Saturday, December 6, 2014

Weekly Commentary, March 1, 2013: Italy and Ro, Ro

It was a relatively quiet Monday, with the Dow flirting with all-time highs. Initial reports from the Italian election had the front-running coalition, led by Pier Luigi Bersani, coasting to victory. Italian 10-year bonds were rallying sharply, with yields sinking as much as 27 bps to 4.17%. The euro was gaining about 1%, trading above 1.33 versus the dollar and above 125 against the yen. Basically, it was business as usual for highly speculative global markets, as the bulls chuckled “told you so!” That is, before all hell about broke loose in the currencies.

Various exit poll projections began painting a quite different picture of what had transpired with Italy’s electorate. The presumptive Prime Minister’s (Bersani) left-leaning coalition was not receiving the expected support. Instead, the big election surprise was the strong performance of comedian Beppe Grillo’s Five Start Movement. Worse yet, Silvio Berlusconi, the disgraced former Prime Minister not long ago given up for dead, was proving himself the cagey cat with nine lives. His right-leaning coalition was doing better-than-expected, with a chance to deny Bersani (perhaps even in alliance with Monti) a majority in Italy’s Senate. And, perhaps worst of all for European leaders and the markets, Caretaker Prime Minister Mario Monti’s coalition was looking like an election disaster. It became a distinct possibility that no party would garner sufficient control in the two houses of Parliament to appoint a leader for a new Italian government.

Suddenly, complacency gave way to trepidation of a “hung parliament” and the potential for an “ungovernable” Italy (the world’s third largest debtor nation!). At least in the currencies, the reaction was rather swift and ferocious. After trading above 1.330, the euro sank to 1.305 to the dollar by the end of the day. The really stunning move, however, was in the euro/yen. After trading above 125 in the morning, the euro/yen “cross” traded below 119 by late-afternoon. The yen rallied more than 4% against the euro and, curiously, almost 3% against the dollar.

The Wall Street Journal and others have highlighted the recent big macro hedge fund profits achieved by betting aggressively against the yen. Monday’s Italian election-induced reversal in the yen kicked the yen bears in the teeth. It will now be interesting to see if the yen reversal marks a key inflection point for the global “risk on” backdrop that has captivated the investing and speculating world in recent months – and provoked ebullient predictions of a new bull market.

So, one might ask, why is the Italian election a big deal for Europe, the euro, the yen, global “risk on” and the supposed “new bull” in U.S. equities? This past summer, the Draghi Plan (Outright Monetary Transactions/OMT) singlehandedly transformed European securities from the leveraged speculating communities’ preferred shorts to their must-have longs. This reversal of speculative finance (“hot money”) dramatically altered financial conditions throughout Europe, while strongly bolstering the flagging euro currency (not to mention confidence in European financial institutions). Importantly, Draghi (with help from the Fed and global central bankers) removed the near-term tail-risk catalyst impeding global “risk on” - and held a potentially problematic global systemic crisis at bay.

Crisis risk in Europe was viewed as having been taken off the table, while the Fed’s $85bn monthly QE would also pressure the dollar and generally support speculation and inflating global risk markets (pro-“risk on”). Meanwhile, the new Abe government in Japan was seen supporting radical monetary stimulus to weaken the yen and jumpstart the moribund Japanese economy. For more than two years, the prospect of a bout of European-induced “risk off” had bolstered the safe haven appeal of the yen. Now, the big sophisticated “macro” hedge funds saw their long-awaited opportunity for a big one-way bearish play against Japan’s susceptible currency. The Japanese wanted their currency lower and global risk markets were in a favorable state of “risk on” that itself created an overhang pressuring the yen (along with other perceived safe havens). At the same time, selling yen to finance higher yielding securities in stronger currencies also worked to bolster global “risk on.”

On the back of the Draghi Plan backstop and resulting “risk on,” Italian yields dropped from August highs of 6.5% to recent lows of 4.13%. Spain’s 10-year yields sank from 7.60% to a low of 4.87%. For Portugal, yields collapsed from about 14% to less than 6%. Similar drops profoundly altered the financial environment for Ireland and even Greece – if not economic fundamentals throughout the region.

After trading as low as 4.17% Monday, Italian 10-year yields surged as high as 4.93% Tuesday when the election outcome had become clear. Italy bond yields closed Friday at 4.79%, up 34 bps for the week. Spain’s 10-year yield traded as high as 5.59% Tuesday, before ending the week down 5 bps to 5.10%. Portuguese yields traded as high as 6.54% before closing the week 8 bps higher at 6.30%.

Post-election headlines have been telling: From the Financial Times: “Fears ECB Bond Scheme Has Its Weakness;” “Italian Poll Disarms ECB’s Bazooka;” “Voters in South Europe Grow Weary of Austerity;” and “The Vandal that Wants to Sack Rome’s Politicians.” And from Reuters: “Italy Election Punches Hole in ECB’s Euro Defenses” and “Grim Jobless, Debt Figures Underscore Italy’s Crisis.”

Thursday from Reuters (Paul Carrel): “A dramatic anti-austerity vote leaves Italy lying outside the fortress the European Central Bank constructed around the euro zone last year and vulnerable to a market attack. This week's election leaves slim prospects for a durable, reform-minded government in Rome and exposes a flaw in the bond-buying defense plan the ECB put together last September - a weakness that could see the euro zone crisis roar back to life. After vowing to do ‘whatever it takes’ to save the euro, the ECB’s Italian chief Mario Draghi launched a plan - dubbed Outright Monetary Transactions (OMT) - in September which promised potentially unlimited buying of a struggling country’s bonds… The catch is Draghi is ready to do whatever it takes ‘within our mandate’. To satisfy this caveat, the scheme requires a country whose bonds the ECB buys to sign up to a European aid program with debt-cutting conditions attached.”

The markets have confidently dismissed the ECB’s “conditionality” clause. When Draghi stated we’ll do “whatever it takes” while staying “within our mandate,” the markets heard “whatever it takes” and immediately stopped listening. The markets view “conditionality” as having been necessary at the time to garner support at the ECB for a commitment to open-ended market intervention. The assumption is that Draghi would resort to aggressive market intervention as necessary to support European bonds and the euro – one way or another. This may be way too complacent.

Reuters quoted ECB Executive Board member Benoit Coeure: “If yields go up because of political events, there is not much the ECB can do, that’s not related to monetary policy whatsoever.” Also from Reuters: “Sources close to the ECB are conscious of the risk of contagion from Italy to Spain, but insist it will not intervene to help Italy if it does not have a credible government capable of the reforms required for support in the debt market.” Facing a potentially difficult situation, the Italian Draghi this week stated, “We do not act to help governments. We act to help maintain the flow of credit to real firms and households. Governments need to address the structural problems in their economies.”

The Bundesbank has been adamantly opposed to the OMT market backstop from day one. Mr. Weidmann has been outspoken in his questioning the legality of the ECB providing monetary financing (“printing” and bailouts) for troubled debtor countries.

The backdrop turns further complicated after the strong anti-German tone to Italian campaign rhetoric. The Italian electorate essentially voted against EU imposed “austerity” they believe is being dictated by Berlin. Berlusconi and Grillo ran campaigns critical of both the loss of sovereignty to European mandates and the euro currency more generally (Grillo has called for a public referendum on the euro). Friday from Bloomberg: “CDU [Merkel’s party] lawmaker Klaus-Peter Willsch says if the majority of Italians cannot be convinced to stand by EMU rules, the country must be allowed to return to its own currency, Handelsblatt says… Monetary union will only survive if it benefits all its members.” President Napolitano canceled a scheduled meeting with the candidate running against Chancellor Merkel in Germany’s September elections, after Peer Steinbrueck was quoted as saying he was “horrified that two clowns won the election.” One can ponder the outcome if Germany’s Bundestag is ever called upon to vote for what would be a very large bailout package for Italy.

There are serious long-term ramifications for the rise of anti-European integration populism in Italy and throughout Europe. For now, the pressing issue is whether Italy can cobble together a functioning government. Grillo’s independent Five Star Movement actually received the most votes of any individual party. He has nothing but acrimony for the establishment – essentially calling for the downfall of the traditional dominating political parties. Grillo has had particularly harsh words for Bersani, while stating that he will not join a coalition with either Bersani or Berlusconi. Meanwhile, Bersani and Berlusconi despise each other. And new corruption charges against Berlusconi have his supporters livid. New elections may be necessary, although it doesn’t appear Bersani, Berlusconi or Grillo prefer that route for now. Complicating matters, the term of Italy’s President (Giorgio Napolitano) – who has a traditional role dissolving parliaments, calling for new elections and brokering alliances – ends next month. Some type of “loose” – and likely dysfunctional – coalition government seems likely.

Beyond the short-term, there is increasing risk that the Italian people at some point completely reject “austerity” and call for a return of the lira. Friday’s data highlighted the problem. The Italian unemployment rate was up another 40 basis points in February to a worse-than-expected 11.7%, the high since 1992 (youth unemployment almost 40%). Italy’s PMI Manufacturing index dropped 2 points to a worse-than-expected 45.8. In Italy and throughout the euro-zone, the lack of economic response to dramatically loosened financial conditions and strong securities markets has been striking. Friday data had euro-zone unemployment up to a record high 11.9% - and counting.

Disconcerting economic developments were not limited this week to continental Europe. Talk turned to “triple dip recession” after the U.K. manufacturing index for February unexpectedly dropped to 47.9. Canada reported the weakest GDP growth (0.6%) in almost two years. China’s manufacturing indices were weaker-than-expected, perhaps indicating an economy more vulnerable than generally assumed. There were also more rumblings of rising home prices and Chinese resolve in tightening mortgage finance. India reported weaker-than-expected Q4 GDP (4.5% vs. estimates of 4.9%). Meanwhile, automatic “sequester” budget cuts went into effect Friday here in the U.S. And whether it is the U.S., China, India, Brazil or “developing” economies more generally, I remain troubled by this dynamic of marginal economic growth in the face of ongoing rapid Credit expansion. I believe this creates heightened vulnerability to a reemergence of global de-risking/de-leveraging dynamics.

The world’s markets have enjoyed six months of powerful “risk on” gains. There has been a veritable flood of “money” into equities and global risk markets more generally. In the U.S., in particular, talk of a new bull market has coaxed previously cautious holdouts back into equities. And I have no reason to believe the bulls will give up their strong market position/domination without one heck of a fight. Yet markets do have an inflection point – “risk on” succumbing to “risk off” – tone to them.

Indicative of a change in trend, volatility has become more pronounced throughout the markets. It has become particularly treacherous throughout the currencies. And after gaining almost 10% in January, Italian stocks now post a 2013 decline of 3.7%. With the exception of the U.K., most European bourses have given back much or all of early-year advances. The same can be said for many key “developing” markets. India’s Sensex index is now down 2.6% y-t-d. Brazil’s Bovespa has lost 6.7%, while Mexico’s Bolsa is up just 70 bps. Most “emerging” currencies were under pressure this week - and thus far for 2013 overall. Eastern Europe’s equities and currencies were on the defensive again this week. The Goldman Sachs Commodities index fell 2.4% this week (up 0.3% y-d-t) and is now about 5% below mid-February trading highs.

U.S. stocks again held their own this week, as the chasm between fundamental prospects and securities market prices widens further. “Safe haven” Treasuries and bunds (and gilts?) enjoyed notably robust demand this week. The bulls were pleased with assurances that chairman Bernanke is not about to flinch on his “money” printing operation. And, you know, I see no reason not to expect next week to provide another “new and exciting adventure” in the workings of speculative “high” finance.

For the Week:

In a volatile week for equities and risk markets, the S&P500 added 0.2% (up 6.5% y-t-d), and the Dow gained 0.6% (up 7.5% y-t-d). The Banks slipped 0.6% (up 5.6%), and the Broker/Dealers fell 1.5% (up 12.2%). The Morgan Stanley Cyclicals gained 0.5% (up 7.2%), and Transports rose 0.7% (up 12.8%). The Morgan Stanley Consumer index increased 0.3% (up 10.9%), and the Utilities rose 0.8% (up 6.3%). The S&P 400 MidCaps declined 0.5% (up 7.6%), and the small cap Russell 2000 slipped 0.2% (up 7.7%). The Nasdaq100 gained 0.4% (up 3.3%), and the Morgan Stanley High Tech index added 0.2% (up 5.8%). The Semiconductors were unchanged (up 10.7%). The InteractiveWeek Internet index increased 0.2% (up 9.6%). The Biotechs surged 3.5% (up 11.7%). With bullion down $5, the HUI gold index fell 2.2% (down 20.8%).

One-month Treasury bill rates ended the week at 6 bps and 3-month rates closed at 10 bps. Two-year government yields were down about a basis point to 0.24%. Five-year T-note yields ended the week down 8 bps to 0.74%. Ten-year yields sank 12 bps to 1.84% (low since 1/23). Long bond yields fell 10 bps to a one-month low 3.05%. Benchmark Fannie MBS yields were down 10 bps to 2.52%. The spread between benchmark MBS and 10-year Treasury yields widened another 2 bps to a five-month high 68 bps. The implied yield on December 2014 eurodollar futures fell another 6 bps to 0.525%. The two-year dollar swap spread was down one to 14 bps, while the 10-year swap spread rose one to 9 bps. Corporate bond spreads ended the week mixed. An index of investment grade bond risk was unchanged at 85.5 bps. An index of junk bond risk declined 4 to 432 bps.

Debt issuance was pretty strong. Investment grade issuers included Freeport-McMoran $6.5bn, Pepsico $2.5bn, Coca-Cola $2.5bn, United Health $2.2bn, AT&T $2.0bn, Fifth Third Bank $1.3bn, Caterpillar $1.1bn, Philip Morris $1.85bn, Con Ed New York $700 million, Spectra Energy Capital $650 million, Motorola $600 million, Praxair $500 million, Cytec Industries $400 million, Mayo Clinic $300 million, Noranda Aluminum $175 million, Shands Teaching Hospital $125 million, and Maimonides Medical Center $100 million.

Junk bond funds saw outflows of $267 million (from Lipper), their fourth straight week of negative flows. Junk issuers included Equinix $1.5bn, CCO Holdings $1.0bn, First Energy $1.5bn, Cedar Fair $500 million, Donnelley & Sons $450 million, Lexmark International $400 million, TRW Automotive $400 million, Isle of Capri Casinos $350 million, Huntsman Intl $250 million, Associated Asphalt $185 million, and Meritage Homes $175 million.

Convertible debt issuers included Radian Group $400 million and Redwood Trust $250 million.

International issuers included National Bank Australia $1.75bn, Council of Europe $1.25bn, BNP Paribas $1.0bn, ING Bank $1.0bn, Rogers Communications $1.0bn, Korea Housing Finance $500 million and Eole Finance $190 million.

Italian 10-yr yields this week jumped 34 bps to 4.78% (up 28bps y-t-d). Spain's 10-year yields declined 5 bps to 5.08% (down 19bps). German bund yields sank 16 bps to 1.41% (up 9bps), and French yields fell 12 bps to 2.11% (up 11bps). The French to German 10-year bond spread widened 4 to 70 bps (wide since November). Ten-year Portuguese yields rose 6 bps to 6.22% (down 53bps). The Greek 10-year note yield slipped 3 bps to 10.80% (up 33bps). U.K. 10-year gilt yields were down 24 bps to 1.87% (up 5bps).

Italy's FTSE MIB fell 3.4% (down 3.7% y-t-d). The German DAX equities index recovered 0.6% for the week (up 1.3%). Spain's IBEX 35 equities index was little changed (up 0.2%). Japanese 10-year "JGB" yields dropped 7 bps to 0.65% (down 13bps). Japan's volatile Nikkei jumped 1.9% (up 11.7%). Emerging markets were mixed. Brazil's Bovespa equities index gained 0.3% (down 6.7%), and Mexico's Bolsa rose 0.3% (up 0.7%). South Korea's Kospi index increased 0.4% (up 1.5%). India’s Sensex equities index dropped 2.1% (down 2.6%). China’s Shanghai Exchange recovered 2.0% (up 4.0%).

Freddie Mac 30-year fixed mortgage rates declined 5 bps to 3.51% (down 39bps y-o-y). Fifteen-year fixed rates slipped a basis point to 2.76% (down 41bps). One-year ARM rates were down one basis point to 2.64% (down 8bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates up 10 bps to 4.24% (down 43bps).

Federal Reserve Credit jumped another $14.2bn to a record $3.078 TN. Fed Credit expanded $292bn in 21 weeks. Over the past year, Fed Credit jumped $169bn, or 5.8%.

Global central bank "international reserve assets" (excluding gold) - as tallied by Bloomberg – were up $748bn y-o-y, or 7.3%, to a record $10.987 TN. Over two years, reserves were $1.646 TN higher, for 18% growth.

M2 (narrow) "money" supply dropped $23.7bn to $10.413 TN. "Narrow money" has expanded 6.6% ($641bn) over the past year. For the week, Currency increased $3.6bn. Demand and Checkable Deposits fell $26.6bn, while Savings Deposits gained $4.7bn. Small Denominated Deposits declined $2.0bn. Retail Money Funds fell $3.5bn.

Money market fund assets increased $5.8bn to $2.663 TN. Money Fund assets have increased $10.6bn y-o-y, or 0.4%.

Total Commercial Paper outstanding slipped $1.8bn the week to $1.061 TN CP declined $64bn over the past four weeks, while expanding $134bn, or 14.4%, over the past year.

Currency and 'Currency War' Watch:

The U.S. dollar index gained 1.0% to 82.31 (up 3.2% y-t-d). For the week on the downside, the South African rand declined 2.2%, the Norwegian krone 1.6%, the New Zealand dollar 1.6%, the Swiss franc 1.4%, the euro 1.3%, the Danish krone 1.3%, the Australian dollar 1.1%, the British pound 0.8%, the Canadian dollar 0.5%, the Mexican peso 0.4%, the Brazilian real 0.4%, the Swedish krona 0.3%, the Singapore dollar 0.2%, and the Japanese yen 0.2%. The South Korean won and the Taiwanese dollar were little changed.

Commodities Watch:

The CRB index declined 1.1% this week (down 1.6% y-t-d). The Goldman Sachs Commodities Index fell 2.4% (down 0.6%). Spot Gold dipped 0.3% to $1,576 (down 5.9%). Silver was little changed at $28.49 (down 5.7%). April Crude dropped $2.45 to $90.68 (down 1%). April Gasoline sank 4.2% (up 13%), while March Natural Gas jumped 3.2% (up 3%). May Copper fell 1.4% (down 4%). March Wheat slipped 0.2% (down 8%), while March Corn jumped 4.9% (up 4%).

U.S. Bubble Economy Watch:

March 1 – Bloomberg (Katherine Burton): “Stan Druckenmiller, one of the best performing hedge-fund managers of the past three decades, has a warning for the youth of America: Don’t let your grandparents steal your money. Druckenmiller, 59, said the mushrooming costs of Social Security, Medicare and Medicaid, with unfunded liabilities as high as $211 trillion, will bankrupt the nation’s youth and pose a much greater danger than the country’s $16 trillion of debt currently being debated in Congress. ‘While everybody is focusing on the here and now, there’s a much, much bigger storm that’s about to hit,’ Druckenmiller said… ‘I am not against seniors. What I am against is current seniors stealing from future seniors.’ Druckenmiller said unsustainable spending will eventually result in a crisis worse than the financial meltdown of 2008, when $29 trillion was erased from global equity markets. What’s particularly troubling, he said, is that government expenditures related to programs for the elderly rocketed in the past two decades, even before the first baby boomers, those born in 1946, started turning 65.”

March 1 – Wall Street Journal (Ruth Simon and Rachel Louise Ensign): “The number of young borrowers who have fallen behind on their student loan payments has soared over the past four years, the Federal Reserve Bank of New York said… According to the report, 35% of people under 30 who have student loans were at least 90 days late on their payments at the end of last year, up from 26% in 2008 and 21% at the end of 2004. The new figures, which exclude borrowers who are still in school or aren't yet required to make payments, show that young Americans are having a tougher time repaying college loans as debt loads increase and job prospects remain shaky… All told, 43% of 25-year-olds had student debt in the fourth quarter of 2012, up from about 33% in the fourth quarter of 2008.”

February 28 – Bloomberg (Janet Lorin): “More people borrowing for education are failing to pay off their loans. Almost a third of student-loan borrowers in repayment were delinquent at the end of last year, up from about a quarter in 2008 and 20% in 2004… The amount of educational debt, which includes federally backed and private loans taken out by students and parents, has almost tripled in the past eight years to $966 billion… With costs to attend college continuing to outpace the inflation rate, more borrowers are struggling to pay. That makes it harder for people -- especially those between 25 and 30 -- to secure other types of credit, including home mortgages. ‘Student loan debt is the only kind of household debt that continued to rise during the Great Recession and has now the second-largest balance after mortgage debt,’ wrote Donghoon Lee, an economist at the New York Fed. ‘With delinquent student debt, mortgage origination is very difficult. The mortgage origination gap across the size of student debt has declined between 2005 and 2012.”

February 28 – Bloomberg (Craig Trudell): “New car buyers, shunned by lenders just four years ago, now are benefiting from historically low interest rates and more-available credit, pacing a U.S. auto market that is hovering near pre-recession levels. General Motors Co. and AutoNation Inc., respectively the top-selling automaker and dealership group in the U.S., are among companies pointing to ample financing for new car and truck purchases pushing sales comfortably past 15 million this year, the highest since 2007. ‘We have the best financing available for our customers ever,’ Mike Jackson, the chief executive officer of… AutoNation, told a J.D. Power & Associates conference…”

Federal Reserve Watch:

February 28 – Wall Street Journal (Victoria McGrane): “The Federal Reserve is potentially years away from ending its easy-money policies and tightening credit, but Chairman Ben Bernanke said central bank officials could alter their strategy for what to do when that time comes. Testifying on Capitol Hill Wednesday, Mr. Bernanke said the Fed could decide to sell its mortgage-backed securities more slowly than previously planned, or even avoid selling them altogether and instead allow them to mature.’ In June 2011, the Fed had said its exit strategy would be to sell off those securities over a period of three to five years, after the central bank started raising short-term interest rates.”

February 27 – Dow Jones (Victoria McGrane and Corey Boles): “Federal Reserve Chairman Ben Bernanke offered a strong defense of his record in the face of sharp criticism from a Senate Republican. Sen. Bob Corker, a critic of the Fed's easy-money policies, asked Mr. Bernanke if he has any concern about how the Fed is ‘throwing seniors under the bus’ and punishing savers. Mr. Bernanke shot back that the Fed is worried about the effect of long-term unemployment and the damage being wrought by people being kept out of the labor force for long periods of time. Mr. Bernanke visibly bristled at Mr. Corker's description of him as the biggest monetary ‘dove’ since World War II. While he may be considered a dove in some aspects, his inflation record is one of the best among Fed chiefs in that period, Mr. Bernanke said.”

February 27 – Dow Jones (Victoria McGrane and Corey Boles): “Federal Reserve Chairman Ben Bernanke said… that he doesn’t see much evidence of overheating in equity markets. Responding to a question during testimony in front of the Senate Banking Committee, Mr. Bernanke explained his view by noting that corporate earnings are very high and equity holders are still being risk adverse as measured by equity risk premiums, which are above normal. He said the Fed is actively monitoring different asset markets for signs of overheating… Fed officials are also asking themselves that if they are wrong and there are bubbles out there, what are the broader implications if they burst?”

February 26 – Bloomberg (Craig Torres, Josh Zumbrun and Caroline Salas Gage): “Federal Reserve Chairman Ben S. Bernanke’s efforts to rescue the economy could result in more than a half trillion dollars of paper losses on the central bank’s books if interest rates rise abruptly from recent levels. That sum is the difference between the value of securities in the Fed’s portfolio on Dec. 31 and what they may fetch in three years, according to data compiled by MSCI Inc. of New York for Bloomberg News... MSCI sees the market value of Fed holdings shrinking by $547 billion over three years under an adverse scenario that includes an economic contraction and rising inflation.”

February 28 – MarketNews International (Claudia Hirsch): “Dallas Federal Reserve Bank President Richard Fisher… said he would like to see the central bank begin scaling back its bond buying program immediately. ‘I would argue for tapering now,’ Fisher said… ‘The housing market's back, and I think it needs less assistance.’ He said he favors immediately reducing the Fed's purchases of both mortgage-backed securities and U.S. Treasury securities, which currently total $85 billion per month. ‘I just don't think the benefits are worth the costs… I would begin now.’”

Fiscal Watch:

March 1 – Bloomberg (Julianna Goldman and Margaret Talev): “President Barack Obama ordered the start of $85 billion in government spending cuts, beginning a potentially decade-long wave of belt-tightening that risks curbing U.S. economic growth this year. The White House released the order tonight, the deadline set by a law passed two years ago to avoid a debt default, and the Office of Management and Budget sent Congress a detailed list of program cuts. The reductions’ impact will become clear over the next several weeks, as agencies inform affected government contractors and notify employees about furloughs, most of which wouldn’t begin until some time in April."

Global Bubble Watch:

March 1 – Bloomberg (Matthew Leising): “Jim Casey, co-head of global debt capital markets at JPMorgan Chase & Co., says 2012 was so spectacular that it deserves a moniker: the Year of Refinancing. The cost of borrowing for companies fell to a record low of 3.24% last year, spurring the flood of deals. With rates so depressed, corporations, which typically refinance debt that matures in one or two years, issued replacement bonds for credit that’s due in four years. Casey says that doubled the potential number of clients for bankers… Corporate and sovereign borrowers issued $3.69 trillion in debt in 2012, generating $19.2 billion of fees for banks, both records… Investor demand for debt was so strong that banks were able to revive collateralized loan obligations, the bundles of securities that helped inflate the credit bubble that burst in 2008. About $55 billion in CLOs were sold last year compared with $13 billion in 2011…”

February 25 – Bloomberg (Kristen Haunss and Cecile Gutscher): “Residential Issuance of loans with fewer safeguards that help finance buyouts is poised to reach a record this month, boosted by investor demand. Companies in the U.S. have received $25 billion of covenant-light loans from non-bank lenders after $26.6 billion last month, which exceeded the February 2007 peak of $25.3 billion, according to Standard & Poor’s… The $13.8 billion in debt backing Dell Inc.’s buyout by Silver Lake Management LLC and Chief Executive Officer Michael Dell will include loans without these protections…. Buyout firms are reaping benefits from negotiating looser financing terms that weaken covenants preventing companies from loading up on debt. Investors are pouring record amounts of money into funds that buy riskier types of loans as the Federal Reserve maintains its policy of keeping benchmark interest rates near zero for a fifth year.”

March 1 – Bloomberg (Krista Giovacco and Sridhar Natarajan): “The riskiest U.S. companies are tapping institutional investors for loans at the fastest pace ever, as some Federal Reserve governors warn of excesses developing in the market. Borrowers obtained more than $88 billion in loans last month from non-bank lenders, exceeding the pre-crisis peak of $55 billion in April 2007 and more than tripling the $26.7 billion received in January, according to JPMorgan Chase & Co.”

February 25 – Bloomberg (David Carey and Richard Bravo): “Five years after their record-setting leveraged buyout of Energy Future Holdings Corp., KKR & Co. and TPG Capital are moving closer to a possible new milestone: the biggest bankruptcy of a private equity-backed company since the failure of Chrysler Group LLC. Texas Competitive Electric Holdings, the utility’s wholesale power unit, faces an October 2014 deadline on the maturity of a portion of its loans.”

February 27 – Bloomberg (Sarika Gangar): “Company bond sales worldwide are on pace for the slowest February since 2008 as the prospect of rising interest rates in the U.S. and persistent recession in Europe quashes the busiest start to a year on record.”

Global Credit Watch:

February 27 – Financial Times (Peter Spiegel in Brussels and Michael Steen): “When the European Central Bank unveiled its new programme to buy eurozone bonds last September, EU officials were quick to tout its differences from previous schemes: It would not only be unlimited, but also conditional on a struggling country living up to Brussels-mandated economic reforms. In the wake of this week’s chaotic Italian elections, some investors and analysts are now concerned that such strings, once hailed as the programme’s strength, may in fact be its Achilles heel. With a long and potentially unstable period ahead for Rome as it attempts to cobble together a new government, Italy may be without the kind of credible policy decisions that are preconditions to gaining access to ECB assistance. ‘The ECB has pledged to cut off the tail risk of a eurozone implosion with the (bond-buying programme), but it is not an Anglo-Saxon bank and it will want to have a focus on conditionality,’ said Andrew Balls, European managing director for Pimco… ‘The gridlock in Italy is a reminder of the political obstacles to stabilization of the eurozone.”

February 27 – Bloomberg (David Goodman and Emma Charlton): “Mario Draghi said last month there is ‘positive contagion’ in Europe’s financial markets. The slide in higher-yielding bonds following Italy’s elections proves negative contagion is alive and well. Italian bonds slumped yesterday, with 10-year yields rising the most in 14 months, as the majority of voters rejected the austerity program of current Prime Minister Mario Monti and left the country in a political vacuum. Spanish 10-year yields jumped the most since August and Portugal’s two-year rates reached the highest since December on concern a political backlash will scuttle more than three years of effort to contain the debt crisis.”

February 27 – Bloomberg (Matthew Brockett): “European Central Bank President Mario Draghi said the bank is ‘far’ from considering an exit from its stimulus measures. While the ECB’s balance sheet may naturally shrink as confidence returns to markets and banks repay emergency loans, ‘we are far from having an exit in mind,’ Draghi said…”

March 1 – Bloomberg (Kati Pohjanpalo): “Italy’s political gridlock following its inconclusive elections risks unraveling years of crisis management, Finnish Prime Minister Jyrki Katainen said. Failure to commit to responsible fiscal policies could reignite market turmoil and result in losses that would be ‘too terrible,’ Katainen said… ‘I don’t even want to consider that.’”

February 28 – Bloomberg (Rodney Jefferson): “The bond market, aided and abetted by the European Central bank, is letting politicians slide on economic reforms. The drop in Spanish and Italian borrowing costs since the ECB said in September it would support troubled euro members took the heat off governments without tying them to the conditions of the mooted bond-buying program, said Mike Turner, head of strategy at Aberdeen Asset Management Plc…. ‘It’s been revealed that the emperor has no clothes,’ said Turner. ‘2013 was always going to be when politicians influence markets rather than markets influencing politicians.”

China Bubble Watch:

March 1 – Bloomberg: “Two Chinese manufacturing indexes showed a slower-than-estimated pace of expansion, a signal the nation’s economic recovery may be losing steam. The official Purchasing Managers’ Index was 50.1 in February, the weakest in five months… A separate gauge from HSBC Holdings Plc and Markit Economics dropped to a four-month low of 50.4 from 52.3… Contractions at small and mid-sized manufacturers in the official survey underscore the headwinds China’s new government will face when it takes power this month after the annual session of parliament. Li Keqiang, set to become premier, faces the task of sustaining a rebound in growth without triggering a resurgence in inflation and banks’ bad debts.”

March 1 – Bloomberg: “China told its central bank to raise down-payment requirements and interest rates for second-home mortgages in cities with ‘excessively fast’ price gains as authorities step up efforts to cool the property market. The central banks’ regional branches may implement the measures in accordance with the price-control targets of local governments, the central government said… Cities facing ‘relatively large’ pressure from rising housing prices must further tighten home-purchase limits, according to the statement. China’s new home prices rose for a ninth straight month in February, SouFun Holdings Ltd. said today, 10 days after Premier Wen Jiabao called on local authorities to ‘decisively’ curb real estate speculation…”

March 1 – Bloomberg: “China’s new home prices rose for a ninth month in February, adding to concerns that the government may issue new property tightening policies. Prices climbed 0.8% to 9,893 yuan ($1,590) per square meter (10.76 square feet) from January, SouFun Holdings Ltd., the country’s biggest real estate website owner, said… ‘The risks for the government to add on more tightening measures are increasing,’ said Johnson Hu, a Hong Kong-based property analyst at CIMB-GK Securities Research. ‘But the policy tightening will be a gradual process and home prices will continue to rise in the coming months.’”

February 28 – Bloomberg (Craig Trudell): “Almost half of China’s provinces are setting their growth sights lower in the wake of the central government’s emphasis on the quality of expansion over speed, a sign of an increased focus on tackling rising debt. Fourteen provinces have set lower targets for gross domestic product expansion this year than in 2012 and the other 17 left their goals unchanged, according to Nomura Holdings… Scaling back regional politicians’ growth-at-any-cost attitudes may limit China’s rebound from its weakest expansion in 13 years… ‘In the future, the central government may look at more indicators, including pollution and debt, in assessing local officials,’ said Zhang Zhiwei, chief China economist at Nomura… and a former researcher for the International Monetary Fund. ‘You can’t continue the traditional way of accumulating heavy debts to push up GDP in your term and then leave the trouble to your successor.’”

February 28 – Bloomberg: “China has determined an official list of candidates for its new government and main political advisory body… The list will be reviewed by the upcoming session of the National People’s Congress, which begins next week, CCTV said… Premier Wen Jiabao will formally announce on March 5 this year’s country-wide economic targets when he delivers his final annual work report to the legislature…”

February 28 – Bloomberg: “Beijing’s air pollution climbed to hazardous levels days before the national legislature opens its annual meeting, drawing new attention to environmental degradation that the government has promised to address. Concentrations of PM2.5, fine particles that pose the greatest health risk, rose to 469 micrograms per cubic meter at 10 a.m. near Tiananmen Square… The World Health Organization recommends 24-hour exposure to PM2.5 of no higher than 25.”

February 25 – Bloomberg (Kelvin Wong, Stephanie Tong and Eleni Himaras): “Residential property sales in Hong Kong fell after the government doubled a sales tax, saying bubble risks are spreading in the world’s most expensive place to buy an apartment. Secondary sales for the 15 most popular housing estates fell 15% at the weekend from the previous weekend…”

Japan Watch:

March 1 – Bloomberg (Toru Fujioka and Keiko Ujikane): “The Bank of Japan may add monetary stimulus as early as April as prospective governor Haruhiko Kuroda looks to demonstrate a more aggressive approach to tackling 15 years of falling prices. Kuroda, the current Asian Development Bank president, would take office after Governor Masaaki Shirakawa retires March 19, if confirmed by Parliament…”

India Watch:

March 1 – Bloomberg (Unni Krishnan and Kartik Goyal): “India’s government raised spending on the poor to court support before elections, relying on higher taxes, asset sales and subsidy cuts to trim the widest fiscal deficit in major emerging nations as economic growth slows. The country targets a shortfall of 4.8% of gross domestic product in the 12 months starting April 1, and achieved 5.2% in 2012-2013, Finance Minister Palaniappan Chidambaram said… Bonds fell the most in seven months as he unveiled record borrowing to finance the excess of expenditure over revenue.”

Global Economy Watch:

March 1 – Bloomberg (Greg Quinn): “Canada’s economic growth stagnated in the fourth quarter as gains in investment and consumer spending were blunted by companies scaling back inventories, suggesting there’s little momentum early this year. Gross domestic product grew at a 0.6% annualized pace from October to December, the slowest since the second quarter of 2011…”

Europe Watch:

February 27 – Bloomberg (Helene Fouquet): “French President Francois Hollande’s promise to create jobs by the end of the year is turning into his Achilles heel. Jobless claims rose last month to a 15-year high at 3.17 million, the labor ministry said… The increase brings such claims close to the country’s historic peak in January 1997… with no signs they’ll fall any time soon. While the Socialist president is falling behind on nearly every economic pledge he’s made for 2013 -- from growth to shrinking the budget deficit -- nothing is heaping more criticism on him, especially from his own supporters, than his inability to spur job creation as he promised.”

February 27 – Bloomberg (Eddie Buckle): “Britain’s economy shrank in the fourth quarter as exports fell and an uncertain outlook depressed company investment. Gross domestic product declined 0.3% from the three months through September…”

March 1 – Bloomberg (Scott Hamilton): “U.K. manufacturing unexpectedly shrank in February as new orders plunged, reviving concerns that the economy may slip into a triple-dip recession. A gauge of factory activity plunged to 47.9, compared with a revised 50.5 in January… Separate reports today showed euro-area manufacturing shrank last month, while Chinese factory growth weakened.”

Italy Watch:

March 1 – Bloomberg (Lorenzo Totaro): “Italy’s joblessness rose to the highest level since at least 1992 in January as businesses refrained from hiring after the country’s recession deepened. The unemployment rate rose to 11.7% from a revised 11.3% in December… The January rate was higher than the 11.3% median of six estimates… Unemployment remained above 10% for a 12th month. Italy’s economy shrank 1% in the fourth quarter as the recession deepened more than forecast amid a fall in consumer spending and investments by companies.”

February 26 – Bloomberg (James G. Neuger): “Silvio Berlusconi may have the last laugh -- at Europe’s expense. Once the subject of German Chancellor Angela Merkel’s barely suppressed titters, the former Italian leader roared back from the political wasteland in yesterday’s election, blocking the formation of a new Italian government and fracturing the euro zone’s brittle newfound stability. The billionaire’s resurrection coupled with the emergence of comedian-turned-politician Beppe Grillo risked igniting anti- austerity forces in southern Europe’s depressed economies, overturning the German-led crisis-management formula and renewing doubts about popular backing for the euro. ‘This is a catastrophe for Europe,’ Luxembourg Foreign Minister Jean Asselborn said… ‘There are a lot of people in Italy, in Europe, who think that Europe is to blame for Italy’s problems. Second, I have very serious doubts that populism would make it possible to find a solution to create stability in Italy.’”

March 1 – Bloomberg (Chiara Vasarri): “Italian Democratic Party leader Pier Luigi Bersani ruled out an alliance with rival Silvio Berlusconi and said he plans a program of reforms to attract votes from all political parties, in an interview with la Repubblica. A broad coalition government including Berlusconi’s People of Liberty party ‘would be the death’ of the Democratic Party, Bersani said… adding that he will ask other parties to support his program in parliament. ‘The hypothesis of a broad coalition doesn’t exist and will never exist,’ he said.”

March 1 – Bloomberg (Elisa Martinuzzi and Sonia Sirletti): “Banca Monte dei Paschi di Siena SpA, which yesterday received a 4.1 billion-euro ($5.3bn) government bailout, sued Deutsche Bank AG and Nomura Holdings Inc. over two derivatives that soured. Monti Paschi filed separate suits in Florence seeking damages over two contracts from 2008 and 2009 dubbed Santorini and Alexandria…”

February 28 – Bloomberg (James G. Neuger): “Defeated Italian Prime Minister Mario Monti blamed crisis-management mistakes at the European level and populism at home for this week’s electoral drubbing that threw Italy into political chaos. Monti faulted the ‘central and northern European’ approach to the debt crisis for keeping Italy’s interest rates too high for too long and undercutting domestic support for his overhaul of the Italian economy.”

February 27 – Bloomberg (Andrew Frye): “Italian President Giorgio Napolitano canceled a meeting with Peer Steinbrueck after the candidate to be Germany’s next chancellor ridiculed the results of this week’s election in Italy... Steinbrueck’s comments… were ‘totally out of place,’ Napolitano told journalists in Munich. The inconclusive Feb. 24-25 election intensified tensions between the two countries as Italian voters rejected the fiscal austerity pushed by Germany as the cure for Europe’s debt crisis.”

Germany Watch:

March 1 – Bloomberg (Brian Parkin): “German Chancellor Angela Merkel urged Italy to stick to the path of reform after the success of anti-austerity parties in February’s election. ‘Now in Europe after the Italian elections it seems to be a case of either austerity and savings programs or growth, but that’s a completely false premise,’ Merkel said today in a speech… Her stance on cutting deficits is ‘not about liking to whip people,’ Merkel told CDU members… Budget cuts are not incompatible with growth, rather growth depends on sound finances, she said.”