[BloombergQ] Where the Midterm Race Stands Days Before U.S. Vote: Election Countdown
[CNBC] Red Wave, Blue Wave: What could happen to markets if Republicans win big or lose big on Tuesday
[BloombergQ] Can Central Banks Survive the Age of Populism?
[BloombergQ] Hedge Fund ‘Hotels’ Burned Managers Who Sought Refuge in October
[Reuters] U.S. carrier leads warships in biggest ever Japan defense war game
[NYT] How the Economic Lives of the Middle Class Have Changed Since 2016, by the Numbers
[WSJ] Tech Swoon Stings Hedge Funds
[FT] Investors face high stakes in US midterm elections
Saturday, November 3, 2018
Friday, November 2, 2018
Weekly Commentary: MBS and the Core
The Dow (DJIA) traded as low as 24,122 in late-Monday afternoon trading. By Friday's open, the Dow had rallied 1,457 points, or 6.0%, to 25,579. Relatively speaking, the Dow was a tame kitten. From Monday's intraday lows, the Nasdaq100 rallied as much at 7.8%. The Semiconductors won this week's Wild Animal competition, rallying 12.7% (week's lows to highs). At 11.9%, the Biotechs were a close second. The Homebuilders (XHB) rallied as much as 11.3% before ending the week with a gain of 7.3%.
A couple obvious questions come to mind: Bear market rally or just another "buy the dip, don't be one" opportunity for a market again ready to scale new heights? Is President Trump now ready to strike a trade deal with China - or was he just goosing markets ahead of the midterms?
Let's start with the markets. They certainly had the likeness of a classic "rip your face off" bear market rally. The Goldman Sachs Most Short index surged 9.0% off Monday lows. For the week, this index rose 6.1%, showing off a negative 2.5 beta versus the S&P500's return (6.1%/2.4%). In the semiconductor space, heavily shorted On Semiconductor, NXP Semiconductor, AMD and Micron Technology gained 23.9%, 18.5%, 14.8% and 13.9%, respectively. A long list of heavily shorted retail stocks gained double-digits, as the Retail index (XRT) surged 4.3% for the week.
There were a number of heavily shorted biotech stocks that posted 20% plus gains for the week. A bunch of regional banks rose between five and nine percent. And I'd be remiss for not mentioning (everyone's favorite short) Tesla. In just 10 sessions, Tesla rallied (38%) from a low of $253 to Friday's $346 close.
It's certainly worth noting that short squeeze dynamics were not limited to U.S. equities. Let's start at the epicenter of global crisis dynamics, the big banks. Hong Kong's Hang Seng (Chinese) Financials index rallied as much as 8.3% off the week's lows, to end the week up 6.3%. Japan's TOPIX Bank index rallied 5.4% for a weekly gain of 3.9%. Italian banks rose 6.1% this week. European banks (STOXX600) rallied 7.4% off Monday lows, to post a weekly rise of 5.4%. Deutsche Bank recovered almost 11% to finish the week up 8.8%.
The Wildness definitely included the emerging markets. The popular EEM ETF rallied as much as 10% off of Monday's lows to end the week up 5.6%. Major stock indices were up 7.0% in Argentina, 6.8% in South Africa, 5.0% in India, 4.4% in Taiwan and 4.0% in Turkey. Brazil's Ibovespa index gained 3.4% this week, boosting gains from June trading lows to 25%. Curiously, the Brazilian real declined 1.6% this week. Overall for the week, key EM currencies were caught up in the global short squeeze. The Argentine peso jumped 3.8%, the Turkish lira 3.0%, the South African rand 2.1%, the South Korean won 1.8%, the Indonesian rupiah 1.8%, and the Indian rupee 1.4%. Down 3.3%, the Mexican peso was the glaring exception.
Ten-year Treasury yields traded as low as 3.06% in nervous Monday trading. And while yields ended the week significantly higher, it's worth noting that the October 5th closing high of 3.23% was only 17 bps higher than Monday's "risk off" low yield. That's a meager pullback in yields considering the drubbing global equities were taking.
There's a number of possible explanations for the recent stickiness of Treasury yields, including: 1) Inflationary pressures have attained more momentum than in the recent past. 2) Global de-risking/deleveraging is impacting global market liquidity more generally, with effects even in safe haven sovereign debt markets. 3) U.S. fixed-income markets have succumbed to deleveraging and resulting waning liquidity. 4) Markets now don't expect the Fed to respond to "risk off" dynamics as early or aggressively as in the past. 5) The U.S. economy maintains significant momentum, especially in terms of tight labor markets.
Ten-year Treasury yields jumped eight bps Friday on the back of stronger-than-expect payrolls data. At 3.21%, yields are only two bps below the seven-year highs posted a month ago. October's 250,000 job gains were a full 50,000 above expectations, as tight labor markets turn tighter by the day. After 10 months, y-t-d job gains of 2,125,000 are running 18% above comparable 2017. October's 32,000 added manufacturing jobs were double expectations, with 2018's 227,000 added manufacturing jobs 64% above comparable 2017. Last month's 3.7% unemployment rate compares to October 2017's 4.1%. And October's 3.1% y-o-y gain in Average Hourly Earnings was the strongest since April 2009 - and compares to the year ago 2.3%. If I were a bond, I'd be on edge.
November 2 - Bloomberg (Christopher Maloney): "The bloodbath last month in the mortgage-bond market points to what the future may be like without Federal Reserve hand holding. Investors are now wondering if anyone will step in to stop the bleeding. Returns on mortgage-backed securities in October lagged Treasuries by 37 bps, the most since November 2016… Last month's weakness coincided with the Fed ending its mortgage purchases as it winds down the $1.7 trillion MBS portfolio it amassed since the financial crisis to support the market… In a situation rarely seen over the last four decades, there isn't going to be a government entity -- which before the financial crisis included Fannie Mae and Freddie Mac -- at hand to provide liquidity for mortgage-backed securities…"
Benchmark MBS yields jumped 10 bps Friday to 4.06%, the high going back to April 2011. Yields surged 16 bps this week and are now up 108 bps y-t-d.
My thesis holds that the global Bubble has been pierced at the "Periphery." After erupting at the "Periphery," de-risking, deleveraging and Contagion have been gravitating toward the "Core." Sinking MBS prices (spiking yields) confirm my view that "Periphery to Core Crisis Dynamics" have now attained important momentum at the "Core."
My assumption has been that a most-prolonged period of ultra-low rates and QE liquidity backstops has heavily incentivized leveraged speculation around the world. Globally, levered "carry trade" strategies (borrow cheap in one currency to purchase higher-yielding securities elsewhere) have proliferated. It's worth noting that the NY Fed's holdings on behalf of foreign (chiefly central bank) owners of Treasuries/Agencies dropped $19.8bn last week (to a 3-month low $3.414 TN), the biggest decline since April. I see this as likely evidence of speculative de-leveraging, capital flight, and foreign central bank purchases (dollar sales) to support their currencies. For years now, speculative international flows to EM were at least partially recycled into U.S. markets (including central bank purchases of Treasuries and Agencies). It would appear these flows have slowed significantly - and perhaps are at risk of reversing as global deleveraging gains further momentum.
I believe huge speculative leverage has accumulated here at home as well. I have posited that higher-yielding corporate Credit has been as bastion of speculative excess. And going all the way back to the early-nineties, the mortgage arena has been treasured by a flourishing leveraged speculating community. The MBS marketplace has generally been highly liquid, with securities easily financed in the booming "repurchase agreement" ("repo") market.
The above Bloomberg article noted a "situation rarely seen over the last four decades." The market is questioning the source of market liquidity going forward. This has become a pressing issue now that the Fed has begun liquidating its MBS portfolio. The predicament is compounded by the GSE's unsound financial position, one that limits their capacity to provide a powerful liquidity backstop as they did throughout the nineties and for much of the mortgage finance Bubble period (until their growth was impeded by revelations of accounting fraud).
If it is correct that de-risking/deleveraging dynamics have reached the "Core," the MBS marketplace faces challenges. In particular, as the hedge funds suffer mounting losses elsewhere (i.e. stocks, global markets, corporate Credit…), they will turn more averse to risk generally, including a vulnerable MBS marketplace. And as the speculator community moves to de-risk in MBS, it is not obvious who will step up to buy. Alternatively, as they hedge MBS interest-rate risk by shorting Treasuries, this places additional selling pressure on a Treasuries marketplace already facing massive issuance and formidable Fed liquidations.
Mortgage-backed securities are a problematic instrument. When yields drop, borrowers refinance and become more likely to purchase new homes. MBS owners get their money back much sooner than they would prefer (with lower reinvestment yields). When yields rise, MBS duration increases as borrowers hold their attractive mortgages longer. MBS holders are stuck for longer.
Over recent decades, this fundamental MBS weakness was more than offset by two critical factors: One, the GSE's eagerness to purchase securities, especially during deleveraging/crisis backdrops. Second, the Fed's willingness to aggressively cut interest-rates in the event of "risk off" marketplace liquidity issues (or, better yet, to buy $1.8 TN of MBS). With rates and yields currently rising, MBS vulnerability is obvious. Meanwhile, traditional offsetting liquidity advantages (GSEs and Fed) are anything but readily apparent going forward.
After the mortgage finance Bubble collapse, it was only natural to anticipate a significant widening of risk premiums throughout the mortgage complex. I expected a fundamental repricing of mortgage Credit, but this was not to be. The Fed slashed short-term borrowing costs to zero and expanded its balance sheet to $4.5 TN, including the purchase of $1.8 TN of mortgage-backed securities. Moreover, after a period of shrinkage, the GSEs again began expanding their mortgage holdings. Between expanding Fed and GSE holdings and the relatively weak household demand for mortgage borrowings, mortgage borrowing costs collapsed.
MBS yields averaged 7.75% during the nineties, and then sank to 6.00% during 2000 through 2007. Well, benchmark MBS yields averaged an extraordinary 3.25% between 2009 and 2017. This pricing anomaly might have finally run its course, with major ramifications for the mortgage marketplace, overall securities market liquidity and the general economy. For a very long time, the MBS marketplace acted as both a key source of marketplace liquidity and a centerpiece of government (Treasury and Federal Reserve) policy activism. The Fed's post-crash efforts to collapse borrowing costs both significantly reduced household mortgage payments, while enriching the holders of mortgage securities. But now losses for levered holders of MBS are mounting, including for the Fed and the barely capitalized GSEs. Payback Time.
I don't want to dismiss the importance of the unfolding U.S. and China trade war - or possible successful negotiations. A trade agreement would be market positive. The markets were buoyed this week by constructive comments from President Trump and Chinese officials. Commentators were, however, understandably skeptical of the timing just days before the midterms. Yet it doesn't take highly speculative "oversold" markets much to be incited into a decent short squeeze.
At the same time, I don't believe the U.S./China trade spat has been the major force behind global de-risking/deleveraging. Stated differently, this dispute worsened the situation but was not the catalyst behind the bursting of the global Bubble. Indeed, from a de-risking/deleveraging perspective, Friday's yield jump was ominous. Fixed-income investors and speculators have no doubt been hoping that "risk off" would provide some relief on the market yield front. With an equities short squeeze and strong payrolls data, the pressure just became too intense.
MBS yields have broken out to the upside, with corporate and Treasury yields close behind. Equity market players are certainly hoping a trade deal is in the works. Fixed-income players not so much. And it is within fixed-income on a global basis that problematic leverage lurks. Leveraged "risk parity" strategies saw some relief from this week's equities rally, but they must look at rising market yields with increasing trepidation.
We're now only days from the midterms. It's an especially difficult event to handicap from a market standpoint. Red wave or blue wave? I don't recall midterm elections where the outcome had the potential to be so market moving. Blue wave - big. Red wave - big. Making things all the more interesting, there has been major market instability heading into the elections. This ensures there have been major shorting and hedging efforts - to hedge/speculate both on the markets and midterm outcomes.
I'll assume large quantities of put options and derivative protection have been purchased. In the event of a red wave, there is ample firepower for an unwind of hedges and short covering to spark a rally. In the event of a blue wave, a market downdraft would see aggressive hedge-related selling by players caught on the wrong side of derivative protection previously sold. The stock market response to the anticipated blue House and red Senate split decision is not clear at all. But maybe equities have become a diversion. In a week where the focus was on short squeezes and tantalizing equities rallies, perhaps the more decisive development was in surging MBS and corporate yields.
For the Week:
The S&P500 rose 2.4% (up 1.8% y-t-d), and the Dow gained 2.4% (up 2.2%). The Utilities slipped 0.6% (up 0.6%). The Banks surged 4.8% (down 6.9%), and the Broker/Dealers rallied 5.4% (down 0.6%). The Transports jumped 4.0% (down 2.3%). The S&P 400 Midcaps rose 3.7% (down 2.0%), and the small cap Russell 2000 surged 4.3% (up 0.8%). The Nasdaq100 gained 1.6% (up 8.9%). The Semiconductors surged 7.5% (down 1.1%). The Biotechs jumped 5.8% (up 13.7%). With bullion about unchanged, the HUI gold index rallied 3.3% (down 22.3%).
Three-month Treasury bill rates ended the week at 2.27%. Two-year government yields rose 10 bps to 2.91% (up 102bps y-t-d). Five-year T-note yields gained 13 bps to 3.04% (up 83bps). Ten-year Treasury yields jumped 14 bps to 3.21% (up 81bps). Long bond yields rose 15 bps to 3.46% (up 72bps). Benchmark Fannie Mae MBS yields surged 16 bps to 4.08% (up 112bps).
Greek 10-year yields were unchanged at 4.27% (up 20bps y-t-d). Ten-year Portuguese yields slipped two bps to 1.88% (down 6bps). Italian 10-year yields dropped 13 bps to 3.32% (up 131bps). Spain's 10-year yields added a basis point to 1.57% (up 1bp). German bund yields jumped eight bps to 0.43% (unchanged). French yields gained five bps to 0.79% (unchanged). The French to German 10-year bond spread narrowed three to 36 bps. U.K. 10-year gilt yields rose 11 bps to 1.49% (up 30bps). U.K.'s FTSE equities index rallied 2.2% (down 7.1%).
Japan's Nikkei 225 equities index rallied 5.0% (down 2.3% y-t-d). Japanese 10-year "JGB" yields increased two bps to 0.13% (up 8bps). France's CAC40 recovered 2.7% (down 4.0%). The German DAX equities index jumped 3.1% (down 10.6%). Spain's IBEX 35 equities index rose 3.0% (down 10.5%). Italy's FTSE MIB index rallied 3.8% (down 11.3%). EM equities were mostly higher. Brazil's Bovespa index gained 3.4% (up 15.7%), while Mexico's Bolsa declined 1.0% (down 7.9%). South Korea's Kospi index recovered 3.4% (down 15.1%). India's Sensex equities index rallied 5.0% (up 2.8%). China's Shanghai Exchange jumped 3.0% (down 19.1%). Turkey's Borsa Istanbul National 100 index surged 4.0% (down 18.4%). Russia's MICEX equities index jumped 3.7% (up 12.7%).
A couple obvious questions come to mind: Bear market rally or just another "buy the dip, don't be one" opportunity for a market again ready to scale new heights? Is President Trump now ready to strike a trade deal with China - or was he just goosing markets ahead of the midterms?
Let's start with the markets. They certainly had the likeness of a classic "rip your face off" bear market rally. The Goldman Sachs Most Short index surged 9.0% off Monday lows. For the week, this index rose 6.1%, showing off a negative 2.5 beta versus the S&P500's return (6.1%/2.4%). In the semiconductor space, heavily shorted On Semiconductor, NXP Semiconductor, AMD and Micron Technology gained 23.9%, 18.5%, 14.8% and 13.9%, respectively. A long list of heavily shorted retail stocks gained double-digits, as the Retail index (XRT) surged 4.3% for the week.
There were a number of heavily shorted biotech stocks that posted 20% plus gains for the week. A bunch of regional banks rose between five and nine percent. And I'd be remiss for not mentioning (everyone's favorite short) Tesla. In just 10 sessions, Tesla rallied (38%) from a low of $253 to Friday's $346 close.
It's certainly worth noting that short squeeze dynamics were not limited to U.S. equities. Let's start at the epicenter of global crisis dynamics, the big banks. Hong Kong's Hang Seng (Chinese) Financials index rallied as much as 8.3% off the week's lows, to end the week up 6.3%. Japan's TOPIX Bank index rallied 5.4% for a weekly gain of 3.9%. Italian banks rose 6.1% this week. European banks (STOXX600) rallied 7.4% off Monday lows, to post a weekly rise of 5.4%. Deutsche Bank recovered almost 11% to finish the week up 8.8%.
The Wildness definitely included the emerging markets. The popular EEM ETF rallied as much as 10% off of Monday's lows to end the week up 5.6%. Major stock indices were up 7.0% in Argentina, 6.8% in South Africa, 5.0% in India, 4.4% in Taiwan and 4.0% in Turkey. Brazil's Ibovespa index gained 3.4% this week, boosting gains from June trading lows to 25%. Curiously, the Brazilian real declined 1.6% this week. Overall for the week, key EM currencies were caught up in the global short squeeze. The Argentine peso jumped 3.8%, the Turkish lira 3.0%, the South African rand 2.1%, the South Korean won 1.8%, the Indonesian rupiah 1.8%, and the Indian rupee 1.4%. Down 3.3%, the Mexican peso was the glaring exception.
Ten-year Treasury yields traded as low as 3.06% in nervous Monday trading. And while yields ended the week significantly higher, it's worth noting that the October 5th closing high of 3.23% was only 17 bps higher than Monday's "risk off" low yield. That's a meager pullback in yields considering the drubbing global equities were taking.
There's a number of possible explanations for the recent stickiness of Treasury yields, including: 1) Inflationary pressures have attained more momentum than in the recent past. 2) Global de-risking/deleveraging is impacting global market liquidity more generally, with effects even in safe haven sovereign debt markets. 3) U.S. fixed-income markets have succumbed to deleveraging and resulting waning liquidity. 4) Markets now don't expect the Fed to respond to "risk off" dynamics as early or aggressively as in the past. 5) The U.S. economy maintains significant momentum, especially in terms of tight labor markets.
Ten-year Treasury yields jumped eight bps Friday on the back of stronger-than-expect payrolls data. At 3.21%, yields are only two bps below the seven-year highs posted a month ago. October's 250,000 job gains were a full 50,000 above expectations, as tight labor markets turn tighter by the day. After 10 months, y-t-d job gains of 2,125,000 are running 18% above comparable 2017. October's 32,000 added manufacturing jobs were double expectations, with 2018's 227,000 added manufacturing jobs 64% above comparable 2017. Last month's 3.7% unemployment rate compares to October 2017's 4.1%. And October's 3.1% y-o-y gain in Average Hourly Earnings was the strongest since April 2009 - and compares to the year ago 2.3%. If I were a bond, I'd be on edge.
November 2 - Bloomberg (Christopher Maloney): "The bloodbath last month in the mortgage-bond market points to what the future may be like without Federal Reserve hand holding. Investors are now wondering if anyone will step in to stop the bleeding. Returns on mortgage-backed securities in October lagged Treasuries by 37 bps, the most since November 2016… Last month's weakness coincided with the Fed ending its mortgage purchases as it winds down the $1.7 trillion MBS portfolio it amassed since the financial crisis to support the market… In a situation rarely seen over the last four decades, there isn't going to be a government entity -- which before the financial crisis included Fannie Mae and Freddie Mac -- at hand to provide liquidity for mortgage-backed securities…"
Benchmark MBS yields jumped 10 bps Friday to 4.06%, the high going back to April 2011. Yields surged 16 bps this week and are now up 108 bps y-t-d.
My thesis holds that the global Bubble has been pierced at the "Periphery." After erupting at the "Periphery," de-risking, deleveraging and Contagion have been gravitating toward the "Core." Sinking MBS prices (spiking yields) confirm my view that "Periphery to Core Crisis Dynamics" have now attained important momentum at the "Core."
My assumption has been that a most-prolonged period of ultra-low rates and QE liquidity backstops has heavily incentivized leveraged speculation around the world. Globally, levered "carry trade" strategies (borrow cheap in one currency to purchase higher-yielding securities elsewhere) have proliferated. It's worth noting that the NY Fed's holdings on behalf of foreign (chiefly central bank) owners of Treasuries/Agencies dropped $19.8bn last week (to a 3-month low $3.414 TN), the biggest decline since April. I see this as likely evidence of speculative de-leveraging, capital flight, and foreign central bank purchases (dollar sales) to support their currencies. For years now, speculative international flows to EM were at least partially recycled into U.S. markets (including central bank purchases of Treasuries and Agencies). It would appear these flows have slowed significantly - and perhaps are at risk of reversing as global deleveraging gains further momentum.
I believe huge speculative leverage has accumulated here at home as well. I have posited that higher-yielding corporate Credit has been as bastion of speculative excess. And going all the way back to the early-nineties, the mortgage arena has been treasured by a flourishing leveraged speculating community. The MBS marketplace has generally been highly liquid, with securities easily financed in the booming "repurchase agreement" ("repo") market.
The above Bloomberg article noted a "situation rarely seen over the last four decades." The market is questioning the source of market liquidity going forward. This has become a pressing issue now that the Fed has begun liquidating its MBS portfolio. The predicament is compounded by the GSE's unsound financial position, one that limits their capacity to provide a powerful liquidity backstop as they did throughout the nineties and for much of the mortgage finance Bubble period (until their growth was impeded by revelations of accounting fraud).
If it is correct that de-risking/deleveraging dynamics have reached the "Core," the MBS marketplace faces challenges. In particular, as the hedge funds suffer mounting losses elsewhere (i.e. stocks, global markets, corporate Credit…), they will turn more averse to risk generally, including a vulnerable MBS marketplace. And as the speculator community moves to de-risk in MBS, it is not obvious who will step up to buy. Alternatively, as they hedge MBS interest-rate risk by shorting Treasuries, this places additional selling pressure on a Treasuries marketplace already facing massive issuance and formidable Fed liquidations.
Mortgage-backed securities are a problematic instrument. When yields drop, borrowers refinance and become more likely to purchase new homes. MBS owners get their money back much sooner than they would prefer (with lower reinvestment yields). When yields rise, MBS duration increases as borrowers hold their attractive mortgages longer. MBS holders are stuck for longer.
Over recent decades, this fundamental MBS weakness was more than offset by two critical factors: One, the GSE's eagerness to purchase securities, especially during deleveraging/crisis backdrops. Second, the Fed's willingness to aggressively cut interest-rates in the event of "risk off" marketplace liquidity issues (or, better yet, to buy $1.8 TN of MBS). With rates and yields currently rising, MBS vulnerability is obvious. Meanwhile, traditional offsetting liquidity advantages (GSEs and Fed) are anything but readily apparent going forward.
After the mortgage finance Bubble collapse, it was only natural to anticipate a significant widening of risk premiums throughout the mortgage complex. I expected a fundamental repricing of mortgage Credit, but this was not to be. The Fed slashed short-term borrowing costs to zero and expanded its balance sheet to $4.5 TN, including the purchase of $1.8 TN of mortgage-backed securities. Moreover, after a period of shrinkage, the GSEs again began expanding their mortgage holdings. Between expanding Fed and GSE holdings and the relatively weak household demand for mortgage borrowings, mortgage borrowing costs collapsed.
MBS yields averaged 7.75% during the nineties, and then sank to 6.00% during 2000 through 2007. Well, benchmark MBS yields averaged an extraordinary 3.25% between 2009 and 2017. This pricing anomaly might have finally run its course, with major ramifications for the mortgage marketplace, overall securities market liquidity and the general economy. For a very long time, the MBS marketplace acted as both a key source of marketplace liquidity and a centerpiece of government (Treasury and Federal Reserve) policy activism. The Fed's post-crash efforts to collapse borrowing costs both significantly reduced household mortgage payments, while enriching the holders of mortgage securities. But now losses for levered holders of MBS are mounting, including for the Fed and the barely capitalized GSEs. Payback Time.
I don't want to dismiss the importance of the unfolding U.S. and China trade war - or possible successful negotiations. A trade agreement would be market positive. The markets were buoyed this week by constructive comments from President Trump and Chinese officials. Commentators were, however, understandably skeptical of the timing just days before the midterms. Yet it doesn't take highly speculative "oversold" markets much to be incited into a decent short squeeze.
At the same time, I don't believe the U.S./China trade spat has been the major force behind global de-risking/deleveraging. Stated differently, this dispute worsened the situation but was not the catalyst behind the bursting of the global Bubble. Indeed, from a de-risking/deleveraging perspective, Friday's yield jump was ominous. Fixed-income investors and speculators have no doubt been hoping that "risk off" would provide some relief on the market yield front. With an equities short squeeze and strong payrolls data, the pressure just became too intense.
MBS yields have broken out to the upside, with corporate and Treasury yields close behind. Equity market players are certainly hoping a trade deal is in the works. Fixed-income players not so much. And it is within fixed-income on a global basis that problematic leverage lurks. Leveraged "risk parity" strategies saw some relief from this week's equities rally, but they must look at rising market yields with increasing trepidation.
We're now only days from the midterms. It's an especially difficult event to handicap from a market standpoint. Red wave or blue wave? I don't recall midterm elections where the outcome had the potential to be so market moving. Blue wave - big. Red wave - big. Making things all the more interesting, there has been major market instability heading into the elections. This ensures there have been major shorting and hedging efforts - to hedge/speculate both on the markets and midterm outcomes.
I'll assume large quantities of put options and derivative protection have been purchased. In the event of a red wave, there is ample firepower for an unwind of hedges and short covering to spark a rally. In the event of a blue wave, a market downdraft would see aggressive hedge-related selling by players caught on the wrong side of derivative protection previously sold. The stock market response to the anticipated blue House and red Senate split decision is not clear at all. But maybe equities have become a diversion. In a week where the focus was on short squeezes and tantalizing equities rallies, perhaps the more decisive development was in surging MBS and corporate yields.
For the Week:
The S&P500 rose 2.4% (up 1.8% y-t-d), and the Dow gained 2.4% (up 2.2%). The Utilities slipped 0.6% (up 0.6%). The Banks surged 4.8% (down 6.9%), and the Broker/Dealers rallied 5.4% (down 0.6%). The Transports jumped 4.0% (down 2.3%). The S&P 400 Midcaps rose 3.7% (down 2.0%), and the small cap Russell 2000 surged 4.3% (up 0.8%). The Nasdaq100 gained 1.6% (up 8.9%). The Semiconductors surged 7.5% (down 1.1%). The Biotechs jumped 5.8% (up 13.7%). With bullion about unchanged, the HUI gold index rallied 3.3% (down 22.3%).
Three-month Treasury bill rates ended the week at 2.27%. Two-year government yields rose 10 bps to 2.91% (up 102bps y-t-d). Five-year T-note yields gained 13 bps to 3.04% (up 83bps). Ten-year Treasury yields jumped 14 bps to 3.21% (up 81bps). Long bond yields rose 15 bps to 3.46% (up 72bps). Benchmark Fannie Mae MBS yields surged 16 bps to 4.08% (up 112bps).
Greek 10-year yields were unchanged at 4.27% (up 20bps y-t-d). Ten-year Portuguese yields slipped two bps to 1.88% (down 6bps). Italian 10-year yields dropped 13 bps to 3.32% (up 131bps). Spain's 10-year yields added a basis point to 1.57% (up 1bp). German bund yields jumped eight bps to 0.43% (unchanged). French yields gained five bps to 0.79% (unchanged). The French to German 10-year bond spread narrowed three to 36 bps. U.K. 10-year gilt yields rose 11 bps to 1.49% (up 30bps). U.K.'s FTSE equities index rallied 2.2% (down 7.1%).
Japan's Nikkei 225 equities index rallied 5.0% (down 2.3% y-t-d). Japanese 10-year "JGB" yields increased two bps to 0.13% (up 8bps). France's CAC40 recovered 2.7% (down 4.0%). The German DAX equities index jumped 3.1% (down 10.6%). Spain's IBEX 35 equities index rose 3.0% (down 10.5%). Italy's FTSE MIB index rallied 3.8% (down 11.3%). EM equities were mostly higher. Brazil's Bovespa index gained 3.4% (up 15.7%), while Mexico's Bolsa declined 1.0% (down 7.9%). South Korea's Kospi index recovered 3.4% (down 15.1%). India's Sensex equities index rallied 5.0% (up 2.8%). China's Shanghai Exchange jumped 3.0% (down 19.1%). Turkey's Borsa Istanbul National 100 index surged 4.0% (down 18.4%). Russia's MICEX equities index jumped 3.7% (up 12.7%).
Investment-grade bond funds were hit with outflows of $3.753 billion, and junk bond funds saw outflows of $1.043 billion (from Lipper).
Freddie Mac 30-year fixed mortgage rates slipped three bps to 4.83% (up 89bps y-o-y). Fifteen-year rates declined six bps to 4.23% (up 96bps). Five-year hybrid ARM rates dropped 10 bps to 4.04% (up 81bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down three bps to 4.79% (up 61bps).
Federal Reserve Credit last week declined $15.3bn to $4.121 TN. Over the past year, Fed Credit contracted $300bn, or 6.8%. Fed Credit inflated $1.310 TN, or 47%, over the past 313 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt dropped $19.8bn last week to $3.415 TN. "Custody holdings" were up $49bn y-o-y, or 1.4%.
M2 (narrow) "money" supply jumped $25.5bn last week to a record $14.287 TN. "Narrow money" gained $541bn, or 3.9%, over the past year. For the week, Currency increased $1.9bn. Total Checkable Deposits rose $29.4bn, while Savings Deposits declined $16.6bn. Small Time Deposits increased $3.7bn. Retail Money Funds gained $7.1bn.
Total money market fund assets added $2.7bn to $2.884 TN. Money Funds gained $155bn y-o-y, or 5.7%.
Total Commercial Paper slipped $0.6bn to $1.087 TN. CP gained $39.7bn y-o-y, or 3.8%.
Currency Watch:
October 30 - Bloomberg (Keith Bradsher): "As the United States and China swap threats and mete out increasingly punishing tariffs, the world is watching to see whether Beijing turns to one of its most potent economic weapons. It involves the number 7. China's currency, the renminbi, has been gradually losing value since mid-April, and on Tuesday it was at its weakest point in a decade. If the currency weakens any further, it could fall below the psychologically important level of 7 renminbi to the dollar. The last time it took more than 7 renminbi to buy a dollar was in May 2008, as the world was slipping into a financial crisis."
October 30 - Bloomberg (Tian Chen): "How much further will China's currency slide after it touched the weakest level in a decade on Tuesday? The answer may depend in large part on whether Beijing can keep capital outflows under control. Official figures released over the past few weeks suggest money is increasingly leaving China's borders, a reminder that motivated citizens and companies still have ways to get their cash out despite a tightening of capital controls after the country's shock devaluation in 2015. While there's little to suggest a stampede for the exits is imminent, the risk increases with every tick lower in the yuan."
The U.S. dollar index was little changed at 96.484 (up 4.7% y-t-d). For the week on the upside, the New Zealand dollar increased 2.2%, the South African rand 2.1%, the South Korean won 1.8%, the Australian dollar 1.5%, the British pound 1.1%, the Swedish krona 0.8% and the Singapore dollar 0.3%. For the week on the downside, the Mexican peso declined 3.3%, the Brazilian real 1.6%, the Japanese yen 1.1%, the Swiss franc 0.7%, the Norwegian krone 0.2% and the euro 0.1%. The Chinese renminbi rallied 0.77% versus the dollar this week (down 5.57% y-t-d).
Commodities Watch:
October 30 - Bloomberg (Ranjeetha Pakiam): "Goldman Sachs… says that 'fear' has made a comeback and gold is benefiting as stocks slide and investors fret more about the possibility that the U.S. economy may tumble back into recession. Bullion's recent advance 'happened on the back of the market sell-off and spike in volatility,' analysts including Mikhail Sprogis and Jeffrey Currie, wrote… 'In our view, it represents a rebound in fear-related demand for gold with ETFs beginning to build after several months of declines.'"
The Goldman Sachs Commodities Index dropped 3.1% (up 1.9% y-t-d). Spot Gold was little changed at $1,233 (down 5.4%). Silver was about unchanged at $14.475 (down 14%). Crude sank another $4.73 to $62.87 (up 4%). Gasoline dropped 6.3% (down 5%), while Natural Gas rallied 2.9% (up 12%). Copper jumped 2.5% (down 15%). Wheat added 0.7% (up 19%). Corn gained 1.0% (up 6%).
Market Dislocation Watch:
October 31 - Reuters (Lewis Krauskopf): "Gridlock, Blue Sweep or Red Repeat? Wall Street is closely watching the U.S. midterm Congressional elections next week, as policy decisions that could sway the economy, corporate decision-making and consumer spending hinge on the results. Should his fellow Republicans maintain or extend their grip on Congress, President Donald Trump may be emboldened to pursue more of his political agenda, including further tax reforms. By contrast, Democratic gains that allow the party to control the House of Representatives, and possibly the Senate, could stifle Trump's policy aims and perhaps lead to attempts to impeach him."
October 30 - Reuters (Richard Leong): "A measure of strain in U.S. money markets grew to its widest level in 2-1/2 months on Tuesday as a gauge of interbank borrowing costs increased for a 10th straight session to a fresh decade high. The London interbank offered rate for banks to borrow three-month dollars from each other climbed 1.4 bps to 2.54100%, the highest since October 2008. LIBOR is the rate benchmark for $200 trillion of dollar-denominated financial products, mainly interest rate swaps and floating-rate loans."
Trump Administration Watch:
November 2 - Bloomberg (Brendan Scott): "As recently as Sunday, Donald Trump was telling supporters China was "not ready" to cut a deal to end their trade war. Last night, he decided it is. The U.S. president ordered Cabinet officials to draft terms for an agreement between the world's two largest economies, Jenny Leonard, Saleha Mohsin and Jennifer Jacobs report. The breakthrough came after Trump's "long and very good" phone call with Chinese counterpart Xi Jinping - their first confirmed conversation in six months. 'They want to make a deal,' Trump told a rally… 'He wants to do it.' Global markets rallied on the news. But Chinese state media said the call came at Trump's request, suggesting another catalyst: the Congressional midterm elections on Tuesday. In the campaign's final weeks, Trump has unveiled a flurry of proposals few expect to pan out, including cutting middle-class taxes and ending birthright citizenship."
November 1 - Reuters (Joseph Campbell and Susan Heavey): "U.S. President Donald Trump on Thursday said trade discussions with China were 'moving along nicely' and that he planned to meet with Chinese President Xi Jinping at the upcoming G-20 summit, after the two had a 'very good' talk. Earlier on Thursday, Chinese Premier Li Keqiang told a group of visiting U.S. politicians that China and the United States could overcome their differences and get relations back on track if they worked together in a spirit of mutual respect."
October 30 - Reuters (John Ruwitch and Ben Blanchard): "U.S. President Donald Trump said he thinks there will be 'a great deal' with China on trade, but warned that he has billions of dollars worth of new tariffs ready to go if a deal isn't possible. 'I think that we will make a great deal with China and it has to be great, because they've drained our country,' Trump told FOX News Channel's 'The Ingraham Angle'…"
October 29 - Bloomberg (Jenny Leonard and Jennifer Jacobs): "The U.S. is preparing to announce by early December tariffs on all remaining Chinese imports if talks next month between presidents Donald Trump and Xi Jinping fail to ease the trade war, three people familiar with the matter said. An early-December announcement of a new product list would mean the effective date -- after a 60-day public comment period -- may coincide with China's Lunar New Year holiday in early February. The list would apply to the imports from the Asian nation that aren't already covered by previous rounds of tariffs -- which may be $257 billion using last year's import figures, according to two of the people."
October 30 - Bloomberg (Randall Woods): "The U.S. Treasury Department said government borrowing this year will more than double from 2017 to $1.34 trillion as the Trump administration finances a rising budget deficit. Specifically, the department expects to issue $425 billion in net marketable debt from October through December, lower than the $440 billion estimated in July... The Treasury sees an end-of-December cash balance of $410 billion, compared with its previous forecast of $390 billion. From July through September, the Treasury said it issued $353 billion in net marketable debt, compared with its earlier prediction of $329 billion in borrowing."
October 31 - Bloomberg (Saleha Mohsin and Liz Capo McCormick): "The U.S. Treasury Department announced debt sales will surpass levels last seen when the country was digging out of its worst economic crisis since the Great Depression. This time around, fiscal stimulus is adding fuel to an already growing economy. A ballooning budget shortfall -- fueled by tax cuts, spending hikes and an aging population -- is driving the U.S. Treasury to raise its long-term debt issuance at its quarterly refunding auctions to $83 billion from $78 billion three months ago… The need for the Treasury to raise auction sizes for a fourth straight quarter is also partially driven by the Federal Reserve's decision not to replace some of its Treasury holdings when they mature as it winds down crisis-era stimulus measures."
Federal Reserve Watch:
October 29 - Bloomberg (Christopher Anstey): "The Federal Reserve isn't likely to come to the rescue of stock investors this time around, given the likelihood of persistent inflationary pressures, Morgan Stanley's cross-asset strategy team warned. 'The Fed and other developed market central banks are in a fundamentally different place than 2010-17,' Morgan Stanley strategists led by Andrew Sheets…wrote… With core inflation picking up, 'this makes it materially more difficult to sound dovish while remaining consistent with a mandate' to contain price gains…'"
October 30 - Bloomberg (Craig Torres, Lisa Lee and Jesse Hamilton): "Daniel Tarullo, the former Federal Reserve governor who transformed the way the U.S. central bank supervises Wall Street banks, called on regulators to scrutinize risky corporate lending markets and publish the results. 'We know more leveraged lending is being done outside the prudentially-regulated institutions,' Tarullo said… That raises questions about who owns this debt,' where the risks are and what funding streams 'would have the potential to be cut off and result in a fire sale.'"
October 31 - Reuters (Sarah Foster and Rich Miller): "Former Federal Reserve Chair Janet Yellen said she's concerned President Donald Trump's complaints about U.S. monetary policy may undermine confidence in the central bank as she expressed support for more interest-rate increases to keep the economy on track. 'It's important that the public have confidence in the Fed,' she said… 'I think it's appropriate for the Fed to be raising rates' some more and 'I have confidence in my successor and his colleagues.' 'Nothing is ever set in stone and I would watch developments very carefully. But at this point it seems to be that at least a couple of more interest rate increases are going to be necessary to stabilize growth at a sustainable pace' and stabilize the labor market so that it doesn't overheat, she said."
U.S. Bubble Watch:
November 2 - Reuters (Lucia Mutikani): "U.S. job growth rebounded sharply in October and wages recorded their largest annual gain in 9-1/2 years, pointing to further labor market tightening that could encourage the Federal Reserve to raise interest rates again in December. The Labor Department's closely watched monthly employment report on Friday also showed the unemployment rate was steady at a 49-year low of 3.7% as 711,000 people entered the labor force, in a sign of confidence in the jobs market."
October 30 - Bloomberg (Bruce Einhorn): "The next round in the U.S.-China trade war could be the costliest one yet for American consumers. The U.S. is said to be preparing to announce tariffs on all remaining Chinese imports by early December, and the impact at the checkout counter may be as much as 10 times higher than earlier rounds of levies, according to a report from Citigroup economists. 'Amid tight labor markets and higher input costs, we think there is a risk that firms decide to pass through some of the costs to consumers,' analysts Cesar Rojas, Catherine Mann and Veronica Clark wrote… 'The additional tariffs on China have the potential to boost inflation even more than what we currently anticipate.'"
October 31 - CNBC (Jeff Cox): "Employment costs rose more than expected in the third quarter in a sign that more inflation could be brewing in the U.S. economy. The Labor Department's employment cost index rose 0.8% for the period, ahead of the estimate of 0.7% from economists surveyed by Refinitiv. Wages and salaries rose 0.9%, well ahead of expectations for 0.5%. Benefit costs were up 0.4%. On a yearly basis, wages and salaries jumped 3.1%, the biggest increase in 10 years."
October 31 - CNBC (Jeff Cox): "Companies continued to hire at a brisk pace in October, with private payrolls rising by a better-than-expected 227,000, according to a report… from ADP and Moody's Analytics. Economists surveyed by Refinitiv had expected growth of 189,000 after September's 218,000, which was revised lower from an initial count of 230,000. Gains came primarily from the services sector, which added 189,000 positions. Construction and manufacturing added 17,000 each."
October 31 - Wall Street Journal (Austen Hufford and Annie Gasparro): "U.S. companies are raising prices on everything from plane tickets to paint, passing on to customers higher costs for fuel, metal and food after years of low inflation. Clorox Co. said it raised prices in the latest quarter on such products as cat litter, and Coca-Cola Co. reported higher prices for the quarter. Other goods makers, as well as airlines, also have announced price increases over the past week. The higher prices have effectively ended a long period of low inflation that led the Federal Reserve to keep short-term interest rates near zero for years. 'We think 2019 will be more inflationary than we have seen historically since the recession,' Kellogg Co. Chief Executive Steve Cahillane said…"
October 29 - Wall Street Journal (Jon Hilsenrath and Harriet Torry): "What if that was as good as it gets? The Commerce Department reported… that U.S. gross domestic product expanded at a 3.5% annual rate in the third quarter. Coming off a 4.2% growth rate in the second quarter, it marked one of the best six-month stretches for the U.S. economy in the past decade. However, private analysts and the Federal Reserve say a slowdown is looming. Economists surveyed by The Wall Street Journal estimate the growth rate will slow to 2.5% by the first quarter of next year and 2.3% by the third quarter of 2019. The Fed is expecting growth to slow further to a 1.8% rate by 2021."
October 29 - Wall Street Journal (AnnaMaria Andriotis): "Two of the biggest credit-card issuers are tightening lending standards, an unusual move in a strong economy that may signal longer-term concerns about consumers' financial health. Capital One… and Discover… said last week they have become more cautious in how they're handling credit limits. The two lenders said they don't currently see signs of deterioration in consumers' ability to pay their debts but do question how much longer the economic recovery will last. 'In so many ways, one can't help but be struck by…just how good the economy [at] this point is,' Capital One Chief Executive Richard Fairbank said… 'And in some ways, it almost feels too good to be true.'"
October 30 - CNBC (Diana Olick): "Mortgage interest rates didn't begin their recent surge until the start of September, but home prices were already feeling pressure, as fewer people could afford what was for sale. Nationally, prices rose 5.8% in August compared with August 2017, according to the S&P CoreLogic Case-Shiller home prices index. That is less than the 6% annual gain in July. The index's 10-City Composite rose 5.1% annually, down from 5.5% in the previous month. The 20-City Composite posted a 5.5% year-over-year gain, down from 5.9% in the previous month."
October 30 - CNBC (Diana Olick): "Higher mortgage rates and overheated home prices hit Southern California home sales hard in September. The number of new and existing houses and condominiums sold during the month plummeted nearly 18% compared with September 2017, according to CoreLogic. That was the slowest September pace since 2007… Sales have been falling on an annual basis for much of this year… 'The double whammy of higher prices and rising mortgage rates has priced out some would-be buyers and prompted others to take a wait-and-see stance,' said Andrew LePage, a CoreLogic analyst…"
October 31 - CNBC (Diana Olick): "Home sales in the San Francisco Bay area have been falling for months, but in September buyers pulled back in an even bigger way. Sales of both new and existing homes plunged nearly 19% compared with September 2017, according to CoreLogic. It marked the slowest September sales pace since 2007 and twice the annual drop seen in August."
October 30 - MarketWatch (Andrea Riquier): "Housing-market headwinds are keeping American homeowners in their properties for the longest stretches on record, in a sharp distortion of the mobility Americans have for decades prized. Across the country, homes that sold in the third quarter of this year had been owned an average of 8.23 years, according to… Attom Data Solutions. That's almost double the length of time a home sold in 2000, when Attom's data begin, had been owned."
October 28 - Financial Times (Alistair Gray): "Landlords have pushed up rents for US retailers to new post-crisis highs in spite of the competitive onslaught from Amazon, with asking figures in the hotspots such as Miami rising more than 10% in the past year. The 4% average rise… is the latest sign that confidence in bricks and mortar stores is recovering, especially in better-off parts of the country… Supply has begun to tighten even in shopping malls… The proportion of mall units either vacant or coming up for lease declined for the first quarter in seven, to 5.8%."
China Watch:
October 31 - Bloomberg: "China's leadership signaled that further stimulus measures are being planned, as disappointing economic data showed that the current piecemeal approach isn't working. The nation's economic situation is changing, downward pressure is increasing, and the government needs to take timely steps to counter this, according to a statement from a Politburo meeting Wednesday chaired by President Xi Jinping… With those pressing constraints, officials have added modest policy support so far, ranging from tax cuts to regulatory relief, rather than repeating the fiscal firepower seen after a previous slowdown. Investors seem unpersuaded by the drip-feed approach with the yuan hovering around a decade low and stocks sliding."
October 31 - Reuters (Stella Qiu, Ryan Woo and Lusha Zhang): "China's manufacturing sector in October expanded at its weakest pace in over two years, hurt by slowing domestic and external demand, in a sign of deepening cracks in the economy from an intensifying trade war with the United States… The official PMI - which gives global investors their first look at business conditions in China at the start of the last quarter of the year - fell to 50.2 in October, the lowest since July 2016 and down from 50.8 in September."
October 29 - Bloomberg: "China's state-sponsored push to dominate technologies of the future is one of the biggest stumbling blocks to prospects for resolution to the U.S. trade war… Officials from both sides are pessimistic about chances for a breakthrough when Donald Trump and Xi Jinping meet on the sidelines of the Group of 20 summit in Buenos Aires on Nov. 30-Dec. 1. While Trump is still dangling the threat of additional levies, Xi is digging in for a protracted conflict by cushioning the impact on growth and showing no signs he's willing to compromise plans to strengthen his nation's technological prowess."
October 26 - Reuters (Samuel Shen and John Ruwitch): "China's banking and insurance regulator has urged lenders in Beijing to avoid forced liquidation of pledged shares, as part of efforts to help stabilize the country's stock market, Chinese financial magazine Yicai reported… The Beijing branch of the China Banking and Insurance Regulatory Commission (CBIRC) said unrealized losses or lending risks associated with shares that banks hold as collateral against loans will not be part of regulatory inspections…"
October 29 - Bloomberg: "China's securities regulator said the market misinterpreted recent news about five state-backed funds liquidating their stock holdings, assuring investors that 'relevant institutions' have actually increased their positions. The rare government comments about China's 'national team' of state investors, delivered in a brief statement on the China Securities Regulatory Commission's website…, follow a $3.2 trillion selloff in local shares that has rattled investor confidence in Asia's largest economy."
October 30 - Bloomberg: "It's never been easy to figure out where China's government ends and the private sector begins, but the dividing line is getting increasingly blurry as the nation's stock market sinks. At least 47 non-state companies in China have disclosed plans to sell stakes to government-backed investors in 2018… The pace of such deals accelerated in recent months as the country's $3.2 trillion equity rout squeezed company founders who pledged their stakes as collateral for loans. Faced with margin calls and cut off from the banking system, some entrepreneurs have had little choice but to accept state money."
October 29 - Reuters (Sue-Lin Wong): "More than 70% of U.S. firms operating in southern China are considering delaying further investment there and moving some or all of their manufacturing to other countries as the trade war bites into profits, a business survey showed… Sixty-four percent of the companies said they were considering relocating production lines to outside of China, but only 1% said they had any plans to establish manufacturing bases in North America."
October 30 - Financial Times (Gabriel Wildau): "The People's Bank of China will issue Rmb20bn ($2.9bn) in central bank bills in Hong Kong's offshore renminbi market, part of China's efforts to support the offshore renminbi bond market by providing an interest-rate benchmark. The issuance will also serve to support the renminbi exchange rate by soaking up offshore renminbi (CNH) liquidity, raising the borrowing costs for investors who want to borrow CNH in order to bet on renminbi depreciation."
EM Watch:
October 28 - Bloomberg (Raymond Colitt, David Biller and Bruce Douglas): "Jair Bolsonaro swept to power in Brazil's presidential election Sunday, marking a hard pivot to the right that promises to open up the resource-rich economy to private investment, strengthen ties to the U.S. and unleash an aggressive crackdown on epidemic crime. The former army captain trounced Fernando Haddad, a leftist former Sao Paulo mayor whose Workers' Party became synonymous with graft, winning 55% of the vote to Haddad's 45% with almost all votes counted."
October 29 - Bloomberg (Justin Villamil): "Mexico's peso and 10-year dollar sovereign bonds fell to four-month lows after incoming president Andres Manuel Lopez Obrador canceled a $13 billion airport project for the capital, even though a third of it had already been built. The country's stocks also declined, hitting their lowest point since February 2016. AMLO, as the president-elect is known, ditched the project after almost 70% of 1.07 million people who participated in a national referendum voted against the airport, among the nation's biggest infrastructure projects. 'Markets are voting with their feet,' said Greg Lesko, a money manager at Deltec Asset Management… There's 'no positive read through on this. AMLO used a phony referendum to get what he wanted.'"
October 30 - Reuters (Rodrigo Viga Gaier): "Brazil would only sell foreign reserves in the event of a speculative attack that drives its currency nearer to 5 to the dollar, the main economic adviser to President-elect Jair Bolsonaro said… Newspaper Valor Econômico had reported on Tuesday that Paulo Guedes, whom Bolsonaro has tapped as his economy minister, proposed reducing foreign reserves to pay off debt."
October 31 - Financial Times (Laura Pitel): "Turkey's food price inflation will soar to almost 30% by the end of the year, the country's central bank governor forecasted… as he was forced to announce a sharp shift in expectations. Unveiling the bank's quarterly inflation report, Murat Cetinkaya said year-on-year food price inflation was expected to hit 29.5% by the end of 2018, upping the bank's previous forecast of 13%. The figures are alarming for Recep Tayyip Erdogan, the Turkish president, who faces local elections in March next year in which the cost of living is likely to prey on many voters' minds."
Central Bank Watch:
November 1 - Reuters (David Milliken and Alistair Smout): "The Bank of England hinted at slightly faster future rises in interest rates if Brexit goes smoothly, but warned all bets were off if next March brought a 'disruptive' departure from the EU… Bank of England Governor Mark Carney said a disruptive no-deal Brexit was not the central bank's main assumption but if there was a shock to the economy, it was not possible to say if rates would need to rise or fall in response."
October 31 - Reuters (Manoj Kumar, Suvashree Choudhury, Tanvi Mehta, Chris Thomas and Krishna N. Das): "India's government affirmed its belief in central bank autonomy…, calling it 'essential' in a bid to calm investors worried by a heated public row with the Reserve Bank of India. Indian stocks and bonds fell and the rupee weakened earlier in the day amid reports that RBI Governor Urjit Patel may consider resigning given the breakdown in relations. The media reports also said the government had invoked never-before-used powers to issue directions to the central bank governor on matters 'of public interest', related to support for the financial sector and small companies."
Italy Watch:
October 30 - Bloomberg (Kevin Costelloe and Lorenzo Totaro): "Italy's economy stalled for the first time in almost four years, putting pressure on the populist government's ambitious spending plans. The government acknowledged that the unexpected stagnation in the third quarter was a concern. Deputy Finance Minister Massimo Garavaglia said… it signals the need for more public and private investment at a time when cooling global trade has hit exports."
Europe Watch:
October 29 - Financial Times (Guy Chazan): "Angela Merkel's decision to stand down as leader of the Christian Democratic Union and not run again as chancellor in 2021 ushers in a new age in German politics: the pre-post-Merkel era. Her move was designed to quell rising discontent in her party and set it on a path of renewal, while allowing Ms Merkel to retain the reins of power as chancellor - a strategy her supporters in the CDU appeared willing to endorse."
October 30 - Financial Times (Claire Jones and Cat Rutter Pooley): "The eurozone is growing at its slowest pace for more than four years, raising the pressure on the European Central Bank to reassess whether the bloc's economy has enough fuel in the tank to cope with plans to end the institution's crisis-era stimulus. Growth in the third quarter was just 0.2%... - far weaker than the 0.4% expected. The annual pace of growth in gross domestic product was also slower than anticipated, at 1.7% during the three months to September, compared with expectations of a 1.8% rise."
October 31 - Financial Times (Clair Jones): "Inflation in the eurozone hit 2.2% in October, the swiftest rate since December 2012, on the back of the surge in energy prices. The year on year rate accelerated from 2.1% in the previous month… Energy prices rose 10.6% over the past 12 months, leading to the rise in the headline figure…"
Global Bubble Watch:
October 30 - Bloomberg (Ruth David): "Dealmakers, flush from what could be a record year for mergers and acquisitions, are watching for signs that growing protectionism and anti-globalization movements will dampen some cross-border transactions. The U.S. trade dispute with China, the U.K.'s decision to leave the European Union and security concerns around technology assets could all affect M&A in the future, panelists said at the XBMA conference… Their concerns come against the backdrop of a vigorous market for deals. Global M&A spending has hit $2.7 trillion already this year, up 26% from the same period in 2017… It's tied with 2015 as the top year for deals since 2007."
October 26 - Barron's (Fang Block): "The exponential growth of the super-rich Chinese boosted global billionaire wealth to US$8.9 trillion last year, a 19% increase from 2016 and the highest level in history, according to a UBS report… China minted two billionaires every week in 2017, with the total number from the country reaching 373. Their combined wealth expanded by 39% year-over-year to US$1.12 trillion. For context, there were only 16 billionaires in China in 2006. 'China is currently the leading country for entrepreneurs to create wealth. Nowhere else has the combination of the world's largest population, supportive government policies, rapidly liberalizing economy, and technology innovation,' says John Mathews, head of ultra-high-net worth Americas at UBS Global Wealth Management. Globally, there were 2,158 billionaires in 2017, up 179 from a year ago. The Asia Pacific region accounts for 711 billionaires, already surpassing the 682 in the Americas."
October 30 - Bloomberg: "Tycoons ranging from an Indian telecom billionaire to Singapore's king of massage chairs are delaying initial public offerings as a rout in emerging-market stocks deepens. Billionaire Sunil Mittal's Bharti Airtel Ltd. is postponing a planned listing of its $8 billion African wireless unit by about half a year… Last week, Singapore entrepreneur Ron Sim confirmed delaying plans to relist the owner of Osim, Asia's biggest massage chair maker, in Hong Kong. STX Entertainment, the U.S. film studio backed by Chinese tech tycoon Pony Ma's Tencent Holdings Ltd., is also shelving a proposed listing in the city. The volatility threatens what's been a banner year for listings out of Asia, with companies raising funds at the fastest pace in eight years… Asian firms have completed $81.3 billion of first-time share sales this year, up from $71.6 billion during the same period in 2017..."
October 28 - Financial Times (Owen Walker): "Investors fled from actively managed funds at the highest rate for seven years over the summer, dashing stockpickers' hopes of staging a comeback in more volatile trading conditions. Active funds… have lost market share to automated passive funds over the past two decades. This has sparked a crisis for investment companies that rely on the higher fee revenues they receive from active funds… Investors, however, pulled more than $86bn from active funds globally in the third quarter during a choppy period for markets, while they continued to invest in index trackers, according to Morningstar data."
Japan Watch:
October 31 - Wall Street Journal (Megumi Fujikawa): "The Bank of Japan kept its ultra-easy monetary policy in place and cited U.S.-China trade tensions as one of the biggest risks for the Japanese economy. 'As protectionist moves and trade friction between the U.S. and China escalate, we pay the most attention to the downside risk that they could pose to their own countries and also global trade and the world economy,' said BOJ Gov. Haruhiko Kuroda… The BOJ's policy board voted 7-2 on Wednesday to maintain its main policies, including setting short-term interest rates at minus 0.1% and the target for the 10-year Japanese government bond yield at around zero. The BOJ reiterated that it would keep 'extremely' low interest rates 'for an extended period.'"
Fixed Income Bubble Watch:
November 1 - Wall Street Journal (Joseph Wallace): "Companies are finding it harder to issue new debt, as the volatility battering global stocks adds to existing concerns in credit markets. Corporate bond prices have declined throughout the year and October's global market rout triggered massive outflows from credit funds. U.S. investment-grade issuance slipped 34% from September, according to… Dealogic, while high-yield issuance was down 50% from October last year. Even before October's selloff, American companies had been raising less money. By the end of September, total investment-grade issuance in 2018 was down 12% compared with the first nine months of last year, and high-yield issuance had fallen by almost a third. The value of new investment-grade corporate bonds in Europe was 75% lower in October than in September and down 40% from October 2017. High-yield issuance slumped 82% from a year ago."
October 29 - Financial Times (Colby Smith): "One of the year's best performing asset classes is starting to draw heat from regulators. Over the past month the booming $1.3tn market for leveraged loans, or those extended to highly indebted companies that are then often packaged up and sold to investors as bonds, has faced a tide of criticism from central bankers and financial watchdogs. Former Federal Reserve chair Janet Yellen warned last week of the 'systemic risks' rising from the loans, echoing concern from current Fed officials, central banks in the UK and Australia as well as the Bank for International Settlements about a market that has become a popular source of funding for leveraged buyouts and is now bigger than that for junk bonds. Official fears are being amplified by hollowing out of protections for investors who ultimately end up owning the loans…"
Leveraged Speculation Watch:
October 31 - Bloomberg (Saijel Kishan and Suzy Waite): "October's stock rout is inflicting the most pain on equity and quant hedge funds. As the U.S. stock market headed for its worst month in seven years, equity funds have slumped 6.8% through Monday, Morgan Stanley's prime brokerage group said… That brings the year's losses to 5.9%. The global turmoil has tripped up the $3 trillion hedge fund industry, wiping out what little money they had made in 2018 -- a year that has seen managers including Highfields Capital's Jon Jacobson and Tourbillon Capital's Jason Karp announce plans to exit the business. The losses also show the difficulties that most managers face in navigating episodic market turbulence. By contrast, macro managers sidestepped the mess and profited from price swings."
Geopolitics Watch:
October 31 - Financial Times (Kathrin Hille, Emily Feng and Katrina Manson): "When General Wei Fenghe, China's defence minister, took to the stage at the Xiangshan security forum organised by the People's Liberation Army…, he assured delegations from 64 countries that China's military 'has always been a staunch defender of world peace'. Yet in the same breath he issued a sharp warning: 'Taiwan is China's core interest,' Gen Wei said. 'On these issues, it's extremely dangerous to challenge China's bottom line repeatedly. If anyone tries to separate Taiwan from China, China's military will take action at all costs.'"
October 31 - Reuters (Jess Macy Yu and Ben Blanchard): "Efforts to decide self-ruled Taiwan's future by 'other than peaceful means' are a grave concern to the United States, a senior American diplomat said…, amid renewed tension between China and the island it considers a wayward province. Washington does not have diplomatic ties with Taipei, but is its main arms supplier and strongest international backer. This month, Taiwan President Tsai Ing-wen vowed to boost national security and said her government would not submit to Chinese suppression."
October 30 - Reuters (Fanny Potkin): "Chief of U.S. Naval Operations Admiral John Richardson said… the United States and China 'will meet each other more and more on the high seas' after a Chinese warship came close to a U.S. ship in the disputed South China Sea… The U.S. mission was the latest attempt to counter what Washington sees as Beijing's efforts to limit freedom of navigation in the strategic waters, where Chinese, Japanese and some Southeast Asian navies operate. China's relationship with the Russian navy should be watched 'with interest' as it grows, said Richardson…"
Freddie Mac 30-year fixed mortgage rates slipped three bps to 4.83% (up 89bps y-o-y). Fifteen-year rates declined six bps to 4.23% (up 96bps). Five-year hybrid ARM rates dropped 10 bps to 4.04% (up 81bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down three bps to 4.79% (up 61bps).
Federal Reserve Credit last week declined $15.3bn to $4.121 TN. Over the past year, Fed Credit contracted $300bn, or 6.8%. Fed Credit inflated $1.310 TN, or 47%, over the past 313 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt dropped $19.8bn last week to $3.415 TN. "Custody holdings" were up $49bn y-o-y, or 1.4%.
M2 (narrow) "money" supply jumped $25.5bn last week to a record $14.287 TN. "Narrow money" gained $541bn, or 3.9%, over the past year. For the week, Currency increased $1.9bn. Total Checkable Deposits rose $29.4bn, while Savings Deposits declined $16.6bn. Small Time Deposits increased $3.7bn. Retail Money Funds gained $7.1bn.
Total money market fund assets added $2.7bn to $2.884 TN. Money Funds gained $155bn y-o-y, or 5.7%.
Total Commercial Paper slipped $0.6bn to $1.087 TN. CP gained $39.7bn y-o-y, or 3.8%.
Currency Watch:
October 30 - Bloomberg (Keith Bradsher): "As the United States and China swap threats and mete out increasingly punishing tariffs, the world is watching to see whether Beijing turns to one of its most potent economic weapons. It involves the number 7. China's currency, the renminbi, has been gradually losing value since mid-April, and on Tuesday it was at its weakest point in a decade. If the currency weakens any further, it could fall below the psychologically important level of 7 renminbi to the dollar. The last time it took more than 7 renminbi to buy a dollar was in May 2008, as the world was slipping into a financial crisis."
October 30 - Bloomberg (Tian Chen): "How much further will China's currency slide after it touched the weakest level in a decade on Tuesday? The answer may depend in large part on whether Beijing can keep capital outflows under control. Official figures released over the past few weeks suggest money is increasingly leaving China's borders, a reminder that motivated citizens and companies still have ways to get their cash out despite a tightening of capital controls after the country's shock devaluation in 2015. While there's little to suggest a stampede for the exits is imminent, the risk increases with every tick lower in the yuan."
The U.S. dollar index was little changed at 96.484 (up 4.7% y-t-d). For the week on the upside, the New Zealand dollar increased 2.2%, the South African rand 2.1%, the South Korean won 1.8%, the Australian dollar 1.5%, the British pound 1.1%, the Swedish krona 0.8% and the Singapore dollar 0.3%. For the week on the downside, the Mexican peso declined 3.3%, the Brazilian real 1.6%, the Japanese yen 1.1%, the Swiss franc 0.7%, the Norwegian krone 0.2% and the euro 0.1%. The Chinese renminbi rallied 0.77% versus the dollar this week (down 5.57% y-t-d).
Commodities Watch:
October 30 - Bloomberg (Ranjeetha Pakiam): "Goldman Sachs… says that 'fear' has made a comeback and gold is benefiting as stocks slide and investors fret more about the possibility that the U.S. economy may tumble back into recession. Bullion's recent advance 'happened on the back of the market sell-off and spike in volatility,' analysts including Mikhail Sprogis and Jeffrey Currie, wrote… 'In our view, it represents a rebound in fear-related demand for gold with ETFs beginning to build after several months of declines.'"
The Goldman Sachs Commodities Index dropped 3.1% (up 1.9% y-t-d). Spot Gold was little changed at $1,233 (down 5.4%). Silver was about unchanged at $14.475 (down 14%). Crude sank another $4.73 to $62.87 (up 4%). Gasoline dropped 6.3% (down 5%), while Natural Gas rallied 2.9% (up 12%). Copper jumped 2.5% (down 15%). Wheat added 0.7% (up 19%). Corn gained 1.0% (up 6%).
Market Dislocation Watch:
October 31 - Reuters (Lewis Krauskopf): "Gridlock, Blue Sweep or Red Repeat? Wall Street is closely watching the U.S. midterm Congressional elections next week, as policy decisions that could sway the economy, corporate decision-making and consumer spending hinge on the results. Should his fellow Republicans maintain or extend their grip on Congress, President Donald Trump may be emboldened to pursue more of his political agenda, including further tax reforms. By contrast, Democratic gains that allow the party to control the House of Representatives, and possibly the Senate, could stifle Trump's policy aims and perhaps lead to attempts to impeach him."
October 30 - Reuters (Richard Leong): "A measure of strain in U.S. money markets grew to its widest level in 2-1/2 months on Tuesday as a gauge of interbank borrowing costs increased for a 10th straight session to a fresh decade high. The London interbank offered rate for banks to borrow three-month dollars from each other climbed 1.4 bps to 2.54100%, the highest since October 2008. LIBOR is the rate benchmark for $200 trillion of dollar-denominated financial products, mainly interest rate swaps and floating-rate loans."
Trump Administration Watch:
November 2 - Bloomberg (Brendan Scott): "As recently as Sunday, Donald Trump was telling supporters China was "not ready" to cut a deal to end their trade war. Last night, he decided it is. The U.S. president ordered Cabinet officials to draft terms for an agreement between the world's two largest economies, Jenny Leonard, Saleha Mohsin and Jennifer Jacobs report. The breakthrough came after Trump's "long and very good" phone call with Chinese counterpart Xi Jinping - their first confirmed conversation in six months. 'They want to make a deal,' Trump told a rally… 'He wants to do it.' Global markets rallied on the news. But Chinese state media said the call came at Trump's request, suggesting another catalyst: the Congressional midterm elections on Tuesday. In the campaign's final weeks, Trump has unveiled a flurry of proposals few expect to pan out, including cutting middle-class taxes and ending birthright citizenship."
November 1 - Reuters (Joseph Campbell and Susan Heavey): "U.S. President Donald Trump on Thursday said trade discussions with China were 'moving along nicely' and that he planned to meet with Chinese President Xi Jinping at the upcoming G-20 summit, after the two had a 'very good' talk. Earlier on Thursday, Chinese Premier Li Keqiang told a group of visiting U.S. politicians that China and the United States could overcome their differences and get relations back on track if they worked together in a spirit of mutual respect."
October 30 - Reuters (John Ruwitch and Ben Blanchard): "U.S. President Donald Trump said he thinks there will be 'a great deal' with China on trade, but warned that he has billions of dollars worth of new tariffs ready to go if a deal isn't possible. 'I think that we will make a great deal with China and it has to be great, because they've drained our country,' Trump told FOX News Channel's 'The Ingraham Angle'…"
October 29 - Bloomberg (Jenny Leonard and Jennifer Jacobs): "The U.S. is preparing to announce by early December tariffs on all remaining Chinese imports if talks next month between presidents Donald Trump and Xi Jinping fail to ease the trade war, three people familiar with the matter said. An early-December announcement of a new product list would mean the effective date -- after a 60-day public comment period -- may coincide with China's Lunar New Year holiday in early February. The list would apply to the imports from the Asian nation that aren't already covered by previous rounds of tariffs -- which may be $257 billion using last year's import figures, according to two of the people."
October 30 - Bloomberg (Randall Woods): "The U.S. Treasury Department said government borrowing this year will more than double from 2017 to $1.34 trillion as the Trump administration finances a rising budget deficit. Specifically, the department expects to issue $425 billion in net marketable debt from October through December, lower than the $440 billion estimated in July... The Treasury sees an end-of-December cash balance of $410 billion, compared with its previous forecast of $390 billion. From July through September, the Treasury said it issued $353 billion in net marketable debt, compared with its earlier prediction of $329 billion in borrowing."
October 31 - Bloomberg (Saleha Mohsin and Liz Capo McCormick): "The U.S. Treasury Department announced debt sales will surpass levels last seen when the country was digging out of its worst economic crisis since the Great Depression. This time around, fiscal stimulus is adding fuel to an already growing economy. A ballooning budget shortfall -- fueled by tax cuts, spending hikes and an aging population -- is driving the U.S. Treasury to raise its long-term debt issuance at its quarterly refunding auctions to $83 billion from $78 billion three months ago… The need for the Treasury to raise auction sizes for a fourth straight quarter is also partially driven by the Federal Reserve's decision not to replace some of its Treasury holdings when they mature as it winds down crisis-era stimulus measures."
Federal Reserve Watch:
October 29 - Bloomberg (Christopher Anstey): "The Federal Reserve isn't likely to come to the rescue of stock investors this time around, given the likelihood of persistent inflationary pressures, Morgan Stanley's cross-asset strategy team warned. 'The Fed and other developed market central banks are in a fundamentally different place than 2010-17,' Morgan Stanley strategists led by Andrew Sheets…wrote… With core inflation picking up, 'this makes it materially more difficult to sound dovish while remaining consistent with a mandate' to contain price gains…'"
October 30 - Bloomberg (Craig Torres, Lisa Lee and Jesse Hamilton): "Daniel Tarullo, the former Federal Reserve governor who transformed the way the U.S. central bank supervises Wall Street banks, called on regulators to scrutinize risky corporate lending markets and publish the results. 'We know more leveraged lending is being done outside the prudentially-regulated institutions,' Tarullo said… That raises questions about who owns this debt,' where the risks are and what funding streams 'would have the potential to be cut off and result in a fire sale.'"
October 31 - Reuters (Sarah Foster and Rich Miller): "Former Federal Reserve Chair Janet Yellen said she's concerned President Donald Trump's complaints about U.S. monetary policy may undermine confidence in the central bank as she expressed support for more interest-rate increases to keep the economy on track. 'It's important that the public have confidence in the Fed,' she said… 'I think it's appropriate for the Fed to be raising rates' some more and 'I have confidence in my successor and his colleagues.' 'Nothing is ever set in stone and I would watch developments very carefully. But at this point it seems to be that at least a couple of more interest rate increases are going to be necessary to stabilize growth at a sustainable pace' and stabilize the labor market so that it doesn't overheat, she said."
U.S. Bubble Watch:
November 2 - Reuters (Lucia Mutikani): "U.S. job growth rebounded sharply in October and wages recorded their largest annual gain in 9-1/2 years, pointing to further labor market tightening that could encourage the Federal Reserve to raise interest rates again in December. The Labor Department's closely watched monthly employment report on Friday also showed the unemployment rate was steady at a 49-year low of 3.7% as 711,000 people entered the labor force, in a sign of confidence in the jobs market."
October 30 - Bloomberg (Bruce Einhorn): "The next round in the U.S.-China trade war could be the costliest one yet for American consumers. The U.S. is said to be preparing to announce tariffs on all remaining Chinese imports by early December, and the impact at the checkout counter may be as much as 10 times higher than earlier rounds of levies, according to a report from Citigroup economists. 'Amid tight labor markets and higher input costs, we think there is a risk that firms decide to pass through some of the costs to consumers,' analysts Cesar Rojas, Catherine Mann and Veronica Clark wrote… 'The additional tariffs on China have the potential to boost inflation even more than what we currently anticipate.'"
October 31 - CNBC (Jeff Cox): "Employment costs rose more than expected in the third quarter in a sign that more inflation could be brewing in the U.S. economy. The Labor Department's employment cost index rose 0.8% for the period, ahead of the estimate of 0.7% from economists surveyed by Refinitiv. Wages and salaries rose 0.9%, well ahead of expectations for 0.5%. Benefit costs were up 0.4%. On a yearly basis, wages and salaries jumped 3.1%, the biggest increase in 10 years."
October 31 - CNBC (Jeff Cox): "Companies continued to hire at a brisk pace in October, with private payrolls rising by a better-than-expected 227,000, according to a report… from ADP and Moody's Analytics. Economists surveyed by Refinitiv had expected growth of 189,000 after September's 218,000, which was revised lower from an initial count of 230,000. Gains came primarily from the services sector, which added 189,000 positions. Construction and manufacturing added 17,000 each."
October 31 - Wall Street Journal (Austen Hufford and Annie Gasparro): "U.S. companies are raising prices on everything from plane tickets to paint, passing on to customers higher costs for fuel, metal and food after years of low inflation. Clorox Co. said it raised prices in the latest quarter on such products as cat litter, and Coca-Cola Co. reported higher prices for the quarter. Other goods makers, as well as airlines, also have announced price increases over the past week. The higher prices have effectively ended a long period of low inflation that led the Federal Reserve to keep short-term interest rates near zero for years. 'We think 2019 will be more inflationary than we have seen historically since the recession,' Kellogg Co. Chief Executive Steve Cahillane said…"
October 29 - Wall Street Journal (Jon Hilsenrath and Harriet Torry): "What if that was as good as it gets? The Commerce Department reported… that U.S. gross domestic product expanded at a 3.5% annual rate in the third quarter. Coming off a 4.2% growth rate in the second quarter, it marked one of the best six-month stretches for the U.S. economy in the past decade. However, private analysts and the Federal Reserve say a slowdown is looming. Economists surveyed by The Wall Street Journal estimate the growth rate will slow to 2.5% by the first quarter of next year and 2.3% by the third quarter of 2019. The Fed is expecting growth to slow further to a 1.8% rate by 2021."
October 29 - Wall Street Journal (AnnaMaria Andriotis): "Two of the biggest credit-card issuers are tightening lending standards, an unusual move in a strong economy that may signal longer-term concerns about consumers' financial health. Capital One… and Discover… said last week they have become more cautious in how they're handling credit limits. The two lenders said they don't currently see signs of deterioration in consumers' ability to pay their debts but do question how much longer the economic recovery will last. 'In so many ways, one can't help but be struck by…just how good the economy [at] this point is,' Capital One Chief Executive Richard Fairbank said… 'And in some ways, it almost feels too good to be true.'"
October 30 - CNBC (Diana Olick): "Mortgage interest rates didn't begin their recent surge until the start of September, but home prices were already feeling pressure, as fewer people could afford what was for sale. Nationally, prices rose 5.8% in August compared with August 2017, according to the S&P CoreLogic Case-Shiller home prices index. That is less than the 6% annual gain in July. The index's 10-City Composite rose 5.1% annually, down from 5.5% in the previous month. The 20-City Composite posted a 5.5% year-over-year gain, down from 5.9% in the previous month."
October 30 - CNBC (Diana Olick): "Higher mortgage rates and overheated home prices hit Southern California home sales hard in September. The number of new and existing houses and condominiums sold during the month plummeted nearly 18% compared with September 2017, according to CoreLogic. That was the slowest September pace since 2007… Sales have been falling on an annual basis for much of this year… 'The double whammy of higher prices and rising mortgage rates has priced out some would-be buyers and prompted others to take a wait-and-see stance,' said Andrew LePage, a CoreLogic analyst…"
October 31 - CNBC (Diana Olick): "Home sales in the San Francisco Bay area have been falling for months, but in September buyers pulled back in an even bigger way. Sales of both new and existing homes plunged nearly 19% compared with September 2017, according to CoreLogic. It marked the slowest September sales pace since 2007 and twice the annual drop seen in August."
October 30 - MarketWatch (Andrea Riquier): "Housing-market headwinds are keeping American homeowners in their properties for the longest stretches on record, in a sharp distortion of the mobility Americans have for decades prized. Across the country, homes that sold in the third quarter of this year had been owned an average of 8.23 years, according to… Attom Data Solutions. That's almost double the length of time a home sold in 2000, when Attom's data begin, had been owned."
October 28 - Financial Times (Alistair Gray): "Landlords have pushed up rents for US retailers to new post-crisis highs in spite of the competitive onslaught from Amazon, with asking figures in the hotspots such as Miami rising more than 10% in the past year. The 4% average rise… is the latest sign that confidence in bricks and mortar stores is recovering, especially in better-off parts of the country… Supply has begun to tighten even in shopping malls… The proportion of mall units either vacant or coming up for lease declined for the first quarter in seven, to 5.8%."
China Watch:
October 31 - Bloomberg: "China's leadership signaled that further stimulus measures are being planned, as disappointing economic data showed that the current piecemeal approach isn't working. The nation's economic situation is changing, downward pressure is increasing, and the government needs to take timely steps to counter this, according to a statement from a Politburo meeting Wednesday chaired by President Xi Jinping… With those pressing constraints, officials have added modest policy support so far, ranging from tax cuts to regulatory relief, rather than repeating the fiscal firepower seen after a previous slowdown. Investors seem unpersuaded by the drip-feed approach with the yuan hovering around a decade low and stocks sliding."
October 31 - Reuters (Stella Qiu, Ryan Woo and Lusha Zhang): "China's manufacturing sector in October expanded at its weakest pace in over two years, hurt by slowing domestic and external demand, in a sign of deepening cracks in the economy from an intensifying trade war with the United States… The official PMI - which gives global investors their first look at business conditions in China at the start of the last quarter of the year - fell to 50.2 in October, the lowest since July 2016 and down from 50.8 in September."
October 29 - Bloomberg: "China's state-sponsored push to dominate technologies of the future is one of the biggest stumbling blocks to prospects for resolution to the U.S. trade war… Officials from both sides are pessimistic about chances for a breakthrough when Donald Trump and Xi Jinping meet on the sidelines of the Group of 20 summit in Buenos Aires on Nov. 30-Dec. 1. While Trump is still dangling the threat of additional levies, Xi is digging in for a protracted conflict by cushioning the impact on growth and showing no signs he's willing to compromise plans to strengthen his nation's technological prowess."
October 26 - Reuters (Samuel Shen and John Ruwitch): "China's banking and insurance regulator has urged lenders in Beijing to avoid forced liquidation of pledged shares, as part of efforts to help stabilize the country's stock market, Chinese financial magazine Yicai reported… The Beijing branch of the China Banking and Insurance Regulatory Commission (CBIRC) said unrealized losses or lending risks associated with shares that banks hold as collateral against loans will not be part of regulatory inspections…"
October 29 - Bloomberg: "China's securities regulator said the market misinterpreted recent news about five state-backed funds liquidating their stock holdings, assuring investors that 'relevant institutions' have actually increased their positions. The rare government comments about China's 'national team' of state investors, delivered in a brief statement on the China Securities Regulatory Commission's website…, follow a $3.2 trillion selloff in local shares that has rattled investor confidence in Asia's largest economy."
October 30 - Bloomberg: "It's never been easy to figure out where China's government ends and the private sector begins, but the dividing line is getting increasingly blurry as the nation's stock market sinks. At least 47 non-state companies in China have disclosed plans to sell stakes to government-backed investors in 2018… The pace of such deals accelerated in recent months as the country's $3.2 trillion equity rout squeezed company founders who pledged their stakes as collateral for loans. Faced with margin calls and cut off from the banking system, some entrepreneurs have had little choice but to accept state money."
October 29 - Reuters (Sue-Lin Wong): "More than 70% of U.S. firms operating in southern China are considering delaying further investment there and moving some or all of their manufacturing to other countries as the trade war bites into profits, a business survey showed… Sixty-four percent of the companies said they were considering relocating production lines to outside of China, but only 1% said they had any plans to establish manufacturing bases in North America."
October 30 - Financial Times (Gabriel Wildau): "The People's Bank of China will issue Rmb20bn ($2.9bn) in central bank bills in Hong Kong's offshore renminbi market, part of China's efforts to support the offshore renminbi bond market by providing an interest-rate benchmark. The issuance will also serve to support the renminbi exchange rate by soaking up offshore renminbi (CNH) liquidity, raising the borrowing costs for investors who want to borrow CNH in order to bet on renminbi depreciation."
EM Watch:
October 28 - Bloomberg (Raymond Colitt, David Biller and Bruce Douglas): "Jair Bolsonaro swept to power in Brazil's presidential election Sunday, marking a hard pivot to the right that promises to open up the resource-rich economy to private investment, strengthen ties to the U.S. and unleash an aggressive crackdown on epidemic crime. The former army captain trounced Fernando Haddad, a leftist former Sao Paulo mayor whose Workers' Party became synonymous with graft, winning 55% of the vote to Haddad's 45% with almost all votes counted."
October 29 - Bloomberg (Justin Villamil): "Mexico's peso and 10-year dollar sovereign bonds fell to four-month lows after incoming president Andres Manuel Lopez Obrador canceled a $13 billion airport project for the capital, even though a third of it had already been built. The country's stocks also declined, hitting their lowest point since February 2016. AMLO, as the president-elect is known, ditched the project after almost 70% of 1.07 million people who participated in a national referendum voted against the airport, among the nation's biggest infrastructure projects. 'Markets are voting with their feet,' said Greg Lesko, a money manager at Deltec Asset Management… There's 'no positive read through on this. AMLO used a phony referendum to get what he wanted.'"
October 30 - Reuters (Rodrigo Viga Gaier): "Brazil would only sell foreign reserves in the event of a speculative attack that drives its currency nearer to 5 to the dollar, the main economic adviser to President-elect Jair Bolsonaro said… Newspaper Valor Econômico had reported on Tuesday that Paulo Guedes, whom Bolsonaro has tapped as his economy minister, proposed reducing foreign reserves to pay off debt."
October 31 - Financial Times (Laura Pitel): "Turkey's food price inflation will soar to almost 30% by the end of the year, the country's central bank governor forecasted… as he was forced to announce a sharp shift in expectations. Unveiling the bank's quarterly inflation report, Murat Cetinkaya said year-on-year food price inflation was expected to hit 29.5% by the end of 2018, upping the bank's previous forecast of 13%. The figures are alarming for Recep Tayyip Erdogan, the Turkish president, who faces local elections in March next year in which the cost of living is likely to prey on many voters' minds."
Central Bank Watch:
November 1 - Reuters (David Milliken and Alistair Smout): "The Bank of England hinted at slightly faster future rises in interest rates if Brexit goes smoothly, but warned all bets were off if next March brought a 'disruptive' departure from the EU… Bank of England Governor Mark Carney said a disruptive no-deal Brexit was not the central bank's main assumption but if there was a shock to the economy, it was not possible to say if rates would need to rise or fall in response."
October 31 - Reuters (Manoj Kumar, Suvashree Choudhury, Tanvi Mehta, Chris Thomas and Krishna N. Das): "India's government affirmed its belief in central bank autonomy…, calling it 'essential' in a bid to calm investors worried by a heated public row with the Reserve Bank of India. Indian stocks and bonds fell and the rupee weakened earlier in the day amid reports that RBI Governor Urjit Patel may consider resigning given the breakdown in relations. The media reports also said the government had invoked never-before-used powers to issue directions to the central bank governor on matters 'of public interest', related to support for the financial sector and small companies."
Italy Watch:
October 30 - Bloomberg (Kevin Costelloe and Lorenzo Totaro): "Italy's economy stalled for the first time in almost four years, putting pressure on the populist government's ambitious spending plans. The government acknowledged that the unexpected stagnation in the third quarter was a concern. Deputy Finance Minister Massimo Garavaglia said… it signals the need for more public and private investment at a time when cooling global trade has hit exports."
Europe Watch:
October 29 - Financial Times (Guy Chazan): "Angela Merkel's decision to stand down as leader of the Christian Democratic Union and not run again as chancellor in 2021 ushers in a new age in German politics: the pre-post-Merkel era. Her move was designed to quell rising discontent in her party and set it on a path of renewal, while allowing Ms Merkel to retain the reins of power as chancellor - a strategy her supporters in the CDU appeared willing to endorse."
October 30 - Financial Times (Claire Jones and Cat Rutter Pooley): "The eurozone is growing at its slowest pace for more than four years, raising the pressure on the European Central Bank to reassess whether the bloc's economy has enough fuel in the tank to cope with plans to end the institution's crisis-era stimulus. Growth in the third quarter was just 0.2%... - far weaker than the 0.4% expected. The annual pace of growth in gross domestic product was also slower than anticipated, at 1.7% during the three months to September, compared with expectations of a 1.8% rise."
October 31 - Financial Times (Clair Jones): "Inflation in the eurozone hit 2.2% in October, the swiftest rate since December 2012, on the back of the surge in energy prices. The year on year rate accelerated from 2.1% in the previous month… Energy prices rose 10.6% over the past 12 months, leading to the rise in the headline figure…"
Global Bubble Watch:
October 30 - Bloomberg (Ruth David): "Dealmakers, flush from what could be a record year for mergers and acquisitions, are watching for signs that growing protectionism and anti-globalization movements will dampen some cross-border transactions. The U.S. trade dispute with China, the U.K.'s decision to leave the European Union and security concerns around technology assets could all affect M&A in the future, panelists said at the XBMA conference… Their concerns come against the backdrop of a vigorous market for deals. Global M&A spending has hit $2.7 trillion already this year, up 26% from the same period in 2017… It's tied with 2015 as the top year for deals since 2007."
October 26 - Barron's (Fang Block): "The exponential growth of the super-rich Chinese boosted global billionaire wealth to US$8.9 trillion last year, a 19% increase from 2016 and the highest level in history, according to a UBS report… China minted two billionaires every week in 2017, with the total number from the country reaching 373. Their combined wealth expanded by 39% year-over-year to US$1.12 trillion. For context, there were only 16 billionaires in China in 2006. 'China is currently the leading country for entrepreneurs to create wealth. Nowhere else has the combination of the world's largest population, supportive government policies, rapidly liberalizing economy, and technology innovation,' says John Mathews, head of ultra-high-net worth Americas at UBS Global Wealth Management. Globally, there were 2,158 billionaires in 2017, up 179 from a year ago. The Asia Pacific region accounts for 711 billionaires, already surpassing the 682 in the Americas."
October 30 - Bloomberg: "Tycoons ranging from an Indian telecom billionaire to Singapore's king of massage chairs are delaying initial public offerings as a rout in emerging-market stocks deepens. Billionaire Sunil Mittal's Bharti Airtel Ltd. is postponing a planned listing of its $8 billion African wireless unit by about half a year… Last week, Singapore entrepreneur Ron Sim confirmed delaying plans to relist the owner of Osim, Asia's biggest massage chair maker, in Hong Kong. STX Entertainment, the U.S. film studio backed by Chinese tech tycoon Pony Ma's Tencent Holdings Ltd., is also shelving a proposed listing in the city. The volatility threatens what's been a banner year for listings out of Asia, with companies raising funds at the fastest pace in eight years… Asian firms have completed $81.3 billion of first-time share sales this year, up from $71.6 billion during the same period in 2017..."
October 28 - Financial Times (Owen Walker): "Investors fled from actively managed funds at the highest rate for seven years over the summer, dashing stockpickers' hopes of staging a comeback in more volatile trading conditions. Active funds… have lost market share to automated passive funds over the past two decades. This has sparked a crisis for investment companies that rely on the higher fee revenues they receive from active funds… Investors, however, pulled more than $86bn from active funds globally in the third quarter during a choppy period for markets, while they continued to invest in index trackers, according to Morningstar data."
Japan Watch:
October 31 - Wall Street Journal (Megumi Fujikawa): "The Bank of Japan kept its ultra-easy monetary policy in place and cited U.S.-China trade tensions as one of the biggest risks for the Japanese economy. 'As protectionist moves and trade friction between the U.S. and China escalate, we pay the most attention to the downside risk that they could pose to their own countries and also global trade and the world economy,' said BOJ Gov. Haruhiko Kuroda… The BOJ's policy board voted 7-2 on Wednesday to maintain its main policies, including setting short-term interest rates at minus 0.1% and the target for the 10-year Japanese government bond yield at around zero. The BOJ reiterated that it would keep 'extremely' low interest rates 'for an extended period.'"
Fixed Income Bubble Watch:
November 1 - Wall Street Journal (Joseph Wallace): "Companies are finding it harder to issue new debt, as the volatility battering global stocks adds to existing concerns in credit markets. Corporate bond prices have declined throughout the year and October's global market rout triggered massive outflows from credit funds. U.S. investment-grade issuance slipped 34% from September, according to… Dealogic, while high-yield issuance was down 50% from October last year. Even before October's selloff, American companies had been raising less money. By the end of September, total investment-grade issuance in 2018 was down 12% compared with the first nine months of last year, and high-yield issuance had fallen by almost a third. The value of new investment-grade corporate bonds in Europe was 75% lower in October than in September and down 40% from October 2017. High-yield issuance slumped 82% from a year ago."
October 29 - Financial Times (Colby Smith): "One of the year's best performing asset classes is starting to draw heat from regulators. Over the past month the booming $1.3tn market for leveraged loans, or those extended to highly indebted companies that are then often packaged up and sold to investors as bonds, has faced a tide of criticism from central bankers and financial watchdogs. Former Federal Reserve chair Janet Yellen warned last week of the 'systemic risks' rising from the loans, echoing concern from current Fed officials, central banks in the UK and Australia as well as the Bank for International Settlements about a market that has become a popular source of funding for leveraged buyouts and is now bigger than that for junk bonds. Official fears are being amplified by hollowing out of protections for investors who ultimately end up owning the loans…"
Leveraged Speculation Watch:
October 31 - Bloomberg (Saijel Kishan and Suzy Waite): "October's stock rout is inflicting the most pain on equity and quant hedge funds. As the U.S. stock market headed for its worst month in seven years, equity funds have slumped 6.8% through Monday, Morgan Stanley's prime brokerage group said… That brings the year's losses to 5.9%. The global turmoil has tripped up the $3 trillion hedge fund industry, wiping out what little money they had made in 2018 -- a year that has seen managers including Highfields Capital's Jon Jacobson and Tourbillon Capital's Jason Karp announce plans to exit the business. The losses also show the difficulties that most managers face in navigating episodic market turbulence. By contrast, macro managers sidestepped the mess and profited from price swings."
Geopolitics Watch:
October 31 - Financial Times (Kathrin Hille, Emily Feng and Katrina Manson): "When General Wei Fenghe, China's defence minister, took to the stage at the Xiangshan security forum organised by the People's Liberation Army…, he assured delegations from 64 countries that China's military 'has always been a staunch defender of world peace'. Yet in the same breath he issued a sharp warning: 'Taiwan is China's core interest,' Gen Wei said. 'On these issues, it's extremely dangerous to challenge China's bottom line repeatedly. If anyone tries to separate Taiwan from China, China's military will take action at all costs.'"
October 31 - Reuters (Jess Macy Yu and Ben Blanchard): "Efforts to decide self-ruled Taiwan's future by 'other than peaceful means' are a grave concern to the United States, a senior American diplomat said…, amid renewed tension between China and the island it considers a wayward province. Washington does not have diplomatic ties with Taipei, but is its main arms supplier and strongest international backer. This month, Taiwan President Tsai Ing-wen vowed to boost national security and said her government would not submit to Chinese suppression."
October 30 - Reuters (Fanny Potkin): "Chief of U.S. Naval Operations Admiral John Richardson said… the United States and China 'will meet each other more and more on the high seas' after a Chinese warship came close to a U.S. ship in the disputed South China Sea… The U.S. mission was the latest attempt to counter what Washington sees as Beijing's efforts to limit freedom of navigation in the strategic waters, where Chinese, Japanese and some Southeast Asian navies operate. China's relationship with the Russian navy should be watched 'with interest' as it grows, said Richardson…"
Friday Evening Links
[Reuters] Wall Street snaps three-day rally as Apple sours, trade weighs
[Reuters] Treasuries-Yields rise as U.S. job growth suggests a Fed rate hike
[Reuters] U.S. municipal bond market struggles to find footing
[Reuters] Consumer companies try price hikes as U.S. wages climb
[WSJ] Wages Rise at Fastest Rate in Nearly a Decade as Hiring Jumps
[WSJ] Corporate Buybacks Return, Supporting Market
[Reuters] Treasuries-Yields rise as U.S. job growth suggests a Fed rate hike
[Reuters] U.S. municipal bond market struggles to find footing
[Reuters] Consumer companies try price hikes as U.S. wages climb
[WSJ] Wages Rise at Fastest Rate in Nearly a Decade as Hiring Jumps
[WSJ] Corporate Buybacks Return, Supporting Market
Thursday, November 1, 2018
Friday's News Links
[BloombergQ] Tech Falls After Apple; Bonds Drop on Jobs Report: Markets Wrap
[Reuters] Shares roar higher on U.S.-China trade deal hopes
[Reuters] Treasuries-Yields tick up after strong jobs report, wage gains
[Reuters] U.S. job growth surges; annual wage gain biggest since 2009
[Reuters] U.S. trade gap widens; deficit with China rises to record high
[CNBC] Apple tumbles 7% after earnings on light guidance
[BloombergQ] Trump Floats China Deal as November Surprise
[Reuters] U.S. voters to decide $76 billion of bonds, taxation limits
[BloombergQ] China's Eco Policy to Be More Preemptive, Flexible, PBOC Says
[BloombergQ] Asia's Most Aggressive Rate Hikers Have More Work Ahead
[Nikkei Asian Review] 'Kiss of debt' for China stocks echoes Japan's post-bubble days
[BloombergQ] The Dirty Legacy of China’s and India’s Growth
[WSJ] Trump and Xi Talk as U.S.-China Tech Fight Brews
[FT] China central bank warns of excessive money growth
[Reuters] Shares roar higher on U.S.-China trade deal hopes
[Reuters] Treasuries-Yields tick up after strong jobs report, wage gains
[Reuters] U.S. job growth surges; annual wage gain biggest since 2009
[Reuters] U.S. trade gap widens; deficit with China rises to record high
[CNBC] Apple tumbles 7% after earnings on light guidance
[BloombergQ] Trump Floats China Deal as November Surprise
[Reuters] U.S. voters to decide $76 billion of bonds, taxation limits
[BloombergQ] China's Eco Policy to Be More Preemptive, Flexible, PBOC Says
[BloombergQ] Asia's Most Aggressive Rate Hikers Have More Work Ahead
[Nikkei Asian Review] 'Kiss of debt' for China stocks echoes Japan's post-bubble days
[BloombergQ] The Dirty Legacy of China’s and India’s Growth
[WSJ] Trump and Xi Talk as U.S.-China Tech Fight Brews
[FT] China central bank warns of excessive money growth
Thursday Evening Links
[Reuters] Wall Street climbs for third day, trade optimism helps
[CNBC] Apple shares are sinking after reporting earnings
[Reuters] Gold jumps over 1 pct as dollar backs off from multi-month highs
[BloombergQ] China-Related Stocks Gain Most in 3 Years as Trump-Xi Talk Trade
[CNBC] Trump says he and China's Xi had 'long and very good' trade conversation
[Reuters] Trump, Xi upbeat on U.S.-China trade disputes ahead of meeting
[BloombergQ] U.S. Consumers Most Comfortable Heading Into Midterms Since 1998
[Reuters] Rising interest rates pinch U.S. auto sales, consumer confidence
[BloombergQ] Leveraged-Loan Launches Boom Thanks to Repricings, M&A Deals
[CNBC] Home flippers are fleeing the market as their profits shrink
[BloombergQ] October Proves to Be Rare Good Month for Both Gold and Dollar
[BloombergQ] Stock Pickers Failed to Shine as the Market Tumbled Last Month
[BloombergQ] A $5 Trillion Asia Equity Loss Still Has Two Months to Play Out
[MarketWatch] Mortgage rates slide as echoes of 2006 haunt the housing market
[BloombergQ] The Solution to India's Liquidity Crunch Is Far From Home
[WSJ] The Global Debt Boom Looks Like It’s On Borrowed Time
[FT] US corporate debt feels the chill as yields shoot up
[CNBC] Apple shares are sinking after reporting earnings
[Reuters] Gold jumps over 1 pct as dollar backs off from multi-month highs
[BloombergQ] China-Related Stocks Gain Most in 3 Years as Trump-Xi Talk Trade
[CNBC] Trump says he and China's Xi had 'long and very good' trade conversation
[Reuters] Trump, Xi upbeat on U.S.-China trade disputes ahead of meeting
[BloombergQ] U.S. Consumers Most Comfortable Heading Into Midterms Since 1998
[Reuters] Rising interest rates pinch U.S. auto sales, consumer confidence
[BloombergQ] Leveraged-Loan Launches Boom Thanks to Repricings, M&A Deals
[CNBC] Home flippers are fleeing the market as their profits shrink
[BloombergQ] October Proves to Be Rare Good Month for Both Gold and Dollar
[BloombergQ] Stock Pickers Failed to Shine as the Market Tumbled Last Month
[BloombergQ] A $5 Trillion Asia Equity Loss Still Has Two Months to Play Out
[MarketWatch] Mortgage rates slide as echoes of 2006 haunt the housing market
[BloombergQ] The Solution to India's Liquidity Crunch Is Far From Home
[WSJ] The Global Debt Boom Looks Like It’s On Borrowed Time
[FT] US corporate debt feels the chill as yields shoot up
Wednesday, October 31, 2018
Thursday's News Links
[Reuters] World stocks start month firmer as risk sentiment rebounds
[BloombergQ] Chinese Stocks Rise on Stimulus Bets as Yuan Gains on Fixing
[Reuters] Oil Falls to Two-Month Low as U.S. Supply Surge Allays Iran Fear
[Reuters] Trump says will meet China's Xi as trade talks 'move along'
[Reuters] Money Markets - Dollar Libor posts biggest one-day rise since March
[Reuters] U.S. labor market tightening; manufacturing slowing
[Reuters] U.S. productivity growth slows in the third quarter
[Reuters] US weekly jobless claims fall; continuing claims at the lowest level since 1973
[Reuters] From pharma to prisons, election-sensitive stocks that could swing
[Reuters] Bank of England holds rates, keeps options open before Brexit
[Reuters] Japan October factory activity rebounds, export orders return to growth: PMI
[BloombergQ] Goldman Says Yuan Will Hit 7 as China Avoids Heavy Meddling
[WSJ] Yuan’s Drop Pressures Chinese Companies Borrowing Overseas
[FT] US-China military tension heightens over Taiwan
[FT] US midterms set stage for mother of all White House battles
[BloombergSub] China's 100,000 Developers Are Bracing for a Giant Shakeout
[BloombergQ] Chinese Stocks Rise on Stimulus Bets as Yuan Gains on Fixing
[Reuters] Oil Falls to Two-Month Low as U.S. Supply Surge Allays Iran Fear
[Reuters] Trump says will meet China's Xi as trade talks 'move along'
[Reuters] Money Markets - Dollar Libor posts biggest one-day rise since March
[Reuters] U.S. labor market tightening; manufacturing slowing
[Reuters] U.S. productivity growth slows in the third quarter
[Reuters] US weekly jobless claims fall; continuing claims at the lowest level since 1973
[Reuters] From pharma to prisons, election-sensitive stocks that could swing
[Reuters] Bank of England holds rates, keeps options open before Brexit
[Reuters] Japan October factory activity rebounds, export orders return to growth: PMI
[BloombergQ] Goldman Says Yuan Will Hit 7 as China Avoids Heavy Meddling
[WSJ] Yuan’s Drop Pressures Chinese Companies Borrowing Overseas
[FT] US-China military tension heightens over Taiwan
[FT] US midterms set stage for mother of all White House battles
[BloombergSub] China's 100,000 Developers Are Bracing for a Giant Shakeout
Wednesday Evening Links
[BloombergQ] Stocks Rally on Tech Rebound; Treasuries Slide: Markets Wrap
[CNBC] Wages and salaries jump by 3.1%, highest level in a decade
[CNBC] Trump advisor Larry Kudlow: 'Nothing is set in stone right now' on new China tariffs
[BloombergQ] U.S Debt Sales Top Crisis-Era Levels as Fiscal Bump Spurs Growth
[BloombergQ] Corporate Bond Issuers Suffered Worst Day in Two Months
[BloombergQ] Satellites Show China Manufacturing Output Contracted in October
[CNBC] San Francisco Bay area home sales suffer their slowest September in 11 years
[CNBC] The problem with housing is prices have recovered but demand hasn't: Real estate mogul Sam Zell
[NYT] Tech Drove Stocks Skyward. It’s a Different Story on the Way Down.
[WSJ] That Big Mac and Coke Now Comes With a Side Order of Inflation
[WSJ] Chinese Banks Can’t Escape the Country’s Gloom for Long
[WSJ] No Experience? No Problem. Private Equity Lures Newbie Bankers With $300,000 Offers.
[WSJ] Mounting Climate Worries Push ‘Location, Location, Location’ Off the Beach
[CNBC] Wages and salaries jump by 3.1%, highest level in a decade
[CNBC] Trump advisor Larry Kudlow: 'Nothing is set in stone right now' on new China tariffs
[BloombergQ] U.S Debt Sales Top Crisis-Era Levels as Fiscal Bump Spurs Growth
[BloombergQ] Corporate Bond Issuers Suffered Worst Day in Two Months
[BloombergQ] Satellites Show China Manufacturing Output Contracted in October
[CNBC] San Francisco Bay area home sales suffer their slowest September in 11 years
[CNBC] The problem with housing is prices have recovered but demand hasn't: Real estate mogul Sam Zell
[NYT] Tech Drove Stocks Skyward. It’s a Different Story on the Way Down.
[WSJ] That Big Mac and Coke Now Comes With a Side Order of Inflation
[WSJ] Chinese Banks Can’t Escape the Country’s Gloom for Long
[WSJ] No Experience? No Problem. Private Equity Lures Newbie Bankers With $300,000 Offers.
[WSJ] Mounting Climate Worries Push ‘Location, Location, Location’ Off the Beach
Tuesday, October 30, 2018
Wednesday's News Links
[BloombergQ] Stocks Rally to End Painful Month; Treasuries Drop: Markets Wrap
[Reuters] Shares bounce as bulls fight back after brutal October
[CNBC] 'Robust' jobs market sees another 227,000 hires in October
[Reuters] Rising wages boost U.S. labor costs in third quarter
[Reuters] U.S. Treasury to boost auction sizes, create new inflation-indexed issuance
[Reuters] Money Markets-LIBOR posts biggest monthly rise since March
[Reuters] How the U.S. midterm elections could ripple through markets
[CNBC] Stock market swings may have hit mortgage applications, down 2.5%
[Reuters] China factory growth weakest in over 2 years, slump in export orders deepens
[BloombergQ] China Signals More Support Needed Amid Pressure on Economy
[BloombergQ] China Feels Trade War Pain as Export Gauge Signals Worse to Come
[BloombergQ] Janet Yellen Says She’s Concerned About Trump Undermining Trust In Fed
[Reuters] India says central bank independence 'essential' as row unnerves markets
[BloombergQ] Can China-U.S. Relations Step Back From the Edge?
[Reuters] U.S. diplomat says bid to decide Taiwan's future by non-peaceful means a 'grave concern'
[WSJ] Companies Raise Prices, Betting Consumers Can Pay More
[WSJ] October’s Market Rout Leaves Investors With No Place to Hide
[WSJ] This Is How China’s Currency Works
[WSJ] Rivals Reap Rewards as China’s Monster Money-Market Fund Shrinks
[WSJ] Bank of Japan Warns of Pressures From Global ‘Protectionist Moves’
[FT] China to sell debt in Hong Kong to support renminbi
[FT] Eurozone inflation rate ticks up to highest level since 2012
[FT] Turkish food price inflation expected to hit almost 30%
[Reuters] Shares bounce as bulls fight back after brutal October
[CNBC] 'Robust' jobs market sees another 227,000 hires in October
[Reuters] Rising wages boost U.S. labor costs in third quarter
[Reuters] U.S. Treasury to boost auction sizes, create new inflation-indexed issuance
[Reuters] Money Markets-LIBOR posts biggest monthly rise since March
[Reuters] How the U.S. midterm elections could ripple through markets
[CNBC] Stock market swings may have hit mortgage applications, down 2.5%
[Reuters] China factory growth weakest in over 2 years, slump in export orders deepens
[BloombergQ] China Signals More Support Needed Amid Pressure on Economy
[BloombergQ] China Feels Trade War Pain as Export Gauge Signals Worse to Come
[BloombergQ] Janet Yellen Says She’s Concerned About Trump Undermining Trust In Fed
[Reuters] India says central bank independence 'essential' as row unnerves markets
[BloombergQ] Can China-U.S. Relations Step Back From the Edge?
[Reuters] U.S. diplomat says bid to decide Taiwan's future by non-peaceful means a 'grave concern'
[WSJ] Companies Raise Prices, Betting Consumers Can Pay More
[WSJ] October’s Market Rout Leaves Investors With No Place to Hide
[WSJ] This Is How China’s Currency Works
[WSJ] Rivals Reap Rewards as China’s Monster Money-Market Fund Shrinks
[WSJ] Bank of Japan Warns of Pressures From Global ‘Protectionist Moves’
[FT] China to sell debt in Hong Kong to support renminbi
[FT] Eurozone inflation rate ticks up to highest level since 2012
[FT] Turkish food price inflation expected to hit almost 30%
Tuesday Evening Links
[Reuters] Wall St. rebounds as chip, transport shares surge
[Reuters] Treasuries-U.S. yields tick up as stocks recover on trade prospects
[BloombergQ] Oil Falls to Two-Month Low as Global Demand Anxiety Intensifies
[Reuters] U.S. consumer confidence at 18-year high; house price gains slow
[CNBC] Southern California suffers its worst housing slump in over a decade
[Reuters] Brazil would only sell reserves under speculative attack -Bolsonaro adviser
[BloombergQ] Dealmakers Worry Anti-Globalization Movement Could Dampen Transactions
[NYT] Fear of 7: The Number That Could Make China’s Currency a Trade-War Weapon
[WSJ] Home Prices Continue to Lose Momentum
[WSJ] The Yawning Divide That Explains American Politics
[Reuters] Treasuries-U.S. yields tick up as stocks recover on trade prospects
[BloombergQ] Oil Falls to Two-Month Low as Global Demand Anxiety Intensifies
[Reuters] U.S. consumer confidence at 18-year high; house price gains slow
[CNBC] Southern California suffers its worst housing slump in over a decade
[Reuters] Brazil would only sell reserves under speculative attack -Bolsonaro adviser
[BloombergQ] Dealmakers Worry Anti-Globalization Movement Could Dampen Transactions
[NYT] Fear of 7: The Number That Could Make China’s Currency a Trade-War Weapon
[WSJ] Home Prices Continue to Lose Momentum
[WSJ] The Yawning Divide That Explains American Politics
Monday, October 29, 2018
Tuesday's News Links
[BloombergQ] U.S. Stocks Mixed on Earnings, Treasuries Retreat: Markets Wrap
[BloombergQ] China’s Yuan Drops to a Decade-Low, 7 Per Dollar Now in Sight
[BloombergQ] China Shares Jump on Trump Comments, Yuan Flirts With Decade Low
[CNBC] Home price gains fall below 6% for the first time in a year: August S&P Case-Shiller index
[Reuters] Trump says he expects 'great deal' with China, but more tariffs if not
[BloombergQ] Treasury Sees 2018 Borrowing Needs Surging to $1.34 Trillion
[BloombergQ] Trump’s Next Tariff Blow Could Be 10 Times Worse for U.S. Shoppers
[BloombergQ] Italian Economy Unexpectedly Stalls in Setback for Populists
[Reuters] Money Markets-LIBOR/OIS spread hits widest level since August
[BloombergQ] China Is Buying Distressed Private Companies as Markets Sink
[BloombergQ] Asia's Rich From Massage Chair King to Telecom Tycoon Delay IPOs
[BloombergQ] Goldman Says the Return of Fear Is a Good Thing for Gold
[Reuters] U.S. Navy chief says U.S, China to 'meet more and more on high seas'
[WSJ] Rising Rates Threaten a Bull-Market Mantra
[WSJ] China Sets Official Yuan Rate at Weakest in a Decade
[FT] ECB exit strategy clouded by weakest growth in four years
[FT] Looming end of Merkel era leaves hard choices for German parties
[FT] Red-hot leveraged loan market draws regulatory heat
[BloombergQ] China’s Yuan Drops to a Decade-Low, 7 Per Dollar Now in Sight
[BloombergQ] China Shares Jump on Trump Comments, Yuan Flirts With Decade Low
[CNBC] Home price gains fall below 6% for the first time in a year: August S&P Case-Shiller index
[Reuters] Trump says he expects 'great deal' with China, but more tariffs if not
[BloombergQ] Treasury Sees 2018 Borrowing Needs Surging to $1.34 Trillion
[BloombergQ] Trump’s Next Tariff Blow Could Be 10 Times Worse for U.S. Shoppers
[BloombergQ] Italian Economy Unexpectedly Stalls in Setback for Populists
[Reuters] Money Markets-LIBOR/OIS spread hits widest level since August
[BloombergQ] China Is Buying Distressed Private Companies as Markets Sink
[BloombergQ] Asia's Rich From Massage Chair King to Telecom Tycoon Delay IPOs
[BloombergQ] Goldman Says the Return of Fear Is a Good Thing for Gold
[Reuters] U.S. Navy chief says U.S, China to 'meet more and more on high seas'
[WSJ] Rising Rates Threaten a Bull-Market Mantra
[WSJ] China Sets Official Yuan Rate at Weakest in a Decade
[FT] ECB exit strategy clouded by weakest growth in four years
[FT] Looming end of Merkel era leaves hard choices for German parties
[FT] Red-hot leveraged loan market draws regulatory heat
Monday Evening Links
[Reuters] Wall Street rally fizzles as tech, Amazon falter
[BloombergQ] U.S. Plans More China Tariffs If Trump-Xi Meeting Fails, Sources Say
[BloombergQ] Mexican Assets Tank as Lopez Obrador Cancels Planned Airport
[Reuters] U.S. October auto sales seen down slightly: consultants
[BloombergQ] Morgan Stanley Says Sell Rallies as Goldman Sees Chance to Buy
[BloombergQ] Italy's Next Big Test in the Bond Market
[BloombergQ] China Regulator to Propose 50% Cut to Car Purchase Tax
[FT] Beijing will play the long game on the renminbi
[FT] German centre’s collapse brings Merkel era to a close
[BloombergQ] U.S. Plans More China Tariffs If Trump-Xi Meeting Fails, Sources Say
[BloombergQ] Mexican Assets Tank as Lopez Obrador Cancels Planned Airport
[Reuters] U.S. October auto sales seen down slightly: consultants
[BloombergQ] Morgan Stanley Says Sell Rallies as Goldman Sees Chance to Buy
[BloombergQ] Italy's Next Big Test in the Bond Market
[BloombergQ] China Regulator to Propose 50% Cut to Car Purchase Tax
[FT] Beijing will play the long game on the renminbi
[FT] German centre’s collapse brings Merkel era to a close
Sunday, October 28, 2018
Monday's News Links
[BloombergQ] U.S. Stocks Rally With Dollar as Bonds Slump: Markets Wrap
[CNBC] Chinese markets take another tumble amid a brutal October for mainland stocks
[Reuters] Euro weakens on report Germany's Merkel won't seek re-election as party chair
[Reuters] Oil edges lower as economic outlook grows gloomier
[Reuters] U.S. spending rises; income posts smallest gain in over a year
[BloombergQ] Italy Budget Deal Could Use `Standby' on Some Items: Messaggero
[BloombergQ] Merkel to Quit as Party Chief as Her Chancellorship Wobbles
[Reuters] End of era beckons as Merkel says she will give up CDU party chair
[BloombergQ] China Says National Team Is Buying, Not Selling, as Stocks Fall
[Reuters] Exclusive: BOJ eyes tweaks to bond-buying program, but won't rush changes - sources
[Reuters] Many U.S. firms in China eyeing relocation as trade war bites: survey
[BloombergQ] Rates Traders Brace for Chaos as Fed, Libor and IOER All in Play
[BloombergQ] The Bar Is High for Fed to Help Investors, Morgan Stanley Says
[BloombergQ] China 2025 Plan Remains a Stumbling Block as Trump Meeting Looms
[WSJ] Rising Libor Troubles Fragile Markets
[WSJ] Credit-Card Spending Limits in the Crosshairs as Issuers Grow Cautious
[WSJ] Global Billionaire Wealth Hits Record US$8.9 Trillion, Led by Chinese
[FT] Merkel coalition under pressure after Hesse election setback
[FT] Active funds suffer worst quarter for seven years
[CNBC] Chinese markets take another tumble amid a brutal October for mainland stocks
[Reuters] Euro weakens on report Germany's Merkel won't seek re-election as party chair
[Reuters] Oil edges lower as economic outlook grows gloomier
[Reuters] U.S. spending rises; income posts smallest gain in over a year
[BloombergQ] Italy Budget Deal Could Use `Standby' on Some Items: Messaggero
[BloombergQ] Merkel to Quit as Party Chief as Her Chancellorship Wobbles
[Reuters] End of era beckons as Merkel says she will give up CDU party chair
[BloombergQ] China Says National Team Is Buying, Not Selling, as Stocks Fall
[Reuters] Exclusive: BOJ eyes tweaks to bond-buying program, but won't rush changes - sources
[Reuters] Many U.S. firms in China eyeing relocation as trade war bites: survey
[BloombergQ] Rates Traders Brace for Chaos as Fed, Libor and IOER All in Play
[BloombergQ] The Bar Is High for Fed to Help Investors, Morgan Stanley Says
[BloombergQ] China 2025 Plan Remains a Stumbling Block as Trump Meeting Looms
[WSJ] Rising Libor Troubles Fragile Markets
[WSJ] Credit-Card Spending Limits in the Crosshairs as Issuers Grow Cautious
[WSJ] Global Billionaire Wealth Hits Record US$8.9 Trillion, Led by Chinese
[FT] Merkel coalition under pressure after Hesse election setback
[FT] Active funds suffer worst quarter for seven years
Sunday Evening Links
[Reuters] Asian shares seen bouncing but sell-off not over yet as sentiment fragile
[BloombergQ] Brazil Swings Right With Jair Bolsonaro's Commanding Victory
[AP] Far-right candidate Jair Bolsonaro wins Brazil's presidential election
[MarketWatch] As the housing market stagnates, American homeowners are staying put for the longest stretches ever
[BBC] Germany election: Further blow for Merkel in Hesse
[BloombergQ] Turkey Strikes U.S.-Backed Kurds After Erdogan's ‘Final Warning’
[BloombergQ] Brazil Swings Right With Jair Bolsonaro's Commanding Victory
[AP] Far-right candidate Jair Bolsonaro wins Brazil's presidential election
[MarketWatch] As the housing market stagnates, American homeowners are staying put for the longest stretches ever
[BBC] Germany election: Further blow for Merkel in Hesse
[BloombergQ] Turkey Strikes U.S.-Backed Kurds After Erdogan's ‘Final Warning’
Sunday's News Links
[BloombergQ] Bond Traders, Spooked by Tumult in Stocks, Doubt Fed's Rate Path
[Reuters] Take Five: World markets themes for the week ahead
[BloombergQ] Everything You Need to Know About Brazil’s Election: Balance of Power Special
[WSJ] Drilling Down Into the Volatility in Financial Markets
[WSJ] U.S. Economy Flashes Signs It’s Downhill From Here
[WSJ] China’s Tech Investment Mania Ebbs—For Now
[FT] Financial conditions tighten as markets tumble
[FT] Landlords push up US rents to post-crisis highs
[FT] Italy is setting itself up for a monumental fiscal failure
[Reuters] Take Five: World markets themes for the week ahead
[BloombergQ] Everything You Need to Know About Brazil’s Election: Balance of Power Special
[WSJ] Drilling Down Into the Volatility in Financial Markets
[WSJ] U.S. Economy Flashes Signs It’s Downhill From Here
[WSJ] China’s Tech Investment Mania Ebbs—For Now
[FT] Financial conditions tighten as markets tumble
[FT] Landlords push up US rents to post-crisis highs
[FT] Italy is setting itself up for a monumental fiscal failure
Saturday, October 27, 2018
Saturday's News Links
[Reuters] China regulator urges Beijing banks not to force liquidation of pledged shares: Yicai
[Reuters] China's industrial profits growth slows for fifth month as orders wane
[CNBC] The 'unbeauty contest': All you need to know as Brazilian voters prepare for an election showdown
[Reuters] More violence feared as Brazil braces for far-right presidency
[CNBC] Populism and nationalism threaten the European project
[FT] Rising costs force consumer goods groups to raise prices
[FT] The regime change for global markets is just beginning
[Reuters] China's industrial profits growth slows for fifth month as orders wane
[CNBC] The 'unbeauty contest': All you need to know as Brazilian voters prepare for an election showdown
[Reuters] More violence feared as Brazil braces for far-right presidency
[CNBC] Populism and nationalism threaten the European project
[FT] Rising costs force consumer goods groups to raise prices
[FT] The regime change for global markets is just beginning
Friday, October 26, 2018
Weekly Commentary: "Whatever They Want" Coming Home to Roost
Let's begin with global. China's yuan (CNY) traded to 6.9644 to the dollar in early-Friday trading, almost matching the low (vs. dollar) from December 2016 (6.9649). CNY is basically trading at lows going back to 2008 - and has neared the key psychological 7.0 level. CNY rallied in late-Friday trading to close the week at 6.9435. From Bloomberg (Tian Chen): "Three traders said at least one big Chinese bank sold the dollar, triggering stop-losses." Earlier, a PBOC governor "told a briefing that the central bank would continue taking measures to stabilize sentiment. 'We have dealt with short-sellers of the yuan a few years ago, and we are very familiar with each other. I think we both have vivid memories of the past.'"
The PBOC eventually won that 2016 skirmish with the CNY "shorts". In general, however, you don't want your central bank feeling compelled to do battle against the markets. It's no sign of strength. For "developing" central banks, in particular, it has too often in the past proved a perilous proposition. Threats and actions are taken, and a lot can ride on the market's response. In a brewing confrontation, the market will test the central bank. If the central bank's response appears ineffective, markets will instinctively pounce.
Often unobtrusively, the stakes can grow incredibly large. There's a dynamic that has been replayed in the past throughout the emerging markets. Bubbles are pierced and "hot money" heads for the exits. Central banks and government officials then work aggressively to bolster their faltering currencies. These efforts appear to stabilize the situation for a period of time, although the relative calm masks assertive market efforts to hedge against future currency devaluation in the derivatives markets.
If policymakers then lose control - market pressures prevail - those on the wrong side of (now outsized) derivative hedges are forced to aggressively sell/short the underlying currency. This type of self-reinforcing selling can too easily foment illiquidity, dislocation and currency collapse. As I highlighted last week, for a list of reasons such a scenario would have devastating consequences for China - and the world.
As I've noted in previous CBBs, the current global environment has some critical differences compared to China's last currency instability episode in early-2016. Global QE was ramped up to about a $2.0 TN annual pace back then, versus today's QE that will soon be only marginally positive. Buoyed by zero rates, sinking bond yields and rising equities prices, global speculative leverage was expanding - versus today's problematic contraction. China's Credit system and economy were significantly more robust in 2016. EM, in general, was still enveloped in powerful financial and economic expansion dynamics. Moreover, the global trade and geopolitical backdrops have deteriorated dramatically since 2016.
October 26 - Bloomberg: "Investors are turning up the temperature on Chinese policy makers, who were already feeling the heat. That may cause the government to resort to even tighter controls on money flowing in and out of the country, according to Citi economists. Net foreign exchange settlement by banks in China on behalf of their clients -- a proxy for capital flows -- was negative in September for a third straight month, according to… the State Administration of Foreign Exchange. At -110.3 billion yuan, purchase of foreign currencies was the most since December 2016. An escalating trade war with the U.S. has contributed to souring investor sentiment and put downward pressure on China's currency, which Friday came within striking distance of a 10-year low against the dollar. It's fallen 9% over the last six months. Measures taken by the People's Bank of China this month to support the economy as the outlook has darkened… haven't helped the exchange rate."
October 26 - Bloomberg (Alfred Liu and Benjamin Robertson): "China's finance ministry has warned the country's state-owned financial assets need further protection from mismanagement, following the release of new data on the size of their balance sheets. Total assets of state-owned financial enterprises amounted to 241 trillion yuan ($34.6 trillion) in 2017, according to a report published by China's Ministry of Finance… Their liabilities were 217.3 trillion yuan last year… 'While we are gradually upgrading the management of state financial assets, we have to be aware that there are still institutional and structural contradictions and problems,' said Liu Kun, China's finance minister… 'The mission of preventing massive risks remains tough.'"
A disorderly breakdown of the Chinese currency has the potential to be one of the most destabilizing developments for global finance and the world economy in decades. I am not confident that Chinese officials have the situation under control. At the same time, there is no doubt that Chinese finance and financial institutions have inflated to previously unimaginable dimensions. And it appears Beijing is increasingly cognizant of unfolding risks. This likely explains why officials appear less inclined than in the past to push through aggressive fiscal and monetary stimulus. A key aspect of the bullish global thesis (Chinese stimulus on demand) is due for reassessment.
The Shanghai Composite rallied 1.9% this week. It was difficult for global markets to sense anything more than fleeting relief, suspecting the "national team" was hard at work. Markets throughout Asia were under pressure. Hong Kong's Hang Seng index fell 3.3%. Major indices were down 6.0% in South Korea, 6.0% in Vietnam, 4.3% in Taiwan, 3.2% in Thailand, 2.8% in Malaysia, 2.8% in India and 1.2% in Philippines. Japan's Nikkei 225 index sank 6.0%, with the TOPIX Bank Index's 4.7% drop boosting y-t-d declines to 17.1%.
Asian bank weakness is a primary Systemic Contagion Link globally. Europe's STOXX 600 bank index fell 3.5% this week, increasing 2018 losses to 24.0%. Italian banks were down another 3.9% this week (down 28.2% y-t-d). Deutsche Bank dropped 11.4% this week (to an all-time low). Deutsche Bank (senior) credit-default swap (CDS) prices rose 11 bps this week to 156 bps, the high since early July. Many of the big global banks saw CDS prices rise this week to near one-year highs. Curiously, Goldman Sachs CDS rose seven this week to 79 bps, an almost 19-month high. The U.S. bank equities index (BKX) sank 5.0% this week, and the Broker/Dealers dropped 4.8%.
In a further indication of heightened global systemic risk, German bund yields sank 11 bps this week to 0.35%, the low since September 4th. With Italian yields declining only four bps (to 3.45%), the spread to bunds widened seven bps to 310 bps. Portuguese yields dropped 11 bps to 1.96%, and Spanish yields fell 17 bps to 1.57%. UK 10-year yields sank 19 bps to 1.38%, the low since August.
It certainly has all the appearance of bond markets beginning to discount ramification of the bursting of the global Bubble. WTI crude declined another $1.52 to $67.62, a two-month low. The dollar index increased 0.7% to 96.412, near a 16-month high. The British pound declined 1.9%, the Norwegian krone 1.6%, the Swedish krona 1.6%, the New Zealand dollar 1.4%, the South African ran 1.3% and the euro 1.0%.
October 26 - Bloomberg (Jacob Bourne): "Inflation expectations are tumbling in the U.S. bond market, suggesting traders are worried that the Federal Reserve's monetary policy is becoming too tight -- potentially by a quarter-point -- amid the slide in equities. The five-year breakeven rate, which represents bond investors' view on the annual inflation rate through 2023, dropped Friday to 1.88%, the lowest since January."
The headline for the above article was "Inflation Bets Are Tanking, Showing Bond Traders See a Tight Fed." Ten-year Treasury yields did drop 12 bps this week to 3.08%. But the overarching issue is escalating systemic risk associated with a faltering global Bubble - not a "tight Fed." The Fed would prefer to remain "data dependent." The early read on Q3 GDP came in at 3.5%, with Personal Consumption growing at a 4.0% rate (strongest since Q4 '14). A number of Fed officials this week downplayed U.S. stock market weakness.
I'm not at all sure Fed officials appreciate their predicament. The global Bubble is bursting, yet the U.S. economy at this point maintains a decent head of steam. Bond markets are quickly adjusting to the changing global backdrop. Treasuries have had more of a domestic focus but this has begun to shift. And having shown resilience until recently, junk bonds (HYG) declined 1.1% over the past two weeks. With yields jumping this week to a two-year high, junk bond funds suffered net outflows of $2.364 billion.
October 26 - Bloomberg (Adam Tempkin): "One of Wall Street's go-to shelters in times of trouble is showing cracks as broad concerns pile up. Bouts of selling have hit bonds backed by mortgages, auto loans and credit card payments -- typically havens during periods of stress -- amid the carnage in financial markets this month. Certain sectors of so-called securitized loans are 'experiencing some headwinds,' said Neil Aggarwal, senior portfolio manager and head of trading at Semper Capital. 'A combination of rates, earnings, and global concerns are having an ongoing impact.' The debt class usually does better than corporate bonds during market turmoil because the securities are linked to consumer payments, rather than company performance, and typically have cash cushions to absorb initial losses. But recent weakness highlights how the sector may be unable to shrug off the chaos enveloping other assets."
Financial conditions have now begun to meaningfully tighten at the "Core." I suspect de-risking/de-leveraging dynamics have begun to unfold throughout U.S. corporate Credit. There are also indications of tightening liquidity conditions in securitized Credit. These are important developments.
October 26 - Bloomberg (Suzy Waite and Nishant Kumar): "Hedge funds using computer-driven models to follow big market trends have been whiplashed as volatility has spiked, among the biggest casualties of a stock rout that has accelerated worldwide. Funds known as commodity trading advisers, or CTAs, have traditionally shielded investors during market selloffs such as the global financial crisis, especially when mathematical models show a clear or pronounced trend. But this time, they've been unable to navigate sharp reversals in asset prices… 'It's a bloodbath out there across almost every strategy with very few exceptions,' said Vaqar Zuberi, head of hedge funds at Mirabaud Asset Management… 'CTAs have been caught by a double-whammy with rising rates and equities plummeting,' said Zuberi. 'There's only one exit and everyone is trying to exit now because the models are telling them to do so.' Computer-driven hedge funds were already headed for their worst year ever before this month's volatility…"
As an industry, hedge funds were already struggling for performance prior to the recent bout of "Risk Off." Many funds have seen 2018 gains quickly morph into losses. There is now the distinct risk of escalating losses into year-end spurring significant industry outflows. This dynamic elevates the odds of a destabilizing de-risking/deleveraging dynamic.
Treasuries provided somewhat of a hedge against equities losses this week. Yet, overall, markets have been particularly uncooperative to popular "risk parity" hedge fund strategies. Leveraged portfolios of stocks, government securities and fixed-income are not experiencing the diversification benefits they've enjoyed for most of the past decade (or two). Losses and general performance volatility will force these strategies to deleverage, with negative consequences for liquidity across various markets.
With de-risking/deleveraging gaining momentum globally - and some of the big global "banks" under pressure - it's reasonable to begin contemplating counter-party risk. And anytime markets start indicating waning liquidity and dislocation risk, my fears return to the derivatives markets. How much market "risk insurance" has been sold by strategies that plan on hedging this risk by selling into declining markets? Stated differently, what is the risk that derivatives "insurance" "dynamically (delta) hedged" by quant models could erupt into self-reinforcing sell programs, illiquidity and market dislocation?
October 26 - Financial Times (Alfred Liu and Benjamin Robertson): "Mario Draghi has pushed back against the wave of political attacks on the world's central banks, warning that the rising pressure could lead to lower growth and undermine a vital line of defence against future financial crises. Speaking just hours after he was criticised by Italy's deputy prime minister as 'poisoning the climate' against Rome, the European Central Bank president called on legislators around the world to instead 'protect the independence' of rate-setters. 'The central bank should not be subject to . . . political dominance and should be free to choose the instruments that are most appropriate to deliver its mandate,' Mr Draghi said in a thinly-veiled rebuke to his native country."
I see things similarly to the great statesman, the ailing Paul Volcker: "A hell of a mess in every direction." The stock market is only a few weeks past all-time highs, yet the finger-pointing has already begun in earnest. The Powell Fed cautiously raising rates just past 2.0% is certainly not responsible for the world's problems. A decade of central bank-induced monetary inflation, well that's a different story. More than a couple decades of central bank experimentation and inflationism, now you're on to something. It was always going to Come Home to Roost. That's the harsh reality that no one was willing to contemplate.
Draghi: "The central bank should not be subject to… political dominance and should be free to choose the instruments that are most appropriate to deliver its mandate."
It's ridiculous to bestow a small group of global central bankers the power to do Whatever They Want in the name of delivering on some arbitrary index level of consumer price inflation. To create $14 TN of "money" and unleash it upon global securities markets is undoubtedly history's most reckless monetary mismanagement.
Inevitable Blowback has commenced. "The dog ate my homework." "The inflation mandate made us do it." With a full year remaining in his term, Draghi won't be sharing Bernanke's good fortune. This whole historic monetary experiment will be unraveling while he's still on watch. But, then again, the Trump administration already has its scapegoat. Perhaps the whole world will blame Chairman Powell - or the man that appointed him.
Following a terrifying trajectory, things somehow turn more disturbing by the week. Political travesty has degenerated into a surreal quagmire. And to see this degree of division and hostility at this cycle's boom phase should have us all thinking carefully about what the future holds. As a nation, we are alarmingly unprepared. And it's back to this same issue that's troubled me for a number of years now:
Bubbles are always mechanisms of wealth redistribution and destruction. Akin to central banking, they can inflict immeasurable harm and somehow deflect culpability. As we've already witnessed as a society, they wreak subtle - and, later, more overt - havoc. And the current astounding Bubble has been on such an unprecedented global scale. Harsh geopolitical fallout is unavoidable. For me, it's been scary for a while. It's just more palpable now. We'll see if the midterms can provide an impetus for a market rally. If not, this has all the appearances of something that could turn sour quickly.
The PBOC eventually won that 2016 skirmish with the CNY "shorts". In general, however, you don't want your central bank feeling compelled to do battle against the markets. It's no sign of strength. For "developing" central banks, in particular, it has too often in the past proved a perilous proposition. Threats and actions are taken, and a lot can ride on the market's response. In a brewing confrontation, the market will test the central bank. If the central bank's response appears ineffective, markets will instinctively pounce.
Often unobtrusively, the stakes can grow incredibly large. There's a dynamic that has been replayed in the past throughout the emerging markets. Bubbles are pierced and "hot money" heads for the exits. Central banks and government officials then work aggressively to bolster their faltering currencies. These efforts appear to stabilize the situation for a period of time, although the relative calm masks assertive market efforts to hedge against future currency devaluation in the derivatives markets.
If policymakers then lose control - market pressures prevail - those on the wrong side of (now outsized) derivative hedges are forced to aggressively sell/short the underlying currency. This type of self-reinforcing selling can too easily foment illiquidity, dislocation and currency collapse. As I highlighted last week, for a list of reasons such a scenario would have devastating consequences for China - and the world.
As I've noted in previous CBBs, the current global environment has some critical differences compared to China's last currency instability episode in early-2016. Global QE was ramped up to about a $2.0 TN annual pace back then, versus today's QE that will soon be only marginally positive. Buoyed by zero rates, sinking bond yields and rising equities prices, global speculative leverage was expanding - versus today's problematic contraction. China's Credit system and economy were significantly more robust in 2016. EM, in general, was still enveloped in powerful financial and economic expansion dynamics. Moreover, the global trade and geopolitical backdrops have deteriorated dramatically since 2016.
October 26 - Bloomberg: "Investors are turning up the temperature on Chinese policy makers, who were already feeling the heat. That may cause the government to resort to even tighter controls on money flowing in and out of the country, according to Citi economists. Net foreign exchange settlement by banks in China on behalf of their clients -- a proxy for capital flows -- was negative in September for a third straight month, according to… the State Administration of Foreign Exchange. At -110.3 billion yuan, purchase of foreign currencies was the most since December 2016. An escalating trade war with the U.S. has contributed to souring investor sentiment and put downward pressure on China's currency, which Friday came within striking distance of a 10-year low against the dollar. It's fallen 9% over the last six months. Measures taken by the People's Bank of China this month to support the economy as the outlook has darkened… haven't helped the exchange rate."
October 26 - Bloomberg (Alfred Liu and Benjamin Robertson): "China's finance ministry has warned the country's state-owned financial assets need further protection from mismanagement, following the release of new data on the size of their balance sheets. Total assets of state-owned financial enterprises amounted to 241 trillion yuan ($34.6 trillion) in 2017, according to a report published by China's Ministry of Finance… Their liabilities were 217.3 trillion yuan last year… 'While we are gradually upgrading the management of state financial assets, we have to be aware that there are still institutional and structural contradictions and problems,' said Liu Kun, China's finance minister… 'The mission of preventing massive risks remains tough.'"
A disorderly breakdown of the Chinese currency has the potential to be one of the most destabilizing developments for global finance and the world economy in decades. I am not confident that Chinese officials have the situation under control. At the same time, there is no doubt that Chinese finance and financial institutions have inflated to previously unimaginable dimensions. And it appears Beijing is increasingly cognizant of unfolding risks. This likely explains why officials appear less inclined than in the past to push through aggressive fiscal and monetary stimulus. A key aspect of the bullish global thesis (Chinese stimulus on demand) is due for reassessment.
The Shanghai Composite rallied 1.9% this week. It was difficult for global markets to sense anything more than fleeting relief, suspecting the "national team" was hard at work. Markets throughout Asia were under pressure. Hong Kong's Hang Seng index fell 3.3%. Major indices were down 6.0% in South Korea, 6.0% in Vietnam, 4.3% in Taiwan, 3.2% in Thailand, 2.8% in Malaysia, 2.8% in India and 1.2% in Philippines. Japan's Nikkei 225 index sank 6.0%, with the TOPIX Bank Index's 4.7% drop boosting y-t-d declines to 17.1%.
Asian bank weakness is a primary Systemic Contagion Link globally. Europe's STOXX 600 bank index fell 3.5% this week, increasing 2018 losses to 24.0%. Italian banks were down another 3.9% this week (down 28.2% y-t-d). Deutsche Bank dropped 11.4% this week (to an all-time low). Deutsche Bank (senior) credit-default swap (CDS) prices rose 11 bps this week to 156 bps, the high since early July. Many of the big global banks saw CDS prices rise this week to near one-year highs. Curiously, Goldman Sachs CDS rose seven this week to 79 bps, an almost 19-month high. The U.S. bank equities index (BKX) sank 5.0% this week, and the Broker/Dealers dropped 4.8%.
In a further indication of heightened global systemic risk, German bund yields sank 11 bps this week to 0.35%, the low since September 4th. With Italian yields declining only four bps (to 3.45%), the spread to bunds widened seven bps to 310 bps. Portuguese yields dropped 11 bps to 1.96%, and Spanish yields fell 17 bps to 1.57%. UK 10-year yields sank 19 bps to 1.38%, the low since August.
It certainly has all the appearance of bond markets beginning to discount ramification of the bursting of the global Bubble. WTI crude declined another $1.52 to $67.62, a two-month low. The dollar index increased 0.7% to 96.412, near a 16-month high. The British pound declined 1.9%, the Norwegian krone 1.6%, the Swedish krona 1.6%, the New Zealand dollar 1.4%, the South African ran 1.3% and the euro 1.0%.
October 26 - Bloomberg (Jacob Bourne): "Inflation expectations are tumbling in the U.S. bond market, suggesting traders are worried that the Federal Reserve's monetary policy is becoming too tight -- potentially by a quarter-point -- amid the slide in equities. The five-year breakeven rate, which represents bond investors' view on the annual inflation rate through 2023, dropped Friday to 1.88%, the lowest since January."
The headline for the above article was "Inflation Bets Are Tanking, Showing Bond Traders See a Tight Fed." Ten-year Treasury yields did drop 12 bps this week to 3.08%. But the overarching issue is escalating systemic risk associated with a faltering global Bubble - not a "tight Fed." The Fed would prefer to remain "data dependent." The early read on Q3 GDP came in at 3.5%, with Personal Consumption growing at a 4.0% rate (strongest since Q4 '14). A number of Fed officials this week downplayed U.S. stock market weakness.
I'm not at all sure Fed officials appreciate their predicament. The global Bubble is bursting, yet the U.S. economy at this point maintains a decent head of steam. Bond markets are quickly adjusting to the changing global backdrop. Treasuries have had more of a domestic focus but this has begun to shift. And having shown resilience until recently, junk bonds (HYG) declined 1.1% over the past two weeks. With yields jumping this week to a two-year high, junk bond funds suffered net outflows of $2.364 billion.
October 26 - Bloomberg (Adam Tempkin): "One of Wall Street's go-to shelters in times of trouble is showing cracks as broad concerns pile up. Bouts of selling have hit bonds backed by mortgages, auto loans and credit card payments -- typically havens during periods of stress -- amid the carnage in financial markets this month. Certain sectors of so-called securitized loans are 'experiencing some headwinds,' said Neil Aggarwal, senior portfolio manager and head of trading at Semper Capital. 'A combination of rates, earnings, and global concerns are having an ongoing impact.' The debt class usually does better than corporate bonds during market turmoil because the securities are linked to consumer payments, rather than company performance, and typically have cash cushions to absorb initial losses. But recent weakness highlights how the sector may be unable to shrug off the chaos enveloping other assets."
Financial conditions have now begun to meaningfully tighten at the "Core." I suspect de-risking/de-leveraging dynamics have begun to unfold throughout U.S. corporate Credit. There are also indications of tightening liquidity conditions in securitized Credit. These are important developments.
October 26 - Bloomberg (Suzy Waite and Nishant Kumar): "Hedge funds using computer-driven models to follow big market trends have been whiplashed as volatility has spiked, among the biggest casualties of a stock rout that has accelerated worldwide. Funds known as commodity trading advisers, or CTAs, have traditionally shielded investors during market selloffs such as the global financial crisis, especially when mathematical models show a clear or pronounced trend. But this time, they've been unable to navigate sharp reversals in asset prices… 'It's a bloodbath out there across almost every strategy with very few exceptions,' said Vaqar Zuberi, head of hedge funds at Mirabaud Asset Management… 'CTAs have been caught by a double-whammy with rising rates and equities plummeting,' said Zuberi. 'There's only one exit and everyone is trying to exit now because the models are telling them to do so.' Computer-driven hedge funds were already headed for their worst year ever before this month's volatility…"
As an industry, hedge funds were already struggling for performance prior to the recent bout of "Risk Off." Many funds have seen 2018 gains quickly morph into losses. There is now the distinct risk of escalating losses into year-end spurring significant industry outflows. This dynamic elevates the odds of a destabilizing de-risking/deleveraging dynamic.
Treasuries provided somewhat of a hedge against equities losses this week. Yet, overall, markets have been particularly uncooperative to popular "risk parity" hedge fund strategies. Leveraged portfolios of stocks, government securities and fixed-income are not experiencing the diversification benefits they've enjoyed for most of the past decade (or two). Losses and general performance volatility will force these strategies to deleverage, with negative consequences for liquidity across various markets.
With de-risking/deleveraging gaining momentum globally - and some of the big global "banks" under pressure - it's reasonable to begin contemplating counter-party risk. And anytime markets start indicating waning liquidity and dislocation risk, my fears return to the derivatives markets. How much market "risk insurance" has been sold by strategies that plan on hedging this risk by selling into declining markets? Stated differently, what is the risk that derivatives "insurance" "dynamically (delta) hedged" by quant models could erupt into self-reinforcing sell programs, illiquidity and market dislocation?
October 26 - Financial Times (Alfred Liu and Benjamin Robertson): "Mario Draghi has pushed back against the wave of political attacks on the world's central banks, warning that the rising pressure could lead to lower growth and undermine a vital line of defence against future financial crises. Speaking just hours after he was criticised by Italy's deputy prime minister as 'poisoning the climate' against Rome, the European Central Bank president called on legislators around the world to instead 'protect the independence' of rate-setters. 'The central bank should not be subject to . . . political dominance and should be free to choose the instruments that are most appropriate to deliver its mandate,' Mr Draghi said in a thinly-veiled rebuke to his native country."
I see things similarly to the great statesman, the ailing Paul Volcker: "A hell of a mess in every direction." The stock market is only a few weeks past all-time highs, yet the finger-pointing has already begun in earnest. The Powell Fed cautiously raising rates just past 2.0% is certainly not responsible for the world's problems. A decade of central bank-induced monetary inflation, well that's a different story. More than a couple decades of central bank experimentation and inflationism, now you're on to something. It was always going to Come Home to Roost. That's the harsh reality that no one was willing to contemplate.
Draghi: "The central bank should not be subject to… political dominance and should be free to choose the instruments that are most appropriate to deliver its mandate."
It's ridiculous to bestow a small group of global central bankers the power to do Whatever They Want in the name of delivering on some arbitrary index level of consumer price inflation. To create $14 TN of "money" and unleash it upon global securities markets is undoubtedly history's most reckless monetary mismanagement.
Inevitable Blowback has commenced. "The dog ate my homework." "The inflation mandate made us do it." With a full year remaining in his term, Draghi won't be sharing Bernanke's good fortune. This whole historic monetary experiment will be unraveling while he's still on watch. But, then again, the Trump administration already has its scapegoat. Perhaps the whole world will blame Chairman Powell - or the man that appointed him.
Following a terrifying trajectory, things somehow turn more disturbing by the week. Political travesty has degenerated into a surreal quagmire. And to see this degree of division and hostility at this cycle's boom phase should have us all thinking carefully about what the future holds. As a nation, we are alarmingly unprepared. And it's back to this same issue that's troubled me for a number of years now:
Bubbles are always mechanisms of wealth redistribution and destruction. Akin to central banking, they can inflict immeasurable harm and somehow deflect culpability. As we've already witnessed as a society, they wreak subtle - and, later, more overt - havoc. And the current astounding Bubble has been on such an unprecedented global scale. Harsh geopolitical fallout is unavoidable. For me, it's been scary for a while. It's just more palpable now. We'll see if the midterms can provide an impetus for a market rally. If not, this has all the appearances of something that could turn sour quickly.
For the Week:
The S&P500 dropped 3.9% (down 0.6% y-t-d), and the Dow fell 3.0% (down 0.1%). The Utilities declined 1.9% (up 1.2%). The Banks sank 5.0% (down 11.1%), and the Broker/Dealers fell 4.8% (down 5.7%). The Transports dropped 4.5% (down 6.1%). The S&P 400 Midcaps dropped 4.1% (up down 5.5%), and the small cap Russell 2000 fell 3.8% (down 3.4%). The Nasdaq100 declined 3.6% (up 7.1%). The Semiconductors sank 5.9% (down 8.0%). The Biotechs were slammed 7.1% (up 7.5%). Although bullion gained $6, the HUI gold index sank 7.0% (down 24.8%).
Three-month Treasury bill rates ended the week at 2.28%. Two-year government yields dropped 10 bps to 2.81% (up 92bps y-t-d). Five-year T-note yields fell 14 bps to 2.91% (up 70bps). Ten-year Treasury yields dropped 12 bps to 3.08% (up 67bps). Long bond yields declined seven bps to 3.31% (up 57bps). Benchmark Fannie Mae MBS yields fell eight bps to 3.93% (up 93bps).
Greek 10-year yields declined five bps to 4.28% (up 20bps y-t-d). Ten-year Portuguese yields fell 11 bps to 1.91% (down 4bps). Italian 10-year yields declined four bps to 3.45% (up 143bps). Spain's 10-year yields sank 17 bps to 1.57% (unchanged). German bund yields dropped 11 bps to 0.35% (down 8bps). French yields fell 10 bps to 0.74% (down 5bps). The French to German 10-year bond spread widened one to 39 bps. U.K. 10-year gilt yields sank 19 bps to 1.38% (up 19bps). U.K.'s FTSE equities index declined 1.6% (down 9.7%).
Japan's Nikkei 225 equities index sank 6.0% (down 6.9% y-t-d). Japanese 10-year "JGB" yields declined four bps to 0.11% (up 7bps). France's CAC40 declined 2.3% (down 6.5%). The German DAX equities index lost 3.1% (down 13.3%). Spain's IBEX 35 equities index fell 1.8% (down 13.1%). Italy's FTSE MIB index declined 2.1% (down 14.5%). EM equities were mostly lower. Brazil's Bovespa index gained 1.6% (up 12.0%), while Mexico's Bolsa fell 3.3% (down 7.0%). South Korea's Kospi index sank 6.0% (down 17.8%). India's Sensex equities index fell 2.8% (down 2.1%). China's Shanghai Exchange rose 1.9% (down 21.4%). Turkey's Borsa Istanbul National 100 index sank 6.1% (down 21.5%). Russia's MICEX equities index fell 2.2% (up 8.7%).
Investment-grade bond funds saw inflows of $415 million, while junk bond funds saw outflows jump to $2.364 billion (from Lipper).
Freddie Mac 30-year fixed mortgage rates added a basis point to 4.86% (up 92bps y-o-y). Fifteen-year rates gained three bps to 4.29% (up 104bps). Five-year hybrid ARM rates increased four bps to 4.14% (up 93bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down two bps to 4.82% (up 62bps).
Federal Reserve Credit last week declined $2.6bn to $4.137 TN. Over the past year, Fed Credit contracted $291bn, or 6.6%. Fed Credit inflated $1.328 TN, or 47%, over the past 312 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt increased $0.9bn last week to $3.434 TN. "Custody holdings" were up $69bn y-o-y, or 2.1%.
M2 (narrow) "money" supply jumped $25.9bn last week to $14.262 TN. "Narrow money" gained $520bn, or 3.8%, over the past year. For the week, Currency increased $1.4bn. Total Checkable Deposits surged $38.3bn, while Savings Deposits fell $23.3bn. Small Time Deposits added $4.6bn. Retail Money Funds gained $5.1bn.
Total money market fund assets rose $9.7bn to $2.882 TN. Money Funds gained $134bn y-o-y, or 4.9%.
Total Commercial Paper increased $5.2bn to $1.088 TN. CP gained $21bn y-o-y, or 1.9%.
Currency Watch:
October 23 - Bloomberg (Emma Dai): "Dollar-yuan trading volume surpassed the frenzied levels seen during the 2015 devaluation on Wednesday, amid signs China is trying to prevent its currency from weakening too fast. Volume was up 27% at $66 billion…, the most since Bloomberg began compiling the data in 2014… 'Authorities may have offered dollar liquidity to yuan sellers in the market, so the yuan wouldn't depreciate too fast amid selling pressures,' said Li Liuyang, a financial market analyst at China Merchants Bank Co. The Chinese currency may face a lot more pressure if it easily breaks past the 6.95 per dollar level, Li said."
The U.S. dollar index gained 0.7% to 96.412 (up 4.7% y-t-d). For the week on the upside, the Brazilian real increased 2.0% and the Japanese yen gained 0.6%. For the week on the downside, the British pound declined 1.9%, the Norwegian krone 1.6%, the Swedish krona 1.6%, the New Zealand dollar 1.4%, the South African rand 1.3%, the euro 1.0%, the South African rand 0.9%, the Australian dollar 0.4%, the Mexican peso 0.4%, the Singapore dollar 0.2% and the Swiss franc 0.1%. The Chinese renminbi declined 0.21% versus the dollar this week (down 6.29% y-t-d).
Commodities Watch:
The Goldman Sachs Commodities Index declined 2.0% (up 5.1% y-t-d). Spot Gold increased 0.5% to $1,233 (down 5.4%). Silver gained 0.5% to $14.725 (down 14.1%). Crude fell $1.52 to $67.60 (up 12%). Gasoline sank 5.1% (up 1%), and Natural Gas declined 1.5% (up 8%). Copper fell 1.0% (down 17%). Wheat added 0.2% (up 18%). Corn increased 0.3% (up 5%).
Market Dislocation Watch:
October 24 - Financial Times (Isabelle Mateos y Lago): "The European Commission has rejected Italy's draft budget. Valdis Dombrovskis, the commission's vice-president responsible for the euro, said this week that Rome's arguments for increasing its fiscal deficit were 'not convincing'. The Italians had been warned. But the Five Star/League coalition government nevertheless decided to pursue a fiscal expansion instead of the adjustment prescribed by European rules. The budget aims for a fiscal deficit of 2.4% - not enormous in itself, but it is three times as large as the previous government's commitment… The bond market's reaction suggests concern, but not outright alarm. This may not last. The episode brings back memories of the confrontation that took place in 2015 between the freshly elected Greek government and European officials."
October 24 - Bloomberg (Joe Easton): "When the next downturn occurs, beware passive investors. That's the warning from JPMorgan…, which says $7.4 trillion of assets managed by passive funds around the world -- concentrated in large-cap and U.S. small- and mid-cap stocks -- will exacerbate a rout during the next recession. 'This is something worth noting at this late stage of a cycle given that passive investing seems to be trend following, with inflows pushing equities higher during bull markets, and outflows likely to magnify their fall during corrections,' analysts Eduardo Lecubarri and Nishchay Dayal wrote… Passive investing wasn't a big driver of equity returns in the last recession, they say. Back in 2007, the strategy's overall size amounted to about 26% of actively managed large and all-cap funds' assets under management (AUM) in the U.S., and about 15% outside of the U.S. Eleven years later, those figures have jumped to 83% and 53%..."
Trump Administration Watch:
October 23 - Bloomberg (Mike Dorning): "President Donald Trump stepped up his attacks on Federal Reserve Chairman Jerome Powell, saying he 'maybe' regrets appointing him and demurring when asked under what circumstances he would fire the central bank chief. Almost a year since nominating Powell to the post, Trump told the Wall Street Journal… that he was intentionally sending a direct message that he wanted lower interest rates, even as he acknowledged that the central bank is an independent entity. Trump said in the interview that Powell 'almost looks like he's happy raising interest rates' and that it's 'too early to tell, but maybe' he regrets appointing him."
October 23 - Financial Times (Ted Kemp and Joanna Tan): "President Donald Trump directly accused Federal Reserve Chairman Jerome Powell of endangering the U.S. economy by raising interest rates, according to The Wall Street Journal. 'I'm just saying this: I'm very unhappy with the Fed because Obama had zero interest rates,' Trump told the Journal… 'Every time we do something great, he raises the interest rates.'"
October 25 - Wall Street Journal (Bob Davis and Lingling Wei): "The U.S. is refusing to resume trade negotiations with China until Beijing comes up with a concrete proposal to address Washington's complaints about forced technology transfers and other economic issues, said officials on both sides… The impasse threatens to undermine a meeting between Presidents Trump and Xi Jinping scheduled for the end of November at the Group of 20 leaders summit… U.S. businesses have been counting on sufficient progress at the meeting for the Trump administration to suspend its plan to increase tariffs on $200 billion of Chinese imports to 25% on Jan. 1, from the current 10%. Such a move would be a blow to U.S. importers and consumers."
October 21 - Axios (Jonathan Swan): "President Trump has no intention of easing his tariffs on China, according to three sources with knowledge of his private conversations. Instead, these sources say he wants Chinese leaders to feel more pain from his tariffs - which he believes need more time to fully kick in. What we're hearing: 'He wants them to suffer more' from tariffs on $200 billion of Chinese goods, said a source with direct knowledge of Trump's thinking, and the president believes the longer his tariffs last, the more leverage he'll have."
October 23 - CNBC (Liz Moyer): "President Donald Trump will meet with China's president, Xi Jinping, next month at the G-20 summit in Buenos Aires, Argentina, according to Larry Kudlow… Kudlow told reporters… that the two leaders 'will meet for a bit' but didn't have other details. Any meeting between the two comes at a time of escalating tensions over trade. Most recently, the Trump administration put tariffs on some $200 billion of Chinese imports, and Beijing retaliated with tariffs on U.S. goods. The two nations have struggled to come to the negotiating table over trade, as the U.S. raises concerns about intellectual property and a widening trade deficit. 'Our asks are on the table, I'd love to see them respond,' Kudlow said… 'Thus far they haven't.'"
October 22 - Bloomberg: "U.S. President Donald Trump's top economic adviser accused China of refusing to engage on trade issues in a Financial Times interview, while a separate report said Trump believes it will take more time for tariffs to bite. 'We gave them a detailed list of asks, regarding technology for example, [which] basically hasn't changed for five or six months. The problem with the story is that they don't respond. Nothing. Nada,' National Economic Council Director Larry Kudlow told the Financial Times… 'It's really the president and the Chinese Communist party, they have to make a decision, and so far they have not, or they have made a decision not to do anything, nothing. I've never seen anything like it.'"
October 22 - Reuters (Jeff Mason): "U.S. President Donald Trump, speaking to reporters at the White House as he left on a campaign trip to Texas, said… his administration planned to produce a resolution within two weeks calling for a 10% tax cut for middle-income people. 'We're putting in a resolution sometime in the next week or week-and-a-half, two weeks… We're giving a middle-income tax reduction of about 10%. We're doing it now for middle-income people.'"
October 21 - Reuters (Lesley Wroughton): "U.S. Treasury Secretary Steven Mnuchin dismissed concerns that China's weakest economic growth since the global financial crisis could spill into other emerging markets and destabilize U.S. financial markets… 'I am not concerned about that destabilizing our markets,' Mnuchin said… 'Broadly, right now, I don't see a contagion risk,' he added."
Federal Reserve Watch:
October 24 - Bloomberg (Erik Wasson): "The chairman of the Senate Finance Committee stood by Federal Reserve Chairman Jerome Powell after President Donald Trump said he 'maybe' regrets appointing him because the Fed has increased interest rates. Asked whether Powell and the Fed are doing a good job, Senator Orrin Hatch said…:'I think so. I think they all are, to be honest with you. I don't agree with everything they do but they are still pretty good people.' Hatch of Utah… stood by the Fed's independence. 'They have a right to act the way they do,' Hatch said."
October 24 - Reuters (Kristen Haunss): "Regulators are concerned about a material loosening of terms and weaknesses in the risk management of the US$1.1trn US leveraged loan market, a Federal Reserve official said… Covenant-lite loans, incremental facilities and so-called addbacks to earnings before interest, tax, depreciation and amoritization (Ebitda) are three areas regulators are focusing their attention, according to… Todd Vermilyea, senior associate director at the Federal Reserve… 'The presence of these practices, especially without the appropriate controls, may lead to safety and soundness concerns,' he said. The leveraged loan market, which finances companies… has recently been flooded with aggressive deals featuring high debt levels and loose terms."
October 24 - Reuters (Jonathan Spicer): "A 'prolonged' fall in U.S. stock markets could eventually begin to weigh on the U.S. economy, though there are no signs of pinched credit or a pending recession so far, Cleveland Federal Reserve President Loretta Mester said… 'If there was a prolonged downturn in the market and a pullback in risk across the board with a lowering of credit extension, then of course you'll have' an effect on the data, Mester… told the Forecasters Club…"
October 23 - CNBC (Steve Matthews): "Federal Reserve Bank of Atlanta President Raphael Bostic said he supports further gradual interest rate hikes and warned that running the economy 'hot' with too much stimulus could end in a recession hurting lower-income Americans. 'Unless the data talk me out of it, I view a continued, gradual removal of policy accommodation as appropriate until we get to a neutral policy rate,' Bostic said... While there's uncertainty about neutral -- the level of rates that neither speed up nor slow down economic activity -- he said 'my assessment is that we are still a few rate hikes away.'"
October 23 - CNBC (Jeff Cox): "The risk of a powerful economy overheating is the reason the Fed should stick to its schedule of interest rate increases, Atlanta Federal Reserve President Raphael Bostic said… With the jobless rate running at 3.7% and considerably below what is considered full employment, the Fed has to weigh the risks of tightening too quickly and choking off what has been a robust economic run, and waiting too long and risking runaway price pressures. 'And while I wrestle with that choice, one thing seems clear: there is little reason to keep our foot on the gas pedal,' Bostic said…"
October 24 - Reuters (Ann Saphir): "The U.S. Federal Reserve should continue raising interest rates at least two but probably three more times before assessing whether further rate hikes to restrain growth are warranted, Dallas Federal Reserve Bank President Robert Kaplan said… 'My base case for 2019 is to gradually and patiently raise the federal funds rate into a range of 2.5 to 2.75% or, more likely, into a range of 2.75 to 3%,' Kaplan said…"
U.S. Bubble Watch:
October 23 - CNBC (Jeff Cox): "Former Federal Reserve Chairman Paul Volcker, who has reached legend status in the world of central banking, isn't optimistic about current conditions. When Volcker looks around now, he sees 'a hell of a mess in every direction,' including a lack of basic respect for government institutions, a current Fed that seems to be following a completely arbitrary benchmark and a 'swamp' in Washington run by plutocrats. 'At least the military still has all the respect. But I don't know, how can you run a democracy when nobody believes in the leadership of the country?'"
October 25 - Bloomberg (Jenny Leonard, Sarah Foster and Katia Dmitrieva): "The U.S. merchandise-trade deficit widened to a record in September while orders for business equipment declined for a second month, adding to signs that an escalating tariff war is starting to constrain economic growth. The gap in goods trade rose to $76 billion from $75.5 billion as gains in imports outpaced exports…"
October 25 - Wall Street Journal (Kate Davidson): "A stark pickup in government spending, particularly in defense, has helped fuel a broad acceleration in U.S. economic growth in the past year and a half, according to a Wall Street Journal analysis… The U.S. economy has expanded at a 2.9% annual rate since April of 2017… That growth rate is faster than the 2.2% annual growth rate between mid-2009-when the expansion started-and April 2017. Faster government spending accounted for nearly half of the acceleration, according to The Wall Street Journal analysis."
October 25 - Bloomberg (Lisa Lee, Jesse Hamilton, Sally Bakewell and Craig Torres): "In the Trump era, Wall Street banks have been testing the limits of what they can get away with in piling risky loans onto highly indebted companies. They may have finally crossed a line. A top Federal Reserve official fired a rare public warning Wednesday, saying that banks appear to be chasing increasingly dangerous deals and foregoing protections against borrowers going bust. 'There may be a material loosening of terms and weaknesses in risk management,' Todd Vermilyea, the Fed's head of risk surveillance and data, told bankers… 'Some institutions could be taking on risk without the appropriate mitigating controls.' The warnings come after watchdogs have spent most of the year expressing confidence about the health of the $1.3 trillion market for leveraged loans."
October 24 - Reuters (Jason Lange): "U.S. factories have raised their prices because of tariffs, although inflation has appeared modest or moderate in most parts of the country, the Federal Reserve said… The U.S. central bank also said in its latest 'Beige Book' report that the economy appeared to be growing modestly to moderately and that businesses across a number of industries had reported labor shortages."
October 24 - Reuters (Lucia Mutikani): "Sales of new U.S. single-family homes fell to a near two-year low in September and data for the prior three months was revised lower, the latest indications that rising mortgage rates and higher prices were undercutting the housing market. …New home sales dropped 5.5% to a seasonally adjusted annual rate of 553,000 units last month. That was the lowest level since December 2016. August's sales pace was revised down to 585,000 units from the previously reported 629,000 units."
October 24 - Reuters (Diana Olick): "Builders warned of a slowdown in home sales. And they were right - except the numbers are even worse than expected. Sales of newly built homes dropped 5.5% in September compared with August, and were 13% lower compared with a year ago, according to the U.S. Census. This was well below predictions, even with higher rates factored in."
October 23 - CNBC (David Randall): "The easy money may be over. U.S. company earnings growth is slowing after a bumper start to the year, and the reality of an escalating trade war between two of the world's largest economies is starting to weigh on companies ranging from Caterpillar Inc to Ford Motor Co. While earnings growth is still high at 22% so far this quarter, the amount by which S&P 500 index companies are beating analyst estimates is nearly half of what it was during the first quarter, according to Refinitiv data."
October 22 - Wall Street Journal (Rachel Louise Ensign): "There's less free money to go around for banks. After nearly three years of rate increases from the Federal Reserve, customers are pulling billions of dollars out of accounts that don't earn interest and putting their money into higher-yielding alternatives. That will crimp banks' ability to grow profits going forward. The four largest U.S. banks... reported a combined 5% drop in U.S. deposits that earn no interest in the third quarter compared with a year ago."
October 26 - Bloomberg (Romy Varghese): "The fiscal contrast between California Governor Jerry Brown and Gavin Newsom, the frontrunner to replace him, may best be shown through a decades-old program to fight blight. Facing a $25 billion budget deficit, Brown entered office in 2011 with a cost-cutting plan that included killing hundreds of redevelopment agencies. Eight years later, Newsom is poised to inherit an almost $9 billion surplus. One of his campaign planks: bring the agencies back. That kind of divergence is making bond investors in boom-and-bust California nervous. Newsom, a Democrat who is seen as coasting to victory over a Republican businessman, would have to balance campaign promises against the threat of a return to massive deficits."
China Watch:
October 22 - CNBC (Brian Schwartz): "Chinese government leaders have a message for American investors: They're not afraid of a trade war with the United States. On Monday in Beijing, Zhang Qingli, a leading member of a Chinese committee tasked with forging alliances with other nations, told a small group of U.S. business leaders, lobbyists and public relations executives that China refuses to be intimidated by an ongoing trade war with the Trump administration. 'China never wants a trade war with anybody, not to mention the U.S., who has been a long term strategic partner, but we also do not fear such a war,' Zhang… 'The U.S. side has disregarded a consensus with China after multiple rounds of consultations, insisting on waging a trade war against China and continuing to escalate it. In response, China is left with no other option but to make necessary counter actions,' Zhang said…"
October 21 - Bloomberg: "Chinese stocks jumped the most since March 2016 after top officials moved to shore up the economy and offer support to the struggling private sector. The Shanghai Composite Index surged 4.1% on Monday and extending Friday's 2.6% gain… President Xi Jinping vowed 'unwavering' support for non-state firms over the weekend, the country's stock exchanges committed to help manage share-pledge risks, and the government released a plan to cut personal income taxes. That follows a rare coordinated effort from top financial officials on Friday to support what's been the world's worst performing equity market."
October 24 - Wall Street Journal (Mike Bird): "Chinese stocks are widely used as collateral for loans. That introduces extra vulnerabilities to a falling market, so authorities are now attempting to contain the risks. Nearly 10% of shares in mainland China are used as collateral for loans by large shareholders. The practice has boomed even as margin lending, another form of share-backed borrowing, has decreased. Margin lending helped fuel a market selloff in 2015, as retail investors were forced to dump shares to cover their losses. 'Users of financial leverage in equities have shifted from retail investors in the 2015 episode to major shareholders in the form of stock-pledged loans,' Goldman Sachs analysts said…"
October 22 - Bloomberg: "China's central bank plans to give 10 billion yuan ($1.4bn) to China Bond Insurance Co. to provide credit support for debt sales by private enterprises, according to people familiar with the situation. The money is part of the plan the People's Bank of China announced… to support private firms issuing debt. The central bank didn't provide any details on how the plan would work, its size, or when it would begin. Officials also hadn't responded to multiple requests for comment. China's announcements… of fresh measures to ease the funding strains of private companies came after top officials commented repeatedly in an attempt to restore confidence in the world's second-largest economy. The central bank reiterated President Xi Jinping's vows to offer 'unwavering' support for the private sector, which has been most affected by the government's campaign to curb debt and cut shadow banking."
October 21 - Bloomberg (Connor Cislo): "As China braces for the full impact of President Donald Trump's trade war, it's seeking to learn from Japan's economic battles with the U.S. during the Reagan years. Chinese officials, business people and academics have been pressing Japanese counterparts to share experiences from the 1980s, when Tokyo found itself in Washington's crosshairs as its huge trade surplus and increasing industrial might sparked alarm in America. While there are differences between Japan's ascent as a commercial power a generation ago and China's emergence today as a potential superpower, Japan also has lessons for its neighbor in dealing with rising debt, asset-price bubbles and an aging population."
October 19 - Bloomberg: "China's home-price gains slowed in September, breaking a half-year streak of accelerating inflation in the housing market. New-home prices gained 1% from the previous month… That compared with a 1.5% increase in August. The Chinese government is likely to keep a tight grip on the property market at least until next year, despite a shift in policy focus from deleveraging to supporting slower growth under rising trade tensions, according to economists including Capital Economics… 'A market correction has started, as sales have undoubtedly cooled,' Yang Kewei, Shanghai-based research director at China Real Estate Information Corp., said... 'A bottleneck in residential purchasing power has been seen in some cities, especially those in second tiers.'"
October 21 - Bloomberg: "China's burst of local bond issuance is supposed to fund roads, affordable homes and other infrastructure developments that will help support its flagging economy. But there don't seem to be enough projects around to spend the money on. Provincial authorities had by the end of September already raised 92% of the 1.35 trillion yuan ($195bn) worth of special infrastructure bonds that the central government has targeted for the entire year. The bonds… are part of an attempt to counter the economic slowdown by financing projects from railwys to environmental facilities and affordable homes."
October 24 - Financial Times (Blake Schmidt and Frederik Balfour): "China Evergrande Group, the country's most indebted developer, has a lot more work to do as it tries to win over investors with plans to reduce leverage and diversify its business. One key concern as Evergrande's stock slides toward a 15-month low and its dollar bonds tumble: the company's continued reliance on China's shadow banking system. The… developer… cut its 671 billion yuan ($97bn) debt load by 8.4% in the first half… But the company has had less success reducing its exposure to high-cost trust financing: it accounted for about 45% of Evergrande's total borrowing at the end of June, the largest portion since at least 2010."
October 23 - Bloomberg: "Corporate debt investors navigating an expanding minefield of bond delinquencies in China are reaching for a hedging tool similar to credit-default swaps that was last used more than two years ago. Since September, China Bond Insurance Co. and Bank of Hangzhou Co. have sold four instruments called credit risk mitigation warrants, which insure creditors against defaults of the underlying debt. These risk hedging instruments are set to become increasingly popular as bond failures pile up, according to Golden Credit Rating International Co. Defaults have spiraled to a record 66.1 billion yuan ($9.5bn) this year as China's deleveraging campaign bites and economic headwinds batter investor confidence. That's made raising funds without resorting to credit protection tougher for some companies. Last week, the biggest state bank threw a lifeline to cash-strapped private firms by expanding a debt-to-equity swap program."
EM Watch:
October 26 - Bloomberg (Rachel Gamarski and Mario Sergio Lima): "The winner of Brazil's presidential election this Sunday will inherit a near-record stockpile of public debt. The Brazilian government's liabilities totaled 3.8 trillion reais ($1 trillion) in September, the Treasury reported… While that's down a notch from the previous month, it's still roughly twice what is was only 5 years ago."
October 26 - Bloomberg (Kartik Goyal): "India's foreign-exchange reserves are shrinking fast and may soon reach a level that could hamper the central bank's ability to defend the rupee, according to Bank of America Merrill Lynch… From a record $426 billion in mid-April, reserves have fallen by $32 billion as the Reserve Bank of India sold dollars to stem losses in Asia's worst-performing currency."
Central Bank Watch:
October 24 - Financial Times (Claire Jones): "The European Central Bank is facing serious challenges: rising tensions between Brussels and Rome, doubts about monetary policy and worries about Britain crashing out of the EU without a deal. A closely watched poll of purchasing managers… also showed that the region's businesses are struggling to come to terms with increased global trade tensions - and that the export-led slowdown is beginning to affect the much larger services sector… The ECB still insists it will halt its €2.5tn quantitative easing programme - which played a vital role in fuelling the eurozone recovery - by the end of the year. It argues that growth is still sufficiently strong and broad-based to forge ahead with its plans to phase out QE - the product of arduous negotiations within the ECB itself."
October 24 - Reuters (David Ljunggren and Steve Scherer): "The Bank of Canada… raised interest rates as expected and said it might speed up the pace of future hikes given the economy was running at almost full capacity and did not need any stimulus. The central bank, which has now lifted rates five times since July 2017, also hailed the signing of a new North American trade pact…"
October 24 - Bloomberg (Rupert Rowling): "Central banks are set to increase their purchases of gold in 2018 for the first time in five years as eastern European and Asian countries seek to diversify their reserves. Net purchases of gold by central banks are forecast to rise to 450 metric tons this year, up from 375 tons in 2017, according to consultancy Metals Focus Ltd. That will be the first increase since 2013, when banks boosted their holdings by 646 tons, the most for several decades."
Italy Watch:
October 23 - The Guardian (Daniel Boffey): "The European commission is at loggerheads with Rome after taking the unprecedented step of rejecting the Italian government's draft budget in a move designed to force the country's populist government to rein in its spending. Italy was presented with a three-week deadline to provide a revised financial plan… The commissioner, a former prime minister of Latvia, threatened to begin a procedure that could lead to the EU imposing fines on Italy unless the new government reconsiders. Dombrovskis accused Rome of 'openly and consciously going against commitments made'. 'Today, for the first time, the commission is obliged to request a euro area country to revise its draft budgetary plan… But we see no alternative … Breaking rules can be tempting on a first look. It can provide the illusion of breaking free. It can be tempting to try to cure debt with more debt. But, at some point, the debt weights too heavy and you end up having no freedom at all.'"
October 23 - Financial Times (Robert Smith): "Matteo Salvini, the leader of Italy's hard-right League party, has borrowed bond market language to create an ingenious new spin on the classic "enemies of the people" trope: the 'lords of the spread'. The spread in question is, of course, the difference between the yield on the Italian 10-year government bond and its German equivalent. This gap has soared to levels last seen half a decade ago as the budget stand-off between Rome and Brussels escalates. Italy's populist government has leapt on the bond market's obsession with this risk measure to conjure up images of shadowy and hostile external forces. With his talk of not bending to the will of the 'lords of the spread', Mr Salvini is invoking the image of faceless bond traders trying to break the government."
October 23 - Financial Times (Miles Johnson and Michael Peel): "Giuseppe Conte, Italy's prime minister, hailed Russia as a 'strategic partner' as he met Vladimir Putin in Moscow on Wednesday - the culmination of a month of diplomatic overtures by Rome's populist coalition, which has ramped up its pro-Russia rhetoric since taking power. In doing so, Italy is setting up a possible battle with fellow EU states around the bloc's painstakingly agreed rolling sanctions on Russia over its 2014 annexation of Crimea… Speaking to Italian business leader in Moscow before meeting Mr Putin, Mr Conte said Russia was a 'strategic partner'."
Europe Watch:
October 23 - CNBC (Tasos Vossos): "The days of quantitative easing in the euro area are long gone, according to signals from the region's $3 trillion corporate bond market. Investors are demanding ever-higher premiums for companies lower down the ratings spectrum over high-quality peers -- a turning point for a market long distorted by the European Central Bank juggernaut. The gap between triple B and single A spreads -- the lowest and second-lowest in the high-grade tier -- is now the widest since the start of the ECB's corporate bond purchase program…"
Global Bubble Watch:
October 24 - Reuters (Tom Miles): "The World Trade Organization is scrambling to develop a plan for the biggest reform in its 23-year history after U.S. President Donald Trump brought the world's top trade court to the brink of collapse by blocking appointments of its judges and threatening to pull the United States out of the organization. Trump's administration has targeted the WTO, the watchdog of global commerce, as part of his wider campaign against trade arrangements he contends have cost hundreds of thousands of U.S. jobs."
Japan Watch:
October 22 - Bloomberg (Issei Hazama): "It's an oddity of Japan's corporate bond market: many debt sales that bankers said were successful actually weren't. The secret may be getting harder to keep. Underwriters failed to fully sell at least 29% of company note offerings in September, twice the average over the past six months, according to information… based on more than 400 interviews with investors, underwriters and issuers."
Fixed Income Bubble Watch:
October 23 - Wall Street Journal (Daniel Kruger and Ira Iosebashvili): "Overseas investors, traders and central bankers are buying fewer Treasurys, a potential turning point for a $15 trillion market at the center of global finance and economics. Foreigners increased their holdings of Treasurys by $78 billion in the first eight months of 2018. That is just over half of what they bought during the same period last year and accounts for a much smaller share of Treasury issuance, as the government steps up the size of regular bond auctions to fill a growing U.S. budget gap. Foreign buyers now hold 41% of outstanding Treasury debt, their lowest share in 15 years, down from 50% as recently as 2013…"
October 24 - Wall Street Journal (Miriam Gottfried and Ryan Tracy): "Four years after a government crackdown on the leveraged-buyout market, risky loans are making a comeback-and few seem worried about it. Nearly 13% of LBOs in the first nine months of 2018 were financed with debt equating to at least seven times the target company's earnings before interest, taxes, depreciation and amortization, or Ebitda… That is more than double the level in all of last year and is on track to be the highest since 2014, when 13.5% of deals crossed that threshold and regulators began to crack down on leverage exceeding six times Ebitda. In another sign of growing risk, the amount of cash private-equity firms are putting into buyouts is falling. Their average equity contribution was 39.6% in the first nine months, also the lowest since 2014."
October 22 - Bloomberg (Misyrlena Egkolfopoulou and Claire Boston): "Netflix Inc. is once again turning to the junk-bond market to fund new programming as the streaming-video giant seeks to maintain its torrid subscriber growth. The $2 billion bond offering… comes just a week after the company reported a bigger jump in subscribers than Wall Street analysts expected. The bonds would push the cash-burning company's debt load above $10 billion for the first time. Netflix's market value has soared almost 70% this year to about $140 billion."
Leveraged Speculation Watch:
October 25 - Wall Street Journal (Rachael Levy): "Hedge funds tout their ability to do well during periods of market stress. But many aren't doing well during the current October rout. On Wednesday, a large group of hedge funds that bet for and against stocks had their worst day in almost seven years, according to… Goldman Sachs… The so-called fundamental long-short equity hedge funds tracked by Goldman dropped 1.44% on Wednesday… Goldman said it was the deepest one-day drop since the bank began tracking the data in January 2012. These funds are down 8.68% this month through Wednesday, bringing returns to minus-6.21% for the year, the report said."
Geopolitics Watch:
October 25 - Reuters (Ben Blanchard): "China's military will take action 'at any cost' to foil any attempt to separate the self-ruled island of Taiwan, which Beijing claims as its own, the country's defense minister said… China has been infuriated by recent U.S. sanctions on its military, one of a growing number of flashpoints in Sino-U.S. ties that include a bitter trade war, the issue of Taiwan, and China's increasingly muscular military posture in the South China Sea… 'The Taiwan issue is related to China's sovereignty and territorial integrity and touches upon China's core interests,' Chinese Defence Minister Wei Fenghe said…"
October 23 - Reuters (Ben Blanchard): "China's Foreign Ministry… said it has expressed deep concern to the United States after Washington sent two warships through the Taiwan Strait in the second such operation this year."
October 22 - Reuters (Adam Jourdan): "Chinese state media sharply criticized U.S. Secretary of State Mike Pompeo… after he made comments in Latin America warning about the hidden risks of seeking Chinese investment amid a growing battle for influence in the region… In an editorial…, the state-run China Daily newspaper said Pompeo's comments were 'ignorant and maliciou' and criticism that its ambitions Belt and Road infrastructure initiative was creating debt traps in other countries was false."
October 20 - Reuters (Jeff Mason, Idrees Ali, Polina Devitt and Michael Martina): "President Donald Trump said Washington would withdraw from a landmark Cold War-era treaty that eliminated nuclear missiles from Europe because Russia was violating the pact, triggering a warning of retaliatory measures from Moscow. The Intermediate-Range Nuclear Forces Treaty, negotiated by then-President Ronald Reagan and Soviet leader Mikhail Gorbachev in 1987, required elimination of short-range and intermediate-range nuclear and conventional missiles by both countries. 'Russia has not, unfortunately, honored the agreement so we're going to terminate the agreement and we're going to pull out,' Trump told reporters…"
The S&P500 dropped 3.9% (down 0.6% y-t-d), and the Dow fell 3.0% (down 0.1%). The Utilities declined 1.9% (up 1.2%). The Banks sank 5.0% (down 11.1%), and the Broker/Dealers fell 4.8% (down 5.7%). The Transports dropped 4.5% (down 6.1%). The S&P 400 Midcaps dropped 4.1% (up down 5.5%), and the small cap Russell 2000 fell 3.8% (down 3.4%). The Nasdaq100 declined 3.6% (up 7.1%). The Semiconductors sank 5.9% (down 8.0%). The Biotechs were slammed 7.1% (up 7.5%). Although bullion gained $6, the HUI gold index sank 7.0% (down 24.8%).
Three-month Treasury bill rates ended the week at 2.28%. Two-year government yields dropped 10 bps to 2.81% (up 92bps y-t-d). Five-year T-note yields fell 14 bps to 2.91% (up 70bps). Ten-year Treasury yields dropped 12 bps to 3.08% (up 67bps). Long bond yields declined seven bps to 3.31% (up 57bps). Benchmark Fannie Mae MBS yields fell eight bps to 3.93% (up 93bps).
Greek 10-year yields declined five bps to 4.28% (up 20bps y-t-d). Ten-year Portuguese yields fell 11 bps to 1.91% (down 4bps). Italian 10-year yields declined four bps to 3.45% (up 143bps). Spain's 10-year yields sank 17 bps to 1.57% (unchanged). German bund yields dropped 11 bps to 0.35% (down 8bps). French yields fell 10 bps to 0.74% (down 5bps). The French to German 10-year bond spread widened one to 39 bps. U.K. 10-year gilt yields sank 19 bps to 1.38% (up 19bps). U.K.'s FTSE equities index declined 1.6% (down 9.7%).
Japan's Nikkei 225 equities index sank 6.0% (down 6.9% y-t-d). Japanese 10-year "JGB" yields declined four bps to 0.11% (up 7bps). France's CAC40 declined 2.3% (down 6.5%). The German DAX equities index lost 3.1% (down 13.3%). Spain's IBEX 35 equities index fell 1.8% (down 13.1%). Italy's FTSE MIB index declined 2.1% (down 14.5%). EM equities were mostly lower. Brazil's Bovespa index gained 1.6% (up 12.0%), while Mexico's Bolsa fell 3.3% (down 7.0%). South Korea's Kospi index sank 6.0% (down 17.8%). India's Sensex equities index fell 2.8% (down 2.1%). China's Shanghai Exchange rose 1.9% (down 21.4%). Turkey's Borsa Istanbul National 100 index sank 6.1% (down 21.5%). Russia's MICEX equities index fell 2.2% (up 8.7%).
Investment-grade bond funds saw inflows of $415 million, while junk bond funds saw outflows jump to $2.364 billion (from Lipper).
Freddie Mac 30-year fixed mortgage rates added a basis point to 4.86% (up 92bps y-o-y). Fifteen-year rates gained three bps to 4.29% (up 104bps). Five-year hybrid ARM rates increased four bps to 4.14% (up 93bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down two bps to 4.82% (up 62bps).
Federal Reserve Credit last week declined $2.6bn to $4.137 TN. Over the past year, Fed Credit contracted $291bn, or 6.6%. Fed Credit inflated $1.328 TN, or 47%, over the past 312 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt increased $0.9bn last week to $3.434 TN. "Custody holdings" were up $69bn y-o-y, or 2.1%.
M2 (narrow) "money" supply jumped $25.9bn last week to $14.262 TN. "Narrow money" gained $520bn, or 3.8%, over the past year. For the week, Currency increased $1.4bn. Total Checkable Deposits surged $38.3bn, while Savings Deposits fell $23.3bn. Small Time Deposits added $4.6bn. Retail Money Funds gained $5.1bn.
Total money market fund assets rose $9.7bn to $2.882 TN. Money Funds gained $134bn y-o-y, or 4.9%.
Total Commercial Paper increased $5.2bn to $1.088 TN. CP gained $21bn y-o-y, or 1.9%.
Currency Watch:
October 23 - Bloomberg (Emma Dai): "Dollar-yuan trading volume surpassed the frenzied levels seen during the 2015 devaluation on Wednesday, amid signs China is trying to prevent its currency from weakening too fast. Volume was up 27% at $66 billion…, the most since Bloomberg began compiling the data in 2014… 'Authorities may have offered dollar liquidity to yuan sellers in the market, so the yuan wouldn't depreciate too fast amid selling pressures,' said Li Liuyang, a financial market analyst at China Merchants Bank Co. The Chinese currency may face a lot more pressure if it easily breaks past the 6.95 per dollar level, Li said."
The U.S. dollar index gained 0.7% to 96.412 (up 4.7% y-t-d). For the week on the upside, the Brazilian real increased 2.0% and the Japanese yen gained 0.6%. For the week on the downside, the British pound declined 1.9%, the Norwegian krone 1.6%, the Swedish krona 1.6%, the New Zealand dollar 1.4%, the South African rand 1.3%, the euro 1.0%, the South African rand 0.9%, the Australian dollar 0.4%, the Mexican peso 0.4%, the Singapore dollar 0.2% and the Swiss franc 0.1%. The Chinese renminbi declined 0.21% versus the dollar this week (down 6.29% y-t-d).
Commodities Watch:
The Goldman Sachs Commodities Index declined 2.0% (up 5.1% y-t-d). Spot Gold increased 0.5% to $1,233 (down 5.4%). Silver gained 0.5% to $14.725 (down 14.1%). Crude fell $1.52 to $67.60 (up 12%). Gasoline sank 5.1% (up 1%), and Natural Gas declined 1.5% (up 8%). Copper fell 1.0% (down 17%). Wheat added 0.2% (up 18%). Corn increased 0.3% (up 5%).
Market Dislocation Watch:
October 24 - Financial Times (Isabelle Mateos y Lago): "The European Commission has rejected Italy's draft budget. Valdis Dombrovskis, the commission's vice-president responsible for the euro, said this week that Rome's arguments for increasing its fiscal deficit were 'not convincing'. The Italians had been warned. But the Five Star/League coalition government nevertheless decided to pursue a fiscal expansion instead of the adjustment prescribed by European rules. The budget aims for a fiscal deficit of 2.4% - not enormous in itself, but it is three times as large as the previous government's commitment… The bond market's reaction suggests concern, but not outright alarm. This may not last. The episode brings back memories of the confrontation that took place in 2015 between the freshly elected Greek government and European officials."
October 24 - Bloomberg (Joe Easton): "When the next downturn occurs, beware passive investors. That's the warning from JPMorgan…, which says $7.4 trillion of assets managed by passive funds around the world -- concentrated in large-cap and U.S. small- and mid-cap stocks -- will exacerbate a rout during the next recession. 'This is something worth noting at this late stage of a cycle given that passive investing seems to be trend following, with inflows pushing equities higher during bull markets, and outflows likely to magnify their fall during corrections,' analysts Eduardo Lecubarri and Nishchay Dayal wrote… Passive investing wasn't a big driver of equity returns in the last recession, they say. Back in 2007, the strategy's overall size amounted to about 26% of actively managed large and all-cap funds' assets under management (AUM) in the U.S., and about 15% outside of the U.S. Eleven years later, those figures have jumped to 83% and 53%..."
Trump Administration Watch:
October 23 - Bloomberg (Mike Dorning): "President Donald Trump stepped up his attacks on Federal Reserve Chairman Jerome Powell, saying he 'maybe' regrets appointing him and demurring when asked under what circumstances he would fire the central bank chief. Almost a year since nominating Powell to the post, Trump told the Wall Street Journal… that he was intentionally sending a direct message that he wanted lower interest rates, even as he acknowledged that the central bank is an independent entity. Trump said in the interview that Powell 'almost looks like he's happy raising interest rates' and that it's 'too early to tell, but maybe' he regrets appointing him."
October 23 - Financial Times (Ted Kemp and Joanna Tan): "President Donald Trump directly accused Federal Reserve Chairman Jerome Powell of endangering the U.S. economy by raising interest rates, according to The Wall Street Journal. 'I'm just saying this: I'm very unhappy with the Fed because Obama had zero interest rates,' Trump told the Journal… 'Every time we do something great, he raises the interest rates.'"
October 25 - Wall Street Journal (Bob Davis and Lingling Wei): "The U.S. is refusing to resume trade negotiations with China until Beijing comes up with a concrete proposal to address Washington's complaints about forced technology transfers and other economic issues, said officials on both sides… The impasse threatens to undermine a meeting between Presidents Trump and Xi Jinping scheduled for the end of November at the Group of 20 leaders summit… U.S. businesses have been counting on sufficient progress at the meeting for the Trump administration to suspend its plan to increase tariffs on $200 billion of Chinese imports to 25% on Jan. 1, from the current 10%. Such a move would be a blow to U.S. importers and consumers."
October 21 - Axios (Jonathan Swan): "President Trump has no intention of easing his tariffs on China, according to three sources with knowledge of his private conversations. Instead, these sources say he wants Chinese leaders to feel more pain from his tariffs - which he believes need more time to fully kick in. What we're hearing: 'He wants them to suffer more' from tariffs on $200 billion of Chinese goods, said a source with direct knowledge of Trump's thinking, and the president believes the longer his tariffs last, the more leverage he'll have."
October 23 - CNBC (Liz Moyer): "President Donald Trump will meet with China's president, Xi Jinping, next month at the G-20 summit in Buenos Aires, Argentina, according to Larry Kudlow… Kudlow told reporters… that the two leaders 'will meet for a bit' but didn't have other details. Any meeting between the two comes at a time of escalating tensions over trade. Most recently, the Trump administration put tariffs on some $200 billion of Chinese imports, and Beijing retaliated with tariffs on U.S. goods. The two nations have struggled to come to the negotiating table over trade, as the U.S. raises concerns about intellectual property and a widening trade deficit. 'Our asks are on the table, I'd love to see them respond,' Kudlow said… 'Thus far they haven't.'"
October 22 - Bloomberg: "U.S. President Donald Trump's top economic adviser accused China of refusing to engage on trade issues in a Financial Times interview, while a separate report said Trump believes it will take more time for tariffs to bite. 'We gave them a detailed list of asks, regarding technology for example, [which] basically hasn't changed for five or six months. The problem with the story is that they don't respond. Nothing. Nada,' National Economic Council Director Larry Kudlow told the Financial Times… 'It's really the president and the Chinese Communist party, they have to make a decision, and so far they have not, or they have made a decision not to do anything, nothing. I've never seen anything like it.'"
October 22 - Reuters (Jeff Mason): "U.S. President Donald Trump, speaking to reporters at the White House as he left on a campaign trip to Texas, said… his administration planned to produce a resolution within two weeks calling for a 10% tax cut for middle-income people. 'We're putting in a resolution sometime in the next week or week-and-a-half, two weeks… We're giving a middle-income tax reduction of about 10%. We're doing it now for middle-income people.'"
October 21 - Reuters (Lesley Wroughton): "U.S. Treasury Secretary Steven Mnuchin dismissed concerns that China's weakest economic growth since the global financial crisis could spill into other emerging markets and destabilize U.S. financial markets… 'I am not concerned about that destabilizing our markets,' Mnuchin said… 'Broadly, right now, I don't see a contagion risk,' he added."
Federal Reserve Watch:
October 24 - Bloomberg (Erik Wasson): "The chairman of the Senate Finance Committee stood by Federal Reserve Chairman Jerome Powell after President Donald Trump said he 'maybe' regrets appointing him because the Fed has increased interest rates. Asked whether Powell and the Fed are doing a good job, Senator Orrin Hatch said…:'I think so. I think they all are, to be honest with you. I don't agree with everything they do but they are still pretty good people.' Hatch of Utah… stood by the Fed's independence. 'They have a right to act the way they do,' Hatch said."
October 24 - Reuters (Kristen Haunss): "Regulators are concerned about a material loosening of terms and weaknesses in the risk management of the US$1.1trn US leveraged loan market, a Federal Reserve official said… Covenant-lite loans, incremental facilities and so-called addbacks to earnings before interest, tax, depreciation and amoritization (Ebitda) are three areas regulators are focusing their attention, according to… Todd Vermilyea, senior associate director at the Federal Reserve… 'The presence of these practices, especially without the appropriate controls, may lead to safety and soundness concerns,' he said. The leveraged loan market, which finances companies… has recently been flooded with aggressive deals featuring high debt levels and loose terms."
October 24 - Reuters (Jonathan Spicer): "A 'prolonged' fall in U.S. stock markets could eventually begin to weigh on the U.S. economy, though there are no signs of pinched credit or a pending recession so far, Cleveland Federal Reserve President Loretta Mester said… 'If there was a prolonged downturn in the market and a pullback in risk across the board with a lowering of credit extension, then of course you'll have' an effect on the data, Mester… told the Forecasters Club…"
October 23 - CNBC (Steve Matthews): "Federal Reserve Bank of Atlanta President Raphael Bostic said he supports further gradual interest rate hikes and warned that running the economy 'hot' with too much stimulus could end in a recession hurting lower-income Americans. 'Unless the data talk me out of it, I view a continued, gradual removal of policy accommodation as appropriate until we get to a neutral policy rate,' Bostic said... While there's uncertainty about neutral -- the level of rates that neither speed up nor slow down economic activity -- he said 'my assessment is that we are still a few rate hikes away.'"
October 23 - CNBC (Jeff Cox): "The risk of a powerful economy overheating is the reason the Fed should stick to its schedule of interest rate increases, Atlanta Federal Reserve President Raphael Bostic said… With the jobless rate running at 3.7% and considerably below what is considered full employment, the Fed has to weigh the risks of tightening too quickly and choking off what has been a robust economic run, and waiting too long and risking runaway price pressures. 'And while I wrestle with that choice, one thing seems clear: there is little reason to keep our foot on the gas pedal,' Bostic said…"
October 24 - Reuters (Ann Saphir): "The U.S. Federal Reserve should continue raising interest rates at least two but probably three more times before assessing whether further rate hikes to restrain growth are warranted, Dallas Federal Reserve Bank President Robert Kaplan said… 'My base case for 2019 is to gradually and patiently raise the federal funds rate into a range of 2.5 to 2.75% or, more likely, into a range of 2.75 to 3%,' Kaplan said…"
U.S. Bubble Watch:
October 23 - CNBC (Jeff Cox): "Former Federal Reserve Chairman Paul Volcker, who has reached legend status in the world of central banking, isn't optimistic about current conditions. When Volcker looks around now, he sees 'a hell of a mess in every direction,' including a lack of basic respect for government institutions, a current Fed that seems to be following a completely arbitrary benchmark and a 'swamp' in Washington run by plutocrats. 'At least the military still has all the respect. But I don't know, how can you run a democracy when nobody believes in the leadership of the country?'"
October 25 - Bloomberg (Jenny Leonard, Sarah Foster and Katia Dmitrieva): "The U.S. merchandise-trade deficit widened to a record in September while orders for business equipment declined for a second month, adding to signs that an escalating tariff war is starting to constrain economic growth. The gap in goods trade rose to $76 billion from $75.5 billion as gains in imports outpaced exports…"
October 25 - Wall Street Journal (Kate Davidson): "A stark pickup in government spending, particularly in defense, has helped fuel a broad acceleration in U.S. economic growth in the past year and a half, according to a Wall Street Journal analysis… The U.S. economy has expanded at a 2.9% annual rate since April of 2017… That growth rate is faster than the 2.2% annual growth rate between mid-2009-when the expansion started-and April 2017. Faster government spending accounted for nearly half of the acceleration, according to The Wall Street Journal analysis."
October 25 - Bloomberg (Lisa Lee, Jesse Hamilton, Sally Bakewell and Craig Torres): "In the Trump era, Wall Street banks have been testing the limits of what they can get away with in piling risky loans onto highly indebted companies. They may have finally crossed a line. A top Federal Reserve official fired a rare public warning Wednesday, saying that banks appear to be chasing increasingly dangerous deals and foregoing protections against borrowers going bust. 'There may be a material loosening of terms and weaknesses in risk management,' Todd Vermilyea, the Fed's head of risk surveillance and data, told bankers… 'Some institutions could be taking on risk without the appropriate mitigating controls.' The warnings come after watchdogs have spent most of the year expressing confidence about the health of the $1.3 trillion market for leveraged loans."
October 24 - Reuters (Jason Lange): "U.S. factories have raised their prices because of tariffs, although inflation has appeared modest or moderate in most parts of the country, the Federal Reserve said… The U.S. central bank also said in its latest 'Beige Book' report that the economy appeared to be growing modestly to moderately and that businesses across a number of industries had reported labor shortages."
October 24 - Reuters (Lucia Mutikani): "Sales of new U.S. single-family homes fell to a near two-year low in September and data for the prior three months was revised lower, the latest indications that rising mortgage rates and higher prices were undercutting the housing market. …New home sales dropped 5.5% to a seasonally adjusted annual rate of 553,000 units last month. That was the lowest level since December 2016. August's sales pace was revised down to 585,000 units from the previously reported 629,000 units."
October 24 - Reuters (Diana Olick): "Builders warned of a slowdown in home sales. And they were right - except the numbers are even worse than expected. Sales of newly built homes dropped 5.5% in September compared with August, and were 13% lower compared with a year ago, according to the U.S. Census. This was well below predictions, even with higher rates factored in."
October 23 - CNBC (David Randall): "The easy money may be over. U.S. company earnings growth is slowing after a bumper start to the year, and the reality of an escalating trade war between two of the world's largest economies is starting to weigh on companies ranging from Caterpillar Inc to Ford Motor Co. While earnings growth is still high at 22% so far this quarter, the amount by which S&P 500 index companies are beating analyst estimates is nearly half of what it was during the first quarter, according to Refinitiv data."
October 22 - Wall Street Journal (Rachel Louise Ensign): "There's less free money to go around for banks. After nearly three years of rate increases from the Federal Reserve, customers are pulling billions of dollars out of accounts that don't earn interest and putting their money into higher-yielding alternatives. That will crimp banks' ability to grow profits going forward. The four largest U.S. banks... reported a combined 5% drop in U.S. deposits that earn no interest in the third quarter compared with a year ago."
October 26 - Bloomberg (Romy Varghese): "The fiscal contrast between California Governor Jerry Brown and Gavin Newsom, the frontrunner to replace him, may best be shown through a decades-old program to fight blight. Facing a $25 billion budget deficit, Brown entered office in 2011 with a cost-cutting plan that included killing hundreds of redevelopment agencies. Eight years later, Newsom is poised to inherit an almost $9 billion surplus. One of his campaign planks: bring the agencies back. That kind of divergence is making bond investors in boom-and-bust California nervous. Newsom, a Democrat who is seen as coasting to victory over a Republican businessman, would have to balance campaign promises against the threat of a return to massive deficits."
China Watch:
October 22 - CNBC (Brian Schwartz): "Chinese government leaders have a message for American investors: They're not afraid of a trade war with the United States. On Monday in Beijing, Zhang Qingli, a leading member of a Chinese committee tasked with forging alliances with other nations, told a small group of U.S. business leaders, lobbyists and public relations executives that China refuses to be intimidated by an ongoing trade war with the Trump administration. 'China never wants a trade war with anybody, not to mention the U.S., who has been a long term strategic partner, but we also do not fear such a war,' Zhang… 'The U.S. side has disregarded a consensus with China after multiple rounds of consultations, insisting on waging a trade war against China and continuing to escalate it. In response, China is left with no other option but to make necessary counter actions,' Zhang said…"
October 21 - Bloomberg: "Chinese stocks jumped the most since March 2016 after top officials moved to shore up the economy and offer support to the struggling private sector. The Shanghai Composite Index surged 4.1% on Monday and extending Friday's 2.6% gain… President Xi Jinping vowed 'unwavering' support for non-state firms over the weekend, the country's stock exchanges committed to help manage share-pledge risks, and the government released a plan to cut personal income taxes. That follows a rare coordinated effort from top financial officials on Friday to support what's been the world's worst performing equity market."
October 24 - Wall Street Journal (Mike Bird): "Chinese stocks are widely used as collateral for loans. That introduces extra vulnerabilities to a falling market, so authorities are now attempting to contain the risks. Nearly 10% of shares in mainland China are used as collateral for loans by large shareholders. The practice has boomed even as margin lending, another form of share-backed borrowing, has decreased. Margin lending helped fuel a market selloff in 2015, as retail investors were forced to dump shares to cover their losses. 'Users of financial leverage in equities have shifted from retail investors in the 2015 episode to major shareholders in the form of stock-pledged loans,' Goldman Sachs analysts said…"
October 22 - Bloomberg: "China's central bank plans to give 10 billion yuan ($1.4bn) to China Bond Insurance Co. to provide credit support for debt sales by private enterprises, according to people familiar with the situation. The money is part of the plan the People's Bank of China announced… to support private firms issuing debt. The central bank didn't provide any details on how the plan would work, its size, or when it would begin. Officials also hadn't responded to multiple requests for comment. China's announcements… of fresh measures to ease the funding strains of private companies came after top officials commented repeatedly in an attempt to restore confidence in the world's second-largest economy. The central bank reiterated President Xi Jinping's vows to offer 'unwavering' support for the private sector, which has been most affected by the government's campaign to curb debt and cut shadow banking."
October 21 - Bloomberg (Connor Cislo): "As China braces for the full impact of President Donald Trump's trade war, it's seeking to learn from Japan's economic battles with the U.S. during the Reagan years. Chinese officials, business people and academics have been pressing Japanese counterparts to share experiences from the 1980s, when Tokyo found itself in Washington's crosshairs as its huge trade surplus and increasing industrial might sparked alarm in America. While there are differences between Japan's ascent as a commercial power a generation ago and China's emergence today as a potential superpower, Japan also has lessons for its neighbor in dealing with rising debt, asset-price bubbles and an aging population."
October 19 - Bloomberg: "China's home-price gains slowed in September, breaking a half-year streak of accelerating inflation in the housing market. New-home prices gained 1% from the previous month… That compared with a 1.5% increase in August. The Chinese government is likely to keep a tight grip on the property market at least until next year, despite a shift in policy focus from deleveraging to supporting slower growth under rising trade tensions, according to economists including Capital Economics… 'A market correction has started, as sales have undoubtedly cooled,' Yang Kewei, Shanghai-based research director at China Real Estate Information Corp., said... 'A bottleneck in residential purchasing power has been seen in some cities, especially those in second tiers.'"
October 21 - Bloomberg: "China's burst of local bond issuance is supposed to fund roads, affordable homes and other infrastructure developments that will help support its flagging economy. But there don't seem to be enough projects around to spend the money on. Provincial authorities had by the end of September already raised 92% of the 1.35 trillion yuan ($195bn) worth of special infrastructure bonds that the central government has targeted for the entire year. The bonds… are part of an attempt to counter the economic slowdown by financing projects from railwys to environmental facilities and affordable homes."
October 24 - Financial Times (Blake Schmidt and Frederik Balfour): "China Evergrande Group, the country's most indebted developer, has a lot more work to do as it tries to win over investors with plans to reduce leverage and diversify its business. One key concern as Evergrande's stock slides toward a 15-month low and its dollar bonds tumble: the company's continued reliance on China's shadow banking system. The… developer… cut its 671 billion yuan ($97bn) debt load by 8.4% in the first half… But the company has had less success reducing its exposure to high-cost trust financing: it accounted for about 45% of Evergrande's total borrowing at the end of June, the largest portion since at least 2010."
October 23 - Bloomberg: "Corporate debt investors navigating an expanding minefield of bond delinquencies in China are reaching for a hedging tool similar to credit-default swaps that was last used more than two years ago. Since September, China Bond Insurance Co. and Bank of Hangzhou Co. have sold four instruments called credit risk mitigation warrants, which insure creditors against defaults of the underlying debt. These risk hedging instruments are set to become increasingly popular as bond failures pile up, according to Golden Credit Rating International Co. Defaults have spiraled to a record 66.1 billion yuan ($9.5bn) this year as China's deleveraging campaign bites and economic headwinds batter investor confidence. That's made raising funds without resorting to credit protection tougher for some companies. Last week, the biggest state bank threw a lifeline to cash-strapped private firms by expanding a debt-to-equity swap program."
EM Watch:
October 26 - Bloomberg (Rachel Gamarski and Mario Sergio Lima): "The winner of Brazil's presidential election this Sunday will inherit a near-record stockpile of public debt. The Brazilian government's liabilities totaled 3.8 trillion reais ($1 trillion) in September, the Treasury reported… While that's down a notch from the previous month, it's still roughly twice what is was only 5 years ago."
October 26 - Bloomberg (Kartik Goyal): "India's foreign-exchange reserves are shrinking fast and may soon reach a level that could hamper the central bank's ability to defend the rupee, according to Bank of America Merrill Lynch… From a record $426 billion in mid-April, reserves have fallen by $32 billion as the Reserve Bank of India sold dollars to stem losses in Asia's worst-performing currency."
Central Bank Watch:
October 24 - Financial Times (Claire Jones): "The European Central Bank is facing serious challenges: rising tensions between Brussels and Rome, doubts about monetary policy and worries about Britain crashing out of the EU without a deal. A closely watched poll of purchasing managers… also showed that the region's businesses are struggling to come to terms with increased global trade tensions - and that the export-led slowdown is beginning to affect the much larger services sector… The ECB still insists it will halt its €2.5tn quantitative easing programme - which played a vital role in fuelling the eurozone recovery - by the end of the year. It argues that growth is still sufficiently strong and broad-based to forge ahead with its plans to phase out QE - the product of arduous negotiations within the ECB itself."
October 24 - Reuters (David Ljunggren and Steve Scherer): "The Bank of Canada… raised interest rates as expected and said it might speed up the pace of future hikes given the economy was running at almost full capacity and did not need any stimulus. The central bank, which has now lifted rates five times since July 2017, also hailed the signing of a new North American trade pact…"
October 24 - Bloomberg (Rupert Rowling): "Central banks are set to increase their purchases of gold in 2018 for the first time in five years as eastern European and Asian countries seek to diversify their reserves. Net purchases of gold by central banks are forecast to rise to 450 metric tons this year, up from 375 tons in 2017, according to consultancy Metals Focus Ltd. That will be the first increase since 2013, when banks boosted their holdings by 646 tons, the most for several decades."
Italy Watch:
October 23 - The Guardian (Daniel Boffey): "The European commission is at loggerheads with Rome after taking the unprecedented step of rejecting the Italian government's draft budget in a move designed to force the country's populist government to rein in its spending. Italy was presented with a three-week deadline to provide a revised financial plan… The commissioner, a former prime minister of Latvia, threatened to begin a procedure that could lead to the EU imposing fines on Italy unless the new government reconsiders. Dombrovskis accused Rome of 'openly and consciously going against commitments made'. 'Today, for the first time, the commission is obliged to request a euro area country to revise its draft budgetary plan… But we see no alternative … Breaking rules can be tempting on a first look. It can provide the illusion of breaking free. It can be tempting to try to cure debt with more debt. But, at some point, the debt weights too heavy and you end up having no freedom at all.'"
October 23 - Financial Times (Robert Smith): "Matteo Salvini, the leader of Italy's hard-right League party, has borrowed bond market language to create an ingenious new spin on the classic "enemies of the people" trope: the 'lords of the spread'. The spread in question is, of course, the difference between the yield on the Italian 10-year government bond and its German equivalent. This gap has soared to levels last seen half a decade ago as the budget stand-off between Rome and Brussels escalates. Italy's populist government has leapt on the bond market's obsession with this risk measure to conjure up images of shadowy and hostile external forces. With his talk of not bending to the will of the 'lords of the spread', Mr Salvini is invoking the image of faceless bond traders trying to break the government."
October 23 - Financial Times (Miles Johnson and Michael Peel): "Giuseppe Conte, Italy's prime minister, hailed Russia as a 'strategic partner' as he met Vladimir Putin in Moscow on Wednesday - the culmination of a month of diplomatic overtures by Rome's populist coalition, which has ramped up its pro-Russia rhetoric since taking power. In doing so, Italy is setting up a possible battle with fellow EU states around the bloc's painstakingly agreed rolling sanctions on Russia over its 2014 annexation of Crimea… Speaking to Italian business leader in Moscow before meeting Mr Putin, Mr Conte said Russia was a 'strategic partner'."
Europe Watch:
October 23 - CNBC (Tasos Vossos): "The days of quantitative easing in the euro area are long gone, according to signals from the region's $3 trillion corporate bond market. Investors are demanding ever-higher premiums for companies lower down the ratings spectrum over high-quality peers -- a turning point for a market long distorted by the European Central Bank juggernaut. The gap between triple B and single A spreads -- the lowest and second-lowest in the high-grade tier -- is now the widest since the start of the ECB's corporate bond purchase program…"
Global Bubble Watch:
October 24 - Reuters (Tom Miles): "The World Trade Organization is scrambling to develop a plan for the biggest reform in its 23-year history after U.S. President Donald Trump brought the world's top trade court to the brink of collapse by blocking appointments of its judges and threatening to pull the United States out of the organization. Trump's administration has targeted the WTO, the watchdog of global commerce, as part of his wider campaign against trade arrangements he contends have cost hundreds of thousands of U.S. jobs."
Japan Watch:
October 22 - Bloomberg (Issei Hazama): "It's an oddity of Japan's corporate bond market: many debt sales that bankers said were successful actually weren't. The secret may be getting harder to keep. Underwriters failed to fully sell at least 29% of company note offerings in September, twice the average over the past six months, according to information… based on more than 400 interviews with investors, underwriters and issuers."
Fixed Income Bubble Watch:
October 23 - Wall Street Journal (Daniel Kruger and Ira Iosebashvili): "Overseas investors, traders and central bankers are buying fewer Treasurys, a potential turning point for a $15 trillion market at the center of global finance and economics. Foreigners increased their holdings of Treasurys by $78 billion in the first eight months of 2018. That is just over half of what they bought during the same period last year and accounts for a much smaller share of Treasury issuance, as the government steps up the size of regular bond auctions to fill a growing U.S. budget gap. Foreign buyers now hold 41% of outstanding Treasury debt, their lowest share in 15 years, down from 50% as recently as 2013…"
October 24 - Wall Street Journal (Miriam Gottfried and Ryan Tracy): "Four years after a government crackdown on the leveraged-buyout market, risky loans are making a comeback-and few seem worried about it. Nearly 13% of LBOs in the first nine months of 2018 were financed with debt equating to at least seven times the target company's earnings before interest, taxes, depreciation and amortization, or Ebitda… That is more than double the level in all of last year and is on track to be the highest since 2014, when 13.5% of deals crossed that threshold and regulators began to crack down on leverage exceeding six times Ebitda. In another sign of growing risk, the amount of cash private-equity firms are putting into buyouts is falling. Their average equity contribution was 39.6% in the first nine months, also the lowest since 2014."
October 22 - Bloomberg (Misyrlena Egkolfopoulou and Claire Boston): "Netflix Inc. is once again turning to the junk-bond market to fund new programming as the streaming-video giant seeks to maintain its torrid subscriber growth. The $2 billion bond offering… comes just a week after the company reported a bigger jump in subscribers than Wall Street analysts expected. The bonds would push the cash-burning company's debt load above $10 billion for the first time. Netflix's market value has soared almost 70% this year to about $140 billion."
Leveraged Speculation Watch:
October 25 - Wall Street Journal (Rachael Levy): "Hedge funds tout their ability to do well during periods of market stress. But many aren't doing well during the current October rout. On Wednesday, a large group of hedge funds that bet for and against stocks had their worst day in almost seven years, according to… Goldman Sachs… The so-called fundamental long-short equity hedge funds tracked by Goldman dropped 1.44% on Wednesday… Goldman said it was the deepest one-day drop since the bank began tracking the data in January 2012. These funds are down 8.68% this month through Wednesday, bringing returns to minus-6.21% for the year, the report said."
Geopolitics Watch:
October 25 - Reuters (Ben Blanchard): "China's military will take action 'at any cost' to foil any attempt to separate the self-ruled island of Taiwan, which Beijing claims as its own, the country's defense minister said… China has been infuriated by recent U.S. sanctions on its military, one of a growing number of flashpoints in Sino-U.S. ties that include a bitter trade war, the issue of Taiwan, and China's increasingly muscular military posture in the South China Sea… 'The Taiwan issue is related to China's sovereignty and territorial integrity and touches upon China's core interests,' Chinese Defence Minister Wei Fenghe said…"
October 23 - Reuters (Ben Blanchard): "China's Foreign Ministry… said it has expressed deep concern to the United States after Washington sent two warships through the Taiwan Strait in the second such operation this year."
October 22 - Reuters (Adam Jourdan): "Chinese state media sharply criticized U.S. Secretary of State Mike Pompeo… after he made comments in Latin America warning about the hidden risks of seeking Chinese investment amid a growing battle for influence in the region… In an editorial…, the state-run China Daily newspaper said Pompeo's comments were 'ignorant and maliciou' and criticism that its ambitions Belt and Road infrastructure initiative was creating debt traps in other countries was false."
October 20 - Reuters (Jeff Mason, Idrees Ali, Polina Devitt and Michael Martina): "President Donald Trump said Washington would withdraw from a landmark Cold War-era treaty that eliminated nuclear missiles from Europe because Russia was violating the pact, triggering a warning of retaliatory measures from Moscow. The Intermediate-Range Nuclear Forces Treaty, negotiated by then-President Ronald Reagan and Soviet leader Mikhail Gorbachev in 1987, required elimination of short-range and intermediate-range nuclear and conventional missiles by both countries. 'Russia has not, unfortunately, honored the agreement so we're going to terminate the agreement and we're going to pull out,' Trump told reporters…"
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