC] Congress just released its massive spending bill: Here's what's in it
[Bloomberg] Americans' Economic Expectations Match Highest Level Since 2002
[CNBC] Rents are rising at the fastest pace in almost two years
[Bloomberg] China’s Central Bank Raises Borrowing Costs After Fed Hikes
[Bloomberg] Cracks Are Starting to Appear in the Global Economy's Momentum
[Reuters] Chinese paper says China should prepare for military action over Taiwan
[NYT] Trump Plans to Slap Stiff Tariffs and Investment Restrictions on China
[WSJ] U.S. to Apply Tariffs on Up to $50 Billion of Chinese Imports
[WSJ] U.S., China Sharpen Trade Swords
[WSJ] Biggest Three Banks Gobble Up $2.4 Trillion in New Deposits Since Crisis
[WSJ] Sorry, But The Fed Will Be Safe Not Sorry
[FT] Fed chair Powell sets tone with first policymaking meeting
[FT] Jay Powell fails to sway investors following the ‘dot plot’
[FT] Fed’s rate signals belie benign financial conditions
[FT] Triple B risks lurking in the US credit market
[FT] IMF warns of mounting debt crisis risk in poor countries
[Bloomberg] Trump to Announce $50 Billion in China Tariffs, Sources Say
[CNBC] US vows to defend farmers from possible China trade action against soybeans
[Reuters] China blames U.S. for staggering trade surplus as tariffs loom
[Bloomberg] Congress Rushes Toward Spending Vote to Prevent Shutdown
[CNBC] Congress just released its massive spending bill: Here's what's in it
[Bloomberg] Americans' Economic Expectations Match Highest Level Since 2002
[CNBC] Rents are rising at the fastest pace in almost two years
[Bloomberg] China’s Central Bank Raises Borrowing Costs After Fed Hikes
[Bloomberg] Cracks Are Starting to Appear in the Global Economy's Momentum
[Reuters] Chinese paper says China should prepare for military action over Taiwan
[NYT] Trump Plans to Slap Stiff Tariffs and Investment Restrictions on China
[WSJ] U.S. to Apply Tariffs on Up to $50 Billion of Chinese Imports
[WSJ] U.S., China Sharpen Trade Swords
[WSJ] Biggest Three Banks Gobble Up $2.4 Trillion in New Deposits Since Crisis
[WSJ] Sorry, But The Fed Will Be Safe Not Sorry
[FT] Fed chair Powell sets tone with first policymaking meeting
[FT] Jay Powell fails to sway investors following the ‘dot plot’
[FT] Fed’s rate signals belie benign financial conditions
[FT] Triple B risks lurking in the US credit market
[FT] IMF warns of mounting debt crisis risk in poor countries
Wednesday Evening Links
[Bloomberg] Asian Stocks Face Mixed Start; Dollar Sinks on Fed: Markets Wrap
[Bloomberg] Stocks Whipsaw Investors After Powell Rate Hike: Markets Wrap
[Bloomberg] Fed Lifts Rates, Steepens Path Through 2020 For More Hikes
[Bloomberg] Powell’s Fed Debut Shows Shift Away From Theory, Models
[Reuters] Fed lifts rates, signals tougher stance as economy strengthens
[CNBC] Fed hikes rates and raises GDP forecast again
[Bloomberg] Oil Rallies to Six-Week High After Surprise U.S. Storage Slump
[Reuters] Treasury's Mnuchin says has prepared investment restrictions on China
[CNBC] White House will announce tariffs cracking down on Chinese theft of intellectual property: Sources
[Bloomberg] Rising Libor Is The Story Of The Year, Not Fed, Morgan Stanley Says
[Bloomberg] China Default Risks Flare on Scrutiny of Public Works Accounting
[Bloomberg] Central Banks Are Raising Rates at Fastest Pace Since 2011, Deutsche Bank Says
[Bloomberg] Volatile Volatility Leaves Europe's Investment Banks Whipsawed
[Bloomberg] Jim Rogers Says Trade War Is Making His Bearish View Even Darker
[Bloomberg] Tesla Investors Approve $2.6 Billion Award for Musk
[WSJ] Fed Raises Rates and Signals Faster Pace in Coming Years
[WSJ] Trump Administration Tells Lawmakers China Trade Actions Are Needed
[WSJ] Could ETFs Fall Into a Liquidity Jam?
[WSJ] Don’t Mistake Last Week’s Record ETF Inflows For Bullish Sentiment
[WSJ] Median CEO Pay Hit Record of Nearly $12 Million in 2017, Juiced by Markets
[FT] Fed signals extra rate rises as growth accelerates
[Bloomberg] Stocks Whipsaw Investors After Powell Rate Hike: Markets Wrap
[Bloomberg] Fed Lifts Rates, Steepens Path Through 2020 For More Hikes
[Bloomberg] Powell’s Fed Debut Shows Shift Away From Theory, Models
[Reuters] Fed lifts rates, signals tougher stance as economy strengthens
[CNBC] Fed hikes rates and raises GDP forecast again
[Bloomberg] Oil Rallies to Six-Week High After Surprise U.S. Storage Slump
[Reuters] Treasury's Mnuchin says has prepared investment restrictions on China
[CNBC] White House will announce tariffs cracking down on Chinese theft of intellectual property: Sources
[Bloomberg] Rising Libor Is The Story Of The Year, Not Fed, Morgan Stanley Says
[Bloomberg] China Default Risks Flare on Scrutiny of Public Works Accounting
[Bloomberg] Central Banks Are Raising Rates at Fastest Pace Since 2011, Deutsche Bank Says
[Bloomberg] Volatile Volatility Leaves Europe's Investment Banks Whipsawed
[Bloomberg] Jim Rogers Says Trade War Is Making His Bearish View Even Darker
[Bloomberg] Tesla Investors Approve $2.6 Billion Award for Musk
[WSJ] Fed Raises Rates and Signals Faster Pace in Coming Years
[WSJ] Trump Administration Tells Lawmakers China Trade Actions Are Needed
[WSJ] Could ETFs Fall Into a Liquidity Jam?
[WSJ] Don’t Mistake Last Week’s Record ETF Inflows For Bullish Sentiment
[WSJ] Median CEO Pay Hit Record of Nearly $12 Million in 2017, Juiced by Markets
[FT] Fed signals extra rate rises as growth accelerates
Tuesday, March 20, 2018
Wednesday's News Links
[Bloomberg] Stocks Renew Drop on Facebook Concern; Dollar Dips: Markets Wrap
[Reuters] U.S. current account deficit widens in fourth quarter
[Bloomberg] U.S. Existing-Home Sales Rebound Even as Inventory Remains Tight
[Bloomberg] Powell to Ponder Hawkish Tone in FOMC Debut: Decision Day Guide
[CNBC] GOP spending bill to include funding for NYC tunnel, opioid crisis, and border security
[Politico] White House plans China trade crackdown Thursday
[Bloomberg] U.S. Starter Homes Are Scarcer, Pricier, Smaller and More Run-Down
[Bloomberg] U.S. Mortgage Refinancing Drops to Nine-Year Low as Rates Rise
[Bloomberg] China Inc. Feels Heat From $668 Billion Puttable Bond Cooker
[Bloomberg] Xi Is Just Getting Started After China’s Biggest Government Shakeup in Years
[Reuters] China sends carrier through Taiwan Strait after Xi warning: report
[AP] U.S. Official, Taiwanese President to Speak at Taipei Event
[NYT] Fed’s Rate Decision: What to Watch For
[WSJ] Fed Set to Raise Rates, Issue New Economic Projections
[WSJ] China to Target Trump’s Base in Tariff Response
[FT] Global deals surge past $1tn at fastest ever pace
[FT] US affirms Taiwan support after Chinese carrier enters Taiwan Strait
[Reuters] U.S. current account deficit widens in fourth quarter
[Bloomberg] U.S. Existing-Home Sales Rebound Even as Inventory Remains Tight
[Bloomberg] Powell to Ponder Hawkish Tone in FOMC Debut: Decision Day Guide
[CNBC] GOP spending bill to include funding for NYC tunnel, opioid crisis, and border security
[Politico] White House plans China trade crackdown Thursday
[Bloomberg] U.S. Starter Homes Are Scarcer, Pricier, Smaller and More Run-Down
[Bloomberg] U.S. Mortgage Refinancing Drops to Nine-Year Low as Rates Rise
[Bloomberg] China Inc. Feels Heat From $668 Billion Puttable Bond Cooker
[Bloomberg] Xi Is Just Getting Started After China’s Biggest Government Shakeup in Years
[Reuters] China sends carrier through Taiwan Strait after Xi warning: report
[AP] U.S. Official, Taiwanese President to Speak at Taipei Event
[NYT] Fed’s Rate Decision: What to Watch For
[WSJ] Fed Set to Raise Rates, Issue New Economic Projections
[WSJ] China to Target Trump’s Base in Tariff Response
[FT] Global deals surge past $1tn at fastest ever pace
[FT] US affirms Taiwan support after Chinese carrier enters Taiwan Strait
Tuesday Evening Links
[Bloomberg] Stocks in Asia Set to Gain as Traders Await Fed: Markets Wrap
[Reuters] Wall Street climbs with oil, but Facebook's slide checks gains
[CNBC] Fed Chairman Powell's first meeting could bring on more market volatility
[Reuters] Congress leaders seek to finalize $1.3 trillion spending bill
[Bloomberg] Soaring U.S. Libor Rate Trickles Into Funding Markets Worldwide
[CNBC] US 2-year Treasury note yield hits 2008 high as Fed meeting begins
[Bloomberg] Libor-OIS Blowout Has Citigroup Eyeing More Negative Effects
[Bloomberg] The Market Gauge of Tech Fear Keeps Rising
[Bloomberg] Libor Rises for 30th Straight Day Ahead of Fed Decision
[BloombergView] The Right Questions to Ask at Fed Press Conferences
[CNBC] Surge in wealth from stocks and other financial assets may be sending a dangerous signal for the economy
[Bloomberg] FTC Probing Facebook for Use of Personal Data, Source Says
[Reuters] Investors crowded into tech sector, BAML March survey finds
[Bloomberg] Drop in Riskiest Chinese Bank Bonds Signals Alert on Dollar Debt
[CNBC] Driverless cars aren’t safe or ready for the road: Robotics expert
[FT] What to look for at the Fed meeting
[Reuters] Wall Street climbs with oil, but Facebook's slide checks gains
[CNBC] Fed Chairman Powell's first meeting could bring on more market volatility
[Reuters] Congress leaders seek to finalize $1.3 trillion spending bill
[Bloomberg] Soaring U.S. Libor Rate Trickles Into Funding Markets Worldwide
[CNBC] US 2-year Treasury note yield hits 2008 high as Fed meeting begins
[Bloomberg] Libor-OIS Blowout Has Citigroup Eyeing More Negative Effects
[Bloomberg] The Market Gauge of Tech Fear Keeps Rising
[Bloomberg] Libor Rises for 30th Straight Day Ahead of Fed Decision
[BloombergView] The Right Questions to Ask at Fed Press Conferences
[CNBC] Surge in wealth from stocks and other financial assets may be sending a dangerous signal for the economy
[Bloomberg] FTC Probing Facebook for Use of Personal Data, Source Says
[Reuters] Investors crowded into tech sector, BAML March survey finds
[Bloomberg] Drop in Riskiest Chinese Bank Bonds Signals Alert on Dollar Debt
[CNBC] Driverless cars aren’t safe or ready for the road: Robotics expert
[FT] What to look for at the Fed meeting
Monday, March 19, 2018
Monday's News Links
[Bloomberg] Stocks Struggle to Shake Tech Selloff; Yields Rise: Markets Wrap
[Bloomberg] U.S. Plans Heavy China Tariff Hit as Soon as This Week
[Bloomberg] Fed Seen Sticking With Three 2018 Rate Hikes, May Hint at Fourth
[CNBC] Tax reform 'phase 2' rollout could come as early as April 15, conservative GOP Rep. Meadows says
[Bloomberg] China to Open Manufacturing, Cut Tariffs and Taxes, Premier Says
[Bloomberg] Days Before Selloff, Tech Hit a Milestone Not Seen Since 2000
[CNBC] Tech stocks are flashing a warning sign similar to before the dot-com bubble popped
[Reuters] Xi warns Taiwan will face 'punishment of history' for separatism
[AP] China’s Xi strikes nationalistic tone in parliament address
[WSJ] Volatility Gauge Rises Most Since Last Month’s Market Rout
[WSJ] Confused? You Should Be, and the Fed Too
[WSJ] Facebook Is Pummeled by User-Data Blowback
[WSJ] Saudi Crown Prince Will Seek to Solidify Anti-Iran Stance With Trump White House
[NYT] How Facebook’s Data Sharing Went From Feature to Bug
[FT] Xi Jinping promises more assertive Chinese foreign policy
[Bloomberg] U.S. Plans Heavy China Tariff Hit as Soon as This Week
[Bloomberg] Fed Seen Sticking With Three 2018 Rate Hikes, May Hint at Fourth
[CNBC] Tax reform 'phase 2' rollout could come as early as April 15, conservative GOP Rep. Meadows says
[Bloomberg] China to Open Manufacturing, Cut Tariffs and Taxes, Premier Says
[Bloomberg] Days Before Selloff, Tech Hit a Milestone Not Seen Since 2000
[CNBC] Tech stocks are flashing a warning sign similar to before the dot-com bubble popped
[Reuters] Xi warns Taiwan will face 'punishment of history' for separatism
[AP] China’s Xi strikes nationalistic tone in parliament address
[WSJ] Volatility Gauge Rises Most Since Last Month’s Market Rout
[WSJ] Confused? You Should Be, and the Fed Too
[WSJ] Facebook Is Pummeled by User-Data Blowback
[WSJ] Saudi Crown Prince Will Seek to Solidify Anti-Iran Stance With Trump White House
[NYT] How Facebook’s Data Sharing Went From Feature to Bug
[FT] Xi Jinping promises more assertive Chinese foreign policy
Monday Evening Links
[Bloomberg] Stocks Face Drop in Asia as Tech Sentiment Rattled: Markets Wrap
[Bloomberg] Stocks Slump as Facebook Hits Tech; Bonds Recover: Markets Wrap
[Reuters] U.S. expected to impose up to $60 billion in China tariffs by Friday: sources
[Bloomberg] It's Not Just Tech. Credit Markets Give Fuel to Equity Rout
[Bloomberg] Uber Halts Autonomous-Car Testing After Fatal Arizona Crash
[Bloomberg] Market Fear Gauge Shows Investors on Edge This Week
[Bloomberg] Hot Hedge Fund Loses 21% After Bet on Volatility Goes Wrong
[Bloomberg] John Paulson’s Merger Arbitrage Fund Plunged at the Start of the Year
[Bloomberg] Stocks Slump as Facebook Hits Tech; Bonds Recover: Markets Wrap
[Reuters] U.S. expected to impose up to $60 billion in China tariffs by Friday: sources
[Bloomberg] It's Not Just Tech. Credit Markets Give Fuel to Equity Rout
[Bloomberg] Uber Halts Autonomous-Car Testing After Fatal Arizona Crash
[Bloomberg] Market Fear Gauge Shows Investors on Edge This Week
[Bloomberg] Hot Hedge Fund Loses 21% After Bet on Volatility Goes Wrong
[Bloomberg] John Paulson’s Merger Arbitrage Fund Plunged at the Start of the Year
Sunday, March 18, 2018
Monday's News Links
[Bloomberg] Stocks Slide in Broad Selloff; Brexit Spurs Pound: Markets Wrap
[Bloomberg] Weakening FANG Stocks Stir Overnight Volatility in U.S. Futures
[Reuters] Powell's Fed to show policy caution, shun political friction
[Bloomberg] Congress risks another shutdown as it struggles to nail down spending bill
[Reuters] EU readies Brexit transition deal, Ireland seeks border assurance
[Bloomberg] Chinese Central Bank’s Departing Chief Leaves a Legacy of Reform – and Debt
[Bloomberg] China New-Home Prices Rise in Fewest Cities in Five Months
[Bloomberg] Hedge Funds Suffer Worst Month in Two Years
[Bloomberg] Hedge Funds Go Long on Yen as Team Abe's Troubles Deepen
[Reuters] ECB debate shifting to interest rate path from QE: sources
[Bloomberg] Draghi Doing ECB's Dirty Work Could Ease Weidmann's Path to Top
[WSJ] Why Global Markets Are Still Far From Normal
[WSJ] Market Panic Measure Hits Eurozone Crisis Heights—But Alarms Aren’t Ringing
[WSJ] A Deeper Look at the Flattening Yield Curve
[WSJ] With Grip on Power Assured, China’s Xi Elevates Lieutenants
[FT] UK and EU agree ‘decisive step’ with 21-month Brexit transition
[Bloomberg] Weakening FANG Stocks Stir Overnight Volatility in U.S. Futures
[Reuters] Powell's Fed to show policy caution, shun political friction
[Bloomberg] Congress risks another shutdown as it struggles to nail down spending bill
[Reuters] EU readies Brexit transition deal, Ireland seeks border assurance
[Bloomberg] Chinese Central Bank’s Departing Chief Leaves a Legacy of Reform – and Debt
[Bloomberg] China New-Home Prices Rise in Fewest Cities in Five Months
[Bloomberg] Hedge Funds Suffer Worst Month in Two Years
[Bloomberg] Hedge Funds Go Long on Yen as Team Abe's Troubles Deepen
[Reuters] ECB debate shifting to interest rate path from QE: sources
[Bloomberg] Draghi Doing ECB's Dirty Work Could Ease Weidmann's Path to Top
[WSJ] Why Global Markets Are Still Far From Normal
[WSJ] Market Panic Measure Hits Eurozone Crisis Heights—But Alarms Aren’t Ringing
[WSJ] A Deeper Look at the Flattening Yield Curve
[WSJ] With Grip on Power Assured, China’s Xi Elevates Lieutenants
[FT] UK and EU agree ‘decisive step’ with 21-month Brexit transition
Sunday Evening Links
[Bloomberg] Asia Stocks Start Week Mixed as Traders Eye Fed: Markets Wrap
[Reuters] U.S. tariffs, China trade tensions overshadow G20 finance meeting
[Reuters] Exclusive: Regulator shopping in vogue as China's shadow banks evade Beijing's grip
[Bloomberg] Noble Group Braces for First Bond Default as Pressure Mounts
[Reuters] Putin wins another six years at Russia's helm in landslide victory
[NYT] China to Name New Central Bank Chief as It Seeks Continuity Amid Change
[WSJ] The Next Housing Crisis: A Historic Shortage of New Homes
[Reuters] U.S. tariffs, China trade tensions overshadow G20 finance meeting
[Reuters] Exclusive: Regulator shopping in vogue as China's shadow banks evade Beijing's grip
[Bloomberg] Noble Group Braces for First Bond Default as Pressure Mounts
[Reuters] Putin wins another six years at Russia's helm in landslide victory
[NYT] China to Name New Central Bank Chief as It Seeks Continuity Amid Change
[WSJ] The Next Housing Crisis: A Historic Shortage of New Homes
Sunday's News Links
[Bloomberg] Bond Traders' March Fed Guide: Beware the Four-Hike Hype So Soon
[Reuters] Investors eye currencies for those most at risk in a trade war
[Bloomberg] Yi Gang to Become China’s Central Bank Governor, WSJ Reports
[Reuters] Republican senator expects Trump to pull out of Iran deal: CBS
[Reuters] Britain accuses Russia of secretly stockpiling deadly nerve agent used in attack
[WSJ] All President Xi’s Men: China’s New Government Braces for Trump
[FT] All eyes on Fed ahead of Powell’s first meeting as chairman
[FT] Federal Reserve tightening pushes Treasury yields higher
[Reuters] Investors eye currencies for those most at risk in a trade war
[Bloomberg] Yi Gang to Become China’s Central Bank Governor, WSJ Reports
[Reuters] Republican senator expects Trump to pull out of Iran deal: CBS
[Reuters] Britain accuses Russia of secretly stockpiling deadly nerve agent used in attack
[WSJ] All President Xi’s Men: China’s New Government Braces for Trump
[FT] All eyes on Fed ahead of Powell’s first meeting as chairman
[FT] Federal Reserve tightening pushes Treasury yields higher
Saturday, March 17, 2018
Saturday's News Links
[Bloomberg] G-20 Sees Global Tension, End to Cheap Money as Risk to Growth
[Bloomberg] Brace Yourself, It’s Going to Be a Busy Week in the World Economy
[Reuters] Russia expels 23 British diplomats as crisis over nerve toxin attack deepens
[CNBC] There are about 14,500 nuclear weapons in the world. Here are the countries that have them
[Spiegel] A Soviet Nerve Agent Triggers a New Cold War
[Bloomberg] Brace Yourself, It’s Going to Be a Busy Week in the World Economy
[Reuters] Russia expels 23 British diplomats as crisis over nerve toxin attack deepens
[CNBC] There are about 14,500 nuclear weapons in the world. Here are the countries that have them
[Spiegel] A Soviet Nerve Agent Triggers a New Cold War
Friday, March 16, 2018
Weekly Commentary: Nobody Thinks It Would Happen Again
WSJ: "Ten Years After the Bear Stearns Bailout, Nobody Thinks It Would Happen Again."
Myriad changes to the financial structure have seemingly safeguarded the financial system from another 2008-style crisis. The big Wall Street financial institutions are these days better capitalized than a decade ago. There are "living wills," along with various regulatory constraints that have limited the most egregious lending and leveraging mistakes that brought down Bear Stearns, Lehman and others. There are central bank swap lines and such, the type of financial structures that breed optimism.
March 17, 2008 - Financial Times (Gillian Tett): "In recent years, bankers have succumbed to the idea that the credit world was all about numbers and complex computer models. These days, however, this assumption looks ever more of a falsehood. For as anyone with a classical education knows, credit takes its root from the Latin word credere ("to trust") And as the current credit turmoil now mutates into ever-more virulent forms, it is faith - or, rather, the lack of it - that has turned a subprime squall into a what is arguably the worst financial crisis in seven decades. Make no mistake: what we are witnessing right now is not just a collapse of faith in one single institution (namely Bear Stearns) or even an asset class (those dodgy subprime mortgage bonds). Instead, it stems from a loss of trust in the whole style of modern finance, with all its complex slicing and dicing of risk into ever-more opaque forms. And this trend is not just damaging the credibility of banks, but the aura of omnipotence that has enveloped institutions such as the US Federal Reserve in recent years."
Gillian Tett was the preeminent journalist during the waning mortgage finance Bubble period. She was seemingly alone in illuminating the degree of excess in subprime Credit default swaps and structured finance more generally. By March 2008, she had already recognized "the worst financial crisis in seven decades," while Wall Street was trapped in denial. Ms. Tett also appreciated the damage being done to Federal Reserve credibility. Yet no one could have anticipated the evolution of policy measures adopted by the Fed and global central bankers over the following decade. Credibility's New Lease on Life.
What I remember most vividly from the Bear Stearns episode was how well the markets took the spectacular collapse of a $400 billion Wall Street institution. After beginning 2008 at 1,468, the S&P500 closed at 1,277 on Monday, March 17. The index then rallied double-digits to 1,440 by May 19th. I recall about that time being informed that I needed to "get on with my life." Bear Stearns had been resolved. The Fed had it all under control. The crisis was over - before it even got started.
It was not over. I was convinced the overriding issue was Trillions of mispriced securities and derivatives throughout the markets - the enormous gap between perceptions and reality. Both the financial system and economy had grown dependent on rapid Credit growth. Moreover, mortgage lending had come to dominate overall system Credit, while debt growth was increasingly vulnerable to risk intermediation fragilities. Speculative leverage, also closely interlinked with risk intermediation, had evolved into a major source of marketplace liquidity.
Risk aversion had begun to significantly restrict access to Credit for the weakest borrowers, and home price declines had commenced in many locations. The financial system was highly levered in risky Credit, while the real economy was severely maladjusted from previous distortions in the flow of spending and investment. At the time, the Fed-orchestrated Bear Stearns bailout only reinforced the misperception that Washington could forestall financial dislocation. This ensured that the inevitable crisis of confidence would prove catastrophic.
I have long argued that a Bubble in junk bonds would not be perilous from a systemic standpoint. Only so many obviously risky bonds would be issued before the marketplace declares, "No more!" Functioning market mechanisms regulate the scope and duration of such booms, thereby limiting structural financial and economic maladjustment.
A boom funded by "money" is inherently problematic - and potentially disastrous. The insatiable demand for perceived safe and liquid stores of value creates the scope for prolonged systemic booms. So long as confidence is sustained in the underlying money-like financial instruments, ongoing monetary expansion (inflation) can continue to inflate securities and asset prices, spending, investment and economic output.
All the sophisticated mortgage finance Bubble-era Credit structures and risk intermediation distorted risk perceptions, spurring inordinate demand for Credit (and finance more generally). Underpinning all the lending, leveraging and speculation was the belief that Washington wouldn't tolerate a crisis in either mortgage finance or housing. Both the Fed and Wall Street had faith that monetary stimulus could resolve any hangover from a period of excess. This confidence was badly shaken by the crisis.
Importantly, however, 10-years of previously unimaginable stimulus measures - culminating in "whatever it takes" Trillions of (non-crisis) QE, negative rates and market manipulation - ensured that faith in central bank power reemerged stronger than ever. There is a critical lesson that went unlearned from the previous crisis episode: government and central bank-related risk distortions are fundamental to self-reinforcing Bubble inflation and resulting deep structural maladjustment.
One can age the mortgage finance Bubble period at about six years, commencing around governor Bernanke's 2002 "helicopter money" speeches and the Fed's focus on mortgage Credit as the expedient for (post-"tech" Bubble) systemic reflation. It would not, however, be unreasonable to date the Bubble genesis back to 1994/95, with the rapid expansion of GSE and Wall Street Credit.
We'll soon be approaching 10 years of what I back in 2009 labeled the "global government finance Bubble." Importantly, this Bubble originated at the heart of "money" and Credit, only to metastasized into the risk markets. The abuse and impairment has been unprecedented. Government debt and central bank Credit were expanded with reckless abandon. Insatiable demand for "money" granted governments at home and abroad blank checkbooks. Central banks have monetized about $15 TN of government debt, flooding speculative global securities markets with excess liquidity. Securities values have inflated to unprecedented levels. The more Credit supplied the greater its price - and the prices of virtually all assets.
Stocks rallied back (post-Bear Stearns bailout) in the spring of 2007, with players confident the Fed would backstop market liquidity. Despite widening cracks and mounting signs of looming crisis, markets were emboldened. I have argued that the collapse of two Bear Stearns structured Credit funds in the summer of 2007 was a key Bubble inflection point. I would argue further that market complacency surrounding the Bear Stearns corporate collapse ensured a catastrophic crisis of confidence. Faith in liquidity backstops and bailouts blinds the markets to risk and impedes the ability to self-adjust and correct.
"I would buy king dollar and I would sell gold." Larry Kudlow, March 14, 2018
March 14 - Bloomberg (Jeanna Smialek and Alister Bull): "The Federal Reserve's independence and monetary-policy approach had a White House ally in Gary Cohn. His successor Larry Kudlow may be a different story. 'Just let it rip, for heaven's sake,' Kudlow said of economic growth in the U.S., during a more than hour-long interview Wednesday on CNBC. 'The market's going to take care of itself. The whole story's going to take care of itself. The Fed's going to do what it has to do, but I hope they don't overdo it.'"
The current backdrop beckons for humility. It has now been almost a decade of experimental massive expansions in both government debt and central bank Credit. The economy is strong, and the financial system appears robust. Through the prism of the 2008 crisis, the big financial institutions today have less risk and more capital. But that's not the appropriate prism. Government debt and central bank Credit have been this cycle's prevailing source of Bubble fuel. Securities market inflation has been a primary inflationary manifestation. For the most part, private-sector lending is not today's pressing issue.
I understand why Mr. Kudlow would say "buy king dollar" and "sell gold." Washington is on a trajectory of dollar devaluation, with massive twin deficits stoking the risk of a dollar crisis of confidence. A loss of faith in the U.S. currency would spur selling in U.S. financial assets, certainly including Treasuries and corporate Credit. Interest rates would spike higher, revealing the scope of speculative leverage that has accumulated over the past decade. And a crisis of confidence in financial assets would surely create a boon for gold and precious metals. Washington, of course, wants none of that. Inflate Credit while saluting king dollar.
Kudlow is seasoned, articulate and media savvy. He knows Washington, Wall Street and propaganda. "Just let it rip, for heaven's sake." Over the years I've felt Kudlow would say just about anything. At times I respect his analysis; too often over the years I've grouped him with the other charlatans.
He's an ideologue with an enticing message: "Just cut taxes." Kudlow is considered a "supply-side" free market proponent, but I've always viewed him more of an inflationist. A conservative that seemingly has absolutely no issue with loose "money;" never a Bubble he doesn't adore. And to say he was detached from reality during the critical late-stage of the mortgage finance Bubble is an understatement. He was blinded by his deep ideological biases. His sight remains distorted.
Wall Street takes comfort from the notion that Kudlow might be able to pull the President back somewhat from major tariffs and trade confrontations. He is certainly a master of touting the stock market. He, as well, seems the obvious perfect spokesman for "Phase 2" of the Trump tax cuts. Why not slash capital gains rates and make individual tax cuts permanent? Deficits don't matter. Lower taxes will spur growth and pay for themselves - with plenty to spare for infrastructure and a military buildup. There is absolutely no doubt about this; no open discussion or dialogue necessary.
We're now well into the high-risk phase of the boom cycle. The February blow-up of the "short vol" funds marked an inflection point, one I have compared to the collapse of Bear Stearns structured Credit funds in the summer of 2007. Ten-year Treasury yields have jumped 44 bps so far this year, and the dollar has been under pressure. The VIX, Treasury market and greenback have calmed down of late, which has supported an equity market recovery. Corporate Credit, however, has been notably less resilient.
March 15 - Bloomberg (Molly Smith, Brian Smith and Austin Weinstein): "For years, investors have gorged on corporate debt. Now they're showing signs of being full. Fewer orders are coming in for new bonds, relative to what's for sale. Companies that sell notes are paying more interest compared with their other debt, according to data compiled by Bloomberg, and once the securities start trading, prices by one measure have been falling about half the time. It's the latest signal that the investment-grade debt market is losing steam after years of torrid gains, as rising rates and talk of tariffs weigh on the outlook for corporate profit. 'Investors are starting to be a little more disciplined,' said Bob Summers, a portfolio manager at Neuberger Berman… 'They aren't just waving in every deal now." Money managers' restraint amounts to more pain for companies. The average yield on corporate bonds is around its highest levels since January 2012…"
March 15 - Reuters (Richard Leong): "A gauge of stress in the U.S. money markets grew to its highest level in more than six years on Thursday, bolstering the risk of further increase in the costs for banks and other companies to borrow dollars. The spread between the three-month dollar London interbank offered rate and three-month overnight indexed swap rate widened to 50.65 bps, a level not seen since January 2012. At the end of 2017, it was 27.83 bps."
And a Friday headline from Bloomberg: "Libor-OIS Spread Expands to Widest Level Since May 2009." LIBOR - a benchmark short-term interbank lending rate - is increasing (27 straight sessions) and rising more rapidly than the overnight indexed swap (OIS) rate (indicative of a risk-free borrowing rate). Essentially, short-term borrowing rates are rising while Credit risk premiums are increasing. Liquidity is becoming less abundant, and there are numerous explanations posited: The Fed is raising rates and reducing its balance sheet, massive T-bill issuance, tax cuts have incentivized U.S. multinational repatriation of funds (selling short-term instruments in the process) and less QE from the ECB.
I suspect this rate and spread development is not unrelated to the rising costs of hedging currency exposures. When markets are placid and leverage is expanding, liquidity remains abundant and cheap market hedges/protection readily available. But when markets turn more volatile and less predictable, sellers of risk protection become more cautious. Hedging costs rise, a dynamic that reduces the attractiveness of underlying securities and derivatives holdings, especially those held on leverage. In particular, the rising cost to hedge dollar exposures reduces the attractiveness of U.S. fixed income investment by foreign investors/speculators. Less demand for T-bills, overseas inter-bank dollar balances and dollar LIBOR contracts manifests into rising short-term rates and expanding spreads. As we've seen, bank funding costs begin to rise. On the margin, there is less impetus to embrace risk and leverage.
The big unknown is the scope of financial leverage and embedded leverage in derivatives markets that have accumulated over this long boom cycle. The dynamics of this Bubble contrast meaningfully from those of the last. The big financial institutions are not sitting on huge holdings of potentially toxic securities and mortgage-related derivatives. Myriad risks these days are more complex and concealed - and, importantly, even more esoteric.
I would argue that the Bubble in government finance has distorted pricing and liquidity throughout the securities and derivatives markets. Securities markets have succumbed to systemic mispricing, a circumstance fostered by liquidity misperceptions and readily available market risk "insurance." The previous cycle's "Moneyness of Credit" evolved into central bank-induced "Moneyness of Risk Assets." And while virtually everyone takes comfort from the apparent soundness of financial institutions, crisis lurks in the tangled world of securities and derivatives markets liquidity.
About a decade ago, runs on Bear Stearns and then Lehman fomented the '08 market crisis. I suspect the next U.S. crisis will unfold with "runs" on stocks and corporate Credit. We've already witnessed how quickly the VIX and equities derivatives markets can dislocate. I'm curious to see how interest-rate and Credit derivatives perform in a backdrop of faltering equities, illiquidity and derivatives market stress. And considering the direction of policymaking in Washington, don't be all too surprised by an unexpected bout of market tumult in Treasuries and the dollar.
Larry Kudlow's "king dollar" and "let it rip" might play well domestically, surely in the oval office. But I suspect it's not confidence inspiring to our lowly foreign creditors. We're at the stage of the cycle that would seem to beckon for caution, contemplation and prudence. How much trouble could Team Trump and Kudlow provoke? There's ample arrogance and ideology to risk plenty.
For the Week:
The S&P500 declined 1.2% (up 2.9% y-t-d), and the Dow fell 1.5% (up 0.9%). The Utilities rallied 2.5% (down 4.9%). The Banks dropped 2.7% (up 5.8%), and the Broker/Dealers declined 1.5% (up 12.0%). The Transports slipped 0.5% (up 0.7%). The S&P 400 Midcaps dipped 0.7% (up 1.8%), and the small cap Russell 2000 declined 0.7% (up 3.3%). The Nasdaq100 fell 1.1% (up 9.7%).The Semiconductors slipped 0.6% (up 13.5%). The Biotechs dropped 1.7% (up 13.5%). With bullion down $9, the HUI gold index lost 1.0% (down 11.0%).
Three-month Treasury bill rates ended the week at 1.74%. Two-year government yields added three bps to 2.29% (up 41bps y-t-d). Five-year T-note yields slipped a basis point to 2.64% (up 44bps). Ten-year Treasury yields were down five bps to 2.85% (up 44bps). Long bond yields fell eight bps to 3.08% (up 34bps).
Greek 10-year yields were little changed at 4.17% (up 10bps y-t-d). Ten-year Portuguese yields sank 11 bps to 1.76% (down 19bps). Italian 10-year yields declined three bps to 1.98% (down 3bps). Spain's 10-year yields fell six bps to 1.38% (down 19bps). German bund yields dropped eight bps to 0.57% (up 14bps). French yields fell seven bps to 0.82% (up 3bps). The French to German 10-year bond spread widened one to 25 bps. U.K. 10-year gilt yields dropped six bps to 1.43% (up 24bps). U.K.'s FTSE equities index declined 0.8% (down 6.8%).
Japan's Nikkei 225 equities index gained 1.0% (down 4.8% y-t-d). Japanese 10-year "JGB" yields declined two bps to 0.04% (down 1bp). France's CAC40 increased 0.2% (down 0.6%). The German DAX equities index gained 0.3% (down 4.1%). Spain's IBEX 35 equities index rose 0.8% (down 2.8%). Italy's FTSE MIB index added 0.5% (up 4.6%). EM markets were mixed. Brazil's Bovespa index fell 1.7% (up 11.1%), and Mexico's Bolsa dropped 2.2% (down 3.8%). South Korea's Kospi index rose 1.4% (up 1.1%). India’s Sensex equities index slipped 0.4% (down 2.6%). China’s Shanghai Exchange dropped 1.1% (down 1.1%). Turkey's Borsa Istanbul National 100 index added 0.3% (up 1.6%). Russia's MICEX equities index declined 0.7% (up 8.8%).
Investment-grade bond funds saw inflows of $2.316 billion, and junk bond funds had inflows of $11 million (from Lipper).
Freddie Mac 30-year fixed mortgage rates declined two bps to 4.44% (up 14bps y-o-y). Fifteen-year rates fell four bps to 3.90% (up 40bps). Five-year hybrid ARM rates gained four bps to 3.67%, the high since April 2011 (up 39bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down two bps to 4.57% (up 14bps).
Myriad changes to the financial structure have seemingly safeguarded the financial system from another 2008-style crisis. The big Wall Street financial institutions are these days better capitalized than a decade ago. There are "living wills," along with various regulatory constraints that have limited the most egregious lending and leveraging mistakes that brought down Bear Stearns, Lehman and others. There are central bank swap lines and such, the type of financial structures that breed optimism.
March 17, 2008 - Financial Times (Gillian Tett): "In recent years, bankers have succumbed to the idea that the credit world was all about numbers and complex computer models. These days, however, this assumption looks ever more of a falsehood. For as anyone with a classical education knows, credit takes its root from the Latin word credere ("to trust") And as the current credit turmoil now mutates into ever-more virulent forms, it is faith - or, rather, the lack of it - that has turned a subprime squall into a what is arguably the worst financial crisis in seven decades. Make no mistake: what we are witnessing right now is not just a collapse of faith in one single institution (namely Bear Stearns) or even an asset class (those dodgy subprime mortgage bonds). Instead, it stems from a loss of trust in the whole style of modern finance, with all its complex slicing and dicing of risk into ever-more opaque forms. And this trend is not just damaging the credibility of banks, but the aura of omnipotence that has enveloped institutions such as the US Federal Reserve in recent years."
Gillian Tett was the preeminent journalist during the waning mortgage finance Bubble period. She was seemingly alone in illuminating the degree of excess in subprime Credit default swaps and structured finance more generally. By March 2008, she had already recognized "the worst financial crisis in seven decades," while Wall Street was trapped in denial. Ms. Tett also appreciated the damage being done to Federal Reserve credibility. Yet no one could have anticipated the evolution of policy measures adopted by the Fed and global central bankers over the following decade. Credibility's New Lease on Life.
What I remember most vividly from the Bear Stearns episode was how well the markets took the spectacular collapse of a $400 billion Wall Street institution. After beginning 2008 at 1,468, the S&P500 closed at 1,277 on Monday, March 17. The index then rallied double-digits to 1,440 by May 19th. I recall about that time being informed that I needed to "get on with my life." Bear Stearns had been resolved. The Fed had it all under control. The crisis was over - before it even got started.
It was not over. I was convinced the overriding issue was Trillions of mispriced securities and derivatives throughout the markets - the enormous gap between perceptions and reality. Both the financial system and economy had grown dependent on rapid Credit growth. Moreover, mortgage lending had come to dominate overall system Credit, while debt growth was increasingly vulnerable to risk intermediation fragilities. Speculative leverage, also closely interlinked with risk intermediation, had evolved into a major source of marketplace liquidity.
Risk aversion had begun to significantly restrict access to Credit for the weakest borrowers, and home price declines had commenced in many locations. The financial system was highly levered in risky Credit, while the real economy was severely maladjusted from previous distortions in the flow of spending and investment. At the time, the Fed-orchestrated Bear Stearns bailout only reinforced the misperception that Washington could forestall financial dislocation. This ensured that the inevitable crisis of confidence would prove catastrophic.
I have long argued that a Bubble in junk bonds would not be perilous from a systemic standpoint. Only so many obviously risky bonds would be issued before the marketplace declares, "No more!" Functioning market mechanisms regulate the scope and duration of such booms, thereby limiting structural financial and economic maladjustment.
A boom funded by "money" is inherently problematic - and potentially disastrous. The insatiable demand for perceived safe and liquid stores of value creates the scope for prolonged systemic booms. So long as confidence is sustained in the underlying money-like financial instruments, ongoing monetary expansion (inflation) can continue to inflate securities and asset prices, spending, investment and economic output.
All the sophisticated mortgage finance Bubble-era Credit structures and risk intermediation distorted risk perceptions, spurring inordinate demand for Credit (and finance more generally). Underpinning all the lending, leveraging and speculation was the belief that Washington wouldn't tolerate a crisis in either mortgage finance or housing. Both the Fed and Wall Street had faith that monetary stimulus could resolve any hangover from a period of excess. This confidence was badly shaken by the crisis.
Importantly, however, 10-years of previously unimaginable stimulus measures - culminating in "whatever it takes" Trillions of (non-crisis) QE, negative rates and market manipulation - ensured that faith in central bank power reemerged stronger than ever. There is a critical lesson that went unlearned from the previous crisis episode: government and central bank-related risk distortions are fundamental to self-reinforcing Bubble inflation and resulting deep structural maladjustment.
One can age the mortgage finance Bubble period at about six years, commencing around governor Bernanke's 2002 "helicopter money" speeches and the Fed's focus on mortgage Credit as the expedient for (post-"tech" Bubble) systemic reflation. It would not, however, be unreasonable to date the Bubble genesis back to 1994/95, with the rapid expansion of GSE and Wall Street Credit.
We'll soon be approaching 10 years of what I back in 2009 labeled the "global government finance Bubble." Importantly, this Bubble originated at the heart of "money" and Credit, only to metastasized into the risk markets. The abuse and impairment has been unprecedented. Government debt and central bank Credit were expanded with reckless abandon. Insatiable demand for "money" granted governments at home and abroad blank checkbooks. Central banks have monetized about $15 TN of government debt, flooding speculative global securities markets with excess liquidity. Securities values have inflated to unprecedented levels. The more Credit supplied the greater its price - and the prices of virtually all assets.
Stocks rallied back (post-Bear Stearns bailout) in the spring of 2007, with players confident the Fed would backstop market liquidity. Despite widening cracks and mounting signs of looming crisis, markets were emboldened. I have argued that the collapse of two Bear Stearns structured Credit funds in the summer of 2007 was a key Bubble inflection point. I would argue further that market complacency surrounding the Bear Stearns corporate collapse ensured a catastrophic crisis of confidence. Faith in liquidity backstops and bailouts blinds the markets to risk and impedes the ability to self-adjust and correct.
"I would buy king dollar and I would sell gold." Larry Kudlow, March 14, 2018
March 14 - Bloomberg (Jeanna Smialek and Alister Bull): "The Federal Reserve's independence and monetary-policy approach had a White House ally in Gary Cohn. His successor Larry Kudlow may be a different story. 'Just let it rip, for heaven's sake,' Kudlow said of economic growth in the U.S., during a more than hour-long interview Wednesday on CNBC. 'The market's going to take care of itself. The whole story's going to take care of itself. The Fed's going to do what it has to do, but I hope they don't overdo it.'"
The current backdrop beckons for humility. It has now been almost a decade of experimental massive expansions in both government debt and central bank Credit. The economy is strong, and the financial system appears robust. Through the prism of the 2008 crisis, the big financial institutions today have less risk and more capital. But that's not the appropriate prism. Government debt and central bank Credit have been this cycle's prevailing source of Bubble fuel. Securities market inflation has been a primary inflationary manifestation. For the most part, private-sector lending is not today's pressing issue.
I understand why Mr. Kudlow would say "buy king dollar" and "sell gold." Washington is on a trajectory of dollar devaluation, with massive twin deficits stoking the risk of a dollar crisis of confidence. A loss of faith in the U.S. currency would spur selling in U.S. financial assets, certainly including Treasuries and corporate Credit. Interest rates would spike higher, revealing the scope of speculative leverage that has accumulated over the past decade. And a crisis of confidence in financial assets would surely create a boon for gold and precious metals. Washington, of course, wants none of that. Inflate Credit while saluting king dollar.
Kudlow is seasoned, articulate and media savvy. He knows Washington, Wall Street and propaganda. "Just let it rip, for heaven's sake." Over the years I've felt Kudlow would say just about anything. At times I respect his analysis; too often over the years I've grouped him with the other charlatans.
He's an ideologue with an enticing message: "Just cut taxes." Kudlow is considered a "supply-side" free market proponent, but I've always viewed him more of an inflationist. A conservative that seemingly has absolutely no issue with loose "money;" never a Bubble he doesn't adore. And to say he was detached from reality during the critical late-stage of the mortgage finance Bubble is an understatement. He was blinded by his deep ideological biases. His sight remains distorted.
Wall Street takes comfort from the notion that Kudlow might be able to pull the President back somewhat from major tariffs and trade confrontations. He is certainly a master of touting the stock market. He, as well, seems the obvious perfect spokesman for "Phase 2" of the Trump tax cuts. Why not slash capital gains rates and make individual tax cuts permanent? Deficits don't matter. Lower taxes will spur growth and pay for themselves - with plenty to spare for infrastructure and a military buildup. There is absolutely no doubt about this; no open discussion or dialogue necessary.
We're now well into the high-risk phase of the boom cycle. The February blow-up of the "short vol" funds marked an inflection point, one I have compared to the collapse of Bear Stearns structured Credit funds in the summer of 2007. Ten-year Treasury yields have jumped 44 bps so far this year, and the dollar has been under pressure. The VIX, Treasury market and greenback have calmed down of late, which has supported an equity market recovery. Corporate Credit, however, has been notably less resilient.
March 15 - Bloomberg (Molly Smith, Brian Smith and Austin Weinstein): "For years, investors have gorged on corporate debt. Now they're showing signs of being full. Fewer orders are coming in for new bonds, relative to what's for sale. Companies that sell notes are paying more interest compared with their other debt, according to data compiled by Bloomberg, and once the securities start trading, prices by one measure have been falling about half the time. It's the latest signal that the investment-grade debt market is losing steam after years of torrid gains, as rising rates and talk of tariffs weigh on the outlook for corporate profit. 'Investors are starting to be a little more disciplined,' said Bob Summers, a portfolio manager at Neuberger Berman… 'They aren't just waving in every deal now." Money managers' restraint amounts to more pain for companies. The average yield on corporate bonds is around its highest levels since January 2012…"
March 15 - Reuters (Richard Leong): "A gauge of stress in the U.S. money markets grew to its highest level in more than six years on Thursday, bolstering the risk of further increase in the costs for banks and other companies to borrow dollars. The spread between the three-month dollar London interbank offered rate and three-month overnight indexed swap rate widened to 50.65 bps, a level not seen since January 2012. At the end of 2017, it was 27.83 bps."
And a Friday headline from Bloomberg: "Libor-OIS Spread Expands to Widest Level Since May 2009." LIBOR - a benchmark short-term interbank lending rate - is increasing (27 straight sessions) and rising more rapidly than the overnight indexed swap (OIS) rate (indicative of a risk-free borrowing rate). Essentially, short-term borrowing rates are rising while Credit risk premiums are increasing. Liquidity is becoming less abundant, and there are numerous explanations posited: The Fed is raising rates and reducing its balance sheet, massive T-bill issuance, tax cuts have incentivized U.S. multinational repatriation of funds (selling short-term instruments in the process) and less QE from the ECB.
I suspect this rate and spread development is not unrelated to the rising costs of hedging currency exposures. When markets are placid and leverage is expanding, liquidity remains abundant and cheap market hedges/protection readily available. But when markets turn more volatile and less predictable, sellers of risk protection become more cautious. Hedging costs rise, a dynamic that reduces the attractiveness of underlying securities and derivatives holdings, especially those held on leverage. In particular, the rising cost to hedge dollar exposures reduces the attractiveness of U.S. fixed income investment by foreign investors/speculators. Less demand for T-bills, overseas inter-bank dollar balances and dollar LIBOR contracts manifests into rising short-term rates and expanding spreads. As we've seen, bank funding costs begin to rise. On the margin, there is less impetus to embrace risk and leverage.
The big unknown is the scope of financial leverage and embedded leverage in derivatives markets that have accumulated over this long boom cycle. The dynamics of this Bubble contrast meaningfully from those of the last. The big financial institutions are not sitting on huge holdings of potentially toxic securities and mortgage-related derivatives. Myriad risks these days are more complex and concealed - and, importantly, even more esoteric.
I would argue that the Bubble in government finance has distorted pricing and liquidity throughout the securities and derivatives markets. Securities markets have succumbed to systemic mispricing, a circumstance fostered by liquidity misperceptions and readily available market risk "insurance." The previous cycle's "Moneyness of Credit" evolved into central bank-induced "Moneyness of Risk Assets." And while virtually everyone takes comfort from the apparent soundness of financial institutions, crisis lurks in the tangled world of securities and derivatives markets liquidity.
About a decade ago, runs on Bear Stearns and then Lehman fomented the '08 market crisis. I suspect the next U.S. crisis will unfold with "runs" on stocks and corporate Credit. We've already witnessed how quickly the VIX and equities derivatives markets can dislocate. I'm curious to see how interest-rate and Credit derivatives perform in a backdrop of faltering equities, illiquidity and derivatives market stress. And considering the direction of policymaking in Washington, don't be all too surprised by an unexpected bout of market tumult in Treasuries and the dollar.
Larry Kudlow's "king dollar" and "let it rip" might play well domestically, surely in the oval office. But I suspect it's not confidence inspiring to our lowly foreign creditors. We're at the stage of the cycle that would seem to beckon for caution, contemplation and prudence. How much trouble could Team Trump and Kudlow provoke? There's ample arrogance and ideology to risk plenty.
For the Week:
The S&P500 declined 1.2% (up 2.9% y-t-d), and the Dow fell 1.5% (up 0.9%). The Utilities rallied 2.5% (down 4.9%). The Banks dropped 2.7% (up 5.8%), and the Broker/Dealers declined 1.5% (up 12.0%). The Transports slipped 0.5% (up 0.7%). The S&P 400 Midcaps dipped 0.7% (up 1.8%), and the small cap Russell 2000 declined 0.7% (up 3.3%). The Nasdaq100 fell 1.1% (up 9.7%).The Semiconductors slipped 0.6% (up 13.5%). The Biotechs dropped 1.7% (up 13.5%). With bullion down $9, the HUI gold index lost 1.0% (down 11.0%).
Three-month Treasury bill rates ended the week at 1.74%. Two-year government yields added three bps to 2.29% (up 41bps y-t-d). Five-year T-note yields slipped a basis point to 2.64% (up 44bps). Ten-year Treasury yields were down five bps to 2.85% (up 44bps). Long bond yields fell eight bps to 3.08% (up 34bps).
Greek 10-year yields were little changed at 4.17% (up 10bps y-t-d). Ten-year Portuguese yields sank 11 bps to 1.76% (down 19bps). Italian 10-year yields declined three bps to 1.98% (down 3bps). Spain's 10-year yields fell six bps to 1.38% (down 19bps). German bund yields dropped eight bps to 0.57% (up 14bps). French yields fell seven bps to 0.82% (up 3bps). The French to German 10-year bond spread widened one to 25 bps. U.K. 10-year gilt yields dropped six bps to 1.43% (up 24bps). U.K.'s FTSE equities index declined 0.8% (down 6.8%).
Japan's Nikkei 225 equities index gained 1.0% (down 4.8% y-t-d). Japanese 10-year "JGB" yields declined two bps to 0.04% (down 1bp). France's CAC40 increased 0.2% (down 0.6%). The German DAX equities index gained 0.3% (down 4.1%). Spain's IBEX 35 equities index rose 0.8% (down 2.8%). Italy's FTSE MIB index added 0.5% (up 4.6%). EM markets were mixed. Brazil's Bovespa index fell 1.7% (up 11.1%), and Mexico's Bolsa dropped 2.2% (down 3.8%). South Korea's Kospi index rose 1.4% (up 1.1%). India’s Sensex equities index slipped 0.4% (down 2.6%). China’s Shanghai Exchange dropped 1.1% (down 1.1%). Turkey's Borsa Istanbul National 100 index added 0.3% (up 1.6%). Russia's MICEX equities index declined 0.7% (up 8.8%).
Investment-grade bond funds saw inflows of $2.316 billion, and junk bond funds had inflows of $11 million (from Lipper).
Freddie Mac 30-year fixed mortgage rates declined two bps to 4.44% (up 14bps y-o-y). Fifteen-year rates fell four bps to 3.90% (up 40bps). Five-year hybrid ARM rates gained four bps to 3.67%, the high since April 2011 (up 39bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down two bps to 4.57% (up 14bps).
Federal Reserve Credit last week gained $5.1bn to $4.359 TN. Over the past year, Fed Credit contracted $69.1bn, or 1.6%. Fed Credit inflated $1.549 TN, or 55%, over the past 280 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt jumped $11.8bn last week to $3.452 TN. "Custody holdings" were up $254bn y-o-y, or 8.0%.
M2 (narrow) "money" supply jumped $29.9bn last week to a record $13.905 TN. "Narrow money" expanded $572bn, or 4.3%, over the past year. For the week, Currency increased $2.7bn. Total Checkable Deposits surged $55.7bn, while savings Deposits dropped $25.8bn. Small Time Deposits added $1.9bn. Retail Money Funds fell $4.7bn.
Total money market fund assets sank $36.3bn to $2.820 TN. Money Funds gained $143bn y-o-y, or 5.3%.
Total Commercial Paper fell $12.6bn to $1.081 TN. CP gained $119bn y-o-y, or 12.3%.
Currency Watch:
The U.S. dollar index gained 0.2% to 90.233 (down 2.1% y-o-y). For the week on the upside, the Norwegian krone increased 0.8%, the Japanese yen 0.8%, the British pound 0.7%, the Swedish krona 0.6%, and the South Korean won 0.3%. For the week on the downside, the Canadian dollar declined 2.2%, the Australian dollar 1.7%, the South African rand 1.3%, the New Zealand dollar 0.9%, the Brazilian real 0.8%, the Mexican peso 0.4%, the euro 0.1% and the Singapore dollar 0.1%. The Chinese renminbi was little changed versus the dollar this week (up 2.71% y-t-d).
Commodities Watch:
The Goldman Sachs Commodities Index was about unchanged (up 0.5% y-t-d). Spot Gold slipped 0.7% to $1,314 (up 0.9%). Silver fell 2.0% to $16.272 (down 5.1%). Crude increased 30 cents to $62.34 (up 3%). Gasoline rose 2.2% (up 8%), while Natural Gas fell 2.2% (down 9%). Copper declined 0.9% (down 5.8%). Wheat sank 4.4% (up 10%). Corn lost 2.0% (up 9%).
Trump Administration Watch:
March 13 - Bloomberg (Nick Wadhams): "President Donald Trump ousted U.S. Secretary of State Rex Tillerson on Tuesday, ending a rocky tenure in an abrupt move that stunned the former Exxon Mobil Corp. CEO and set in motion a shakeup of the administration's foreign policy team. Trump announced Tillerson's ouster in a tweet shortly before 9 a.m. after weeks of staff turmoil, saying he would nominate CIA Director Mike Pompeo as secretary of state. But it was several hours before Trump discussed his decision with Tillerson, who said he'll hand over all responsibilities to Deputy Secretary John Sullivan at midnight Tuesday."
March 13 - Politico (Adam Behsudi and Andrew Restuccia): "President Donald Trump is getting ready to crack down on China. Trump told Cabinet secretaries and top advisers during a meeting at the White House last week that he wanted to soon hit China with steep tariffs and investment restrictions in response to allegations of intellectual property theft, according to three people familiar with the internal discussions. During the meeting… U.S. Trade Representative Robert Lighthizer presented Trump with a package of tariffs that would target the equivalent of $30 billion a year in Chinese imports. In response, Trump urged Lighthizer to aim for an even bigger number - and he instructed administration officials to be ready for a formal announcement in the coming weeks…"
March 14 - Reuters (David Lawder): "The Trump administration is pressing China to cut its trade surplus with the United States by $100 billion, a White House spokeswoman said…, clarifying a tweet last week from President Donald Trump. Last Wednesday, Trump tweeted that China had been asked to develop a plan to reduce its trade imbalance with the United States by $1 billion, but the spokeswoman said Trump had meant to say $100 billion. The United States had a record $375 billion trade deficit with China in 2017…"
March 15 - Bloomberg (Justin Sink and Steve Matthews): "Larry Kudlow wasted no time in showing Wall Street and Washington that he's ready to serve as an unabashed economic warrior for President Donald Trump. Within minutes of being named as top White House economic adviser…, Kudlow was on the airwaves to push a tough stance toward China and promise a new phase of tax cuts -- hitting two of Trump's favorite talking points and making clear why he was chosen for the job. Trump confirmed the selection… on Twitter. 'Our Country will have many years of Great Economic & Financial Success, with low taxes, unparalleled innovation, fair trade and an ever expanding labor force leading the way! #MAGA,' Trump tweeted. Kudlow… has demonstrated a Trump-like willingness to ignore taboos. In a rare departure for someone about to take a senior government job, he questioned Federal Reserve monetary policy and even offered a trading recommendation: 'I would buy King Dollar and I would sell gold.'"
March 14 - Bloomberg (Sarah Ponczek): "President Donald Trump's push for import tariffs and the recent White House personnel upheaval increase the chance of a global trade war -- and traders need to stay alert, because the end result could be the reappearance of inflation, according to at least one market analyst. 'We've gone a long time with a zero percent chance of a trade war, it's now higher than that -- probably significantly higher than that,' Matt Maley, a Miller Tabak equity strategist, said… 'The internationalists have lost and the nationalists have won.'"
March 14 - Financial Times (Katrina Manson): "Mike Pompeo's appointment as America's top diplomat puts a populist hawk in charge of foreign policy at a critical point in the country's strained relations with Iran, North Korea and Russia. The former Central Intelligence Agency director has touted the benefits of regime change in Iran and North Korea, and will probably push for a much tougher posture on both than his ousted predecessor Rex Tillerson. 'Pompeo wants to further the president's agenda,' said an administration official, contrasting him with Mr Tillerson, whose few fans saw him as a bulwark for a liberal global order under attack from a nationalistic and isolationist president."
March 13 - CNBC (Chloe Aiello): "President Donald Trump killed Broadcom's proposed buyout of Qualcomm, citing national security concerns, according to a statement issued by the White House… 'There is credible evidence that leads me to believe that Broadcom Limited, a limited company organized under the laws of Singapore (Broadcom)...through exercising control of Qualcomm Incorporated (Qualcomm), a Delaware corporation, might take action that threatens to impair the national security of the United States,' the statement said. Both companies were ordered to immediately abandon the proposed deal. The order, an unusual move by any sitting U.S. president, also prohibits all 15 of Broadcom's proposed candidates for Qualcomm's board from standing for election."
U.S. Bubble Watch:
March 13 - Wall Street Journal (Justin Baer and Ryan Tracy): "A major investment bank careens toward bankruptcy. It has $400 billion in assets, 85 years of history and deep ties to every major bank on Wall Street. As word of its troubles spreads, a run begins, sending its stock plummeting. Ten years ago Wednesday, that was Bear Stearns Cos., a once-storied firm whose excessive leverage had helped put it on the brink. The Federal Reserve tried to limit the damage with extraordinary actions, first extending the firm credit before forcing it into a hasty weekend shotgun marriage to JPMorgan…, with $29 billion in assistance. It was the first time the Fed had intervened with a noncommercial bank since the Great Depression. 'Industry participants didn't want to see Bear Stearns go down, and they didn't want to see others go down,' says Alan Schwartz, then Bear's chief executive."
March 12 - Bloomberg (Sarah McGregor): "The U.S. recorded a $215 billion budget deficit in February -- its biggest in six years -- as revenue declined. Fiscal income dropped to $156 billion, down 9% from a year earlier, while spending rose 2% to $371 billion… The deficit for the fiscal year that began in October widened to $391 billion, compared with a $351 billion shortfall the same period a year earlier… The data underscore concerns by some economists that Republican tax cuts enacted this year could increase the U.S. government debt load, which has surpassed $20 trillion. The tax changes are expected to reduce federal revenue by more than $1 trillion over the next decade, while a $300 billion spending deal reached by Congress in February could push the deficit higher."
March 12 - Reuters (Jonathan Spicer): "U.S. inflation expectations edged higher last month, with one measure hitting its highest level in a year, according to a Federal Reserve Bank of New York survey published Monday that adds to signs of price pressures. The survey of consumer expectations, which the Fed considers among other data as it continues to gradually raise interest rates, showed median one-year ahead inflation expectations rose to 2.83% from 2.71% in January, the highest reading since February 2017."
March 13 - Bloomberg (Katia Dmitrieva): "U.S. consumer prices continued to firm in February, indicating inflation is creeping up toward the Federal Reserve's target without the kind of breakout that would warrant a faster pace of interest-rate hikes. Both the main consumer price index and the core gauge, which excludes food and energy, rose 0.2% from January, matching the median estimates… The CPI was up 2.2% in the 12 months through February, compared with 2.1% in January, while the core index increased 1.8% from a year earlier for a third month."
March 14 - Reuters (Lucia Mutikani): "U.S. producer prices increased slightly more than expected in February as a rise in the cost of services offset a decline in the price of goods. The Labor Department said… its producer price index for final demand rose 0.2% last month after increasing 0.4% in January. That lifted the year-on-year increase in the PPI to 2.8% in February from 2.7% in January."
March 15 - Bloomberg (Prashant Gopal): "Home prices in the U.S. surged 8.8% in February -- the biggest gain in four years -- as buyers battled for an increasingly scarce resource: homes. While sales were little changed amid the thin inventory, the median price across 172 large metropolitan areas jumped to $285,700, according to… brokerage Redfin Corp. It was the 72nd straight month of year-over-year increases since the market bottomed in 2012. U.S. home prices are now 6.3% higher than their peak in July 2006 and 46% above their trough in February 2012, according to the S&P CoreLogic Case-Shiller national home-price index."
March 13 - CNBC (Matthew J. Belvedere): "Not enough for-sale signs in front yards are driving residential home prices higher, the chief economist at the Mortgage Bankers Association said… Compounding the problem is that Americans' wage growth is being left far behind, according to the MBA's Mike Fratantoni. 'We're still seeing home prices increase at twice the rate of income growth,' he told CNBC… 'The major constraint in the market right now is the lack of supply,' Fratantoni said. 'The absolute number of units on the market is near an all-time record low.' Fratantoni said homebuilders are trying to increase their pace of construction but 'not fast enough.'"
March 14 - CNBC (Diana Olick): "Higher interest rates caused applications to refinance a home loan to fall 2% for the week and 18% from a year ago, when rates were lower. The refinance share of all mortgage applications fell to 40%, the lowest since 2008. Mortgage applications to purchase a home did manage to eke out a slight gain, up 3% for the week and also up 3% from a year ago."
March 15 - Reuters: "U.S. import prices rose more than expected in February as the largest increase in the cost of capital goods since 2008 offset a drop in petroleum prices, bolstering views that inflation will pick up this year. …Import prices increased 0.4% last month after a downwardly revised 0.8% surge in January. Economists… had forecast import prices climbing 0.2% in February… In the 12 months through February, import prices increased 3.5% after rising 3.4% in the 12 months through January."
March 13 - Bloomberg (Scott Lanman and Christopher Condon): "Optimism among chief executive officers of large U.S. companies has reached a record high, a Business Roundtable survey showed… Index advanced to 118.6, highest since the survey began in 2002, from 96.8 in the fourth quarter… Gauge of capital spending plans in the next six months rose to 115.4 from 92.7; sales outlook jumped to 141.9 from 122. Measure of hiring expectations increased to 98.5 from 75.7."
March 14 - Bloomberg (Adam Tempkin): "More Americans are falling behind on their car payments and that's making it more expensive for subprime auto lenders to sell bundled loans. On average, AAA bond investors last year demanded insulation from the first 51% of losses on subprime-auto asset-backed securities, up more than seven percentage points from 2016, according to Wells Fargo NA. Prime lenders needed to offer enhancements on just 6%, Fitch Ratings said. The demands come as investors have grown weary of a market that's worsening at the same time that the extra interest offered over safer debt has started to shrink to levels last seen before the financial crisis. Delinquencies have steadily increased over the last five years, according to S&P Global Ratings, with losses rising to 8.32% for subprime-auto bonds in 2017 from 8.13% in 2016."
March 12 - CNBC (Jeff Cox): "Companies have been feverishly putting the savings they reaped from the tax breaks passed in December into their investors' pockets this year. Share buybacks in 2018 have averaged $4.8 billion a day, double the pace for the same period last year, according to… TrimTabs. That comes following Congress's move to slash the corporate tax rate from the highest-in-the-world 35% to 21%. The buyback announcements also have happened amid a volatile backdrop for the stock market… The share repurchases have helped keep the market afloat, as investors have pulled $23.5 billion out of funds that focus on U.S. stocks this year, according to Bank of America Merrill Lynch."
March 15 - Reuters (Pete Schroeder): "The U.S. Senate voted 67 to 31… to ease bank rules, bringing Congress a step closer to passing the first rewrite of the Dodd-Frank reform law enacted after the 2007-2009 global financial crisis. The draft legislation now heads to the U.S. House of Representatives where Republicans in the majority say they want to add more provisions to ease financial regulations. Those changes have some of the bill's backers worried that late alterations could upend the deal struck in the Senate between Republicans and Democrats."
March 13 - Bloomberg (Carolina Wilson): "A whopping 44% of all flows into U.S.-listed ETFs this year has gone to four low-cost funds from BlackRock Inc. At the top is the iShares Core MSCI EAFE ETF, known by its ticker IEFA, which has taken in $13.7 billion… Not far behind is the iShares Core S&P 500 ETF, or IVV, which has swelled by $12.2 billion. The iShares Core MSCI Emerging Markets ETF (IEMG) and the iShares Core U.S. Aggregate Bond ETF (AGG) also make the cut, taking in $5.1 billion and $2.4 billion respectively, the data show."
March 15 - Bloomberg (Emma Orr and Tiffany Kary): "IHeartMedia Inc., the biggest U.S. radio-station owner, filed for bankruptcy with a plan to halve its debt load of more than $20 billion, the legacy of a leveraged buyout that hobbled the company as the digital era spawned new rivals. IHeart, with about 850 radio stations and 17,000 employees worldwide, filed for Chapter 11 protection…, a move that allows iHeart to keep operating while it tries to cement its turnaround plan."
China Watch:
March 13 - Wall Street Journal (Tom Hancock and Lucy Hornby): "China has unveiled a sweeping revamp of its government bureaucracies, breaking up traditional power structures as President Xi Jinping attempts to fuse the ruling Communist party into the day-to-day operations of the state. The changes are aimed at streamlining the civil government and closing regulatory gaps that have frustrated Beijing's attempts to implement central policy. However, they will also allow closer alignment between the party and the civil bureaucracies, giving the CCP a greater role in day-to-day governance. Among the biggest changes is the creation of a National Supervision Commission that subjects a wider-range of government staff, such as hospital managers and university staff, to the party's internal disciplinary apparatus, reversing a division of labour that has been in place for decades."
March 12 - Bloomberg: "China unveiled a 'revolutionary' government restructuring plan that consolidates Communist Party authority, giving President Xi Jinping more direct control over the levers of money and power. The plan put before China's rubber-stamp parliament… calls for giving the People's Bank of China greater oversight in the $43 trillion banking and insurance industry and merging regulators that oversee the sector. The plan's goal was 'strengthening the Communist Party's overall leadership' of the state, the document said."
March 12 - Bloomberg: "China is giving its central bank the power to write the rules for the financial sector, as part of a sweeping overhaul aimed at closing regulatory loopholes and curbing risk in the $43 trillion banking and insurance industries. The China Banking Regulatory Commission and the China Insurance Regulatory Commission will be merged in the biggest industry overhaul since 2003. Some of their functions, including drafting key regulations and prudential oversight, will move to the People's Bank of China… A new regulatory structure with the PBOC as the pivot is emerging as the annual legislative meetings progress through their second week. Still to come are personnel appointments…"
March 12 - Bloomberg (Enda Curran): "When Zhou Xiaochuan hands over the reins of the People's Bank of China after 15 years in control, his successor will take charge of a central bank with unprecedented global influence. The economy's size has ballooned from $1.5 trillion in 2002 when he started… to about $12 trillion today. China is estimated to have contributed more than a third of global growth last year… The nation surpassed the U.S. as the world's biggest oil importer last year, buying about 8.43 million barrels a day. It's also the world's biggest trading nation with total trade of $3.82 trillion in 2016, ahead of $3.58 trillion for the U.S. Other central banks are scrambling to deepen links and decipher PBOC policies. Reserve managers including the Bundesbank are buying yuan, Thailand has joined countries extending a currency swap arrangement while the Bank of Indonesia is opening a representative office in Beijing this year -- the ninth central bank to establish an office in China."
March 12 - Financial Times (Gideon Rachman): "The foundations of America's relationship with China crumbled last week. The key developments were a lurch by the US towards protectionism and a swing by China towards one-man rule. For the past 40 years, the world's two largest economies have both embraced globalisation, based on understandings about how the other would behave. The Chinese assumed that the US would continue to support free trade. The Americans believed that economic liberalisation in China would eventually lead to political liberalisation. Both of these assumptions are now shattered. On Sunday, China's National People's Congress rubber-stamped a constitutional change that would allow President Xi Jinping to rule for life. Three days earlier, President Donald Trump announced tariffs on steel and aluminium and tweeted that 'trade wars are good and easy to win'."
March 15 - Financial Times (Gabriel Wildau and Jane Pong): "China is not immune to the charms of symbolic gestures when they serve a diplomatic purpose. From 2005 to 2014, when US criticism of China for undervaluing its currency was a big bilateral issue, Beijing frequently pushed the renminbi higher in advance of international summits and state visits, only to revert once international attention had faded. But this time - faced with demands by President Donald Trump to cut the bilateral trade deficit by $100bn - Beijing has few easy options. 'If you look at China's overall trade or current account surplus, we can't really call that a mercantilist or excess-saving economy,' says Louis Kuijs, head of Asia economics at Oxford Economics... 'China now runs trade deficits with many countries, but it happens to run big surpluses with US, Europe and India - three regions where there is now increasing momentum towards protectionism.'"
March 11 - Reuters (Elias Glenn): "Any trade war with the United States will only bring disaster to the world economy, Chinese Commerce Minister Zhong Shan said…, as Beijing stepped up its criticism on proposed metals tariffs by Washington amid fears it could shatter global growth."
March 13 - Bloomberg (Blake Schmidt, Pei Yi Mak and Venus Feng): "HNA Group Co., the poster child for runaway corporate debt in China, is increasingly drawing attention to another of the nation's financial ills: trading halts that leave stock investors trapped for weeks on end. Seven listed units of HNA have halted their shares for seven weeks or more, creating the largest swathe of frozen stock tied to a single business group in China. The suspensions, which affect $31 billion of equity, have prevented minority shareholders from selling at a time of mounting financial stress for the aviation-to-hotels conglomerate."
March 11 - Associated Press: "The day China's ruling Communist Party unveiled a proposal to allow President Xi Jinping to rule indefinitely as Mao Zedong did a generation ago, Ma Bo was so shaken he couldn't sleep. So Ma, a renowned writer, wrote a social media post urging the party to remember the history of unchecked one-man rule that ended in catastrophe. 'History is regressing badly,' Ma thundered in his post. 'As a Chinese of conscience, I cannot stay silent!' Censors silenced him anyway, swiftly wiping his post from the internet. As China's rubber-stamp legislature prepares to approve constitutional changes abolishing term limits for the president…, signs of dissent and biting satire have been all but snuffed out."
Central Bank Watch:
March 13 - Bloomberg (Birgit Jennen, Alessandro Speciale, and Chris Reiter): "By all rights, it's Germany's turn for one of the biggest political plums in Europe: the chance to name the next president of the European Central Bank. Chancellor Angela Merkel may be prepared to trade that for other items on her agenda. Merkel's political partners say they're potentially willing to concede Germany's chit. The tradeoff: more influence on French President Emmanuel Macron's push to create closer ties among euro countries. The party leaders asked not to be identified because Merkel hasn't announced her plans publicly. The man who could be left out of the equation is Bundesbank chief Jens Weidmann, a leading contender to become the fourth head of the ECB."
March 14 - Financial Times (Claire Jones): "Mario Draghi has set out his intent for how the European Central Bank will raise interest rates, advocating a moderate series of rises after the bank ends its extraordinary stimulus measures. A commitment to slow and cautious rises could set the path of ECB policy beyond the end of Mr Draghi's term of office next year and make it more difficult for his successor to deviate from his dovish monetary policy. Mr Draghi reiterated… that the central bank would not raise rates until 'well past' the end of its bond-buying programme, known as quantitative easing, which is expected by the latter stages of this year."
March 14 - Bloomberg (Piotr Skolimowski): "Mario Draghi said the European Central Bank will avoid surprising investors with sudden changes to its stimulus plans, stressing that inflation is still too low and U.S. trade policies and a stronger euro are concerns. 'Adjustments to our policy will remain predictable, and they will proceed at a measured pace,' the institution's president said in his opening speech at the annual ECB and Its Watchers conference… 'We still need to see further evidence that inflation dynamics are moving in the right direction. So monetary policy will remain patient, persistent and prudent.'"
March 13 - Reuters (Leika Kihara): "Bank of Japan Governor Haruhiko Kuroda… voiced confidence the central bank could engineer a smooth exit from its ultra-loose monetary policy, but said it was too early to debate specifics with inflation still distant from its target. 'By combining various tools, it's possible to shrink the BOJ's balance sheet at an appropriate pace while keeping markets stable,' Kuroda told parliament…"
March 11 - Reuters (Marc Jones): "The recent volatility in global financial markets should not deter top central banks from lifting interest rates or ending years of unprecedented stimulus, the Bank for International Settlements said… The latest report from the… group said that after such a long period of calm there were bound to be more market wobbles and that trade war worries were making the 'delicate task' of trying to normalize policy more complicated. Nevertheless, the move toward higher interest rates, which started in the United States and is gradually gaining traction elsewhere, should continue. 'Treading the path (of policy normalization) will call for a great deal of skill, judgment and, yes, also a measure of good fortune,' said Claudio Borio, the head of the BIS' monetary and economic department."
Global Bubble Watch:
March 11 - Reuters (Claire Milhench): "Chinese banks have significantly stepped up their lending activities in recent years to rank now as the sixth-largest international creditor group, the Bank for International Settlements (BIS) said… The BIS, an umbrella body for global central banks, said in its latest report that Chinese banks had cross-border financial assets worth about $2 trillion as of the third quarter of 2017. As Chinese banks lend abroad largely in U.S. dollars, in absolute terms this makes them the third-largest provider of U.S. dollars to the international banking system… 'Their global footprint encompasses not just emerging market economies, but also advanced economies and offshore centers worldwide,' the BIS said."
March 11 - Bloomberg (John Glover): "China, Canada and Hong Kong are among the economies most at risk of a banking crisis, according to early-warning indicators compiled by the Bank for International Settlements. Canada -- whose economy grew last year at the fastest pace since 2011 -- was flagged thanks to its households' maxed-out credit cards and high debt levels in the wider economy. Household borrowing is also seen as a risk factor for China and Hong Kong… 'The indicators currently point to the build-up of risks in several economies,' analysts Inaki Aldasoro, Claudio Borio and Mathias Drehmann wrote in the BIS's latest Quarterly Review…"
March 12 - Bloomberg (Narae Kim, Lianting Tu, and Carrie Hong): "After complaints of 'drive-by' deals, weaker covenants and abbreviated roadshows in Asia's booming dollar-bond market, some participants are starting to see scope for demanding bigger premiums from weaker borrowers. The landscape may be changing, with a jump in volatility and benchmark 10-year Treasury yields climbing toward 3%. At least two issuers delayed deals last week as scrutiny rises. 'That's investors being selective,' said Ashley Perrott, head of pan-Asia fixed income at UBS Asset Management… 'Rising tides lifted all boats' during the record issuance last year, he said. 'Those days are kind of finished for now.'"
March 12 - Bloomberg (David Goodman and Sharon R Smyth): "London house prices are falling at the fastest pace since the depths of the recession almost a decade ago, with the capital's most expensive areas seeing the biggest declines. Average prices fell to 593,396 pounds ($820,000) in January, an annual decline of 2.6%... That's the most since August 2009."
Fixed-Income Bubble Watch:
March 15 - Bloomberg (Edward Bolingbroke): "For traders focused on the short end of the U.S. rates market, next week's Federal Reserve policy meeting is turning into a sideshow amid a relentless march higher in the London interbank offered rate and other money-market benchmarks. With a quarter-point Fed hike largely priced in by the overnight index swaps market, all eyes are now on the surging dollar Libor rate and its spread over the OIS rate. A spread known as FRA/OIS, which measures market expectations for the Libor/OIS gap, this week breached 50 bps for the first time since January 2012 and extended through 52 bps Thursday. The increase, partly a result of climbing T-bill issuance, is distorting the market for eurodollar futures, which are used to speculate about Fed policy and which settle based on Libor. Three-month dollar Libor jumped 3.25 bps Thursday to 2.17750 percent, the highest since 2008, prompting a flurry of sales in March and June eurodollar contracts."
March 13 - Bloomberg (Liz McCormick and Sid Verma): "While many fixed-income investors may be focused on the specter of higher long-term Treasury yields, there's a sea change afoot at the shorter end -- in U.S. money markets. The London interbank offered rate, or Libor, and rates on Treasury bills are around levels not seen since 2008. The Federal Reserve's move to tighten policy forms the backdrop for the increase, but an added force behind the surge this year has come from a deluge of supply as U.S. deficits widen. Higher short-term borrowing costs have implications for investors and also for banks, which find themselves paying up to borrow through the commercial-paper market as they compete to lure cash. 'We are in a new paradigm,' said Jerome Schneider, head of the short-term and funding desk at Pacific Investment Management Co. 'The clear focus for the market is where will incremental demand come from to meet this supply.'"
March 12 - Wall Street Journal (James Mackintosh): "It's easy to lend money. The trick to successful finance is getting it back-and lenders, egged on by politicians, are once again forgetting how hard it can be to recover debts in a downturn… The excesses are becoming visible. Leveraged lending hit a new high of $1.6 trillion last year, spreads over the interbank lending rate neared postcrisis lows and lenders showed an unprecedented willingness to waive the usual protections. Just as in the high-yield bond market, covenants designed to prevent the most egregious behavior of borrowers were scrapped and investors took more on faith: Half of U.S. leveraged loans and 60% of Europe's are 'covenant-lite'…'This is a market with a ton of cash chasing too few deals,' says one major underwriter. 'It feels awfully frothy, going back to the days of 2006, 2007.'"
March 12 - Reuters (Max Bower): "Senior participants are warning that today's market could be as good as it gets, despite a robust global economic backdrop and buoyant mood in the private equity and leveraged loan markets. Comparisons to 2007's pre-crisis conditions are becoming more common and industry figures are debating whether today's robust conditions constitute a bubble, as purchase prices rise, jumbo buyouts proliferate and deal terms become more aggressive. 'I think we're now in bubble territory,' said Frode Strand-Nielsen, founder of Nordic private equity firm FSN Capital. Leveraged buyout purchase price multiples hit a record high of 11.2 times average Ebitda in 2017 and average buyout sizes also hit a new record of US$675m in the third quarter of 2017, up from 10 times in 2016, according to… Bain & Co."
Europe Watch:
March 14 - Reuters (Gavin Jones and Claudia Cristoferi): "The leader of Italy's eurosceptic League said on… a government deal with the anti-system 5-Star Movement was possible after an inconclusive election, raising the prospect of two radical groups running the country. The March 4 vote ended in gridlock, with 5-Star and the League emerging as the top two parties in parliament, but no bloc or group securing a majority to govern alone."
Japan Watch:
March 12 - Bloomberg (Andy Sharp): "Japan's government said… that the names of Prime Minister Shinzo Abe, his wife and his finance minister were deleted from documents at the heart of a land scandal that erupted last year, a revelation that threatens to derail his administration and its economic strategy. Finance Minister Taro Aso apologized and said an internal investigation was ongoing as opposition lawmakers called for him to resign. He admitted that staff in his department tampered with the documents, but said all the blame rests with one of his subordinates who resigned last week. Abe also sought to limit the damage. 'We'll continue the investigation to get to the bottom of why this happened -- I want Finance Minister Aso to take responsibility for that,' Abe told reporters… 'This situation has shaken public trust in the whole administration, and as its head, I feel responsibility and deeply apologize to the people.'"
Leveraged Speculator Watch:
March 13 - Bloomberg (Sridhar Natarajan and Nabila Ahmed): "A group of powerful hedge funds is banding together to repair the credit-default swaps market after a spate of manufactured defaults has threatened the usefulness of the product. Elliott Capital Management and Apollo Global Management are among firms working on closing loopholes that have allowed investors to profit from engineering defaults on a company's debt… Companies' failures to make payments on their borrowings can trigger CDS payouts. Investors have previously complained that these maneuvers spur defaults from companies that are still very much alive, when credit derivatives were meant to protect money managers against the borrowers' demise. Those complaints are translating to action now after a controversial trade late last year from Blackstone Group's GSO Capital, where it loaned money to Hovnanian Enterprises Inc. and planned to induce a default on a portion of that company's debt."
March 12 - Bloomberg (Dani Burger): "Chalk one up for the humans. Hedge funds that use artificial intelligence and machine learning in their trading process posted the worst month on record in February, according to a Eurekahedge index that's tracked the industry from 2011. The first equity correction in two years upended their strategies as once-reliable cross-asset correlations shifted. While computerized programs are feared for their potential to render human traders obsolete, the AI quants lagged behind their discretionary counterparts. The AI index fell 7.3% last month, compared to a 2.4% decline for the broader Hedge Fund Research index."
Geopolitical Watch:
March 14 - Financial Times (Claire Jones): "Russia considers the British government to be engaging in 'very serious provocation' in its response to the poisoning of a former double agent earlier this month, the Russian ambassador to the UK has told Sky News. Describing the UK response to the nerve gas attack in Salisbury as 'absolutely unacceptable', the ambassador said: 'I had a meeting in the Foreign Office. Everything that is done today by the British government is absolutely unacceptable and we consider this a provocation. The UK should follow international law.'"
March 13 - Reuters (Andrew Osborn): "Russia said on Tuesday it had information that the United States planned to bomb the government quarter in Damascus on an invented pretext, and said it would respond militarily if it felt Russian lives were threatened by such an attack. Valery Gerasimov, head of Russia's General Staff, said Moscow had information that rebels in the enclave of eastern Ghouta were planning to fake a chemical weapons attack against civilians and blame it on the Syrian army."
M2 (narrow) "money" supply jumped $29.9bn last week to a record $13.905 TN. "Narrow money" expanded $572bn, or 4.3%, over the past year. For the week, Currency increased $2.7bn. Total Checkable Deposits surged $55.7bn, while savings Deposits dropped $25.8bn. Small Time Deposits added $1.9bn. Retail Money Funds fell $4.7bn.
Total money market fund assets sank $36.3bn to $2.820 TN. Money Funds gained $143bn y-o-y, or 5.3%.
Total Commercial Paper fell $12.6bn to $1.081 TN. CP gained $119bn y-o-y, or 12.3%.
Currency Watch:
The U.S. dollar index gained 0.2% to 90.233 (down 2.1% y-o-y). For the week on the upside, the Norwegian krone increased 0.8%, the Japanese yen 0.8%, the British pound 0.7%, the Swedish krona 0.6%, and the South Korean won 0.3%. For the week on the downside, the Canadian dollar declined 2.2%, the Australian dollar 1.7%, the South African rand 1.3%, the New Zealand dollar 0.9%, the Brazilian real 0.8%, the Mexican peso 0.4%, the euro 0.1% and the Singapore dollar 0.1%. The Chinese renminbi was little changed versus the dollar this week (up 2.71% y-t-d).
Commodities Watch:
The Goldman Sachs Commodities Index was about unchanged (up 0.5% y-t-d). Spot Gold slipped 0.7% to $1,314 (up 0.9%). Silver fell 2.0% to $16.272 (down 5.1%). Crude increased 30 cents to $62.34 (up 3%). Gasoline rose 2.2% (up 8%), while Natural Gas fell 2.2% (down 9%). Copper declined 0.9% (down 5.8%). Wheat sank 4.4% (up 10%). Corn lost 2.0% (up 9%).
Trump Administration Watch:
March 13 - Bloomberg (Nick Wadhams): "President Donald Trump ousted U.S. Secretary of State Rex Tillerson on Tuesday, ending a rocky tenure in an abrupt move that stunned the former Exxon Mobil Corp. CEO and set in motion a shakeup of the administration's foreign policy team. Trump announced Tillerson's ouster in a tweet shortly before 9 a.m. after weeks of staff turmoil, saying he would nominate CIA Director Mike Pompeo as secretary of state. But it was several hours before Trump discussed his decision with Tillerson, who said he'll hand over all responsibilities to Deputy Secretary John Sullivan at midnight Tuesday."
March 13 - Politico (Adam Behsudi and Andrew Restuccia): "President Donald Trump is getting ready to crack down on China. Trump told Cabinet secretaries and top advisers during a meeting at the White House last week that he wanted to soon hit China with steep tariffs and investment restrictions in response to allegations of intellectual property theft, according to three people familiar with the internal discussions. During the meeting… U.S. Trade Representative Robert Lighthizer presented Trump with a package of tariffs that would target the equivalent of $30 billion a year in Chinese imports. In response, Trump urged Lighthizer to aim for an even bigger number - and he instructed administration officials to be ready for a formal announcement in the coming weeks…"
March 14 - Reuters (David Lawder): "The Trump administration is pressing China to cut its trade surplus with the United States by $100 billion, a White House spokeswoman said…, clarifying a tweet last week from President Donald Trump. Last Wednesday, Trump tweeted that China had been asked to develop a plan to reduce its trade imbalance with the United States by $1 billion, but the spokeswoman said Trump had meant to say $100 billion. The United States had a record $375 billion trade deficit with China in 2017…"
March 15 - Bloomberg (Justin Sink and Steve Matthews): "Larry Kudlow wasted no time in showing Wall Street and Washington that he's ready to serve as an unabashed economic warrior for President Donald Trump. Within minutes of being named as top White House economic adviser…, Kudlow was on the airwaves to push a tough stance toward China and promise a new phase of tax cuts -- hitting two of Trump's favorite talking points and making clear why he was chosen for the job. Trump confirmed the selection… on Twitter. 'Our Country will have many years of Great Economic & Financial Success, with low taxes, unparalleled innovation, fair trade and an ever expanding labor force leading the way! #MAGA,' Trump tweeted. Kudlow… has demonstrated a Trump-like willingness to ignore taboos. In a rare departure for someone about to take a senior government job, he questioned Federal Reserve monetary policy and even offered a trading recommendation: 'I would buy King Dollar and I would sell gold.'"
March 14 - Bloomberg (Sarah Ponczek): "President Donald Trump's push for import tariffs and the recent White House personnel upheaval increase the chance of a global trade war -- and traders need to stay alert, because the end result could be the reappearance of inflation, according to at least one market analyst. 'We've gone a long time with a zero percent chance of a trade war, it's now higher than that -- probably significantly higher than that,' Matt Maley, a Miller Tabak equity strategist, said… 'The internationalists have lost and the nationalists have won.'"
March 14 - Financial Times (Katrina Manson): "Mike Pompeo's appointment as America's top diplomat puts a populist hawk in charge of foreign policy at a critical point in the country's strained relations with Iran, North Korea and Russia. The former Central Intelligence Agency director has touted the benefits of regime change in Iran and North Korea, and will probably push for a much tougher posture on both than his ousted predecessor Rex Tillerson. 'Pompeo wants to further the president's agenda,' said an administration official, contrasting him with Mr Tillerson, whose few fans saw him as a bulwark for a liberal global order under attack from a nationalistic and isolationist president."
March 13 - CNBC (Chloe Aiello): "President Donald Trump killed Broadcom's proposed buyout of Qualcomm, citing national security concerns, according to a statement issued by the White House… 'There is credible evidence that leads me to believe that Broadcom Limited, a limited company organized under the laws of Singapore (Broadcom)...through exercising control of Qualcomm Incorporated (Qualcomm), a Delaware corporation, might take action that threatens to impair the national security of the United States,' the statement said. Both companies were ordered to immediately abandon the proposed deal. The order, an unusual move by any sitting U.S. president, also prohibits all 15 of Broadcom's proposed candidates for Qualcomm's board from standing for election."
U.S. Bubble Watch:
March 13 - Wall Street Journal (Justin Baer and Ryan Tracy): "A major investment bank careens toward bankruptcy. It has $400 billion in assets, 85 years of history and deep ties to every major bank on Wall Street. As word of its troubles spreads, a run begins, sending its stock plummeting. Ten years ago Wednesday, that was Bear Stearns Cos., a once-storied firm whose excessive leverage had helped put it on the brink. The Federal Reserve tried to limit the damage with extraordinary actions, first extending the firm credit before forcing it into a hasty weekend shotgun marriage to JPMorgan…, with $29 billion in assistance. It was the first time the Fed had intervened with a noncommercial bank since the Great Depression. 'Industry participants didn't want to see Bear Stearns go down, and they didn't want to see others go down,' says Alan Schwartz, then Bear's chief executive."
March 12 - Bloomberg (Sarah McGregor): "The U.S. recorded a $215 billion budget deficit in February -- its biggest in six years -- as revenue declined. Fiscal income dropped to $156 billion, down 9% from a year earlier, while spending rose 2% to $371 billion… The deficit for the fiscal year that began in October widened to $391 billion, compared with a $351 billion shortfall the same period a year earlier… The data underscore concerns by some economists that Republican tax cuts enacted this year could increase the U.S. government debt load, which has surpassed $20 trillion. The tax changes are expected to reduce federal revenue by more than $1 trillion over the next decade, while a $300 billion spending deal reached by Congress in February could push the deficit higher."
March 12 - Reuters (Jonathan Spicer): "U.S. inflation expectations edged higher last month, with one measure hitting its highest level in a year, according to a Federal Reserve Bank of New York survey published Monday that adds to signs of price pressures. The survey of consumer expectations, which the Fed considers among other data as it continues to gradually raise interest rates, showed median one-year ahead inflation expectations rose to 2.83% from 2.71% in January, the highest reading since February 2017."
March 13 - Bloomberg (Katia Dmitrieva): "U.S. consumer prices continued to firm in February, indicating inflation is creeping up toward the Federal Reserve's target without the kind of breakout that would warrant a faster pace of interest-rate hikes. Both the main consumer price index and the core gauge, which excludes food and energy, rose 0.2% from January, matching the median estimates… The CPI was up 2.2% in the 12 months through February, compared with 2.1% in January, while the core index increased 1.8% from a year earlier for a third month."
March 14 - Reuters (Lucia Mutikani): "U.S. producer prices increased slightly more than expected in February as a rise in the cost of services offset a decline in the price of goods. The Labor Department said… its producer price index for final demand rose 0.2% last month after increasing 0.4% in January. That lifted the year-on-year increase in the PPI to 2.8% in February from 2.7% in January."
March 15 - Bloomberg (Prashant Gopal): "Home prices in the U.S. surged 8.8% in February -- the biggest gain in four years -- as buyers battled for an increasingly scarce resource: homes. While sales were little changed amid the thin inventory, the median price across 172 large metropolitan areas jumped to $285,700, according to… brokerage Redfin Corp. It was the 72nd straight month of year-over-year increases since the market bottomed in 2012. U.S. home prices are now 6.3% higher than their peak in July 2006 and 46% above their trough in February 2012, according to the S&P CoreLogic Case-Shiller national home-price index."
March 13 - CNBC (Matthew J. Belvedere): "Not enough for-sale signs in front yards are driving residential home prices higher, the chief economist at the Mortgage Bankers Association said… Compounding the problem is that Americans' wage growth is being left far behind, according to the MBA's Mike Fratantoni. 'We're still seeing home prices increase at twice the rate of income growth,' he told CNBC… 'The major constraint in the market right now is the lack of supply,' Fratantoni said. 'The absolute number of units on the market is near an all-time record low.' Fratantoni said homebuilders are trying to increase their pace of construction but 'not fast enough.'"
March 14 - CNBC (Diana Olick): "Higher interest rates caused applications to refinance a home loan to fall 2% for the week and 18% from a year ago, when rates were lower. The refinance share of all mortgage applications fell to 40%, the lowest since 2008. Mortgage applications to purchase a home did manage to eke out a slight gain, up 3% for the week and also up 3% from a year ago."
March 15 - Reuters: "U.S. import prices rose more than expected in February as the largest increase in the cost of capital goods since 2008 offset a drop in petroleum prices, bolstering views that inflation will pick up this year. …Import prices increased 0.4% last month after a downwardly revised 0.8% surge in January. Economists… had forecast import prices climbing 0.2% in February… In the 12 months through February, import prices increased 3.5% after rising 3.4% in the 12 months through January."
March 13 - Bloomberg (Scott Lanman and Christopher Condon): "Optimism among chief executive officers of large U.S. companies has reached a record high, a Business Roundtable survey showed… Index advanced to 118.6, highest since the survey began in 2002, from 96.8 in the fourth quarter… Gauge of capital spending plans in the next six months rose to 115.4 from 92.7; sales outlook jumped to 141.9 from 122. Measure of hiring expectations increased to 98.5 from 75.7."
March 14 - Bloomberg (Adam Tempkin): "More Americans are falling behind on their car payments and that's making it more expensive for subprime auto lenders to sell bundled loans. On average, AAA bond investors last year demanded insulation from the first 51% of losses on subprime-auto asset-backed securities, up more than seven percentage points from 2016, according to Wells Fargo NA. Prime lenders needed to offer enhancements on just 6%, Fitch Ratings said. The demands come as investors have grown weary of a market that's worsening at the same time that the extra interest offered over safer debt has started to shrink to levels last seen before the financial crisis. Delinquencies have steadily increased over the last five years, according to S&P Global Ratings, with losses rising to 8.32% for subprime-auto bonds in 2017 from 8.13% in 2016."
March 12 - CNBC (Jeff Cox): "Companies have been feverishly putting the savings they reaped from the tax breaks passed in December into their investors' pockets this year. Share buybacks in 2018 have averaged $4.8 billion a day, double the pace for the same period last year, according to… TrimTabs. That comes following Congress's move to slash the corporate tax rate from the highest-in-the-world 35% to 21%. The buyback announcements also have happened amid a volatile backdrop for the stock market… The share repurchases have helped keep the market afloat, as investors have pulled $23.5 billion out of funds that focus on U.S. stocks this year, according to Bank of America Merrill Lynch."
March 15 - Reuters (Pete Schroeder): "The U.S. Senate voted 67 to 31… to ease bank rules, bringing Congress a step closer to passing the first rewrite of the Dodd-Frank reform law enacted after the 2007-2009 global financial crisis. The draft legislation now heads to the U.S. House of Representatives where Republicans in the majority say they want to add more provisions to ease financial regulations. Those changes have some of the bill's backers worried that late alterations could upend the deal struck in the Senate between Republicans and Democrats."
March 13 - Bloomberg (Carolina Wilson): "A whopping 44% of all flows into U.S.-listed ETFs this year has gone to four low-cost funds from BlackRock Inc. At the top is the iShares Core MSCI EAFE ETF, known by its ticker IEFA, which has taken in $13.7 billion… Not far behind is the iShares Core S&P 500 ETF, or IVV, which has swelled by $12.2 billion. The iShares Core MSCI Emerging Markets ETF (IEMG) and the iShares Core U.S. Aggregate Bond ETF (AGG) also make the cut, taking in $5.1 billion and $2.4 billion respectively, the data show."
March 15 - Bloomberg (Emma Orr and Tiffany Kary): "IHeartMedia Inc., the biggest U.S. radio-station owner, filed for bankruptcy with a plan to halve its debt load of more than $20 billion, the legacy of a leveraged buyout that hobbled the company as the digital era spawned new rivals. IHeart, with about 850 radio stations and 17,000 employees worldwide, filed for Chapter 11 protection…, a move that allows iHeart to keep operating while it tries to cement its turnaround plan."
China Watch:
March 13 - Wall Street Journal (Tom Hancock and Lucy Hornby): "China has unveiled a sweeping revamp of its government bureaucracies, breaking up traditional power structures as President Xi Jinping attempts to fuse the ruling Communist party into the day-to-day operations of the state. The changes are aimed at streamlining the civil government and closing regulatory gaps that have frustrated Beijing's attempts to implement central policy. However, they will also allow closer alignment between the party and the civil bureaucracies, giving the CCP a greater role in day-to-day governance. Among the biggest changes is the creation of a National Supervision Commission that subjects a wider-range of government staff, such as hospital managers and university staff, to the party's internal disciplinary apparatus, reversing a division of labour that has been in place for decades."
March 12 - Bloomberg: "China unveiled a 'revolutionary' government restructuring plan that consolidates Communist Party authority, giving President Xi Jinping more direct control over the levers of money and power. The plan put before China's rubber-stamp parliament… calls for giving the People's Bank of China greater oversight in the $43 trillion banking and insurance industry and merging regulators that oversee the sector. The plan's goal was 'strengthening the Communist Party's overall leadership' of the state, the document said."
March 12 - Bloomberg: "China is giving its central bank the power to write the rules for the financial sector, as part of a sweeping overhaul aimed at closing regulatory loopholes and curbing risk in the $43 trillion banking and insurance industries. The China Banking Regulatory Commission and the China Insurance Regulatory Commission will be merged in the biggest industry overhaul since 2003. Some of their functions, including drafting key regulations and prudential oversight, will move to the People's Bank of China… A new regulatory structure with the PBOC as the pivot is emerging as the annual legislative meetings progress through their second week. Still to come are personnel appointments…"
March 12 - Bloomberg (Enda Curran): "When Zhou Xiaochuan hands over the reins of the People's Bank of China after 15 years in control, his successor will take charge of a central bank with unprecedented global influence. The economy's size has ballooned from $1.5 trillion in 2002 when he started… to about $12 trillion today. China is estimated to have contributed more than a third of global growth last year… The nation surpassed the U.S. as the world's biggest oil importer last year, buying about 8.43 million barrels a day. It's also the world's biggest trading nation with total trade of $3.82 trillion in 2016, ahead of $3.58 trillion for the U.S. Other central banks are scrambling to deepen links and decipher PBOC policies. Reserve managers including the Bundesbank are buying yuan, Thailand has joined countries extending a currency swap arrangement while the Bank of Indonesia is opening a representative office in Beijing this year -- the ninth central bank to establish an office in China."
March 12 - Financial Times (Gideon Rachman): "The foundations of America's relationship with China crumbled last week. The key developments were a lurch by the US towards protectionism and a swing by China towards one-man rule. For the past 40 years, the world's two largest economies have both embraced globalisation, based on understandings about how the other would behave. The Chinese assumed that the US would continue to support free trade. The Americans believed that economic liberalisation in China would eventually lead to political liberalisation. Both of these assumptions are now shattered. On Sunday, China's National People's Congress rubber-stamped a constitutional change that would allow President Xi Jinping to rule for life. Three days earlier, President Donald Trump announced tariffs on steel and aluminium and tweeted that 'trade wars are good and easy to win'."
March 15 - Financial Times (Gabriel Wildau and Jane Pong): "China is not immune to the charms of symbolic gestures when they serve a diplomatic purpose. From 2005 to 2014, when US criticism of China for undervaluing its currency was a big bilateral issue, Beijing frequently pushed the renminbi higher in advance of international summits and state visits, only to revert once international attention had faded. But this time - faced with demands by President Donald Trump to cut the bilateral trade deficit by $100bn - Beijing has few easy options. 'If you look at China's overall trade or current account surplus, we can't really call that a mercantilist or excess-saving economy,' says Louis Kuijs, head of Asia economics at Oxford Economics... 'China now runs trade deficits with many countries, but it happens to run big surpluses with US, Europe and India - three regions where there is now increasing momentum towards protectionism.'"
March 11 - Reuters (Elias Glenn): "Any trade war with the United States will only bring disaster to the world economy, Chinese Commerce Minister Zhong Shan said…, as Beijing stepped up its criticism on proposed metals tariffs by Washington amid fears it could shatter global growth."
March 13 - Bloomberg (Blake Schmidt, Pei Yi Mak and Venus Feng): "HNA Group Co., the poster child for runaway corporate debt in China, is increasingly drawing attention to another of the nation's financial ills: trading halts that leave stock investors trapped for weeks on end. Seven listed units of HNA have halted their shares for seven weeks or more, creating the largest swathe of frozen stock tied to a single business group in China. The suspensions, which affect $31 billion of equity, have prevented minority shareholders from selling at a time of mounting financial stress for the aviation-to-hotels conglomerate."
March 11 - Associated Press: "The day China's ruling Communist Party unveiled a proposal to allow President Xi Jinping to rule indefinitely as Mao Zedong did a generation ago, Ma Bo was so shaken he couldn't sleep. So Ma, a renowned writer, wrote a social media post urging the party to remember the history of unchecked one-man rule that ended in catastrophe. 'History is regressing badly,' Ma thundered in his post. 'As a Chinese of conscience, I cannot stay silent!' Censors silenced him anyway, swiftly wiping his post from the internet. As China's rubber-stamp legislature prepares to approve constitutional changes abolishing term limits for the president…, signs of dissent and biting satire have been all but snuffed out."
Central Bank Watch:
March 13 - Bloomberg (Birgit Jennen, Alessandro Speciale, and Chris Reiter): "By all rights, it's Germany's turn for one of the biggest political plums in Europe: the chance to name the next president of the European Central Bank. Chancellor Angela Merkel may be prepared to trade that for other items on her agenda. Merkel's political partners say they're potentially willing to concede Germany's chit. The tradeoff: more influence on French President Emmanuel Macron's push to create closer ties among euro countries. The party leaders asked not to be identified because Merkel hasn't announced her plans publicly. The man who could be left out of the equation is Bundesbank chief Jens Weidmann, a leading contender to become the fourth head of the ECB."
March 14 - Financial Times (Claire Jones): "Mario Draghi has set out his intent for how the European Central Bank will raise interest rates, advocating a moderate series of rises after the bank ends its extraordinary stimulus measures. A commitment to slow and cautious rises could set the path of ECB policy beyond the end of Mr Draghi's term of office next year and make it more difficult for his successor to deviate from his dovish monetary policy. Mr Draghi reiterated… that the central bank would not raise rates until 'well past' the end of its bond-buying programme, known as quantitative easing, which is expected by the latter stages of this year."
March 14 - Bloomberg (Piotr Skolimowski): "Mario Draghi said the European Central Bank will avoid surprising investors with sudden changes to its stimulus plans, stressing that inflation is still too low and U.S. trade policies and a stronger euro are concerns. 'Adjustments to our policy will remain predictable, and they will proceed at a measured pace,' the institution's president said in his opening speech at the annual ECB and Its Watchers conference… 'We still need to see further evidence that inflation dynamics are moving in the right direction. So monetary policy will remain patient, persistent and prudent.'"
March 13 - Reuters (Leika Kihara): "Bank of Japan Governor Haruhiko Kuroda… voiced confidence the central bank could engineer a smooth exit from its ultra-loose monetary policy, but said it was too early to debate specifics with inflation still distant from its target. 'By combining various tools, it's possible to shrink the BOJ's balance sheet at an appropriate pace while keeping markets stable,' Kuroda told parliament…"
March 11 - Reuters (Marc Jones): "The recent volatility in global financial markets should not deter top central banks from lifting interest rates or ending years of unprecedented stimulus, the Bank for International Settlements said… The latest report from the… group said that after such a long period of calm there were bound to be more market wobbles and that trade war worries were making the 'delicate task' of trying to normalize policy more complicated. Nevertheless, the move toward higher interest rates, which started in the United States and is gradually gaining traction elsewhere, should continue. 'Treading the path (of policy normalization) will call for a great deal of skill, judgment and, yes, also a measure of good fortune,' said Claudio Borio, the head of the BIS' monetary and economic department."
Global Bubble Watch:
March 11 - Reuters (Claire Milhench): "Chinese banks have significantly stepped up their lending activities in recent years to rank now as the sixth-largest international creditor group, the Bank for International Settlements (BIS) said… The BIS, an umbrella body for global central banks, said in its latest report that Chinese banks had cross-border financial assets worth about $2 trillion as of the third quarter of 2017. As Chinese banks lend abroad largely in U.S. dollars, in absolute terms this makes them the third-largest provider of U.S. dollars to the international banking system… 'Their global footprint encompasses not just emerging market economies, but also advanced economies and offshore centers worldwide,' the BIS said."
March 11 - Bloomberg (John Glover): "China, Canada and Hong Kong are among the economies most at risk of a banking crisis, according to early-warning indicators compiled by the Bank for International Settlements. Canada -- whose economy grew last year at the fastest pace since 2011 -- was flagged thanks to its households' maxed-out credit cards and high debt levels in the wider economy. Household borrowing is also seen as a risk factor for China and Hong Kong… 'The indicators currently point to the build-up of risks in several economies,' analysts Inaki Aldasoro, Claudio Borio and Mathias Drehmann wrote in the BIS's latest Quarterly Review…"
March 12 - Bloomberg (Narae Kim, Lianting Tu, and Carrie Hong): "After complaints of 'drive-by' deals, weaker covenants and abbreviated roadshows in Asia's booming dollar-bond market, some participants are starting to see scope for demanding bigger premiums from weaker borrowers. The landscape may be changing, with a jump in volatility and benchmark 10-year Treasury yields climbing toward 3%. At least two issuers delayed deals last week as scrutiny rises. 'That's investors being selective,' said Ashley Perrott, head of pan-Asia fixed income at UBS Asset Management… 'Rising tides lifted all boats' during the record issuance last year, he said. 'Those days are kind of finished for now.'"
March 12 - Bloomberg (David Goodman and Sharon R Smyth): "London house prices are falling at the fastest pace since the depths of the recession almost a decade ago, with the capital's most expensive areas seeing the biggest declines. Average prices fell to 593,396 pounds ($820,000) in January, an annual decline of 2.6%... That's the most since August 2009."
Fixed-Income Bubble Watch:
March 15 - Bloomberg (Edward Bolingbroke): "For traders focused on the short end of the U.S. rates market, next week's Federal Reserve policy meeting is turning into a sideshow amid a relentless march higher in the London interbank offered rate and other money-market benchmarks. With a quarter-point Fed hike largely priced in by the overnight index swaps market, all eyes are now on the surging dollar Libor rate and its spread over the OIS rate. A spread known as FRA/OIS, which measures market expectations for the Libor/OIS gap, this week breached 50 bps for the first time since January 2012 and extended through 52 bps Thursday. The increase, partly a result of climbing T-bill issuance, is distorting the market for eurodollar futures, which are used to speculate about Fed policy and which settle based on Libor. Three-month dollar Libor jumped 3.25 bps Thursday to 2.17750 percent, the highest since 2008, prompting a flurry of sales in March and June eurodollar contracts."
March 13 - Bloomberg (Liz McCormick and Sid Verma): "While many fixed-income investors may be focused on the specter of higher long-term Treasury yields, there's a sea change afoot at the shorter end -- in U.S. money markets. The London interbank offered rate, or Libor, and rates on Treasury bills are around levels not seen since 2008. The Federal Reserve's move to tighten policy forms the backdrop for the increase, but an added force behind the surge this year has come from a deluge of supply as U.S. deficits widen. Higher short-term borrowing costs have implications for investors and also for banks, which find themselves paying up to borrow through the commercial-paper market as they compete to lure cash. 'We are in a new paradigm,' said Jerome Schneider, head of the short-term and funding desk at Pacific Investment Management Co. 'The clear focus for the market is where will incremental demand come from to meet this supply.'"
March 12 - Wall Street Journal (James Mackintosh): "It's easy to lend money. The trick to successful finance is getting it back-and lenders, egged on by politicians, are once again forgetting how hard it can be to recover debts in a downturn… The excesses are becoming visible. Leveraged lending hit a new high of $1.6 trillion last year, spreads over the interbank lending rate neared postcrisis lows and lenders showed an unprecedented willingness to waive the usual protections. Just as in the high-yield bond market, covenants designed to prevent the most egregious behavior of borrowers were scrapped and investors took more on faith: Half of U.S. leveraged loans and 60% of Europe's are 'covenant-lite'…'This is a market with a ton of cash chasing too few deals,' says one major underwriter. 'It feels awfully frothy, going back to the days of 2006, 2007.'"
March 12 - Reuters (Max Bower): "Senior participants are warning that today's market could be as good as it gets, despite a robust global economic backdrop and buoyant mood in the private equity and leveraged loan markets. Comparisons to 2007's pre-crisis conditions are becoming more common and industry figures are debating whether today's robust conditions constitute a bubble, as purchase prices rise, jumbo buyouts proliferate and deal terms become more aggressive. 'I think we're now in bubble territory,' said Frode Strand-Nielsen, founder of Nordic private equity firm FSN Capital. Leveraged buyout purchase price multiples hit a record high of 11.2 times average Ebitda in 2017 and average buyout sizes also hit a new record of US$675m in the third quarter of 2017, up from 10 times in 2016, according to… Bain & Co."
Europe Watch:
March 14 - Reuters (Gavin Jones and Claudia Cristoferi): "The leader of Italy's eurosceptic League said on… a government deal with the anti-system 5-Star Movement was possible after an inconclusive election, raising the prospect of two radical groups running the country. The March 4 vote ended in gridlock, with 5-Star and the League emerging as the top two parties in parliament, but no bloc or group securing a majority to govern alone."
Japan Watch:
March 12 - Bloomberg (Andy Sharp): "Japan's government said… that the names of Prime Minister Shinzo Abe, his wife and his finance minister were deleted from documents at the heart of a land scandal that erupted last year, a revelation that threatens to derail his administration and its economic strategy. Finance Minister Taro Aso apologized and said an internal investigation was ongoing as opposition lawmakers called for him to resign. He admitted that staff in his department tampered with the documents, but said all the blame rests with one of his subordinates who resigned last week. Abe also sought to limit the damage. 'We'll continue the investigation to get to the bottom of why this happened -- I want Finance Minister Aso to take responsibility for that,' Abe told reporters… 'This situation has shaken public trust in the whole administration, and as its head, I feel responsibility and deeply apologize to the people.'"
Leveraged Speculator Watch:
March 13 - Bloomberg (Sridhar Natarajan and Nabila Ahmed): "A group of powerful hedge funds is banding together to repair the credit-default swaps market after a spate of manufactured defaults has threatened the usefulness of the product. Elliott Capital Management and Apollo Global Management are among firms working on closing loopholes that have allowed investors to profit from engineering defaults on a company's debt… Companies' failures to make payments on their borrowings can trigger CDS payouts. Investors have previously complained that these maneuvers spur defaults from companies that are still very much alive, when credit derivatives were meant to protect money managers against the borrowers' demise. Those complaints are translating to action now after a controversial trade late last year from Blackstone Group's GSO Capital, where it loaned money to Hovnanian Enterprises Inc. and planned to induce a default on a portion of that company's debt."
March 12 - Bloomberg (Dani Burger): "Chalk one up for the humans. Hedge funds that use artificial intelligence and machine learning in their trading process posted the worst month on record in February, according to a Eurekahedge index that's tracked the industry from 2011. The first equity correction in two years upended their strategies as once-reliable cross-asset correlations shifted. While computerized programs are feared for their potential to render human traders obsolete, the AI quants lagged behind their discretionary counterparts. The AI index fell 7.3% last month, compared to a 2.4% decline for the broader Hedge Fund Research index."
Geopolitical Watch:
March 14 - Financial Times (Claire Jones): "Russia considers the British government to be engaging in 'very serious provocation' in its response to the poisoning of a former double agent earlier this month, the Russian ambassador to the UK has told Sky News. Describing the UK response to the nerve gas attack in Salisbury as 'absolutely unacceptable', the ambassador said: 'I had a meeting in the Foreign Office. Everything that is done today by the British government is absolutely unacceptable and we consider this a provocation. The UK should follow international law.'"
March 13 - Reuters (Andrew Osborn): "Russia said on Tuesday it had information that the United States planned to bomb the government quarter in Damascus on an invented pretext, and said it would respond militarily if it felt Russian lives were threatened by such an attack. Valery Gerasimov, head of Russia's General Staff, said Moscow had information that rebels in the enclave of eastern Ghouta were planning to fake a chemical weapons attack against civilians and blame it on the Syrian army."
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