Sunday, December 14, 2014

Weekly Commentary, February 7, 2014: EM Hedge Funds and Corporate Debt

Global markets have turned highly unsettled. The S&P500 opened the week at about 1,783, sank to an intraday low of 1,738 on Wednesday before rallying to close the week at 1,797. The Goldman Sachs Most Short index sank 4.0% Monday, was little changed Tuesday, fell 1.6% Wednesday, jumped 1.7% Thursday and then surged 3.3% Friday. High-profile hedge fund short positions have turned wildly volatile. Green Mountain Coffee surged 33.0% this week.

Currency markets have turned treacherous. Those short the commodity currencies abruptly found themselves on the wrong side of a squeeze. The New Zealand dollar gained 2.6% this week, with the Australian dollar up 2.3%. Some EM currencies enjoyed strong weekly gains. The Polish zloty increased 3.0%, the Turkish lira 1.7%, the Hungarian forint 2.6%, the Argentine peso 2.3%, the Brazilian real 1.4%, the Russian ruble 1.1% and the Czech koruna 1.1%.

Overall, global markets these days convulse between “risk off” and “risk on” – in bloody trench warfare between market bulls and bears. Greed and fear vacillate between the two camps. The yen weakened only modestly this week, and EM equities were generally unimpressive. EM bonds for the most part held their own. Mexico’s sovereign debt rating was upgraded, which lent some support to the sector.

Bill Gross’ February piece, “Most ‘Medieval’”, provides an insightful read. He focused on a focal point of my analytical framework: “Asset prices are dependent on credit expansion or in some cases credit contraction, and as credit goes, so go the markets, one might legitimately say, and I do most emphatically say that!” “Credit creation or credit destruction is really the fundamental force that changes P/Es, risk premiums, natural interest rates, etc.” As part of his concluding comments, Gross added: “The days of getting rich quickly are over, and the days of getting rich slowly may be as well.”

It’s my view that we have reached – or, perhaps, are approaching – a historic inflection point in global Credit. Credit has tightened meaningfully in segments of China’s finance, as well as throughout EM more broadly. Yet rapid Chinese Credit growth has thus far been sustained, though the expansion is notably unbalanced and vulnerable. This has negative implications for global economic performance, as well as global securities and asset prices. But the timing of a significant Chinese Credit slowdown remains unclear.

Most analysts are quick to dismiss U.S. susceptibility to EM woes. Such complacency, while handsomely rewarded over recent years, could this time prove a major mistake. For one, I would view current EM instabilities as a major crack in what evolved over years into historic global financial and economic Bubbles. EM is global “subprime.”

In the post-2008 crisis landscape, EM economies did indeed assume the role of “global locomotive.” Less appreciated, China and EM Credit systems grew to become responsible for much of global Credit growth. Many of the major EM Credit systems experienced in the neighborhood of 20% compounded annual Credit expansion over the past five years. Emblematic, total annual Chinese Credit growth exploded and approached $3.0 TN in 2013, the greatest expansion ever experienced by an individual economy.

While astonishing amounts of new Credit inflated and distorted real economies, there is the less transparent – yet absolutely critical - issue of financial leverage. With the Fed, Japanese and other “developed” central banks engaged in unprecedented “printing” and devaluation measures, EM markets were the focal point of the expansive “hot money” financed “global reflation trade.” Unknown amounts of speculative leverage were employed in myriad “carry trades” and other speculations to capitalize on borrowing cheap in (depreciating) currencies to speculate in higher returning EM securities. There was as well unprecedented investment into EM economies and markets, pushing overall financial flows to the several Trillions.

The key point is that one should not today in anyway downplay the ramifications of bursting EM Bubbles and associated de-leveraging. There will be major unfolding consequences on global Credit growth, pricing dynamics, financial flows, speculative finance, Credit availability and economic performance. This process has commenced, although the pace of initial developments has been generally held in check by the ongoing rapid expansion of Chinese Credit coupled with Fed and BOJ quantitative easing measures.

“Is Tapering Tightening?” has become topical. From the perspective of my analytical framework, of course it’s tightening. No question about it; silly to think otherwise. The risk of leveraging in the marginal global securities markets and economies (EM) has increased; market behavior has begun to adjust; and financial conditions have started to tighten at the margin.

Since August of 2008, the Fed’s balance sheet has inflated from about $900bn to $4.1 TN. In just the past 14 months, Fed holdings have jumped $1.25 TN. It’s simply implausible that the Fed winding down such aggressive monetary inflation won’t have major impacts on U.S. and global market liquidity dynamics. After all, the “periphery” is already being pressured by the altered liquidity backdrop. While the timing and dynamics involved remain uncertain, I fully expect risk aversion and de-leveraging “contagion” to over time gravitate to the “core.”

The global “leveraged speculating community” could provide the most direct transmission mechanism from EM tumult to U.S. securities markets. As the leveraged players get caught in faltering global markets, their reduced risk appetite will impinge liquidity in U.S. and other markets. But with still significant Fed and BOJ QE, there remains the prevailing 2013 “trouble at the periphery stokes flows to the core” dynamic shaping market trading.

There are as well powerful speculative Bubble Dynamics that tend to disregard fundamental deterioration for a time. Short squeezes and the unwind of hedges also tend to incite “bear market rallies” readily interpreted as bullish market signals. So there are today powerful market crosscurrents. Over time, however, I would expect these forces to wane as the more typical “periphery to core” dynamic gathers momentum.

There is a potentially momentous development now taking shape out on the horizon. For more than 20 years, the leveraged players have operated with confidence that huge balance sheets were readily available to backstop market liquidity. GSE holdings expanded rapidly to initially accommodate speculative deleveraging back during the 1994 bursting of the bond/MBS/derivatives Bubble. The GSEs came to the markets’ defense again in 1998, 2000, 2001, and 2002. The Fed’s balance sheet then took over as marketplace backstop in 2008, 2009, 2011 and 2013.

If the Fed now holds true to its stated intention of winding down its balance sheet expansion, the marketplace in coming months will grapple with the possibility that financial markets for the first time in two decades must operate without a reliable liquidity backstop. Such an altered backdrop would imply a reduced appetite for risk and leverage, with rising risk premiums, lower asset prices, slower Credit growth and heightened economic risk. Corporate debt could prove particularly susceptible. Leveraged holdings would be vulnerable to increasing Credit risk as well as widening spreads versus perceived safe haven Treasury and other government debt.

The hedge fund industry has enjoyed an incredible 20-year run. GSE and Federal Reserve market liquidity backstops were integral to “The days of getting rich quickly.” Billionaire “traders” sprang up like never before. The inflating “leveraged speculating community” came to play an integral role in ensuring seemingly limitless marketplace liquidity, in the process bolstering Credit Availability more generally. Ultra-loose financial market conditions were instrumental in boosting overall system Credit growth. Federal Reserve rate and balance sheet policies in concert with the leveraged players amounted to history’s most powerful monetary policy transfer mechanism.

Over recent years, the greatest market excesses unfolded in equities and corporate debt. They’ve fed on each other in an interrelated market mis-pricing/speculative Bubble. During 2013, in particular, QE-induced market excess gravitated to U.S. stocks and higher-yielding corporate Credits (i.e. bonds and leveraged loans). I have posited that 2013 QE operations were especially dangerous. Risk premiums generally collapsed to 2007 levels, as the gulf between inflated securities prices and deteriorating fundamental prospects widened fatefully. This chasm becomes problematic when Credit growth slows.

Over five Trillion of corporate debt has been issued since the 2008 crisis. Fed and central bank operations pushed down global yields and crushed risk premiums. I would argue that Trillions of corporate debt these days trade with varying degrees of inflated market valuation. Importantly, central bank liquidity was much more successful in terms of inflating securities prices than in inflating a general increase in global price levels. Now, with EM financial and economic Bubbles faltering, global disinflationary risks are mounting. This creates major risks to global profits and growth dynamics, risks that remain largely latent until Credit growth wanes.

The corporate debt market would now appear unusually vulnerable. I suspect large amounts of speculative leverage have accumulated over recent years throughout the corporate debt marketplace. If true, this only adds to potential debt market fragility.

February 5 – Bloomberg (Jody Shenn): “Freddie Mac may boost how much it pays bond investors to share the risk of homeowner defaults as the government-controlled mortgage-finance company plans its biggest offering of such debt, according to a person with knowledge of the deal. A $360 million portion of the transaction expected to be graded Baa1 by Moody’s… may yield about 2 percentage points more than a borrowing benchmark, said the person… That compares with a spread of 1.45 percentage points on $245 million of similar securities that were part of a $630 million deal in November.”

Thus far, Credit spreads have widened only modestly from depressed late-2013 levels. Hedge funds are clearly big operators in GSE securities markets. They are expected to be big buyers in the upcoming Puerto Rico debt offering (see Fixed Income Bubble Watch). Hedge funds are commonly mentioned as major players in ABS, MBS, CMBS, CMOs, CLOs, leveraged loans, etc. Hedge funds and mutual funds have become aggressive operators in the booming market in “alternative” Credit funds that garner significant returns from “structured products” (including myriad trading and derivative strategies that involve variations of writing Credit insurance). Any forced retreat by the hedge funds would have wide market implications.

I can easily envisage a scenario of rapidly slowing global Credit growth. It’s difficult to see a case for accelerating U.S. Credit growth. Seeing eye to eye with Bill Gross, as goes Credit growth so go the markets. Granted, Fed “money” printing has since the 2008 crisis largely abrogated this fundamental relationship. The upshot has been rapid expansion of mis-priced corporate debt and equities securities, along with untold speculative leveraging. There are fragilities associated with major Bubbles inflating in the face of a deteriorating – increasingly disinflationary - global backdrop. This could prove a volatile mix in a world of faltering EM, de-risking/de-leveraging, waning market liquidity and mounting global downside risks.

For the Week:

The S&P500 gained 1.3% (down 2.8% y-t-d), and the Dow rose 1.1% (down 4.7%). The Utilities slipped 0.6% (up 2.4%). The Banks increased 0.7% (down 2.2%), while the Broker/Dealers lost 0.4% (down 4.6%). The Morgan Stanley Cyclicals rallied 0.6% (down 3.8%), while the Transports declined 0.6% (down 2.1%). The S&P 400 Midcaps slipped 0.4% (down 2.5%), and the small cap Russell 2000 fell 1.3% (down 4.1%). The Nasdaq100 jumped 1.1% (down 0.8%), and the Morgan Stanley High Tech index rose 1.1% (down 0.3%). The Semiconductors gained 1.2% (unchanged). The Biotechs slipped 0.2% (up 8.6%). With bullion gaining $23, the HUI gold index added 0.8% (up 10.6%).

One-month Treasury bill rates ended the week at 10 bps and three-month bills ended at 8 bps. Two-year government yields declined 3 bps to 0.305% (down 8bps y-t-d). Five-year T-note yields declined 2 bps to 1.47% (down 27bps). Ten-year yields rose 4 bps to 2.68% (down 35bps). Long bond yields gained 7 bps to 3.67% (down 30bps). Benchmark Fannie MBS yields increased 2 bps to 3.35% (down 26bps). The spread between benchmark MBS and 10-year Treasury yields narrowed 2 to 67 bps. The implied yield on December 2014 eurodollar futures declined 3.5 bps to 0.33%. The two-year dollar swap spread declined one to 12 bps, and the 10-year swap spread declined one to 13 bps. Corporate bond spreads declined. An index of investment grade bond risk fell 4 to 67.5 bps. An index of junk bond risk dropped 20 bps to 331 bps. An index of emerging market (EM) debt risk declined 18 bps to 341 bps.

Debt issuance picked up some. Investment-grade issuers included IBM $4.5bn, ARC Properties $2.55bn, Enterprise Products LLC $2.0bn, Hyundai Capital America $1.5bn, Virginia Electric & Power $750 million, Affiliated Managers Group $400 million, M&T Bank $350 million and Webster Financial $150 million.

Junk bond funds saw outflows increase to $972 million (from Lipper). Junk issuers included Chrysler $2.76bn, Regency Energy Partners $900 million, Seven Generations Energy $700 million, Micron Technologty $600 million, Netflix $400 million, Lennar $400 million, AMC Entertainment $375 million, Century Intermediate $285 million, Oshkosh $250 million and Bioscrip $200 million.

Convertible debt issuers included Herbalife $1.0bn, Cepheid $300 million, PDL Biopharma $260 million and NRG Yield $200 million.

International dollar debt issuers included Deutsche Bank $3.5bn, BP Capital $2.5bn, BPCE $1.15bn, Network Rial Infrastructure $500 million, Korea Gas $500 million, Neder Waterschapsbank $350 million, Export-Import Bank of Korea $250 million and Barclays $100 million.

Ten-year Portuguese yields declined 7 bps to 4.93% (down 120bps y-t-d). Italian 10-yr yields were down 8 bps to 3.69% (down 44bps). Spain's 10-year yields fell 7 bps to 3.59% (down 57bps). German bund yields were unchanged at 1.66% (down 27bps). French yields increased a basis point to 2.24% (down 32bps). The French to German 10-year bond spread widened one to 58 bps. Greek 10-year note yields sank 85 bps to 7.76% (down 66bps). U.K. 10-year gilt yields increased one to 2.71% (down 31bps).

Japan's Nikkei equities index dropped 3.0% (down 11.2% y-t-d). Japanese 10-year "JGB" yields increased a basis point to 0.62% (down 12bps). The German DAX equities index was little changed (down 2.6% y-t-d). Spain's IBEX 35 equities index gained 1.5% (up 1.6%). Italy's FTSE MIB index rose 1.4% (up 3.8%). Emerging equities markets were mixed. Brazil's Bovespa index rallied 0.9% (down 6.7%), while Mexico's Bolsa declined 0.8% (down 5.1%). South Korea's Kospi index was down 1.0% (down 4.4%). India’s Sensex equities index declined 0.7% (down 3.8%). In this week's lone session, China’s Shanghai Exchange gained 0.6% (down 3.4%). Turkey's Borsa Istanbul National 100 index rallied 3.7% (down 5.4%)

Freddie Mac 30-year fixed mortgage rates dropped 9 bps to 4.23% (up 70bps y-o-y). Fifteen-year fixed rates fell 7 bps to 3.33% (up 56bps). One-year ARM rates declined 4 bps to 2.51% (down 2bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down 17 bps to 4.34% (up 19bps).

Federal Reserve Credit expanded $4.2bn last week to a record $4.063 TN. Over the past year, Fed Credit expanded $1.071 TN, or 35.8%.

Global central bank "international reserve assets" (excluding gold) - as tallied by Bloomberg – were up $746bn y-o-y, or 6.8%, to a record $11.706 TN. Over two years, reserves were $1.458 TN higher for 14% growth.

M2 (narrow) "money" supply jumped $25.5bn to a record $11.043 TN. "Narrow money" expanded 6.0% ($620bn) over the past year. For the week, Currency was about unchanged. Total Checkable Deposits gained $8.6bn, and Savings Deposits jumped $18.7bn. Small Time Deposits slipped $1.2bn. Retail Money Funds were little changed.

Money market fund assets were little changed at $2.705 TN. Money Fund assets were up $11bn, or 0.4%, from a year ago.

Total Commercial Paper dropped $24.3bn to a six-month low $990 billion. CP was down $56bn year-to-date and declined $122bn over the past year, or 11.0%.
Currency Watch:

The U.S. dollar index declined 0.8% to 80.69 (up 0.8% y-t-d). For the week on the upside, the New Zealand dollar increased 2.6%, the Australian dollar 2.3%, the Norwegian krone 1.7%, the Brazilian real 1.4%, the euro 1.1%, the Danish krone 1.1%, the Swedish krona 1.0%, the Swiss franc 0.9%, the Canadian dollar 0.9%, the Singapore dollar 0.7%, the South Korean won 0.6%, the Mexican peso 0.6%, the South African rand 0.5% and the Taiwanese dollar 0.1%. For the week on the downside, the Japanese yen declined 0.3% and the British pound 0.2%.

Commodities Watch:

The CRB index gained 2.3% this week (up 3.4% y-t-d). The Goldman Sachs Commodities Index rose 2.1% (up 0.4%). Spot Gold increased 1.8% to $1,267 (up 5.1%). March Silver surged 4.3% to $19.94 (up 2.9%). March Crude jumped $2.39 to $99.88 (up 1.5%). March Gasoline rallied 4.5% (down 1.3%), while March Natural Gas fell 3.4% (up 13%). March Copper gained 1.2% (down 5%). March Wheat rose 3.9% (down 5%). March Corn gained 2.4% (up 5%).

U.S. Fixed Income Bubble Watch:

February 7 – Bloomberg (Michelle Kaske): “Puerto Rico is trying to refinance debt or negotiate with creditors to avoid making a $940 million payment, almost 10% of its budget, after the U.S. commonwealth was cut to junk by Standard & Poor’s and Moody’s…”

February 6 – Bloomberg (Michelle Kaske and Brian Chappatta): “Investors including BlackRock Inc. and Vanguard Group Inc. say Puerto Rico’s finances hinge on its ability to carry out a planned debt sale this month after the territory’s credit rating was cut to junk. The U.S. commonwealth of 3.6 million people is set to issue bonds to help plug budget deficits and stave off a deeper downgrade. Standard & Poor’s said the island needs to raise funds or the company may lower the rating again after cutting it this week to BB+, the highest speculative grade, because of limited access to capital markets… ‘Unless the economy turns around dramatically, which doesn’t seem likely, there’s going to be a need to restructure at some point,’ said Peter Hayes, head of munis at… BlackRock, which oversees about $108 billion in local debt. ‘If they bring a deal, that point is later. If they can’t bring a deal, that point is sooner.’ Puerto Rico and its agencies have $70 billion of debt, about $16 billion of which is backed by Puerto Rico’s full faith and credit… ‘The chatter is there are willing hedge fund buyers at double-digit yields,’ said Chris Alwine, head of munis at Valley Forge, Pennsylvania-based Vanguard, which oversees $130 billion in local debt.”

February 5 – Bloomberg (Christine Idzelis): “Leveraged-buyout firms led by billionaire Leon Black’s Apollo Global Management LLC, seeing fewer bargains in acquiring companies, are loading up on high- risk debt being abandoned by the world’s biggest banks. Apollo’s credit unit has swelled to $103 billion in assets from about $4 billion in seven years, first by buying loans from banks hurt by the 2008 financial crisis and now by benefiting from regulations designed to prevent a repeat of that event. The expansion has put the company co-founded by Black, known for acquiring companies such as Vail Resorts Inc., at the forefront of private-equity firms from Blackstone Group LP to KKR & Co. scooping up debt as banks unload. This shift carries its own risk, as returns on credit assets have plunged to about half what they were a year ago, after the Federal Reserve said it would trim its $85 billion a month stimulus program.”

February 5 – Bloomberg (Jody Shenn): “Freddie Mac may boost how much it pays bond investors to share the risk of homeowner defaults as the government-controlled mortgage-finance company plans its biggest offering of such debt, according to a person with knowledge of the deal. A $360 million portion of the transaction expected to be graded Baa1 by Moody’s… may yield about 2 percentage points more than a borrowing benchmark, said the person… That compares with a spread of 1.45 percentage points on $245 million of similar securities that were part of a $630 million deal in November.”

February 4 – Financial Times (Tracy Alloway, Anjli Raval and Arash Massoudi): “Blackstone Group hired the go-to New York public relations company Sard Verbinnen when it launched its house rental business, Invitation Homes, in early 2012. Through property tours for local media, Sard sought to acclimatize residents in states from Arizona to Florida to the idea of a faraway investment company owning and managing tens of thousands of rental houses for average American families. But two years on, after spending more than $8bn on 43,000 houses and creating a bond backed by the rental proceeds, it seems Blackstone needs to kick-start a PR offensive on its home turf – Wall Street. Some investors and market participants have soured on ‘single-family rental’ securitizations in recent weeks, even as new deals prepare to come to market.”

February 6 – Bloomberg (Sarah Mulholland): “Hedge funds are zeroing in on America’s malls and hotels. Axonic Capital LLC, LibreMax Capital LLC and Saba Capital Management LP are among firms positioning to provide loans as more than $1 trillion in commercial real-estate debt originated before the property crash comes due over the next three years, aiming to bridge the gap for borrowers needing more cash than banks are willing to lend. ‘New participants are capitalizing on that void,’ said Richard Hill, an analyst at Morgan Stanley, who said he’s surprised by the range of investors entering the market. ‘The wave of loans coming due is going to create a bottleneck. The image I get is a snake trying to swallow an elephant.’”

February 6 – Bloomberg (Kristen Haunss): “The Volcker Rule, aimed at making the financial system safer, is already prompting changes in the high-risk corporate loans market even as regulators spar over how to implement the measure without stunting economic growth. Leon Black’s Apollo Global Management LLC and Highland Capital Management LP recently created collateralized loan obligations that won’t hold bonds to comply with the new regulations… Under the rules, banks can’t buy the debt of CLOs that own bonds.”
Federal Reserve Watch:

February 5 – Dow Jones (Cynthia Lin): “The Federal Reserve risks falling behind the curve if it doesn't speed up its stimulus-reduction process as the U.S. economy and jobs market improves, a top Fed official said… ‘I believe a good case can be made for speeding up the pace of our taper if the economic outlook plays out as I expect,’ Mr. Plosser said… ‘My preference is to scale back our purchase program at a faster pace to reflect the strengthening economy.’”

February 4 – Bloomberg (Craig Torres): “Federal Reserve Bank of Richmond President Jeffrey Lacker said a decline in global stock markets probably won’t deter the Fed from further trimming bond buying that has pushed up central bank assets to $4.1 trillion. ‘The hurdle ought to remain pretty high for pausing in tapering,’ Lacker… said… ‘We linked the asset purchase programs to significant improvement in the outlook for labor market conditions. That has definitely occurred.’”

February 6 – Bloomberg (Joshua Zumbrun): “Stanley Fischer, the nominee for vice chairman of the Federal Reserve, said he’ll sell his interests in financial companies including BlackRock Inc., American Express Co., T. Rowe Price Group Inc. and General Electric Co. if he is confirmed, according to disclosure documents… While Fischer has spent much of his career as an academic and government official, he served as vice chairman of Citigroup from 2002 to 2005 and amassed a personal fortune of between $14.6 million and $56.3 million, a sum that would make him one of the wealthiest Fed officials.”
U.S. Bubble Economy Watch:

February 7 – Bloomberg (Wes Goodman): “Investors shifted record amounts out of U.S. stock funds and into bonds, while withdrawing money from emerging-market equities for a 15th straight week, according to Citigroup Inc. U.S. equity funds had $24 billion of outflows in the week to Feb. 5… Withdrawals from stock funds worldwide totaled $28.3 billion… citing data from EPFR… Money managers plowed $13 billion into U.S. bond funds, accounting for most of the $14.8 billion that flowed into debt worldwide. All the figures for the period are record highs.”

February 7 – Bloomberg (Brian Womack): “Google Inc. surpassed Exxon Mobil Corp. as the second-most valuable U.S. company, trailing only Apple Inc. and underscoring the growing role of technology in the economy. Google… has a market capitalization of $393.5 billion while oil company Exxon is valued at $392.6 billion…”

February 4 – Bloomberg (Sarah Mulholland): “Planned store closures by J.C. Penney Co., the biggest tenant in the commercial-mortgage bond market, is widening a chasm between thriving malls and those teetering on collapse that threatens to amplify bondholder losses. Of the 33 stores the struggling retailer will shutter by May, 11 are in shopping centers with loans that were packaged into securities, according to Nomura… J.C. Penney is closing a store in a southwest Virginia mall that, as it stands, barely collects enough rent to cover the $17 million mortgage that was packaged into $2.2 billion of commercial- mortgage bonds in 2006…”
Global Bubble Watch:

February 4 – Reuters (Steve Slater): “European banks have loaned in excess of $3 trillion to emerging markets, more than four times U.S. lenders and putting them at greater risk if financial market turmoil in countries such as Turkey, Brazil, India and South Africa intensifies. The risk is most acute for six European banks - BBVA, Erste Bank, HSBC, Santander, Standard Chartered, and UniCredit - according to analysts. But the exposure could be a headache for the industry as a whole, just as it faces a rigorous health-check by the European Central Bank, aiming to expose weak points and restore investor confidence in the wake of the 2008 financial crisis. ‘We think EM (emerging markets) shocks are a real concern for 2014,’ said Matt Spick, analyst at Deutsche Bank. ‘When currency (volatility) combines with revenue slowdowns and rising bad debts, we see compounding threats to the exposed banks.’ The Deutsche Bank analysts said the six most exposed European banks - which they did not name - had more than $1.7 trillion of exposure to developing markets.”

February 4 – Bloomberg (Tanya Angerer): “Companies in Asia refrained from marketing U.S. dollar-denominated bonds as the cost of insuring debt in the region outside Japan against non-payment rose to the highest in five months…”

February 4 – Bloomberg (Mark Sweetman and Vladimir Kuznetsov): “Russia canceled a bond auction for the second consecutive week after an emerging-market rout sent yields on January 2028 bonds to record highs. The Finance Ministry scrapped the sale after ‘an analysis of market conditions,’ it said… The government plans to offer 275 billion rubles ($7.8bn) of securities this quarter…”

February 5 – Canadian Press: “Home sales in the Vancouver region for January were up 30.3% compared with the same month a year ago, according to the Real Estate Board of Greater Vancouver. The board says sales through its multiple listing service totalled 1,760 for the month, up from 1,351 in January 2013. However, sales were down 9.9% from 1,953 in December 2013.”

February 6 – Bloomberg (Katya Kazakina): “A restituted Pissarro painting, a Van Gogh canvas and prominent dealer’s collection fueled Sotheby’s record auction in London yesterday as collectors from 44 countries competed for Impressionist, modern and Surrealist art. The evening sale tallied 163.5 million pounds ($266.8 million), up 57% from a year ago and surpassing its high presale estimate of 128.4 million pounds.”

February 6 – Bloomberg (Katya Kazakina): “Kour Pour, the 26-year-old whose detailed paintings depict Persian rugs, drew such a frenzy for his first solo exhibition that his works sold out before the opening last month at New York’s Untitled Gallery. All seven of the U.K.-born, Los Angeles-based artist’s 8- foot-tall paintings were priced at $15,000. The gallery has a three-page waiting list for Pour’s works and received unsolicited offers from buyers willing to pay ‘significantly more,’ said Joel Mesler, co-owner of the Lower East Side gallery… ‘There’s a tremendous amount of speculation in the market right now, particularly for emerging artists,’ said Todd Levin, director of the… Levin Art Group, who has advised collectors for more than 25 years. ‘It is more ferocious than it’s ever been.’”

February 5 – Bloomberg (Nick Taborek and Callie Bost): “An exchange-traded fund that appreciates as calm is restored to financial markets has never been more popular. About $196 million was added last week to the VelocityShares Daily Inverse VIX Short-Term ETN, which rises in value as swings decline, the most since its debut in November 2010…”
EM Bubble Watch:

February 3 – Bloomberg (Mario Sergio Lima and Matthew Malinowski): “Brazil in January recorded its largest monthly trade deficit on record as exports dropped and imports of consumer and capital goods increased. Brazil posted a trade deficit of $4.06 billion after posting last year the worst annual trade balance since at least 1991… Imports rose 5.4% on a daily average from December, totaling $20 billion, while exports fell 27% to $16 billion on a decline in foreign sales of cars and ethanol.”

February 5 – Bloomberg (Boris Korby and Filipe Pacheco): “Brazil’s sputtering economy and deteriorating creditworthiness are fueling the worst start of a year for dollar-denominated bond sales since 2003. Offerings in January plunged 90% from a year earlier to $500 million… The decline compares with a 6% drop in emerging-market debt issuance to $46.3 billion. Sales from the developing world’s largest market for dollar debt are vanishing as flagging growth, the prospect of a rating downgrade and an exodus from emerging markets push borrowing costs to an almost four-month high. Issuance from Brazil tumbled 23% last year as persistent inflation and a soaring budget deficit eroded confidence in President Dilma Rousseff, who’s seeking re-election in October.”

February 4 – Reuters: “Fitch Ratings stepped up pressure on the Brazilian government… to cut spending, despite upcoming presidential elections, to maintain the country's sovereign credit rating. Fellow ratings firms Moody's and Standard & Poor's have already warned they may lower their outlook on Brazil's rating, or even downgrade it in the next few months, if the government does not take action. The three agencies all rate Brazil at the second-lowest investment grade level. Fitch said that the country's fiscal performance deteriorated further in 2013 as government spending accelerated, while revenues were hurt by sluggish economic activity and tax breaks. Brazil's public sector primary surplus, or the excess revenue recorded before debt service, declined to 1.9% of gross domestic product in 2013, falling short of an official adjusted target of 2.3% of GDP… If it wasn't for a surge in extraordinary revenues coming from corporate tax settlements and an oil field auction bonus late last year, the country's primary surplus would have been much lower. ‘We believe high reliance on nonrecurrent revenues highlights the need for the government to control spending,’ Fitch analyst Shelly Shetty wrote…”

February 4 – Bloomberg (David Biller): “Brazil’s industrial production in December fell by the most in five years, surprising analysts, as the central bank continues to boost interest rates in the world’s second-biggest emerging market… Industrial output dropped 3.5% from the previous month after declining a revised 0.3% in November…”

February 5 – Bloomberg (Stephan Nielsen and Mario Sergio Lima): “Brazil may provide power distributors with financial support as a drought depletes reservoirs at dams and drives up the price of electricity, the head of the government’s energy-research agency said. The ‘government won’t let distribution utilities suffer a bigger financial burden than they are capable of facing,’ Mauricio Tolmasquim, president of Empresa de Pesquisa Energetica, told reporters… He spoke after a blackout in parts of Brazil yesterday that affected 6 million people…”

February 7 – Bloomberg (Weiyi Lim): “The worst isn’t over for emerging markets after the benchmark stock index sank to a five-month low and the nations’ currencies tumbled, said Templeton Emerging Markets Group’s Mark Mobius. ‘The negative sentiment is pretty much in place so you can expect a lot more selling,’ Mobius… said…”

February 5 – Bloomberg (Yuriy Humber): “Mongolia sits atop so much mineral wealth -- an estimated $1.3 trillion in gold, copper, coal and iron ore -- that it’s sometimes called ‘Minegolia.’ It’s among the world’s fastest-growing economies. Even so, some of its bigger foreign investors want out. The recent turmoil at Golomt Bank LLC, one of Mongolia’s biggest lenders, illuminates some of the reasons. Credit Suisse Group AG and Abu Dhabi’s sovereign wealth fund invested in Golomt in the past half decade, seeking a share of the country’s promised bounty. Those hopes have soured amid allegations that one of Golomt’s owners arranged loans he didn’t report, hid defaults for years and, as the bank’s board called for probes, oversaw the destruction of financial records…”

Turkey Watch:

February 7 – Bloomberg (Onur Ant): “Turkey’s credit rating outlook was cut to negative from stable by Standard & Poor’s, which said there’s a growing risk of a ‘hard economic landing’ as reserves decline and policy makers spar over interest rates… The move by S&P, the only one of the three main credit rating companies that doesn’t classify Turkish debt as investment grade, comes after the country’s central bank reversed policy and raised interest rates to halt a currency slump. The government has been calling for borrowing costs to be kept low, and says it has alternative plans to revive the economy and the lira. ‘Turkey’s policy environment is becoming less predictable’ and ‘this could weigh on the economy’s resilience and long-term growth potential,’ S&P said… It cited ‘constraints on the independence and transparency’ of Turkey’s central bank.”

February 7 – Bloomberg (Taylan Bilgic): “Ercan Cercioglu is holding off on investing in new technology for the Turkish maker of car parts that he runs as the lira’s slide makes it harder for companies to service foreign-currency debt. The cost of importing raw materials like steel jumped as the lira tumbled 13% in the past six months, according to Cercioglu, chief executive officer of… Sanayi ve Ticaret AS. The company, whose third-quarter financial debt was 41 million liras ($19 million) and was almost fully denominated in foreign currencies, is hesitating to pass additional costs onto customers, he said.”

February 6 – Bloomberg (Selcan Hacaoglu): “Turkey’s parliament approved a bill giving Prime Minister Recep Tayyip Erdogan’s government broader powers to block access to websites, as wiretaps allegedly documenting official corruption were being shared on the Internet. Legislators late yesterday authorized the head of Turkey’s telecommunications authority to ban access to content deemed to violate personal privacy within four hours of a petition, eliminating the need for a court order.”

China Bubble Watch:

February 3 – Bloomberg: “A Chinese manufacturing gauge fell to a six-month low in January as output and orders slowed, adding to signs that government efforts to rein in excessive credit will cool growth in the world’s second-largest economy. The Purchasing Managers’ Index was at 50.5... The survey showed jobs and export orders shrinking, amplifying risks of a deeper slowdown as Communist Party leaders clamp down on the $6 trillion shadow-banking industry and interbank borrowing costs rise.”

February 5 – Bloomberg: “Chinese households’ concentration of wealth in real estate is magnifying the danger to the world’s second-largest economy of any property bust, as the nation grapples with the consequences of its record credit surge. Some 66.1% of family assets were in housing in 2013, a national survey of about 28,000 households shows. Mortgage debt as a share of disposable income rose to 30% from 18% in 2008, according to estimates by Nicholas Lardy at the Peterson Institute for International Economics… The buildup raises the stakes for any slide in property prices amid China’s efforts to head off defaults by local governments and developers that propelled a run-up in borrowing that now amounts to more than double the size of the economy, according to Goldman Sachs Group Inc. A hit to household wealth could impair consumer spending, rebuffing policy maker efforts to rebalance the economy toward domestic demand.”

February 5 – Bloomberg: “Claims on China by overseas banks reached a record $522 billion in 3Q13, a 30% increase from 4Q12, according to BIS. The increase stokes the risk of a Chinese slowdown or trust crisis affecting global markets. Canadian banks' claims rose 82% yoy, the fastest increase, ahead of Australian lenders' 67% jump. There was a rise of 38% for Europe and of 23% for the U.S.”

February 4 – Bloomberg (Liz Capo McCormick): “Bill Gross… said the pace of Chinese economic growth is among the biggest questions in developing nations and greatest risks for financial markets. ‘I call China the mystery meat of emerging-market countries,’ Gross said during an interview on Bloomberg Television’s “Market Makers” with Erik Schatzker and Stephanie Ruhle. ‘Nobody knows what’s there and there’s a little bit of bologna, so we’re just going to have to wonder going forward through this year as to the potential problems in China and other emerging markets.’”
Japan Watch:

February 5 – Bloomberg (Andy Sharp and Masaaki Iwamoto): “Japan’s base wages adjusted for inflation last year matched a 16-year low in 2009 when the world was gripped by recession, posing a risk to consumer spending as the nation girds for a higher consumption tax. Pay excluding bonuses and overtime payments dropped to 98.9 in 2013 on a labor ministry index… that takes price changes into account, equaling the level four years earlier. The gauge is based at 100 in 2010 in data back to 1990.”
India Watch:

February 7 – Bloomberg (Unni Krishnan): “India forecast a faster acceleration from decade-low economic growth than analysts expected even as interest-rate increases and looming elections deter investment. Gross domestic product will rise 4.9% in the 12 months through March 2014, compared with 4.5% last year…”
Latin America Watch:

February 7 – Bloomberg (David Biller and Juan Pablo Spinetto): “State development bank BNDES wants to cede market share to private-sector peers as government lending puts Brazil at risk of a credit downgrade. Goldman Sachs Group Inc. is skeptical private banks are able to fill the void. Loans by state banks, led by BNDES’s record 190 billion reais ($80bn) last year, have inflated Brazil’s public debt and prompted Standard & Poor’s and Moody’s… to cut their outlooks.”
Europe Watch:

February 7 – Bloomberg (Karin Matussek): “Germany’s top court questioned the European Central Bank’s bond-buying plan and asked the European Union’s highest tribunal to rule on the legality of the program. Germany’s Federal Constitutional Court put the fate of the ECB initiative… partly in the hands of the European Court of Justice in Luxembourg. Judges at the German court expressed doubts about the legality of the measure in a six to two vote. ‘Subject to the interpretation by the Court of Justice of the European Union, the Federal Constitutional Court considers the OMT Decision incompatible with primary law,’ the court said…, in reference to the ECB’s Outright Monetary Transactions program. ‘Another assessment could, however, be warranted if the OMT Decision could be interpreted in conformity with primary law.’”

February 3 – UK Telegraph; (Bruno Waterfield): “Leaked German finance ministry paper estimates Greece needs a further €10-20bn to service its debts. The eurozone has begun preparing a third bailout package for Greece of up to €20bn (£16.5bn) on top of existing loans totaling €240bn. The new bailout, which will be decided in April, was discussed at a eurozone meeting last week… Wolfgang Schaeuble, the German finance minister, has admitted that new loans will be necessary for Greece as doubts continue over the sustainability of the country’s high levels of debt.”

February 5 – Bloomberg (Nikos Chrysoloras and Rebecca Christie): “The next handout to Greece may include extending the maturity on rescue loans to 50 years and cutting the interest rate on some previous aid by 50 bps, according to two officials with knowledge of discussions… The plan, which will be considered by policy makers by May or June, may also include a loan for a package worth between 13 billion euros ($17.6bn) and 15 billion euros… Greece, which got 240 billion euros in two bailouts, has previously had its terms eased by the euro zone and International Monetary Fund amid a six-year recession.”

February 3 – Bloomberg (Frances Schwartzkopff): “The head of Denmark’s biggest pension fund said recurring sell-offs of emerging economy assets may increasingly affect global markets as central banks unwind support measures. The scale of the market rout suggests gains in some asset classes may have been excessive after unprecedented monetary easing distorted prices, according to Carsten Stendevad, chief executive office for ATP, which oversees $112 billion in assets. ‘We’ve been strongly encouraged to go out on the risk curve, but we have to go further and further out to make money,’ Stendevad said… ‘That makes you worried.’”

February 6 – Bloomberg (Maud van Gaal): “‘I swear that I will do my utmost to preserve and enhance confidence in the financial-services industry. So help me God.’ The oath, the first of its kind in Europe, became binding on board members of Dutch banks last month as the government sought to rein in an industry with assets more than four times the size of the country’s economy. All 90,000 Dutch bank employees must take the pledge, or a non-religious affirmation, starting the second half of this year. They’ll be punished should they break new ethical rules, Banking Association Chairman Chris Buijink said…”

February 4 – Bloomberg (Mark Deen): “President Francois Hollande’s approval rating fell 3 points, matching the record low of 23% set two months ago, an Ifop poll for Paris Match showed.”