Saturday, December 6, 2014

Weekly Commentary, February 13, 2013: New Bull, or Larger Ro, Ro

CNBC’s Andrew Ross-Sorkin (February 7, 2013): “Are you worried about Europe, still?”

Former Secretary of the Treasury and Goldman Sachs co-chairman Robert Rubin: “I think that Europe is very different than most people think it is. I think there’s a complacency about Europe that is probably a product largely of… the announcements Mario Draghi made. And I think he’s an outstanding leader and, in fairness, he’s a very good friend. But that has nothing to do with my evaluation. He made an announcement on a Thursday that he was going to do what was needed. And the markets reacted very positively. He subsequently, very wisely, said that the ECB was only going to act if conditionality was met, so that the politicians would do what they need to do. I think there’s been a very substantial complacency in Europe and I think the risks are probably considerably higher than people think. And I'll just add one more point: a lot of the Europeans will say a lot’s been accomplished over the past year. What I think is that European leaders have been behind the curve from the very beginning. And if you look at the facts now, in the troubled countries, the banking systems, nobody knows what the numbers are. Growth is still negative and therefore the output gaps are greater and the debt-to-GDP ratios are greater. So I think Europe is probably far more troubled.”

Ross-Sorkin: “More tail risk? I was just in Davos. They said tail risk is off the table. Mario Draghi came out and said ‘it’s over; don’t worry about it.’”

Rubin: “There is a complacency -- I think Mario Draghi, who I think is outstanding, has a role to play. But I was not at Davos. But people tell me that there was this sort of attitude you just described, and I've heard people who were there describe it as complacency. I would certainly describe it as complacency. And I think it’s a function of a misreading – a misreading of what the ECB’s action could actually mean.”

This past July the euro was under major selling pressure and about to break through the key 1.20 level versus the dollar. Spanish 10-yr yields surged above 7.5% as Italian yields surpassed 6.5%. The marketplace was questioning the creditworthiness of literally Trillions of European debt. Accelerating capital flight out of Europe’s troubled “periphery” – and continental Europe more generally – had become a major market worry. The stability of the entire European banking system hung in the balance. The dollar was rallying strongly, with a “hot money” run from susceptible “developing” economies also a mounting concern. And with the European economy faltering rapidly, the Chinese Bubble Economy under pressure and the U.S. economic recovery downshifting, global markets and economies were in a poor state to manage through a severe European crisis.

Dr. Draghi responded with his Outright-Monetary Transactions (OMT), a strategy to backstop faltering debt markets with potentially unlimited European Central Bank (ECB) purchases. This was followed quickly by Bernanke’s dollar-weakening plan for open-ended quantitative easing – which was generally supported by myriad easing measures from central bankers around the world.

It will be interesting to see how history judges Draghi, Bernanke and global monetary management during this recent period. Increasingly desperate measures have thus far held a return to global crisis conditions at bay. Does this ensure the eruption of a greater crisis later? We do know that Draghi’s OMT market backstop dramatically altered market perceptions. He almost singlehandedly transformed Trillions of some of the most appealing securities for shorting into the most enticing for leveraging on the long side. Draghi, Bernanke and friends certainly incited a major global unwind of bearish positions and risk hedges. And with the help of $85bn monthly QE from the Fed and talk of open-ended QE from the Bank of Japan, this “short squeeze” morphed into a major – perhaps historic - period of “risk on” speculation.

Mr. Rubin’s comments resonate, especially this week. The degree of complacency with respect to Europe is, on the one hand, astounding. On the other, it is perfectly understandable. News, analysis and “investor” perceptions always follow market direction. And as George Soros explained years ago, market perceptions can create their own reality. It all boils down to a major consequence of these heavy-handed global government risk market intrusions/interventions: short squeezes and “risk on” speculative dynamics take on lives of their own – leading to market prices and ebullience detaching from troubling fundamental underpinnings.

Again from Rubin: “I think it’s a function of a misreading – a misreading of what the ECB’s action could actually mean.”

Well, Dr. Draghi’s market backstop pronouncement profoundly altered global markets. And while the Draghi Plan has had a powerful impact on perceptions, from day one this market backstop has rested on rather flimsy foundations. First of all, the Bundesbank – by far the most powerful central bank in Europe - remains adamantly opposed to open-ended bond purchases. So, how big could one expect the OMT bazooka to become without the Germans – not to mention other euro-zone central banks and Parliaments – on board? Draghi had to really bend/break the rules to claim that potentially open-ended debt purchases were within the ECB’s mandate – as opposed to state financing and bailouts which are specifically forbidden.

In order to garner the necessary support from other ECB members, Draghi made debt support conditional upon a country’s politicians agreeing to a specific structural reform program (through the ESM bailout mechanism). In the midst of intense crisis conditions, this conditionality seemed acceptable to (most) ECB governors and euro-zone politicians alike. Now, with markets exuberant and financial conditions much loosened, politicians have returned to being politicians and central bankers have been left to pray that reform programs don’t completely collapse.

The hope, of course, is that the OMT never sees the light of day. The hope is that liquid debt markets (and lower market yields) work their magic on real economies. And so long as the hedge funds and others stay enamored with European debt (and the euro), the ECB market backstop can indeed remain mothballed. But along the way - if “risk on” somehow again succumbs to “risk off” - and the leveraged speculators turn nervous, this whole issue of “conditionality” becomes a market concern. If hopes are dashed and easier Credit and inflated securities prices fail to jolt economic recovery – then the region will be facing only more acute problems. These would include larger quantities of suspect debt, additional financial leverage, greater fragilities and, presumably, more intense public frustration and political instability.

The past six months have not been all that kind to the reform process. The markets have shined, though real economies throughout Europe have continued to dull. Seemingly unbeknownst to market participants, European recessions and public angst have only deepened. Weak political leaders have weakened.

The notion of ECB “conditionality” rests upon political stability. Yet, two of the region’s bigger potential problem-children – Spain and Italy – appear to be facing acute political uncertainties. Italian elections are now less than three weeks away. A savvy old campaigner and a resonating populist (anti-reform) message have propelled a surprising rise in the polls for Silvio Berlusconi’s People of Liberty party. Meanwhile, the former professor, now Caretaker Prime Minister, Mario Monti really struggles on the campaign trail. There is increasing talk of “inconclusive” results, a “hung parliament,” and potentially the need for a second election, as the leading Democratic Party (and its leader Pier Luigi Bersani) sees its lead in the polls almost disappear. The likely outcome will be a fragile coalition government and limited power (not to mention desire) to move forward with difficult reform programs.

The political backdrop in Spain appears even more tenuous.

February 6 – Financial Times (David Gardner): “The avalanche of slush fund allegations threatening to engulf the ruling Popular party of Mariano Rajoy is only the latest in a long line of illegal party financing cases in Spain, after the restoration of democracy in 1977 brought with it the expensive inconvenience of regular elections. In the mid-1990s, there was the Filesa scam whereby the then-ruling Socialists collected large corporate donations for fictitious consultancy work not carried out by dummy firms. The scandal helped bring down the government of Felipe González… The current, so-called Bárcenas case, which centres on the purported secret accounts kept by former PP treasurer Luis Bárcenas that detail covert donations and cash payments allegedly made to senior party figures including Mr Rajoy, is in the same league.”

Prime Minister Rajoy has denied receiving illicit funds, although in some cases payments on the purported handwritten ledger (published by El Pais) have been confirmed by other recipients. The opposition party has called for Rajoy’s resignation. This scandal doesn’t look good, although some have suggested it might remain in the courts for awhile. Yet it further weakens public trust, while emboldening separatist movements.

The Financial Times’ David Gardner notes a key risk: “…A [Popular party] back in power for barely a year risks implosion, but the Socialists, demoralized and divided regionally as well as ideologically, are in retreat. If elections were to take place now, Spain could face Greek-style political fragmentation, with the two main parties reduced to something like the diminished size of Greece’s conservative New Democracy and former prime minister George Papandreou’s Pasok (which, like the PP, also had a recently won absolute majority). Two decades ago Spaniards were enamored of Europe. Now, amid the compound devastation wrought by the fiscal, banking and euro crises, the EU is ‘like a wicked stepmother’, one Spanish analyst says.”

Speculative markets love “bi-polar” backdrops – that is, as long as the bad pole (“risk off”) ensures an aggressive policy response, short-squeeze and abrupt lurch toward the good pole (“risk on”). And, over the years, everything has just gotten a lot bigger – and, accordingly, only more bi-polar. Remember the “asymmetrical” policy response issue from the Greenspan years? Well, these days of systemic structurally maladjusted economies and financial systems, global “risk off” provokes just the most incredible policy measures. In contrast, what kind of provoking do we see with a major bout of global “risk on” market speculation? Well, essentially no response whatsoever. To be sure, the Fed’s $85bn monthly “money printing” operation is exempt. Extreme global monetary looseness? Right. Exempt.

The inevitable upshot to this unwieldy “risk on, risk off” and attendant New Age Policy Asymmetry is unanchored global liquidity and general currency market instability. The Draghi and Bernanke Plans incited re-risking, re-leveraging and an absolute global market liquidity bonanza. Many now talk openly of “currency wars” – recalling the destabilizing “beggar thy neighbor” Credit/currency devaluations from the Depression era. Watching their moribund economies, European leaders are getting antsy. And the elevated euro (weak dollar and yen) was the target of strong words this past week from French President Hollande: “We can’t let the euro fluctuate according to the mood of the market. We have to act at the international level to assert our interests… We have to determine for the medium term an exchange-rate level that appears most realistic, that is most in line with the state of our real economies.”

The euro weakened 2.0% this week. Even Draghi seemed to imply that the ECB would now closely monitor the consequences of a strong euro. Recent euro sentiment had turned quite bullish, in the face of major economic and political uncertainties. If this week’s reversal points to a shift in sentiment against the euro, then we’ll have to closely monitor how this translates throughout European securities markets. European equities have rather quickly given up most of what were strong January gains. In particular, European financial stocks were under heavy selling pressure this week. Debt markets are also indicating heightened vulnerability. And, while we’re on the subject, “developing” markets didn’t trade all that impressively this week either.

As noted by Robert Rubin, “There’s been a very substantial complacency in Europe and I think the risks are probably considerably higher than people think.” I’ll suggest complacency and unappreciated risks are a global product of worldwide monetary disorder. And with all the talk of new secular bull markets, I’ll suggest that the backdrop might actually be more conducive to just A Bigger “Ro,Ro” (risk on, risk off) Dynamic. If so, it will be key to monitor for potential subtle shifts away from risk-taking and leveraged speculation. A weak euro, recovering yen and stronger dollar might be expected to engender a somewhat more cautious approach to risk-taking. Yields in Spain and Italy should be monitored closely, along with Credit spreads/risk premiums more generally. Almost across the board, these indicators this week pointed to a somewhat less robust “risk on” market backdrop.

I’ll conclude with a Thursday exchange from CNBC, which brought back memories of the first time I heard that Dr. Bernanke was being considered to replace Alan Greenspan (when I said to myself, “You’ve got to be kidding.”).

NBC’s Steve Liesman: “I want to bring you some exclusive parts of the interview which we taped after the live portion ended really from the man who has done more than anybody else to promote this idea of the Federal Reserve using economic targets, a real revolution in central banking. Evans sees evidence already that QE, this unlimited QE, this QE linked to economic targets is working. He sees it is in auto loans. He sees it in a revival in the housing sector. But, most importantly, he sees it happening in the minds of investors.”

Federal Reserve Bank of Chicago President Charles Evans: “The investment climate seems to be one where people are increasingly understanding that very low interest rates on super safe assets are going to be around for a while. And if they’re worried by that they need to take on more risk - and taking on that more risk will help get the economy growing.”

Liesman: “Guys, this idea of economic targets going global, you talked about Mark Carney heading over to the Bank of England. There’re some discussions as to whether or not he adopts a nominal GDP target. Japan’s focusing more on economic targets. So if this works, guys, I have to start thinking a crazy idea: why aren’t we thinking about Charlie Evans as a possible replacement for Ben Bernanke in 2014?”

For the Week:

For the week, the S&P500 added 0.3% (up 6.4% y-t-d), while the Dow slipped 0.1% (up 6.8% y-t-d). The Banks gained 0.5% (up 7.3%), and the Broker/Dealers rose 0.9% (up 13.4%). The Morgan Stanley Cyclicals were unchanged (up 7.3%), and Transports gained 0.9% (up 11.4%). The Morgan Stanley Consumer index increased 0.4% (up 8.2%), while the Utilities slipped 0.1% (up 4.4%). The S&P 400 Mid-Caps increased 0.7% (up 8.7%), and the small cap Russell 2000 added 0.3% (up 7.6%). The Nasdaq100 advanced 0.4% (up 4.3%), and the Morgan Stanley High Tech index added 0.2% (up 6.4%). The Semiconductors gained 1.0% (up 10.6%). The InteractiveWeek Internet index increased 0.4% (up 9.6%). The Biotechs gained 0.5% (up 9.3%). Although bullion was little changed, the HUI gold index rallied 0.8% (down 9.2%).

One-month Treasury bill rates ended the week at 3 bps and 3-month rates closed at 7 bps. Two-year government yields were down a basis point to 0.25%. Five-year T-note yields ended the week down 5 bps to 0.83%. Ten-year yields declined 7 bps to 1.95%. Long bond yields fell 5 bps to 3.16%. Benchmark Fannie MBS yields slipped 2 bps to 2.58%. The spread between benchmark MBS and 10-year Treasury yields widened 5 to 63 bps. The implied yield on December 2014 eurodollar futures fell 4.5 bps to 0.605%. The two-year dollar swap spread declined one to 15 bps, while the 10-year swap spread was little changed at 8 bps. Corporate bond spreads widened. An index of investment grade bond risk increased 3 to 89 bps. An index of junk bond risk jumped 14 to 448 bps.

Domestic debt issuance slowed. Investment grade issuers included AT&T $2.25bn, Wells Fargo $2.0bn, IBM $2.0bn, Citigroup $900 million, New York Life $400 million, and George Washington University $170 million.

Junk bond funds saw outflows jump to $1.4bn (from Lipper). Junk issuers included Lynx $1.5bn, Caesars Entertainment $1.5bn, Revlon $500 million, Vector Group $450 million, Speedy Cash $440 million, Nationstar Mortgage $400 million, Genesis Energy $350 million, SMU $300 million, CCRE $250 million, MRT $250 million, Universal Hospital Services $220 million, and Starz $175 million.

Convertible debt issuers included Accuray $100 million.

Another long list of international issuers included International Bank of Reconstruction & Development $5.0bn, Ukraine $2.25bn, Nordic Investment Bank $2.0bn, Vimpelcom $1.6bn, Development Bank of Kazakhstan $1.4bn, Australia & New Zealand Bank $1.25bn, Quebec $1.25bn, ING $1.0bn, Ontario $1.0bn, Imperial Tobacco $1.0bn, Guatemala $700 million, Tervita $650 million, Phosagro $500 million, Banco de Cred $500 million, Geopark $300 million, Millenium Offshore $225 million, VRG Linhas Aereas $200 million and Lulwa $150 million.

Spain's 10-year yields this week rose 16 bps to 5.34% (up 14bps y-t-d). Italian 10-yr yields jumped 23 bps to 4.54% (up 6bps). German bund yields declined 6 bps to 1.61% (up 30bps), and French yields dipped one basis point to 2.23% (up 25bps). The French to German 10-year bond spread widened 5 to 62 bps. Ten-year Portuguese yields jumped 34 bps to 6.39% (down 36bps). The new Greek 10-year note yield rose 23 bps to 10.70% (down 75bps). U.K. 10-year gilt yields were unchanged at 2.09% (up 27bps).

The German DAX equities index fell 2.3% for the week (up 0.5% y-t-d). Spain's IBEX 35 equities index slipped 0.7% (up 0.1%). Italy's FTSE MIB sank 4.0% (up 2.2%). Japanese 10-year "JGB" yields were little changed at 0.76% (down 3bps). Japan's volatile Nikkei slipped 0.3% (up 7.3%). Emerging markets were mostly lower. Brazil's Bovespa equities index fell 3.1% (down 4.0%), and Mexico's Bolsa dropped 1.6% (up 3.0%). South Korea's Kospi index declined 0.4% (down 2.3%). India’s Sensex equities index fell 1.5% (up 0.3%). China’s Shanghai Exchange added 0.6% (up 7.2%).

Freddie Mac 30-year fixed mortgage rates were unchanged at 3.53% (down 34bps y-o-y). Fifteen-year fixed rates declined 4 bps to 2.77% (down 39bps). One-year ARM rates were down 6 bps to 2.53% (down 25bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates unchanged at 4.15% (down 49bps).

Federal Reserve Credit increased $2.6bn to a record $2.992 TN. Fed Credit has increased $206bn in 18 weeks. Over the past year, Fed Credit expanded $78bn, or 2.7%.

Global central bank "international reserve assets" (excluding gold) - as tallied by Bloomberg – were up $712bn y-o-y, or 6.9%, to a record $10.960 TN. Over two years, reserves were $1.670 TN higher, for 18% growth.

M2 (narrow) "money" supply rose $9.8bn to $10.413 TN. "Narrow money" has expanded 6.7% ($653bn) over the past year. For the week, Currency increased $0.5bn. Demand and Checkable Deposits rose $9.6bn, and Savings Deposits gained $7.6bn. Small Denominated Deposits slipped $3.3bn. Retail Money Funds fell $4.8bn.

Money market fund assets dipped $3.7bn to $2.691 TN. Money Fund assets have expanded $35bn y-o-y, or 1.3%.

Total Commercial Paper outstanding declined $13.1bn to $1.112 TN CP was up a notable $148bn in 13 weeks and $139bn, or 14.3%, over the past year.

Currency and 'Currency War' Watch:

February 5 – Bloomberg (Shamim Adam): “A ‘perfect storm’ may be forming in the world economy as signs of a recovery spur capital flows to emerging markets and some advanced nations that may lead to asset bubbles, Banco de Mexico Governor Agustin Carstens said. ‘Risk appetite among investors has returned and the search for yield is in full force,’ Carstens said… ‘Concerns of asset-price bubbles fed by credit booms are starting to appear.’ The risk of a ‘currency war’ has surfaced as monetary easing from Japan to the U.S. spurs demand for higher-yielding assets and boosts inflows into emerging markets.”

February 5 – Bloomberg (Jonathan Stearns and James G. Neuger): “French President Francois Hollande called for government leaders to steer the euro’s exchange rate, becoming the most powerful European official to warn that the rising currency may deepen the recession. Hollande broke with Germany’s hands-off policy on exchange rates and set up a potential clash with the European Central Bank by saying the euro area has to use the currency as an export-promoting tool just like the U.S. and China. ‘We can’t let the euro fluctuate according to the mood of the market,’ Hollande told reporters… ‘We have to act at the international level to assert our interests… We have to determine for the medium term an exchange-rate level that appears most realistic, that is most in line with the state of our real economies,’ Hollande said.”

February 8 – Bloomberg (Andrew Joyce and Mayumi Otsuma): “Japanese Finance Minister Taro Aso said the pace of the yen’s weakening has been too fast, speaking a week before a meeting of global finance chiefs where Japan’s currency stance is forecast to be an issue.”

The U.S. dollar index rallied 1.4% to 80.25 (up 0.6% y-t-d). For the week on the upside, the Brazilian real increased 0.8%, the British pound 0.7%, the Singapore dollar 0.2%, the South Korean won 0.1% and the Japanese yen 0.1%. For the week on the downside, the Swedish krona declined 2.2%, the Danish krone 2.0%, the euro 2.0%, the Norwegian krone 1.5%, the New Zealand dollar 1.1%, the Swiss franc 1.0%, the Mexican peso 0.9%, the Australian dollar 0.9%, the Canadian dollar 0.6%, the South African rand 0.5% and the Taiwanese dollar 0.4%.

Commodities Watch:

The CRB index declined 1.3% this week (up 2.1% y-t-d). The Goldman Sachs Commodities Index slipped 0.1% (up 4.9%). Spot Gold was unchanged at $1,667 (down 0.5%). Silver declined 1.6% to $31.44 (up 4.0%). March Crude fell $2.05 to $95.72 (up 4%). March Gasoline added 0.2% (up 11%), while February Natural Gas declined 0.9% (down 2%). March Copper declined 0.7% (up 3%). March Wheat fell 1.1% (down 3%), and March Corn sank 3.7% (up 2%).

U.S. Bubble Economy Watch:

February 5 – Bloomberg (Prashant Gopal): “The U.S. housing market, entering its busiest season, is tipped so far in favor of sellers that almost a third of listings in areas from Washington, D.C., to Denver and Seattle are under contract in two weeks or less. One home in Washington attracted 168 offers in December and sold for almost twice the asking price. About 70 people lined up last month for a lottery to select buyers for four available houses in a San Ramon, California, subdivision where, in August, bidders camped for weeks to secure purchases. A plunge in U.S. home listings to a 12-year low is driving up prices and preventing transactions from returning to historically normal levels.”

February 4 – Bloomberg (Margaret Collins, John Gittelsohn and Heather Perlberg): “JPMorgan… is giving its wealthiest clients the chance to invest in the single-family rental market after other investments linked to the U.S. housing recovery jumped in value. The firm’s unit that caters to individuals and families with more than $5 million, put client money in a partnership that bought more than 5,000 single family homes to rent in Florida, Arizona, Nevada and California, said David Lyon… at J.P. Morgan Private Bank. Investors can expect returns of as much as 8% annually from rental income as well as part of the profits when the homes are sold, he said. The bank’s wealthy clients are joining a growing number of private-equity firms and individuals buying rental homes in the regions hardest hit by the U.S. housing crash.”

February 8 – Bloomberg (Lorraine Woellert): “Consumer borrowing in the U.S. rose in December for a fifth straight month as non-revolving credit surged by the most in 11 years. The $14.6 billion gain followed a revised $15.9 billion advance in November… Rising home values and job creation are boosting the ability and willingness of households to borrow…”

February 5 – Bloomberg (Janet Lorin): “Needy U.S. borrowers are defaulting on almost $1 billion in federal student loans earmarked for the poor, leaving schools such as Yale University and the University of Pennsylvania, with little choice except to sue their graduates. The record defaults on federal Perkins loans may jeopardize the prospects of current students since they are part of a revolving fund that colleges give to students who show extraordinary financial hardship.”

Fiscal Watch:

February 6 – Bloomberg (Angela Greiling Keane): “The U.S. Postal Service plans to end Saturday mail delivery as soon as August to cut financial losses, a change Postmaster General Patrick Donahoe said it can make without Congress’s approval if necessary. The service, which lost $15.9 billion last year, said it would continue six-day deliveries of packages, deliver mail to post-office boxes and keep open retail locations that now operate on Saturdays. The change would lead to the elimination of 22,500 jobs and cost reductions of as much as $2 billion a year, Donahoe said.”

February 6 – Bloomberg (James Rowley and Roxana Tiron): “House Speaker John Boehner said he will oppose any delay of $1.2 trillion in automatic U.S. spending reductions set to begin March 1 unless Congress replaces them with other ‘cuts and reforms…’ ‘At some point, Washington has to deal with its spending problem,’ Boehner… told reporters… ‘I’ve watched them kick this can down the road for 22 years that I’ve been here. I’ve had enough of it. It’s time to act.’”

Muni Watch: 

February 5 – Bloomberg (James Nash): “California’s rebounding finances are drawing investors to the riskiest debt of the world’s ninth-largest economy, buoying prospects for a revival in bond sales by its blight-fighting organizations. The successor to the San Francisco Redevelopment Agency sold $123 million of debt last week, a year after lawmakers abolished the issuers. The offer marked the first new bonds to back a redevelopment project since all of the more than 400 authorities were eliminated as part of steps to balance the state budget. The securities are unrated, placing them among the most default-prone local obligations.”

Global Bubble Watch:

February 8 – Bloomberg (Sarika Gangar and John Glover): “Sales of company bonds from the U.S. to Europe and Asia stumbled this week, following the busiest ever start to a year, as a surge in yields prompted investors to pull money out of funds that buy the debt. Companies… sold about $48 billion of notes, the least since the first week of 2013 and less than half the $97.7 billion issued in the same period a year ago… In January, companies borrowed $424.3 billion.”

February 5 – Bloomberg (Rachel Evans): “Asia is leading the worldwide retreat in newly issued corporate bonds after surging issuance and a strengthening global economy spurred some investors to favor equities. Almost 79% of the dollar bonds sold in January by companies from Asia outside Japan lost money by the end of the month, from 1.3% a year earlier… That compares with 52% of new European deals and 46% in the U.S. Bond buyers’ appetite for debt is stretched after companies sold $419.8 billion of debentures in all currencies, a record for the month… About $2.6 trillion was added to the value of equities worldwide last month as confidence mounted that global economic growth is accelerating. Investors put almost three times more money into stock funds than debt in the period, according to EPFR Global.”

February 6 – Bloomberg (Jacqueline Simmons and Aaron Kirchfeld): “Three banks climbed to the top of the merger rankings within 24 hours after landing roles on this year’s two largest deals valued together at almost $50 billion, as a mergers and acquisition recovery gathers strength. Goldman Sachs Group Inc., Credit Suisse Group AG and JPMorgan Chase & Co. have taken the lead… The three large lenders won advisory roles on the Liberty Global deal and the bid to take Dell Inc. private in a transaction valued at $24.4 billion. The transactions account for about one-eighth of the $205 billion so far this year in an M&A recovery that may be gathering speed.”

February 6 – Bloomberg (Krista Giovacco and Sridhar Natarajan ): “The busiest start in six years in loans made to the neediest U.S. companies is poised to accelerate as Silver Lake Management LLC moves to acquire Dell Inc. in the biggest leveraged buyout since the financial crisis. Private-equity firms from Carlyle Group LP to Bain Capital Partners LLC obtained $26.7 billion of the debt last month from non-bank lenders to support takeovers and refinance borrowings… That’s the most for any January since 2007, when $32 billion of the loans were made.”

February 7 – Financial Times (Michael Stothard): “Strong hybrid bond issuance since the start of the year is being heralded as a turning point for the asset class after years of little interest in the wake of severe losses in the financial crisis. The $14bn worth of corporate hybrid debt issued globally last month was the highest monthly total ever by nearly four times amid a slew of record-breaking. Just one month into the year, it is already the best quarter of all time, according to Dealogic. Corporate hybrid bonds are attractive to companies coming under increasing ratings pressure as the rating agencies rank the debt as half equity… They are also being seen as increasingly attractive to fixed income investors in this ‘risk on environment’ because they carry a higher coupon due to their heavy subordination in the capital structure and some risky equity-like characteristics.”

Global Credit Watch:

February 4 – Bloomberg (Patrick Donahue): “Europe’s political tremors risk spoiling the region’s market calm, with corruption allegations buffeting Spanish Premier Mariano Rajoy and Italy’s Silvio Berlusconi narrowing the front-runner’s lead as elections loom. Rajoy, facing opposition calls to resign amid contested reports about illegal payments, travels to Berlin today as euro- area leaders schedule a flurry of meetings this week ahead of a Feb. 7-8 European Union summit. Last week’s nationalization of the Netherlands’ fourth-largest bank and a 2.17 billion-euro ($3bn) loss at Deutsche Bank AG underscore the fragile economic health in the region. ‘The euro crisis is not over,’ German Finance Minister Wolfgang Schaeuble said… Still, ‘we’re in a much better position than we were a year ago,’ the minister said.”

February 6 – Bloomberg (Corina Ruhe and Maud van Gaal): “The Netherlands had the outlook on its top credit rating cut to negative by Fitch Ratings as the Dutch economy suffers from a deepening housing slump and persistent bank system woes. The ratings company maintained the country’s grade at AAA while removing its designation as stable… As reasons for the move, it cited the level of public debt, problems at some Dutch banks and a property-market slump which may shave a total of 25% off values from their peak.”

February 7 – Bloomberg (Natalie Weeks): “More than 90% of Greek households say their incomes have fallen since the start of the crisis, the average drop being 38%, according to a survey by Marc SA… Sixty-six percent of respondents say total income doesn’t exceed 18,000 euros, and only 2.5% say they make more than 40,000 euros…”

China Bubble Watch:

February 8 – Financial Times (Simon Rabinovitch): “Chinese credit issuance surged to a record high in January on the back of a boom in shadow banking, stoking concerns that the economy could overheat. Total new financing in January reached Rmb2.5tn ($400bn) – up more than 50% from December and more than double the figure a year ago – eclipsing even the start of 2009 when China unleashed stimulus spending to battle the global financial crisis. Analysts warned that the credit jump could lead to a sharp rise in Chinese inflation and debt levels if left unchecked and said that regulators would be forced to intervene to contain the excesses… The explosion in financing was only partly driven by banks, which made Rmb1.07tn in loans. The rest of the new credit – 60% of the total – came from corporate bonds, loans by investment companies, direct lending from companies to other companies and bankers’ acceptances… These non-bank sources of lending, which are collectively referred to as shadow banking in China, are controversial. Regulators say they have good oversight of the situation, but ratings agencies have cautioned that the risks are mounting.”

February 5 – Bloomberg: “China’s ruling State Council approved an income-distribution plan intended to tackle the nation’s wealth gap, with the government describing the task as huge, complicated and unable to be completed in a single step. The 35-point blueprint targets boosting minimum wages to at least 40% of average salaries, loosening controls on lending and deposit rates and increasing spending on education and affordable housing.”

February 8 – Bloomberg: “China’s trade expanded more than estimated and a broad measure of credit rose to a record in a January that had five more working days than last year, helping sustain a rebound in the world’s second-biggest economy. Exports gained 25% from a year earlier and imports rose 28.8%...”

February 4 – Bloomberg: “China signaled it’s preparing for its first new central bank chief since 2002 as an official newspaper said Zhou Xiaochuan will step down from his position next month… The successor to Zhou, 65, whose decade of service makes him the longest-tenured PBOC chief, will help decide the pace of loosening controls on interest rates and capital flows.”

February 7 – Bloomberg: “Japan is exploiting an incident in which a Chinese ship used weapons-targeting radar on a Japanese naval vessel and helicopter to prepare the people of both countries for war, China’s state-run Global Times said. ‘We believe, in doing this, Japan is at the same time also sounding a combat alarm among the Chinese and Japanese public,’ the Chinese-language editorial said…”

February 8 – Bloomberg: “China plans to conduct daily fishery patrols in the South China Sea in 2014, the official Xinhua News Agency reported. The frequency of the patrols is based on the growing law enforcement capacity of the Ministry of Agriculture’s South China Sea Fishery Bureau, Xinhua reported…”

February 4 – Bloomberg (Simon Lee and Stephanie Tong): “Hong Kong monetary chief Norman Chan said more measures are possible to cool the city’s housing market as elevated household debt adds to risks from property- price gains over the past four years. Debt is ‘near historic high levels,’ Chan, the chief executive of the Hong Kong Monetary Authority, told lawmakers… citing ratios of 58% to 59% of gross domestic product in the third and fourth quarters.”

Japan Watch:

February 4 – Bloomberg (Anna Kitanaka, Toshiro Hasegawa and Yumi Ikeda): “Japan’s public pension fund, the world’s biggest manager of retirement savings, is considering the first change to its asset balance as a new government’s policies could erode the value of $747 billion in local bonds. Managers of the Government Pension Investment Fund, which oversees about 108 trillion yen ($1.16 trillion) in assets, will begin talks in April about reducing its 67% target allocation to domestic bonds, President Takahiro Mitani said… ‘If we think about the future and if interest rates go up, then 67% in bonds does look harsh,’ said Mitani…”

February 6 – Bloomberg (John Brinsley and Isabel Reynolds): “Japanese Prime Minister Shinzo Abe denounced China’s use of weapons-targeting radar on one of Japan’s naval vessels as provocative, saying the move will undermine efforts to ease tensions over a territorial dispute. ‘This was a dangerous action that could lead to unforeseen circumstances,’ Abe said… ‘At a time when there were signs that there could be talks between China and Japan, it is extremely regrettable that China should carry out such a one-sided provocation.”

February 8 – Bloomberg (John Brinsley and Isabel Reynolds): “Japanese Prime Minister Shinzo Abe signaled he will implement a more robust foreign policy in the midst of disputes with Russia and China that underscore his push to boost defense spending. Japan… said two Russian fighter jets intruded on its airspace, which Russia’s Defense Ministry denied. The alleged incursion followed accusations that Chinese ships used weapons-targeting radar on a Japanese destroyer and helicopter last month near islands claimed by both countries… ‘When our sovereignty and national interests are threatened we must change our foreign policy to firmly express our point of view,’ Abe told parliament…”

India Watch:

February 5 – Bloomberg (Anto Antony): “Bad loans at Indian banks are headed for a decade high as the slowest economic growth since 2003 and Asia’s highest interest rates strain corporate finances, according to the nation’s largest debt reconstruction company. ‘This is the time to act as we are progressively heading toward a dire situation,’ P. Rudran, chief executive officer at Asset Reconstruction Company (India) Ltd., set up by the nation’s biggest lenders to reorganize non-performing credit, said… Bad debt plus restructured assets, a combined measure of delinquencies that the central bank plans to put into effect in 2015, has exceeded 10% of total advances, the most since 2002…”

February 5 – Bloomberg (Tushar Dhara): “India’s service industries expanded at the fastest pace in a year in January… The purchasing managers’ index rose to 57.5 from 55.6 in December…”

Latin America Watch:

February 8 – Bloomberg (Charlie Devereux and Jose Orozco): “Venezuela devalued its currency for the fifth time in nine years as ailing President Hugo Chavez seeks to narrow a widening fiscal gap and reduce a shortage of dollars in the economy. The government will weaken the exchange rate by 32% to 6.3 bolivars per dollar, Finance Minister Jorge Giordani told reporters… A spending spree that almost tripled the fiscal deficit last year helped Chavez... win a third six-term term.”

February 7 – Bloomberg (Andre Soliani): “Brazilian inflation is at a high level that requires attention, the central bank said in response to a report showing that consumer prices rose in January at the fastest pace in almost eight years. The 12-month inflation rate will hover around 6% until June before slowing, Banco Central do Brasil said.”

February 7 – Bloomberg (Blake Schmidt and Francisco Marcelino): “Saddled with record debt and rising default rates, Brazilian consumers are threatening to undermine the nation’s attempt to reignite an economy that’s relied on a decade-long spending spree by its middle class. Household debt jumped to 44.6% of annual earnings as of November, double the level in November 2005… In the U.S., the ratio fell to a nine-year low of 96% in September from 109% at the end of 2005… Brazilians borrowing to buy cars, electronics and plastic surgery helped Latin America’s biggest economy expand an annual 3.6% over the past decade, helping the middle class grow by 40%. With default rates now matching a 30-month high, analysts are chopping 2013 growth forecasts to just 3.1%...”

February 5 – Bloomberg (Gabrielle Coppola and Juan Pablo Spinetto): “The Brazilian steelmaker known as Usiminas is reaping the benefits of the steepest interest-rate cuts among the world’s biggest economies by raising a record amount of financing at home instead of abroad. Usinas Siderurgicas de Minas Gerais SA took advantage of record low benchmark rates to sell 1 billion reais ($501 million) of six-year local bonds last week paying 1 percentage point more than the overnight rate, or about 7.95%.”

Global Economy Watch:

February 5 – Bloomberg (Olga Tanas): “Russian consumer prices rose more than economists estimated in January, advancing at the fastest rate in 15 months and bolstering the central bank’s case to resist government calls for lower borrowing costs. The inflation rate was 7.1%, jumping from 6.6% the previous month…”

Central Bank Watch:

February 5 – Bloomberg (Jana Randow): “The European Central Bank’s balance sheet shrank to the smallest in almost a year after euro-area banks started to repay emergency ECB loans. The balance sheet dropped 159.1 billion ($215.1bn) to 2.77 trillion euros in the week ended Feb. 1… That’s the lowest level since Feb. 24 last year. ECB lending to banks declined 140.8 billion to 1.02 trillion.”

Federal Reserve Watch:

February 8 – New York Times (Binyamin Appelbaum): “Some financial markets are showing signs of overheated speculation as investors take larger risks in response to the persistence of low interest rates, a senior Federal Reserve official said… The official, Jeremy C. Stein, a Fed governor, highlighted a surge in junk bond issues, the popularity of certain kinds of real estate investment trusts and shifts in bank balance sheets as areas the Fed is watching closely, although he played down any immediate threat to the financial system or the broader economy. ‘We are seeing a fairly significant pattern of reaching-for-yield behavior emerging in corporate credit,’ Mr. Stein said… He added, however, ‘It need not follow that this risk-taking has ominous systemic implications.’”

Europe Watch:

February 8 – Bloomberg (Mark Deen and Anchalee Worrachate): “President Francois Hollande’s call for a weaker euro masks France’s real issue: a loss of competitiveness against countries that share the currency. Eight months into his presidency, Hollande picked up a traditional French grievance when he said this week… that the euro’s rise to a 14-month high may deepen a regional recession… For economists, France’s export woes are less about weaker currencies in the U.S., China, and Japan and more about the nation’s diminished ability to compete with partners in Europe’s 17-nation currency union. Trade figures for 2012 showed a deficit of 67.2 billion euros ($90bn), the second largest on record after 74 billion euros in 2011, with about two-thirds of the shortfall coming from the euro area.”

February 5 – Bloomberg (Sanat Vallikappen): “Goldman Sachs Group Inc. President Gary Cohn said that Europe still faces ‘fundamental problems’ and that policy makers don’t appear to have a plan for generating economic growth in the region’s southern nations. ‘No one has solved the European economic issue for me yet,’ Cohn, 52, said… 'No one’s given me an explanation of how we’re really going to create growth in Greece, or in Spain, or in other peripheral countries.’”

Germany Watch:

February 5 – Bloomberg (Joseph de Weck): “The German state governments of Bavaria and Hesse announced plans to challenge the federal system of tax transfers to the country’s poorer regions, saying they’re being unfairly penalized for their relative wealth. Bavaria, whose capital of Munich is home to Bayerische Motoren Werke and Siemens AG, and Hesse, where Deutsche Bank AG and the European Central Bank are based, are the two biggest per-capita contributors under Germany’s post-World War II system of financial redistribution among the country’s 16 states. ‘We finance close to half of the transfers, that is nearly 10% of our state budget,’ Horst Seehofer, Bavarian prime minister, told reporters… ‘This lawsuit is an act of self-defense as no balance in the system could be achieved through negotiations.’”

Spain Watch:

February 5 – Bloomberg (Emma Charlton): “Spain’s 10-year bond yields at 5.4% are too high for the nation to curtail its debts as a deepening recession thwarts attempts to rein in the euro area’s second-largest budget deficit… Yields are above their five-year average of about 4.8% as the nation’s economic slump enters its fifth year, hampering Prime Minister Mariano Rajoy’s efforts to impose austerity and restore confidence. ‘There will be a snowball effect of the debt because the rate isn’t low enough to avoid deterioration’ in the debt-to-gross domestic product ratio, said Axel Botte… strategist at Natixis Asset Management, which oversees $734 billion. ‘Spain is probably going to miss its deficit targets. Yields are still a bit high.’”

February 6 – Bloomberg (Josiane Kremer): “Spain’s ability to navigate its way through the crisis is crucial to the future of the euro area as the currency bloc’s fourth-largest economy has the potential to weaken the whole region, Fitch Ratings said. ‘Spain is a pivotal country with the potential to drag the euro zone down again,’ Fitch Managing Director Ed Parker said… ‘There is still a large budget deficit that will take several more years of austerity to close, to stabilize and then reduce government debt from high levels…’”

Italy Watch:

February 8 – Bloomberg (Lorenzo Totaro): “Italy’s election in three weeks may yield a hung parliament, requiring a follow-up vote to establish a governing majority, a member of poll leader Pier Luigi Bersani’s campaign said for the first time. ‘Returning to polls is the answer in a situation of ungovernability,’ Stefano Fassina, Bersani’s head of economic policy, wrote…”