Credit Bubble Bulletin : 03/14/20

Saturday, March 14, 2020

Weekly Commentary: The Loss of Moneyness

It was as if global markets pulled elements from the 1994 bond market dislocation, 1997’s Asian Bubble collapses, the 1998 Russian/LTCM fiasco, and the 2008 market crash – and synthesized them for a week of ridiculous market instability and dysfunction.

Thursday was an extraordinary day of global market panic – The “Worst Day Since the 1987 Market Crash” – “Biggest VaR Shock In History.” Add the “worst week for Credit in Decade.” It was the dreadful global de-risking/deleveraging episode – a disturbing case of synchronized liquidation, market illiquidity and dislocation. Global markets – stocks, bonds, Credit, derivatives, currencies and commodities - were all convulsing and “seizing up.”

The Dow sank 2,353 points, or 10.0% Thursday, with the S&P500 sinking 9.50%. Italy’s MIB index collapsed 16.9%, Germany’s DAX 12.2%, Spain’s IBEX 14.1%, and France’s CAC40 12.3%. Major equities indices were down 14.8% Thursday in Brazil, 12.7% in Poland, 11.5% in Hungary, 8.3% in Russia, 8.2% in India and 10.8% in Thailand. Japan’s Nikkei traded down as much as 10% in early-Friday trading before ending the session with a 6.1% loss.

Equities markets almost appeared orderly compared to Credit market mayhem. An index of U.S. high-yield CDS surged 92 bps to 685 bps, capping off a six-session surge of 317 bps to the highest level since the crisis. For comparison, this index spiked 138 bps in seven weeks to 485 bps during the late-2018 dislocation. An index of investment-grade CDS jumped 21 bps Thursday to 139 bps, with a six-session surge of 73 bps to the highest level since 2011.

March 12 – Bloomberg (Katherine Greifeld): “Bond ETFs are highlighting signs of liquidity stress in broader markets, with cash prices trading at persistent and deep discounts to the value of the underlying assets. The $31 billion iShares iBoxx $ Investment Grade Corporate Bond ETF closed at a discount of 3.3% to its net asset value on March 11, the largest such divergence since 2008… Meanwhile, the $23 billion iShares 20+ Year Treasury Bond fund’s price has dropped 5% below its net-asset value, the most ever. And even the U.S. municipal market is feeling the squeeze: The VanEck Vectors High Yield Municipal Index ETF traded at a record 8.3% discount on Wednesday.”

March 12 – Bloomberg (Alexandra Harris): “Libor-OIS expands to 61.1bp, the widest level since May 2009, from 52.6bp the prior session as funding pressures in the credit market continue to build.”

The iShares High yield ETF (HYG) sank 4.0% Thursday and 5.9% for the week. After ending last week at an all-time high, the iShares Investment-grade ETF (LQD) dropped 4.8% Thursday and 8.4% during the week. There were issues as well in mortgage-backed securities and municipal debt markets. After closing the previous Friday at a record low yield, benchmark MBS yields surged an eye-popping 48 bps to 2.37%. A couple Bloomberg headlines: “A Day of Hell: The Muni Market’s Worst Day in Modern History,” and “For the Muni-Bond Market, It’s the Worst Week Since 1987.” Across the derivatives markets, it was utter mayhem.

Emerging market (EM) bonds were ravaged. Yields on Brazil’s local currency 10-year bonds surged 125 bps to 8.29% in Thursday trading. Yields jumped 98 bps in Hungary (to 2.97%), 76 bps in Russia (7.98%), 71 bps in Colombia (7.65%), 55 bps in South Africa (9.81%), 44 bps in Mexico (7.72%) and 39 bps in Romania (4.52%).

For the week, local currency 10-year yields surged 292 bps in Ukraine, 127 bps in Mexico, 113 bps in Brazil, 107 bps in Turkey, 95 bps in Philippines, 92 bps in Russia, 88 bps in Chile, and 84 bps in Indonesia. “Carry trades” blowing up.

EM dollar-denominated bonds were not spared the bludgeoning. Thursday’s upheaval saw yields spike 172 bps in Ukraine (to 11.09%), 76 bps in Brazil (4.36%), 67 bps in Turkey (7.26%), 62 bps in Russia (3.66%), 61 bps in Mexico (4.12%), 45 bps in Philippines (2.76%), 38 bps in Indonesia (2.88%), and 36 bps in Chile (2.64%). For the week, yields surged 284 bps in Ukraine, 120 bps in Mexico, 107 bps in Brazil, 107 bps in Turkey, 87 bps in Russia, 86 bps in Chile, 82 bps in Philippines, and 74 bps in Indonesia.

In EM currencies, the Russian ruble fell 2.6% Thursday, the Colombian peso 2.6%, Mexican peso 2.5%, Czech koruna 2.3%, Chilean peso 2.1%, South African rand 2.1%, Polish zloty 2.0% and Turkish lira 1.7%.

Curiously, Thursday’s bigger moves were in “developed” currencies. The Norwegian krone sank 4.7%, the Australian dollar 3.8%, the New Zealand dollar 2.9%, the Swedish krona 2.4%, the British pound 1.9% and the Canadian dollar 1.1%. For the week, the Mexican peso dropped 8.3%, the Norwegian krone 8.1%, the Australian dollar 6.5%, the British pound 5.9%, the Brazilian real 4.3%, the South African rand 3.7%, the New Zealand dollar 3.4%, the Swedish krona 3.2% and the Canadian dollar 2.8%.

It’s fair to say that trading was in particular disarray wherever the levered funds have been active. Especially Thursday, markets traded as if cluster bombs besieged the leveraged speculating community.

Italian government yields surged 58 bps Thursday to 1.76%. With German bund yields little changed on the day, the Italian to German yield spread widened a remarkable 58 bps in one session. Greek yields jumped 50 bps (to 2.04%), with Portuguese yields up 32 bps (to 0.72%) and Spanish yields rising 25 bps (to 0.51%). For the week, Italian yields spiked 71 bps and Greek yields surged 70 bps. Yields were up 52 bps in Portugal and 41 bps in Spain. Ominously, safe haven German bund yields jumped 17 bps despite all the mayhem.

March 9 – Bloomberg (John Ainger and Anooja Debnath): “Fund managers are being faced with a collapse of liquidity as they try to handle record market moves. Investors say it is becoming increasingly difficult to trade due to the extent of swings on a day that saw 30-year Treasury yields drop the most since the 1980s and a fall in U.S. stocks so sharp that trading was halted minutes from the open. Even before today financial conditions were tightening at the fastest pace since the 2008 crisis. ‘I have yet to find liquidity,’ said Richard Hodges, a money manager at Nomura Asset Management, whose bets on Italian and Portuguese bonds last year put him in the top 1% of money managers. ‘There is none.’”

March 12 – Financial Times (Joe Rennison and Colby Smith): “Investors and analysts are warning about deepening cracks in the world’s largest government bond market. Strange patterns have started to emerge, such as drops in the price of US Treasuries — a traditional haven — even while riskier assets such as stocks have been squeezed by fears that the coronavirus outbreak will spark a global recession. Some are warning that the patterns could lead to the unwinding of one of the market’s most popular trading strategies — with potentially serious consequences.”

As global markets “seized up,” safe haven Treasury bonds were notable for providing minimal offsetting benefit. There was actually a point late in Thursday’s session where yields were higher on the day (before ending the session down 6bps to 0.81%). For the week, 10-year Treasury yields surged 20 bps – changing the calculus of Treasuries as a hedge against the risk markets and systemic risk more generally. Seeing the Treasury market succumb to illiquidity and dislocation could have been the most troubling aspect of a deeply troubling week.

The Federal Reserve was a busy bee. Last week’s emergency 50 bps fell flat in the marketplace. The New York Fed on Monday raised the size of its overnight repo liquidity operations 50% to $150 billion. It also more than doubled the size of the two-week repo facility to $45 billion. These measures were “intended to ensure that the supply of reserves remains ample and to mitigate the risk of money market pressures that could adversely affect policy implementation.” Whatever the intention, they suffered the same fate as the emergency cut. The Fed was back Tuesday to boost overnight operations to $175 billion, while adding a $50 billion one-month “term repo.” Still no pulse.

Thursday’s “seizing up” brought out the “whatever it takes,” “insurance”, shock and awe bazookas. It was surreal listening to analysts on Bloomberg and CNBC trying to comprehend exactly what the Fed had announced. I appreciated the Financial Times (Colby Smith and Brendan Greeley) effort: “The Fed would now offer up at least $500bn in three-month loans, beginning immediately, with another $500bn of three-month loans on Friday. It said it would also provide a $500bn one-month loan on Friday that settles on the same day. It also said it would continue to offer $500bn of three-month loans and $500bn one-month loans on a weekly basis until April 13, on top of its ongoing programme of $175bn in overnight loans and $45bn in two-week loans twice per week.” Holy Crap: Desperation.

The Dow surged almost 1,500 points in a matter of minutes. Hopes that prospects for Trillions of Fed liquidity had finally reversed the markets were quickly dashed as prices reversed lower to end a day of panic at session lows.

Japan’s Nikkei traded down 10% in early-Friday trading, as overnight S&P500 futures dropped another 3%. On prospects for aggressive global fiscal and monetary stimulus, Japanese and Asian stocks cut their losses. European stocks rallied sharply, with major indices up near double-digits by the time U.S. exchanges began trading. The S&P500 gapped 6% higher, though most of the gain had disappeared after a couple hours. No rest for the weary. The Fed had yet another announcement, stating it would be purchasing longer-term Treasuries (instead of T-bills) in its monthly QE purchases (acquiring $37 billion by the end of the day). The President scheduled a coronavirus press conference during the last hour of the market session. The Dow rallied 1,500 points in the final 34 minutes of trading, as “Stocks Retrace 90% of Thursday’s Epic Plunge with Late-Day Surge.” Well-orchestrated.

March 13 – Financial Times (James Politi, Lauren Fedor and Courtney Weaver): “Steven Mnuchin, the Treasury secretary, said US authorities will do ‘whatever we need to do’ to boost liquidity in financial markets and help the US economy weather the coronavirus outbreak, including action by the Federal Reserve and a deal with Democratic lawmakers for more fiscal stimulus. ‘There will be liquidity available, whatever we need to do, whatever the Fed needs to do, whatever Congress needs to do. We will provide liquidity,’ Mr Mnuchin said… Mr Mnuchin said he was in constant contact with Jay Powell, the chairman of the Federal Reserve, as well as US business leaders, about mitigating the impact of the spreading disease.”

Crude collapsed 25% Monday. Bitcoin collapsed 41% during the week. For the week, palladium collapsed 37%, platinum 17% and silver 16%. Gold dropped 8.6%. Sugar and Cattle were down almost 10%, as the Bloomberg Commodities Index sank 7.8% for the week. The S&P500 dropped 7.6% Monday; rallied 4.9% Tuesday; fell 4.9% Wednesday; sank 9.5% Thursday; and surged 9.3% Friday. Circuit breakers were triggered at least twice – and I don’t recall anything quite like it, even during 2008. It was a week when, to those paying attention, the potential for a crisis much beyond the scope of 2008 became readily apparent. We witnessed more than a glimpse of how global financial collapse could materialize.

March 12 – Financial Times (Gillian Tett): “This decade, America’s equity market has been like a drug addict. Until 2008, investors were hooked on monetary heroin (ie a private sector credit bubble). Then, when that bubble burst, they turned to the financial equivalent of morphine (trillions of dollars of central bank support). Now, in the wake of Thursday’s historic equity market crash, they must contemplate a scary question: has this monetary morphine ceased to work? Think about it. Ever since 2016, the Federal Reserve has tried to wean the markets off its quantitative easing measures and ultra-low rates. But whenever markets have wobbled — as they did last year in the repurchase sector — the Fed always returned with a new monetary fix. That has helped to sustain a startling bull market in equities and bonds.”

“Coordinated fiscal and monetary stimulus” – Wall Street’s new catchphrase. Aggressive fiscal stimulus has begun – with deficits already running at 5% of GDP. Rates could be cut to near zero next week – with the unemployment rate at 60-year lows and stocks only four weeks from all-time highs. QE will begin in earnest, with the Fed’s bloated balance sheet at $4.222 TN - having expanded $500 billion over the past six months.

I’m reminded of how a few highly-levered mortgage companies filed for bankruptcy in 1998 (after the LTCM crisis) without ever missing a Wall Street earnings estimate. It’s full crisis-management mode without even a negative GDP print. I certainly appreciate the seriousness of the unfolding crisis. But I do ponder what the government response will be after the Bubble has deflated and policymakers are confronting deep recession and financial calamity.

With all the put options and hedges in the marketplace, I don’t doubt the capacity to incite a short squeeze and higher market prices. But I do doubt fiscal and monetary stimulus will resuscitate the Bubble in global leveraged speculation. Illiquidity and market dysfunction have been exposed. Huge losses have been suffered and “money” will flee popular (and overcrowded) leveraged strategies (i.e. risk parity). I also suspect confidence in derivatives has also likely been shaken. Liquidity risk will be a persistent feature of global markets.

It started with Alan Greenspan imagining the wonder of market-based finance - with a little helping (visible) hand from central bankers. I referred to the “Moneyness of Credit” throughout the mortgage finance Bubble period. With the implicit backing of the federal government, the GSEs and Wall Street luxuriated in the capacity to turn endless risky mortgage loans into perceived safe and liquid “AAA” securitizations and instruments. Money – with the perception of safety and liquidity – enjoys insatiable demand. When it comes to financing runaway Bubbles, “money” is incredibly dangerous.

“Moneyness of Risk Assets” has been fundamental to my global government finance Bubble thesis. Dr. Bernanke collapsed interest rates, forced savers into the securities markets, and repeatedly employed the government printing press (QE) to backstop the markets – in the process nurturing the perception of safety and liquidity for stocks, corporate Credit, government bonds and derivatives. An enterprising Wall Street was right there with ETFs, index funds, “passive” investing, myriad derivatives strategies and other low-cost products for speculating on the ever-rising stock market. Risky securities and financial structures were transformed into perceived safe and liquid “investment” products. Only a moron doesn’t believe in buying and holding like the great Warren Buffett. Cash is trash. Disregard risk and avoid active managers that invariably underperform index products.

It was history’s greatest speculative Bubble – and it has burst. “AAA” wasn’t risk free – and this recognition changed everything. Those levered in “AAA” were suddenly suspect. Perceived money-like liabilities (repos, derivatives, securitizations, etc.) abruptly lost their “Moneyness” and the run was on.

Myriad perceived safe and liquid financial instruments/strategies lost their Moneyness this week (fiscal and monetary stimulus notwithstanding, I don’t think it’s coming back). The run was on. With risks illuminated, leverage must come down. The “hot money” is now fleeing countries, markets, trading strategies and instruments - marking a momentous change in the flow of finance and global marketplace liquidity.

The critical issue is not so much the coronavirus and its economic impacts, as it is the uncertainty associated with the pandemic as a catalyst for the piercing of history’s greatest global Bubble. We’ll get through this, but the world is today poorly prepared for the great challenges it now confronts.

For the Week:

In a stunningly volatile week, the S&P500 fell 8.8% (down 16.1% y-t-d), and the Dow sank 10.4% (down 18.8%). The Utilities collapsed 14.0% (down 10.3%). The Banks dropped 11.1% (down 34.2%), and the Broker/Dealers lost 11.7% (down 22.9%). The Transports fell 11.4% (down 27.2%). The S&P 400 Midcaps sank 14.0% (down 25.0%), and the small cap Russell 2000 slumped 16.5% (down 27.5%). The Nasdaq100 declined 6.3% (down 8.4%). The Semiconductors lost 9.2% (down 16.5%). The Biotechs fell 11.5% (down 14.2%). With bullion sinking $144, the HUI gold index collapsed 31.9% (down 32.3%).

Three-month Treasury bill rates ended the week at 0.24%. Two-year government yields declined two bps to 0.49% (down 108bps y-t-d). Five-year T-note yields rose 11 bps to 0.72% (down 97bps). Ten-year Treasury yields jumped 20 bps to 0.96% (down 95bps). Long bond yields rose 25 bps to 1.54% (down 85bps). Benchmark Fannie Mae MBS yields surged 48 bps to 2.37% (down 34bps).

Greek 10-year yields surged 70 bps to 2.09% (up 66bps y-t-d). Ten-year Portuguese yields jumped 52 bps to 0.82% (up 38bps). Italian 10-year yields spiked 71 bps to 1.79% (up 37bps). Spain's 10-year yields rose 41 bps to 0.62% (up 15bps). German bund yields increased 17 bps to negative 0.54% (down 36bps). French yields jumped 36 bps to 0.02% (down 10bps). The French to German 10-year bond spread widened 19 to 56 bps. U.K. 10-year gilt yields rose 18 bps to 0.41% (down 41bps). U.K.'s FTSE equities index collapsed 17.0% (down 28.9%).

Japan's Nikkei Equities Index sank 16.0% (down 26.3% y-t-d). Japanese 10-year "JGB" yields surged 18 bps to 0.05% (up 7bps y-t-d). France's CAC40 collapsed 19.9% (down 31.1%). The German DAX equities index fell 20.0% (down 30.3%). Spain's IBEX 35 equities index lost 20.8% (down 30.6%). Italy's FTSE MIB index sank 23.3% (down 32.1%). EM equities were also under intense liquidation. Brazil's Bovespa index dropped 15.6% (down 28.5%), and Mexico's Bolsa declined 8.0% (down 12.5%). South Korea's Kospi index slumped 13.2% (down 19.4%). India's Sensex equities index fell 9.2% (down 17.3%). China's Shanghai Exchange declined 4.8% (down 5.3%). Turkey's Borsa Istanbul National 100 index dropped 12.8% (down 16.4%). Russia's MICEX equities index sank 14.8% (down 24.0%).

Investment-grade bond funds saw outflows of $7.725 billion, and junk bond funds posted outflows of $4.944 billion (from Lipper).

Freddie Mac 30-year fixed mortgage rates rose seven bps to 3.36% (down 95bps y-o-y). Fifteen-year rates slipped two bps to 2.77% (down 99bps). Five-year hybrid ARM rates dropped 17 bps to 3.01% (down 83bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-year fixed rates up 19 bps to 3.97% (down 33bps).

Federal Reserve Credit last week surged $77.2bn to $4.222 TN, with a 27-week gain of $500 billion. Over the past year, Fed Credit expanded $290bn, or 7.4%. Fed Credit inflated $1.411 Trillion, or 50%, over the past 383 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt sank $17.7 billion last week to $3.440 TN. "Custody holdings" were down $32bn, or 0.9%, y-o-y.

M2 (narrow) "money" supply jumped $89bn last week to a record $15.622 TN. "Narrow money" surged $1.148 TN, or 7.9%, over the past year. For the week, Currency increased $3.5bn. Total Checkable Deposits surged $54.4bn, and Savings Deposits rose $24.7bn. Small Time Deposits were little changed. Retail Money Funds gained $6.0bn.

Total money market fund assets surged $94bn to $3.777 TN. Total money funds jumped $665bn y-o-y, or 21.4%.

Total Commercial Paper added $5.3bn to $1.129 TN. CP was up $60bn, or 5.6% year-over-year.

Currency Watch:

March 9 – Bloomberg (Netty Idayu Ismail): “The rout in oil prices is throwing the decades-old currency pegs of the Gulf Arab region back under the microscope. Twelve-month forward contracts on Saudi Arabia’s riyal climbed fourfold to 180 points in the offshore market Monday as the slide in crude following the collapse of the OPEC+ production agreement sent global markets into turmoil. While that’s a long way from the all-time high of 1,000 points reached in 2016, there was a more worrying jump for Oman’s forwards -- they almost tripled to an all-time high of 2,000 points.”

For the week, the U.S. dollar index jumped 2.9% to 98.749 (up 2.3% y-t-d). For the week on the downside, the Mexican peso declined 8.3%, the Norwegian krone 8.1%, the Australian dollar 6.5%, the British pound 5.9%, the Brazilian real 4.3%, the South African rand 3.7%, the New Zealand dollar 3.4%, the Swedish krona 3.2%, the Canadian dollar 2.8%, the Singapore dollar 2.6%, the South Korean won 2.2%, the Japanese yen 2.1%, the euro 1.6% and the Swiss franc 1.4%. The Chinese renminbi declined 1.1% versus the dollar this week (down 0.65% y-t-d).

Commodities Watch:

March 9 – Financial Times (David Sheppard): “After the oil market experienced one of its biggest one-day falls in history on Monday, is there anything still worth warning energy investors about? The discouraging answer, for those who have watched their portfolios plunge dramatically lower, is yes. The decision by Saudi Arabia and Russia to start an oil price war promises a lot of pain for both sides… If you wanted to know what sort of personalities were involved in negotiations leading up to Monday’s rout, you could do worse than consider Mr Sechin, a figure once described as the Darth Vader of the Russian oil industry: a powerful number two with a reputation for ruthlessness. The Rosneft chief, like Mr Putin, was forged in the dark days of the cold war.”

The Bloomberg Commodities Index dropped 7.8% (down 19.3% y-t-d). Spot Gold fell 8.6% to $1,530 (up 0.8%). Silver slumped 16.0% to $14.50 (down 19.1%). WTI crude collapsed $9.55 to $31.73 (down 48%). Gasoline tanked 35.3% (down 47%), while Natural Gas rallied 9.4% (down 15%). Copper declined 3.8% (down 12%). Wheat lost 1.9% (down 9%). Corn fell 2.7% (down 6%).

Coronavirus Watch:

March 11 – Reuters (Emma Farge): “The World Health Organization is describing the new coronavirus as a pandemic…, adding that Italy and Iran were now in the frontline of the disease and other countries would soon join them. ‘We are deeply concerned both by the alarming levels of spread and severity and by the alarming levels of inaction. We have therefore made the assessment that COVID-19 can be characterized as a pandemic,’ WHO Director General Tedros Adhanom Ghebreyesus told a news conference…”

March 11 – Reuters (Liangping Gao and Andrea Shalal): “Travelers scrambled to rebook flights and markets reeled on Thursday after U.S. President Donald Trump imposed sweeping restrictions on travel from Europe, hitting battered airlines and heightening global alarm over the coronavirus… That sent markets into a tailspin, with European shares plunging to their lowest in almost four years and oil also slumping. It also sent stressed travelers rushing to airports to board last flights back to the United States. ‘It caused a mass panic,’ said 20-year-old Anna Grace, a U.S. student at Suffolk University on her first trip to Europe who rushed to Madrid’s Barajas airport at 5 a.m. to get home.”

March 10 – Financial Times (Miles Johnson, Davide Ghiglione, Dan Dombey and Sam Jones): “Italy increased its emergency economic measures and suspended mortgage payments to mitigate the consequences of imposing nationwide quarantine restrictions as Europe battles to contain the largest outbreak of the novel coronavirus outside China. Rome’s move is designed to help businesses and families weather a decision late on Monday to ban all ‘non-essential’ travel and public gatherings… The government said… it would inject €10bn into the economy…”

March 12 – Financial Times: “More than 40% of EU residents are now facing life under far-reaching coronavirus-related controls as national leaders battle to limit the accelerating spread of the virus. The announcement of new restrictions in countries including Ireland, Spain, Poland and the Czech Republic on Thursday brought the number of people affected by planned or imposed measures to well over 190m, according to Financial Times analysis.”

March 11 – CNBC (William Feuer): “Public officials on Wednesday banned large gatherings in San Francisco and the Seattle area as cities seek to curb the spread of the new flu-like coronavirus that’s infected more than 121,000 people across the world since December. Washington Gov. Jay Inslee said he’s banning gatherings of more than 250 people in several counties across the state to try to contain the COVID-19 outbreak that that has killed at least 23 residents.”

March 13 – Bloomberg (Tim Loh): “About half the people who tested positive for the coronavirus on the Diamond Princess cruise ship appeared to show no symptoms, according to an estimate published Friday. Of the 634 confirmed cases aboard the ship off of the coast of Japan last month, 328 were reported to be asymptomatic, the review said.”

Market Instability Watch:

March 9 – Bloomberg (Elizabeth Stanton): “Monday’s Treasuries rally produced the biggest intraday decline in 30-year yields since at least October 1998… The rate fell as much as 59 bps to a record low 0.699%, its first time trading under 1%. The next biggest drop -- 47 bps in November 2008 as U.S. stocks plunged during the financial crisis -- was from 3.905%. Of the 10 steepest intraday declines, one occurred last week and four were in 2008 or 2009. The U.K. Brexit vote in June 2016 and the Treasury’s surprise suspension of 30-year issuance on Oct. 31, 2001, caused two others.”

March 8 – Financial Times (Anjli Raval, David Sheppard and Derek Brower): “Saudi Arabia has launched an aggressive oil price war targeting its biggest rival producers after Russia refused to join production cuts with Opec, in a move that threatens to swamp the crude market with supplies just as the coronavirus outbreak hits demand. Saudi Arabia will raise production and offer its crude at deep discounts to win new customers next month… Oil prices had already dropped by a third since January to near $45 a barrel. Within seconds of the market opening on Sunday evening oil prices crashed as much as 30%, driving crude to its lowest level in four years.”

March 12 – Bloomberg (Justina Lee): “A booming quant trade touted for its diversification appeal is starting to feel the pain in this once-a-decade explosion of volatility. It’s also raising scary questions about billions riding the tried-and-tested link between stocks and bonds. Known as risk parity, the levered-investing method made famous by Ray Dalio allocates to an array of assets based on their volatility. Before this week, it had -- at least on relative terms -- outperformed in the turmoil, benefiting from its outsized fixed-income exposure. But now, just like for everything else on Wall Street, the worries are stacking up. The $948 million Wealthfront Risk Parity Fund lost more than 8% on both Monday and Wednesday. An S&P benchmark for the strategy has been suffering its worst start to a week since the global financial crisis.”

March 10 – Bloomberg (Sam Potter): “The sell-off may be taking a rest but the volatility is still at work. On Tuesday, S&P 500 futures hit their trading limits after rising too fast. A day earlier, stocks fell so quickly they also triggered curbs. The raging equity swings underscore how volatility is engulfing every region and asset class at a pace unseen since the dark days of the global crisis. The Bank of America Merrill Lynch GFSI Market Risk indicator, a measure of expectations for turbulence in stocks, rates, currencies and commodities worldwide, hasn’t risen this fast since the collapse of Lehman Brothers.”

March 12 – Bloomberg (Molly Smith, Hannah Benjamin and Andrew Kostic): “Funds that invest in U.S. investment-grade corporate bonds saw their worst outflow on record as global credit markets head toward the end of the week in a renewed state of panic. High-grade bond funds lost $7.3 billion in the week ended March 11…”

March 11 – Bloomberg (Sridhar Natarajan and Yalman Onaran): “Under duress from a viral pandemic and plummeting oil prices, corporate America is facing its most severe test since the 2008 crisis. A swath of the nation’s biggest names is maxing out credit lines, grabbing cash before it can disappear. Behind the scenes, some CEOs and their finance chiefs are calling bankers this week to ask for liquidity. And throughout the day Wednesday, word leaked out on company after company pulling from existing facilities. First it was long-embattled Boeing Co. drawing down a $13.8 billion term loan, then it was travel-and-leisure empires Hilton Worldwide Holdings Inc. and Wynn Resorts Ltd. leaning harder on credit facilities totaling more than $2.5 billion. Private-equity titans Blackstone Group Inc. and Carlyle Group Inc. advised some of the businesses they control to consider similar measures to prevent potential shortfalls.”

March 13 – Wall Street Journal (Matt Wirz): “Economic fallout from the novel coronavirus and collapsing oil prices are sparking steep declines in the $3.4 trillion market of corporate bonds with triple-B credit ratings, the lowest rung on the investment-grade scale. Fear that many of the bonds will be downgraded to junk status is causing an unusually steep drop in prices this month, despite the sharp rally in Treasury bonds, which typically buoys investment-grade corporate debt. Yields on an index of triple-B corporate bonds in the U.S. jumped a half-percentage point to 3.24% from Monday to Wednesday, the biggest two-day jump since at least the financial crisis…”

March 13 – Wall Street Journal (Caitlin McCabe): “Investors are fleeing stock funds at the fastest pace since the bruising market selloff at the end of 2018, while racing into government bond funds at a record clip. They pulled $47.4 billion out of global stock-focused mutual funds and exchange-traded funds in the three weeks ended Wednesday…”

March 12 – CNBC (Kate Duguid and Megan Davies): “High-yield U.S. bonds suffered more pain on Thursday as major junk bond exchange-traded funds fell to the lowest level since February 2016 and an index for credit insurance protecting against exposure to junk bonds widened to a nine-year high… The Markit high-yield credit-default swap index CDXHY5Y widely used as a gauge of sentiment about high-yield debt - surged to its highest since November 2011.”

March 11 – Bloomberg (Gowri Gurumurthy): “U.S. junk bond funds are set to record their third consecutive week with outflows of more than $4 billion as investors retreat from risk assets… U.S. high-yield funds have seen outflows of $4.8 billion from Thursday through to Tuesday based on Refinitiv Lipper data estimates... If that occurs it will be the first time on record that funds have seen three straight weeks of outflows topping $4 billion…”

March 12 – CNBC (Holly Ellyatt): “The pan-European Stoxx 600 had plummeted 11% by the close, with travel and leisure stocks sinking 12.8% following Trump’s announcement of a ban on European travel. The U.K.’s FTSE 100 lost 9.8%, France’s CAC 40 shed 12.3% and Germany’s DAX fell 12.2%. Italian stocks finished nearly 17% lower, which was also the worst single-day loss for the FTSE MIB. Trump said Wednesday that the U.S. will suspend all travel from 26 European countries to the U.S. for 30 days to curb the spread of coronavirus.”

March 11 – Bloomberg (Kelsey Butler and Rachel McGovern): “Private credit funds looking to raise more than $212 billion from investors are now finding their efforts hampered by the continuing spread of the coronavirus. Over the last two weeks, at least half a dozen lenders to mid-size businesses actively fundraising in North America and Europe have canceled appointments or travel plans to meet with prospective investors…”

March 11 – Bloomberg (Martin Z Braun): “The coronavirus is crushing high-yield municipal bonds. Risky state and local government debt issued on behalf of airlines, oil companies, or backed by a national settlement with tobacco companies has declined 1.5% each of the last two days as investors were spooked by the impact the virus and crashing oil prices will have on the economy. VanEck Vectors High Yield Municipal Index ETF, the biggest high-yield municipal bond exchange traded fund, declined more than 8% during the first two days of the week…”

March 9 – Bloomberg (Amanda Albright): “The riskiest municipal bonds are getting pulled into the financial market maelstrom. Ohio’s tobacco-settlement-backedbonds, which soared soon after they were sold late last month, fell as much as 12.7% from their peak in just seven trading days… The yields on some junk-rated bonds backed by American Airlines Group Inc.’s terminal at John F. Kennedy International Airport have jumped by more than 3 percentage points since last week. And investors hit the exits on a $3.8 billion high-yield municipal ETF, marking the biggest one-day exodus from the fund since 2016.”

Global Bubble Watch:

March 11 – Bloomberg (Liz McCormick and Alyce Andres): “Coronavirus-induced market mayhem has pushed so much liquidity out of U.S. Treasuries that the true value of more than $50 trillion in assets around the globe is in doubt. Yields in the world’s largest debt market have been on a mind-bending, three-week roller-coaster ride. At one point, the entire U.S. yield curve was below 1% for the first time ever. But this week rates have jumped from Monday’s all-time lows even though fear of the virus has intensified… One key gauge of Treasury liquidity -- market depth, or the ability to trade without substantially moving prices -- has plunged to levels last seen during the 2008 financial crisis, according to… JPMorgan. That liquidity shortfall, JPMorgan says, is most profound in long-term Treasuries.”

March 11 – New York Times (Peter S. Goodman): “To grasp why the most important central banks — from the Fed to the Bank of England to the Bank of Japan —- are now leaping into action as if the world were on fire, it helps to examine the subject of corporate debt. For years, wonks bearing spreadsheets have warned that corporations around the planet were developing a dangerous addiction to debt. Interest rates were so low that borrowing money was essentially free, enticing companies to avail themselves with abandon. Something bad was bound to happen eventually, leaving borrowers struggling to make their debt payments. Lenders would grow agitated, tightening credit for everyone. The world would confront a fresh crisis. Something bad is now happening. As the coronavirus outbreak spreads, halting factories from China to Italy, sending stock markets plunging and prompting fears of a worldwide recession, historic levels of corporate debt threaten to intensify the economic damage. Companies facing grave debt burdens may be forced to cut costs, laying off workers and scrapping investments, as they seek to avoid default.”

March 8 – Financial Times (Patrick McGee and Andrew Edgecliffe-Johnson): “Shortages of components and raw materials because of the coronavirus are likely to be far worse than expected, experts warn, with most US companies unaware that they are exposed to Chinese factories idled by the outbreak. ‘I guarantee you that most organisations have some level of exposure that they are not aware of,’ said Alex Saric, chief marketing officer at Ivalua, a platform for digitalising procurement. While companies closely track their direct suppliers — the tier ones such as Foxconn that would send Apple a finished iPhone — they can be blind to their suppliers’ factories, the tier twos, and those further down the chain.”

March 11 – Bloomberg (Sridhar Natarajan and Heather Perlberg): “Private equity titans Blackstone Group Inc. and Carlyle Group Inc. are sending a message to portfolio companies: Do whatever it takes to stave off a credit crunch. Businesses controlled by the firms are joining a growing wave of corporations drawing down bank credit lines to help prevent any liquidity shortfalls amid signs of mounting stress in markets. At Blackstone… the focus is on sectors hurt by the coronavirus, such as the hospitality industry, as well as energy firms facing a slump in oil prices, according to people with knowledge of the matter.”

March 12 – Reuters (Tom Wilson): “Bitcoin plummeted on Thursday amid wild volatility in cryptocurrency markets, with traders citing a sell-off across assets as fears of the economic damage from the coronavirus pandemic take hold. The biggest cryptocurrency slumped as much as 25% during morning trading before clawing back some of its losses… Bitcoin has lost over 30% of its value in the last five days…”

Trump Administration Watch:

March 13 – CNBC (Dan Mangan and Christina Wilkie): “President Donald Trump on Friday declared a national emergency over the coronavirus pandemic, and announced a set of specific measures aimed at stemming the effects of the outbreak… The emergency declaration will free up as much as $50 billion in financial resources to efforts by states and U.S. territories to assist Americans affected by the outbreak.”

March 10 – Reuters (Tim Ahmann): “President Donald Trump on Tuesday lashed into the U.S. Federal Reserve and its chairman Jerome Powell, calling the institution ‘pathetic, slow moving’ and saying it should bring U.S. interest rates down to the level of ‘competitor nations.’ ‘Our pathetic, slow moving Federal Reserve, headed by Jay Powell, who raised rates too fast and lowered too late, should get our Fed Rate down to the levels of our competitor nations,’ Trump said on Twitter. ‘They now have as much as a two point advantage, with even bigger currency help.’”

March 11 – Reuters (Ann Saphir): “President Donald Trump this week tried to get Treasury Secretary Steven Mnuchin to push Federal Reserve Chair Jerome Powell to do more to boost the economy and stem the stock market’s decline, the Washington Post reported… The president’s latest attempt to get the U.S. central bank to do his bidding came during what the Post described as an ‘explosive tirade’ at a Monday meeting in the Oval Office, citing three unnamed White House officials…”

March 11 – Reuters (David Lawder, Lindsay Dunsmuir and Andrea Shalal): “U.S. Treasury Secretary Steven Mnuchin said banking regulators are looking at various possible short-term regulatory actions in response to the fast-spreading coronavirus outbreak, but he saw no need for intervention in financial markets. ‘We see no need for any intervention in the markets,’ Mnuchin told reporters…, noting that the Federal Reserve had already put liquidity into the market. ‘The Fed has already acted significantly in putting lots of liquidity into the market,’ he said, adding that he was in daily contact with Federal Reserve Chair Jerome Powell.”

March 11 – Bloomberg (Saleha Mohsin and Liz McCormick): “Treasury Secretary Steven Mnuchin indicated the U.S. will keep issuing debt at a steady pace as he seeks to fund a possible extension of the April 15 tax filing deadline. Treasury’s bill issuance was set to fall in the second quarter as it historically does due to seasonal factors related to tax filings. Issuance drops as tax season approaches because the federal government can rely on incoming tax revenue to fund itself.”

March 11 – Reuters (David Lawder and Gabriel Crossley): “The U.S. Treasury is working with the International Monetary Fund and the World Bank to gain full transparency of countries’ debts from China’s Belt and Road infrastructure initiative and ensure that funds from the institutions are not used to repay China, Treasury Secretary Steven Mnuchin said... ‘We think this is critically important,’ Mnuchin told a hearing of the U.S. House of Representatives Appropriations Committee. ‘We’re not ever going to be using money from these international organizations to pay back China.’”

March 7 – Wall Street Journal (Scott Patterson): “In Washington, the coronavirus is serious but manageable and the economy is solid. On Wall Street, it is a full-blown crisis that will cause a deep recession and seriously damage global trade. The two starkly different views of the crisis are adding to the anxiety as the coronavirus spreads globally and the number of cases grows in the U.S. The Trump administration is trying to stay upbeat and argue the disease is under control, fearing that a panic would cause the economy to slow, or even cause a recession. The bond market and, to a lesser extent, the stock market are saying a recession is inevitable and could be bad. The coronavirus ‘is very well under control in our country,’ the president said in late February, just as markets started to tumble.”

March 11 – Reuters (Timothy Gardner, Richard Cowan, Humeyra Pamuk and Steve Holland): “U.S. Senator John Thune said… he believes the Trump administration is evaluating use of the Strategic Petroleum Reserve, and other measures, to help oil producers deal with the plunge in crude prices due to the coronavirus and a price war between Saudi Arabia and Russia. ‘There have been in the past measures that have been taken with the Strategic Petroleum Reserve and other things, but I’m not suggesting that at this point,’ Thune, the No. 2 Senate Republican, told reporters. But, he added, ‘I think the administration is evaluating that.’”

Federal Reserve Watch:

March 11 – Bloomberg (Alex Harris): “The Federal Reserve is trying to get ahead of possible funding disruptions caused by the coronavirus, ramping up cash injections in the coming weeks to as much as $505 billion in a bid to keep short-term financing markets functioning smoothly through quarter-end. The central bank’s New York branch said Wednesday that it would conduct additional repurchase-agreement operations that could take its support for this crucial corner of the financial markets beyond the total of $490 billion it offered over year-end.”

March 12 – Financial Times (Colby Smith and Brendan Greeley): “The Federal Reserve said it would pump trillions of dollars into the financial system in a dramatic attempt to ease stresses in short-term funding and US Treasury markets that have accompanied the spread of the coronavirus. The US central bank is also making changes to its programme of Treasury purchases ‘to address highly unusual disruptions in Treasury financing markets’. For the third time in four days, the Fed’s New York arm announced on Thursday that it would increase the size of its lending in the repo market… this time by multiples of the amounts previously on offer… The Fed would now offer up at least $500bn in three-month loans, beginning immediately, with another $500bn of three-month loans on Friday. It said it would also provide a $500bn one-month loan on Friday that settles on the same day. It also said it would continue to offer $500bn of three-month loans and $500bn one-month loans on a weekly basis until April 13, on top of its ongoing programme of $175bn in overnight loans and $45bn in two-week loans twice per week.”

March 12 – Bloomberg (Alexandra Harris): “The Federal Reserve ramped up the amount of cash it’s prepared to inject into funding markets over the next month, promising a cumulative total above $5 trillion, in a signal that officials will do whatever it takes to keep short-term financing rates from spiking. In the third upsizing of its repo schedule this week, the Fed’s New York branch on Thursday offered $500 billion in a three-month repo operation amid signs that the financial impact of the coronavirus outbreak was starting to strain borrowing markets as well as trading in U.S. Treasuries. The bank will repeat that exercise Friday along with a $500 billion one-month operation, and it plans to offer that amount on 10 occasions in total in the next month. Add it all up and throw in the shorter repo maturities the Fed has scheduled, and the sum will reach $5.4 trillion.”

U.S. Bubble Watch:

March 10 – Bloomberg (Rich Miller and Claire Boston): “The coronavirus is threatening to expose the Achilles heel of the U.S. economy: heavily leveraged companies. As the economic expansion stretched into a record 11th year, and interest rates stayed at ultralow levels, business debt ballooned and now exceeds that of households for the first time since 1991. What’s more, the borrowing has increasingly been concentrated in riskier companies with fewer financial resources to ride out virus-driven difficulties. A wave of defaults would intensify the economic impact of the contagion. ‘It will add to recessionary pressures in the U.S.,’ says Nariman Behravesh, chief economist at consultant IHS Markit Ltd. Energy companies are especially vulnerable…”

March 9 – Wall Street Journal (Collin Eaton and Rebecca Elliott): “U.S. shale drillers are poised to be among the biggest losers in the oil-price war stoked by Russia and Saudi Arabia that has sent global prices crashing. Dozens of debt-addled companies… were already facing financial difficulties even before U.S. benchmark prices plummeted 25%... Monday… Now many of the shale companies that led the U.S. to become the world’s top oil and gas producer are in a fight for survival. But unlike the 2014 price plunge, Wall Street—down on the industry due to poor returns—isn’t primed to offer a helping hand.”

March 13 – Bloomberg (Rachel Adams-Heard, David Wethe, Steve Matthews and Reade Pickert): “Just last week, when crude oil prices fell to $46 a barrel, the mayor of the biggest city in the world’s largest shale oil patch seemed oddly calm, almost relieved. Midland, in the heart of the Permian Basin in Texas, could use something of a slowdown, Patrick Payton figured, after breakneck growth had stretched services so thin that the police force could barely keep cops on the beat. Then a couple days passed, and the digital sign downtown that flashes the current oil price read -- suddenly -- $30. Payton could hardly take it in. ‘Crisis is an overused word, but it’s a crisis of shock,’ he said. ‘We have to adjust to our new reality.’ Texas as a whole might have to.”

March 11 – Reuters (Tim McLaughlin): “Employees at the largest U.S. oil companies have lost around $5 billion in retirement savings since the end of 2018 because of outsized bets on their own slumping stock… The losses spread across the 401(k) plans of some 66,000 workers underscore the dangers facing employees that do not diversify their retirement investments. The issue is most pronounced at big blue-chip corporations that have historically matched worker retirement contributions in shares and whose stocks have track records of stable growth. ‘A lot of people think their company’s stock is safer than an index fund,’ said David Blanchett, head of retirement research at Morningstar Inc.”

March 11 – Bloomberg (Leslie Josephs): “Boeing is immediately suspending most hiring and implementing other measures to preserve cash as the rapid spread of the coronavirus roils the air travel industry, sending the manufacturer’s stock to the lowest level since mid-2017. Shares of the manufacturer plunged more than 18% — their biggest one-day percentage drop in more than four decades — to $189.08…. The company also is drawing down earlier than expected the entirety of a $13.8 billion loan it secured in January to give it a cushion to weather the turmoil. Boeing is already reeling from the damage of two fatal crashes of its 737 Max and the worldwide grounding of the planes, which hits the one-year mark on Friday.”

March 11 – Reuters (Lawrence Delevingne): “The top U.S. securities regulator has increased its scrutiny of private funds that make higher-risk loans over the last two years, according to a Reuters review of SEC actions and industry and regulatory sources — just as fears of a global recession hit the booming private credit market. The intensified oversight from the Securities and Exchange Commission (SEC) could have deeper consequences as the financial turmoil wrought by the coronavirus and an oil price war increases the risk of corporate and individual defaults and raises pressure on fund managers to hide losses.”

March 12 – Wall Street Journal (Nicole Friedman): “The lowest mortgage rates on record are colliding with the prospect of an economic downturn prompted by the coronavirus outbreak, setting the stage for an unpredictable spring selling season in the housing market. Early indications suggest that rock-bottom borrowing costs may not be enough to lure many home buyers amid the current uncertainty. Economists are tamping down earlier expectations that cheap rates and a strong job market would boost the housing market in 2020 following years of sluggish growth. The National Association of Realtors had anticipated about 5.5 million sales of previously owned homes in 2020, up from 5.3 million a year in 2019 and 2018…”

March 11 – Bloomberg (Lu Wang and Vildana Hajric): “In times of crisis, you do what you can to reduce risk. That’s bad news for anyone hoping buybacks will put a floor under the stock market. U.S. companies, whose willingness to repurchase shares gets credit in some circles for fueling the 11-year bull market while being pilloried elsewhere as waste, have been stepping back from the practice since before the coronavirus outbreak. They announced $122 billion of share repurchases in January and February, down 46% from a year ago for the biggest drop to start a year since 2009…”

March 9 – Wall Street Journal (Sebastian Pellejero): “U.S. corporations are signaling a reduced appetite for stock buybacks this year, undermining a pillar of support for stocks at a time of heightened volatility. Companies authorized around $122 billion in future buybacks through February…, marking a nearly 50% drop from the same period a year ago and representing the slowest pace in three years. Meanwhile, S&P Dow Jones Indices projects that the total amount of buybacks in the final three months of 2019 was down 18% compared with a year earlier, totaling around $183 billion. Companies repurchased around $730 billion of their own stock during 2019… Analysts are still projecting around $800 billion in buybacks this year…”

March 11 – Reuters (Lucia Mutikani): “U.S. consumer prices unexpectedly rose in February… The… consumer price index increased 0.1% last month, matching January’s gain, as rising food and accommodation costs offset cheaper gasoline. In the 12 months through February, the CPI rose 2.3%. That followed a 2.5% jump in January, which was the biggest year-on-year gain since October 2018.”

March 12 – Reuters: “U.S. producer prices fell by the most in five years in February, pulled down by declines in the costs of goods such as gasoline and services. The… producer price index for final demand dropped 0.6% last month, the biggest decline since January 2015, after surging 0.5% in January. In the 12 months through February, the PPI increased 1.3% after gaining 2.1% in January.”

March 10 – CNBC (Diana Olick): “Rock-bottom mortgage rates are causing a surge in mortgage refinances, so much so that the industry’s largest trade group is revising sharply higher its origination forecasts for the year. The Mortgage Bankers Association is now forecasting total mortgage originations of approximately $2.61 trillion this year — a 20.3% gain over 2019′s $2.17 trillion and a jump from last month’s forecast of $1.99 trillion.”

March 10 – Bloomberg (Jennifer Surane, Annie Massa, and John Gittelsohn): “In the throes of frantic market uncertainty, traders using Robinhood Markets Inc. faced the ultimate frustration: Their accounts kept malfunctioning. Behind the scenes, the online brokerage was already bracing for financial strains. Robinhood drew its entire $200 million credit facility from Barclays Plc, Citigroup Inc. and JPMorgan…, according to people familiar… It made the move just as fears of the coronavirus set off more than two weeks of violent market swings and heavy volume, during which Robinhood’s trading platform suffered three significant outages.”

Fixed-Income Bubble Watch:

March 10 – Washington Post (David J. Lynch): “The coronavirus panic could threaten a $10 trillion mountain of corporate debt, unleashing a cycle of layoffs and business spending cuts that would hit the economy just as some analysts are warning of a recession. Financial markets already are showing major signs of stress… The mammoth debt bulge includes a dramatic increase in borrowing by the lowest quality investment grade firms -- those rated just one level above ‘junk.’ More than $1 trillion in ‘leveraged loans,’ a type of risky bank lending to debt-laden companies, is a second potential flash point.”

March 12 – Bloomberg (Irene Garcia Perez): “Hundreds of high-risk companies in Europe need to repay or refinance nearly $100 billion in the coming months, a prospect that becomes more daunting by the day amid the relentless collapse in credit markets. From Germany’s Thyssenkrupp AG to Telecom Italia, around 600 European high-yield and non-rated bond borrowers have $92.5 billion bonds maturing by the end of 2021, a narrow window to get deals done. With investors running for the hills and the cost of raising funds soaring, that’s a big ask… One measure of high yield debt risk in Europe jumped to its highest level since 2012.”

March 12 – Bloomberg (Alex Harris and Liz McCormick): “The shortage of T-bills is about to get a whole lot worse. All along, Wall Street has been bracing for a record decline in second-quarter net issuance as the Treasury cuts supply in response to tax season and the Federal Reserve buys bills to boost reserves. But now, supply is set to get squeezed even more as the Covid-19 scare causes demand for Treasuries to soar. Money market funds in particular are rushing to lock in rates before they reach 0%, prompting strategists at JPMorgan… to say demand could outstrip supply by over $1 trillion next quarter.”

March 10 – Financial Times (Tommy Stubbington and Chloe Cornish): “Investors in Lebanon’s dollar debt are nursing big losses after the government failed to repay a $1.2bn bond due on Monday, triggering the country’s first ever sovereign default. Lebanese dollar bonds have since lost half of their value, with the March bond trading at roughly 28 cents on the dollar on Tuesday, down from 57 cents on Friday.”

March 10 – Wall Street Journal (Peter Grant and Konrad Putzier): “Hotel owners with heavy debt loads are grappling with the prospect the industry could fall into a tailspin from the spread of the coronavirus, leading to a potential uptick in defaults. The U.S. hotel industry overall had about $300 billion of mortgage debt as of the third quarter of last year, up 7.8% from a year earlier and 14.2% from two years earlier, according to… Trepp LLC. New York, Los Angeles, Las Vegas and other cities that count on foreign visitors could be especially vulnerable, analysts say. Some investors who seized on low interest rates and took out big loans could be at risk, said Neil Shah, president and chief operating officer of Hersha Hospitality Trust…”

China Watch:

March 13 – Reuters (Kevin Yao, Yawen Chen, Stella Qiu and Ryan Woo): “China’s central bank cut the cash that banks must hold as reserves on Friday for the second time this year, releasing 550 billion yuan ($79bn) to help its coronavirus-hit economy… China’s central bank has been encouraging banks to lend more to small firms and other vulnerable sectors under its inclusive financing push, and has urged lenders to extend cheap loans and tolerate late payments from companies hit by the health crisis.”

March 10 – Bloomberg: “The coronavirus epidemic is accelerating a shakeout in China’s property sector as a cash crunch forces distressed developers to throw in the towel. With lockdowns across the world’s most-populous nation entering their third month, smaller home builders are being pushed to the brink because they can’t get enough money from pre-sales of apartments to cover their costs. In the first two months of this year, around 105 real estate firms issued bankruptcy filing statements, after almost 500 collapses in 2019… ‘A vast number of mid- to small-sized developers will face a choice no one wants to make -- either sell their property assets and start another business, or be bought out,’ China Index Holdings Ltd. Research Director Huang Yu said. ‘The shakeout is just beginning.’”

March 12 – Associated Press (Joe McDonald): “China’s auto sales plunged 81.7% in February from a year ago after much of the economy was shut down to fight a virus outbreak… Sales of SUVs, sedans and minivans fell to 224,000, according to the China Association of Automobile Manufacturers. Total vehicle sales, including trucks and buses, fell 79.1% to 310,000.”

March 11 – Bloomberg: “While corporate-debt markets shut down for issuers in the U.S. and Europe for a stretch in February, with investors spooked by the economic hit from the coronavirus, China had its busiest month on record. Optimism about Chinese policy makers providing abundant liquidity and spending has helped support the country’s $4.5 trillion corporate-debt market… But leveraged borrowers, particularly in the private sector, face the same pressures that propelled two record years of defaults in 2018 and 2019. ‘Although the overall condition looks stable, there is a strong market preference towards issuances by financial institutions and public firms,’ Alicia Garcia Herrero, chief Asia Pacific economist at Natixis SA, wrote… The coronavirus shock ‘pushes private firms deeper in the mire,’ and without an improvement in market sentiment, the central bank may need to strengthen support, she said.”

March 11 – Wall Street Journal (Grace Zhu): “State-backed investors will shore up Bank of Jinzhou Co. with an injection of roughly $1.7 billion in fresh funds. The bank is one of a handful of regional lenders that have run into trouble as China’s economy cools and the government tries to crack down on financial risk-taking. Numerous banks extended credit to risky borrowers in recent years—while portraying many of them as healthy.”

March 6 – Reuters (Gabriel Crossley and Lusha Zhang): “China’s exports contracted sharply in the first two months of the year, and imports declined, as the health crisis triggered by the coronavirus outbreak caused massive disruptions to business operations, global supply chains and economic activity… Overseas shipments fell 17.2% in January-February from the same period a year earlier…, marking the steepest fall since February 2019.”

March 10 – Reuters (Kevin Yao): “China’s producer prices swung back into deflation territory in February as the coronavirus epidemic braked economic activity, raising the prospect of more policy stimulus even as consumer inflation stayed elevated on high food costs… The producer price index (PPI) fell 0.4% in the year to February…”

March 6 – Reuters (Judy Hua, Kevin Yao and Gabriel Crossley): “China’s foreign exchange reserves fell less than expected in February as the yuan weakened on fears over the fast spreading coronavirus epidemic and its severe impact on economic activity. The country’s foreign exchange reserves - the world’s largest - fell $8.779 billion in February to $3.107 trillion…”

Central Bank Watch:

March 12 – Financial Times (Martin Arnold and Tommy Stubbington): “Christine Lagarde triggered a bond market sell-off on Thursday as she launched a package of measures to alleviate the economic chaos caused by the spread of coronavirus, saying it was not the European Central Bank’s role to respond to movements in government debt markets. Her comments came after the ECB announced it would expand its quantitative easing programme with €120bn of extra bond purchases, launch a new programme of cheap loans to banks and make the rates on its existing bank lending scheme more favourable. ‘We are not here to close spreads, this is not the function or the mission of the ECB,’ said Ms Lagarde. ‘There are other tools for that and other actors to deal with those issues.’”

March 11 – Bloomberg (Fergal O'Brien): “European Central Bank President Christine Lagarde said Europe risks a major economic shock echoing the global financial crisis unless leaders act urgently on the coronavirus outbreak, and signaled that her institution will take steps as soon as Thursday. Lagarde told European Union leaders on a conference call late on Tuesday that without coordinated action Europe ‘will see a scenario that will remind many of us of the 2008 Great Financial Crisis’… With the right response, the shock will likely prove temporary, she added. Lagarde said her officials are looking at all their tools for Thursday’s policy decision, particularly measures to provide ‘super-cheap’ funding and ensure liquidity and credit don’t dry up…”

March 11 – Reuters (David Milliken and Paul Sandle): “The Bank of England slashed interest rates by half a percentage point on Wednesday and announced support for bank lending just hours before the unveiling of a budget splurge designed to stave off a recession triggered by the coronavirus outbreak. In what amounts to a choreographed double-barrelled stimulus programme, the BoE announced its unanimous emergency rate cut as London markets were opening and before Prime Minister Boris Johnson’s government sets out its spending plans after midday. Mark Carney’s parting shot as governor, which returns the main interest rate to a record low of 0.25%, comes as COVID-19, the flu-like infection caused by the virus, spreads rapidly, stoking fears of global recession and roiling markets.”

March 13 – Reuters (Wayne Cole, Stanley White, Cynthia Kim, Terje Solsvik and Johan Ahlander): “Central banks worldwide acted to shore up money markets after cratering share prices drove a rush for cash, hitting many regional currencies and threatening a surge in short-term borrowing costs. In China, which bore the brunt of the economic fallout from the coronavirus in the first few months of 2020, authorities late on Friday cut banks’ reserve requirements for the second time this year. With most developed economies now also moving into partial shutdowns as the epidemic tightens its global grip, Norway and Sweden announced far-reaching stimulus packages as European trading got under way.”

March 13 – Financial Times (Martin Arnold): “The European Central Bank’s chief economist has sought to soothe the disruption his president Christine Lagarde caused in government bond markets by saying that they ‘stand ready to do more’ to contain any sovereign debt stress. Italian government bonds suffered their biggest single-day fall for almost a decade on Thursday after Ms Lagarde said it was not the role of the ECB to ‘close the spread’ in sovereign debt markets — referring to the spread between Italian and German bond yields that is a key risk indicator for Italy. In an apparent effort to reassure investors that the ECB was not leaving Italy to fend for itself… ECB chief economist Philip Lane said in a blog…: ‘We will not tolerate any risks to the smooth transmission of our monetary policy in all jurisdictions of the euro area.’”

Europe Watch:

March 13 – Bloomberg (Birgit Jennen, Arne Delfs and Viktoria Dendrinou): “Germany pledged to spend whatever necessary to protect its economy and the European Commission said it’s ready to green light widespread fiscal stimulus for euro nations as policy makers aimed to calm the markets with a decisive response to the coronavirus. KfW, the German state bank, can lend up to 550 billion euros ($610 billion) to companies to ensure they survive the pandemic and shield their workers from its impact, Economy Minister Peter Altmaier said… Finance Minister Olaf Scholz… said Germany is prepared to take on additional debt to finance the spree and they will consider full-blown fiscal stimulus if the situation worsens. European stocks surged. ‘This is the bazooka,’ Scholz said. ‘We’re using it to do what is necessary. We’ll check later to see if we need additional smaller weapons.’”

March 7 – Bloomberg (Paul Tugwell): “The governing council of the European Central Bank has ended the limit imposed on the exposure of Greek lenders to the country’s sovereign debt, Greece’s Finance Minister said. The ECB believes that the reasons and conditions that led to the March 2015 decision no longer exist, Christos Staikouras said…, citing rising deposits, the improved macroeconomic environment, the lifting of capital controls and record low Greek financing costs.”

EM Watch:

March 8 – Bloomberg (Archana Chaudhary and Suvashree Ghosh): “India, home to one of the world’s worst piles of bad debt, once again finds itself defending the stability of its financial system after the biggest bank failure in its history. The Reserve Bank of India took to Twitter on Sunday to affirm the safety of deposits in the wake of a decision to seize Yes Bank Ltd. and invite the nation’s largest lender to make a confidence-building share purchase. It also announced an unprecedented move to permanently write down Yes Bank’s 87.8 billion rupees ($1.2bn) of additional tier 1 bonds…”

Japan Watch:

March 11 – Reuters (Leika Kihara): “The Bank of Japan may expand monetary stimulus next week by pledging to buy exchange-traded funds (ETF) faster than the current pace, if market volatility persists enough to hurt business confidence, sources familiar with its thinking said. The step will be aimed at preventing the fallout from the coronavirus and subsequent market turbulence from derailing Japan’s fragile economic recovery, the sources said.”

Leveraged Speculation Watch:

March 11 – Bloomberg (Ruth Carson): “Cratering U.S. Treasury yields may be eroding the haven quality of some of the world’s safest assets, according to a growing chorus on Wall Street. Goldman Sachs… says the coronavirus panic-driven plunge in yields makes the sovereign debt vulnerable to a correction, while BlackRock Investment Institute said Treasuries are getting weaker as protection when stocks sell off… ‘One question to ask is if nominal bonds still carry the same insurance value,” Goldman analysts Praveen Korapaty and Avisha Thakkar wrote… ‘Unless central banks show a willingness to cut deeply into negative territory, we think the answer is no, at least for the larger bond markets like the U.S., euro area and Japan.’”

March 11 – Bloomberg (Lucca De Paoli and Nishant Kumar): “H2O Asset Management suffered heavy losses of as much as 30% across its funds during Monday’s market rout, adding to severe declines that have pummeled its strategies over the past month. The Natixis SA-backed firm saw record daily drops in at least four of its money pools as coronavirus fears and an oil-price plunge rocked markets. H2O’s Multiequities fund lost about 30%, erasing about six years of gains. Its Vivace strategy slumped 26%, the Multibonds fund lost 20%, and the firm’s flagship Allegro fund fell 18%.”

Geopolitical Watch:

March 12 – Reuters (Gabriel Crossley): “A spokesman for China's Foreign Ministry suggested… the U.S. military might have brought the coronavirus to the Chinese city of Wuhan, which has been hardest hit by the outbreak, doubling down on a war of words with Washington. China has taken great offence at comments by U.S. officials accusing it of being slow to react to the virus… and of not being transparent enough. On Wednesday, U.S. National Security Adviser Robert O'Brien said the speed of China's reaction to the emergence of the coronavirus had probably cost the world two months when it could have been preparing for the outbreak. In a strongly worded tweet, written in English on his verified Twitter account, Chinese Foreign Ministry spokesman Zhao Lijian said it was the United States that lacked transparency.”

March 12 – Reuters (Gabriel Crossley): “China criticized U.S. officials for ‘immoral and irresponsible’ comments that blamed Beijing’s response to the coronavirus for worsening the global impact of the pandemic. On Wednesday, U.S. national security advisor Robert O’Brien accused China of a slow response to the initial emergence of the coronavirus, saying this had probably cost the world two months when it could have been preparing for the outbreak.”

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Saturday, March 14, 2020

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Weekly Commentary: The Loss of Moneyness