[Reuters] Stocks sizzle at 2-month highs, iron ore still on fire
[CNBC] Here’s what investors should watch for in Trump’s State of the Union
[Reuters] Fed Chair Powell and Trump met Monday to discuss economy: Fed
[Reuters] Fed's Mester says rates may need to rise if U.S. growth stays on track
[CNBC] Profits in the first quarter are now expected to decline as company outlooks fall short
[Reuters] Loose money era leaves trail of U.S. corporate debt junkies
[Reuters] Trump to choose Treasury's Malpass to lead World Bank: sources
[AP] 5 reasons why autonomous cars aren’t coming anytime soon
[Reuters] Exclusive: Fed could raise rates as much as twice this year - BlackRock's Rieder
[Reuters] Iran warns Israel against further air strikes in Syria
[Politico] Soak the rich? Americans say go for it
[NYT] Tech Is Splitting the U.S. Work Force in Two
[WSJ] Negative Rates Would Have Sped Up Economic Recovery, Fed Paper Says
[WSJ] Car Dealer Lots Are Flush With Unsold Cars as Sales Are Expected To Drop
[WSJ] To Gauge the Health of the Global Economy, Look to Purchasing Managers
[WSJ] Out-of-State Buyers Flock to Miami
[FT] Market calm gives volatility funds a green light to buy
[FT] Italian services sector slips back into contraction in January — PMI
[Bloomberg] Weidmann Comeback Could Yet Jolt ECB Race for Draghi Succession
[Bloomberg] Trade Hawks Quietly Bristle as Trump’s China Deadline Approaches
[Bloomberg] Australians Close Their Wallets as Retail Sales, Imports Tumble
Monday, February 4, 2019
Sunday, February 3, 2019
Monday's News Links
[Reuters] Wall Street flat as tech boost offset by lower oil prices
[Reuters] Oil prices edge lower, tightening supply outlook supports
[Reuters] U.S. factory orders unexpectedly fall in November
[Reuters] White House adviser: 'A lot of work to do' in China trade talks: CNBC
[CNBC] Chuck Schumer and Bernie Sanders call for restricting corporate share buybacks
[Reuters] Germany's Merkel drops hint of a 'creative' Brexit compromise
[CNBC] Beijing has been ‘ineffective’ in reviving its slowing economy: JP Morgan
[Reuters] Germany facing big budget hole as economy slows: finance ministry document
[Reuters] Australia vows to clean up financial sector after landmark misconduct inquiry
[CNBC] The ‘splinternet’: How China and the US could divide the internet for the rest of the world
[Reuters] Australia's central bank faces watershed week for policy
[WSJ] China Fears Loom Over Stocks After January Surge
[WSJ] January’s Stock-Market Rally Revives Appetite for Risky Margin Loans
[FT] Non-bank lenders thrive in the shadows
[FT] Forget fear and greed. Confusion is now markets’ watchword
[Bloomberg] The Safest Trade on Wall Street Is Entering the Danger Zone
[Reuters] Oil prices edge lower, tightening supply outlook supports
[Reuters] U.S. factory orders unexpectedly fall in November
[Reuters] White House adviser: 'A lot of work to do' in China trade talks: CNBC
[CNBC] Chuck Schumer and Bernie Sanders call for restricting corporate share buybacks
[Reuters] Germany's Merkel drops hint of a 'creative' Brexit compromise
[CNBC] Beijing has been ‘ineffective’ in reviving its slowing economy: JP Morgan
[Reuters] Germany facing big budget hole as economy slows: finance ministry document
[Reuters] Australia vows to clean up financial sector after landmark misconduct inquiry
[CNBC] The ‘splinternet’: How China and the US could divide the internet for the rest of the world
[Reuters] Australia's central bank faces watershed week for policy
[WSJ] China Fears Loom Over Stocks After January Surge
[WSJ] January’s Stock-Market Rally Revives Appetite for Risky Margin Loans
[FT] Non-bank lenders thrive in the shadows
[FT] Forget fear and greed. Confusion is now markets’ watchword
[Bloomberg] The Safest Trade on Wall Street Is Entering the Danger Zone
Sunday Evening Links
[Reuters] Asia stocks quiet, dollar supported after upbeat U.S. jobs data
[SCMP] Xi Jinping and Donald Trump ‘may meet in Da Nang, Vietnam’ at the end of February
[Reuters] Fed's Kashkari says Powell is 'coming around' to his dovish view
[Reuters] Germany could face budget deficits for years to come: Bild, citing government document
[NYT] Behind Tech’s Shine, Some Warnings Signs Appear
[SCMP] Xi Jinping and Donald Trump ‘may meet in Da Nang, Vietnam’ at the end of February
[Reuters] Fed's Kashkari says Powell is 'coming around' to his dovish view
[Reuters] Germany could face budget deficits for years to come: Bild, citing government document
[NYT] Behind Tech’s Shine, Some Warnings Signs Appear
Sunday's News Links
[Reuters] Wall St Week Ahead-Fed pause validates market fears about U.S. growth
[Reuters] China's services sector moderates in January but still solid: Caixin PMI
[Reuters] May will seek 'pragmatic' solution to Brexit deal in Brussels
[Reuters] Trump says sending military to Venezuela 'an option': CBS
[WSJ] Bond Rally Suggests the Stock Market Honeymoon Is on Borrowed Time
[WSJ] Small Businesses Are Waving the Caution Flag
[WSJ] For Some Companies, Tax-Cut Gains Are Smaller Than They Once Appeared
[Bloomberg] Asia Stocks Having a ‘Bear-Market Bounce,’ JPMorgan Asset Says
[Bloomberg] Feud Between U.S. Allies Deepens as Trump Sits on Sidelines
[Reuters] China's services sector moderates in January but still solid: Caixin PMI
[Reuters] May will seek 'pragmatic' solution to Brexit deal in Brussels
[Reuters] Trump says sending military to Venezuela 'an option': CBS
[WSJ] Bond Rally Suggests the Stock Market Honeymoon Is on Borrowed Time
[WSJ] Small Businesses Are Waving the Caution Flag
[WSJ] For Some Companies, Tax-Cut Gains Are Smaller Than They Once Appeared
[Bloomberg] Asia Stocks Having a ‘Bear-Market Bounce,’ JPMorgan Asset Says
[Bloomberg] Feud Between U.S. Allies Deepens as Trump Sits on Sidelines
Saturday, February 2, 2019
Saturday's News Links
[Reuters] Russia suspends nuclear arms treaty after U.S. says to pull out
[Reuters] Venezuelan general urges military to disavow Maduro as opposition stages rallies
[Bloomberg] What CEOs Are Saying About the Possibility of a Recession
[MarketWatch] Opinion: The evidence is in: Stocks are in a ‘bull trap’
[WSJ] Why the Fed Made a U-Turn: Perceived Risks to Growth Shifted
[WSJ] Over 60, and Crushed by Student Loan Debt
[Reuters] Venezuelan general urges military to disavow Maduro as opposition stages rallies
[Bloomberg] What CEOs Are Saying About the Possibility of a Recession
[MarketWatch] Opinion: The evidence is in: Stocks are in a ‘bull trap’
[WSJ] Why the Fed Made a U-Turn: Perceived Risks to Growth Shifted
[WSJ] Over 60, and Crushed by Student Loan Debt
Friday, February 1, 2019
Weekly Commentary: No Mystery
January 30 – Financial Times (Sam Fleming): “After putting traders on notice six weeks ago to expect further increases in US interest rates in 2019, the Federal Reserve… executed one of its sharpest U-turns in recent memory. Leaving rates unchanged at 2.25-2.5%, Jay Powell, Fed chairman, unveiled new language that opened up the possibility that the next move could equally be down, instead of up. Forecasts from the Fed’s December meeting that another two rate rises are likely this year now appear to be history. Changes to its guidance were needed, Mr Powell argued, because of ‘cross-currents’ that had recently emerged. Among them were slower growth in China and Europe, trade tensions, the risk of a hard Brexit and the federal government shutdown. Financial conditions had also tightened, he added. Yet the about-face left some Fed-watchers wrongfooted and bemused. Many of those hazards were already perfectly apparent in the central bank’s December meeting, when it lifted rates by a quarter point and kept in place language pointing to further ‘gradual’ increases.”
The Wall Street Journal’s Greg Ip pursued a similar path with his article, “The Fed’s Mysterious Pause.” “Last December, Mr. Powell noted his colleagues thought they’d raise rates two more times this year, from between 2.25% and 2.5%, which was at the lower end of estimates of ‘neutral’—a level that neither stimulates nor holds back growth. On Wednesday, he suggested the Fed could already be at neutral: ‘Our policy stance is appropriate right now. We also know that our policy rate is in the range of the… committee’s estimates of neutral.’ If indeed the Fed is done, that would be a breathtaking pivot. Yet the motivation remains somewhat mystifying: What changed in the past six weeks to justify it?”
No Mystery. Don’t be bemused. The Fed Chairman was prepared to hold his ground, but the ground was suddenly giving way. Between the December 19th and January 30th FOMC meetings, acute systemic fragilities were revealed.
Not to dismiss economic weakness in China and Europe – or even tenuous U.S./Chinese trade talks and the government shutdown. But January 3rd was pivotal, not coincidently the wild market session ahead of Chairman Powell’s January 4th U-turn. Recall the currency market “flash crash” – with an 8% intraday move in the yen vs. Australian dollar, along with the dramatic widening of credit spreads (and a 19bps surge in Goldman Sachs CDS prices). Markets were careening toward dislocation.
Chairman Powell appeared somewhat downtrodden during his Wednesday press conference, a notable shift from his confident demeanor in December. We can assume Powell and other Fed officials have been alarmed by how swiftly booming securities markets succumb to instability and illiquidity. I believe Powell wanted to see markets begin standing on their own; that, in contrast to his three most-recent predecessors, he would be in no rush to come to the markets’ defense. He was content to see overheated markets commence the cooling process. A correction would actually be constructive for system stability. The predicament: Overinflated Bubbles don’t calmly deflate.
Circumstances forced the Fed’s hand. Old fears soon reemerged of escalating market instability getting ahead of the Fed. Better to act quickly before market/liquidity issues turned intricate and precarious. While not blatantly shock and awe, kind of along the same line. And responding to criticism of blurred messaging, the course of FOMC policymaking must appear coherent and decisive.
There will be no more rate hikes anytime soon. Now heeding market alarm, the Fed will also be reevaluating the runoff of its securities holdings. The Fed would prefer to convey that it remains “data dependent” in an environment of extraordinary uncertainties, while tepid inflation provides convenient cover for embracing “patience.” Well enough, but markets saw it for what it was: The Fed “caved” – just as the markets knew it would. No longer in doubt, the latest incantation of the “Fed put” is alive and well (irrespective of job or GDP growth). Indeed, the new Chairman’s hope for lowering the “put” strike price (Fed support not invoked before a significant market decline) was rather hastily quashed by acute market fragility.
There’s really nothing like a short “squeeze” to get market speculative juices flowing. How about a synchronized global squeeze across myriad asset classes? Only weeks ago, global markets were alarmingly synchronized to the downside. Now it’s everyone off to the races – lockstep (seemingly inebriated). Stocks and corporate Credit; EM currencies, stocks and bonds; Treasuries, bunds and JGBs; Italian bonds; crude and commodities and so on.
Here in the U.S., “Stocks Wrap Up Best January in 30 Years.” The DJIA surged 1,672 points (returning 7.2%) during the month. The S&P500 returned 8.0%, robust gains overshadowed by the broader market. The S&P 400 Midcaps jumped 10.4% in January, with the small cap Russell 2000 rising 11.2%. The average stock (Value Line Arithmetic) gained 11.2%. The Banks (BKX) rose 12.4%, with the Nasdaq Financials up 9.7%. The Nasdaq Composite also rose 9.7%. The Goldman Sachs Most Short index jumped 12.5%. The Philadelphia Oil Services index surged 19.3%.
Some of the problem-children EM currencies bounced strongly. The South African rand gained 8.2% in January, the Russian ruble 6.6%, Brazilian real 6.2%, Chilean peso 6.0%, Colombian peso 4.6%, Thai baht 4.2%, Indonesian rupiah 3.0% and Mexican peso 2.9%. The Chinese renminbi gained 2.7% against the dollar in January.
Over the past month, local currency bond yields were down 137 bps in Lebanon, 93 bps in the Philippines, 50 bps in Russia, 47 bps in Brazil, 34 bps in Cyprus, 33 bps in Hungary and 21 bps in Mexico. Equities gained 19.9% in Argentina, 14.0% in Turkey, 13.5% in Russia, 10.8% in Brazil, 9.6% in South Korea and 9.2% in Colombia. Dollar-denominated bond yields sank 124 bps in Argentina, 100 bps in Ukraine, 50 bps in Turkey, 34 bps in Indonesia and 35 bps in Russia.
January was also a big month for European equities. Major stock indices returned 8.9% in Portugal, 8.1% in Italy, 6.6% in Spain, 5.6% in France, 5.8% in Germany, 6.4% in Switzerland, 8.2% in Finland, 7.6% in Sweden and 8.7% in Austria. January saw 10-year sovereign yields drop 15 bps in Italy, nine bps in Germany, 15 bps in France, 22 bps in Spain, 10 bps in Portugal and 46 bps in Greece.
An overarching CBB theme over the years (debated compellingly generations ago): the problem with discretionary policymaking is that a policy mistake leads invariably to a series of mistakes. The Powell Fed coming quickly to the markets’ defense was a perpetuation of flawed policy doctrine. Moreover, it’s especially dangerous for central banks to so conspicuously buttress the securities markets at this late stage of historic speculative Bubbles. Calming language has an effect akin to electric shock therapy.
Clearly, such actions only further embolden a marketplace conditioned to reach for returns – adopting leverage while disregarding risk. Financial and economic stability are only further undermined. Blatant support of Wall Street will as well further erode public trust in such a critical institution. During the previous crisis, central bank measures were seen as vital to stabilization. I fear they will be viewed as fundamental to the problem in the coming crisis.
The delusion was believing zero rates and QE would over time support system stability. The “buyer of last resort” function during a time of crisis should never have morphed into the buyer of first resort for years of booming markets and economies. We’re now a full decade into aggressive stimulus, and global finance is more fragile than ever. Policy rates remain at zero and the ECB only recently ended its historic balance sheet expansion (to $4.7 TN). Yet economies throughout the Eurozone appear in - or headed toward - recession. Amazingly, despite a QE-induced collapse in market yields, Italy faces a recessionary backdrop with its fragile banks hanging in the balance.
Meanwhile, troubling data run unabated in China. The Caixin China Manufacturing PMI dropped 1.4 points during January to 48.3, the low since gloomy February 2016. It was also the first back-to-back months below 50 (contracting manufacturing activity) since May/June 2016. To see China’s economy weaken in the face of ongoing rapid Credit growth should be alarming to the entire world.
January 27 – Bloomberg: “The number of Chinese companies warning on earnings is turning into a flood, with no industry spared from worsening demand. Some 440 firms disclosed on Wednesday -- the day before a deadline to do so -- that their 2018 financial results deteriorated… Of the more than 2,400 mainland-listed firms that have announced preliminary numbers or issued guidance this season, some 373 said they’ll post a loss, the data show. About 86% of those were profitable in 2017.”
In a globalized, digitized and serviced-based economy, I never viewed consumer price inflation as the prevailing QE risk in the U.S. For the U.S. and the world more generally, zero rates and Trillions of fabricated “money” have fomented interminable Monetary Disorder (on full display during the past two months). Once unleashed, there was no controlling it. Yet with global markets in a synchronized rally, one easily assumes the Fed and central banks have again worked their magic. Stability has engulfed the world. Nothing could be more detached from reality.
The world is in the throes of a precarious period. Ill-advised central banking has ceded a historic global market Bubble additional rope. Meanwhile, until something snaps it is reckless fiscal policies accommodated by ultra-low rates, along with the precarious market perception that central banks will have no alternative other than to reinstitute QE. Central bank-induced Monetary Disorder has completely distorted sovereign debt markets, granting Washington politicians the proverbial blank checkbook. And it is worse than merely a marketplace devoid of “bond vigilantes.” Treasury yields are pressured downward by the fragility of global Bubbles and the expectation of aggressive monetary stimulus as far as the eye can see.
Reckless global monetary management fuels reckless global fiscal mismanagement. Here in the U.S., trillion-dollar plus federal deficits until the market invokes some discipline. And it’s all passed off as business as usual. If I were a bond, I’d be tense. Bailing on “normalization,” the Fed has essentially committed to perpetual loose “money” and stock market support. And in the event the risk market rally turns crazier, there’s just not much slack in the U.S. economy. Ten-year Treasury yields jumped six bps Friday (to 2.68%), although the more interesting move was the 16 bps surge in Italian yields (to 2.74%). Under the circumstances, gold’s $38 January advance was rather restrained.
To see securities markets – risk assets and safe haven alike – rally as they’ve done over recent weeks is something to behold. Sellers overwhelming the markets one month – buyers the next. Legitimate fears of illiquidity supplanted by the utter fright of being on the wrong side of the market and missing a rally. The S&P500 recorded its strongest January since 1987. It’s an apt reminder not to place too much faith in the “January effect”- especially when global markets are acutely speculative. With Monetary Disorder and Dysfunctional Market Structure operating at full-force, no reason not to expect 2019 to be anything but a momentous year.
For the Week:
The S&P500 gained 1.6% (up 8.0% y-t-d), and the Dow increased 1.3% (up 7.4%). The Utilities rose 2.4% (up 3.1%). The Banks declined 1.5% (up 12.8%), while the Broker/Dealers added 0.2% (up 9.6%). The Transports gained 2.0% (up 10.4%). The S&P 400 Midcaps (up 10.7%) and the small cap Russell 2000 (up 11.4%) increased 1.3%. The Nasdaq100 advanced 1.3% (up 8.6%). The Semiconductors added 0.5% (up 11.4%). The Biotechs increased 0.8% (up 16.3%). With bullion up $14.50, the HUI gold index surged 6.7% (up 5.4%).
Three-month Treasury bill rates ended the week at 2.34%. Two-year government yields dropped 10 bps to 2.51% (up 1bp y-t-d). Five-year T-note yields fell 10 bps to 2.50% (down 1bp). Ten-year Treasury yields declined seven bps to 2.69% (unchanged). Long bond yields fell four bps to 3.03% (up 1bp). Benchmark Fannie Mae MBS yields dropped nine bps to 3.47% (down 3bps).
Greek 10-year yields dropped 16 bps to 3.90% (down 44bps y-t-d). Ten-year Portuguese yields slipped a basis point to 1.64% (down 7bps). Italian 10-year yields jumped 10 bps to 2.75% (unchanged). Spain's 10-year yields declined one basis point to 1.22% (down 19bps). German bund yields fell three bps to 0.17% (down 7bps). French yields declined three bps to 0.57% (down 14bps). The French to German 10-year bond spread was little changed at 40 bps. U.K. 10-year gilt yields fell six bps to 1.25% (down 3bps). U.K.'s FTSE equities index rallied 3.1% (up 4.3% y-t-d).
Japan's Nikkei 225 equities index was little changed (up 3.9% y-t-d). Japanese 10-year "JGB" yields declined a basis point to negative 0.01% (down 2bps y-t-d). France's CAC40 rose 1.9% (up 6.1%). The German DAX equities index declined 0.9% (up 5.9%). Spain's IBEX 35 equities index fell 1.8% (up 5.6%). Italy's FTSE MIB index lost 1.2% (up 6.8%). EM equities were higher. Brazil's Bovespa index added 0.2% (up 11.3%), and Mexico's Bolsa increased 0.2% (up 5.0%). South Korea's Kospi index gained 1.2% (up 8.0%). India's Sensex equities index rose 1.2% (up 1.1%). China's Shanghai Exchange increased 0.6% (up 5.0%). Turkey's Borsa Istanbul National 100 index rose 1.1% (up 12.8%). Russia's MICEX equities index added 0.9% (up 6.9%).
Investment-grade bond funds saw inflows of $34 million, and junk bond funds posted inflows of $73 million (from Lipper).
Freddie Mac 30-year fixed mortgage rates added a basis point to 4.46% (up 24bps y-o-y). Fifteen-year rates increased one basis point to 3.89% (up 21bps). Five-year hybrid ARM rates gained six bps to 3.96% (up 43bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down six bps to 4.42% (up 7bps).
Federal Reserve Credit last week declined $9.9bn to $4.001 TN. Over the past year, Fed Credit contracted $387bn, or 8.8%. Fed Credit inflated $1.189 TN, or 42%, over the past 325 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt rose $5.6bn last week to $3.414 TN. "Custody holdings" rose $47.8bn y-o-y, or 1.4%.
M2 (narrow) "money" supply declined $2.3bn last week to $14.519 TN. "Narrow money" gained $673bn, or 4.9%, over the past year. For the week, Currency increased $1.9bn. Total Checkable Deposits jumped $39.6bn, while Savings Deposits dropped $51.7bn. Small Time Deposits gained $6.2bn. Retail Money Funds added $1.6bn.
Total money market fund assets declined $13.5bn to $3.038 TN. Money Funds gained $239bn y-o-y, or 8.5%.
Total Commercial Paper rose $9.9bn to $1.079 TN. CP declined $60bn y-o-y, or 5.3%.
Currency Watch:
The U.S. dollar index slipped 0.2% to 95.579 (down 0.6% y-t-d). For the week on the upside, the Brazilian real increased 2.9%, the South African rand 2.2%, the Australian dollar 1.0%, the New Zealand dollar 0.9%, the Canadian dollar 0.9%, the Norwegian krone 0.9%, the euro 0.4%, the Singapore dollar 0.3%, the South Korean won 0.2% and the Japanese yen 0.1%. For the week on the downside, the British pound declined 0.9%, the Mexican peso 0.6% and the Swiss franc 0.2%. The Chinese renminbi was little changed versus the dollar this week (up 1.97% y-t-d).
Commodities Watch:
The Goldman Sachs Commodities Index added 0.9% (up 10.4% y-t-d). Spot Gold gained 1.1% to $1,318 (up 2.7%). Silver rose 1.5% to $15.931 (up 2.5%). Crude gained $1.57 to $55.26 (up 22%). Gasoline jumped 3.4% (up 10%), while Natural Gas dropped 14.0% (down 7%). Copper rose 1.6% (up 5%). Wheat increased 0.8% (up 4%). Corn declined 0.5% (up 1%).
Market Dislocation Watch:
January 28 – CNBC (Hugh Son): “The market meltdown that wiped out stocks’ gains late last year will be a recurring feature of the trading environment, according to Daniel Pinto, co-president of J.P. Morgan Chase and head of its massive corporate and investment bank. ‘Over time, you will probably see several more market events like we saw in December,’ Pinto said… ‘People know we are working towards the end of the cycle, and they have built some risk and some positions that they’ve been accumulating for years, and they know that when they want to trade, liquidity won’t necessarily be there,’ Pinto said. ‘So markets will tend to overreact to things, and you have these big moves, and then a correction to rationality, as we’ve seen.’”
January 31 – Financial Times (Joe Rennison and Colby Smith): “Retail investors pulled money from US loan funds for the 11th week in a row, as falling interest rate forecasts have damped demand for the asset class despite prices stabilising after a December slump. US loan funds suffered $935m in outflows for the week ending January 30, according to… Lipper, extending a run of outflows that has resulted in $19bn being withdrawn from the $1.2tn asset class.”
Trump Administration Watch:
January 31 – Financial Times (James Politi): “The US and China claimed progress in tackling some of the thorniest issues in their trade war as Donald Trump suggested that a new presidential summit might be necessary to settle the economic conflict within the next month. At the end of two days of negotiations in Washington, Robert Lighthizer, the US trade representative, said his talks with Liu He, China’s vice-premier, had finally centred on US demands for structural reforms by Beijing — such as ending the forced transfer of technology from US companies or reining in the use of industrial subsidies. But Mr Lighthizer failed to report a specific concession made by Beijing, and said he and Steven Mnuchin, US Treasury secretary, were considering a trip to Beijing after the Chinese new year celebration in early February to resume negotiations.”
January 29 – Reuters (Doina Chiacu and Susan Heavey): “U.S. Treasury Secretary Steve Mnuchin said… he expected to see significant progress in trade talks with Chinese officials this week and that U.S. charges against telecommunications giant Huawei Technologies Co Ltd were a separate issue. ‘Those are separate issues, and that’s a separate dialogue,’ Mnuchin said... ‘So those are not part of trade discussions. Forced technology issues are part of trade discussions, but any issues as it relates to violations of U.S. law or U.S. sanctions are going through a separate track.’”
January 27 – Wall Street Journal (Peter Nicholas and Kristina Peterson): “President Trump said Sunday he doesn’t believe congressional negotiators will strike a deal over border-wall funding that he could accept and vowed that he would build a wall anyway, using emergency powers if need be. Mr. Trump… assessed the chances of whether a newly formed group of 17 lawmakers could craft a deal before the next government-funding lapse, in less than three weeks: ‘I personally think it’s less than 50-50, but you have a lot of very good people on that board.’”
January 29 – Wall Street Journal (Andrew Ackerman): “The Trump administration plans to work with Congress to overhaul mortgage-finance giants Fannie Mae and Freddie Mac , a White House spokeswoman said… —playing down the idea the administration will seek to unilaterally release the firms from government control. The White House also expects to announce a framework for developing comprehensive housing-finance changes ‘shortly,’ White House spokeswoman Lindsay Walters said. But that framework will not likely make specific recommendations about what to do with the two companies, according to people familiar... For more than a decade, lawmakers have tried without success to overhaul Fannie and Freddie, which were placed in conservatorship during the 2008 financial crisis. Recent statements by administration officials indicated the government was reviewing plans to directly end government control without input from Congress, sending shares surging.”
Federal Reserve Watch:
January 31 – Reuters (Steve Holland, Makini Brice, Jason Lange and Ginger Gibson): “U.S. President Donald Trump is considering former pizza chain executive and Republican presidential candidate Herman Cain for a seat on the Federal Reserve Board, a senior administration official said…”
January 27 – Wall Street Journal (Nick Timiraos): “Some investors blame the stock market’s volatility on the Federal Reserve shrinking its bond portfolio. But the critique puzzles Fed officials and some economists because there is little evidence of turmoil in the two markets where the central bank actively intervened: Treasurys and mortgage debt. The Fed is shrinking its $4 trillion portfolio by allowing Treasury and mortgage securities to mature without replacing them. Up to $50 billion worth is allowed to expire every month under the plan, though the actual amounts have been closer to $40 billion in recent months. Markets barely blinked when the Fed announced its move in 2017. But in the last few months, a number of prominent investors, including Stanley Druckenmiller, have said the portfolio runoff is a big factor behind the return of market volatility. With stocks gyrating, President Trump said he wanted the Fed to slow or stop the moves.”
U.S. Bubble Watch:
January 29 – Reuters (Lucia Mutikani): “U.S consumer confidence fell to a 1-1/2 year-low in January as a partial shutdown of the government and financial markets turmoil left households a bit nervous about the economy’s prospects. The drop in confidence reported by the Conference Board… mirrors another survey earlier this month showing sentiment tumbling to its lowest level since President Donald Trump was elected more than two years ago, strengthening analysts expectations that the economy was losing momentum.”
January 28 – Bloomberg (Brendan Murray): “The U.S. Treasury Department indicated that the government’s borrowing needs are rising faster than previous estimates as the Trump administration finances a widening budget deficit. The department expects to issue $365 billion in net marketable debt from January through March, up $8 billion from its estimate in October… The Treasury sees an end-of-March cash balance of $320 billion, unchanged from its forecast three months ago. In its first estimate of the April-June period this year, the department estimated borrowing of $83 billion, $11 billion more than in the same period last year and the most for that quarter since 2012.”
January 30 – Bloomberg (Liz Capo McCormick and Saleha Mohsin): “The U.S. Treasury Department announced plans to issue another record-breaking amount of debt, giving President Donald Trump’s re-election opponents more ammunition as they question whether his tax cuts will pay for themselves. The federal budget shortfall is set to swell, driven by tax cuts, spending increases and an aging American population. As a result, the Treasury is raising its long-term debt issuance at its quarterly refunding auctions to $84 billion…, $1 billion more than three months ago. Such elevated levels of borrowing will finance the widening deficit, with Wall Street strategists projecting new debt issuance will top $1 trillion for a second straight year.”
January 29 – CNBC (Diana Olick): “Home values increased 5.2% annually in November, slowing from 5.3% in October, according to the… S&P CoreLogic Case-Shiller National Home Price Index. The 10-city composite annual increase also fell to 4.3%, down from 4.7% in the previous month. The 20-city composite saw a 4.7% annual gain, down from 5.0% in October. Home price gains have been slowing since last spring, as higher mortgage interest rates cut sharply into affordability. The gains are slowing the most in large metropolitan markets, where home prices had overheated over the past three years.”
January 27 – Financial Times (Richard Armstrong): “Fourth-quarter results from US regional banks — which finance many of America’s small and mid-sized businesses — revealed a robust domestic economy, despite worries about unsteady markets, global trade talks and slowdowns in China and Europe. At the 10 largest regional banks, or ‘super-regionals,’ which have combined assets of more than $2tn, business and credit-card loan portfolios grew 6%, in aggregate, accelerating from earlier in the year and surprising industry analysts. ‘There’s certainly a lot of chatter about the government shutdown, Brexit, trade talk, all of that . . . But so far, on Main Street, we don’t see that,’ said Kelly King, chief executive of BB&T…”
January 29 – Reuters: “Power provider PG&E filed for voluntary Chapter 11 bankruptcy protection on Tuesday, succumbing to liabilities stemming from wildfires in Northern California in 2017 and 2018… The owner of the biggest U.S. power utility has filed a motion seeking court approval for a $5.5 billion debtor-in-possession financing… PG&E listed assets of $71.39 billion and liabilities of $51.69 billion, in a court document…”
January 28 – Financial Times (Robert Armstrong): “In the years after the financial crisis, small businesses that needed credit were stuck. New capital rules discouraged big banks from touching any borrower perceived as risky. The bond and loan markets, where larger businesses flocked for inexpensive debt capital, have little use for sums under $100,000 — which is what most small enterprises need. A handful of non-bank lenders, payment and e-commerce companies have leapt into the gap. In an environment of easy money and economic expansion, small business lending operations at OnDeck, Kabbage, PayPal, Square and others have grown fast. The question now is whether these new, branchless business models can thrive in a market where credit is tightening and the economy slowing. The interest rates on the loans are high — often the equivalent of a 30-40% annual rate, or higher — and the borrowers tend to have short credit histories. There are some signs of vulnerability. Morgan Stanley analyst James Faucette notes that in periods where credit has tightened in recent years, the online lenders ‘have done worse than traditional lenders . . . they have all had to rework their underwriting in a significant way. Once they have done that, they try to re-engage during an expansion and take advantage of what they have learnt.’”
January 29 – Wall Street Journal (Ben Eisen and Nick Timiraos): “One of the principal gatekeepers to housing-finance markets is stepping up scrutiny of nonbank mortgage lenders, concerned that some may not have the financial heft needed to overcome stressed conditions. The increased oversight by the Government National Mortgage Association, or Ginnie Mae, comes as nonbank lenders play an ever-bigger role in making mortgages to Americans and as housing markets are cooling. Many of these companies flourished after the financial crisis as banks stepped back from the mortgage market but haven’t yet been tested by an economic downturn. For the first time in recent memory, the agency has asked a handful of these lenders to improve certain financial metrics before granting them full ability to continue issuing Ginnie-backed mortgage bonds, according to Maren Kasper, who stepped in as Ginnie’s acting head this month.”
January 29 – Wall Street Journal (Esther Fung): “Chinese net purchases of U.S. commercial real estate last year dwindled to their lowest level since 2012, as Beijing kept up the pressure on Chinese investors to bring cash home during a period of worsening economic growth. Insurers, conglomerates and other investors from mainland China were net sellers of $854 million of U.S. commercial property in the fourth quarter, according to Real Capital Analytics. That marked the third-straight quarter Chinese investors sold more U.S. property than they bought, the first time ever these investors have been sellers for that long a stretch. The selling during most of 2018 marked a powerful reversal from the previous five years, when Chinese investors went on a massive buying spree, often handily outbidding other investors for U.S. trophy properties.”
January 31 – Bloomberg (Arit John and Laura Davison): “Independent Senator Bernie Sanders is proposing to expand the estate tax on wealthy Americans, including a rate of up to 77% on the value of estates above $1 billion. Sanders of Vermont… said… his plan would apply to the wealthiest 0.2% Americans. It would set a 45% tax on the value of estates between $3.5 million and $10 million, increasing gradually to 77% for amounts more than $1 billion. The current estate tax kicks in when an estate is worth about $11 million.”
China Watch:
January 31 – Financial Times (Edward White): “A private sector gauge of China’s manufacturing sector in January contracted to its lowest level since February 2016, in the latest sign of economic headwinds hitting the world’s second largest economy despite moves by Beijing to shore up growth. The Caixin manufacturing purchasing managers’ index slipped to 48.3 in January, from 49.7 a month earlier and marking the second-straight monthly decline after the index retreated into negative territory for the first time in 19 months in December.”
January 29 – Bloomberg: “Chinese executives are sounding warning bells over the world’s second-largest economy. At least 20 companies, including China Life Insurance Co. and Chongqing Changan Automobile Co., told investors late Tuesday that full-year earnings would fall well short of expectations. Reasons they cited included the country’s economic slowdown, as well as recent changes to accounting rules and the equity market’s $2.3 trillion rout last year, the world’s biggest loss of value.”
January 28 – Reuters (Michael Sheetz): “Chinese representatives met with the World Trade Organization… to begin the process of legally challenging United States tariffs on China’s exports, Reuters reported, citing a transcript of the meeting’s discussion. ‘This is a blatant breach of the United States’ obligations under the WTO agreements and is posing a systemic challenge to the multilateral trading system,’ a Chinese representative said… ‘If the United States were free to continue infringing these principles without consequences, the future viability of this organization is in dire peril.’”
January 29 – Reuters (Associated Press): “U.S. criminal charges against Chinese electronics giant Huawei have sparked a fresh round of trans-Pacific recriminations, with Beijing demanding… that Washington back off what it called an ‘unreasonable crackdown’ on the maker of smartphones and telecom gear. China’s foreign ministry said it would defend the ‘lawful rights and interests of Chinese companies’ but gave no details. Huawei is the No. 2 smartphone maker and an essential player in global communications networks.”
January 31 – Reuters (Li Zheng, Zhang Xiaochong and Ryan Woo): “China’s central bank told some commercial banks in January to moderate their pace of lending…, as it seeks to manage the amount of credit flowing into the economy. In its guidance, the People’s Bank of China (PBOC) also told the lenders that the pace and size of loans granted should not fall below the level from the same period a year earlier.”
January 27 – Bloomberg (Christopher Balding): “In the past decade, China has relied primarily on credit growth to fund its economic ambitions. The country’s banks are now feeling the constraints of this lending binge and need to raise a lot of capital over the next couple of years… With 267 trillion yuan ($39.4 trillion) of total assets, and home to the world’s four largest banks by this measure, the country’s financial system doesn’t operate in isolation… Major Chinese banks raised or announced plans to raise 343 billion yuan in 2018, according to… Nomura Holdings Inc. That’s well below the estimates of UBS Group AG, which just last year said these firms would need 1 trillion to 3 trillion yuan… The fundamental problem is the conflicting pressures on the sector. Despite talk of deleveraging in 2018, as nominal GDP growth slowed to 9.7%, total loans outstanding grew 13.5%. To prop up the economy, Chinese banks have been lending well in excess of deposit growth. Since the beginning of 2016, as loans outstanding grew 41%, deposits rose just 29%...”
January 31 – Bloomberg (Andrew Mayeda and Katherine Greifeld): “China’s holdings of U.S. Treasuries fell to the lowest level in a year and a half amid a bruising trade war with the Trump administration. China’s pile of notes, bills and bonds dropped to $1.12 trillion in November, from $1.14 trillion in October… It was the sixth straight decline and left the nation’s stockpile the smallest since May 2017. China remains the U.S.’s biggest foreign creditor. Japan is next, with $1.04 trillion, up from $1.02 trillion in October, which was its smallest amount since 2011.”
January 29 – Financial Times (Don Weinland and Emma Dunkley): “S&P Global’s breakthrough into China’s domestic ratings scene is promising to bring a new level of clarity to foreign investors hoping to take a bigger slice of the country’s $12tn bond market. The… credit rating agency this week became the first foreign company to gain approval from China’s central bank to start assessing domestic bonds, following a year-long process to gain a foothold in the local market, the world’s third largest. The move could help to unlock flows into a market where foreign investors currently hold about 3% of the total bonds outstanding… But asset managers have flagged the perils of trying to compete with China’s domestic agencies, which routinely offer issuers high ratings. There are also questions as to whether S&P could come under pressure from the government to give better ratings to some state-backed debt issuers.”
Central Bank Watch:
January 28 – Bloomberg (Carolynn Look and Alexander Weber): “Mario Draghi said that while the euro-area economy is looking bleaker than anticipated, it’s not bad enough to warrant additional monetary support. The president of the European Central Bank blamed ‘softer external demand and some country and sector-specific factors’ for the slowdown, but indicated he still has some confidence in the underlying strength of the economy. ‘If things go very wrong, we can still resume other instruments in our toolbox. There is nothing objecting to that possibility,’ he told lawmakers in Brussels in response to a question on whether net asset purchases could be restarted. ‘The only point is under what contingency are we going to do this. And at this point in time, we don’t see such contingency as likely to materialize, certainly this year.’”
EM Watch:
February 1 – Bloomberg (Cagan Koc): “Turkey’s top economic body ruled out seeking support from the International Monetary Fund, in an effort to end market speculation that Ankara is in touch with the Washington-based lender to negotiate a rescue package. Those spreading the rumors are carrying out a propaganda war to ‘harm the Turkish government, the Turkish economy and Turkish people,’ the Treasury and Finance Ministry said… ‘This sick state of mind has reached a dangerous level.’”
February 1 – Bloomberg (Kartik Goyal and Subhadip Sircar): “Sovereign Indian bonds yields surged the most in eight months and rupee weakened after Prime Minister Narendra Modi’s government announced record borrowings to fund populist policies before elections by May. The administration plans to borrow 7.1 trillion rupees ($100bn) in the year starting April 1… That compares with a 6.4-trillion rupee forecast in a Bloomberg News survey and a revised 5.71 trillion rupees for the current fiscal period.”
Global Bubble Watch:
January 31 – Bloomberg (Jonathan Cable and Marius Zaharia): “Factory activity was at its weakest in years across much of the world during January, adding to worries trade tariffs, political uncertainty and cooling demand poses an increasing threat to global growth… Trade-focused Asia appears to be suffering the most visible loss of momentum so far, with activity shrinking in China, although European economies are stuck in low gear and many emerging markets are sputtering. The euro zone has been rocked by protests in France, an auto sector struggling to regain momentum, political strife and rising trade protectionism. Manufacturing growth in the bloc was minimal last month, at a four-year low, and forward looking indicators suggest there will be no turnaround soon.”
January 29 – Financial Times (Lucy Hornby): “China is ‘rebalancing’ its overseas lending practices in the face of mounting concerns over the debt burdens of developing countries, the head of the Asian Infrastructure Investment Bank told the Financial Times… Infrastructure investment in Asia’s largest developing countries fell in 2017 and 2018, amid a deleveraging campaign in China and deepening concern over the fiscal impact of Chinese-backed mega projects on their host countries. The AIIB, the Beijing-based multilateral bank, provides an alternative model to the Chinese state-backed bilateral lending that has contributed to the economic meltdown in Venezuela, a controversial debt renegotiation in Sri Lanka and cancelled projects in Malaysia. Jin Liqun, the AIIB’s president, told the FT that China is conscious of the criticism. ‘Chinese leaders definitely have picked up the message. You cannot go on and on putting money in, without taking a review of what’s going on, to rebalance.’”
January 28 – Bloomberg (Michael Heath): “Australian firms suffered the worst slump in conditions since the 2008 global financial crisis as evidence mounts that the economy slowed in the latter part of last year. The business conditions index -- measuring hiring, sales and profits -- dropped to 2 in December from 11 a month earlier, a National Australia Bank Ltd. report showed Tuesday. A gauge of employment fell to 4 from 9 in November, while profitability plunged to zero from 8. A separate confidence index was unchanged at 3.”
January 31 – Bloomberg (Jackie Edwards): “Sydney property values continued to fall in January, driving nationwide house prices back to levels last seen in October 2016, amid tighter lending conditions and high levels of housing supply. Nationwide home values dropped 1% last month, led by a 1.3% decline in Sydney and a 1.6% slide in Melbourne, according to CoreLogic…”
Europe Watch:
February 1 – Bloomberg (Carolynn Look): “Italy’s recession isn’t seeing any signs of a turnaround at the start of the year, as a drop in manufacturing orders weighed on output and forced companies to cut jobs. Manufacturing conditions worsened in January to the greatest extent in almost six years, a purchasing managers’ index showed on Friday. At 47.8, it’s well below the 50 level that marks the crossover between expansion and contraction. Growth in the euro area as a whole slowed, led by a contraction in Germany, the region’s biggest economy, a separate PMI report showed.”
February 1 – Bloomberg (Simbarashe Gumbo): “IHS Markit releases manufacturing purchasing managers’ index for Eurozone in January. Index falls to 50.5 from 51.4 in Dec.; Year ago 59.6. Lowest reading since Nov. 2014. New Orders fall to 47.8 vs 48.8 in Dec. Lowest reading since April 2013. Fourth consecutive month of contraction.”
Japan Watch:
February 1 – Bloomberg (Dave McCombs and Kazunori Takada): “The slowdown in China that’s rattled global stocks is hitting the earnings of Japanese manufacturers as the world’s third-biggest economy fights to bounce back from a contraction. The health of the Chinese economy reverberates through many countries but is especially important for export-reliant Japan. China is Japan’s top trading partner, easily eclipsing the U.S. and the Europe. Following the biggest contraction since 2014 in the three months through September, Japan’s economy is unlikely to see anything more than a tepid return to growth. Factory output dropped again in December, falling for the seventh time in the last nine months.”
The Wall Street Journal’s Greg Ip pursued a similar path with his article, “The Fed’s Mysterious Pause.” “Last December, Mr. Powell noted his colleagues thought they’d raise rates two more times this year, from between 2.25% and 2.5%, which was at the lower end of estimates of ‘neutral’—a level that neither stimulates nor holds back growth. On Wednesday, he suggested the Fed could already be at neutral: ‘Our policy stance is appropriate right now. We also know that our policy rate is in the range of the… committee’s estimates of neutral.’ If indeed the Fed is done, that would be a breathtaking pivot. Yet the motivation remains somewhat mystifying: What changed in the past six weeks to justify it?”
No Mystery. Don’t be bemused. The Fed Chairman was prepared to hold his ground, but the ground was suddenly giving way. Between the December 19th and January 30th FOMC meetings, acute systemic fragilities were revealed.
Not to dismiss economic weakness in China and Europe – or even tenuous U.S./Chinese trade talks and the government shutdown. But January 3rd was pivotal, not coincidently the wild market session ahead of Chairman Powell’s January 4th U-turn. Recall the currency market “flash crash” – with an 8% intraday move in the yen vs. Australian dollar, along with the dramatic widening of credit spreads (and a 19bps surge in Goldman Sachs CDS prices). Markets were careening toward dislocation.
Chairman Powell appeared somewhat downtrodden during his Wednesday press conference, a notable shift from his confident demeanor in December. We can assume Powell and other Fed officials have been alarmed by how swiftly booming securities markets succumb to instability and illiquidity. I believe Powell wanted to see markets begin standing on their own; that, in contrast to his three most-recent predecessors, he would be in no rush to come to the markets’ defense. He was content to see overheated markets commence the cooling process. A correction would actually be constructive for system stability. The predicament: Overinflated Bubbles don’t calmly deflate.
Circumstances forced the Fed’s hand. Old fears soon reemerged of escalating market instability getting ahead of the Fed. Better to act quickly before market/liquidity issues turned intricate and precarious. While not blatantly shock and awe, kind of along the same line. And responding to criticism of blurred messaging, the course of FOMC policymaking must appear coherent and decisive.
There will be no more rate hikes anytime soon. Now heeding market alarm, the Fed will also be reevaluating the runoff of its securities holdings. The Fed would prefer to convey that it remains “data dependent” in an environment of extraordinary uncertainties, while tepid inflation provides convenient cover for embracing “patience.” Well enough, but markets saw it for what it was: The Fed “caved” – just as the markets knew it would. No longer in doubt, the latest incantation of the “Fed put” is alive and well (irrespective of job or GDP growth). Indeed, the new Chairman’s hope for lowering the “put” strike price (Fed support not invoked before a significant market decline) was rather hastily quashed by acute market fragility.
There’s really nothing like a short “squeeze” to get market speculative juices flowing. How about a synchronized global squeeze across myriad asset classes? Only weeks ago, global markets were alarmingly synchronized to the downside. Now it’s everyone off to the races – lockstep (seemingly inebriated). Stocks and corporate Credit; EM currencies, stocks and bonds; Treasuries, bunds and JGBs; Italian bonds; crude and commodities and so on.
Here in the U.S., “Stocks Wrap Up Best January in 30 Years.” The DJIA surged 1,672 points (returning 7.2%) during the month. The S&P500 returned 8.0%, robust gains overshadowed by the broader market. The S&P 400 Midcaps jumped 10.4% in January, with the small cap Russell 2000 rising 11.2%. The average stock (Value Line Arithmetic) gained 11.2%. The Banks (BKX) rose 12.4%, with the Nasdaq Financials up 9.7%. The Nasdaq Composite also rose 9.7%. The Goldman Sachs Most Short index jumped 12.5%. The Philadelphia Oil Services index surged 19.3%.
Some of the problem-children EM currencies bounced strongly. The South African rand gained 8.2% in January, the Russian ruble 6.6%, Brazilian real 6.2%, Chilean peso 6.0%, Colombian peso 4.6%, Thai baht 4.2%, Indonesian rupiah 3.0% and Mexican peso 2.9%. The Chinese renminbi gained 2.7% against the dollar in January.
Over the past month, local currency bond yields were down 137 bps in Lebanon, 93 bps in the Philippines, 50 bps in Russia, 47 bps in Brazil, 34 bps in Cyprus, 33 bps in Hungary and 21 bps in Mexico. Equities gained 19.9% in Argentina, 14.0% in Turkey, 13.5% in Russia, 10.8% in Brazil, 9.6% in South Korea and 9.2% in Colombia. Dollar-denominated bond yields sank 124 bps in Argentina, 100 bps in Ukraine, 50 bps in Turkey, 34 bps in Indonesia and 35 bps in Russia.
January was also a big month for European equities. Major stock indices returned 8.9% in Portugal, 8.1% in Italy, 6.6% in Spain, 5.6% in France, 5.8% in Germany, 6.4% in Switzerland, 8.2% in Finland, 7.6% in Sweden and 8.7% in Austria. January saw 10-year sovereign yields drop 15 bps in Italy, nine bps in Germany, 15 bps in France, 22 bps in Spain, 10 bps in Portugal and 46 bps in Greece.
An overarching CBB theme over the years (debated compellingly generations ago): the problem with discretionary policymaking is that a policy mistake leads invariably to a series of mistakes. The Powell Fed coming quickly to the markets’ defense was a perpetuation of flawed policy doctrine. Moreover, it’s especially dangerous for central banks to so conspicuously buttress the securities markets at this late stage of historic speculative Bubbles. Calming language has an effect akin to electric shock therapy.
Clearly, such actions only further embolden a marketplace conditioned to reach for returns – adopting leverage while disregarding risk. Financial and economic stability are only further undermined. Blatant support of Wall Street will as well further erode public trust in such a critical institution. During the previous crisis, central bank measures were seen as vital to stabilization. I fear they will be viewed as fundamental to the problem in the coming crisis.
The delusion was believing zero rates and QE would over time support system stability. The “buyer of last resort” function during a time of crisis should never have morphed into the buyer of first resort for years of booming markets and economies. We’re now a full decade into aggressive stimulus, and global finance is more fragile than ever. Policy rates remain at zero and the ECB only recently ended its historic balance sheet expansion (to $4.7 TN). Yet economies throughout the Eurozone appear in - or headed toward - recession. Amazingly, despite a QE-induced collapse in market yields, Italy faces a recessionary backdrop with its fragile banks hanging in the balance.
Meanwhile, troubling data run unabated in China. The Caixin China Manufacturing PMI dropped 1.4 points during January to 48.3, the low since gloomy February 2016. It was also the first back-to-back months below 50 (contracting manufacturing activity) since May/June 2016. To see China’s economy weaken in the face of ongoing rapid Credit growth should be alarming to the entire world.
January 27 – Bloomberg: “The number of Chinese companies warning on earnings is turning into a flood, with no industry spared from worsening demand. Some 440 firms disclosed on Wednesday -- the day before a deadline to do so -- that their 2018 financial results deteriorated… Of the more than 2,400 mainland-listed firms that have announced preliminary numbers or issued guidance this season, some 373 said they’ll post a loss, the data show. About 86% of those were profitable in 2017.”
In a globalized, digitized and serviced-based economy, I never viewed consumer price inflation as the prevailing QE risk in the U.S. For the U.S. and the world more generally, zero rates and Trillions of fabricated “money” have fomented interminable Monetary Disorder (on full display during the past two months). Once unleashed, there was no controlling it. Yet with global markets in a synchronized rally, one easily assumes the Fed and central banks have again worked their magic. Stability has engulfed the world. Nothing could be more detached from reality.
The world is in the throes of a precarious period. Ill-advised central banking has ceded a historic global market Bubble additional rope. Meanwhile, until something snaps it is reckless fiscal policies accommodated by ultra-low rates, along with the precarious market perception that central banks will have no alternative other than to reinstitute QE. Central bank-induced Monetary Disorder has completely distorted sovereign debt markets, granting Washington politicians the proverbial blank checkbook. And it is worse than merely a marketplace devoid of “bond vigilantes.” Treasury yields are pressured downward by the fragility of global Bubbles and the expectation of aggressive monetary stimulus as far as the eye can see.
Reckless global monetary management fuels reckless global fiscal mismanagement. Here in the U.S., trillion-dollar plus federal deficits until the market invokes some discipline. And it’s all passed off as business as usual. If I were a bond, I’d be tense. Bailing on “normalization,” the Fed has essentially committed to perpetual loose “money” and stock market support. And in the event the risk market rally turns crazier, there’s just not much slack in the U.S. economy. Ten-year Treasury yields jumped six bps Friday (to 2.68%), although the more interesting move was the 16 bps surge in Italian yields (to 2.74%). Under the circumstances, gold’s $38 January advance was rather restrained.
To see securities markets – risk assets and safe haven alike – rally as they’ve done over recent weeks is something to behold. Sellers overwhelming the markets one month – buyers the next. Legitimate fears of illiquidity supplanted by the utter fright of being on the wrong side of the market and missing a rally. The S&P500 recorded its strongest January since 1987. It’s an apt reminder not to place too much faith in the “January effect”- especially when global markets are acutely speculative. With Monetary Disorder and Dysfunctional Market Structure operating at full-force, no reason not to expect 2019 to be anything but a momentous year.
For the Week:
The S&P500 gained 1.6% (up 8.0% y-t-d), and the Dow increased 1.3% (up 7.4%). The Utilities rose 2.4% (up 3.1%). The Banks declined 1.5% (up 12.8%), while the Broker/Dealers added 0.2% (up 9.6%). The Transports gained 2.0% (up 10.4%). The S&P 400 Midcaps (up 10.7%) and the small cap Russell 2000 (up 11.4%) increased 1.3%. The Nasdaq100 advanced 1.3% (up 8.6%). The Semiconductors added 0.5% (up 11.4%). The Biotechs increased 0.8% (up 16.3%). With bullion up $14.50, the HUI gold index surged 6.7% (up 5.4%).
Three-month Treasury bill rates ended the week at 2.34%. Two-year government yields dropped 10 bps to 2.51% (up 1bp y-t-d). Five-year T-note yields fell 10 bps to 2.50% (down 1bp). Ten-year Treasury yields declined seven bps to 2.69% (unchanged). Long bond yields fell four bps to 3.03% (up 1bp). Benchmark Fannie Mae MBS yields dropped nine bps to 3.47% (down 3bps).
Greek 10-year yields dropped 16 bps to 3.90% (down 44bps y-t-d). Ten-year Portuguese yields slipped a basis point to 1.64% (down 7bps). Italian 10-year yields jumped 10 bps to 2.75% (unchanged). Spain's 10-year yields declined one basis point to 1.22% (down 19bps). German bund yields fell three bps to 0.17% (down 7bps). French yields declined three bps to 0.57% (down 14bps). The French to German 10-year bond spread was little changed at 40 bps. U.K. 10-year gilt yields fell six bps to 1.25% (down 3bps). U.K.'s FTSE equities index rallied 3.1% (up 4.3% y-t-d).
Japan's Nikkei 225 equities index was little changed (up 3.9% y-t-d). Japanese 10-year "JGB" yields declined a basis point to negative 0.01% (down 2bps y-t-d). France's CAC40 rose 1.9% (up 6.1%). The German DAX equities index declined 0.9% (up 5.9%). Spain's IBEX 35 equities index fell 1.8% (up 5.6%). Italy's FTSE MIB index lost 1.2% (up 6.8%). EM equities were higher. Brazil's Bovespa index added 0.2% (up 11.3%), and Mexico's Bolsa increased 0.2% (up 5.0%). South Korea's Kospi index gained 1.2% (up 8.0%). India's Sensex equities index rose 1.2% (up 1.1%). China's Shanghai Exchange increased 0.6% (up 5.0%). Turkey's Borsa Istanbul National 100 index rose 1.1% (up 12.8%). Russia's MICEX equities index added 0.9% (up 6.9%).
Investment-grade bond funds saw inflows of $34 million, and junk bond funds posted inflows of $73 million (from Lipper).
Freddie Mac 30-year fixed mortgage rates added a basis point to 4.46% (up 24bps y-o-y). Fifteen-year rates increased one basis point to 3.89% (up 21bps). Five-year hybrid ARM rates gained six bps to 3.96% (up 43bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down six bps to 4.42% (up 7bps).
Federal Reserve Credit last week declined $9.9bn to $4.001 TN. Over the past year, Fed Credit contracted $387bn, or 8.8%. Fed Credit inflated $1.189 TN, or 42%, over the past 325 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt rose $5.6bn last week to $3.414 TN. "Custody holdings" rose $47.8bn y-o-y, or 1.4%.
M2 (narrow) "money" supply declined $2.3bn last week to $14.519 TN. "Narrow money" gained $673bn, or 4.9%, over the past year. For the week, Currency increased $1.9bn. Total Checkable Deposits jumped $39.6bn, while Savings Deposits dropped $51.7bn. Small Time Deposits gained $6.2bn. Retail Money Funds added $1.6bn.
Total money market fund assets declined $13.5bn to $3.038 TN. Money Funds gained $239bn y-o-y, or 8.5%.
Total Commercial Paper rose $9.9bn to $1.079 TN. CP declined $60bn y-o-y, or 5.3%.
Currency Watch:
The U.S. dollar index slipped 0.2% to 95.579 (down 0.6% y-t-d). For the week on the upside, the Brazilian real increased 2.9%, the South African rand 2.2%, the Australian dollar 1.0%, the New Zealand dollar 0.9%, the Canadian dollar 0.9%, the Norwegian krone 0.9%, the euro 0.4%, the Singapore dollar 0.3%, the South Korean won 0.2% and the Japanese yen 0.1%. For the week on the downside, the British pound declined 0.9%, the Mexican peso 0.6% and the Swiss franc 0.2%. The Chinese renminbi was little changed versus the dollar this week (up 1.97% y-t-d).
Commodities Watch:
The Goldman Sachs Commodities Index added 0.9% (up 10.4% y-t-d). Spot Gold gained 1.1% to $1,318 (up 2.7%). Silver rose 1.5% to $15.931 (up 2.5%). Crude gained $1.57 to $55.26 (up 22%). Gasoline jumped 3.4% (up 10%), while Natural Gas dropped 14.0% (down 7%). Copper rose 1.6% (up 5%). Wheat increased 0.8% (up 4%). Corn declined 0.5% (up 1%).
Market Dislocation Watch:
January 28 – CNBC (Hugh Son): “The market meltdown that wiped out stocks’ gains late last year will be a recurring feature of the trading environment, according to Daniel Pinto, co-president of J.P. Morgan Chase and head of its massive corporate and investment bank. ‘Over time, you will probably see several more market events like we saw in December,’ Pinto said… ‘People know we are working towards the end of the cycle, and they have built some risk and some positions that they’ve been accumulating for years, and they know that when they want to trade, liquidity won’t necessarily be there,’ Pinto said. ‘So markets will tend to overreact to things, and you have these big moves, and then a correction to rationality, as we’ve seen.’”
January 31 – Financial Times (Joe Rennison and Colby Smith): “Retail investors pulled money from US loan funds for the 11th week in a row, as falling interest rate forecasts have damped demand for the asset class despite prices stabilising after a December slump. US loan funds suffered $935m in outflows for the week ending January 30, according to… Lipper, extending a run of outflows that has resulted in $19bn being withdrawn from the $1.2tn asset class.”
Trump Administration Watch:
January 31 – Financial Times (James Politi): “The US and China claimed progress in tackling some of the thorniest issues in their trade war as Donald Trump suggested that a new presidential summit might be necessary to settle the economic conflict within the next month. At the end of two days of negotiations in Washington, Robert Lighthizer, the US trade representative, said his talks with Liu He, China’s vice-premier, had finally centred on US demands for structural reforms by Beijing — such as ending the forced transfer of technology from US companies or reining in the use of industrial subsidies. But Mr Lighthizer failed to report a specific concession made by Beijing, and said he and Steven Mnuchin, US Treasury secretary, were considering a trip to Beijing after the Chinese new year celebration in early February to resume negotiations.”
January 29 – Reuters (Doina Chiacu and Susan Heavey): “U.S. Treasury Secretary Steve Mnuchin said… he expected to see significant progress in trade talks with Chinese officials this week and that U.S. charges against telecommunications giant Huawei Technologies Co Ltd were a separate issue. ‘Those are separate issues, and that’s a separate dialogue,’ Mnuchin said... ‘So those are not part of trade discussions. Forced technology issues are part of trade discussions, but any issues as it relates to violations of U.S. law or U.S. sanctions are going through a separate track.’”
January 27 – Wall Street Journal (Peter Nicholas and Kristina Peterson): “President Trump said Sunday he doesn’t believe congressional negotiators will strike a deal over border-wall funding that he could accept and vowed that he would build a wall anyway, using emergency powers if need be. Mr. Trump… assessed the chances of whether a newly formed group of 17 lawmakers could craft a deal before the next government-funding lapse, in less than three weeks: ‘I personally think it’s less than 50-50, but you have a lot of very good people on that board.’”
January 29 – Wall Street Journal (Andrew Ackerman): “The Trump administration plans to work with Congress to overhaul mortgage-finance giants Fannie Mae and Freddie Mac , a White House spokeswoman said… —playing down the idea the administration will seek to unilaterally release the firms from government control. The White House also expects to announce a framework for developing comprehensive housing-finance changes ‘shortly,’ White House spokeswoman Lindsay Walters said. But that framework will not likely make specific recommendations about what to do with the two companies, according to people familiar... For more than a decade, lawmakers have tried without success to overhaul Fannie and Freddie, which were placed in conservatorship during the 2008 financial crisis. Recent statements by administration officials indicated the government was reviewing plans to directly end government control without input from Congress, sending shares surging.”
Federal Reserve Watch:
January 31 – Reuters (Steve Holland, Makini Brice, Jason Lange and Ginger Gibson): “U.S. President Donald Trump is considering former pizza chain executive and Republican presidential candidate Herman Cain for a seat on the Federal Reserve Board, a senior administration official said…”
January 27 – Wall Street Journal (Nick Timiraos): “Some investors blame the stock market’s volatility on the Federal Reserve shrinking its bond portfolio. But the critique puzzles Fed officials and some economists because there is little evidence of turmoil in the two markets where the central bank actively intervened: Treasurys and mortgage debt. The Fed is shrinking its $4 trillion portfolio by allowing Treasury and mortgage securities to mature without replacing them. Up to $50 billion worth is allowed to expire every month under the plan, though the actual amounts have been closer to $40 billion in recent months. Markets barely blinked when the Fed announced its move in 2017. But in the last few months, a number of prominent investors, including Stanley Druckenmiller, have said the portfolio runoff is a big factor behind the return of market volatility. With stocks gyrating, President Trump said he wanted the Fed to slow or stop the moves.”
U.S. Bubble Watch:
January 29 – Reuters (Lucia Mutikani): “U.S consumer confidence fell to a 1-1/2 year-low in January as a partial shutdown of the government and financial markets turmoil left households a bit nervous about the economy’s prospects. The drop in confidence reported by the Conference Board… mirrors another survey earlier this month showing sentiment tumbling to its lowest level since President Donald Trump was elected more than two years ago, strengthening analysts expectations that the economy was losing momentum.”
January 28 – Bloomberg (Brendan Murray): “The U.S. Treasury Department indicated that the government’s borrowing needs are rising faster than previous estimates as the Trump administration finances a widening budget deficit. The department expects to issue $365 billion in net marketable debt from January through March, up $8 billion from its estimate in October… The Treasury sees an end-of-March cash balance of $320 billion, unchanged from its forecast three months ago. In its first estimate of the April-June period this year, the department estimated borrowing of $83 billion, $11 billion more than in the same period last year and the most for that quarter since 2012.”
January 30 – Bloomberg (Liz Capo McCormick and Saleha Mohsin): “The U.S. Treasury Department announced plans to issue another record-breaking amount of debt, giving President Donald Trump’s re-election opponents more ammunition as they question whether his tax cuts will pay for themselves. The federal budget shortfall is set to swell, driven by tax cuts, spending increases and an aging American population. As a result, the Treasury is raising its long-term debt issuance at its quarterly refunding auctions to $84 billion…, $1 billion more than three months ago. Such elevated levels of borrowing will finance the widening deficit, with Wall Street strategists projecting new debt issuance will top $1 trillion for a second straight year.”
January 29 – CNBC (Diana Olick): “Home values increased 5.2% annually in November, slowing from 5.3% in October, according to the… S&P CoreLogic Case-Shiller National Home Price Index. The 10-city composite annual increase also fell to 4.3%, down from 4.7% in the previous month. The 20-city composite saw a 4.7% annual gain, down from 5.0% in October. Home price gains have been slowing since last spring, as higher mortgage interest rates cut sharply into affordability. The gains are slowing the most in large metropolitan markets, where home prices had overheated over the past three years.”
January 27 – Financial Times (Richard Armstrong): “Fourth-quarter results from US regional banks — which finance many of America’s small and mid-sized businesses — revealed a robust domestic economy, despite worries about unsteady markets, global trade talks and slowdowns in China and Europe. At the 10 largest regional banks, or ‘super-regionals,’ which have combined assets of more than $2tn, business and credit-card loan portfolios grew 6%, in aggregate, accelerating from earlier in the year and surprising industry analysts. ‘There’s certainly a lot of chatter about the government shutdown, Brexit, trade talk, all of that . . . But so far, on Main Street, we don’t see that,’ said Kelly King, chief executive of BB&T…”
January 29 – Reuters: “Power provider PG&E filed for voluntary Chapter 11 bankruptcy protection on Tuesday, succumbing to liabilities stemming from wildfires in Northern California in 2017 and 2018… The owner of the biggest U.S. power utility has filed a motion seeking court approval for a $5.5 billion debtor-in-possession financing… PG&E listed assets of $71.39 billion and liabilities of $51.69 billion, in a court document…”
January 28 – Financial Times (Robert Armstrong): “In the years after the financial crisis, small businesses that needed credit were stuck. New capital rules discouraged big banks from touching any borrower perceived as risky. The bond and loan markets, where larger businesses flocked for inexpensive debt capital, have little use for sums under $100,000 — which is what most small enterprises need. A handful of non-bank lenders, payment and e-commerce companies have leapt into the gap. In an environment of easy money and economic expansion, small business lending operations at OnDeck, Kabbage, PayPal, Square and others have grown fast. The question now is whether these new, branchless business models can thrive in a market where credit is tightening and the economy slowing. The interest rates on the loans are high — often the equivalent of a 30-40% annual rate, or higher — and the borrowers tend to have short credit histories. There are some signs of vulnerability. Morgan Stanley analyst James Faucette notes that in periods where credit has tightened in recent years, the online lenders ‘have done worse than traditional lenders . . . they have all had to rework their underwriting in a significant way. Once they have done that, they try to re-engage during an expansion and take advantage of what they have learnt.’”
January 29 – Wall Street Journal (Ben Eisen and Nick Timiraos): “One of the principal gatekeepers to housing-finance markets is stepping up scrutiny of nonbank mortgage lenders, concerned that some may not have the financial heft needed to overcome stressed conditions. The increased oversight by the Government National Mortgage Association, or Ginnie Mae, comes as nonbank lenders play an ever-bigger role in making mortgages to Americans and as housing markets are cooling. Many of these companies flourished after the financial crisis as banks stepped back from the mortgage market but haven’t yet been tested by an economic downturn. For the first time in recent memory, the agency has asked a handful of these lenders to improve certain financial metrics before granting them full ability to continue issuing Ginnie-backed mortgage bonds, according to Maren Kasper, who stepped in as Ginnie’s acting head this month.”
January 29 – Wall Street Journal (Esther Fung): “Chinese net purchases of U.S. commercial real estate last year dwindled to their lowest level since 2012, as Beijing kept up the pressure on Chinese investors to bring cash home during a period of worsening economic growth. Insurers, conglomerates and other investors from mainland China were net sellers of $854 million of U.S. commercial property in the fourth quarter, according to Real Capital Analytics. That marked the third-straight quarter Chinese investors sold more U.S. property than they bought, the first time ever these investors have been sellers for that long a stretch. The selling during most of 2018 marked a powerful reversal from the previous five years, when Chinese investors went on a massive buying spree, often handily outbidding other investors for U.S. trophy properties.”
January 31 – Bloomberg (Arit John and Laura Davison): “Independent Senator Bernie Sanders is proposing to expand the estate tax on wealthy Americans, including a rate of up to 77% on the value of estates above $1 billion. Sanders of Vermont… said… his plan would apply to the wealthiest 0.2% Americans. It would set a 45% tax on the value of estates between $3.5 million and $10 million, increasing gradually to 77% for amounts more than $1 billion. The current estate tax kicks in when an estate is worth about $11 million.”
China Watch:
January 31 – Financial Times (Edward White): “A private sector gauge of China’s manufacturing sector in January contracted to its lowest level since February 2016, in the latest sign of economic headwinds hitting the world’s second largest economy despite moves by Beijing to shore up growth. The Caixin manufacturing purchasing managers’ index slipped to 48.3 in January, from 49.7 a month earlier and marking the second-straight monthly decline after the index retreated into negative territory for the first time in 19 months in December.”
January 29 – Bloomberg: “Chinese executives are sounding warning bells over the world’s second-largest economy. At least 20 companies, including China Life Insurance Co. and Chongqing Changan Automobile Co., told investors late Tuesday that full-year earnings would fall well short of expectations. Reasons they cited included the country’s economic slowdown, as well as recent changes to accounting rules and the equity market’s $2.3 trillion rout last year, the world’s biggest loss of value.”
January 28 – Reuters (Michael Sheetz): “Chinese representatives met with the World Trade Organization… to begin the process of legally challenging United States tariffs on China’s exports, Reuters reported, citing a transcript of the meeting’s discussion. ‘This is a blatant breach of the United States’ obligations under the WTO agreements and is posing a systemic challenge to the multilateral trading system,’ a Chinese representative said… ‘If the United States were free to continue infringing these principles without consequences, the future viability of this organization is in dire peril.’”
January 29 – Reuters (Associated Press): “U.S. criminal charges against Chinese electronics giant Huawei have sparked a fresh round of trans-Pacific recriminations, with Beijing demanding… that Washington back off what it called an ‘unreasonable crackdown’ on the maker of smartphones and telecom gear. China’s foreign ministry said it would defend the ‘lawful rights and interests of Chinese companies’ but gave no details. Huawei is the No. 2 smartphone maker and an essential player in global communications networks.”
January 31 – Reuters (Li Zheng, Zhang Xiaochong and Ryan Woo): “China’s central bank told some commercial banks in January to moderate their pace of lending…, as it seeks to manage the amount of credit flowing into the economy. In its guidance, the People’s Bank of China (PBOC) also told the lenders that the pace and size of loans granted should not fall below the level from the same period a year earlier.”
January 27 – Bloomberg (Christopher Balding): “In the past decade, China has relied primarily on credit growth to fund its economic ambitions. The country’s banks are now feeling the constraints of this lending binge and need to raise a lot of capital over the next couple of years… With 267 trillion yuan ($39.4 trillion) of total assets, and home to the world’s four largest banks by this measure, the country’s financial system doesn’t operate in isolation… Major Chinese banks raised or announced plans to raise 343 billion yuan in 2018, according to… Nomura Holdings Inc. That’s well below the estimates of UBS Group AG, which just last year said these firms would need 1 trillion to 3 trillion yuan… The fundamental problem is the conflicting pressures on the sector. Despite talk of deleveraging in 2018, as nominal GDP growth slowed to 9.7%, total loans outstanding grew 13.5%. To prop up the economy, Chinese banks have been lending well in excess of deposit growth. Since the beginning of 2016, as loans outstanding grew 41%, deposits rose just 29%...”
January 31 – Bloomberg (Andrew Mayeda and Katherine Greifeld): “China’s holdings of U.S. Treasuries fell to the lowest level in a year and a half amid a bruising trade war with the Trump administration. China’s pile of notes, bills and bonds dropped to $1.12 trillion in November, from $1.14 trillion in October… It was the sixth straight decline and left the nation’s stockpile the smallest since May 2017. China remains the U.S.’s biggest foreign creditor. Japan is next, with $1.04 trillion, up from $1.02 trillion in October, which was its smallest amount since 2011.”
January 29 – Financial Times (Don Weinland and Emma Dunkley): “S&P Global’s breakthrough into China’s domestic ratings scene is promising to bring a new level of clarity to foreign investors hoping to take a bigger slice of the country’s $12tn bond market. The… credit rating agency this week became the first foreign company to gain approval from China’s central bank to start assessing domestic bonds, following a year-long process to gain a foothold in the local market, the world’s third largest. The move could help to unlock flows into a market where foreign investors currently hold about 3% of the total bonds outstanding… But asset managers have flagged the perils of trying to compete with China’s domestic agencies, which routinely offer issuers high ratings. There are also questions as to whether S&P could come under pressure from the government to give better ratings to some state-backed debt issuers.”
Central Bank Watch:
January 28 – Bloomberg (Carolynn Look and Alexander Weber): “Mario Draghi said that while the euro-area economy is looking bleaker than anticipated, it’s not bad enough to warrant additional monetary support. The president of the European Central Bank blamed ‘softer external demand and some country and sector-specific factors’ for the slowdown, but indicated he still has some confidence in the underlying strength of the economy. ‘If things go very wrong, we can still resume other instruments in our toolbox. There is nothing objecting to that possibility,’ he told lawmakers in Brussels in response to a question on whether net asset purchases could be restarted. ‘The only point is under what contingency are we going to do this. And at this point in time, we don’t see such contingency as likely to materialize, certainly this year.’”
EM Watch:
February 1 – Bloomberg (Cagan Koc): “Turkey’s top economic body ruled out seeking support from the International Monetary Fund, in an effort to end market speculation that Ankara is in touch with the Washington-based lender to negotiate a rescue package. Those spreading the rumors are carrying out a propaganda war to ‘harm the Turkish government, the Turkish economy and Turkish people,’ the Treasury and Finance Ministry said… ‘This sick state of mind has reached a dangerous level.’”
February 1 – Bloomberg (Kartik Goyal and Subhadip Sircar): “Sovereign Indian bonds yields surged the most in eight months and rupee weakened after Prime Minister Narendra Modi’s government announced record borrowings to fund populist policies before elections by May. The administration plans to borrow 7.1 trillion rupees ($100bn) in the year starting April 1… That compares with a 6.4-trillion rupee forecast in a Bloomberg News survey and a revised 5.71 trillion rupees for the current fiscal period.”
Global Bubble Watch:
January 31 – Bloomberg (Jonathan Cable and Marius Zaharia): “Factory activity was at its weakest in years across much of the world during January, adding to worries trade tariffs, political uncertainty and cooling demand poses an increasing threat to global growth… Trade-focused Asia appears to be suffering the most visible loss of momentum so far, with activity shrinking in China, although European economies are stuck in low gear and many emerging markets are sputtering. The euro zone has been rocked by protests in France, an auto sector struggling to regain momentum, political strife and rising trade protectionism. Manufacturing growth in the bloc was minimal last month, at a four-year low, and forward looking indicators suggest there will be no turnaround soon.”
January 29 – Financial Times (Lucy Hornby): “China is ‘rebalancing’ its overseas lending practices in the face of mounting concerns over the debt burdens of developing countries, the head of the Asian Infrastructure Investment Bank told the Financial Times… Infrastructure investment in Asia’s largest developing countries fell in 2017 and 2018, amid a deleveraging campaign in China and deepening concern over the fiscal impact of Chinese-backed mega projects on their host countries. The AIIB, the Beijing-based multilateral bank, provides an alternative model to the Chinese state-backed bilateral lending that has contributed to the economic meltdown in Venezuela, a controversial debt renegotiation in Sri Lanka and cancelled projects in Malaysia. Jin Liqun, the AIIB’s president, told the FT that China is conscious of the criticism. ‘Chinese leaders definitely have picked up the message. You cannot go on and on putting money in, without taking a review of what’s going on, to rebalance.’”
January 28 – Bloomberg (Michael Heath): “Australian firms suffered the worst slump in conditions since the 2008 global financial crisis as evidence mounts that the economy slowed in the latter part of last year. The business conditions index -- measuring hiring, sales and profits -- dropped to 2 in December from 11 a month earlier, a National Australia Bank Ltd. report showed Tuesday. A gauge of employment fell to 4 from 9 in November, while profitability plunged to zero from 8. A separate confidence index was unchanged at 3.”
January 31 – Bloomberg (Jackie Edwards): “Sydney property values continued to fall in January, driving nationwide house prices back to levels last seen in October 2016, amid tighter lending conditions and high levels of housing supply. Nationwide home values dropped 1% last month, led by a 1.3% decline in Sydney and a 1.6% slide in Melbourne, according to CoreLogic…”
Europe Watch:
February 1 – Bloomberg (Carolynn Look): “Italy’s recession isn’t seeing any signs of a turnaround at the start of the year, as a drop in manufacturing orders weighed on output and forced companies to cut jobs. Manufacturing conditions worsened in January to the greatest extent in almost six years, a purchasing managers’ index showed on Friday. At 47.8, it’s well below the 50 level that marks the crossover between expansion and contraction. Growth in the euro area as a whole slowed, led by a contraction in Germany, the region’s biggest economy, a separate PMI report showed.”
February 1 – Bloomberg (Simbarashe Gumbo): “IHS Markit releases manufacturing purchasing managers’ index for Eurozone in January. Index falls to 50.5 from 51.4 in Dec.; Year ago 59.6. Lowest reading since Nov. 2014. New Orders fall to 47.8 vs 48.8 in Dec. Lowest reading since April 2013. Fourth consecutive month of contraction.”
Japan Watch:
February 1 – Bloomberg (Dave McCombs and Kazunori Takada): “The slowdown in China that’s rattled global stocks is hitting the earnings of Japanese manufacturers as the world’s third-biggest economy fights to bounce back from a contraction. The health of the Chinese economy reverberates through many countries but is especially important for export-reliant Japan. China is Japan’s top trading partner, easily eclipsing the U.S. and the Europe. Following the biggest contraction since 2014 in the three months through September, Japan’s economy is unlikely to see anything more than a tepid return to growth. Factory output dropped again in December, falling for the seventh time in the last nine months.”
February 1 – Bloomberg (Keiko Ujikane and Shigeki Nozawa): “The world’s biggest pension fund posted a record loss after a global equity rout last quarter pummeled an asset class that made up about half of its investments. Japan’s Government Pension Investment Fund lost 9.1%, or 14.8 trillion yen ($136bn), in the three months ended Dec. 31… The decline in value and the rate of loss were the steepest based on comparable data back to April 2008.”
Fixed-Income Bubble Watch:
January 27 – Financial Times (Joe Rennison): “Wall Street’s debt machine is being powered by a familiar engine: securitisation. As scrutiny of the $1.2tn leveraged loan market has increased, focus has turned to the market’s main source of support: collateralised loan obligations. CLOs are vehicles which take a group of risky loans and then use them to back a series of bonds of varying degrees of safety. Investors in the most perilous, lowest-rated ‘tranches’, as they are known, are rewarded with higher returns but are hit first if the underlying loans — issued to low-rated or heavily indebted companies across the US — begin to default. As such, CLOs resemble other structures that rocked the financial system a decade ago, such as CDOs, which issued debt backed by bundles of (what turned out to be) junk mortgage bonds. But both investors and CLO managers say this time is different.”
January 30 – Bloomberg (Lisa Lee and Adam Tempkin): “The collateralized loan obligation machine is back as the all-important arbitrage between leveraged loans and CLO-manager borrowing costs shows signs of improvement. The improving arbitrage, buoyed by softer leveraged-loan prices, has been enough to kickstart CLO bond issuance this month. CLOs started coming out of the woodwork in mid-January, with $5.1 billion in supply so far this month, though less than the $8 billion seen in January 2018.”
Geopolitical Watch:
February 1 – Reuters (Lesley Wroughton and Arshad Mohammed): “The United States will suspend compliance with the Intermediate-range Nuclear Forces Treaty with Russia on Saturday and formally withdraw in six months if Moscow does not end its alleged violation of the pact, Secretary of State Mike Pompeo said…”
January 29 – Wall Street Journal (Dustin Volz and Warren P. Strobel): “U.S. intelligence officials warned Tuesday of increased threats to national security from tighter cooperation between China and Russia, while also differing with President Trump in their analysis of North Korea’s nuclear intentions and the current danger posed by Islamic State. The warnings were contained in an annual threat assessment that accompanied testimony by Director of National Intelligence Dan Coats, Federal Bureau of Investigation Director Chris Wray, Central Intelligence Agency Director Gina Haspel and other leaders of the U.S. intelligence community, who appeared Tuesday before a Senate panel. The annual exercise affords the public a look at imminent challenges facing the country, such as cyberattacks, nuclear proliferation and terrorism. The assessment cautioned that Beijing and Moscow are pouring resources into a ‘race for technological and military superiority’ that will define the 21st century. It said the two countries are more aligned than at any point since the mid-1950s.”
January 28 – Reuters (Matt Spetalnick and Brian Ellsworth): “The Trump administration on Monday imposed sweeping sanctions on Venezuelan state-owned oil firm PDVSA, aimed at severely curbing the OPEC member’s crude exports to the United States and at pressuring socialist President Nicolas Maduro to step down. Russia, a close ally of Venezuela, denounced the move as illegal interference in Venezuela’s affairs and said the curbs meant Venezuela would probably have problems servicing its $3.15 billion sovereign debt to Moscow.”
January 28 – Reuters (Ana Isabel Martinez): “Venezuela’s government struck back at self-declared interim president Juan Guaido on Tuesday, with the Supreme Court imposing a travel ban and freeze on his bank accounts despite a warning from Washington of ‘serious consequences’ if it did so. The court also said prosecutors could investigate Guaido, in apparent retaliation for sweeping U.S. sanctions on oil firm PDVSA…”
January 28 – Reuters (Parisa Hafezi): “A senior Iranian Revolutionary Guards commander… threatened Israel with destruction if it attacks Iran, state media reported. The comments by Brigadier General Hossein Salami, deputy head of the elite Islamic Revolutionary Guard Corps, followed an Israeli attack on Iranian targets in Syria last week - the latest in a series of assaults targeting Tehran’s presence there in support of President Bashar al-Assad’s government.”
Fixed-Income Bubble Watch:
January 27 – Financial Times (Joe Rennison): “Wall Street’s debt machine is being powered by a familiar engine: securitisation. As scrutiny of the $1.2tn leveraged loan market has increased, focus has turned to the market’s main source of support: collateralised loan obligations. CLOs are vehicles which take a group of risky loans and then use them to back a series of bonds of varying degrees of safety. Investors in the most perilous, lowest-rated ‘tranches’, as they are known, are rewarded with higher returns but are hit first if the underlying loans — issued to low-rated or heavily indebted companies across the US — begin to default. As such, CLOs resemble other structures that rocked the financial system a decade ago, such as CDOs, which issued debt backed by bundles of (what turned out to be) junk mortgage bonds. But both investors and CLO managers say this time is different.”
January 30 – Bloomberg (Lisa Lee and Adam Tempkin): “The collateralized loan obligation machine is back as the all-important arbitrage between leveraged loans and CLO-manager borrowing costs shows signs of improvement. The improving arbitrage, buoyed by softer leveraged-loan prices, has been enough to kickstart CLO bond issuance this month. CLOs started coming out of the woodwork in mid-January, with $5.1 billion in supply so far this month, though less than the $8 billion seen in January 2018.”
Geopolitical Watch:
February 1 – Reuters (Lesley Wroughton and Arshad Mohammed): “The United States will suspend compliance with the Intermediate-range Nuclear Forces Treaty with Russia on Saturday and formally withdraw in six months if Moscow does not end its alleged violation of the pact, Secretary of State Mike Pompeo said…”
January 29 – Wall Street Journal (Dustin Volz and Warren P. Strobel): “U.S. intelligence officials warned Tuesday of increased threats to national security from tighter cooperation between China and Russia, while also differing with President Trump in their analysis of North Korea’s nuclear intentions and the current danger posed by Islamic State. The warnings were contained in an annual threat assessment that accompanied testimony by Director of National Intelligence Dan Coats, Federal Bureau of Investigation Director Chris Wray, Central Intelligence Agency Director Gina Haspel and other leaders of the U.S. intelligence community, who appeared Tuesday before a Senate panel. The annual exercise affords the public a look at imminent challenges facing the country, such as cyberattacks, nuclear proliferation and terrorism. The assessment cautioned that Beijing and Moscow are pouring resources into a ‘race for technological and military superiority’ that will define the 21st century. It said the two countries are more aligned than at any point since the mid-1950s.”
January 28 – Reuters (Matt Spetalnick and Brian Ellsworth): “The Trump administration on Monday imposed sweeping sanctions on Venezuelan state-owned oil firm PDVSA, aimed at severely curbing the OPEC member’s crude exports to the United States and at pressuring socialist President Nicolas Maduro to step down. Russia, a close ally of Venezuela, denounced the move as illegal interference in Venezuela’s affairs and said the curbs meant Venezuela would probably have problems servicing its $3.15 billion sovereign debt to Moscow.”
January 28 – Reuters (Ana Isabel Martinez): “Venezuela’s government struck back at self-declared interim president Juan Guaido on Tuesday, with the Supreme Court imposing a travel ban and freeze on his bank accounts despite a warning from Washington of ‘serious consequences’ if it did so. The court also said prosecutors could investigate Guaido, in apparent retaliation for sweeping U.S. sanctions on oil firm PDVSA…”
January 28 – Reuters (Parisa Hafezi): “A senior Iranian Revolutionary Guards commander… threatened Israel with destruction if it attacks Iran, state media reported. The comments by Brigadier General Hossein Salami, deputy head of the elite Islamic Revolutionary Guard Corps, followed an Israeli attack on Iranian targets in Syria last week - the latest in a series of assaults targeting Tehran’s presence there in support of President Bashar al-Assad’s government.”
Thursday, January 31, 2019
Friday's News Links
[Reuters] Stock rally pauses after disappointing China data
[Reuters] Italian bond yields jump as weak PMI shines a light on rising deficit
[Reuters] U.S. job growth surges; unemployment rate rises to 4.0 percent
[Reuters] Factory activity shrinks across Asia as cooling China threatens global growth
[Reuters] China central bank told banks to moderate pace of lending in January: sources
[Reuters] U.S. suspends compliance with INF treaty, may withdraw in six months
[FT] Trump floats fresh Xi summit to settle trade war
[FT] China factory sector contracts at fastest pace in 3 years: survey
[FT] Distress test: beware China’s $3tn of troubled debt
[FT] Investor withdrawals from US loan funds top $19bn
[Bloomberg] China's U.S. Treasury Holdings Continue to Tumble Amid Trade War
[Bloomberg] Australia’s Housing Downturn Deepens as Prices Hit 2016 Levels
[Reuters] Italian bond yields jump as weak PMI shines a light on rising deficit
[Reuters] U.S. job growth surges; unemployment rate rises to 4.0 percent
[Reuters] Factory activity shrinks across Asia as cooling China threatens global growth
[Reuters] China central bank told banks to moderate pace of lending in January: sources
[Reuters] U.S. suspends compliance with INF treaty, may withdraw in six months
[FT] Trump floats fresh Xi summit to settle trade war
[FT] China factory sector contracts at fastest pace in 3 years: survey
[FT] Distress test: beware China’s $3tn of troubled debt
[FT] Investor withdrawals from US loan funds top $19bn
[Bloomberg] China's U.S. Treasury Holdings Continue to Tumble Amid Trade War
[Bloomberg] Australia’s Housing Downturn Deepens as Prices Hit 2016 Levels
Wednesday, January 30, 2019
Thursday's News Links
[Reuters] Friendly Fed fires world stocks to best January on record
[Reuters] Dollar weaker on Fed's dovish outlook; Aussie dollar, euro gain
[Reuters] U.S. weekly jobless claims jump to near one-and-a-half year high
[Reuters] Trump upbeat on China trade talks but wants to meet Xi to cinch deal
[CNBC] China says its manufacturing activity contracted for the second-straight month in January
[AP] Italy slides into recession, darkening outlook for Europe
[NYT] The Hot Topic in Markets Right Now: ‘Quantitative Tightening’
[WSJ] Central Banks Signal End to Short-Lived Era of Restraint
[WSJ] The Fed’s Mysterious Pause
[FT] Federal Reserve’s ‘momentous’ U-turn prompts puzzlement
[FT] Central bank gold-buying reaches half-century high
[FT] China official manufacturing PMI details ‘not so reassuring’
[FT] US companies turn to junk bonds over loans to fund deals
[FT] Italy’s faltering economy will put populists’ plans to the test
[FT] Liquidity tops list of FX concerns for 2019, says JPM survey
[Bloomberg] India’s Still-Reeling Shadow Banks Face Fresh Cash Shortage Risk
[Reuters] Dollar weaker on Fed's dovish outlook; Aussie dollar, euro gain
[Reuters] U.S. weekly jobless claims jump to near one-and-a-half year high
[Reuters] Trump upbeat on China trade talks but wants to meet Xi to cinch deal
[CNBC] China says its manufacturing activity contracted for the second-straight month in January
[AP] Italy slides into recession, darkening outlook for Europe
[NYT] The Hot Topic in Markets Right Now: ‘Quantitative Tightening’
[WSJ] Central Banks Signal End to Short-Lived Era of Restraint
[WSJ] The Fed’s Mysterious Pause
[FT] Federal Reserve’s ‘momentous’ U-turn prompts puzzlement
[FT] Central bank gold-buying reaches half-century high
[FT] China official manufacturing PMI details ‘not so reassuring’
[FT] US companies turn to junk bonds over loans to fund deals
[FT] Italy’s faltering economy will put populists’ plans to the test
[FT] Liquidity tops list of FX concerns for 2019, says JPM survey
[Bloomberg] India’s Still-Reeling Shadow Banks Face Fresh Cash Shortage Risk
Wednesday Evening Links
[Reuters] Stocks surge on Fed pledge to pause, dollar slips
[CNBC] Gold rises after Fed points to slower pace of rate hikes
[Reuters] In a shift, Fed will be 'patient' on future U.S. rate hikes
[AP] Fed sees low rates well into future and excites Wall Street
[AP] For US-China trade talks, hopes are high, expectations low
[CNBC] Private companies add 213,000 jobs in January, easily topping expectations: ADP/Moody’s Analytics
[CNBC] Pending home sales drop in December despite much lower interest rates
[Reuters] Investors flood U.S. bond funds with cash for 3rd straight week -ICI
[NYT] Fed Signals End of Interest Rate Increases
[WSJ] Fed Leaves Rates Unchanged, Signals Possible End to String of Rate Increases
[WSJ] Powell Now Owns the Fed’s Balance-Sheet Problem
[FT] Fed puts rate rises on hold as global economy slows
[Bloomberg] Europe Stays in Gloomy Mood as Germany Slashes Its 2019 Outlook
[Bloomberg] ECB Stimulus Looks Endless Now. Here's What It Means for Markets
[CNBC] Gold rises after Fed points to slower pace of rate hikes
[Reuters] In a shift, Fed will be 'patient' on future U.S. rate hikes
[AP] Fed sees low rates well into future and excites Wall Street
[AP] For US-China trade talks, hopes are high, expectations low
[CNBC] Private companies add 213,000 jobs in January, easily topping expectations: ADP/Moody’s Analytics
[CNBC] Pending home sales drop in December despite much lower interest rates
[Reuters] Investors flood U.S. bond funds with cash for 3rd straight week -ICI
[NYT] Fed Signals End of Interest Rate Increases
[WSJ] Fed Leaves Rates Unchanged, Signals Possible End to String of Rate Increases
[WSJ] Powell Now Owns the Fed’s Balance-Sheet Problem
[FT] Fed puts rate rises on hold as global economy slows
[Bloomberg] Europe Stays in Gloomy Mood as Germany Slashes Its 2019 Outlook
[Bloomberg] ECB Stimulus Looks Endless Now. Here's What It Means for Markets
Tuesday, January 29, 2019
Wednesday's News Links
[Reuters] Stocks steady before Fed as Apple relief offsets Brexit complications
[Reuters] Fed likely to hold rates steady as it navigates data blind spots
[Reuters] U.S., China launch high level trade talks amid deep differences
[WSJ] Federal Reserve Likely to Hold Rates Steady
[WSJ] As China Trade Talks Begin, Trump Faces Pressure to Make a Deal
[WSJ] Trump Won’t Act Alone to Get Fannie, Freddie Out of Government Control
[FT] China’s slowdown is of its own doing
[FT] S&P route into China’s $12tn bond market faces perils
[Bloomberg] Powell to Stress Fed Patience on Rate Hikes: Decision Day Guide
[Bloomberg] U.S. and China Are Talking Some More, But Deal Prospects Are Still Slim
[Bloomberg] Fed's Big Balance Sheet Wind-Down May Be Halfway Complete
[Bloomberg] At Least 20 Companies in China Issued Profit Warnings in One Day
[Reuters] Fed likely to hold rates steady as it navigates data blind spots
[Reuters] U.S., China launch high level trade talks amid deep differences
[WSJ] Federal Reserve Likely to Hold Rates Steady
[WSJ] As China Trade Talks Begin, Trump Faces Pressure to Make a Deal
[WSJ] Trump Won’t Act Alone to Get Fannie, Freddie Out of Government Control
[FT] China’s slowdown is of its own doing
[FT] S&P route into China’s $12tn bond market faces perils
[Bloomberg] Powell to Stress Fed Patience on Rate Hikes: Decision Day Guide
[Bloomberg] U.S. and China Are Talking Some More, But Deal Prospects Are Still Slim
[Bloomberg] Fed's Big Balance Sheet Wind-Down May Be Halfway Complete
[Bloomberg] At Least 20 Companies in China Issued Profit Warnings in One Day
Tuesday Evening Links
[Reuters] Wall Street wavers as tech gives ground and industrials rebound
[Reuters] U.S. consumer morale at one-and-a-half year-low; house price gains slow
[AP] 3 things to watch for from the Federal Reserve on Wednesday
[AP] China-US row over tech giant Huawei overshadows trade talks
[Reuters] Another shutdown spells deeper pain for U.S. economy: Moody's
[CNBC] More cracks are appearing in the market for loans that helped cause the financial crisis
[Reuters] U.S. warns of 'serious consequences' after Venezuela moves against Guaido
[WSJ] What Could Go Wrong With the Fed on Hold
[WSJ] China and Russia, Aligned More Closely, Seen as Chief Security Threat to U.S.
[Reuters] U.S. consumer morale at one-and-a-half year-low; house price gains slow
[AP] 3 things to watch for from the Federal Reserve on Wednesday
[AP] China-US row over tech giant Huawei overshadows trade talks
[Reuters] Another shutdown spells deeper pain for U.S. economy: Moody's
[CNBC] More cracks are appearing in the market for loans that helped cause the financial crisis
[Reuters] U.S. warns of 'serious consequences' after Venezuela moves against Guaido
[WSJ] What Could Go Wrong With the Fed on Hold
[WSJ] China and Russia, Aligned More Closely, Seen as Chief Security Threat to U.S.
Monday, January 28, 2019
Tuesday's News Links
[Reuters] Wall Street higher after latest batch of earnings
[Reuters] Gold reaches seven-month high as stocks, dollar struggle
[Reuters] Powell faces early reckoning on Fed's $4-trillion question
[Reuters] PG&E, owner of biggest US power utility, files for bankruptcy
[CNBC] Home prices rise at a slower pace: S&P Case-Shiller
[Reuters] Mnuchin says Huawei case 'separate' from U.S.-China trade talks
[AP] China tells US to stop ‘unreasonable crackdown’ on Huawei
[Reuters] Exclusive: PG&E to tap restructuring chief in final bankruptcy preparations - sources
[NYT] Trump’s Shutdown Surrender Adds Pressure to Secure China Trade Win
[WSJ] Big Divides Remain as U.S.-China Trade Talks Resume
[WSJ] Plain-Spoken Fed Chairman Sometimes Leaves Markets Confused
[WSJ] Cooling Housing Market Prompts Closer Scrutiny of Some Lenders
[WSJ] Chinese Exiting U.S. Real Estate as Beijing Directs Money Back to Shore Up Economy
[WSJ] Emerging-Markets Rally Leaves Asian Bonds Behind
[FT] Federal Reserve seeks to be steadier guide after market squalls
[FT] China ‘rebalances’ overseas lending on debt burden concerns
[FT] US-China trade talks to resume as tariff deadline looms
[FT] Worrying signals from the US housing market
[FT] How online platforms shook small-business lending in America
[Bloomberg] Trump to Wade Into China Trade Talks as U.S. Targets Huawei
[Bloomberg] The Dark Case for Both QE, QT Being Bad. And Treasuries as Haven
[Bloomberg] Australia Firms See Worst Slump in Conditions Since Financial Crisis
[Reuters] Gold reaches seven-month high as stocks, dollar struggle
[Reuters] Powell faces early reckoning on Fed's $4-trillion question
[Reuters] PG&E, owner of biggest US power utility, files for bankruptcy
[CNBC] Home prices rise at a slower pace: S&P Case-Shiller
[Reuters] Mnuchin says Huawei case 'separate' from U.S.-China trade talks
[AP] China tells US to stop ‘unreasonable crackdown’ on Huawei
[Reuters] Exclusive: PG&E to tap restructuring chief in final bankruptcy preparations - sources
[NYT] Trump’s Shutdown Surrender Adds Pressure to Secure China Trade Win
[WSJ] Big Divides Remain as U.S.-China Trade Talks Resume
[WSJ] Plain-Spoken Fed Chairman Sometimes Leaves Markets Confused
[WSJ] Cooling Housing Market Prompts Closer Scrutiny of Some Lenders
[WSJ] Chinese Exiting U.S. Real Estate as Beijing Directs Money Back to Shore Up Economy
[WSJ] Emerging-Markets Rally Leaves Asian Bonds Behind
[FT] Federal Reserve seeks to be steadier guide after market squalls
[FT] China ‘rebalances’ overseas lending on debt burden concerns
[FT] US-China trade talks to resume as tariff deadline looms
[FT] Worrying signals from the US housing market
[FT] How online platforms shook small-business lending in America
[Bloomberg] Trump to Wade Into China Trade Talks as U.S. Targets Huawei
[Bloomberg] The Dark Case for Both QE, QT Being Bad. And Treasuries as Haven
[Bloomberg] Australia Firms See Worst Slump in Conditions Since Financial Crisis
Monday Evening Links
[Reuters] Asia shares slip as China's Huawei in legal hot water; focus on Sino-U.S. talks
[Reuters] Wall Street rattled by Caterpillar, Nvidia warnings
[Reuters] U.S.' Mnuchin says expects progress in China trade talks
[Reuters] U.S. unseals indictments against China's Huawei and CFO Wanzhou
[Reuters] U.S. sanctions Venezuelan state oil firm, escalating pressure on Maduro
[CNBC] China accuses US of a ‘blatant breach’ of trade policy in WTO meeting
[Reuters] U.S. officials to announce China-related enforcement on Monday
[Reuters] Caterpillar, Nvidia sound alarm on China impact
[Reuters] China brings U.S. tariff dispute to WTO, berates Washington for blocking judges
[Bloomberg] China Weakness Spreads Far and Wide, From Caterpillar to Nvidia
[Bloomberg] U.S. Treasury Set to Borrow $1 Trillion for a Second Year to Finance the Deficit
[Bloomberg] Draghi Doesn't See Need for More Stimulus to Combat Growth Woes
[Reuters] Wall Street rattled by Caterpillar, Nvidia warnings
[Reuters] U.S.' Mnuchin says expects progress in China trade talks
[Reuters] U.S. unseals indictments against China's Huawei and CFO Wanzhou
[Reuters] U.S. sanctions Venezuelan state oil firm, escalating pressure on Maduro
[CNBC] China accuses US of a ‘blatant breach’ of trade policy in WTO meeting
[Reuters] U.S. officials to announce China-related enforcement on Monday
[Reuters] Caterpillar, Nvidia sound alarm on China impact
[Reuters] China brings U.S. tariff dispute to WTO, berates Washington for blocking judges
[Bloomberg] China Weakness Spreads Far and Wide, From Caterpillar to Nvidia
[Bloomberg] U.S. Treasury Set to Borrow $1 Trillion for a Second Year to Finance the Deficit
[Bloomberg] Draghi Doesn't See Need for More Stimulus to Combat Growth Woes
Sunday, January 27, 2019
Monday's News Links
[Reuters] Wall Street drops more than 1 percent on Caterpillar, Nvidia warnings
[CNBC] Caterpillar stock skids after the company’s earnings, forecast fall short of expectations
[Reuters] Gold hovers near $1,300 as investors await Fed meet, trade talks
[Reuters] Explainer: Key Issues, implications of U.S.-China trade talks
[CNBC] Trump tells WSJ another government shutdown is ‘certainly an option’
[CNBC] US-China trade war: A stable deal with a strategic adversary is an elusive quest
[CNBC] JP Morgan’s co-president says more market meltdowns like December’s rout are coming
[Reuters] Iranian commander threatens Israel's destruction if it attacks: state TV
[WSJ] Trump Skeptical He Would Accept Any Congressional Border Deal
[WSJ] A $4 Trillion Scapegoat for Market Volatility: the Fed’s Shrinking Portfolio
[WSJ] Manufacturers Take a Sales Hit in China
[FT] Specialist loan vehicles lure yield-hungry investors
[Bloomberg] China’s Banks Are Desperate for Capital
[CNBC] Caterpillar stock skids after the company’s earnings, forecast fall short of expectations
[Reuters] Gold hovers near $1,300 as investors await Fed meet, trade talks
[Reuters] Explainer: Key Issues, implications of U.S.-China trade talks
[CNBC] Trump tells WSJ another government shutdown is ‘certainly an option’
[CNBC] US-China trade war: A stable deal with a strategic adversary is an elusive quest
[CNBC] JP Morgan’s co-president says more market meltdowns like December’s rout are coming
[Reuters] Iranian commander threatens Israel's destruction if it attacks: state TV
[WSJ] Trump Skeptical He Would Accept Any Congressional Border Deal
[WSJ] A $4 Trillion Scapegoat for Market Volatility: the Fed’s Shrinking Portfolio
[WSJ] Manufacturers Take a Sales Hit in China
[FT] Specialist loan vehicles lure yield-hungry investors
[Bloomberg] China’s Banks Are Desperate for Capital
Sunday Evening Links
[Reuters] Stocks rise after U.S. government reopens for now
[Reuters] Gold prices hold above $1,300 on U.S. rate pause hopes
[Reuters] Oil prices fall on rising U.S. rig count, economic slowdown
[Reuters] As nations turn against Maduro, Venezuela leader parades with military
[Bloomberg] Here Are Three Scenarios for U.S.-China Trade Talks This Week
[Bloomberg] Fitch Warns More Emerging Markets Face Downgrades This Year
[Reuters] Gold prices hold above $1,300 on U.S. rate pause hopes
[Reuters] Oil prices fall on rising U.S. rig count, economic slowdown
[Reuters] As nations turn against Maduro, Venezuela leader parades with military
[Bloomberg] Here Are Three Scenarios for U.S.-China Trade Talks This Week
[Bloomberg] Fitch Warns More Emerging Markets Face Downgrades This Year
Sunday's News Links
[Reuters] Wall St Week Ahead-Consumer confidence in focus as shutdown fears fade
[AP] UK PM May faces bruising week with Brexit challenges
[BBC] Trudeau fires Canada's ambassador to China amid Huawei controversy
[Reuters] French 'yellow vests' defy Macron again in tense protests
[NYT] America Pushes Allies to Fight Huawei in New Arms Race With China
[WSJ] Manufacturers Take a Sales Hit in China
[FT] Will the Fed stick to its new script?
[FT] Another tech bubble could be about to burst
[FT] US regional banks show robust business lending
[AP] UK PM May faces bruising week with Brexit challenges
[BBC] Trudeau fires Canada's ambassador to China amid Huawei controversy
[Reuters] French 'yellow vests' defy Macron again in tense protests
[NYT] America Pushes Allies to Fight Huawei in New Arms Race With China
[WSJ] Manufacturers Take a Sales Hit in China
[FT] Will the Fed stick to its new script?
[FT] Another tech bubble could be about to burst
[FT] US regional banks show robust business lending
Saturday, January 26, 2019
Saturday's News Links
[CNBC] Global market liquidity could ‘freeze like the water in Davos,’ UBS’ Ermotti says
[Reuters] Major European countries poised to recognize Venezuela's Guaido
[WSJ] IPO Hopes Trigger Scramble for Shares of Top Unicorns
[Bloomberg] Wildlife Perish, Rivers Run Dry in Record-Breaking Australian Heat
[Reuters] Major European countries poised to recognize Venezuela's Guaido
[WSJ] IPO Hopes Trigger Scramble for Shares of Top Unicorns
[Bloomberg] Wildlife Perish, Rivers Run Dry in Record-Breaking Australian Heat
Friday, January 25, 2019
Weekly Commentary: Just the Facts - January 25, 2019
For the Week:
The S&P500 slipped 0.2% (up 6.3% y-t-d), while the Dow added 0.1% (up 6.0%). The Utilities increased 0.7% (up 0.6%). The Banks added 0.7% (up 14.5%), while the Broker/Dealers declined 1.5% (up 9.4%). The Transports slipped 0.9% (up 8.2%). The S&P 400 Midcaps (up 9.4%) and the small cap Russell 2000 (up 10.0%) were little changed for the week. The Nasdaq100 was about unchanged (up 7.2%). The Semiconductors surged 4.3% (up 10.9%). The Biotechs declined 0.6% (up 15.4%). With bullion jumping $21, the HUI gold index surged 5.2% (down 1.2%).
Three-month Treasury bill rates ended the week at 2.33%. Two-year government yields slipped a basis point to 2.61% (up 12bps y-t-d). Five-year T-note yields declined two bps to 2.60% (up 9bps). Ten-year Treasury yields fell three bps to 2.76% (up 7bps). Long bond yields declined three bps to 3.07% (up 5bps). Benchmark Fannie Mae MBS yields dipped one basis point to 3.56% (up 5bps).
Greek 10-year yields fell 11 bps to 4.06% (down 29bps y-t-d). Ten-year Portuguese yields declined eight bps to 1.65% (down 6bps). Italian 10-year yields fell eight bps to 2.65% (down 9bps). Spain's 10-year yields dropped 12 bps to 1.23% (down 19bps). German bund yields fell seven bps to 0.19% (down 5bps). French yields declined six bps to 0.60% (down 11bps). The French to German 10-year bond spread widened one to 41 bps. U.K. 10-year gilt yields declined five bps to 1.31% (up 3bps). U.K.'s FTSE equities index dropped 2.3% (up 1.2% y-t-d).
Japan's Nikkei 225 equities index increased 0.5% (up 3.8% y-t-d). Japanese 10-year "JGB" yields declined two bps to 0.00% (down 1bp y-t-d). France's CAC40 gained 1.0% (up 4.1% y-t-d). The German DAX equities index increased 0.7% (up 6.8%). Spain's IBEX 35 equities index rose 1.3% (up 7.6%). Italy's FTSE MIB index added 0.5% (up 8.1%). EM equities were mixed. Brazil's Bovespa index gained 1.6% (up 11.1%), while Mexico's Bolsa fell 1.4% (up 4.8%). South Korea's Kospi index jumped 2.5% (up 6.7%). India's Sensex equities index declined 1.0% (down 0.1%). China's Shanghai Exchange added 0.2% (up 4.3%). Turkey's Borsa Istanbul National 100 index surged 3.4% (up 11.5%). Russia's MICEX equities index gained 1.0% (up 5.9%).
Investment-grade bond funds saw outflows of $158 million, and junk bond funds posted outflows of $264 million (from Lipper).
Freddie Mac 30-year fixed mortgage rates were unchanged at 4.45% (up 30bps y-o-y). Fifteen-year rates were unchanged at 3.88% (up 26bps). Five-year hybrid ARM rates increased three bps to 3.90% (up 38bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates up six bps to a six-week high 4.48% (up 19bps).
Federal Reserve Credit last week declined $5.2bn to $4.011 TN. Over the past year, Fed Credit contracted $389bn, or 8.9%. Fed Credit inflated $1.200 TN, or 43%, over the past 324 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt gained $5.2bn last week to $3.408 TN. "Custody holdings" rose $56.6bn y-o-y, or 1.7%.
M2 (narrow) "money" supply rose $15.2bn last week to $14.521 TN. "Narrow money" gained $684bn, or 4.9%, over the past year. For the week, Currency increased $2.2bn. Total Checkable Deposits jumped $30.0bn, while Savings Deposits dropped $25.5bn. Small Time Deposits gained $4.6bn. Retail Money Funds rose $4.0bn.
Total money market fund assets added $2.4bn to $3.052 TN. Money Funds gained $227bn y-o-y, or 8.0%.
Total Commercial Paper increased $3.0bn to $1.069 TN. CP declined $60bn y-o-y, or 5.3%.
Currency Watch:
The U.S. dollar index declined 0.6% to 95.794 (down 0.4% y-t-d). For the week on the upside, the British pound increased 2.5%, the South African rand 1.7%, the New Zealand dollar 1.4%, the Mexican peso 0.6%, the Norwegian krone 0.6%, the Singapore dollar 0.4%, the euro 0.4%, the Canadian dollar 0.3%, the Japanese yen 0.2%, the Australian dollar 0.2%, the Swiss franc 0.2% and the South Korean won 0.1%. For the week on the downside, the Swedish krona declined 0.2% and the Swedish krona slipped 0.2%. The Chinese renminbi increased 0.44% versus the dollar this week (up 1.93% y-t-d).
Commodities Watch:
January 25 – Bloomberg (Aibing Guo, Dan Murtaugh and Javier Blas): “China’s largest oil refiner said its trading unit lost almost $700 million last year after being wrong-footed by zigzagging markets, revealing one of the biggest losses by a commodity trader in the last decade. Sinopec blamed the losses at its Unipec unit in part on ‘inappropriate hedging techniques’ and said it closed its positions after discovering the problem. Oil plunged sharply in late November and December, prompting traders to speculate that Unipec may have contributed to the price drop… It marks a sharp reversal of fortunes for Unipec, which has grown over the last 25 years to become one of the largest and most aggressive oil traders.”
The Goldman Sachs Commodities Index declined 0.8% (up 9.4% y-t-d). Spot Gold rose 1.7% to $1,303 (up 1.6%). Silver jumped 1.9% to $15.699 (up 1.0%). Crude slipped 11 cents to $53.69 (up 18%). Gasoline dropped 4.4% (up 7%), and Natural Gas sank 8.7% (up 8%). Copper added 0.4% (up 4%). Wheat increased 0.4% (up 3%). Corn declined 0.4% (up 1%).
Market Dislocation Watch:
January 23 – Wall Street Journal (Ira Iosebashvili and Amrith Ramkumar): “Stocks, bond yields, commodities and other risky assets have continued moving in lockstep lately, raising hopes that this year’s nascent rebound will continue but also fueling worries momentum could once again reverse. Correlations across assets have hit their highest level in almost a year, with the S&P 500, the 10-year U.S. Treasury yield and U.S. crude oil moving in tandem in nine of the previous 12 sessions through Tuesday. A six-day run of declines for the asset classes earlier this month was the longest streak since June, according to Dow Jones Market Data.”
January 25 – Bloomberg (Gowri Gurumurthy): “This month’s new junk-bond deals are all trading up in the secondary, even after most of them were upsized and priced at the tight end of guidance. High-yield issuers returned this month, the busiest for bond sales since September 2018, following a slump in issuance during December…”
January 22 – Bloomberg (Christopher Maloney): “Mortgage returns are lagging those of investment-grade corporates to start 2019, and that gap may persist thanks to an OAS spread differential that’s near its widest in two years. The option-adjusted spread of the Bloomberg Barclays U.S. Aggregate Corporate index offered 106 bps more than seen in the U.S. MBS index as of Friday’s close. While this is down from the 121 bps seen at the beginning of the year, it’s still near the widest since the beginning of 2017.”
Trump Administration Watch:
January 25 – Reuters (Steve Holland and Richard Cowan): “President Donald Trump agreed under mounting pressure on Friday to end a 35-day-old partial U.S. government shutdown without getting the $5.7 billion he had demanded from Congress for a border wall, handing a political victory to Democrats. The three-week spending deal reached with congressional leaders, quickly passed by the Republican-led Senate and the Democratic-controlled House of Representatives without opposition and signed by Trump, paves the way for tough talks with lawmakers about how to address security along the U.S.-Mexican border.”
January 22 – Reuters (Jeff Mason): “As much as U.S. President Donald Trump wants to boost markets through a trade pact with China, he will not soften his position that Beijing must make real structural reforms, including how it handles intellectual property, to reach a deal, advisers say. Offering to buy more American goods is unlikely by itself to overcome an issue that has bedeviled talks between the two countries. Those talks are set to continue when Chinese Vice Premier Liu He visits Washington at the end of January. The United States accuses China of stealing intellectual property and forcing American companies to share technology when they do business in China. Beijing denies the accusations.”
January 24 – CNBC (Berkeley Lovelace Jr.): “Commerce Secretary Wilbur Ross said Thursday the U.S. is still ‘miles and miles’ from a trade deal with China. ‘Frankly, that shouldn’t be too surprising,’ Ross said… The U.S. and China have ‘lots and lots of issues,’ he continued, and the Trump administration will need to create ‘structural reforms’ and ‘penalties’ in order to resume normal trade relations with Beijing. ‘We would like to make a deal but it has to be a deal that will work for both parties,’ he said. ‘We’re miles and miles from getting a resolution.’ Ross listed the sticking points, starting with what he calls America’s ‘intolerably big trade deficit’ with China. That deficit ballooned to $323.3 billion in 2018… It’s the worst imbalance on record dating to 2006.”
January 24 – Bloomberg (Andrew Mayeda and Jenny Leonard): “Commerce Secretary Wilbur Ross said the U.S. and China are eager to end their trade war, but the outcome will hinge on whether Beijing will deepen economic reforms and further open up its markets. Ross said he expects that negotiators will release a statement on their progress after Chinese Vice Premier Liu He meets with U.S. Trade Representative Robert Lighthizer in Washington from Jan. 30-31. ‘The harder issues are the ones that deal with structural reforms, particularly intellectual property rights,’ said Ross…, adding that China is moving up the technology value chain and also has an interest in protecting its own IP. ‘The equal market access is another very big issue. The idea of forced technology transfers is a huge issue.’”
January 23 – CNBC (Tucker Higgins): “President Donald Trump’s outside advisor on China said… that he didn’t expect a breakthrough in trade talks in the ‘near term.’ Michael Pillsbury, director of the Center for Chinese Strategy at the Hudson Institute and a noted China hawk with the ear of the president, suggested that he expected a planned meeting between U.S. and Chinese negotiators scheduled for the end of the month to conclude without a trade deal. ‘Over the last 45 years, a lot of American presidents have negotiated with China,’ Pillsbury said… ‘And there are some patterns to what has gone on. One of them is that the Chinese prefer to make a last-minute deal, to get the best deal they can. So I am not among those who think there is going to be a breakthrough in the next few days.’”
January 24 – Bloomberg (Victoria Guida and Katy O’Donnell): “The White House will announce a plan by next month to end government control of Fannie Mae and Freddie Mac in a bid to resolve a long debate over the fate of the two companies that dominate the mortgage market, a top regulator said. Joseph Otting, acting director of the Federal Housing Finance Agency, told employees last week that the administration would not wait on Congress, where attempts to overhaul the housing finance system have repeatedly faltered in the years since Fannie and Freddie were rescued during the financial crisis, according to a recording of his remarks obtained by Politico. ‘In the next two to four weeks you’re going to be able to see some communication that comes out of the White House and Treasury that really sets a direction for what the future of housing will be in the U.S. and what the FHFA’s part of that will be,’ Otting said…”
January 21 – Reuters (Sijia Jiang, Michael Martina, Christian Shepherd and Rishika Chatterjee): “The United States will proceed with the formal extradition from Canada of Huawei executive Meng Wanzhou, Canada’s ambassador to the United States told the Globe and Mail, as Beijing vowed to respond to Washington’s actions.”
Federal Reserve Watch:
January 25 – Wall Street Journal (Nick Timiraos): “Federal Reserve officials are close to deciding they will maintain a larger portfolio of Treasury securities than they’d expected when they began shrinking those holdings two years ago, putting an end to the central bank’s portfolio wind-down closer into sight. Officials are still resolving details of their strategy and how to communicate it to the public… With interest rate increases on hold for now, planning for the bond portfolio could take center stage at a two-day policy meeting of the central bank’s Federal Open Market Committee next week.”
January 24 – Wall Street Journal (Paul Kiernan and Vivian Salama): “A top White House economic adviser said… President Trump will seek to fill two Federal Reserve Board vacancies with nominees who don’t believe a rapidly expanding economy has to fuel faster inflation. ‘The White House wants highly capable, competent people who understand that you can have strong economic growth without higher inflation,’ White House National Economic Council head Lawrence Kudlow told reporters. He said surges in the economy’s productive capacity mean that more people can work at higher wages without causing inflation to pick up. Mr. Trump has repeatedly criticized the Fed in recent months for raising interest rates.”
U.S. Bubble Watch:
January 23 – CNBC (Annie Nova): “Hundreds of thousands of people are living without a paycheck amid the longest government shutdown in history. As a result, federal employees and contractors are digging into their retirement savings, filing for unemployment, picking up other jobs and unable to meet their rent or mortgage payments. Most people would be in the same bind if they missed even one pay period. Just 40% of Americans are able to cover an unexpected $1,000 expense, such as an emergency room visit or car repair, with their savings, according to a survey from… Bankrate.”
January 24 – Reuters (Richard Leong): “J.P. Morgan economists reduced their outlook for U.S. economic growth in the first quarter to 1.75% from 2.00% as the partial U.S. government shutdown has stretched to a second month for the longest one ever, they said… ‘That estimate solely accounts for the reduction in government sector output and does not incorporate any potential spillover effects into private economic activity. Fortunately, so far those spillovers look contained,’ the banks’ economists wrote…”
January 22 – CNBC (Diana Olick): “Real estate brokers are trying to figure out why sales of existing homes plunged in December. The 6.4% monthly move was unusually large, regardless of direction. The tally from the National Association of Realtors generally moves in the very low single digits month to month. In fact, the shift was one of the largest that didn’t involve some sort of change in government policy, like the homebuyer tax credit. ‘The latest decline is harder to explain. Perhaps it is the decline in consumer confidence that’s been occurring in the latter half of 2018,’ said Lawrence Yun, chief economist for the Realtors. ‘The latest numbers do not reflect the lower, current mortgage rates compared to the November figures, so it’s really harder to explain.’”
January 23 – Bloomberg (Prashant Gopal): “After years of soaring U.S. home prices, cash-out refinancing is coming back in fashion, primarily among homeowners with government-backed loans who tend to have weaker credit and fewer other options. About 76% of refinancing deals last year for loans backed by the Federal Housing Administration, the departments of Agriculture and Veterans Affairs were used to tap equity, the highest share in 20 years of data, according to CoreLogic...”
January 25 – Bloomberg (Jesse Hamilton): “High-risk leveraged lending is still standing out as a danger in the financial system, though the overall risk has lessened in the wider $4.4 trillion portfolio of big loans tied to multiple lenders, according to an examination… by U.S. banking regulators. While leveraged loans are only a segment of the Shared National Credit Program review by the Federal Reserve and other agencies, that lending -- often backing mergers and acquisitions of highly indebted companies -- represent the bulk of loans rated at the lowest levels. ‘Risks associated with leveraged lending activities are building in contrast to the portfolio overall,’ the Fed, Office of the Comptroller of the Currency and Federal Deposit Insurance Corp. said… ‘A material downturn in the economy could result in a significant increase in classified exposures and higher losses.’”
January 24 – Bloomberg (Emily Barrett and Misyrlena Egkolfopoulou): “The U.S. government shutdown risks putting a dent in both the dollar and Treasuries if it drags on. A quick resolution could do the same. A drawn-out spending battle may collide with the looming debate over America’s borrowing limit, potentially raising the odds of a U.S. credit rating downgrade, as occurred in 2011. But some observers reckon the market reaction this time around would be different: Instead of driving a haven trade into Treasuries, concerns about the U.S.’s growing debt burden could reverse that flow, pushing sovereign yields higher and the dollar lower.”
January 22 – Wall Street Journal (Rob Copeland): “Messaging startup Hustle projected the picture of Silicon Valley largess. The company spent millions of dollars raised from investors such as Alphabet Inc. on expensive new hires, on-tap kombucha, arcade games and a six-figure salary for its pedigreed chief executive. So it came as a shock to many employees earlier this month when co-founder and CEO Roddy Lindsay sent them an early-morning email announcing mass layoffs. Before the week was done, even the espresso machine was ripped out of the kitchen at Hustle’s San Francisco headquarters. Hustle is hardly the first startup to spend lavishly in an era of technology riches. What is new these days: The bill is coming due.”
January 22 – CNBC (Diana Olick): “After falling to record lows, the supply of homes on the market is finally rising. But a growing share of those homes are still out of reach to most buyers. In hot markets like Seattle, San Jose, California, Las Vegas and Portland, Oregon, the number of homes for sale rose last year. Even so, the share of affordable homes fell, thanks to rising home values and increasing mortgage interest rates. In Seattle, 58% of homes were considered affordable in 2017, but that share dropped to 46% last year, according to a survey from Redfin…”
January 25 – Wall Street Journal (Sam Goldfarb): “More companies with low credit ratings are limiting their borrowing to loans that would be repaid first in a bankruptcy, a trend that stands to undermine loans’ reputation as a safe investment. At the end of last year, roughly 27% of first-lien loans—the most senior type of debt that is typically held by investors—were backed by companies that didn’t have junior debt outstanding, according to LCD, a unit of S&P Global Market Intelligence. That was the largest share in records going back to 2007, up from 26% in 2017 and 18% in 2007… The presence of more junior debt is often referred to as a ‘debt cushion’ for investors in first-lien loans. Junior bonds and loans typically absorb losses first in a bankruptcy, while senior lenders typically get most or all of their money back.”
China Watch:
January 20 – CNBC (Huileng Tan): “China… announced that its official economic growth came in at 6.6% in 2018 — the slowest pace since 1990. That announcement was highly anticipated by many around the world amid Beijing’s ongoing trade dispute with the U.S., its largest trading partner. Economists polled by Reuters had predicted full-year GDP to come in at that pace, which was down from a revised 6.8% in 2017. Fourth quarter GDP growth was 6.4%, matching expectations.”
January 21 – Reuters (Yawen Chen and Ryan Woo): “Weakness in the service and farm sectors slowed China’s economic growth in the fourth quarter, despite a strong pickup in construction activity… Services grew 7.4% from a year earlier, slowing from 7.9% in the third quarter, while growth in agriculture slowed to 3.5% from 3.6%, the National Bureau of Statistics (NBS) said.”
January 20 – Reuters (Yawen Chen, Stella Qiu and Ryan Woo): “Growth in property investment in China cooled to the second slowest pace in 2018 in December, adding to signs of a further slackening in the real estate market in a blow to a key driver of economic growth. Real estate investment, which mainly focuses on the residential sector but includes commercial and office space, rose 8.2% in December from a year earlier, down from 9.3% in November…”
January 25 – Reuters (Kevin Yao): “China will take steps to spur growth amid a trade war with the United States, but there is limited room for aggressive stimulus in an economy already laden with massive debts and a property market prone to credit-driven spikes, policy insiders said. China’s deepening economic slowdown has fanned market expectations of a big spending binge, especially if the bruising tariff war with Washington escalates, intensifying pressure on Chinese jobs and threatening social stability. Such a move, plans for which have repeatedly been denied by China’s top leaders, would come at a price, however - similar moves in the past have quickly juiced growth rates but also buried the world’s No.2 economy under a mountain of debt. ‘The room for a strong stimulus is not big, and there are very big risks, because that will rely on a flood of cash and increased leverage in the economy,’ said a policy insider…”
January 20 – Reuters (Andrew Galbraith): “Encouraging China’s banks to actively increase support for the real economy, rather than relying on authorities’ orders to boost lending, is the key to improving the supply of credit in the economy, a central bank official said...”
January 21 – Bloomberg: “President Xi Jinping stressed the need to maintain political stability in an unusual meeting of China’s top leaders -- a fresh sign the ruling party is growing concerned about the social implications of the slowing economy. Xi told a ‘seminar’ of top provincial leaders and ministers in Beijing… that the Communist Party needed greater efforts ‘to prevent and resolve major risks,’… He said areas of concern facing the leadership ranged from politics and ideology to the economy, environment and external situation. ‘The party is facing long-term and complex tests in terms of maintaining long-term rule, reform and opening-up, a market-driven economy, and within the external environment,’ Xi said… ‘The party is facing sharp and serious dangers of a slackness in spirit, lack of ability, distance from the people, and being passive and corrupt. This is an overall judgment based on the actual situation.’”
January 20 – CNBC (Edward White): “Defaults on Chinese corporate bonds rose to a record high last year, in a fresh sign of wobbles hitting the country’s financial markets as economic growth slows. Forty five Chinese corporates defaulted on 117 bonds with a principal amount of Rmb110.5bn ($16.3bn), according to Fitch… Both the number of issuers and principal value were all-time peaks. ‘The vast majority of onshore defaults were by non-[state-owned enterprises], which accounted for 86.7% of defaults by issuer count and 90% by principal amount,’ said Jenny Huang and Shuncheng Zhang, analysts at Fitch, also noting signs that ‘investor risk appetite has deteriorated on the surge in onshore defaults’.”
January 24 – Bloomberg: “Several Chinese provinces have unveiled sharply lower shantytown redevelopment targets for 2019, suggesting one key driver of home sales may be on the wane. From Sichuan to Shanxi, targets to replace older, rundown dwellings with new, affordable housing have fallen as much as 74% from 2018… UBS Group AG property analyst John Lam estimates the national target may this year be pared back by 14% to 5 million units. Beijing’s shantytown redevelopment drive, part of China’s fight to alleviate poverty, had been fueling robust demand for new residential properties over the past three years. People were often given cash handouts to buy new apartments on the private market, and such transactions may have contributed to more than one-fifth of home sales in 2017, China International Capital Corp. wrote…”
January 25 – CNBC (Evelyn Cheng): “Chinese authorities face an ever-growing list of challenges — be it an ongoing trade fight with the U.S. or headwinds in domestic demand — and it appears they don’t have many tools left to spur the economy amid a slowdown. The real estate market in China has traditionally played a major role in its economic development, household wealth and public sentiment and was used by Beijing to stimulate growth during previous downturns… But along with a Chinese penchant for investing in houses, persistent expectations of government support sent prices and the household debt burden soaring… Junheng Li, founder of China-focused equity research firm JL Warren Capital, estimates 61% of Chinese urban households live in homes less than 10 years old… ‘(Some) simple math shows that continuously building new homes to stimulate investments and meanwhile create the false impression of wealth effect coming with home price appreciation is about to hit the wall,’ she said… ‘Chinese policy makers are fully aware and highly alert not to send the wrong signal to the home buyers that home prices will continue to hike.’”
January 23 – Bloomberg: “Chinese companies challenged by policy makers’ determination to tamp down leverage in the country’s financial system have found some creative ways to secure funding. One of the least transparent mechanisms to emerge so far is a tactic where bond issuers are indirectly buying their own bond offerings, according to investors and credit analysts. The idea is to inflate issuance sizes, creating the image of greater access to capital than might otherwise be true -- and leading to lower coupons in subsequent sales.”
Central Bank Watch:
January 24 – Financial Times (Claire Jones and Ben Hall): “The European Central Bank has sounded the alarm over the eurozone economy, warning a slowdown it thought would be temporary was showing signs of becoming long-lasting because of global trade tensions, Brexit and financial market volatility. The shift in outlook, which policymakers said had clearly ‘moved to the downside’, comes just six weeks after the ECB removed the most important element of its crisis-era stimulus, halting new purchases of bonds as part of its €2.6tn quantitative easing programme. ‘We were unanimous about acknowledging the weaker momentum and changing the balance of risk for growth,’ said Mario Draghi… The new guidance, which the ECB said had not yet trigger a change in monetary policy, came amid mounting signs of economic trouble across the eurozone. A monthly poll of purchasing managers, a key gauge of business activity, fell to its lowest levels since the eurozone debt crisis…”
January 22 – Reuters (Tetsushi Kajimoto and Daniel Leussink): “The Bank of Japan cut its inflation forecasts… but maintained its massive stimulus programme, with Governor Haruhiko Kuroda warning of growing risks to the economy from trade protectionism and faltering global demand.”
EM Watch:
January 22 – Wall Street Journal (Rob Copeland): “Reports of the death of the emerging market bond market appear to have been greatly exaggerated. A currency crisis in Turkey and Argentina and worries about rising US sanctions risk for Russia kept a lid on EM sovereign debt sales in 2018. But a spate of issuance since the start of the year is offering proof that all problems can be forgiven if the price is right. After dropping by a fifth in value last year, US dollar issuance from the developing world has bounced back to hit $14.1bn for the year to January 17, according to Dealogic. That makes it the third-best start on record after 2018 and 2014 as countries rush to take advantage of the window of opportunity opened up by diminishing expectations for further US interest rate rises this year.”
January 21 – Bloomberg (Aline Oyamada and Yakob Peterseil): “The longest weekly rally in emerging-market stocks in a year encouraged record inflows into at least one exchange-traded fund in the past two weeks. Investors piled more than $2 billion into the iShares Core MSCI Emerging Markets ETF, the second largest emerging-market ETF, in the two weeks through Jan. 18.”
Global Bubble Watch:
January 23 – Financial Times (Gideon Rachman): “Two questions come up repeatedly in the corridors of the World Economic Forum in Davos. First, what is going to happen in the US-China trade war? Second, what is going to happen with Brexit? There are considerable similarities between these two questions. In both cases, the only sensible answer is some variant of: ‘I don’t know’. In both cases, there is a strong possibility of a bad ‘no deal’ outcome that could create turmoil in the world economy. And, in both cases, the answer will be revealed in March. The Trump administration has set a deadline of March 2 for the US to reach a new trade deal with China. Without an agreement, the US has pledged to raise its import tariffs on $200bn worth of Chinese goods to 25%, from the current 10% level. The deadline for Britain to leave the EU is March 29. Without a deal, the default position is that there will be a ‘no deal Brexit’ — in which Britain will crash out of the EU, leading to the immediate imposition of tariffs, the lapse of existing legal agreements and a surge in red-tape and regulations.”
January 21 – Reuters (Leika Kihara and Silvia Aloisi): “The International Monetary Fund trimmed its global growth forecasts… and a survey showed increasing pessimism among business chiefs as trade tensions and uncertainty loomed over the world’s biggest annual gathering of the rich and powerful.”
January 22 – CNBC (Jeff Cox): “Governments are continuing to run up huge debt levels, with emerging countries helping push the total global IOU to 80% of gross domestic product. The worldwide tab through 2018 is now up to $66 trillion as measured in U.S. currency terms, about double where it was in 2007, just as the financial crisis was beginning to unfold, according to Fitch Ratings’ new Global Government Debt Chart Book… ‘Government debt levels are high, leaving many countries poorly positioned for financial tightening as global interest rates begin to move higher,’ James McCormack, Fitch’s global head of sovereign ratings, said…”
January 21 – Reuters (Marc Jones): “Credit ratings in the developing world look set to grind lower again this year as the world economy slows, with Latin America likely to be the center of the action… The year is already off to a gloomy start, with S&P Global warning last week that nearly a third of big bond issuers in emerging markets now have an unsustainable amount of debt. Ratings matter for sovereign borrowers because the more highly rated they are, the lower their funding costs tend to be. Fitch Ratings thinks there will be more downgrades than upgrades again this year and Moody’s… still has close to twice as many countries on downgrade warnings, at 19, than the 11 it sees as candidates for an upgrade.”
January 20 – Reuters (Tom Miles): “Global foreign direct investment (FDI) fell 19% last year to an estimated $1.2 trillion, largely caused by U.S. President Donald Trump’s tax reforms, the United Nations trade and development agency UNCTAD said…”
January 24 – Bloomberg (Chanyaporn Chanjaroen and Pooja Thakur Mahrotri): “Rising interest rates and the latest round of property curbs have put the brakes on mortgage demand at Singapore’s banks, potentially further dragging down the city’s housing market. Home-loan growth slowed to 1.9% in the first 11 months of 2018, less than half the 4.2% increase posted in 2017… Mortgage growth will stay stuck below 2% this year, according to Diksha Gera, an analyst at Bloomberg Intelligence.”
January 23 – Bloomberg (Cathy Chan and Crystal Tse): “First came a sweeping government crackdown and a surge in defaults and failures at thousands of China’s peer-to-peer lenders. Now, in another troubling sign for the industry, some of the biggest investment banks have stopped taking them public. Wall Street firms including Goldman Sachs… and Citigroup Inc. walked away from U.S. initial public offerings of Chinese P2P lenders in recent months, people with knowledge of the matter said.”
Europe Watch:
January 23 – Wall Street Journal (Stephen Fidler): “Europe seems stuck, its economic recovery running out of steam and its politics shaken by the growing strength of nationalist politicians in many European countries. The continent is still in shock from the effects of the financial crisis that started more than a decade ago. In its wake, it has left ‘polarization, reactionary populism and inequality,’ Spain’s new Prime Minister Pedro Sánchez told the World Economic Forum… As a result, politics is in a funk in many countries. Brexit, France’s street protests, and a reaction in Italy and countries of Eastern Europe against the policy prescriptions of the European Union and increased immigration have clouded the path forward, while also threatening to undermine the recovery. Many business and financial leaders prefer to seek action elsewhere.”
January 24 – Bloomberg (Fergal O’Brien): “Germany’s industrial slump worsened at the start of 2019, dragging the euro-area economy into its worst performance in more than five years. IHS Markit’s monthly index showed manufacturing in Germany shrank for the first time in four years. In the euro area it barely grew, and a broader measure of activity dropped to the weakest since 2013.”
January 22 – Financial Times (Valentina Romei): “Italian banks became more cautious about lending in the last quarter of 2018, tightening credit standards as well as terms and conditions on their loans, according to the European Central Bank’s latest bank lending survey. This is the second successive quarter of tightening in the Italian banking sector, ‘partly because they are charging higher interest margins on riskier loans’, said Jack Allen, an economist at Capital Economics.”
Brexit Watch:
January 22 – Reuters (Guy Faulconbridge and William James): “An attempt by British lawmakers to prevent a no-deal Brexit was gaining momentum on Wednesday after the opposition Labour Party said it was likely to throw its parliamentary weight behind that. The United Kingdom, facing the deepest political crisis since World War Two, is due to leave the European Union at 2300 GMT on March 29 but has no approved deal on how the divorce will take place.”
Japan Watch:
January 20 – Reuters (Tetsushi Kajimoto): “Confidence among Japanese manufacturers dropped for a third straight month in January to a two-year low, a Reuters monthly poll showed, as worries over the health of the global economy and trade tensions take a toll on the corporate sector.”
January 22 – Associated Press (Yuri Kageyama): “Japan’s exports fell 3.8% in December from a year earlier, hit by slowing demand in China, as the trade balance shifted back into deficit for the year… For the year, imports outpaced the rise in exports, leaving a trade deficit for the first time in three years…”
Fixed-Income Bubble Watch:
January 23 – CNBC (Jim Christie): “California power company PG&E Corp, which expects to soon file for bankruptcy, said… it would cost between $75 billion and $150 billion to fully comply with a judge’s order to inspect its power grid and remove or trim trees that could fall into power lines and trigger wildfires.”
Leveraged Speculation Watch:
January 23 – CNBC (Robert Frank): “Hedge fund billionaire Ken Griffin closed a deal to buy the most expensive home ever sold in the U.S., paying around $238 million for a New York penthouse… The deal is the largest in Griffin’s recent $700 million global real estate shopping spree, believed to be the largest ever for a U.S. billionaire. Over the past few years, the founder and CEO of Citadel has purchased the most expensive homes in Chicago, Miami and New York. He has spent more than $200 million to buy land in Palm Beach, Florida, for a home he plans to build there. And this week, news broke that he purchased a $122 million property in London, which was the most expensive sale in that city in a decade.”
Geopolitical Watch:
January 25 – CNBC (Sam Meredith): “Liberal billionaire George Soros… warned that the U.S. and China, the world’s two largest economies, are locked in a ‘cold war that could soon turn into a hot one.’ His comments come at a time when investors are increasingly concerned about a serious economic downturn, with a long-running U.S.-China trade war souring business and consumer sentiment. Referencing Trump’s decision to label China as a ‘strategic’ competitor in late 2017, Soros said this approach was ‘too simplistic.’ ‘An effective policy towards China can’t be reduced to a slogan. It needs to be far more sophisticated, detailed and practical; and it must include an American economic response to the Belt and Road Initiative,’ he said.”
January 23 – Reuters (Andrew Osborn and Robin Emmott): “Russia accused the United States on Thursday of trying to usurp power in Venezuela and warned against military intervention, putting it at odds with Washington and the EU which backed protests against one of Moscow’s closest allies. Venezuelan opposition leader Juan Guaido declared himself interim leader on Wednesday, winning the support of Washington and parts of Latin America. That prompted socialist President Nicolas Maduro… to sever diplomatic ties with the United States. The prospect of Maduro being ousted is a geopolitical and economic headache for Moscow which, alongside China, has become a creditor of last resort for Caracas”
January 25 – Reuters (Robin Emmott and Vladimir Soldatkin): “NATO and Russia failed on Friday to resolve a dispute over a new Russian missile that Western allies say is a threat to Europe, bringing closer Washington’s withdrawal from a landmark arms control treaty… Without a breakthrough, the United States is set to start the six-month process of pulling out of the 1987 Intermediate-range Nuclear Forces Treaty (INF), having notified it would do so in early December and accusing Moscow of breaching it.”
January 24 – Financial Times (Edward White and Nian Liu): “Taiwan’s foreign minister has called for international support after a Chinese publication sought to name and shame foreign companies that do not acknowledge Taiwan as part of China. A Chinese academic study of hundreds of the world’s largest companies operating in China named 66 companies that it said ‘misidentified’ Taiwan, in a move that threatens to reignite international tension over how global corporates refer to Taiwan. The publication’s list of companies — which included US tech giants Apple and Amazon as well as German industrial Siemens — has been reported by China’s state media and has prompted calls by a Communist party-linked news outlet for stronger oversight by Chinese authorities.”
January 24 – Bloomberg (Saijel Kishan, Katherine Burton and Melissa Karsh): “Billionaire George Soros warned of the ‘mortal danger’ of China’s use of artificial intelligence to repress its citizens under the leadership of Xi Jinping, who he called the most dangerous opponent of democracies. ‘The instruments of control developed by artificial intelligence give an inherent advantage of totalitarian regimes over open societies,’ the 88-year-old said… ‘China is not the only authoritarian regime in the world but it’s undoubtedly the wealthiest, strongest and most developed in machine learning and artificial intelligence.’”
The S&P500 slipped 0.2% (up 6.3% y-t-d), while the Dow added 0.1% (up 6.0%). The Utilities increased 0.7% (up 0.6%). The Banks added 0.7% (up 14.5%), while the Broker/Dealers declined 1.5% (up 9.4%). The Transports slipped 0.9% (up 8.2%). The S&P 400 Midcaps (up 9.4%) and the small cap Russell 2000 (up 10.0%) were little changed for the week. The Nasdaq100 was about unchanged (up 7.2%). The Semiconductors surged 4.3% (up 10.9%). The Biotechs declined 0.6% (up 15.4%). With bullion jumping $21, the HUI gold index surged 5.2% (down 1.2%).
Three-month Treasury bill rates ended the week at 2.33%. Two-year government yields slipped a basis point to 2.61% (up 12bps y-t-d). Five-year T-note yields declined two bps to 2.60% (up 9bps). Ten-year Treasury yields fell three bps to 2.76% (up 7bps). Long bond yields declined three bps to 3.07% (up 5bps). Benchmark Fannie Mae MBS yields dipped one basis point to 3.56% (up 5bps).
Greek 10-year yields fell 11 bps to 4.06% (down 29bps y-t-d). Ten-year Portuguese yields declined eight bps to 1.65% (down 6bps). Italian 10-year yields fell eight bps to 2.65% (down 9bps). Spain's 10-year yields dropped 12 bps to 1.23% (down 19bps). German bund yields fell seven bps to 0.19% (down 5bps). French yields declined six bps to 0.60% (down 11bps). The French to German 10-year bond spread widened one to 41 bps. U.K. 10-year gilt yields declined five bps to 1.31% (up 3bps). U.K.'s FTSE equities index dropped 2.3% (up 1.2% y-t-d).
Japan's Nikkei 225 equities index increased 0.5% (up 3.8% y-t-d). Japanese 10-year "JGB" yields declined two bps to 0.00% (down 1bp y-t-d). France's CAC40 gained 1.0% (up 4.1% y-t-d). The German DAX equities index increased 0.7% (up 6.8%). Spain's IBEX 35 equities index rose 1.3% (up 7.6%). Italy's FTSE MIB index added 0.5% (up 8.1%). EM equities were mixed. Brazil's Bovespa index gained 1.6% (up 11.1%), while Mexico's Bolsa fell 1.4% (up 4.8%). South Korea's Kospi index jumped 2.5% (up 6.7%). India's Sensex equities index declined 1.0% (down 0.1%). China's Shanghai Exchange added 0.2% (up 4.3%). Turkey's Borsa Istanbul National 100 index surged 3.4% (up 11.5%). Russia's MICEX equities index gained 1.0% (up 5.9%).
Investment-grade bond funds saw outflows of $158 million, and junk bond funds posted outflows of $264 million (from Lipper).
Freddie Mac 30-year fixed mortgage rates were unchanged at 4.45% (up 30bps y-o-y). Fifteen-year rates were unchanged at 3.88% (up 26bps). Five-year hybrid ARM rates increased three bps to 3.90% (up 38bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates up six bps to a six-week high 4.48% (up 19bps).
Federal Reserve Credit last week declined $5.2bn to $4.011 TN. Over the past year, Fed Credit contracted $389bn, or 8.9%. Fed Credit inflated $1.200 TN, or 43%, over the past 324 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt gained $5.2bn last week to $3.408 TN. "Custody holdings" rose $56.6bn y-o-y, or 1.7%.
M2 (narrow) "money" supply rose $15.2bn last week to $14.521 TN. "Narrow money" gained $684bn, or 4.9%, over the past year. For the week, Currency increased $2.2bn. Total Checkable Deposits jumped $30.0bn, while Savings Deposits dropped $25.5bn. Small Time Deposits gained $4.6bn. Retail Money Funds rose $4.0bn.
Total money market fund assets added $2.4bn to $3.052 TN. Money Funds gained $227bn y-o-y, or 8.0%.
Total Commercial Paper increased $3.0bn to $1.069 TN. CP declined $60bn y-o-y, or 5.3%.
Currency Watch:
The U.S. dollar index declined 0.6% to 95.794 (down 0.4% y-t-d). For the week on the upside, the British pound increased 2.5%, the South African rand 1.7%, the New Zealand dollar 1.4%, the Mexican peso 0.6%, the Norwegian krone 0.6%, the Singapore dollar 0.4%, the euro 0.4%, the Canadian dollar 0.3%, the Japanese yen 0.2%, the Australian dollar 0.2%, the Swiss franc 0.2% and the South Korean won 0.1%. For the week on the downside, the Swedish krona declined 0.2% and the Swedish krona slipped 0.2%. The Chinese renminbi increased 0.44% versus the dollar this week (up 1.93% y-t-d).
Commodities Watch:
January 25 – Bloomberg (Aibing Guo, Dan Murtaugh and Javier Blas): “China’s largest oil refiner said its trading unit lost almost $700 million last year after being wrong-footed by zigzagging markets, revealing one of the biggest losses by a commodity trader in the last decade. Sinopec blamed the losses at its Unipec unit in part on ‘inappropriate hedging techniques’ and said it closed its positions after discovering the problem. Oil plunged sharply in late November and December, prompting traders to speculate that Unipec may have contributed to the price drop… It marks a sharp reversal of fortunes for Unipec, which has grown over the last 25 years to become one of the largest and most aggressive oil traders.”
The Goldman Sachs Commodities Index declined 0.8% (up 9.4% y-t-d). Spot Gold rose 1.7% to $1,303 (up 1.6%). Silver jumped 1.9% to $15.699 (up 1.0%). Crude slipped 11 cents to $53.69 (up 18%). Gasoline dropped 4.4% (up 7%), and Natural Gas sank 8.7% (up 8%). Copper added 0.4% (up 4%). Wheat increased 0.4% (up 3%). Corn declined 0.4% (up 1%).
Market Dislocation Watch:
January 23 – Wall Street Journal (Ira Iosebashvili and Amrith Ramkumar): “Stocks, bond yields, commodities and other risky assets have continued moving in lockstep lately, raising hopes that this year’s nascent rebound will continue but also fueling worries momentum could once again reverse. Correlations across assets have hit their highest level in almost a year, with the S&P 500, the 10-year U.S. Treasury yield and U.S. crude oil moving in tandem in nine of the previous 12 sessions through Tuesday. A six-day run of declines for the asset classes earlier this month was the longest streak since June, according to Dow Jones Market Data.”
January 25 – Bloomberg (Gowri Gurumurthy): “This month’s new junk-bond deals are all trading up in the secondary, even after most of them were upsized and priced at the tight end of guidance. High-yield issuers returned this month, the busiest for bond sales since September 2018, following a slump in issuance during December…”
January 22 – Bloomberg (Christopher Maloney): “Mortgage returns are lagging those of investment-grade corporates to start 2019, and that gap may persist thanks to an OAS spread differential that’s near its widest in two years. The option-adjusted spread of the Bloomberg Barclays U.S. Aggregate Corporate index offered 106 bps more than seen in the U.S. MBS index as of Friday’s close. While this is down from the 121 bps seen at the beginning of the year, it’s still near the widest since the beginning of 2017.”
Trump Administration Watch:
January 25 – Reuters (Steve Holland and Richard Cowan): “President Donald Trump agreed under mounting pressure on Friday to end a 35-day-old partial U.S. government shutdown without getting the $5.7 billion he had demanded from Congress for a border wall, handing a political victory to Democrats. The three-week spending deal reached with congressional leaders, quickly passed by the Republican-led Senate and the Democratic-controlled House of Representatives without opposition and signed by Trump, paves the way for tough talks with lawmakers about how to address security along the U.S.-Mexican border.”
January 22 – Reuters (Jeff Mason): “As much as U.S. President Donald Trump wants to boost markets through a trade pact with China, he will not soften his position that Beijing must make real structural reforms, including how it handles intellectual property, to reach a deal, advisers say. Offering to buy more American goods is unlikely by itself to overcome an issue that has bedeviled talks between the two countries. Those talks are set to continue when Chinese Vice Premier Liu He visits Washington at the end of January. The United States accuses China of stealing intellectual property and forcing American companies to share technology when they do business in China. Beijing denies the accusations.”
January 24 – CNBC (Berkeley Lovelace Jr.): “Commerce Secretary Wilbur Ross said Thursday the U.S. is still ‘miles and miles’ from a trade deal with China. ‘Frankly, that shouldn’t be too surprising,’ Ross said… The U.S. and China have ‘lots and lots of issues,’ he continued, and the Trump administration will need to create ‘structural reforms’ and ‘penalties’ in order to resume normal trade relations with Beijing. ‘We would like to make a deal but it has to be a deal that will work for both parties,’ he said. ‘We’re miles and miles from getting a resolution.’ Ross listed the sticking points, starting with what he calls America’s ‘intolerably big trade deficit’ with China. That deficit ballooned to $323.3 billion in 2018… It’s the worst imbalance on record dating to 2006.”
January 24 – Bloomberg (Andrew Mayeda and Jenny Leonard): “Commerce Secretary Wilbur Ross said the U.S. and China are eager to end their trade war, but the outcome will hinge on whether Beijing will deepen economic reforms and further open up its markets. Ross said he expects that negotiators will release a statement on their progress after Chinese Vice Premier Liu He meets with U.S. Trade Representative Robert Lighthizer in Washington from Jan. 30-31. ‘The harder issues are the ones that deal with structural reforms, particularly intellectual property rights,’ said Ross…, adding that China is moving up the technology value chain and also has an interest in protecting its own IP. ‘The equal market access is another very big issue. The idea of forced technology transfers is a huge issue.’”
January 23 – CNBC (Tucker Higgins): “President Donald Trump’s outside advisor on China said… that he didn’t expect a breakthrough in trade talks in the ‘near term.’ Michael Pillsbury, director of the Center for Chinese Strategy at the Hudson Institute and a noted China hawk with the ear of the president, suggested that he expected a planned meeting between U.S. and Chinese negotiators scheduled for the end of the month to conclude without a trade deal. ‘Over the last 45 years, a lot of American presidents have negotiated with China,’ Pillsbury said… ‘And there are some patterns to what has gone on. One of them is that the Chinese prefer to make a last-minute deal, to get the best deal they can. So I am not among those who think there is going to be a breakthrough in the next few days.’”
January 24 – Bloomberg (Victoria Guida and Katy O’Donnell): “The White House will announce a plan by next month to end government control of Fannie Mae and Freddie Mac in a bid to resolve a long debate over the fate of the two companies that dominate the mortgage market, a top regulator said. Joseph Otting, acting director of the Federal Housing Finance Agency, told employees last week that the administration would not wait on Congress, where attempts to overhaul the housing finance system have repeatedly faltered in the years since Fannie and Freddie were rescued during the financial crisis, according to a recording of his remarks obtained by Politico. ‘In the next two to four weeks you’re going to be able to see some communication that comes out of the White House and Treasury that really sets a direction for what the future of housing will be in the U.S. and what the FHFA’s part of that will be,’ Otting said…”
January 21 – Reuters (Sijia Jiang, Michael Martina, Christian Shepherd and Rishika Chatterjee): “The United States will proceed with the formal extradition from Canada of Huawei executive Meng Wanzhou, Canada’s ambassador to the United States told the Globe and Mail, as Beijing vowed to respond to Washington’s actions.”
Federal Reserve Watch:
January 25 – Wall Street Journal (Nick Timiraos): “Federal Reserve officials are close to deciding they will maintain a larger portfolio of Treasury securities than they’d expected when they began shrinking those holdings two years ago, putting an end to the central bank’s portfolio wind-down closer into sight. Officials are still resolving details of their strategy and how to communicate it to the public… With interest rate increases on hold for now, planning for the bond portfolio could take center stage at a two-day policy meeting of the central bank’s Federal Open Market Committee next week.”
January 24 – Wall Street Journal (Paul Kiernan and Vivian Salama): “A top White House economic adviser said… President Trump will seek to fill two Federal Reserve Board vacancies with nominees who don’t believe a rapidly expanding economy has to fuel faster inflation. ‘The White House wants highly capable, competent people who understand that you can have strong economic growth without higher inflation,’ White House National Economic Council head Lawrence Kudlow told reporters. He said surges in the economy’s productive capacity mean that more people can work at higher wages without causing inflation to pick up. Mr. Trump has repeatedly criticized the Fed in recent months for raising interest rates.”
U.S. Bubble Watch:
January 23 – CNBC (Annie Nova): “Hundreds of thousands of people are living without a paycheck amid the longest government shutdown in history. As a result, federal employees and contractors are digging into their retirement savings, filing for unemployment, picking up other jobs and unable to meet their rent or mortgage payments. Most people would be in the same bind if they missed even one pay period. Just 40% of Americans are able to cover an unexpected $1,000 expense, such as an emergency room visit or car repair, with their savings, according to a survey from… Bankrate.”
January 24 – Reuters (Richard Leong): “J.P. Morgan economists reduced their outlook for U.S. economic growth in the first quarter to 1.75% from 2.00% as the partial U.S. government shutdown has stretched to a second month for the longest one ever, they said… ‘That estimate solely accounts for the reduction in government sector output and does not incorporate any potential spillover effects into private economic activity. Fortunately, so far those spillovers look contained,’ the banks’ economists wrote…”
January 22 – CNBC (Diana Olick): “Real estate brokers are trying to figure out why sales of existing homes plunged in December. The 6.4% monthly move was unusually large, regardless of direction. The tally from the National Association of Realtors generally moves in the very low single digits month to month. In fact, the shift was one of the largest that didn’t involve some sort of change in government policy, like the homebuyer tax credit. ‘The latest decline is harder to explain. Perhaps it is the decline in consumer confidence that’s been occurring in the latter half of 2018,’ said Lawrence Yun, chief economist for the Realtors. ‘The latest numbers do not reflect the lower, current mortgage rates compared to the November figures, so it’s really harder to explain.’”
January 23 – Bloomberg (Prashant Gopal): “After years of soaring U.S. home prices, cash-out refinancing is coming back in fashion, primarily among homeowners with government-backed loans who tend to have weaker credit and fewer other options. About 76% of refinancing deals last year for loans backed by the Federal Housing Administration, the departments of Agriculture and Veterans Affairs were used to tap equity, the highest share in 20 years of data, according to CoreLogic...”
January 25 – Bloomberg (Jesse Hamilton): “High-risk leveraged lending is still standing out as a danger in the financial system, though the overall risk has lessened in the wider $4.4 trillion portfolio of big loans tied to multiple lenders, according to an examination… by U.S. banking regulators. While leveraged loans are only a segment of the Shared National Credit Program review by the Federal Reserve and other agencies, that lending -- often backing mergers and acquisitions of highly indebted companies -- represent the bulk of loans rated at the lowest levels. ‘Risks associated with leveraged lending activities are building in contrast to the portfolio overall,’ the Fed, Office of the Comptroller of the Currency and Federal Deposit Insurance Corp. said… ‘A material downturn in the economy could result in a significant increase in classified exposures and higher losses.’”
January 24 – Bloomberg (Emily Barrett and Misyrlena Egkolfopoulou): “The U.S. government shutdown risks putting a dent in both the dollar and Treasuries if it drags on. A quick resolution could do the same. A drawn-out spending battle may collide with the looming debate over America’s borrowing limit, potentially raising the odds of a U.S. credit rating downgrade, as occurred in 2011. But some observers reckon the market reaction this time around would be different: Instead of driving a haven trade into Treasuries, concerns about the U.S.’s growing debt burden could reverse that flow, pushing sovereign yields higher and the dollar lower.”
January 22 – Wall Street Journal (Rob Copeland): “Messaging startup Hustle projected the picture of Silicon Valley largess. The company spent millions of dollars raised from investors such as Alphabet Inc. on expensive new hires, on-tap kombucha, arcade games and a six-figure salary for its pedigreed chief executive. So it came as a shock to many employees earlier this month when co-founder and CEO Roddy Lindsay sent them an early-morning email announcing mass layoffs. Before the week was done, even the espresso machine was ripped out of the kitchen at Hustle’s San Francisco headquarters. Hustle is hardly the first startup to spend lavishly in an era of technology riches. What is new these days: The bill is coming due.”
January 22 – CNBC (Diana Olick): “After falling to record lows, the supply of homes on the market is finally rising. But a growing share of those homes are still out of reach to most buyers. In hot markets like Seattle, San Jose, California, Las Vegas and Portland, Oregon, the number of homes for sale rose last year. Even so, the share of affordable homes fell, thanks to rising home values and increasing mortgage interest rates. In Seattle, 58% of homes were considered affordable in 2017, but that share dropped to 46% last year, according to a survey from Redfin…”
January 25 – Wall Street Journal (Sam Goldfarb): “More companies with low credit ratings are limiting their borrowing to loans that would be repaid first in a bankruptcy, a trend that stands to undermine loans’ reputation as a safe investment. At the end of last year, roughly 27% of first-lien loans—the most senior type of debt that is typically held by investors—were backed by companies that didn’t have junior debt outstanding, according to LCD, a unit of S&P Global Market Intelligence. That was the largest share in records going back to 2007, up from 26% in 2017 and 18% in 2007… The presence of more junior debt is often referred to as a ‘debt cushion’ for investors in first-lien loans. Junior bonds and loans typically absorb losses first in a bankruptcy, while senior lenders typically get most or all of their money back.”
China Watch:
January 20 – CNBC (Huileng Tan): “China… announced that its official economic growth came in at 6.6% in 2018 — the slowest pace since 1990. That announcement was highly anticipated by many around the world amid Beijing’s ongoing trade dispute with the U.S., its largest trading partner. Economists polled by Reuters had predicted full-year GDP to come in at that pace, which was down from a revised 6.8% in 2017. Fourth quarter GDP growth was 6.4%, matching expectations.”
January 21 – Reuters (Yawen Chen and Ryan Woo): “Weakness in the service and farm sectors slowed China’s economic growth in the fourth quarter, despite a strong pickup in construction activity… Services grew 7.4% from a year earlier, slowing from 7.9% in the third quarter, while growth in agriculture slowed to 3.5% from 3.6%, the National Bureau of Statistics (NBS) said.”
January 20 – Reuters (Yawen Chen, Stella Qiu and Ryan Woo): “Growth in property investment in China cooled to the second slowest pace in 2018 in December, adding to signs of a further slackening in the real estate market in a blow to a key driver of economic growth. Real estate investment, which mainly focuses on the residential sector but includes commercial and office space, rose 8.2% in December from a year earlier, down from 9.3% in November…”
January 25 – Reuters (Kevin Yao): “China will take steps to spur growth amid a trade war with the United States, but there is limited room for aggressive stimulus in an economy already laden with massive debts and a property market prone to credit-driven spikes, policy insiders said. China’s deepening economic slowdown has fanned market expectations of a big spending binge, especially if the bruising tariff war with Washington escalates, intensifying pressure on Chinese jobs and threatening social stability. Such a move, plans for which have repeatedly been denied by China’s top leaders, would come at a price, however - similar moves in the past have quickly juiced growth rates but also buried the world’s No.2 economy under a mountain of debt. ‘The room for a strong stimulus is not big, and there are very big risks, because that will rely on a flood of cash and increased leverage in the economy,’ said a policy insider…”
January 20 – Reuters (Andrew Galbraith): “Encouraging China’s banks to actively increase support for the real economy, rather than relying on authorities’ orders to boost lending, is the key to improving the supply of credit in the economy, a central bank official said...”
January 21 – Bloomberg: “President Xi Jinping stressed the need to maintain political stability in an unusual meeting of China’s top leaders -- a fresh sign the ruling party is growing concerned about the social implications of the slowing economy. Xi told a ‘seminar’ of top provincial leaders and ministers in Beijing… that the Communist Party needed greater efforts ‘to prevent and resolve major risks,’… He said areas of concern facing the leadership ranged from politics and ideology to the economy, environment and external situation. ‘The party is facing long-term and complex tests in terms of maintaining long-term rule, reform and opening-up, a market-driven economy, and within the external environment,’ Xi said… ‘The party is facing sharp and serious dangers of a slackness in spirit, lack of ability, distance from the people, and being passive and corrupt. This is an overall judgment based on the actual situation.’”
January 20 – CNBC (Edward White): “Defaults on Chinese corporate bonds rose to a record high last year, in a fresh sign of wobbles hitting the country’s financial markets as economic growth slows. Forty five Chinese corporates defaulted on 117 bonds with a principal amount of Rmb110.5bn ($16.3bn), according to Fitch… Both the number of issuers and principal value were all-time peaks. ‘The vast majority of onshore defaults were by non-[state-owned enterprises], which accounted for 86.7% of defaults by issuer count and 90% by principal amount,’ said Jenny Huang and Shuncheng Zhang, analysts at Fitch, also noting signs that ‘investor risk appetite has deteriorated on the surge in onshore defaults’.”
January 24 – Bloomberg: “Several Chinese provinces have unveiled sharply lower shantytown redevelopment targets for 2019, suggesting one key driver of home sales may be on the wane. From Sichuan to Shanxi, targets to replace older, rundown dwellings with new, affordable housing have fallen as much as 74% from 2018… UBS Group AG property analyst John Lam estimates the national target may this year be pared back by 14% to 5 million units. Beijing’s shantytown redevelopment drive, part of China’s fight to alleviate poverty, had been fueling robust demand for new residential properties over the past three years. People were often given cash handouts to buy new apartments on the private market, and such transactions may have contributed to more than one-fifth of home sales in 2017, China International Capital Corp. wrote…”
January 25 – CNBC (Evelyn Cheng): “Chinese authorities face an ever-growing list of challenges — be it an ongoing trade fight with the U.S. or headwinds in domestic demand — and it appears they don’t have many tools left to spur the economy amid a slowdown. The real estate market in China has traditionally played a major role in its economic development, household wealth and public sentiment and was used by Beijing to stimulate growth during previous downturns… But along with a Chinese penchant for investing in houses, persistent expectations of government support sent prices and the household debt burden soaring… Junheng Li, founder of China-focused equity research firm JL Warren Capital, estimates 61% of Chinese urban households live in homes less than 10 years old… ‘(Some) simple math shows that continuously building new homes to stimulate investments and meanwhile create the false impression of wealth effect coming with home price appreciation is about to hit the wall,’ she said… ‘Chinese policy makers are fully aware and highly alert not to send the wrong signal to the home buyers that home prices will continue to hike.’”
January 23 – Bloomberg: “Chinese companies challenged by policy makers’ determination to tamp down leverage in the country’s financial system have found some creative ways to secure funding. One of the least transparent mechanisms to emerge so far is a tactic where bond issuers are indirectly buying their own bond offerings, according to investors and credit analysts. The idea is to inflate issuance sizes, creating the image of greater access to capital than might otherwise be true -- and leading to lower coupons in subsequent sales.”
Central Bank Watch:
January 24 – Financial Times (Claire Jones and Ben Hall): “The European Central Bank has sounded the alarm over the eurozone economy, warning a slowdown it thought would be temporary was showing signs of becoming long-lasting because of global trade tensions, Brexit and financial market volatility. The shift in outlook, which policymakers said had clearly ‘moved to the downside’, comes just six weeks after the ECB removed the most important element of its crisis-era stimulus, halting new purchases of bonds as part of its €2.6tn quantitative easing programme. ‘We were unanimous about acknowledging the weaker momentum and changing the balance of risk for growth,’ said Mario Draghi… The new guidance, which the ECB said had not yet trigger a change in monetary policy, came amid mounting signs of economic trouble across the eurozone. A monthly poll of purchasing managers, a key gauge of business activity, fell to its lowest levels since the eurozone debt crisis…”
January 22 – Reuters (Tetsushi Kajimoto and Daniel Leussink): “The Bank of Japan cut its inflation forecasts… but maintained its massive stimulus programme, with Governor Haruhiko Kuroda warning of growing risks to the economy from trade protectionism and faltering global demand.”
EM Watch:
January 22 – Wall Street Journal (Rob Copeland): “Reports of the death of the emerging market bond market appear to have been greatly exaggerated. A currency crisis in Turkey and Argentina and worries about rising US sanctions risk for Russia kept a lid on EM sovereign debt sales in 2018. But a spate of issuance since the start of the year is offering proof that all problems can be forgiven if the price is right. After dropping by a fifth in value last year, US dollar issuance from the developing world has bounced back to hit $14.1bn for the year to January 17, according to Dealogic. That makes it the third-best start on record after 2018 and 2014 as countries rush to take advantage of the window of opportunity opened up by diminishing expectations for further US interest rate rises this year.”
January 21 – Bloomberg (Aline Oyamada and Yakob Peterseil): “The longest weekly rally in emerging-market stocks in a year encouraged record inflows into at least one exchange-traded fund in the past two weeks. Investors piled more than $2 billion into the iShares Core MSCI Emerging Markets ETF, the second largest emerging-market ETF, in the two weeks through Jan. 18.”
Global Bubble Watch:
January 23 – Financial Times (Gideon Rachman): “Two questions come up repeatedly in the corridors of the World Economic Forum in Davos. First, what is going to happen in the US-China trade war? Second, what is going to happen with Brexit? There are considerable similarities between these two questions. In both cases, the only sensible answer is some variant of: ‘I don’t know’. In both cases, there is a strong possibility of a bad ‘no deal’ outcome that could create turmoil in the world economy. And, in both cases, the answer will be revealed in March. The Trump administration has set a deadline of March 2 for the US to reach a new trade deal with China. Without an agreement, the US has pledged to raise its import tariffs on $200bn worth of Chinese goods to 25%, from the current 10% level. The deadline for Britain to leave the EU is March 29. Without a deal, the default position is that there will be a ‘no deal Brexit’ — in which Britain will crash out of the EU, leading to the immediate imposition of tariffs, the lapse of existing legal agreements and a surge in red-tape and regulations.”
January 21 – Reuters (Leika Kihara and Silvia Aloisi): “The International Monetary Fund trimmed its global growth forecasts… and a survey showed increasing pessimism among business chiefs as trade tensions and uncertainty loomed over the world’s biggest annual gathering of the rich and powerful.”
January 22 – CNBC (Jeff Cox): “Governments are continuing to run up huge debt levels, with emerging countries helping push the total global IOU to 80% of gross domestic product. The worldwide tab through 2018 is now up to $66 trillion as measured in U.S. currency terms, about double where it was in 2007, just as the financial crisis was beginning to unfold, according to Fitch Ratings’ new Global Government Debt Chart Book… ‘Government debt levels are high, leaving many countries poorly positioned for financial tightening as global interest rates begin to move higher,’ James McCormack, Fitch’s global head of sovereign ratings, said…”
January 21 – Reuters (Marc Jones): “Credit ratings in the developing world look set to grind lower again this year as the world economy slows, with Latin America likely to be the center of the action… The year is already off to a gloomy start, with S&P Global warning last week that nearly a third of big bond issuers in emerging markets now have an unsustainable amount of debt. Ratings matter for sovereign borrowers because the more highly rated they are, the lower their funding costs tend to be. Fitch Ratings thinks there will be more downgrades than upgrades again this year and Moody’s… still has close to twice as many countries on downgrade warnings, at 19, than the 11 it sees as candidates for an upgrade.”
January 20 – Reuters (Tom Miles): “Global foreign direct investment (FDI) fell 19% last year to an estimated $1.2 trillion, largely caused by U.S. President Donald Trump’s tax reforms, the United Nations trade and development agency UNCTAD said…”
January 24 – Bloomberg (Chanyaporn Chanjaroen and Pooja Thakur Mahrotri): “Rising interest rates and the latest round of property curbs have put the brakes on mortgage demand at Singapore’s banks, potentially further dragging down the city’s housing market. Home-loan growth slowed to 1.9% in the first 11 months of 2018, less than half the 4.2% increase posted in 2017… Mortgage growth will stay stuck below 2% this year, according to Diksha Gera, an analyst at Bloomberg Intelligence.”
January 23 – Bloomberg (Cathy Chan and Crystal Tse): “First came a sweeping government crackdown and a surge in defaults and failures at thousands of China’s peer-to-peer lenders. Now, in another troubling sign for the industry, some of the biggest investment banks have stopped taking them public. Wall Street firms including Goldman Sachs… and Citigroup Inc. walked away from U.S. initial public offerings of Chinese P2P lenders in recent months, people with knowledge of the matter said.”
Europe Watch:
January 23 – Wall Street Journal (Stephen Fidler): “Europe seems stuck, its economic recovery running out of steam and its politics shaken by the growing strength of nationalist politicians in many European countries. The continent is still in shock from the effects of the financial crisis that started more than a decade ago. In its wake, it has left ‘polarization, reactionary populism and inequality,’ Spain’s new Prime Minister Pedro Sánchez told the World Economic Forum… As a result, politics is in a funk in many countries. Brexit, France’s street protests, and a reaction in Italy and countries of Eastern Europe against the policy prescriptions of the European Union and increased immigration have clouded the path forward, while also threatening to undermine the recovery. Many business and financial leaders prefer to seek action elsewhere.”
January 24 – Bloomberg (Fergal O’Brien): “Germany’s industrial slump worsened at the start of 2019, dragging the euro-area economy into its worst performance in more than five years. IHS Markit’s monthly index showed manufacturing in Germany shrank for the first time in four years. In the euro area it barely grew, and a broader measure of activity dropped to the weakest since 2013.”
January 22 – Financial Times (Valentina Romei): “Italian banks became more cautious about lending in the last quarter of 2018, tightening credit standards as well as terms and conditions on their loans, according to the European Central Bank’s latest bank lending survey. This is the second successive quarter of tightening in the Italian banking sector, ‘partly because they are charging higher interest margins on riskier loans’, said Jack Allen, an economist at Capital Economics.”
Brexit Watch:
January 22 – Reuters (Guy Faulconbridge and William James): “An attempt by British lawmakers to prevent a no-deal Brexit was gaining momentum on Wednesday after the opposition Labour Party said it was likely to throw its parliamentary weight behind that. The United Kingdom, facing the deepest political crisis since World War Two, is due to leave the European Union at 2300 GMT on March 29 but has no approved deal on how the divorce will take place.”
Japan Watch:
January 20 – Reuters (Tetsushi Kajimoto): “Confidence among Japanese manufacturers dropped for a third straight month in January to a two-year low, a Reuters monthly poll showed, as worries over the health of the global economy and trade tensions take a toll on the corporate sector.”
January 22 – Associated Press (Yuri Kageyama): “Japan’s exports fell 3.8% in December from a year earlier, hit by slowing demand in China, as the trade balance shifted back into deficit for the year… For the year, imports outpaced the rise in exports, leaving a trade deficit for the first time in three years…”
Fixed-Income Bubble Watch:
January 23 – CNBC (Jim Christie): “California power company PG&E Corp, which expects to soon file for bankruptcy, said… it would cost between $75 billion and $150 billion to fully comply with a judge’s order to inspect its power grid and remove or trim trees that could fall into power lines and trigger wildfires.”
Leveraged Speculation Watch:
January 23 – CNBC (Robert Frank): “Hedge fund billionaire Ken Griffin closed a deal to buy the most expensive home ever sold in the U.S., paying around $238 million for a New York penthouse… The deal is the largest in Griffin’s recent $700 million global real estate shopping spree, believed to be the largest ever for a U.S. billionaire. Over the past few years, the founder and CEO of Citadel has purchased the most expensive homes in Chicago, Miami and New York. He has spent more than $200 million to buy land in Palm Beach, Florida, for a home he plans to build there. And this week, news broke that he purchased a $122 million property in London, which was the most expensive sale in that city in a decade.”
Geopolitical Watch:
January 25 – CNBC (Sam Meredith): “Liberal billionaire George Soros… warned that the U.S. and China, the world’s two largest economies, are locked in a ‘cold war that could soon turn into a hot one.’ His comments come at a time when investors are increasingly concerned about a serious economic downturn, with a long-running U.S.-China trade war souring business and consumer sentiment. Referencing Trump’s decision to label China as a ‘strategic’ competitor in late 2017, Soros said this approach was ‘too simplistic.’ ‘An effective policy towards China can’t be reduced to a slogan. It needs to be far more sophisticated, detailed and practical; and it must include an American economic response to the Belt and Road Initiative,’ he said.”
January 23 – Reuters (Andrew Osborn and Robin Emmott): “Russia accused the United States on Thursday of trying to usurp power in Venezuela and warned against military intervention, putting it at odds with Washington and the EU which backed protests against one of Moscow’s closest allies. Venezuelan opposition leader Juan Guaido declared himself interim leader on Wednesday, winning the support of Washington and parts of Latin America. That prompted socialist President Nicolas Maduro… to sever diplomatic ties with the United States. The prospect of Maduro being ousted is a geopolitical and economic headache for Moscow which, alongside China, has become a creditor of last resort for Caracas”
January 25 – Reuters (Robin Emmott and Vladimir Soldatkin): “NATO and Russia failed on Friday to resolve a dispute over a new Russian missile that Western allies say is a threat to Europe, bringing closer Washington’s withdrawal from a landmark arms control treaty… Without a breakthrough, the United States is set to start the six-month process of pulling out of the 1987 Intermediate-range Nuclear Forces Treaty (INF), having notified it would do so in early December and accusing Moscow of breaching it.”
January 24 – Financial Times (Edward White and Nian Liu): “Taiwan’s foreign minister has called for international support after a Chinese publication sought to name and shame foreign companies that do not acknowledge Taiwan as part of China. A Chinese academic study of hundreds of the world’s largest companies operating in China named 66 companies that it said ‘misidentified’ Taiwan, in a move that threatens to reignite international tension over how global corporates refer to Taiwan. The publication’s list of companies — which included US tech giants Apple and Amazon as well as German industrial Siemens — has been reported by China’s state media and has prompted calls by a Communist party-linked news outlet for stronger oversight by Chinese authorities.”
January 24 – Bloomberg (Saijel Kishan, Katherine Burton and Melissa Karsh): “Billionaire George Soros warned of the ‘mortal danger’ of China’s use of artificial intelligence to repress its citizens under the leadership of Xi Jinping, who he called the most dangerous opponent of democracies. ‘The instruments of control developed by artificial intelligence give an inherent advantage of totalitarian regimes over open societies,’ the 88-year-old said… ‘China is not the only authoritarian regime in the world but it’s undoubtedly the wealthiest, strongest and most developed in machine learning and artificial intelligence.’”
January 21 – Reuters (Angus McDowall and Dan Williams): “Israel struck in Syria early on Monday, the latest salvo in its increasingly open assault on Iran’s presence there, shaking the night sky over Damascus with an hour of loud explosions in a second consecutive night of military action.”
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