Thursday, November 30, 2017

Friday's News Links

[Bloomberg] Stocks Fall as Flynn Said to Implicate Trump Team: Markets Wrap

[ABC] Flynn prepared to testify against President Trump - report

[Bloomberg] European Stocks Hit Two-Week Low as Tech Shares Extend Selloff

[Bloomberg] Oil Extends Gains as OPEC Prolongs Production Curbs Through 2018

[Bloomberg] China Stocks Set for Worst Week This Year as State Cools Gains

[Bloomberg] Here’s Where the GOP Tax Plan Stands Right Now

[Reuters] Senate grapples with tax cut plan's impact on U.S. deficit

[CNBC] Three ways Trump's latest pick could really shake up the Federal Reserve

[Reuters] November was best month for euro zone factories in over 17 years: PMI

[Bloomberg] China Bans Unlicensed Micro-Lending, Curbs Rates to Limit Risks

[Bloomberg] Falling Sydney Prices Drive a Slowdown in Australian Property

[Bloomberg] Tencent Drops Suddenly as Shares Set for Worst Week in 21 Months

[FT] Trump puts talks to boost China economic ties on ice

Thursday Evening Links

[Bloomberg] Asia Stocks Pare Gains as U.S. Equity Futures Drop: Markets Wrap

[Politico] Republicans rewriting tax bill — and won’t vote tonight

[CNN] The Senate tax bill has hit a snag, votes to continue Friday

[CNBC] Senate pushes back tax bill vote as setback hits in final hours

[CNBC] Senate tax bill would fall $1 trillion short of paying for itself after economic growth, congressional analysis says

[Bloomberg] OPEC Agrees to Extend Oil Cuts Until the End of 2018

[Bloomberg] Investors Are Piling Into Retail ETFs After Holiday-Fueled Rally

[Reuters] Trump: China's North Korea diplomacy appears to have 'no impact on Little Rocket Man'

[WSJ] Senate Bill Hits Obstacle Over Deficit Concern

[WSJ] Senate Tax Plan Won’t Pay for Itself, Congressional Analysis Says

[WSJ] China Inflames U.S. Ire in Steel Dispute

Wednesday, November 29, 2017

Thursday's News Links

[Bloomberg] U.S. Stocks Gain on FANG Rebound as Crude Climbs: Markets Wrap

[Reuters] Senate tax drama enters complicated end-game

[Bloomberg] U.S. Consumer Spending Cools While Inflation May Encourage Fed

[Bloomberg] Bank of Korea Leads the Way in Asia With Interest-Rate Hike

[Bloomberg] BIS Warns Central Banks That Policy Caution Has Its Perils Too

[Reuters] Trump nominates Marvin Goodfriend for Fed governor post

[Bloomberg] China Factory Gauge Unexpectedly Rises as Global Demand Firms Up

[Bloomberg] Flattening Curve Aside, Bonds Haven't Been This Calm Since 1979

[Reuters] U.S. warns North Korean leadership will be 'utterly destroyed' in case of war

[WSJ] Corporate Tax Rate in Flux as Senate Votes to Open Debate

[WSJ] Is China’s Central Bank Losing Its Monetary-Policy Mojo?

[FT] After 12 years of leadership, Merkel fatigue spreads in Germany

[FT] Hedge funds eye juicy returns of esoteric trends

[FT] Hunt for yield drives record sales of long-dated EM debt

Wednesday Evening Links

[Bloomberg] U.S. Stocks Dragged Down by Tech Rout; Bonds Fall: Markets Wrap

[Bloomberg] Bitcoin Just Plunged 20% in a Matter of Hours

[Bloomberg] Fed Says Price Pressures Rising With Economic Growth Steady

[Reuters] Fed districts see U.S. outlook improving, price pressures picking up

[Reuters] Fed's Williams sees four rate hikes between now and end of 2018

[CNBC] Fed Chair Janet Yellen: Rates have to rise to prevent 'boom-bust' economy

[Reuters] GOP tax plan grows even more unpopular as nearly half of Americans oppose it: Poll

[CNBC] Some GOP senators aren't happy about the tool being used to win Corker's tax vote

[Reuters] U.S. pending home sales jump 3.5 percent in October

[Bloomberg] Venezuelan ‘Hunger Bonds’ Sink Into Default, Adding to Goldman's Headache

[Bloomberg] Biggest U.S. Crypto Exchange Hit by Delays as Demand Surges

[CNBC] Yellen: $20 trillion national debt 'should keep people awake at night'

[CNBC] Investors should worry about war between Israel and Iran, warns Pulitzer Prize-winner Tom Friedman

Tuesday, November 28, 2017

Wednesday's News Links

[Bloomberg] Stocks Gain With Tax, Data in Focus; Pound Rises: Markets Wrap

[Bloomberg] U.S. Third-Quarter Growth Revised Up to 3.3%, Three-Year High

[Reuters] Senate Republicans shove tax bill ahead as Democrats fume

[CNBC] Bitcoin surges through $11,000 less than 24 hours after topping $10,000

[Bloomberg] Yellen Says U.S. Expansion Widening as Financial Risks Muted

[Bloomberg] Clock Ticking for Equities’ Last ‘Hurrah,’ Credit Suisse Says

[Bloomberg] Goldman Warns Highest Valuations Since 1900 Mean Pain Is Coming

[Bloomberg] German Inflation Accelerated More Than Expected in November

[Bloomberg] North Korea Says Nuclear Program Completed After ICBM Test

[Bloomberg] The End of the U.S. Housing Shortage Is Finally in Sight

[WSJ] Global Markets Focus on Bitcoin, Not North Korea’s Latest Missile

[WSJ] Chinese State Bank Adds Pressure to Debt-Laden Indian Wireless Carrier

[FT] Trump team opens new front in trade battle with China

[FT] ECB bond buying transforms universe of top tier debt

Tuesday Evening Links

[Bloomberg] Asia Stocks to Track U.S. Gains, Shrug Off Missile: Markets Wrap

[Reuters] Surging banks lead Wall Street to highs as tax plan advances

[Reuters] Republican tax plan clears hurdle in Senate; fight erupts over spending

[Bloomberg] GOP Tax Plan Heads to Senate Floor for Vote Likely This Week

[Bloomberg] Democrats Pull Out of Trump Meeting After He Says Deal Is Unlikely

[Bloomberg] Powell Says Case ‘Coming Together’ for December Rate Hike

[Bloomberg] North Korea Launches Another Ballistic Missile, Yonhap Says

[NYT] A Prince’s Uncertain Fate Deepens Mystery in Saudi Arabia

Monday, November 27, 2017

Tuesday's News Links

[Bloomberg] Stocks Rise as Energy Shares Jump; Dollar Steady: Markets Wrap

[Bloomberg] U.S. Consumer Confidence Unexpectedly Climbs to 17-Year High

[Reuters] U.S. goods trade deficit widens in October, inventories fall

[Bloomberg] Home Prices in 20 U.S. Cities Rise by Most Since Mid-2014

[Reuters] Fed nominee Powell, once hawkish, now champions Yellen's focus on jobs

[Bloomberg] Here’s Where the GOP Tax Plan Stands Right Now

[Reuters] Senate tax drama intensifies as bill faces key panel vote

[CNBC] Sen. Bob Corker: 'I've been a deficit hawk for 11 years' and don't want to damage the nation with tax vote

[Bloomberg] China Bond Rout Is `Early Warning Signal' to Global Debt Market

[Reuters] BOJ Kuroda: 'Reversal rate' helps understand appropriate yield curve

[Bloomberg] Market's Numbness to Risk Reminds of Calm Before Storm: Axioma

[Reuters] China's regulator just moved to slow the flow of mainland cash into Hong Kong

[Bloomberg] Chinese Rival to Tesla Faces a Debt Crunch

[WSJ] Powell Seeks to Support Economy, Defend Fed Independence

[WSJ] Senators Seek Changes to Tax Bill as Busy Week Kicks Off

[FT] US tax reform: the return of trickle-down economics

Monday Evening Links

[Bloomberg] Stocks Languish at Start of Busy Week, Oil Drops: Markets Wrap

[CNBC] Here's where GOP Senate holdouts stand on sweeping tax bill

[AP] Senators consider automatic tax hikes if revenue falls short

[Reuters] Fed chair nominee Powell pledges 'decisive' response to any economic crisis

[CNBC] Dallas Fed president: Stock market 'excesses' pose potential threat to economy

[Reuters] U.S. Cyber Monday sales jump 17 percent, fewer deals on offer

[Bloomberg] How China's Going to Try to Control Its Massive Housing Bubble

[Bloomberg] OPEC’s Clash With U.S. Oil Is Nearing Its Day of Reckoning

[Bloomberg] North Korea May Be Preparing a Missile Launch, Kyodo Reports

[WSJ] Senators Seek Changes to Tax Bill as Busy Week Kicks Off

[WSJ] Beijing is Making Its Most Serious Effort Yet to Tackle Its Financial-System Issues

[FT] Cautious trade follows fresh China stocks sell-off

[FT] Structured credit boom sees investors scaling risk curve

[FT] Trump, Xi and the siren song of nationalism

Sunday, November 26, 2017

Monday's News Links

[Bloomberg] Stocks Struggle as Metal Prices Drop; Dollar Slips: Markets Wrap

[Bloomberg] China Shares Resume Decline as Year's Top Performers Take a Hit

[Bloomberg] Bitcoin Guns For $10,000 as Cryptocurrency Mania Intensifies

[Bloomberg] Here’s Where the GOP Tax Plan Stands Right Now

[Bloomberg] U.S. New-Home Sales Unexpectedly Climb to Highest in a Decade

[CNBC] Wall Street week ahead: A new Fed chief, the pulse on the housing market and bitcoin mania

[CNBC] Chance of US stock market correction now at 70 percent: Vanguard Group

[Reuters] German government talks likely a month away, Merkel ally says

[Reuters] South Korea warns North not to repeat armistice violation

[WSJ] Fed’s Plan for 2017 Nears Completion—but View for 2018 Is Fuzzy

[FT] Corporate Japan hit by severe labour shortages

Sunday Evening Links

[Bloomberg] Asian Stocks Nudge Higher as Rand Halts Slide: Markets Wrap

[Bloomberg] China's Top Bond Fund Says Rout May Worsen

[Bloomberg] Early China Indicators Signal That Economy Cooled in November

[Bloomberg] New York Could Lose Top Earners Under Tax Bill, Goldman Says

[FT] BoJ hints at normalisation, with Japanese characteristics

Sunday's News Links

[Reuters] Black Friday, Thanksgiving online sales climb to record high

[Bloomberg] Bond Traders Start to See Crack in Fed's Resolve About Inflation

[Reuters] Bavaria boss backs SPD tie-up as consensus grows for German grand coalition

[Bloomberg] The Most Expensive U.S. Hurricane Season Ever: By the Numbers

[WSJ] Jerome Powell’s Path to Confirmation May Lack Drama of Recent Fed Nominee Battles

Friday, November 24, 2017

Weekly Commentary: Just the Facts November 24, 2017

For the Week:

The S&P500 gained 0.9% (up 16.2% y-t-d), and the Dow rose 0.9% (up 19.2%). The Utilities added 0.2% (up 14.4%). The Banks slipped 0.3% (up 7.8%), while the Broker/Dealers advanced 1.4% (up 21.0%). The Transports rallied 1.4% (up 6.4%). The S&P 400 Midcaps gained 1.0% (up 12.0%), and the small cap Russell 2000 jumped 1.8% (up 11.9%). The Nasdaq100 advanced 1.5% (up 31.8%).The Semiconductors surged 2.7% (up 48.0%). The Biotechs gained 1.6% (up 37.2%). Though bullion fell $5, the HUI gold index added 0.2% (up 3.2%).

Three-month Treasury bill rates ended the week at 124 bps. Two-year government yields increased two bps to 1.75% (up 56bps y-t-d). Five-year T-note yields added a basis point to 2.06% (up 14bps). Ten-year Treasury yields were unchanged at 2.34% (down 10bps). Long bond yields slipped a basis point to 2.76% (down 30bps).

Greek 10-year yields rose 12 bps to 5.29% (down 173bps y-t-d). Ten-year Portuguese yields declined four bps to 1.94% (down 181bps). Italian 10-year yields dipped three bps to 1.81% (unchanged). Spain's 10-year yields fell seven bps to 1.49% (up 11bps). German bund yields were unchanged at 0.36% (up 16bps). French yields slipped a basis point to 0.70% (up 1bp). The French to German 10-year bond spread narrowed one to 34 bps. U.K. 10-year gilt yields fell four bps to 1.25% (up 1bp). U.K.'s FTSE equities increased 0.4% (up 3.7%).

Japan's Nikkei 225 equities index gained 0.7% (up 18.0% y-t-d). Japanese 10-year "JGB" yields slipped a basis point to 0.03% (down 1bp). France's CAC40 rallied 1.3% (up 10.9%). The German DAX equities index recovered 0.5% (up 13.8%). Spain's IBEX 35 equities index increased 0.4% (up 7.5%). Italy's FTSE MIB index gained 1.5% (up 16.5%). EM markets were mixed. Brazil's Bovespa index rose 1.0% (up 23.1%), and Mexico's Bolsa added 0.2% (up 5.0%). India’s Sensex equities index gained 1.0% (up 26.5%). China’s Shanghai Exchange fell 0.9% (up 8.1%). Turkey's Borsa Istanbul National 100 index dropped 1.6% (up 33.8%). Russia's MICEX equities index gained 1.4% (down 3.2%).

Junk bond mutual funds saw outflows of $209 million (from Lipper).

Freddie Mac 30-year fixed mortgage rates dipped three bps to 3.92% (down 11bps y-o-y). Fifteen-year rates added a basis point to 3.32% (up 7bps). Five-year hybrid ARM rates gained one basis point to 3.22% (up 10bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates up a basis point to 4.14% (up 6bps).

Federal Reserve Credit last week declined $12.7bn to $4.410 TN. Over the past year, Fed Credit fell $12.2bn. Fed Credit inflated $1.591 TN, or 57%, over the past 263 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt increased $3.2bn last week to $3.372 TN. "Custody holdings" were up $252bn y-o-y, or 8.1%.

M2 (narrow) "money" supply rose $20.2bn last week to a record $13.778 TN. "Narrow money" expanded $642bn, or 4.9%, over the past year. For the week, Currency slipped $0.2bn. Total Checkable Deposits jumped $49.8bn, while Savings Deposits declined $26.1bn. Small Time Deposits added $0.9bn. Retail Money Funds declined $4.2bn.

Total money market fund assets gained $21.9bn to $2.761 TN. Money Funds rose $56bn y-o-y, or 2.1%.

Total Commercial Paper declined $4.0bn to $1.029 TN. CP gained $107bn y-o-y, or 11.6%.

Currency Watch:

The U.S. dollar index dropped 0.9% to 92.782 (down 9.4% y-t-d). For the week on the upside, the Mexican peso increased 1.9%, the Swedish krona 1.8%, the Norwegian krone 1.4%, the South Korean won 1.1%, the New Zealand dollar 1.0%, the Swiss franc 1.0%, the British pound 0.9%, the Brazilian real 0.9%, the Singapore dollar 0.8%, the Australian dollar 0.7%, the Japanese yen 0.5%, and the Canadian dollar 0.4%. For the week on the downside, the South African rand declined 1.1%. The Chinese renminbi increased 0.37% versus the dollar this week (up 5.2% y-t-d).

Commodities Watch:

The Goldman Sachs Commodities Index gained 1.4% (up 8.2% y-t-d). Spot Gold slipped 0.4% to $1,289 (up 11.8%). Silver declined 1.6% to $17.093 (up 7.0%). Crude surged $2.40 to $58.95 (up 9.5%). Gasoline rose 2.5% (up 7%), while Natural Gas sank 9.2% (down 25%). Copper jumped 3.3% (up 27%). Wheat dropped 2.0% (up 7%). Corn was unchanged (up 1%).

Trump Administration Watch:

November 24 – Bloomberg: “The $1.4 trillion item on President Donald Trump’s wish list -- a package of tax cuts for businesses and individuals that he has said he wants to sign before year’s end -- is headed into the legislative equivalent of a Black Friday scrum next week. Senate Republican leaders plan a make-or-break floor vote on their bill as soon as Thursday -- a dramatic moment that will come only after a marathon debate that could go all night. Democrats are expected to try to delay or derail the measure, and the GOP must hold together at least 50 votes from its thin, 52-vote majority in order to prevail. Their chances improved this week when Republican Senator Lisa Murkowski of Alaska said she’ll support repealing the ‘individual mandate’ imposed by Obamacare -- a provision that Senate tax writers are counting on to help finance the tax cuts.”

November 19 – Wall Street Journal (Lingling Wei, Jacob M. Schlesinger, Jeremy Page and Michael C. Bender): “A month before President Donald Trump’s visit to Beijing, Chinese officials presented an offer they thought Washington couldn’t refuse. China proposed that during the trip, Mr. Trump and his counterpart, Xi Jinping, unveil a plan to widen foreign firms’ access to China’s vast financial industry, according to people with knowledge of the matter. It was a move previous U.S. administrations had sought for years. To Beijing’s consternation, according to the people, Washington wasn’t interested. The offer was made a second time during one of Mr. Trump’s meetings at the Great Hall of the People. Hours after Air Force One took off from Beijing, China announced the opening on its own. The cold shoulder from the White House reflects a fundamental shift in how the U.S. manages its relationship with China, one that suggests a bold gamble and a rocky road ahead despite the bonhomie of the presidential summit earlier this month in Beijing.”

November 21 – Wall Street Journal (Jacob M. Schlesinger and Dudley Althaus): “President Donald Trump’s chief trade negotiator issued a downbeat assessment… of efforts to rewrite the North American Free Trade Agreement, decrying ‘a lack of headway’ and accusing Canada and Mexico of refusing to ‘seriously engage’ on controversial U.S. proposals aimed at cutting the U.S. trade deficit. U.S. Trade Representative Robert Lighthizer didn’t go as far as repeating Mr. Trump’s threat to pull out of the 23-year-old pact if the other parties don’t agree to American demands to ‘rebalance’ Nafta to make it more favorable to the U.S. But he made clear he expected them to do so by next month. ‘Absent rebalancing, we will not reach a satisfactory result,’ Mr. Lighthizer said…”

November 20 – Reuters (Jeff Mason and David Brunnstrom): “President Donald Trump put North Korea back on a list of state sponsors of terrorism on Monday, a designation that allows the United States to impose more sanctions and risks inflaming tensions over Pyongyang’s nuclear weapons and missile programs.”

November 21 – Politico (Rachael Bade and Heather Caygle): “Concern is growing in both parties that a clash over the fate of Dreamers will trigger a government shutdown this December. House conservatives have warned Speaker Paul Ryan against lumping a fix for undocumented immigrants who came to the country as minors into a year-end spending deal. They want him to keep the two issues separate and delay immigration negotiations into 2018 to increase their leverage… But many liberal Democrats have already vowed to withhold votes from the spending bill should it not address Dreamers…”

November 20 – CNBC (Liz Moyer): “The Justice Department sued… to block AT&T's merger with Time Warner, calling it an ‘illegal’ combination that harms consumers and stifles innovation, DOJ officials said. AT&T and Time Warner announced their $85 billion merger last year, but the closing has been dragged out by the government's antitrust review. It is the latest salvo in a drama more than one year in the making. Earlier this month, reports circulated that the government had demanded AT&T sell Turner Broadcasting, operator of the CNN news network, or DirectTV as a condition of approval, though the government pushed back at those reports.”

China Watch:

November 20 – Bloomberg: “When China unveiled plans on Friday to end the implicit guarantees underpinning asset-management products worth trillions of dollars, it should have been a bombshell for the nation’s savers. But for Yolanda Yuan and other individual investors who’ve piled into AMPs issued by banks, insurers and securities firms, the government’s announcement was largely a non-event. The reason: they didn’t believe it. ‘I don’t think any big banks will dare to take the risk of allowing defaults on AMPs, as that will lead to a flood of fund redemptions,’ said Yuan, a 29-year-old sales manager at a state-run financial company… She has about 100,000 yuan ($15,069) of personal savings in products covered by the new regulations. Over the past 13 years, assets in Chinese AMPs have swelled from almost nothing to $15 trillion in large part due to one key assumption: that investors would be made whole no matter what happened to the products’ underlying assets. Authorities are now moving to quash that belief amid concern that rampant moral hazard is distorting market prices and making the financial system vulnerable to crises.”

November 22 – CNBC (Huileng Tan): “China has been pumping a lot of cash into its system to lift market sentiment, as the world's second-largest economy walks a thin line between curbing debt and keeping everything running smoothly. Last week, the People's Bank of China injected cash totaling 810 billion Chinese yuan ($122.4bn) in five straight days of daily liquidity management operations. Those actions, which represented the largest weekly net increase since January, were in part a Beijing response to its 10-year sovereign bond yields spiking to multiyear highs, experts said. ‘Surging Chinese government bond yields hit the nerve of policymakers, so in order to further prevent a greater surge, they injected liquidity into the system to improve market sentiment,’ said Ken Cheung, a foreign exchange strategist at Mizuho Bank…”

November 22 – Bloomberg: “When Zhou Xiaochuan finally hands over the baton at the People’s Bank of China after a decade and a half in charge, his successor will inherit a series of headaches crowned by a debt pile racing toward 300% of output. The next governor will be tasked with not just reining in that leverage without tripping up economic growth, but keeping an eye on accelerating inflation too, all as the institution’s role in a complex regulatory structure evolves. As if that wasn’t enough, they’ll also be tasked with maintaining a stable currency as it opens up to market forces and boosting communication to keep global investors in the loop. ‘The PBOC is in more of bind than ever with its monetary policy,’ said Zhao Yang, chief China economist at Nomura Holdings Inc. in Hong Kong. ‘While it was fine to just look at inflation and economic growth targets in the past, the central bank now has to strike a balance among more targets, some of them conflicting.’”

November 23 – Bloomberg (Justina Lee): “A $2.2 trillion superbank is feeling the pinch of China’s bond slump. The yield on China Development Bank’s 10-year bonds surged past 5% on Wednesday, bringing the rise this quarter to about 70 bps. More striking has been the jump in its premium over government debt with a similar maturity, given that the state-owned lender is a so-called policy bank that aligns lending with national goals. The spread surged to 1 percentage point this week, up more than a quarter point just this month. The latest increase comes in the wake of tightened rules unveiled this month for CDB and two sister banks, with regulators pushing for strengthened risk management. As these lenders rely on market funding rather than deposits, the bond rout poses an increasing challenge both to their earnings and the credit they extend -- to everything from shantytown redevelopment to President Xi Jinping’s signature Belt and Road Initiative across Eurasia.”

November 21 - Bloomberg: “China’s drive to reduce its debt burden has shifted into a higher gear following the Communist Party’s twice-a-decade congress in October. Regulators have set their sights on a key pressure point -- shadow banking -- with rules around asset-management products tightened last week as they seek to bring the market under control. But these popular, high-yielding products are just one slice of China’s sizable banking leverage pie, characterized by state media as the ‘original sin’ of the financial system. Even if credit growth eases, China’s debt is on track to be more than three times the size of the economy by 2022…”

November 22 – Financial Times (Emily Feng): “China has halted all approvals for new online lending companies, sending a chill through the country’s fast-growing fintech sector, which has produced some of the biggest and most well subscribed offshore listings this year. The regulations came from a new state body set up to regulate internet finance. The rules also forbid fresh approvals of offline microlending companies that lend across provinces. Existing companies will be allowed to continue operating but may see their operations more heavily regulated.”

November 22 - Bloomberg (Lianting Tu, Enda Curran, and Emma Dai): “China’s deleveraging campaign is finally starting to bite in the nation’s corporate-bond market, a shift that will make 2018 a clearer test of policy makers’ appetites to let struggling companies fail. Yields on five-year top-rated local corporate notes have jumped about 33 bps since the month began, to a three-year high of 5.3%... Government bonds… had already moved last month as the central bank warned further deleveraging was needed. With more than $1 trillion of local bonds maturing in 2018-19, it will become increasingly expensive for Chinese companies to roll over financing -- and all the tougher for those in industries like coal that the nation’s leadership wants to shrink.”

November 23 – Wall Street Journal (Nathaniel Taplin): “It is well known that Chinese history is circular—dynasties rise and dynasties fall. So is commentary on the country’s economy. In 2008, China was supposedly on the brink of collapse. In 2009, its farsighted stimulus program saved the world economy. And in 2015, its nearsighted stimulus and ham-handed regulation was poised to tank the world economy. Now, according to market consensus, China’s problems have largely been fixed and it is poised to dominate the new century. If that sounds suspicious, it should.”

November 17 - Bloomberg: “Chinese home prices rose in more cities in October, snapping a three-month decline, a sign the market is stabilizing amid government efforts to curb property speculation. New-home prices, excluding state-subsidized housing, climbed in 50 of the 70 cities tracked by the government, compared with 44 in September, the National Bureau of Statistics said on Saturday. Prices fell in 14 cities from the previous month and were unchanged in six.”

Federal Reserve Watch:

November 22 – CNBC (Jeff Cox): “Federal Reserve officials expressed largely optimistic views of economic growth at their most recent meeting but also started to worry that financial market prices are getting out of hand and posing a danger to the economy. Minutes from the Oct. 31-Nov. 1 Federal Open Market Committee meeting indicate members with almost universally positive views on growth — the labor market, consumer spending and manufacturing all were showing solid gains. While there were disagreements on the pace of inflation, and even a discussion about changing the Fed's approach to price stability, the sentiment otherwise was largely positive.”

November 21 – Reuters (Jonathan Spicer and Stephanie Kelly): “Federal Reserve Chair Janet Yellen stuck by her prediction that U.S. inflation will soon rebound but offered… an unusually strong caveat: she is ‘very uncertain’ about this and is open to the possibility that prices could remain low for years to come. A day after announcing her retirement from the U.S. central bank, planned for early February, Yellen said the Fed is nonetheless reasonably close to its goals and should continue to gradually raise interest rates to keep both inflation and unemployment from drifting too low.”

U.S. Bubble Watch:

November 20 - Bloomberg (Emma Orr and Scott Moritz): “Some of the biggest landline phone providers in the U.S., from Connecticut to Arizona, are running headlong into a debt crisis after borrowing heavily to add more territory and then failing to escape the industry’s decline. CenturyLink Inc., Frontier Communications Corp. and Windstream Holdings Inc. -- the three largest rural phone carriers -- have lost 8% of their lines in the past year alone as people abandon home-phone service for more convenient wireless plans. The companies have merged with equally weak peers and drained dwindling cash reserves in an effort to pay dividends. Their bonds have plunged, with some of Frontier’s trading as low as 73 cents on the dollar and Windstream’s for as little as 65 cents. CenturyLink is in better shape, but some of its notes now trade at about 95 cents, down from more than 106 cents in July.”

November 20 – CNBC (Fred Imbert): “Investors are too optimistic and taking on too much risk in this low volatile environment, setting the stock market up for a potential downfall, according to strategists at… Societe Generale. ‘In a goldilocks scenario of low interest rates, abundant liquidity, stable growth and a focus on the 'good' Trump, investors continue to push asset prices, volatility and leverage to historical extremes,’ said Alain Bokobza, head of global asset allocation at Societe Generale… ‘Yet, a low volatility carry environment with rather extreme positioning is a dangerous combination, which we recently likened to dancing on the rim of a volcano.’ Bokobza also compared U.S. stocks to the boiling frog that doesn't realize the trouble surrounding it.”

November 20 – Wall Street Journal (Dana Mattioli): “Investment bankers have gotten used to being asked by worried retail-industry chief executives to pitch takeover ideas aimed at fending off Inc. Now the fear has spread to media, health care and many other sectors, where CEOs dread the breathtaking competitive advancements made by not just Amazon but also Facebook Inc., Alphabet Inc.’s Google and Netflix Inc. The result is an explosion of mergers and acquisitions. So far this month, about $200 billion of deals have been announced in the U.S., according to Dealogic. November is on pace to be the second-biggest deal-making month since the firm began tracking them in 1995.”

November 23 – Wall Street Journal (Ben Eisen and Chris Dieterich): “Large companies are repurchasing their shares at the slowest pace in five years, as record U.S. stock indexes and an expanding economy propel more money out of flush corporate coffers into capital spending and mergers. Companies in the S&P 500 are on pace to spend $500 billion this year on share buybacks, or about $125 billion a quarter, according to… INTL FCStone. That is the least since 2012 and down from a quarterly average of $142 billion between 2014 and 2016.”

November 19 - Bloomberg (Shobhana Chandra, Vince Golle and Jordan Yadoo): “Faster apartment building was instrumental in pulling the U.S. housing market out of its slump a decade ago. Now, that engine is starting to throttle back. A softening in the multifamily segment is something to keep an eye on even as overall homebuilding… is expected to keep moving forward. The supply of apartments and condominiums has surged in recent years as builders responded to rising demand… A Commerce Department report… showed completions of multifamily units in October reached the fastest annualized rate in almost three decades. What’s more, the pipeline of apartments under construction is leveling off from a 42-year high reached at the start of 2017.”

Central Banker Watch:

November 23 – Wall Street Journal (Tom Fairless): “European Central Bank President Mario Draghi appears to have gone beyond what top officials agreed by stating last month that the ECB’s giant bond-buying program will continue beyond next September. The minutes of the ECB’s October meeting… show officials were divided over whether to announce a concrete end-date for their bond purchases, known as quantitative easing or QE—and didn’t agree to any extension or wind-down phase after September 2018. On the contrary: Some officials warned against leaving the program open-ended, precisely because it might lead investors to believe that QE would be extended again. A fresh extension ‘did not appear justified in the absence of major new shocks,’ the minutes said.”

November 21 – Reuters (Leika Kihara): “The Bank of Japan is dropping subtle, yet intentional, hints that it could edge away from crisis-mode stimulus earlier than expected, through a future hike in its yield target, according to people familiar with the central bank’s thinking. With inflation still way below its 2% target, the BOJ sees no immediate need to withdraw stimulus, and regards weak price growth as its most pressing policy challenge. But bank officials are now more vocal on the rising cost of prolonged easing…”

Global Bubble Watch:

November 22 - Bloomberg (Luke Kawa): “‘I’m melting, I’m melting!’ The dying lament of a Wicked Witch? Yes. But it’s also an apt description of what’s been happening to bond yields since the financial crisis, according to Bank of America Merrill Lynch. In 2008, there was $28 trillion of debt yielding 4% or more. Now, it’s down to $3 trillion. An era of unprecedented monetary accommodation and structurally slower growth has been accompanied by a seemingly insatiable search for yield. Investors will now accept lower relative returns on risky debt or extend duration to clip coupons on sovereign bonds that still aren’t anywhere close to pre-crisis levels.”

November 21 – Financial Times (Robin Wigglesworth): “The difference between US short and long-term bond yields has dropped below the 1% mark for the first time in a decade, sparking concerns that the post-crisis economic expansion may be approaching its end. The so-called yield curve made up by the US government’s borrowing costs is one of the most widely followed financial indicators… On Tuesday the difference between two and 30-year US Treasury yields slipped to 98.8 bps, below the 100 bps (or 1%) level for the first time since November 2007.”

November 24 – Financial Times (John Authers): “Bats with Fangs can bite back. For those who do not speak fluent acronym, the Bats are the dominant Chinese internet groups — Baidu, Alibaba and Tencent — while the Fangs are the dominant US players in the internet, a list which includes Facebook, Amazon, Apple, Netflix, Google and some others. They have risen extraordinarily this year, so that all the world’s largest seven companies by market value are now either Bats or Fangs. The co-ordinated advance of online companies in the world’s two largest economies is one of the phenomena of the age. It can cloud perceptions of China, which is now the fulcrum of world capital markets. China’s political model is changing as Xi Jinping asserts greater control over the economy, while its attempts to change its economic model continue — and while officials throughout the Chinese power structure signal their worry about the country’s huge overhang of debt.”

November 22 – Bloomberg: “Unease rippled through China’s stock market on Thursday, with a gauge of large-cap shares plummeting the most since June last year, as investors fretted a bond rout is getting out of control. The CSI 300 Index sank 3%, with losses steepening in the last hour of trading… Industrial & Commercial Bank of China Ltd., Ping An Insurance (Group) Co. and Kweichow Moutai Co. were among the biggest drags on Shanghai’s benchmark index. Hong Kong’s Hang Seng Index slid 1% from a decade-high.”

November 23 – Bloomberg (Chris Bourke): “The party is finally winding down for Australia’s housing market. How severe the hangover is will determine the economy’s fate for years to come. After five years of surging prices, the market value of the nation’s homes has ballooned to A$7.3 trillion ($5.6 trillion) -- or more than four times gross domestic product. Not even the U.S. and U.K. markets achieved such heights at their peaks a decade ago before prices spiraled lower and dragged their economies with them. Australia’s obsession with property is firmly entrenched in the nation’s economy and psyche, fueled by record-low interest rates, generous tax breaks, banks hooked on mortgage lending, and prime-time TV shows where home renovators are lauded like sporting heroes. For many, homes morphed into cash machines to finance loans for boats, cars and investment properties.”

Fixed Income Bubble Watch:

November 20 – CNBC (Patti Domm): “Corporate debt is at its highest level relative to U.S. GDP since the financial crisis, and while not now a concern, that mountain of corporate IOUs could quickly turn into a heap of worry under the right circumstances. Fueled by low interest rates and strong investor appetite, debt of nonfinancial companies has increased at a rapid clip, to $8.7 trillion, and is equal to more than 45% of GDP, according to David Ader, chief macro strategist at Informa Financial Intelligence. According to the Federal Reserve, nonfinancial corporate debt outstanding has grown by $1 trillion in two years.”

Europe Watch:

November 23 – Bloomberg (Birgit Jennen and Arne Delfs): “Germany’s biggest opposition party said it’s open to talks on backing a government led by Chancellor Angela Merkel, offering a way to restore political stability to Europe’s biggest economy. Social Democrat Secretary General Hubertus Heil told reporters that the party is ready to start discussions if that’s the course that President Frank-Walter Steinmeier, who is trying to broker a deal, decides upon. Heil spoke after an eight-hour meeting of the SPD leadership in Berlin that wrapped up in the early hours of Friday. The SPD is firmly convinced that talks are needed,’ Heil was quoted as saying… ‘The SPD won’t reject such talks.’”

Japan Watch:

November 19 - Bloomberg (James Mayger): “Japan’s exports grew by double digits for a fourth straight month in October, continuing the best year-to-date performance since the global financial crisis. The value of exports rose 14% from a year earlier. Imports increase 18.9%.”

Emerging Market Watch:

November 20 - Bloomberg (Srinivasan Sivabalan): “Anyone wondering whether there’s still a price to pay for political risk need look no further than Turkey. The extra returns investors demand to buy the country’s assets are among the highest for developing nations, surpassing the premia for politically troubled peers such as Brazil, South Africa and Mexico. And the gap widened in recent days, after Turkish President Recep Tayyip Erdogan hit out at the central bank’s rate policy, reviving concern over government meddling in monetary decisions. That drove the nation’s bonds lower, pushing the yield on the benchmark 10-year debt to a record high on Monday, while the Borsa Istanbul 100 Index posted the biggest four-day loss in local currency terms since the aftermath of a failed coup last year.”

Geopolitical Watch:

November 23 – Reuters (Noah Browning and Parisa Hafezi): “Saudi Arabia’s powerful Crown Prince called the Supreme Leader of Iran ‘the new Hitler of the Middle East’ in an interview with the New York Times…, sharply escalating the war of words between the arch-rivals. The Sunni Muslim kingdom of Saudi Arabia and Shi‘ite Iran back rival sides in wars and political crises throughout the region. Mohammed bin Salman, who is also Saudi defense minister in the U.S.-allied kingdom, suggested the Islamic Republic’s alleged expansion under Ayatollah Ali Khamenei needed to be confronted.”

November 19 - Reuters (Patrick Markey and Mohamed Abdellah): “Saudi Arabia and other Arab foreign ministers criticized Iran and its Lebanese Shi‘ite ally Hezbollah at an emergency meeting in Cairo on Sunday, calling for a united front to counter Iranian interference. Regional tensions have risen in recent weeks between Sunni monarchy Saudi Arabia and Shi‘ite Islamist Iran over Lebanese Prime Minister Saad al-Hariri’s surprise resignation, and an escalation in Yemen’s conflict.”

November 22 - Bloomberg (Donna Abu-Nasr): “Lebanese Prime Minister Saad Hariri suspended his resignation after the country’s president called for talks on how and why he ended up in Saudi Arabia this month and quit suddenly. Hariri said he accepted a request from President Michel Aoun to delay his departure, temporarily defusing a crisis that’s drawn in regional and global powers and rattled investors. The premier, who had said he feared for his life in Lebanon, has denied he was pressured by the Saudis to step down.”

November 21 – Reuters (MacDonald Dzirutwe): “Robert Mugabe resigned as Zimbabwe’s president on Tuesday, a week after the army and his former political allies moved to end four decades of rule by a man once feted as an independence hero who became feared as a despot.”

Friday's News Links

[Bloomberg] Stocks Climb as Retailers Gain on Black Friday: Markets Wrap

[Bloomberg] Oil Rises as Russia and OPEC Said to Reach Outline Deal on Cuts

[Bloomberg] The GOP Tax Plan Is Entering Its Make-or-Break Week

[Bloomberg] Germany's SPD Decides to Accept Negotiations With Merkel

[Bloomberg] The Party Is Over for Australia's $5.6 Trillion Housing Frenzy

[Reuters] 'Stealth hedging' shows investors not so complacent

[FT] Chinese tech shares set for classic burst-bubble scenario

[WSJ] Investors Have Gotten Too Complacent on China Debt

[NYT] Saudi Crown Prince calls Iran leader 'new Hitler': NYT

Wednesday, November 22, 2017

Thursday's News Links

[Bloomberg] European Stocks Erase Losses; Dollar Extends Drop: Markets Wrap

[Bloomberg] Chinese Stocks Tumble Most in 17 Months as Bond Selloff Spreads

[Reuters] China stocks suffer mauling, Fed leaves dollar in a daze

[Bloomberg] What Analysts Are Saying About the Sudden Drop in Chinese Stocks

[Bloomberg] Oil Trades Above $58 as U.S. Stockpile Draw Boosts OPEC Optimism

[Reuters] ECB split over keeping bond buys open-ended: minutes

[Bloomberg] Merkel Offered Path to Fourth Term as Resistance Dwindles

[Bloomberg] China's $3.4 Trillion Corporate Bond Market Faces Rocky 2018

[Bloomberg] These Are the Five Biggest Tests Facing China's Next Central Bank Chief

[Bloomberg] Two Biggest Risks Now Are China and Inflation, Market Veteran Says

[Bloomberg] ECB Policy Makers Worried Markets Expect More QE Extensions

[Bloomberg] Australia's $5.6 Trillion Housing Frenzy Tops U.S. Subprime Peak

[WSJ] Fed on Track for December Rate Rise, but Inflation Worries Persist

[WSJ] Have Trillions of Fed Dollars Broken a Bond Market Warning Sign?

[WSJ] Saying Bye to Buybacks

Wednesday Evening Links

[Bloomberg] Dollar Steady After Sinking on U.S. Rate Outlook: Markets Wrap

[Bloomberg] Fed Signals December Hike Even as Debate on Prices Persists

[CNBC] Fed officials fear financial market 'imbalances' and possibility of 'sharp reversal' in prices

[Bloomberg] China is pumping a lot of cash into its economy to calm investors

Tuesday, November 21, 2017

Wednesday's News Links

[Bloomberg] Dollar, Bonds Slip as Stocks Rise; Pound Swings: Markets Wrap

[Bloomberg] Oil Climbs to Two-Year High as Stockpiles Fall Before OPEC Meets

[Bloomberg] U.S. Business Equipment Orders Fall for First Time Since June

[Reuters] 'Very uncertain' Yellen still predicts U.S. inflation rebound

[Bloomberg] Bond Scarcity Made $25 Trillion in Higher-Yielding Debt Disappear

[Reuters] Half of Germans want new elections after coalition talks fail

[Reuters] Lebanon's Hariri Delays Resignation, Vows to Protect Nation

[WSJ] Trump Administration Blasts Mexico, Canada For Limited Nafta ‘Headway’

[WSJ] Fed Minutes to Give Hints on Officials’ Mood Ahead of Final Meeting of 2017

[WSJ] Yellen Says She’s Uncertain Weak Inflation Is Transitory

[FT] Yellen describes low US inflation in 2017 as a ‘mystery’

[FT] US yield curve hits its flattest point since November 2007

[FT] Beijing throws cold water on China’s fintech IPO wave

Tuesday Evening Links

[Bloomberg] Asian Stocks to Climb as S&P 500 Hits Record High: Markets Wrap

[Reuters] Fed close to goals, sees dual risks as it hikes rates: Yellen

[Reuters] BOJ gives early sign of lift-off with warnings on the costs of easing

[Reuters] NAFTA round wrapping up, 'significant differences' remain

[Bloomberg] Chip Stocks Are on the Verge of Finally Breaking Their Tech Bubble Era Records

[Reuters] Zimbabwe's Mugabe resigns, ending four decades of rule

Monday, November 20, 2017

Tuesday's News LInks

[Bloomberg] Global Stocks Gain as Bonds Rise; Dollar Slips: Markets Wrap

[Bloomberg] People Are Suddenly Worried About the Yield Curve Flattening

[Politico] Congress speeds toward shutdown over Dreamers

[Bloomberg] ECB Is Said Likely to Take Small Steps in QE Exit Guidance

[Bloomberg] China Is Stepping Up the Fight Against Its Mountain of Debt

[Bloomberg] Turkey Lifts Bank-Funding Cost as Lira Drops to All-Time Low

[Bloomberg] Turkish Assets Race to the Bottom as Erdogan Targets Rates Again

[Bloomberg] Hong Kong Apartment Sets Asia Price Record

[NYT] C.E.O. Deficit Fears Dissolve With the Prospect of Corporate Tax Cuts

[WSJ] Tech Boom Creates New Order for World Markets

[WSJ] Takeovers Roar to Life as Companies Hear Footsteps From Tech Giants

[WSJ] Germany’s Political Impasse Will Stymie Further European Change

[FT] Merkel left searching for route out of crisis

[FT] Low volatility paradox will catch out investors and regulators

Monday Evening Links

[Reuters] Industrials, techs lift Wall Street, health stocks limit gains

[CNBC] Justice Department calls AT&T deal for Time Warner 'illegal' and 'harmful' to consumers

[CNBC] The debt time bomb that keeps growing and now equals nearly half of US GDP

[Bloomberg] Yellen Says She'll Leave Fed Once Powell Sworn in as Chair

[Bloomberg] Merkel Says She Prefers New Elections Over Minority Government

[CNBC] The stock market is 'dancing on the rim of a volcano,' warns investment bank

[Bloomberg] China's $15 Trillion Problem: Investors Don't Believe in Losses

[Bloomberg] A Trader Called the ‘VIX Elephant’ Is About to Rock Volatility Options

[Reuters] Trump: U.S. designates North Korea a state sponsor of terror, triggering sanctions

Sunday, November 19, 2017

Monday's News Links

[Bloomberg] Stocks Rebound in Short Week for U.S. Exchanges: Markets Wrap

[Bloomberg] Merkel’s Attempt to Form a New German Government Collapses

[Bloomberg] China Clampdown Signals ‘New Era’ for $15 Trillion in Funds

[CNBC] Chinese shadow banking has slowed — but that's not as good as it seems

[Bloomberg] A Boring Week in U.S. Stocks Masks a Roaring Appetite for Hedges

[Bloomberg] Rural-Phone Crisis: $48 Billion of Junk Debt Hangs Over Industry

[Bloomberg] Once-Hot Apartment Construction Cooling as U.S. Housing Engine

[Reuters] Japan PM Abe: Govt and BOJ to work together to beat deflation

[WSJ] U.S. Rebuffs China’s Charm Offensive, Edging Closer to Trade War

[WSJ] Growing Gas Glut Threatens West Texas Oil Boom

[WSJ] How China’s Acquisitive HNA Group Fell From Favor

[FT] Angela Merkel faces worst political crisis of her career

[FT] EU leaders warn on risks of Berlin power vacuum

[NYT] Six Years After Fukushima, Robots Finally Find Reactors’ Melted Uranium Fuel

Sunday Evening Links

[Bloomberg] Euro Drops as German Talks Fail; Asian Stocks Slip: Markets Wrap

[Bloomberg] Bitcoin Soars Past $8,000 as Technology Shift Concern Vanishes

[CNBC] The stock market's 'split personality' could set off a correction at any moment, Art Cashin warns

[Bloomberg] Japan’s Best Export Performance Since 2008 Crisis Rolls On

[Reuters] Saudi Arabia and Arab allies push for unity against Iran, Hezbollah meddling

Sunday's News Links

[Reuters] 'No fireworks' at NAFTA talks, but few signs of progress

[Bloomberg] Merkel Faces Endgame for Next German Government in Party Talks

[Reuters] Mugabe agrees to stand down as Zimbabwe president: source

[WSJ] Is This the Top of the Market?

[FT] China must reveal the true level of its GDP growth

Friday, November 17, 2017

Weekly Commentary: "Not Clear What That Means"

November 15 – Bloomberg (Nishant Kumar and Suzy Waite): “Hedge-fund manager David Einhorn said the problems that caused the global financial crisis a decade ago still haven’t been resolved. ‘Have we learned our lesson? It depends what the lesson was…’ Einhorn said he identified several issues at the time of the crisis, including the fact that institutions that could have gone under were deemed too big to fail. The scarcity of major credit-rating agencies was and remains a factor, Einhorn said, while problems in the derivatives market ‘could have been dealt with differently.’ And in the ‘so-called structured-credit market, risk was transferred, but not really being transferred, and not properly valued.’ ‘If you took all of the obvious problems from the financial crisis, we kind of solved none of them,’ Einhorn said… Instead, the world ‘went the bailout route.’ ‘We sweep as much under the rug as we can and move on as quickly as we can,’ he said.”

October 12 – ANSA: “European Central Bank President Mario Draghi defended quantitative easing at a conference with former Fed chief Ben Bernanke, saying the policy had helped create seven million jobs in four years. Bernanke chided the idea that QE distorted the markets, saying ‘It's not clear what that means’.”

Once you provide a benefit it’s just very difficult to take it way. This sure seems to have become a bigger and more complex issue than it had been in the past. Taking away benefits is certainly front and center in contentious Washington with tax and healthcare reform. It is fundamental to the dilemma confronting central bankers these days.

As I read David Einhorn’s above analysis, my thoughts returned to Ben Bernanke’s comment last month regarding distorted markets: “It’s Not Clear What That Means.” Einhorn attended one of those paid dinners with Bernanke back in 2014, and then shared thoughts on Bloomberg television: “I got to ask him all these questions that had been on my mind for a very long period of time. And then on the other side, it was, like, sort of frightening, because the answers weren’t any better than I thought that they might be.” A successful hedge fund manager such a Mr. Einhorn is keen to decipher market distortions. Dr. Bernanke was keen to benefit markets – to inflate them.

During the mortgage finance Bubble period, I often referred to “The Moneyness of Credit” and “Wall Street Alchemy.” Various risk intermediation processes were basically transforming endless (increasingly) risky loans into perceived safe and liquid money-like instruments. Throughout history, insatiable demand for money created great power and peril. I can’t conceptualize a more far-reaching market distortion than conferring money attributes to risky financial instruments. Pandora’s Box. For a while now, I’ve been astounded that the Federal Reserve has no issue with epic market distortions.

Fannie and Freddie were on the hook for insuring Trillions of mortgage securities. These GSEs essentially had no reserves or equity in the event of a significant downturn, a fact that had no bearing whatsoever on the safe haven pricing of their perceived money-like securities. Insurers of Credit were on the hook for Trillions, with minimal reserves. So, investors held (and leveraged) Trillions of “AAA” with little concern for losses or illiquid trading. Meanwhile, there was the gargantuan derivatives marketplace thriving on the assumption of liquid and continuous markets, despite hundreds of years of market history replete with recurring bouts of illiquidity and dislocation.

There were as well myriad variations of cheap market “insurance” readily available, bolstering risk-taking with the misperception that risks (equities, Credit, interest-rates, etc.) could always be easily hedged. And so long as Credit expanded rapidly (risky loans into “money”), the economy boomed and markets inflated, the pricing for market insurance remained low (or went lower).

As Einhorn stated, “risk was transferred, but not really being transferred, and not properly valued.” It amounted to a historic market Bubble distortion. Underlying risks were being grossly distorted and mispriced in the marketplace. Distortions fostered a massive expansion of risky Credit and untenable financial intermediation – a powerful boom and bust dynamic that culminated in a crash. Amazingly, catastrophic market distortions evolved gradually enough over years so to barely garnered attention. Can’t worry about risk when there’s easy “money” to amass.

Central bankers learned the wrong lessons from that modern-day market crisis. The post-crisis focus was on traditional lending and bank capital. As the thinking goes, so long as banks avoid reckless lending and remain well-capitalized, the risk of a repeat crisis remains negligible. Central banks did come to appreciate the risk of institutional Too Big to Fail, but again the solution was additional bank capital. Market distortions behind the Bubble and crash didn’t even enter into the discussion. Indeed, the Fed moved aggressively to reflate market prices, employing various measures that specifically manipulated market perceptions, prices and dynamics. There was no recognition that this course would elevate the entire structure of global market Bubbles to Too Big to Fail.

“Moneyness of Credit” evolved into the “Moneyness of Risk Assets.” It moved so far beyond Fannie, Freddie, and Wall Street structured finance distorting perceptions of risk in mortgage securities. The Federal Reserve and global central bankers turned to brazenly distorting risk perceptions throughout equities, corporate Credit, sovereign debt, EM and the rest. Slash rates and force savers into the risk asset marketplace. Inject new “money” into the securities markets and guarantee liquid, continuous and levitated markets. Who wouldn’t write flood insurance during a predetermined drought? And then, why not reach for risk, speculate and leverage with prices rising and market insurance remaining so cheap? History’s Greatest Market Distortions.

The VIX ended Friday’s session at 11.43, only somewhat above recent historic lows. The Fed is only a few weeks from what will likely be its fifth “tightening” move of this cycle. And with rather conspicuous market excesses facing a tightening cycle, why does market insurance remain so cheap? For one, markets assume that central bankers will not actually impose a tightening of market or financial conditions. Second, the greater risk asset Bubbles inflate the more confident the markets become that central bankers have no alternative than to backstop market liquidity and prices.

“The West will never allow a Russian collapse.” Then, after the LTCM bailout and the “committee to save the world,” the powers that be would surely not allow a crisis in 1999. Then it was “Washington will never allow a housing bust.” Later it was 2008 as the “100-year flood.” Global central bankers will simply not tolerate another crisis. And it is always these types of pervasive market misperceptions that ensure far-reaching distortions – risk-taking, lending, speculating, leveraging, investing, etc. – that inevitably ensure problematic market “adjustments.”

One of the Capitalism’s great virtues is the capacity for a well-functioning pricing mechanism to promote self-adjustment and self-correction. And I would argue that the pricing of finance is absolutely critical to system adjustment and sustainability. Increasing demands for finance should induce higher borrowing costs that work to temper demand. But the proliferation of non-traditional non-bank and market-based finance essentially generates unlimited supply. It may have been subtle, though consequences were earth-shattering.

With Wall Street intermediation leading the charge, the mortgage finance Bubble period experienced a huge surge in demand for Credit accommodated at declining borrowing costs. This was transformative particularly for home and securities price inflation dynamics, where rising asset prices generally tend to incite heightened speculative demand. The critical pricing mechanisms that promote self-adjustment and correction became inoperable.

There is a special place in market hell for long-term price distortions. Given sufficient time, an enterprising Wall Street will ensure a proliferation of new products and strategies meant to profit from upward price trends and ingrained market perceptions. As central banks punished savers and “helped” the markets with low rates, QE and liquidity assurances, The Street ensured an onslaught of enticing new investment vehicles and approaches. Why not just buy a corporate Credit ETF instead of holding zero-rate deposits or T-bills? Of course it’s perfectly rational to own equities index ETFs, especially with central bankers ensuring underperformance by active managers conscious of risk. And after a number of years, with markets booming and economies humming along, don’t fundamentals beckon for participating in the junk bond ETF bonanza?

From my perspective, there are two key areas where central banker-induced market distortions have been precariously exacerbated by (fed and fed by) structural developments. First, the perception of “moneyness” has spurred Trillions of flows into the ETF complex. Indeed, the perception of safety and liquidity has created a structural vulnerability to a destabilizing reversal of flows. Everyone perceives they can easily – and almost instantaneously - get out of the market with a couple mouse clicks. And in a rehash of Wall Street Alchemy, hundreds of billions (Trillions?) of illiquid securities have been intermediated through the ETF complex - transformed into perceived liquid ETF shares. This has been a particularly momentous development for corporate Credit and critical as well for mid- and small cap equities.

A second perilous structural development has been within the Wild West of Derivatives. The perception that there are no limits to what central bankers will do to bolster the markets has fostered an explosion of derivative strategies - variations of writing market protection or “selling flood insurance during a drought”. The availability of cheap risk protection became fundamental to financial excess on a systemic basis.

I would add, as well, that over the years a powerful interplay has evolved between the ETF complex and derivatives markets. The perception of highly liquid ETF shares – especially in corporate Credit and liquidity-challenged equities – has been integral to “dynamic” derivative hedging strategies. Why not leverage in corporate Credit and outperforming small cap stocks when cheap derivative protection is so readily available? Better yet, why not leverage a “diversified” portfolio of multiple asset classes (i.e. “risk parity”)? And, likewise, why not garner easy returns from selling such insurance on the low-probability of a market decline? After all, liquid markets in ETF shares are available for shorting in the unlikely event the seller of market protection decides to hedge risk.

November 17 – CNBC (Jeff Cox): “Though stock market prices have held up in November, investors generally are running from risk at a near-record pace. Judging from the flow of money out of high-yield bonds, investors are getting increasingly leery of a market that continues to hover around record levels, despite a handful of rough trading sessions in November and a rocky start Friday. Funds that track junk bonds saw $6.8 billion of outflows over the past week through Wednesday, according to Bank of America Merrill Lynch. That's the third-highest on record.”

Just a very interesting week in the markets. There was a Risk Off feel to junk bond flows. Risk aversion also appeared to be gaining some momentum early in the week. The S&P500 fell to a two-week low in early-Wednesday trading, confirmed by a safe haven bid to Treasuries. Equities then rallied sharply Thursday, in what appeared a habitual final jam prior to option expiration (conveniently crushing the value of puts). For the week, the safe haven yen gained 1.1%, while the euro increased 1.1% and the Swiss franc rose 0.7%. Gold gained 1.5%. The Treasury yield curve flattened notably, with two-year yields up seven bps and ten-year yields down five bps (62 bps spread a 10-year low).

There were other dynamics not necessarily inconsistent with incipient Risk Off. The small caps rallied 1.2% this week. There also appeared a squeeze in some of the popularly shorted stocks and sectors. The Retail Sector ETF (XRT) surged 3.9%. Footlocker jumped 34.5% and Abercrombie & Fitch rose 23.8%. And speaking of popular shorts, Mattel jumped 27.8% and Buffalo Wild Wings gained 16.3%.

It would not be extraordinary for a market to succumb to Risk Off at the conclusion of a short squeeze. In the initial phase of Risk Off, the leveraged speculating community pares back both longs and shorts. The upward bias on popular short positions fuels disappointing performance generally on the short side, spurring short covering, frustration and position adjustments. The market had that kind of feel this week. Definitely some instability beneath the markets’ surface, while complacency generally held sway.

For the Week:

The S&P500 slipped 0.1% (up 15.2% y-t-d), and the Dow declined 0.3% (up 18.2%). The Utilities added 0.3% (up 14.2%). The Banks rallied 1.6% (up 8.1%), and the Broker/Dealers added 0.1% (up 19.4%). The Transports dipped 0.2% (up 4.9%). The S&P 400 Midcaps gained 0.8% (up 10.8%), and the small cap Russell 2000 jumped 1.2% (up 10.0%). The Nasdaq100 added 0.1% (up 29.8%).The Semiconductors increased 0.3% (up 44.2%). The Biotechs recovered 1.5% (up 35.0%). With bullion up $19, the HUI gold index added 0.5% (up 3.1%).

Three-month Treasury bill rates ended the week at 124 bps. Two-year government yields jumped seven bps to 1.72% (up 53bps y-t-d). Five-year T-note yields added a basis point to 2.06% (up 13bps). Ten-year Treasury yields fell five bps to 2.34% (down 10bps). Long bond yields dropped ten bps to 2.78% (down 29bps).

Greek 10-year yields rose five bps to 5.18% (down 184bps y-t-d). Ten-year Portuguese yields fell another eight bps to 1.98% (down 176bps). Italian 10-year yields slipped a basis point to 1.84% (up 2bps). Spain's 10-year yields dipped two bps to 1.56% (up 18bps). German bund yields fell five bps to 0.36% (up 16bps). French yields dropped seven bps to 0.71% (up 3bps). The French to German 10-year bond spread narrowed two to 35 bps. U.K. 10-year gilt yields declined five bps to 1.29% (up 6bps). U.K.'s FTSE equities declined 0.7% (up 3.3%).

Japan's Nikkei 225 equities index fell 1.3% (up 17.2% y-t-d). Japanese 10-year "JGB" yields declined less than a basis point to 0.036% (unchanged). France's CAC40 fell 1.1% (up 9.4%). The German DAX equities index lost 1.0% (up 13.2%). Spain's IBEX 35 equities index declined 0.8% (up 7.0%). Italy's FTSE MIB index dropped 2.1% (up 14.9%). EM markets were mostly lower. Brazil's Bovespa index rallied 1.8% (up 21.9%), while Mexico's Bolsa slipped 0.4% (up 4.9%). India’s Sensex equities index was little changed (up 25.2%). China’s Shanghai Exchange dropped 1.4% (up 9.0%). Turkey's Borsa Istanbul National 100 index sank 2.5% (up 36%). Russia's MICEX equities index lost 1.7% (down 4.5%).

Junk bond mutual funds saw outflows surged to $4.442 billion (from Lipper).

Freddie Mac 30-year fixed mortgage rates rose five bps to 3.95% (up 1bp y-o-y). Fifteen-year rates jumped seven bps to 3.31% (up 17bps). Five-year hybrid ARM rates slipped a basis point to 3.21% (up 14bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates up 12 bps to 4.13% (up 12bps).

Federal Reserve Credit last week gained $4.5bn to $4.423 TN. Over the past year, Fed Credit increased $2.9bn. Fed Credit inflated $1.603 TN, or 57%, over the past 262 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt fell $4.2bn last week to $3.369 TN. "Custody holdings" were up $250bn y-o-y, or 8.0%.

M2 (narrow) "money" supply increased $8.2bn last week to $13.758 TN. "Narrow money" expanded $667bn, or 5.1%, over the past year. For the week, Currency slipped $0.5bn. Total Checkable Deposits fell $15.0bn, while Savings Deposits jumped $23.1bn. Small Time Deposits were little changed. Retail Money Funds gained $3.7bn.

Total money market fund assets slipped $1.4bn to $2.739 TN. Money Funds rose $52.4bn y-o-y, or 2.0%.

Total Commercial Paper dropped $18.8bn to $1.033 TN. CP gained $120bn y-o-y, or 13.2%.

Currency Watch:

The U.S. dollar index declined 0.8% to 93.662 (down 8.5% y-t-d). For the week on the upside, the South African rand increased 2.7%, the South Korean won 1.8%, the Japanese yen 1.1%, the euro 1.1%, the Mexican peso 0.8%, the Brazilian real 0.8%, the Swiss franc 0.7%, the Singapore dollar 0.3%, and the British pound 0.1%. For the week on the downside, the New Zealand dollar declined 1.9%, the Norwegian krone 1.3%, the Australian dollar 1.3%, the Swedish krona 0.9% and the Canadian dollar 0.6%. The Chinese renminbi increased 0.22% versus the dollar this week (up 4.81% y-t-d).

Commodities Watch:

The Goldman Sachs Commodities Index declined 0.8% (up 6.7% y-t-d). Spot Gold gained 1.5% to $1,294 (up 12.3%). Silver jumped 3.0% to $17.373 (up 8.7%). Crude slipped 19 cents to $56.55 (up 5%). Gasoline dropped 3.7% (up 4%), and Natural Gas declined 0.8% (down 17%). Copper added 0.5% (up 23%). Wheat jumped 2.8% (up 9%). Corn surged 3.3% (up 1%).

Trump Administration Watch:

November 15 – Reuters (Stephanie Armour and Richard Rubin): “Senate Republicans attached a provision to their tax overhaul that would repeal the requirement that all Americans have health insurance, a new twist in the GOP lawmakers’ efforts to rewrite much of the U.S. tax code. The insurance mandate is a centerpiece of the 2010 Affordable Care Act, also known as Obamacare. Repealing it is a long-sought goal of Republicans, who see it as onerous. Moreover, eliminating the mandate could free up federal tax revenue because it would mean fewer households buying insurance and thus fewer applying for federal health-care subsidies or for Medicaid.”

November 13 – Bloomberg (Ben Brody and Mark Niquette): “The House of Representatives wouldn’t accept a tax bill that, like the Senate’s, eliminates deductions for all state and local taxes, the chairman of the House’s tax-writing committee said. The comments from House Ways and Means Chairman Kevin Brady show that although both the House and Senate are moving forward with plans to overhaul the U.S. tax code under tight, self-imposed deadlines, the path forward remains difficult because of differences in their legislation.”

November 15 – Bloomberg (Jacob Pramuk): “The Republican tax plan appears to have a public opinion problem. Most American voters — 52% — disapprove of the GOP proposals to overhaul the tax system, according to a Quinnipiac University poll… Only 25% of respondents approve of the Republican effort. The GOP says its push to chop taxes on businesses and individuals by year-end is designed to trim the burden on middle-class taxpayers while boosting job creation and wage growth. Voters largely have not bought into the message, the Quinnipiac poll found.”

China Watch:

November 16 – Financial Times (Don Weinland and Yuan Yang): “China’s central bank injected the largest amount of reserves since January into the financial system on Thursday, a move that stemmed recent weakness in government bond prices that has driven the 10-year benchmark yield to its highest level since late 2014. Bond market concerns have intensified this past week as China’s policymakers reiterated their determination to reduce the economy’s reliance on debt-fuelled growth. Jitters have been accompanied by global investors cutting their exposure across emerging markets, with notable swings seen in prices for commodities such as metals and oil. China’s benchmark 10-year yield has steadily climbed from 3.60% since late September to above 4% this week…”

November 13 – Bloomberg: “China’s new home sales fell by the most in almost three years last month, adding to signs of cooling as local governments keep rolling out curbs to limit price increases. Sales by value dropped 3.4% from a year earlier to 909 billion yuan ($137bn)… That was the biggest year-on-year decline since November 2014.”

November 14 – Bloomberg: “China’s economic expansion dialed back a notch in October, as a campaign to manage credit risks took hold and the Communist Party signaled a less stringent approach to hitting growth targets. Industrial output rose 6.2% from a year earlier in October, versus a median projection of 6.3% and September’s 6.6%. Retail sales expanded 10% from a year earlier, versus an estimated 10.5 percent and 10.3 percent the prior month. That’s the slowest pace in a year.”

November 15 – Bloomberg (Heesu Lee and Luzi-Ann Javier): “A slowdown in the world’s biggest consumer of most commodities is reviving fears over a glut in raw materials. The Bloomberg Commodity Index extended declines after sliding the most in six months on Tuesday. Futures in China also plunged in overnight trading. Concern is increasing that demand will weaken as the world’s second-biggest economy dials back amid a pledge by President Xi Jinping to focus on the quality of expansion rather than the pace of it. Nickel, iron ore and oil all dropped, and shares of resources companies slipped… The Chinese slowdown is seen hurting metals use.”

November 14 – Reuters (David Stanway, Matthew Miller and Michael Martina): “China will continue to ‘deepen’ reform of state-owned enterprises (SOE) and experiment with new ownership structures, but strengthening ruling Communist Party leadership remains the guiding principle, the head of the state asset regulator said. Imposing party discipline on state firms remains a key part of China’s goals in its effort to fight graft, ‘upgrade’ domestic industry and dominate overseas markets, Xiao Yaqing, chairman of the State-Owned Asset Supervision and Administration Commission (SASAC), said.”

November 13 – Financial Times (Eric Platt): “Asset-backed securities still suffer an image hangover in the west from the days of the 2008 financial crisis. But China’s issuance of the financial products is soaring this year as Beijing places a big bet on securitisation as a salve for its huge credit risks. Though only a few years old, the Chinese debt securitisation market — in which pools of debt like mortgages, auto loans and credit-card loans are repackaged and sold to investors — is growing like topsy. Issuance of securitised assets rose 61% in the first half of this year and could climb to $170bn for the full year, according to… Bank of America Merrill Lynch. But are foreign investors ready to dive in? The answer appears to be a qualified yes. Given memories of how the US collateralised debt obligation (CDOs) market imploded 10 years ago, it is not surprising that foreign investors are cautious and generally avoid local issuers.”

November 14 – Bloomberg: “Chinese developers facing a looming wall of debt repayments have been thrown a lifeline by regulators easing access to offshore financing. That won’t solve all their problems… Amid the slowdown, developers still face restrictions on borrowing in the local bond market, rising costs for domestic financing -- including shadow loans -- and a record $30 billion in onshore and offshore bonds coming due in 2018. That figure balloons to $71 billion if put options are exercised…”

Federal Reserve Watch:

November 15 – Bloomberg (Jeanna Smialek and Matthew Boesler): “Federal Reserve officials are pushing for a potentially radical revamp of the playbook for guiding U.S. monetary policy, hoping to seize a moment of economic calm and leadership change to prepare for the next storm. While the country is enjoying its third-longest expansion on record, inflation and interest rates are still low, meaning the central bank has little room to ease policy in a downturn before hitting zero again. With Jerome Powell nominated to take over as Fed chairman in February, influential officials including San Francisco Fed chief John Williams and the Chicago Fed’s Charles Evans have taken the lead in calling for reconsidering policy maker’s 2% inflation target.”

November 14 – Reuters (Ann Saphir): “Chicago Federal Reserve Bank President Charles Evans… became the second Fed policymaker in recent days to call for a new approach to rate-setting that would allow the central bank to respond to shocks when interest-rate cuts alone are not enough. One option is so-called price-level targeting, Evans said in remarks prepared for a European Central Bank conference… Under such a strategy, a central bank combats bouts of too-low inflation by allowing inflation to run too high for a time. Evans championed this policy in 2010 to deal with sagging inflation, but ultimately the Fed rejected such an ‘extreme’ idea as too difficult to undertake during an economic crisis, Evans said…”

U.S. Bubble Watch:

November 14 – Bloomberg (Sho Chandra): “U.S. wholesale prices advanced more than forecast in October, boosted by higher margins at fuel retailers… Compared with a year earlier, producer prices rose the most in more than five years. Producer-price index rose 0.4% (est. 0.1% gain) for a second month. PPI climbed 2.8% from a year earlier, the most since February 2012, after 2.6% gain in prior 12-month period. Excluding food and energy, core gauge rose 0.4% from prior month and was up 2.4% from October 2016.”

November 15 – Bloomberg (Sho Chandra): “U.S. inflation excluding food and fuel accelerated on an annual basis for the first time since January, a pickup that will be welcomed by Federal Reserve officials debating the pace of interest-rate increases… Consumer-price index rose 0.1% m/m (matching est.) after 0.5% rise the prior month; increased 2% y/y (matching est.).
Excluding food and energy, so-called core CPI rose 0.2% m/m (matching est.) after rising 0.1%; climbed 1.8% y/y (est. 1.7%) after 1.7% advance.”

November 12 – Financial Times (John Authers and Joanna S Kao): “The year after Donald Trump’s surprise victory in the US presidential election have been the quietest months for the US stock market in more than half a century. Since election day, the daily change in the S&P 500, the most widely followed index of US stocks, has been only 0.31% as the blue-chip index has set new record highs. This is the lowest daily change in more than 50 years… A Financial Times analysis of historic returns for the S&P 500, dating back to its inception in 1927, shows only one previous period with lower average volatility. The quietest 12 months on record also followed a political shock, starting a week after the assassination of John F. Kennedy in 1963. The period saw an average daily movement of only 0.25%... Over the last half century, the index has moved by an average of 0.72% each day, more than double the volatility seen this year.”

November 14 – Bloomberg (Sid Verma): “Investors are riding a wave of ‘irrational exuberance’ as they extend bullish positions even as they fret over valuations, according to the latest fund-manager survey by Bank of America Merrill Lynch. While a record net 48% of investors say stocks are overvalued, a net 16% say they are taking on above-normal levels of risk, another all-time high. Investors are also taking out less downside protection and holding less cash, the survey shows. ‘Icarus is flying ever closer to the sun,’ said Michael Hartnett, the bank’s chief investment strategist. ‘And investors’ risk-taking has hit an all-time high.’”

November 15 – Wall Street Journal (Sarah Krouse): “Vanguard Group quadrupled in size over the last eight years. It is about to get even bigger. The money management giant is on pace to collect a record one-year total of about $350 billion in investor cash by the end of 2017… The expected haul, which would exceed Vanguard’s prior record by $27 billion, reinforces an industrywide shift away from money managers who specialize in handpicking winners.”

November 14 – Bloomberg (Gabrielle Coppola): “There’s a growing rift in car debt: Delinquent subprime loans are nearing crisis levels at auto finance companies, while loan performance at banks and credit unions has been improving… Almost 9.7% of subprime car loans made by non-bank lenders -- including private-equity-backed firms catering to car dealers -- became 90 or more days past due in the third quarter, the highest annualized rate in more than seven… That’s more than double the 4.4% rate for subprime loans made by traditional banks, a number that’s been falling pretty steadily since the end of the financial crisis. ‘The subprime delinquency rates are really where the pressure is,’ analysts and executives at the Fed wrote…’The delinquency rate -- even among borrowers in the same credit score bucket -- is considerably higher and rising on the auto finance side.’”

November 13 – Bloomberg (Rebecca Spalding): “Puerto Rico is seeking $94 billion in federal aid to help it recovery from the hurricane that devastated the territory in September, leaving much of the island still without power and worsening a financial crisis that had already pushed the government into bankruptcy. The biggest share of the funds, $31 billion, would be used to rebuild homes, with another $18 billion requested for the electric utility, Governor Ricardo Rossello said… ‘The scale and scope of the catastrophe in Puerto Rico in the aftermath of Hurricane Maria knows no historic precedent,’ Rossello wrote.’ We are calling upon your administration to request an emergency supplemental appropriation bill that addresses our unique unmet needs with strength and expediency.’”

November 13 – CNBC (John Melloy): “General Electric said… it is cutting its dividend in half, a move that could cause many long-time shareholders in the 125-year-old conglomerate to flee but also free up much-needed capital to fund a turnaround for the one-time American bellwether. GE said the quarterly payout is being cut to 12 cents a share from 24 cents... Shares, which are down more than 35% for the year, rose 0.3% in premarket trading.”

November 13 – Bloomberg: “China’s efforts to curb credit growth are increasingly showing signs of working. Aggregate financing stood at 1.04 trillion yuan ($156.6 bn) in October, the People’s Bank of China said…, versus an estimated 1.1 trillion yuan… New yuan loans stood at 663.2 billion yuan, versus a projected 783 billion yuan. The broad M2 money supply rose 8.8%, compared with a projected 9.2%. Broad money supply growth was the slowest since at least January 1996.”

Central Banker Watch:

November 14 – Reuters (Balazs Koranyi and Francesco Canepa): “Four of the world’s top central bankers promised… to keep openly guiding investors about future policy moves as they slowly withdraw the huge monetary stimulus rolled out during the financial crisis. After pumping some $10 trillion into financial markets since the 2008 crisis… the Federal Reserve, European Central Bank, Bank of England and Bank of Japan are now trying to wean investors off easy money without causing an upset. To do this, words will be key, the heads of the four central banks told an ECB conference on communication. It is called forward guidance in banker-speak, essentially warning gently of what is coming. ‘Forward guidance has become a full-fledged monetary policy instrument,’ ECB President Mario Draghi said. ‘Why discard a monetary policy instrument that has proved to be effective?’”

November 13 – Financial Times (Eric Platt): “As investors fret over the recent sell-off in US Treasuries, a reminder that the world is still awash in low yields. Nearly $11tn of sovereign and corporate bonds trade with a yield below zero… The $10.9tn figure includes notes and bonds in the benchmark global aggregate index as well as Bloomberg Barclays’ US, Euro, UK and Japanese short-Treasury indices at the end of October. Central bank stimulus upended the normal rules of fixed income markets after the financial crisis, when policymakers in Europe, the US, Japan and UK launched large-scale bond buying programmes and the European Central Bank and Bank of Japan cut interest rates below zero.”

November 16 – Reuters (Balazs Koranyi and Marja Novak): “Investors should not expect the European Central Bank to increase its bond purchases, ECB director Yves Mersch said on Thursday, adding such unconventional stimulus tools will be gradually phased out with the rise of inflation.”

Global Bubble Watch:

November 14 – CNBC (Robert Frank): “The wealthiest 1% of the world's population now owns more than half of the world's wealth, according to a new report. The total wealth in the world grew by 6% over the past 12 months to $280 trillion, marking the fastest wealth creation since 2012, according to… Credit Suisse… More than half of the $16.7 trillion in new wealth was in the U.S., which grew $8.5 trillion richer. But that wealth around the world is increasingly concentrated among those at the top. The top 1% now owns 50.1% of the world's wealth, up from 45.5% in 2001.”

November 15 – Bloomberg (Steven Church and Michelle Kaske): “The conundrum faced by Alan Greenspan is back -- and possibly worse. This time, the Federal Reserve is confronting a ‘far more dangerous’ backdrop in the bond market as it gears up to further raise interest rates. The prevailing dynamics in the Treasury market -- an ever-narrowing gap between short and longer-term U.S. Treasury yields, and record lows in forward rates for this point in the monetary cycle -- could derail the Fed’s tightening path, according to Bank of America Merrill Lynch. Though a flattening yield curve is seemingly a replay of previous rate-hike regimes -- including the one overseen by Greenspan and Ben Bernanke, which culminated in the financial crisis -- Bank of America sees extra cause for concern. A Fed that’s intent on raising rates four to five more times by the end of 2018 would risk ‘consciously putting short-term rates above five-year term rates,” strategists led by Shyam Rajan wrote… That’s something the central bank has never allowed to happen aside from a brief period in the last month of its 2004-2006 tightening cycle.”

November 13 – Wall Street Journal (Steven Russolillo and Corrie Driebusch): “A flood of Chinese companies is driving the biggest world-wide surge of initial public offerings in a decade. More than 1,450 companies globally have gone public so far in 2017, putting this year on track to become the busiest for new listings since 2007, according to Dealogic... Roughly two-thirds of the IPOs were in the Asia-Pacific region… Overall, the deals raised more than $170 billion globally, compared with the roughly 950 deals in the same period last year that raised around $120 billion… Nearly 170 private companies globally are valued at $1 billion or more, according to Dow Jones VentureSource. That is up from about 75 in November 2014.”

November 13 – Financial Times (Thomas Hale and Robert Smith): “Sales of corporate bonds is on course for a record year, as stimulus from the European Central Bank and extremely cheap borrowing costs propel companies into the capital markets. There have been €339bn of non-financial corporate bonds sold in euros so far in 2017, according to Dealogic…, putting issuance on course to surpass last year’s record of €345bn. A decade of monetary stimulus from major central banks, including the ECB, has swelled borrowing to levels few would have imagined before the global financial crisis. In 2007, corporate issuance in euros was less than half its current level.”

November 13 – Financial Times (Kate Allen): “The world’s riskiest countries are issuing debt at a record rate, buoyed by the global economic upturn and investors’ search for yield in a world of historically low returns. Junk-rated emerging market sovereigns have raised $75bn in syndicated bonds so far this year, up 50% year on year to the highest total on record, according to… Dealogic… The increase has buoyed the total volume of debt-raising by developing economies; non-investment grade issuance has made up 40% of the new debt syndicated in EM so far in 2017. These rare and new issuers have been lured into the market by attractive pricing…, making it one of the best-performing assets globally in 2017.”

November 14 – CNBC (Liz Moyer): “Sign of the times: It is shaping up to be the hottest year in a decade to raise investor money for companies in the development stage with no specific business plan or purpose. This week, a former hedge fund manager and a former real estate executive are raising $500 million to hunt for buyouts in the ‘blank check company’ in the hospitality and real estate sectors… It comes the same week as former Procter & Gamble executives prepare for their $345 million Legacy Acquisition to begin trading in the U.S., focused on snapping up companies in consumer packaged goods, food, retail and restaurant sectors. Blank check companies… raise money from investors first and use it to buy companies later… So far this year, 27 of them have begun trading in the U.S., raising $7.7 billion, the most active year since 2007, according to Renaissance Capital.”

November 15 – Bloomberg: “China’s non-financial outbound investment slumped to $86.3 billion in January to October, plunging 41% from a year earlier, as projects in some industries dried up. There were no new real estate, sports or entertainment deals for the period… Most outbound investment was in leasing and business services, manufacturing, wholesale and retail sales and information technology services.”

November 15 – CNBC (Everett Rosenfeld): “A Leonardo da Vinci painting sold for more than $450 million on Wednesday, according to auction house Christie's, which said that it topped a world record for any work of art sold at an auction. The painting, called ‘Salvator Mundi,’ Italian for ‘Savior of the World,’ is one of fewer than 20 paintings by Leonardo known to exist and the only one in private hands.”

November 14 – Reuters (Marc Jones): “The world’s top 60 economies have adopted more than 7,000 protectionist trade measures on a net basis since the financial crisis and tariffs are now worth more than $400 billion, a study of global data showed… The research, which drew from World Bank, Heritage index and Global Trade Alert figures, also found that the United States and European Union were each responsible for more than 1,000 of the restrictions.”

Fixed Income Bubble Watch:

November 15 – Financial Times (Eric Platt): “A sell-off in the $1.3tn high-yield bond sector is a worrying omen for the wider market, frequently signalling greater losses and broader contagion to come. This market for highly indebted companies, which has found little trouble raising money during the credit boom of recent years, is getting hit hard following a stirring run of gains. Junk-rated debt has already lost 1.1% in value so far during November, on pace for its worst month since January 2016, according to ICE BofAML indices… Gains by closely followed exchange traded funds have also been erased for the year, with both State Street’s $13bn high-yield ETF, which trades under the ticker JNK, and BlackRock’s $19bn iShares HYG fund sitting at seven-month lows.”

November 13 – Bloomberg (Dani Burger): “Trading in exchange-traded funds got a little crazy last week when it became clear that junk bonds were in for more pain. But the market was fortunate the consequences weren’t more severe, strategists warn. Though spared the worst, investors came close to creating a scenario where ETF activity drove prices. Calling it the ‘ETF spiral,’ Peter Tchir of Academy Securities Inc. describes a snowball effect where a dislocation develops between the fund price and the value of its underlying assets. The issue’s endemic to liquid ETFs that trade without dipping into the underlying market. In that case, the selling doesn’t affect the actual securities it holds right away, so for a time the fund is priced differently than the cumulative value of its assets, known as its NAV.”

November 12 – Bloomberg (Steven Church and Michelle Kaske): “Puerto Rico is considering suspending debt-service payments for five years, a lead lawyer for the territory’s federal oversight board said, in the first indication of how the devastation caused by Hurricane Maria will affect the restructuring of the island’s debt. A moratorium may be included as part of Puerto Rico’s plan to reduce what it owes through bankruptcy, Martin Bienenstock, a partner at Proskauer Rose LLP who represents the panel, said at a court hearing Wednesday in Manhattan. It wasn’t immediately clear whether such a step would apply to all of government’s $74 billion of debt."

November 16 – Wall Street Journal (Nick Timiraos): “The Treasury Department has unveiled a new strategy for managing federal debt that could ease pressures set to push up long-term interest rates and reduce a potential drag on the economy. Under the plan unveiled earlier this month by Treasury, the department would increase the share of shorter-term debt issuance and reduce the share of longer debt issuance, ending a yearslong trend that favored long-term debt issuance. Total issuance of government debt will still rise in coming years with growing federal budget deficits.”

November 13 – Bloomberg (Srinivasan Sivabalan): “Slowly but steadily, a selloff is taking hold in developing-nation bonds. A Bloomberg Barclays Index of hard-currency emerging-market bonds has fallen for six straight days, capping the biggest weekly yield jump since last year when Donald Trump’s victory spurred a selloff in risk assets. The gauge shows average borrowing costs for governments and companies in developing nations have risen to a four-month high of 4.68%.”

Europe Watch:

November 13 – Bloomberg (Piotr Skolimowski): “German growth steamed ahead in the third quarter, keeping Europe’s largest economy on track for its best year since 2011. The 0.8% jump in gross domestic product was an acceleration from the previous three months and topped the 0.6% median forecast…”

November 11 – Reuters (Valentina Za): “The outcome of local elections in Sicily has further weakened the ruling party of former Prime Minister Matteo Renzi and strengthened the populist 5-Star Movement’s lead… Based on the IPSOS poll published in Saturday’s Corriere della Sera, a center-right coalition would win next year’s general election with 253 seats while the 5-Star would have 173 and Renzi’s Democratic Party 164 together with a smaller ally, leading to a hung parliament.”

Brexit Watch:

November 12 – Bloomberg (Lucy Meakin): “Embattled U.K. Prime Minister Theresa May faced a fresh challenge as the Sunday Times said 40 Conservative members of Parliament, nearly enough to trigger action, have agreed to sign a letter of no confidence in her. May’s opponents are now eight lawmakers short of what’s needed for a leadership challenge… May is struggling to maintain her grip on power after the resignation of two cabinet ministers, mounting calls to sack Foreign Minister Boris Johnson and as the European Union raises the prospect of Brexit talks failing to reach a breakthrough by year-end.”

Japan Watch:

November 15 – BBC: “Japan's economy has expanded for seven quarters in a row in the longest period of growth in more than a decade. Data showed gross domestic product (GDP) grew at an annualised rate of 1.4% between July and September. The solid quarterly result comes after more than four years of economic stimulus by Prime Minister Shinzo Abe. Exports and stronger global demand for Japanese products has driven the expansion which helped offset a dip in consumer spending at home.”

Emerging Market Watch:

November 13 – Bloomberg (Ben Bartenstein, Katia Porzecanski, and Patricia Laya): “Venezuela’s grand gathering with creditors Monday lasted all of 30 minutes and didn’t produce anything of substance. To make matters worse, S&P Global Ratings declared the country in default while Fitch… cited missed payments by the state oil company prompting a fresh selloff in the nation’s bonds. The actions from the ratings companies came after an odd spectacle in Caracas, where bond investors who made the trek found a red-carpet welcome, an honor guard salute and gift bags stuffed with state-produced chocolate and coffee.”

November 12 – Financial Times (Ahmed Al Omran and Simeon Kerr): “When Saudi Crown Prince Mohammed bin Salman spoke to his nation six months ago, he pledged to crack down on corruption. ‘I assure you that nobody who is involved in corruption will escape, regardless if he was minister or a prince or anyone,’ he said. But few people could have expected the sudden storm this month when a new anti-graft committee ordered the arrest of more than 200 suspects, including princes, prominent businessmen and former senior officials, on allegations related to at least $100bn in corruption… But others have raised questions about the motivations behind a probe that also targeted a member of the royal family once seen as a contender for the throne. Critics of Saudi Arabia’s King Salman warn of the danger of ignoring the actions of the monarch’s own children, including the crown prince, who in 2015 reportedly bought a yacht for €420m. The Salman clan has extensive business interests, including media and financial services.”

Geopolitical Watch:

November 12 – Reuters (Mostafa Hashem): “Saudi Arabia has called for an urgent meeting of Arab League foreign ministers in Cairo next week to discuss Iran’s intervention in the region, an official league source told Egypt’s MENA state news agency… The call came after the resignation of Lebanon’s prime minister pushed Beirut back into the center of a rivalry between Sunni kingdom Saudi Arabia and Shi‘ite Iran and heightened regional tensions.”

November 15 – Bloomberg (MacDonald Dzirutwe): “Zimbabwe’s military seized power on Wednesday saying it was holding President Robert Mugabe and his family safe while targeting ‘criminals’ in the entourage of the man who has ruled the nation since independence 37 years ago. Soldiers seized the state broadcaster and a general appeared on television to announce the takeover. Armored vehicles blocked roads to the main government offices, parliament and the courts in central Harare, while taxis ferried commuters to work nearby.”