Monday, December 15, 2014

Weekly Commentary, October 24, 2014: More Wackoism

October 21 – Reuters (Andreas Framke, Eva Taylor and Paul Carrel): “The European Central Bank is considering buying corporate bonds on the secondary market and may decide on the matter as soon as December with a view to begin buying early next year, several sources familiar with the situation told Reuters. The ECB has already carried out work on such purchases, which would widen out the private-sector asset-buying program it began on Monday - stimulus it is deploying to try to foster lending to businesses and thereby support the euro zone economy. ‘The pressure in this direction is high,’ said one person familiar with the work inside the ECB, speaking on condition of anonymity.”

Early Tuesday morning trading provided another dicey juncture, with a semblance of global market stability at risk of unravelling. European stocks were under heavy selling pressure, with Germany’s DAX index trading to the lowest level since September 2013. Italian, Portuguese and Spanish bonds were getting hit hard. Italian Credit default swaps (CDS) were trading at 146 bps, up 26 bps from Friday’s close to the highest level since March. Portugal CDS traded as high as 217 (last Friday’s close 185), and Spain rose to as much as 110 (last Friday’s close 97). Popular European corporate and financial CDS were spiking to one-year highs. Safe haven bunds and Treasuries were being bought, while commodities and EM were being sold. S&P500 futures were trading down 20 points. “Risk off” was gathering momentum.

The timely Reuters’ article - with unnamed sources claiming the ECB was readying corporate debt purchases - worked wonders for struggling global markets. After trading as low as 8,645, the DAX ended Tuesday’s session at 8,887 - and then traded as high as 9,068 on Thursday. Italian stocks enjoyed a 6.1% rally off of trading lows and Spanish stocks bounced 5.75%. After trading to 392, a popular European high-yield corporate CDS contract sank back to 350 bps. A European subordinate financial debt CDX dropped from 186 to end the week at 155.

After trading as low at 1,886 in the pre-market, S&P500 futures rallied 2.8% to end Tuesday’s session at 1,938. By the end of the week the S&P500 had surged 4.1%, as U.S. equities enjoyed "the best week since 2013.” The corporate debt market came back to life. And it’s easy to miss the significance the Reuters article had for global markets. Importantly, talk of ECB buying in the huge corporate bond market helps ameliorate the markets' waning confidence in the potential scope of Draghi's QE.  I believe European markets are now a key weak link in the global securities Bubble. Especially with a now vulnerable global speculator community, an unwind of leveraged positions in European high-yield and periphery sovereign debt would have major “risk off” ramifications.It’s worth noting that the yen weakened soon after European market rallied. A strengthening yen would also be problematic for the leveraged crowd (yen “carry trade”). Anyways, “Do Whatever it Takes” central banking won the day and the week.

October 24 – Reuters (Noah Barkin, Eva Taylor and Paul Taylor): “In early October, European Central Bank board member Benoit Coeure paid a discreet visit to the Chancellery in Berlin to express concerns about rising criticism of the bank from German politicians. The Frenchman… hoped for reassurances that the bank bashing, led by Finance minister Wolfgang Schaeuble, would stop. But the message from Chancellor Angela Merkel's advisers was not entirely comforting… Merkel would continue to refrain from questioning the ECB's policies in public. But the broader backlash would be difficult to contain, especially if Draghi pressed ahead with unconventional measures… ‘Then you would see a real debate,’ a top German official told Reuters… ‘Public criticism in Germany would take off.’ Back in 2012, Draghi appeared to save the euro zone from breaking up with his promise to do ‘whatever it takes’ to defend the single currency, a stance that won swift backing from Merkel… But two years on, the Italian's relationship with his most important stakeholder - the Germans - is fraying, with worrying implications for Europe and its faltering economy. This tension is most obvious in the relationship between Draghi and Bundesbank President Jens Weidmann, which… has almost broken down… According to German officials, Merkel felt betrayed by Draghi's speech at a central banking conference in Jackson Hole… in which he pressed Berlin for looser fiscal policy to stimulate the economy. Her entourage is also deeply skeptical about Draghi's plan to buy up asset-backed securities (ABS) and covered bond…”

Markets have grown completely dependent on “Do Whatever it Takes” central control. And six years into a historic global experiment in central bank monetary stimulus, the maladjusted global economy has become dependent upon inflated (and dangerously speculative) securities markets. Meanwhile, the consequences of reckless “money” printing spur deepening social and political tensions. As more begin to question contemporary central bank doctrine, the issue of economic inequality is finally becoming an issue. “Hats off” this week to Yves Mersch, Luxembourg central banker and member of the ECB’s Executive Board, for his presentation “Monetary Policy and Economic Equality.”

"...I would like to discuss an unusual topic for central bankers – namely the interactions between monetary policy and inequality. All economic policy-makers have some distributional impact as a result of the measures they introduce – yet until relatively recently, such consequences have been largely ignored in the theory and practice of monetary policy. Of course, central banks are not charged with the task of addressing inequalities in the distribution of wealth, income or consumption – nor are they dealing with the broader challenge of promoting economic justice for society as a whole… But particularly at a time of exceptionally low interest rates and non-standard monetary policy measures, it is essential for us to be aware of all collateral effects – including the distributional ones, i.e. the potential economic damage to some parts of society; and the potential benefits for others. So I would like to take this opportunity to explore some of the emerging evidence on the distributional effects of monetary policy. I will begin with a brief discussion of the rising prominence of inequality as an issue of global public concern."

Let me begin with inequality, which has recently re-emerged as a topic of wide public debate. From a central banker’s perspective, the most relevant aspects of recent works concern the assessment that monetary policy can have sizable distributional effects. Indeed, inequality has been largely ignored in discussions of monetary policy. But this might be changing. In part, this is because of the potentially negative impact of rising inequality on financial stability. For example, some – not least the current governor of the Reserve Bank of India – have argued that US policies to circumvent the consequences of inequality fueled financial instability ahead of the crisis. More generally, inequality is of interest to central banking discussions because monetary policy itself has distributional consequences which in turn influence the monetary transmission mechanism. For example, the impact of changes in interest rates on the consumer spending of an individual household depend crucially on that household’s overall financial position – whether it is a net debtor or a net creditor; and whether the interest rates on its assets and liabilities are fixed or variable.”

There are so many signs pointing to the present as an extraordinary juncture in history. For one, the misconceptions, flaws and unfolding failure of contemporary central banking are coming into clearer view. Yet fragilities associated with a flagging global Bubble ensure only more radical monetary measures. In the name of fighting “deflation” risk, everything has become fair game. God only knows how much “money” they might end up printing.

It seems an opportune time to revisit Fed governor Bernanke’s speech from almost 12 years ago, “Deflation: Making Sure ‘It’ Doesn't Happen Here.” Since Bernanke’s 2002 “U.S. government has a technology, called a printing press” dissertation, the Fed’s balance sheet has inflated from $800 billion to $4.5 TN. Treasury debt has inflated from about $4.5 TN to $12.6 TN. Total system marketable debt has jumped from about $30 TN to almost $60 TN. On the rate side, despite booming mortgage Credit growth, the Fed waited until June 2004 to nudge rates up 25 bps (to 1.25%). Rates didn’t make it to 4% until late 2005, just as mortgage Credit was wrapping up its fourth consecutive year of double-digit expansion.

Bernanke: “But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation. Of course, the U.S. government is not going to print money and distribute it willy-nilly (although as we will see later, there are practical policies that approximate this behavior). Normally, money is injected into the economy through asset purchases by the Federal Reserve. To stimulate aggregate spending when short-term interest rates have reached zero, the Fed must expand the scale of its asset purchases or, possibly, expand the menu of assets that it buys… Thus, as I have stressed already, prevention of deflation remains preferable to having to cure it. If we do fall into deflation, however, we can take comfort that the logic of the printing press example must assert itself, and sufficient injections of money will ultimately always reverse a deflation.

It’s been painful to watch. Federal Reserve Credit has inflated 460% in twelve years (most of it in the past six). Federal debt has about tripled (excluding wildly inflating contingent liabilities). Rates have been held at near zero for almost six years. Savers have been punished as financial operators have made billions. Two years of previously unimaginable “money” printing have coincided with a collapse in global commodities prices and general downward pressures on consumer price inflation. Arguably, financial, economic and geopolitical stability have all suffered at the hands of two years of rampant QE. Inarguably, there are serious flaws in central bank doctrine that need to be resolved. For me, so much goes back to Dr. Bernanke and his defective theories.

Bernanke: “Deflation is defined as a general decline in prices, with emphasis on the word ‘general.’ At any given time, especially in a low-inflation economy like that of our recent experience, prices of some goods and services will be falling. Price declines in a specific sector may occur because productivity is rising and costs are falling more quickly in that sector than elsewhere or because the demand for the output of that sector is weak relative to the demand for other goods and services. Sector-specific price declines, uncomfortable as they may be for producers in that sector, are generally not a problem for the economy as a whole and do not constitute deflation. Deflation per se occurs only when price declines are so widespread that broad-based indexes of prices… register ongoing declines. The sources of deflation are not a mystery. Deflation is in almost all cases a side effect of a collapse of aggregate demand--a drop in spending so severe that producers must cut prices on an ongoing basis in order to find buyers.

There’s always been an arrogance surrounding Bernanke’s view of deflation and the power and omnipotence of contemporary central bankers. He blames inept central banking and associated insufficient Fed money printing for the Great Depression. He places blame for the 1929 crash on the “Bubble poppers” and excessively tight monetary policy. He apparently has little issue with the 1920s Bubble. In general, Bernanke is dismissive of risks associated with Bubbles, convinced that aggressive “mopping up” policies can simply inflate away problematic debt loads and shortfalls in aggregate demand. It’s been an incredibly dangerous six-year experiment: “Sufficient injections of money will ultimately always reverse a deflation.” Well, we do have evidence that injections inflate securities market Bubbles.

I have for years argued that Bubbles – rather than deflation - were the prevailing risk to global financial and economic stability. Deflation and faltering demand are certainly risks that I associate with protracted Credit and speculative Bubbles. Dr. Bernanke has referred to understanding the forces behind the Great Depression as the “Holy Grail of economics.” I am instead convinced that understanding this protracted Bubble period is the real “Holy Grail.” And once we come to a more coherent understanding of this period we can attempt to go back and correct the historical revisionism that made such a phenomenal mess out of 1920s and 1930s analysis.

There are key analytical parallels between this prolonged Bubble period and the Bubble that commenced with the First World War and ended with the 1929 stock market crash. The “Roaring Twenties” Bubble period saw incredible technological innovation and stunning productivity gains. Importantly, the fledgling Federal Reserve took an increasingly activist role in managing the economy and markets (fledgling Greenspan Fed “activism” took hold in the early-nineties). The Fed succeeded in prolonging the boom, but at the high cost of deepening maladjustment in the real economy and distortions in increasingly speculative financial and asset markets. When the Bubble finally burst, all the structural deficiencies – including gross wealth disparities – came home to roost. Fed money printing would have had minimal impact in the face of a devastating collapse in confidence and Credit.

I am convinced that protracted booms bolstered by aggressive policymaking are the root cause of so-called “deflation risks”. Prolonged booms become more global in nature, with major ramifications for financial and economic stability. The benefits of “Globalization” spur trade, investment and outsized financial flows. Later, growing imbalances, speculative excess and runaway booms become prominent. To sustain increasingly unwieldy booms and to ward off fragility require that policies become more “activist”/inflationist. The combination of aggressive monetary inflation and unstable booms over time leads to gross imbalances and increasingly conspicuous wealth redistributions and inequality. Various price levels in real economies and assets markets go haywire, feeding wild wealth disparities and animosities.

I was always uncomfortable with Bernanke’s prescription of aggressive “mopping up” monetary inflation with basically no consideration whatsoever for the associated costs/risks. It was always presented that the scourge of deflation was so utterly horrendous that nothing else really mattered. Yet what we’re seeing in the world today can be explained as the foreseeable consequences of inflationism – financial fragility, economic imbalances and maladjustment, and social and geopolitical tensions reflective of increasingly conspicuous wealth redistribution and inequality. And I feel quite comfortable stating that more QE – from the ECB, Fed, BOJ, Bank of China and others – will in no way stabilize the situation.

Air needs to come out of dangerously inflated global securities markets. Right now, however, the bull has taken a sword and he’s turned crazy violent – just wants to hurt people. After the 1929 crash there was a big crackdown on large financial institutions. My own theory is that in the late phase of protracted Bubble periods the markets turn dangerously speculative and the marketplace becomes increasingly dictated by dominant market operators. A general perception takes hold in the marketplace that these big players and reliable policy interventions ensure that the game keeps rolling on. This helps explain why speculative markets for a while continue to inflate in the face of deteriorating fundamentals. Moreover, I believe prolonged booms underpinned by policy measures tend to nurture myriad financial schemes and shenanigans, again disregarding fundamental factors. It regresses to the point of being little more than one big precarious game.

I appreciate that comparing today’s backdrop to the late-twenties is considered Wackoism. And I don’t make these comparisons as some prediction of an imminent crash. Markets will do what the markets will do. I just believe strongly that the Credit Bubble Analytical Framework has become invaluable for better understanding the extraordinarily complex and precarious global backdrop. When Bernanke back in 2002 was outlining his policy course to fight deflation, he would not have contemplated today’s social and geopolitical tension. He would not have seen how his “mopping up” could lead to so much instability and angst around the world. He surely would have scoffed at the notion of a new cold war.

“Vladimir Putin took part in the final plenary meeting of the Valdai International Discussion Club’s XI session. The meeting’s theme is The World Order: New Rules or a Game without Rules. This year, 108 experts, historians and political analysts from 25 countries, including 62 foreign participants, took part in the club’s work. The plenary meeting summed up the club’s work over the previous three days, which concentrated on analyzing the factors eroding the current system of institutions and norms of international law.”

Putin’s Friday speech did nothing to temper my apprehension that an unstable world is turning more confrontational. Rather than excerpt, a bunch of Bloomberg headlines pretty well captured the gist of his message:

“Putin says world order changing… World growing less secure, predictable; No guarantee of global security; Global security system is weak, deformed; Cold war ended without peace being achieved; Cold war ‘victors’ dismantling international laws, relations; U.S. has worsened imbalance in international relations; U.S. acting like nouveau riche as global leader; World leaders being blackmailed by ‘Big Brother’; U.S. leadership brings no good for others; Sees global media under control, undermining truth; Unipolar world like dictatorship over other countries; Russia sees attempt to carve up world, create image of enemy; Business under unprecedented pressure of western governments; …Many countries disenchanted with globalization; U.S. risks losing trust as globalization leader; Russia won’t beg for anything; U.S. can’t humiliate its partners forever; Pressure from sanctions won’t sway Russia; Ukraine conflict isn’t last to affect world balance; Ukraine crisis itself caused by unbalanced international ties; Putin says current conflicts may lead world order to collapse.”

For the Week:

The S&P500 surged 4.1% (up 6.3% y-t-d), and the Dow gained 2.6% (up 1.4%). The Utilities jumped 3.5% (up 16.6%). The Banks rallied 3.9% (up 0.2%), and the Broker/Dealers gained 2.7% (up 3.4%). Transports surged 5.2% (up 15.8%). The S&P 400 Midcaps rose 4.2% (up 2.6%), and the small cap Russell 2000 gained 3.4% (down 3.8%). The Nasdaq100 advanced 5.9% (up 12.5%), and the Morgan Stanley High Tech index rose 3.4% (up 3.5%). The Semiconductors shot 6.4% higher (up 14.4%). The Biotechs surged 7.5% to a new record (up 39.2%). With bullion declining $7, the HUI gold index was down 1.4% (down 6.7%).

One- and three-month Treasury bill rates closed the week at one basis point. Two-year government yields increased two bps to 0.39% (up one basis point y-t-d). Five-year T-note yields jumped eight bps to 1.50% (down 25bps). Ten-year Treasury yields rose eight bps to 2.27% (down 76bps). Long bond yields gained eight bps to 3.04% (down 93bps). Benchmark Fannie MBS yields rose seven bps to 2.97% (down 64bps). The spread between benchmark MBS and 10-year Treasury yields narrowed one to 70 bps. The implied yield on December 2015 eurodollar futures was unchanged at 0.77%. The two-year dollar swap spread was little changed at 26 bps, while the 10-year swap spread declined one to 15 bps. Corporate bond spreads narrowed. An index of investment grade bond risk declined five to 65 bps. An index of junk bond risk ended the week down 28 bps to 345 bps. An index of emerging market (EM) debt risk dropped 10 bps to 309 bps.

Greek 10-year yields dropped 74 bps to 7.33% (down 109bps y-t-d). Ten-year Portuguese yields declined four bps to 3.26% (down 287bps). Italian 10-yr yields added two bps to 2.52% (down 161bps). Spain's 10-year yields were unchanged at 2.17% (down 198bps). German bund yields rose three bps to 0.89% (down 104bps). French yields added a basis point to 1.31% (down 125bps). The French to German 10-year bond spread narrowed two to 42 bps. U.K. 10-year gilt yields rose four bps to 2.23% (down 79bps).

Japan's Nikkei equities index surged 5.2% (down 6.1% y-t-d). Japanese 10-year "JGB" yields declined a basis point to a record low 0.465% (down 28bps). The German DAX equities index recovered 1.6% (down 5.9%). Spain's IBEX 35 equities index rallied 3.8% (up 4.3%). Italy's FTSE MIB index recovered 4.3% (up 2.8%). Emerging equities were mixed. Brazil's volatile Bovespa index sank 6.8% (up 0.8%). Mexico's Bolsa increased 0.9% (up 2.2%). South Korea's Kospi index was up 1.3% (down 4.3%). India’s Sensex equities index jumped 2.8% (up 26.8%). China’s Shanghai Exchange fell 1.7% (up 8.8%). Turkey's Borsa Istanbul National 100 index jumped 5.1% (up 17.1%). Russia's MICEX equities index slipped 0.3% (down 8.2%).

Debt issuance picked back up. Investment-grade issuers included Verizon $6.5bn, Goldman Sachs $3.0bn, Morgan Stanley $3.0bn, Bank of America $1.4bn, Ingersoll-Rand $1.1bn, Omnicom Group $750 million, Targa Resources Partners LP $700 million, Virginia E&P $600 million, Kroger $500 million, New York Life $400 million, Textron $350 million, US Bank $350 million, WGL Holdings $225 million and Windermere Aviation $180 million.

Junk funds saw inflows jump to $1.708bn (from Lipper). Junk issuers this week included Citigroup $1.5bn, Tesoro Logistics LP $1.3bn, Fresenius Med Care $900 million, TPC Group $805 million, Constellation Brands $800 million, IHS $750 million and Graphic Packaging $250 million.

I saw no convertible debt issues.

International dollar debt issuers included International Colombia $4.6bn, KFW $3.0bn, Credit Suisse $2.0bn, Macquarie Bank $1.75bn, FMS Wertmanagement $1.5bn, Schaeffler $1.15bn, Bank of Reconstruction & Development $1.0bn, Dai-Ichi Mutual Life $1.0bn, Turkiye Is Bankasi $750 million, S.A.C.I. Falabella $400 million, Nightingale Finance $350 million, E-CL $350 million, and Korea Hydro & Nuclear Power $300 million.

Freddie Mac 30-year fixed mortgage rates fell five bps to a 16-month low 3.92% (down 21bps y-o-y). Fifteen-year rates sank 10 bps to 3.08% (down 16bps). One-year ARM rates rose three bps to 2.41% (down 19bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down 29 bps to 4.22% (down 10bps).

Federal Reserve Credit last week expanded $15.2bn to a record $4.437 TN. During the past year, Fed Credit inflated $654bn, or 17.3%. Fed Credit inflated $1.626 TN, or 58%, over the past 102 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt dropped $14.7bn last week to a four-month low $3.303 TN. "Custody holdings" were down $50.5bn year-to-date, and fell $18.7bn from a year ago.

Global central bank "international reserve assets" (excluding gold) - as tallied by Bloomberg – were up $428bn y-o-y, or 3.8%, to $11.852 TN. Over two years, reserves were $1.101 TN higher for 10% growth.

M2 (narrow) "money" supply dropped $39.3bn to $11.478 TN. "Narrow money" expanded $544bn, or 5.0%, over the past year. For the week, Currency increased $2.2bn. Total Checkable Deposits declined $7.8bn, and Savings Deposits sank $39.7bn. Small Time Deposits added $1.3bn. Retail Money Funds gained $4.9bn.

Money market fund assets rose $12.8bn to $2.622 TN. Money Fund assets were down $97bn y-t-d and dropped $44bn from a year ago, or 1.7%.

Total Commercial Paper added $2.2bn to $1.063 TN. CP was up $17.0bn year-to-date but was little changed over the past year.

Currency Watch:

October 22 – Bloomberg (David Goodman, Lucy Meakin and Ye Xie): “Currency wars are back, though this time the goal is to steal inflation, not growth. Brazil Finance Minister Guido Mantega popularized the term ‘currency war’ in 2010 to describe policies employed at the time by major central banks to boost the competitiveness of their economies through weaker currencies. Now, many see lower exchange rates as a way to avoid crippling deflation. Weak price growth is stifling economies from the euro region to Israel and Japan. Eight of the 10 currencies with the biggest forecasted declines through 2015 are from nations that are either in deflation or pursuing policies that weaken their exchange rates, data compiled by Bloomberg show. ‘This beggar-thy-neighbor policy is not about rebalancing, not about growth,’ David Bloom, the global head of currency strategy at… HSBC… ‘This is about deflation, exporting your deflationary problems to someone else.’”

October 21 – Bloomberg (Richard Partington): “The cost for banks to settle probes into allegations traders rigged foreign-exchange benchmarks could hit as much as $41 billion, Citigroup Inc. analysts said. Deutsche Bank AG is seen as probably the ‘most impacted’ with a fine of as much as 5.1 billion euros ($6.5bn), Citigroup analysts led by Kinner Lakhani said…, estimating the Frankfurt-based bank’s settlements could reach 10% of its tangible book value, or its assets’ worth.”

The U.S. dollar index gained 0.7% to 85.73 (up 7.1% y-t-d). For the week on the upside, the South African rand increased 1.4%, the South Korean won 0.8%, the Australian dollar 0.6% and the Canadian dollar 0.4%. For the week on the downside, the Brazilian real declined 1.6%, the Japanese yen 1.2%, the Swedish krona 1.0%, the New Zealand dollar 0.9%, the Norwegian krone 0.7%, the euro 0.7%, the Danish krone 0.7%, the Swiss franc 0.6% and the Mexican peso 0.3%.

Commodities Watch:

The CRB index declined 0.9% this week (down 3.6% y-t-d). The Goldman Sachs Commodities Index slipped another 0.6% to a new four-year low (down 15.1%). Spot Gold lost 0.6% to $1,231 (up 2.1%). December Silver declined 0.9% to $17.182 (down 11%). November Crude fell $1.74 to a 28-month low $81.01 (down 18%). November Gasoline dropped 2.3% (down 22%), and November Natural Gas sank 3.8% (down 14%). December Copper gained 1.2% (down 11%). December Wheat increased 0.3% (down 15%). December Corn gained 1.4% (down 16%).

U.S. Fixed Income Bubble Watch:

October 21 – Bloomberg (Matthew Boesler and Christopher Condon): “Banks must change the way employees are compensated and take other steps to fix a corporate culture that encourages misdeeds or face being broken up, said William C. Dudley, president of the Federal Reserve Bank of New York. If bad behavior persists, ‘the inevitable conclusion will be reached that your firms are too big and complex to manage effectively,’ Dudley told industry leaders… ‘In that case, financial stability concerns would dictate that your firms need to be dramatically downsized and simplified so they can be managed effectively.’ Dudley’s comments, which follow bank scandals involving Libor and foreign exchange trading, were made at a closed-doors workshop attended by senior bankers at the New York Fed on reforming Wall Street culture and behavior.”

October 20 – Bloomberg (Lisa Abramowicz): “High-yield investors are more worried that no one will bid on their bonds than they are about the risk of companies defaulting. At a time when the default rate for below investment-grade companies is holding at about half its historical average, junk- bond investors are increasingly concerned that they’ll be unable to sell when they want to. That’s why some analysts aren’t ready to recommend plowing back into the notes even after yields soared as high as 6.7% on Oct. 15 from an all-time low of 5.7% in June. ‘Clients now want to sell any bond they don’t want to hold for the long-term for fear that they will not be able to sell them later,’ Bank of America Corp. analysts led by Michael Contopoulos wrote… The recent volatility ‘has been a wake-up call for many that dealer balance sheet constraints leads to faster price discovery and gappier price moves.’ The main worry plaguing investors is that prices will plunge in a free-fall when everyone wants to sell, partly because banks have cut their debt holdings in the face of higher capital requirements.”

October 22 – Bloomberg (Lisa Abramowicz): “The $800 billion U.S. leveraged-loan market is losing mutual-fund investors just as it’s about to need them more than ever. Regulators are approving new rules this week making it more expensive to create funds that are the biggest source of demand for the below investment-grade debt: collateralized loan obligations. Managers of the funds will be required to retain 5% of the debt they package or sell, or banks underwriting CLOs will have to hang on to a piece. The Loan Syndications & Trading Association, the market’s main lobbying group, said… the rule will ‘materially reduce the CLO market.’ This matters because junk-rated companies have found willing lenders in CLO managers as other investors have fled… Investors pulled $946 million from U.S. funds that buy leveraged loans in the week…, bringing net outflows for the year to $11.2 billion, according to… Lipper. Meanwhile, the CLO market has grown by about $50 billion this year to almost $350 billion, according to Wells Fargo…”

October 21 – Bloomberg (Wes Goodman): “For all the gyrations in bonds over the past week, government securities are beating stocks in October by the most in two years. Treasuries rallied… The Bloomberg Global Developed Sovereign Bond Index has returned 1.8% this month, versus a 4% decline for the MSCI All-Country World Index… It’s the biggest outperformance since May 2012…”

Federal Reserve Watch:

October 20 – Wall Street Journal (Jon Hilsenrath and Pedro Nicolaci da Costa): “Federal Reserve officials are taking a steady-as-she-goes stance as they prepare for their policy meeting this month, even though market volatility and uncertainties about the global economic outlook have rattled investors in recent weeks and led to some mixed messages from central bank officials. The Fed is highly likely to end its bond-buying program on schedule at the Oct. 28-29 meeting, according to recent interviews with officials and their public statements. Officials also are preparing to debate whether to fine-tune the Fed’s formal assessment of the labor market and the guidance it provides about the likely path of interest rates. ‘I haven’t really changed my view on the economic outlook,’ San Francisco Fed President John Williams said…”

October 19 – New York Times (Binyamin Appelbaum): “The Federal Reserve is watching carefully as financial markets bounce around, but the likely course of monetary policy remains the same, officials have said… The Fed still intends to finish its bond-buying campaign at the end of the month. And it is still likely to start raising interest rates in mid-2015, although it now seems a little less likely that the Fed would act sooner, and more likely it would wait longer. ‘Just based on a short period of volatility, that’s not enough for me to make much of an adjustment,’ Eric S. Rosengren, president of the Federal Reserve Bank of Boston, said… ‘We need more time to evaluate whether we should be doing any updating. And I would say the financial market movements have not been triggered by very many real economic indicators.”

U.S. Bubble Watch:

October 23 – Wall Street Journal (Josh Mitchell): “Parents with damaged credit histories will gain greater access to federal student loans to help cover their children’s undergraduate costs under a plan finalized Wednesday by the Obama administration. The plan follows months of debate among colleges and consumer groups about how to help students cover rising tuitions without burdening families with huge piles of debt. The Education Department, under rules it hopes to implement by next spring, said it would loosen credit standards for families borrowing from the agency’s Parent Plus program. The loans are designed to cover tuition and living expenses when undergraduates reach the limits on their federal Stafford loans, the government’s most widely used program.”

October 21 – Bloomberg (Isaac Arnsdorf and Bradley Olson): “The bear market in oil has analysts reassessing the U.S. shale boom after five years of historic growth. The U.S. benchmark price dropped to $79.78 a barrel on Oct. 16, the lowest since June 2012. At that level, one-third of U.S. shale oil production would be uneconomic, analysts for… Sanford C. Bernstein & Co. led by Bob Brackett said… Drillers would add fewer barrels to domestic output than the previous year for the first time since 2010, according to Macquarie Group… Horizontal drilling through shale accounts for as much as 55% of U.S. production and just about all the growth, according to Bloomberg Intelligence… Though some forecasts show oil rebounding or stabilizing, any slower increase in U.S. output would shake perceptions for the global market, said Vikas Dwivedi, an oil and gas economist in Houston for… Macquarie. ‘It would reshape the way everybody would think about oil,” Dwivedi said.”

October 23 – Bloomberg (David M. Levitt): “New York City developers will spend 60% more on new homes this year, while adding only 22% more units, a sign of the market’s tilt toward luxury condominiums, the New York Building Congress said. Spending on new housing will reach $10.9 billion, the most in records dating to 1995 and $4.1 billion more than last year’s total… The number of homes that money will build is 22,500, up from 18,400 in 2013. A record wave of ultra-luxury condo projects planned or under construction in Manhattan accounts for the ‘wide disparity’ between costs and unit production, said Frank Sciame, chairman of the New York Building Foundation…”

October 23 – Bloomberg (Christine Idzelis and Alex Sherman): “Heightened U.S. regulatory scrutiny of leveraged lending is leading the biggest banks to back away from funding some takeovers financed by debt… JPMorgan…, Bank of America Corp., Credit Suisse Group AG, Deutsche Bank AG, Barclays Plc and Morgan Stanley are among banks that have passed on the chance to fund deals the past few months, according to people with knowledge of the matter… The trend has accelerated as the Federal Reserve and Office of the Comptroller of the Currency step up their oversight of financial firms that haven’t abided by previous industrywide guidelines issued last year.”

October 23 – Bloomberg (Brian Chappatta and Elise Young): “Investors demanded yields typical of junk-rated debt to buy investment-grade bonds backed by luxury taxes in Atlantic City in a sign of the cost of the seaside community’s downward financial spiral. New Jersey’s Casino Reinvestment Development Authority, created in 1984 to spur economic development and job creation in the resort town, issued $241 million of debt yesterday…”

ECB Watch:

October 20 – Bloomberg (Alastair Marsh): “The European Central Bank bought French covered bonds today as it started its asset purchase program… The central bank bought short-dated notes, said the people, who asked not to be identified… Policy makers are seeking to use the region’s $3.3 trillion covered bond market as part of their efforts to stimulate the region’s economy. The 250-year-old debt market helps fund Europe’s mortgage industry and the notes have historically been attractive to investors because they’re guaranteed by the issuer and backed by a pool of assets. ‘From today we will begin to know how aggressive the ECB will be in bidding for bonds,’ said Agustin Martin, head of European credit research at Banco Bilbao Vizcaya Argentaria SA in London.”

October 22 – Bloomberg (Alastair Marsh and Stefan Riecher): “The European Central Bank bought Spanish covered bonds in a third day of asset purchases that has seen it acquire notes from Italy to Germany, according to people familiar with the matter. The ECB is adding to French and Portuguese securities it bought this week, said the people… The central bank will reveal the amount of debt purchased on Oct. 27. The ECB entered the 2.6 trillion-euro ($3.3 trillion) covered bond market as part of efforts to improve companies’ and households’ access to financing. While policy makers could embark on further stimulus after purchasing the securities, there’s no specific plan to buy corporate bonds, ECB Governing Council member Luc Coene said in an interview with L’Echo newspaper today.”

October 21 - Reuters (Andreas Framke, Eva Taylor and Paul Carrel): “The European Central Bank is considering buying corporate bonds on the secondary market and may decide on the matter as soon as December with a view to begin buying early next year, several sources familiar with the situation told Reuters. The ECB has already carried out work on such purchases, which would widen out the private-sector asset-buying program it began on Monday - stimulus it is deploying to try to foster lending to businesses and thereby support the euro zone economy. ‘The pressure in this direction is high,’ said one person familiar with the work inside the ECB, speaking on condition of anonymity. Asked about the possibility of making such purchases, an ECB spokesman said: ‘The Governing Council has taken no such decision.’

Brazil Watch:

October 24 – Bloomberg (Raymond Colitt): “Whoever wins Brazil’s presidential runoff election this Sunday won’t have much good news to deliver on the outlook for the world’s second-largest emerging market. Brazil is in recession, and annual inflation is above the ceiling of its target range. A widening budget deficit threatens the country’s investment-grade status, and business confidence hovering around five-year lows has driven investment to the lowest rate among the BRICS nations, which include Russia, India, China and South Africa.”

October 24 – Bloomberg (Cristiane Lucchesi, Ye Xie and Josue Leonel): “Fourteen months after Brazil began selling billions of dollars’ worth of derivative contracts to shore up its currency, the strategy is proving ineffective and raising concern in financial markets.  The real fell to a six-year low yesterday and is the world’s most volatile currency. Some analysts say the swaps, which are equivalent to selling dollars in the futures market and now amount to 27% of foreign reserves, are approaching critical levels. The opposition’s presidential candidate has indicated he’d discontinue their use.  ‘The swaps program has reached its limit and it needs urgent review since it is losing efficiency and credibility,’ said Tony Volpon, the head of emerging-market research at Nomura Holdings Inc., Japan’s largest brokerage.”

October 24 – Bloomberg (Julia Leite and Paula Sambo): “With polls showing increasing support for President Dilma Rousseff’s re-election in a runoff vote this weekend, bond investors in Brazil’s state-run banks such as BNDES are preparing for disappointment. While her opponent Aecio Neves promised to reduce their role as part of his effort to roll back government intervention, Rousseff has pushed the lenders to ratchet up lending at below-market interest rates to spur economic growth and her victory may mean more of the same, according to Standard Chartered… ‘In the last couple of years, when Brazil started to slow down, the government forced the public banks to keep low rates and boost credit as a way of stimulating the economy,’ Rodrigo Cabernite, the head of debt capital markets for Latin America at Standard Chartered, said…”

October 24 – Bloomberg (Cristiane Lucchesi, Ye Xie and Josue Leonel): “Fourteen months after Brazil began selling billions of dollars-worth of derivative contracts to shore up its currency, the strategy is proving ineffective and raising concern in financial markets. The real fell to a six-year low yesterday and is the world’s most volatile currency. Some analysts say the swaps, which are equivalent to selling dollars in the futures market and now amount to 27% of foreign reserves, are approaching critical levels… ‘The swaps program has reached its limit and it needs urgent review since it is losing efficiency and credibility,’ said Tony Volpon, the managing director and head of emerging markets research at Nomura…, Japan’s largest brokerage.”

EM Bubble Watch:

October 23 – Bloomberg (Olga Tanas): “Russia’s international reserves shrank for a ninth week, tumbling $7.9 billion in the biggest drop in more than five months, as the central bank sold foreign currency to arrest the ruble’s decline to a record. The value of the stockpile, the second-biggest in Europe after Switzerland’s, fell to $443.8 billion… after dropping $3 billion a week earlier…”

October 21 – Bloomberg (Vladimir Kuznetsov): “Russia scrapped its second bond auction in a row after the ruble’s retreat spurred bets interest rates will be increased and kept the nation’s borrowing costs near a record high. The Finance Ministry pulled tomorrow’s offering due to ‘unfavorable market conditions,’ according to a statement…”

October 21 – Bloomberg (Suttinee Yuvejwattana): “Thailand’s economy is stagnating as a lack of confidence in the pace of a recovery discourages investment and consumption, Finance Minister Sommai Phasee said. ‘It looks like stagnation,’ Sommai said… ‘We have high liquidity in the country. But wealthy people are hesitant to invest as they are concerned that the economic recovery may drag on…, while the poor don’t have much money to spend or access to funding.’”

Europe Watch:

October 23 – Bloomberg (Eshe Nelson): “The euro area’s weakest economies need to reverse the trajectory of their burgeoning debt loads to earn upgrades from Fitch Ratings… While record-low bond yields from Italy to Portugal suggest investors have increasing faith in the safety of those securities, Fitch’s James McCormack says he’s more interested in debt levels than government borrowing costs. The region’s debt- to-gross domestic product ratio rose in the second quarter from the first quarter… ‘Until the debt-to-GDP ratios come down, then I think the ratings and the market might have divergent views,’ McCormack said… ‘In order for ratings to move higher in general terms, the debt ratios would need to be seen coming down. The direction of change has to be right. It needs to be going the right way in combination with other improvements in the credit profile.’”

October 22 – Bloomberg (Lukanyo Mnyanda and Eshe Nelson): “Italy is paying the price for having the euro area’s third-largest debt load with the rate investors charge to lend it money at the highest in more than two years relative to Spain. While a selloff in euro-area bonds last week rekindled memories of the sovereign-debt crisis, the pain was being felt more keenly in Rome than Madrid. Traders judged that Italy’s bigger debt burden made it more vulnerable in a potential recession as the region’s economy falters… Italy is mired in a contraction; this month it cut its growth forecast while Spain’s Cabinet in September approved a budget based on higher growth estimates. ‘The Italian debt dynamics are poor and would get worse remarkably quickly’ if the euro area slides into a recession, said Andrew Milligan, head of global strategy at Standard Life Investments… ‘People are giving Spain the benefit of the doubt because the economy is starting to grow.’”

October 24 - Reuters(Isla Binnie): “Striking workers took to the streets in cities across Italy on Friday to protest against cuts to public services and labor reforms proposed by Prime Minister Matteo Renzi. The stoppages mainly affected the transport sector… The protests were a prelude to a larger series of rallies called by Italy's biggest union, the CGIL, on Saturday.”

October 24 – Bloomberg (Robert Hutton and Ian Wishart): “Britain’s decades-long battle over the European Union budget flared up again with Prime Minister David Cameron resisting a call for the U.K. to pay more to finance the EU’s institutions in Brussels. Cameron’s opposition to chipping in an extra 2.1 billion euros ($2.7bn) is the latest installment in a fight dating back to the 1970s, this time with the potential to shift U.K. public opinion toward quitting the 28-nation bloc.”

Germany Watch:

October 22 – Reuters (Gernot Heller): “Senior lawmakers from Chancellor Angela Merkel's conservative party heaped criticism on the European Central Bank… following a Reuters report that it was considering the purchase of corporate bonds to spur growth… ‘With its purchase programmes, the ECB is taking unforeseeable risks onto its balance sheet,’ said Norbert Barthle, a veteran lawmaker for Merkel's Christian Democrats (CDU)… The ECB should focus on its main target of price stability and refrain from more ‘dubious measures’ to boost the economy, Barthle warned. Hans Michelbach of the Christian Social Union (CSU), the Bavarian sister party of the CDU, said Draghi was endangering the stability of financial markets with his moves. ‘The ECB is turning itself into a bad bank for the euro zone's crisis countries at an increasingly rapid pace,’ said the senior conservative member… ‘The ECB needs a clear change of course.’ The head of the CDU's pro-business wing, Kurt Lauk, accused the ECB of undermining European agreements on fiscal policy and Germany's budget consolidation course. ‘That's a dangerous mixture,’ he said.”

October 23 – Reuters (Thomas Atkins) - None of the 24 German banks taking part in stress tests led by the European Central Bank will need to raise capital in the next six to nine months as a result of the tests, daily Handelsblatt reported…”

Global Bubble Watch:

October 21 – Dow Jones (Richard Barley): “It's still all about the central banks. That much is clear from the reaction to a report Tuesday that the European Central Bank could decide as soon as December to buy corporate bonds. In short order, the euro fell half a cent against the dollar, stocks and southern European government bond prices jumped and the cost to insure investment-grade corporate debt fell. The ECB said no decisions had been taken… But the market believes the ECB will have trouble lifting its balance sheet back to the size it was in 2012--implying an expansion of EUR650 billion-EUR1 trillion--by targeting these instruments. Buying eurozone-government bonds is clearly a last-resort option, such a move being politically controversial and practically difficult. Buying corporate bonds could give the ECB a big market to aim at: there are EUR710 billion of securities in the Markit iBoxx non-financial senior corporate bond index, and issuance is plentiful. And such a move, while radical, isn't beyond the pale: the Bank of England and the Bank of Japan have both bought corporate debt.”

October 23 – Financial Times (Jamie Chisholm): “The veracity of the ‘Draghi put’ moved back into focus this week after a Reuters report that the European Central Bank was considering widening its asset buying to include corporate bonds. In simple terms, a central bank put refers to the idea that the monetary guardians will step in as buyers when things go pear-shaped. Talk that the ECB is moving towards full-blown Federal Reserve-style quantitative easing was a contributor to the stock market’s latest rebound but is, for now, just that – talk. So what if, Bank of America Merrill Lynch asks, the market again begins to lose confidence in the value of the Draghi put? Answer: it will switch attention to the Fed put. But where is the Fed put’s strike price? (Meaning, when/where would the Fed re-intervene?).”

October 21 – Bloomberg (Simon Kennedy): “The central-bank put lives on. Policy makers deny its existence, yet investors still reckon that whenever stocks and other risk assets take a tumble, the authorities will be there with calming words or economic stimulus to ensure the losses are limited… Last week as markets swooned again, it was St. Louis Federal Reserve President James Bullard and Bank of England Chief Economist Andrew Haldane who did the trick. Bullard said the Fed should consider delaying the end of its bond-purchase program to halt a decline in inflation expectations, while Haldane said he’s less likely to vote for a U.K. rate increase than three months ago. ‘These comments left markets with the impression that the ‘central-bank put’ is still in place,’ Morgan Stanley currency strategists led by… Hans Redeker told clients… Matt King, global head of credit strategy at Citigroup Inc., and colleagues have put a price on how much liquidity central banks need to provide each quarter to stop markets from sliding. By estimating that zero stimulus would be consistent with a 10% quarterly drop in equities, they calculate it takes around $200 billion from central banks each quarter to keep markets from selling off."

October 22 – Reuters (Lionel Laurent): “A dramatic upswing in volatility is putting post-crisis financial markets to the test, as curbs on banks' ability to take risks and an increase in technology-driven trading expose potential new cracks in the system. While investors and traders say markets have become safer since the 2008 financial crisis - there is less leverage in the system and banks are better able to withstand shocks - they worry that the post-crisis rule book has reduced the market's ability to absorb sharp spikes in buying and selling. Case in point: last week's sell-off in stocks and lower-rated bonds, which was attributed to a confluence of factors such as disappointing data, fears over global growth and anxiety over the impact of an eventual rise in U.S. interest rates. It was worsened by a lack of banks and market-makers able to step in and buy assets that were being dumped. These worries were most keenly felt in the corporate bond market, which has been a virtual magnet over the past five years for investors in search of yield at a time of rock-bottom interest rates.”

October 20 – Bloomberg (Lisa Abramowicz and Lu Wang): “When markets are buckling and volatility is signaling a crisis, you sell what you can, not what you want. That’s what happened last week on Wall Street… Loath to find out what their record holdings of corporate bonds and leveraged loans were worth as liquidity thinned and markets slid, professional traders turned to stocks and Treasuries to defuse risk. The result was a frenzy. U.S. government debt volume surged to an all-time high of $946 billion at ICAP Plc, the world’s largest interdealer broker, more than 40% above the previous record. About 11.9 billion shares changed hands on U.S. equity exchanges on Oct. 15, the most since the European debt crisis of 2011. ‘Whenever people can’t sell their illiquid assets, they turn to the U.S. stock market because everyone is involved in it and that’s what they can sell,’ said Matt Maley, an equity strategist at Miller Tabak… ‘That’s why the market selloff was so sharp. You sell what you can, and the deepest, most liquid asset in the world is U.S. stocks.’”

October 21 – Wall Street Journal (Juliet Chung, Rob Copeland and Maureen Farrell): “This month’s turmoil in financial markets has been a ‘bloodbath’ for hedge funds, inflicting large losses at an array of multibillion-dollar firms in the industry’s worst stretch since late 2011. It isn’t unusual for one segment of the $2.8 trillion hedge-fund world to find itself caught in a downdraft. But in October, the pain has been widespread. There were casualties among funds that make bets based on their fundamental analysis of companies, events like takeovers and broad economic trends. The losses came amid sharp volatility in stocks, bonds, currencies and commodities… ‘It’s a bloodbath out there,’ said Brad Alford of Alpha Capital Management… He attributed some of the losses to funds crowding into the same stocks and rushing out at the same time. 'There are some awful numbers.' One hedge-fund manager told clients Monday that market activity reminded him of a ‘familiar plotline’ from the ‘Jaws’ movies. ‘An idyllic investment environment amid an improving economy…and then cue the music…dun-dun…dun-dun…dun-dun,’ Paul Westhead, chief executive of… Rimrock Capital Management LLC, wrote in a letter to investors.”

October 22 – Financial Times (Miles Johnson): “Bull markets, as the saying goes, must always drag themselves up a wall of worry. For hedge funds, many of which have been asking how long the calm in markets can last, that wall must now appear to have grown several metres. Last week saw the return of market swings reminiscent of the deepest days of the financial crisis, with the 10 year US Treasury bond gyrating wildly in just a matter of minutes… Many hedge funds have been caught out by falling equity markets. Several have endured a rough October so far, according to early performance estimates… For many, the so-called ‘flash crash’ in yields on Treasury bonds, one of the world’s most liquid markets, was one of the clearest signs yet of a growing risk that has been worrying many of the world’s largest hedge fund managers for some time… ‘The big price gap in bonds surprised investors because the US bond market is considered very deep and liquid,’ says Anthony Lawler, a portfolio manager at GAM. ‘What became apparent was that when investor risk models told many people to make the same trade, there was almost no one to take the other side of that trade, even in very deep government bond markets. There were no banks or others to provide liquidity like they used to do.’ For several years hedge funds sceptical of the post-crisis central bank-stimulated market rally have been offered a ‘Hobson’s Choice’ between staying on the sidelines and underperforming their peers, or investing in earnest and ignoring their own doubts about the potential for a large market correction.”

Geopolitical Watch:

October 23 – Bloomberg (Indira A.R. Lakshmanan): “Vladimir Putin has outmaneuvered his opponents and humiliated Ukraine by continuing to back pro-Russian separatists and flouting a cease-fire, making it crucial that sanctions on Russia remain firm, France’s ambassador to the U.S. said. The Russian president ‘has won because we were not ready to die for Ukraine, while apparently he was,’ Ambassador Gerard Araud said… Echoing the view of other European envoys in Washington, Araud expressed concern that the Ukraine conflict has hit an impasse, leaving Putin the winner by default. While many observers have called Putin a geopolitical chess player, he said, the Russian leader is more a ‘poker player really, putting all the money on the table, saying, ‘Do the same,’ and of course we blink. We don’t do the same.’”

October 22 – Financial Times (Christian Oliver): “Russia has raised further conditions for resuming gas supplies to Ukraine, dashing hopes that a deal to safeguard Europe’s energy supply this winter would be agreed on Tuesday. Moscow cut gas exports to Ukraine in June amid a payment dispute, and talks on restarting flows have been weighed down by the conflict between Kiev’s forces and pro-Russian militias. However, many officials had expected that a new deal on a gas price and a timetable for settling debts would be reached at a meeting in Brussels. Instead, Russia made another demand, asking for evidence to be submitted within five days that international lenders or other organisations were able to guarantee Kiev as good for its money.”

October 23 – Bloomberg (Daryna Krasnolutska, Volodymyr Verbyany and Kateryna Choursina): “Pro-Russian rebels vowed to keep battling Ukrainian government forces and expand their territory by retaking control of cities including the port of Mariupol as Oct. 26 general elections near. Ukrainian Prime Minister Arseniy Yatsenyuk warned today that Russia may try to stir provocations ahead of the ballot. Ukraine, the European Union and the U.S. say that President Vladimir Putin’s Russia has backed the rebels with arms and troops. Russia denies the allegation.”

October 24 – Bloomberg: “China pushed ahead with the creation of its proposed $50 billion Asia regional bank by signing a memorandum today with 21 countries, which didn’t include South Korea, Australia and Indonesia. The proposed Asian Infrastructure Investment Bank (AIIB), first put forward by Chinese President Xi Jinping in October last year, is a key component of China’s efforts to expand its regional influence. The bank, a potential rival to institutions such as the Asian Development Bank, has been opposed by the U.S., which has asked its allies not to participate…”

October 20 – Dow Jones (William Mauldin): “The world's banks tightened the purse strings on Ukraine in the middle of its conflict with Russia this year, endangering the country's ability to work its way out of a deepening economic crisis. Global banks' lending to Ukrainian entities--known as ‘cross-border claims’--fell to $12.1 billion in the second quarter, a currency-adjusted decline of $1.9 billion that marks the biggest drop since 2011… With an underdeveloped banking system, Ukraine is relying on foreign lending and bailouts from the International Monetary Fund and other global institutions to repair damage from the pro-Russian separatist movement in the east and restart manufacturing, including the crucial processing and shipment of coal used in electricity generation and the steel industry.”

October 22 – Bloomberg (Kateryna Choursina, Daryna Krasnolutska and Peter Laca): “To many Ukrainians who flooded Kiev last winter to demand change, this month’s parliamentary ballot is a chance to get the revolution back on track. While the nation’s new rulers sealed a European integration pact, the sweeping change the protesters demanded as they ousted Viktor Yanukovych hasn’t materialized. Efforts to curb graft and revamp dysfunctional state offices have fallen by the wayside. President Petro Poroshenko, elected in May, has picked tycoons for top jobs and hasn’t sold his business empire as promised. Voters are poised to expel Yanukovych’s allies at the Oct. 26 vote.”

October 24 – UK Telegraph: “Extremists have declared Libya part of the Isil caliphate. Former Libyan militant Noman Benotman examines what's gone wrong Libya is now in the throes of an extreme political crisis. If the conditions remain unchallenged and, hence, unchanged, it will turn into another Syria or Iraq. While ISIL has managed to capture the attention of the international media with its powerful propaganda and its violent tactics, the world’s has ignored the equally threatening Islamist groups and movements that have prospered in North Africa in the post-Arab Spring vacuum. Nowhere is this threat more profound than with the rise of radical Islam in Libya.”

October 21 - Reuters (Sanjeev Miglani): “India warned Pakistan… of more ‘pain’ if it continued to violate a ceasefire on their disputed border in Kashmir and said it was up to Islamabad to create the conditions for a resumption of peace talks. The two sides exchanged mortars and intense gunfire this month, killing at least 20 civilians and wounding dozens in the worst violation to date of a 2003 ceasefire… ‘Our conventional strength is far more than theirs. So if they persist with this, they'll feel the pain of this adventurism,’ Indian Defense Minister Arun Jaitley told NDTV… Indian Prime Minister Narendra Modi's government came to power in May promising a tough response to violence in the Himalayan territory. It accuses Pakistan of helping Islamist militants cross into its side to keep alive a 25-year armed revolt in India's only Muslim-majority state.”

China Bubble Watch:

October 24 – Financial Times (Jamil Anderlini): “China’s housing prices fell for the fifth consecutive month in September as oversupply and falling sales continued to undermine the sector that has driven growth in the country for much of the past decade. Falling prices and fewer sales in the Chinese housing market are key reasons for recent weakness in global markets for hard commodities such as iron ore, copper and coal… ‘The negative impact of the ongoing property downturn is being felt not only in heavy industry production, but also in manufacturing investment, both of which have weakened,’ said Wang Tao, chief China economist at UBS. ‘Investment in the mining sector also decelerated sharply to its slowest pace in more than a decade.’ Housing sales in the first nine months of the year fell 10.8%... In spite of contracting sales and falling prices, investment in new capacity continues to pour in, with real estate investment up 12.5% in the first nine months. That means the property-led downturn in the economy is likely to continue and worsen as prices and sales volumes decline and new investment dries up.”

October 23 – Reuters Breakingviews (John Foley): “China’s strict capital controls are designed to shield the economy from flighty foreign money. In practice, they haven’t stopped a tremendous build up of fickle cash from abroad. There’s enough to create a serious nuisance if it starts to flow the other way. The People’s Bank of China allows money to cross the border for trade or long-term investment, but generally frowns on short-term speculation. Nevertheless, central bank data suggests $725 billion of what might be called ‘hot money’ has piled up since 2008. That’s the combination of short-term funds Chinese residents have borrowed from foreign lenders, and securities they have sold to overseas investors, minus anything that was repaid or sold.”

October 22 – Bloomberg: “Chinese companies have sold a record amount of bonds this year as the central bank eases monetary policy to help ensure economic growth meets its target. Issuance totals 4.29 trillion yuan ($701bn) so far in 2014, more than the 3.77 trillion yuan for all of 2013… The yield on five-year AAA rated corporate notes has declined 146 bps this year to 4.83%, the lowest since July 2013, as the People’s Bank of China has cut repurchase rates to help reduce borrowing costs.”

October 21 – Bloomberg: “China’s economic growth beat analysts’ estimates last quarter as export demand quickened and services expanded, bolstering the government’s case for avoiding broader stimulus measures. Gross domestic product rose 7.3% in the July-September period from a year earlier… While that exceeded the 7.2% median estimate…, it was also the slowest expansion since the first quarter of 2009.”

October 21 – Bloomberg: “China’s vehicle sales will probably miss a revised growth forecast for the year as demand slows in the world’s second-largest economy, according to the country’s main auto association. Dong Yang, secretary general of the state-backed China Association of Automobile Manufacturers, said total passenger and commercial vehicle sales for the full year would likely hit 23 million units, or an increase of about 4.6%. In July, the group lowered its projection for the increase in China vehicle sales to 8.3%..., down from the 10% increase it predicted in January. ‘There was an obvious slowdown in auto sales in August and September,’ Dong said… ‘We are looking into the exact reasons causing this so I don’t want to elaborate on the factors at the moment.’”

October 21 – Bloomberg (Rakteem Katakey and Aibing Guo): “Crude oil’s steepest crash in almost six years is throwing up a new challenge for China’s refiners -- a plunge in the value of their stockpiles. The oil price drop is adding up to a triple whammy for earnings prospects through the end of the year, for companies already beset by slowing economic growth and state controls on prices… ‘Refiners’ earnings will be impacted and the main reason for that is inventory losses,’ said Duke Suttikulpanich… oil and gas analyst at Standard Chartered Bank. ‘Contrary to common belief, the sharp drop in oil price does not benefit refiners’ earnings. And low demand forecasts mean margins aren’t expanding.’”

Latin America Watch:

October 21 – Financial Times (Elaine Moore): “In the famous Big Mac index of global currency values against the US dollar, Venezuela makes a surprise entrance as the third most expensive place in the world to eat a burger. This unexpected finding can be explained by two factors: the array of fixed exchange rates set by a country that has to import almost everything apart from oil and the rampant inflation that has pushed up prices more than 60% in 2014. For investors in the country’s debt, it is not good news. Nor is the fact that oil prices are dropping, reserves are falling and the country is experiencing a widespread shortage of basic goods… Against this gloomy economic backdrop international investors are reassessing the likelihood of Venezuela making payments on its external debt. The cost of buying insurance against a failure by Venezuela to make a payment on its debt via five-year credit-default swaps is now higher than for any other country and last week rose to levels not seen for five years. Meanwhile, the yield on Venezuela’s benchmark 2027 bond hit nearly 18%, the highest in five years.”

Japan Bubble Watch:

October 21 – Bloomberg (Isabel Reynolds and Maiko Takahashi): “Japanese Prime Minister Shinzo Abe rushed to appoint two new members of his cabinet yesterday, after two female ministers were forced to resign as he confronts some of the most difficult decisions since he took office. Abe picked Yoichi Miyazawa, a 64-year-old man as trade and industry minister and Yoko Kamikawa, a 61-year-old woman as justice minister. Their predecessors, Yuko Obuchi, 40, and Midori Matsushima, 58, quit yesterday over allegations of financial impropriety. The scandals may damage Abe’s public support as he nears a year-end deadline for deciding whether to raise the sales tax to 10% from the current 8%.”