[Reuters] Government shutdown breaks record, with no end in sight
[Reuters] May warns of catastrophe if lawmakers don't back Brexit deal
[Bloomberg] Gundlach Warns U.S. Economy Is Floating on ‘an Ocean of Debt’
[Reuters] White House asked for options to strike Iran: WSJ
[FT] China hawks fear Trump will yield in trade war
[FT] GAM, Schroders and BlackRock hedge funds among worst performers in 2018
Saturday, January 12, 2019
Saturday's News Links
[CNBC] The partial government shutdown is now the longest ever as Trump border wall fight rages on
[CNBC] New home sales tank 19 percent to end 2018
[CNBC] 5 historic global shifts that could turn 2019 into a treacherous year
[Reuters] Turkey sends more reinforcements to border with Syria's Idlib
[WSJ] Cities and States With the Most Federal Workers Affected by the Shutdown
[CNBC] New home sales tank 19 percent to end 2018
[CNBC] 5 historic global shifts that could turn 2019 into a treacherous year
[Reuters] Turkey sends more reinforcements to border with Syria's Idlib
[WSJ] Cities and States With the Most Federal Workers Affected by the Shutdown
Friday, January 11, 2019
Market Commentary: Issues 2019
Please join Doug Noland and David McAlvany Thursday, January 24th, at 4:00PM EST/ 2:00pm MST for the Tactical Short Q4 recap conference call, "The 2019 Secular Shift: Beginning the Long, Difficult Road." Click here to register.
When I began posting the CBB some twenty years ago, I made a commitment to readers: “I’ll call it as I see it - and let the chips fall where they will.” Over the years, I made a further commitment to myself: Don’t be concerned with reputation – stay diligently focused on analytical integrity.
I attach this odd intro to “Issues 2019” recognizing this is a year where I could look quite foolish. I believe Global Financial Crisis is the Paramount Issue 2019. Last year saw the bursting of a historic global Bubble, Crisis Dynamics commencing with the blow-up of “short vol” strategies and attendant market instabilities. Crisis Dynamics proceeded to engulf the global “Periphery” (Argentina, Turkey, EM, more generally, and China). Receiving a transitory liquidity boost courtesy of the faltering “Periphery,” speculative Bubbles at “Core” U.S. securities markets succumbed to blow-off excess. Crisis Dynamics finally engulfed a vulnerable “Core” during 2018’s tumultuous fourth quarter.
As we begin a new year, rallying risk markets engender optimism. The storm has passed, it is believed. Especially with the Fed’s early winding down of rate “normalization”, there’s no reason why the great bull market can’t be resuscitated and extended. The U.S. economy remains reasonably strong, while Beijing has China’s slowdown well under control. A trade deal would reduce uncertainty, creating a positive boost for markets and economies. With markets stabilized, the EM boom can get back on track. As always, upside volatility reenergizes market bullishness.
I titled Issues 2018, “Market Structure.” I fully anticipate Market Structure to remain a key Issue 2019. Trend-following strategies will continue to foment volatility and instability. U.S. securities markets rallied throughout the summer of 2018 in the face of a deteriorating fundamental backdrop. That rally, surely fueled by ETF flows and derivatives strategies, exacerbated fragilities. Speculative flows fueling the upside destabilization eventually reversed course - and market illiquidity soon followed. Yet short squeezes and the unwind of market hedges create the firepower for abrupt rallies and extreme shifts in market sentiment.
Market Illiquidity is a key Issue 2019. Its Wildness Lies in Wait. Rallying risk markets create their own liquidity, with speculative leverage and derivative strategies in particular generating self-reinforcing liquidity. Recovering stock prices ensure bouts of optimism, along with confidence that robust markets enjoy liquidity abundance. Problems arise with market downdrafts and De-Risking/Deleveraging Dynamics. Rally-induced optimism feeds unreasonable expectations and eventual disappointment.
Crisis Dynamics tend to be a process. There’s the manic phase followed by some type of shock. There is at least a partial recovery and a return of optimism – often bolstered by a dovish central bank response. It’s the second major leg down when things turn more serious – for sentiment, for market dynamics and illiquidity. Disappointment turns to disenchantment and, eventually, revulsion. It’s been a long time since market participants were tested by a prolonged, grinding bear market.
The February 2018 “short vol” blowup was a harbinger of trouble to come. I believe the January 3, 2019 “flash crash” portends serious Issues 2019 in global currency markets. An 8% intraday move in the yen vs. Australian dollar exposed problematic liquidity dynamics. Last year, the “short vol” market signal was initially dismissed then soon forgotten. The recent currency market “flash crash” is an ominous development of potentially momentous significance.
Our so-called “king dollar” is indicating some vulnerability to begin the new year. Newfound Fed dovishness has caught many traders too long the U.S. currency and short the yen, Canadian dollar, renminbi and EM currencies more generally. A clash among a band of fundamentally weak currencies is a critical Issue 2019. When the current currency market short squeeze runs its course, I see a marketplace that’s lost its bearings. A new global currency regime of extraordinary uncertainty, instability and volatility is an Issue 2019. This unsettled new regime is not conducive to speculative leverage.
The U.S. dollar has serious fundamental issues: Trillion-dollar fiscal deficits; large structural Current Account Deficits; huge government, corporate and household debt loads; fragile securities markets; a maladjusted Bubble Economy; political dysfunction and, potentially, Washington chaos; and festering geopolitical risks.
The world’s reserve currency is fundamentally unsound. The dollar is also the nucleus for a financial apparatus financing much of the world’s levered speculative holdings. De-risking/Deleveraging Dynamics in 2018 saw waning liquidity and widening funding and hedging costs in the entangled world of dollar funding markets. With the likes of Goldman Sachs and Deutsche Bank seeing CDS prices rise significantly late in 2018, mounting systemic fragility would appear a serious Issue 2019.
China’s currency has serious fundamental issues: A vulnerable banking system approaching $40 TN of assets (more than quadrupling since the crisis), with Trillions of potentially suspect loans; a troubled “shadow” banking apparatus; an historic housing Bubble with an estimated 65 million vacant units; a deeply maladjusted economic structure; Bubble economic and financial structures dependent upon ongoing loose financial conditions and rapid Credit expansion; huge financial and economic exposures to the emerging markets and the global economy more generally; a population with significantly elevated expectations prone to disappointment and dissatisfaction; and mounting geopolitical risks. In short, China’s historic Bubble is increasingly susceptible to a disorderly collapse.
Hong Kong’s Hang Seng China H-Financial Index dropped 18% in 2018, although China’s banks outperformed the 28% fall in Japan’s TOPIX Bank Index. I would tend to see Asian finance as especially vulnerable to the unfolding global Bubble collapse. Waning confidence in the region’s financial stability would portend acute currency market instability. China’s currency is especially vulnerable to capital flight and the imposition of draconian capital controls. The big unknown is how much “hot money” and leverage has accumulated in Chinese markets. The Indonesia rupiah remains vulnerable to tightening global finance. I worry about India’s banking system after years of Bubble excess. I have concerns for the region’s financial institutions generally. The stability of the perceived stable Hong Kong and Singapore dollars is on the list of Issues 2019.
Fragile Asian finance has company. Italian banks sank 30% in 2018, slightly outperforming the 28% drop in European bank shares (STOXX 600). Italy’s 10-year yields traded to 3.72% in late-November, before ending 2018 at 2.74% (up 73bps in ’18). Italian – hence European – stability is an Issue 2019.
I believe a problematic crisis is likely to unfold in 2019, perhaps sparked by dislocation in Italian debt markets and the resulting crisis of confidence in Italy’s fragile banking system. Serious de-risking/deleveraging in Italian debt would surely see contagion in the vulnerable European periphery – including Greece, Spain and Portugal. Italy’s Target2 balances (liabilities to other eurozone central banks) almost reached $500 billion in 2018. Heightened social and political instability would appear a major Issue 2019, not coincidental with the end of ECB liquidity-creating operations. Draghi had kicked the can down the road. Markets, economies, politicians and protestors have about reached the can.
A crisis of confidence in Europe would ensure problematic currency market instability. Such a scenario would portent difficulties for vulnerable “developing” Eastern European markets and economies. Many economies would appear vulnerable to being locked out of global financing markets. A full-fledged financial crisis engulfing Turkey cannot be ruled out. Last year saw significant currency weakness also in the Russian ruble, Iceland krona, Hungarian forint and Polish zloty. I would see 2018 difficulties as a harbinger of much greater challenges ahead.
Bubbles are mechanism of wealth redistribution and destruction. This reality has been at the foundation of my ongoing deep worries for the consequences of history’s greatest global Bubble. We’ve witnessed the social angst, a deeply divided country and waning confidence in U.S. institutions following the collapse of the mortgage finance Bubble. I fear that the Bubble over the past decade has greatly increased the likelihood of geopolitical tensions and conflict. Aspects of this risk began to manifest in 2018, as fissures developed in the global Bubble. Geopolitical conflict is a critical Issue 2019. Trade relations are clearly front and center. Going forward, I don’t believe we can disregard escalating risks of military confrontation.
Bubbles inflate many things, including expectations. I worry that the protracted Chinese Bubble has so inflated expectations throughout China’s large population. With serious cracks in their Bubble, Beijing will continue to craft a strategy of casting blame on the U.S. (and the “west”). The administration’s hard line creates a convenient narrative: Trump and the U.S. are trying to hold back China’s advancement and ascendency to global superpower status. A faltering Bubble and deteriorating situation in China present Chinese leadership a not inconvenient time to confront the hostile U.S. The South China Sea and Taiwan could loom large as surprise flashpoint Issues 2019.
There are a number of potential geopolitical flashpoints. Without delving into detail, I would say generally that geopolitical risks will continue to rise rapidly in the post-Bubble backdrop. Issues easily disregarded during the Bubble expansion (i.e. the Middle East, Russia, Ukraine, Iran, etc.) may in total become more pressing Issues 2019. I can see a scenario where the U.S. is spending significantly more on national defense in the not too distant future.
“Chairman Powell ‘very worried’ about massive debt” was an early-2019 headline. I believe the U.S. Treasury market in 2018 hinted at a momentous change in Market Dynamics. And while a bout of “risk off” and a powerful short squeeze fueled a big year-end rally, there were times when the Treasury market's traditional safe haven appeal seemed to have lost some luster. The unfolding bursting Bubble predicament turns even more problematic if ever Treasury yields rise concurrently with faltering risk markets. Such a scenario seemed more realistic in 2018. With huge and expanding deficits as far as the eye can see, the suspect dollar and mounting geopolitical tensions, the potential for a disorderly rise in Treasury yields is a potential surprise Issue 2019.
Whether Treasury yields surprise on the upside or fall further in an unfolding crisis backdrop, U.S. corporate Credit is a pressing Issue 2019. Thursday (Jan. 10) ended a 40-day drought in junk bond issuance (longest stretch since at least 1995). Both high-yield and investment-grade funds suffered major redemptions in late-2018, exposing how abruptly financial conditions can tighten throughout corporate finance. Fueling liquidity abundance throughout the boom, ETF flows were exposed as a critical market risk.
Flows for years have been dominated by trend-following and performance-chasing strategies on the upside. The reversal of bullish speculative flows was joined in late-2018 by speculative shorting and hedging-related selling. Liquidity abundance abruptly transformed into unmanageable selling pressure and acute illiquidity. Pernicious Market Structure was revealed and, outside of short squeezes and fleeting bouts of optimism, I believe putting the ETF humpty dumpty back together will prove difficult. The misperception of ETF “moneyness” is being cracked wide open.
Enormous leverage has accumulated throughout corporate Credit over the past decade. This portends negative surprises and challenges in the unfolding backdrop. At this point, I’ll assume some type of trade agreement is cobbled together with the Chinese. This might provide near-term support for the markets and global economy. But I don’t believe a trade agreement would fundamentally change the backdrop of faltering global financial and economic Bubbles.
Expect ongoing global pressure on leveraged speculation. As an industry, the hedge funds did not experience huge redemptions in 2018. I expect redemptions and fund closures to be a significant issue following the next bout of serious de-risking/deleveraging. A similar dynamic should be expected for the ETF complex. Late-2018 outflows were likely just a warmup for the type of destabilizing flows possible in a panic environment.
In my view, an important interplay evolved during this protracted cycle between the ETF complex and a booming derivatives marketplace. Reliable inflows and abundant liquidity in the ETF universe created an advantageous backdrop for structuring and trading various derivatives strategies. This seemingly symbiotic relationship has run its course. The now highly uncertain ETF flow backdrop translates into a potentially problematic liquidity dynamic for derivative-related trading. ETF outflows pose risk to derivatives strategies, while a derivatives-induced market dislocation risks destroying investor faith in the liquidity and safety of ETF passive “investing.”
The possibility of a 1987-style “portfolio insurance” debacle except on a grander – global, multi-asset class - scale is an Issue 2019. The U.S. economy has vulnerabilities. Yet Unsound Finance is a predominant Issue 2019. Outside of possible dreadful geopolitical developments, I would argue that the key major risk for 2019 is the seizing up of global markets. Unprecedented amounts of risk have accumulated across markets around the globe. Consider a particularly problematic scenario: a major de-risking/deleveraging episode sparks upheaval and illiquidity across currencies, equities and fixed-income markets. Such a scenario might incite a crisis of confidence in major global financial institutions, including derivatives markets and counterparties. Central bankers better not disappoint.
Last week’s dovish turn by Chairman Powell broke the bearish spell and reversed markets higher, though this came weeks late in the eyes of most market participants. “We know that long periods of suppressed volatility can lead to the build-up of risks and to a disruptive ending, and the idea that monetary policy can ignore that and leave it to macroprudential tools just is not credible to me.” This prescient comment (released Friday) is extracted from 2013 Federal Reserve transcripts. Governor Powell at the time clearly had a firmer grasp of the risks associated with QE than chairman Bernanke and future chair Yellen.
It is my long-held view that the Fed (and the other major central banks) will see no alternative than to resort to QE when global markets “seize up.” Ten-year Treasury yields at 2.70%, German bund yields at 22 bps and JGBs at zero don’t seem inconsistent with this view. It’s been a decade (or three) of Monetary Disorder. Now come the consequences, commencing with acute market and price instability. I believe this instability will end in a serious and prolonged crisis. There will be policy interventions, of course. But it will become increasingly clear that flawed monetary doctrine and policies are more the problem than the solution. In an increasingly acrimonious world, how closely will policymakers coordinate crisis responses? Will central bankers stick with “whatever it takes”? How quickly will they react to the markets – and with how much firepower? Uncertainty associated with monetary policymaking in a global crisis environment is an Issue 2019.
When I began posting the CBB some twenty years ago, I made a commitment to readers: “I’ll call it as I see it - and let the chips fall where they will.” Over the years, I made a further commitment to myself: Don’t be concerned with reputation – stay diligently focused on analytical integrity.
I attach this odd intro to “Issues 2019” recognizing this is a year where I could look quite foolish. I believe Global Financial Crisis is the Paramount Issue 2019. Last year saw the bursting of a historic global Bubble, Crisis Dynamics commencing with the blow-up of “short vol” strategies and attendant market instabilities. Crisis Dynamics proceeded to engulf the global “Periphery” (Argentina, Turkey, EM, more generally, and China). Receiving a transitory liquidity boost courtesy of the faltering “Periphery,” speculative Bubbles at “Core” U.S. securities markets succumbed to blow-off excess. Crisis Dynamics finally engulfed a vulnerable “Core” during 2018’s tumultuous fourth quarter.
As we begin a new year, rallying risk markets engender optimism. The storm has passed, it is believed. Especially with the Fed’s early winding down of rate “normalization”, there’s no reason why the great bull market can’t be resuscitated and extended. The U.S. economy remains reasonably strong, while Beijing has China’s slowdown well under control. A trade deal would reduce uncertainty, creating a positive boost for markets and economies. With markets stabilized, the EM boom can get back on track. As always, upside volatility reenergizes market bullishness.
I titled Issues 2018, “Market Structure.” I fully anticipate Market Structure to remain a key Issue 2019. Trend-following strategies will continue to foment volatility and instability. U.S. securities markets rallied throughout the summer of 2018 in the face of a deteriorating fundamental backdrop. That rally, surely fueled by ETF flows and derivatives strategies, exacerbated fragilities. Speculative flows fueling the upside destabilization eventually reversed course - and market illiquidity soon followed. Yet short squeezes and the unwind of market hedges create the firepower for abrupt rallies and extreme shifts in market sentiment.
Market Illiquidity is a key Issue 2019. Its Wildness Lies in Wait. Rallying risk markets create their own liquidity, with speculative leverage and derivative strategies in particular generating self-reinforcing liquidity. Recovering stock prices ensure bouts of optimism, along with confidence that robust markets enjoy liquidity abundance. Problems arise with market downdrafts and De-Risking/Deleveraging Dynamics. Rally-induced optimism feeds unreasonable expectations and eventual disappointment.
Crisis Dynamics tend to be a process. There’s the manic phase followed by some type of shock. There is at least a partial recovery and a return of optimism – often bolstered by a dovish central bank response. It’s the second major leg down when things turn more serious – for sentiment, for market dynamics and illiquidity. Disappointment turns to disenchantment and, eventually, revulsion. It’s been a long time since market participants were tested by a prolonged, grinding bear market.
The February 2018 “short vol” blowup was a harbinger of trouble to come. I believe the January 3, 2019 “flash crash” portends serious Issues 2019 in global currency markets. An 8% intraday move in the yen vs. Australian dollar exposed problematic liquidity dynamics. Last year, the “short vol” market signal was initially dismissed then soon forgotten. The recent currency market “flash crash” is an ominous development of potentially momentous significance.
Our so-called “king dollar” is indicating some vulnerability to begin the new year. Newfound Fed dovishness has caught many traders too long the U.S. currency and short the yen, Canadian dollar, renminbi and EM currencies more generally. A clash among a band of fundamentally weak currencies is a critical Issue 2019. When the current currency market short squeeze runs its course, I see a marketplace that’s lost its bearings. A new global currency regime of extraordinary uncertainty, instability and volatility is an Issue 2019. This unsettled new regime is not conducive to speculative leverage.
The U.S. dollar has serious fundamental issues: Trillion-dollar fiscal deficits; large structural Current Account Deficits; huge government, corporate and household debt loads; fragile securities markets; a maladjusted Bubble Economy; political dysfunction and, potentially, Washington chaos; and festering geopolitical risks.
The world’s reserve currency is fundamentally unsound. The dollar is also the nucleus for a financial apparatus financing much of the world’s levered speculative holdings. De-risking/Deleveraging Dynamics in 2018 saw waning liquidity and widening funding and hedging costs in the entangled world of dollar funding markets. With the likes of Goldman Sachs and Deutsche Bank seeing CDS prices rise significantly late in 2018, mounting systemic fragility would appear a serious Issue 2019.
China’s currency has serious fundamental issues: A vulnerable banking system approaching $40 TN of assets (more than quadrupling since the crisis), with Trillions of potentially suspect loans; a troubled “shadow” banking apparatus; an historic housing Bubble with an estimated 65 million vacant units; a deeply maladjusted economic structure; Bubble economic and financial structures dependent upon ongoing loose financial conditions and rapid Credit expansion; huge financial and economic exposures to the emerging markets and the global economy more generally; a population with significantly elevated expectations prone to disappointment and dissatisfaction; and mounting geopolitical risks. In short, China’s historic Bubble is increasingly susceptible to a disorderly collapse.
Hong Kong’s Hang Seng China H-Financial Index dropped 18% in 2018, although China’s banks outperformed the 28% fall in Japan’s TOPIX Bank Index. I would tend to see Asian finance as especially vulnerable to the unfolding global Bubble collapse. Waning confidence in the region’s financial stability would portend acute currency market instability. China’s currency is especially vulnerable to capital flight and the imposition of draconian capital controls. The big unknown is how much “hot money” and leverage has accumulated in Chinese markets. The Indonesia rupiah remains vulnerable to tightening global finance. I worry about India’s banking system after years of Bubble excess. I have concerns for the region’s financial institutions generally. The stability of the perceived stable Hong Kong and Singapore dollars is on the list of Issues 2019.
Fragile Asian finance has company. Italian banks sank 30% in 2018, slightly outperforming the 28% drop in European bank shares (STOXX 600). Italy’s 10-year yields traded to 3.72% in late-November, before ending 2018 at 2.74% (up 73bps in ’18). Italian – hence European – stability is an Issue 2019.
I believe a problematic crisis is likely to unfold in 2019, perhaps sparked by dislocation in Italian debt markets and the resulting crisis of confidence in Italy’s fragile banking system. Serious de-risking/deleveraging in Italian debt would surely see contagion in the vulnerable European periphery – including Greece, Spain and Portugal. Italy’s Target2 balances (liabilities to other eurozone central banks) almost reached $500 billion in 2018. Heightened social and political instability would appear a major Issue 2019, not coincidental with the end of ECB liquidity-creating operations. Draghi had kicked the can down the road. Markets, economies, politicians and protestors have about reached the can.
A crisis of confidence in Europe would ensure problematic currency market instability. Such a scenario would portent difficulties for vulnerable “developing” Eastern European markets and economies. Many economies would appear vulnerable to being locked out of global financing markets. A full-fledged financial crisis engulfing Turkey cannot be ruled out. Last year saw significant currency weakness also in the Russian ruble, Iceland krona, Hungarian forint and Polish zloty. I would see 2018 difficulties as a harbinger of much greater challenges ahead.
Bubbles are mechanism of wealth redistribution and destruction. This reality has been at the foundation of my ongoing deep worries for the consequences of history’s greatest global Bubble. We’ve witnessed the social angst, a deeply divided country and waning confidence in U.S. institutions following the collapse of the mortgage finance Bubble. I fear that the Bubble over the past decade has greatly increased the likelihood of geopolitical tensions and conflict. Aspects of this risk began to manifest in 2018, as fissures developed in the global Bubble. Geopolitical conflict is a critical Issue 2019. Trade relations are clearly front and center. Going forward, I don’t believe we can disregard escalating risks of military confrontation.
Bubbles inflate many things, including expectations. I worry that the protracted Chinese Bubble has so inflated expectations throughout China’s large population. With serious cracks in their Bubble, Beijing will continue to craft a strategy of casting blame on the U.S. (and the “west”). The administration’s hard line creates a convenient narrative: Trump and the U.S. are trying to hold back China’s advancement and ascendency to global superpower status. A faltering Bubble and deteriorating situation in China present Chinese leadership a not inconvenient time to confront the hostile U.S. The South China Sea and Taiwan could loom large as surprise flashpoint Issues 2019.
There are a number of potential geopolitical flashpoints. Without delving into detail, I would say generally that geopolitical risks will continue to rise rapidly in the post-Bubble backdrop. Issues easily disregarded during the Bubble expansion (i.e. the Middle East, Russia, Ukraine, Iran, etc.) may in total become more pressing Issues 2019. I can see a scenario where the U.S. is spending significantly more on national defense in the not too distant future.
“Chairman Powell ‘very worried’ about massive debt” was an early-2019 headline. I believe the U.S. Treasury market in 2018 hinted at a momentous change in Market Dynamics. And while a bout of “risk off” and a powerful short squeeze fueled a big year-end rally, there were times when the Treasury market's traditional safe haven appeal seemed to have lost some luster. The unfolding bursting Bubble predicament turns even more problematic if ever Treasury yields rise concurrently with faltering risk markets. Such a scenario seemed more realistic in 2018. With huge and expanding deficits as far as the eye can see, the suspect dollar and mounting geopolitical tensions, the potential for a disorderly rise in Treasury yields is a potential surprise Issue 2019.
Whether Treasury yields surprise on the upside or fall further in an unfolding crisis backdrop, U.S. corporate Credit is a pressing Issue 2019. Thursday (Jan. 10) ended a 40-day drought in junk bond issuance (longest stretch since at least 1995). Both high-yield and investment-grade funds suffered major redemptions in late-2018, exposing how abruptly financial conditions can tighten throughout corporate finance. Fueling liquidity abundance throughout the boom, ETF flows were exposed as a critical market risk.
Flows for years have been dominated by trend-following and performance-chasing strategies on the upside. The reversal of bullish speculative flows was joined in late-2018 by speculative shorting and hedging-related selling. Liquidity abundance abruptly transformed into unmanageable selling pressure and acute illiquidity. Pernicious Market Structure was revealed and, outside of short squeezes and fleeting bouts of optimism, I believe putting the ETF humpty dumpty back together will prove difficult. The misperception of ETF “moneyness” is being cracked wide open.
Enormous leverage has accumulated throughout corporate Credit over the past decade. This portends negative surprises and challenges in the unfolding backdrop. At this point, I’ll assume some type of trade agreement is cobbled together with the Chinese. This might provide near-term support for the markets and global economy. But I don’t believe a trade agreement would fundamentally change the backdrop of faltering global financial and economic Bubbles.
Expect ongoing global pressure on leveraged speculation. As an industry, the hedge funds did not experience huge redemptions in 2018. I expect redemptions and fund closures to be a significant issue following the next bout of serious de-risking/deleveraging. A similar dynamic should be expected for the ETF complex. Late-2018 outflows were likely just a warmup for the type of destabilizing flows possible in a panic environment.
In my view, an important interplay evolved during this protracted cycle between the ETF complex and a booming derivatives marketplace. Reliable inflows and abundant liquidity in the ETF universe created an advantageous backdrop for structuring and trading various derivatives strategies. This seemingly symbiotic relationship has run its course. The now highly uncertain ETF flow backdrop translates into a potentially problematic liquidity dynamic for derivative-related trading. ETF outflows pose risk to derivatives strategies, while a derivatives-induced market dislocation risks destroying investor faith in the liquidity and safety of ETF passive “investing.”
The possibility of a 1987-style “portfolio insurance” debacle except on a grander – global, multi-asset class - scale is an Issue 2019. The U.S. economy has vulnerabilities. Yet Unsound Finance is a predominant Issue 2019. Outside of possible dreadful geopolitical developments, I would argue that the key major risk for 2019 is the seizing up of global markets. Unprecedented amounts of risk have accumulated across markets around the globe. Consider a particularly problematic scenario: a major de-risking/deleveraging episode sparks upheaval and illiquidity across currencies, equities and fixed-income markets. Such a scenario might incite a crisis of confidence in major global financial institutions, including derivatives markets and counterparties. Central bankers better not disappoint.
Last week’s dovish turn by Chairman Powell broke the bearish spell and reversed markets higher, though this came weeks late in the eyes of most market participants. “We know that long periods of suppressed volatility can lead to the build-up of risks and to a disruptive ending, and the idea that monetary policy can ignore that and leave it to macroprudential tools just is not credible to me.” This prescient comment (released Friday) is extracted from 2013 Federal Reserve transcripts. Governor Powell at the time clearly had a firmer grasp of the risks associated with QE than chairman Bernanke and future chair Yellen.
It is my long-held view that the Fed (and the other major central banks) will see no alternative than to resort to QE when global markets “seize up.” Ten-year Treasury yields at 2.70%, German bund yields at 22 bps and JGBs at zero don’t seem inconsistent with this view. It’s been a decade (or three) of Monetary Disorder. Now come the consequences, commencing with acute market and price instability. I believe this instability will end in a serious and prolonged crisis. There will be policy interventions, of course. But it will become increasingly clear that flawed monetary doctrine and policies are more the problem than the solution. In an increasingly acrimonious world, how closely will policymakers coordinate crisis responses? Will central bankers stick with “whatever it takes”? How quickly will they react to the markets – and with how much firepower? Uncertainty associated with monetary policymaking in a global crisis environment is an Issue 2019.
For the Week:
The S&P500 jumped 2.5% (up 3.6% y-t-d), and the Dow rose 2.4% (up 2.9%). The Utilities increased 0.6% (up 0.3%). The Banks added 1.5% (up 5.5%), and the Broker/Dealers gained 2.2% (up 5.5%). The Transports surged 4.3% (up 5.0%). The S&P 400 Midcaps surged 4.7% (up 5.0%), and the small cap Russell 2000 jumped 4.8% (up 7.3%). The Nasdaq100 advanced 2.8% (up 4.3%). The Semiconductors rose 6.0% (up 5.0%). The Biotechs surged 8.1% (up 12.8%). While bullion added $2, the HUI gold index fell 1.8% (down 0.7%).
Three-month Treasury bill rates ended the week at 2.37%. Two-year government yields rose five bps to 2.54% (up 5bps y-t-d). Five-year T-note yields added three bps to 2.53% (up 2bps). Ten-year Treasury yields gained three bps to 2.70% (up 2bps). Long bond yields rose five bps to 3.03% (up 2bps). Benchmark Fannie Mae MBS yields increased two bps to 3.48% (down 2bps).
Greek 10-year yields dropped 11 bps to 4.28% (down 7bps y-t-d). Ten-year Portuguese yields fell 10 bps to 1.71% (down 1bp). Italian 10-year yields declined four bps to 2.85% (up 11bps). Spain's 10-year yields slipped three bps to 1.45% (up 3bps). German bund yields gained three bps to 0.24% (unchanged). French yields declined three bps to 0.66% (down 5bps). The French to German 10-year bond spread narrowed six to 42 bps. U.K. 10-year gilt yields added a basis point to 1.29% (up 1bp). U.K.'s FTSE equities index rose 1.2% (up 2.8% y-t-d).
Japan's Nikkei 225 equities index surged 4.1% (up 1.7% y-t-d). Japanese 10-year "JGB" yields jumped six bps to 0.02% (up 1bp y-t-d). France's CAC40 increased 0.9% (up 1.1% y-t-d). The German DAX equities index rose 1.1% (up 3.1%). Spain's IBEX 35 equities index jumped 1.6% (up 3.9%). Italy's FTSE MIB index rose 2.4% (up 5.3%). EM equities were mostly higher. Brazil's Bovespa index gained 2.0% (up 6.6%), and Mexico's Bolsa jumped 2.6% (up 4.6%). South Korea's Kospi index rallied 3.2% (up 1.7%). India's Sensex equities index increased 0.9% (down 0.2%). China's Shanghai Exchange rallied 1.5% (up 2.4%). Turkey's Borsa Istanbul National 100 index jumped 3.2% (up 0.5%). Russia's MICEX equities index rose 1.6% (up 3.6%).
Investment-grade bond funds saw outflows of $1.137 billion, while junk bond funds posted inflows of $1.048 billion (from Lipper).
Freddie Mac 30-year fixed mortgage rates declined six bps to a near nine-month low 4.45% (up 46bps y-o-y). Fifteen-year rates dropped 10 bps to 3.89% (up 45bps). Five-year hybrid ARM rates sank 15 bps to 3.83% (up 37bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates up three bps to 4.41% (up 8bps).
Federal Reserve Credit last week declined $12.2bn to $4.017 TN. Over the past year, Fed Credit contracted $388bn, or 8.8%. Fed Credit inflated $1.206 TN, or 43%, over the past 322 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt recovered $6.7bn last week to $3.396 TN. "Custody holdings" rose $44bn y-o-y, or 1.3%.
M2 (narrow) "money" supply rose $24.1bn last week to a record $14.523 TN. "Narrow money" gained $702bn, or 5.1%, over the past year. For the week, Currency slipped $0.5bn. Total Checkable Deposits dropped $48.6bn, while Savings Deposits jumped $44.5bn. Small Time Deposits added $4.5bn. Retail Money Funds surged $24.3bn.
Total money market fund assets jumped $19bn to a near nine-year high $3.067 TN. Money Funds gained $230bn y-o-y, or 8.1%.
Total Commercial Paper jumped $28.1bn to $1.073 TN. CP declined $38bn y-o-y, or 3.4%.
Currency Watch:
The U.S. dollar index declined 0.5% to 95.67 (down 0.5% y-t-d). For the week on the upside, the New Zealand dollar increased 1.5%, the Australian dollar 1.4%, the Mexican peso 1.4%, the British pound 1.0%, the Norwegian krone 0.9%, the South African rand 0.9%, the euro 0.7%, the Singapore dollar 0.4%, the Swiss franc 0.4%, the Swedish krona 0.4% and the Brazilian real 0.1%. The Japanese yen was little changed for the week. The Chinese renminbi increased 1.57% versus the dollar this week (up 1.71% y-t-d).
Commodities Watch:
January 7 – Bloomberg: “Goldman Sachs… chopped back its near-term metals forecasts as China’s economy has ‘decelerated notably,’ while balancing that outlook with a prediction mainland policy makers will respond by stoking expansion in the second half, aiding a revival in copper and aluminum. The bank -- which had been consistently bullish on raw materials heading into 2019 -- now sees copper at $6,100 a metric ton in three months and $6,400 in six, down from earlier forecasts of $6,500 and $7,000…”
The Goldman Sachs Commodities Index surged 4.2% (up 7.6% y-t-d). Spot Gold added $2 to $1,288 (up 0.4%). Silver slipped 0.8% to $15.656 (up 0.7%). Crude surged $3.63 to $51.59 (up 14%). Gasoline rose 3.9% (up 8%), and Natural Gas gained 1.8% (up 5%). Copper increased 0.5% (up 1%). Wheat added 0.5% (up 3%). Corn declined 1.2% (up 1%).
Market Dislocation Watch:
January 6 – Wall Street Journal (Ira Iosebashvili): “Uneven economic data and volatility in stocks have accelerated a surge into assets perceived as relatively safe…The Japanese yen is up nearly 5% against the dollar since markets began sliding at the end of last year’s third quarter. That move picked up speed after weaker-than-expected manufacturing data and a sales warning from Apple Inc. last week bolstered fears of a global slowdown. Other so-called haven assets are also rising. Gold prices have strengthened around 7% in that period and stand near their highest level in about half a year…”
January 10 – Wall Street Journal (Daniel Kruger and Sam Goldfarb): “No U.S. company rated below investment grade has issued bonds since November—the longest stretch without a high-yield sale in more than two decades… December was the first month since 2008 without a junk-bond sale, according to Dealogic. Thursday is on pace to mark 41 days without a deal, the longest stretch in data going back to 1995. Volatility in financial markets, uncertainty about the economy and the recent drop in oil prices are discouraging riskier companies from issuing debt and investors from buying it, analysts say. Slack investor demand recently lifted the premium, or spread, that companies with junk credit ratings have to pay over risk-free government debt to the highest level in more than two years.”
January 7 – Bloomberg (Tracy Alloway): “Underneath the surface of a burgeoning calm in credit markets lies a fat-tailed monster: Options traders preparing for a sell-off that would spark a surge in risk premiums to levels not seen in two years. Spreads in the cash market for U.S. corporate bonds have begun to reduce, tracking a relief rally in stocks after a tough year for the vast majority of asset classes. But fears linger in credit derivatives, with benchmark indexes implying a higher chance of a major surge in spreads… The distribution of probabilities implied by the options market is ‘becoming increasingly fat-tailed’ which "indicates an increase in market expectation of a tail event," JPMorgan analysts wrote…”
January 9 – Reuters (Trevor Hunnicutt): “Investors demanded cash back from U.S.-based funds for a 13th straight week… Investment Company Institute (ICI) data showed… People withdrew $30.4 billion from U.S.-based mutual funds and exchange-traded funds (ETFs) on a net basis during the week ended Jan. 2, including $14.2 billion from bonds and $11.3 billion from stocks…”
January 7 – CNBC (Yun Li): “Investors are dumping stocks and corporate bonds at the fastest pace ever. Mutual funds invested in equity and bonds lost a record $152 billion in December, while U.S. equity exchange-traded funds just had their first back-to-back weekly outflows since July 2018, shedding $7.1 billion in the last two weeks, according to TrimTabs Investment Research.”
January 9 – Reuters (Trevor Hunnicutt): “U.S. money market fund assets increased for a fifth straight week to their highest level since early 2010, as investors further raised their cash pile due to recent market volatility, a private report… showed. Assets of money market funds… jumped $35.62 billion to $3.029 trillion in the week ended Jan. 8.”
January 9 – Wall Street Journal (Stephanie Yang): “Investors have started to shake off last year’s steep losses, helping markets regain some ground in 2019. But the robots are still almost uniformly bearish. Trend-following investment strategies—a computer-based way of trading that has become a major force in some markets—have gone from bullish to bearish to a degree not seen in a decade, according to an analysis of algorithms that buy or sell based on asset-price momentum. Funds that use such strategies likely went from holding net long positions… in four major asset classes—stocks, bonds, currencies and commodities—in the third quarter of 2017, to being short, or wagering against, everything but bonds by 2019.”
Trump Administration Watch:
January 8 – Bloomberg (Jenny Leonard, Jennifer Jacobs, Saleha Mohsin, and Shawn Donnan): “President Donald Trump is increasingly eager to strike a deal with China soon in an effort to perk up financial markets that have slumped on concerns over the trade war, according to people familiar with internal White House deliberations. Talks between mid-level U.S. and Chinese officials in Beijing concluded on Wednesday, and a Chinese foreign ministry spokesman said a positive result from the meetings will be good for the global economy. The negotiations had been extended for a day, which added to optimism fueled by tweets from Trump that the two sides are making progress toward an agreement.”
January 10 – Wall Street Journal (Rebecca Ballhaus, Kristina Peterson and Natalie Andrews): “As negotiations to end a partial government shutdown broke down Wednesday, White House officials said an increasingly likely option is for President Trump to declare a national emergency over border security and try to use Pentagon funds to pay for construction of a wall or other barrier on the U.S.-Mexico border. If the White House goes that route, House Democrats, who now hold a majority in the chamber, have vowed to immediately challenge it in court. The stakes in the showdown over border-wall funding heightened Wednesday after discussions at the White House between the president and congressional leaders collapsed when Mr. Trump walked out.”
January 9 – CNBC (Emmie Martin): “The partial government shutdown, which began Dec. 22, has now stretched well into the new year. President Donald Trump said Friday that it would continue for ‘months or even years’ until he receives the requested $5 billion in funding for a border wall. The shutdown has left approximately 800,000 federal workers in financial limbo. Around 420,000 ‘essential’ employees are working without pay, while another 380,000 have been ordered to stay home… Government workers are far from alone in feeling stressed about not getting paid. Nearly 80% of American workers (78%) say they’re living paycheck to paycheck, according to a 2017 report by… CareerBuilder.”
January 7 – CNBC (Matthew J. Belvedere): “Commerce Secretary Wilbur Ross told CNBC… that U.S. tariffs are hurting China’s economy and Beijing’s ability to create jobs to stave off domestic disorder. The economic slowdown in China is a ‘big problem in their context of having a very big need to create millions of millions of jobs to hold down social unrest coming out of the little villages,’ Ross said… He argued that Chinese workers going to cities for jobs are finding none and returning home. ‘That creates a real social problem,’ he said. ‘That’s a very disgruntled group of people.’”
January 8 – Reuters (Lisa Lambert): “President Donald Trump… expressed longing for the lower interest rates that the Federal Reserve put in place during the 2007-09 recession, saying he could boost the economy if the central bank brought interest rates to zero. ‘Economic numbers looking REALLY good. Can you imagine if I had long term ZERO interest rates to play with like the past administration, rather than the rapidly raised normalized rates we have today. That would have been SO EASY! Still, markets up BIG since 2016 Election!’ Trump wrote in an early morning tweet.”
January 7 – Bloomberg (Felice Maranz): “Shares of Fannie Mae and Freddie Mac both gained the most intraday since November 2016 on Monday, as U.S. Comptroller of the Currency Joseph Otting takes over as acting director of GSEs’ regulator, the Federal Housing Finance Agency (FHFA). FNMA is up as much as 21% to the highest since Oct. 25; FMCC is up as much as 19% to the highest since Sept. 21…”
Federal Reserve Watch:
January 9 – Associated Press (Martin Crutsinger): “Federal Reserve officials expressed increasing worries when they met last month, as they grappled with volatile stock markets, trade tensions and uncertain global growth. The threats, they said, made the future path of interest rate hikes ‘less clear.’ According to minutes of the Fed’s December gathering…, officials believed that with inflation still muted, the central bank could afford to be ‘patient’ about future rate hikes. While the Fed did approve a fourth rate increase for the year, the minutes show that a ‘few’ Fed officials argued against hiking rates at the meeting.”
January 7 – Reuters (Howard Schneider): “The Federal Reserve may only need to raise interest rates once in 2019, Atlanta Fed President Raphael Bostic said…, focusing on business executives’ nervousness about the economy and a global slowdown as factors that may hold the U.S. central bank back. ‘I am at one move for 2019,’ Bostic said.”
January 7 – Bloomberg (Jeanna Smialek): “Former U.S. Treasury Secretary Lawrence Summers has jumped into the debate about negative interest rates, signing onto a paper that gives the policy -- adopted in Europe and Japan as an emergency tool during the financial crisis -- a damning review. Negative central bank rates have not been transmitted to overall deposit rates, and a model suggests that tiptoeing into negative territory in a world with such a disconnect is ‘at best irrelevant, but could potentially be contractionary due to a negative effect on bank profits,’ Summers writes…”
U.S. Bubble Watch:
January 8 – New York Times (Jim Tankersley): “The federal budget deficit continued to rise in the first quarter of fiscal 2019 and is on pace to top $1 trillion for the year, as President Trump’s signature tax cuts continue to reduce corporate tax revenue… The monthly numbers from the Congressional Budget Office also show an increase in spending on federal debt as rising interest rates drive up the cost of the government’s borrowing. The widening deficit comes despite a booming economy and a low unemployment rate… Federal spending outpaced revenue by $317 billion over the first three months of the fiscal year, which began in October… That was 41% higher than the same period a year ago, or 17% after factoring in payment shifts that made the fiscal 2018 first-quarter deficit appear smaller than it actually was… Corporate tax receipts fell by $9 billion for the quarter, or 15%. Individual receipts fell by $17 billion, or 4%. Interest costs on the debt rose by $16 billion for the quarter, or 19%. Interest costs for December were up 47% from the same month in 2017.”
January 9 – CNBC (Sam Meredith): “The U.S. is in danger of losing its triple-A sovereign credit rating later this year, Fitch said…, warning an ongoing government shutdown could soon start to impact its ability to pass a budget. A stalemate between President Donald Trump and congressional Democrats over a spending package to fund nine government agencies entered its 19th day on Wednesday. It comes at a time when lawmakers are deeply divided over the president’s demand for money for a border wall. ‘I think people are looking at the CBO (Congressional Budget Office) numbers. If people take the time to look at that you can see debt levels moving higher, you can see the interest burden in the U.S. government moving decidedly higher over the next decade,” James McCormack, Fitch’s global head of sovereign ratings told CNBC’s “Squawk Box Europe”… ‘There needs to be some kind of fiscal adjustment to offset that or the deficit itself moves higher and you’re essentially borrowing money to pay interest on the debt. So there is a meaningful fiscal deterioration there, going on the United States,’ he added.”
January 7 – Reuters (Richard Leong and Lucia Mutikani): “U.S. services sector activity slowed to a five-month low in December, but remained above a level consistent with solid economic growth in the fourth quarter. The Institute for Supply Management said… its non-manufacturing activity index fell to 57.6 last month, the lowest reading since July, from 60.7 in November.”
January 10 – Reuters (Sinéad Carew): “U.S. companies’ shopping spree for their own shares helped put a floor on market declines in 2018. Don’t look for the same level of support in 2019. Wall Street’s recent volatility has optimists betting that buybacks could provide the market with an even better buffer in 2019. But many strategists see the lift from buybacks - a major factor behind the bull market - losing some force as earnings growth slows while tax policy bonanzas fizzle out. ‘Companies bought back around 2.8% of shares outstanding in 2018. That was a substantial support to the market and bigger than dividends,’ said Jack Ablin, chief investment officer at Cresset Wealth Advisors… ‘(In 2019) we expect the corporate firepower behind share buybacks to be diminished. The growth in cash flow will be slower.’”
January 7 – CNBC (Diana Olick): “More Americans think it is a bad time to buy a home, as fewer potential buyers can afford what is on the market. The share of Americans who think it is a good time to buy a home just dropped sharply, according to a December survey from… Fannie Mae. Higher mortgage rates and increased home prices are likely to blame. Homes are simply very expensive right now, in relation to income, and there are still very few entry-level homes for sale… ‘Consumer attitudes regarding whether it’s a good time to buy a home worsened significantly in the last month, as well as from a year ago, to a survey low,’ said Doug Duncan, senior vice president and chief economist at Fannie Mae.”
January 8 – Bloomberg (Prashant Gopal): “The U.S. housing market, already losing steam, is taking another hit from the government shutdown, delaying closings and damaging buyer confidence, according to a National Association of Realtors survey. About 20% of 2,211 agents surveyed by the group said they had clients who were impacted in some way by the shutdown that began on Dec. 22, the organization said today.”
January 9 – CNBC (Diana Olick): “The combination of lower mortgage rates and an unusually slow end to 2018 caused mortgage applications to surge to start this year. Overall volume jumped 23.5% last week from the previous week, according to the Mortgage Bankers Association... Mortgage applications to purchase a home also jumped 17% last week but were just 4% higher than a year ago.”
January 8 – Associated Press (Martin Crutsinger): “Americans slowed their pace of borrowing slightly in November, but it still grew by a robust $22.1 billion. Solid auto and student loans offset some of the decline in the category that covers credit cards. …November’s figure follows a $25 billion gain in October, which had been the biggest increase in 11 months.”
January 7 – Financial Times (Chris Flood): “Vanguard has kept its title as the world’s fastest-growing fund manager for a seventh successive year despite a sharp fall in new business in 2018. A preliminary estimate… showed that it attracted net inflows of $232bn, down 38% on the record $371.9bn it gathered in 2017… BlackRock, the world’s largest asset manager, registered net inflows of $73.8bn in the first nine months of 2018…”
January 8 – CNBC (Diana Olick): “Chinese consumers may have soured on some American products, like iPhones, but they have only sweetened on U.S. residential real estate. They have been the top foreign buyers in both units and dollar volume of residential housing for six years straight, according to the National Association of Realtors, and now they are expanding to new, lower price tiers. Chinese consumers appear to be less interested in trade wars and more interested in bidding wars, according to San Francisco-based real estate agent Michi Olson, who just returned from an international real estate property show in Shanghai.”
January 6 – Reuters (Heather Somerville): “New Trump administration policies aimed at curbing China’s access to American innovation have all but halted Chinese investment in U.S. technology startups, as both investors and startup founders abandon deals amid scrutiny from Washington. Chinese venture funding in U.S. startups crested to a record $3 billion last year, according to… Rhodium Group… Since then, Chinese venture funding in U.S. startups has slowed to a trickle, Reuters interviews with more than 35 industry players show.”
China Watch:
January 9 – Reuters: “China’s producer price index (PPI) in December rose 0.9% from a year earlier, marking the lowest rate since September 2016 and slowing sharply from the previous month’s 2.7% increase… Analysts… had expected producer inflation would cool to 1.6% last month. The consumer price index (CPI) rose 1.9% last month compared with a year earlier, also below market expectations for a 2.1% gain.”
January 9 – Bloomberg: “China’s Finance Ministry is set to propose a small increase in the targeted budget deficit for this year as officials seek to balance support for the economy with the need to keep control of debt levels. The ministry agreed the proposed deficit target of 2.8% of gross domestic product… The figure, which compares with 2018’s target of 2.6%, will be presented for approval at the National People’s Congress…”
January 7 – Wall Street Journal (Tom Wright and Bradley Hope): “Senior Chinese leaders offered in 2016 to help bail out a Malaysian government fund at the center of a swelling, multibillion-dollar graft scandal, according to minutes from a series of previously undisclosed meetings… Chinese officials told visiting Malaysians that China would use its influence to try to get the U.S. and other countries to drop their probes of allegations that allies of then-Prime Minister Najib Razak and others plundered the fund known as 1MDB… The Chinese also offered to bug the homes and offices of Journal reporters in Hong Kong who were investigating the fund, to learn who was leaking information to them… In return, Malaysia offered lucrative stakes in railway and pipeline projects for China’s One Belt, One Road program of building infrastructure abroad.”
Central Bank Watch:
January 9 – Wall Street Journal (Brian Blackstone): “One year after posting a record 54 billion franc ($55bn) profit, the Swiss National Bank swung to a 15 billion franc loss in 2018, as a double whammy of weaker global equity markets and a stronger Swiss franc eroded the value of its massive holdings of foreign stocks and bonds. The valuation loss… underscores the interplay between central banks and markets. Usually, it is central bank decisions, or hints of changes in interest rates and other policies that cause stock and bond markets to fluctuate. But this has worked in reverse for Switzerland’s central bank, whose finances are largely at the mercy of financial markets beyond its borders.”
Global Bubble Watch:
January 7 – Financial Times (Lena Komileva): “If 2018 was the first year that tested the resilience of global markets to a switch from quantitative easing to quantitative tightening, the results did not inspire confidence. Investors began the year unprepared for the renewed volatility that came as the Federal Reserve rolled back more of its insurance liquidity. The fact a strong US jobs market and historically low policy rates could not prevent US stocks having their worst December since 1931 confirmed that a decade of repressing volatility had left the market with a weak immune system. The central issue facing markets now is where the new clearing level for risk lies. Has recent turbulence reset market fundamentals to more sustainable levels, or does it portend greater pain to come?”
January 8 – Reuters (Katherine Greifeld): “The growth of the global economy is expected to slow to 2.9% in 2019 compared with 3% in 2018, the World Bank said…, citing elevated trade tensions and international trade moderation. ‘At the beginning of 2018 the global economy was firing on all cylinders, but it lost speed during the year and the ride could get even bumpier in the year ahead,’ World Bank Chief Executive Officer Kristalina Georgieva said…”
January 9 – Bloomberg: “The growth engine for the world’s car industry has been thrown into reverse, with China recording the first annual slump in auto sales in more than two decades -- though progress in trade talks with the U.S. and planned government incentives offer a ray of optimism. Sales in the world’s biggest market fell 6% to 22.7 million units last year…”
January 8 – Bloomberg (Sam Kim): “Samsung Electronics Co.’s quarterly profit and revenue missed estimates on sputtering demand for memory chips during the last three months of 2018, the same period when Apple Inc. saw anemic sales in China. The… company’s operating income fell to 10.8 trillion won ($9.6bn) in the quarter… falling short of the 13.8 trillion-won average of analysts’ estimates…”
January 8 – CNBC (Stephanie Landsman): “Earnings season may deliver a wake-up call to Wall Street. Stephen Roach, one of Wall Street’s leading authorities on Asia, believes multinational corporations are largely underestimating the impact of the U.S.-China trade war on their bottom lines. According to Roach, the first indication came last week… ‘Apple is probably the canary in the coal mine… There’s likely to be more to come.’ Roach, who was Morgan Stanley Asia chairman for five years, sees the trade conflict with China as the biggest threat to the U.S. economy and markets… ‘To think that what affects the Chinese has no bearing whatsoever on an otherwise resilient U.S. economy I think, is ludicrous,’ he said. ‘This is a two-way relationship. The U.S. depends heavily on China. It’s our third largest and most rapidly growing export market over the last 10 years.’”
January 9 – Financial Times (Jamie Smyth): “Free iPads, rental guarantees and an eye-watering A$100,000 ($72,000) off the price of an apartment are some of the sweeteners on offer from property developers amid the worst housing downturn in Australia for 35 years. National house prices fell 1.3% in December, the largest monthly fall since 1983, which resulted in an annual decline of 6.1% last year. Prices in Sydney… are down 11.1% from their peak, according to Morgan Stanley, which warned this week the slump could torpedo Australia’s run of 27 years without a recession… ‘We think the steep downturn in house prices exposes Australia to the risk of recession, particularly in the context of an exogenous shock such as slowdown in Chinese growth,’ said Daniel Blake, lead author of the Morgan Stanley report.”
Europe Watch:
January 9 – Financial Times (Miles Johnson and Monika Pronczuk): “Matteo Salvini has pledged a ‘new European spring’ alongside Poland’s rightwing government as Italy’s populist leader attempts to build a Eurosceptic alliance ahead of Brussels elections in May. On a trip to Warsaw to meet Jaroslaw Kaczynski, leader of Poland’s ruling Law and Justice party, Mr Salvini, Italy’s deputy prime minister and head of the country’s hard right League party, …promised a common action plan that would ‘fuel Europe with new strength and new energy’. ‘Poland and Italy will be the heroes of the new European spring and the renaissance of true European values,’ said Mr Salvini, who has already forged ties with other anti-migrant rightwing leaders across Europe, including France’s Marine Le Pen.”
January 7 – Financial Times (Kate Allen): “Italy must sell €226bn of medium- and long-dated debt this year to a market that remains fragile after investors were rattled by last year’s stand-off between the populist government and Brussels. The political turbulence drove Italian bond yields to their highest since the eurozone debt crisis more than half a decade ago, and while Rome last month reached agreement with Brussels on its budget deficit, investors are wary of assuming that the market will remain calm.”
January 8 – Reuters (Michael Nienaber): “German industrial output unexpectedly fell in November for the third consecutive month, adding to signs that companies in Europe’s largest economy are shifting into a lower gear… Industrial output fell by 1.9% on the month in November… coming in way below the 0.3% increase that had been forecast. The output figure for October was revised down to a fall of 0.8% from a previously reported drop of 0.5%.”
Brexit Watch:
January 6 – Reuters (William James): “Prime Minister Theresa May said… that Britain would be in uncharted territory if her Brexit deal is rejected by parliament later this month, despite little sign that she has won over skeptical lawmakers. Britain is due to leave the European Union on March 29 but May’s inability so far to get her deal for a managed exit through parliament has alarmed business leaders and investors who fear the country is heading for a damaging no-deal Brexit. May said the vote in parliament would be around Jan. 15…”
January 6 – Reuters (Richard Lough and Caroline Pailliez): “Emmanuel Macron intended to start the new year on the offensive against the ‘yellow vest’ protesters. Instead, the French president is reeling from more violent street demonstrations. What began as a grassroots rebellion against diesel taxes and the high cost of living has morphed into something more perilous for Macron - an assault on his presidency and French institutions.”
Fixed-Income Bubble Watch:
January 9 – Bloomberg (Katherine Greifeld): “As the U.S. government kicks off its debt sales this year, here’s one potentially worrisome sign for traders to keep in mind: the steep decline in demand at its bond auctions. Of the $2.4 trillion of notes and bonds the Treasury Department offered last year, investors submitted bids for just 2.6 times that amount… That’s less than any year since 2008. The bid-to-cover ratio, as it’s known, fell even as benchmark Treasury yields soared to multi-year highs in October, before falling back to their lows last month.”
January 7 – Reuters (Ismail Shakil and Arundhati Sarkar): “PG&E Corp’s shares fell 14% on Tuesday, after S&P Global stripped the California power company of its investment-grade credit rating in the face of massive claims stemming from deadly wildfires. The utility, whose roughly $18 billion in bonds fell on Monday due to bankruptcy fears, has come under severe pressure since a fatal Camp fire in November compounded its woes. It currently faces billions of dollars in liabilities related to wildfires in 2017 and 2018.”
Leveraged Speculation Watch:
January 8 – Bloomberg (Alan Mirabella): “Hedge funds posted a loss of 5.7% last year as managers struggled to capitalize on volatility and were roiled by political uncertainty. For December, funds lost 1.9%, according to preliminary figures from the Bloomberg Hedge Fund Database. The industry suffered through one of its worst years in 2018. Many managers not only failed to make money but did worse than the broader market. The return of volatility posed a challenge. The prospect of a trade war with China and the combative stance of President Donald Trump didn’t help.”
January 8 – Financial Times (Robin Wigglesworth): “Philippe Jabre was the quintessential swashbuckling trader, slicing his way through markets first at GLG Partners and then an eponymous hedge fund he founded in 2007 — at the time one of the industry’s biggest-ever launches. But in December he fell on his sword, closing Jabre Capital after racking up huge losses. The fault, he said, was machines. ‘The last few years have become particularly difficult for active managers,’ he said in his final letter to clients. ‘Financial markets have significantly evolved over the past decade, driven by new technologies, and the market itself is becoming more difficult to anticipate as traditional participants are imperceptibly replaced by computerised models.’ …Various quant strategies — ranging from simple ones packaged into passive funds to pricey, complex hedge funds — manage at least $1.5tn, according to Morgan Stanley. JPMorgan estimates that only about 10% of US equity trading is now done by traditional investors.”
Geopolitical Watch:
January 5 – South China Morning Post: “Chinese President Xi Jinping… ordered the People’s Liberation Army to be ready for battle as the country faces unprecedented risks and challenges. Xi’s speech was made at a meeting of top officials from the Central Military Commission (CMC), which he heads, and broadcast later on national television. ‘All military units must correctly understand major national security and development trends, and strengthen their sense of unexpected hardship, crisis and battle,’ he said… China’s armed forces must ‘prepare for a comprehensive military struggle from a new starting point’, he said. ‘Preparation for war and combat must be deepened to ensure an efficient response in times of emergency.’”
January 5 – Financial Times (Edward White): “Taiwan’s president Tsai Ing-wen has made a fresh call for international support in the face of aggressive signals from China. Ms Tsai, in a rare briefing with foreign media, said given the ‘worst-case scenario of China using force’, Taiwan was speeding up development of its military and signalled hope for more foreign assistance. ‘We are working hard to do everything to help ourselves to improve our defence capabilities but at the same time we still hope other countries that attach great importance to democracy and value Taiwan will be able to work together with us,’ Ms Tsai said.”
January 6 – Reuters (Philip Stewart, Christian Shepherd and Michael Martina): “A U.S. guided-missile destroyer sailed near disputed islands in the South China Sea in what China called a ‘provocation’ as U.S. officials joined talks in Beijing during a truce in a bitter trade war. The USS McCampbell carried out a ‘freedom of navigation’ operation, sailing within 12 nautical miles of the Paracel Island chain, ‘to challenge excessive maritime claims’, Pacific Fleet spokeswoman Rachel McMarr said…”
January 8 – Financial Times (Laura Pitel and Aime Williams): “Donald Trump’s top security aide was snubbed by Turkey’s president…, striking a blow to Washington’s efforts to contain the fallout from a plan to withdraw US troops from Syria. John Bolton, the White House national security adviser, had hoped to meet Recep Tayyip Erdogan on his two-day visit to Ankara as part of a rearguard effort to reassure US allies and secure the safety of Kurdish forces in Syria following last month’s abrupt announcement on the departure of the troops. Instead, he found himself on the receiving end of a blistering attack by Mr Erdogan, who accused him of making a ‘serious mistake’ in asking Turkey not to attack Kurdish militants…”
January 6 – Reuters: “Iran’s central bank has proposed slashing four zeros from the rial, state news agency IRNA reported…, after the currency plunged in a year marked by an economic crisis fuelled by U.S. sanctions. ‘A bill to remove four zeros from the national currency was presented to the government by the central bank yesterday and I hope this matter can be concluded as soon as possible,’ IRNA quoted central bank governor Abdolnaser Hemmati…”
The S&P500 jumped 2.5% (up 3.6% y-t-d), and the Dow rose 2.4% (up 2.9%). The Utilities increased 0.6% (up 0.3%). The Banks added 1.5% (up 5.5%), and the Broker/Dealers gained 2.2% (up 5.5%). The Transports surged 4.3% (up 5.0%). The S&P 400 Midcaps surged 4.7% (up 5.0%), and the small cap Russell 2000 jumped 4.8% (up 7.3%). The Nasdaq100 advanced 2.8% (up 4.3%). The Semiconductors rose 6.0% (up 5.0%). The Biotechs surged 8.1% (up 12.8%). While bullion added $2, the HUI gold index fell 1.8% (down 0.7%).
Three-month Treasury bill rates ended the week at 2.37%. Two-year government yields rose five bps to 2.54% (up 5bps y-t-d). Five-year T-note yields added three bps to 2.53% (up 2bps). Ten-year Treasury yields gained three bps to 2.70% (up 2bps). Long bond yields rose five bps to 3.03% (up 2bps). Benchmark Fannie Mae MBS yields increased two bps to 3.48% (down 2bps).
Greek 10-year yields dropped 11 bps to 4.28% (down 7bps y-t-d). Ten-year Portuguese yields fell 10 bps to 1.71% (down 1bp). Italian 10-year yields declined four bps to 2.85% (up 11bps). Spain's 10-year yields slipped three bps to 1.45% (up 3bps). German bund yields gained three bps to 0.24% (unchanged). French yields declined three bps to 0.66% (down 5bps). The French to German 10-year bond spread narrowed six to 42 bps. U.K. 10-year gilt yields added a basis point to 1.29% (up 1bp). U.K.'s FTSE equities index rose 1.2% (up 2.8% y-t-d).
Japan's Nikkei 225 equities index surged 4.1% (up 1.7% y-t-d). Japanese 10-year "JGB" yields jumped six bps to 0.02% (up 1bp y-t-d). France's CAC40 increased 0.9% (up 1.1% y-t-d). The German DAX equities index rose 1.1% (up 3.1%). Spain's IBEX 35 equities index jumped 1.6% (up 3.9%). Italy's FTSE MIB index rose 2.4% (up 5.3%). EM equities were mostly higher. Brazil's Bovespa index gained 2.0% (up 6.6%), and Mexico's Bolsa jumped 2.6% (up 4.6%). South Korea's Kospi index rallied 3.2% (up 1.7%). India's Sensex equities index increased 0.9% (down 0.2%). China's Shanghai Exchange rallied 1.5% (up 2.4%). Turkey's Borsa Istanbul National 100 index jumped 3.2% (up 0.5%). Russia's MICEX equities index rose 1.6% (up 3.6%).
Investment-grade bond funds saw outflows of $1.137 billion, while junk bond funds posted inflows of $1.048 billion (from Lipper).
Freddie Mac 30-year fixed mortgage rates declined six bps to a near nine-month low 4.45% (up 46bps y-o-y). Fifteen-year rates dropped 10 bps to 3.89% (up 45bps). Five-year hybrid ARM rates sank 15 bps to 3.83% (up 37bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates up three bps to 4.41% (up 8bps).
Federal Reserve Credit last week declined $12.2bn to $4.017 TN. Over the past year, Fed Credit contracted $388bn, or 8.8%. Fed Credit inflated $1.206 TN, or 43%, over the past 322 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt recovered $6.7bn last week to $3.396 TN. "Custody holdings" rose $44bn y-o-y, or 1.3%.
M2 (narrow) "money" supply rose $24.1bn last week to a record $14.523 TN. "Narrow money" gained $702bn, or 5.1%, over the past year. For the week, Currency slipped $0.5bn. Total Checkable Deposits dropped $48.6bn, while Savings Deposits jumped $44.5bn. Small Time Deposits added $4.5bn. Retail Money Funds surged $24.3bn.
Total money market fund assets jumped $19bn to a near nine-year high $3.067 TN. Money Funds gained $230bn y-o-y, or 8.1%.
Total Commercial Paper jumped $28.1bn to $1.073 TN. CP declined $38bn y-o-y, or 3.4%.
Currency Watch:
The U.S. dollar index declined 0.5% to 95.67 (down 0.5% y-t-d). For the week on the upside, the New Zealand dollar increased 1.5%, the Australian dollar 1.4%, the Mexican peso 1.4%, the British pound 1.0%, the Norwegian krone 0.9%, the South African rand 0.9%, the euro 0.7%, the Singapore dollar 0.4%, the Swiss franc 0.4%, the Swedish krona 0.4% and the Brazilian real 0.1%. The Japanese yen was little changed for the week. The Chinese renminbi increased 1.57% versus the dollar this week (up 1.71% y-t-d).
Commodities Watch:
January 7 – Bloomberg: “Goldman Sachs… chopped back its near-term metals forecasts as China’s economy has ‘decelerated notably,’ while balancing that outlook with a prediction mainland policy makers will respond by stoking expansion in the second half, aiding a revival in copper and aluminum. The bank -- which had been consistently bullish on raw materials heading into 2019 -- now sees copper at $6,100 a metric ton in three months and $6,400 in six, down from earlier forecasts of $6,500 and $7,000…”
The Goldman Sachs Commodities Index surged 4.2% (up 7.6% y-t-d). Spot Gold added $2 to $1,288 (up 0.4%). Silver slipped 0.8% to $15.656 (up 0.7%). Crude surged $3.63 to $51.59 (up 14%). Gasoline rose 3.9% (up 8%), and Natural Gas gained 1.8% (up 5%). Copper increased 0.5% (up 1%). Wheat added 0.5% (up 3%). Corn declined 1.2% (up 1%).
Market Dislocation Watch:
January 6 – Wall Street Journal (Ira Iosebashvili): “Uneven economic data and volatility in stocks have accelerated a surge into assets perceived as relatively safe…The Japanese yen is up nearly 5% against the dollar since markets began sliding at the end of last year’s third quarter. That move picked up speed after weaker-than-expected manufacturing data and a sales warning from Apple Inc. last week bolstered fears of a global slowdown. Other so-called haven assets are also rising. Gold prices have strengthened around 7% in that period and stand near their highest level in about half a year…”
January 10 – Wall Street Journal (Daniel Kruger and Sam Goldfarb): “No U.S. company rated below investment grade has issued bonds since November—the longest stretch without a high-yield sale in more than two decades… December was the first month since 2008 without a junk-bond sale, according to Dealogic. Thursday is on pace to mark 41 days without a deal, the longest stretch in data going back to 1995. Volatility in financial markets, uncertainty about the economy and the recent drop in oil prices are discouraging riskier companies from issuing debt and investors from buying it, analysts say. Slack investor demand recently lifted the premium, or spread, that companies with junk credit ratings have to pay over risk-free government debt to the highest level in more than two years.”
January 7 – Bloomberg (Tracy Alloway): “Underneath the surface of a burgeoning calm in credit markets lies a fat-tailed monster: Options traders preparing for a sell-off that would spark a surge in risk premiums to levels not seen in two years. Spreads in the cash market for U.S. corporate bonds have begun to reduce, tracking a relief rally in stocks after a tough year for the vast majority of asset classes. But fears linger in credit derivatives, with benchmark indexes implying a higher chance of a major surge in spreads… The distribution of probabilities implied by the options market is ‘becoming increasingly fat-tailed’ which "indicates an increase in market expectation of a tail event," JPMorgan analysts wrote…”
January 9 – Reuters (Trevor Hunnicutt): “Investors demanded cash back from U.S.-based funds for a 13th straight week… Investment Company Institute (ICI) data showed… People withdrew $30.4 billion from U.S.-based mutual funds and exchange-traded funds (ETFs) on a net basis during the week ended Jan. 2, including $14.2 billion from bonds and $11.3 billion from stocks…”
January 7 – CNBC (Yun Li): “Investors are dumping stocks and corporate bonds at the fastest pace ever. Mutual funds invested in equity and bonds lost a record $152 billion in December, while U.S. equity exchange-traded funds just had their first back-to-back weekly outflows since July 2018, shedding $7.1 billion in the last two weeks, according to TrimTabs Investment Research.”
January 9 – Reuters (Trevor Hunnicutt): “U.S. money market fund assets increased for a fifth straight week to their highest level since early 2010, as investors further raised their cash pile due to recent market volatility, a private report… showed. Assets of money market funds… jumped $35.62 billion to $3.029 trillion in the week ended Jan. 8.”
January 9 – Wall Street Journal (Stephanie Yang): “Investors have started to shake off last year’s steep losses, helping markets regain some ground in 2019. But the robots are still almost uniformly bearish. Trend-following investment strategies—a computer-based way of trading that has become a major force in some markets—have gone from bullish to bearish to a degree not seen in a decade, according to an analysis of algorithms that buy or sell based on asset-price momentum. Funds that use such strategies likely went from holding net long positions… in four major asset classes—stocks, bonds, currencies and commodities—in the third quarter of 2017, to being short, or wagering against, everything but bonds by 2019.”
Trump Administration Watch:
January 8 – Bloomberg (Jenny Leonard, Jennifer Jacobs, Saleha Mohsin, and Shawn Donnan): “President Donald Trump is increasingly eager to strike a deal with China soon in an effort to perk up financial markets that have slumped on concerns over the trade war, according to people familiar with internal White House deliberations. Talks between mid-level U.S. and Chinese officials in Beijing concluded on Wednesday, and a Chinese foreign ministry spokesman said a positive result from the meetings will be good for the global economy. The negotiations had been extended for a day, which added to optimism fueled by tweets from Trump that the two sides are making progress toward an agreement.”
January 10 – Wall Street Journal (Rebecca Ballhaus, Kristina Peterson and Natalie Andrews): “As negotiations to end a partial government shutdown broke down Wednesday, White House officials said an increasingly likely option is for President Trump to declare a national emergency over border security and try to use Pentagon funds to pay for construction of a wall or other barrier on the U.S.-Mexico border. If the White House goes that route, House Democrats, who now hold a majority in the chamber, have vowed to immediately challenge it in court. The stakes in the showdown over border-wall funding heightened Wednesday after discussions at the White House between the president and congressional leaders collapsed when Mr. Trump walked out.”
January 9 – CNBC (Emmie Martin): “The partial government shutdown, which began Dec. 22, has now stretched well into the new year. President Donald Trump said Friday that it would continue for ‘months or even years’ until he receives the requested $5 billion in funding for a border wall. The shutdown has left approximately 800,000 federal workers in financial limbo. Around 420,000 ‘essential’ employees are working without pay, while another 380,000 have been ordered to stay home… Government workers are far from alone in feeling stressed about not getting paid. Nearly 80% of American workers (78%) say they’re living paycheck to paycheck, according to a 2017 report by… CareerBuilder.”
January 7 – CNBC (Matthew J. Belvedere): “Commerce Secretary Wilbur Ross told CNBC… that U.S. tariffs are hurting China’s economy and Beijing’s ability to create jobs to stave off domestic disorder. The economic slowdown in China is a ‘big problem in their context of having a very big need to create millions of millions of jobs to hold down social unrest coming out of the little villages,’ Ross said… He argued that Chinese workers going to cities for jobs are finding none and returning home. ‘That creates a real social problem,’ he said. ‘That’s a very disgruntled group of people.’”
January 8 – Reuters (Lisa Lambert): “President Donald Trump… expressed longing for the lower interest rates that the Federal Reserve put in place during the 2007-09 recession, saying he could boost the economy if the central bank brought interest rates to zero. ‘Economic numbers looking REALLY good. Can you imagine if I had long term ZERO interest rates to play with like the past administration, rather than the rapidly raised normalized rates we have today. That would have been SO EASY! Still, markets up BIG since 2016 Election!’ Trump wrote in an early morning tweet.”
January 7 – Bloomberg (Felice Maranz): “Shares of Fannie Mae and Freddie Mac both gained the most intraday since November 2016 on Monday, as U.S. Comptroller of the Currency Joseph Otting takes over as acting director of GSEs’ regulator, the Federal Housing Finance Agency (FHFA). FNMA is up as much as 21% to the highest since Oct. 25; FMCC is up as much as 19% to the highest since Sept. 21…”
Federal Reserve Watch:
January 9 – Associated Press (Martin Crutsinger): “Federal Reserve officials expressed increasing worries when they met last month, as they grappled with volatile stock markets, trade tensions and uncertain global growth. The threats, they said, made the future path of interest rate hikes ‘less clear.’ According to minutes of the Fed’s December gathering…, officials believed that with inflation still muted, the central bank could afford to be ‘patient’ about future rate hikes. While the Fed did approve a fourth rate increase for the year, the minutes show that a ‘few’ Fed officials argued against hiking rates at the meeting.”
January 7 – Reuters (Howard Schneider): “The Federal Reserve may only need to raise interest rates once in 2019, Atlanta Fed President Raphael Bostic said…, focusing on business executives’ nervousness about the economy and a global slowdown as factors that may hold the U.S. central bank back. ‘I am at one move for 2019,’ Bostic said.”
January 7 – Bloomberg (Jeanna Smialek): “Former U.S. Treasury Secretary Lawrence Summers has jumped into the debate about negative interest rates, signing onto a paper that gives the policy -- adopted in Europe and Japan as an emergency tool during the financial crisis -- a damning review. Negative central bank rates have not been transmitted to overall deposit rates, and a model suggests that tiptoeing into negative territory in a world with such a disconnect is ‘at best irrelevant, but could potentially be contractionary due to a negative effect on bank profits,’ Summers writes…”
U.S. Bubble Watch:
January 8 – New York Times (Jim Tankersley): “The federal budget deficit continued to rise in the first quarter of fiscal 2019 and is on pace to top $1 trillion for the year, as President Trump’s signature tax cuts continue to reduce corporate tax revenue… The monthly numbers from the Congressional Budget Office also show an increase in spending on federal debt as rising interest rates drive up the cost of the government’s borrowing. The widening deficit comes despite a booming economy and a low unemployment rate… Federal spending outpaced revenue by $317 billion over the first three months of the fiscal year, which began in October… That was 41% higher than the same period a year ago, or 17% after factoring in payment shifts that made the fiscal 2018 first-quarter deficit appear smaller than it actually was… Corporate tax receipts fell by $9 billion for the quarter, or 15%. Individual receipts fell by $17 billion, or 4%. Interest costs on the debt rose by $16 billion for the quarter, or 19%. Interest costs for December were up 47% from the same month in 2017.”
January 9 – CNBC (Sam Meredith): “The U.S. is in danger of losing its triple-A sovereign credit rating later this year, Fitch said…, warning an ongoing government shutdown could soon start to impact its ability to pass a budget. A stalemate between President Donald Trump and congressional Democrats over a spending package to fund nine government agencies entered its 19th day on Wednesday. It comes at a time when lawmakers are deeply divided over the president’s demand for money for a border wall. ‘I think people are looking at the CBO (Congressional Budget Office) numbers. If people take the time to look at that you can see debt levels moving higher, you can see the interest burden in the U.S. government moving decidedly higher over the next decade,” James McCormack, Fitch’s global head of sovereign ratings told CNBC’s “Squawk Box Europe”… ‘There needs to be some kind of fiscal adjustment to offset that or the deficit itself moves higher and you’re essentially borrowing money to pay interest on the debt. So there is a meaningful fiscal deterioration there, going on the United States,’ he added.”
January 7 – Reuters (Richard Leong and Lucia Mutikani): “U.S. services sector activity slowed to a five-month low in December, but remained above a level consistent with solid economic growth in the fourth quarter. The Institute for Supply Management said… its non-manufacturing activity index fell to 57.6 last month, the lowest reading since July, from 60.7 in November.”
January 10 – Reuters (Sinéad Carew): “U.S. companies’ shopping spree for their own shares helped put a floor on market declines in 2018. Don’t look for the same level of support in 2019. Wall Street’s recent volatility has optimists betting that buybacks could provide the market with an even better buffer in 2019. But many strategists see the lift from buybacks - a major factor behind the bull market - losing some force as earnings growth slows while tax policy bonanzas fizzle out. ‘Companies bought back around 2.8% of shares outstanding in 2018. That was a substantial support to the market and bigger than dividends,’ said Jack Ablin, chief investment officer at Cresset Wealth Advisors… ‘(In 2019) we expect the corporate firepower behind share buybacks to be diminished. The growth in cash flow will be slower.’”
January 7 – CNBC (Diana Olick): “More Americans think it is a bad time to buy a home, as fewer potential buyers can afford what is on the market. The share of Americans who think it is a good time to buy a home just dropped sharply, according to a December survey from… Fannie Mae. Higher mortgage rates and increased home prices are likely to blame. Homes are simply very expensive right now, in relation to income, and there are still very few entry-level homes for sale… ‘Consumer attitudes regarding whether it’s a good time to buy a home worsened significantly in the last month, as well as from a year ago, to a survey low,’ said Doug Duncan, senior vice president and chief economist at Fannie Mae.”
January 8 – Bloomberg (Prashant Gopal): “The U.S. housing market, already losing steam, is taking another hit from the government shutdown, delaying closings and damaging buyer confidence, according to a National Association of Realtors survey. About 20% of 2,211 agents surveyed by the group said they had clients who were impacted in some way by the shutdown that began on Dec. 22, the organization said today.”
January 9 – CNBC (Diana Olick): “The combination of lower mortgage rates and an unusually slow end to 2018 caused mortgage applications to surge to start this year. Overall volume jumped 23.5% last week from the previous week, according to the Mortgage Bankers Association... Mortgage applications to purchase a home also jumped 17% last week but were just 4% higher than a year ago.”
January 8 – Associated Press (Martin Crutsinger): “Americans slowed their pace of borrowing slightly in November, but it still grew by a robust $22.1 billion. Solid auto and student loans offset some of the decline in the category that covers credit cards. …November’s figure follows a $25 billion gain in October, which had been the biggest increase in 11 months.”
January 7 – Financial Times (Chris Flood): “Vanguard has kept its title as the world’s fastest-growing fund manager for a seventh successive year despite a sharp fall in new business in 2018. A preliminary estimate… showed that it attracted net inflows of $232bn, down 38% on the record $371.9bn it gathered in 2017… BlackRock, the world’s largest asset manager, registered net inflows of $73.8bn in the first nine months of 2018…”
January 8 – CNBC (Diana Olick): “Chinese consumers may have soured on some American products, like iPhones, but they have only sweetened on U.S. residential real estate. They have been the top foreign buyers in both units and dollar volume of residential housing for six years straight, according to the National Association of Realtors, and now they are expanding to new, lower price tiers. Chinese consumers appear to be less interested in trade wars and more interested in bidding wars, according to San Francisco-based real estate agent Michi Olson, who just returned from an international real estate property show in Shanghai.”
January 6 – Reuters (Heather Somerville): “New Trump administration policies aimed at curbing China’s access to American innovation have all but halted Chinese investment in U.S. technology startups, as both investors and startup founders abandon deals amid scrutiny from Washington. Chinese venture funding in U.S. startups crested to a record $3 billion last year, according to… Rhodium Group… Since then, Chinese venture funding in U.S. startups has slowed to a trickle, Reuters interviews with more than 35 industry players show.”
China Watch:
January 9 – Reuters: “China’s producer price index (PPI) in December rose 0.9% from a year earlier, marking the lowest rate since September 2016 and slowing sharply from the previous month’s 2.7% increase… Analysts… had expected producer inflation would cool to 1.6% last month. The consumer price index (CPI) rose 1.9% last month compared with a year earlier, also below market expectations for a 2.1% gain.”
January 9 – Bloomberg: “China’s Finance Ministry is set to propose a small increase in the targeted budget deficit for this year as officials seek to balance support for the economy with the need to keep control of debt levels. The ministry agreed the proposed deficit target of 2.8% of gross domestic product… The figure, which compares with 2018’s target of 2.6%, will be presented for approval at the National People’s Congress…”
January 7 – Wall Street Journal (Tom Wright and Bradley Hope): “Senior Chinese leaders offered in 2016 to help bail out a Malaysian government fund at the center of a swelling, multibillion-dollar graft scandal, according to minutes from a series of previously undisclosed meetings… Chinese officials told visiting Malaysians that China would use its influence to try to get the U.S. and other countries to drop their probes of allegations that allies of then-Prime Minister Najib Razak and others plundered the fund known as 1MDB… The Chinese also offered to bug the homes and offices of Journal reporters in Hong Kong who were investigating the fund, to learn who was leaking information to them… In return, Malaysia offered lucrative stakes in railway and pipeline projects for China’s One Belt, One Road program of building infrastructure abroad.”
Central Bank Watch:
January 9 – Wall Street Journal (Brian Blackstone): “One year after posting a record 54 billion franc ($55bn) profit, the Swiss National Bank swung to a 15 billion franc loss in 2018, as a double whammy of weaker global equity markets and a stronger Swiss franc eroded the value of its massive holdings of foreign stocks and bonds. The valuation loss… underscores the interplay between central banks and markets. Usually, it is central bank decisions, or hints of changes in interest rates and other policies that cause stock and bond markets to fluctuate. But this has worked in reverse for Switzerland’s central bank, whose finances are largely at the mercy of financial markets beyond its borders.”
Global Bubble Watch:
January 7 – Financial Times (Lena Komileva): “If 2018 was the first year that tested the resilience of global markets to a switch from quantitative easing to quantitative tightening, the results did not inspire confidence. Investors began the year unprepared for the renewed volatility that came as the Federal Reserve rolled back more of its insurance liquidity. The fact a strong US jobs market and historically low policy rates could not prevent US stocks having their worst December since 1931 confirmed that a decade of repressing volatility had left the market with a weak immune system. The central issue facing markets now is where the new clearing level for risk lies. Has recent turbulence reset market fundamentals to more sustainable levels, or does it portend greater pain to come?”
January 8 – Reuters (Katherine Greifeld): “The growth of the global economy is expected to slow to 2.9% in 2019 compared with 3% in 2018, the World Bank said…, citing elevated trade tensions and international trade moderation. ‘At the beginning of 2018 the global economy was firing on all cylinders, but it lost speed during the year and the ride could get even bumpier in the year ahead,’ World Bank Chief Executive Officer Kristalina Georgieva said…”
January 9 – Bloomberg: “The growth engine for the world’s car industry has been thrown into reverse, with China recording the first annual slump in auto sales in more than two decades -- though progress in trade talks with the U.S. and planned government incentives offer a ray of optimism. Sales in the world’s biggest market fell 6% to 22.7 million units last year…”
January 8 – Bloomberg (Sam Kim): “Samsung Electronics Co.’s quarterly profit and revenue missed estimates on sputtering demand for memory chips during the last three months of 2018, the same period when Apple Inc. saw anemic sales in China. The… company’s operating income fell to 10.8 trillion won ($9.6bn) in the quarter… falling short of the 13.8 trillion-won average of analysts’ estimates…”
January 8 – CNBC (Stephanie Landsman): “Earnings season may deliver a wake-up call to Wall Street. Stephen Roach, one of Wall Street’s leading authorities on Asia, believes multinational corporations are largely underestimating the impact of the U.S.-China trade war on their bottom lines. According to Roach, the first indication came last week… ‘Apple is probably the canary in the coal mine… There’s likely to be more to come.’ Roach, who was Morgan Stanley Asia chairman for five years, sees the trade conflict with China as the biggest threat to the U.S. economy and markets… ‘To think that what affects the Chinese has no bearing whatsoever on an otherwise resilient U.S. economy I think, is ludicrous,’ he said. ‘This is a two-way relationship. The U.S. depends heavily on China. It’s our third largest and most rapidly growing export market over the last 10 years.’”
January 9 – Financial Times (Jamie Smyth): “Free iPads, rental guarantees and an eye-watering A$100,000 ($72,000) off the price of an apartment are some of the sweeteners on offer from property developers amid the worst housing downturn in Australia for 35 years. National house prices fell 1.3% in December, the largest monthly fall since 1983, which resulted in an annual decline of 6.1% last year. Prices in Sydney… are down 11.1% from their peak, according to Morgan Stanley, which warned this week the slump could torpedo Australia’s run of 27 years without a recession… ‘We think the steep downturn in house prices exposes Australia to the risk of recession, particularly in the context of an exogenous shock such as slowdown in Chinese growth,’ said Daniel Blake, lead author of the Morgan Stanley report.”
Europe Watch:
January 9 – Financial Times (Miles Johnson and Monika Pronczuk): “Matteo Salvini has pledged a ‘new European spring’ alongside Poland’s rightwing government as Italy’s populist leader attempts to build a Eurosceptic alliance ahead of Brussels elections in May. On a trip to Warsaw to meet Jaroslaw Kaczynski, leader of Poland’s ruling Law and Justice party, Mr Salvini, Italy’s deputy prime minister and head of the country’s hard right League party, …promised a common action plan that would ‘fuel Europe with new strength and new energy’. ‘Poland and Italy will be the heroes of the new European spring and the renaissance of true European values,’ said Mr Salvini, who has already forged ties with other anti-migrant rightwing leaders across Europe, including France’s Marine Le Pen.”
January 7 – Financial Times (Kate Allen): “Italy must sell €226bn of medium- and long-dated debt this year to a market that remains fragile after investors were rattled by last year’s stand-off between the populist government and Brussels. The political turbulence drove Italian bond yields to their highest since the eurozone debt crisis more than half a decade ago, and while Rome last month reached agreement with Brussels on its budget deficit, investors are wary of assuming that the market will remain calm.”
January 8 – Reuters (Michael Nienaber): “German industrial output unexpectedly fell in November for the third consecutive month, adding to signs that companies in Europe’s largest economy are shifting into a lower gear… Industrial output fell by 1.9% on the month in November… coming in way below the 0.3% increase that had been forecast. The output figure for October was revised down to a fall of 0.8% from a previously reported drop of 0.5%.”
Brexit Watch:
January 6 – Reuters (William James): “Prime Minister Theresa May said… that Britain would be in uncharted territory if her Brexit deal is rejected by parliament later this month, despite little sign that she has won over skeptical lawmakers. Britain is due to leave the European Union on March 29 but May’s inability so far to get her deal for a managed exit through parliament has alarmed business leaders and investors who fear the country is heading for a damaging no-deal Brexit. May said the vote in parliament would be around Jan. 15…”
January 6 – Reuters (Richard Lough and Caroline Pailliez): “Emmanuel Macron intended to start the new year on the offensive against the ‘yellow vest’ protesters. Instead, the French president is reeling from more violent street demonstrations. What began as a grassroots rebellion against diesel taxes and the high cost of living has morphed into something more perilous for Macron - an assault on his presidency and French institutions.”
Fixed-Income Bubble Watch:
January 9 – Bloomberg (Katherine Greifeld): “As the U.S. government kicks off its debt sales this year, here’s one potentially worrisome sign for traders to keep in mind: the steep decline in demand at its bond auctions. Of the $2.4 trillion of notes and bonds the Treasury Department offered last year, investors submitted bids for just 2.6 times that amount… That’s less than any year since 2008. The bid-to-cover ratio, as it’s known, fell even as benchmark Treasury yields soared to multi-year highs in October, before falling back to their lows last month.”
January 7 – Reuters (Ismail Shakil and Arundhati Sarkar): “PG&E Corp’s shares fell 14% on Tuesday, after S&P Global stripped the California power company of its investment-grade credit rating in the face of massive claims stemming from deadly wildfires. The utility, whose roughly $18 billion in bonds fell on Monday due to bankruptcy fears, has come under severe pressure since a fatal Camp fire in November compounded its woes. It currently faces billions of dollars in liabilities related to wildfires in 2017 and 2018.”
Leveraged Speculation Watch:
January 8 – Bloomberg (Alan Mirabella): “Hedge funds posted a loss of 5.7% last year as managers struggled to capitalize on volatility and were roiled by political uncertainty. For December, funds lost 1.9%, according to preliminary figures from the Bloomberg Hedge Fund Database. The industry suffered through one of its worst years in 2018. Many managers not only failed to make money but did worse than the broader market. The return of volatility posed a challenge. The prospect of a trade war with China and the combative stance of President Donald Trump didn’t help.”
January 8 – Financial Times (Robin Wigglesworth): “Philippe Jabre was the quintessential swashbuckling trader, slicing his way through markets first at GLG Partners and then an eponymous hedge fund he founded in 2007 — at the time one of the industry’s biggest-ever launches. But in December he fell on his sword, closing Jabre Capital after racking up huge losses. The fault, he said, was machines. ‘The last few years have become particularly difficult for active managers,’ he said in his final letter to clients. ‘Financial markets have significantly evolved over the past decade, driven by new technologies, and the market itself is becoming more difficult to anticipate as traditional participants are imperceptibly replaced by computerised models.’ …Various quant strategies — ranging from simple ones packaged into passive funds to pricey, complex hedge funds — manage at least $1.5tn, according to Morgan Stanley. JPMorgan estimates that only about 10% of US equity trading is now done by traditional investors.”
Geopolitical Watch:
January 5 – South China Morning Post: “Chinese President Xi Jinping… ordered the People’s Liberation Army to be ready for battle as the country faces unprecedented risks and challenges. Xi’s speech was made at a meeting of top officials from the Central Military Commission (CMC), which he heads, and broadcast later on national television. ‘All military units must correctly understand major national security and development trends, and strengthen their sense of unexpected hardship, crisis and battle,’ he said… China’s armed forces must ‘prepare for a comprehensive military struggle from a new starting point’, he said. ‘Preparation for war and combat must be deepened to ensure an efficient response in times of emergency.’”
January 5 – Financial Times (Edward White): “Taiwan’s president Tsai Ing-wen has made a fresh call for international support in the face of aggressive signals from China. Ms Tsai, in a rare briefing with foreign media, said given the ‘worst-case scenario of China using force’, Taiwan was speeding up development of its military and signalled hope for more foreign assistance. ‘We are working hard to do everything to help ourselves to improve our defence capabilities but at the same time we still hope other countries that attach great importance to democracy and value Taiwan will be able to work together with us,’ Ms Tsai said.”
January 6 – Reuters (Philip Stewart, Christian Shepherd and Michael Martina): “A U.S. guided-missile destroyer sailed near disputed islands in the South China Sea in what China called a ‘provocation’ as U.S. officials joined talks in Beijing during a truce in a bitter trade war. The USS McCampbell carried out a ‘freedom of navigation’ operation, sailing within 12 nautical miles of the Paracel Island chain, ‘to challenge excessive maritime claims’, Pacific Fleet spokeswoman Rachel McMarr said…”
January 8 – Financial Times (Laura Pitel and Aime Williams): “Donald Trump’s top security aide was snubbed by Turkey’s president…, striking a blow to Washington’s efforts to contain the fallout from a plan to withdraw US troops from Syria. John Bolton, the White House national security adviser, had hoped to meet Recep Tayyip Erdogan on his two-day visit to Ankara as part of a rearguard effort to reassure US allies and secure the safety of Kurdish forces in Syria following last month’s abrupt announcement on the departure of the troops. Instead, he found himself on the receiving end of a blistering attack by Mr Erdogan, who accused him of making a ‘serious mistake’ in asking Turkey not to attack Kurdish militants…”
January 6 – Reuters: “Iran’s central bank has proposed slashing four zeros from the rial, state news agency IRNA reported…, after the currency plunged in a year marked by an economic crisis fuelled by U.S. sanctions. ‘A bill to remove four zeros from the national currency was presented to the government by the central bank yesterday and I hope this matter can be concluded as soon as possible,’ IRNA quoted central bank governor Abdolnaser Hemmati…”
Friday Evening Links
[AP] US stocks drift in a quiet close to another winning week
[Reuters] Powell sought fast end in 2013 to Fed's bond-buying program
[Reuters] If U.S. again risks default, Fed has 'loathsome' playbook
[Reuters] China banks' bad loan ratio climbs to 10-year high at end-2018
[WSJ] Default Fears Add Fresh Stress to Chinese Private Sector
[FT] Powell backed slowdown in Fed bond-buying in 2013
[Reuters] Powell sought fast end in 2013 to Fed's bond-buying program
[Reuters] If U.S. again risks default, Fed has 'loathsome' playbook
[Reuters] China banks' bad loan ratio climbs to 10-year high at end-2018
[WSJ] Default Fears Add Fresh Stress to Chinese Private Sector
[FT] Powell backed slowdown in Fed bond-buying in 2013
Thursday, January 10, 2019
Friday's News Links
[AP] Global stocks give up some gains after solid start to year
[Reuters] Gold set for fourth weekly gain on softening dollar
[Reuters] U.S. consumer prices post first drop in nine months
[Reuters] U.S. expects China's top trade negotiator to visit 'most likely' this month
[Reuters] Exclusive: China to set lower GDP growth target of 6-6.5 percent in 2019 - sources
[CNBC] Moody’s: China’s slowing growth is pushing Beijing to launch new ‘untested’ policies
[Reuters] U.S.-based stock funds draw $8.74 billion in latest week: Lipper
[WSJ] ed Debate Heats Up Over the Size and Composition of Its Bond Holdings
[WSJ] How the Fed Showed It Had the Market’s Back
[WSJ] Junk-Bond Sale Ends 40-Day Market Drought
[WSJ] Chinese Huawei Executive Is Charged With Espionage in Poland
[FT] US execs should worry about travel to China if trade war worsens
[FT] ETF growth sputters after markets’ ‘rocky ride’ in 2018
[FT] Emerging markets can't escape the Fed's balance sheet unwind
[Reuters] Gold set for fourth weekly gain on softening dollar
[Reuters] U.S. consumer prices post first drop in nine months
[Reuters] U.S. expects China's top trade negotiator to visit 'most likely' this month
[Reuters] Exclusive: China to set lower GDP growth target of 6-6.5 percent in 2019 - sources
[CNBC] Moody’s: China’s slowing growth is pushing Beijing to launch new ‘untested’ policies
[Reuters] U.S.-based stock funds draw $8.74 billion in latest week: Lipper
[WSJ] ed Debate Heats Up Over the Size and Composition of Its Bond Holdings
[WSJ] How the Fed Showed It Had the Market’s Back
[WSJ] Junk-Bond Sale Ends 40-Day Market Drought
[WSJ] Chinese Huawei Executive Is Charged With Espionage in Poland
[FT] US execs should worry about travel to China if trade war worsens
[FT] ETF growth sputters after markets’ ‘rocky ride’ in 2018
[FT] Emerging markets can't escape the Fed's balance sheet unwind
Thursday Evening Links
[Reuters] Wall St. flat after four-day surge as retailers, trade talks disappoint
[CNBC] Fed Chairman Powell says he is ‘very worried’ about growing amount of U.S. debt
[Reuters] Powell says Fed can be patient as U.S. economy evolves in 2019
[CNBC] Amid shutdown, thousands of federal workers file for unemployment
[Reuters] Britain's May suffers parliament defeat as Brexit debate resumes
[Reuters] Ford, Jaguar slash thousands of jobs across Europe
[Reuters] Brazil in focus for 2019 as bond market slows, Mexico's woes grow
[WSJ] America’s Electric Grid Has a Vulnerable Back Door—and Russia Walked Through It
[Bloomberg] Goldman Predicts Gold Prices to Climb to Highest Since 2013
[Bloomberg] China’s Digital Silk Road Is Looking More Like an Iron Curtain
[CNBC] Fed Chairman Powell says he is ‘very worried’ about growing amount of U.S. debt
[Reuters] Powell says Fed can be patient as U.S. economy evolves in 2019
[CNBC] Amid shutdown, thousands of federal workers file for unemployment
[Reuters] Britain's May suffers parliament defeat as Brexit debate resumes
[Reuters] Ford, Jaguar slash thousands of jobs across Europe
[Reuters] Brazil in focus for 2019 as bond market slows, Mexico's woes grow
[WSJ] America’s Electric Grid Has a Vulnerable Back Door—and Russia Walked Through It
[Bloomberg] Goldman Predicts Gold Prices to Climb to Highest Since 2013
[Bloomberg] China’s Digital Silk Road Is Looking More Like an Iron Curtain
Wednesday, January 9, 2019
Thursday's News Links
[Reuters] Stocks rally splutters as trade talks, data disappoint
[Reuters] Dollar weak on expectations of no 2019 Fed hikes; Aussie slips
[Reuters] Oil down 1 percent on indecisive U.S.-China trade talks, rising inventories
[AP] US, China leave next steps for trade talks unclear
[Reuters] U.S. buyback market support may wane in 2019
[Reuters] China's December factory-gate inflation at 0.9 percent year-on-year, lowest since September 2016'
[Associated Press] Fed minutes: Growing risks make rate hike path less clear
[CNBC] Fed officials see benchmark rate becoming ‘volatile’ during balance sheet run-off
[WSJ] Fed Chairman to Answer Questions on Economy and Rate Increases
[WSJ] Fed Is Unlikely to Raise Rates in Next Months, Minutes Show
[WSJ] A Junk-Bond Drought Is Making Investors Nervous
[FT] Wall Street battles for supremacy in volatility market
[FT] Trump Walks Out of Shutdown Talks, Calls Them ‘Total Waste of Time’
[Reuters] Dollar weak on expectations of no 2019 Fed hikes; Aussie slips
[Reuters] Oil down 1 percent on indecisive U.S.-China trade talks, rising inventories
[AP] US, China leave next steps for trade talks unclear
[Reuters] U.S. buyback market support may wane in 2019
[Reuters] China's December factory-gate inflation at 0.9 percent year-on-year, lowest since September 2016'
[Associated Press] Fed minutes: Growing risks make rate hike path less clear
[CNBC] Fed officials see benchmark rate becoming ‘volatile’ during balance sheet run-off
[WSJ] Fed Chairman to Answer Questions on Economy and Rate Increases
[WSJ] Fed Is Unlikely to Raise Rates in Next Months, Minutes Show
[WSJ] A Junk-Bond Drought Is Making Investors Nervous
[FT] Wall Street battles for supremacy in volatility market
[FT] Trump Walks Out of Shutdown Talks, Calls Them ‘Total Waste of Time’
Wednesday Evening LInks
[Reuters] Wall Street extends rally as chipmakers rebound
[Reuters] Oil rises more than 4 percent on U.S.-China trade talk hope, OPEC cuts
[Reuters] Many Fed policymakers urged patience on future rate hikes: minutes
[Reuters] Trump walks out of talks on shutdown, bemoans 'total waste of time'
[Reuters] U.S. stock, bond funds leak $30.4 billion in ominous start to 2019
[Reuters] U.S. focuses on China pledge to buy more goods as trade talks end
[Reuters] Fed policymakers call for caution on further U.S. rate hikes
[Reuters] U.S. money fund assets rise above $3 trillion for the first time since 2010
[CNBC] The government shutdown spotlights a bigger issue: 78% of US workers live paycheck to paycheck
[WSJ] December Fed Minutes Show Officials Saw ‘Limited Amount’ of Additional Rate Increases
[FT] Federal Reserve focuses on how to hit interest-rate target
[FT] KKR warns investors on giant corporate debt loads
[FT] Australia’s house price slide poses threat to economy
[FT] Italy’s Salvini touts ‘European spring’ with Poland’s rightwing government
[Reuters] Oil rises more than 4 percent on U.S.-China trade talk hope, OPEC cuts
[Reuters] Many Fed policymakers urged patience on future rate hikes: minutes
[Reuters] Trump walks out of talks on shutdown, bemoans 'total waste of time'
[Reuters] U.S. stock, bond funds leak $30.4 billion in ominous start to 2019
[Reuters] U.S. focuses on China pledge to buy more goods as trade talks end
[Reuters] Fed policymakers call for caution on further U.S. rate hikes
[Reuters] U.S. money fund assets rise above $3 trillion for the first time since 2010
[CNBC] The government shutdown spotlights a bigger issue: 78% of US workers live paycheck to paycheck
[WSJ] December Fed Minutes Show Officials Saw ‘Limited Amount’ of Additional Rate Increases
[FT] Federal Reserve focuses on how to hit interest-rate target
[FT] KKR warns investors on giant corporate debt loads
[FT] Australia’s house price slide poses threat to economy
[FT] Italy’s Salvini touts ‘European spring’ with Poland’s rightwing government
Tuesday, January 8, 2019
Wednesday's News Links
[Reuters] U.S.-China trade hopes lift world stocks, oil soars
[Reuters] Oil rises 2 percent on U.S.-China trade talk optimism
[Reuters] U.S.-China trade talks conclude as hopes of a deal build
[Reuters] Chinese state media says any U.S.-China trade agreement must involve 'give and take'
[CNBC] Fitch warns of possible cut to US triple-A rating if shutdown continues
[Reuters] Bostic: Fed needs to be patient, seek 'greater clarity' on economic risks
[CNBC] Sharp drop in rates sparks 23.5% spike in weekly mortgage applications after unusually weak holidays
[BBC] China car sales fall for the first time in 20 years
[Reuters] China plans 2019 fiscal deficit target of 2.8 pct of GDP -Bloomberg
[AP] US consumer borrowing growth up $22.1 billion in November
[NYT] U.S.-China Trade Talks End. Now High-Level Talks Can Begin.
[WSJ] Computer Models to Investors: Short Everything
[WSJ] Fed Meeting Minutes Will Show How Officials Judged Economic Risks
[WSJ] Riches to Rags: Swiss Central Bank Swings from Record Profit to Large Loss
[FT] Volatility: how ‘algos’ changed the rhythm of the market
[Bloomberg] Trump Wants Trade Deal With China to Boost Stocks, Sources Say
[Bloomberg] Weakest Treasuries Demand Since 2008 Sends Bond-Market Warning
[Reuters] Oil rises 2 percent on U.S.-China trade talk optimism
[Reuters] U.S.-China trade talks conclude as hopes of a deal build
[Reuters] Chinese state media says any U.S.-China trade agreement must involve 'give and take'
[CNBC] Fitch warns of possible cut to US triple-A rating if shutdown continues
[Reuters] Bostic: Fed needs to be patient, seek 'greater clarity' on economic risks
[CNBC] Sharp drop in rates sparks 23.5% spike in weekly mortgage applications after unusually weak holidays
[BBC] China car sales fall for the first time in 20 years
[Reuters] China plans 2019 fiscal deficit target of 2.8 pct of GDP -Bloomberg
[AP] US consumer borrowing growth up $22.1 billion in November
[NYT] U.S.-China Trade Talks End. Now High-Level Talks Can Begin.
[WSJ] Computer Models to Investors: Short Everything
[WSJ] Fed Meeting Minutes Will Show How Officials Judged Economic Risks
[WSJ] Riches to Rags: Swiss Central Bank Swings from Record Profit to Large Loss
[FT] Volatility: how ‘algos’ changed the rhythm of the market
[Bloomberg] Trump Wants Trade Deal With China to Boost Stocks, Sources Say
[Bloomberg] Weakest Treasuries Demand Since 2008 Sends Bond-Market Warning
Tuesday Evening Links
[Reuters] Apple, Facebook propel Wall Street to three-week peak
[Reuters] U.S. oil prices rise above $50 on trade talk hopes
[Reuters] Exclusive: New documents link Huawei to suspected front companies in Iran, Syria
[Reuters] Gundlach on 2019: Rising yields to hit stocks, trouble in bonds and a possible bitcoin bounce
[CNBC] Hedge funds squeak by S&P 500, topping the benchmark for the first time in a decade
[Reuters] World Bank sees global growth slowing in 2019
[CNBC] Chinese buyers expand their reach in the US housing market as the middle class gets in on the act
[NYT] Federal Deficit Climbs Again, Putting It on Track for $1 Trillion This Year
[WSJ] U.S., China Negotiators Narrow Differences on Trade
[WSJ] Volatility Signal Flashes Red, Even as Stocks Rebound
[FT] Italy’s 2019 financing challenge — in charts
[FT] Hedge funds suffer worst year since 2011
[Bloomberg] Realtors Say the Government Shutdown Is Sinking Home Sales
[Bloomberg] Hedge Funds Lost Almost 6% Last Year as Markets Roiled Managers
[Reuters] U.S. oil prices rise above $50 on trade talk hopes
[Reuters] Exclusive: New documents link Huawei to suspected front companies in Iran, Syria
[Reuters] Gundlach on 2019: Rising yields to hit stocks, trouble in bonds and a possible bitcoin bounce
[CNBC] Hedge funds squeak by S&P 500, topping the benchmark for the first time in a decade
[Reuters] World Bank sees global growth slowing in 2019
[CNBC] Chinese buyers expand their reach in the US housing market as the middle class gets in on the act
[NYT] Federal Deficit Climbs Again, Putting It on Track for $1 Trillion This Year
[WSJ] U.S., China Negotiators Narrow Differences on Trade
[WSJ] Volatility Signal Flashes Red, Even as Stocks Rebound
[FT] Italy’s 2019 financing challenge — in charts
[FT] Hedge funds suffer worst year since 2011
[Bloomberg] Realtors Say the Government Shutdown Is Sinking Home Sales
[Bloomberg] Hedge Funds Lost Almost 6% Last Year as Markets Roiled Managers
Monday, January 7, 2019
Tuesday's News Links
[Reuters] Stocks stay strong as Europe shrugs off Samsung warning
[Reuters] More U.S. regions see job openings outnumbering jobless
[AP] No word on progress after 2nd day of China-US trade talks
[CNBC] Sears plans to shutter after 126 years in business as Chairman Eddie Lampert’s bid fails
[CNBC] Apple’s China warning is a ‘canary in the coal mine,’ says expert Stephen Roach
[Reuters] Trump renews dig at Fed, expresses longing for lower interest rates
[Reuters] S&P downgrades PG&E ratings to 'junk' status
[CNBC] China’s current GDP growth is likely less than 6 percent, economist says
[Reuters] German growth worries mount as industrial output plunges
[Reuters] Supply avalanche keeps upward pressure on euro zone bond yields
[FT] Donald Trump and Xi Jinping face off in global trade war
[FT] Triple-B movie: ‘Big Short’ star fears for debt-laden companies
[FT] Erdogan: US made ‘serious error’ in push against Kurdish offensive
[Bloomberg] Three Reasons Trump’s Trade War Will Become a Pain for the U.S. Economy
[BloombergQ] Samsung Feels Apple's Pain as Technology Slowdown Hits Sales
[Reuters] More U.S. regions see job openings outnumbering jobless
[AP] No word on progress after 2nd day of China-US trade talks
[CNBC] Sears plans to shutter after 126 years in business as Chairman Eddie Lampert’s bid fails
[CNBC] Apple’s China warning is a ‘canary in the coal mine,’ says expert Stephen Roach
[Reuters] Trump renews dig at Fed, expresses longing for lower interest rates
[Reuters] S&P downgrades PG&E ratings to 'junk' status
[CNBC] China’s current GDP growth is likely less than 6 percent, economist says
[Reuters] German growth worries mount as industrial output plunges
[Reuters] Supply avalanche keeps upward pressure on euro zone bond yields
[FT] Donald Trump and Xi Jinping face off in global trade war
[FT] Triple-B movie: ‘Big Short’ star fears for debt-laden companies
[FT] Erdogan: US made ‘serious error’ in push against Kurdish offensive
[Bloomberg] Three Reasons Trump’s Trade War Will Become a Pain for the U.S. Economy
[BloombergQ] Samsung Feels Apple's Pain as Technology Slowdown Hits Sales
Monday Evening Links
[Reuters] Amazon, Netflix help Wall Street build on rally
[CNBC] Investors flee stock and bond funds in record numbers amid equity panic in December
[Reuters] U.S., China can reach trade deal 'we can live with': U.S. Commerce secretary
[Reuters] Fed's Bostic sees one U.S. interest rate hike this year
[CNBC] More Americans think it’s a bad time to buy a home
[WSJ] As U.S. Footprint Shrinks, Others Happily Fill the Void
[WSJ] WSJ Investigation: China Offered to Bail Out Troubled Malaysian Fund In Return for Deals
[CNBC] Investors flee stock and bond funds in record numbers amid equity panic in December
[Reuters] U.S., China can reach trade deal 'we can live with': U.S. Commerce secretary
[Reuters] Fed's Bostic sees one U.S. interest rate hike this year
[CNBC] More Americans think it’s a bad time to buy a home
[WSJ] As U.S. Footprint Shrinks, Others Happily Fill the Void
[WSJ] WSJ Investigation: China Offered to Bail Out Troubled Malaysian Fund In Return for Deals
Sunday, January 6, 2019
Monday's News Links
[Reuters] Stocks flat after Wall Street's strongest surge in new year
[Reuters] Gold rises, palladium hits record high as Fed shift hopes hurt dollar
[Reuters] Oil gains 2 percent, extending rally from December lows
[Reuters] U.S. services sector growth hits five-month low in December
[CNBC] Government shutdown becomes the third-longest ever. Here’s where things stand
[Reuters] Trump: Weakness in China economy gives Beijing incentive for trade deal
[CNBC] Commerce Secretary Wilbur Ross: US tariffs pressure China’s ability to create jobs to stave off social unrest
[AP] China upbeat ahead of US trade talks, but differences large
[Reuters] Chinese tech investors flee Silicon Valley as Trump tightens scrutiny
[AP] China protests over US warship sighting as trade talks start
[Reuters] France's Macron reeling as tough stance against 'yellow vests' backfires
[Reuters] U.S. Navy ship sails in disputed South China Sea amid trade talks with Beijing
[WSJ] U.S. Pushes China to Follow Through on Trade Promises
[WSJ] Trade Tensions Take a Toll on China’s Economy
[FT] Market challenge for the Fed is just beginning
[FT] Vanguard keeps title of fastest-growing fund manager
[FT] China turns up heat on individual users of foreign websites
[Bloomberg] Credit Investors Are Still Braced for a Blow-Out in Spreads
[Bloomberg] Goldman Sounds the China Alarm and Cuts Metals Outlook
[Reuters] Gold rises, palladium hits record high as Fed shift hopes hurt dollar
[Reuters] Oil gains 2 percent, extending rally from December lows
[Reuters] U.S. services sector growth hits five-month low in December
[CNBC] Government shutdown becomes the third-longest ever. Here’s where things stand
[Reuters] Trump: Weakness in China economy gives Beijing incentive for trade deal
[CNBC] Commerce Secretary Wilbur Ross: US tariffs pressure China’s ability to create jobs to stave off social unrest
[AP] China upbeat ahead of US trade talks, but differences large
[Reuters] Chinese tech investors flee Silicon Valley as Trump tightens scrutiny
[AP] China protests over US warship sighting as trade talks start
[Reuters] France's Macron reeling as tough stance against 'yellow vests' backfires
[Reuters] U.S. Navy ship sails in disputed South China Sea amid trade talks with Beijing
[WSJ] U.S. Pushes China to Follow Through on Trade Promises
[WSJ] Trade Tensions Take a Toll on China’s Economy
[FT] Market challenge for the Fed is just beginning
[FT] Vanguard keeps title of fastest-growing fund manager
[FT] China turns up heat on individual users of foreign websites
[Bloomberg] Credit Investors Are Still Braced for a Blow-Out in Spreads
[Bloomberg] Goldman Sounds the China Alarm and Cuts Metals Outlook
Sunday Evening Links
[Reuters] Asian shares ride relief rally, Sino-U.S. trade a hurdle
[Reuters] Gold up as Fed stance pricks dollar, stocks rally cap gains
[Reuters] Dollar weak on Powell views; China easing, trade optimism lift Aussie dollar
[Reuters] Oil prices rise on trade talks and supply cuts, but global economy concerns linger
[WSJ] Fed Faces a Fresh Test: Engineering a Soft Economic Landing
[Reuters] Gold up as Fed stance pricks dollar, stocks rally cap gains
[Reuters] Dollar weak on Powell views; China easing, trade optimism lift Aussie dollar
[Reuters] Oil prices rise on trade talks and supply cuts, but global economy concerns linger
[WSJ] Fed Faces a Fresh Test: Engineering a Soft Economic Landing
Sunday's News Links
[Reuters] No breakthrough in U.S. shutdown talks, Pelosi plans new legislation
[Reuters] PM May says if Brexit deal is rejected, UK will be in uncharted territory
[Reuters] Iran's central bank proposes slashing four zeros from falling currency: IRNA
[Bloomberg] Sears Prepares for Possible Liquidation as ESL Bid Fails
[WSJ] White House Signals Flexibility on Concrete Border Wall
[WSJ] Investors Seek Safety in Yen, Gold as Markets Swing
[FT] The rhetoric is changing, but Xi Jinping is staying the course
[Reuters] PM May says if Brexit deal is rejected, UK will be in uncharted territory
[Reuters] Iran's central bank proposes slashing four zeros from falling currency: IRNA
[Bloomberg] Sears Prepares for Possible Liquidation as ESL Bid Fails
[WSJ] White House Signals Flexibility on Concrete Border Wall
[WSJ] Investors Seek Safety in Yen, Gold as Markets Swing
[FT] The rhetoric is changing, but Xi Jinping is staying the course
Saturday, January 5, 2019
Saturday's News Links
[Reuters] Take Five: Be careful out there! World markets themes for the week ahead
[MarketWatch] The government shutdown already ranks as the 2nd longest in 20 years
[SCMP] Chinese President Xi Jinping gives army its first order of 2019: be ready for battle
[Reuters] Russia says it is not willing to exchange detained ex-U.S. marine: Interfax
[FT] History has some troubling lessons on bear markets
[FT] Taiwan seeks international support against China threats
[MarketWatch] The government shutdown already ranks as the 2nd longest in 20 years
[SCMP] Chinese President Xi Jinping gives army its first order of 2019: be ready for battle
[Reuters] Russia says it is not willing to exchange detained ex-U.S. marine: Interfax
[FT] History has some troubling lessons on bear markets
[FT] Taiwan seeks international support against China threats
Friday, January 4, 2019
Weekly Commentary: Global Markets’ Plumbing Problem
“Goldilocks with a capital ‘J’,” exclaimed an enthusiastic Bloomberg Television analyst. The Dow was up 747 points in Friday trading (more than erasing Thursday’s 660-point drubbing) on the back of a stellar jobs report and market-soothing comments from Fed Chairman “Jay” Powell.
December non-farm payrolls surged 312,000. The strongest job gains since February blew away both estimates (184k) and November job creation (revised up 21k to 176k). Manufacturing jobs jumped 32,000 (3-month gain 88k), the biggest increase since December 2017’s 39,000. Average Hourly Earnings rose a stronger-than-expected 0.4% for the month (high since August), pushing y-o-y gains to 3.2%, near the high going back to April 2009.
Just 90 minutes following the jobs report, Chairman Powell joined Janet Yellen and Ben Bernanke for a panel discussion at an American Economic Association meeting in Atlanta. Powell’s comments were not expected to be policy focused (his post-FOMC press conference only two weeks ago). But the Fed Chairman immediately pulled out some prepared comments, perhaps crafted over the previous 24 hours (of rapidly deteriorating global market conditions).
Chairman Powell: “Financial markets have been sending different signals – signals of concern about downside risks, about slowing global growth particularly related to China, about ongoing trade negotiations, about – let’s call - general policy uncertainty coming out of Washington, among other factors. You do have this difference between, on the one hand, strong data, and some tension between financial markets that are signaling concern and downside risks. And the question is, within those contrasting set of factors, how should we think about the outlook and how should we think about monetary policy going forward. When we get conflicting signals, as is not infrequently the case, policy is very much about risk management. And I’ll offer a couple thoughts on that… First, as always, there is no preset path for policy. And particularly, with the muted inflation readings that we’ve seen coming in, we will be patient as we watch to see how the economy evolves. But we’re always prepared to shift the stance of policy and to shift it significantly if necessary, in order to promote our statutory goals of maximum employment and stable prices. And I’d like to point to a recent example when the committee did just that in early 2016… As many of you will recall, in December 2015 when we lifted off from the zero bound, the median FOMC participant expected four rate increases for 2016. But very early in the year, in 2016, financial conditions tightened quite sharply and under Janet’s leadership, the committee nimbly – and I would say flexibly – adjusted our expected rate path. We did eventually raise rates a full year later in December 2016. Meanwhile, the economy weathered a soft patch in the first half of 2016 and then got back on track. And gradual policy normalization resumed. No one knows whether this year will be like 2016, but what I do know is that we will be prepared to adjust policy quickly and flexibly and to use all of our tools to support the economy should that be appropriate to keep the expansion on track, to keep the labor market strong and to keep inflation near 2%.”
Powell heedfully hit key market hot buttons: “…Policy is very much about risk management.” “We will be patient as we watch to see how the economy evolves…” “…Always prepared to shift the stance of policy and to shift it significantly if necessary…” “We will be prepared to adjust policy quickly and flexibly and to use all of our tools to support the economy…” A Bloomberg headline: “Powell Shows He Cares About Markets.” Markets heard assurances of an operative “Fed put” - with rate cuts and QE (“all of our tools”) available when demanded – and it was off to the races. The Nasdaq Composite surged 4.3%, the small cap Russell 2000 3.8% and the S&P500 3.4%. The Goldman Sachs Most Short index rose 3.8% in Friday trading.
Treasury investors, of late fixated on mounting global fragilities, saw the data, listened intently to Powell, glared at surging stock prices - and recoiled. Ten-year yields jumped 11 bps in Friday trading, with five-yields surging 14 bps. Friday’s equities buyers’ panic masked troubling market behavior over the previous week – important developments not to be swept under the rug.
January 4 – Financial Times (Robin Wigglesworth): “Housebuyers always carefully study the kitchen fittings and measure up the airy living room, but often neglect to check whether the pipes are up to scratch. Investors act similarly, often forgetting that dodgy market plumbing can lead to a smelly catastrophe. There has been no shortage of culprits offered up to explain the worst month for US markets since the financial crisis, with conveniently nebulous ‘algorithms’ emerging as a particularly popular bogeyman. But on New Year’s Eve a little-watched corner of the US money markets offered up clues as to another, arguably stronger candidate as a contributor to the recent volatility. On Dec 31, the rate on ‘general collateral’ overnight repurchase agreements suddenly rocketed from 2.56% to 6.125%, its highest level since 2001. This was a huge move, the single biggest outright percentage jump since at least 1998. The repo rate has since normalised, but the severity of the spike indicates that at least part of the market’s plumbing gummed up.”
The Global Markets’ Plumbing Problem didn’t unclog with the passing of year-end funding pressures.
January 3 – Bloomberg (Ruth Carson and Michael G Wilson): “It took seven minutes for the yen to surge through levels that have held through almost a decade. In those wild minutes from about 9:30 a.m. Sydney, the yen jumped almost 8% against the Australian dollar to its strongest since 2009, and surged 10% versus the Turkish lira. The Japanese currency rose at least 1% versus all its Group-of-10 peers, bursting through the 72 per Aussie level that has held through a trade war, a stock rout, Italy’s budget dispute and Federal Reserve rate hikes. Traders across Asia and Europe are still seeking to piece together what happened in those minutes when orders flooded in to sell Australia’s dollar and Turkey’s lira against the yen… Whatever the cause, the moves were exacerbated by algorithmic programs and thin liquidity with Japan on holiday.”
Thursday’s market gyrations hinted at a quite disconcerting scenario: illiquidity, dislocation and a “seizing up” of global markets. The day saw an 8% move in the yen vs. Australian dollar – two major – and supposedly highly liquid - global currencies. Trading in the yen dislocated across the currencies market, a so-called “flash crash.” We’ve seen the occasional “flash crash” in equities over the past decade. These abrupt bouts of selling and illiquidity reversed in relatively short order, with recovery only emboldening animal spirits. These recoveries, in contrast the current backdrop, were supported by expanding global central bank balance sheets (QE/liquidity).
I’m concerned that Thursday’s currency “flash crash” has potentially dire implications. Together with other key market indicators, evidence of systemic illiquidity risk is mounting. De-risking/deleveraging dynamics continue to gain momentum globally. Moreover, there are literally hundreds of Trillions of currency-related derivatives transactions – a byzantine edifice fabricated on a flimsy assumption of “liquid and continuous markets.”
I suspect the “global” derivatives marketplace is today much more global than the U.S.-dominated market heading into the 2008 crisis. This implies scores of new players, certainly including Chinese and Asian institutions. This suggests different types of strategies, complexities, counterparties and risks more generally. It certainly raises the issue of regulatory oversight along with potential policy challenges in the event of a globalized market dislocation. Interestingly, the AIG bailout was mentioned in Friday’s Fed head panel discussion. It’s been about a decade of derivative risk complacency.
When it comes to current global systemic liquidity risks, the Japanese yen may be the single-most critical global currency. Trillions have flowed out of Japan to play higher global yields. Zero Japanese rates and, importantly, negative market yields forced so-called “Mrs. Watanabe” to forage global securities markets in search of positive returns.
Years of radical monetary policies coerced enormous quantities of Japanese household savings into the realm of international securities and currency speculation. Likely an even greater source of global liquidity materialized from “carry trade” speculations – borrowing at zero (or negative yields) in Japan to finance levered holdings in higher-yielding instruments around the world – certainly including in Australia.
Keep in mind also that massive (reckless) BOJ balance sheet growth seemed to ensure a weak Japanese currency. Prospective yen devaluation has been integral to the yen becoming a prevailing “funding” currency for global speculation throughout this historic global government finance Bubble period (what’s better than borrowing for free in a currency you expect to be worth less in the future?). “King dollar,” with its positive rate differentials, shrinking Fed balance sheet and booming markets, bolstered the case for the yen as dominant global funding currency.
Thursday’s yen dislocation was quickly transmitted across global bond markets. After beginning the new year at an incredibly meager 0.005%, Japanese 10-year “JGB” yields in Friday trading dropped to a low of negative 0.054%, before closing at negative 0.045% - a 13-month low. Ten-year Treasury yields began Wednesday trading at 2.69%. Yields then sank to as low as 2.54% in late-Thursday trading, an almost one-year low. At that point, Treasury yields had collapsed 70 bps since the 3.24% closing yield on November 8th. And after beginning 2019 at 23 bps, German 10-year bund yields sank to as low as 15 bps in Thursday trading (down 30bps since Nov. 8th).
Italian yields, after trading Wednesday at a five-month low 2.66%, abruptly reversed course Thursday to close the session 20 bps higher at 2.86% (ending the week up 16bps to 2.90%). With their relatively high yields, Italian bonds have likely been a target of Japanese savers and yen “carry trade” speculators. Curiously, Portuguese 10-year yields, trading down to 1.69% Wednesday, reversed course and traded as high at 1.82% Friday before ending the week up nine bps to 1.81%. This week saw spreads to German bunds widen 19 bps in Italy, 12 bps in Portugal, nine bps in Spain and seven bps in Greece. European high-yield (iTraxx Crossover) CDS was up 12 bps for the week at Thursday’s close, the high going back to June 2016. European bank index CDS prices also rose to two-year highs in Thursday trading.
It’s worth noting that Goldman Sachs Credit default swap (5yr CDS) prices surged an eye-opening 19 bps in Thursday trading to 129 bps, the high going back to the early-2016 market tumult period. Goldman CDS traded below 60 in early-October, before ending October at 77 bps, November at 87 bps and closing out 2018 at 106 bps. Deutsche Bank CDS rose seven bps Thursday to 218 bps, near the highest level since 2016. Many large financial institutions saw CDS prices rise this week to highs going back to 2016 (Goldman up 17bps, Morgan Stanley 14 bps, Nomura 11 bps, Citigroup 9 bps and BofA 8 bps).
U.S. junk bonds were under significant pressure. U.S. high-yield corporate bond yields (Bloomberg Barclays average OAS index) jumped 10 bps Thursday to 5.37%, the high going back to July 2016. Energy-related debt was not helped by WTI crude trading as low as $44.35 in Wednesday trading, before reversing course and ending the week up almost 6% to $47.96. Investment-grade corporate spreads to Treasuries traded Thursday to new two-year highs (and narrowed little Friday).
Gold is worthy of a mention. Spot bullion traded to $1,299 Friday morning (pre-payrolls/Powell), the high since June. Bullion gained $10 in Thursday trading and was up $18 for the week at Friday highs (before closing the week up $4 to $1,285). As global systemic risk builds, Gold is demonstrating safe haven attributes.
And speaking of global systemic risk: China.
January 2 – Wall Street Journal (Nathaniel Taplin): “Champagne or no, New Year’s Eve must have been a somber affair for China’s top leadership, with word that manufacturing activity declined in December for the first time since 2016. The bad news from the official purchasing managers index was confirmed Wednesday by the privately compiled Caixin index, which further showed new orders in December down for the first time in 2½ years. It’s a sign that nine months of monetary easing by the central bank has failed to boost lending to the real economy, though it has succeeded in pushing housing and government-bond prices into bubbly territory. This kink in China’s monetary-policy machinery bodes ill for 2019, and makes predictions that growth could bottom out in the first quarter look optimistic. Where banks are lending again, it’s mostly to other financial institutions and the government, not the cash-starved private companies that really drive growth.”
Hong Kong’s Hang Seng index dropped 2.8% during the first trading session of 2019 (down 3.6% y-t-d at Thursday’s lows). The Shanghai Composite was down more than 2% y-t-d as of early Friday, trading at the lowest level since November 2014. An abrupt 3% rally pushed the index positive (up 0.8%) for the first few sessions 2019. The People’s Bank of China Friday announced another reduction in reserve requirements (0.5%).
From Reuters (Kevin Yao and Lusha Zhang): “The announcement came just hours after Premier Li Keqiang said China would take further action to bolster the economy, including reserve requirement ratio (RRR) cuts and more cuts in taxes and fees, highlighting the urgency to cope with increasing headwinds. ‘This speedy RRR cut with great intensity fully demonstrates the determination of policymakers to stabilize growth,’ said Yang Hao, an analyst at Nanjing Securities.”
It's hardly coincidence that Powell’s market-pleasing comments followed by only a few hours the PBOC’s policy move. The situation has turned more serious – in China, in global finance and in U.S. markets. Apple’s Thursday cut in earnings guidance was one more important indication of rapidly slowing Chinese demand. That China’s economic slowdown is occurring in the facing of a historic apartment Bubble significantly complicates policymaking. Beijing would surely prefer to cautiously deflate this colossal Bubble. But, at this point, aggressive measures to stimulate China’s economy would further extend the precarious “Terminal Phase” of mortgage and housing excess.
December 31 – New York Times (Alexandra Stevenson and Cao Li): “Unwanted apartments are weighing on China’s economy — and, by extension, dragging down growth around the world. Property sales are dropping. Apartments are going unsold. Developers who bet big on continued good times are now staggering under billions of dollars of debt. ‘The prospects of the property market are grim,’ said Xiang Songzuo, a senior economist at Renmin University, said… ‘The property market is the biggest gray rhino,’ he said, referring to a term the government has used to describe visibly big problems in the Chinese economy that are disregarded until they start gaining momentum… More than one in five apartments in Chinese cities — roughly 65 million — sit unoccupied, estimates Gan Li, a professor at Southwestern University of Finance and Economics in Chengdu.”
It's difficult to fathom 65 million vacant apartment units – more than 20% of China’s housing stock. What is the scope of future bad debts and bank impairment associated with such a fiasco? Economic impact – China and globally? Financial ramifications? With a bear market in Chinese equities, China’s vulnerable Bubble Economy and waning global growth, it’s perfectly reasonable for the world to start really worrying about China’s vulnerable apartment Bubble. With all the Friday excitement surrounding Powell and rallying U.S. equities, it’s worth noting that Asian shares underperformed this week. Copper declined another 1.3%.
Along with sinking Treasury and bund yields, there’s ample evidence that something lurking out there is stirring up a palpable degree of angst. And I would like to be more sanguine about U.S. economic prospects, especially considering strong December payroll data. I’m actually not expecting the economy to just fall off a cliff. Tightened financial conditions are a relatively recent development. Barring an accident, it might take some time for faltering markets to feed into the real economy. Yet the U.S. has a Bubble Economy structure unusually vulnerable to deflating securities and asset markets. It also faces perilous structural issues throughout its securities markets and financial system more generally. I certainly believe the U.S. is highly exposed to the unfolding issue of illiquidity afflicting global financial markets.
January 4 – Bloomberg (Rizal Tupaz): “Investors pulled the most money out of investment-grade bond funds in three years last week amid the ongoing turmoil in credit markets. The funds lost $4.5 billion for the weekly reporting period ending Jan. 2, the biggest outflow since December 2015, according to Lipper. That marks the sixth straight retreat by investors. High-yield funds saw a seventh week in a row of outflows as investors yanked $628 million versus the previous period’s $3.9 billion.”
December non-farm payrolls surged 312,000. The strongest job gains since February blew away both estimates (184k) and November job creation (revised up 21k to 176k). Manufacturing jobs jumped 32,000 (3-month gain 88k), the biggest increase since December 2017’s 39,000. Average Hourly Earnings rose a stronger-than-expected 0.4% for the month (high since August), pushing y-o-y gains to 3.2%, near the high going back to April 2009.
Just 90 minutes following the jobs report, Chairman Powell joined Janet Yellen and Ben Bernanke for a panel discussion at an American Economic Association meeting in Atlanta. Powell’s comments were not expected to be policy focused (his post-FOMC press conference only two weeks ago). But the Fed Chairman immediately pulled out some prepared comments, perhaps crafted over the previous 24 hours (of rapidly deteriorating global market conditions).
Chairman Powell: “Financial markets have been sending different signals – signals of concern about downside risks, about slowing global growth particularly related to China, about ongoing trade negotiations, about – let’s call - general policy uncertainty coming out of Washington, among other factors. You do have this difference between, on the one hand, strong data, and some tension between financial markets that are signaling concern and downside risks. And the question is, within those contrasting set of factors, how should we think about the outlook and how should we think about monetary policy going forward. When we get conflicting signals, as is not infrequently the case, policy is very much about risk management. And I’ll offer a couple thoughts on that… First, as always, there is no preset path for policy. And particularly, with the muted inflation readings that we’ve seen coming in, we will be patient as we watch to see how the economy evolves. But we’re always prepared to shift the stance of policy and to shift it significantly if necessary, in order to promote our statutory goals of maximum employment and stable prices. And I’d like to point to a recent example when the committee did just that in early 2016… As many of you will recall, in December 2015 when we lifted off from the zero bound, the median FOMC participant expected four rate increases for 2016. But very early in the year, in 2016, financial conditions tightened quite sharply and under Janet’s leadership, the committee nimbly – and I would say flexibly – adjusted our expected rate path. We did eventually raise rates a full year later in December 2016. Meanwhile, the economy weathered a soft patch in the first half of 2016 and then got back on track. And gradual policy normalization resumed. No one knows whether this year will be like 2016, but what I do know is that we will be prepared to adjust policy quickly and flexibly and to use all of our tools to support the economy should that be appropriate to keep the expansion on track, to keep the labor market strong and to keep inflation near 2%.”
Powell heedfully hit key market hot buttons: “…Policy is very much about risk management.” “We will be patient as we watch to see how the economy evolves…” “…Always prepared to shift the stance of policy and to shift it significantly if necessary…” “We will be prepared to adjust policy quickly and flexibly and to use all of our tools to support the economy…” A Bloomberg headline: “Powell Shows He Cares About Markets.” Markets heard assurances of an operative “Fed put” - with rate cuts and QE (“all of our tools”) available when demanded – and it was off to the races. The Nasdaq Composite surged 4.3%, the small cap Russell 2000 3.8% and the S&P500 3.4%. The Goldman Sachs Most Short index rose 3.8% in Friday trading.
Treasury investors, of late fixated on mounting global fragilities, saw the data, listened intently to Powell, glared at surging stock prices - and recoiled. Ten-year yields jumped 11 bps in Friday trading, with five-yields surging 14 bps. Friday’s equities buyers’ panic masked troubling market behavior over the previous week – important developments not to be swept under the rug.
January 4 – Financial Times (Robin Wigglesworth): “Housebuyers always carefully study the kitchen fittings and measure up the airy living room, but often neglect to check whether the pipes are up to scratch. Investors act similarly, often forgetting that dodgy market plumbing can lead to a smelly catastrophe. There has been no shortage of culprits offered up to explain the worst month for US markets since the financial crisis, with conveniently nebulous ‘algorithms’ emerging as a particularly popular bogeyman. But on New Year’s Eve a little-watched corner of the US money markets offered up clues as to another, arguably stronger candidate as a contributor to the recent volatility. On Dec 31, the rate on ‘general collateral’ overnight repurchase agreements suddenly rocketed from 2.56% to 6.125%, its highest level since 2001. This was a huge move, the single biggest outright percentage jump since at least 1998. The repo rate has since normalised, but the severity of the spike indicates that at least part of the market’s plumbing gummed up.”
The Global Markets’ Plumbing Problem didn’t unclog with the passing of year-end funding pressures.
January 3 – Bloomberg (Ruth Carson and Michael G Wilson): “It took seven minutes for the yen to surge through levels that have held through almost a decade. In those wild minutes from about 9:30 a.m. Sydney, the yen jumped almost 8% against the Australian dollar to its strongest since 2009, and surged 10% versus the Turkish lira. The Japanese currency rose at least 1% versus all its Group-of-10 peers, bursting through the 72 per Aussie level that has held through a trade war, a stock rout, Italy’s budget dispute and Federal Reserve rate hikes. Traders across Asia and Europe are still seeking to piece together what happened in those minutes when orders flooded in to sell Australia’s dollar and Turkey’s lira against the yen… Whatever the cause, the moves were exacerbated by algorithmic programs and thin liquidity with Japan on holiday.”
Thursday’s market gyrations hinted at a quite disconcerting scenario: illiquidity, dislocation and a “seizing up” of global markets. The day saw an 8% move in the yen vs. Australian dollar – two major – and supposedly highly liquid - global currencies. Trading in the yen dislocated across the currencies market, a so-called “flash crash.” We’ve seen the occasional “flash crash” in equities over the past decade. These abrupt bouts of selling and illiquidity reversed in relatively short order, with recovery only emboldening animal spirits. These recoveries, in contrast the current backdrop, were supported by expanding global central bank balance sheets (QE/liquidity).
I’m concerned that Thursday’s currency “flash crash” has potentially dire implications. Together with other key market indicators, evidence of systemic illiquidity risk is mounting. De-risking/deleveraging dynamics continue to gain momentum globally. Moreover, there are literally hundreds of Trillions of currency-related derivatives transactions – a byzantine edifice fabricated on a flimsy assumption of “liquid and continuous markets.”
I suspect the “global” derivatives marketplace is today much more global than the U.S.-dominated market heading into the 2008 crisis. This implies scores of new players, certainly including Chinese and Asian institutions. This suggests different types of strategies, complexities, counterparties and risks more generally. It certainly raises the issue of regulatory oversight along with potential policy challenges in the event of a globalized market dislocation. Interestingly, the AIG bailout was mentioned in Friday’s Fed head panel discussion. It’s been about a decade of derivative risk complacency.
When it comes to current global systemic liquidity risks, the Japanese yen may be the single-most critical global currency. Trillions have flowed out of Japan to play higher global yields. Zero Japanese rates and, importantly, negative market yields forced so-called “Mrs. Watanabe” to forage global securities markets in search of positive returns.
Years of radical monetary policies coerced enormous quantities of Japanese household savings into the realm of international securities and currency speculation. Likely an even greater source of global liquidity materialized from “carry trade” speculations – borrowing at zero (or negative yields) in Japan to finance levered holdings in higher-yielding instruments around the world – certainly including in Australia.
Keep in mind also that massive (reckless) BOJ balance sheet growth seemed to ensure a weak Japanese currency. Prospective yen devaluation has been integral to the yen becoming a prevailing “funding” currency for global speculation throughout this historic global government finance Bubble period (what’s better than borrowing for free in a currency you expect to be worth less in the future?). “King dollar,” with its positive rate differentials, shrinking Fed balance sheet and booming markets, bolstered the case for the yen as dominant global funding currency.
Thursday’s yen dislocation was quickly transmitted across global bond markets. After beginning the new year at an incredibly meager 0.005%, Japanese 10-year “JGB” yields in Friday trading dropped to a low of negative 0.054%, before closing at negative 0.045% - a 13-month low. Ten-year Treasury yields began Wednesday trading at 2.69%. Yields then sank to as low as 2.54% in late-Thursday trading, an almost one-year low. At that point, Treasury yields had collapsed 70 bps since the 3.24% closing yield on November 8th. And after beginning 2019 at 23 bps, German 10-year bund yields sank to as low as 15 bps in Thursday trading (down 30bps since Nov. 8th).
Italian yields, after trading Wednesday at a five-month low 2.66%, abruptly reversed course Thursday to close the session 20 bps higher at 2.86% (ending the week up 16bps to 2.90%). With their relatively high yields, Italian bonds have likely been a target of Japanese savers and yen “carry trade” speculators. Curiously, Portuguese 10-year yields, trading down to 1.69% Wednesday, reversed course and traded as high at 1.82% Friday before ending the week up nine bps to 1.81%. This week saw spreads to German bunds widen 19 bps in Italy, 12 bps in Portugal, nine bps in Spain and seven bps in Greece. European high-yield (iTraxx Crossover) CDS was up 12 bps for the week at Thursday’s close, the high going back to June 2016. European bank index CDS prices also rose to two-year highs in Thursday trading.
It’s worth noting that Goldman Sachs Credit default swap (5yr CDS) prices surged an eye-opening 19 bps in Thursday trading to 129 bps, the high going back to the early-2016 market tumult period. Goldman CDS traded below 60 in early-October, before ending October at 77 bps, November at 87 bps and closing out 2018 at 106 bps. Deutsche Bank CDS rose seven bps Thursday to 218 bps, near the highest level since 2016. Many large financial institutions saw CDS prices rise this week to highs going back to 2016 (Goldman up 17bps, Morgan Stanley 14 bps, Nomura 11 bps, Citigroup 9 bps and BofA 8 bps).
U.S. junk bonds were under significant pressure. U.S. high-yield corporate bond yields (Bloomberg Barclays average OAS index) jumped 10 bps Thursday to 5.37%, the high going back to July 2016. Energy-related debt was not helped by WTI crude trading as low as $44.35 in Wednesday trading, before reversing course and ending the week up almost 6% to $47.96. Investment-grade corporate spreads to Treasuries traded Thursday to new two-year highs (and narrowed little Friday).
Gold is worthy of a mention. Spot bullion traded to $1,299 Friday morning (pre-payrolls/Powell), the high since June. Bullion gained $10 in Thursday trading and was up $18 for the week at Friday highs (before closing the week up $4 to $1,285). As global systemic risk builds, Gold is demonstrating safe haven attributes.
And speaking of global systemic risk: China.
January 2 – Wall Street Journal (Nathaniel Taplin): “Champagne or no, New Year’s Eve must have been a somber affair for China’s top leadership, with word that manufacturing activity declined in December for the first time since 2016. The bad news from the official purchasing managers index was confirmed Wednesday by the privately compiled Caixin index, which further showed new orders in December down for the first time in 2½ years. It’s a sign that nine months of monetary easing by the central bank has failed to boost lending to the real economy, though it has succeeded in pushing housing and government-bond prices into bubbly territory. This kink in China’s monetary-policy machinery bodes ill for 2019, and makes predictions that growth could bottom out in the first quarter look optimistic. Where banks are lending again, it’s mostly to other financial institutions and the government, not the cash-starved private companies that really drive growth.”
Hong Kong’s Hang Seng index dropped 2.8% during the first trading session of 2019 (down 3.6% y-t-d at Thursday’s lows). The Shanghai Composite was down more than 2% y-t-d as of early Friday, trading at the lowest level since November 2014. An abrupt 3% rally pushed the index positive (up 0.8%) for the first few sessions 2019. The People’s Bank of China Friday announced another reduction in reserve requirements (0.5%).
From Reuters (Kevin Yao and Lusha Zhang): “The announcement came just hours after Premier Li Keqiang said China would take further action to bolster the economy, including reserve requirement ratio (RRR) cuts and more cuts in taxes and fees, highlighting the urgency to cope with increasing headwinds. ‘This speedy RRR cut with great intensity fully demonstrates the determination of policymakers to stabilize growth,’ said Yang Hao, an analyst at Nanjing Securities.”
It's hardly coincidence that Powell’s market-pleasing comments followed by only a few hours the PBOC’s policy move. The situation has turned more serious – in China, in global finance and in U.S. markets. Apple’s Thursday cut in earnings guidance was one more important indication of rapidly slowing Chinese demand. That China’s economic slowdown is occurring in the facing of a historic apartment Bubble significantly complicates policymaking. Beijing would surely prefer to cautiously deflate this colossal Bubble. But, at this point, aggressive measures to stimulate China’s economy would further extend the precarious “Terminal Phase” of mortgage and housing excess.
December 31 – New York Times (Alexandra Stevenson and Cao Li): “Unwanted apartments are weighing on China’s economy — and, by extension, dragging down growth around the world. Property sales are dropping. Apartments are going unsold. Developers who bet big on continued good times are now staggering under billions of dollars of debt. ‘The prospects of the property market are grim,’ said Xiang Songzuo, a senior economist at Renmin University, said… ‘The property market is the biggest gray rhino,’ he said, referring to a term the government has used to describe visibly big problems in the Chinese economy that are disregarded until they start gaining momentum… More than one in five apartments in Chinese cities — roughly 65 million — sit unoccupied, estimates Gan Li, a professor at Southwestern University of Finance and Economics in Chengdu.”
It's difficult to fathom 65 million vacant apartment units – more than 20% of China’s housing stock. What is the scope of future bad debts and bank impairment associated with such a fiasco? Economic impact – China and globally? Financial ramifications? With a bear market in Chinese equities, China’s vulnerable Bubble Economy and waning global growth, it’s perfectly reasonable for the world to start really worrying about China’s vulnerable apartment Bubble. With all the Friday excitement surrounding Powell and rallying U.S. equities, it’s worth noting that Asian shares underperformed this week. Copper declined another 1.3%.
Along with sinking Treasury and bund yields, there’s ample evidence that something lurking out there is stirring up a palpable degree of angst. And I would like to be more sanguine about U.S. economic prospects, especially considering strong December payroll data. I’m actually not expecting the economy to just fall off a cliff. Tightened financial conditions are a relatively recent development. Barring an accident, it might take some time for faltering markets to feed into the real economy. Yet the U.S. has a Bubble Economy structure unusually vulnerable to deflating securities and asset markets. It also faces perilous structural issues throughout its securities markets and financial system more generally. I certainly believe the U.S. is highly exposed to the unfolding issue of illiquidity afflicting global financial markets.
January 4 – Bloomberg (Rizal Tupaz): “Investors pulled the most money out of investment-grade bond funds in three years last week amid the ongoing turmoil in credit markets. The funds lost $4.5 billion for the weekly reporting period ending Jan. 2, the biggest outflow since December 2015, according to Lipper. That marks the sixth straight retreat by investors. High-yield funds saw a seventh week in a row of outflows as investors yanked $628 million versus the previous period’s $3.9 billion.”
For the Week:
The S&P500 gained 1.9% (up 1.0% y-t-d), and the Dow rose 1.6% (up 0.5%). The Utilities slipped 0.2% (down 0.3%). The Banks surged 4.7% (up 4.0%), and the Broker/Dealers jumped 4.0% (up 3.2%). The Transports increased 1.3% (up 0.6%). The S&P 400 Midcaps gained 2.3% (up 1.3%), and the small cap Russell 2000 jumped 3.2% (up 2.4%). The Nasdaq100 rose 2.2% (up 1.5%). The Semiconductors slipped 0.3% (down 1.0%). The Biotechs surged 6.8% (up 4.4%). With bullion up $4, the HUI gold index rose 2.6% (up 1.1%).
Three-month Treasury bill rates ended the week at 2.36%. Two-year government yields declined two bps to 2.49% (up 53bps y-o-y). Five-year T-note yields fell five bps to 2.50% (up 21bps). Ten-year Treasury yields declined five bps to 2.67% (up 19bps). Long bond yields fell four bps to 2.98% (up 17bps). Benchmark Fannie Mae MBS yields dropped seven bps to 3.46% (up 42bps).
Greek 10-year yields gained four bps to 4.39% (up 66bps y-o-y). Ten-year Portuguese yields jumped nine bps to 1.81% (down 13bps). Italian 10-year yields surged 16 bps to 2.90% (up 89bps). Spain's 10-year yields rose six bps to 1.47% (down 5bps). German bund yields declined three bps to 0.21% (down 23bps). French yields slipped a basis point to 0.70% (down 10bps). The French to German 10-year bond spread widened two to 49 bps. U.K. 10-year gilt yields added one basis point to 1.28% (up 3bps). U.K.'s FTSE equities index rallied 1.5% (up 1.6% y-t-d).
Japan's Nikkei 225 equities index dropped 2.3% (down 2.3% y-t-d). Japanese 10-year "JGB" yields fell four bps to negative 0.04% (down 10bps y-o-y). France's CAC40 gained 1.2% (up 0.1% y-t-d). The German DAX equities index recovered 2.0% (up 2.0%). Spain's IBEX 35 equities index jumped 2.9% (up 2.3%). Italy's FTSE MIB index rose 2.8% (up 2.8%). EM equities were mixed. Brazil's Bovespa index surged 4.5% to all-time highs (up 4.5%), and Mexico's Bolsa gained 2.4% (up 2.0%). South Korea's Kospi index fell 1.5% (down 1.5%). India's Sensex equities index declined 1.1% (down 1.1%). China's Shanghai Exchange increased 0.8% (up 0.8%). Turkey's Borsa Istanbul National 100 index dropped 1.8% (down 2.7%). Russia's MICEX equities index rose 2.0% (up 2.0%).
Investment-grade bond funds saw outflows of $4.517 billion, and junk bond funds posted outflows of $628 million (from Lipper).
Freddie Mac 30-year fixed mortgage rates fell four bps to an eight-month low 4.51% (up 56bps y-o-y). Fifteen-year rates declined two bps to 3.99% (up 61bps). Five-year hybrid ARM rates dipped two bps to 3.98% (up 53bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down four bps to a ten-month low 4.38% (up 25bps).
Federal Reserve Credit last week declined $15.0bn to $4.029 TN. Over the past year, Fed Credit contracted $379bn, or 8.6%. Fed Credit inflated $1.218 TN, or 43%, over the past 321 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt fell $7.9bn last week to $3.389 TN. "Custody holdings" rose $33bn y-o-y, or 1.0%.
M2 (narrow) "money" supply surged $84.5bn last week to a record $14.498 TN. "Narrow money" gained $663bn, or 4.8%, over the past year. For the week, Currency declined $1.4bn. Total Checkable Deposits jumped $64.8bn, and Savings Deposits added $8.9bn. Small Time Deposits rose $5.4bn. Retail Money Funds gained $6.9bn.
Total money market fund assets gained $8.5bn to a near nine-year high $3.047 TN. Money Funds gained $209bn y-o-y, or 7.4%.
Total Commercial Paper dropped $10.6bn to near an 13-month low $1.045 TN. CP declined $41.2bn y-o-y, or 3.8%.
Currency Watch:
The U.S. dollar index slipped 0.2% to 96.179 (unchanged y-t-d). For the week on the upside, the Brazilian real increased 4.3%, the South African rand 3.4%, the Canadian dollar 2.0%, the Japanese yen 1.6%, the Mexican peso 1.2%, the Norwegian krone 1.1%, the Australian dollar 0.9%, the Singapore dollar 0.5%, the Swedish krona 0.3%, the New Zealand dollar 0.2% and the British pound 0.2%. For the week on the downside, the South Korean won declined 0.8%, the euro 0.4% and the Swiss franc 0.3%. The Chinese renminbi increased 0.14% versus the dollar this week (up 0.14% y-t-d).
Commodities Watch:
The Goldman Sachs Commodities Index rallied 3.2% (up 3.3% y-t-d). Spot Gold added $4 to $1,285 (up 0.2%). Silver jumped 2.3% to $15.786 (up 1.6%). Crude recovered $2.63 to $47.96 (up 5.6%). Gasoline gained 1.6% (up 3.5%), while Natural Gas sank 7.8% (up 3.5%). Copper declined 1.3% (up 1%). Wheat gained 1.1% (up 3%). Corn fell 1.5% (up 2%).
2018 in Review:
December 30 – Financial Times (Don Weinland): “A trade dispute with the US and a crackdown on shadow banking made China the world’s worst-performing major stock market in 2018, shedding some $2.3tn in value. Investors say that while China’s intensifying trade war with the US grabbed much of the attention, a government campaign against leverage in the financial system played a big role in slowing market demand and forcing some funds into liquidation. China’s benchmark CSI 300 index will finish the year close to 3,000, down more than 25% from where it started 2018…”
December 31 – Bloomberg (Christopher DeReza): “U.S. investment-grade credit spreads are at the highest level in more than two years as the market nears the end of 2018 with the worst returns in a decade. High-grade bonds are returning -2.75% this year as of the start of the final trading day of 2018, which is the biggest loss since the asset class lost 4.94% in 2008, according to the Bloomberg Barclays U.S. corporate index… Investment-grade bond spreads held at 152 bps Friday.”
January 2 – Bloomberg (Natalya Doris): “It may be the end of an era. If all the pieces that suppressed U.S. investment-grade corporate bond issuance in 2018 remain in place, what has been a decade of heavy bond sales could come to an end in 2019. Borrowers sold nearly $1.1 trillion of bonds in 2018, just short of 2017’s record $1.2 trillion. Analysts expect some of the main drivers of the decline -- corporate repatriation of cash, borrowing costs rising off of record lows, and broader uncertainty, somewhat offset by strong M&A-related supply – to persist in the new year, affecting some sectors more than others.”
December 30 – Financial Times (Joe Rennison): “Investors have withdrawn a record amount of cash from funds invested in junk-rated debt in 2018 as sentiment over the outlook for the economy has soured and oil prices plummeted. The total outflow from US high-yield bond funds is on track to exceed $60bn, according to… EPFR Global, double the amount withdrawn last year… It is also double the amount withdrawn in 2014, another period when oil prices fell sharply. Energy companies account for about 15% of the junk bonds outstanding, so the 20% fall in the oil price this year has damped investor appetite for the companies’ debt.”
January 2 – Bloomberg (Kelsey Butler): “There was no U.S. high-yield bond issuance last month for the first time in at least 10 years… There hasn’t been a December with no openly syndicated high-yield bond issuance in at least 12 years… December 2017 saw $19.9b in sales, up from $18.6b in the last month of 2016. There was $5.2b in volume during November 2018. High-yield issuance dropped 42.3% last year as rising rates and volatility made bond markets less attractive to issuers…”
January 2 – Bloomberg (Lisa Lee and Lara Wieczezynski): “December brought to a dismal end the second-biggest year on record for U.S. leveraged loan issuance. The outlook is rocky as volatility sets in. U.S. leveraged loan sales fell to $814b in 2018, down 25% from the record $1.1t sold in 2017…”
January 32 – Bloomberg: “Bank of China was the top underwriter of emerging market bonds in 2018 as the value of deals fell 1%. Issuers sold $1.97 trillion of bonds vs. $1.99 trillion in 2017, according to… Bloomberg League Tables. Bank of China ranked No. 1 capturing 4.23%...”
January 32 – Bloomberg: “Bank of China was the top underwriter of Offshore China bonds in 2018 as the value of deals fell 23%. Issuers sold $166.2 billion of bonds vs. $215.8 billion in 2017, according to… Bloomberg League Tables…”
December 29 – Reuters (Douglas Busvine): “Deutsche Bank is strong and its turnaround strategy is bearing fruit, Chairman Paul Achleitner said, ruling out the need for state aid and playing down speculation that the lossmaking German bank should merge.”
Market Dislocation Watch:
January 2 – Reuters (Abhinav Ramnarayan): “Benchmark German government bond yields were set for their biggest one-day fall since September 2016 after business surveys in China and the euro zone underlined worries about the global growth outlook and hit stock markets.”
January 2 – Reuters (Trevor Hunnicutt): “U.S. fund investors anguished over economic growth and policies pulled the most cash from stocks in any weekly period since last February, Investment Company Institute data showed… Mutual funds and exchange-traded funds (ETFs) tracked by the trade group reported $37.8 billion in withdrawals overall, a 12th week of declines and the most cash pulled since a Chinese growth scare in August 2015. More than $21 billion tumbled out of stock funds during the week ended Dec. 26, the most since February 2018.”
December 29 – Reuters (Rich Barbieri and David Goldman): “The past two weeks on Wall Street have been epic. In the last 10 trading days, the Dow fell more than 350 points six times. There was also one day when the Dow rose by 1,000 points — the biggest point gain ever. The market is in an historic period of volatility. The S&P 500 was up or down more than 1% nine times in December and 64 times this year. In all of 2017, that happened only eight times.”
January 3 – Bloomberg (Edward Bolingbroke and Emily Barrett): “Bond traders are showing little sign of stepping back from their fight with the Federal Reserve over the path of interest rates and the market is now positioned for cuts on the horizon. Just over a month ago the market was pointing to a quarter-point hike in 2019, but it’s now factoring in a more than 50% chance of a reduction this year. That’s in stark contrast to the median projection of two increases projected by Fed officials last month. On top of that, traders are now fully pricing in a cut by April 2020. The rate on the June 2020 U.S. dollar overnight index swap, which was close to 3% less than two months ago, dropped as low as 2.04% on Thursday -- suggesting a benchmark rate more than 30 bps below the current effective fed funds rate by the middle of 2020.”
January 2 – Bloomberg (Lisa Lee): “U.S. leveraged loans suffered their biggest loss in December since mid-2011, following record-breaking fund outflows. Despite this, the floating-rate asset class eked out a slim gain for 2018. Loans posted a 2.5% loss in December, the worst since August 2011… This followed a 0.9% drop in November and compared to a 2.1% loss for U.S. junk bonds last month… Still, loans held onto a rare gain in U.S. credit markets, rising 0.44% as high-yield bonds lost 2.1% and investment-grade bonds fell 2.5% for the year.”
Trump Administration Watch:
December 29 – Reuters (Yeganeh Torbati and Ryan Woo): “U.S. President Donald Trump said on Twitter that he had a ‘long and very good call’ with Chinese President Xi Jinping and that a possible trade deal between the United States and China was progressing well. As a partial shutdown of the U.S. government entered its eighth day, with no quick end in sight, the Republican president was in Washington, sending out tweets attacking Democrats and talking up possibly improved relations with China.”
January 2 – CNBC (Fred Imbert): “U.S. Trade Representative Robert Lighthizer has warned President Donald Trump that additional tariffs on Chinese imports may be needed to get meaningful concessions in trade negotiations… Lighthizer, who is taking the lead in trade negotiations with China, has told friends and associates he is intent on preventing Trump from accepting ‘empty promises’ like temporary increases in soybean purchases, the newspaper said. In order to avoid this, the U.S. may have to slap tariffs on more Chinese goods, Lighthizer reportedly said.”
December 31 – Wall Street Journal (Bob Davis): “The U.S. is urging Beijing to fill in the details of a slew of trade and investment proposals Chinese officials have made recently, as the two sides try to resolve a trade battle that has rocked global markets. Since President Trump and Chinese President Xi Jinping met in Buenos Aires on Dec. 1, Beijing has pledged to cut tariffs, buy more U.S. goods and services, ease restrictions on foreign companies operating in China and further open sectors for foreign investment. But details have been scant. That has led to skepticism in the administration that the initiatives will lead to meaningful progress unless Beijing specifies the types of changes it will adopt, the schedule for implementing them and ways to enforce the pledges, said people tracking the talks.”
Federal Reserve Watch:
January 3 – Bloomberg (Jeanna Smialek): “Federal Reserve Bank of Dallas President Robert Kaplan said the U.S. central bank should put interest rates on hold as it waits to see how uncertainties about global growth, weakness in interest-sensitive industries and tighter financial conditions play out. ‘We should not take any further action on interest rates until these issues are resolved, for better, for worse,’ Kaplan told Bloomberg’s Michael McKee… ‘So I would be an advocate of taking no action and -- for example -- in the first couple of quarters this year, if you asked me my base case, my base case would be take no action at all.’ Kaplan, who next votes on policy in 2020, also indicated a willingness to be open-minded about adjusting the Fed’s balance-sheet runoff if needed -- something some market commentators have been calling for but the central bank has resisted to date.”
U.S. Bubble Watch:
January 3 – Bloomberg (Jeff Kearns): “A gauge of U.S. manufacturing plunged last month by the most since October 2008, a fresh sign of deceleration in the economy amid global strains across the sector. U.S. stocks extended declines and Treasury yields fell after the report. The Institute for Supply Management index dropped to a two-year low of 54.1, missing all estimates in Bloomberg’s survey… All five main components declined, led by new orders slumping the most in almost five years and the steepest slide for production since early 2012. Employment, delivery and inventory gauges fell, and ISM said just 11 of 18 industries reported growth in December, the fewest in two years. The index compiled from a survey of manufacturers has tumbled sharply from a 14-year high in August..."
January 3 – CNBC (Jeff Cox): “Contrary to growing concerns about a potentially slowing U.S. economy, job creation surged in December as measured by the latest ADP/Moody’s Analytics survey… Companies added 271,000 new positions as 2018 came to a close, smashing estimates of 178,000… It was the survey’s best month since February 2017, which saw a gain of 280,000, and brought the average monthly gain for last year to 206,000.”
December 29 – Wall Street Journal (Sam Goldfarb and Rachel Louise Ensign): “In the aftermath of the financial crisis, a swath of individuals and families began a long and painful deleveraging process. Businesses, meanwhile, quickly moved in the opposite direction—loading up on cheap debt to the point where many observers now worry that highly leveraged companies pose a threat to the global economy. U.S. corporate debt has climbed to roughly 46% of gross domestic product, the highest on record… Businesses in emerging markets, such as China, have gone on an even bigger borrowing binge, taking advantage of ultralow interest rates and, in some cases, state-driven policies designed to propel economies forward.”
December 30 – Wall Street Journal (Dana Mattioli, Dana Cimilluca and Ben Dummett): “The year got off to a fast start for deal making as companies struck mergers including Takeda Pharmaceutical Co.’s $63 billion acquisition of Shire PLC. The pace was so torrid, some thought 2018 would be the biggest year ever for M&A. But choppy financial markets, trade tensions and fears of an economic slowdown hampered deal makers when they returned from summer vacation. It was still a good year and is set to go down as the third-busiest ever for M&A, trailing only 2007 and 2015, with more than $3.8 trillion in announced deals. It was also a good year for the bankers and lawyers who helped arrange all those corporate marriages, for which they reap fees that can run into the tens of millions of dollars.”
December 29 – Wall Street Journal (Jared S. Hopkins): “Pharmaceutical companies are ringing in the new year by raising the price of hundreds of drugs, with Allergan PLC setting the pace with increases of nearly 10% on more than two dozen products… Many companies’ increases are relatively modest this year, amid growing public and political pressure on the industry over prices. Yet a few are particularly high, including on some generics, the cheaper alternative to branded accounting for nine out of 10 prescriptions filled in the U.S. Overall, price increases, including recently restored price increases from Pfizer Inc. continue to exceed inflation.”
January 4 – Bloomberg (Mark Chediak and Margot Habiby): “PG&E Corp. is considering filing for bankruptcy protection within weeks as a way of organizing billions of dollars in potential liabilities tied to deadly wildfires that ravaged parts of California in 2017 and 2018, according to people familiar with the situation. The California utility giant may decide to file by February, said the people… A bankruptcy filing isn’t certain and is one of a number of steps being considered… PG&E said in a statement that it’s ‘working diligently to assess the company’s potential liabilities as a result of the wildfires and the options for addressing those liabilities.’ …The stock slid as much as 32% in after-hours trading.”
January 2 – Wall Street Journal (Bradley Olson, Rebecca Elliott and Christopher M. Matthews): “Thousands of shale wells drilled in the last five years are pumping less oil and gas than their owners forecast to investors, raising questions about the strength and profitability of the fracking boom that turned the U.S. into an oil superpower. The Wall Street Journal compared the well-productivity estimates that top shale-oil companies gave investors to projections from third parties about how much oil and gas the wells are now on track to pump over their lives, based on public data of how they have performed to date. Two-thirds of projections made by the fracking companies between 2014 and 2017 in America’s four hottest drilling regions appear to have been overly optimistic, according to the analysis of some 16,000 wells operated by 29 of the biggest producers in oil basins in Texas and North Dakota.”
January 2 – Reuters (Sanjana Shivdas): “U.S. office vacancy rate rose to 16.7% in the fourth quarter from 16.4% a year earlier, according to real estate research firm Reis Inc. Net absorption, measured in terms of available office space sold in the market during a certain time period, dropped to 7.4 million sq ft of office space in the quarter, compared with 7.6 million sq ft a year earlier.”
January 3 – Bloomberg (Justina Vasquez): “Manhattan home prices fell in the fourth quarter, with the median slipping to less than $1 million for the first time in three years, as ample inventory continued to allow buyers to demand sweeter deals. Condo and co-op prices declined to $999,000 in the three months through December, a drop of 5.8% from a year earlier, appraiser Miller Samuel Inc. and brokerage Douglas Elliman Real Estate said... Many apartments were sold for less than sellers originally sought, with an average discount of 6.2% from the last list price. That’s up from price cuts of 5.4% a year earlier.”
China Watch:
December 28 – Bloomberg: “A rough year for China’s markets draws to a close, with tired stocks near multiyear lows. The yuan, despite a bump higher this month, is still one of the weakest Asian currencies in 2018. At least bonds have done OK. Equities have demanded plenty of attention due to the eye-watering size of the slump -- $3 trillion wiped off China’s stock market since a January… The yuan’s near 8% slide from June to mid-August also weighed on sentiment over a bruising summer.”
January 2 – Reuters (Stella Qiu and Ryan Woo): “China’s factory activity contracted for the first time in 19 months in December as domestic and export orders continued to weaken, a private survey showed, pointing to a rocky start for the world’s second-largest economy in 2019… The Caixin/Markit Manufacturing Purchasing Managers’ Index (PMI) for December… fell to 49.7 from 50.2 in November, marking the first contraction since May 2017.”
December 31 – Bloomberg: “Chinese President Xi Jinping stressed self- reliance amid ‘changes unseen in 100 years,’ as the country faced an economic slowdown and a more confrontational U.S. under President Donald Trump. In his annual New Year’s Eve address, Xi stressed China’s capacity to weather the storm, citing a series of industrial and technological achievements in 2018. He said the government would keep growth from slowing too quickly and follow through on a tax cut as part of an effort ‘to ease the burden on enterprises.’ ‘Despite all sorts of risks and challenges, we pushed our economy towards high-quality development, sped up the replacement of the old drivers of growth, and kept the major economic indicators within a reasonable range,’ Xi said.”
January 2 – Reuters (Andrew Galbraith): “China will not yield on issues it deems to be its core national interests, a commentary in the ruling Communist Party’s official newspaper said…, a day after China’s president called for cooperation with the United States. ‘In matters related to core national interests, China has not given in, is not giving in, and will never give in,’ the People’s Daily commentary said.”
January 2 – Reuters (Kevin Yao): “China’s economic growth could fall below 6.5% in the fourth quarter as companies face increased difficulties, a central bank magazine said… ‘The trend of economic slowdown still continues, and the slowing momentum is increasing. The fourth quarter GDP growth is very possible to be lower than 6.5%,’ said China Finance magazine, which is published by the People’s Bank of China.”
January 2 – Bloomberg: “China will cut the reserve requirement ratio and improve funding conditions this month, as liquidity tightens toward the Spring Festival holidays, the country’s largest securities firm says. Fresh demand for funds will amount to nearly 4.3 trillion yuan ($625 billion) in January, according to Citic Securities… Mainland residents will withdraw 1 trillion yuan of cash in preparation for the holiday, when money is gifted in red envelopes. Corporate tax payments and maturities of lenders’ interbank debt will also mop up liquidity, prompting authorities to step up cash injections.”
December 30 – Bloomberg: “China announced plans to rein in the expansion of lending by the nation’s regional banks to areas beyond their home bases, the latest step policy makers have taken to defend against financial risk in the world’s second-biggest economy. Those lenders, which include rural cooperatives, must have the proper licenses to provide financing beyond the region where they’re based, or else must wind down those businesses, the China Banking and Insurance Regulatory Commission said…”
EM Watch:
December 31 – Reuters (Anthony Boadle): “Brazil’s newly inaugurated President Jair Bolsonaro said… his election had freed the country from ‘socialism and political correctness,’ and he vowed to tackle corruption, crime and economic mismanagement in Latin America’s largest nation. Bolsonaro, a former army captain turned lawmaker who openly admires Brazil’s 1964-1985 military dictatorship, promised in his first remarks as president to adhere to democratic norms, after his tirades against the media and political opponents had stirred unease.”
January 2 – Bloomberg (Subhadip Sircar): “Fiscal worries are back to haunt India’s sovereign bonds just after they posted the best quarter in four years. Prime Minister Narendra Modi’s party, which recently met with electoral losses in key states, is said to be preparing to unveil a farm-relief package ahead of general elections due by May. The prospect of substantial aid for farmers at a time when the nation’s tax and asset sales collections are lagging estimates is stoking fears that India may miss its fiscal deficit target. ‘Fiscal concerns are again taking center-stage,’ said Badrish Kulhalli, head of fixed income at HDFC Standard Life Insurance Co. ‘Any extra spending on a large farm relief package when the government is falling short on indirect tax and divestment revenue may lead to a high fiscal slippage.’”
Global Bubble Watch:
January 1 – Reuters (Jonathan Cable and Marius Zaharia): “Factory activity weakened across much of Europe and Asia in December as the U.S.-China trade war and a slowdown in demand hit production in many economies, offering little reason for optimism as the new year begins. A series of purchasing managers’ indexes for December… mostly showed declines or slowdowns in manufacturing activity across the globe.”
December 31 – Reuters (Sujata Rao, Ritvik Carvalho): “U.S. companies have sent home over half a trillion dollars of cash they held overseas in 2018 to take advantage of tax changes, but data suggest the pace is slowing, potentially removing a key source of support for Wall Street. Dollar repatriation in the July-September period fell to $93 billion, around half of second-quarter volumes and less than a third of the $300 billion or so sent home from January to March, U.S. current account data shows. The repatriation bonanza followed new regulations that allowed the U.S. government to tax profits accumulated overseas, regardless of where the money was held… The current account data shows repatriation in all sectors. Looking at just non-financial companies, JPMorgan calculates $60 billion was repatriated in the third quarter, versus $225 billion in the first quarter and $115 billion in the second quarter.”
December 31 – Wall Street Journal (Mike Bird): “The banks hit hardest by the financial crisis have retreated from overseas lending in the decade since the 2008 collapse of Lehman Brothers, marking a rare example of a sector in which leverage has been curtailed even as global debt has boomed. The total amount of cross-border bank debt has dropped from a peak of $35.453 trillion in the first quarter of 2008 to $29.456 trillion in the second quarter of this year, a fall of nearly 17%. The decline in interbank lending—the credit banks extend to other banks—has been particularly steep. The 10-year period of decline and stagnation is unprecedented in the records of the Bank for International Settlements, which monitors global financial trends.”
Europe Watch:
January 2 – Bloomberg (Sotiris Nikas): “After emerging from its steepest economic crisis in living memory, Greece still has a mountain to climb in 2019 if it’s to consummate its comeback with a sustained return to bond markets. The government plans to issue as much as 7 billion euros ($8 billion) of new debt this year, using part of its cash buffer to repay some International Monetary Fund loans early. The finance ministry could test markets with a short or medium-term note as soon as this month if market conditions allow it…”
Japan Watch:
January 3 – Bloomberg (Cecile Vannucci): “For Japanese investors, skepticism remains high after a year that has seen $938 billion of stock values vanish. The cost of hedging against declines in the Nikkei 225 Stock Average is near its highest level since February 2016… The gauge’s 10% slide in December worsened its first annual slump since 2011.”
Fixed-Income Bubble Watch:
January 1 – Financial Times (Mark Vandevelde): “A $2bn loan fund that was once managed by Blackstone has seen its market value plunge by more than a quarter since private equity rival KKR took over management of the vehicle in April. The stark reversal at Franklin Square Investment Corp highlights the uncertainties facing credit funds that have displaced banks as major lenders to the midsized companies that are the economic engine of middle America. It also shows how two of the most powerful investment firms in the US are taking sharply different views of investments forged in the heat of a credit boom, at a time when investors and central bankers are warning of dangerously loose lending standards.”
Leveraged Speculation Watch:
January 2 – Bloomberg (Katherine Burton, Katia Porzecanski and Nishant Kumar): “Hedge fund managers set on starting their own firms in 2019 face the worst money-raising environment in years. Only one is slated to begin with more than $1 billion: San Francisco-based Woodline Partners… ‘You have to be borderline crazy to be starting a hedge fund in this environment and the only way you should do it is if you feel you have something differentiated to offer,’ said Ilana Weinstein, founder and chief executive officer of IDW Group, a hedge fund recruiter.”
Geopolitical Watch:
January 2 – Bloomberg: “Chinese President Xi Jinping said Taiwan must be unified with the mainland to achieve his goal of completing the country’s rejuvenation. ‘China must and will be united, which is an inevitable requirement for the historical rejuvenation of the Chinese nation in the new era,” Xi told a gathering in Beijing to mark the 40th anniversary of a landmark Beijing overture to Taipei... Xi also sent a warning to advocates of Taiwan’s independence, who include supporters of Taiwanese President Tsai Ing-wen. ‘It’s a legal fact that both sides of the straits belong to one China, and cannot be changed by anyone or any force,’ Xi said. Tsai warned against continued threats from China in her New Year’s Day address Tuesday, signaling a hard line despite her recent election losses to Taiwan’s more Beijing-friendly Kuomintang opposition.”
December 31 – Reuters (Hyonhee Shin and Soyoung Kim): “North Korean leader Kim Jong Un said… he is ready to meet U.S. President Donald Trump again anytime to achieve their common goal of denuclearizing the Korean Peninsula, but warned he may have to take an alternative path if U.S. sanctions and pressure against the country continued. In a nationally televised New Year address, Kim said denuclearization was his ‘firm will’ and North Korea had ‘declared at home and abroad that we would neither make and test nuclear weapons any longer nor use and proliferate them.’”
January 2 – Reuters (Mary Milliken and Gabrielle Tétrault-Farber): “The United States wants an explanation for why Russia detained a former U.S. Marine on spying charges in Moscow and will demand his immediate return if it determines his detention is inappropriate, Secretary of State Mike Pompeo said…”
January 1 – Reuters (Jessie Pang and James Pomfret): “Thousands of demonstrators marched in Hong Kong on Tuesday to demand full democracy, fundamental rights, and even independence from China in the face of what many see as a marked clampdown by the Communist Party on local freedoms.”
The S&P500 gained 1.9% (up 1.0% y-t-d), and the Dow rose 1.6% (up 0.5%). The Utilities slipped 0.2% (down 0.3%). The Banks surged 4.7% (up 4.0%), and the Broker/Dealers jumped 4.0% (up 3.2%). The Transports increased 1.3% (up 0.6%). The S&P 400 Midcaps gained 2.3% (up 1.3%), and the small cap Russell 2000 jumped 3.2% (up 2.4%). The Nasdaq100 rose 2.2% (up 1.5%). The Semiconductors slipped 0.3% (down 1.0%). The Biotechs surged 6.8% (up 4.4%). With bullion up $4, the HUI gold index rose 2.6% (up 1.1%).
Three-month Treasury bill rates ended the week at 2.36%. Two-year government yields declined two bps to 2.49% (up 53bps y-o-y). Five-year T-note yields fell five bps to 2.50% (up 21bps). Ten-year Treasury yields declined five bps to 2.67% (up 19bps). Long bond yields fell four bps to 2.98% (up 17bps). Benchmark Fannie Mae MBS yields dropped seven bps to 3.46% (up 42bps).
Greek 10-year yields gained four bps to 4.39% (up 66bps y-o-y). Ten-year Portuguese yields jumped nine bps to 1.81% (down 13bps). Italian 10-year yields surged 16 bps to 2.90% (up 89bps). Spain's 10-year yields rose six bps to 1.47% (down 5bps). German bund yields declined three bps to 0.21% (down 23bps). French yields slipped a basis point to 0.70% (down 10bps). The French to German 10-year bond spread widened two to 49 bps. U.K. 10-year gilt yields added one basis point to 1.28% (up 3bps). U.K.'s FTSE equities index rallied 1.5% (up 1.6% y-t-d).
Japan's Nikkei 225 equities index dropped 2.3% (down 2.3% y-t-d). Japanese 10-year "JGB" yields fell four bps to negative 0.04% (down 10bps y-o-y). France's CAC40 gained 1.2% (up 0.1% y-t-d). The German DAX equities index recovered 2.0% (up 2.0%). Spain's IBEX 35 equities index jumped 2.9% (up 2.3%). Italy's FTSE MIB index rose 2.8% (up 2.8%). EM equities were mixed. Brazil's Bovespa index surged 4.5% to all-time highs (up 4.5%), and Mexico's Bolsa gained 2.4% (up 2.0%). South Korea's Kospi index fell 1.5% (down 1.5%). India's Sensex equities index declined 1.1% (down 1.1%). China's Shanghai Exchange increased 0.8% (up 0.8%). Turkey's Borsa Istanbul National 100 index dropped 1.8% (down 2.7%). Russia's MICEX equities index rose 2.0% (up 2.0%).
Investment-grade bond funds saw outflows of $4.517 billion, and junk bond funds posted outflows of $628 million (from Lipper).
Freddie Mac 30-year fixed mortgage rates fell four bps to an eight-month low 4.51% (up 56bps y-o-y). Fifteen-year rates declined two bps to 3.99% (up 61bps). Five-year hybrid ARM rates dipped two bps to 3.98% (up 53bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down four bps to a ten-month low 4.38% (up 25bps).
Federal Reserve Credit last week declined $15.0bn to $4.029 TN. Over the past year, Fed Credit contracted $379bn, or 8.6%. Fed Credit inflated $1.218 TN, or 43%, over the past 321 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt fell $7.9bn last week to $3.389 TN. "Custody holdings" rose $33bn y-o-y, or 1.0%.
M2 (narrow) "money" supply surged $84.5bn last week to a record $14.498 TN. "Narrow money" gained $663bn, or 4.8%, over the past year. For the week, Currency declined $1.4bn. Total Checkable Deposits jumped $64.8bn, and Savings Deposits added $8.9bn. Small Time Deposits rose $5.4bn. Retail Money Funds gained $6.9bn.
Total money market fund assets gained $8.5bn to a near nine-year high $3.047 TN. Money Funds gained $209bn y-o-y, or 7.4%.
Total Commercial Paper dropped $10.6bn to near an 13-month low $1.045 TN. CP declined $41.2bn y-o-y, or 3.8%.
Currency Watch:
The U.S. dollar index slipped 0.2% to 96.179 (unchanged y-t-d). For the week on the upside, the Brazilian real increased 4.3%, the South African rand 3.4%, the Canadian dollar 2.0%, the Japanese yen 1.6%, the Mexican peso 1.2%, the Norwegian krone 1.1%, the Australian dollar 0.9%, the Singapore dollar 0.5%, the Swedish krona 0.3%, the New Zealand dollar 0.2% and the British pound 0.2%. For the week on the downside, the South Korean won declined 0.8%, the euro 0.4% and the Swiss franc 0.3%. The Chinese renminbi increased 0.14% versus the dollar this week (up 0.14% y-t-d).
Commodities Watch:
The Goldman Sachs Commodities Index rallied 3.2% (up 3.3% y-t-d). Spot Gold added $4 to $1,285 (up 0.2%). Silver jumped 2.3% to $15.786 (up 1.6%). Crude recovered $2.63 to $47.96 (up 5.6%). Gasoline gained 1.6% (up 3.5%), while Natural Gas sank 7.8% (up 3.5%). Copper declined 1.3% (up 1%). Wheat gained 1.1% (up 3%). Corn fell 1.5% (up 2%).
2018 in Review:
December 30 – Financial Times (Don Weinland): “A trade dispute with the US and a crackdown on shadow banking made China the world’s worst-performing major stock market in 2018, shedding some $2.3tn in value. Investors say that while China’s intensifying trade war with the US grabbed much of the attention, a government campaign against leverage in the financial system played a big role in slowing market demand and forcing some funds into liquidation. China’s benchmark CSI 300 index will finish the year close to 3,000, down more than 25% from where it started 2018…”
December 31 – Bloomberg (Christopher DeReza): “U.S. investment-grade credit spreads are at the highest level in more than two years as the market nears the end of 2018 with the worst returns in a decade. High-grade bonds are returning -2.75% this year as of the start of the final trading day of 2018, which is the biggest loss since the asset class lost 4.94% in 2008, according to the Bloomberg Barclays U.S. corporate index… Investment-grade bond spreads held at 152 bps Friday.”
January 2 – Bloomberg (Natalya Doris): “It may be the end of an era. If all the pieces that suppressed U.S. investment-grade corporate bond issuance in 2018 remain in place, what has been a decade of heavy bond sales could come to an end in 2019. Borrowers sold nearly $1.1 trillion of bonds in 2018, just short of 2017’s record $1.2 trillion. Analysts expect some of the main drivers of the decline -- corporate repatriation of cash, borrowing costs rising off of record lows, and broader uncertainty, somewhat offset by strong M&A-related supply – to persist in the new year, affecting some sectors more than others.”
December 30 – Financial Times (Joe Rennison): “Investors have withdrawn a record amount of cash from funds invested in junk-rated debt in 2018 as sentiment over the outlook for the economy has soured and oil prices plummeted. The total outflow from US high-yield bond funds is on track to exceed $60bn, according to… EPFR Global, double the amount withdrawn last year… It is also double the amount withdrawn in 2014, another period when oil prices fell sharply. Energy companies account for about 15% of the junk bonds outstanding, so the 20% fall in the oil price this year has damped investor appetite for the companies’ debt.”
January 2 – Bloomberg (Kelsey Butler): “There was no U.S. high-yield bond issuance last month for the first time in at least 10 years… There hasn’t been a December with no openly syndicated high-yield bond issuance in at least 12 years… December 2017 saw $19.9b in sales, up from $18.6b in the last month of 2016. There was $5.2b in volume during November 2018. High-yield issuance dropped 42.3% last year as rising rates and volatility made bond markets less attractive to issuers…”
January 2 – Bloomberg (Lisa Lee and Lara Wieczezynski): “December brought to a dismal end the second-biggest year on record for U.S. leveraged loan issuance. The outlook is rocky as volatility sets in. U.S. leveraged loan sales fell to $814b in 2018, down 25% from the record $1.1t sold in 2017…”
January 32 – Bloomberg: “Bank of China was the top underwriter of emerging market bonds in 2018 as the value of deals fell 1%. Issuers sold $1.97 trillion of bonds vs. $1.99 trillion in 2017, according to… Bloomberg League Tables. Bank of China ranked No. 1 capturing 4.23%...”
January 32 – Bloomberg: “Bank of China was the top underwriter of Offshore China bonds in 2018 as the value of deals fell 23%. Issuers sold $166.2 billion of bonds vs. $215.8 billion in 2017, according to… Bloomberg League Tables…”
December 29 – Reuters (Douglas Busvine): “Deutsche Bank is strong and its turnaround strategy is bearing fruit, Chairman Paul Achleitner said, ruling out the need for state aid and playing down speculation that the lossmaking German bank should merge.”
Market Dislocation Watch:
January 2 – Reuters (Abhinav Ramnarayan): “Benchmark German government bond yields were set for their biggest one-day fall since September 2016 after business surveys in China and the euro zone underlined worries about the global growth outlook and hit stock markets.”
January 2 – Reuters (Trevor Hunnicutt): “U.S. fund investors anguished over economic growth and policies pulled the most cash from stocks in any weekly period since last February, Investment Company Institute data showed… Mutual funds and exchange-traded funds (ETFs) tracked by the trade group reported $37.8 billion in withdrawals overall, a 12th week of declines and the most cash pulled since a Chinese growth scare in August 2015. More than $21 billion tumbled out of stock funds during the week ended Dec. 26, the most since February 2018.”
December 29 – Reuters (Rich Barbieri and David Goldman): “The past two weeks on Wall Street have been epic. In the last 10 trading days, the Dow fell more than 350 points six times. There was also one day when the Dow rose by 1,000 points — the biggest point gain ever. The market is in an historic period of volatility. The S&P 500 was up or down more than 1% nine times in December and 64 times this year. In all of 2017, that happened only eight times.”
January 3 – Bloomberg (Edward Bolingbroke and Emily Barrett): “Bond traders are showing little sign of stepping back from their fight with the Federal Reserve over the path of interest rates and the market is now positioned for cuts on the horizon. Just over a month ago the market was pointing to a quarter-point hike in 2019, but it’s now factoring in a more than 50% chance of a reduction this year. That’s in stark contrast to the median projection of two increases projected by Fed officials last month. On top of that, traders are now fully pricing in a cut by April 2020. The rate on the June 2020 U.S. dollar overnight index swap, which was close to 3% less than two months ago, dropped as low as 2.04% on Thursday -- suggesting a benchmark rate more than 30 bps below the current effective fed funds rate by the middle of 2020.”
January 2 – Bloomberg (Lisa Lee): “U.S. leveraged loans suffered their biggest loss in December since mid-2011, following record-breaking fund outflows. Despite this, the floating-rate asset class eked out a slim gain for 2018. Loans posted a 2.5% loss in December, the worst since August 2011… This followed a 0.9% drop in November and compared to a 2.1% loss for U.S. junk bonds last month… Still, loans held onto a rare gain in U.S. credit markets, rising 0.44% as high-yield bonds lost 2.1% and investment-grade bonds fell 2.5% for the year.”
Trump Administration Watch:
December 29 – Reuters (Yeganeh Torbati and Ryan Woo): “U.S. President Donald Trump said on Twitter that he had a ‘long and very good call’ with Chinese President Xi Jinping and that a possible trade deal between the United States and China was progressing well. As a partial shutdown of the U.S. government entered its eighth day, with no quick end in sight, the Republican president was in Washington, sending out tweets attacking Democrats and talking up possibly improved relations with China.”
January 2 – CNBC (Fred Imbert): “U.S. Trade Representative Robert Lighthizer has warned President Donald Trump that additional tariffs on Chinese imports may be needed to get meaningful concessions in trade negotiations… Lighthizer, who is taking the lead in trade negotiations with China, has told friends and associates he is intent on preventing Trump from accepting ‘empty promises’ like temporary increases in soybean purchases, the newspaper said. In order to avoid this, the U.S. may have to slap tariffs on more Chinese goods, Lighthizer reportedly said.”
December 31 – Wall Street Journal (Bob Davis): “The U.S. is urging Beijing to fill in the details of a slew of trade and investment proposals Chinese officials have made recently, as the two sides try to resolve a trade battle that has rocked global markets. Since President Trump and Chinese President Xi Jinping met in Buenos Aires on Dec. 1, Beijing has pledged to cut tariffs, buy more U.S. goods and services, ease restrictions on foreign companies operating in China and further open sectors for foreign investment. But details have been scant. That has led to skepticism in the administration that the initiatives will lead to meaningful progress unless Beijing specifies the types of changes it will adopt, the schedule for implementing them and ways to enforce the pledges, said people tracking the talks.”
Federal Reserve Watch:
January 3 – Bloomberg (Jeanna Smialek): “Federal Reserve Bank of Dallas President Robert Kaplan said the U.S. central bank should put interest rates on hold as it waits to see how uncertainties about global growth, weakness in interest-sensitive industries and tighter financial conditions play out. ‘We should not take any further action on interest rates until these issues are resolved, for better, for worse,’ Kaplan told Bloomberg’s Michael McKee… ‘So I would be an advocate of taking no action and -- for example -- in the first couple of quarters this year, if you asked me my base case, my base case would be take no action at all.’ Kaplan, who next votes on policy in 2020, also indicated a willingness to be open-minded about adjusting the Fed’s balance-sheet runoff if needed -- something some market commentators have been calling for but the central bank has resisted to date.”
U.S. Bubble Watch:
January 3 – Bloomberg (Jeff Kearns): “A gauge of U.S. manufacturing plunged last month by the most since October 2008, a fresh sign of deceleration in the economy amid global strains across the sector. U.S. stocks extended declines and Treasury yields fell after the report. The Institute for Supply Management index dropped to a two-year low of 54.1, missing all estimates in Bloomberg’s survey… All five main components declined, led by new orders slumping the most in almost five years and the steepest slide for production since early 2012. Employment, delivery and inventory gauges fell, and ISM said just 11 of 18 industries reported growth in December, the fewest in two years. The index compiled from a survey of manufacturers has tumbled sharply from a 14-year high in August..."
January 3 – CNBC (Jeff Cox): “Contrary to growing concerns about a potentially slowing U.S. economy, job creation surged in December as measured by the latest ADP/Moody’s Analytics survey… Companies added 271,000 new positions as 2018 came to a close, smashing estimates of 178,000… It was the survey’s best month since February 2017, which saw a gain of 280,000, and brought the average monthly gain for last year to 206,000.”
December 29 – Wall Street Journal (Sam Goldfarb and Rachel Louise Ensign): “In the aftermath of the financial crisis, a swath of individuals and families began a long and painful deleveraging process. Businesses, meanwhile, quickly moved in the opposite direction—loading up on cheap debt to the point where many observers now worry that highly leveraged companies pose a threat to the global economy. U.S. corporate debt has climbed to roughly 46% of gross domestic product, the highest on record… Businesses in emerging markets, such as China, have gone on an even bigger borrowing binge, taking advantage of ultralow interest rates and, in some cases, state-driven policies designed to propel economies forward.”
December 30 – Wall Street Journal (Dana Mattioli, Dana Cimilluca and Ben Dummett): “The year got off to a fast start for deal making as companies struck mergers including Takeda Pharmaceutical Co.’s $63 billion acquisition of Shire PLC. The pace was so torrid, some thought 2018 would be the biggest year ever for M&A. But choppy financial markets, trade tensions and fears of an economic slowdown hampered deal makers when they returned from summer vacation. It was still a good year and is set to go down as the third-busiest ever for M&A, trailing only 2007 and 2015, with more than $3.8 trillion in announced deals. It was also a good year for the bankers and lawyers who helped arrange all those corporate marriages, for which they reap fees that can run into the tens of millions of dollars.”
December 29 – Wall Street Journal (Jared S. Hopkins): “Pharmaceutical companies are ringing in the new year by raising the price of hundreds of drugs, with Allergan PLC setting the pace with increases of nearly 10% on more than two dozen products… Many companies’ increases are relatively modest this year, amid growing public and political pressure on the industry over prices. Yet a few are particularly high, including on some generics, the cheaper alternative to branded accounting for nine out of 10 prescriptions filled in the U.S. Overall, price increases, including recently restored price increases from Pfizer Inc. continue to exceed inflation.”
January 4 – Bloomberg (Mark Chediak and Margot Habiby): “PG&E Corp. is considering filing for bankruptcy protection within weeks as a way of organizing billions of dollars in potential liabilities tied to deadly wildfires that ravaged parts of California in 2017 and 2018, according to people familiar with the situation. The California utility giant may decide to file by February, said the people… A bankruptcy filing isn’t certain and is one of a number of steps being considered… PG&E said in a statement that it’s ‘working diligently to assess the company’s potential liabilities as a result of the wildfires and the options for addressing those liabilities.’ …The stock slid as much as 32% in after-hours trading.”
January 2 – Wall Street Journal (Bradley Olson, Rebecca Elliott and Christopher M. Matthews): “Thousands of shale wells drilled in the last five years are pumping less oil and gas than their owners forecast to investors, raising questions about the strength and profitability of the fracking boom that turned the U.S. into an oil superpower. The Wall Street Journal compared the well-productivity estimates that top shale-oil companies gave investors to projections from third parties about how much oil and gas the wells are now on track to pump over their lives, based on public data of how they have performed to date. Two-thirds of projections made by the fracking companies between 2014 and 2017 in America’s four hottest drilling regions appear to have been overly optimistic, according to the analysis of some 16,000 wells operated by 29 of the biggest producers in oil basins in Texas and North Dakota.”
January 2 – Reuters (Sanjana Shivdas): “U.S. office vacancy rate rose to 16.7% in the fourth quarter from 16.4% a year earlier, according to real estate research firm Reis Inc. Net absorption, measured in terms of available office space sold in the market during a certain time period, dropped to 7.4 million sq ft of office space in the quarter, compared with 7.6 million sq ft a year earlier.”
January 3 – Bloomberg (Justina Vasquez): “Manhattan home prices fell in the fourth quarter, with the median slipping to less than $1 million for the first time in three years, as ample inventory continued to allow buyers to demand sweeter deals. Condo and co-op prices declined to $999,000 in the three months through December, a drop of 5.8% from a year earlier, appraiser Miller Samuel Inc. and brokerage Douglas Elliman Real Estate said... Many apartments were sold for less than sellers originally sought, with an average discount of 6.2% from the last list price. That’s up from price cuts of 5.4% a year earlier.”
China Watch:
December 28 – Bloomberg: “A rough year for China’s markets draws to a close, with tired stocks near multiyear lows. The yuan, despite a bump higher this month, is still one of the weakest Asian currencies in 2018. At least bonds have done OK. Equities have demanded plenty of attention due to the eye-watering size of the slump -- $3 trillion wiped off China’s stock market since a January… The yuan’s near 8% slide from June to mid-August also weighed on sentiment over a bruising summer.”
January 2 – Reuters (Stella Qiu and Ryan Woo): “China’s factory activity contracted for the first time in 19 months in December as domestic and export orders continued to weaken, a private survey showed, pointing to a rocky start for the world’s second-largest economy in 2019… The Caixin/Markit Manufacturing Purchasing Managers’ Index (PMI) for December… fell to 49.7 from 50.2 in November, marking the first contraction since May 2017.”
December 31 – Bloomberg: “Chinese President Xi Jinping stressed self- reliance amid ‘changes unseen in 100 years,’ as the country faced an economic slowdown and a more confrontational U.S. under President Donald Trump. In his annual New Year’s Eve address, Xi stressed China’s capacity to weather the storm, citing a series of industrial and technological achievements in 2018. He said the government would keep growth from slowing too quickly and follow through on a tax cut as part of an effort ‘to ease the burden on enterprises.’ ‘Despite all sorts of risks and challenges, we pushed our economy towards high-quality development, sped up the replacement of the old drivers of growth, and kept the major economic indicators within a reasonable range,’ Xi said.”
January 2 – Reuters (Andrew Galbraith): “China will not yield on issues it deems to be its core national interests, a commentary in the ruling Communist Party’s official newspaper said…, a day after China’s president called for cooperation with the United States. ‘In matters related to core national interests, China has not given in, is not giving in, and will never give in,’ the People’s Daily commentary said.”
January 2 – Reuters (Kevin Yao): “China’s economic growth could fall below 6.5% in the fourth quarter as companies face increased difficulties, a central bank magazine said… ‘The trend of economic slowdown still continues, and the slowing momentum is increasing. The fourth quarter GDP growth is very possible to be lower than 6.5%,’ said China Finance magazine, which is published by the People’s Bank of China.”
January 2 – Bloomberg: “China will cut the reserve requirement ratio and improve funding conditions this month, as liquidity tightens toward the Spring Festival holidays, the country’s largest securities firm says. Fresh demand for funds will amount to nearly 4.3 trillion yuan ($625 billion) in January, according to Citic Securities… Mainland residents will withdraw 1 trillion yuan of cash in preparation for the holiday, when money is gifted in red envelopes. Corporate tax payments and maturities of lenders’ interbank debt will also mop up liquidity, prompting authorities to step up cash injections.”
December 30 – Bloomberg: “China announced plans to rein in the expansion of lending by the nation’s regional banks to areas beyond their home bases, the latest step policy makers have taken to defend against financial risk in the world’s second-biggest economy. Those lenders, which include rural cooperatives, must have the proper licenses to provide financing beyond the region where they’re based, or else must wind down those businesses, the China Banking and Insurance Regulatory Commission said…”
EM Watch:
December 31 – Reuters (Anthony Boadle): “Brazil’s newly inaugurated President Jair Bolsonaro said… his election had freed the country from ‘socialism and political correctness,’ and he vowed to tackle corruption, crime and economic mismanagement in Latin America’s largest nation. Bolsonaro, a former army captain turned lawmaker who openly admires Brazil’s 1964-1985 military dictatorship, promised in his first remarks as president to adhere to democratic norms, after his tirades against the media and political opponents had stirred unease.”
January 2 – Bloomberg (Subhadip Sircar): “Fiscal worries are back to haunt India’s sovereign bonds just after they posted the best quarter in four years. Prime Minister Narendra Modi’s party, which recently met with electoral losses in key states, is said to be preparing to unveil a farm-relief package ahead of general elections due by May. The prospect of substantial aid for farmers at a time when the nation’s tax and asset sales collections are lagging estimates is stoking fears that India may miss its fiscal deficit target. ‘Fiscal concerns are again taking center-stage,’ said Badrish Kulhalli, head of fixed income at HDFC Standard Life Insurance Co. ‘Any extra spending on a large farm relief package when the government is falling short on indirect tax and divestment revenue may lead to a high fiscal slippage.’”
Global Bubble Watch:
January 1 – Reuters (Jonathan Cable and Marius Zaharia): “Factory activity weakened across much of Europe and Asia in December as the U.S.-China trade war and a slowdown in demand hit production in many economies, offering little reason for optimism as the new year begins. A series of purchasing managers’ indexes for December… mostly showed declines or slowdowns in manufacturing activity across the globe.”
December 31 – Reuters (Sujata Rao, Ritvik Carvalho): “U.S. companies have sent home over half a trillion dollars of cash they held overseas in 2018 to take advantage of tax changes, but data suggest the pace is slowing, potentially removing a key source of support for Wall Street. Dollar repatriation in the July-September period fell to $93 billion, around half of second-quarter volumes and less than a third of the $300 billion or so sent home from January to March, U.S. current account data shows. The repatriation bonanza followed new regulations that allowed the U.S. government to tax profits accumulated overseas, regardless of where the money was held… The current account data shows repatriation in all sectors. Looking at just non-financial companies, JPMorgan calculates $60 billion was repatriated in the third quarter, versus $225 billion in the first quarter and $115 billion in the second quarter.”
December 31 – Wall Street Journal (Mike Bird): “The banks hit hardest by the financial crisis have retreated from overseas lending in the decade since the 2008 collapse of Lehman Brothers, marking a rare example of a sector in which leverage has been curtailed even as global debt has boomed. The total amount of cross-border bank debt has dropped from a peak of $35.453 trillion in the first quarter of 2008 to $29.456 trillion in the second quarter of this year, a fall of nearly 17%. The decline in interbank lending—the credit banks extend to other banks—has been particularly steep. The 10-year period of decline and stagnation is unprecedented in the records of the Bank for International Settlements, which monitors global financial trends.”
Europe Watch:
January 2 – Bloomberg (Sotiris Nikas): “After emerging from its steepest economic crisis in living memory, Greece still has a mountain to climb in 2019 if it’s to consummate its comeback with a sustained return to bond markets. The government plans to issue as much as 7 billion euros ($8 billion) of new debt this year, using part of its cash buffer to repay some International Monetary Fund loans early. The finance ministry could test markets with a short or medium-term note as soon as this month if market conditions allow it…”
Japan Watch:
January 3 – Bloomberg (Cecile Vannucci): “For Japanese investors, skepticism remains high after a year that has seen $938 billion of stock values vanish. The cost of hedging against declines in the Nikkei 225 Stock Average is near its highest level since February 2016… The gauge’s 10% slide in December worsened its first annual slump since 2011.”
Fixed-Income Bubble Watch:
January 1 – Financial Times (Mark Vandevelde): “A $2bn loan fund that was once managed by Blackstone has seen its market value plunge by more than a quarter since private equity rival KKR took over management of the vehicle in April. The stark reversal at Franklin Square Investment Corp highlights the uncertainties facing credit funds that have displaced banks as major lenders to the midsized companies that are the economic engine of middle America. It also shows how two of the most powerful investment firms in the US are taking sharply different views of investments forged in the heat of a credit boom, at a time when investors and central bankers are warning of dangerously loose lending standards.”
Leveraged Speculation Watch:
January 2 – Bloomberg (Katherine Burton, Katia Porzecanski and Nishant Kumar): “Hedge fund managers set on starting their own firms in 2019 face the worst money-raising environment in years. Only one is slated to begin with more than $1 billion: San Francisco-based Woodline Partners… ‘You have to be borderline crazy to be starting a hedge fund in this environment and the only way you should do it is if you feel you have something differentiated to offer,’ said Ilana Weinstein, founder and chief executive officer of IDW Group, a hedge fund recruiter.”
Geopolitical Watch:
January 2 – Bloomberg: “Chinese President Xi Jinping said Taiwan must be unified with the mainland to achieve his goal of completing the country’s rejuvenation. ‘China must and will be united, which is an inevitable requirement for the historical rejuvenation of the Chinese nation in the new era,” Xi told a gathering in Beijing to mark the 40th anniversary of a landmark Beijing overture to Taipei... Xi also sent a warning to advocates of Taiwan’s independence, who include supporters of Taiwanese President Tsai Ing-wen. ‘It’s a legal fact that both sides of the straits belong to one China, and cannot be changed by anyone or any force,’ Xi said. Tsai warned against continued threats from China in her New Year’s Day address Tuesday, signaling a hard line despite her recent election losses to Taiwan’s more Beijing-friendly Kuomintang opposition.”
December 31 – Reuters (Hyonhee Shin and Soyoung Kim): “North Korean leader Kim Jong Un said… he is ready to meet U.S. President Donald Trump again anytime to achieve their common goal of denuclearizing the Korean Peninsula, but warned he may have to take an alternative path if U.S. sanctions and pressure against the country continued. In a nationally televised New Year address, Kim said denuclearization was his ‘firm will’ and North Korea had ‘declared at home and abroad that we would neither make and test nuclear weapons any longer nor use and proliferate them.’”
January 2 – Reuters (Mary Milliken and Gabrielle Tétrault-Farber): “The United States wants an explanation for why Russia detained a former U.S. Marine on spying charges in Moscow and will demand his immediate return if it determines his detention is inappropriate, Secretary of State Mike Pompeo said…”
January 1 – Reuters (Jessie Pang and James Pomfret): “Thousands of demonstrators marched in Hong Kong on Tuesday to demand full democracy, fundamental rights, and even independence from China in the face of what many see as a marked clampdown by the Communist Party on local freedoms.”
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