Saturday, December 6, 2014

Weekly Commentary, February 22, 2013: The Fed, Chinese Tightening and Distribution

Federal Reserve Bank of St. Louis President James Bullard (February 21, 2013): “Let me just talk a minute about Jeremy Stein’s speech – governor Stein is a Harvard finance professor – surely one of the leading finance people in the world. And we’re fortunate to have him on the [Federal Reserve] Board of Governors. He came out to a conference in St. Louis a couple of weeks ago and gave a speech in which he talked about potential imbalances in financial markets in the U.S. and a little bit around the world. The first point to make would be that – my main take away from the speech - he pushed back some against the ‘Bernanke doctrine.’ The Bernanke doctrine has been that we’re going to use monetary policy to deal with normal macro-economic concerns and then we’ll use regulatory policy to try to contain financial excess. And Jeremy Stein’s speech said, in effect, ‘I’m not sure that you’re always going to be able to take care of the financial excess with the regulatory policy.’ And in a key line, he said, ‘Raising interest rates is a way to get into all the corners of the financial markets that you might not be able to see or you might not be able to attack with the regulatory approach.’ I thought this was interesting and I would certainly listen to him. Everyone should take heed of this. This is an argument that maybe you should think about using interest rates to fight financial excess a little more than we have in the last few years where we’ve always said we’re going to use regulatory policies in that dimension. I thought it was a very interesting speech, but let me give a little broader context. The Fed has been talking about asset bubbles since the ‘irrational exuberance’ speech which was 1996. So it’s nothing new. We had a big bubble in the nineties. A big bubble in the two thousands. Those two bubbles ended very differently. The Fed’s been talking, talking, talking about this. So it’s certainly been a concern. It is a concern today. But it’s like nothing new. This has been going on for 20 years. Frankly, there aren’t good answers because we don’t have great models of financial instability.”

For the second straight month, the release of the most recent (January 29-30) Federal Open Market Committee (FOMC) meeting somewhat rattled the markets. From the New York Times (Binyamin Appelbaum): “There are widening divisions among Federal Reserve officials about the value of its efforts to reduce unemployment, but supporters of those efforts remain firmly in control… An increasingly vocal minority of Fed officials are concerned that buying about $85 billion of Treasury securities and mortgage-backed securities each month is doing more harm than good. They argue the purchases may need to end even before unemployment drops, because the Fed’s efforts are encouraging excessive risk-taking and may be difficult to reverse.”

There is dissension as well as confusion at our central bank. There are (“many”) members that believe open-ended QE was a mistake – and that this policy error should be corrected as soon as possible. Others believe aggressive QE could be continued indefinitely, or at least until unemployment has been reduced to a comfortable level. There is broad disagreement as to impacts, benefits and costs associated with the Fed’s long-term zero rate policy, quantitative easing, the mix of asset purchases, the ongoing balance sheet expansion (and, supposedly, eventual “exit”), pre-committing on the future course of policy and communications more generally. While no one wants to admit as much, it’s all become one big and consequential mess.

Those bullish on U.S. equities can easily ignore this increasingly contentious and complex debate. Understandably, they remain confident that Bernanke, Yellen, Dudley, Evans, Williams and Co. will continue to dictate ultra-easy policy for some years to come. What more do you need to know? And it is not outlandish to surmise that the more the doves’ “inflationist” strategy is called into question, the more insular and intransigent this group becomes.

There are those that believe that the Federal Reserve and global central bankers are on the right course. If QE/money printing is not getting the desired results, it’s because central banks aren’t using it with sufficient determination. And then there are those of us that see global monetary policy as an unmitigated disaster. Dr. Bullard is certainly accurate when he states “We had a big bubble in the nineties. A big bubble in the two thousands… This has been going on for 20 years.”

By now, the “Greenspan doctrine” of unfettered market-based finance and asymmetrical policy responses should have been completely discredited. Ditto for the “Greenspan/Bernanke doctrine” of disregarding assets Bubbles while they’re inflating, focusing instead on reflationary monetary measures to “mop up” after they’ve burst. By accommodating even bigger – and more systemic - Bubbles, the Fed has perpetrated even bigger policy debacles. And we should today look at the “Bernanke doctrine” – “Use monetary policy to deal with normal macro-economic concerns and then we’ll use regulatory policy to try to contain financial excess” with heightened skepticism and outright alarm.

Please explain how “regulatory policy” is to address the unprecedented issuance of government debt coupled with unconventional experimental reflationary monetary policy – the heart of today’s “global government finance Bubble”? It hasn’t – and it won’t. And, clearly, I’m not alone in recognizing the obvious: The Fed has become a rather conspicuous enabler of Washington fiscal dysfunction. The Fed has become an enabler of global speculation, along with ever-mounting financial and economic imbalances. The debate is not going away – and the timing of the wind down in the most recent batch of quantitative easing is not the real issue.

Yet the sophisticated market operators’ immediate focus is to gauge when global “risk on” might be imperiled by the Fed’s backtracking from its $85bn monthly money printing operation. Upon deeper inspection, however, one can see a central bank institution that’s flailing. They’ve opened the money printing Pandora’s Box – without a doctrine, a strategy or even a consensus view for how to approach its latest experiment with “open-ended” quantitative easing. I believe the decision to proceed with aggressive liquidity creation was based more on global systemic issues than the U.S. jobless rate. But in reversing last year’s potentially destabilizing global “risk off,” the Fed and global central bankers incited a historic period of “risk on” excess and attendant fragilities. Now they’re stuck.

A lot is riding on the current “risk on.” Six months ago, the consensus view was that monetary policy was largely out of ammunition. Today, irrational exuberance has central bankers enjoying unlimited firepower. Central banks will be there the moment markets require additional liquidity. And the more markets inflate, the more confident players are with notion that central bankers won’t dare rock the applecart. It’s increasingly clear that “risk on” comes with heightened excesses and imbalances. Let’s quickly go around the globe.

The Shanghai Composite sank 4.9% this week. Markets increasingly fear a government imposed tightening cycle in China. Recall that Chinese officials were in the process of attempting to cool an overheated economy and a national housing Bubble before the “European” crisis last year risked unwieldy downturns. Officials cautiously retreated from measured “tightening” and, as Bubbles tend to do in the face of timid policymaking, the Chinese economic, Credit and Housing market Bubbles sprung right back. Housing transactions have surged, price inflation has accelerated and Credit growth has gone from amazing to utterly astounding. Reports put total January system lending (“social financing”) at an incredible $400bn. There is the distinct possibility that the Chinese Credit boom has reached the point of being, literally, out of control.

Importantly, global “risk on” - with attendant liquidity and “hot money” bonanzas - has worked to reenergize China’s historic Bubble. The bullish consensus view holds that Chinese leaders have their economy and Credit system well under control. Yet each passing year of Bubble excess – certainly exacerbated by global liquidity oversupply and timid domestic policy – ensures that myriad imbalances become more deeply embedded in financial and economic structures.

There were indications this week that Chinese authorities are again moving to tighten housing finance (see “China Bubble Watch” below). On the one hand, the consensus view holds that the Chinese will approach tightening gingerly. And, at this point, global markets seem rather numb to Chinese tightening risks. On the other hand, with Credit Bubble infrastructure and psychology now deeply embedded, authorities will need to inflict some real pain (break inflationary psychology) if they are indeed determined to see results.

I would argue that a new Chinese tightening cycle would come with huge uncertainties and major unappreciated risks. Indeed, it could mark a significant inflection point for Chinese Credit, the imbalanced Chinese economy and global economies and markets more generally. It is worth noting that tin and nickel prices were down 7% this week, with silver, platinum and copper all down more than 5%.

A lot has transpired in China over the past year. The Chinese people – and the world more generally - have become much more aware of China’s endemic corruption problem. Widespread toxic air (and water) pollution has also been recognized as a consequence of a runaway Chinese boom. Other more typical Credit inflation consequences – notably asset Bubbles, widening wealth disparities and economic imbalances – have also become more pressing. Moreover, inflation continues to quietly impart pain upon the large population of impoverished Chinese. The new Chinese government faces daunting financial, economic, environmental and social challenges. The global love affair with money printing (QE) doesn’t today seem to work in their best interest.

When I ponder a future bursting of the Chinese Bubble, I fret China’s relationship with Japan. For now, however, we’ll focus on the yen and Japanese stocks and bonds. The hedge funds have placed big bearish bets on Japan’s currency, while yen weakness has fueled heightened speculation in Japanese equities and, likely, global “risk on” “carry trades” more generally. Markets this week seemed to indicate that a yen rally might endanger an increasingly vulnerable global “risk on” market backdrop. And if “risk on” is viewed as susceptible, yen weakness might not be such a sure one-way bet.

This week also provided added confirmation of European vulnerabilities. For starters, the euro dropped 1.4%. Euro weakness also seemed to pressure global “risk on.” Euro-zone economic data was generally dismal. PMI manufacturing and services indices were indicative of economic contraction. “Core” country France, in particular, was notable for signs of deepening recession. France’s “composite” PMI index of manufacturing and services index declined to 42.3 (from January’s 42.7), the low since 2009. And then on Friday, the European Commission again downgraded Europe’s growth prospects. Euro zone GDP is now expected to contract 0.3% in 2013, with unemployment climbing to 12.2%.

A Reuters’ headline captured a growing market issue: “Core Problem for Europe as France and Germany Drift Apart.” Elsewhere, Spain’s 2012 deficit was reported at 10.2%. And Sunday commences the two-day Italian election, almost sure to raise concerns regarding Italy’s commitment to reform and the political stability to carry on with commitments. This week seemed to bring a spotlight on the huge chasm that has developed between “risk on” market levels and the region’s troubling fundamental backdrop.

I always find it fascinating how news and analyses follow the direction of the market. When the markets are strong, the media focuses on the positives and are content to disregard the negatives. As markets reversed this week, suddenly there’s awareness that the European economy remains a mess, the U.S. still has serious fiscal and monetary policy issues to address, and global growth dynamics remain challenged. News outlets also tend to find a simple explanation for market selloffs. This week, it was the Fed minutes – an issue conveniently dismissed by the reality that the Fed is under the tight control of the dovish contingent.

When one takes an objective view of the world, I along with others see a deeply flawed monetary policy experiment run amuck. I see myriad historic Bubbles. I see, as well, a global “risk on” speculative trading dynamic that will eventually impart pain upon the unsuspecting. The short-term is significantly less clear. Does the sophisticated leveraged speculating community continue to play “risk on” for all its worth? Or will a more susceptible global backdrop dictate a change in strategy? Will the speculating community now seek to begin selling their holdings to the less sophisticated rushing to participate in the “new bull market”? It’s traditionally called “distribution.” In today’s highly distorted financial backdrop, it’s probably more aptly referred to as “wealth redistribution.”

One could add wealth redistribution to the list of “unintended consequences” from Federal Reserve reflationary policymaking. That is, except for the fact that the Bernanke Fed is rather open in its view that it prefers savers out of safety and into the risk markets (jungle).

For the Week:

The S&P 500 slipped 0.3% (up 6.3% y-t-d), while the Dow added 0.1% (up 6.8% y-t-d). The Morgan Stanley Consumer index gained 1.0% (up 10.5%), and the Utilities rose 1.3% (up 5.5%). The Banks fell 1.1% (up 6.3%), and the Broker/Dealers dropped 1.6% (up 14%). The Morgan Stanley Cyclicals sank 1.7% (up 6.7%), and the Transports slipped 0.1% (up 12%). The S&P 400 MidCaps declined 1.1% (up 8.2%), and the small cap Russell 2000 lost 0.8% (up 7.9%). The Nasdaq100 declined 1.0% (up 2.9%), and the Morgan Stanley High Tech index fell 1.0% (up 5.6%). The Semiconductors declined 0.8% (up 10.7%). The InteractiveWeek Internet index dropped 1.2% (up 9.3%). The Biotechs declined 0.7% (up 7.9%). With bullion hit for another $29, the HUI gold index sank 5.2% (down 19%).

One-month Treasury bill rates ended the week at 10 bps and 3-month rates closed at 12 bps. Two-year government yields were down about 2 bps to 0.25%. Five-year T-note yields ended the week down 3 bps to 0.83%. Ten-year yields fell 3 bps to 1.97%. Long bond yields declined 2 bps to 3.16%. Benchmark Fannie MBS yields were little changed at 2.62%. The spread between benchmark MBS and 10-year Treasury yields widened 3 to a five-month high 65 bps. The implied yield on December 2014 eurodollar futures dropped 4.5 bps to 0.585%. The two-year dollar swap spread was little changed at 15 bps, while the 10-year swap spread increased one to 8 bps. Corporate bond spreads were volatile but ended the week little changed. An index of investment grade bond risk was unchanged at 87 bps. An index of junk bond risk declined one to 436 bps.

Debt issuance slowed. Investment grade issuers included Morgan Stanley $4.5bn, JPMorgan $2.5bn, Cardinal Health $1.3bn, Kinder Morgan Energy Partners $1.0bn, Wyndham Worldwide $850 million, Whirlpool $500 million, Carpenter Technology $300 million, and Ryder System $250 million.

Junk bond funds saw outflows of $125 million (from Lipper), the third straight week of negative flows. Junk issuers included Ashland Inc $2.3bn, Goodyear Tire $900 million, and Clear Channel Communications $575 million.

Convertible debt issuers included Forestar Group $110 million.

International issuers included Sweden $3.0bn, Spain $2.0bn, African Development Bank $1.25bn, Digicel $1.0bn, Export-Import Bank of Korea $500 million, Bank of Tokyo-Mitsubishi $2.25bn, Tenedora Nemak $500 million, and Privatebank $175 million.

Spain's 10-year yields this week declined 4 bps to 5.13% (down 14bps y-t-d). Italian 10-yr yields rose 6 bps to 4.44% (down 6bps). German bund yields fell 8 bps to 1.57% (up 25bps), and French yields declined 5 bps to 2.22% (up 22bps). The French to German 10-year bond spread widened 3 to 65 bps. Ten-year Portuguese yields rose 11 bps to 6.16% (down 59bps). The Greek 10-year note yield jumped 15 bps to 10.83% (up 36bps). U.K. 10-year gilt yields were down 8 bps to 2.11% (up 29bps).

The German DAX equities index rallied 0.9% for the week (up 0.7% y-t-d). Spain's IBEX 35 equities index recovered 0.4% (up 0.1%). Italy's FTSE MIB fell 1.6% (down 0.3%). Japanese 10-year "JGB" yields dipped 2 bps to 0.72% (down 6bps). Japan's volatile Nikkei jumped 1.9% (up 9.5%). Emerging markets for the most part were on the defensive. Brazil's Bovespa equities index fell 2.1% (down 7.0%), and Mexico's Bolsa slipped 0.6% (up 0.4%). South Korea's Kospi index rallied 1.9% (up 1.1%). India’s Sensex equities index declined 0.8% (down 0.6%). China’s Shanghai Exchange sank 4.9% (up 0.2%).

Freddie Mac 30-year fixed mortgage rates rose 3 bps to a 6-month high 3.56% (down 39bps y-o-y). Fifteen-year fixed rates were unchanged at 2.77% (down 42bps). One-year ARM rates were up 4 bps to a 6-month high 2.65% (down 8bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates 2 bps higher to 4.14% (down 54bps).

Federal Reserve Credit surged $45.7bn to a record $3.063 TN. Fed Credit has increased $278bn in 20 weeks. Over the past year, Fed Credit expanded $146bn, or 5.0%.

Global central bank "international reserve assets" (excluding gold) - as tallied by Bloomberg – were up $701bn y-o-y, or 6.9%, to $10.953 TN. Over two years, reserves were $1.644 TN higher, for 18% growth.

M2 (narrow) "money" supply rose $14.3bn to $10.435 TN. "Narrow money" has expanded 6.7% ($655bn) over the past year. For the week, Currency increased $0.7bn. Demand and Checkable Deposits declined $11.9bn, and Savings Deposits jumped $28.6bn. Small Denominated Deposits slipped $2.6bn. Retail Money Funds declined $0.6bn.

Money market fund assets dropped $23.8bn to $2.657 TN. Money Fund assets have declined $8bn y-o-y, or 0.3%.

Total Commercial Paper outstanding dropped $22.4bn the week to $1.063 TN CP declined $62bn over the past three weeks, while expanding $125bn, or 13.4%, over the past year.

Currency and 'Currency War' Watch:

The U.S. dollar index gained 1.1% to 81.42 (up 2.1% y-t-d). For the week on the upside, the Australian dollar increased 0.2% and the Japanese yen 0.1%. For the week on the downside, the British pound declined 2.3%, the Norwegian krone 2.1%, the Canadian dollar 1.5%, the Swedish krona 1.5%, the Danish krone 1.3%, the euro 1.2%, the Swiss franc 0.8%, the New Zealand dollar 0.8%, the South Korean won 0.6%, the Brazilian real 0.2%, the Taiwanese dollar 0.2%, the South African rand 0.1%, and the Mexican peso 0.1%.

Commodities Watch:

The CRB index dropped 1.7% this week (down 0.5% y-t-d). The Goldman Sachs Commodities Index sank 2.6% (up 1.8%). Spot Gold fell 1.8% to $1,581 (down 5.6%). Silver lost 4.6% to $28.52 (down 5.6%). May Crude fell $3.28 to $93.13 (up 1%). March Gasoline declined 1.8% (up 11%), while March Natural Gas rallied 4.4% (down 2%). May Copper sank 5.4% (down 3%). March Wheat fell 3.7% (down 8%), and March Corn declined 1.2% (down 1%).

U.S. Bubble Economy Watch:

February 20 – Bloomberg (Yalman Onaran): “Warning: Banks in the U.S. are bigger than they appear. That label, like a similar one on automobile side-view mirrors, might be required of the four largest U.S. lenders if Thomas Hoenig, vice chairman of the Federal Deposit Insurance Corp., has his way. Applying stricter accounting standards for derivatives and off-balance-sheet assets would make the banks twice as big as they say they are -- or about the size of the U.S. economy… ‘Derivatives, like loans, carry risk,’ Hoenig said… ‘To recognize those bets on the balance sheet would give a better picture of the risk exposures that are there.’ U.S. accounting rules allow banks to record a smaller portion of their derivatives than European peers and keep most mortgage-linked bonds off their books. That can underestimate the risks firms face and affect how much capital they need.”

February 20 – Bloomberg (John Lauerman): “Donations to U.S. colleges and universities rose 2.3% in the year through June, less than a third of the previous year’s increase, as more alumni backed away from giving. Donors gave $31 billion to higher education in fiscal 2012, compared with an 8.2% increase to $30.3 billion a year earlier, according to… the Council for Aid to Education in New York.”

Federal Reserve Watch:

February 20 – MarketNews International (Steven K. Beckner): “Although Federal Reserve policymakers overwhelmingly reaffirmed plans to buy $85 billion per month of Treasury and mortgage-backed securities on Jan. 30, ‘many’ participants had reservations about continuing to expand the Fed's balance sheet, minutes released Wednesday show. Beyond that, divisions persisted about how to proceed with so-called ‘quantitative easing’ going forward. There were those who argued that the FOMC should be willing to ‘vary the pace’ of future asset purchases, or even to change them ‘incrementally from meeting to meeting.’ Others argued that the FOMC might need to ‘taper or end asset purchases’ before the FOMC had reached the announced goal of QE3 - namely a ‘substantial improvement’ in the labor market outlook. Still others warned against the costs of ending or scaling back bond buying prematurely.”

February 21 – New York Times (Binyamin Appelbaum): “There are widening divisions among Federal Reserve officials about the value of its efforts to reduce unemployment, but supporters of those efforts remain firmly in control, according to an official account of the Fed’s most recent meeting in January. An increasingly vocal minority of Fed officials are concerned that buying about $85 billion of Treasury securities and mortgage-backed securities each month is doing more harm than good. They argue the purchases may need to end even before unemployment drops, because the Fed’s efforts are encouraging excessive risk-taking and may be difficult to reverse. But the Fed’s policy-making committee reiterated its determination in January to hold course until there is ‘substantial improvement’ in the outlook for job growth, and several officials cautioned at the January meeting that the greater risk to the economy was in stopping too soon, according to the account, which was published after a standard three-week delay.”

February 22 – Bloomberg (Rich Miller): “Federal Reserve Chairman Ben S. Bernanke minimized concerns that the central bank’s easy monetary policy has spawned economically-risky asset bubbles in comments at a meeting with dealers and investors this month, according to three people with knowledge of the discussions. The people, who asked not to be identified… said Bernanke made the remarks at a meeting in early February with the Treasury Borrowing Advisory Committee… The Fed chairman brushed off the risks of asset bubbles in response to a presentation on the subject from the group…”

February 21 – Bloomberg (Aki Ito and Caroline Salas Gage): “Federal Reserve Bank of San Francisco President John Williams said the central bank’s bond- buying will be needed well into 2013, as he urged Fed policy makers to maintain ‘strong monetary stimulus’ to foster economic expansion. ‘We need powerful and continuing monetary accommodation to move toward our mandated goals,’ Williams said… referring to the central bank’s mission to achieve maximum employment and price stability. ‘Purchases of mortgage-backed securities and longer- term Treasury securities will be needed well into the second half of this year.’”

February 22 – Bloomberg (Joshua Zumbrun and Caroline Salas Gage): “Two Federal Reserve policy makers rejected a warning from economists that potential losses on the Fed’s $3.1 trillion balance sheet may undermine central bank control of monetary policy. Boston Fed President Eric Rosengren said today ‘this discussion does not do justice to the policy trade-offs’ of the Fed’s large-scale asset purchases, referring to a paper written by four economists, including Frederic Mishkin, a former Fed governor… Fed Governor Jerome Powell dismissed a suggestion policy makers won’t act to curb inflation.”

Fiscal Watch:

February 19 – Bloomberg (Chris Christoff): “A fiscal emergency exists in Detroit, the General Motors Co. home town where local officials can’t reverse a slide that created a $326.6 million budget gap, according to a report that clears the way for a state takeover. ‘It doesn’t have to be adversarial,’ state Treasurer Andy Dillon said… ‘Detroit is fixable and brighter days are ahead.’ A fiscal crisis grips Michigan’s most-populous city, according to the review…”

Global Bubble Watch:

February 20 – Bloomberg (Sarah Mulholland): “Investors in the asset-backed securities market are seeking relief from record-low yields by snapping up riskier securities tied to jewelry loans and cars parked on dealership lots. Springleaf Finance Corp., the lender to borrowers with poor or limited credit, sold $604 million of bonds last month backed by personal loans secured by household goods from furniture to electronics, its first such deal… Demand for riskier asset-backed bonds has grown as the Federal Reserve holds its benchmark interest rate at almost zero for a fifth year. Sales of securities linked to subprime auto loans doubled to $4 billion in January from a year earlier… ‘The ever-increasing demand for higher-yielding investments has resulted in new issuers and an evolving array of transactions coming to the ABS space,’ said Harris Trifon, a debt analyst at Deutsche Bank… ‘What started out in interest in subprime has broadened out to personal-finance loans and everything in between.’”

February 19 – Bloomberg (Ye Xie and Michael Patterson): “Junk bonds of companies in emerging markets are the most expensive in seven years relative to the U.S., underscoring concerns by policy makers from Mexico to the Philippines who say the threat of asset bubbles is increasing. Speculative-grade securities from nations including China and Brazil returned 14.8% since end-June, versus 9.4% in the U.S…. Emerging-market yields fell to 7.3% from 9.3% a year ago even as net debt rose to a record 3.02 times earnings before interest, taxes, depreciation and amortization… “

February 21 – Bloomberg (Michael Patterson and Weiyi Lim): “Emerging-market stocks may enter a ‘significant correction’ after they trailed developed-nation shares this year, according to JPMorgan & Chase Co. ‘Fundamentals and technicals are weakening,’ Adrian Mowat, the chief Asia and emerging-market strategist at JPMorgan, wrote… He recommended options that protect against stock losses and advised selling equities that are most sensitive to market swings.”

February 22 – Bloomberg (Jason Corcoran): “Russian banks including the nation’s biggest non-state lender and a local unit of Societe Generale SA are selling record amounts of domestic bonds to help fund retail lending growth… Growth in consumer lending advanced to 39.6% in January from the year before after retail sales rose for a third year in 2012…”

Global Credit Watch:

February 22 – New York Times (James Kanter): “Despite growing confidence that Europe is managing its debt crisis and is poised to embark on a recovery, fresh developments on Friday indicated that the region continues to struggle to stimulate growth while cutting spending to pare deficits. A top European official warned on Friday that the euro area economy would shrink for the second consecutive year and that countries like France and Spain would miss fiscal targets meant to ensure the stability of the common currency.”

February 22 – Bloomberg (Jana Randow): “The European Central Bank said banks will repay only half the amount of emergency loans economists forecast, indicating financial institutions remain wary of lending to each other. Some 356 banks will hand back 61.1 billion euros ($80.5bn) of the ECB’s second three-year loan on Feb. 27, the first opportunity for early repayment…”

February 20 – Bloomberg (Fabio Benedetti-Valentini): “Credit Agricole SA, France’s third-largest bank by market value, reported a record fourth-quarter loss after writing down goodwill at its Italian and investment- banking businesses. The net loss widened 30% from a year earlier to 3.98 billion euros ($5.3bn), the bank, based outside Paris, said…”

February 20 – Bloomberg (Charles Penty): “Spanish banks will still face funding and liquidity pressures in coming months even though some were able tap bond markets earlier this year, Moody’s… said. ‘We still consider that liquidity and funding will continue to constrain banks’ credit profiles over the coming months,’ Pepa Mori, a Moody’s senior analyst… said… ‘While recognizing the decline in the system’s overall financing requirements, Spanish banks continue to display wholesale funding reliance at a time when accessibility to long- term wholesale markets, while improving, has not normalized.’”

February 20 – Bloomberg (Angeline Benoit and Esteban Duarte): “Spain is imposing yield limits on debt sales by its 17 semi-autonomous regions that would shut most of them out of markets as it seeks to curb the country’s borrowing… The government wants regions to pay a premium no higher than 100 bps more than sovereign bonds. Catalonia’s 1 billion euros ($1.3bn) of 4.95% bonds due 2020 yield 314 bps more than government debt.”

February 20 – Bloomberg (Tanya Angerer): “China’s second-biggest construction equipment maker fell the most among Asian dollar-denominated junk bonds amid corporate governance concerns in the nation. Notes sold by Zoomlion Heavy Industry Science & Technology Co. have lost 4% this year… Moody’s… warned of ‘red flags’ on the accounting of 61 firms in July 2011 and forestry operator Sino- Forest Corp. filed for bankruptcy protection in March last year after accusations it had overstated its plantations. Non- investment-grade issuance from Chinese businesses boosted dollar debt sales in the Asia-Pacific to a monthly record of $37.3 billion in January, raising the stakes for global investors.”

China Bubble Watch:

February 20 – Bloomberg: “Chinese Premier Wen Jiabao called for local authorities to ‘decisively’ curb real estate speculation and take steps to rein the property market after data showed prices surged the most in two years last month. Cities that have witnessed ‘excessively fast’ price gains should promptly impose home-purchase restrictions if they’ve not done so already, the central government said in a statement released after a meeting of the State Council headed by Wen. Provincial capitals and municipalities to report directly to the central government should also publish annual price control targets to keep new-home costs “basically stable,” according to the statement. Shares of Chinese developers listed in Shanghai fell the most in more than six months… Home prices rose 1% last month from December, the most since January 2011, according to… SouFun Holdings Ltd., the nation’s biggest property website.”

February 21 – Bloomberg: “China told local authorities to ‘decisively’ curb real estate speculation and take steps to rein in the property market after prices rose the most in two years last month. Shares of developers declined. Cities that have had ‘excessively fast’ price gains should ‘promptly’ impose home-purchase restrictions if they’ve not done so already, according to a statement yesterday after a State Council meeting headed by Premier Wen Jiabao. Provincial capitals and municipalities reporting directly to the central government should publish annual price control targets to keep new-home costs ‘basically stable,’ according to the statement.”

February 21 – Bloomberg: “The People’s Bank of China’s first draining of cash since June, seeking to damp a property-market revival, is prompting Citigroup Inc. to predict one-year yields will rise faster than longer-term rates. The central bank sold repurchase agreements for the first time in eight months on Feb. 19, withdrawing capital from banks after they lent the most money in two years in January… ‘The PBOC regards the current liquidity conditions as overly loose,’ said Weisheng He, a strategist in Shanghai at Citigroup.”

February 19 – MarketNews International: “China's central bank is expected to book a record total forex purchase position of CNY660 billion in January, and there are conflicting views of how that number, seen as a gauge of capital inflows, should be accurately interpreted. The most obvious impact and apparently the most widely accepted view is that expectations of monetary tightening by the central bank has started to build despite no official confirmation of that number.”

February 22 – Bloomberg (Weiyi Lim): “China’s stocks fell, dragging the benchmark index to its steepest weekly loss in 20 months, as higher home prices boosted concern the government will adopt tighter policies to prevent asset bubbles… China Construction Bank Corp., the largest mortgage lender, led declines for financial companies this week. A gauge of Shanghai property developers posted its worst weekly loss since July… The Shanghai Composite Index slid 0.5%..., adding to a 4.9% slump this week…”

February 22 – Bloomberg: “China’s new home prices rose in most cities the government tracks for a third month, adding pressure on leaders to intensify policy-tightening efforts to prevent asset bubbles and inflation as the economy rebounds. Prices climbed in January from December in 53 of the 70 cities… Shenzhen, which borders Hong Kong, led the gains with a 2.2% jump from December, while Beijing and Shanghai also rose, as prices accelerated in the nation’s most expensive markets.”

February 19 – Bloomberg: “China’s army may be behind a hacking group that has attacked at least 141 companies worldwide since 2006, according to a report by a U.S. security firm. The attacks, mainly directed at U.S. companies, were carried out by a group that is ‘likely government sponsored’ and is similar ‘in its mission, capabilities, and resources’ to a unit of the People’s Liberation Army, Mandiant Corp. said… Mandiant said it traced the group, labeled Advanced Persistent Threat 1, to four large computer networks in Shanghai. Two of the networks serve the Pudong New Area district, where a secret army unit called 61398 is based, the report said. ‘It is time to acknowledge the threat is originating in China,’ …Mandiant said. ‘Our research and observations indicate that the Communist Party of China is tasking the Chinese People’s Liberation Army to commit systematic cyber espionage and data theft against organizations around the world.’”

February 22 – Bloomberg (Kelvin Wong and Stephanie Tong): “Hong Kong doubled the sales tax on property costing more than HK$2 million ($258,000) and targeted commercial real estate for the first time as bubble risks spread from apartments to parking spaces, shops and hotels. The stamp duty will increase to 8.5% of the purchase price for all properties… The Hong Kong Monetary Authority also tightened mortgage terms for commercial properties and parking spaces.”

Japan Watch:

February 22 – Bloomberg (Isabel Reynolds): “Japanese Prime Minister Shinzo Abe is vowing that Japan won’t tolerate any challenges to the country’s control of islands at the center of a territorial dispute with China. In a speech he’s delivering today after meeting with U.S. President Barack Obama, Abe also will underscore Japan’s plans to beef up its military and to form closer ties with other democracies in the region. ‘We simply cannot tolerate any challenge,’ Abe will say, according to the text of an address he’ll deliver to the Center for Strategic and International Studies in Washington. ‘No nation should underestimate the firmness of our resolve. No one should ever doubt the robustness of the Japan-U.S. alliance.’”

February 22 – Financial Times (Ben McLannahan): “Investors’ excitement over ‘Abenomics’ is showing signs of flagging, almost 100 days on from the market turnround triggered by hopes of aggressive monetary and fiscal stimulus under a new Japanese prime minister. This week, stock trading volumes on the Tokyo Stock Exchange’s first section have dipped about a quarter from the average so far this year, while volumes of Nikkei 225 futures contracts have dropped below 100,000 a day for the first time since December. Over the past two weeks, the index itself has fallen as often as it has risen, bringing an end to the longest streak of gains in more than 50 years.”

February 20 – Bloomberg (James Mayger and Andy Sharp): “Japan’s trade deficit swelled to a record 1.63 trillion yen ($17.4bn) on energy imports and a weaker yen, highlighting one cost of Prime Minister Shinzo Abe’s policies that are driving down the currency. Exports climbed 6.4% in January from a year earlier, the first rise in eight months… Imports increased 7.3%... Weakness in the yen that aids exporters such as Sharp Corp. and Sony Corp. also means the country pays more to import fossil fuels needed as nuclear reactors stand idle after the Fukushima crisis in 2011. That burden may encourage the government to limit the currency’s slide, with Deputy Economy Minister Yasutoshi Nishimura signaling in a Jan. 24 interview that the government may prefer a yen stronger than 110 per dollar.”

India Watch:

February 22 – Bloomberg (Anto Antony and Bhuma Shrivastava): “Indian billionaires including Kumar Mangalam Birla are vying to set up banks in the world’s second- most populated nation after rules were eased to allow companies into the business and tap rural savings.”

Latin America Watch:

February 20 – Bloomberg (Matthew Malinowski): “Brazil’s fourth quarter economic expansion slowed by about half from the previous period, as investments faltered in the world’s second-largest emerging market. The seasonally adjusted economic activity index, a proxy for gross domestic product, rose 0.62% in the fourth quarter… Yearlong growth fell to 1.6% from 2.7% in 2011. President Dilma Rousseff’s administration has worked to reverse two years of declining growth while slowing the highest inflation in a year.”

February 21 – Bloomberg (Francisco Marcelino): “Banco do Brasil SA, Latin America’s largest lender by assets, said fourth-quarter profit rose 5.1%, beating analysts’ estimates, after credit expanded faster than its guidance… Banco do Brasil… expanded the loan book above the 2012 forecast for domestic lending growth of 17% to 21%. Domestic credit reached 480.6 billion reais in the fourth quarter, up 23% from a year earlier…”

February 19 – Bloomberg (David Biller): “Brazil’s retail sales unexpectedly contracted in December, led by a decline in electronics and telecommunications equipment… The volume of sales declined 0.5%, after increasing 0.3% in November… The decline was the first since May, 2012. From the year earlier, sales increased 5%, as compared to a 7.3% forecast from 29 economists surveyed.”

Global Economy Watch:

February 20 – Bloomberg (Sangwon Yoon): “After a series of failed business ventures, Kwon Eui Moon decided to get rich in a more traditional way in South Korea by taking out a mortgage in 2002 and waiting for house prices to soar. They haven’t. After 10 years, Kwon still owes 112 million won ($103,810) on his 109-square-meter (1,173-square-foot) apartment in a southern Seoul suburb. His 5 million won in monthly living costs and debt payments is four times what he makes in a good month importing toys from China. The value of his home since he bought it hasn’t even kept pace with inflation. The total household debt of Kwon and other Koreans rose to a record 937.5 trillion won in the third quarter… The debt reached 164% of disposable income in 2011, compared with 138% in the U.S. at the start of the housing crisis, according to Royal Bank of Scotland Group Plc.”

February 18 – Bloomberg (Niklas Magnusson): “Sweden’s financial regulator says it’s ready to tighten restrictions on mortgage lending to stop banks feeding household debt loads after a cap imposed during the crisis failed to stem credit growth. ‘Swedish households today are among the most indebted in Europe and we cannot have household lending that spirals out of control,’ Martin Andersson, the director general of the Financial Supervisory Authority, said… ‘If that would happen, we can utilize the two tools we do have again, or look at other alternatives.’”

Central Bank Watch:

February 20 – Bloomberg (Jennifer Ryan): “Bank of England Governor Mervyn King was defeated in a push for more stimulus this month as officials considered options including a rate cut and expanding the range of assets purchased as ways to help the economy. King, Paul Fisher and David Miles wanted to increase the target for bond purchases by 25 billion pounds ($38bn) to 400 billion pounds on Feb. 7, though they were outvoted by the remaining six members of the Monetary Policy Committee… Officials said they ‘stand ready’ to increase quantitative easing to support the recovery, though they still questioned the effectiveness of current policy tools for easing credit strains in the economy.”

Europe Watch:

February 22 – Bloomberg (Rebecca Christie): “The euro-area economy will shrink for a second year in 2013, driving unemployment higher as governments, consumers and companies curb spending, the European Commission said. The 17-nation euro zone’s gross domestic product will fall 0.3% this year, compared with a November prediction of 0.1% growth… Unemployment will climb to 12.2%, up from the previous estimate of 11.8% and 11.4% last year, it said. Europe’s labor market ‘is a serious concern,’ Marco Buti, head of the commission’s economics department, said… ‘This has grave social consequences and will, if unemployment becomes structurally entrenched, also weigh on growth perspectives going forward.’”

February 21 – Bloomberg (Fergal O’Brien): “Euro-area services and manufacturing contracted at a faster pace than economists forecast in February as the economy struggled to recover from the deepest recession in almost four years. A composite index based on a survey of purchasing managers in both industries in the 17-nation currency bloc fell to 47.3 from 48.6 in January… Economists had forecast a reading of 49…”

February 22 – Financial Times (Michael Steen and Hugh Carnegy): “Hopes of a eurozone recovery were dealt a blow on Thursday by a very weak indicator of business activity in the French economy, which hit its lowest in nearly four years, prompting fears that Paris was stuck in a ‘downward spiral’. The report banged a new dent in President François Hollande’s socialist government a day after it came under blistering attack from Maurice Taylor, the head of tyremaker Tital International, who lashed out at short working hours in France and the country’s lack of industrial competitiveness… The data for France, the second-biggest eurozone economy, painted a bleak picture. The so-called composite output index, which measures both services and manufacturing, fell to 42.3 in February from 42.7 in January, close to a four-year low.”

February 22 – Bloomberg (Rebecca Christie and Jerrold Colten): “EU needs to safeguard financial stability as it designs rescue package for Cyprus and its banks, Economic and Monetary Affairs Commissioner Rehn says.”

February 20 – Bloomberg (Tom Stoukas): “Greek labor unions held their first general strike this year as Prime Minister Antonis Samaras’s coalition government implements a new round of austerity measures amid record unemployment. Schools, ferries, trains and government services are shut today as 30,000 protesters marched to parliament in central Athens… One group advocating a return to the drachma held a banner in front of parliament which read ‘Plan B, no to the euro, stop paying, lift the burden now.’ Fresh cuts in pensions and wages as well as tax rises follow a wave of austerity measures that have led the country to a sixth year of recession, with unemployment at a record 27%. The jobless rate among Greeks at age 15 to 24 now stands at 61.7%...”

Italy Watch:

February 22 – Bloomberg (James Hertling): “Italy’s economy will shrink again this year and unemployment will continue rising in 2014 to reach 12%, European Commission forecasts show. In its fourth recession since 2001, Italy’s gross domestic product will fall 1% this year after a 2.2% decline in 2012… That’s deeper than the 0.5% contraction it predicted in November.”

February 22 – Bloomberg (Andrew Frye): “Italy’s election campaign ends tonight with comic-turned-populist Beppe Grillo filling a Roman plaza with his cheering supporters and billionaire ex-Prime Minister Silvio Berlusconi making a televised appeal for voters to flout the austerity demanded by Germany. Grillo’s backers gathered from the early afternoon in front of the Basilica di San Giovanni, where, just up the hill from the Colosseum, the upstart politician’s 73-stop tour of Italy wraps up with a speech at 9 p.m. Berlusconi pulled out of his final rally in Naples due to an eye condition, joining incumbent Mario Monti and front-runner Pier Luigi Bersani in making their final appearances on television. Grillo is seeking to keep momentum for his anti-austerity, euro-skeptic platform, while Bersani has a last chance to make his pitch for budget rigor and wealth re-distribution resonate with recession-scarred voters. Investors say the four-way race may result in gridlock, much like a vote in Greece last May that required a second ballot six weeks later. ‘The pro-euro parties are losing ground in favor of populist forces,’ Riccardo Barbieri, chief European economist at Mizuho International Plc in London, said… ‘But, much like in the Greek case, there are no viable alternatives to austerity and structural reforms.’”

February 22 – Bloomberg (Andrew Frye and Chiara Vasarri): “Elisa Dalbosco says she lost her job when it came time for her former employer, a refugee shelter in northern Italy, to either offer her a permanent contract or let her go. ‘I have a college degree and it would have cost too much,’ said Dalbosco, who at 26 is now unemployed and poised to vote for self-described populist Beppe Grillo in elections on Feb. 24 and Feb. 25. Dalbasco’s disappointment shows why Italy is braced for its biggest political upheaval since 1994. Dalbosco, whose ballot five years ago went to an ally of front-runner Pier Luigi Bersani, won’t vote for anyone tied to incumbent Mario Monti because she says his austerity policies in a shrinking economy put the interests of banks ahead of everyone else’s.”

February 21 – Bloomberg (Andrew Frye and Chiara Vasarri): “Pier Luigi Bersani is traveling from Palermo to Naples with a spread-the-wealth message to fend off populist rival Beppe Grillo in two poor regions pollsters say are vital to gaining control of Italy’s Senate. With outright victory at stake in the Feb. 24-25 parliamentary election, Bersani, 61, is set to appear in Naples, capital of the southern region of Campania, after speaking to thousands in Sicily’s biggest city yesterday. He has covered the length of the Italian peninsula this week to rally voters in the three must-win regions of Lombardy, Sicily and Campania.”

February 19 – Bloomberg (Elisa Martinuzzi and Sonia Sirletti): “Banca Monte dei Paschi di Siena SpA may face as much as 1.5 billion euros ($2bn) more losses after misrepresenting derivatives transactions, a consumer group challenging the lender’s bailout alleged in a court filing. Monte Paschi, the world’s oldest lender, is being probed by regulators and prosecutors after using derivatives to hide losses. In one transaction that wasn’t fully disclosed to shareholders, the bank made a money-losing bet on the country’s government bonds in a structured deal disguised as a loan… The bank may have to classify that bet as a credit default swap and record a trading loss as the value of Italian bonds fell after the deal was put in place, consumer group Codacons, based in Rome, said in the court filing.”

Germany Watch:

February 22 – Bloomberg (Jana Randow): “German business confidence rose more than economists forecast to a 10-month high in February, adding to signs that Europe’s largest economy is gathering strength.”

Spain Watch:

February 22 – Bloomberg (Angeline Benoit and Ben Sills): “Spain’s budget deficit widened to 10.2% in 2012, the most in three years, swollen by the cost of bailing out the banking system and a shortfall in tax revenue, the European Commission forecast. Rescuing lenders including Bankia SA added 3.2 percentage points to the budget gap last year while rising unemployment and falling asset prices crimped government income… The deficit will narrow to 6.7% of gross domestic product this year before growing in 2014 to 7.2% -- more than twice its 2.8% target -- as temporary austerity measures expire.”

February 21 – UK Telegraph (Helia Ebrahimi): “Nationalized Spanish lender Bankia is expected to reveal a €19bn loss next week, the largest in the country’s corporate history. The bank has been struggling to close 1,100 branches and sell assets since its bailout in 2012.”

February 22 – Bloomberg (Ben Sills): “The graft allegations roiling the Spanish elite may edge closer to the head of state, King Juan Carlos, when his son-in-law and a senior palace official testify in court on corruption charges. Inaki Urdangarin, a former Olympic handball player married to Princess Cristina, is due to answer questions in Mallorca tomorrow as part of a private prosecution where he has been named as an official suspect on six counts including fraud, embezzlement and money laundering, a court spokeswoman said.”