Friday, October 30, 2020

Weekly Commentary: Very Dangerous

We’re now only a few days from the most pivotal of elections. Meanwhile, new U.S. Covid infections have surged to pandemic highs (Friday surpassing 100,000 on worldometers), with the virus running rampant throughout the country. The early-winter season spike in European cases is nothing short of shocking. Across the continent, governments are being forced to move swiftly to impose restrictions and limited lockdowns.

A few data points: Daily infections in France averaged about 550 during June. They had surged to 13,970 by the first day of October. A record 52,013 infections were reported last Sunday and 49,000 on Friday. Daily Italian infections peaked at 6,557 on March 21st and then averaged below 300 for much of the summer. Infections jumped to 2,548 on October 1st and were a record 31,084 Friday. Spain has observed daily infections surge from several hundred in June to Friday’s 25,595. After beginning the month at 2,503, German cases Thursday rose to 16,774. Cases have spiked to 24,000 in Belgium, 22,000 in Poland, and 9,000 in Switzerland. In the UK, after averaging below 1,000 during the summer, new cases averaged about 25,000 over the past week.

Covid cases here at home remained highly elevated all summer. And if U.S. infections now follow Europe’s trajectory, our nation is facing a dark and challenging winter. By the look of new infection trends in the likes of Michigan, Ohio and Illinois, a worst-case scenario appears increasingly probable. This is a highly infectious virus that now permeates the entire country – cities large and small, the suburbs and rural communities.

This gloom will be compounded by about half the electorate suffering post-election dejection. Emotions are running deep - anger appears poised to boil over. There is clear potential for large nationwide protests, violence and general social strife. Our nation desperately needs to commence a healing process. Yet this seems especially improbable during the acute phase of a historic pandemic - that is proving wickedly divisive. Trump or Biden at the helm on January 20th, a precarious government lame duck session awaits.

And this week we saw the return of market instability. The S&P500 dropped 5.6%, the biggest weekly sell-off since March. The Nasdaq100 (NDX) sank 5.5%, with the beloved Wall Street darling, “growth,” “defensive,” all-everything (most Crowded Trade ever?) big technology stocks under intense selling pressure. Apple dropped 5.4% for the week, with Amazon down 5.3%, Facebook 7.6%, Tesla 7.8%, Nvidia 7.8%, Microsoft 6.4% and Zoom 9.9%.

Yet the U.S. equities sell-off was rather bland compared to the shellacking in Europe. Germany’s DAX sank 8.6%, with a two-week drop of 10.5%. France’s CAC fell 6.4%, with major indices down 7.0% in Italy and 6.4% in Spain. UK’s FTSE 100 sank 4.8%. Italian bank stocks fell 7.4%.

The European Covid spike right into U.S. elections complicates an already complex market environment. The euro dropped 1.8% this week, with the Norwegian krone down 2.9% and the Swedish krona falling 1.6%. European currency weakness supported the dollar. At risk of breaking key technical support, the dollar index reversed 1.4% higher on the week. Newfound dollar strength - in concert with Covid fears - weighed heavily on commodities markets. Crude oil was hammered $4.06, or 10%, closing the week at the low since June 1st. The precious metals suffered as well. Silver dropped 4.2%, and Platinum sank 6.4%. Gold was a relative winner, with losses limited to 1.2%.

The struggle to find decent hedges ahead of critical elections turned only more futile. First, it was U.S. equities rallying over recent weeks, as odds rose for a decisive Biden win (and, supposedly, lower odds of the ugly contested election outcome). Many likely pulled back on hedging and/or boosted equities exposure. And then equities abruptly tank just ahead of the elections, with various hedges and the safe havens malfunctioning. Some likely were long European equities as a partial hedge against U.S. election risk. The metals seemed an attractive hedge. Commodities appeared a reasonable hedge against a Democrat clean sweep. Others were positioned short the dollar heading into possible election turmoil

Covid garbled any possible message this week from currency and commodities markets. The Treasury market seemed to speak loudly and clearly: “Don’t look to me for a hedge – not with Trillions of new supply coming!” In what must be alarming to many, Treasury bond prices suffered marginal declines in the face of a potent “risk off” dynamic in equities and corporate Credit. If you can’t trust Treasuries (as a hedge), whom do you trust? The iShares long-term Treasury ETF (TLT) declined 0.3% this week. Whereas the TLT ETF surged 4.0% (Treasury yields sinking 18 bps) on the S&P500’s last major (4.8%) drop during the week of June 12th.

Ten-year Treasury yields increased three bps this week to 0.875%, the high since June 8th. Corporate Credit was under pressure. Investment-grade Credit default swap (CDS) prices (Markit CDX) surged 10 to 79 bps, the high since May. More dramatically, high-yield CDS surged 48 to 421 bps, the high going back to late-July. Ominously, junk bond funds suffered a $2.5 billion outflow over the past week. Debt deals were cancelled, including PetSmart’s chunky $4.65 billion junk offering.

Corporate Credit was not a good equities hedge. The iShares Investment-grade ETF (LQD) declined 0.7% this week, with the iShares high-yield ETF (HYG) dropping 1.2%. High-yield CDS prices were sharply higher across the board – energy, utilities, industrials, communications, financials as well as consumer discretionary.

I remain skeptical of the bullish “‘blue wave’ is great for equities” narrative. Ceteris paribus – all things being equal – perhaps massive stimulus would support the equities speculative Bubble. But there are many facets to Global Bubble Analysis. All things are not equal. “Blue wave” runaway fiscal deficits will not be viewed positively by a vulnerable bond market. In particular, a backup in yields poses a major risk to the speculative Bubble raging throughout corporate Credit. And while mounting Covid risks could be viewed supportive of an even larger “blue wave” stimulus package, a dark winter scenario would ensure festering Credit issues poison the entire market environment.

Corporate Credit exceeds even equities in terms of Bubble Markets divorced from fundamental prospects. And it’s difficult for me to believe equities can sustain their fairytale run if the corporate debt market stumbles. Of course, central to the “nothing matters but the Fed” narrative is that our central bank is standing ready to inject whatever liquidity is necessary to preserve the boom.

Bloomberg Television’s Lisa Abramowicz (October 19, 2020): “Steve Ricchiuto from Mizuho was just on and he said that if Congress were to pass a $2 TN fiscal support plan that he expects the Federal Reserve to potentially buy up all of that in order to help things along. Do you think that’s an advisable step?

Former Fed chair Janet Yellen: “So, the Federal Reserve’s asset purchases – they [the Fed] have not made clear their plans going forward. I’m expecting them to offer more guidance. But their objective there is going to be to try to keep both long and short interest-rates at low levels to support an economic recovery. It is not their objective – ever – to directly try to help the federal government finance its budget deficit. And that would be a Very Dangerous kind of support to provide. But I do expect – I think asset purchases have worked. They’re holding down longer-term rates, and I expect there to be ongoing purchases. But probably not geared to the federal deficit.

I agree it would be “Very Dangerous” to “directly try to help the federal government finance its budget deficit.” History is unequivocal on the matter. Yet Janet Yellen, Jerome Powell and other Fed officials these days face quite a challenge explaining why this is indeed the case. After all, the Fed’s balance sheet expanded from $900 billion to $4.5 TN between 2008 and 2014. I don’t recall anyone at the Fed suggesting this was “Very Dangerous.” In Yellen’s words, “asset purchases have worked.” And chiefly because of Treasury purchases, Fed assets are up about $3.0 TN in 34 weeks. Again, no one associated with the Federal Reserve is warning “Very Dangerous.”

Our nation could well be on the cusp of a historic “blue wave.” In the event of a Democrat controlled Washington, a massive fiscal spending program early in 2021 is guaranteed. And there’s a reasonably high probability for a scenario where stimulus approaches $3 TN: A tough Covid winter would see recovery succumbing to another distressing leg down for the real economy. Faltering markets would significantly worsen the crisis. If fragile debt markets buckle, a resulting tightening of financial conditions would spur downside economic risk.

The Fed could well be on the cusp of a historic predicament. They are in the throes of massive monetization. But their approximately $100 billion of monthly purchases will be woefully inadequate to sustain Bubble markets in the event of another major de-risking/deleveraging dynamic. With unprecedented Fed support, speculative Bubbles have further inflated over recent months. And now there’s the prospect of the Democrats passing a second massive stimulus package – fiscal stimulus Fed officials have been publicly endorsing.

How much of the resulting deficit does the Fed monetize? The Democrats will be infuriated if the FOMC balks at monetizing most of it. When it appears the Fed is accommodating a liberal agenda, the (newfound fiscal conservative) Republican party will be enraged. Once Covid is controlled, debt and deficits move to key issues for the 2022 mid-terms. For now, of course the equities market expects the Fed to do whatever it takes to sustain the market boom. Meanwhile, an anxious Treasury market must be thinking some market discipline pointed Washington’s way is long overdue. And if Treasury yields surprise to the upside on an announcement of larger QE Treasury purchases, the Federal Reserve’s job turns a lot tougher.

The Fed has never been transparent with QE. Specifically, in what circumstance is it appropriate? In what situations would it be inappropriate? How exactly does it operate? What are the benefits? The risks? What limits should be placed on the scope and duration of QE programs?

The Fed says QE is to lower rates and market yields. The stock market hears that QE is to bolster equities prices. The corporate Credit market hears QE is to narrow risk premiums, support issuance and ensure liquidity for the vulnerable ETF complex. Derivatives markets hear QE is to ensure liquid and continuous markets – to backstop securities markets and quell dislocation and panic. The Democrats hear that QE is to finance fiscal stimulus and programs to mitigate inequality.

The Fed was always content to play fast and loose with QE. It was supposed to be a temporary emergency measure – get in and out and there’s not a lot of explaining to do. But it somehow morphed into an instrumental, permanent policy fixture – and there remains a tremendous amount that needs to be explained. You can’t just go about creating Trillions of “money” on an impulse – allocating wealth on a whim. And in this strange new Covid world, everyone’s going to want a piece of them – of their electronic printing press – the Dems, the markets, the Republicans and the American people. What are you going to tell them?

October 28 – Bloomberg (Bill Dudley): “No central bank wants to admit that it’s out of firepower. Unfortunately, the U.S. Federal Reserve is very near that point. This means America’s future prosperity depends more than ever on the government’s spending plan… There’s always something more that the Fed can do. It can push down longer-term interest rates by buying more Treasury and mortgage-backed securities, or by committing to keep buying for a longer period of time. It can promise to keep short-term interest rates lower for longer… It can put a specified ceiling on long-term interest rates (a maneuver that economists call yield-curve control). It can even take interest rates negative (a move that Fed officials have so far rejected). But this misses a crucial point. Even if the Fed did more — much more — it would not provide much additional support to the economy.

Is the Fed almost out of firepower? Mr. Market – with both fists clinched - would blast “HERESY!” “Open-ended” QE means unlimited balance sheet expansion and unending market support. But is it really that simple? The past six months have experienced about the loosest financial conditions imaginable. Equities surged back to record highs, with the most intense speculative excess since 1999/early-2000. A booming corporate Credit market saw collapsing risk premiums and a record $1.4 TN (y-t-d) issuance.

How much speculative leverage has accumulated throughout the securities markets, especially corporate Credit? How wide is the gulf between market prices and fundamental prospects? How powerful is the derivatives time bomb? What really has the Fed accomplished with $3 TN of QE? At what risk? Have we reached the point where $3 TN buys a good six or seven months of “stability”?

If President Trump wins reelection, Joe Biden needs to offer words of support and national unity. He must appeal to his base to remain calm and resist violence. If Joe Biden wins the presidency, President Trump should respectfully concede while offering conciliatory words of tolerance and national cohesion. Our nation’s interests must be placed above his own. It is imperative that he instruct a segment of his supporters to renounce violence. The armed militias need to stand down. Now those are words I never imagined writing…

For the Week:

The S&P500 dropped 5.6% (up 1.2% y-t-d), and the Dow sank 6.5% (down 7.1%). The Utilities declined 3.5% (down 1.2%). The Banks fell 5.0% (down 32.1%), and the Broker/Dealers lost 3.1% (up 2.2%). The Transports sank 6.5% (up 1.9%). The S&P 400 Midcaps dropped 5.7% (down 7.9%), and the small cap Russell 2000 lost 6.2% (down 7.8%). The Nasdaq100 fell 5.5% (up 26.6%). The Semiconductors dropped 4.8% (up 21.4%). The Biotechs slumped 3.0% (up 2.9%). With bullion down $23, the HUI gold index declined 2.8% (up 30.0%).

Three-month Treasury bill rates ended the week at 0.085%. Two-year government yields were unchanged at 0.155% (down 141bps y-t-d). Five-year T-note yields added a basis point to 0.39% (down 131bps). Ten-year Treasury yields rose three bps to 0.875% (down 104bps). Long bond yields increased two bps to 1.66% (down 73bps). Benchmark Fannie Mae MBS yields were unchanged at 1.41% (down 130bps).

Greek 10-year yields increased a basis point to 0.93% (down 50bps y-t-d). Ten-year Portuguese yields dropped seven bps to 0.11% (down 34bps). Italian 10-year yields were unchanged at 0.76% (down 65bps). Spain's 10-year yields were down six bps to 0.14% (down 33bps). German bund yields dropped five bps to negative 0.63% (down 44bps). French yields fell four bps to negative 0.34% (down 46bps). The French to German 10-year bond spread widened one to 29 bps. U.K. 10-year gilt yields slipped two bps to 0.26% (down 56bps). U.K.'s FTSE equities index dropped 4.8% (down 26.1%).

Japan's Nikkei Equities Index declined 2.3% (down 2.9% y-t-d). Japanese 10-year "JGB" yields were unchanged at 0.04% (up 5bps y-t-d). France's CAC40 dropped 6.4% (down 23.1%). The German DAX equities index sank 8.6% (down 12.8%). Spain's IBEX 35 equities index fell 6.4% (down 32.4%). Italy's FTSE MIB index sank 7.0% (down 23.7%). EM equities were under pressure. Brazil's Bovespa index dropped 7.2% (down 18.8%), and Mexico's Bolsa fell 4.4% (down 15.1%). South Korea's Kospi index dropped 4.0% (up 3.2%). India's Sensex equities index lost 2.6% (down 4.0%). China's Shanghai Exchange declined 1.6% (up 5.7%). Turkey's Borsa Istanbul National 100 index sank 6.6% (down 2.8%). Russia's MICEX equities index dropped 4.5% (down 11.7%).

Investment-grade bond funds saw inflows of $3.317 billion, while junk bond funds posted outflows of $2.513 billion (from Lipper).

Freddie Mac 30-year fixed mortgage rates added a basis point to 2.81% (down 97bps y-o-y). Fifteen-year rates slipped a basis point to an all-time low 2.32% (down 87bps). Five-year hybrid ARM rates increased one basis point to 2.88% (down 55bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-year fixed rates down six bps to a record low 3.03% (down 108bps).

Federal Reserve Credit last week gained $14.0bn to a record $7.125 TN. Over the past year, Fed Credit expanded $3.159 TN, or 80%. Fed Credit inflated $4.314 Trillion, or 153%, over the past 416 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt last week declined $7.8bn to a four-month low $3.395 TN. "Custody holdings" were down $26.7bn, or 0.8%, y-o-y.

M2 (narrow) "money" supply expanded $19.8bn last week to a record $18.815 TN, with an unprecedented 34-week gain of $3.308 TN. "Narrow money" surged $3.616 TN, or 23.8%, over the past year. For the week, Currency increased $4.3bn. Total Checkable Deposits dropped $62.4bn, while Savings Deposits surged $82.1bn. Small Time Deposits fell $6.6bn. Retail Money Funds added $2.4bn.

Total money market fund assets declined $7.4bn to $4.348 TN. Total money funds surged $835bn y-o-y, or 23.8%.

Total Commercial Paper was little changed at $974bn. CP was down $140bn, or 12.5% year-over-year.

Currency Watch:

For the week, the U.S. dollar index rallied 1.4% to 94.038 (down 2.6% y-t-d). For the week on the upside, the Japanese yen increased 0.1%. For the week on the downside, the Norwegian krone declined 3.1%, the Brazilian real 2.2%, the euro 1.8%, the Swedish krona 1.7%, the Australian dollar 1.6%, the Canadian dollar 1.5%, the Mexican peso 1.5%, the Swiss franc 1.4%, the New Zealand dollar 1.1%, the British pound 0.7%, the Singapore dollar 0.6%, the South African rand 0.4%, and the South Korean won 0.2%. The Chinese renminbi declined 0.07% versus the dollar this week (up 4.06% y-t-d).

Commodities Watch:

The Bloomberg Commodities Index declined 2.3% (down 11.2% y-t-d). Spot Gold fell 1.2% to $1,879 (up 23.8%). Silver sank 4.2% to $23.646 (up 31.9%). WTI crude was clobbered $4.06 to $35.79 (down 41%). Gasoline sank 9.4% (down 39%), while Natural Gas surged 12.9% (up 24%). Copper declined 2.6% (up 9%). Wheat sank 5.4% (up 7%). Corn dropped 4.9% (up 3%).

Coronavirus Watch:

October 29 – CNN: “Populists who call coronavirus harmless are ‘dangerous and irresponsible,’ German Chancellor Angela Merkel said…, adding that disinformation damages the fight against coronavirus… ‘Lies and disinformation, conspiracy, and hatred damage not only the democratic debate, but also the fight against the virus… It is only with solidarity and transparency that we will be able to confront the pandemic."

October 26 – Wall Street Journal (Stacy Meichtry, Joanna Sugden and Andrew Barnett): “From the corridors of Washington to the cobblestones of Paris, the coronavirus is roaring back and authorities are ramping up restrictions again. This time around, however, everyone is tired. Hospital staff world-wide are demoralized after seven months of virus-fighting triage. The wartime rhetoric that world leaders initially used to rally support is gone. Family members who willingly sealed themselves off during spring lockdowns are suddenly finding it hard to resist the urge to reunite… The collective exhaustion—known as pandemic fatigue—has emerged as a formidable adversary for governments that are counting on a high degree of public cooperation... Too much pandemic fatigue, authorities say, can fuel a vicious cycle: A tired public tends to let its guard down, triggering more infections and restrictions that in turn compound the fatigue.”

October 28 – CNBC (Berkeley Lovelace Jr.): “White House coronavirus advisor Dr. Anthony Fauci said… that the United States is in a ‘bad position’ as coronavirus cases and hospitalizations surge in many parts of the nation. Fauci said the U.S. never got its Covid-19 cases down to low enough levels after the initial surge in New York and other states earlier in the year. New cases had hit a peak in April of about 31,000 a day before steadily falling to about 20,000 cases a day by the end of May… They surged again and are now reaching record levels, Fauci said. ‘That’s a bad position to be in,’ the director of the National Institute of Allergy and Infectious Diseases said… ‘When you look at the country and the heat map color, when you see red dots, which indicate that that part of the county, the city, the city is having an uptick in cases ... all of that puts us in a precarious situation.’ ‘We should have been way down in baseline and daily cases and we’re not,’ he said.”

October 26 – Bloomberg (Jonathan Levin): “The record Covid-19 spike that started with young Americans is increasingly finding older communities at elevated risk of severe illness. Counties with the largest 65-and-over populations are now recording on average 18.9 daily cases per 100,000 residents, 67% higher than a month ago, according to… the U.S. Centers for Disease Control and Prevention.”

October 28 – Associated Press (Todd Richmond, Frank Jordans and John O’Connor): “A new wave of lockdowns and business closings swept across France, Germany and other places in Europe… as surging coronavirus infections there and in the U.S. wipe out months of progress against the scourge on two continents… French President Emmanuel Macron declared a new nationwide lockdown starting Friday, saying the country has been ‘overpowered by a second wave.’ …In Germany, Chancellor Angela Merkel announced a four-week shutdown of bars, restaurants and theaters. ‘We must act, and now, to avoid an acute national health emergency,’ she said. Countries such as Switzerland, Italy, Bulgaria and Greece have closed or otherwise clamped down again on nightspots and imposed other restrictions such as curfews and mandatory mask-wearing. Madrid and other parts of Spain banned all but essential travel in and out of their regions.”

October 25 – Financial Times (Miles Johnson and Daniel Dombey): “The governments of Italy and Spain, the European countries hardest hit by the first wave of the coronavirus pandemic, announced sweeping measures… to combat a surge in the number of new cases. Italy said it would introduce the harshest public health restrictions since the end of its first national lockdown in May as new coronavirus cases hit a fresh daily record. Spain announced a nationwide curfew and triggered emergency powers after the country’s infection rate jumped by almost a third over the past week.”

October 27 – Wall Street Journal (Noemie Bisserbe): “France has emerged as the epicenter of the second wave of coronavirus infections now sweeping much of Europe, causing hospitals to brace for a surge of new patients and pushing the government to consider tough new restrictions in some places. The country saw daily cases top 50,000 over the weekend, while the seven-day average of new daily cases has increased by more than 50% over the past week, reaching 38,278 on Tuesday.”

October 29 – Bloomberg (Rudy Ruitenberg): “France is aiming to limit the drop in economic activity to 15% during the country’s second coronavirus lockdown starting on Friday, Finance Minister Bruno Le Maire said… That would be half of the 30% drop in activity during the country’s first lockdown…”

October 30 – Reuters (Alistair Smout): “New COVID-19 cases in England increased by around 51,900 each day last week, up nearly 50% on the week before, an official survey said on Friday, suggesting that the incidence of new infections was still rising steeply and had not levelled off.”

October 26 – Reuters (Guy Faulconbridge, Kate Kelland and Kate Holton): “One of the world’s leading COVID-19 experimental vaccines produces an immune response in both young and old adults, raising hopes of a path out of the gloom and economic destruction wrought by the novel coronavirus.”

October 26 – Wall Street Journal (Stephen Fidler): “A large English study showed the number of people with Covid-19 antibodies declined significantly over the summer, suggesting that getting the virus might not confer long-lasting immunity from future infection. The survey of 365,000 adults in England who tested themselves at home using a finger-prick test showed the proportion of people testing positive for Covid-19 antibodies declined by 26.5% between June 20—12 weeks after the peak of infections in the country—and Sept. 28. The results also suggested that people who didn’t display symptoms were likely to lose detectable antibodies before those who had showed symptoms.”

Market Instability Watch:

October 29 – Bloomberg (Ilya Banares): “U.S. high-yield bond funds suffered the biggest outflows since the end of September, as investors sought to limit their risk exposure amid growing coronavirus infections across the world and ahead of the upcoming U.S. election. High-yield investors pulled $2.5 billion out of retail funds during the week ended Oct. 28, according to… Refinitiv Lipper.”

October 23 – Financial Times (Michael Mackenzie): “Those with long memories of the credit woes that typified recessions since the early 1990s are living in a topsy-turvy world thanks to the dramatic actions of central banks in March. A highly uncertain future for the economy and companies should prompt risk aversion among investors in the world of credit, whereby low prices and higher yields prevail for some time. Instead, credit markets are now telling a very different story. An important measure of how investors view the debt of companies comes from comparing their usually higher borrowing costs with those of the US government. This gap has narrowed sharply from March levels for US investment-grade and high-yield debt and it is not far from the pre-pandemic levels of February. ‘Everything has been turned on its head,’ observed Matt King, global head of credit strategy at Citigroup. Rather than focus on fundamentals, investors ‘spend their time looking at central bank liquidity’ and the level of inflation-adjusted Treasury yields for guidance.”

Global Bubble Watch:

October 29 – Financial Times (Tommy Stubbington and Martin Arnold): “Investors will not have to contribute a single euro to finance the vast budget deficits of eurozone governments next year, according to analysts who forecast that the European Central Bank will buy a greater quantity of debt than all the new bonds hitting the market. Draft budget plans published by EU member states earlier this month showed that deficits are expected to remain sky high even as economies rebound from the effects of the Covid-19 pandemic. But, according to calculations by Citigroup, ECB purchases will more than cover the extra cash that governments need in 2021 — even if the central bank does not scale up its €1.35tn emergency bond-buying programme by another €500bn in December as is widely expected.”

October 28 – Financial Times (Dambisa Moyo): “A critical issue policymakers need to address urgently is the amount of debt plaguing the UK, the US and the global economy, and the impact the growing status of China as creditor to both the west and the developing world will have on that. The IMF and World Bank have urged economies to access financial markets to borrow high during the pandemic. Kristalina Georgieva, head of the IMF, has said, ‘Only one thing matters — to be able to dare’. But the debt picture is precarious. The global debt to gross domestic product ratio is unsustainable, at over 320%. Perhaps more worrying is that China’s role as a creditor now means debt concerns are not just economic, but also geopolitical. China is one of the top lenders to the US — which gives the country’s political class enormous leverage — and also now the largest lender to emerging economies.”

October 26 – Reuters (Marc Jones): “Dollar-denominated debt in emerging markets has risen past $4 trillion for the first time following a surge in issuance during the COVID-19 crisis, data from the Bank for International Settlements (BIS) has shown. The central bank umbrella group said a 14% jump in debt issuance during the April to June second quarter had driven a 7% year-on-year increase in broader dollar-denominated credit… Consistent with the past few quarters, credit to Africa and the Middle East registered the highest growth rate at 14%... Emerging Asia-Pacific and Latin America saw 9% and 5% respective year-on-year increases. In contrast, emerging Europe saw a 5% fall, extending the decline seen over the past six years as euro-denominated credit has become more important for the region.”

Trump Administration Watch:

October 29 – Reuters (Tim Ahmann): “President Donald Trump’s chief economic adviser said on Thursday that any deal on coronavirus relief legislation would have to wait for now as he accused U.S. House Speaker Nancy Pelosi of ‘stringing’ the administration along and refusing to compromise. ‘She is stringing us along,’ Trump adviser Larry Kudlow told Fox News... ‘They showed no evidence of compromising on the very key issues. So, we’ll perhaps have to wait.’”

October 27 – Reuters (Steve Holland, Doina Chiacu, Susan Heavey and Patricia Zengerle): “President Donald Trump acknowledged… that a coronavirus economic relief deal would likely come after the Nov. 3 election… ‘After the election we’ll get the best stimulus package you’ve ever seen,’ Trump told reporters… Trump and House of Representatives Speaker Nancy Pelosi have traded blame for the impasse over another large stimulus package worth around $2 trillion to help Americans weather the pandemic. ‘We’ll always talk about it because our people should get it, the stimulus, but Nancy Pelosi is only interested in bailing out badly run, crime-ridden Democrat cities and states,’ Trump said.”

October 27 – Bloomberg (Erik Wasson and Billy House): “President Donald Trump and his aides… appeared resigned to waiting until after the election to get a coronavirus stimulus package and put blame on House Speaker Nancy Pelosi for the delay. ‘After the election we’ll get the best stimulus package you’ve ever seen,’ Trump told reporters. The speaker responded… that ‘the president’s words only have meaning if he can get Mitch McConnell to take his hand off the pause button,’ referring to the Senate majority leader’s reluctance to embrace a larger-scale relief bill.”

October 26 – Reuters (Sanjeev Miglani, Neha Arora, Devjyot Ghoshal and Alasdair Pal and Yew Lun Tian): “The United States and India signed a pact to share sensitive satellite and map data… as U.S. Secretary of State Mike Pompeo warned of the threat posed by an increasingly assertive China. Pompeo… said after talks with their Indian counterparts that the two countries had to work together to confront the threat China posed to security and freedom… ‘Big things are happening as our democracies align to better protect the citizens of our two countries and indeed, of the free world,’ Pompeo told reporters after the talks with Indian Foreign Minister Subrahmanyam Jaishankar and Defence Minister Rajnath Singh.”

October 30 – Bloomberg (Ben Steverman): “The numbers don’t lie: We are living in the Billionaire Age. Four years ago, America elected its first billionaire president. Since then, the nation’s 200-or-so wealthiest people -- a cohort representing 0.00006% of the population – have increased their combined wealth by a staggering $1 trillion. Now, in a moment of peril, a polarized nation is voting again. The outcome will not only determine America’s future, but also the arc of the country’s largest fortunes.”

U.S. Bubble Watch:

October 28 – Reuters (Jonnelle Marte): “Whether it’s President Donald Trump or Democratic challenger and former Vice President Joe Biden, the reality is grim: about half of the 22 million who lost their jobs during the pandemic are still out of work. New hiring is slowing, dimming prospects for the low-wage workers hit hardest by job losses. Infections of the virus that killed more than 225,000 Americans are rising to new records. Hotels, transportation companies and food providers warn that more layoffs are coming, and the government aid that helped many pay the bills is long gone. Securing a future for a vast, growing underclass ‘is the most important challenge America faces over the next few years, 10 years, 20 years,’ said Gene Ludwig, a former comptroller of the currency… The winner of the race for the White House will face a generation of low-to-middle income Americans struggling to get back to work because of a health crisis not seen in more than 100 years.”

October 28 – Wall Street Journal (Heather Gillers and Gunjan Banerji): “U.S. states are facing their biggest cash crisis since the Great Depression. Nationwide, the U.S. state budget shortfall from 2020 through 2022 could amount to about $434 billion, according to… Moody’s Analytics… The estimates assume no additional fiscal stimulus from Washington, further coronavirus-fueled restrictions on business and travel, and extra costs for Medicaid amid high unemployment… Deficits have already prompted tax hikes and cuts to education, corrections and parks. State workers are being laid off and are taking pay cuts, and the retirement benefits for police, firefighters, teachers and other government workers are under more pressure.”

October 28 – New York Times (Tara Siegel Bernard): “Social Security has always seemed like a future problem, with experts long predicting a benefits squeeze in the decades ahead. But the coronavirus has put tens of millions of Americans out of work, and economists are predicting that the recovery will take years. That means the future is now. If nothing is done to shore up the program, all benefit checks will need to be cut by roughly one-quarter in perhaps 11 years — or, if the recession is protracted and severe, maybe even sooner. ‘We thought we had more than a decade, and now it could be less than a decade,’ said Kathleen Romig, a senior policy analyst at the Center on Budget and Policy Priorities. ‘That makes a big difference both psychologically and in policy terms.’”

October 27 – CNBC (Greg Iacurci): “Millions of jobless Americans are poised to lose their unemployment benefits at the end of the year without action from Congress to extend temporary aid programs. A federal program paying benefits to gig workers and others (such as the self-employed, freelancers, contractors and part-timers) is poised to lapse after December, as is one paying extra relief to workers who’ve exhausted their standard state benefit. In all, there are about 13.5 million people in these two programs — more than half of the roughly 23 million people receiving unemployment benefits… ‘There’s going to be an enormous cliff at the end of the year,’ Stephen Wandner, a labor economist and senior fellow at the National Academy of Social Insurance, said…”

October 28 – Associated Press (Christopher Rugaber): “Americans may feel whiplashed by a report Thursday on the economy’s growth this summer, when an explosive rebound followed an epic collapse. The government will likely estimate that the economy grew faster on an annualized basis last quarter than in any such period since record-keeping began in 1947. Just be forewarned: The sizzling pace won’t last. The economy is weakening and facing renewed threats. Confirmed viral cases are surging. Hiring has sagged. Government stimulus has run out. And even last quarter’s outsize growth will leave the economy far below its level before the pandemic struck in March.”

October 27 – Wall Street Journal (Will Parker): “Fallout from missed rent payments is threatening a swath of the U.S. population, as the expiration of eviction bans draws near. A large number of renters have been unable to pay some or even all of their rent since March… Many businesses remain closed or only partially open, pushing renters into unemployment and draining their savings. Federal and local eviction moratoriums have protected many of them from losing their homes if they missed payments during the pandemic. But the national eviction ban and some state and city protections are set to expire by January or sooner. Renters then will be on the hook for months of missed payments, which even those who have jobs could struggle to pay.”

October 27 – Wall Street Journal (Esther Fung): “More lenders are starting to deliver a stern new message to delinquent mall owners: time to pay up. During the early months of the pandemic, lenders were willing to allow rent deferrals and offer other concessions to retail property owners. Retail cash flow would return once the initial lockdown period passed, lenders figured. But the pandemic has accelerated store closures. In a big blow to dozens of malls, Lord & Taylor filed for bankruptcy in August and will close all 38 of its stores. Now, as many landlords continue to struggle and miss payments, some banks and other lenders think it is time to start cracking down.”

October 28 – Reuters (Lucia Mutikani): “The United States’ trade deficit in goods narrowed sharply in September as exports increased, sealing expectations for record economic growth in the third quarter. The goods trade deficit decreased 4.5% to $79.4 billion last month… Exports of goods rose $3.2 billion, while in imports fell $0.5 billion.”

October 29 – CNBC (Jeff Cox): “Coming off the worst quarter in history, the U.S. economy grew at its fastest pace ever in the third quarter as a nation battered by an unprecedented pandemic started to put itself back together… Third-quarter gross domestic product, a measure of the total goods and services produced in the July-to-September period, expanded at a 33.1% annualized pace… The gain came after a 31.4% plunge in the second quarter…”

October 29 – CNBC (Fred Imbert): “The number of first-time unemployment-benefits filers fell to the lowest level in the pandemic, declining for a second straight week… Initial weekly U.S. jobless claims came in at 751,000 for the week ending Oct. 24, down 40,000 from the previous week… It was the lowest initial claims total since the week of March 14, when they came in at 282,000.”

October 27 – CNBC (Diana Olick): “Strong demand and a limited supply of homes have caused home price gains to accelerate dramatically. Prices beat expectations, rising 5.7% annually in August, up from 4.8% in July, according to the S&P CoreLogic Case-Shiller National Home Price Index. The 10-City Composite posted a 4.7% gain, up from 3.5% in the previous month. The 20-City Composite rose 5.2% year-over-year, up from 4.1% in July… All 19 cities for which data was reported rose monthly and annually, with all 19 seeing larger annual gains than in July.”

October 26 – Reuters (Lucia Mutikani): “Sales of new U.S. single-family homes unexpectedly fell in September after four straight monthly increases, but the housing market remains supported by record low mortgage rates and demand for more space as the COVID-19 pandemic drags on… New home sales fell 3.5% to a seasonally adjusted annual rate of 959,000 units last month. August’s sales pace was revised down to 994,000 units from the previously reported 1.011 million units… New home sales surged 32.1% year-on-year.”

October 27 – Reuters (Lucia Mutikani): “New orders for key U.S.-made capital goods increased to six-year high in September, wrapping up a quarter of potentially record growth in business spending and the economy, thanks to fiscal stimulus aimed at softening the blow from the COVID-19 pandemic.

October 28 – Bloomberg (Michelle Kaske): “The New York City region is at risk of losing an estimated $65 billion in gross domestic product annually if the federal government fails to allocate billions in aid to the Metropolitan Transportation Authority, according a report… Without help from Washington, the nation’s largest public transit agency will have to drastically curtail services and lay off staff. That would reverberate through the New York City regional economy, potentially costing 450,000 jobs by 2022 and a $50 billion yearly loss in earnings in addition to the GDP blow, Pat Foye, MTA’s chief executive officer, said…”

Fixed Income Watch:

October 26 – Bloomberg (Jeremy Hill and Max Reyes): “Three cents. Two cents. Even a mere 0.125 cents on the dollar. More and more, these are the kinds of scraps that bondholders are fighting over as companies go belly up. Bankruptcy filings are surging due to the economic fallout of Covid-19, and many lenders are coming to the realization that their claims are almost completely worthless. Instead of recouping, say, 40 cents for every dollar owed, as has been the norm for years, unsecured creditors now face the unenviable prospect of walking away with just pennies -- if that. While few could have foreseen the pandemic’s toll on the economy, the depth of investors’ pain from corporate distress was all too predictable.”

October 26 – Wall Street Journal (Sam Goldfarb): “Fewer major U.S. companies are defaulting on their debt than investors feared just months ago, a boost to corporate bond prices and an encouraging sign for the U.S. economy. At the end of September, the trailing 12-month default rate for U.S. corporate issuers of speculative-grade bonds and loans was 8.5%, according to Moody’s Investors Service. That was below the 11.2% rate that Moody’s had forecast in early April and a decline from the previous month’s rate of 8.7%.”

China Watch:

October 26 – Associated Press (Joe McDonald): “Chinese leaders met Monday to formulate an economic blueprint for the next five years that is expected to emphasize development of semiconductors and other technology at a time when Washington is cutting off access to U.S. technology. President Xi Jinping’s government is working to promote self-sustaining growth supported by domestic consumer spending and technology development as tensions with trading partners hamper access to export markets and technology. The ruling Communist Party wants Chinese industry to rely on domestic suppliers and consumers, a strategy it calls ‘dual circulation.’ Economists warn that while this might help to reduce disruption of trade disputes with the United States and other partners, it will raise costs and hurt productivity.”

October 29 – Bloomberg: “China unveiled the first glimpses of its economic plans for the next five years, promising to build the nation into a technological powerhouse as it emphasized quality growth over speed. Initial details… stressed the need for sustainable growth and also pledged to develop a robust domestic market… The new plan elevated China’s self-reliance in technology into a national strategic pillar, a move signaled by officials from President Xi Jinping down in the lead up to the meeting. Central to that endeavor is self-reliance in chips, the building blocks for innovations from artificial intelligence to fifth-generation networking and autonomous vehicles.”

October 29 – Reuters: “China will promote Taiwan’s reunification with the mainland and peaceful cross-straits development, according to a meeting of the leadership of China’s ruling Communist Party. China will also maintain the long-term prosperity and stability of Hong Kong and Macau, said a meeting of the Central Committee, the biggest of the ruling Communist Party’s elite decision-making bodies…”

October 27 – Bloomberg: “China’s economic recovery displayed mixed signals while remaining broadly steady in October, with small businesses turning more cautious and the property market weakening even as car sales soar. The aggregate index combining eight early indicators tracked by Bloomberg was unchanged from the previous month. Small business confidence eased in October, with sub-indices weakening across the board, according to Standard Chartered Plc, which surveys more than 500 smaller firms each month.”

October 27 – CNBC (Evelyn Cheng): “Chinese companies are piling into what they see as a window of opportunity to raise billions from global stock markets… Just take Alibaba-affiliated fintech giant Ant Group, which is set to launch its long-awaited, massive initial public offering… The dual listing on the Hong Kong Stock Exchange and Shanghai’s STAR board is slated to surpass the record $29.4 billion float by oil giant Saudi Aramco almost a year ago… One-fifth of global public listings in the first nine months of this year, or 180 of them, took place on the Shanghai Stock Exchange, according to… Ernst & Young… That made Shanghai the top market, surpassing second-place Nasdaq’s 119 deals. Add in 115 IPOs in Shenzhen and 99 in Hong Kong, and greater China stock exchanges accounted for 45% of global IPOs in the first three quarters of the year…”

October 27 – Bloomberg: “To understand why some of China Evergrande Group’s strategic investors agreed to throw the embattled developer a $13 billion lifeline last month, look no further than their own sources of revenue. Interior decorator Grandland Group Holdings Co.’s listed unit gets almost 58% of its sales from Evergrande. Hangzhou Robam Appliances’s sales jumped after deepening its cooperation with Evergrande. And the developer has been the largest source of revenue for door maker Beijing Jiayu over the last four years… With such strong ties to the indebted real estate firm, many suppliers agreed to waive their rights to a combined $13 billion repayment just five days after Evergrande became embroiled in a crisis of confidence.”

October 29 – Bloomberg (Jeanny Yu and John Cheng): “Chen Wu frantically clicked the order button on his online brokerage account as the clock struck noon. Like thousands of individual investors in Hong Kong and across China, the 35-year-old software developer was desperate for a piece of Ant Group Co.’s initial public offering. His brokerage was allowing a small number of clients to supercharge their bets on Ant using 33 times leverage, and the offer was only available on a first-come, first-served basis. Wu had to act fast… Brokers in Hong Kong say the IPO is generating unprecedented client interest… Bids for the retail portion of Ant’s concurrent listing in Shanghai totaled a record 19.05 trillion yuan ($2.8 trillion) on Thursday, exceeding supply by more than 870 times.”

October 26 – Bloomberg: “China will impose unspecified sanctions on Boeing Co.’s defense unit, Lockheed Martin Corp. and Raytheon Technologies Corp. after the U.S. State Department approved $1.8 billion in arms sales to Taiwan last week. The sanctions will be imposed ‘in order to uphold national interests,’ Chinese Foreign Ministry spokesman Zhao Lijian told reporters…”

October 30 – Bloomberg: “Evergrande Real Estate’s 6.98% 4.5b yuan bond sank to the lowest level in a month… The local note dropped 4.4% to 86 yuan…”

Central Bank Watch:

October 29 – Bloomberg (Piotr Skolimowski): “The European Central Bank gave a strong indication that it will likely boost its emergency bond-buying program to stabilize the euro-area economy after governments imposed a spate of new restrictions to control the coronavirus. For now, the Governing Council held its pandemic bond-buying program at 1.35 trillion euros ($1.6 trillion), reiterating that it will run until at least June 2021 and won’t be stopped until the ‘crisis phase’ of the pandemic is past. The ECB’s deposit rate stayed at -0.5%.”

October 29 – Reuters (Tim Ahmann): “Money-printing at the world’s biggest central banks has slowed to a tenth of the rate seen in April, putting the onus on governments to spend more as a resurgent COVID-19 pandemic threatens to again freeze economic activity. The European Central Bank… left policy unchanged while providing the clearest hint yet that more stimulus was on its way… The Bank of Japan on Thursday signaled that it had delivered enough stimulus for the time being. The ECB, the U.S. Federal Reserve, Bank of England and Bank of Japan, grew their balance sheets by just $125 billion last month… That was a third of August levels of $363 billion, and well off April’s $1.89 trillion peak.”

October 27 – Bloomberg (Cagan Koc): “Turkish central bank Governor Murat Uysal is expected to revise inflation forecasts upward after a series of surprise interest-rate decisions failed to bolster a lira weakened by policy steps and international spats. With the currency hitting record lows, Uysal is contending with a pickup in price pressures… The monetary authority in July projected inflation would end this year at 8.9% and 2021 at 6.2%.”

EM Watch:

October 26 – Financial Times (Michael Stott): “Often dubbed the ‘Switzerland of central America’, Costa Rica is a beacon of relative peace and prosperity in the troubled neighbourhood of Central America. Well-heeled ecotourists enjoy its abundant tropical rainforests and rich biodiversity. Even coronavirus, which ravaged most of Latin America, was initially under control there. But last month, Costa Rica erupted into weeks of violent clashes between police and protesters. The reason for the trouble? Short of cash to cover a yawning budget deficit, President Carlos Alvarado was attempting to negotiate a $1.75bn IMF loan. His plans involved temporary tax rises, the sale of state assets and pay freezes for public sector workers.”

October 30 – Bloomberg (Mario Sergio Lima): “Brazil’s unemployment rose for the eighth straight month to a record high as the end of anti-virus lockdowns lures droves of job seekers back to the labor market. The jobless rate rose to 14.4% in the three months through August…”

Europe Watch:

October 27 – Financial Times (Martin Arnold): “Banks are pulling back from lending to European businesses and households as they braced themselves for a rise in bad loans due to the economic impact of the pandemic, a European Central Bank survey has shown. The ECB’s quarterly survey of banks found ‘a tightening of credit standards on loans to firms in the third quarter of 2020 indicating credit risk considerations due to the coronavirus pandemic’. Banks told the ECB they expected ‘credit standards for enterprises to tighten further, reflecting concerns around the recovery as some sectors remain vulnerable as well as uncertainties around the prolongation of fiscal support measures’.”

October 26 – Reuters (Crispian Balmer): “Protests flared across Italy… against a new round of government restrictions aimed at curbing a resurgent coronavirus, with violence reported in at least two major northern cities, Milan and Turin.”

Leveraged Speculation Watch:

October 25 – Bloomberg (Nishant Kumar): “Investors have thronged the largest hedge funds since the last financial crisis as they sought safety in size. Now, they’re paying a hefty price. Supersized funds are failing their clients during a period of market upheaval that in theory should pose an unprecedented chance to make money. Instead of profiting, though, some of the world’s biggest hedge funds have barely managed to protect their investors from losses. A Hedge Fund Research gauge that gives more weight to larger players was down 4.4% this year through September, while all hedge funds on average managed to eke out a small profit. Gold-plated names that have slumped include Bridgewater Associates, quant powerhouses Renaissance Technologies and Winton, Michael Hintze’s CQS and Lansdowne Partners.”

October 28 – Bloomberg (Hema Parmar, Katia Porzecanski, and Annie Massa): “For hedge fund managers, preparations for chaos in the U.S. elections are giving way to strategies to capitalize on a sweeping Democratic victory. Just six days away from final voting, several top funds see former Vice President Joe Biden winning the presidency as well as the possibility of a so-called blue wave in which Republicans also lose control of the Senate. Asset managers UBS O’Connor, Harvest Volatility Management and MKP Capital Management -- with a total of more than $12 billion in assets -- say the odds are that President Donald Trump will be unseated, and they have embraced an array of strategies from buying value stocks to betting on commodities to cash in on the outcome.”

October 27 – Reuters (Svea Herbst-Bayliss): “Technology stocks, which have surged for months during the pandemic, likely hit their top last month, hedge fund investor David Einhorn wrote… Einhorn, who runs Greenlight Capital, wrote in a letter ‘we are in the midst of an enormous tech bubble,’ but noted “September 2, 2020 was the top and the bubble has already popped.’”

Geopolitical Watch:

October 27 – Bloomberg (Ben Bartenstein): “Relations between the world’s two largest economies will deteriorate further no matter who wins the U.S. presidential election, according to Ian Bremmer, who heads the risk consultant Eurasia Group. The… political scientist said U.S. criticism of Beijing’s detention of Uighurs as well as disagreements over Hong Kong, Taiwan, the South China Sea, intellectual property, trade and technology will escalate under the administrations of Joe Biden or President Donald Trump. ‘There will be an enormous amount of confrontation and no trust between the U.S. and China, even if Biden becomes president,’ Bremmer said…”

October 27 – Financial Times (Amy Kazmin): “After 20 Indian soldiers were killed in a skirmish with Chinese troops along the Himalayan border this summer, New Delhi quietly dispatched a frontline warship on an unusual voyage to the South China Sea. Little was revealed publicly about the vessel or its mission. But Indian security analysts saw its unexpected presence in the heavily disputed waters as a clear warning to Beijing… ‘The message was: Don’t mess in my backyard or otherwise I’ll mess in your backyard,’ said Nitin Pai, director of the Takshashila Institution…”

October 26 – Reuters (Christian Lowe and Tuvan Gumrukcu): “Turkish leader Tayyip Erdogan asked his compatriots to stop buying French goods… in the latest expression of anger in the Muslim world over images being displayed in France of the Prophet Mohammad, which some Muslims consider blasphemous.”

Friday Evening Links

[Reuters] Tech slide, pandemic surge slam Wall Street, biggest weekly loss since March 

[Reuters] Wall Street 'fear gauge' logs largest weekly gain in about 4 months

[AP] State leaders facing 2nd wave resist steps to curb virus

[CNBC] Coronavirus live updates: U.S. tops 9 million cases as Trump, McConnell and Pelosi torn on relief timeline

[CNBC] Covid cases in the U.S. are ‘extremely high and quite unacceptable’ ahead of the winter, Fauci says

[NYT] Boarded-Up Windows and Increased Security: Retailers Brace for the Election

[FT] Europe imposes more shutdowns as Covid-19 cases rise

[FT] Covid infections exceed ‘worst-case scenario’, say UK scientists

Friday Afternoon Links

[Reuters] Tech slide hits Wall Street as coronavirus cases spiral

[Reuters] European shares slide on the week as lockdowns dull recovery hopes

[Yahoo/Bloomberg] Gold Trims Monthly Loss With Dollar Steady Ahead of U.S. Vote

[Reuters] Days before election, economic data reveals gradual improvement, gloomy outlook

[Reuters] U.S. Senate leader says coronavirus aid bill should advance in early 2021

[CNBC] Coronavirus live updates: U.S. reports record daily cases as experts warn of exponential growth

[Reuters] Why the U.S. military would welcome a decisive 2020 election win

[Yahoo/Bloomberg] Long and Wrong? The Election Wild Cards That May Stump Investors

[Reuters] Mom-and-pop investors bid record $3 trillion for Ant Group's IPO

[Bloomberg] Henry Kravis Says the Market Is Wilder Than at Any Time in His Career

[FT] Trump vs Biden: essential reading

[FT] Europe imposes more shutdowns as Covid-19 cases rise