Friday, February 1, 2019

Weekly Commentary: No Mystery

January 30 – Financial Times (Sam Fleming): “After putting traders on notice six weeks ago to expect further increases in US interest rates in 2019, the Federal Reserve… executed one of its sharpest U-turns in recent memory. Leaving rates unchanged at 2.25-2.5%, Jay Powell, Fed chairman, unveiled new language that opened up the possibility that the next move could equally be down, instead of up. Forecasts from the Fed’s December meeting that another two rate rises are likely this year now appear to be history. Changes to its guidance were needed, Mr Powell argued, because of ‘cross-currents’ that had recently emerged. Among them were slower growth in China and Europe, trade tensions, the risk of a hard Brexit and the federal government shutdown. Financial conditions had also tightened, he added. Yet the about-face left some Fed-watchers wrongfooted and bemused. Many of those hazards were already perfectly apparent in the central bank’s December meeting, when it lifted rates by a quarter point and kept in place language pointing to further ‘gradual’ increases.”

The Wall Street Journal’s Greg Ip pursued a similar path with his article, “The Fed’s Mysterious Pause.” “Last December, Mr. Powell noted his colleagues thought they’d raise rates two more times this year, from between 2.25% and 2.5%, which was at the lower end of estimates of ‘neutral’—a level that neither stimulates nor holds back growth. On Wednesday, he suggested the Fed could already be at neutral: ‘Our policy stance is appropriate right now. We also know that our policy rate is in the range of the… committee’s estimates of neutral.’ If indeed the Fed is done, that would be a breathtaking pivot. Yet the motivation remains somewhat mystifying: What changed in the past six weeks to justify it?”

No Mystery. Don’t be bemused. The Fed Chairman was prepared to hold his ground, but the ground was suddenly giving way. Between the December 19th and January 30th FOMC meetings, acute systemic fragilities were revealed.

Not to dismiss economic weakness in China and Europe – or even tenuous U.S./Chinese trade talks and the government shutdown. But January 3rd was pivotal, not coincidently the wild market session ahead of Chairman Powell’s January 4th U-turn. Recall the currency market “flash crash” – with an 8% intraday move in the yen vs. Australian dollar, along with the dramatic widening of credit spreads (and a 19bps surge in Goldman Sachs CDS prices). Markets were careening toward dislocation.

Chairman Powell appeared somewhat downtrodden during his Wednesday press conference, a notable shift from his confident demeanor in December. We can assume Powell and other Fed officials have been alarmed by how swiftly booming securities markets succumb to instability and illiquidity. I believe Powell wanted to see markets begin standing on their own; that, in contrast to his three most-recent predecessors, he would be in no rush to come to the markets’ defense. He was content to see overheated markets commence the cooling process. A correction would actually be constructive for system stability. The predicament: Overinflated Bubbles don’t calmly deflate.

Circumstances forced the Fed’s hand. Old fears soon reemerged of escalating market instability getting ahead of the Fed. Better to act quickly before market/liquidity issues turned intricate and precarious. While not blatantly shock and awe, kind of along the same line. And responding to criticism of blurred messaging, the course of FOMC policymaking must appear coherent and decisive.

There will be no more rate hikes anytime soon. Now heeding market alarm, the Fed will also be reevaluating the runoff of its securities holdings. The Fed would prefer to convey that it remains “data dependent” in an environment of extraordinary uncertainties, while tepid inflation provides convenient cover for embracing “patience.” Well enough, but markets saw it for what it was: The Fed “caved” – just as the markets knew it would. No longer in doubt, the latest incantation of the “Fed put” is alive and well (irrespective of job or GDP growth). Indeed, the new Chairman’s hope for lowering the “put” strike price (Fed support not invoked before a significant market decline) was rather hastily quashed by acute market fragility.

There’s really nothing like a short “squeeze” to get market speculative juices flowing. How about a synchronized global squeeze across myriad asset classes? Only weeks ago, global markets were alarmingly synchronized to the downside. Now it’s everyone off to the races – lockstep (seemingly inebriated). Stocks and corporate Credit; EM currencies, stocks and bonds; Treasuries, bunds and JGBs; Italian bonds; crude and commodities and so on.

Here in the U.S., “Stocks Wrap Up Best January in 30 Years.” The DJIA surged 1,672 points (returning 7.2%) during the month. The S&P500 returned 8.0%, robust gains overshadowed by the broader market. The S&P 400 Midcaps jumped 10.4% in January, with the small cap Russell 2000 rising 11.2%. The average stock (Value Line Arithmetic) gained 11.2%. The Banks (BKX) rose 12.4%, with the Nasdaq Financials up 9.7%. The Nasdaq Composite also rose 9.7%. The Goldman Sachs Most Short index jumped 12.5%. The Philadelphia Oil Services index surged 19.3%.

Some of the problem-children EM currencies bounced strongly. The South African rand gained 8.2% in January, the Russian ruble 6.6%, Brazilian real 6.2%, Chilean peso 6.0%, Colombian peso 4.6%, Thai baht 4.2%, Indonesian rupiah 3.0% and Mexican peso 2.9%. The Chinese renminbi gained 2.7% against the dollar in January.

Over the past month, local currency bond yields were down 137 bps in Lebanon, 93 bps in the Philippines, 50 bps in Russia, 47 bps in Brazil, 34 bps in Cyprus, 33 bps in Hungary and 21 bps in Mexico. Equities gained 19.9% in Argentina, 14.0% in Turkey, 13.5% in Russia, 10.8% in Brazil, 9.6% in South Korea and 9.2% in Colombia. Dollar-denominated bond yields sank 124 bps in Argentina, 100 bps in Ukraine, 50 bps in Turkey, 34 bps in Indonesia and 35 bps in Russia.

January was also a big month for European equities. Major stock indices returned 8.9% in Portugal, 8.1% in Italy, 6.6% in Spain, 5.6% in France, 5.8% in Germany, 6.4% in Switzerland, 8.2% in Finland, 7.6% in Sweden and 8.7% in Austria. January saw 10-year sovereign yields drop 15 bps in Italy, nine bps in Germany, 15 bps in France, 22 bps in Spain, 10 bps in Portugal and 46 bps in Greece.

An overarching CBB theme over the years (debated compellingly generations ago): the problem with discretionary policymaking is that a policy mistake leads invariably to a series of mistakes. The Powell Fed coming quickly to the markets’ defense was a perpetuation of flawed policy doctrine. Moreover, it’s especially dangerous for central banks to so conspicuously buttress the securities markets at this late stage of historic speculative Bubbles. Calming language has an effect akin to electric shock therapy.

Clearly, such actions only further embolden a marketplace conditioned to reach for returns – adopting leverage while disregarding risk. Financial and economic stability are only further undermined. Blatant support of Wall Street will as well further erode public trust in such a critical institution. During the previous crisis, central bank measures were seen as vital to stabilization. I fear they will be viewed as fundamental to the problem in the coming crisis.

The delusion was believing zero rates and QE would over time support system stability. The “buyer of last resort” function during a time of crisis should never have morphed into the buyer of first resort for years of booming markets and economies. We’re now a full decade into aggressive stimulus, and global finance is more fragile than ever. Policy rates remain at zero and the ECB only recently ended its historic balance sheet expansion (to $4.7 TN). Yet economies throughout the Eurozone appear in - or headed toward - recession. Amazingly, despite a QE-induced collapse in market yields, Italy faces a recessionary backdrop with its fragile banks hanging in the balance.

Meanwhile, troubling data run unabated in China. The Caixin China Manufacturing PMI dropped 1.4 points during January to 48.3, the low since gloomy February 2016. It was also the first back-to-back months below 50 (contracting manufacturing activity) since May/June 2016. To see China’s economy weaken in the face of ongoing rapid Credit growth should be alarming to the entire world.

January 27 – Bloomberg: “The number of Chinese companies warning on earnings is turning into a flood, with no industry spared from worsening demand. Some 440 firms disclosed on Wednesday -- the day before a deadline to do so -- that their 2018 financial results deteriorated… Of the more than 2,400 mainland-listed firms that have announced preliminary numbers or issued guidance this season, some 373 said they’ll post a loss, the data show. About 86% of those were profitable in 2017.”

In a globalized, digitized and serviced-based economy, I never viewed consumer price inflation as the prevailing QE risk in the U.S. For the U.S. and the world more generally, zero rates and Trillions of fabricated “money” have fomented interminable Monetary Disorder (on full display during the past two months). Once unleashed, there was no controlling it. Yet with global markets in a synchronized rally, one easily assumes the Fed and central banks have again worked their magic. Stability has engulfed the world. Nothing could be more detached from reality.

The world is in the throes of a precarious period. Ill-advised central banking has ceded a historic global market Bubble additional rope. Meanwhile, until something snaps it is reckless fiscal policies accommodated by ultra-low rates, along with the precarious market perception that central banks will have no alternative other than to reinstitute QE. Central bank-induced Monetary Disorder has completely distorted sovereign debt markets, granting Washington politicians the proverbial blank checkbook. And it is worse than merely a marketplace devoid of “bond vigilantes.” Treasury yields are pressured downward by the fragility of global Bubbles and the expectation of aggressive monetary stimulus as far as the eye can see.

Reckless global monetary management fuels reckless global fiscal mismanagement. Here in the U.S., trillion-dollar plus federal deficits until the market invokes some discipline. And it’s all passed off as business as usual. If I were a bond, I’d be tense. Bailing on “normalization,” the Fed has essentially committed to perpetual loose “money” and stock market support. And in the event the risk market rally turns crazier, there’s just not much slack in the U.S. economy. Ten-year Treasury yields jumped six bps Friday (to 2.68%), although the more interesting move was the 16 bps surge in Italian yields (to 2.74%). Under the circumstances, gold’s $38 January advance was rather restrained.

To see securities markets – risk assets and safe haven alike – rally as they’ve done over recent weeks is something to behold. Sellers overwhelming the markets one month – buyers the next. Legitimate fears of illiquidity supplanted by the utter fright of being on the wrong side of the market and missing a rally. The S&P500 recorded its strongest January since 1987. It’s an apt reminder not to place too much faith in the “January effect”- especially when global markets are acutely speculative. With Monetary Disorder and Dysfunctional Market Structure operating at full-force, no reason not to expect 2019 to be anything but a momentous year.

For the Week:

The S&P500 gained 1.6% (up 8.0% y-t-d), and the Dow increased 1.3% (up 7.4%). The Utilities rose 2.4% (up 3.1%). The Banks declined 1.5% (up 12.8%), while the Broker/Dealers added 0.2% (up 9.6%). The Transports gained 2.0% (up 10.4%). The S&P 400 Midcaps (up 10.7%) and the small cap Russell 2000 (up 11.4%) increased 1.3%. The Nasdaq100 advanced 1.3% (up 8.6%). The Semiconductors added 0.5% (up 11.4%). The Biotechs increased 0.8% (up 16.3%). With bullion up $14.50, the HUI gold index surged 6.7% (up 5.4%).

Three-month Treasury bill rates ended the week at 2.34%. Two-year government yields dropped 10 bps to 2.51% (up 1bp y-t-d). Five-year T-note yields fell 10 bps to 2.50% (down 1bp). Ten-year Treasury yields declined seven bps to 2.69% (unchanged). Long bond yields fell four bps to 3.03% (up 1bp). Benchmark Fannie Mae MBS yields dropped nine bps to 3.47% (down 3bps).

Greek 10-year yields dropped 16 bps to 3.90% (down 44bps y-t-d). Ten-year Portuguese yields slipped a basis point to 1.64% (down 7bps). Italian 10-year yields jumped 10 bps to 2.75% (unchanged). Spain's 10-year yields declined one basis point to 1.22% (down 19bps). German bund yields fell three bps to 0.17% (down 7bps). French yields declined three bps to 0.57% (down 14bps). The French to German 10-year bond spread was little changed at 40 bps. U.K. 10-year gilt yields fell six bps to 1.25% (down 3bps). U.K.'s FTSE equities index rallied 3.1% (up 4.3% y-t-d).

Japan's Nikkei 225 equities index was little changed (up 3.9% y-t-d). Japanese 10-year "JGB" yields declined a basis point to negative 0.01% (down 2bps y-t-d). France's CAC40 rose 1.9% (up 6.1%). The German DAX equities index declined 0.9% (up 5.9%). Spain's IBEX 35 equities index fell 1.8% (up 5.6%). Italy's FTSE MIB index lost 1.2% (up 6.8%). EM equities were higher. Brazil's Bovespa index added 0.2% (up 11.3%), and Mexico's Bolsa increased 0.2% (up 5.0%). South Korea's Kospi index gained 1.2% (up 8.0%). India's Sensex equities index rose 1.2% (up 1.1%). China's Shanghai Exchange increased 0.6% (up 5.0%). Turkey's Borsa Istanbul National 100 index rose 1.1% (up 12.8%). Russia's MICEX equities index added 0.9% (up 6.9%).

Investment-grade bond funds saw inflows of $34 million, and junk bond funds posted inflows of $73 million (from Lipper).

Freddie Mac 30-year fixed mortgage rates added a basis point to 4.46% (up 24bps y-o-y). Fifteen-year rates increased one basis point to 3.89% (up 21bps). Five-year hybrid ARM rates gained six bps to 3.96% (up 43bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down six bps to 4.42% (up 7bps).

Federal Reserve Credit last week declined $9.9bn to $4.001 TN. Over the past year, Fed Credit contracted $387bn, or 8.8%. Fed Credit inflated $1.189 TN, or 42%, over the past 325 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt rose $5.6bn last week to $3.414 TN. "Custody holdings" rose $47.8bn y-o-y, or 1.4%.

M2 (narrow) "money" supply declined $2.3bn last week to $14.519 TN. "Narrow money" gained $673bn, or 4.9%, over the past year. For the week, Currency increased $1.9bn. Total Checkable Deposits jumped $39.6bn, while Savings Deposits dropped $51.7bn. Small Time Deposits gained $6.2bn. Retail Money Funds added $1.6bn.

Total money market fund assets declined $13.5bn to $3.038 TN. Money Funds gained $239bn y-o-y, or 8.5%.

Total Commercial Paper rose $9.9bn to $1.079 TN. CP declined $60bn y-o-y, or 5.3%.

Currency Watch:

The U.S. dollar index slipped 0.2% to 95.579 (down 0.6% y-t-d). For the week on the upside, the Brazilian real increased 2.9%, the South African rand 2.2%, the Australian dollar 1.0%, the New Zealand dollar 0.9%, the Canadian dollar 0.9%, the Norwegian krone 0.9%, the euro 0.4%, the Singapore dollar 0.3%, the South Korean won 0.2% and the Japanese yen 0.1%. For the week on the downside, the British pound declined 0.9%, the Mexican peso 0.6% and the Swiss franc 0.2%. The Chinese renminbi was little changed versus the dollar this week (up 1.97% y-t-d).

Commodities Watch:

The Goldman Sachs Commodities Index added 0.9% (up 10.4% y-t-d). Spot Gold gained 1.1% to $1,318 (up 2.7%). Silver rose 1.5% to $15.931 (up 2.5%). Crude gained $1.57 to $55.26 (up 22%). Gasoline jumped 3.4% (up 10%), while Natural Gas dropped 14.0% (down 7%). Copper rose 1.6% (up 5%). Wheat increased 0.8% (up 4%). Corn declined 0.5% (up 1%).

Market Dislocation Watch:

January 28 – CNBC (Hugh Son): “The market meltdown that wiped out stocks’ gains late last year will be a recurring feature of the trading environment, according to Daniel Pinto, co-president of J.P. Morgan Chase and head of its massive corporate and investment bank. ‘Over time, you will probably see several more market events like we saw in December,’ Pinto said… ‘People know we are working towards the end of the cycle, and they have built some risk and some positions that they’ve been accumulating for years, and they know that when they want to trade, liquidity won’t necessarily be there,’ Pinto said. ‘So markets will tend to overreact to things, and you have these big moves, and then a correction to rationality, as we’ve seen.’”

January 31 – Financial Times (Joe Rennison and Colby Smith): “Retail investors pulled money from US loan funds for the 11th week in a row, as falling interest rate forecasts have damped demand for the asset class despite prices stabilising after a December slump. US loan funds suffered $935m in outflows for the week ending January 30, according to… Lipper, extending a run of outflows that has resulted in $19bn being withdrawn from the $1.2tn asset class.”

Trump Administration Watch:

January 31 – Financial Times (James Politi): “The US and China claimed progress in tackling some of the thorniest issues in their trade war as Donald Trump suggested that a new presidential summit might be necessary to settle the economic conflict within the next month. At the end of two days of negotiations in Washington, Robert Lighthizer, the US trade representative, said his talks with Liu He, China’s vice-premier, had finally centred on US demands for structural reforms by Beijing — such as ending the forced transfer of technology from US companies or reining in the use of industrial subsidies. But Mr Lighthizer failed to report a specific concession made by Beijing, and said he and Steven Mnuchin, US Treasury secretary, were considering a trip to Beijing after the Chinese new year celebration in early February to resume negotiations.”

January 29 – Reuters (Doina Chiacu and Susan Heavey): “U.S. Treasury Secretary Steve Mnuchin said… he expected to see significant progress in trade talks with Chinese officials this week and that U.S. charges against telecommunications giant Huawei Technologies Co Ltd were a separate issue. ‘Those are separate issues, and that’s a separate dialogue,’ Mnuchin said... ‘So those are not part of trade discussions. Forced technology issues are part of trade discussions, but any issues as it relates to violations of U.S. law or U.S. sanctions are going through a separate track.’”

January 27 – Wall Street Journal (Peter Nicholas and Kristina Peterson): “President Trump said Sunday he doesn’t believe congressional negotiators will strike a deal over border-wall funding that he could accept and vowed that he would build a wall anyway, using emergency powers if need be. Mr. Trump… assessed the chances of whether a newly formed group of 17 lawmakers could craft a deal before the next government-funding lapse, in less than three weeks: ‘I personally think it’s less than 50-50, but you have a lot of very good people on that board.’”

January 29 – Wall Street Journal (Andrew Ackerman): “The Trump administration plans to work with Congress to overhaul mortgage-finance giants Fannie Mae and Freddie Mac , a White House spokeswoman said… —playing down the idea the administration will seek to unilaterally release the firms from government control. The White House also expects to announce a framework for developing comprehensive housing-finance changes ‘shortly,’ White House spokeswoman Lindsay Walters said. But that framework will not likely make specific recommendations about what to do with the two companies, according to people familiar... For more than a decade, lawmakers have tried without success to overhaul Fannie and Freddie, which were placed in conservatorship during the 2008 financial crisis. Recent statements by administration officials indicated the government was reviewing plans to directly end government control without input from Congress, sending shares surging.”

Federal Reserve Watch:

January 31 – Reuters (Steve Holland, Makini Brice, Jason Lange and Ginger Gibson): “U.S. President Donald Trump is considering former pizza chain executive and Republican presidential candidate Herman Cain for a seat on the Federal Reserve Board, a senior administration official said…”

January 27 – Wall Street Journal (Nick Timiraos): “Some investors blame the stock market’s volatility on the Federal Reserve shrinking its bond portfolio. But the critique puzzles Fed officials and some economists because there is little evidence of turmoil in the two markets where the central bank actively intervened: Treasurys and mortgage debt. The Fed is shrinking its $4 trillion portfolio by allowing Treasury and mortgage securities to mature without replacing them. Up to $50 billion worth is allowed to expire every month under the plan, though the actual amounts have been closer to $40 billion in recent months. Markets barely blinked when the Fed announced its move in 2017. But in the last few months, a number of prominent investors, including Stanley Druckenmiller, have said the portfolio runoff is a big factor behind the return of market volatility. With stocks gyrating, President Trump said he wanted the Fed to slow or stop the moves.”

U.S. Bubble Watch:

January 29 – Reuters (Lucia Mutikani): “U.S consumer confidence fell to a 1-1/2 year-low in January as a partial shutdown of the government and financial markets turmoil left households a bit nervous about the economy’s prospects. The drop in confidence reported by the Conference Board… mirrors another survey earlier this month showing sentiment tumbling to its lowest level since President Donald Trump was elected more than two years ago, strengthening analysts expectations that the economy was losing momentum.”

January 28 – Bloomberg (Brendan Murray): “The U.S. Treasury Department indicated that the government’s borrowing needs are rising faster than previous estimates as the Trump administration finances a widening budget deficit. The department expects to issue $365 billion in net marketable debt from January through March, up $8 billion from its estimate in October… The Treasury sees an end-of-March cash balance of $320 billion, unchanged from its forecast three months ago. In its first estimate of the April-June period this year, the department estimated borrowing of $83 billion, $11 billion more than in the same period last year and the most for that quarter since 2012.”

January 30 – Bloomberg (Liz Capo McCormick and Saleha Mohsin): “The U.S. Treasury Department announced plans to issue another record-breaking amount of debt, giving President Donald Trump’s re-election opponents more ammunition as they question whether his tax cuts will pay for themselves. The federal budget shortfall is set to swell, driven by tax cuts, spending increases and an aging American population. As a result, the Treasury is raising its long-term debt issuance at its quarterly refunding auctions to $84 billion…, $1 billion more than three months ago. Such elevated levels of borrowing will finance the widening deficit, with Wall Street strategists projecting new debt issuance will top $1 trillion for a second straight year.”

January 29 – CNBC (Diana Olick): “Home values increased 5.2% annually in November, slowing from 5.3% in October, according to the… S&P CoreLogic Case-Shiller National Home Price Index. The 10-city composite annual increase also fell to 4.3%, down from 4.7% in the previous month. The 20-city composite saw a 4.7% annual gain, down from 5.0% in October. Home price gains have been slowing since last spring, as higher mortgage interest rates cut sharply into affordability. The gains are slowing the most in large metropolitan markets, where home prices had overheated over the past three years.”

January 27 – Financial Times (Richard Armstrong): “Fourth-quarter results from US regional banks — which finance many of America’s small and mid-sized businesses — revealed a robust domestic economy, despite worries about unsteady markets, global trade talks and slowdowns in China and Europe. At the 10 largest regional banks, or ‘super-regionals,’ which have combined assets of more than $2tn, business and credit-card loan portfolios grew 6%, in aggregate, accelerating from earlier in the year and surprising industry analysts. ‘There’s certainly a lot of chatter about the government shutdown, Brexit, trade talk, all of that . . . But so far, on Main Street, we don’t see that,’ said Kelly King, chief executive of BB&T…”

January 29 – Reuters: “Power provider PG&E filed for voluntary Chapter 11 bankruptcy protection on Tuesday, succumbing to liabilities stemming from wildfires in Northern California in 2017 and 2018… The owner of the biggest U.S. power utility has filed a motion seeking court approval for a $5.5 billion debtor-in-possession financing… PG&E listed assets of $71.39 billion and liabilities of $51.69 billion, in a court document…”

January 28 – Financial Times (Robert Armstrong): “In the years after the financial crisis, small businesses that needed credit were stuck. New capital rules discouraged big banks from touching any borrower perceived as risky. The bond and loan markets, where larger businesses flocked for inexpensive debt capital, have little use for sums under $100,000 — which is what most small enterprises need. A handful of non-bank lenders, payment and e-commerce companies have leapt into the gap. In an environment of easy money and economic expansion, small business lending operations at OnDeck, Kabbage, PayPal, Square and others have grown fast. The question now is whether these new, branchless business models can thrive in a market where credit is tightening and the economy slowing. The interest rates on the loans are high — often the equivalent of a 30-40% annual rate, or higher — and the borrowers tend to have short credit histories. There are some signs of vulnerability. Morgan Stanley analyst James Faucette notes that in periods where credit has tightened in recent years, the online lenders ‘have done worse than traditional lenders . . . they have all had to rework their underwriting in a significant way. Once they have done that, they try to re-engage during an expansion and take advantage of what they have learnt.’”

January 29 – Wall Street Journal (Ben Eisen and Nick Timiraos): “One of the principal gatekeepers to housing-finance markets is stepping up scrutiny of nonbank mortgage lenders, concerned that some may not have the financial heft needed to overcome stressed conditions. The increased oversight by the Government National Mortgage Association, or Ginnie Mae, comes as nonbank lenders play an ever-bigger role in making mortgages to Americans and as housing markets are cooling. Many of these companies flourished after the financial crisis as banks stepped back from the mortgage market but haven’t yet been tested by an economic downturn. For the first time in recent memory, the agency has asked a handful of these lenders to improve certain financial metrics before granting them full ability to continue issuing Ginnie-backed mortgage bonds, according to Maren Kasper, who stepped in as Ginnie’s acting head this month.”

January 29 – Wall Street Journal (Esther Fung): “Chinese net purchases of U.S. commercial real estate last year dwindled to their lowest level since 2012, as Beijing kept up the pressure on Chinese investors to bring cash home during a period of worsening economic growth. Insurers, conglomerates and other investors from mainland China were net sellers of $854 million of U.S. commercial property in the fourth quarter, according to Real Capital Analytics. That marked the third-straight quarter Chinese investors sold more U.S. property than they bought, the first time ever these investors have been sellers for that long a stretch. The selling during most of 2018 marked a powerful reversal from the previous five years, when Chinese investors went on a massive buying spree, often handily outbidding other investors for U.S. trophy properties.”

January 31 – Bloomberg (Arit John and Laura Davison): “Independent Senator Bernie Sanders is proposing to expand the estate tax on wealthy Americans, including a rate of up to 77% on the value of estates above $1 billion. Sanders of Vermont… said… his plan would apply to the wealthiest 0.2% Americans. It would set a 45% tax on the value of estates between $3.5 million and $10 million, increasing gradually to 77% for amounts more than $1 billion. The current estate tax kicks in when an estate is worth about $11 million.”

China Watch:

January 31 – Financial Times (Edward White): “A private sector gauge of China’s manufacturing sector in January contracted to its lowest level since February 2016, in the latest sign of economic headwinds hitting the world’s second largest economy despite moves by Beijing to shore up growth. The Caixin manufacturing purchasing managers’ index slipped to 48.3 in January, from 49.7 a month earlier and marking the second-straight monthly decline after the index retreated into negative territory for the first time in 19 months in December.”

January 29 – Bloomberg: “Chinese executives are sounding warning bells over the world’s second-largest economy. At least 20 companies, including China Life Insurance Co. and Chongqing Changan Automobile Co., told investors late Tuesday that full-year earnings would fall well short of expectations. Reasons they cited included the country’s economic slowdown, as well as recent changes to accounting rules and the equity market’s $2.3 trillion rout last year, the world’s biggest loss of value.”

January 28 – Reuters (Michael Sheetz): “Chinese representatives met with the World Trade Organization… to begin the process of legally challenging United States tariffs on China’s exports, Reuters reported, citing a transcript of the meeting’s discussion. ‘This is a blatant breach of the United States’ obligations under the WTO agreements and is posing a systemic challenge to the multilateral trading system,’ a Chinese representative said… ‘If the United States were free to continue infringing these principles without consequences, the future viability of this organization is in dire peril.’”

January 29 – Reuters (Associated Press): “U.S. criminal charges against Chinese electronics giant Huawei have sparked a fresh round of trans-Pacific recriminations, with Beijing demanding… that Washington back off what it called an ‘unreasonable crackdown’ on the maker of smartphones and telecom gear. China’s foreign ministry said it would defend the ‘lawful rights and interests of Chinese companies’ but gave no details. Huawei is the No. 2 smartphone maker and an essential player in global communications networks.”

January 31 – Reuters (Li Zheng, Zhang Xiaochong and Ryan Woo): “China’s central bank told some commercial banks in January to moderate their pace of lending…, as it seeks to manage the amount of credit flowing into the economy. In its guidance, the People’s Bank of China (PBOC) also told the lenders that the pace and size of loans granted should not fall below the level from the same period a year earlier.”

January 27 – Bloomberg (Christopher Balding): “In the past decade, China has relied primarily on credit growth to fund its economic ambitions. The country’s banks are now feeling the constraints of this lending binge and need to raise a lot of capital over the next couple of years… With 267 trillion yuan ($39.4 trillion) of total assets, and home to the world’s four largest banks by this measure, the country’s financial system doesn’t operate in isolation… Major Chinese banks raised or announced plans to raise 343 billion yuan in 2018, according to… Nomura Holdings Inc. That’s well below the estimates of UBS Group AG, which just last year said these firms would need 1 trillion to 3 trillion yuan… The fundamental problem is the conflicting pressures on the sector. Despite talk of deleveraging in 2018, as nominal GDP growth slowed to 9.7%, total loans outstanding grew 13.5%. To prop up the economy, Chinese banks have been lending well in excess of deposit growth. Since the beginning of 2016, as loans outstanding grew 41%, deposits rose just 29%...”

January 31 – Bloomberg (Andrew Mayeda and Katherine Greifeld): “China’s holdings of U.S. Treasuries fell to the lowest level in a year and a half amid a bruising trade war with the Trump administration. China’s pile of notes, bills and bonds dropped to $1.12 trillion in November, from $1.14 trillion in October… It was the sixth straight decline and left the nation’s stockpile the smallest since May 2017. China remains the U.S.’s biggest foreign creditor. Japan is next, with $1.04 trillion, up from $1.02 trillion in October, which was its smallest amount since 2011.”

January 29 – Financial Times (Don Weinland and Emma Dunkley): “S&P Global’s breakthrough into China’s domestic ratings scene is promising to bring a new level of clarity to foreign investors hoping to take a bigger slice of the country’s $12tn bond market. The… credit rating agency this week became the first foreign company to gain approval from China’s central bank to start assessing domestic bonds, following a year-long process to gain a foothold in the local market, the world’s third largest. The move could help to unlock flows into a market where foreign investors currently hold about 3% of the total bonds outstanding… But asset managers have flagged the perils of trying to compete with China’s domestic agencies, which routinely offer issuers high ratings. There are also questions as to whether S&P could come under pressure from the government to give better ratings to some state-backed debt issuers.”

Central Bank Watch:

January 28 – Bloomberg (Carolynn Look and Alexander Weber): “Mario Draghi said that while the euro-area economy is looking bleaker than anticipated, it’s not bad enough to warrant additional monetary support. The president of the European Central Bank blamed ‘softer external demand and some country and sector-specific factors’ for the slowdown, but indicated he still has some confidence in the underlying strength of the economy. ‘If things go very wrong, we can still resume other instruments in our toolbox. There is nothing objecting to that possibility,’ he told lawmakers in Brussels in response to a question on whether net asset purchases could be restarted. ‘The only point is under what contingency are we going to do this. And at this point in time, we don’t see such contingency as likely to materialize, certainly this year.’”

EM Watch:

February 1 – Bloomberg (Cagan Koc): “Turkey’s top economic body ruled out seeking support from the International Monetary Fund, in an effort to end market speculation that Ankara is in touch with the Washington-based lender to negotiate a rescue package. Those spreading the rumors are carrying out a propaganda war to ‘harm the Turkish government, the Turkish economy and Turkish people,’ the Treasury and Finance Ministry said… ‘This sick state of mind has reached a dangerous level.’”

February 1 – Bloomberg (Kartik Goyal and Subhadip Sircar): “Sovereign Indian bonds yields surged the most in eight months and rupee weakened after Prime Minister Narendra Modi’s government announced record borrowings to fund populist policies before elections by May. The administration plans to borrow 7.1 trillion rupees ($100bn) in the year starting April 1… That compares with a 6.4-trillion rupee forecast in a Bloomberg News survey and a revised 5.71 trillion rupees for the current fiscal period.”

Global Bubble Watch:

January 31 – Bloomberg (Jonathan Cable and Marius Zaharia): “Factory activity was at its weakest in years across much of the world during January, adding to worries trade tariffs, political uncertainty and cooling demand poses an increasing threat to global growth… Trade-focused Asia appears to be suffering the most visible loss of momentum so far, with activity shrinking in China, although European economies are stuck in low gear and many emerging markets are sputtering. The euro zone has been rocked by protests in France, an auto sector struggling to regain momentum, political strife and rising trade protectionism. Manufacturing growth in the bloc was minimal last month, at a four-year low, and forward looking indicators suggest there will be no turnaround soon.”

January 29 – Financial Times (Lucy Hornby): “China is ‘rebalancing’ its overseas lending practices in the face of mounting concerns over the debt burdens of developing countries, the head of the Asian Infrastructure Investment Bank told the Financial Times… Infrastructure investment in Asia’s largest developing countries fell in 2017 and 2018, amid a deleveraging campaign in China and deepening concern over the fiscal impact of Chinese-backed mega projects on their host countries. The AIIB, the Beijing-based multilateral bank, provides an alternative model to the Chinese state-backed bilateral lending that has contributed to the economic meltdown in Venezuela, a controversial debt renegotiation in Sri Lanka and cancelled projects in Malaysia. Jin Liqun, the AIIB’s president, told the FT that China is conscious of the criticism. ‘Chinese leaders definitely have picked up the message. You cannot go on and on putting money in, without taking a review of what’s going on, to rebalance.’”

January 28 – Bloomberg (Michael Heath): “Australian firms suffered the worst slump in conditions since the 2008 global financial crisis as evidence mounts that the economy slowed in the latter part of last year. The business conditions index -- measuring hiring, sales and profits -- dropped to 2 in December from 11 a month earlier, a National Australia Bank Ltd. report showed Tuesday. A gauge of employment fell to 4 from 9 in November, while profitability plunged to zero from 8. A separate confidence index was unchanged at 3.”

January 31 – Bloomberg (Jackie Edwards): “Sydney property values continued to fall in January, driving nationwide house prices back to levels last seen in October 2016, amid tighter lending conditions and high levels of housing supply. Nationwide home values dropped 1% last month, led by a 1.3% decline in Sydney and a 1.6% slide in Melbourne, according to CoreLogic…”

Europe Watch:

February 1 – Bloomberg (Carolynn Look): “Italy’s recession isn’t seeing any signs of a turnaround at the start of the year, as a drop in manufacturing orders weighed on output and forced companies to cut jobs. Manufacturing conditions worsened in January to the greatest extent in almost six years, a purchasing managers’ index showed on Friday. At 47.8, it’s well below the 50 level that marks the crossover between expansion and contraction. Growth in the euro area as a whole slowed, led by a contraction in Germany, the region’s biggest economy, a separate PMI report showed.”

February 1 – Bloomberg (Simbarashe Gumbo): “IHS Markit releases manufacturing purchasing managers’ index for Eurozone in January. Index falls to 50.5 from 51.4 in Dec.; Year ago 59.6. Lowest reading since Nov. 2014. New Orders fall to 47.8 vs 48.8 in Dec. Lowest reading since April 2013. Fourth consecutive month of contraction.”

Japan Watch:

February 1 – Bloomberg (Dave McCombs and Kazunori Takada): “The slowdown in China that’s rattled global stocks is hitting the earnings of Japanese manufacturers as the world’s third-biggest economy fights to bounce back from a contraction. The health of the Chinese economy reverberates through many countries but is especially important for export-reliant Japan. China is Japan’s top trading partner, easily eclipsing the U.S. and the Europe. Following the biggest contraction since 2014 in the three months through September, Japan’s economy is unlikely to see anything more than a tepid return to growth. Factory output dropped again in December, falling for the seventh time in the last nine months.”

February 1 – Bloomberg (Keiko Ujikane and Shigeki Nozawa): “The world’s biggest pension fund posted a record loss after a global equity rout last quarter pummeled an asset class that made up about half of its investments. Japan’s Government Pension Investment Fund lost 9.1%, or 14.8 trillion yen ($136bn), in the three months ended Dec. 31… The decline in value and the rate of loss were the steepest based on comparable data back to April 2008.”

Fixed-Income Bubble Watch:

January 27 – Financial Times (Joe Rennison): “Wall Street’s debt machine is being powered by a familiar engine: securitisation. As scrutiny of the $1.2tn leveraged loan market has increased, focus has turned to the market’s main source of support: collateralised loan obligations. CLOs are vehicles which take a group of risky loans and then use them to back a series of bonds of varying degrees of safety. Investors in the most perilous, lowest-rated ‘tranches’, as they are known, are rewarded with higher returns but are hit first if the underlying loans — issued to low-rated or heavily indebted companies across the US — begin to default. As such, CLOs resemble other structures that rocked the financial system a decade ago, such as CDOs, which issued debt backed by bundles of (what turned out to be) junk mortgage bonds. But both investors and CLO managers say this time is different.”

January 30 – Bloomberg (Lisa Lee and Adam Tempkin): “The collateralized loan obligation machine is back as the all-important arbitrage between leveraged loans and CLO-manager borrowing costs shows signs of improvement. The improving arbitrage, buoyed by softer leveraged-loan prices, has been enough to kickstart CLO bond issuance this month. CLOs started coming out of the woodwork in mid-January, with $5.1 billion in supply so far this month, though less than the $8 billion seen in January 2018.”

Geopolitical Watch:

February 1 – Reuters (Lesley Wroughton and Arshad Mohammed): “The United States will suspend compliance with the Intermediate-range Nuclear Forces Treaty with Russia on Saturday and formally withdraw in six months if Moscow does not end its alleged violation of the pact, Secretary of State Mike Pompeo said…”

January 29 – Wall Street Journal (Dustin Volz and Warren P. Strobel): “U.S. intelligence officials warned Tuesday of increased threats to national security from tighter cooperation between China and Russia, while also differing with President Trump in their analysis of North Korea’s nuclear intentions and the current danger posed by Islamic State. The warnings were contained in an annual threat assessment that accompanied testimony by Director of National Intelligence Dan Coats, Federal Bureau of Investigation Director Chris Wray, Central Intelligence Agency Director Gina Haspel and other leaders of the U.S. intelligence community, who appeared Tuesday before a Senate panel. The annual exercise affords the public a look at imminent challenges facing the country, such as cyberattacks, nuclear proliferation and terrorism. The assessment cautioned that Beijing and Moscow are pouring resources into a ‘race for technological and military superiority’ that will define the 21st century. It said the two countries are more aligned than at any point since the mid-1950s.”

January 28 – Reuters (Matt Spetalnick and Brian Ellsworth): “The Trump administration on Monday imposed sweeping sanctions on Venezuelan state-owned oil firm PDVSA, aimed at severely curbing the OPEC member’s crude exports to the United States and at pressuring socialist President Nicolas Maduro to step down. Russia, a close ally of Venezuela, denounced the move as illegal interference in Venezuela’s affairs and said the curbs meant Venezuela would probably have problems servicing its $3.15 billion sovereign debt to Moscow.”

January 28 – Reuters (Ana Isabel Martinez): “Venezuela’s government struck back at self-declared interim president Juan Guaido on Tuesday, with the Supreme Court imposing a travel ban and freeze on his bank accounts despite a warning from Washington of ‘serious consequences’ if it did so. The court also said prosecutors could investigate Guaido, in apparent retaliation for sweeping U.S. sanctions on oil firm PDVSA…”

January 28 – Reuters (Parisa Hafezi): “A senior Iranian Revolutionary Guards commander… threatened Israel with destruction if it attacks Iran, state media reported. The comments by Brigadier General Hossein Salami, deputy head of the elite Islamic Revolutionary Guard Corps, followed an Israeli attack on Iranian targets in Syria last week - the latest in a series of assaults targeting Tehran’s presence there in support of President Bashar al-Assad’s government.”