[Bloomberg] U.S. Stocks Retreat, Treasuries Advance With Gold: Markets Wrap
[Bloomberg] Offshore Yuan Falls for Second Day as Bears Reload After Squeeze
[Bloomberg] Turkish Lira Extends Losses as Rate Speculation Mounts: Chart
[Reuters] Asian stocks bounce on U.S. cues though dlr gains may clip wings
[CNBC] Chinese yuan’s muscle flexing didn’t last long
[Reuters] Fed's Rosengren calls for gradual, but faster, interest-rate hikes
[Bloomberg] Why the China Manipulator Label Looks Increasingly Appealing to Trump
[Reuters] Mexico annual inflation picks up to 2-year high in December
[Reuters] Germany's left parties set conditions for tie-up to threaten Merkel
[Bloomberg] Cross-Asset Stress Eases to Lowest Since 2015 China Scare: Chart
[Bloomberg] Xi’s Graft Busters Pledge Loyalty as Reshuffle Year Kicks Off
[Reuters] Chinese state tabloid warns Trump, end one China policy and China will take revenge
[FT] Turkey: the crisis candidate
Sunday, January 8, 2017
Sunday Evening Links
[Bloomberg] Asia Stocks Set to Follow U.S. Gains, Pound Slips: Markets Wrap
[Bloomberg] Potential Fed Chairs Suggest They Would Pursue Tighter Policy
[Bloomberg] China Reserves Slumped $320 Billion Last Year as Yuan Tumbled
[Bloomberg] China Is Planning a New, Relaxed Approach to Growth
[Reuters] North Korea's missile testing 'serious threat' to U.S.: defense secretary
[NYT] With Speech, Theresa May Prepares to Walk ‘Brexit’ Tightrope
[FT] China battles to control growing online nationalism
[Bloomberg] Potential Fed Chairs Suggest They Would Pursue Tighter Policy
[Bloomberg] China Reserves Slumped $320 Billion Last Year as Yuan Tumbled
[Bloomberg] China Is Planning a New, Relaxed Approach to Growth
[Reuters] North Korea's missile testing 'serious threat' to U.S.: defense secretary
[NYT] With Speech, Theresa May Prepares to Walk ‘Brexit’ Tightrope
[FT] China battles to control growing online nationalism
Saturday, January 7, 2017
Sunday's News Links
[Bloomberg] Dubai Stocks Lead Middle East Gains as Traders Seek Dividends
[CNBC] 2016 was a terrible year for stock picking, and 2017 may not get much better
[Reuters] Germany's Gabriel says EU break-up no longer unthinkable
[Bloomberg] May Denies ‘Muddled’ Thinking, Pledges Brexit Details in Weeks
[Reuters] Shanghai suspends sales of commercial office projects
[NBC] Millions in China Learn to Live With Smog 'Airpocalypse'
[WSJ] Investors Betting Strongest Junk-Bond Rally in Years Has Legs
[FT] China capital controls help slow cash outflows
[FT] Banks rush to bond market ahead of rates rise
[CNBC] 2016 was a terrible year for stock picking, and 2017 may not get much better
[Reuters] Germany's Gabriel says EU break-up no longer unthinkable
[Bloomberg] May Denies ‘Muddled’ Thinking, Pledges Brexit Details in Weeks
[Reuters] Shanghai suspends sales of commercial office projects
[NBC] Millions in China Learn to Live With Smog 'Airpocalypse'
[WSJ] Investors Betting Strongest Junk-Bond Rally in Years Has Legs
[FT] China capital controls help slow cash outflows
[FT] Banks rush to bond market ahead of rates rise
Saturday's News Links
[Bloomberg] Fed’s Powell Urges Congress to Take Another Look at Volcker Rule
[Reuters] China Dec forex reserves fall less than expected to $3.011 trillion
[Bloomberg] Older Americans Are Retiring in Droves
[Bloomberg] Gabriel Takes Aim at Merkel, Targets SPD-Led Government Majority
[Bloomberg] Turkey Fires 8,000 Civil Servants for Alleged Terror Links
[WSJ] We Are Not the World
[Reuters] China Dec forex reserves fall less than expected to $3.011 trillion
[Bloomberg] Older Americans Are Retiring in Droves
[Bloomberg] Gabriel Takes Aim at Merkel, Targets SPD-Led Government Majority
[Bloomberg] Turkey Fires 8,000 Civil Servants for Alleged Terror Links
[WSJ] We Are Not the World
Friday, January 6, 2017
Weekly Commentary: Just the Facts
For the Week:
The S&P500 gained 1.7% (up 18.5% y-o-y), and the Dow rose 1.0% (up 22.1%). The Utilities added 0.3% (up 13.5%). The Banks gained 1.1% (up 39.7%), and the Broker/Dealers surged 4.4% (up 32.9%). The Transports increased 0.7% (up 31.1%). The S&P 400 Midcaps rose 1.3% (up 28.6%), and the small cap Russell 2000 added 0.7% (up 30.7%). The Nasdaq100 jumped 2.9% (up 17.2%), and the Morgan Stanley High Tech index surged 3.4% (up 25.6%). The Semiconductors added 0.2% (up 51.3%). The Biotechs surged 6.8% (down 4.4%). With bullion jumping $21, the HUI gold index rose 7.8% (up 65.8%).
Three-month Treasury bill rates ended the week at 51 bps. Two-year government yields added two bps to 1.21% (up 28bps y-o-y). Five-year T-note yields slipped a basis point to 1.92% (up 36bps). Ten-year Treasury yields declined two bps to 2.42% (up 30bps). Long bond yields fell six bps to 3.01% (up 8bps).
Greek 10-year yields dropped 24 bps to 6.78% (down 165bps y-o-y). Ten-year Portuguese yields surged 31 bps to a 10-month high 4.05% (up 146bps). Italian 10-year yields jumped 15 bps to 1.96% (up 43bps). Spain's 10-year yields rose 16 bps to 1.54% (down 16bps). German bund yields gained nine bps to 0.30% (down 21bps). French yields jumped 15 bps to 0.83% (down 5bps). The French to German 10-year bond spread widened seven to an almost two-year high 53 bps. U.K. 10-year gilt yields rose 15 bps to 1.38% (down 39bps). U.K.'s FTSE equities index added 0.9% to another record high.
Japan's Nikkei 225 equities index jumped 1.8%. Japanese 10-year "JGB" yields increased two bps to 0.06% (down 15bps y-o-y). The German DAX equities index rose 1.0%. Spain's IBEX 35 equities index jumped 1.8%. Italy's FTSE MIB index surged 2.4%. EM equities were mostly higher. Brazil's Bovespa index rose 2.4%. Mexico's Bolsa gained 0.9%. South Korea's Kospi advanced 1.1%. India’s Sensex equities index increased 0.5%. China’s Shanghai Exchange jumped 1.6%. Turkey's Borsa Istanbul National 100 index declined 1.3%. Russia's MICEX equities slipped 0.8%.
Junk bond mutual funds saw inflows of $734 million (from Lipper).
Freddie Mac 30-year fixed mortgage rates dropped 12 bps to 4.20% (up 23bps y-o-y). Fifteen-year rates declined 11 bps to 3.44% (up 18bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down nine bps to 4.28% (up 20bps).
Federal Reserve Credit last week declined $12.8bn to $4.414 TN. Over the past year, Fed Credit contracted $32.8bn (down 0.7%). Fed Credit inflated $1.604 TN, or 57%, over the past 217 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt increased $2.1bn last week to $3.182 TN. "Custody holdings" were down $130bn y-o-y, or 3.9%.
M2 (narrow) "money" supply last week jumped $24.3bn to $13.260 TN. "Narrow money" expanded $938bn, or 7.6%, over the past year. For the week, Currency declined $0.7bn. Total Checkable Deposits jumped $28.6bn, while Savings Deposits were little changed. Small Time Deposits slipped $0.7bn. Retail Money Funds declined $3.3bn.
Total money market fund assets declined $10.0bn to $2.718 TN. Money Funds declined $16.6bn y-o-y (0.6%).
Total Commercial Paper dropped $36.5bn to $950bn. CP declined $132bn y-o-y, or 12.5%.
Currency Watch:
The U.S. dollar index slipped 0.2% to 102.2 (up 3.9% y-o-y). For the week on the upside, the Canadian dollar increased 1.5%, the Australian dollar 1.3%, the South Korean won 1.2%, the Brazilian real 0.9%, the Singapore dollar 0.5%, the Swedish krona 0.5%, the New Zealand dollar 0.4%, the euro 0.1% and the Swiss franc 0.1%. For the week on the downside, the Mexican peso declined 2.3%, the British pound 0.4%, the South African rand 0.1% and the Japanese yen 0.1%. In unusually volatile trading, the Chinese yuan increased 0.3% versus the dollar (down 5.3% y-o-y).
Commodities Watch:
January 4 – Bloomberg (Alfred Cang): “Chinese investors traded a record volume of commodity futures last year as speculators poured in and out of the market on bets that shortages are looming. Combined aggregate trading volume on the Shanghai Futures Exchange, Dalian Commodity Exchange and Zhengzhou Commodity Exchange jumped 27% from 2015 levels to 4.1 billion contracts, according to… the China Futures Association. Turnover across the bourses rose 30% to a record 177.4 trillion yuan ($25.5 trillion)…”
The Goldman Sachs Commodities Index declined 0.2% (up 34.6% y-o-y). Spot Gold jumped 1.8% to $1,173 (up 6.2%). Silver surged 3.3% to $16.52 (up 18.6%). Crude slipped 13 cents to $53.70 (up 62%). Gasoline declined 2.7% (up 45%), and Natural Gas dropped 12.8% (up 32%). Copper gained 1.5% (up 26%). Wheat jumped 3.7% (down 12%). Corn gained 1.7% (unchanged).
Trump Administration Watch:
January 5 – Bloomberg (Andrew Mayeda): “The makeup of President-elect Donald Trump’s trade team suggests he wasn’t joking when he promised voters to shake things up. On the campaign trail, Trump portrayed an America that has been shortchanged by bad trade deals and unscrupulous trading partners, leading to the hollowing out of the nation’s manufacturing sector. He promised to label China a currency manipulator and renegotiate the North American Free Trade Agreement with Canada and Mexico. Since the election, Trump has taken aim at individual companies, warning General Motors Co. this week that it could face a ‘big border tax’ if it doesn’t shift production to the U.S. from Mexico. And the track records of his top trade officials signal that his administration will take aggressive steps to boost exports… ‘It’s clear this wasn’t just campaign rhetoric. The team that the President-elect has put in place was at the core of advising him during the campaign and has a clear playbook of what it wants to implement,’ said Mark Wu, an assistant professor at Harvard Law School who worked in the office of the U.S. trade representative under George W. Bush. ‘They’ve been pretty straightforward about their view of the status quo, which is that it undermines American economic interests.’”
January 3 – New York Times (Binyamin Appelbaum): “President-elect Donald J. Trump… named as his chief trade negotiator a Washington lawyer who has long advocated protectionist policies, the latest sign that Mr. Trump intends to fulfill his campaign promise to get tough with China, Mexico and other trading partners. Mr. Trump also renewed his episodic campaign to persuade American companies to expand domestic manufacturing, criticizing General Motors via Twitter on Tuesday... The choice of Robert Lighthizer (pronounced LIGHT-hi-zer) to be the United States’ trade representative nearly completes Mr. Trump’s selection of top economic advisers and, taken together with the president-elect’s running commentary on Twitter, underscores Mr. Trump’s focus on making things in America.”
January 4 – Reuters (Sarah N. Lynch): “With his selection of deal-making attorney Walter ‘Jay’ Clayton to head the U.S. Securities and Exchange Commission, President-elect Donald Trump is signaling that the agency will try to reduce regulations that critics see as burdensome or hindering corporate growth. Trump announced… that he intends to nominate Clayton, a partner in the New York office of law firm Sullivan & Cromwell, to lead the agency that polices and regulates Wall Street. Clayton specializes in public and private mergers and acquisitions and capital-raising efforts, and notably worked on the initial public offering of Alibaba Group Holding Company.”
January 6 – Financial Times (Shawn Donnan): “Senior Chinese officials have warned the US that Beijing is ready to retaliate if Donald Trump’s incoming administration imposes new tariffs, highlighting the risk of a destructive trade war between the world’s two largest economies. Penny Pritzker, the outgoing US commerce secretary, said… that Chinese officials had informed their US counterparts in a meeting after November’s election that they would be forced to respond to trade measures taken by the new administration. ‘The Chinese leadership said to me ‘If you guys put an import duty on us we are going to do it on you’,’ Ms Pritzker said. ‘And then they said ‘That will be bad for both of us’.’”
January 6 - Los Angeles Times (Ralph Jennings): “Taiwanese President Tsai Ing-wen, who rattled mainland China by phoning President-elect Donald Trump last month, leaves Saturday for a trip to the United States and Central America that will be closely watched for any further breaches in the delicate diplomatic protocol with Beijing. The journey is seen as a chance for Tsai to prop up relations in a region that has historically been friendly to Taiwan but faces pressure from the mainland. Because her government is not formally recognized by the United States, Tsai will only make ‘transit stops’ of about a day apiece in Houston on Saturday and in San Francisco at the end of the nine-day trip.”
China Bubble Watch:
January 2 – Bloomberg: “China’s factories and services both closed out 2016 on relatively robust notes that signal growth is strong enough for policy makers to keep pushing for economic reforms in 2017. The manufacturing purchasing managers index stabilized near a post-2012 high in December, edging down to 51.4 from 51.7 the prior month. The non-manufacturing PMI slipped to 54.5 from a two-year high of 54.7 in November… A gauge of factory input prices surged to a five-year high of 69.6.”
January 4 – Bloomberg: “The People’s Bank of China faces a reckoning after revving its credit engine for years. Three conditions suggest traditional financing and shadow banking are due to cool: Restrictions on property markets are poised to start weighing on mortgage issuance; bond market turbulence has spurred widespread cancellation of new corporate issues; and banks face more curbs on selling wealth-management products amid a regulatory tightening. With economic expansion on pace to meet the government’s objective and inflation pressure rising, leaders are signaling tighter monetary policy as they seek to reduce risks. The PBOC also cut language from its last quarterly statement saying it would reduce lending costs. ‘China’s credit engine is running out of gas,’ said Frederic Neumann, co-head of Asian economic research at HSBC… ‘Regulatory tightening, higher interest rates and a liquidity squeeze will likely weigh on credit growth in coming months.’”
January 1 – Wall Street Journal (Rachel Rosenthal): “At the top of regulators’ agenda in China for 2017 is a campaign to wean the nation’s sprawling financial system off of cheap borrowing and rising credit levels. Years of easy money have helped fuel growth, but also have sparked a worrisome surge in asset prices and other financial risks. The latest target is the $9 trillion bond market, where the central bank has been gradually tamping down short-term credit to discourage the kind of borrowing many financial institutions use to make risky investments… As much as $833 billion may have left China in 2016 through November, estimates French investment bank Natixis, compared with an outflow of $742 billion in all of 2015… The trouble is that the easy money is funding a huge tangle of investments by banks, insurers, brokers and speculators in everything from real estate and troubled infrastructure projects to corporate bonds and soybean-meal futures. Any tightening can threaten the debt-saddled corporate sector and potentially sow turmoil in unexpected places.”
January 3 – Wall Street Journal (Lingling Wei): “The large pile of foreign debt owed by Chinese companies, from state-owned banks to airlines, is giving added impetus to Beijing’s efforts to keep the yuan from falling too steeply against the rallying dollar. The yuan dropped by 4% over the past three months, as the dollar recently hit a 14-year high against 16 currencies. The faster-than-expected depreciation is causing more businesses and individuals to try to get out of yuan, further pressuring the currency… Chinese companies with large amounts of dollar debts represent another motivation for stepped-up controls, economists and officials say… Though the People’s Bank of China doesn’t give detailed breakdowns of Chinese companies’ foreign debt, more than half of it is in U.S. dollars… Chinese businesses’ foreign borrowings increased by $47.7 billion—a 4% rise—to $1.2 trillion in the third quarter of 2016 from the second quarter, official data show. State banks, traditionally big users of external funding to help replenish their capital base, accounted for 38% of the jump.”
January 4 – Bloomberg: “China has studied possible scenarios for the yuan and capital outflows this year and is preparing contingency plans, according to people familiar with the matter… The authorities have used stress tests, models and field research, said the people who asked not to be identified… Financial regulators have already encouraged some state-owned enterprises to sell foreign currency and may order them to temporarily convert some holdings into yuan under the current account if necessary, they added… The reported plans come amid increasing pressure on the yuan from a resurgent dollar, rising capital outflows and concern that U.S. President-elect Donald Trump may make good on his threats to take punitive measures on China’s exports. Policy makers in Beijing have recently taken a slew of measures to tighten control of the currency market, including placing higher scrutiny on citizens’ conversion quotas and stricter requirements for banks reporting cross-border transactions.”
January 6 – Wall Street Journal (Saumya Vaishampayan): “China continued to squeeze the global market for the yuan Friday, sending the cost of borrowing the currency in overseas markets soaring to a near-record high. Investors and analysts say the nosebleed rates are likely to continue as China’s central bank battles to keep the country’s currency from weakening too far and fast. The rate that banks charge each other in Hong Kong’s overnight lending market for the yuan jumped to 61.3% on Friday--the highest in a year and the second-highest level on record. That rate was 38.3% on Thursday, and has remained above 10% since Dec. 30.”
January 1 – Financial Times (Tom Mitchell): “Chinese residents hoping to cash out of the renminbi will face a great wall of paperwork on Tuesday in a test of confidence for the currency as the annual quota for individuals’ foreign exchange purchases resets. With individuals in China allowed to purchase up to $50,000 worth of foreign exchange each calendar year, observers will be watching for signs of a rush to use up their limit as banks reopen after the new year holiday. The incentive to buy dollars is strong after the US Federal Reserve’s December rate rise — and the fiscal and economic policies of US president-elect Donald Trump are only expected to accelerate the renminbi’s two-year decline against the greenback.”
January 2 – Bloomberg: “At risk of capital flight, China marked the new year with extra requirements for citizens converting yuan into foreign currencies. The State Administration of Foreign Exchange, the currency regulator, said in a statement Dec. 31 that it wanted to close loopholes exploited for purposes such as money laundering and illegally channeling money into overseas property. While the regulator left unchanged quotas of $50,000 of foreign currency per person a year, citizens faced extra disclosure requirements from Jan. 1.”
January 1 – CNBC (Nyshka Chandran): “First Britain, then the United States. Now, could China be facing a populist backlash of its own? A growing anti-establishment movement will test the nation's leadership ahead of the 19th Party Congress in late 2017, set to be one of the year's biggest political events… President Xi Jinping is widely expected to be given a second term but his ability to manage rising socio-economic pressures will be a major theme in the lead-up to the Congress, Nicholas Consonery, senior Asia-Pacific director at FTI Consulting, told CNBC… Cynicism with Beijing's economy-first policies has created a new political movement known as the New Left, or neo-Maoism, that supports the egalitarian ideas preached by dictator Mao Zedong.”
Italy Watch:
January 1 – Reuters (Paul Carrel): “The head of Germany's Ifo economic institute believes Italians will eventually want to quit the euro currency area if their standard of living does not improve, he told German daily Tagesspiegel. ‘The standard of living in Italy is at the same level as in 2000. If that does not change, the Italians will at some stage say: ‘We don't want this euro zone any more',’ Ifo chief Clemens Fuest told the newspaper. He also said that if Germany's parliament were to approve a European rescue programme for Italy, it would impose on German taxpayers risks ‘the size of which it does not know and cannot control.’”
Europe Watch:
January 4 – Bloomberg (Carolynn Look): “The euro-area economy finished 2016 with the strongest momentum in more than 5 1/2 years, bolstering the region as it heads into a year of political uncertainty. A composite Purchasing Managers’ Index climbed to 54.4 in December from 53.9 in November, IHS Markit said… That’s the highest in 67 months and above a Dec. 15 estimate.”
January 6 – Financial Tribune: “Euro-area economic confidence jumped to the highest since 2011 at the end of last year after the European Central Bank extended its stimulus and the recovery in the 19-nation region showed further signs of strengthening. An index of executive and consumer sentiment increased to 107.8 in December from a revised 106.6 in November… That’s the strongest reading since March 2011 and compares with a forecast of 106.8 in a Bloomberg survey.”
January 5 – Reuters (Madeline Chambers and Michael Nienaber): “German economists called on the European Central Bank… to raise interest rates after euro zone consumer prices rose faster than expected in December. Inflation in the 19 countries sharing the euro increased an annual 1.1% last month, …stirring a fear of inflation among German that goes back to the 1920s… To fight off deflation, the central bank has cut interest rates to zero and pumped more than a trillion euros into the economy through a bond-buying program. ‘It is time for a normalization (of monetary policy),’ Stefan Bielmeier, the chief economist at DZ Bank, told the newspaper Bild. ‘Now a change in interest rates is doable.’”
January 5 – Bloomberg (Carolynn Look): “Mario Draghi’s German problem has come back to haunt him. In a week that revealed a jump in inflation in Europe’s largest economy, commentators are lining up to urge the European Central Bank president to end his ultra-loose monetary policy. From the allegation that savers face devastation to Bild newspaper’s call to ‘Raise rates now!’ Draghi is once again facing the wrath of Germans fretting that the guardian of price stability will let them down. ‘The debate is going to get louder, particularly in Germany where people are bred to fear inflation,’ said Stefan Kipar, an economist at BayernLB…”
January 6 – Bloomberg (John Geddie): “Should France ditch the single currency under a president Le Pen, redenominating nearly 2 trillion euros of government bonds in ‘new francs’ could be legally straightforward, but hundreds of billions of corporate debt would be left in limbo. The crux of the issue is that the sovereign debt is subject to French laws that could be changed by the government to prevent a currency switch triggering a default, while a large chunk of the 1 trillion euros ($1.1 trillion) of bonds issued by major French companies are governed by foreign legislation.”
The S&P500 gained 1.7% (up 18.5% y-o-y), and the Dow rose 1.0% (up 22.1%). The Utilities added 0.3% (up 13.5%). The Banks gained 1.1% (up 39.7%), and the Broker/Dealers surged 4.4% (up 32.9%). The Transports increased 0.7% (up 31.1%). The S&P 400 Midcaps rose 1.3% (up 28.6%), and the small cap Russell 2000 added 0.7% (up 30.7%). The Nasdaq100 jumped 2.9% (up 17.2%), and the Morgan Stanley High Tech index surged 3.4% (up 25.6%). The Semiconductors added 0.2% (up 51.3%). The Biotechs surged 6.8% (down 4.4%). With bullion jumping $21, the HUI gold index rose 7.8% (up 65.8%).
Three-month Treasury bill rates ended the week at 51 bps. Two-year government yields added two bps to 1.21% (up 28bps y-o-y). Five-year T-note yields slipped a basis point to 1.92% (up 36bps). Ten-year Treasury yields declined two bps to 2.42% (up 30bps). Long bond yields fell six bps to 3.01% (up 8bps).
Greek 10-year yields dropped 24 bps to 6.78% (down 165bps y-o-y). Ten-year Portuguese yields surged 31 bps to a 10-month high 4.05% (up 146bps). Italian 10-year yields jumped 15 bps to 1.96% (up 43bps). Spain's 10-year yields rose 16 bps to 1.54% (down 16bps). German bund yields gained nine bps to 0.30% (down 21bps). French yields jumped 15 bps to 0.83% (down 5bps). The French to German 10-year bond spread widened seven to an almost two-year high 53 bps. U.K. 10-year gilt yields rose 15 bps to 1.38% (down 39bps). U.K.'s FTSE equities index added 0.9% to another record high.
Japan's Nikkei 225 equities index jumped 1.8%. Japanese 10-year "JGB" yields increased two bps to 0.06% (down 15bps y-o-y). The German DAX equities index rose 1.0%. Spain's IBEX 35 equities index jumped 1.8%. Italy's FTSE MIB index surged 2.4%. EM equities were mostly higher. Brazil's Bovespa index rose 2.4%. Mexico's Bolsa gained 0.9%. South Korea's Kospi advanced 1.1%. India’s Sensex equities index increased 0.5%. China’s Shanghai Exchange jumped 1.6%. Turkey's Borsa Istanbul National 100 index declined 1.3%. Russia's MICEX equities slipped 0.8%.
Junk bond mutual funds saw inflows of $734 million (from Lipper).
Freddie Mac 30-year fixed mortgage rates dropped 12 bps to 4.20% (up 23bps y-o-y). Fifteen-year rates declined 11 bps to 3.44% (up 18bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down nine bps to 4.28% (up 20bps).
Federal Reserve Credit last week declined $12.8bn to $4.414 TN. Over the past year, Fed Credit contracted $32.8bn (down 0.7%). Fed Credit inflated $1.604 TN, or 57%, over the past 217 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt increased $2.1bn last week to $3.182 TN. "Custody holdings" were down $130bn y-o-y, or 3.9%.
M2 (narrow) "money" supply last week jumped $24.3bn to $13.260 TN. "Narrow money" expanded $938bn, or 7.6%, over the past year. For the week, Currency declined $0.7bn. Total Checkable Deposits jumped $28.6bn, while Savings Deposits were little changed. Small Time Deposits slipped $0.7bn. Retail Money Funds declined $3.3bn.
Total money market fund assets declined $10.0bn to $2.718 TN. Money Funds declined $16.6bn y-o-y (0.6%).
Total Commercial Paper dropped $36.5bn to $950bn. CP declined $132bn y-o-y, or 12.5%.
Currency Watch:
The U.S. dollar index slipped 0.2% to 102.2 (up 3.9% y-o-y). For the week on the upside, the Canadian dollar increased 1.5%, the Australian dollar 1.3%, the South Korean won 1.2%, the Brazilian real 0.9%, the Singapore dollar 0.5%, the Swedish krona 0.5%, the New Zealand dollar 0.4%, the euro 0.1% and the Swiss franc 0.1%. For the week on the downside, the Mexican peso declined 2.3%, the British pound 0.4%, the South African rand 0.1% and the Japanese yen 0.1%. In unusually volatile trading, the Chinese yuan increased 0.3% versus the dollar (down 5.3% y-o-y).
Commodities Watch:
January 4 – Bloomberg (Alfred Cang): “Chinese investors traded a record volume of commodity futures last year as speculators poured in and out of the market on bets that shortages are looming. Combined aggregate trading volume on the Shanghai Futures Exchange, Dalian Commodity Exchange and Zhengzhou Commodity Exchange jumped 27% from 2015 levels to 4.1 billion contracts, according to… the China Futures Association. Turnover across the bourses rose 30% to a record 177.4 trillion yuan ($25.5 trillion)…”
The Goldman Sachs Commodities Index declined 0.2% (up 34.6% y-o-y). Spot Gold jumped 1.8% to $1,173 (up 6.2%). Silver surged 3.3% to $16.52 (up 18.6%). Crude slipped 13 cents to $53.70 (up 62%). Gasoline declined 2.7% (up 45%), and Natural Gas dropped 12.8% (up 32%). Copper gained 1.5% (up 26%). Wheat jumped 3.7% (down 12%). Corn gained 1.7% (unchanged).
Trump Administration Watch:
January 5 – Bloomberg (Andrew Mayeda): “The makeup of President-elect Donald Trump’s trade team suggests he wasn’t joking when he promised voters to shake things up. On the campaign trail, Trump portrayed an America that has been shortchanged by bad trade deals and unscrupulous trading partners, leading to the hollowing out of the nation’s manufacturing sector. He promised to label China a currency manipulator and renegotiate the North American Free Trade Agreement with Canada and Mexico. Since the election, Trump has taken aim at individual companies, warning General Motors Co. this week that it could face a ‘big border tax’ if it doesn’t shift production to the U.S. from Mexico. And the track records of his top trade officials signal that his administration will take aggressive steps to boost exports… ‘It’s clear this wasn’t just campaign rhetoric. The team that the President-elect has put in place was at the core of advising him during the campaign and has a clear playbook of what it wants to implement,’ said Mark Wu, an assistant professor at Harvard Law School who worked in the office of the U.S. trade representative under George W. Bush. ‘They’ve been pretty straightforward about their view of the status quo, which is that it undermines American economic interests.’”
January 3 – New York Times (Binyamin Appelbaum): “President-elect Donald J. Trump… named as his chief trade negotiator a Washington lawyer who has long advocated protectionist policies, the latest sign that Mr. Trump intends to fulfill his campaign promise to get tough with China, Mexico and other trading partners. Mr. Trump also renewed his episodic campaign to persuade American companies to expand domestic manufacturing, criticizing General Motors via Twitter on Tuesday... The choice of Robert Lighthizer (pronounced LIGHT-hi-zer) to be the United States’ trade representative nearly completes Mr. Trump’s selection of top economic advisers and, taken together with the president-elect’s running commentary on Twitter, underscores Mr. Trump’s focus on making things in America.”
January 4 – Reuters (Sarah N. Lynch): “With his selection of deal-making attorney Walter ‘Jay’ Clayton to head the U.S. Securities and Exchange Commission, President-elect Donald Trump is signaling that the agency will try to reduce regulations that critics see as burdensome or hindering corporate growth. Trump announced… that he intends to nominate Clayton, a partner in the New York office of law firm Sullivan & Cromwell, to lead the agency that polices and regulates Wall Street. Clayton specializes in public and private mergers and acquisitions and capital-raising efforts, and notably worked on the initial public offering of Alibaba Group Holding Company.”
January 6 – Financial Times (Shawn Donnan): “Senior Chinese officials have warned the US that Beijing is ready to retaliate if Donald Trump’s incoming administration imposes new tariffs, highlighting the risk of a destructive trade war between the world’s two largest economies. Penny Pritzker, the outgoing US commerce secretary, said… that Chinese officials had informed their US counterparts in a meeting after November’s election that they would be forced to respond to trade measures taken by the new administration. ‘The Chinese leadership said to me ‘If you guys put an import duty on us we are going to do it on you’,’ Ms Pritzker said. ‘And then they said ‘That will be bad for both of us’.’”
January 6 - Los Angeles Times (Ralph Jennings): “Taiwanese President Tsai Ing-wen, who rattled mainland China by phoning President-elect Donald Trump last month, leaves Saturday for a trip to the United States and Central America that will be closely watched for any further breaches in the delicate diplomatic protocol with Beijing. The journey is seen as a chance for Tsai to prop up relations in a region that has historically been friendly to Taiwan but faces pressure from the mainland. Because her government is not formally recognized by the United States, Tsai will only make ‘transit stops’ of about a day apiece in Houston on Saturday and in San Francisco at the end of the nine-day trip.”
China Bubble Watch:
January 2 – Bloomberg: “China’s factories and services both closed out 2016 on relatively robust notes that signal growth is strong enough for policy makers to keep pushing for economic reforms in 2017. The manufacturing purchasing managers index stabilized near a post-2012 high in December, edging down to 51.4 from 51.7 the prior month. The non-manufacturing PMI slipped to 54.5 from a two-year high of 54.7 in November… A gauge of factory input prices surged to a five-year high of 69.6.”
January 4 – Bloomberg: “The People’s Bank of China faces a reckoning after revving its credit engine for years. Three conditions suggest traditional financing and shadow banking are due to cool: Restrictions on property markets are poised to start weighing on mortgage issuance; bond market turbulence has spurred widespread cancellation of new corporate issues; and banks face more curbs on selling wealth-management products amid a regulatory tightening. With economic expansion on pace to meet the government’s objective and inflation pressure rising, leaders are signaling tighter monetary policy as they seek to reduce risks. The PBOC also cut language from its last quarterly statement saying it would reduce lending costs. ‘China’s credit engine is running out of gas,’ said Frederic Neumann, co-head of Asian economic research at HSBC… ‘Regulatory tightening, higher interest rates and a liquidity squeeze will likely weigh on credit growth in coming months.’”
January 1 – Wall Street Journal (Rachel Rosenthal): “At the top of regulators’ agenda in China for 2017 is a campaign to wean the nation’s sprawling financial system off of cheap borrowing and rising credit levels. Years of easy money have helped fuel growth, but also have sparked a worrisome surge in asset prices and other financial risks. The latest target is the $9 trillion bond market, where the central bank has been gradually tamping down short-term credit to discourage the kind of borrowing many financial institutions use to make risky investments… As much as $833 billion may have left China in 2016 through November, estimates French investment bank Natixis, compared with an outflow of $742 billion in all of 2015… The trouble is that the easy money is funding a huge tangle of investments by banks, insurers, brokers and speculators in everything from real estate and troubled infrastructure projects to corporate bonds and soybean-meal futures. Any tightening can threaten the debt-saddled corporate sector and potentially sow turmoil in unexpected places.”
January 3 – Wall Street Journal (Lingling Wei): “The large pile of foreign debt owed by Chinese companies, from state-owned banks to airlines, is giving added impetus to Beijing’s efforts to keep the yuan from falling too steeply against the rallying dollar. The yuan dropped by 4% over the past three months, as the dollar recently hit a 14-year high against 16 currencies. The faster-than-expected depreciation is causing more businesses and individuals to try to get out of yuan, further pressuring the currency… Chinese companies with large amounts of dollar debts represent another motivation for stepped-up controls, economists and officials say… Though the People’s Bank of China doesn’t give detailed breakdowns of Chinese companies’ foreign debt, more than half of it is in U.S. dollars… Chinese businesses’ foreign borrowings increased by $47.7 billion—a 4% rise—to $1.2 trillion in the third quarter of 2016 from the second quarter, official data show. State banks, traditionally big users of external funding to help replenish their capital base, accounted for 38% of the jump.”
January 4 – Bloomberg: “China has studied possible scenarios for the yuan and capital outflows this year and is preparing contingency plans, according to people familiar with the matter… The authorities have used stress tests, models and field research, said the people who asked not to be identified… Financial regulators have already encouraged some state-owned enterprises to sell foreign currency and may order them to temporarily convert some holdings into yuan under the current account if necessary, they added… The reported plans come amid increasing pressure on the yuan from a resurgent dollar, rising capital outflows and concern that U.S. President-elect Donald Trump may make good on his threats to take punitive measures on China’s exports. Policy makers in Beijing have recently taken a slew of measures to tighten control of the currency market, including placing higher scrutiny on citizens’ conversion quotas and stricter requirements for banks reporting cross-border transactions.”
January 6 – Wall Street Journal (Saumya Vaishampayan): “China continued to squeeze the global market for the yuan Friday, sending the cost of borrowing the currency in overseas markets soaring to a near-record high. Investors and analysts say the nosebleed rates are likely to continue as China’s central bank battles to keep the country’s currency from weakening too far and fast. The rate that banks charge each other in Hong Kong’s overnight lending market for the yuan jumped to 61.3% on Friday--the highest in a year and the second-highest level on record. That rate was 38.3% on Thursday, and has remained above 10% since Dec. 30.”
January 1 – Financial Times (Tom Mitchell): “Chinese residents hoping to cash out of the renminbi will face a great wall of paperwork on Tuesday in a test of confidence for the currency as the annual quota for individuals’ foreign exchange purchases resets. With individuals in China allowed to purchase up to $50,000 worth of foreign exchange each calendar year, observers will be watching for signs of a rush to use up their limit as banks reopen after the new year holiday. The incentive to buy dollars is strong after the US Federal Reserve’s December rate rise — and the fiscal and economic policies of US president-elect Donald Trump are only expected to accelerate the renminbi’s two-year decline against the greenback.”
January 2 – Bloomberg: “At risk of capital flight, China marked the new year with extra requirements for citizens converting yuan into foreign currencies. The State Administration of Foreign Exchange, the currency regulator, said in a statement Dec. 31 that it wanted to close loopholes exploited for purposes such as money laundering and illegally channeling money into overseas property. While the regulator left unchanged quotas of $50,000 of foreign currency per person a year, citizens faced extra disclosure requirements from Jan. 1.”
January 1 – CNBC (Nyshka Chandran): “First Britain, then the United States. Now, could China be facing a populist backlash of its own? A growing anti-establishment movement will test the nation's leadership ahead of the 19th Party Congress in late 2017, set to be one of the year's biggest political events… President Xi Jinping is widely expected to be given a second term but his ability to manage rising socio-economic pressures will be a major theme in the lead-up to the Congress, Nicholas Consonery, senior Asia-Pacific director at FTI Consulting, told CNBC… Cynicism with Beijing's economy-first policies has created a new political movement known as the New Left, or neo-Maoism, that supports the egalitarian ideas preached by dictator Mao Zedong.”
Italy Watch:
January 1 – Reuters (Paul Carrel): “The head of Germany's Ifo economic institute believes Italians will eventually want to quit the euro currency area if their standard of living does not improve, he told German daily Tagesspiegel. ‘The standard of living in Italy is at the same level as in 2000. If that does not change, the Italians will at some stage say: ‘We don't want this euro zone any more',’ Ifo chief Clemens Fuest told the newspaper. He also said that if Germany's parliament were to approve a European rescue programme for Italy, it would impose on German taxpayers risks ‘the size of which it does not know and cannot control.’”
Europe Watch:
January 4 – Bloomberg (Carolynn Look): “The euro-area economy finished 2016 with the strongest momentum in more than 5 1/2 years, bolstering the region as it heads into a year of political uncertainty. A composite Purchasing Managers’ Index climbed to 54.4 in December from 53.9 in November, IHS Markit said… That’s the highest in 67 months and above a Dec. 15 estimate.”
January 6 – Financial Tribune: “Euro-area economic confidence jumped to the highest since 2011 at the end of last year after the European Central Bank extended its stimulus and the recovery in the 19-nation region showed further signs of strengthening. An index of executive and consumer sentiment increased to 107.8 in December from a revised 106.6 in November… That’s the strongest reading since March 2011 and compares with a forecast of 106.8 in a Bloomberg survey.”
January 5 – Reuters (Madeline Chambers and Michael Nienaber): “German economists called on the European Central Bank… to raise interest rates after euro zone consumer prices rose faster than expected in December. Inflation in the 19 countries sharing the euro increased an annual 1.1% last month, …stirring a fear of inflation among German that goes back to the 1920s… To fight off deflation, the central bank has cut interest rates to zero and pumped more than a trillion euros into the economy through a bond-buying program. ‘It is time for a normalization (of monetary policy),’ Stefan Bielmeier, the chief economist at DZ Bank, told the newspaper Bild. ‘Now a change in interest rates is doable.’”
January 5 – Bloomberg (Carolynn Look): “Mario Draghi’s German problem has come back to haunt him. In a week that revealed a jump in inflation in Europe’s largest economy, commentators are lining up to urge the European Central Bank president to end his ultra-loose monetary policy. From the allegation that savers face devastation to Bild newspaper’s call to ‘Raise rates now!’ Draghi is once again facing the wrath of Germans fretting that the guardian of price stability will let them down. ‘The debate is going to get louder, particularly in Germany where people are bred to fear inflation,’ said Stefan Kipar, an economist at BayernLB…”
January 6 – Bloomberg (John Geddie): “Should France ditch the single currency under a president Le Pen, redenominating nearly 2 trillion euros of government bonds in ‘new francs’ could be legally straightforward, but hundreds of billions of corporate debt would be left in limbo. The crux of the issue is that the sovereign debt is subject to French laws that could be changed by the government to prevent a currency switch triggering a default, while a large chunk of the 1 trillion euros ($1.1 trillion) of bonds issued by major French companies are governed by foreign legislation.”
Fixed-Income Bubble Watch:
January 4 – Bloomberg (Anchalee Worrachate): “If you thought you had already read the gloomiest possible prognosis for bonds, wait until you read this one. Paul Schmelzing, a PhD candidate at Harvard University and a visiting scholar at the Bank of England, said if the latest bond market bubble bursts, it will be worse than in 1994 when global government bonds suffered the biggest annual loss on record. ‘Looking back over eight centuries of data, I find that the 2016 bull market was indeed one of the largest ever recorded,’ wrote Schmelzing in an article posted on Bank Underground, which is a blog run by Bank of England staff. ‘History suggests this reversal will be driven by inflation fundamentals, and leave investors worse off than the 1994 ‘bond massacre’’.”
Global Bubble Watch:
January 4 – Reuters (Dion Rabouin): “Global debt levels rose to more than 325% of the world's gross domestic product last year as government debt rose sharply, a report from the Institute for International Finance showed… The IIF's report found that global debt had risen more than $11 trillion in the first nine months of 2016 to more than $217 trillion. The report also found that general government debt accounted for nearly half of the total increase. Emerging market debt rose substantially, as government bond and syndicated loan issuance in 2016 grew to almost three times its 2015 level. China accounted for the lion's share of the new debt, providing $710 million of the total $855 billion in new issuance during the year, the IIF reported.”
January 4 – Financial Times (Joe Rennison and Eric Platt): “Wall Street’s debt engine has begun 2017 in record form… After this week’s record start for debt sales, activity remained brisk on Wednesday with dollar deals completed by car companies Ford and Toyota and banking groups Lloyds, Bank of Montreal and Citigroup… That followed 11 companies and banks selling $19.9bn of debt in the US on Tuesday as global financial markets reopened after the new year holiday. It marked the strongest start to a year on record, according to… Dealogic. Global issuance totalled $21.2bn, also a record.”
January 2 – Bloomberg (Anchalee Worrachate and Anooja Debnath): “Governments of the world’s leading economies have about $7.7 trillion of debt maturing in 2017, with most facing higher borrowing costs as a three-decade bull market for bonds shows signs of running out of steam. The amount of sovereign bills, notes and bonds coming due for the Group-of-Seven nations plus Brazil, Russia, India and China will climb more than 8% from approximately $7 trillion in 2016… The first substantial increase since Bloomberg started collating the data in 2012 is led by China, where $588 billion of expected redemptions represents a 132% jump from 2016.”
January 4 – Reuters (Marc Jones): “Moody's is likely to make key rating calls on Britain, China and South Africa among others this year as rising political risk and debt levels push the number of countries on a downgrade warning back to a record high. From Europe's Brexit strains and looming elections to the battles of China, South Africa and Brazil to re-orientate their economies, not to mention Donald Trump's first months as U.S. president, the rating agency faces a daunting list of decisions. ‘A quarter of the sovereigns are on a negative outlook, which is the highest proportion we've had since 2012,’ the peak of the euro crisis, Alastair Wilson, Moody's managing director of sovereign risk told Reuters…”
January 2 – Wall Street Journal (Jon Sindreu): “For markets, the era of the central bank may be starting to draw to a close. In 2017, tightening monetary policy and brighter economic fundamentals could ease markets from the grip of the central banks whose policy in recent years has dominated trading in bonds, shares and other assets. That shift portends big changes for investors, who already are repositioning in anticipation. A long period of ultralow interest rates and central-bank asset buying has boosted the prices of bonds and safe stocks. Now investors expect economic performance to catch up as a key driver, not least as they predict stimulus will stop expanding.”
January 2 – Bloomberg (Emily Cadman): “Australian house values increased at the fastest pace in seven years in 2016, as record-low interest rates helped fuel demand for property despite warnings such price increases may be unsustainable. The average dwelling value in the nation’s eight state and mainland territory capitals rose 10.9% last year, compared to 7.8% in 2015, data from CoreLogic… showed.”
January 4 – Bloomberg (Anchalee Worrachate): “If you thought you had already read the gloomiest possible prognosis for bonds, wait until you read this one. Paul Schmelzing, a PhD candidate at Harvard University and a visiting scholar at the Bank of England, said if the latest bond market bubble bursts, it will be worse than in 1994 when global government bonds suffered the biggest annual loss on record. ‘Looking back over eight centuries of data, I find that the 2016 bull market was indeed one of the largest ever recorded,’ wrote Schmelzing in an article posted on Bank Underground, which is a blog run by Bank of England staff. ‘History suggests this reversal will be driven by inflation fundamentals, and leave investors worse off than the 1994 ‘bond massacre’’.”
Global Bubble Watch:
January 4 – Reuters (Dion Rabouin): “Global debt levels rose to more than 325% of the world's gross domestic product last year as government debt rose sharply, a report from the Institute for International Finance showed… The IIF's report found that global debt had risen more than $11 trillion in the first nine months of 2016 to more than $217 trillion. The report also found that general government debt accounted for nearly half of the total increase. Emerging market debt rose substantially, as government bond and syndicated loan issuance in 2016 grew to almost three times its 2015 level. China accounted for the lion's share of the new debt, providing $710 million of the total $855 billion in new issuance during the year, the IIF reported.”
January 4 – Financial Times (Joe Rennison and Eric Platt): “Wall Street’s debt engine has begun 2017 in record form… After this week’s record start for debt sales, activity remained brisk on Wednesday with dollar deals completed by car companies Ford and Toyota and banking groups Lloyds, Bank of Montreal and Citigroup… That followed 11 companies and banks selling $19.9bn of debt in the US on Tuesday as global financial markets reopened after the new year holiday. It marked the strongest start to a year on record, according to… Dealogic. Global issuance totalled $21.2bn, also a record.”
January 2 – Bloomberg (Anchalee Worrachate and Anooja Debnath): “Governments of the world’s leading economies have about $7.7 trillion of debt maturing in 2017, with most facing higher borrowing costs as a three-decade bull market for bonds shows signs of running out of steam. The amount of sovereign bills, notes and bonds coming due for the Group-of-Seven nations plus Brazil, Russia, India and China will climb more than 8% from approximately $7 trillion in 2016… The first substantial increase since Bloomberg started collating the data in 2012 is led by China, where $588 billion of expected redemptions represents a 132% jump from 2016.”
January 4 – Reuters (Marc Jones): “Moody's is likely to make key rating calls on Britain, China and South Africa among others this year as rising political risk and debt levels push the number of countries on a downgrade warning back to a record high. From Europe's Brexit strains and looming elections to the battles of China, South Africa and Brazil to re-orientate their economies, not to mention Donald Trump's first months as U.S. president, the rating agency faces a daunting list of decisions. ‘A quarter of the sovereigns are on a negative outlook, which is the highest proportion we've had since 2012,’ the peak of the euro crisis, Alastair Wilson, Moody's managing director of sovereign risk told Reuters…”
January 2 – Wall Street Journal (Jon Sindreu): “For markets, the era of the central bank may be starting to draw to a close. In 2017, tightening monetary policy and brighter economic fundamentals could ease markets from the grip of the central banks whose policy in recent years has dominated trading in bonds, shares and other assets. That shift portends big changes for investors, who already are repositioning in anticipation. A long period of ultralow interest rates and central-bank asset buying has boosted the prices of bonds and safe stocks. Now investors expect economic performance to catch up as a key driver, not least as they predict stimulus will stop expanding.”
January 2 – Bloomberg (Emily Cadman): “Australian house values increased at the fastest pace in seven years in 2016, as record-low interest rates helped fuel demand for property despite warnings such price increases may be unsustainable. The average dwelling value in the nation’s eight state and mainland territory capitals rose 10.9% last year, compared to 7.8% in 2015, data from CoreLogic… showed.”
U.S. Bubble Watch:
January 6 – Bloomberg (Sho Chandra): “After six straight years of annual job gains topping 2 million, America’s labor market is as tight as ever, and it’s entering the next phase: an enduring pickup in wages. Average hourly earnings jumped by 2.9% in the 12 months through December, the most since the last recession ended in June 2009… Workers in almost every category, from mining and construction to retail and education, saw paychecks rise from November. The 4.7% jobless rate remains close to a nine-year low, even with a tick up last month.”
January 3 – Bloomberg (Michelle Jamrisko): “American manufacturing expanded in December at the fastest pace in two years, reflecting firmer output and the biggest pickup in orders growth since August 2009. The Institute for Supply Management said… that its index increased to 54.7, the fourth straight advance, from 53.2 a month earlier. The median forecast in a Bloomberg survey called for 53.8… The ISM’s measure of orders surged 7.2 points, while its gauge of prices paid for materials climbed to the highest level since June 2011.”
January 6 – Bloomberg (Patricia Laya): “The U.S. trade deficit widened to a nine-month high in November as exports fell and companies and governments imported the most since August 2015. The gap grew by 6.8% to $45.2 billion from a revised $42.4 billion in the prior month…”
January 4 – Reuters (Bernie Woodall): “U.S. auto sales rose 0.4% in 2016 and set an annual record high of 17.465 million vehicles, from 17.396 million in 2015… WardsAuto, which provides economic data for analysis by the U.S. government, said December auto sales rose 3% to 1.68 million vehicles, for a seasonally adjusted annualized rate of 18.29 million vehicles…”
January 4 – Reuters (Richard Leong and Dan Burns): “The interest rate banks charge each other to borrow dollars for three months rose above 1% on Wednesday for the first time since May 2009 as global rates extended their climb on expectations of accelerating growth and inflation. The London interbank offered rate, or Libor, for three-month dollars was fixed at 1.00511%, the highest level since 1.00688% on May 1, 2009…”
January 4 – Reuters (Olivia Oran): “Big U.S. banks are set on getting Congress this year to loosen or eliminate the Volcker rule against using depositors' funds for speculative bets on the bank's own account, a test case of whether Wall Street can flex its muscle in Washington again. In interviews over the past several weeks, half a dozen industry lobbyists said they began meeting with legislative staff after the U.S. election in November to discuss matters including a rollback of Volcker, part of the Dodd-Frank financial reform that Congress enacted after the financial crisis and bank bailouts. Lobbyists said they plan to present evidence to congressional leaders that the Volcker rule is actually bad for companies, investors and the U.S. economy.”
January 5 – Financial Times (Adam Samson): “Only one in five mutual fund managers that invest in shares of large US companies beat their benchmark last year — half of the rate notched up in 2015. The decline underscored the struggles for active managers amid increasing competition from passive funds. Just 19% of large-cap mutual fund managers notched returns that exceeded that of their benchmark in 2016, compared with 41% in the previous year, according to data compiled by BofA Merrill Lynch.”
January 6 – Bloomberg (Sho Chandra): “After six straight years of annual job gains topping 2 million, America’s labor market is as tight as ever, and it’s entering the next phase: an enduring pickup in wages. Average hourly earnings jumped by 2.9% in the 12 months through December, the most since the last recession ended in June 2009… Workers in almost every category, from mining and construction to retail and education, saw paychecks rise from November. The 4.7% jobless rate remains close to a nine-year low, even with a tick up last month.”
January 3 – Bloomberg (Michelle Jamrisko): “American manufacturing expanded in December at the fastest pace in two years, reflecting firmer output and the biggest pickup in orders growth since August 2009. The Institute for Supply Management said… that its index increased to 54.7, the fourth straight advance, from 53.2 a month earlier. The median forecast in a Bloomberg survey called for 53.8… The ISM’s measure of orders surged 7.2 points, while its gauge of prices paid for materials climbed to the highest level since June 2011.”
January 6 – Bloomberg (Patricia Laya): “The U.S. trade deficit widened to a nine-month high in November as exports fell and companies and governments imported the most since August 2015. The gap grew by 6.8% to $45.2 billion from a revised $42.4 billion in the prior month…”
January 4 – Reuters (Bernie Woodall): “U.S. auto sales rose 0.4% in 2016 and set an annual record high of 17.465 million vehicles, from 17.396 million in 2015… WardsAuto, which provides economic data for analysis by the U.S. government, said December auto sales rose 3% to 1.68 million vehicles, for a seasonally adjusted annualized rate of 18.29 million vehicles…”
January 4 – Reuters (Richard Leong and Dan Burns): “The interest rate banks charge each other to borrow dollars for three months rose above 1% on Wednesday for the first time since May 2009 as global rates extended their climb on expectations of accelerating growth and inflation. The London interbank offered rate, or Libor, for three-month dollars was fixed at 1.00511%, the highest level since 1.00688% on May 1, 2009…”
January 4 – Reuters (Olivia Oran): “Big U.S. banks are set on getting Congress this year to loosen or eliminate the Volcker rule against using depositors' funds for speculative bets on the bank's own account, a test case of whether Wall Street can flex its muscle in Washington again. In interviews over the past several weeks, half a dozen industry lobbyists said they began meeting with legislative staff after the U.S. election in November to discuss matters including a rollback of Volcker, part of the Dodd-Frank financial reform that Congress enacted after the financial crisis and bank bailouts. Lobbyists said they plan to present evidence to congressional leaders that the Volcker rule is actually bad for companies, investors and the U.S. economy.”
January 5 – Financial Times (Adam Samson): “Only one in five mutual fund managers that invest in shares of large US companies beat their benchmark last year — half of the rate notched up in 2015. The decline underscored the struggles for active managers amid increasing competition from passive funds. Just 19% of large-cap mutual fund managers notched returns that exceeded that of their benchmark in 2016, compared with 41% in the previous year, according to data compiled by BofA Merrill Lynch.”
January 4 – Bloomberg (Oshrat Carmiel): “Manhattan resale home prices tumbled by the most in more than four years, a sign that sellers are lowering their expectations in a slowing market where buyers have the option to walk away. The median price of previously owned condominiums and co-ops fell 6.3% in the fourth quarter from a year earlier to $900,000, according to… appraiser Miller Samuel Inc. and brokerage Douglas Elliman Real Estate. It was the first annual decline since the beginning of 2015, and the biggest since the third quarter of 2012, when resale prices dropped 8.1%.”
January 2 – Wall Street Journal (Timothy W. Martin): “Herbert Whitehouse was one of the first in the U.S. to suggest workers use a 401(k). His hope in 1981 was that the retirement-savings plan would supplement a company pension that guaranteed payouts for life. Thirty-five years later, the former Johnson & Johnson human-resources executive has misgivings about what he helped start. What Mr. Whitehouse and other proponents didn’t anticipate was that the tax-deferred savings tool would largely replace pensions as big employers looked for ways to cut expenses. Just 13% of all private-sector workers have a traditional pension, compared with 38% in 1979.”
Federal Reserve Watch:
January 6 – Wall Street Journal (Michael S. Derby and Shayndi Raice): “Several Federal Reserve officials, in their first public comments since raising short-term interest rates last month, signaled Friday they still favor lifting them higher this year. The Fed in December lifted its benchmark federal-funds rate to a range between 0.50% and 0.75% and penciled in three quarter-percentage-point increases in 2017. Two of the central-bank speakers Friday suggested that more than three moves could be coming. Cleveland Fed President Loretta Mester said… she has a steeper forecast for rate rises because she is expecting faster economic growth and higher inflation than many of her colleagues. The Richmond Fed’s Jeffrey Lacker didn’t lay out how far he wants to go with rates, but said they ‘may need to increase more briskly than markets appear to expect, depending on developments as the year unfolds.’”
January 2 – Wall Street Journal (Timothy W. Martin): “Herbert Whitehouse was one of the first in the U.S. to suggest workers use a 401(k). His hope in 1981 was that the retirement-savings plan would supplement a company pension that guaranteed payouts for life. Thirty-five years later, the former Johnson & Johnson human-resources executive has misgivings about what he helped start. What Mr. Whitehouse and other proponents didn’t anticipate was that the tax-deferred savings tool would largely replace pensions as big employers looked for ways to cut expenses. Just 13% of all private-sector workers have a traditional pension, compared with 38% in 1979.”
Federal Reserve Watch:
January 6 – Wall Street Journal (Michael S. Derby and Shayndi Raice): “Several Federal Reserve officials, in their first public comments since raising short-term interest rates last month, signaled Friday they still favor lifting them higher this year. The Fed in December lifted its benchmark federal-funds rate to a range between 0.50% and 0.75% and penciled in three quarter-percentage-point increases in 2017. Two of the central-bank speakers Friday suggested that more than three moves could be coming. Cleveland Fed President Loretta Mester said… she has a steeper forecast for rate rises because she is expecting faster economic growth and higher inflation than many of her colleagues. The Richmond Fed’s Jeffrey Lacker didn’t lay out how far he wants to go with rates, but said they ‘may need to increase more briskly than markets appear to expect, depending on developments as the year unfolds.’”
January 4 – Reuters (Jason Lange and Lindsay Dunsmuir): “Almost all Federal Reserve policymakers thought the economy could grow more quickly because of fiscal stimulus under the Trump administration and many were eyeing faster interest rate increases, minutes from the central bank's December meeting showed. The minutes… showed how broadly views within the Fed are shifting in response to President-elect Donald Trump's promises of tax cuts, infrastructure spending and deregulation. Policymakers were clear that the outlook for those policies remained uncertain, but they could, if implemented, stoke higher inflation which would lead the central bank to raise borrowing costs more aggressively.”
January 4 – Bloomberg (Christopher Condon and Craig Torres): “Federal Reserve officials focused on the impact of potential fiscal stimulus during their December policy meeting, with many starting to worry that the central bank might eventually be forced to quicken the pace of interest-rate increases to head off higher inflation. Almost all the participants ‘indicated that the upside risks to their forecasts for economic growth had increased as a result of prospects for more expansionary fiscal policies in coming years,’ read the minutes of the Dec. 13-14 meeting… Despite growing attention to the risks of increased government spending and tax cuts spurring faster growth than currently forecast, most on the committee reiterated that a ‘gradual’ pace of rate hikes over the coming years would likely remain appropriate.”
January 4 - Wall Street Journal (Harriet Torry): “Congressional Republicans… revived bills to subject the Federal Reserve’s monetary policy decisions to greater public scrutiny, proposals that didn’t get far in recent years but could face brighter prospects under the incoming Trump administration. Fed officials meet several times a year to decide what to do with short-term interest rates and how to influence them… The ‘Audit the Fed’ measures would require the Government Accountability Office to examine those decisions. The Fed’s financial statements are already audited, and the GAO can examine most other Fed operations, but Congress has long exempted monetary policy decisions from such scrutiny.”
Japan Watch:
January 4 – Reuters (Stanley White): “Activity in Japan's services sector expanded in December at the fastest pace in 11 months, …in a sign that economic growth could pick up due to gains in consumer spending. The Markit/Nikkei Japan Services Purchasing Managers Index (PMI) rose to a seasonally adjusted 52.3 in December from 51.8 in November.”
EM Watch:
January 6 – Bloomberg (Miguel Gutierrez and Adriana Barrera): “Mexico's central bank sold dollars in Mexico and New York on Thursday to fight off the peso's nose dive to record lows amid fears U.S. President-elect Donald Trump's protectionist policies could further hammer Latin America's second-biggest economy. The central bank sold at least $1 billion in U.S. currency in morning trade, four traders told Reuters…”
January 4 – Bloomberg (Christopher Condon and Craig Torres): “Federal Reserve officials focused on the impact of potential fiscal stimulus during their December policy meeting, with many starting to worry that the central bank might eventually be forced to quicken the pace of interest-rate increases to head off higher inflation. Almost all the participants ‘indicated that the upside risks to their forecasts for economic growth had increased as a result of prospects for more expansionary fiscal policies in coming years,’ read the minutes of the Dec. 13-14 meeting… Despite growing attention to the risks of increased government spending and tax cuts spurring faster growth than currently forecast, most on the committee reiterated that a ‘gradual’ pace of rate hikes over the coming years would likely remain appropriate.”
January 4 - Wall Street Journal (Harriet Torry): “Congressional Republicans… revived bills to subject the Federal Reserve’s monetary policy decisions to greater public scrutiny, proposals that didn’t get far in recent years but could face brighter prospects under the incoming Trump administration. Fed officials meet several times a year to decide what to do with short-term interest rates and how to influence them… The ‘Audit the Fed’ measures would require the Government Accountability Office to examine those decisions. The Fed’s financial statements are already audited, and the GAO can examine most other Fed operations, but Congress has long exempted monetary policy decisions from such scrutiny.”
Japan Watch:
January 4 – Reuters (Stanley White): “Activity in Japan's services sector expanded in December at the fastest pace in 11 months, …in a sign that economic growth could pick up due to gains in consumer spending. The Markit/Nikkei Japan Services Purchasing Managers Index (PMI) rose to a seasonally adjusted 52.3 in December from 51.8 in November.”
EM Watch:
January 6 – Bloomberg (Miguel Gutierrez and Adriana Barrera): “Mexico's central bank sold dollars in Mexico and New York on Thursday to fight off the peso's nose dive to record lows amid fears U.S. President-elect Donald Trump's protectionist policies could further hammer Latin America's second-biggest economy. The central bank sold at least $1 billion in U.S. currency in morning trade, four traders told Reuters…”
January 2 – Bloomberg (Jeanette Rodrigues and P R Sanjai): “A private gauge indicates that India’s manufacturing sector will shrink for the first time in a year as Prime Minister Narendra Modi’s unprecedented clampdown on cash hurts demand. The Nikkei India Manufacturing Purchasing Managers’ Index was at 49.6 in December, …the lowest since December 2015.”
Leveraged Speculator Watch:
January 5 – Financial Times (Dan McCrum): “Amid the tweets and bonfire of expertise last year, did you notice the worldwide boom in asset prices? For instance, a non-exhaustive list of ways an investor might have increased their wealth by more than a tenth in 2016 includes: crude oil; the major stock market indices for the US, UK, Brazil and Russia; Emerging market equities as a whole; pretty much any high yielding corporate bond market; sugar, silver and copper; even gilts, debt of the UK government. Yet the premium part of the asset management industry, cosseting its sharpest minds in the most luxurious offices, had another dismal year. The average investor in a hedge fund, according to… HFR, saw their money grow a mere 2.5% last year, only slightly more than investors handed over in fees, of roughly $65bn. The immediate question might be how so many hedge fund managers failed to do better.”
January 5 – Bloomberg (Nishant Kumar): “Crispin Odey’s main hedge fund slumped 49.5% in 2016, its worst annual decline since it began trading in 1992, according to an investor letter. The billionaire, who last month complained that ‘mindless’ passive investing was driving out active fund managers, saw his bearish bets against stocks suffer amid a surge in equities.”
January 6 – Financial Times (Eric Platt and Joe Rennison): “The amount of money making bets that US Treasuries will fall in value climbed to a new record high over the last week in a wager that faster US economic growth and higher inflation will weigh further on government bond prices. So-called ‘non-commercial’ speculative positions selling the 10-year Treasury futures contract have been rising since the US presidential election and hit 816,156 contracts in the week to January 3, outnumbering long positions by 344,931 — a record level…”
Geopolitical Watch:
December 31 – Reuters (Ben Blanchard): “China will never allow anyone to ‘make a great fuss’ about its territorial sovereignty and maritime rights, President Xi Jinping said in his New Year's address, while China's top official in charge of Taiwan ties warned of risk ahead in 2017. China's increasingly assertive moves to push its territorial claims in the disputed South China Sea, including building artificial islands, has unnerved its neighbors. ‘We adhere to peaceful development, and resolutely safeguard our territorial sovereignty and maritime rights and interests,’ Xi said… ‘Chinese people will never allow anyone to get away with making a great fuss about it,’ he said…”
January 5 – Bloomberg: “Chinese state media warned U.S. President-elect Donald Trump that he’ll be met with ‘big sticks’ if he tries to ignite a trade war or further strain ties. ‘There are flowers around the gate of China’s Ministry of Commerce, but there are also big sticks hidden inside the door -- they both await Americans,’ the Communist Party’s Global Times newspaper wrote… The article was published in response to Trump picking Robert Lighthizer, a former trade official in the Ronald Reagan administration who has criticized Beijing’s trade practices, as U.S. trade representative.”
Leveraged Speculator Watch:
January 5 – Financial Times (Dan McCrum): “Amid the tweets and bonfire of expertise last year, did you notice the worldwide boom in asset prices? For instance, a non-exhaustive list of ways an investor might have increased their wealth by more than a tenth in 2016 includes: crude oil; the major stock market indices for the US, UK, Brazil and Russia; Emerging market equities as a whole; pretty much any high yielding corporate bond market; sugar, silver and copper; even gilts, debt of the UK government. Yet the premium part of the asset management industry, cosseting its sharpest minds in the most luxurious offices, had another dismal year. The average investor in a hedge fund, according to… HFR, saw their money grow a mere 2.5% last year, only slightly more than investors handed over in fees, of roughly $65bn. The immediate question might be how so many hedge fund managers failed to do better.”
January 5 – Bloomberg (Nishant Kumar): “Crispin Odey’s main hedge fund slumped 49.5% in 2016, its worst annual decline since it began trading in 1992, according to an investor letter. The billionaire, who last month complained that ‘mindless’ passive investing was driving out active fund managers, saw his bearish bets against stocks suffer amid a surge in equities.”
January 6 – Financial Times (Eric Platt and Joe Rennison): “The amount of money making bets that US Treasuries will fall in value climbed to a new record high over the last week in a wager that faster US economic growth and higher inflation will weigh further on government bond prices. So-called ‘non-commercial’ speculative positions selling the 10-year Treasury futures contract have been rising since the US presidential election and hit 816,156 contracts in the week to January 3, outnumbering long positions by 344,931 — a record level…”
Geopolitical Watch:
December 31 – Reuters (Ben Blanchard): “China will never allow anyone to ‘make a great fuss’ about its territorial sovereignty and maritime rights, President Xi Jinping said in his New Year's address, while China's top official in charge of Taiwan ties warned of risk ahead in 2017. China's increasingly assertive moves to push its territorial claims in the disputed South China Sea, including building artificial islands, has unnerved its neighbors. ‘We adhere to peaceful development, and resolutely safeguard our territorial sovereignty and maritime rights and interests,’ Xi said… ‘Chinese people will never allow anyone to get away with making a great fuss about it,’ he said…”
January 5 – Bloomberg: “Chinese state media warned U.S. President-elect Donald Trump that he’ll be met with ‘big sticks’ if he tries to ignite a trade war or further strain ties. ‘There are flowers around the gate of China’s Ministry of Commerce, but there are also big sticks hidden inside the door -- they both await Americans,’ the Communist Party’s Global Times newspaper wrote… The article was published in response to Trump picking Robert Lighthizer, a former trade official in the Ronald Reagan administration who has criticized Beijing’s trade practices, as U.S. trade representative.”
Friday Evening Links
[Bloomberg] U.S. Stocks Set Record, Dollar Gains on Jobs Data: Markets Wrap
[Bloomberg] Americans See Enduring Wage Gains as Labor Market Tightens
[WSJ] Fed Officials Say More Rate Rises Coming
[FT] China warns US of retaliation if Trump imposes tariffs
[FT] Bearish bets against US Treasuries climb to new record
[Bloomberg] Americans See Enduring Wage Gains as Labor Market Tightens
[WSJ] Fed Officials Say More Rate Rises Coming
[FT] China warns US of retaliation if Trump imposes tariffs
[FT] Bearish bets against US Treasuries climb to new record
Thursday, January 5, 2017
Friday's News Links
[Reuters] Dollar rises, boosted by strong wages in U.S. jobs report
[Reuters] Asian shares rise as U.S. interest rates ease, China steps up yuan defense
[Bloomberg] Yuan Pares Record Rally as Goldman Says Now’s the Time to Sell
[Bloomberg] U.S. Payrolls Rise 156,000 as Wages Increase Most Since 2009
[Bloomberg] U.S. Trade Deficit Widened in November to a Nine-Month High
[Bloomberg] Euro-Area Economic Confidence Jumps to Highest Since 2011
[Reuters] Le Pen plan raises franc questions over France's euro debt pile
[Reuters] Mexico central bank sells $1 billion to prop peso after Trump slump: traders
[Bloomberg] Lampert’s Rescue of Sears Puts Him on the Hook for $1.2 Billion
[WSJ] China Doubles Down on Defending Its Currency
[FT] Active managers tripped up as just 19% beat benchmark
[LA Times] As an angry China watches, Taiwan president takes a risky trip to the Americas
[Reuters] Asian shares rise as U.S. interest rates ease, China steps up yuan defense
[Bloomberg] Yuan Pares Record Rally as Goldman Says Now’s the Time to Sell
[Bloomberg] U.S. Payrolls Rise 156,000 as Wages Increase Most Since 2009
[Bloomberg] U.S. Trade Deficit Widened in November to a Nine-Month High
[Bloomberg] Euro-Area Economic Confidence Jumps to Highest Since 2011
[Reuters] Le Pen plan raises franc questions over France's euro debt pile
[Reuters] Mexico central bank sells $1 billion to prop peso after Trump slump: traders
[Bloomberg] Lampert’s Rescue of Sears Puts Him on the Hook for $1.2 Billion
[WSJ] China Doubles Down on Defending Its Currency
[FT] Active managers tripped up as just 19% beat benchmark
[LA Times] As an angry China watches, Taiwan president takes a risky trip to the Americas
Thursday Evening Links
[Reuters] Bank stocks bring down S&P, Dow; techs prop up Nasdaq
[Reuters] Mexico central bank sells $1 billion to prop peso after Trump slump: traders
[Bloomberg] Trump's Trade Team Suggests His Hardnosed Campaign Talk Was No Bluff
[Bloomberg] China Ready to Step Up Scrutiny of U.S. Firms If Trump Starts Feud: Sources
[Reuters] Dismal holiday sales at Macy's, Kohl's spell gloom for sector
[Bloomberg] U.S. Consumer Comfort Gauge in 2016 Was Strongest in Nine Years
[Bloomberg] Draghi’s German Problem Flares Up as Inflation Surge Stirs Anger
[Bloomberg] Mall Companies Fall After Sears Announces Plans to Close Stores
[NYT] China, Seeking to Stop Weakening of Currency, Issues Restrictions
[Reuters] Mexico central bank sells $1 billion to prop peso after Trump slump: traders
[Bloomberg] Trump's Trade Team Suggests His Hardnosed Campaign Talk Was No Bluff
[Bloomberg] China Ready to Step Up Scrutiny of U.S. Firms If Trump Starts Feud: Sources
[Reuters] Dismal holiday sales at Macy's, Kohl's spell gloom for sector
[Bloomberg] U.S. Consumer Comfort Gauge in 2016 Was Strongest in Nine Years
[Bloomberg] Draghi’s German Problem Flares Up as Inflation Surge Stirs Anger
[Bloomberg] Mall Companies Fall After Sears Announces Plans to Close Stores
[NYT] China, Seeking to Stop Weakening of Currency, Issues Restrictions
Wednesday, January 4, 2017
Thursday's News Links
[Bloomberg] Dollar Rally Stymied by China, Fed as Gold Climbs: Markets Wrap
[Reuters] Asian stocks rise for eighth day on strong PMIs, Wall Street gains
[Bloomberg] China’s Epic Short Squeeze Is Back as Yuan Rally Crushes Bears
[CNBC] China’s offshore yuan surges most against dollar in a year
[Bloomberg] Portugal 10-Year Yield Climbs Above 4% as Selloff Deepens: Chart
[Bloomberg] Bears Scramble for Yuan as China Chokes Flows, Supports Currency
[Reuters] China's choices narrowing as it burns through FX reserves to support yuan
[Reuters] China services sector activity rises to 17-month high in December: Caixin PMI
[Reuters] Japan December services PMI rises to 11-month high
[Reuters] UK, China, South Africa downgrade calls loom for Moody's
[Bloomberg] Prices Are Rising Across the Globe. That's a Good Thing, Right?
[Reuters] German economists press ECB to raise interest rates
[Bloomberg] Chinese Media Say ‘Big Sticks’ Await Trump If He Seeks Trade War
[WSJ] Republican Lawmakers Revive ‘Audit the Fed’ Legislation
[FT] It was another great year for investors who avoid hedge funds
[Reuters] Asian stocks rise for eighth day on strong PMIs, Wall Street gains
[Bloomberg] China’s Epic Short Squeeze Is Back as Yuan Rally Crushes Bears
[CNBC] China’s offshore yuan surges most against dollar in a year
[Bloomberg] Portugal 10-Year Yield Climbs Above 4% as Selloff Deepens: Chart
[Bloomberg] Bears Scramble for Yuan as China Chokes Flows, Supports Currency
[Reuters] China's choices narrowing as it burns through FX reserves to support yuan
[Reuters] China services sector activity rises to 17-month high in December: Caixin PMI
[Reuters] Japan December services PMI rises to 11-month high
[Reuters] UK, China, South Africa downgrade calls loom for Moody's
[Bloomberg] Prices Are Rising Across the Globe. That's a Good Thing, Right?
[Reuters] German economists press ECB to raise interest rates
[Bloomberg] Chinese Media Say ‘Big Sticks’ Await Trump If He Seeks Trade War
[WSJ] Republican Lawmakers Revive ‘Audit the Fed’ Legislation
[FT] It was another great year for investors who avoid hedge funds
Wednesday Evening Links
[Bloomberg] U.S. Stocks Rise, Bonds Erase Drop on Fed Minutes: Markets Wrap
[Bloomberg] Fed Officials See Gradual Rate Hikes as Upside Risks Debated
[Reuters] Fed policymakers agree Trump fiscal boost poses inflation risk
[Reuters] Total global debt tops 325 pct of GDP as government debt jumps: IIF
[Bloomberg] Inside the Fed’s December Meeting: The Annotated Minutes
[Bloomberg] Harvard Academic Sees Debt Rout Worse Than 1994 ‘Bond Massacre’
[Reuters] December US auto sales come in at pace of 18.4 million, vs. 17.7 million estimate
[Reuters] GM December U.S. sales up 8 percent, sees record for industry in 2017
[Reuters] U.S. 2016 auto sales set new record at 17.465 mln - WardsAuto
[Reuters] Trump's SEC pick Clayton points to capital formation, not enforcement
[Bloomberg] China Sets Sights on Another Skeptic-Defying Year
[NYT] Fed Sees Faster Economic Growth Under Trump, but Not a Boom
[FT] Wall Street debt issuance off to a record start in 2017
[WSJ] Envisioning a Fannie and Freddie Endgame
[Bloomberg] Fed Officials See Gradual Rate Hikes as Upside Risks Debated
[Reuters] Fed policymakers agree Trump fiscal boost poses inflation risk
[Reuters] Total global debt tops 325 pct of GDP as government debt jumps: IIF
[Bloomberg] Inside the Fed’s December Meeting: The Annotated Minutes
[Bloomberg] Harvard Academic Sees Debt Rout Worse Than 1994 ‘Bond Massacre’
[Reuters] December US auto sales come in at pace of 18.4 million, vs. 17.7 million estimate
[Reuters] GM December U.S. sales up 8 percent, sees record for industry in 2017
[Reuters] U.S. 2016 auto sales set new record at 17.465 mln - WardsAuto
[Reuters] Trump's SEC pick Clayton points to capital formation, not enforcement
[Bloomberg] China Sets Sights on Another Skeptic-Defying Year
[NYT] Fed Sees Faster Economic Growth Under Trump, but Not a Boom
[FT] Wall Street debt issuance off to a record start in 2017
[WSJ] Envisioning a Fannie and Freddie Endgame
Tuesday, January 3, 2017
Wednesday's News Links
[Bloomberg] Risk-On Tide Lifts Developing World to Commodities: Markets Wrap
[Reuters] Strong dollar lifts Japan shares, crimps commodities
[Bloomberg] China’s Stocks Rise as Rail Companies, Liquor Makers Lead Gains
[Reuters] China steps in to support yuan again as Trump inauguration nears
[Bloomberg] China Said to Consider Options to Support Yuan, Curb Outflows
[Bloomberg] Euro-Area Economy Ended Year With Fastest Growth Since 2011
[CNBC] Mortgage applications tank 12% to end 2016
[Reuters] U.S. banks gear up to fight Dodd-Frank Act's Volcker rule
[Reuters] U.S. LIBOR breaks above 1 percent for first time since 2009
[Bloomberg] Manhattan Resale Home Prices Tumble the Most in Four Years
[Bloomberg] China Goes on $26 Trillion Commodity Binge as Shortages Seen
[NYT] With Choice of Trade Negotiator, Trump Prepares to Confront Mexico and China
[WSJ] Fed Minutes to Offer Insight on Central Bankers’ Outlook for 2017
[WSJ] Clients Want Hedge Funds but Not Their Big Bets
[Reuters] Strong dollar lifts Japan shares, crimps commodities
[Bloomberg] China’s Stocks Rise as Rail Companies, Liquor Makers Lead Gains
[Reuters] China steps in to support yuan again as Trump inauguration nears
[Bloomberg] China Said to Consider Options to Support Yuan, Curb Outflows
[Bloomberg] Euro-Area Economy Ended Year With Fastest Growth Since 2011
[CNBC] Mortgage applications tank 12% to end 2016
[Reuters] U.S. banks gear up to fight Dodd-Frank Act's Volcker rule
[Reuters] U.S. LIBOR breaks above 1 percent for first time since 2009
[Bloomberg] Manhattan Resale Home Prices Tumble the Most in Four Years
[Bloomberg] China Goes on $26 Trillion Commodity Binge as Shortages Seen
[NYT] With Choice of Trade Negotiator, Trump Prepares to Confront Mexico and China
[WSJ] Fed Minutes to Offer Insight on Central Bankers’ Outlook for 2017
[WSJ] Clients Want Hedge Funds but Not Their Big Bets
Tuesday Evening Links
[Bloomberg] Japanese Stocks Lead Asian Equity Gains, Oil Rises: Markets Wrap
[Reuters] Wall St. pares some gains as oil prices drop
[Bloomberg] China’s Credit Engine Is Running Out of Gas
[Bloomberg] New Year’s Money Curbs May Prompt More Use of China Outflow Pipe
[Bloomberg] Fed Tightening Eases Stimulus Pressure Globally, Rajan Says
[Bloomberg] These Eight Charts Explain What's Happening in Markets Right Now
[Bloomberg] That Bubbling Sound Coming From U.S. Factories May Be Inflation
[Bloomberg] ETF Investors, Hedge Funds Bail on Gold as Dollar, Equities Gain
[Bloomberg] Asia’s Richest Families Are Abandoning ‘Complacent’ Hedge Funds
[WSJ] China Inc.’s Large Dollar Debts Fuel Beijing’s Efforts to Curb Yuan Plunge
[FT] Cities offer a glimpse of China’s economic future
[WSJ] China Has Too Many Shopping Malls
[Reuters] Wall St. pares some gains as oil prices drop
[Bloomberg] China’s Credit Engine Is Running Out of Gas
[Bloomberg] New Year’s Money Curbs May Prompt More Use of China Outflow Pipe
[Bloomberg] Fed Tightening Eases Stimulus Pressure Globally, Rajan Says
[Bloomberg] These Eight Charts Explain What's Happening in Markets Right Now
[Bloomberg] That Bubbling Sound Coming From U.S. Factories May Be Inflation
[Bloomberg] ETF Investors, Hedge Funds Bail on Gold as Dollar, Equities Gain
[Bloomberg] Asia’s Richest Families Are Abandoning ‘Complacent’ Hedge Funds
[WSJ] China Inc.’s Large Dollar Debts Fuel Beijing’s Efforts to Curb Yuan Plunge
[FT] Cities offer a glimpse of China’s economic future
[WSJ] China Has Too Many Shopping Malls
Monday, January 2, 2017
Tuesday's News Links
[Bloomberg] Stocks Climb on Economy Optimism as Oil Advances: Markets Wrap
[Bloomberg] Oil Climbs to 18-Month High as Kuwait and Oman Fulfill OPEC Cuts
[Reuters] Asia stocks edge up in positive start to 2017, dollar resumes climb
[Bloomberg] Manufacturing in U.S. Expands at Fastest Pace in Two Years
[Bloomberg] China’s Factories and Services Cap Year of Gains as Prices Surge
[Bloomberg] China Gets Strict on Forex Transactions to Stop Money Exiting Abroad
[Reuters] China's yuan may see more volatility vs. dollar after basket change
[Bloomberg] Biggest Economies Face $7.7 Trillion Bond Tab as Bull Run Fades
[Bloomberg] It’s the ‘Most Volatile’ Year for Political Risk Since WWII, Eurasia Group Says
[Reuters] China's economy could grow 6.5 percent in 2017; devaluation could stabilize yuan: think tank
[Bloomberg] Trump Taps China Critic Lighthizer for U.S. Trade Representative
[Bloomberg] Australian House Prices Rise Most in Seven Years on Low Rates
[NYT] With Trump, an Economic Feast With Surprises on the Menu
[FT] A daunting new year dawns in global markets
[WSJ] The Champions of the 401(k) Lament the Revolution They Started
[WSJ] Businesses Ramp Up Investment Despite Rising Rates
[FT] Equity bulls enter 2017 ignoring expensive valuations
[Bloomberg] Oil Climbs to 18-Month High as Kuwait and Oman Fulfill OPEC Cuts
[Reuters] Asia stocks edge up in positive start to 2017, dollar resumes climb
[Bloomberg] Manufacturing in U.S. Expands at Fastest Pace in Two Years
[Bloomberg] China’s Factories and Services Cap Year of Gains as Prices Surge
[Bloomberg] China Gets Strict on Forex Transactions to Stop Money Exiting Abroad
[Reuters] China's yuan may see more volatility vs. dollar after basket change
[Bloomberg] Biggest Economies Face $7.7 Trillion Bond Tab as Bull Run Fades
[Bloomberg] It’s the ‘Most Volatile’ Year for Political Risk Since WWII, Eurasia Group Says
[Reuters] China's economy could grow 6.5 percent in 2017; devaluation could stabilize yuan: think tank
[Bloomberg] Trump Taps China Critic Lighthizer for U.S. Trade Representative
[Bloomberg] Australian House Prices Rise Most in Seven Years on Low Rates
[NYT] With Trump, an Economic Feast With Surprises on the Menu
[FT] A daunting new year dawns in global markets
[WSJ] The Champions of the 401(k) Lament the Revolution They Started
[WSJ] Businesses Ramp Up Investment Despite Rising Rates
[FT] Equity bulls enter 2017 ignoring expensive valuations
Sunday, January 1, 2017
Monday's News Links
[Bloomberg] European Stocks Advance as Data Confirms Manufacturing Strength
[Reuters] North American movie box office sets record in 2016
[Bloomberg] India’s Manufacturing to Shrink as Cash Shortages Cut Demand
[Bloomberg] PBOC’s Ma Says New Cash Transaction Rules Are Not Capital Controls
[Bloomberg] Samsung Warns of Slowing Growth in Key Markets Amid Uncertainty
[Bloomberg] Modi’s Speeches Spur Memes, Pub Drinking Games in Indian Cities
[CNBC] Potential new banking crises are a concern in Europe: Analyst
[Reuters] China says won't allow Hong Kong to be used as subversion base
[WSJ] Central Banks Loosening Their Grip on Markets
[FT] Markets outlook: the big issues facing investors in 2017
[FT] Renminbi faces confidence test as Chinese FX purchase quota resets
[Reuters] North American movie box office sets record in 2016
[Bloomberg] India’s Manufacturing to Shrink as Cash Shortages Cut Demand
[Bloomberg] PBOC’s Ma Says New Cash Transaction Rules Are Not Capital Controls
[Bloomberg] Samsung Warns of Slowing Growth in Key Markets Amid Uncertainty
[Bloomberg] Modi’s Speeches Spur Memes, Pub Drinking Games in Indian Cities
[CNBC] Potential new banking crises are a concern in Europe: Analyst
[Reuters] China says won't allow Hong Kong to be used as subversion base
[WSJ] Central Banks Loosening Their Grip on Markets
[FT] Markets outlook: the big issues facing investors in 2017
[FT] Renminbi faces confidence test as Chinese FX purchase quota resets
Sunday Evening Links
[CNBC] Real estate developers engaged in 'arms race' to fill Brooklyn luxury apartments
[Reuters] The head of Germany's Ifo economic institute believes Italians will eventually want to quit
[CNBC] China's homegrown populism to test Xi Jinping
[WSJ] Europe’s Fate in 2017: Caught Between Low Rates and Populist Politics
[Reuters] The head of Germany's Ifo economic institute believes Italians will eventually want to quit
[CNBC] China's homegrown populism to test Xi Jinping
[WSJ] Europe’s Fate in 2017: Caught Between Low Rates and Populist Politics
Saturday, December 31, 2016
Sunday's News Links
[Bloomberg] China Manufacturing Stabilizes Near a Post-2012 High
[Reuters] China steps up scrutiny on individual forex purchases in the new year
[Reuters] China's Xi says won't let anyone make 'fuss' about its territory
[WSJ] Re-Energized Dollar Looms Over the Rest of the World
[WSJ] China Embarking on a Financial High-Wire Act
[NYT] Deutsche Bank Flew and Fell. Some Paid a High Price.
[Reuters] China steps up scrutiny on individual forex purchases in the new year
[Reuters] China's Xi says won't let anyone make 'fuss' about its territory
[WSJ] Re-Energized Dollar Looms Over the Rest of the World
[WSJ] China Embarking on a Financial High-Wire Act
[NYT] Deutsche Bank Flew and Fell. Some Paid a High Price.
Saturday's News Links
[Reuters] Investors brace for 2017 shocks after surprise 2016 run
[Reuters] Wall St. thinks stocks will rise in 2017 - What could go wrong?
[Bloomberg] China’s Xi Vows to Defend Maritime Interests, Sovereignty in ’17
[Reuters] China considering strong measures to contain Taiwan: sources
[FT] Charting the twists and turns across financial markets in 2016
[FT] Investor optimism ignores potential for sudden upsets
[Reuters] Wall St. thinks stocks will rise in 2017 - What could go wrong?
[Bloomberg] China’s Xi Vows to Defend Maritime Interests, Sovereignty in ’17
[Reuters] China considering strong measures to contain Taiwan: sources
[FT] Charting the twists and turns across financial markets in 2016
[FT] Investor optimism ignores potential for sudden upsets
Friday, December 30, 2016
Weekly Commentary: 2016 Year in Review
When looking back on a year, it’s only natural that events later in the year receive added emphasis. The DJIA made it within 23 points of the 20,000 benchmark as the year wound down. All major U.S. equities indices posted all-time highs in December – the Dow, S&P500 and Nasdaq, as well as small and mid-cap indices. After trading as low as 667 back in March 2009, the S&P500 closed out 2016 at 2,239. Over this period the small cap Russell 2000 inflated about four-fold to end the year at 1,357.
The broader market shined in 2016, with the small cap Russell 2000 and S&P400 Mid-Cap indices gaining 18.7% and 19.5%, respectively. Also outshining the S&P500, junk bonds enjoyed their best performance since 2009, with the HYG (high-yield ETF) returning 13.4%. The TLT (long-term Treasury ETF) eked out a 1.0% gain for the year, while the LQD (investment-grade corporate ETF) returned 6.1%.
The S&P500 rallied almost 10% post-election, with the small caps doubling that percentage gain. Trump trepidation may have temporarily pushed the DJIA down almost 1,000 points election night, but post-election optimism rallied right along with market prices. Reagan-style deregulation, along with tax reform, fiscal stimulus, infrastructure spending and trade reform are viewed as ushering in a fundamentally improved environment for corporate America and the U.S. economy overall.
Importantly, the economic backdrop was supportive of market optimism. At 3.5%, Q3 GDP was the strongest in two years. GDP has shown strong momentum, rising from Q1’s 0.8% and Q2’s 1.4%. At 4.6%, November’s unemployment rate was the lowest going back to boom-time August 2007. On the back of surging stock prices, consumer confidence jumped to the highest level since August 2001. Auto sales were on track to reach an annual record 17.5 million units. Home prices have returned to record levels, with existing home sales the strongest since 2007.
It’s reasonable to posit that U.S. lending conditions have become the loosest since (at least) 2007, helping to explain the strength in auto and home sales along with the general economy. It’s worth noting that the 2016 U.S. fiscal deficit rose a third to $587 billion, or 3.2% of GDP. Revenues increased 1%, while spending jumped 5%.
As of the end of Q3, the U.S. economy was on track for the strongest Credit growth since 2008. Q3 seasonally-adjusted and annualized (SAAR) Non-financial Credit growth reached $2.679 TN (about $2.375 TN SAAR over three quarters) the strongest expansion since 2007’s record $2.503 TN. Household mortgage Credit has been expanding the most rapidly since 2007. M2 “money” supply increased over $900bn in 2016, expanding about 8.0%. Clearly, U.S. rates have been held way to too low for way too long.
Ultra-loose finance was a global phenomenon. According to the Financial Times, global debt issuance reached an all-time high $6.60 TN, surpassing 2006’s record. Global corporate issuance was up 8% from 2015 to $3.60 TN. The year supported the view that things tend to get crazy near the end of epic Bubbles.
A summarizing December 30th Bloomberg headline: “A Year in China Markets: Yuan Down, Stocks Down, Bonds Faltering.” For the year, China’s currency declined 6.6%, “the most in two decades.” The yuan began the year weak and end the year weaker. “Money” flooded out of China at the beginning of 2016, then somewhat stabilized before the floodwaters began to rise again during the fourth quarter.
Chinese stocks also had a rough year. The Shanghai Composite dropped 11.3%, with the CSI Smallcap 500 Index down 17.8%. China’s growth-oriented ChiNext index was hit even harder, sinking 27.7%. Chinese international reserves dropped another $280 billion during the year to $3.330 TN. Reserves have declined a stunning $940 billion since the June, 2014 peak.
With year-end optimism dominating, it’s easy to forget that China was in the process of bringing global markets to their knees early in the year. According to the Financial Times, global markets lost $4.0 TN in the first ten trading sessions of 2016 – the “worst-ever” start to a trading year. The Shanghai Composite sank a quick 25% in January, with fears of a bursting Chinese Bubble hammering global markets. The S&P500 dropped 11%, the worst start to a year in decades. The Nasdaq Composite fell 16%. By early February, crude was already down almost 30%. The GSCI commodities index lost 14%, trading to a low going all the way back to 2004.
As fears rose of a bursting global Bubble, bank stocks fell under heavy selling pressure. U.S. banks (BKX) and broker/dealers (XBD) were each down over 20% in the year’s initial weeks. The Hang Seng China Financials index sank almost 25%. Japanese banks were under even more intense selling pressure, with the TOPIX-Banks Index falling 35%. European stocks (STOXX 600) dropped almost 30%. By mid-February, Germany’s behemoth Deutsche Bank was sporting a y-t-d loss of almost 40% - and it was making folks nervous.
Again, year-end optimism clouds our memories and interpretations of early-year market behavior. But my view at the time was that the global Bubble was faltering. The great Chinese Bubble was at serious risk of implosion, with stocks crashing, the economic boom faltering, bond defaults multiplying and “money” trying to exit as fast as possible. In short, China’s debt Bubble was at acute risk of crashing, imperiling some of that nation’s largest banks – huge institutions that now populate the top of the list of the world’s largest banks.
While they surely received zero consideration, I’d award global central bankers “2016 Person of the Year.” Understandably, most see “The Year of Donald Trump” or “The Year of Global Populism.” Yet from my analytical perspective it was “Yet Another Year of Desperate Central Bankers.” Recall that market sentiment early in the year held that central banks had largely expended their ammo. There was even talk of “quantitative tightening.” The Fed had commenced a tightening cycle and EM central banks were under pressure to sell Treasuries and other reserve assets to help stabilize their currencies. Meanwhile, the BOJ and ECB had already pushed rate cuts and QE to their limits – or so it seemed. Ominously, markets were faltering in the face of, seemingly, peak “whatever it takes.”
With Japanese unemployment at 3.3%, the Bank of Japan on January 29th did the previously thought impossible (and something Kuroda had said the prior week was not even being considered) – rates were pushed into negative territory with a warning that they could go even lower. Reuters: “BOJ stuns markets with surprise move to negative interest rates.” BOJ Governor Haruhiko Kuroda, responding to unstable global markets: “What’s important is to show people that the BOJ is strongly committed to achieving 2% inflation and that it will do whatever it takes to achieve it.”
Reuters: “Kuroda said the world's third-biggest economy was recovering moderately and the underlying price trend was rising steadily. ‘But there's a risk recent further falls in oil prices, uncertainty over emerging economies, including China, and global market instability could hurt business confidence and delay the eradication of people's deflationary mindset,’ he said.”
Draghi’s ECB entered the fray on March 9th. Determined to “beat market expectation,” ECB doves pushed the hawks completely out of the way to boost monthly QE by 20bn euros (second increase in three months), slash rates, introduce a new LTRO lending program, and add corporate debt to its buy list. Mario Draghi rather proudly stated: “We have shown that we are not short of ammunition.”
The FOMC refrained from rate normalization during January and March meetings, as the tone was set for “whatever it takes” central banking worldwide. The subsequent global market rally was interrupted by the previously thought impossible, a majority in the UK voting on Thursday, June 23rd to exit the EU.
A shocked market pounded the pound down more than 10%, before the British currency ended that Friday’s session down 8.3%. The euro fell 3%, while EM currencies were under heavy selling pressure. Safe haven assets surged. Treasury yields sank to 1.41%, the yen jumped 3.8% and gold rose 4%. Meanwhile, global equities erased $2.0 TN of value. Italian and Spanish stocks were down about 12%, with losses of about 6% for German and French equities. European bank stocks were crushed. The DJIA dropped 611 points on June 24th trading. The Nasdaq Composite was down 202 points, or 4.1%, its worst showing since 2011. Crude sank 5%. It would prove a great buying opportunity for almost all global risk assets.
On August 4th, the Bank of England (with unemployment at 4.9% and market yields collapsing) moved forward with “whatever it takes,” cutting rates and reviving QE. From the UK Guardian: “Carney rebuffed suggestions the Bank was over-reacting to the Brexit vote and implied the UK would fall into recession without the new measures. ‘There is a clear case for stimulus, and stimulus now, in order to have an effect when the economy really needs it,’ he said.” The FTSE 100 ended the year up 14.4% at an all-time high. Not faring as well, the British pound dropped 16.3% versus the dollar.
By August markets took serious comfort from “whatever it takes.” And when it came to global reflation and reversing faltering market Bubbles, global central bankers had received extraordinary assistance from Beijing. Panicked Chinese officials had imposed a series of extreme measures to bolster liquidity and market prices, while adopting various control measures that restricted “money” leaving the country. The so-called “national team” had become an aggressive buyer of Chinese equities. Most importantly, a surge in state-directed lending saw Total Social Financing jump an incredible $525bn in January, spurring what would be a record $1.5 TN of first-half Credit growth - and full-year 2016 Credit expansion approaching an unmatched $3.0 TN.
When it comes to major Credit Bubbles, there’s inherently a fine line between a bursting Bubble and a perilous amplification of Terminal Phase Excess. It’s worth recalling that previous Chinese official efforts to rein in overheated real estate (apartment) markets worked to push excess liquidity into increasingly speculative stock markets. Trading around 2,200 in mid-2014, the Shanghai Composite surged to a peak Bubble 5,380 by mid-2015. Ironically, efforts this year to stabilize faltering equities, mounting Credit stress and a rapidly slowing economy incited a precarious liquidity (speculative blow-off) stampede into real estate and bond Bubbles.
Chinese mortgage finance Bubble excess this year pushed China’s housing Bubble to a state of being completely out of control. Year-over-year prices surged 46% in Shanghai, 35% in Beijing, 51% in Shenzhen and 49% in Nanjing. Despite mounting defaults and Credit stress, the over-abundance of cheap liquidity ensured that Chinese companies continued their aggressive leveraging. Growing another 16.5% during 2016, China now takes claim to the third-largest global bond market. Total repo financing is said to now exceed the amount of available outstanding bonds, in the face of an ongoing rapid expansion of “Shadow Finance” and speculative leveraging.
Total Chinese debt now easily exceeds 250% of GDP. It was also a record year for Chinese outbound M&A - $219 billion (Dealogic). As the year progressed, rapid Credit growth fueled rises in consumer and producer inflation: China’s November PPI was up 3.3% y-o-y, the strongest rise since 2011
As 2016 came to an end, Chinese officials appeared to recognize the dilemma they faced. The talk was how surging home prices posed a risk to social stability, and of the need for more aggressive measures to thwart Bubbles. In particular, “shadow banking” and speculation appear to be in official crosshairs.
The Shanghai Composite dropped 6.4% in December. More ominously, China’s bond markets turned increasingly unstable. Ten-year Chinese government yields surged 50 bps in several weeks (to 3.32%), before a year-end rally had yields closing 2016 at 3.04%. Year-end funding pressures were even more intense than usual. More importantly, increasingly conspicuous cracks are forming in China’s corporate financing markets. Liquidity, default, fraud and counter-party issues are taking a rising toll. Desperate measures in 2016 to mask systemic debt problems with record amounts of new debt and market intervention will have dire consequences.
It’s that ominous dynamic of rapidly rising Credit necessary to stimulate even declining economic growth. But massive Credit did stabilize Chinese economic activity in 2016, playing a major role in the stabilization of global crude and commodity prices – price recoveries that were instrumental in stabilizing global debt concerns that were spreading from commodity-related companies, countries and regions.
It’s worth noting that the popular U.S. high-yield bond ETF (HYG) was down almost 7.0% by mid-February. Emerging market stocks and bonds were trading at multi-year lows. Key EM currencies, including the Mexican peso, South Korean won, South African rand, Indian rupee, Russian ruble, and Turkish lira, were under heavy selling pressure. Remember the fears for Glencore and other companies highly leveraged to commodities?
Well, Glencore’s stock ended 2016 up over 200%. U.S., European and Asian junk debt, for the most part, enjoyed a banner year. The HYG returned 13.4% in 2016, ahead of the 9.3% gain for the EMB (EM bond ETF). EM stocks (EEM) rose 11.7%. The GSCI Commodities Index jumped 27.9%, led by a 45% increase in crude prices. Stocks in Brazil gained 38.9%, Russia 26.8% and Mexico 6.2%. Down a quick 12% to start the year, Canadian stocks ended 2016 with a 17.5% gain, the “Developed World’s Top Market.”
Who back in February would have forecast oil, junk, Brazil and Russia at the top of the 2016 leaderboard? Who would have predicted Friday’s AP headline? “Energy Companies and Banks Led Rally on S&P 500 in 2016.” But it’s always the leveraged and finance-dependent entities “at the margin” that are most sensitive to changing financial conditions. Without extreme “whatever it takes” measures (from global central banks and China) it would be today a very different world. This year’s biggest winners – stocks, bonds, currencies, etc. – could have instead been huge losers, with the Periphery dragging down the Core.
But with global QE in the neighborhood of $2.0 TN annually and hundreds of billions flowing out of China, the vulnerable Periphery enjoyed a liquidity windfall. Global fragilities were in the short-term ameliorated by unprecedented global rate and liquidity dynamics. The year began with the world at the precipice of a bursting Bubble. The bottom line is that the global Bubble persevered and then inflated significantly.
To be sure, Global Monetary Disorder become deeply entrenched. After trading at a 13-year low $26.05, WTI crude more than doubled (“biggest annual gain since 2009”) to trade as high as $54.50 near year-end (OPEC managing the first production cut since 2008). Trading inversely to risk assets, bullion began the year at $1,061, surged to $1,375 (7/11) and then reversed course to end the year at $1,152. After starting 2016 at 111, the HUI gold equities index surged to 286 in July, before reversing course to close the year up 64% at 182. Wild moves were not limited to commodities. The British pound sank 10% versus the dollar on Brexit, to a 31-year low. The Mexican peso collapsed 14% to an all-time low on Trump’s equally stunning win. Draghi’s December move to expand and extend ECB monetary stimulus pushed the euro to a 14-year low against the U.S. currency.
The Japanese yen has for some time been a leading funding currency for global leveraged speculation. The dollar/yen began the year at 120.22 before trading as high as 121.69 on January 29th. Fears of global de-risking/de-leveraging saw the yen rally strongly versus the dollar. This advance was capped by a Brexit induced better than 4% surge that had the dollar/yen trading below 100 on June 24th (first time below 100 since 2013). The dollar/yen began to rally in September, although it traded as low as 101.20 during chaotic U.S. election-night trading. Then an abrupt rally had the dollar/yen trade as high as 118.66 on December 15th, before closing 2016 at 116.96.
Yet nowhere was Monetary Disorder more prominent in 2016 than throughout global bond markets. When it appeared global yields could not possibly decline much more, the impossible: They sank a lot lower, hitting historic extremes in the wake of the Brexit vote. UK debt has traded for a very long time, yet never at yields as low as those of 2016. After beginning the year at 1.96%, 10-year gilt yields dropped to 1.22% in early-July. After starting 2016 at 2.27%, 10-year Treasury yields hit a record low 1.36% on July 8th. Japan’s JGB yields sank to negative 29 bps, after starting the year at positive 27 bps. Swiss 10-year yields were a negative five bps to begin the year, but then sank to an incredible negative 63 bps. Bund yields dropped to negative 19 bps (began 2016 at 63bps), as French yields fell all the way to 10 bps (99 bps). Highly indebted Italy saw its 10-year yields sink to an impossibly low 1.04% (1.60%), and Spanish yields fell to an equally incredible 0.88% (1.77%). By August, an impossible $13.4 TN of global bonds were trading with negative yields (FT).
It evolved into a spectacular market dislocation and melt-up, surely fueled by derivative-related trading and a powerful short-squeeze. Typical of blow-off tops with their abrupt reversals, market euphoria proved short-lived. From 2016 lows, Treasury yields surged 124 bps, with British gilt yields up 109 bps. From lows to highs, bund yields rose 59 bps, French yields 77 bps and Spanish yields 73 bps.
Of special note, Italian yields jumped 109 bps from earlier lows, with a year-end rally reducing the 2016 yield rise to 22 bps at 1.82%. Portuguese bonds ended the year at 3.76%, up 124 bps. Providing a good microcosm of “Periphery” instability, Greek bond yields surged to 11.57% in February only to close 2016 at 7.11%. In a few short weeks, Mexican (peso) yields surged 160 bps, with significant yield rises throughout EM.
For the year, the Argentine peso declined 18.6%, the Turkish lira 17.2%, the Mexican peso 17.0%, the Polish zloty 6.3%, the Philippine peso 5.2% and the Malaysian ringgit 4.3%. Mexico was forced to raise rates to support a rapidly sinking peso and counter prospects for an inflationary surge.
Wild markets for the most part didn’t help the struggling leveraged speculating community. A December 28th Bloomberg headline: “The Golden Era of Hedge Funds Draws to a Close With Clients in Revolt.” While most funds again underperformed expectations, the industry got through 2016 without major redemptions. This they owe to central bankers and Chinese officials. And another Bloomberg headline, this one from December 30th: “Actively Managed Funds Take a Beating.” Throughout 2016, and especially after the election, “money” literally flooded into equity index and other passively managed ETFs. Central bankers ensured that managers attentive to risk and risk management had another crummy year.
I expect future historians will see 2016 chiefly through the geopolitical perspective. How can market happenings compete against Brexit, the Trump phenomenon and Renzi’s failed political reform referendum (to name only the most obvious)? But clearly unstable markets, unsettled societies and simmering geopolitical turmoil are more than coincidental. At their roots, all can be traced to a prolonged period of unchecked finance, central bank activism and the general effects of inflationism.
Consequences were on increasing display throughout 2016. There was the rising tide of anti-establishment populism that seemingly became a global phenomenon. There was the deep discontent that led to Brexit and President-elect Trump. This was part of general instability and uncertainty that afflicted financial markets – in the process ensuring “whatever it takes” went to even crazier extremes. And, almost ironically, this is the type of mercurial social and monetary backdrop conducive to powerful markets reversals and attendant bouts of hope and optimism.
December 27 – Bloomberg (Vince Golle): “The last time Americans’ optimism about the stock market registered such a dramatic one-month surge was during the dot-com boom. As stocks reached a record, the share of households anticipating higher equity prices a year from now surged to 44.7% in December from 30.9% a month earlier, the biggest monthly advance since November 1998…”
As an extraordinary year came to an end, confidence overtook caution. Just kind of pushed it aside. Markets became willing to dismiss myriad risks – all the uncertainties associated with China, Italy, rising populism, terrorism, geopolitical, etc. It was as if everyone just turned tired of worrying. There was as well a willingness to imagine the best of President-elect Trump’s policies, while disregarding all the uncertainty that comes with such a unique personality. It’s going to be an incredibly fascinating 2017.
The broader market shined in 2016, with the small cap Russell 2000 and S&P400 Mid-Cap indices gaining 18.7% and 19.5%, respectively. Also outshining the S&P500, junk bonds enjoyed their best performance since 2009, with the HYG (high-yield ETF) returning 13.4%. The TLT (long-term Treasury ETF) eked out a 1.0% gain for the year, while the LQD (investment-grade corporate ETF) returned 6.1%.
The S&P500 rallied almost 10% post-election, with the small caps doubling that percentage gain. Trump trepidation may have temporarily pushed the DJIA down almost 1,000 points election night, but post-election optimism rallied right along with market prices. Reagan-style deregulation, along with tax reform, fiscal stimulus, infrastructure spending and trade reform are viewed as ushering in a fundamentally improved environment for corporate America and the U.S. economy overall.
Importantly, the economic backdrop was supportive of market optimism. At 3.5%, Q3 GDP was the strongest in two years. GDP has shown strong momentum, rising from Q1’s 0.8% and Q2’s 1.4%. At 4.6%, November’s unemployment rate was the lowest going back to boom-time August 2007. On the back of surging stock prices, consumer confidence jumped to the highest level since August 2001. Auto sales were on track to reach an annual record 17.5 million units. Home prices have returned to record levels, with existing home sales the strongest since 2007.
It’s reasonable to posit that U.S. lending conditions have become the loosest since (at least) 2007, helping to explain the strength in auto and home sales along with the general economy. It’s worth noting that the 2016 U.S. fiscal deficit rose a third to $587 billion, or 3.2% of GDP. Revenues increased 1%, while spending jumped 5%.
As of the end of Q3, the U.S. economy was on track for the strongest Credit growth since 2008. Q3 seasonally-adjusted and annualized (SAAR) Non-financial Credit growth reached $2.679 TN (about $2.375 TN SAAR over three quarters) the strongest expansion since 2007’s record $2.503 TN. Household mortgage Credit has been expanding the most rapidly since 2007. M2 “money” supply increased over $900bn in 2016, expanding about 8.0%. Clearly, U.S. rates have been held way to too low for way too long.
Ultra-loose finance was a global phenomenon. According to the Financial Times, global debt issuance reached an all-time high $6.60 TN, surpassing 2006’s record. Global corporate issuance was up 8% from 2015 to $3.60 TN. The year supported the view that things tend to get crazy near the end of epic Bubbles.
A summarizing December 30th Bloomberg headline: “A Year in China Markets: Yuan Down, Stocks Down, Bonds Faltering.” For the year, China’s currency declined 6.6%, “the most in two decades.” The yuan began the year weak and end the year weaker. “Money” flooded out of China at the beginning of 2016, then somewhat stabilized before the floodwaters began to rise again during the fourth quarter.
Chinese stocks also had a rough year. The Shanghai Composite dropped 11.3%, with the CSI Smallcap 500 Index down 17.8%. China’s growth-oriented ChiNext index was hit even harder, sinking 27.7%. Chinese international reserves dropped another $280 billion during the year to $3.330 TN. Reserves have declined a stunning $940 billion since the June, 2014 peak.
With year-end optimism dominating, it’s easy to forget that China was in the process of bringing global markets to their knees early in the year. According to the Financial Times, global markets lost $4.0 TN in the first ten trading sessions of 2016 – the “worst-ever” start to a trading year. The Shanghai Composite sank a quick 25% in January, with fears of a bursting Chinese Bubble hammering global markets. The S&P500 dropped 11%, the worst start to a year in decades. The Nasdaq Composite fell 16%. By early February, crude was already down almost 30%. The GSCI commodities index lost 14%, trading to a low going all the way back to 2004.
As fears rose of a bursting global Bubble, bank stocks fell under heavy selling pressure. U.S. banks (BKX) and broker/dealers (XBD) were each down over 20% in the year’s initial weeks. The Hang Seng China Financials index sank almost 25%. Japanese banks were under even more intense selling pressure, with the TOPIX-Banks Index falling 35%. European stocks (STOXX 600) dropped almost 30%. By mid-February, Germany’s behemoth Deutsche Bank was sporting a y-t-d loss of almost 40% - and it was making folks nervous.
Again, year-end optimism clouds our memories and interpretations of early-year market behavior. But my view at the time was that the global Bubble was faltering. The great Chinese Bubble was at serious risk of implosion, with stocks crashing, the economic boom faltering, bond defaults multiplying and “money” trying to exit as fast as possible. In short, China’s debt Bubble was at acute risk of crashing, imperiling some of that nation’s largest banks – huge institutions that now populate the top of the list of the world’s largest banks.
While they surely received zero consideration, I’d award global central bankers “2016 Person of the Year.” Understandably, most see “The Year of Donald Trump” or “The Year of Global Populism.” Yet from my analytical perspective it was “Yet Another Year of Desperate Central Bankers.” Recall that market sentiment early in the year held that central banks had largely expended their ammo. There was even talk of “quantitative tightening.” The Fed had commenced a tightening cycle and EM central banks were under pressure to sell Treasuries and other reserve assets to help stabilize their currencies. Meanwhile, the BOJ and ECB had already pushed rate cuts and QE to their limits – or so it seemed. Ominously, markets were faltering in the face of, seemingly, peak “whatever it takes.”
With Japanese unemployment at 3.3%, the Bank of Japan on January 29th did the previously thought impossible (and something Kuroda had said the prior week was not even being considered) – rates were pushed into negative territory with a warning that they could go even lower. Reuters: “BOJ stuns markets with surprise move to negative interest rates.” BOJ Governor Haruhiko Kuroda, responding to unstable global markets: “What’s important is to show people that the BOJ is strongly committed to achieving 2% inflation and that it will do whatever it takes to achieve it.”
Reuters: “Kuroda said the world's third-biggest economy was recovering moderately and the underlying price trend was rising steadily. ‘But there's a risk recent further falls in oil prices, uncertainty over emerging economies, including China, and global market instability could hurt business confidence and delay the eradication of people's deflationary mindset,’ he said.”
Draghi’s ECB entered the fray on March 9th. Determined to “beat market expectation,” ECB doves pushed the hawks completely out of the way to boost monthly QE by 20bn euros (second increase in three months), slash rates, introduce a new LTRO lending program, and add corporate debt to its buy list. Mario Draghi rather proudly stated: “We have shown that we are not short of ammunition.”
The FOMC refrained from rate normalization during January and March meetings, as the tone was set for “whatever it takes” central banking worldwide. The subsequent global market rally was interrupted by the previously thought impossible, a majority in the UK voting on Thursday, June 23rd to exit the EU.
A shocked market pounded the pound down more than 10%, before the British currency ended that Friday’s session down 8.3%. The euro fell 3%, while EM currencies were under heavy selling pressure. Safe haven assets surged. Treasury yields sank to 1.41%, the yen jumped 3.8% and gold rose 4%. Meanwhile, global equities erased $2.0 TN of value. Italian and Spanish stocks were down about 12%, with losses of about 6% for German and French equities. European bank stocks were crushed. The DJIA dropped 611 points on June 24th trading. The Nasdaq Composite was down 202 points, or 4.1%, its worst showing since 2011. Crude sank 5%. It would prove a great buying opportunity for almost all global risk assets.
On August 4th, the Bank of England (with unemployment at 4.9% and market yields collapsing) moved forward with “whatever it takes,” cutting rates and reviving QE. From the UK Guardian: “Carney rebuffed suggestions the Bank was over-reacting to the Brexit vote and implied the UK would fall into recession without the new measures. ‘There is a clear case for stimulus, and stimulus now, in order to have an effect when the economy really needs it,’ he said.” The FTSE 100 ended the year up 14.4% at an all-time high. Not faring as well, the British pound dropped 16.3% versus the dollar.
By August markets took serious comfort from “whatever it takes.” And when it came to global reflation and reversing faltering market Bubbles, global central bankers had received extraordinary assistance from Beijing. Panicked Chinese officials had imposed a series of extreme measures to bolster liquidity and market prices, while adopting various control measures that restricted “money” leaving the country. The so-called “national team” had become an aggressive buyer of Chinese equities. Most importantly, a surge in state-directed lending saw Total Social Financing jump an incredible $525bn in January, spurring what would be a record $1.5 TN of first-half Credit growth - and full-year 2016 Credit expansion approaching an unmatched $3.0 TN.
When it comes to major Credit Bubbles, there’s inherently a fine line between a bursting Bubble and a perilous amplification of Terminal Phase Excess. It’s worth recalling that previous Chinese official efforts to rein in overheated real estate (apartment) markets worked to push excess liquidity into increasingly speculative stock markets. Trading around 2,200 in mid-2014, the Shanghai Composite surged to a peak Bubble 5,380 by mid-2015. Ironically, efforts this year to stabilize faltering equities, mounting Credit stress and a rapidly slowing economy incited a precarious liquidity (speculative blow-off) stampede into real estate and bond Bubbles.
Chinese mortgage finance Bubble excess this year pushed China’s housing Bubble to a state of being completely out of control. Year-over-year prices surged 46% in Shanghai, 35% in Beijing, 51% in Shenzhen and 49% in Nanjing. Despite mounting defaults and Credit stress, the over-abundance of cheap liquidity ensured that Chinese companies continued their aggressive leveraging. Growing another 16.5% during 2016, China now takes claim to the third-largest global bond market. Total repo financing is said to now exceed the amount of available outstanding bonds, in the face of an ongoing rapid expansion of “Shadow Finance” and speculative leveraging.
Total Chinese debt now easily exceeds 250% of GDP. It was also a record year for Chinese outbound M&A - $219 billion (Dealogic). As the year progressed, rapid Credit growth fueled rises in consumer and producer inflation: China’s November PPI was up 3.3% y-o-y, the strongest rise since 2011
As 2016 came to an end, Chinese officials appeared to recognize the dilemma they faced. The talk was how surging home prices posed a risk to social stability, and of the need for more aggressive measures to thwart Bubbles. In particular, “shadow banking” and speculation appear to be in official crosshairs.
The Shanghai Composite dropped 6.4% in December. More ominously, China’s bond markets turned increasingly unstable. Ten-year Chinese government yields surged 50 bps in several weeks (to 3.32%), before a year-end rally had yields closing 2016 at 3.04%. Year-end funding pressures were even more intense than usual. More importantly, increasingly conspicuous cracks are forming in China’s corporate financing markets. Liquidity, default, fraud and counter-party issues are taking a rising toll. Desperate measures in 2016 to mask systemic debt problems with record amounts of new debt and market intervention will have dire consequences.
It’s that ominous dynamic of rapidly rising Credit necessary to stimulate even declining economic growth. But massive Credit did stabilize Chinese economic activity in 2016, playing a major role in the stabilization of global crude and commodity prices – price recoveries that were instrumental in stabilizing global debt concerns that were spreading from commodity-related companies, countries and regions.
It’s worth noting that the popular U.S. high-yield bond ETF (HYG) was down almost 7.0% by mid-February. Emerging market stocks and bonds were trading at multi-year lows. Key EM currencies, including the Mexican peso, South Korean won, South African rand, Indian rupee, Russian ruble, and Turkish lira, were under heavy selling pressure. Remember the fears for Glencore and other companies highly leveraged to commodities?
Well, Glencore’s stock ended 2016 up over 200%. U.S., European and Asian junk debt, for the most part, enjoyed a banner year. The HYG returned 13.4% in 2016, ahead of the 9.3% gain for the EMB (EM bond ETF). EM stocks (EEM) rose 11.7%. The GSCI Commodities Index jumped 27.9%, led by a 45% increase in crude prices. Stocks in Brazil gained 38.9%, Russia 26.8% and Mexico 6.2%. Down a quick 12% to start the year, Canadian stocks ended 2016 with a 17.5% gain, the “Developed World’s Top Market.”
Who back in February would have forecast oil, junk, Brazil and Russia at the top of the 2016 leaderboard? Who would have predicted Friday’s AP headline? “Energy Companies and Banks Led Rally on S&P 500 in 2016.” But it’s always the leveraged and finance-dependent entities “at the margin” that are most sensitive to changing financial conditions. Without extreme “whatever it takes” measures (from global central banks and China) it would be today a very different world. This year’s biggest winners – stocks, bonds, currencies, etc. – could have instead been huge losers, with the Periphery dragging down the Core.
But with global QE in the neighborhood of $2.0 TN annually and hundreds of billions flowing out of China, the vulnerable Periphery enjoyed a liquidity windfall. Global fragilities were in the short-term ameliorated by unprecedented global rate and liquidity dynamics. The year began with the world at the precipice of a bursting Bubble. The bottom line is that the global Bubble persevered and then inflated significantly.
To be sure, Global Monetary Disorder become deeply entrenched. After trading at a 13-year low $26.05, WTI crude more than doubled (“biggest annual gain since 2009”) to trade as high as $54.50 near year-end (OPEC managing the first production cut since 2008). Trading inversely to risk assets, bullion began the year at $1,061, surged to $1,375 (7/11) and then reversed course to end the year at $1,152. After starting 2016 at 111, the HUI gold equities index surged to 286 in July, before reversing course to close the year up 64% at 182. Wild moves were not limited to commodities. The British pound sank 10% versus the dollar on Brexit, to a 31-year low. The Mexican peso collapsed 14% to an all-time low on Trump’s equally stunning win. Draghi’s December move to expand and extend ECB monetary stimulus pushed the euro to a 14-year low against the U.S. currency.
The Japanese yen has for some time been a leading funding currency for global leveraged speculation. The dollar/yen began the year at 120.22 before trading as high as 121.69 on January 29th. Fears of global de-risking/de-leveraging saw the yen rally strongly versus the dollar. This advance was capped by a Brexit induced better than 4% surge that had the dollar/yen trading below 100 on June 24th (first time below 100 since 2013). The dollar/yen began to rally in September, although it traded as low as 101.20 during chaotic U.S. election-night trading. Then an abrupt rally had the dollar/yen trade as high as 118.66 on December 15th, before closing 2016 at 116.96.
Yet nowhere was Monetary Disorder more prominent in 2016 than throughout global bond markets. When it appeared global yields could not possibly decline much more, the impossible: They sank a lot lower, hitting historic extremes in the wake of the Brexit vote. UK debt has traded for a very long time, yet never at yields as low as those of 2016. After beginning the year at 1.96%, 10-year gilt yields dropped to 1.22% in early-July. After starting 2016 at 2.27%, 10-year Treasury yields hit a record low 1.36% on July 8th. Japan’s JGB yields sank to negative 29 bps, after starting the year at positive 27 bps. Swiss 10-year yields were a negative five bps to begin the year, but then sank to an incredible negative 63 bps. Bund yields dropped to negative 19 bps (began 2016 at 63bps), as French yields fell all the way to 10 bps (99 bps). Highly indebted Italy saw its 10-year yields sink to an impossibly low 1.04% (1.60%), and Spanish yields fell to an equally incredible 0.88% (1.77%). By August, an impossible $13.4 TN of global bonds were trading with negative yields (FT).
It evolved into a spectacular market dislocation and melt-up, surely fueled by derivative-related trading and a powerful short-squeeze. Typical of blow-off tops with their abrupt reversals, market euphoria proved short-lived. From 2016 lows, Treasury yields surged 124 bps, with British gilt yields up 109 bps. From lows to highs, bund yields rose 59 bps, French yields 77 bps and Spanish yields 73 bps.
Of special note, Italian yields jumped 109 bps from earlier lows, with a year-end rally reducing the 2016 yield rise to 22 bps at 1.82%. Portuguese bonds ended the year at 3.76%, up 124 bps. Providing a good microcosm of “Periphery” instability, Greek bond yields surged to 11.57% in February only to close 2016 at 7.11%. In a few short weeks, Mexican (peso) yields surged 160 bps, with significant yield rises throughout EM.
For the year, the Argentine peso declined 18.6%, the Turkish lira 17.2%, the Mexican peso 17.0%, the Polish zloty 6.3%, the Philippine peso 5.2% and the Malaysian ringgit 4.3%. Mexico was forced to raise rates to support a rapidly sinking peso and counter prospects for an inflationary surge.
Wild markets for the most part didn’t help the struggling leveraged speculating community. A December 28th Bloomberg headline: “The Golden Era of Hedge Funds Draws to a Close With Clients in Revolt.” While most funds again underperformed expectations, the industry got through 2016 without major redemptions. This they owe to central bankers and Chinese officials. And another Bloomberg headline, this one from December 30th: “Actively Managed Funds Take a Beating.” Throughout 2016, and especially after the election, “money” literally flooded into equity index and other passively managed ETFs. Central bankers ensured that managers attentive to risk and risk management had another crummy year.
I expect future historians will see 2016 chiefly through the geopolitical perspective. How can market happenings compete against Brexit, the Trump phenomenon and Renzi’s failed political reform referendum (to name only the most obvious)? But clearly unstable markets, unsettled societies and simmering geopolitical turmoil are more than coincidental. At their roots, all can be traced to a prolonged period of unchecked finance, central bank activism and the general effects of inflationism.
Consequences were on increasing display throughout 2016. There was the rising tide of anti-establishment populism that seemingly became a global phenomenon. There was the deep discontent that led to Brexit and President-elect Trump. This was part of general instability and uncertainty that afflicted financial markets – in the process ensuring “whatever it takes” went to even crazier extremes. And, almost ironically, this is the type of mercurial social and monetary backdrop conducive to powerful markets reversals and attendant bouts of hope and optimism.
December 27 – Bloomberg (Vince Golle): “The last time Americans’ optimism about the stock market registered such a dramatic one-month surge was during the dot-com boom. As stocks reached a record, the share of households anticipating higher equity prices a year from now surged to 44.7% in December from 30.9% a month earlier, the biggest monthly advance since November 1998…”
As an extraordinary year came to an end, confidence overtook caution. Just kind of pushed it aside. Markets became willing to dismiss myriad risks – all the uncertainties associated with China, Italy, rising populism, terrorism, geopolitical, etc. It was as if everyone just turned tired of worrying. There was as well a willingness to imagine the best of President-elect Trump’s policies, while disregarding all the uncertainty that comes with such a unique personality. It’s going to be an incredibly fascinating 2017.
For the Week:
The S&P500 declined 1.1% (up 9.5% in 2016), and the Dow dipped 0.9% (up 13.4%). The Utilities were little changed (up 13.2%). The Banks gave back 1.4% (up 25.6%), and the Broker/Dealers sank 2.2% (up 15.3%). The Transports lost 1.6% (up 20.4%). The S&P 400 Midcaps slipped 0.8% (up 18.7%), and the small cap Russell 2000 declined 1.0% (up 19.5%). The Nasdaq100 dropped 1.5% (up 5.9%), and the Morgan Stanley High Tech index fell 1.3% (up 12.3%). The Semiconductors fell 2.3% (up 36.6%). The Biotechs sank 3.3% (down 19.4%). With bullion recovering $18, the HUI gold index rallied 7.9% (up 64%).
Three-month Treasury bill rates ended the week at 50 bps. Two-year government yields slipped a basis point to 1.19% (up 14 bps for 2016). Five-year T-note yields fell 10 bps to 1.93% (up 18bps). Ten-year Treasury yields dropped nine bps to 2.45% (up 20bps). Long bond yields declined five bps to 3.07% (up 5bps).
Greek 10-year yields dropped 22 bps to close the year at 7.02% (down 30bps in 2016). Ten-year Portuguese yields added two bps to 3.75% (up 123bps). Italian 10-year yields slipped a basis point to 1.81% (up 31bps). Spain's 10-year yields increased one basis point to 1.38% (down 39bps). German bund yields slipped a basis point to 0.20% (down 42bps). French yields declined one basis point to 0.68% (down 31bps). The French to German 10-year bond spread was unchanged at 48 bps. U.K. 10-year gilt yields dropped 11 bps to 1.24% (down 73bps). U.K.'s FTSE equities index jumped 1.1% (up 14.4%).
Japan's Nikkei 225 equities index dropped 1.6% (up 0.4% for 2016). Japanese 10-year "JGB" yields declined a basis point to 0.04% (down 22bps). The German DAX equities index added 0.3% (up 6.9%). Spain's IBEX 35 equities index slipped 0.2% (down 2.0%). Italy's FTSE MIB index declined 0.6% (down 10.2%). EM equities were mixed. Brazil's Bovespa index surged 4.0% (up 38.9%). Mexico's Bolsa gained 1.0% (up 6.2%). South Korea's Kospi declined 0.5% (up 3.3%). India’s Sensex equities index rallied 2.2% (up 1.9%). China’s Shanghai Exchange slipped 0.2% (down 12.3%). Turkey's Borsa Istanbul National 100 index jumped 1.5% (up 8.9%). Russia's MICEX equities index rallied 2.7% (up 26.8%).
Junk bond mutual funds saw inflows of $592 million (from Lipper).
Freddie Mac 30-year fixed mortgage rates added two bps to a 27-month high 4.32% (up 31bps y-o-y). Fifteen-year rates rose three bps to 3.55% (up 31bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates up one basis point to 4.37% (up 27bps).
Federal Reserve Credit last week expanded $3.7bn to a nine-week high $4.427 TN. Over the past year, Fed Credit contracted $27.4bn (down 0.6%). Fed Credit inflated $1.616 TN, or 58%, over the past 216 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt jumped $8.0bn last week to $3.180 TN. "Custody holdings" were down $144bn y-o-y, or 4.3%.
M2 (narrow) "money" supply last week added $1.3bn to $13.236 TN. "Narrow money" expanded $909bn, or 7.4%, over the past year. For the week, Currency increased $0.3bn. Total Checkable Deposits gained $8.8bn, while Savings Deposits declined $6.3bn. Small Time Deposits slipped $1.3bn. Retail Money Funds gained $1.2bn.
Total money market fund assets jumped $15.9bn to $2.728 TN. Money Funds declined $31bn y-o-y (1.1%).
Total Commercial Paper surged $20.5bn to $987bn. CP declined $70bn y-o-y, or 6.7%.
Currency Watch:
December 29 – Wall Street Journal (Lingling Wei): “China’s central bank is adjusting the mix of foreign currencies used in setting the yuan’s official daily value… Starting Jan. 1, the central bank will expand the number of currencies in the basket uses to calibrate the yuan’s value to 24 from 13 and reduce the weighting given to the U.S. dollar to 22.4%, from 26.4%... China wants a slightly weaker currency to help exporters and maintain competitiveness with other economies as the dollar rises, but it doesn’t want to lose control. By diluting the dollar’s share and bringing in currencies from the Korean won to the Saudi riyal and Swedish krona, the People’s Bank of China is giving itself more room to maneuver to keep the yuan from falling too fast, analysts said.”
The U.S. dollar index slipped 0.6% to 102.4 (up 3.8% y-t-d). For the week on the upside, the South African rand increased 1.9%, the Swedish krona 1.1%, the New Zealand dollar 0.9%, the Swiss franc 0.7%, the Norwegian krone 0.7%, the Canadian dollar 0.7%, the Brazilian real 0.6%, the euro 0.6%, the British pound 0.5% and the Australian dollar 0.5%. For the week on the downside, the Mexican peso declined 0.6%, the South Korean won 0.4% and the Taiwanese dollar 0.3%. The Chinese yuan was little changed versus the dollar (down 6.6%).
Commodities Watch:
The Goldman Sachs Commodities Index jumped 1.7% (up 27.9% in 2016). Spot Gold rallied 1.6% to $1,152 (up 8.6%). Silver gained 1.4% to $15.98 (up 15.8%). Crude rose 81 cents to $53.83 (up 45%). Gasoline added 1.9% (up 32%), and Natural Gas gained 1.7% (up 60%). Copper rose 1.1% (up 17%). Wheat jumped 3.7% (down 13%). Corn recovered 1.8% (down 2%).
The S&P500 declined 1.1% (up 9.5% in 2016), and the Dow dipped 0.9% (up 13.4%). The Utilities were little changed (up 13.2%). The Banks gave back 1.4% (up 25.6%), and the Broker/Dealers sank 2.2% (up 15.3%). The Transports lost 1.6% (up 20.4%). The S&P 400 Midcaps slipped 0.8% (up 18.7%), and the small cap Russell 2000 declined 1.0% (up 19.5%). The Nasdaq100 dropped 1.5% (up 5.9%), and the Morgan Stanley High Tech index fell 1.3% (up 12.3%). The Semiconductors fell 2.3% (up 36.6%). The Biotechs sank 3.3% (down 19.4%). With bullion recovering $18, the HUI gold index rallied 7.9% (up 64%).
Three-month Treasury bill rates ended the week at 50 bps. Two-year government yields slipped a basis point to 1.19% (up 14 bps for 2016). Five-year T-note yields fell 10 bps to 1.93% (up 18bps). Ten-year Treasury yields dropped nine bps to 2.45% (up 20bps). Long bond yields declined five bps to 3.07% (up 5bps).
Greek 10-year yields dropped 22 bps to close the year at 7.02% (down 30bps in 2016). Ten-year Portuguese yields added two bps to 3.75% (up 123bps). Italian 10-year yields slipped a basis point to 1.81% (up 31bps). Spain's 10-year yields increased one basis point to 1.38% (down 39bps). German bund yields slipped a basis point to 0.20% (down 42bps). French yields declined one basis point to 0.68% (down 31bps). The French to German 10-year bond spread was unchanged at 48 bps. U.K. 10-year gilt yields dropped 11 bps to 1.24% (down 73bps). U.K.'s FTSE equities index jumped 1.1% (up 14.4%).
Japan's Nikkei 225 equities index dropped 1.6% (up 0.4% for 2016). Japanese 10-year "JGB" yields declined a basis point to 0.04% (down 22bps). The German DAX equities index added 0.3% (up 6.9%). Spain's IBEX 35 equities index slipped 0.2% (down 2.0%). Italy's FTSE MIB index declined 0.6% (down 10.2%). EM equities were mixed. Brazil's Bovespa index surged 4.0% (up 38.9%). Mexico's Bolsa gained 1.0% (up 6.2%). South Korea's Kospi declined 0.5% (up 3.3%). India’s Sensex equities index rallied 2.2% (up 1.9%). China’s Shanghai Exchange slipped 0.2% (down 12.3%). Turkey's Borsa Istanbul National 100 index jumped 1.5% (up 8.9%). Russia's MICEX equities index rallied 2.7% (up 26.8%).
Junk bond mutual funds saw inflows of $592 million (from Lipper).
Freddie Mac 30-year fixed mortgage rates added two bps to a 27-month high 4.32% (up 31bps y-o-y). Fifteen-year rates rose three bps to 3.55% (up 31bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates up one basis point to 4.37% (up 27bps).
Federal Reserve Credit last week expanded $3.7bn to a nine-week high $4.427 TN. Over the past year, Fed Credit contracted $27.4bn (down 0.6%). Fed Credit inflated $1.616 TN, or 58%, over the past 216 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt jumped $8.0bn last week to $3.180 TN. "Custody holdings" were down $144bn y-o-y, or 4.3%.
M2 (narrow) "money" supply last week added $1.3bn to $13.236 TN. "Narrow money" expanded $909bn, or 7.4%, over the past year. For the week, Currency increased $0.3bn. Total Checkable Deposits gained $8.8bn, while Savings Deposits declined $6.3bn. Small Time Deposits slipped $1.3bn. Retail Money Funds gained $1.2bn.
Total money market fund assets jumped $15.9bn to $2.728 TN. Money Funds declined $31bn y-o-y (1.1%).
Total Commercial Paper surged $20.5bn to $987bn. CP declined $70bn y-o-y, or 6.7%.
Currency Watch:
December 29 – Wall Street Journal (Lingling Wei): “China’s central bank is adjusting the mix of foreign currencies used in setting the yuan’s official daily value… Starting Jan. 1, the central bank will expand the number of currencies in the basket uses to calibrate the yuan’s value to 24 from 13 and reduce the weighting given to the U.S. dollar to 22.4%, from 26.4%... China wants a slightly weaker currency to help exporters and maintain competitiveness with other economies as the dollar rises, but it doesn’t want to lose control. By diluting the dollar’s share and bringing in currencies from the Korean won to the Saudi riyal and Swedish krona, the People’s Bank of China is giving itself more room to maneuver to keep the yuan from falling too fast, analysts said.”
The U.S. dollar index slipped 0.6% to 102.4 (up 3.8% y-t-d). For the week on the upside, the South African rand increased 1.9%, the Swedish krona 1.1%, the New Zealand dollar 0.9%, the Swiss franc 0.7%, the Norwegian krone 0.7%, the Canadian dollar 0.7%, the Brazilian real 0.6%, the euro 0.6%, the British pound 0.5% and the Australian dollar 0.5%. For the week on the downside, the Mexican peso declined 0.6%, the South Korean won 0.4% and the Taiwanese dollar 0.3%. The Chinese yuan was little changed versus the dollar (down 6.6%).
Commodities Watch:
The Goldman Sachs Commodities Index jumped 1.7% (up 27.9% in 2016). Spot Gold rallied 1.6% to $1,152 (up 8.6%). Silver gained 1.4% to $15.98 (up 15.8%). Crude rose 81 cents to $53.83 (up 45%). Gasoline added 1.9% (up 32%), and Natural Gas gained 1.7% (up 60%). Copper rose 1.1% (up 17%). Wheat jumped 3.7% (down 13%). Corn recovered 1.8% (down 2%).
Italy Watch:
December 26 – Reuters (Silvia Aloisi and Stephen Jewkes): “The European Central Bank has told Monte dei Paschi it needs to plug a capital shortfall of 8.8 billion euros ($9.2bn), higher than a previous 5 billion euro gap estimated by the bank… Last Friday the Italian government approved a decree to bail out Monte dei Paschi after Italy's No. 3 lender failed to win investor backing for a desperately needed 5 billion euro capital increase. The bank said on Monday it had officially asked the ECB last Friday for go ahead for a ‘precautionary recapitalization’.”
December 26 – Reuters (Maria Sheahan): “European Central Bank policymaker Jens Weidmann said plans for a state bailout of Italian bank Monte dei Paschi di Siena should be weighed carefully as many questions remain to be answered… ‘For the measures planned by the Italian government the bank has to be financially healthy at its core. The money cannot be used to cover losses that are already expected,’ Bild quoted Weidmann as saying…”
Europe Watch:
December 27 – Reuters (Maria Sheahan): “Germany's Bundesbank has this year taken back more of its gold than planned as it moves towards hoarding half of the world's second-largest reserve at home, Bundesbank President Jens Weidmann told German daily Bild. ‘We brought back significantly more gold to Germany in 2016 again than initially planned. By now, almost half of the gold reserves are in Germany,’ the paper quoted Weidmann… In the wake of the euro zone crisis, many ordinary Germans want to see more of the 3,381 tonnes of gold in vaults at home.”
China Bubble Watch:
December 22 – Bloomberg: “President Xi Jinping said China should deflate property bubbles and regulate the market for rental housing to better meet people’s residential needs, reinforcing the objectives outlined last week at an annual gathering of the country’s top economic leaders. ‘The country should accurately understand the residential feature of housing’ and create a better system for purchases and rentals to better serve new urban populations, Xi said... ‘The market will play the leading role in catering to multi-layered demand, while the government will take care of basic housing demand.’”
December 25 – Bloomberg: “China Guangfa Bank Co. said Monday that documents and seals for a letter claiming to guarantee bond payments by the lender were forged, in the second such incident in the nation this month, raising concern about transparency in the world’s third-biggest bond market… ‘Over the past few years, business growth of financial institutions has outpaced their capability to boost internal controls and also gone beyond the radar of regulators,’ said He Xuanlai… analyst at Commerzbank AG… A lack of transparency and protection in bond documentation are adding to angst among investors after Sealand Securities Co. said earlier this month a former employee was found to have forged a seal to conduct bond trading. Concern about China’s bond market has been climbing after at least 28 onshore notes defaulted this year amid an economic slowdown, jumping from seven in 2015.”
December 28 – Bloomberg (Justina Lee): “China bulls could be facing a grim New Year’s eve. The first day of 2017 is when an annual $50,000 quota to convert the yuan into foreign exchange resets, stoking concern there will be a rush to sell the local currency. With tax payments and a regulatory assessment also tightening liquidity in the money market toward year-end, January may bring scant relief as lenders prepare for stronger cash demand before Lunar New Year holidays, which are only a month away. China’s markets are seeing renewed pressure this month as the Federal Reserve projects a faster pace of rate increases for 2017 and its Chinese counterpart tightens monetary conditions to spur deleveraging and defend the exchange rate. The declines are capping off a tough year for investors during which bonds, shares and currency all slumped.”
December 27 – Bloomberg: “The onshore yuan’s surging trading volume is another piece of evidence that capital is fleeing China at a faster pace. The daily average value of transactions in Shanghai climbed to $34 billion in December as of Monday, the highest since at least April 2014… That’s up 51% from the first 11 months of the year. The increase suggests quickening outflows, given that data in recent months showed banks were net sellers of the yuan, according to Harrison Hu, …chief greater China economist at Royal Bank of Scotland… This month’s jump in trading volume signals sentiment has kept deteriorating since November, when the nation’s foreign-exchange reserves shrank by the most since January.”
December 29 – Bloomberg: “China pledged more proactive fiscal policy in 2017 while vowing to enhance control over local government debt, as policy makers in the world’s second-largest economy seek to sustain steady growth while defusing risks. Fiscal policy will be more proactive and effective next year, and more tax cuts will be rolled out… China will ‘reasonably’ expand expenditures and improve efficacy, while strengthening management of local government debt, it said.”
December 28 – Bloomberg: “China’s requirement for how much cash banks must hold as reserves is ‘very high’ and should be reduced at an ‘appropriate time,’ a senior banking regulator said… Other financing tools can be used to manage the money supply after easing the required reserve ratio, China Banking Regulatory Commission official Yu Xuejun said… New monetary tools such as the medium-term lending facility are best used after a cut… The People’s Bank of China has held the RRR at 17% since February after four cuts last year.”
Global Bubble Watch:
December 27 – Financial Times (Eric Platt): “Global debt sales reached a record in 2016, led by companies gorging on cheap borrowing costs that are now threatened by Donald Trump’s pledge to fire up the US economy. The bond rally that dominated the first half of the year helped entice borrowers that issued debt via banks to take on just over $6.6tn, according to… Dealogic, breaking the previous annual record set in 2006. Companies accounted for more than half of the $6.62tn of debt issued, underlining the extent to which negative interest-rate policies adopted by the European Central Bank and the Bank of Japan, as well as a cautious Federal Reserve, encouraged the corporate world to increase its leverage. Corporate bond sales climbed 8% year on year to $3.6tn… The year’s debt sales were buoyed by China and Japan-based issuers, up 23 and 30% respectively, from a year earlier.”
December 19 –Reuters (Marc Jones): “The number of firms worldwide that have defaulted this year has reached 150, up more than 40% year-on-year, making 2016 the worst year for corporate stress since the height of the global financial crisis, ratings firm Standard and Poor's said. S&P data showed that two defaults last week by U.S.-based firms had brought up the milestone and taken the U.S.-only count to 99, or two-thirds of the overall total. Just over 40%, or 63, had been by oil and gas firms, with 50 of those also in the United States. Emerging markets had accounted for 28 defaults overall, followed by Europe on 12.”
December 29 – Financial Times (Arash Massoudi, James Fontanella-Khan and Don Weinland): “A final flurry of large takeovers during the last months of 2016 lifted global dealmaking to its second-best annual level since the financial crisis as appetite for corporate acquisitions continued in spite of political turmoil and heightened regulatory scrutiny. Merger and acquisition activity in the fourth quarter reached $1.2tn, the busiest period for dealmaking in 2016… In total, the volume of global M&A was $3.6tn in 2016, a 17% drop from last year’s record $4.37tn but enough to make the year the second highest for dealmaking since 2007… Chinese companies became a major force in cross-border M&A in 2016, accounting for $220bn of transactions — almost double the amount of 2015.”
December 28 – Bloomberg (Tom Metcalf and Jack Witzig): “In a year when populist voters reshaped power and politics across Europe and the U.S., the world’s wealthiest people are ending 2016 with $237 billion more than they had at the start. Triggered by disappointing economic data from China at the beginning, the U.K.’s vote to leave the European Union in the middle and the election of billionaire Donald Trump at the end, the biggest fortunes on the planet whipsawed through $4.8 trillion of daily net worth gains and losses during the year, rising 5.7% to $4.4 trillion by the close of trading Dec. 27, according to the Bloomberg Billionaires Index.”
U.S. Bubble Watch:
December 27 – Bloomberg (Michelle Jamrisko): “Consumer confidence climbed in December to the highest level since August 2001 as Americans were more upbeat about the outlook than at any time in the last 13 years, according to the… Conference Board. Measure of consumer expectations for the next six months rose to 105.5, the highest since December 2003, from 94.4…”
December 26 – Wall Street Journal (Corrie Driebusch and Aaron Kuriloff): “Corporate stock repurchases are on the upswing once again, wrong-footing skeptics who predicted 2016 would mark the beginning of the end of a postcrisis spending spree. Through Dec. 16, companies this month have stepped up their buybacks by nearly two-thirds over the same period last year, according to Goldman Sachs… Repurchases have been a major contributor to the nearly eight-year stock rally. From the start of 2009 to the end of September 2016, companies in the S&P 500 spent more than $3.24 trillion repurchasing shares… In the first three quarters of the year, companies in the S&P 500 spent just over $400 billion on stock buybacks, down from the $426 billion in the same period last year…”
December 27 – Bloomberg (Vince Golle): “The last time Americans’ optimism about the stock market registered such a dramatic one-month surge was during the dot-com boom. As stocks reached a record, the share of households anticipating higher equity prices a year from now surged to 44.7% in December from 30.9% a month earlier, the biggest monthly advance since November 1998, the Conference Board’s report… showed…”
December 29 – Reuters (Swetha Gopinath): “U.S. shale drillers are set to ramp up spending on exploration and production next year as recovering oil prices prompt banks to extend credit lines for the first time in two years. The credit increase is small, but with major oil producers worldwide aiming to hold down production in 2017, U.S.-based shale drillers are looking to boost market share to take advantage of higher prices, and greater availability of capital will make that easier.”
December 28 – Wall Street Journal (Kirsten Grind and Peter Rudegeair): “This is a great time to be in the house-flipping business. The number of investors who flipped a house in the first nine months of 2016 reached the highest level since 2007. About one-third of the deals were financed with debt, a percentage not seen in eight years. Now Wall Street, which was nearly felled by real-estate forays almost a decade ago, is getting back into the action. A number of banks are arranging financing vehicles for house-flippers, who buy and sell homes in a matter of months.”
EM Watch:
December 27 – Dow Jones: “Brazil's government deficit widened to 9.28% of gross domestic product in the 12 months through the end of November, compared with 8.83% through the end of October… The primary budget balance, which excludes interest payments and is a measure of the government's ability to reduce its debt, increased to 2.50% of GDP…”
Leveraged Speculator Watch:
December 28 – CNBC (Jeff Cox): “Hedge funds have jacked up their bets on the stock market to their highest levels of 2016 and cut back on short positions to a three-year low amid a blistering post-election rally. For the fourth quarter, the $3 trillion industry increased its net exposure — the difference between short and long positions — to 63%, a level that equates to a net $656 billion, according to Bank of America Merrill Lynch data. Hedge funds were last this optimistic in the fourth quarter of 2015.”
Geopolitical Watch:
December 27 – Reuters (J.R. Wu and Ben Blanchard): “China's sole aircraft carrier has arrived at a naval base on the southern Chinese province of Hainan, a senior Taiwanese military officer said…, after drills that took it around self-ruled Taiwan, an island China claims as its own. Taiwan warned on Tuesday that ‘the threat of our enemies is growing day by day’, as Chinese warships led by the carrier sailed towards Hainan through the disputed South China Sea.”
December 28 – Reuters (Ben Blanchard): “Quoting a poem by the founder of Communist China Mao Zedong, China's government said… that the efforts by Hong Kong and Taiwan independence supporters to link up were doomed to fail, as they would be dashed to the ground like flies. Chinese leaders are increasingly concerned about a fledgling independence movement in the former British colony of Hong Kong, which returned to mainland rule in 1997 with a promise of autonomy, and recent protests in the city. China is also deeply suspicious of Taiwan President Tsai Ing-wen, elected earlier this year, who Beijing suspects is pushing for the self-ruled island's independence.”
December 22 – Financial Times (Tom Mitchell and Demetri Sevastopulo): “China has warned Donald Trump that ‘co-operation is the only correct choice’ after the US president-elect tapped a China hawk to run a new White House trade policy office. The appointment of Peter Navarro, a campaign adviser, to a formal White House post shocked Chinese officials and scholars who had hoped that Mr Trump would tone down his anti-Beijing rhetoric after assuming office. Mr Navarro… is the author of Death by China and other books that paint the country as America’s most dangerous adversary.”
December 29 – Reuters (Jeff Mason): “President Barack Obama… authorized a series of sanctions against Russia for intervening in the 2016 U.S. presidential election and warned of more action to come. ‘These actions follow repeated private and public warnings that we have issued to the Russian government, and are a necessary and appropriate response to efforts to harm U.S. interests in violation of established international norms of behavior,’ Obama said…’These actions are not the sum total of our response to Russia’s aggressive activities. We will continue to take a variety of actions at a time and place of our choosing, some of which will not be publicized,’ he said.”
December 19 –Reuters: “The Russian ambassador to Turkey was shot in the back and killed as he gave a speech at an Ankara art gallery on Monday by an off-duty police officer who shouted ‘Don't forget Aleppo’ and ‘Allahu Akbar’ as he opened fire. President Tayyip Erdogan… cast the attack as an attempt to undermine NATO-member Turkey's relations with Russia - ties long tested by the war in Syria. He said he had agreed in a telephone call with Russia's Vladimir Putin to step up cooperation in fighting terrorism.”
December 26 – Reuters (Silvia Aloisi and Stephen Jewkes): “The European Central Bank has told Monte dei Paschi it needs to plug a capital shortfall of 8.8 billion euros ($9.2bn), higher than a previous 5 billion euro gap estimated by the bank… Last Friday the Italian government approved a decree to bail out Monte dei Paschi after Italy's No. 3 lender failed to win investor backing for a desperately needed 5 billion euro capital increase. The bank said on Monday it had officially asked the ECB last Friday for go ahead for a ‘precautionary recapitalization’.”
December 26 – Reuters (Maria Sheahan): “European Central Bank policymaker Jens Weidmann said plans for a state bailout of Italian bank Monte dei Paschi di Siena should be weighed carefully as many questions remain to be answered… ‘For the measures planned by the Italian government the bank has to be financially healthy at its core. The money cannot be used to cover losses that are already expected,’ Bild quoted Weidmann as saying…”
Europe Watch:
December 27 – Reuters (Maria Sheahan): “Germany's Bundesbank has this year taken back more of its gold than planned as it moves towards hoarding half of the world's second-largest reserve at home, Bundesbank President Jens Weidmann told German daily Bild. ‘We brought back significantly more gold to Germany in 2016 again than initially planned. By now, almost half of the gold reserves are in Germany,’ the paper quoted Weidmann… In the wake of the euro zone crisis, many ordinary Germans want to see more of the 3,381 tonnes of gold in vaults at home.”
China Bubble Watch:
December 22 – Bloomberg: “President Xi Jinping said China should deflate property bubbles and regulate the market for rental housing to better meet people’s residential needs, reinforcing the objectives outlined last week at an annual gathering of the country’s top economic leaders. ‘The country should accurately understand the residential feature of housing’ and create a better system for purchases and rentals to better serve new urban populations, Xi said... ‘The market will play the leading role in catering to multi-layered demand, while the government will take care of basic housing demand.’”
December 25 – Bloomberg: “China Guangfa Bank Co. said Monday that documents and seals for a letter claiming to guarantee bond payments by the lender were forged, in the second such incident in the nation this month, raising concern about transparency in the world’s third-biggest bond market… ‘Over the past few years, business growth of financial institutions has outpaced their capability to boost internal controls and also gone beyond the radar of regulators,’ said He Xuanlai… analyst at Commerzbank AG… A lack of transparency and protection in bond documentation are adding to angst among investors after Sealand Securities Co. said earlier this month a former employee was found to have forged a seal to conduct bond trading. Concern about China’s bond market has been climbing after at least 28 onshore notes defaulted this year amid an economic slowdown, jumping from seven in 2015.”
December 28 – Bloomberg (Justina Lee): “China bulls could be facing a grim New Year’s eve. The first day of 2017 is when an annual $50,000 quota to convert the yuan into foreign exchange resets, stoking concern there will be a rush to sell the local currency. With tax payments and a regulatory assessment also tightening liquidity in the money market toward year-end, January may bring scant relief as lenders prepare for stronger cash demand before Lunar New Year holidays, which are only a month away. China’s markets are seeing renewed pressure this month as the Federal Reserve projects a faster pace of rate increases for 2017 and its Chinese counterpart tightens monetary conditions to spur deleveraging and defend the exchange rate. The declines are capping off a tough year for investors during which bonds, shares and currency all slumped.”
December 27 – Bloomberg: “The onshore yuan’s surging trading volume is another piece of evidence that capital is fleeing China at a faster pace. The daily average value of transactions in Shanghai climbed to $34 billion in December as of Monday, the highest since at least April 2014… That’s up 51% from the first 11 months of the year. The increase suggests quickening outflows, given that data in recent months showed banks were net sellers of the yuan, according to Harrison Hu, …chief greater China economist at Royal Bank of Scotland… This month’s jump in trading volume signals sentiment has kept deteriorating since November, when the nation’s foreign-exchange reserves shrank by the most since January.”
December 29 – Bloomberg: “China pledged more proactive fiscal policy in 2017 while vowing to enhance control over local government debt, as policy makers in the world’s second-largest economy seek to sustain steady growth while defusing risks. Fiscal policy will be more proactive and effective next year, and more tax cuts will be rolled out… China will ‘reasonably’ expand expenditures and improve efficacy, while strengthening management of local government debt, it said.”
December 28 – Bloomberg: “China’s requirement for how much cash banks must hold as reserves is ‘very high’ and should be reduced at an ‘appropriate time,’ a senior banking regulator said… Other financing tools can be used to manage the money supply after easing the required reserve ratio, China Banking Regulatory Commission official Yu Xuejun said… New monetary tools such as the medium-term lending facility are best used after a cut… The People’s Bank of China has held the RRR at 17% since February after four cuts last year.”
Global Bubble Watch:
December 27 – Financial Times (Eric Platt): “Global debt sales reached a record in 2016, led by companies gorging on cheap borrowing costs that are now threatened by Donald Trump’s pledge to fire up the US economy. The bond rally that dominated the first half of the year helped entice borrowers that issued debt via banks to take on just over $6.6tn, according to… Dealogic, breaking the previous annual record set in 2006. Companies accounted for more than half of the $6.62tn of debt issued, underlining the extent to which negative interest-rate policies adopted by the European Central Bank and the Bank of Japan, as well as a cautious Federal Reserve, encouraged the corporate world to increase its leverage. Corporate bond sales climbed 8% year on year to $3.6tn… The year’s debt sales were buoyed by China and Japan-based issuers, up 23 and 30% respectively, from a year earlier.”
December 19 –Reuters (Marc Jones): “The number of firms worldwide that have defaulted this year has reached 150, up more than 40% year-on-year, making 2016 the worst year for corporate stress since the height of the global financial crisis, ratings firm Standard and Poor's said. S&P data showed that two defaults last week by U.S.-based firms had brought up the milestone and taken the U.S.-only count to 99, or two-thirds of the overall total. Just over 40%, or 63, had been by oil and gas firms, with 50 of those also in the United States. Emerging markets had accounted for 28 defaults overall, followed by Europe on 12.”
December 29 – Financial Times (Arash Massoudi, James Fontanella-Khan and Don Weinland): “A final flurry of large takeovers during the last months of 2016 lifted global dealmaking to its second-best annual level since the financial crisis as appetite for corporate acquisitions continued in spite of political turmoil and heightened regulatory scrutiny. Merger and acquisition activity in the fourth quarter reached $1.2tn, the busiest period for dealmaking in 2016… In total, the volume of global M&A was $3.6tn in 2016, a 17% drop from last year’s record $4.37tn but enough to make the year the second highest for dealmaking since 2007… Chinese companies became a major force in cross-border M&A in 2016, accounting for $220bn of transactions — almost double the amount of 2015.”
December 28 – Bloomberg (Tom Metcalf and Jack Witzig): “In a year when populist voters reshaped power and politics across Europe and the U.S., the world’s wealthiest people are ending 2016 with $237 billion more than they had at the start. Triggered by disappointing economic data from China at the beginning, the U.K.’s vote to leave the European Union in the middle and the election of billionaire Donald Trump at the end, the biggest fortunes on the planet whipsawed through $4.8 trillion of daily net worth gains and losses during the year, rising 5.7% to $4.4 trillion by the close of trading Dec. 27, according to the Bloomberg Billionaires Index.”
U.S. Bubble Watch:
December 27 – Bloomberg (Michelle Jamrisko): “Consumer confidence climbed in December to the highest level since August 2001 as Americans were more upbeat about the outlook than at any time in the last 13 years, according to the… Conference Board. Measure of consumer expectations for the next six months rose to 105.5, the highest since December 2003, from 94.4…”
December 26 – Wall Street Journal (Corrie Driebusch and Aaron Kuriloff): “Corporate stock repurchases are on the upswing once again, wrong-footing skeptics who predicted 2016 would mark the beginning of the end of a postcrisis spending spree. Through Dec. 16, companies this month have stepped up their buybacks by nearly two-thirds over the same period last year, according to Goldman Sachs… Repurchases have been a major contributor to the nearly eight-year stock rally. From the start of 2009 to the end of September 2016, companies in the S&P 500 spent more than $3.24 trillion repurchasing shares… In the first three quarters of the year, companies in the S&P 500 spent just over $400 billion on stock buybacks, down from the $426 billion in the same period last year…”
December 27 – Bloomberg (Vince Golle): “The last time Americans’ optimism about the stock market registered such a dramatic one-month surge was during the dot-com boom. As stocks reached a record, the share of households anticipating higher equity prices a year from now surged to 44.7% in December from 30.9% a month earlier, the biggest monthly advance since November 1998, the Conference Board’s report… showed…”
December 29 – Reuters (Swetha Gopinath): “U.S. shale drillers are set to ramp up spending on exploration and production next year as recovering oil prices prompt banks to extend credit lines for the first time in two years. The credit increase is small, but with major oil producers worldwide aiming to hold down production in 2017, U.S.-based shale drillers are looking to boost market share to take advantage of higher prices, and greater availability of capital will make that easier.”
December 28 – Wall Street Journal (Kirsten Grind and Peter Rudegeair): “This is a great time to be in the house-flipping business. The number of investors who flipped a house in the first nine months of 2016 reached the highest level since 2007. About one-third of the deals were financed with debt, a percentage not seen in eight years. Now Wall Street, which was nearly felled by real-estate forays almost a decade ago, is getting back into the action. A number of banks are arranging financing vehicles for house-flippers, who buy and sell homes in a matter of months.”
EM Watch:
December 27 – Dow Jones: “Brazil's government deficit widened to 9.28% of gross domestic product in the 12 months through the end of November, compared with 8.83% through the end of October… The primary budget balance, which excludes interest payments and is a measure of the government's ability to reduce its debt, increased to 2.50% of GDP…”
Leveraged Speculator Watch:
December 28 – CNBC (Jeff Cox): “Hedge funds have jacked up their bets on the stock market to their highest levels of 2016 and cut back on short positions to a three-year low amid a blistering post-election rally. For the fourth quarter, the $3 trillion industry increased its net exposure — the difference between short and long positions — to 63%, a level that equates to a net $656 billion, according to Bank of America Merrill Lynch data. Hedge funds were last this optimistic in the fourth quarter of 2015.”
Geopolitical Watch:
December 27 – Reuters (J.R. Wu and Ben Blanchard): “China's sole aircraft carrier has arrived at a naval base on the southern Chinese province of Hainan, a senior Taiwanese military officer said…, after drills that took it around self-ruled Taiwan, an island China claims as its own. Taiwan warned on Tuesday that ‘the threat of our enemies is growing day by day’, as Chinese warships led by the carrier sailed towards Hainan through the disputed South China Sea.”
December 28 – Reuters (Ben Blanchard): “Quoting a poem by the founder of Communist China Mao Zedong, China's government said… that the efforts by Hong Kong and Taiwan independence supporters to link up were doomed to fail, as they would be dashed to the ground like flies. Chinese leaders are increasingly concerned about a fledgling independence movement in the former British colony of Hong Kong, which returned to mainland rule in 1997 with a promise of autonomy, and recent protests in the city. China is also deeply suspicious of Taiwan President Tsai Ing-wen, elected earlier this year, who Beijing suspects is pushing for the self-ruled island's independence.”
December 22 – Financial Times (Tom Mitchell and Demetri Sevastopulo): “China has warned Donald Trump that ‘co-operation is the only correct choice’ after the US president-elect tapped a China hawk to run a new White House trade policy office. The appointment of Peter Navarro, a campaign adviser, to a formal White House post shocked Chinese officials and scholars who had hoped that Mr Trump would tone down his anti-Beijing rhetoric after assuming office. Mr Navarro… is the author of Death by China and other books that paint the country as America’s most dangerous adversary.”
December 29 – Reuters (Jeff Mason): “President Barack Obama… authorized a series of sanctions against Russia for intervening in the 2016 U.S. presidential election and warned of more action to come. ‘These actions follow repeated private and public warnings that we have issued to the Russian government, and are a necessary and appropriate response to efforts to harm U.S. interests in violation of established international norms of behavior,’ Obama said…’These actions are not the sum total of our response to Russia’s aggressive activities. We will continue to take a variety of actions at a time and place of our choosing, some of which will not be publicized,’ he said.”
December 19 –Reuters: “The Russian ambassador to Turkey was shot in the back and killed as he gave a speech at an Ankara art gallery on Monday by an off-duty police officer who shouted ‘Don't forget Aleppo’ and ‘Allahu Akbar’ as he opened fire. President Tayyip Erdogan… cast the attack as an attempt to undermine NATO-member Turkey's relations with Russia - ties long tested by the war in Syria. He said he had agreed in a telephone call with Russia's Vladimir Putin to step up cooperation in fighting terrorism.”
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