Friday, November 29, 2019

Weekly Commentary: Just the Facts - 11/29/19

For the Week:

The S&P500 gained 1.0% (up 25.3% y-t-d), and the Dow added 0.6% (up 20.3%). The Utilities were unchanged (up 19.0%). The Banks added 0.4% (up 27.9%), and the Broker/Dealers jumped 2.1% (up 21.7%). The Transports increased 0.7% (up 18.4%). The S&P 400 Midcaps rose 1.2% (up 20.9%), and the small cap Russell 2000 jumped 2.2% (up 20.5%). The Nasdaq100 advanced 1.6% (up 32.8%). The Semiconductors rose 1.5% (up 48.6%). The Biotechs surged 3.5% (up 18.5%). Though bullion fell $18, the HUI gold index gained 1.9% (up 33.8%).

Three-month Treasury bill rates ended the week at 1.54%. Two-year government yields dipped one basis point to 1.61% (down 88bps y-t-d). Five-year T-note yields were unchanged at 1.63% (down 89bps). Ten-year Treasury yields added one basis point to 1.78% (down 91bps). Long bond yields declined two bps to 2.21% (down 81bps). Benchmark Fannie Mae MBS yields slipped a basis point to 2.70% (down 80bps).

Greek 10-year yields rose five bps to 1.43% (down 297bps y-t-d). Ten-year Portuguese yields were about unchanged at 0.40% (down 132bps). Italian 10-year yields gained five bps to 1.23% (down 151bps). Spain's 10-year yields added a basis point to 0.42% (down 100bps). German bund yields were unchanged at negative 0.36% (down 60bps). French yields slipped a basis point to negative 0.05% (down 76bps). The French to German 10-year bond spread narrowed one to 31 bps. U.K. 10-year gilt yields declined one basis point to 0.70% (down 58bps). U.K.'s FTSE equities index added 0.3% (up 9.2% y-t-d).

Japan's Nikkei Equities Index gained 0.8% (up 16.4% y-t-d). Japanese 10-year "JGB" yields were little changed at negative 0.07% (down 8bps y-t-d). France's CAC40 % (up 24.8%). The German DAX equities index increased 0.6% (up 25.4%). Spain's IBEX 35 equities index rose 1.1% (up 9.5%). Italy's FTSE MIB index was unchanged (up 26.9%). EM equities were mixed. Brazil's Bovespa index declined 0.4% (up 18.9%), and Mexico's Bolsa fell 0.4% (up 2.8%). South Korea's Kospi index declined 0.7% (up 2.3%). India's Sensex equities index advanced 1.1% (up 13.1%). China's Shanghai Exchange dipped 0.5% (up 15.2%). Turkey's Borsa Istanbul National 100 index added 0.3% (up 17.1%). Russia's MICEX equities index declined 0.4% (up 23.9%).

Investment-grade bond funds saw inflows of $4.545 billion, and junk bond funds posted inflows of $348 million (from Lipper).

Freddie Mac 30-year fixed mortgage rates gained two bps to 3.68% (down 113bps y-o-y). Fifteen-year rates were unchanged at 3.15% (down 110bps). Five-year hybrid ARM rates rose four bps to 3.43% (down 69bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-year fixed rates up a basis point to 4.02% (down 64bps).

Federal Reserve Credit last week increased $14.5bn to $4.002 TN, with an 11-week gain of $275 billion. Over the past year, Fed Credit contracted $62bn, or 1.5%. Fed Credit inflated $1.191 Trillion, or 42%, over the past 367 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt declined $0.6 billion last week to $3.415 TN. "Custody holdings" were up $13 billion, or 0.4% y-o-y.

M2 (narrow) "money" supply gained $30.1 billion last week to a record $15.326 TN. "Narrow money" rose $1.064 TN, or 7.5%, over the past year. For the week, Currency increased $0.7bn. Total Checkable Deposits dropped $45bn, while Savings Deposits jumped $73.4bn. Small Time Deposits declined $3.0bn. Retail Money Funds gained $4.8bn.

Total money market fund assets surged $50.4bn to $3.577 TN. Money Funds gained $657bn y-o-y, or 22.5%.

Total Commercial Paper jumped $17.2bn to $1.138 TN. CP was up $48bn, or 4.4% year-over-year.

Currency Watch:

The U.S. dollar index was unchanged at 98.27 (up 2.2% y-t-d). For the week on the upside, the British pound increased 0.7%, the Swedish krona 0.6%, the South African rand 0.3%, the New Zealand dollar 0.2%, and the Canadian dollar 0.2%. On the downside, the Brazilian real declined 1.0%, the Mexican peso 0.8%, the Japanese yen 0.8%, the Norwegian krone 0.7%, the Australian dollar 0.3%, the Swiss franc 0.3%, the Singapore dollar 0.3%, and the South Korean won 0.2%. The Chinese renminbi increased 0.08% versus the dollar this week (down 2.19% y-t-d).

Commodities Watch:

The Bloomberg Commodities Index dropped 2.1% this week (up 0.2% y-t-d). Spot Gold declined 1.2% to $1,444 (up 12.6%). Silver slipped 0.2% to $17.106 (up 10.1%). WTI crude sank $2.60 to $55.17 (up 22%). Gasoline dropped 5.0% (up 20%), and Natural Gas sank 15.8% (down 22%). Copper was little changed (up 1%). Wheat rallied 4.4% (up 8%). Corn increased 0.7% (up 2%).

Market Instability Watch:

November 29 – Wall Street Journal (Akane Otani): “It has been quiet in markets lately—so quiet that one measure of traders’ expectations for stock volatility recently touched its lowest level in more than a year. The Cboe Volatility Index, or VIX, finished Wednesday at 11.75. That was just a hair above where it ended Tuesday, which was its lowest closing level since Aug. 9, 2018…”

November 29 – Bloomberg (Joanna Ossinger): “Exchange-traded products are taking up a bigger chunk of Cboe Volatility Index futures trading than they have in about seven years, and that could be depressing the gauge, according to Nomura… When VIX-linked ETPs roll to the next month, they sell front-month futures on the volatility gauge to buy second-month ones. And when that activity becomes a larger portion of overall futures trading, it could have a bigger influence on the level of the index itself. The current impact of ETP rebalancing on the front VIX future is about 20% of daily volume on the index’s contracts, ‘just smashing the VIX future,’ according to Nomura Cross-Asset Strategist Charlie McElligott.”

Trump Administration Watch:

November 27 – CNS (Terence P. Jeffrey): “The federal debt has increased by $1,303,466.578.471.45 since last Thanksgiving,.. That is the largest Thanksgiving-to-Thanksgiving increase in the debt in nine years. The last time the debt increased more from Thanksgiving to Thanksgiving was in 2010, when it increased by $1,785,995,360,978.10. It also equals approximately $10,137.48 per household in the United States.”

November 26 – Reuters (Andrea Shalal and Kevin Yao): “The United States and China are close to agreement on the first phase of a trade deal, U.S. President Donald Trump said on Tuesday… Trump said Washington was in the ‘final throes’ of work on a deal that would defuse a 16-month trade war with Beijing, but also underscored Washington’s support for protesters in Hong Kong, a potential huge sore point with China. China said it had summoned U.S. Ambassador Terry Branstad on Monday to protest the passage in the U.S. Congress of the Hong Kong Human Rights and Democracy Act, saying the bill amounted to interference in a Chinese internal matter.”

November 22 – Reuters (Nick Timiraos): “President Donald Trump said… his administration would take a ‘good look’ at a Hong Kong bill that passed the U.S. Congress nearly unanimously, as lawmakers awaited his decision on whether he would sign it into law or issue a veto. Asked if he was going to sign the legislation, Trump said: ‘It’s being sent over (to the White House). We’re going to take a very good look at it.’ If Trump were to issue a veto, it would take two-thirds majorities in both the House of Representatives and Senate to override it and allow the bill to become law.”

November 24 – Reuters (Heather Timmons and Andrea Shalal): “An ambitious ‘phase two’ trade deal between the United States and China is looking less likely as the two countries struggle to strike a preliminary ‘phase one’ agreement, according to U.S. and Beijing officials, lawmakers and trade experts.”

Federal Reserve Watch:

November 25 – CNBC (Jeff Cox): “Federal Reserve economists warn that printing money to pay for deficit spending has been a disaster for other nations that have tried it. In a paper that discusses the burgeoning U.S. fiscal debt, Fed experts note that high levels are not necessarily unsustainable so long as income is rising at a faster pace. They note that countries that have gotten into trouble and looked to central banks to bail them out haven’t fared well. ‘A solution some countries with high levels of unsustainable debt have tried is printing money. In this scenario, the government borrows money by issuing bonds and then orders the central bank to buy those bonds by creating (printing) money,’ wrote Scott A. Wolla and Kaitlyn Frerking. ‘History has taught us, however, that this type of policy leads to extremely high rates of inflation (hyperinflation) and often ends in economic ruin.’”

November 25 – Bloomberg (Alex Harris and Katherine Greifeld): “Market participants leaped at the opportunity to lock in end-of year funding at Monday’s Federal Reserve repurchase-agreement operation, the first to be conducted with a 2020 maturity. The central bank boosted the size of its next operation in the wake of the result. Even with concern about liquidity having eased since September’s upheaval, the Federal Reserve Bank of New York’s Monday operation to inject cash into the financial system for 42 days attracted $49 billion in bids -- almost twice the $25 billion available. This was the first of three term operations to provide funding past Dec. 31, with the bank planning another 42-day action on Dec. 2 and a 28-day offering on Dec. 9.”

November 25 – New York Times (Jeanna Smialek): “Federal Reserve officials have increasingly acknowledged that the labor market might have more room to run, and Chair Jerome H. Powell made the point in perhaps the plainest way yet during a… speech. While the job market is strong, benefiting low-wage workers and pulling prime-age adults back into the labor pool, ‘there is still plenty of room for building on these gains,’ he told a room full of local business leaders… ‘The Fed can play a role in this effort by steadfastly pursuing our goals of maximum employment and price stability,’ Mr. Powell said.”

November 25 – Bloomberg (Christopher Condon): “Federal Reserve Chairman Jerome Powell struck an upbeat tone in gauging the ability of policy makers to extend the record U.S. economic expansion, while signaling interest rates would probably remain on hold. ‘At this point in the long expansion, I see the glass as much more than half full,’ Powell said… ‘With the right policies, we can fill it further, building on the gains so far and spreading the benefits more broadly to all Americans.”

November 25 – Wall Street Journal (Nick Timiraos): “Top Federal Reserve officials are in the final stages of a search to fill two top staff jobs overseeing its financial markets operations… Candidates who have been considered for the New York Fed posts include private-sector economists Daleep Singh and Charles Himmelberg, according to these people. Lorie Logan, the interim manager of the central bank’s asset portfolio, is also seen as a front-runner for one of the two positions, these people said. The person in one of the jobs will oversee the central bank’s $4 trillion securities portfolio and open market operations, implementing Fed officials’ interest rate decisions. The other will handle the markets group’s operations and technology.”

U.S. Bubble Watch:

November 26 – Bloomberg (Reade Pickert): “Buyers snapped up new U.S. homes over the past two months at the fastest pace in more than 12 years, adding to signs of sturdy housing demand amid lower prices and borrowing costs. Single-family house sales ran at a 733,000 annualized pace in October, topping all estimates in a Bloomberg survey, following an upwardly revised 738,000 in September… Those were the two strongest readings since July 2007. The median sales price decreased 3.5% from a year earlier to $316,700.”

November 26 – CNBC (Diana Olick): “After shrinking for much of this year, home price gains are now growing again. On a national level, prices rose 3.2% annually in September, up from a 3.1% gain in August, according to the S&P CoreLogic Case-Shiller U.S. National Home Price Index. The 10-City Composite annual increase was 1.5%, unchanged from the previous month. The 20-City Composite rose 2.1% annually, up from 2.0% in August. Of the 20 cities covered, Phoenix, Charlotte, North Carolina, and Tampa, Florida, saw the highest annual gains, with 6.0%, 4.6% and 4.5% annual gains, respectively. Ten of the 20 cities saw larger price increases in the year ended in September 2019 versus the year ended in August 2019.”

November 26 – Wall Street Journal (Heather Somerville): “Once Silicon Valley’s highest-flying darlings, companies from WeWork to Uber Technologies Inc. have collectively lost about $100 billion in value this year, prompting some startup executives to talk up profitability over growth as venture-capital investors grow more cautious about spending. In recent weeks, car-subscription company Fair and software company UiPath have downsized. Scooter-renting company Lime has rejiggered its operations to prove to investors it can turn a profit. ‘We’ve been in the middle of a rollicking party that’s gone on for five years and someone has snapped on the light switch,’ said Chris Douvos, whose firm, Ahoy Capital, invests in venture-capital firms and startups. ‘We are all adjusting our eyes and no one has any idea how the rest of the night is going to go. That’s how Silicon Valley feels right now.’”

November 26 – Reuters (Lucia Mutikani): “The U.S. goods trade deficit fell sharply in October as both exports and imports declined, pointing to a continued reduction in trade flows that has been blamed on the Trump administration’ ‘America First’ policy. The… goods trade gap dropped 5.7% percent to $66.5 billion last month.”

November 26 – Reuters (Pete Schroeder): “Profits across U.S. banks dipped by $4.5 billion to $57.4 billion in the third quarter of 2019, as ‘nonrecurring events’ at three large financial institutions drove down sector growth, the Federal Deposit Insurance Corporation reported… Absent those events, which the FDIC said were previously disclosed asset writedowns by Bank of America, Wells Fargo, and Mufg Union Bank, the banking sector would have continued its march to record profits by posting a slight increase to its all-time high of $62.6 billion record in the second quarter.”

China Watch:

November 23 – Reuters (Cate Cadell): “The United States is the world’s biggest source of instability and its politicians are going around the world baselessly smearing China, the Chinese government’s top diplomat said… in a stinging attack at a G20 meeting in Japan. Relations between the world’s two largest economies have nose-dived amid a bitter trade war… and arguments over human rights, Hong Kong and U.S. support for Chinese-claimed Taiwan… ‘The United States is broadly engaged in unilateralism and protectionism, and is damaging multilateralism and the multilateral trading system. It has already become the world’s biggest destabilizing factor,’ China’s Foreign Ministry cited Wang as saying.”

November 23 – Bloomberg: “Chinese state media stepped up criticism of the U.S. and accused it of meddling in China’s domestic affairs, as President Donald Trump deliberates signing into a law an amendment that would require annual reviews of Hong Kong’s special trading status with it. Attempts to use Hong Kong ‘to contain China’s development is a pipe dream,’ according the state-run People’s Daily, while Foreign Minister Wang Yi… called the U.S. the ‘biggest destabilizing element.’ American politicians risk pushing the city into a ‘more dangerous abyss’ as they use the ‘Hong Kong card’ to contain China’s growth, the official Xinhua News Agency said…”

November 26 – CNBC (Evelyn Cheng): “The leaders of the U.S.-China trade negotiations held another phone call on Tuesday morning, China’s Ministry of Commerce said… ‘Both sides discussed resolving core issues of common concern, reached consensus on how to resolve related problems (and) agreed to stay in contact over remaining issues for a phase one agreement,’ the Chinese-language statement said…”

November 24 – Reuters (Bhargav Acharya, Tony Munroe, Gabriel Crossley and Andrea Shalal): “China and the United States are ‘moving closer to agreeing’ on a ‘phase one’ trade deal, the Global Times, a tabloid run by the ruling Communist Party’s official People’s Daily, reported… But the report noted that Washington and Beijing had not agreed on specifics or size of rollbacks of tariffs on Chinese goods. Beijing’s insistence that Washington roll back the Trump administration's tariffs here has been a major sticking point.”

November 24 – Bloomberg: “China said it will raise penalties on violations of intellectual property rights in an attempt to address one of the sticking points in trade talks with the U.S. The country will also look into lowering the thresholds for criminal punishments for those who steal IP, according to guidelines issued by the government…. It didn’t elaborate on what such moves might entail. The U.S. wants China to commit to cracking down on IP theft and stop forcing U.S. companies to hand over their commercial secrets as a condition of doing business there.”

November 26 – Bloomberg: “The earliest-available indicators of China’s economic performance point to a continued slowdown in November. Economic growth was already the slowest in almost three decades in the third quarter, and Bloomberg Economics’ gauge aggregating the earliest data from financial markets and businesses shows that continuing, with a worsening picture for trade, sales manager sentiment, and factory prices. While tensions with the U.S. have eased since the two sides announced talks toward a so-called ‘phase one’ deal last month, a leading indicator for trade flows in Asia, South Korean exports, still contracted almost 10% in the first 20 days of November.”

November 28 – Reuters (Cheng Leng and Kevin Yao): “China has room to ease monetary policy further, but authorities should not be careless in how they use such stimulus options, a central bank official said…, reinforcing its cautious stance. ‘Our monetary policy has space...but such policy space cannot be squandered at will,’ Zhang Xuechun, the deputy director of the research bureau at the People’s Bank of China (PBOC), said..."

November 26 – Reuters (Stella Qiu and Se Young Lee): “Profits at China’s industrial firms shrank at their fastest pace in eight months in October, tracking sustained drops in producer prices and exports and underscoring slowing momentum in the world’s second-largest economy. Industrial profits fell 9.9% in October year-on-year to 427.56 billion yuan ($60.74bn)…, marking the biggest drop since January-February period and compared with a 5.3% decline in September.”

November 28 – Bloomberg: “From rural bank runs to surging consumer indebtedness and an unprecedented bond restructuring, mounting signs of financial stress in China are putting the nation’s policy makers to the test. Xi Jinping’s government faces an increasingly difficult balancing act as it tries to support the world’s second-largest economy without encouraging moral hazard and reckless spending. While authorities have so far been reluctant to rescue troubled borrowers and ramp up stimulus, the costs of maintaining that stance are rising as defaults increase and China’s slowdown deepens… Among China’s most vexing challenges is the deteriorating health of smaller lenders and regional state-owned companies, whose financial linkages risk triggering a downward spiral without support from Beijing. A landmark debt recast proposed this week by Tewoo Group, a state-owned commodities trader, has raised concerns about more financial turbulence in its home city of Tianjin.”

November 26 – Financial Times (Don Weinland): “Troubled banks in China are struggling to raise funds as concerns over the health of the financial system grow and confidence in state-led bailouts falters. China’s banking system is facing its greatest challenge in nearly 20 years after years of runaway growth and mounting bad debt levels, which have topped 40% of loans at some small lenders. The government has had to intervene in the operations of three local banks this year, starting with the takeover of Baoshang Bank in May, marking the first instance of a direct state takeover of a lender in two decades. Partial bailouts at two more lenders, Bank of Jinzhou and Hengfeng Bank, were also carried out this year with the hopes of calming nerves in the interbank market and avoiding a liquidity crisis for troubled banks that are heavily reliant on borrowing from the market. Despite those efforts, many banks are facing deteriorating funding conditions. Troubled banks have been able to secure only 20-40% of the funds they have sought to raise in the interbank market for negotiable certificates of deposit, a vital source of funding for many smaller lenders, since the takeover of Baoshang Bank, according to research from UBS. ‘They clearly have some liquidity issues,’ said May Yan, UBS’s head of greater China financials equity research.”

November 25 – Bloomberg: “China’s banking sector is showing signs of strain, with more than 13% of 4,379 lenders now considered ‘high risk’ by the central bank. The high risk category contains 586 banks and financing firms, most of which are smaller rural institutions, the People’s Bank of China said in its 2019 China Financial Stability Report… A first review last year found about 10% were deemed high risk, though that calculation didn’t include many consumer finance firms.”

November 24 – Bloomberg (Ina Zhou and Hong Shen): “Being state-owned in China no longer means being supported by the state, if the case of a troubled commodities trader is anything to go by. Tewoo Group Corp. proposed… that investors either suffer losses as much as 64% or accept delayed repayment with sharply reduced coupons on $1.25 billion of dollar bonds.The debt restructuring plan is the first of its kind for a state-owned enterprise, and increases the prospect of a default, which would at the very least be one of the biggest by an SOE in the dollar bond market in two decades. The company’s woes also raises fresh alarm about the health of Tianjin, the northern port city in which it’s based. A de facto default by Tewoo would be considered a ‘landmark case,’ said Cindy Huang, an analyst at S&P Global Ratings.”

November 25 – Bloomberg (Rebecca Choong Wilkins and Tongjian Dong): “A major Chinese commodity trader looks poised to become the most high-profile state-owned enterprise to default in the dollar bond market in over two decades. In a fresh sign that Beijing is more willing to allow failures in the politically sensitive SOE sector, Tewoo Group has offered an unprecedented debt restructuring plan that entails deep losses for investors or a swap for new bonds with significantly lower returns.”

November 28 – Bloomberg (Rebecca Choong Wilkins and Jing Zhao): “A Chinese steelmaker failed to repay a 1 billion yuan ($142 million) bond even after bondholders gave the company more than a month to find the cash. …Xiwang Group Co. didn’t meet the Wednesday repayment deadline for the principal and interest on the bond originally due Oct. 24… Bondholders approved the delay earlier this month.”

November 28 – Bloomberg (Gregor Stuart Hunter): “The number of Chinese companies failing to make payments will continue to rise in the year ahead as economic growth sputters and the government attempts to rein in support to indebted companies, according to Moody’s… The credit ratings company expects 40-50 new defaults in 2020, up from 35 this year, according to Ivan Chung, head of greater China credit research and analysis at Moody’s. He expects the total value of defaults would be below 200 billion yuan ($28bn), representing less than 1% of the size of China’s bond market.”

November 25 – Reuters (Stella Qiu, Cheng Leng and Huizhong Wu): “China needs to resolve outstanding financial risks, and must counter risks from ‘abnormal’ market fluctuations that stem from external shocks, said the central bank…, as Beijing prioritizes financial stability amid increasing challenges. Financial markets are highly sensitive to global trade situations and rising uncertainties in global liquidity, said the People’s Bank of China (PBOC) in its annual financial stability report, adding that it will step up real-time supervision on stock, bond, foreign exchange markets to prevent cross-sector risk contamination. Bond defaults may continue, so authorities must prevent the risks of such defaults from triggering systemic risks, it said, while penalties on regulatory violations in the securities market would be increased.”

November 27 – Wall Street Journal (Francis Yoon): “A UBS Group AG trader is winning big in the booming market for junk bonds issued by Chinese companies. Hong Kong-based Kelvin Zhao has made the Swiss bank nearly $30 million this year… He has become one of the biggest traders in a corner of finance that has grown rapidly: dollar bonds from Chinese borrowers with low or no credit ratings. There is now nearly $229 billion of such high-yield bonds outstanding, according to Fitch Ratings, up from $8.7 billion at the end of 2014.”

November 25 – Financial Times (Hudson Lockett in Hong Kong and Sun Yu): “A high-profile initiative to fire up funding for Chinese infrastructure has fallen short of meeting regions’ needs and ended up diverting some cash into the real estate sector instead of the public projects it is intended to support, analysis by the Financial Times shows. Beijing ordered a big increase in the issuance of so-called special-purpose bonds in late 2018, touting them as a way to fund specific projects including irrigation, transport and toll roads. This boost has helped the market to swell to $1.3tn in five years…, pulling a sizeable chunk of local financing out of the shadows. But a particularly flexible slice of these bonds that can be paid off using projects’ revenues has flowed largely into real estate projects. In total, 90% of this slice has ended up in the sector — an injection worth more than $370bn.”

November 25 – Financial Times (Tom Hancock): “China’s central bank has warned over the dangers of a rapid build-up in the country’s household debt, urging greater oversight of mortgages and consumer loans to decrease risks to the country’s financial system. Household leverage hit 60% of China’s gross domestic product as of the end of 2018, with total debt now equal to total household income… ‘The debt risks of the household sector and some low-income households in some regions are relatively prominent and should be paid attention to,’ the PBOC said, calling for tougher policies to ‘guard against household sector debt’.”

November 27 – Reuters (Kevin Yao, Stella Qiu, Leng Cheng): “China has brought forward 1 trillion yuan ($142.07bn) of the 2020 local government special bonds quota to this year as it seeks to avert a sharper economic slowdown. The finance ministry said… local governments must ensure that special purpose bonds — used to finance infrastructure projects — should be issued and used as early as possible. ‘To ensure we can see results early next year ... and the economy can be effectively boosted as soon as possible,’ the ministry said…”

Brexit Watch:

November 25 – Reuters (Guy Faulconbridge and William James): “Former prime minister Tony Blair said… that Britain was in a dangerous mess and that neither his own Labour Party nor Prime Minister Boris Johnson’s Conservatives deserved to win a Dec. 12 election. Britain is holding an election three years ahead of schedule because parliament was deadlocked over Brexit, unable to agree on how or even whether to leave the European Union. ‘We’re a mess,’ Blair said… ‘The buoyancy of the world economy has kept us going up to now, but should that falter, we will be in deep trouble.’”

Central Banking Watch:

November 26 – Bloomberg (Craig Stirling and John Ainger): “Global central banks are approaching the end of the year with a collective shudder at the risky behavior that their low interest-rate policies are encouraging. Policy makers from European Central Bank and the Federal Reserve are among those raising cautionary flags at potentially unsafe investing stoked by their efforts to flood economies with ultra-cheap money. Stock indexes from the U.S. to India are at records, and low sovereign bond yields have pushed funds into property seeking better returns. The warnings are couched in measured language that doesn’t signal panic, but the combined message is one of growing anxiety, laced with the discomfort that central bankers can’t easily tighten policy either. The danger is that such risk-taking recreates a backdrop similar to that preceding the global financial crisis a decade ago.”

EM Watch:

November 29 – Bloomberg (Vrishti Beniwal): “India’s economy grew at its weakest pace in more than six years last quarter, a blow to Prime Minister Narendra Modi as he steps up action to stem the fallout. Gross domestic product rose 4.5% in the September quarter from a year ago, down from 5% in the previous quarter… Core infrastructure industries’ output declined 5.8% in October, the biggest contraction since at least 2005…”

November 27 – Reuters (Dave Sherwood): “Chilean lawmakers agreed… to fast-track reforms to beef up security, warning that a resurgence in violence and vandalism was threatening to derail the country’s 30-year-old democracy. Five weeks of unrest over inequality and shabby social services have left at least 26 dead and more than 13,500 injured, prosecutors said. Riots have hobbled the capital’s public transport system, once the envy of Latin America, and caused billions in losses for private business.”

Europe Watch:

November 28 – Associated Press (Pan Pylas): “Unemployment across the 19-country eurozone has fallen to its lowest rate since July 2008… The… rate across the single currency bloc declined in October to 7.5% from 7.6% the previous month. Over the month, the number of people out of work fell by 31,000 to 12.33 million.”

Global Bubble Watch:

November 25 – Reuters (Emma Farge): “Greenhouse gases in the atmosphere hit a new record in 2018, exceeding the average yearly increase of the last decade and reinforcing increasingly damaging weather patterns, the World Meteorological Organization (WMO) said… ‘There is no sign of a slowdown, let alone a decline, in greenhouse gases’ concentration in the atmosphere - despite all the commitments under the Paris Agreement on Climate Change,’ said WMO Secretary-General Petteri Taalas.”

November 26 – New York Times (Somini Sengupta): “With world leaders gathering in Madrid next week for their annual bargaining session over how to avert a climate catastrophe, the latest assessment issued by the United Nations said Tuesday that greenhouse gas emissions are still rising dangerously. ‘The summary findings are bleak,’ said the annual assessment, which is produced by the United Nations Environment Program and is formally known as the Emissions Gap Report. Countries have failed to halt the rise of greenhouse gas emissions despite repeated warnings from scientists, with China and the United States, the two biggest polluters, further increasing their emissions last year. The result, the authors added, is that ‘deeper and faster cuts are now required.’”

November 27 – Bloomberg (Michael Arnold and Anirban Nag): “Food prices are climbing fast in the world’s biggest emerging markets, posing a possible inflation threat after months of dormant pressures. Asia’s two largest developing economies face a price surge for staple products -- pork in China and onions in India -- that are central to consumers’ diets. In Turkey and Nigeria, supply problems are driving up costs, while United Nations data show global food prices rose at the fastest pace in October in more than two years. Asia’s two largest developing economies face a price surge for staple products -- pork in China and onions in India -- that are central to consumers’ diets.”

November 25 – Financial Times (Eric Platt and Arash Massoudi): “Companies unleashed a wave of global takeovers on Monday, agreeing more than $70bn in deals as multinationals targeted the booming US market to squeeze out competitors and find new sources of growth. Industry leaders such as US discount brokerage Charles Schwab, French luxury goods powerhouse LVMH, Swiss drugs company Novartis and Japanese conglomerate Mitsubishi all snapped up rivals to extend dominance over their sectors. The shopping spree suggests that a dealmaking boom across the corporate world remains intact, after a pause attributed to shrinking confidence among executives and fears of a slowdown in global growth.”

November 25 – Financial Times (Galia Velimukhametova): “Zombies continue to stalk the corporate landscape, and the horde is growing. The number of businesses in industrialised countries whose interest costs are in excess of their annual earnings — ‘zombie companies’, as they are sometimes known — has reached a level not seen since the global financial crisis. Bank of America Merrill Lynch estimates that there are 548 of these zombies in the OECD club of mostly rich nations, against a peak of 626 during the crash. These zombies have been kept alive by years of cheap borrowing costs, created by investors chasing whatever yield they can find in a long bull market for government bonds. This helps to explain why there are five times more zombies today than during the late 1990s, when interest rates were significantly higher worldwide.”

November 24 – Financial Times (Laura Noonan): “Europe’s four biggest investment banks cut $280bn of assets from their main US holding companies in the past three years as they withdrew from Wall Street and moved business away from the glare of regulators. The dramatic reshaping of the US operations of Deutsche Bank, Credit Suisse, UBS and Barclays shows how the banks are tackling their chronic profitability challenges in the country.”

November 25 – CNBC (Yun Li): “What a tough month it has been for bitcoin. The world’s most popular cryptocurrency sank to $6,558.14 on Monday, its lowest level since May… It lost $3,000 in value in just a month as China accelerated a crackdown on businesses involved in cryptocurrency operations, a reversal from President Xi Jinping’s previous signal to be more open to the blockchain technology. The coin last traded at $7,150.79.”

Japan Watch:

November 28 – Reuters (Daniel Leussink): “Japan’s industrial output slipped at the fastest pace since early last year in October, exposing widening cracks in the economy which faces a decline in domestic and foreign demand. Factory output fell 4.2% in October from the previous month…, below the median market forecast for a 2.1% fall and swinging from a 1.7% rise the previous month.”

Fixed-Income Bubble Watch:

November 24 – Wall Street Journal (Andrew Ackerman): “Some of the biggest names in finance are warning that the government’s plan to return Fannie Mae and Freddie Mac to private ownership risks disrupting a market critical to the U.S. housing system. The investors, including BlackRock Inc., Fidelity Investments and Pacific Investment Management Co., have told the Trump administration that any move to privatize Fannie and Freddie should include an explicit guarantee of the $5 trillion in mortgage-backed securities they issue, which only Congress can provide, according to people familiar with the matter. The Trump administration, by contrast, says it is willing to move forward without such a guarantee, arguing that it is past time for the government to reduce its role in housing.”

November 25 – Financial Times (Robert Armstrong): “The market for securities backed by the riskiest US car loans is booming, as yield-crazed investors shrug off nagging concerns over the health of the American consumer. Deals have been ‘going gangbusters’ in subprime auto asset-backed securities (ABS), said Jennifer Thomas, an analyst at Loomis Sayles… At $29bn so far this year, issuance of subprime auto ABS is on track to surpass 2018’s record haul of $32bn, according to data from Finsight… The lower-rated slices of recent deals are ‘five or six times oversubscribed’, said Ms Thomas. ‘The market is trading very well.’”

November 25 – Bloomberg (Kelsey Butler and Allison McNeely): “Private equity firms are increasingly turning to an obscure type of loan, once almost exclusively used to finance smaller deals, to fund larger and larger buyouts. Yet a growing number of analysts and investors warn the debt may be riskier than it appears. Demand for unitranches, which blend first-priority and subordinated loans into a single facility from just a handful of lenders, is surging as borrowers bypass conventional sources of financing in pursuit of greater speed and simplicity. Previously used solely to fund middle-market transactions, volume reached a record $10.7 billion last quarter as non-traditional lenders deploy more cash for deals that in the past may have gone to the institutional loan market. The frenzied growth is another example of how red-hot demand for private credit is reshaping the global lending landscape.”

Leveraged Speculation Watch:

November 27 – Bloomberg (Justin Carrigan and Steven Arons): “Deutsche Bank AG has found a willing partner in Goldman Sachs… as the German lender tries to quickly offload billions of euros worth of unwanted assets. The U.S. bank bought securities with a notional value of about 40 billion pounds ($51bn) from the German firm… It’s at least the second time Goldman Sachs has taken advantage of the sweeping deleveraging effort underway since Deutsche Bank Chief Executive Officer Christian Sewing unveiled a new turnaround plan in early July. In September, the U.S. investment bank purchased the Asian portion of a portfolio of equity derivatives that the German lender had put up for sale… And BNP Paribas previously agreed to take over the hedge fund business.”

Geopolitical Watch:

November 27 – CNBC (Grace Shao, Christine Wang and Evelyn Cheng): “China’s Ministry of Foreign Affairs said… the U.S. has ‘sinister intentions’ and its ‘plot’ is ‘doomed to fail,’ after President Donald Trump signed two bills supporting Hong Kong protesters into law. State media also published a statement from the Hong Kong liaison office, emphasizing its commitment to defending its ‘one country, two systems’ policy. ‘We are officially telling the U.S. and the handful of opposition politicians in Hong Kong who follow America’s lead to not underestimate our determination to protect Hong Kong’s prosperity and stability, don’t underestimate our belief to protect the ‘one country, two systems policy’ and don’t underestimate our capabilities and strategies in protecting our country’s sovereignty, safety, growth and rights,’ the office said…”

November 27 – Free Beacon (Adam Kredo): “Iran, China, and Russia will hold in the coming weeks their first-ever joint war drills, which leaders say are meant to send a ‘message to the world’ about increased military cooperation between the rogue countries. The commander of Iran's navy, Rear Admiral Hossein Khanzadi, said… the Islamic Republic will team up with Moscow and Beijing within the next month to hold the mass war drills. ‘When we talk about joint wargames, we are talking about two or more countries with a high level of relations in various political, economic and social fields, which culminate in cooperation in the military sector, with wargames usually being the highest level of such cooperation,’ Khanzadi was quoted as saying…”

November 23 – CNBC (Frederick Kempe): “Iran faces a time of reckoning, and the stakes couldn’t be higher: potential war with the United States, the reversal of its gains across the Middle East and the future of its revolutionary state… This defining moment for Tehran – perhaps the most critical since the Iranian Revolution of 1979 -- has been prompted by the Trump administration’s ‘maximum pressure’ campaign of sanctions, Iran’s dangerously declining economy, and the cumulative effect of Tehran’s domestic malfeasance and regional overstretch. Growing protests in Iran, Iraq and Lebanon have charged the atmosphere with urgency.”

November 25 – Reuters: “Four months before a swarm of drones and missiles crippled the world’s biggest oil processing facility in Saudi Arabia, Iranian security officials gathered at a heavily fortified compound in Tehran. The group included the top echelons of the Islamic Revolutionary Guard Corps, an elite branch of the Iranian military whose portfolio includes missile development and covert operations. The main topic that day in May: How to punish the United States for pulling out of a landmark nuclear treaty and re-imposing economic sanctions on Iran… With Major General Hossein Salami, leader of the Revolutionary Guards, looking on, a senior commander took the floor. ‘It is time to take out our swords and teach them a lesson,’ the commander said…”

November 24 – Bloomberg (Julia Fioretti, Iain Marlow, and Fion Li): “Hong Kong residents handed an overwhelming victory to pro-democracy candidates in a vote for local district councils on Sunday, a stunning repudiation of the city’s Beijing-backed government after months of increasingly violent protests seeking meaningful elections. Pro-democracy candidates won 85% seats of 452 seats up for election… In the last election in 2015, they had won about a quarter of all elected seats.”

November 25 – Reuters (Sharon Tam and Clare Jim): “Hong Kong leader Carrie Lam renewed her appeals for peace in the Chinese-ruled city on Tuesday but failed to offer any concessions to anti-government protesters despite a resounding victory for pro-democracy parties in local elections. Appearing tired and drawn, Lam spoke a day after results showed democratic candidates secured almost 90% of 452 district council seats in Sunday’s elections, which were widely seen as a barometer of the opposition to the Beijing-backed politician following months of unrest.”

November 25 – Reuters (Keith Zhai, James Pomfret and David Kirton): “Tightening control over efforts to manage the upheaval in Hong Kong, the Chinese leadership has set up a crisis command center on the mainland side of the border and is considering replacing its official liaison to the restive semi-autonomous city, people familiar with the matter said. As violent protests roil Hong Kong, top Chinese leaders in recent months have been managing their response from a villa on the outskirts of Shenzhen, bypassing the formal bureaucracy through which Beijing has supervised the financial hub for two decades.”

November 24 – Reuters (Yimou Lee and Ben Blanchard): “Taiwan President Tsai Ing-wen’s ruling party denounced China as an ‘enemy of democracy’ on Monday following fresh claims of Chinese interference in the island’s politics ahead of presidential and legislative elections on Jan. 11.”

November 23 – Reuters (Ben Blanchard): “Election campaigning in Taiwan was hit at the weekend by new allegations that Beijing had tried to meddle in the island’s politics. A Chinese defector, named as Wang ‘William’ Liqiang by Australian media, gave a sworn statement to the Australian Security Intelligence Organization, or ASIO, about Beijing’s efforts to influence politics in Taiwan, Hong Kong and Australia. In particular, Wang said he helped guide positive media attention toward certain Taiwanese politicians, including President Tsai Ing-wen’s main opponent, Han Kuo-yu of the Kuomintang party.”

Friday Evening Links

[Reuters] Wall Street slips as U.S.-China tensions weigh, investors watch retail

[Reuters] Oil slumps but sets monthly gain ahead of OPEC meeting

[Reuters] Exclusive: U.S. weighs new regulations to further restrict Huawei suppliers - sources

[AP] How a central banker’s low-rate shift showed the way for Fed

[Reuters] Global funds raise stock allocations at the expense of cash: Reuters poll

[Reuters] Iraq PM says he will quit after cleric's call but violence rages on

[Bloomberg] European Banks Pile Into Risky Loans as Economic Outlook Darkens

Wednesday, November 27, 2019

Thursday's News Links

[Reuters] World stocks stall as U.S.-China tensions flare again

[Reuters] Yen gains, yuan falls as Hong Kong tensions muddy trade progress

[Reuters] Oil falls as U.S. rights bill fuels tensions with China

[CNBC] China accuses US of ‘sinister intentions’ after Trump signs bills supporting Hong Kong protesters

[Reuters] China warns U.S. over Hong Kong law as thousands stage 'Thanksgiving' rally

[Reuters] China gives P2P lenders two years to exit industry: document

[Bloomberg] The Big Question on Hong Kong: How Will China Hit Back at Trump?

[Bloomberg] It's Getting More Expensive to Eat, and Economists Are Worried

[WSJ] China Protests New U.S. Law Supporting Hong Kong but Signals Hope for Trade Deal

Wednesday Evening Links

[Reuters] Trump approves legislation backing Hong Kong protesters

[Reuters] Strong data, trade optimism propel Wall Street to record levels

[Reuters] Treasuries - Yields rise on strong capital goods orders

[Reuters] Emerging Markets - Latam FX hit by strong dollar; growing unrest knocks down Chilean, Colombian peso

[CNS] Federal Debt Up $1.3 Trillion Since Last Thanksgiving; $10,137 Per Household

[Reuters] U.S. economy growing modestly, labor market still tight: Fed report

[Reuters] Violence in Chile resurges, peso plunges to historic low

[Free Beacon] Iran, Russia, China to Hold Joint Wargames in ‘Message to the World’

[Bloomberg] Trump Signs Hong Kong Bill That Will Strain Relations With China

Tuesday, November 26, 2019

Wednesday's News LInks

[Reuters] Global stocks nearing record highs on trade hopes

[Reuters] Dollar boosted by trade deal optimism, Swedish crown hits 4-month high

[CNBC] US GDP rose 2.1% in the third quarter, vs 1.9% reading expected

[CNBC] US durable goods orders rebound in October, rising 0.6%

[CNBC] Weekly mortgage refinance applications surge over 300% from a year ago, but there’s a catch

[Yahoo/Bloomberg] China Faces Biggest State Firm Offshore Debt Failure in 20 Years

[Yahoo/Bloomberg] Global Risk Binge Gives Central Bankers Cause to Shudder

[Reuters] China's industrial profits post steepest fall in eight months

[Reuters] China front-loads $142 billion in 2020 local government bonds to spur growth

[FOX] How Trump just upped the ante with China over trade deal: expert panel

[Bloomberg] Global Risk-Taking Binge Is Worrying Central Banks

[Bloomberg] Can the Fed Slowly Deflate the Credit Bubble?

[Bloomberg] David Solomon, Stephen Schwarzman Prepare for Biggest 2020 Risks

[Bloomberg] Never in the History of the Euro Has Volatility Been This Low

[WSJ] UBS Trader Hits Pay Dirt With Chinese Junk Debt

[FT] China’s bank funding under pressure as financial confidence drops

Tuesday Evening Links

[CNBC] Stocks eke out another record as Best Buy leads retailers higher

[Reuters] Trump says near deal with China, but U.S. also has eye on Hong Kong

[Reuters] U.S. banking sector profits dip 7.3 percent to $57.4 billion in third-quarter 2019: FDIC

[Bloomberg] U.S. New-Home Sales Post Two Best Months in More Than 12 Years

[NYT] ‘Bleak’ U.N. Report Finds World Heading to Climate Catastrophes

[Bloomberg] Fed's Brainard Sees Solid Economy, Backs Big Strategy Change

[Bloomberg] China’s Economy Slows for Seventh Month, Early Indicators Show

[Bloomberg] China’s $40 Trillion Man Has the Toughest Job in Global Finance

Monday, November 25, 2019

Tuesday's News Links

[Reuters] Wall Street hits new record high on Disney, Best Buy

[Reuters] World stocks edge off highs to await U.S.-China progress

[Reuters] Dollar hits two-week high on yen, yuan up after China-U.S. trade call

[Reuters] China trade deal close, sticking points remain: White House adviser

[CNBC] China’s top trade negotiator Liu He talks to Lighthizer, Mnuchin about ‘resolving core issues’

[AP] New home sales slipped 0.7% in October but remain solid

[CNBC] Home price gains accelerate in September, S&P Case-Shiller Index says

[Reuters] U.S. goods trade deficit narrows sharply in October

[Reuters] Exclusive: China sets up Hong Kong crisis center in mainland, considers replacing chief liaison

[Reuters] Hong Kong's Lam appeals for calm but offers no concessions after election drubbing

[Bloomberg] China Faces Biggest State Firm Offshore Debt Failure in 20 Years

[Bloomberg] Fed's Powell Says U.S. Economy's Glass Is ‘More Than Half Full’

[Bloomberg] China’s Shifting Approach to Bank Bailouts

[NYT] Fed Chair Powell Says a Solid Labor Market Could Get Even Stronger

[WSJ] China Stays Upbeat About Trade Deal With U.S.

[WSJ] Powell Says Fed’s Rate Cuts Reflect More Bearish View of Economy

[WSJ] Silicon Valley Adjusts to New Reality as $100 Billion Evaporates

[FT] China central bank warns over rising household debt levels

[FT] Repo: How the financial markets' plumbing got blocked

[FT] Boomtime back as dealmaking hits $70bn in a day

[FT] Yield-crazed investors pile into US subprime car loans

[FT] China’s special-purpose bonds fall short of Beijing’s ambitions

Monday Evening Links

[Reuters] S&P 500, Nasdaq hit new highs as chips climb on trade optimism

[Reuters] China and U.S. moving closer to trade deal, but no agreement on tariff rollbacks: report

[CNBC] Fed economists warn of ‘economic ruin’ if Modern Monetary Theory policies are ever adopted

[CNBC] Bitcoin sinks to lowest level since May, falling $3,000 in a month as China accelerates crackdown

[Bloomberg] ‘Cheap’ End-of-Year Funding Fuels Demand for Fed Repo Operation

[Bloomberg] Over 13% of China’s Banks Are Highly Risky, Central Bank Says

[WSJ] Fed Officials Close to Filling Two Top Markets Jobs

Sunday, November 24, 2019

Monday's News Links

[Reuters] World shares climb on trade hopes

[Reuters] Dollar boosted by trade progress signs, Brexit promise lifts sterling

[Reuters] Oil kicks off week with gains on fresh hopes for U.S.-China trade talks

[Reuters] Trump says administration to take 'good look' at Hong Kong rights bill

[Reuters] China central bank warns high financial risks amid rising economic headwinds

[Reuters] Fresh headache for China after Hong Kong democrats rout pro-Beijing candidates

[Reuters] Britain is a dangerous mess, former PM Blair says

[Reuters] Special report: ‘Time to take out our swords' - Inside Iran’s plot to attack Saudi Arabia

[Reuters] Taiwan ruling party says China 'enemy of democracy' after meddling allegations

[Reuters] Greenhouse gases accelerate to new peak in 2018, U.N. says

[Bloomberg] A Booming Corner of Private Credit Has Some Investors on Edge

[Bloomberg] China’s Tewoo Seeks Debt Haircut of Up to 64% on Dollar Bonds

[Bloomberg] Pro-Democracy Forces in Hong Kong Bolstered by Huge Election Win

[FT] Beware the dawn of the corporate dead

Sunday Evening Links

[Reuters] Asia shares bounce, hope for best on U.S.-China trade

[Yahoo/Bloomberg] U.S. Stock Futures Rise as Trade News Considered: Markets Wrap

[Reuters] No 'phase two' U.S.-China deal on the horizon, officials say

[Reuters] Hong Kong democrats cheer landslide victory in local elections amid political crisis

[Bloomberg] China State Media Steps Up U.S. Criticism for Hong Kong Meddling

[WSJ] Utilities Targeted in Cyberattacks Identified

[FT] European banks slash $280bn from main US businesses

Sunday's News Links

[CNBC] US wants China trade deal but won’t turn blind eye to Hong Kong, Trump national security advisor says

[Reuters] Still hope for U.S.-China deal this year: U.S. official

[CNBC] Hong Kong vote hits record amid calls for democracy

[MarketWatch] Why are markets ignoring escalating conflict in Hong Kong?

[Reuters] China meddling allegations roil Taiwan election campaign

[Bloomberg] China to Raise Penalties on IP Theft in Trade War Compromise

[Bloomberg] Negative Rates Can Do a Lot More Damage Yet: a Nordic Warning

[WSJ] Stocks Run Gantlet of Bad News to Record Highs

[WSJ] U.S. Firms Pull Back on Investment

[WSJ] Firms Warn of Risks in Plan to Take Fannie Mae, Freddie Mac Private

Friday, November 22, 2019

Weekly Commentary: Weak Link

Last week from The Institute of International Finance (IIF) (a summary from a members-only report): “Global debt has topped $250 billion – 320% of GDP: emerging market debt hits a new record of $71.4 trillion (220% of GDP); With limited room for further easing, debt service costs will be an increasing constraint on fiscal policy… USD hovering at record highs despite Fed rate cuts this year: persistent growth in demand for U.S. liquidity as dollar debt across EM and mature markets hits record highs. Non-U.S. banks are increasingly reliant on USD funding.”

The IIF estimated that global debt would end the year at $255 TN – “nearly $32,500 for each of the 7.7 billion people on planet” (as noted by Reuters’ Marc Jones). Global debt expanded $7.5 TN during the first half of the year, led by China and the U.S. From Reuters (Marc Jones): “Separate analysis from Bank of America Merrill Lynch… calculated that since the collapse of U.S. investment bank Lehman Brothers, governments have borrowed $30 trillion, companies have taken on $25 trillion, households $9 trillion and banks $2 trillion.”

Looking back, total U.S. Non-Financial Debt expanded 8.16% in 2007, strong growth that few found alarming. It was, after all, down from 2006’s 8.53%, 2005’s 8.77% and 2004’s 9.15%. Conventional thinking had it that the Fed was successfully orchestrating a “soft landing.” Yields were said to remain relatively low in the face of booming Credit demand because of the so-called “global saving glut.”

Financial Sector debt growth at the time was signaling something momentous, though most conventional analysts at the time chose to disregard financial sector expansion (arguing that such analysis would be “double-counting” Credit already included in household, corporate and government sector tabulations). Financial Sector borrowings expanded at a 13.66% pace in 2007, up from 2006’s 10.35% and 2005’s 9.01%.

I have in previous CBBs highlighted the two-year $1.114 TN, or 27%, increase in (Z.1 category) “Fed Funds and Repurchase Agreements” that culminated with a $319 billion jump during Q1 2008. This data series was emblematic of the extreme speculative leveraging that had taken hold during mortgage finance Bubble “Terminal Phase” excess. While conventional retrospective focuses on risky mortgage lending and housing market excess, the epicenter of the Bubble was in “repo” finance and myriad instruments (CDO’s, ABS, special purpose vehicles, derivatives and such) financed directly and indirectly in short-term market-based lending markets. It was the Bubble in speculative leverage that kept mortgage rates low in the face of historic borrowing demand.

The decade-old “global government finance Bubble” has notable differences - as well as clear similarities - to the previous Bubble. I have posited that global sovereign debt and central bank Credit have been the key sources of Bubble excess (as opposed to U.S. mortgage Credit). In general, interest rates (along with market yields) have been held at historically low levels, a dynamic that has trimmed overall rates of debt expansion. This cycle has experienced unprecedented growth in central bank balance sheets that analytically should be viewed similarly to financial sector leveraging from the previous cycle. Moreover, I would argue securities finance and speculative leveraging have evolved from a U.S. phenomenon to now comprise “repo” funding markets spanning the globe – “developed” markets, “developing” and, certainly, the “off-shore financial centers.”

The rapid expansions in global “Non-Bank Financial Institutions” and “off-shore” Credit indicate extreme speculative leveraging (akin to U.S. “repos” in 2007). Overall global Credit continues to outpace GDP growth, this despite historically low market yields that significantly reduce debt service costs. Indeed, the unrelenting rapid expansion of debt (and speculative leveraging) in the face of waning global growth dynamics portends difficult times ahead.

From the Bank for International Settlement’s “Statistical Release: BIS International Banking Statistics at end-June 2019.”

Under the headline, “Lending to [Non-Bank Financial Institutions] (NBFI) Continued to Lead Growth in Cross-Border Claims:” “The BIS locational banking statistics show that global cross-border bank claims rose by $365 billion during the second quarter of 2019, to reach $31 trillion by end-June. Their annual growth rate, which averaged around 0% since the Great Financial Crisis, reached a post-crisis high of 6%... Growth in lending to all major sectors increased. Claims on non-bank financial institutions continued to expand the most rapidly (13% year over year).”

Global cross-border bank claims (lending) surged $1.735 TN during the first half, the strongest six-month growth since pre-crisis Q4 ’07 to Q1 ’08. This compares to first-half growth of $324 billion during 2018 and $341 billion in 2017. Over two years, cross-border bank claims surged $2.520 TN, or 9%, to $30.98 TN. The second quarter’s 13% growth in lending to Non-Bank Financial Institutions was the strongest in the five-year history of the data. Notably, growth accelerated from Q1’s 11.7%, Q4 18’s 8.2% and Q3 18’s 6.4% pace.

BIS: “Reporting banks’ cross-border claims on all major sectors expanded during Q2 2019. The $190 billion expansion in claims on non-banks accounted for more than a half of the overall quarterly increase in global cross-border claims. This, in turn, was mostly driven by claims on non-bank financial institutions (NBFIs include entities such as insurance companies, pension funds, hedge funds and money market funds), which increased by $172 billion, resulting in an annual growth rate of 13%. The majority of this new lending to NBFIs was directed towards a few financial centres, such as the Cayman Islands ($37 billion), the United Kingdom ($34 billion) and Luxembourg ($24 billion).”

The $172 billion increase in lending to Non-Bank Financial Institutions followed Q1’s (record for the series) $468 billion surge, putting first-half growth at $641 billion.

BIS: “The latest increase in lending to NBFIs is part of a longer trend. Over the past five years, cross-border claims on that sector have grown at an average annual pace of 7% (compared with 1% for claims on all sectors), reaching $7 trillion at mid-2019.”

BIS: “Lending to offshore financial centres (OFCs) remained strong. It grew at 6% year over year and stood at $5 trillion as of end-June 2019, mostly to the benefit of NBFIs. Banks reported large increases in their claims on the Cayman Islands (+$45 billion), Jersey (+$9 billion) and Hong Kong SAR (+$8 billion).”

The surge in “offshore financial centers” began in 2013, concurrent with the ramp up of global QE following the European bond crisis. After ending Q2 2013 at $3.5 TN, the “offshore financial centers” over six years surged $1.5 TN, or 43%, to $5.0 TN. I’ll assume this data capture only a segment of bubbling global markets funding financial speculation. I also presume this surge in lending has been instrumental in the global collapse in sovereign yields (in the face of massive issuance) that has fueled broad-based inflation in real and financial assets around the world.

We won’t know all the crazy leverage and derivative strategies spawned during this period until the next big de-risking/deleveraging period. If recent articles pointing to the unwind of hedge fund trades as responsible for a jump in Japanese bond yields are accurate, we can assume at this point virtually everything is levered up. Who would have ever thought of leveraging negative-yielding bonds?

BIS: “…Cross-border lending to borrowers in developing Asia-Pacific rose by $27 billion, bringing the annual growth rate to 4%. Claims on China, up by $25 billion, accounted for almost the whole increase. Those claims have grown from a recent low of $699 billion (at end-March 2016) to $990 billion (at end-June 2019).”

Clearly, the Cayman Islands, the UK and Luxembourg are major sources of cheap finance for the global leveraged speculating community. But I ponder how much speculative finance during this cycle has emanated out of the likes of financial centers Hong Kong and Singapore - and flowed freely into higher-yielding Chinese Credit instruments. After all, the world has never seen such a Bubble in “subprime” Credit. I have argued China is the great global Credit Bubble’s Weak Link. Yet, at this point, perhaps it’s Asian finance more generally. The backdrop is increasingly conducive to heightened currency market instability.

For the Week:

The S&P500 declined 0.3% (up 24.1% y-t-d), and the Dow fell 0.5% (up 19.5%). The Utilities added 0.2% (up 19.1%). The Banks increased 0.7% (up 27.4%), and the Broker/Dealers jumped 2.4% (up 19.2%). The Transports fell 0.8% (up 17.6%). The S&P 400 Midcaps declined 0.7% (up 19.4%), and the small cap Russell 2000 dipped 0.5% (up 17.8%). The Nasdaq100 fell 0.5% (up 30.7%). The Semiconductors dropped 3.0% (up 46.4%). The Biotechs surged 3.4% (up 14.4%). Though bullion declined $7, the HUI gold index increased 0.3% (up 31.3%).

Three-month Treasury bill rates ended the week at 1.545%. Two-year government yields added two bps to 1.63% (down 86bps y-t-d). Five-year T-note yields declined two bps to 1.625% (down 89bps). Ten-year Treasury yields fell six bps to 1.77% (down 91bps). Long bond yields dropped eight bps to 2.22% (down 79bps). Benchmark Fannie Mae MBS yields slipped a basis point to 2.70% (down 79bps).

Greek 10-year yields fell six bps to 1.38% (down 302bps y-t-d). Ten-year Portuguese yields gained three bps to 0.40% (down 132bps). Italian 10-year yields declined five bps to 1.18% (down 156bps). Spain's 10-year yields dipped three bps to 0.41% (down 101bps). German bund yields declined three bps to negative 0.36% (down 60bps). French yields slipped two bps to negative 0.04% (down 75bps). The French to German 10-year bond spread widened one to 32 bps. U.K. 10-year gilt yields declined two bps to 0.71% (down 57bps). U.K.'s FTSE equities index added 0.3% (up 8.9% y-t-d).

Japan's Nikkei Equities Index declined 0.8% (up 15.5% y-t-d). Japanese 10-year "JGB" yields dipped a basis point to negative 0.07% (down 8bps y-t-d). France's CAC40 fell 0.8% (up 24.6%). The German DAX equities index dipped 0.6% (up 24.7%). Spain's IBEX 35 equities index was little changed (up 8.4%). Italy's FTSE MIB index fell 1.4% (up 26.9%). EM equities were mixed. Brazil's Bovespa index rallied 2.0% (up 19.4%), and Mexico's Bolsa increased 0.3% (up 4.5%). South Korea's Kospi index sank 2.8% (up 3.0%). India's Sensex equities index was unchanged (up 11.9%). China's Shanghai Exchange slipped 0.2% (up 15.7%). Turkey's Borsa Istanbul National 100 index gained 1.1% (up 16.8%). Russia's MICEX equities index increased 0.4% (up 24.4%).

Investment-grade bond funds saw inflows of $5.190 billion, and junk bond funds posted inflows of $250 million (from Lipper).

Freddie Mac 30-year fixed mortgage rates dropped nine bps to 3.66% (down 115bps y-o-y). Fifteen-year rates declined five bps to 3.15% (down 109bps). Five-year hybrid ARM rates fell five bps to 3.39% (down 70bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-year fixed rates down 11 bps to 4.01% (down 69bps).

Federal Reserve Credit last week declined $19.0bn to $3.987 TN, with a ten-week gain of $261bn. Over the past year, Fed Credit contracted $82.7bn, or 2.0%. Fed Credit inflated $1.177 Trillion, or 42%, over the past 367 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt declined $4.9bn last week to $3.416 TN. "Custody holdings" were up $10.4 billion, or 0.3% y-o-y.

M2 (narrow) "money" supply gained $15.9bn last week to a record $15.292 TN. "Narrow money" rose $1.058 TN, or 7.4%, over the past year. For the week, Currency increased $1.1bn. Total Checkable Deposits declined $4.0bn, while Savings Deposits rose $15.7bn. Small Time Deposits slipped $1.1bn. Retail Money Funds gained $4.2bn.

Total money market fund assets dropped $45.9bn to $3.526 TN. Money Funds gained $619bn y-o-y, or 21.3%.

Total Commercial Paper declined $10.0bn to $1.121 TN. CP was up $32bn, or 3.0% year-over-year.

Currency Watch:

November 17 – CNBC (Weizhen Tan): “China is heavily exposed to the U.S. dollar, but now, with the risk of ‘decoupling,’ Beijing is silently diversifying its reserves to reduce its dependence on the world’s largest reserve currency, analysts say. Ongoing trade tensions with the U.S. has ‘increased the risk of a financial decoupling’ between the two largest economies, ANZ Research said in a recent report. The White House reportedly considered some curbs on U.S. investments in China such as delisting Chinese stocks in the U.S. Beijing will therefore manage its risk by diversifying its foreign exchange reserves into other currencies, ANZ predicted, as well as build up its ‘shadow reserves.’”

The U.S. dollar index recovered 0.3% to 98.27 (up 2.2% y-t-d). For the week on the upside, the Japanese yen increased 0.1%, the Swedish krona 0.1%, and the New Zealand dollar 0.1%. On the downside, the South Korean won declined 1.0%, the Mexican peso 1.0%, the Swiss franc 0.8%, the Norwegian krone 0.7%, the Canadian dollar 0.6%, the British pound 0.5%, the Australian dollar 0.5%, the euro 0.3%, the Singapore dollar 0.3%, and the Brazilian real 0.2%. The Chinese renminbi declined 0.43% versus the dollar this week (down 2.27% y-t-d).

Commodities Watch:

The Bloomberg Commodities Index declined 0.5% this week (up 2.3% y-t-d). Spot Gold dipped 0.5% to $1,462 (up 14.0%). Silver jumped 1.2% to $17.147 (up 10.3%). WTI crude added five cents to $57.77 (up 27%). Gasoline jumped 2.4% (up 27%), while Natural Gas declined 0.9% (down 9%). Copper increased 0.3% (up 1%). Wheat jumped 2.5% (up 3%). Corn declined 0.6% (up 1%).

Market Instability Watch:

November 20 – Financial Times (Jennifer Ablan and Joe Rennison): “Bond funds buying the best-quality US corporate debt are set to chalk up one of their three best years on record for inflows in 2019, even as the extra returns on offer have shrunk and some Federal Reserve officials expressed concern over mounting risks. Investors have poured $180bn into US bond funds so far this year, trailing only 2009’s $246bn of inflows and 2017’s $210bn, according to Refinitiv Lipper… The rush into the corporate bond market reflects investors’ ongoing need for yield at a time when interest rates remain at very low levels.”

November 18 – Financial Times (Philip Stafford): “The S&P 500 closed at a record high last Friday, just like it did in the six weeks before that. Despite a lot of political turmoil around the world, prices are drifting gently upwards, and a lot of people expect them to keep doing so. The Vix volatility index — a measure of expected swings in the S&P over the next 30 days — has slumped to 12.78, not far off its lowest levels of the year, and well below its 30-year average of around 19. More significant is that hedge funds seem confident that this tranquil state of affairs will continue. They have gone ‘short’ the Vix in a record 204,000 futures contracts tied to the index…”

November 17 – Financial Times (Tommy Stubbington): “Investors lent €487.5m to Greece’s government last month. When the debt matures after 13 weeks, they will get back slightly less than they paid. The high price raised eyebrows in bond markets. Investors had refused to lend to Greece at any price during the eurozone’s 2009-2015 debt crisis, leading to three sovereign bailouts. Now, they are paying Athens to look after their cash… ‘Greece selling at negative yields is absurd,’ says Mohamed El-Erian… ‘It shows you the extent to which markets are distorted. One by one, things that seemed impossible a few years ago have happened.’”

November 18 – Financial Times (David Tuckwell): “Junk bond exchange traded funds are being short sold in bulk. Almost 40% of the US’s biggest junk bond ETFs available for borrowing are on loan to short sellers, according to… FIS Astec Analytics… Such short selling has raised alarm about the quality of the funds’ holdings. It has also prompted the question of whether junk bond ETFs have design flaws that could wreak havoc if market conditions deteriorate. Junk bond ETFs — which buy bonds with low, or ‘junk’, credit ratings — have surged in popularity thanks to a decade of low interest rates. They hold more than $60bn in assets…”

Trump Administration Watch:

November 19 – Wall Street Journal (William Mauldin and Josh Zumbrun): “Trade talks between the U.S. and China are in danger of hitting an impasse, threatening to derail the Trump administration’s plan for a limited ‘phase-one’ pact this year, according to former administration officials and others following the talks. Both sides remain divided over core issues—including Beijing’s demand for removing tariffs and the U.S.’s insistence on China buying farm products—nearly six weeks after an ‘agreement in principle’ was announced by the White House on Oct. 11. ‘China is going to have to make a deal that I like,’ President Trump said… ‘If we don’t make a deal with China, I’ll just raise the tariffs even higher.’”

November 21 – Bloomberg (Daniel Flatley and Justin Sink): “U.S. President Donald Trump is expected to sign legislation passed by Congress supporting Hong Kong protesters, setting up a confrontation with China that could imperil a long-awaited trade deal between the world’s two largest economies. The bill, approved unanimously by the U.S. Senate on Tuesday, passed the House 417-1 on Wednesday and could go to Trump as soon as Thursday. A person familiar with the matter said Trump planned to sign the bill… The remarkable bipartisan support for a hard-line U.S. stance on China creates one of the toughest economic and foreign policy challenges of Trump’s presidency… China’s foreign ministry urged the U.S. to prevent the legislation from becoming law…”

November 19 – Reuters (David Lawder): “A ‘phase one’ trade deal between the United States and China was supposed to be a limited agreement that would allow leaders from both countries to claim an easy victory while soothing financial markets. But it may morph into something bigger if U.S. President Donald Trump agrees to Beijing’s demands to roll back existing tariffs on Chinese goods, people familiar with the talks say. China’s commerce ministry said this month that removing tariffs imposed during the trade war is an important condition to any deal. The demand has U.S. officials wondering if higher Chinese purchases of U.S. farm goods, promises of improved access to China’s financial services industry, and pledges to protect intellectual property are enough to ask in return.”

November 19 – Bloomberg (Jordan Fabian): “Vice President Mike Pence said… it would be difficult for the U.S. to sign a trade agreement with China if demonstrations in Hong Kong are met with violence. ‘The president’s made it clear it’ll be very hard for us to do a deal with China if there’s any violence or if that matter is not treated properly and humanely,’ Pence said…”

November 18 – CNBC (Kevin Stankiewicz): “Former White House chief economic advisor Gary Cohn said… he believes President Donald Trump will go forward with the Dec. 15 tariffs if the U.S. and China haven’t agreed to a trade deal. ‘I think he thinks that that’s a forcing function and if he keeps blinking, he loses credibility in the Chinese eyes,’ Cohn said…”

November 18 – Reuters (Eric Beech): “U.S. President Donald Trump said he complained to Federal Reserve Chair Jerome Powell about high U.S. interest rates in a meeting they held at the White House... ‘At my meeting with Jay Powell this morning, I protested fact that our Fed Rate is set too high relative to the interest rates of other competitor countries,’ Trump said on Twitter… ‘In fact, our rates should be lower than all others (we are the U.S.). Too strong a Dollar hurting manufacturers & growth!,’ he said.”

November 18 – Reuters (Alexandra Alper): “Top Senate Democrat Chuck Schumer and Republican Senator Tom Cotton… urged the U.S. government to swiftly issue rules to make it harder to export sophisticated technologies to China that Beijing can use to boost its military.”

Federal Reserve Watch:

November 18 – Bloomberg (Christopher Condon): “Federal Reserve Bank of Boston President Eric Rosengren warned his fellow monetary policy makers against putting financial stability at risk in pursuit of higher inflation. ‘I don’t think there’s a big cost to being a little below 2%,’ Rosengren told Bloomberg…, referring to the central bank’s inflation target. ‘I’d rather be higher, but I wouldn’t want to distort financial markets to get that outcome.’”

U.S. Bubble Watch:

November 19 – Wall Street Journal (Daniel Kruger): “Holdings of U.S. government debt by overseas investors declined the most in almost two years in September as yields on Treasurys climbed from near-record lows. Foreign holdings of Treasury debt declined 1.2% to $6.78 trillion, the biggest drop since the end of 2017… Demand for the debt from foreign investors at September’s auctions of new Treasurys was the lowest since before the financial crisis… ‘Foreign ownership of Treasurys hasn’t kept pace with issuance,’ said Jon Hill, a government debt strategist at BMO Capital Markets.”

November 19 – Financial Times (Lucia Mutikani): “U.S. homebuilding rebounded in October and permits for future home construction jumped to a more than 12-year high, pointing to strength in the housing market amid lower mortgage rates… Housing starts increased 3.8% to a seasonally adjusted annual rate of 1.314 million units last month, with single-family construction rising for a fifth straight month and activity in the volatile multi-family sector rebounding solidly… Building permits surged 5.0% to a rate of 1.461 million units in October, the highest level since May 2007. Permits were driven by the single-family housing segment, which increased 3.2% to the highest level since August 2007.”

November 21 – Reuters (Lindsay Dunsmuir): “U.S. home sales increased more than expected in October and house prices rose at the fastest pace in more than two years amid lower mortgage rates and a shortage of properties for sale. …Existing home sales rose 1.9% to a seasonally adjusted annual rate of 5.46 million units last month… Other factors continue to weigh on housing though, including a chronic lack of properties for sale, which has inflated prices and kept many buyers on the sidelines. There were 1.77 million homes in the market last month, a decline of 4.3% compared to a year ago.”

November 19 – CNBC (Diana Olick): “Anyone out shopping for an entry-level home knows the prices are high and the pickings are slim. Now, the same is holding true for rentals. As more Americans find it harder to afford a home, rental demand is soaring, especially for single-family homes. The supply of rental homes is shrinking, and that continues to push rent prices higher, particularly on the lower end of the market. Those less expensive rentals, going for less than 75% of the median regional rent, jumped nearly 4% annually in September, according to CoreLogic. High-end rentals, or those with prices greater than 125% of the region’s median rent, increased just 2.9% annually. ‘Low rental supply coupled with ongoing demand pushed up rents in September,’ said Molly Boesel, principal economist at CoreLogic. ‘Vacancy rates have fallen moderately on the national level over the last quarter – with a 0.3% decrease in the third quarter of 2019 compared to a year earlier – and more significantly in select metro areas.’”

November 21 – Bloomberg (Romy Varghese): “America’s states are increasing their spending at the fastest pace since the end of the Great Recession. Their budgets swelled by 5.9% in the 2019 fiscal year to about $2.1 trillion, the biggest annual increase since the recession ended in 2009, according to… the National Association of State Budget Officers. That’s up from a 3.7% pace in the year before as state officials pumped more money into transportation projects, pensions and reserves that will help them weather the next economic rout.”

November 22 – Wall Street Journal (Matt Wirz): “The default risk of companies owned by private-equity firms is 2.5 times that of their public counterparts, according to data collected from banks, insurers and asset managers by analytics firm Credit Benchmark. Private-equity firms use leveraged loans, rated below investment grade, for the financing of buyouts of target companies. Financial institutions raised their estimates of the average probability of default—or nonpayment—for such loans to about 6% in September from 5.44% a year earlier, according to the data.”

November 19 – Wall Street Journal (Akane Otani and Karen Langley): “Technology stocks are racing toward their best year in a decade... Investors have favored shares of rapidly growing, relatively pricey companies over their more low-valued counterparts for much of the more-than-decadelong bull market. Although the latter group has rebounded over the past three months, technology stocks remain the market’s leaders: The S&P 500 technology sector’s 41% gain for the year has put the group well above the S&P 500’s 24% climb and on course for its biggest one-year advance since 2009.”

November 22 – Bloomberg (Kriti Gupta): “Banks have begun trimming back the credit lines of America’s shale producers, further undercutting a beleaguered industry that’s been struggling to rebuild investor confidence. Laredo Petroleum Inc. and Oasis Petroleum Inc. are among at least six producers whose ability to secure short-term loans against their oil and natural gas reserves have dropped by 10% or more… The declines offer the first hint of results from a semi-annual bank review of the industry’s borrowing capacity that generally runs through December.”

November 22 – Bloomberg (Olivia Rockeman): “The real estate market in downtown Los Angeles is taking a hit as Chinese cash dries up. Condo sales plunged 31% in the third quarter from a year earlier, according to… Miller Samuel Inc. and… Douglas Elliman Real Estate. Chinese buyers have made about 50% of the purchases in downtown Los Angeles in recent years… But tightened restrictions on capital flowing out of China have hampered the market.”

November 21 – CNBC (Hugh Son): “A digital bank that raised $110 million from venture capital funds and celebrities including Leonardo DiCaprio is scrambling to find funding, a potential sign that investors are cooling on risky start-ups after the WeWork debacle. At first blush, Aspiration has all the trappings of a successful disruptor… But Aspiration, which allows its customers to choose how much they pay for services, has so far failed to persuade enough investors to participate in its latest fundraising round, according to people with knowledge of the situation.”

November 20 – Wall Street Journal (Katherine Clarke): “Over a decade ago, Jeff Greene earned a fortune betting against risky mortgages in the last housing market crash. These days, the billionaire is finding himself less lucky in a different real-estate investment—an enormous Los Angeles mansion that he is having trouble selling amid an oversupply of such homes. Mr. Greene said he is planning to once again relist the Beverly Hills home for $129 million, down from its original $195 million asking price when he first listed it in 2014.”

China Watch:

November 22 – Associated Press (Elaine Kurtenbach): “Chinese President Xi Jinping said Friday that Beijing wants to work for a trade deal with the United States but is not afraid to ‘fight back’ to protect its own interests. Echoing the upbeat tone adopted by other Chinese officials in recent days, Xi told a visiting U.S. business delegation that China holds a ‘positive attitude’ toward the trade talks. ‘As we always said we don’t want to start the trade war, but we are not afraid,’ Xi said. ‘When necessary we will fight back but we have been working actively to try not to have a trade war.’”

November 18 – CNBC (Yun Li): “The mood in Beijing about a trade deal is pessimistic due to President Donald Trump’s reluctance to roll back tariffs, which China believed the U.S. had agreed to, a government source told CNBC’s Eunice Yoon. ‘Mood in Beijing about #trade deal is pessimistic, government source tells me. #China troubled after Trump said no tariff rollback. (China thought both had agreed in principle.) Strategy now to talk but wait due to impeachment, US election. Also prioritize China economic support.’”

November 18 – Financial Times (Don Weinland): “China’s central bank cut its short-term lending rate for the first time in four years on Monday, signalling the start of a new easing cycle as Beijing becomes increasingly concerned over slowing economic growth. The People’s Bank of China said… it would lower the seven-day reverse repurchase rate from 2.55% to 2.5%.”

November 19 – Bloomberg: “The People’s Bank of China asked commercial lenders to increase credit support to the country’s economy at a Tuesday meeting, a move aimed at putting a floor under an economic slowdown. The financial sector should ‘put development as the first priority’ while serving the real economy and making sure that economic growth will stay in a reasonable range, the central bank said after meeting with commercial lenders on the current credit situation.”

November 18 – Bloomberg: “Local government investment arms in China were once considered one of the country’s riskiest groups of borrowers and a time bomb in a creaky financial system. But in recent years, a growing number of these heavily-indebted entities, known as local government financial vehicles, have emerged as white knights of a troubled private sector, offering guarantees to loans and bonds from garment makers to construction firms. The shifting role of the LGFVs, which build roads, bridges and airports across China, highlights Beijing’s growing reliance on an ever-bulging state sector to engineer stability in turbulent times. The credit guarantees are part of a broader nationwide campaign to alleviate pain for private businesses hit hard by trade tensions and a weakening economy… Around 2,000 of these funding platforms have offered a total of 5.9 trillion yuan ($842bn) worth of credit guarantees to domestic firms, representing nearly a quarter of their combined net assets, said Liu Yu, an analyst from Guosheng Securities Co.”

November 21 – Bloomberg (Ina Zhou): “Two companies based in China’s Shandong province saw their dollar bonds plunge on Thursday amid signs that their debt troubles are worsening. Shandong Ruyi Technology Group Co.’s dollar bond due in December plunged by 11.2 cents on the dollar to 77 cents…, its biggest drop on record… Shandong Yuhuang Chemical Co., another firm from the same province, saw its dollar bond due in March drop by 13.6 cents to 59 cents, also a record drop for the note…”

November 19 – Bloomberg: “A Chinese bank that backed Tewoo Group Co.’s dollar bond made an interest payment on its behalf, in a sign of worsening finances at the distressed commodities trader. Industrial and Commercial Bank of China Ltd. transferred $7.875 million to repay interest due December 1 on Tewoo’s $500 million dollar bond due 2020… ICBC had provided a standby letter of credit (SBLC) on the note -- which is effectively a pledge to repay if the borrower can’t. This is the first such payout since June on an offshore bond from a SBLC provider, when troubled conglomerate China Minsheng Investment Group Corp. received a similar backstop from China Construction Bank Corp.”

November 19 – Bloomberg: “Chinese technology conglomerate Tunghsu Group Co. is looking to extend its bond payment deadlines after failing to settle its obligations this week, in the latest sign that the nation’s private-sector firms are struggling to ease their debt load amid an economic slowdown… Tunghsu Group is in talks with bond investors about extending the repayment deadline on a 7.48% local note, after its Shenzhen-listed unit Tunghsu Optoelectronic Technology failed to repay the 1.97 billion yuan principal and interest.”

November 21 – Financial Times (Sun Yu): “A subsidiary of China’s largest construction group has suspended work on one of the nation’s tallest skyscrapers after the developer became the latest in a string of companies to default on a payment. The default highlights the growing challenges faced by China’s construction groups as the slowing economy trims credit supply, putting the once runaway mega-tower building boom under stress. …China Construction Third Engineering Bureau Co said it would halt construction on a 475m-high skyscraper in the central city of Wuhan. It said Greenland Group, one of the nation’s largest property companies, had failed to make ‘a significant’ project payment.”

November 15 – Bloomberg: “China’s central bank said it will ‘increase counter-cyclical adjustment’ to ward off downward pressure on the economy, while staying vigilant on the possibility of expectations that inflation may spread… ‘It should be noted that the current external environment is complex, the economy is under rising downward pressure, and some businesses are faced with operating difficulties,’ the PBOC said.”

November 17 – Reuters (Cheng Leng and Ryan Woo): “Shares of Harbin Bank, a midsize lender with links to the troubled conglomerate Tomorrow Holdings, rose more than 9% on Monday as state-backed investors became its key shareholders in a $2 billion deal. The bank will now be 48%-controlled by two state-controlled entities… The total transaction will be worth around 15 billion yuan ($2bn)…”

November 19 – Financial Times (Tom Mitchell): “China’s parliament has attacked a Hong Kong court ruling that overturned a contentious mask ban, threatening to inflame tensions in the territory where a police siege of a university has entered its third day. …A National People’s Congress spokesperson said members of its of law and labour committee ‘expressed serious concern’ and ‘strong dissatisfaction’ with the Hong Kong High Court ruling, which invalidated a mask ban implemented in early October.’”

November 17 – Bloomberg (Shawna Kwan): “Home sales in Hong Kong plunged over the weekend as increasingly violent protests shut down parts of the city… The number of transactions in 15 housing estates tracked by Midland Realty International Ltd. slumped 78% on the weekend from a month earlier… ‘The unpredictable social events have intensified in the past few days, affecting apartment visits for potential buyers,’ said Sammy Po, the chief executive officer of Midland’s residential department. ‘Buyers have turned more cautious.’”

Central Banking Watch:

November 22 – Reuters (Balazs Koranyi and Francesco Canepa): “The European Central Bank should not be complacent if its ultra- easy policy fuels bubbles because the tools devised to mitigate these imbalances are in their infancy, Bundesbank President Jens Weidmann said… ‘Monetary policy cannot be complacent if its policy stance raises long-term risks to price stability through the build-up of financial imbalances,’ Weidmann told a… conference. ‘We should not be over-confident about the role macroprudential policy can play in addressing systemic risks,’ he said. ‘This policy approach is still in its infancy.’”

November 19 – Bloomberg (Piotr Skolimowski): “The European Central Bank warned of potential side effects from its loose monetary policy, highlighting how years of unprecedented stimulus designed to bolster the economy is contributing to an erosion of financial stability. Low interest rates have encouraged excessive risk-taking by investment funds and insurers as well as in some real estate markets, the ECB said in its semi-annual Financial Stability Review… ‘While the low interest-rate environment supports the overall economy, we also note an increase in risk-taking which could, in the medium term, create financial-stability challenges,’ Vice President Luis de Guindos said…”

November 16 – Bloomberg (Piotr Skolimowski): “European Central Bank policy maker Madis Muller said the central bank could broadened its asset-purchase program, if the economic situation in the euro area deteriorates significantly. ‘Right now, we are doing unconventional things,’ he told students at a Bundesbank event… ‘You could -- of course -- imagine even more unconventional things if the situation gets really bad.’”

EM Watch:

November 20 – Bloomberg (Suvashree Ghosh and Rahul Satija): “India’s central bank took control of troubled Dewan Housing Finance Corp. on governance concerns and payment defaults, the second such move at a systemically important shadow lender since 2018. The Reserve Bank of India appointed R. Subramaniakumar, former chief executive officer at state-run lender Indian Overseas Bank as the administrator in the company… Bankruptcy proceedings will be initiated under the country’s insolvency law, the central bank added.”

November 18 – Bloomberg (Divya Patil): “The health of India’s shadow banks remained weak last month as a credit crisis continued to sting. Among four indicators compiled by Bloomberg News covering areas including liquidity and share performance, three were stuck in the same position as the previous month, with two at levels indicating weakness. Another gauge showed total outstanding debt increased at 50 financial firms and other companies impacted by the crisis, as banking-system liquidity remained buoyant given the central bank’s monetary easing.”

November 19 – Financial Times (Henny Sender): “Central bankers around the globe are doing their best to ensure that financial asset prices remain high. But one consequence of keeping interest rates low is that they have left distressed debt funds with few assets to pick up at a sharp discount. At the regional level, capital continues to flow into emerging markets, even those with the gloomiest prospects. India is one of the big beneficiaries of this trend. Debt and stock markets in the country have seen combined inflows of $16bn so far in 2019… Meanwhile, foreign direct investment is up by a fifth… But these positive figures are at odds with a grim mood, particularly in New Delhi, the capital.”

November 19 – Bloomberg (Paul Wallace): “The political crisis in Lebanon has sent yields on some of its dollar bonds into triple digits. Rates on the government’s $1.2 billion of notes maturing in March next year have climbed 28 percentage points this week to 105%. They were at 13% five weeks ago, just before the start of protests that led to the resignation of Prime Minister Saad Hariri and exacerbated the nation’s economic woes. Protesters marched to parliament in Beirut on Tuesday, forcing it to suspend a session as the army and riot police tried to disperse them.”

Europe Watch:

November 20 – Financial Times (Mehreen Khan and Daniel Dombey): “Brussels has warned France and Italy that they are running stubbornly high levels of public debt, meaning their future budgets risk breaching EU rules and alarming investors. The European Commission… published its opinion on the 2020 draft spending plans of all eurozone member states. It had harsh words for Paris, Rome and Madrid which, it said, had failed to make use of good economic times to chip away at their debt burdens.”

November 17 – Reuters (Gavin Jones): “The 5-Star Movement, senior partner in two coalitions since last year’s national election, is struggling with internal strife and falling support which threaten the survival of Italy’s two-month old government. The anti-establishment party won 34% in the March 2018 election, twice that of its nearest rival, but is now polling at half that level. Surveys show a downward trend that is fuelling party anxiety and dissent towards its leader, Luigi Di Maio. Investors are becoming jittery.”

Global Bubble Watch:

November 19 – Bloomberg (Denise Wee): “From Chinese conglomerates to coal miners in Indonesia, companies in Asia are facing rising financial stress, prompting fears defaults will pick up next year. Weaker regional borrowers with dollar bonds yielding at least 15% could come under further pressure next year, when they have about $15.1 billion or nearly a third of such debt due… Amid rising failures in China, some firms are finding it harder to refinance their debt offshore, while Indian shadow lenders are grappling with a liquidity crunch.”

November 17 – Bloomberg (Finbarr Flynn and Annie Lee): “Asian dollar bond sales have jumped to a record of almost $300 billion this year, the kind of unprecedented supply that can start to make investors feel a bit queasy… The market has been red hot this year, with global central banks cutting rates and the hunt for yield accelerating. Issuance in the region excluding Japan is running at $299 billion, the most for similar periods in previous years… The debt has returned the most in five years in 2019, at about 11%.”

November 17 – Financial Times (Jennifer Thompson): “Global dividend growth is expected to falter next year as an economic slowdown across much of the world hurts company profits. In the three months to September this year, total payouts to shareholders grew 2.8% to a record $355.3bn, according to the Janus Henderson Global Dividend Index report. Underlying growth — stripping out the effects of special dividends, currency movements and other one-off factors — was 5.3%.”

Japan Watch:

November 18 – Reuters (Leika Kihara): “Bank of Japan Governor Haruhiko Kuroda… denied ever saying the central bank can deepen negative interest rates unlimitedly, or that it had unlimited ammunition to ramp up stimulus. ‘I’ve never said there are no limits to how much we can deepen negative rates, or that we have unlimited means to ease policy,’ Kuroda told parliament. ‘We need to look not just at the benefits but at the costs in deciding the most appropriate policy step,’ he added.”

November 20 – Financial Times (Leo Lewis): “The Bank of Japan has gone 40 days without making a big purchase of domestic stocks, prompting speculation that it has begun ‘stealth tapering’ the controversial stimulus programme which is soon to enter its tenth year. Analysts and investors in Tokyo have begun to question whether the programme, started in 2010 as a way to prop up the market in the wake of the financial crisis, still serves much purpose. The central bank now owns 80% of the domestic exchange-traded fund market, fanning fears that its grip over prices has become too strong. Under the scheme, the BoJ aims to buy some Y6tn ($55bn) of domestic ETFs every year and has accumulated Y28tn since it began buying in December 2010.”

November 19 – Reuters (Daniel Leussink): “Japan’s exports tumbled at their quickest pace in three years in October, threatening to tip the trade-reliant economy into recession as weakening demand from United States and China darkened the outlook. …Japan’s exports fell 9.2% year-on-year in October, a bigger decline than the 7.6% drop expected by economists in a Reuters poll.”

Fixed-Income Bubble Watch:

November 21 – Bloomberg (Hannah Benjamin and Natalie Harrison): “Money managers are clamoring to buy all the corporate bonds they can in the U.S. and Europe, giving banks a second chance to bring to market deals that were previously scrapped. European high-yield bond sales have reached almost 10 billion euros ($11bn) in November, the busiest month on record… In U.S. high-yield, the market is on pace for its busiest November for bond sales since at least 2005. For U.S. investment-grade sales, issuance this month was on track to be up about 40% from the same period last year…”

November 20 – Reuters (Joshua Franklin): “Many investors are shunning the riskiest corners of the junk-rated U.S. corporate loan market because of concerns about possible credit rating downgrades, putting the brakes on a run of leveraged buyouts and debt-funded dividends. The push back against the riskiest corporate debt shows how the Federal Reserve has failed to alleviate fears about a recession next year that would trigger a cash crunch for heavily indebted companies, corporate financiers and analysts said. Rock-bottom interest rates have fueled a boom in junk rated loans, with the U.S. market tripling in size to $1.3 trillion since 2010 as investors bet on riskier assets, allowing private equity firms to juice their returns and pursue even bigger acquisitions.”

November 18 – Financial Times (Miranda Carr): “Bond bulls should not rest easy. The world may have reconciled itself to the financial insanity of negative yields, as central banks continue to cut interest rates. But there are signs that the big rally in bond prices may be reaching a turning point. The reason? A major, long-term rebalancing in capital flows between the US and China. Instead of excess global capital flowing into overinflated US dollar markets, money is moving into underinvested renminbi assets. China is turning from being one of the largest providers of global capital and a ‘double surplus’ economy — having both a trade surplus and a financial one within its balance of payments — to a consumer of capital… This trend could either significantly tighten global monetary conditions or, more unexpectedly, lead to the imposition of global capital controls. Both scenarios would shake bond markets out of their current complacency.”

November 21 – Bloomberg (Brian Chappatta): “Investors and strategists in the bond markets rarely, if ever, come out firmly against their own asset class. Rather, they opt to use language like ‘be selective,’ ‘move up in credit quality’ or ‘clean up portfolios.’ This is what’s happening now in the once red-hot market for collateralized loan obligations. In October, while U.S. stocks soared to records and high-yield bonds posted their fifth consecutive monthly gain, the pools of leveraged loans quietly faced something of a reckoning. Prices on double-B CLOs tumbled to the lowest in more than three years, according to data from Palmer Square Capital Management.”

Leveraged Speculation Watch:

November 21 – Financial Times (Ortenca Aliaj, Miles Kruppa and Laurence Fletcher): “Louis Bacon, the veteran hedge fund manager, is planning to shut his 30-year-old firm Moore Capital Management and return capital to investors… The decision, which would mark one of the industry’s most high-profile closures to date, follows years of diminished performance and outflows at Moore’s global macro hedge funds… Moore’s assets under management have declined by billions in the past decade to $8.9bn at the end of last year, according to regulatory filings.”

November 19 – Bloomberg (Joanna Ossinger): “Hedge funds are ending the year on a high note as their top picks outperform, according to Goldman Sachs… ‘Hedge fund favorites have rallied sharply so far’ in the fourth quarter after struggling in the prior period, strategists including Ben Snider and David Kostin wrote… Goldman’s list of most-popular hedge fund long positions has outperformed the S&P 500 by 200 basis points since the start of October… The average equity hedge fund is returning 10% year-to-date, they said.”

Geopolitical Watch:

November 20 – Bloomberg: “Former U.S. Secretary of State Henry Kissinger said the U.S. and China were in the ‘foothills of a Cold War,’ and warned that the conflict could be worse than World War I if left to run unconstrained. ‘That makes it, in my view, especially important that a period of relative tension be followed by an explicit effort to understand what the political causes are and a commitment by both sides to try to overcome those,’ Kissinger told a session of the New Economy Forum. ‘It is far from being too late for that, because we are still in the foothills of a cold war.’ Kissinger said China and the U.S. were countries of a magnitude exceeding that of the Soviet Union and America, and that the world’s two largest economies, who are locked in a protracted trade war, ‘are bound to step on each other’s toes all over the world, in the sense of being conscious of the purposes of the other.’”

November 21 – New York Times (Andrew Ross Sorkin): “The United States and China will eventually settle their differences over tariffs — maybe even reach a deal that allows both sides to say they won. But don’t be fooled. Even if the world’s two biggest economies reach a truce, their relationship is likely to get worse. That’s the bold warning that Henry M. Paulson Jr., the former Treasury secretary, plans to make… The danger, Mr. Paulson said, is that the animosity between the two countries has merged ‘military prisms and ideas into economic policies.’ ‘It should concern every one of us who cares about the state of the global economy that the positive-sum metaphors of healthy economic competition are giving way to the zero-sum metaphors of military competition’…”

November 20 – Bloomberg: “China had a swift and forceful response on Wednesday after the U.S. Senate passed legislation supporting Hong Kong’s pro-democracy protesters, with multiple government agencies threatening some sort of unspecified retaliation. ‘Don’t say I didn’t warn you,’ said a statement issued by the foreign ministry’s office…, using a Chinese phrase that prior to this year was used only in rare cases like before a 1962 war with India.”

November 17 – Reuters (Susan Cornwell): “The United States condemned the ‘unjustified use of force’ in Hong Kong and called on Beijing to protect Hong Kong’s freedom, a senior official in President Donald Trump’s administration said Sunday… ‘We condemn the unjustified use of force and urge all sides to refrain from violence and engage in constructive dialogue,’ the senior U.S. official said.”

November 17 – Reuters (Phil Stewart): “China… called on the U.S. military to stop flexing its muscles in the South China Sea and to avoid adding ‘new uncertainties’ over Taiwan, during high-level talks that underscored tension between the world’s two largest economies. The remarks by Chinese Defence Minister Wei Fenghe to U.S. Defense Secretary Mark Esper, recounted by a Chinese spokesman, came just two weeks after a top White House official denounced Chinese ‘intimidation’ in the busy waterway. It also came a day after Esper publicly accused Beijing of ‘increasingly resorting to coercion and intimidation to advance its strategic objectives’ in the region.”

November 17 – Reuters (Lusha Zhang and Cate Cadell): “China will not tolerate any Taiwan independence incidents, a spokesman for its defense ministry said…, urging the United States to deal appropriately with the issue… The defense ministry of self-ruled Taiwan said a Chinese carrier ship passed through the Taiwan Strait on Sunday, tailed by U.S. and Japanese ships. China has never ruled out the use of force to reunite what it regards as a wayward province.”

November 22 – Bloomberg: “In a statement that is likely to annoy some in Japan ahead of his visit planned for next spring, Chinese President Xi Jinping blamed the unpopularity of his country on Japanese bias and prejudice… ‘As for the biased view of Japanese people toward China, yes, China needs to do some things but more importantly the responsibility is on the Japanese side. It needs to do more things to undo the prejudiced and biased views against China.’”

November 21 – Wall Street Journal (John Otis): “Tens of thousands of people marched through the streets of Bogotá and other big cities on Thursday, as the antigovernment protests that have roiled countries in Latin America spread to Colombia. Protesters banged drums and carried Colombian flags and banners, calling for a crackdown on government corruption, higher wages and increased government spending on education. “