Sometimes there are sellers standing by to capitalize on year end buying. Occasionally, markets are susceptible to pent up selling pressure. There are managers anxious to make portfolio adjustments, yet they prefer to avoid year-end sales that would impact annual performance numbers. The hope is for a peaceful holiday market price mark-up that pushes out portfolio adjustments early into the new year. It’s a tenuous peace. A surprise market downdraft forces players off the fence, sparking an earlier-than-expected start to portfolio changes.
The Nasdaq100 was hit 1.4% in Friday trading. At least for a session, “magnificent” was a misnomer, with the tech darlings down 2 to 3% at intraday lows. By the close, Nvidia had dropped 2.1%, Microsoft 1.7%, Netflix 1.8%, Alphabet 1.6%, Amazon 1.5%, Apple 1.3%, and Meta Platforms 0.6%. Wall Street favorite MicroStrategy fell 3.2%, reducing y-t-d gains to 422%. Tesla sank 5.0% during the session, trimming Q4 gains to 65.0% (lagging only United Airlines in the S&P500).
I’ll double-down on last week’s CBB thesis that instability has made its initial leap from the “Periphery” to the “Core” – a rather inconvenient development for an exuberant marketplace primed for a year-end rally, followed by an even more pleasurable “January effect.” Festering instability – “periphery” and “core” – risks upsetting a lot of strategies, plans and dreams.
Russia’s ruble was slammed 4.5% in volatile Friday trading. For the week, South Africa’s rand dropped 2.0%, Brazil’s real 1.7%, South Korea’s won 1.6%, Russia’s ruble 1.2%, and the Mexico's peso 1.3%. Chunky month-to-date losses include South Korea (5.0%), South Africa (3.3%), Indonesia (2.4%), Chile (2.0%) and Argentina (1.8%). Brazil’s real has dropped 3.6% so far this month, boosting 2024 losses to 21.6%.
No waning of crisis dynamics in Brazil. The country’s 10-year (local currency) yields jumped another 27 bps Friday to 15.16%. Yields surged 96 bps this week, boosting the month-to-date rise to 165 bps – while trading above 15% for the first time since February 2016. Brazilian dollar bond yields rose eight bps this week to 7.09%, up 75 bps month-to-date to the high since October 2023 (approaching highs since 2006). Brazil’s Ibovespa Equities Index fell 1.5% (down 10.4% y-t-d) to a six-month low. The country's sovereign CDS jumped five Friday and 14 for the week to 211 bps (began the year at 132 and December at 163bps).
December 24 – Bloomberg (Oscar Medina): “Colombia and Brazil are both run by leftist presidents with ambitious social agendas. Now the neighboring Latin American nations have something else in common: growing investor fears about government finance. In the first two years of their mandates, Gustavo Petro and Luiz Inacio Lula da Silva have taken similar tacks to boost their economies. They each relied on deficit spending to deliver on campaign pledges just as inflation became a global problem. And they each lashed out at their independent central banks for raising interest rates… Faced with the need to balance their budgets, both Petro and Lula unveiled plans to increase government revenue without cutting spending. Neither announced austerity measures until everything else failed — and in Brazil’s case, it was too little too late.”
Colombia’s 10-year (local currency) yields surged 56 bps this week (up 192bps m-t-d) to 11.87%, the high since October 2023. Dollar-yields rose another seven bps to 7.69%, with a two-week jump of 33 bps. Colombia CDS gained four to 209 bps, after beginning 2024 at 157 bps. Colombia’s peso has declined 12.6% versus the dollar this year.
The Mexican peso’s 1.3% weekly decline pushed 2024 losses against the dollar to 16.5%. Mexico’s 10-year (local currency) yields rose another seven bps this week to 10.45%, the highest yield since 2002. Mexico CDS gained 4.5 to 133 bps, the highest close since October 2023.
Two straight weeks with heightened instability at the “periphery” failing to engender “safe haven” benefits for the “core.” Ten-year Treasury yields jumped another 10 bps to 4.63%, the highest close since May 1st.
It’s tempting to suggest that the revitalized bond vigilantes are now active globally – enveloping the “periphery” while penetrating “core” defenses. UK gilt yields rose 12 bps this week to 4.63%, exceeding the highest close from the October 2022 bond crisis – and within 11 bps of the highest yield back to October 2008. Japan’s JGB yields gained six bps to 1.11%, the high since July 2011. French yields jumped 13 bps to 3.21%, the highest close since July. Yields this week were up 10 or 11 bps in Italy, Spain, Portugal, and Germany.
Deleveraging continues to gain momentum in key EM markets. Friday’s volatility is a reminder of latent fragility in over-owned and uber-loved technology and AI stocks, along with mounting risk of a de-risking/deleveraging event in a sector rife with leverage and speculation. There’s a strong argument that the “core” is today extraordinarily vulnerable to strengthening contagion (i.e., higher yields, risk aversion and illiquidity) from the “periphery.”
The 2-year/10-year Treasury yield spread widened another 7.5 this week to 29 bps, the widest since June 2022. The curve has steepened 21 bps since the Fed slashed rates on September 18th, with 10-year yields having now spiked 97 bps.
December 26 – Bloomberg (Alexandra Harris): “Key rates tied to the US overnight funding market are rising, even after the Federal Reserve adjusted some of its tools in an effort to rein in volatility. The Secured Overnight Financing Rate — an important one-day lending benchmark linked to activity in the repurchase agreement market — jumped to 4.40% as of Dec. 24 from 4.31%... Other reference rates tied to the repo market — the Tri-Party General Collateral Rate and Broad General Collateral Rate — jumped to 4.39% from 4.29%... The increased rates come at a critical end-of-year moment as Wall Street watches for signs that volatility in funding markets is extending beyond the typical surges during month- and quarter-ends, when banks shore up their balance sheets for regulatory purposes by curbing repo activity.”
December 27 – Bloomberg (Alexandra Harris): “Elevated rates in the US funding market suggest primary dealer balance sheets are constrained as year-end approaches. The Secured Overnight Financing Rate rose to 4.53% on Dec. 26 from 4.40%... That leaves it higher than the interest on reserve balances rate of 4.40%.”
As deleveraging gains momentum, we’ll be closely monitoring for “repo” market instability. While the levered Treasury “basis trade” garners little attention these days, it’s worthy of plenty. Especially if the big tech stocks surprise to the downside, I would expect significant hedge fund deleveraging and attendant liquidity issues. Fear of unfolding systemic instability and illiquidity would pressure the egregiously levered “basis trade” players to begin paring back. Any disorderly unwind of “basis trade” leverage would trigger a destabilizing tightening of financial conditions.
December 27 – Financial Times (Harriet Clarfelt): “Global corporate debt sales soared to a record $8tn this year, as companies took advantage of red-hot demand from investors to accelerate their borrowing plans. Issuance of corporate bonds and leveraged loans climbed by more than a third from 2023 to $7.93tn, according to LSEG data, as big companies… took advantage of borrowing costs falling to their lowest level in decades relative to government debt. The surge in activity passed a previous peak in 2021, as strong investor demand drove down costs for corporate borrowers even before the Federal Reserve and other central banks started cutting interest rates from their multi-decade highs.”
While the reality of a hostile new environment has begun to sink in at the “periphery,” the exuberant “core” continues to extrapolate “terminal phase excess.”
December 26 – Axios (Michael Flaherty): “Big Tech is spending at a rate that's never been seen, sparking boom times for companies scrambling to facilitate the AI build-out. AI is changing the economy, but not in the way most people assume. AI needs facilities and machines and power, and all of that has, in turn, fueled its own new spending involving real estate, building materials, semiconductors and energy. Energy providers have seen a huge boost in particular, because data centers require as much power as a small city. ‘Some of the greatest shifts in history are happening in certain industries,’ Stephan Feldgoise, co-head of M&A for Goldman Sachs, tells Axios. ‘You have this whole convergence of tech, semiconductors, data centers, hyperscalers and power producers’… The fortunes being spent today on data centers for AI are jaw-dropping, but tech leaders are actually worrying about spending too little. ‘When you go through a curve like this, the risk of underinvesting is dramatically greater than the risk of overinvesting for us here,’ Google CEO Sundar Pichai told analysts... Tech CEOs view their investments in data centers as all-purpose bets on the future. If the AI bubble pops, a data center can easily be put to work fueling whatever the next big wave in tech turns out to be.”
Perhaps history’s greatest spending boom, the runaway AI/tech Bubble is fueled by late-cycle extraordinarily loose conditions coupled with blind faith. I’m reminded of the “Roaring Twenties” post-crash “over-investment” versus “malinvestment” debate (seemed to be monstrous amounts of both). An incredible arms race mentality has the world today poised to spend Trillions with little clarity on future revenues or profits. It’s party on so long as financial conditions remain loose and market Bubbles inflate.
It’s difficult for me to envisage systems (financial and economic at home and abroad) more vulnerable to a destabilizing market-induced tightening and forced reassessment of future prospects. I believe global deleveraging has attained sufficient momentum to be self-reinforcing. And it’s unclear what might reignite “risk on” speculative leveraging, especially at the “periphery.” Contrary to early-August instability, today’s deleveraging is not fueled by a strong yen susceptible to dovish Bank of Japan pronouncements. And with yields up almost 100 bps since the Fed began its rate cuts, the incredible magic powers of Fed monetary easing appear to have finally dissipated.
For the Week:
The S&P500 increased 0.7% (up 25.2% y-t-d), and the Dow added 0.4% (up 14.1%). The Utilities inched 0.3% higher (up 17.5%). The Banks recovered 1.0% (up 33.8%), and the Broker/Dealers rallied 1.9% (up 46.3%). The Transports gained 0.9% (up 0.8%). The S&P 400 Midcaps increased 0.5% (up 12.8%), while the small cap Russell 2000 was little changed (up 10.7%). The Nasdaq100 added 0.9% (up 27.6%). The Semiconductors rallied 3.2% (up 22.7%). The Biotechs gained 1.1% (up 6.8%). With bullion down $2, the HUI gold index slipped 0.5% (up 14.5%).
Three-month Treasury bill rates ended the week at 4.1725%. Two-year government yields added a basis point to 4.33% (up 8bps y-t-d). Five-year T-note yields rose eight bps to 4.46% (up 61bps). Ten-year Treasury yields jumped 10 bps to 4.63% (up 75bps). Long bond yields increased 10 bps to 4.82% (up 79bps). Benchmark Fannie Mae MBS yields gained eight bps to 5.89% (up 62bps).
Italian 10-year yields rose 10 bps to 3.54% (down 16bps y-t-d). Greek 10-year yields jumped 11 bps to 3.24% (up 19bps). Spain's 10-year yields rose 11 bps to 3.08% (up 9bps). German bund yields increased 11 bps to 2.40% (up 37bps). French yields jumped 13 bps to 3.21% (up 65bps). The French to German 10-year bond spread widened two to 81 bps. U.K. 10-year gilt yields rose 12 bps to 4.63% (up 110bps). U.K.'s FTSE equities index increased 0.8% (up 5.4% y-t-d).
Japan's Nikkei 225 Equities Index rallied 4.1% (up 20.4% y-t-d). Japanese 10-year "JGB" yields jumped six bps to 1.11% (up 49bps y-t-d). France's CAC40 recovered 1.1% (down 2.5%). The German DAX equities index increased 0.5% (up 19.3%). Spain's IBEX 35 equities index added 0.6% (up 14.2%). Italy's FTSE MIB index advanced 1.2% (up 12.6%). EM equities were mixed. Brazil's Bovespa index fell 1.5% (down 10.4%), and Mexico's Bolsa index declined 0.6% (down 14.1%). South Korea's Kospi was unchanged (down 9.4%). India's Sensex equities index gained 0.8% (up 8.9%). China's Shanghai Exchange Index added 1.0% (up 14.3%). Turkey's Borsa Istanbul National 100 index gained 3.1% (up 34.2%).
Federal Reserve Credit declined $12.4 billion last week to $6.841 TN. Fed Credit was down $2.049 TN from the June 22, 2022, peak. Over the past 276 weeks, Fed Credit expanded $3.114 TN, or 84%. Fed Credit inflated $4.030 TN, or 143%, over the past 633 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt fell $5.7 billion last week to $3.297 TN. "Custody holdings" were down $88.4 billion y-o-y, or 2.6%.
Total money market fund assets surged $54.7 billion to a record $6.806 TN. Money funds were up $671 billion over 21 weeks (27% annualized) and $919 billion y-t-d (15.6% ann.).
Total Commercial Paper declined $8.8 billion to $1.148 TN. CP was down $123 billion, or 9.7%, over the past year.
Freddie Mac 30-year fixed mortgage rates jumped 13 bps this week to 6.85% (up 24bps y-o-y). Fifteen-year rates rose eight bps to 6.00% (up 7bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-year fixed rates up seven bps to 7.33% (up 28bps).
Currency Watch:
December 23 – Bloomberg (Erica Yokoyama, Daisuke Sakai and Mia Glass): “Japan rolled out more warnings against speculative yen movements as the currency continues to show weakness ahead of two potentially market-moving central bank events this week. ‘I’m deeply concerned about recent currency moves, including those driven by speculators,’ Japanese Finance Minister Katsunobu Kato told reporters… ‘The government will take appropriate action against excessive FX moves,’ Kato added in a standard hint at potential intervention.”
December 22 – Bloomberg (David Finnerty): “Leveraged funds have turned bullish on dollar-yen as they rush into positions that project the currency pair will rise as much as 5% in the coming months. Hedge funds piled into bullish dollar-yen options trades following hawkish Federal Reserve and dovish Bank of Japan interest rate decisions last week.”
For the week, the U.S. Dollar Index increased 0.4% to 108.00 (up 6.6% y-t-d). For the week on the upside, the Swedish krona increased 0.2% and the British pound inched 0.1% higher. On the downside, the South African rand declined 2.1%, the Brazilian real 1.7%, the South Korean won 1.6%, the Mexican peso 0.3%, the Japanese yen 1.0%, the Swiss franc 1.0%, the Australian dollar 0.5%, the Canadian dollar 0.4%, the Norwegian krone 0.3%, the New Zealand dollar 0.3%, and the Singapore dollar. The Chinese (onshore) renminbi was little changed versus the dollar (down 2.69% y-t-d).
Commodities Watch:
The Bloomberg Commodities Index increased 0.7% (down 0.4% y-t-d). Spot Gold was little changed at $2,621 (up 27.1%). Silver slipped 0.5% to $29.385 (up 23.5%). WTI crude recovered $1.14, or 1.6%, to $70.60 (down 2%). Gasoline increased 0.9% (down 7%), while Natural Gas dipped 0.8% to $3.383 (up 35%). Copper added 0.5% (up 6%). Wheat rallied 2.5% (down 13%), and Corn gained 1.7% (down 4%). Bitcoin dropped $3,180, or 3.3%, to $94,450 (up 122%).
Trump Administration Watch:
December 22 – Financial Times (Steff Chávez): “Donald Trump has tapped Stephen Miran, an economist who served during the president-elect’s first term, to chair his Council of Economic Advisers and named billionaire investor Stephen Feinberg to a senior defence post… Miran was a senior adviser for economic policy at the Treasury department in the first Trump administration. With his nomination, the president-elect is seeking to elevate a critic of Federal Reserve chair Jay Powell who has also accused the Biden administration of manipulating the economy and ‘usurping’ the central bank’s role. ‘Steve will work with the rest of my Economic Team to deliver a Great Economic Boom that lifts up all Americans,’ Trump said…”
December 24 – Axios (Dave Lawler): “President-elect Trump has big plans to make America greater, in terms of square mileage. Trump has been in a strikingly imperial mood since his election victory. He has floated acquiring Greenland, reclaiming the Panama Canal, annexing Canada, and potentially invading Mexico — to the intense consternation of their leaders. In each case, Trump is blending trolling, negotiation and intimidation. He pitched statehood for Canada at least in part to needle ‘Governor’ Justin Trudeau. But he has doubled down in the last 48 hours (including via memes) on taking over Greenland and claiming the Panama Canal. It's unclear how exactly either would be accomplished short of an invasion. Between the lines: This is Trump's foreign policy playbook, or lack thereof. He says wild stuff, sometimes acts on it, and often doesn't.”
December 22 – Financial Times (Steff Chávez and Thomas Graham): “Panama’s President José Raúl Mulino hit back at Donald Trump after the president-elect said he would demand the Panama Canal be ‘returned’ to the US if the vital waterway was not operated to his liking. Trump’s weekend salvo and the ensuing diplomatic feud offered a taste of his chaotic brand of international politics… The president-elect attacked the Central American country over what he considered excessive fees… ‘I want to express precisely that every square metre of the Panama Canal and its adjacent area belong to PANAMA, and will continue to be. The sovereignty and independence of our country are not negotiable,’ Mulino said… Trump said… ‘we will demand that the Panama Canal be returned to us’ if the ‘principles, both moral and legal, of [the US’s] magnanimous gesture of giving are not followed’, adding that control of the canal was ‘foolishly’ ceded to Panama 25 years ago.”
December 22 – Wall Street Journal (Santiago Pérez, José de Córdoba and Alex Leary): “President-elect Donald Trump is openly discussing provocative aspirations for U.S. territorial expansion as he prepares to return to the White House, warning about taking over the Panama Canal and wresting control of Greenland from Denmark. His comments… come after he recently trolled Canadian Prime Minister Justin Trudeau by suggesting that Canada should become the 51st state and referring to Trudeau as a governor. During the recent presidential campaign, Trump said he would deploy the U.S. military to impose a naval embargo on Mexican cartels and order the Pentagon to use American special forces to take down cartel leaders. Taken together, the president-elect’s broadsides signal that he will pursue a confrontational foreign-policy agenda, leveraging unconventional threats and pointed demands in an attempt to gain advantage over allies and adversaries alike.”
December 23 – Bloomberg (Michael McDonald): “Panama President Jose Raul Mulino rallied support from former presidents in defense of the country’s canal following threats from Donald Trump to reimpose US control over the waterway. Mulino met with three Panamanian leaders on Monday, who all signed a statement asserting the country’s independence and autonomy over the canal. ‘As ex-presidents, we support the the declarations of President Jose Raul Mulino and we unite under the affirmation that the sovereignty and independence of our country and our canal are not negotiable,’ the statement said. It was signed by former Presidents Mireya Moscoso, Ernesto Perez Balladares and Martin Torrijos.”
December 21 – Bloomberg (Esha Dey): “Less than two months ago, shares of Tesla Inc. were on their way to just the third losing year in the electric-vehicle maker’s decade-and-a-half as a public company. But after a furious rally in the last seven weeks, the stock is suddenly among the S&P 500 Index’s best performers for 2024… Since Election Day, they’ve soared 73%, putting them up 69% for 2024. Meaning, in less than two months, the EV maker has added a staggering $572 billion to its market capitalization, bringing it to around $1.4 trillion, although nothing about the company fundamentally changed.”
December 25 – New York Times (Lydia DePillis): “Money is the mother’s milk of politics, but the outcome of elections also determines where it flows — and last month’s was especially crucial for the energy industry. Clean investment — including renewable energy as well as the manufacturing of electric vehicles, batteries and solar panels — has boomed since the passage of the 2022 Inflation Reduction Act, championed by President Biden. In the third quarter of 2024, it reached a record $71 billion, according to… the Rhodium Group… and M.I.T. The big question looming now on Wall Street: Will President-elect Donald J. Trump, who called Mr. Biden’s policies the ‘green new scam’ during the campaign, pull back enough of those subsidies and regulations to meaningfully change the economics of investing in decarbonization?”
Trade War Watch:
December 23 – New York Times (Ana Swanson and Paul Mozur): “The Biden administration… initiated a trade investigation into China’s production of older types of computer chips that are integral for cars, dishwashers, telecom networks and military weaponry. The inquiry could result in tariffs or other measures to block Chinese chips from entering U.S. markets, though the decision of which approach to take, if any, would fall to the incoming Trump administration. In industry after industry — from steel and ships to solar panels and electric vehicles — China has pumped money into building world-class manufacturing facilities, creating a surge of low-cost products that ultimately flood global markets. American companies… are finding themselves unable to compete, have shut down, leaving Chinese firms largely in control of the global market.”
December 21 – Bloomberg: “Chinese curbs on exports of three niche metals to the US have already rattled the market. Now, a bigger clampdown looks set to have far-reaching ramifications for supply chains feeding American defense and chip-making industries. Beijing this month slapped a ban on US-bound exports of gallium, germanium and antimony in a tit-for-tat move in a technology trade war. The metals are important because they have crucial uses in many Western industries from military tech to semiconductors to satellites.”
Middle East War Watch:
December 26 – Wall Street Journal (Omar Abdel-Baqui): “Syria’s new rulers are facing challenges to their authority, including clashes with allies of the old regime and protests accusing them of destroying religious symbols. Islamist group Hayat Tahrir al-Sham launched the assault that overthrew dictator Bashar al-Assad and has now positioned itself as the country’s new government. In the largest incident since taking over, it said at least 14 members of the new government’s security forces were killed Wednesday in an ambush conducted by loyalists of the old regime. The killings happened in Tartus province, along the coast, an area heavily populated by Syria’s minority Alawite sect, which included the Assads. The transitional government said it launched an operation to pursue Assad loyalists and restore order.”
Ukraine War Watch:
December 25 – Reuters (Pavel Polityuk): “Russia attacked Ukraine's energy system and some cities with cruise and ballistic missiles plus drones on Wednesday in an ‘inhuman’ Christmas Day assault, Ukraine's President Volodymyr Zelenskiy said. Nearly three years into the war, the strikes wounded at least six people in the northeastern city of Kharkiv and killed one in the region of Dnipropetrovsk, the governors there said. Half a million people in Kharkiv region were left without heating, in temperatures just a few degrees Celsius above zero, while there were blackouts in the capital Kyiv and elsewhere.”
December 22 – Wall Street Journal (Editorial Board): “Donald Trump wants to end the war in Ukraine, and who doesn’t? Apparently Vladimir Putin, who used his annual end-of-year news conference last week to send the President-elect a message about his peace terms. ‘Now, regarding the conditions for starting negotiations: We have no preconditions,’ Mr. Putin said before outlining sweeping preconditions. Talks would be ‘based on’ 2022 negotiations in Istanbul and ‘proceeding from the current realities on the ground,’ he said. Russia’s 2022 Istanbul proposal called for Ukraine to abandon aspirations to join NATO, become a permanently neutral state, and drastically shrink its armed forces. This would ratify Russia’s territorial gains and render Ukraine defenseless against inevitable future Russian aggression.”
Taiwan Watch:
December 22 – Bloomberg: “China will take all necessary measures to defend national sovereignty, security and territorial integrity, the Ministry of Foreign Affairs said… responding to the US’ decision to provide defense assistance and approve the sales of weapons to Taiwan. China urges the US to immediately stop arming Taiwan. The Chinese side is strongly dissatisfied and firmly opposed the US moves.”
December 26 – Reuters (Yimou Lee): “Taiwan's Presidential Office held its first ‘tabletop’ exercise involving government agencies beyond the armed forces on Thursday, simulating a military escalation with China amid renewed threats from Beijing, officials said. Dozens of central and local government agencies as well as civil groups participated in the three-hour exercise…”
December 27 – Financial Times (Kathrin Hille): “China has launched the world’s largest amphibious assault ship, in the latest demonstration of how Beijing’s industrial capacity is strengthening its military power amid rising geopolitical tensions with the US. Combining elements of amphibious landing vessels — which are designed to carry and support an invasion force — with those of an aircraft carrier, the ship significantly strengthens Beijing’s ability to project power globally. It also adds to China’s capabilities in the event of an invasion of Taiwan.”
Market Instability Watch:
December 22 – Wall Street Journal (Mary Anastasia O’Grady): “Investors piled out of Brazil last week, sending its currency, the real, to historically low levels and country risk soaring. Brazilian stocks plummeted. The panic came after months of deterioration in the outlook for the Brazilian fisc. Reuters reported… the dollar-denominated MSCI Brazil index had ‘fallen more than 30% since the start of the year.’ The trigger for the most recent round of selling in the world’s ninth-largest economy was a watered-down tax and spending package that fell far short of what’s needed to close a gaping hole in the budget. With a nominal deficit of 9.5% of gross domestic product, more than double what it was when President Luiz Inácio ‘Lula’ da Silva took office two years ago, and no credible plan to right-size it, Brazil faces a deep fiscal crisis.”
December 23 – Bloomberg (Ye Xie, Michael Mackenzie and Liz Capo McCormick): “Bond traders have rarely suffered so much from a Federal Reserve easing cycle. Now they fear 2025 threatens more of the same. US 10-year yields have climbed more than three-quarters of a percentage point since central bankers started slashing benchmark interest rates in September. It’s a counterintuitive, loss-inducing response, marking the biggest jump in the first three months of a rate-cutting cycle since 1989.”
Global Credit Bubble Watch:
December 23 – Bloomberg (Robert Burgess and Clive Crook): “US federal debt and budget deficits are at extreme levels, putting America on a path toward financial ruin. Or not. The government borrowed heavily in recent years to support the economy through the global pandemic and underwrite the agendas of presidents Donald Trump and Joe Biden. Total debt outstanding has surged to $36 trillion from $19.5 trillion in 2016, or approximately 120% of gross domestic product from 105%. To make matters worse, spending continues to far outstrip tax revenue even though the economy has made a striking recovery from the Covid-19 emergency, causing the budget deficit to balloon to $1.83 trillion in the fiscal year ended Sept. 30.”
December 27 – Bloomberg (Vincent Daigger and Jasvinder Singh): “US institutional leveraged loan issuance topped $1.3 trillion this year, as economic optimism and strong investor demand allowed for repricings. A deals recovery may mean stronger new-money financing in 2025. The recently launched Bloomberg US Leveraged Loan Index (LOAN Index) has been outperforming most major debt benchmarks this year. Both investors and issuers were satisfied as relatively high floating rates juiced returns, while credit spreads narrowed amid declining default risk. Collateralized loan obligation managers have been busy packaging debt into structured products.”
December 22 – Financial Times (Joshua Franklin): “The four biggest US banks are on course to capture their largest share of the industry’s profits in almost a decade, a sign of how they are consolidating their dominant market position. JPMorgan Chase, Bank of America, Citigroup and Wells Fargo… collectively reported about $88bn in profits in the first nine months of 2024… Together they account for 44% of the US banking industry’s profits — the highest share for the first nine months of the year since 2015 — despite the pool taking in more than 4,000 of the country’s other banks. Including US Bank, PNC and Truist, the seven largest banks by deposits generated almost 56% of all banking profits in the first nine months of the year, up from 48% for the same period in 2023.”
December 18 – Bloomberg (Will Kubzansky and Josyana Joshua): “Wall Street firms are debating whether US high-grade corporate bond sales can set a record in 2025 as just over $1 trillion of notes are set to mature. Some key elements for a big year are in pl¬ace after 2024 issuance set a multiyear high. Companies unleashed a record wave of bond sales early this decade, when the Federal Reserve cut rates to near-zero after Covid-19 hobbled economic activity. The echo of that boom is now coming as four- and five-year bonds sold then are coming due. Many will need to be refinanced. On top of that, the artificial intelligence revolution is spurring many companies — including utilities — to borrow more to fund construction and other investments.”
December 24 – Financial Times (Alan Livsey and Harriet Clarfelt): “US companies are defaulting on junk loans at the fastest rate in four years, as they struggle to refinance a wave of cheap borrowing that followed the Covid pandemic. Defaults in the global leveraged loan market — the bulk of which is in the US — picked up to 7.2% in the 12 months to October… That is the highest rate since the end of 2020. The rise in companies struggling to repay loans contrasts with a much more modest rise in defaults in the high-yield bond market, highlighting how many of the riskier borrowers in corporate America have gravitated towards the fast-growing loan market. Because leveraged loans — high yield bank loans that have been sold on to other investors — have floating interest rates, many of those companies that took on debt when rates were ultra low during the pandemic have struggled under high borrowing costs in recent years.”
December 23 – Bloomberg (Esteban Duarte): “Bank of America Corp. is close to issuing a significant risk transfer linked to a $1 billion portfolio of corporate loans, according to people familiar with the matter. The SRT, which is equivalent to about $90 million, was priced at a spread of less than 400 bps over a benchmark borrowing rate…”
AI Bubble Watch:
December 20 – Wall Street Journal (Deepa Seetharaman): “OpenAI’s new artificial-intelligence project is behind schedule and running up huge bills. It isn’t clear when—or if—it’ll work. There may not be enough data in the world to make it smart enough. The project, officially called GPT-5 and code-named Orion, has been in the works for more than 18 months and is intended to be a major advancement in the technology that powers ChatGPT. OpenAI’s closest partner and largest investor, Microsoft, had expected to see the new model around mid-2024… OpenAI has conducted at least two large training runs, each of which entails months of crunching huge amounts of data… Each time, new problems arose and the software fell short of the results researchers were hoping for… At best, they say, Orion performs better than OpenAI’s current offerings, but hasn’t advanced enough to justify the enormous cost of keeping the new model running. A six-month training run can cost around half a billion dollars in computing costs alone…”
December 24 – Wall Street Journal (Raffaele Huang and Tracy Qu): “Chinese startups show signs of catching up with America’s leading artificial-intelligence models more quickly than many in the industry had expected… DeepSeek, a startup funded by one of China’s most successful hedge-fund managers, released a preview version of its latest large language model in November. It said the program’s abilities compared favorably with OpenAI’s reasoning model called o1, which came out in preview form in September. Other Chinese companies have made similar claims in recent weeks. Moonshot AI, a startup backed by Chinese internet giants Alibaba and Tencent, said it developed a model specializing in math with capabilities close to o1, while Alibaba said one of its own experimental research models outperformed the preview version of the U.S. model on math.”
Bubble and Mania Watch:
December 21 – Financial Times (Ian Smith and George Steer): “Investors poured record amounts into global bond funds this year as they bet on a shift towards easier monetary policy by major central banks. Bond funds attracted more than $600bn in inflows so far this year, according to… EPFR, topping the previous high of almost $500bn in 2021… This ‘was the year that investors bet big on a substantial shift in monetary policy’ that has historically supported bond returns, said Matthias Scheiber, a senior portfolio manager at asset manager Allspring.”
December 23 – New York Times (Michael J. de la Merced): “By most measures, 2024 was a year of fits and starts for M.&A., especially compared with a year ago. And I.P.O.s were a flat-out dud. For deal makers, there are plenty of reasons to hope that 2025 will be better, including a potentially more business-friendly White House and Congress, investor ebullience and a relatively strong American economy. But there are also factors that may keep corporate deal makers on edge… Heading into 2024, bankers and lawyers said that the overall mood in corporate boardrooms was cautious, given geopolitical uncertainties and questions about the vitality of the global economy… While the dollar volume of deals announced in 2024 as of Friday rose 9% year-on-year, to $3 trillion, the number of transactions fell 18%, to 46,534, according to… the London Stock Exchange Group. That’s the lowest level since 2015 and worse than 2020…”
December 27 – Bloomberg (Olga Kharif and Yizhu Wang): “Bitcoin’s record-breaking rally is rekindling hope that the digital-ledger technology that underpins cryptocurrencies will revolutionize everything from recording the ownership of houses to bonds. Tokenization, or the process of creating digital representations of real-world assets on a blockchain, has become one of this year’s buzzwords in both conventional and crypto finance circles. The excitement is reminiscent of the hype of a few years ago surrounding the use of blockchains for everything from tracking lettuce at Walmart Inc. to digitizing stocks that proved to be premature.”
December 24 – Financial Times (Antoine Gara and Alexandra Heal): “Private equity funds cashed out just half the value of investments they typically sell in 2024, the third consecutive year payouts to investors have fallen short because of a deal drought. Buyout houses typically sell down 20% of their investments in any given year, but industry executives forecast that cash payouts for the year would be about half that figure. Cambridge Associates… estimated that funds had fallen about $400bn short in payments to their investors over the past three years compared with historical averages. The data underline the increasing pressure on firms to find ways to return cash to investors, including by exiting more investments in the year ahead. Firms have struggled to strike deals at attractive prices since early 2022, when rising interest rates caused financing costs to soar and corporate valuations to fall.”
U.S./Russia/China/Europe Watch:
December 25 – Bloomberg (Minxin Pei): “President Xi Jinping is fond of invoking stormy seas to describe the dangers China will confront in the years ahead… As Donald Trump reenters the White House, Xi’s luck threatens to run out. He could face five simultaneous challenges that will determine China’s trajectory for the remainder of the decade. Without question, the first ‘storm’ awaiting Xi is an escalation in Sino-American tensions… With its economy hobbled by excessively high debt, deflation, and a real estate crisis, China is in a more perilous state than in 2018, when Trump first hauled out his tariff bazooka. Even more dangerously, the hawks in control of the US national security apparatus are likely to adopt more aggressive tactics on Taiwan and the South China Sea, which could precipitate a superpower standoff reminiscent of the 1962 Cuban missile crisis.”
December 26 – Financial Times (Minxin Pei): “Finland suspects an oil tanker that is part of Russia’s shadow fleet of damaging an underwater electricity cable and three communication cables, opening an investigation into the vessel for aggravated sabotage. The Eagle S was stopped by Finnish authorities after the Estlink 2 subsea electricity cable in the Gulf of Finland was disconnected on Wednesday… Finnish police said… they believe the vessel’s anchor, which they did not find on the ship, cut the cables. ‘We must be able to prevent the risks posed by ships belonging to the Russian shadow fleet,’ said Finland’s President Alexander Stubb…”
December 24 – Reuters (Kanishka Singh): “The Canadian government condemned China… for taking steps against two Canadian institutions and 20 people involved in human rights issues concerning the Uyghurs and Tibet. China announced the measures, which included asset freezes and bans on entry... Its targets included the Canada-based Uyghur Rights Advocacy Project and the Canada-Tibet Committee, China's foreign ministry said.”
De-globalization Watch:
December 26 – Bloomberg: “Russian President Vladimir Putin said any new deal for transporting natural gas through Ukraine will be challenging. ‘There is no contract, and it is impossible to conclude it in three to four days,’ Putin said…”
December 25 – Reuters (Gleb Bryanski): “Russian companies have begun using bitcoin and other digital currencies in international payments following legislative changes that allowed such use in order to counter Western sanctions, Finance Minister Anton Siluanov said… Sanctions have complicated Russia's trade with its major partners such as China or Turkey, as local banks are extremely cautious with Russia-related transactions to avoid scrutiny from Western regulators.”
Inflation Watch:
December 23 – Wall Street Journal (Nicole Friedman): “Soaring costs for home insurance and property taxes are busting homeowners’ budgets. Insurers have pushed big rate increases because of losses from natural disasters and rising costs to repair homes. Surging home values in recent years, meanwhile, have lifted property taxes for many homeowners. These ballooning expenses are rewriting the math of homeownership. In September, 32% of the average single-family mortgage payment went to property taxes and home insurance, the highest rate ever for data going back to 2014… For a small but increasing share of households, the burden is far more significant. In five major metro areas—Rochester and Syracuse, N.Y.; Omaha, Neb.; New Orleans and Miami—at least a quarter of borrowers spend more than half their monthly mortgage payment on taxes and insurance…”
Federal Reserve Watch:
December 23 – Bloomberg (Jana Randow): “Elon Musk, the billionaire tasked with making the US government more efficient come January, has zeroed in on the Federal Reserve. The central bank in charge of protecting the world’s largest economy is ‘absurdly overstaffed,’ Musk wrote on social-media platform X. The remarks were part of a thread that began with another individual posting about the Fed’s latest policy decision.”
December 24 – CNBC (Sara Eisen): “A group of banks and business groups are suing the Federal Reserve over the annual bank stress tests. The Bank Policy Institute, which represents big banks like JPMorgan, Citigroup and Goldman Sachs, is joining the American Bankers Association, the Ohio Bankers League, the Ohio Chamber of Commerce and the U.S. Chamber of Commerce to file the suit, which they said aims to ‘resolve longstanding legal violations by subjecting the stress test process to public input as required by federal law.’ The groups said they don’t oppose stress testing, but that the current process falls short and ‘produces vacillating and unexplained requirements and restrictions on bank capital.’”
December 24 – Bloomberg (Alexandra Harris): “Balances at the Federal Reserve’s overnight reverse repurchase agreement facility swelled on Tuesday by the most since June quarter-end as year-end balance-sheet constraints and scramble for funding ahead of Christmas drove cash to the central bank. Some 52 counterparties parked $181 billion at the RRP, the highest since Nov. 2, from $116 billion the prior session.”
December 23 – Bloomberg (Pete Schroeder): “Federal Reserve Vice Chair for Supervision Michael Barr has sought legal advice to explore his options against any attempts by President-elect Donald Trump to remove him, sources said, the latest sign that a conflict might be looming between the incoming administration and the central bank. Barr, who was tapped to serve as the Fed's top regulatory official by President Joe Biden, has in recent weeks sought advice from law firm Arnold & Porter in his personal capacity…”
U.S. Economic Bubble Watch:
December 24 – Associated Press (Mae Anderson): “A recent survey shows small business owners are feeling more optimistic about the economy following the election. The National Federation of Independent Businesses’ Small Business Optimism Index rose by eight points in November to 101.7, its highest reading since June 2021. The Uncertainty Index declined 12 points in November to 98, following October’s pre-election record high of 110. NFIB Chief Economist Bill Dunkelberg said small business owners became more certain about future business conditions following the presidential election…”
December 23 – Yahoo Finance (Josh Schafer): “US consumer confidence tumbled in December from the previous month amid Americans' growing uncertainty over the economic outlook in the year ahead. The Conference Board's consumer confidence index declined by 8.1 points in December to 104.7, below the 113.2 expected by economists… The expectations index, which includes the short-term outlook for income, business, and labor market conditions, sank 12.6 points to 81.1 in December, its largest month-over-month decline since November 2020.”
December 26 – Reuters (Savyata Mishra and Siddharth Cavale): “Price-conscious holiday shoppers opened their wallets for last-minute online discounts on clothing and stocking stuffers… According to a Mastercard SpendingPulse report, online spending during the holiday shopping period from Nov. 1 to Dec. 24 grew by 6.7% over last year, compared to a 2.9% increase for in-store sales. This contributed to a total spending increase of 3.8% over 2023, surpassing the previously forecast rise of 3.2% and topping the 3.1% increase during the same period last year.”
December 26 – CNBC (Lorie Konish): “Many Americans are capping off the holidays with new debt balances. This season, 36% of American consumers took on holiday debt, according to… LendingTree. Those who racked up balances this season took on an average of $1,181 in debt, up from $1,028 in 2023. However, that is still down from $1,549 in 2022… Less than half — 44% — of the people who took on debt expected to acquire those balances, a sign that this holiday season is still financially challenging for many people, according to Matt Schulz, chief credit analyst at LendingTree.”
December 26 – Associated Press (Matt Ott): “The number of Americans applying for unemployment benefits held steady last week, though continuing claims rose to the highest level in three years. Jobless claim applications ticked down by 1,000 to 219,000 for the week of Dec. 21… That’s fewer than the 223,000 analysts forecast. Continuing claims, the total number of Americans collecting jobless benefits, climbed by 46,000 to 1.91 million for the week of Dec. 14.”
December 23 – Bloomberg (Michael Sasso): “New-home sales in the US rebounded last month as builders and consumers sealed deals that had been delayed by storms in the South, and buyers took advantage of heavy sales incentives. Sales of new single-family homes increased 5.9% last month to a 664,000 annualized rate… The median sale price of a new single-family home decreased 6.3% last month from a year ago, and is now $402,600.”
December 23 – Financial Times (Patrick Temple-West): “Chief executives of publicly traded US companies are leaving in record numbers despite historic pay bonuses as the booming stock market and fear of turmoil in 2025 has prompted executives to exit. In the year to November, 327 chief executives at US public companies announced they were leaving, exceeding the record 312 exits in 2019, according to Challenger Gray... The exits have contributed to a falling tenure for the role. In the third quarter, eight CEOs left after lasting less than three years in the position, the highest number of short-term appointments since 2019, according to… Russell Reynolds.”
China Watch:
December 27 – Bloomberg: “Chinese government bonds are primed for their best year in a decade, with local fund managers and strategists predicting more gains for 2025. They are set to reap a 9% total return in 2024, the highest since 2014, as measured by a Bloomberg Index which excludes currency moves. The nation’s 10-year yields have plummeted 84 bps since January, dropping to 1.71% on Thursday.”
December 24 – Bloomberg: “China’s policymakers plan to sell a record 3 trillion yuan ($411bn) of special treasury bonds in 2025…, a move aimed at bolstering the slowing economy. The plan would be a sharp increase from this year’s 1 trillion yuan and be used to support consumption and investments as well as recapitalizing large state banks… The reported fiscal measures come as China is mapping out its economic plans for next year, with top leaders hinting at bolder stimulus as Beijing faces tariff threats from the incoming Trump administration.”
December 23 – Bloomberg: “China’s finance ministry reaffirmed it will increase public spending with a greater focus on boosting consumption to support the economy next year, ahead of growth headwinds from looming US tariffs. China will ‘expand the magnitude of fiscal spending and accelerate the spending pace,’ according to a statement… following a two-day national conference held by the Ministry of Finance on fiscal work in 2025.”
December 23 – Reuters (Kevin Yao): “China will ramp up fiscal support for consumption next year by raising pensions and medical insurance subsidies for residents as well as expanding consumer goods trade-ins, its finance ministry said… The country will boost the basic pension for retirees and for urban and rural residents and raise financial subsidy standards for urban and rural residents' medical insurance to help ‘vigorously’ boost consumption, the ministry said after concluding a two-day national fiscal work conference.”
December 25 – Bloomberg: “China is allowing local officials to invest in more areas with a key government bond while also simplifying its approval process in a bid to make better use of an important source of public funding to drive the economy. Local governments can use their special bonds to invest in projects as long as they’re not on a special list published by the cabinet, the government said… That list includes projects that don’t generate any returns, government buildings, vanity constructions like giant sculptures and commercial property.”
December 26 – Bloomberg: “China’s latest measures to deal with the financial risks of local officials have centered on a massive debt-swap plan, but a companion step is now drawing attention as a possible new tool. Ever since China unleashed a massive wave of credit to stoke its domestic economy in the depths of the global financial crisis, policymakers have been dealing with the dangers posed by a structure on which that wave relied — the so-called local government financing vehicles (LGFVs). Now, economists see potential for ‘central government financing vehicles’ to displace some of that activity... China has given a green light for a total 500 billion yuan ($68.5bn) to be raised by two state-owned enterprises for the purpose of ‘stabilizing the economy and expanding investment.’”
December 24 – Bloomberg: “China refrained from cutting the interest rate and drained the most cash since 2014 with a one-year policy tool, keeping its powder dry ahead of possible escalation in trade tensions with the US next year. The People’s Bank of China held the interest rate on the one-year medium-term lending facility steady at 2%... The authorities also withdrew a net 1.15 trillion yuan ($158bn) from the financial system with the tool, the most since 2014. Earlier this month, policymakers pledged ‘moderately loose’ monetary policy — the first shift in stance in about 14 years — along with ‘more proactive’ fiscal tools to bolster the economy.”
December 23 – Wall Street Journal (Lingling Wei): “Some are calling it a ‘Lost Decade.’ More than 10 years into the Xi Jinping era, it has become clear that much of China’s growth under his watch was driven by unsustainable borrowing, real estate speculation and investments in factories and infrastructure the country didn’t really need. Difficult reforms that could have unlocked more durable growth… were neglected in favor of policies designed to bolster Communist Party control. Now, China is drowning in debt, reeling from a property bust that wiped out trillions of dollars of household wealth, and verging on a deflationary spiral. Growth has slowed, Western investment has collapsed and consumer confidence is near a record low. And yet, as China squares off with the U.S. for a second showdown over trade, Xi is digging in. He’s convinced that his top-down approach to managing China’s economy, with plans to make it an even bigger industrial power, offers the best path for China to eventually surpass the U.S. in economic might.”
December 21 – Bloomberg: “One of China’s leading developers is now on authorities’ radar for default risk. A major Hong Kong builder is asking lenders to extend loans. Another industry peer is selling an iconic but largely empty mall in Beijing. As China’s property debt crisis enters its fifth year, there’s little indication that distressed developers are finding it easier to repay debt as a slump in home sales continues. Their dollar bonds are still trading at deeply distressed levels, their debt issuance has nearly dried up, and the sector is a notable laggard in stock markets. Alarm bells went off again in recent weeks, when the banking regulator told top insurers to report their financial exposure to China Vanke Co. to assess how much support the country’s fourth-largest developer by sales needs to avoid default.”
December 23 – Financial Times (Kaye Wiggins and Thomas Hale): “The world’s biggest private equity groups have been unable to sell or list their China-based portfolio companies this year, as Beijing’s crackdown on initial public offerings and a slowing economy leave foreign investors’ capital trapped... Among the 10 largest global private equity groups with operations in China, there is no record of any having listed a Chinese company this year or fully sold their stake through an M&A deal… It is the first year for at least a decade where this has been the case, though the pace of exits has been slow since Beijing introduced restrictions on Chinese companies’ ability to list in 2021. Buyout groups rely on being able to sell or list companies, typically within three to five years of buying them…”
Europe Watch:
December 24 – Associated Press (Angela Charlton): “France’s president and prime minister managed to form a new government just in time for the holidays. Now comes the hard part. Crushing debt, intensifying pressure from the nationalist far right, wars in Europe and the Mideast: Challenges abound for President Emmanuel Macron and Prime Minister Francois Bayrou… The most urgent order of business is passing a 2025 budget. Financial markets, ratings agencies and the European Commission are pushing France to bring down its deficit, to comply with EU rules limiting debt and keep France’s borrowing costs from spiraling… France’s debt is currently estimated at a staggering 112% of gross domestic product.”
Japan Watch:
December 25 – Bloomberg (Toru Fujioka): “Bank of Japan Governor Kazuo Ueda avoided giving a clear signal that he might raise interest rates next month by reiterating the need to keep monitoring risks for the economy in comments that nudged down the yen. ‘The timing and pace of adjusting the degree of monetary accommodation will depend on developments in economic activity and prices as well as financial conditions going forward,’ Ueda said… ‘The bank needs to pay due attention to various risk factors at home and abroad, and to examine how these factors will affect the outlook and risks for Japan’s economic activity and prices and the likelihood of realizing the outlook,’ he said.”
December 24 – Reuters (Leika Kihara): “Bank of Japan policymakers agreed in October to keep raising interest rates if the economy moves in line with their forecast, but some stressed the need for caution on uncertainty over U.S. economic policy, minutes of the meeting showed… The debate highlights how overseas economic risks… While the Oct. 30-31 meeting was held before Donald Trump's victory in the Nov. 5 presidential election, BOJ board members warned of renewed market volatility and potential big changes to U.S. policy as key risks to the outlook… ‘We can spend time scrutinising U.S. developments, including those after the U.S. presidential election, as we had already been expecting to raise rates at a moderate pace,’ one of the members was quoted as saying in the minutes.”
December 26 – Bloomberg (Erica Yokoyama): “Inflation in Tokyo accelerated for a second month in December while the labor market remained tight, results that largely keep the Bank of Japan on track for an interest rate hike... Consumer prices excluding fresh food rose 2.4% in the capital, quickening from growth of 2.2% the previous month… Tokyo’s figures serve as a leading indicator for national trends. Separate data showed… the jobless rate unchanged at 2.5%, while factory output declined less-than-expected on a monthly basis after robust gains in September and October. Retail sales came in stronger than forecast.”
December 25 – Bloomberg (Takashi Umekawa and Erica Yokoyama): “Japanese Prime Minister Shigeru Ishiba’s cabinet is expected to approve a record initial budget Friday for the next fiscal year that will ramp up spending on defense and support for local economies. The budget for the year starting in April 2025 will total around ¥115.5 trillion ($735bn)… While the draft shows the government will still have to lean heavily on debt issuance to help fund the spending, record tax receipts will enable the cutting back of fresh bond issuance by almost a fifth to ¥28.6 trillion.”
December 22 – Bloomberg (Masaki Kondo and Saburo Funabiki): “Investors are set to face the largest supply of Japanese sovereign bonds in at least a decade as the central bank plans to shrink its balance sheet, adding to debtholders’ woes from rising interest rates. The Ministry of Finance typically releases a plan in late December on the amount of debt it will sell in the fiscal year starting April 1. Should it be roughly the same as the current year, supply will increase 64% to ¥61 trillion ($390bn) if redemptions and Bank of Japan purchases are taken into account…”
December 22 – Bloomberg (Ayai Tomisawa): “Personal debt is overwhelming an increasing number of Japanese as higher interest rates and the rising cost of living bite. Consumer loans are rising at the highest rate in 16 years. Household borrowing exceeded incomes for the first time last year. And government officials are worried that many people accustomed to rock-bottom rates will struggle with their mounting loans.”
Emerging Markets Watch:
December 23 – Bloomberg (Juan Pablo Spinetto): “Latin America and the Caribbean will experience another frenetic year in 2025. I could bend your ear about the impact of Donald Trump’s return to the White House on Mexico and Central America… In Venezuela, Nicolás Maduro will try to extend his reign of terror while leaders from left to right will move carefully not to be squeezed by the US-China competition. The year will start and end with two consequential presidential elections in Ecuador (Feb. 9) and Chile (Nov. 16); the risk of Bolivia becoming the next political basket case is growing. Insecurity, migration and poverty will loom large… I must single out Latin America’s inescapable fiscal problem as my top obsession. The region is living way beyond its means, with debt that has become a black hole for resources, a system of tax collection unfit for purpose and an even more flawed approach to spending. The consistent failure to defuse this fiscal time bomb will have profound political, economic, social and financial consequences throughout the region next year and beyond.”
December 27 – Financial Times (Song Jung-a): “South Korea’s opposition-controlled parliament has impeached the acting president, throwing the country into further political turmoil. Lawmakers… passed a motion to impeach Han Duck-soo, who is also the prime minister, after he resisted pressure to appoint three justices to fill vacancies on the Constitutional Court. It marks the first time an acting president has been impeached in South Korea and comes less than two weeks after President Yoon Suk Yeol was suspended from his duties… Finance minister Choi Sang-mok assumed the acting presidency — the country’s third leader in less than a month.”
December 26 – Bloomberg (Sam Kim): “South Korea’s business confidence deteriorated the most since the global outbreak of Covid-19, reflecting mounting concerns about an economy grappling with political turmoil and facing Donald Trump’s tariff threats.”
December 23 – Bloomberg (Alex Vasquez and Carolina Millan): “Mexico’s annual inflation slowed slightly less than expected in early December as services prices remained pressured, supporting the central bank’s cautious stance as it extends interest rate cuts… Consumer prices rose 4.44% in the first two weeks of December from a year prior… Services inflation was the main driver in the period.”
December 23 – Bloomberg (Maria Elena Vizcaino and Zijia Song): “A row developing between President-elect Donald Trump and Panama over one of the world’s most-important waterways is denting the nation’s assets. Panama’s bonds dipped across the curve Monday morning, the most in emerging markets after Trump threatened to reassert US control of the Panama Canal if the nation didn’t cut transit fees. President José Raúl Mulino was quick to rebuff the threat, but the developing spat added to traders’ concerns over Panama’s outlook.”
December 26 – Bloomberg (Kevin Simauchi and Ignacio Olivera Doll): “Argentina’s central bank on Thursday sold the most foreign reserves in one day since October 2019 after officials eliminated a key tax on imports, igniting corporate demand for dollars. The country sold $599 million in foreign exchange reserves, monetary authorities said…”
Social, Political, Environmental, Cybersecurity Instability Watch:
December 22 – Reuters (Mark John): “No sooner had the global economy started to put the aftermath of the COVID-19 pandemic behind it than a whole new set of challenges opened up for 2025. In 2024, the world's central banks were finally able to start lowering interest rates after largely winning the battle against inflation without sparking a global recession. Stocks hit record highs in the United States and Europe and Forbes declared a ‘banner year for the mega-wealthy’ as 141 new billionaires joined its list of the super-rich. But if this was supposed to be good news, someone forgot to tell voters. In a bumper election year, they punished incumbents from India to South Africa, Europe and the United States for the economic reality they were feeling: a merciless cost of living crisis brought on by cumulative post-pandemic price rises.”
December 23 – Financial Times (Gideon Rachman): “The G7 is the ‘steering committee of the free world’, according to Jake Sullivan, President Joe Biden’s national security adviser. If so, the free world has a problem. The majority of G7 governments are now so burdened with domestic political problems that they are incapable of steering their own countries — let alone the free world. Consider the political situations in France, Germany, Canada, Japan and South Korea… In France, the government recently fell after it was unable to pass a budget. A new prime minister is in place but will face the same problems. There is much speculation that Emmanuel Macron will resign as president before the scheduled end of his term in 2027. Germany is heading for elections after the collapse of the ‘traffic-light’ coalition led by Olaf Scholz. Recent elections in Japan saw the ruling Liberal Democratic party lose its majority for the first time since 2009… In Canada, Justin Trudeau’s near decade in power is coming to an undignified end.”
December 26 – Reuters (Puyaan Singh): “The U.S. Centers for Disease Control and Prevention said… its analysis of samples from the first severe case of bird flu in the country last week showed mutations not seen in samples from an infected backyard flock on the patient's property. The CDC said the patient's sample showed mutations in the hemagglutinin (HA) gene, the part of the virus that plays a key role in it attaching to host cells. The health body said the risk to the general public from the outbreak has not changed and remains low.”
Geopolitical Watch:
December 23 – Reuters (David Ljunggren): “Canadian Prime Minister Justin Trudeau, whose party looks set to lose power early next year, is under increasing pressure from his own legislators to step down and let someone else take over. The ruling Liberals face obliteration in the next election after more than nine years in office amid voter fatigue as well as anger over high prices and a housing crisis… More than 50 Liberal members of parliament from Ontario - the most populous of the 10 provinces and the party's main stronghold - held a call on Saturday and agreed Trudeau had to step down.”
The S&P500 increased 0.7% (up 25.2% y-t-d), and the Dow added 0.4% (up 14.1%). The Utilities inched 0.3% higher (up 17.5%). The Banks recovered 1.0% (up 33.8%), and the Broker/Dealers rallied 1.9% (up 46.3%). The Transports gained 0.9% (up 0.8%). The S&P 400 Midcaps increased 0.5% (up 12.8%), while the small cap Russell 2000 was little changed (up 10.7%). The Nasdaq100 added 0.9% (up 27.6%). The Semiconductors rallied 3.2% (up 22.7%). The Biotechs gained 1.1% (up 6.8%). With bullion down $2, the HUI gold index slipped 0.5% (up 14.5%).
Three-month Treasury bill rates ended the week at 4.1725%. Two-year government yields added a basis point to 4.33% (up 8bps y-t-d). Five-year T-note yields rose eight bps to 4.46% (up 61bps). Ten-year Treasury yields jumped 10 bps to 4.63% (up 75bps). Long bond yields increased 10 bps to 4.82% (up 79bps). Benchmark Fannie Mae MBS yields gained eight bps to 5.89% (up 62bps).
Italian 10-year yields rose 10 bps to 3.54% (down 16bps y-t-d). Greek 10-year yields jumped 11 bps to 3.24% (up 19bps). Spain's 10-year yields rose 11 bps to 3.08% (up 9bps). German bund yields increased 11 bps to 2.40% (up 37bps). French yields jumped 13 bps to 3.21% (up 65bps). The French to German 10-year bond spread widened two to 81 bps. U.K. 10-year gilt yields rose 12 bps to 4.63% (up 110bps). U.K.'s FTSE equities index increased 0.8% (up 5.4% y-t-d).
Japan's Nikkei 225 Equities Index rallied 4.1% (up 20.4% y-t-d). Japanese 10-year "JGB" yields jumped six bps to 1.11% (up 49bps y-t-d). France's CAC40 recovered 1.1% (down 2.5%). The German DAX equities index increased 0.5% (up 19.3%). Spain's IBEX 35 equities index added 0.6% (up 14.2%). Italy's FTSE MIB index advanced 1.2% (up 12.6%). EM equities were mixed. Brazil's Bovespa index fell 1.5% (down 10.4%), and Mexico's Bolsa index declined 0.6% (down 14.1%). South Korea's Kospi was unchanged (down 9.4%). India's Sensex equities index gained 0.8% (up 8.9%). China's Shanghai Exchange Index added 1.0% (up 14.3%). Turkey's Borsa Istanbul National 100 index gained 3.1% (up 34.2%).
Federal Reserve Credit declined $12.4 billion last week to $6.841 TN. Fed Credit was down $2.049 TN from the June 22, 2022, peak. Over the past 276 weeks, Fed Credit expanded $3.114 TN, or 84%. Fed Credit inflated $4.030 TN, or 143%, over the past 633 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt fell $5.7 billion last week to $3.297 TN. "Custody holdings" were down $88.4 billion y-o-y, or 2.6%.
Total money market fund assets surged $54.7 billion to a record $6.806 TN. Money funds were up $671 billion over 21 weeks (27% annualized) and $919 billion y-t-d (15.6% ann.).
Total Commercial Paper declined $8.8 billion to $1.148 TN. CP was down $123 billion, or 9.7%, over the past year.
Freddie Mac 30-year fixed mortgage rates jumped 13 bps this week to 6.85% (up 24bps y-o-y). Fifteen-year rates rose eight bps to 6.00% (up 7bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-year fixed rates up seven bps to 7.33% (up 28bps).
Currency Watch:
December 23 – Bloomberg (Erica Yokoyama, Daisuke Sakai and Mia Glass): “Japan rolled out more warnings against speculative yen movements as the currency continues to show weakness ahead of two potentially market-moving central bank events this week. ‘I’m deeply concerned about recent currency moves, including those driven by speculators,’ Japanese Finance Minister Katsunobu Kato told reporters… ‘The government will take appropriate action against excessive FX moves,’ Kato added in a standard hint at potential intervention.”
December 22 – Bloomberg (David Finnerty): “Leveraged funds have turned bullish on dollar-yen as they rush into positions that project the currency pair will rise as much as 5% in the coming months. Hedge funds piled into bullish dollar-yen options trades following hawkish Federal Reserve and dovish Bank of Japan interest rate decisions last week.”
For the week, the U.S. Dollar Index increased 0.4% to 108.00 (up 6.6% y-t-d). For the week on the upside, the Swedish krona increased 0.2% and the British pound inched 0.1% higher. On the downside, the South African rand declined 2.1%, the Brazilian real 1.7%, the South Korean won 1.6%, the Mexican peso 0.3%, the Japanese yen 1.0%, the Swiss franc 1.0%, the Australian dollar 0.5%, the Canadian dollar 0.4%, the Norwegian krone 0.3%, the New Zealand dollar 0.3%, and the Singapore dollar. The Chinese (onshore) renminbi was little changed versus the dollar (down 2.69% y-t-d).
Commodities Watch:
The Bloomberg Commodities Index increased 0.7% (down 0.4% y-t-d). Spot Gold was little changed at $2,621 (up 27.1%). Silver slipped 0.5% to $29.385 (up 23.5%). WTI crude recovered $1.14, or 1.6%, to $70.60 (down 2%). Gasoline increased 0.9% (down 7%), while Natural Gas dipped 0.8% to $3.383 (up 35%). Copper added 0.5% (up 6%). Wheat rallied 2.5% (down 13%), and Corn gained 1.7% (down 4%). Bitcoin dropped $3,180, or 3.3%, to $94,450 (up 122%).
Trump Administration Watch:
December 22 – Financial Times (Steff Chávez): “Donald Trump has tapped Stephen Miran, an economist who served during the president-elect’s first term, to chair his Council of Economic Advisers and named billionaire investor Stephen Feinberg to a senior defence post… Miran was a senior adviser for economic policy at the Treasury department in the first Trump administration. With his nomination, the president-elect is seeking to elevate a critic of Federal Reserve chair Jay Powell who has also accused the Biden administration of manipulating the economy and ‘usurping’ the central bank’s role. ‘Steve will work with the rest of my Economic Team to deliver a Great Economic Boom that lifts up all Americans,’ Trump said…”
December 24 – Axios (Dave Lawler): “President-elect Trump has big plans to make America greater, in terms of square mileage. Trump has been in a strikingly imperial mood since his election victory. He has floated acquiring Greenland, reclaiming the Panama Canal, annexing Canada, and potentially invading Mexico — to the intense consternation of their leaders. In each case, Trump is blending trolling, negotiation and intimidation. He pitched statehood for Canada at least in part to needle ‘Governor’ Justin Trudeau. But he has doubled down in the last 48 hours (including via memes) on taking over Greenland and claiming the Panama Canal. It's unclear how exactly either would be accomplished short of an invasion. Between the lines: This is Trump's foreign policy playbook, or lack thereof. He says wild stuff, sometimes acts on it, and often doesn't.”
December 22 – Financial Times (Steff Chávez and Thomas Graham): “Panama’s President José Raúl Mulino hit back at Donald Trump after the president-elect said he would demand the Panama Canal be ‘returned’ to the US if the vital waterway was not operated to his liking. Trump’s weekend salvo and the ensuing diplomatic feud offered a taste of his chaotic brand of international politics… The president-elect attacked the Central American country over what he considered excessive fees… ‘I want to express precisely that every square metre of the Panama Canal and its adjacent area belong to PANAMA, and will continue to be. The sovereignty and independence of our country are not negotiable,’ Mulino said… Trump said… ‘we will demand that the Panama Canal be returned to us’ if the ‘principles, both moral and legal, of [the US’s] magnanimous gesture of giving are not followed’, adding that control of the canal was ‘foolishly’ ceded to Panama 25 years ago.”
December 22 – Wall Street Journal (Santiago Pérez, José de Córdoba and Alex Leary): “President-elect Donald Trump is openly discussing provocative aspirations for U.S. territorial expansion as he prepares to return to the White House, warning about taking over the Panama Canal and wresting control of Greenland from Denmark. His comments… come after he recently trolled Canadian Prime Minister Justin Trudeau by suggesting that Canada should become the 51st state and referring to Trudeau as a governor. During the recent presidential campaign, Trump said he would deploy the U.S. military to impose a naval embargo on Mexican cartels and order the Pentagon to use American special forces to take down cartel leaders. Taken together, the president-elect’s broadsides signal that he will pursue a confrontational foreign-policy agenda, leveraging unconventional threats and pointed demands in an attempt to gain advantage over allies and adversaries alike.”
December 23 – Bloomberg (Michael McDonald): “Panama President Jose Raul Mulino rallied support from former presidents in defense of the country’s canal following threats from Donald Trump to reimpose US control over the waterway. Mulino met with three Panamanian leaders on Monday, who all signed a statement asserting the country’s independence and autonomy over the canal. ‘As ex-presidents, we support the the declarations of President Jose Raul Mulino and we unite under the affirmation that the sovereignty and independence of our country and our canal are not negotiable,’ the statement said. It was signed by former Presidents Mireya Moscoso, Ernesto Perez Balladares and Martin Torrijos.”
December 21 – Bloomberg (Esha Dey): “Less than two months ago, shares of Tesla Inc. were on their way to just the third losing year in the electric-vehicle maker’s decade-and-a-half as a public company. But after a furious rally in the last seven weeks, the stock is suddenly among the S&P 500 Index’s best performers for 2024… Since Election Day, they’ve soared 73%, putting them up 69% for 2024. Meaning, in less than two months, the EV maker has added a staggering $572 billion to its market capitalization, bringing it to around $1.4 trillion, although nothing about the company fundamentally changed.”
December 25 – New York Times (Lydia DePillis): “Money is the mother’s milk of politics, but the outcome of elections also determines where it flows — and last month’s was especially crucial for the energy industry. Clean investment — including renewable energy as well as the manufacturing of electric vehicles, batteries and solar panels — has boomed since the passage of the 2022 Inflation Reduction Act, championed by President Biden. In the third quarter of 2024, it reached a record $71 billion, according to… the Rhodium Group… and M.I.T. The big question looming now on Wall Street: Will President-elect Donald J. Trump, who called Mr. Biden’s policies the ‘green new scam’ during the campaign, pull back enough of those subsidies and regulations to meaningfully change the economics of investing in decarbonization?”
Trade War Watch:
December 23 – New York Times (Ana Swanson and Paul Mozur): “The Biden administration… initiated a trade investigation into China’s production of older types of computer chips that are integral for cars, dishwashers, telecom networks and military weaponry. The inquiry could result in tariffs or other measures to block Chinese chips from entering U.S. markets, though the decision of which approach to take, if any, would fall to the incoming Trump administration. In industry after industry — from steel and ships to solar panels and electric vehicles — China has pumped money into building world-class manufacturing facilities, creating a surge of low-cost products that ultimately flood global markets. American companies… are finding themselves unable to compete, have shut down, leaving Chinese firms largely in control of the global market.”
December 21 – Bloomberg: “Chinese curbs on exports of three niche metals to the US have already rattled the market. Now, a bigger clampdown looks set to have far-reaching ramifications for supply chains feeding American defense and chip-making industries. Beijing this month slapped a ban on US-bound exports of gallium, germanium and antimony in a tit-for-tat move in a technology trade war. The metals are important because they have crucial uses in many Western industries from military tech to semiconductors to satellites.”
Middle East War Watch:
December 26 – Wall Street Journal (Omar Abdel-Baqui): “Syria’s new rulers are facing challenges to their authority, including clashes with allies of the old regime and protests accusing them of destroying religious symbols. Islamist group Hayat Tahrir al-Sham launched the assault that overthrew dictator Bashar al-Assad and has now positioned itself as the country’s new government. In the largest incident since taking over, it said at least 14 members of the new government’s security forces were killed Wednesday in an ambush conducted by loyalists of the old regime. The killings happened in Tartus province, along the coast, an area heavily populated by Syria’s minority Alawite sect, which included the Assads. The transitional government said it launched an operation to pursue Assad loyalists and restore order.”
Ukraine War Watch:
December 25 – Reuters (Pavel Polityuk): “Russia attacked Ukraine's energy system and some cities with cruise and ballistic missiles plus drones on Wednesday in an ‘inhuman’ Christmas Day assault, Ukraine's President Volodymyr Zelenskiy said. Nearly three years into the war, the strikes wounded at least six people in the northeastern city of Kharkiv and killed one in the region of Dnipropetrovsk, the governors there said. Half a million people in Kharkiv region were left without heating, in temperatures just a few degrees Celsius above zero, while there were blackouts in the capital Kyiv and elsewhere.”
December 22 – Wall Street Journal (Editorial Board): “Donald Trump wants to end the war in Ukraine, and who doesn’t? Apparently Vladimir Putin, who used his annual end-of-year news conference last week to send the President-elect a message about his peace terms. ‘Now, regarding the conditions for starting negotiations: We have no preconditions,’ Mr. Putin said before outlining sweeping preconditions. Talks would be ‘based on’ 2022 negotiations in Istanbul and ‘proceeding from the current realities on the ground,’ he said. Russia’s 2022 Istanbul proposal called for Ukraine to abandon aspirations to join NATO, become a permanently neutral state, and drastically shrink its armed forces. This would ratify Russia’s territorial gains and render Ukraine defenseless against inevitable future Russian aggression.”
Taiwan Watch:
December 22 – Bloomberg: “China will take all necessary measures to defend national sovereignty, security and territorial integrity, the Ministry of Foreign Affairs said… responding to the US’ decision to provide defense assistance and approve the sales of weapons to Taiwan. China urges the US to immediately stop arming Taiwan. The Chinese side is strongly dissatisfied and firmly opposed the US moves.”
December 26 – Reuters (Yimou Lee): “Taiwan's Presidential Office held its first ‘tabletop’ exercise involving government agencies beyond the armed forces on Thursday, simulating a military escalation with China amid renewed threats from Beijing, officials said. Dozens of central and local government agencies as well as civil groups participated in the three-hour exercise…”
December 27 – Financial Times (Kathrin Hille): “China has launched the world’s largest amphibious assault ship, in the latest demonstration of how Beijing’s industrial capacity is strengthening its military power amid rising geopolitical tensions with the US. Combining elements of amphibious landing vessels — which are designed to carry and support an invasion force — with those of an aircraft carrier, the ship significantly strengthens Beijing’s ability to project power globally. It also adds to China’s capabilities in the event of an invasion of Taiwan.”
Market Instability Watch:
December 22 – Wall Street Journal (Mary Anastasia O’Grady): “Investors piled out of Brazil last week, sending its currency, the real, to historically low levels and country risk soaring. Brazilian stocks plummeted. The panic came after months of deterioration in the outlook for the Brazilian fisc. Reuters reported… the dollar-denominated MSCI Brazil index had ‘fallen more than 30% since the start of the year.’ The trigger for the most recent round of selling in the world’s ninth-largest economy was a watered-down tax and spending package that fell far short of what’s needed to close a gaping hole in the budget. With a nominal deficit of 9.5% of gross domestic product, more than double what it was when President Luiz Inácio ‘Lula’ da Silva took office two years ago, and no credible plan to right-size it, Brazil faces a deep fiscal crisis.”
December 23 – Bloomberg (Ye Xie, Michael Mackenzie and Liz Capo McCormick): “Bond traders have rarely suffered so much from a Federal Reserve easing cycle. Now they fear 2025 threatens more of the same. US 10-year yields have climbed more than three-quarters of a percentage point since central bankers started slashing benchmark interest rates in September. It’s a counterintuitive, loss-inducing response, marking the biggest jump in the first three months of a rate-cutting cycle since 1989.”
Global Credit Bubble Watch:
December 23 – Bloomberg (Robert Burgess and Clive Crook): “US federal debt and budget deficits are at extreme levels, putting America on a path toward financial ruin. Or not. The government borrowed heavily in recent years to support the economy through the global pandemic and underwrite the agendas of presidents Donald Trump and Joe Biden. Total debt outstanding has surged to $36 trillion from $19.5 trillion in 2016, or approximately 120% of gross domestic product from 105%. To make matters worse, spending continues to far outstrip tax revenue even though the economy has made a striking recovery from the Covid-19 emergency, causing the budget deficit to balloon to $1.83 trillion in the fiscal year ended Sept. 30.”
December 27 – Bloomberg (Vincent Daigger and Jasvinder Singh): “US institutional leveraged loan issuance topped $1.3 trillion this year, as economic optimism and strong investor demand allowed for repricings. A deals recovery may mean stronger new-money financing in 2025. The recently launched Bloomberg US Leveraged Loan Index (LOAN Index) has been outperforming most major debt benchmarks this year. Both investors and issuers were satisfied as relatively high floating rates juiced returns, while credit spreads narrowed amid declining default risk. Collateralized loan obligation managers have been busy packaging debt into structured products.”
December 22 – Financial Times (Joshua Franklin): “The four biggest US banks are on course to capture their largest share of the industry’s profits in almost a decade, a sign of how they are consolidating their dominant market position. JPMorgan Chase, Bank of America, Citigroup and Wells Fargo… collectively reported about $88bn in profits in the first nine months of 2024… Together they account for 44% of the US banking industry’s profits — the highest share for the first nine months of the year since 2015 — despite the pool taking in more than 4,000 of the country’s other banks. Including US Bank, PNC and Truist, the seven largest banks by deposits generated almost 56% of all banking profits in the first nine months of the year, up from 48% for the same period in 2023.”
December 18 – Bloomberg (Will Kubzansky and Josyana Joshua): “Wall Street firms are debating whether US high-grade corporate bond sales can set a record in 2025 as just over $1 trillion of notes are set to mature. Some key elements for a big year are in pl¬ace after 2024 issuance set a multiyear high. Companies unleashed a record wave of bond sales early this decade, when the Federal Reserve cut rates to near-zero after Covid-19 hobbled economic activity. The echo of that boom is now coming as four- and five-year bonds sold then are coming due. Many will need to be refinanced. On top of that, the artificial intelligence revolution is spurring many companies — including utilities — to borrow more to fund construction and other investments.”
December 24 – Financial Times (Alan Livsey and Harriet Clarfelt): “US companies are defaulting on junk loans at the fastest rate in four years, as they struggle to refinance a wave of cheap borrowing that followed the Covid pandemic. Defaults in the global leveraged loan market — the bulk of which is in the US — picked up to 7.2% in the 12 months to October… That is the highest rate since the end of 2020. The rise in companies struggling to repay loans contrasts with a much more modest rise in defaults in the high-yield bond market, highlighting how many of the riskier borrowers in corporate America have gravitated towards the fast-growing loan market. Because leveraged loans — high yield bank loans that have been sold on to other investors — have floating interest rates, many of those companies that took on debt when rates were ultra low during the pandemic have struggled under high borrowing costs in recent years.”
December 23 – Bloomberg (Esteban Duarte): “Bank of America Corp. is close to issuing a significant risk transfer linked to a $1 billion portfolio of corporate loans, according to people familiar with the matter. The SRT, which is equivalent to about $90 million, was priced at a spread of less than 400 bps over a benchmark borrowing rate…”
AI Bubble Watch:
December 20 – Wall Street Journal (Deepa Seetharaman): “OpenAI’s new artificial-intelligence project is behind schedule and running up huge bills. It isn’t clear when—or if—it’ll work. There may not be enough data in the world to make it smart enough. The project, officially called GPT-5 and code-named Orion, has been in the works for more than 18 months and is intended to be a major advancement in the technology that powers ChatGPT. OpenAI’s closest partner and largest investor, Microsoft, had expected to see the new model around mid-2024… OpenAI has conducted at least two large training runs, each of which entails months of crunching huge amounts of data… Each time, new problems arose and the software fell short of the results researchers were hoping for… At best, they say, Orion performs better than OpenAI’s current offerings, but hasn’t advanced enough to justify the enormous cost of keeping the new model running. A six-month training run can cost around half a billion dollars in computing costs alone…”
December 24 – Wall Street Journal (Raffaele Huang and Tracy Qu): “Chinese startups show signs of catching up with America’s leading artificial-intelligence models more quickly than many in the industry had expected… DeepSeek, a startup funded by one of China’s most successful hedge-fund managers, released a preview version of its latest large language model in November. It said the program’s abilities compared favorably with OpenAI’s reasoning model called o1, which came out in preview form in September. Other Chinese companies have made similar claims in recent weeks. Moonshot AI, a startup backed by Chinese internet giants Alibaba and Tencent, said it developed a model specializing in math with capabilities close to o1, while Alibaba said one of its own experimental research models outperformed the preview version of the U.S. model on math.”
Bubble and Mania Watch:
December 21 – Financial Times (Ian Smith and George Steer): “Investors poured record amounts into global bond funds this year as they bet on a shift towards easier monetary policy by major central banks. Bond funds attracted more than $600bn in inflows so far this year, according to… EPFR, topping the previous high of almost $500bn in 2021… This ‘was the year that investors bet big on a substantial shift in monetary policy’ that has historically supported bond returns, said Matthias Scheiber, a senior portfolio manager at asset manager Allspring.”
December 23 – New York Times (Michael J. de la Merced): “By most measures, 2024 was a year of fits and starts for M.&A., especially compared with a year ago. And I.P.O.s were a flat-out dud. For deal makers, there are plenty of reasons to hope that 2025 will be better, including a potentially more business-friendly White House and Congress, investor ebullience and a relatively strong American economy. But there are also factors that may keep corporate deal makers on edge… Heading into 2024, bankers and lawyers said that the overall mood in corporate boardrooms was cautious, given geopolitical uncertainties and questions about the vitality of the global economy… While the dollar volume of deals announced in 2024 as of Friday rose 9% year-on-year, to $3 trillion, the number of transactions fell 18%, to 46,534, according to… the London Stock Exchange Group. That’s the lowest level since 2015 and worse than 2020…”
December 27 – Bloomberg (Olga Kharif and Yizhu Wang): “Bitcoin’s record-breaking rally is rekindling hope that the digital-ledger technology that underpins cryptocurrencies will revolutionize everything from recording the ownership of houses to bonds. Tokenization, or the process of creating digital representations of real-world assets on a blockchain, has become one of this year’s buzzwords in both conventional and crypto finance circles. The excitement is reminiscent of the hype of a few years ago surrounding the use of blockchains for everything from tracking lettuce at Walmart Inc. to digitizing stocks that proved to be premature.”
December 24 – Financial Times (Antoine Gara and Alexandra Heal): “Private equity funds cashed out just half the value of investments they typically sell in 2024, the third consecutive year payouts to investors have fallen short because of a deal drought. Buyout houses typically sell down 20% of their investments in any given year, but industry executives forecast that cash payouts for the year would be about half that figure. Cambridge Associates… estimated that funds had fallen about $400bn short in payments to their investors over the past three years compared with historical averages. The data underline the increasing pressure on firms to find ways to return cash to investors, including by exiting more investments in the year ahead. Firms have struggled to strike deals at attractive prices since early 2022, when rising interest rates caused financing costs to soar and corporate valuations to fall.”
U.S./Russia/China/Europe Watch:
December 25 – Bloomberg (Minxin Pei): “President Xi Jinping is fond of invoking stormy seas to describe the dangers China will confront in the years ahead… As Donald Trump reenters the White House, Xi’s luck threatens to run out. He could face five simultaneous challenges that will determine China’s trajectory for the remainder of the decade. Without question, the first ‘storm’ awaiting Xi is an escalation in Sino-American tensions… With its economy hobbled by excessively high debt, deflation, and a real estate crisis, China is in a more perilous state than in 2018, when Trump first hauled out his tariff bazooka. Even more dangerously, the hawks in control of the US national security apparatus are likely to adopt more aggressive tactics on Taiwan and the South China Sea, which could precipitate a superpower standoff reminiscent of the 1962 Cuban missile crisis.”
December 26 – Financial Times (Minxin Pei): “Finland suspects an oil tanker that is part of Russia’s shadow fleet of damaging an underwater electricity cable and three communication cables, opening an investigation into the vessel for aggravated sabotage. The Eagle S was stopped by Finnish authorities after the Estlink 2 subsea electricity cable in the Gulf of Finland was disconnected on Wednesday… Finnish police said… they believe the vessel’s anchor, which they did not find on the ship, cut the cables. ‘We must be able to prevent the risks posed by ships belonging to the Russian shadow fleet,’ said Finland’s President Alexander Stubb…”
December 24 – Reuters (Kanishka Singh): “The Canadian government condemned China… for taking steps against two Canadian institutions and 20 people involved in human rights issues concerning the Uyghurs and Tibet. China announced the measures, which included asset freezes and bans on entry... Its targets included the Canada-based Uyghur Rights Advocacy Project and the Canada-Tibet Committee, China's foreign ministry said.”
De-globalization Watch:
December 26 – Bloomberg: “Russian President Vladimir Putin said any new deal for transporting natural gas through Ukraine will be challenging. ‘There is no contract, and it is impossible to conclude it in three to four days,’ Putin said…”
December 25 – Reuters (Gleb Bryanski): “Russian companies have begun using bitcoin and other digital currencies in international payments following legislative changes that allowed such use in order to counter Western sanctions, Finance Minister Anton Siluanov said… Sanctions have complicated Russia's trade with its major partners such as China or Turkey, as local banks are extremely cautious with Russia-related transactions to avoid scrutiny from Western regulators.”
Inflation Watch:
December 23 – Wall Street Journal (Nicole Friedman): “Soaring costs for home insurance and property taxes are busting homeowners’ budgets. Insurers have pushed big rate increases because of losses from natural disasters and rising costs to repair homes. Surging home values in recent years, meanwhile, have lifted property taxes for many homeowners. These ballooning expenses are rewriting the math of homeownership. In September, 32% of the average single-family mortgage payment went to property taxes and home insurance, the highest rate ever for data going back to 2014… For a small but increasing share of households, the burden is far more significant. In five major metro areas—Rochester and Syracuse, N.Y.; Omaha, Neb.; New Orleans and Miami—at least a quarter of borrowers spend more than half their monthly mortgage payment on taxes and insurance…”
Federal Reserve Watch:
December 23 – Bloomberg (Jana Randow): “Elon Musk, the billionaire tasked with making the US government more efficient come January, has zeroed in on the Federal Reserve. The central bank in charge of protecting the world’s largest economy is ‘absurdly overstaffed,’ Musk wrote on social-media platform X. The remarks were part of a thread that began with another individual posting about the Fed’s latest policy decision.”
December 24 – CNBC (Sara Eisen): “A group of banks and business groups are suing the Federal Reserve over the annual bank stress tests. The Bank Policy Institute, which represents big banks like JPMorgan, Citigroup and Goldman Sachs, is joining the American Bankers Association, the Ohio Bankers League, the Ohio Chamber of Commerce and the U.S. Chamber of Commerce to file the suit, which they said aims to ‘resolve longstanding legal violations by subjecting the stress test process to public input as required by federal law.’ The groups said they don’t oppose stress testing, but that the current process falls short and ‘produces vacillating and unexplained requirements and restrictions on bank capital.’”
December 24 – Bloomberg (Alexandra Harris): “Balances at the Federal Reserve’s overnight reverse repurchase agreement facility swelled on Tuesday by the most since June quarter-end as year-end balance-sheet constraints and scramble for funding ahead of Christmas drove cash to the central bank. Some 52 counterparties parked $181 billion at the RRP, the highest since Nov. 2, from $116 billion the prior session.”
December 23 – Bloomberg (Pete Schroeder): “Federal Reserve Vice Chair for Supervision Michael Barr has sought legal advice to explore his options against any attempts by President-elect Donald Trump to remove him, sources said, the latest sign that a conflict might be looming between the incoming administration and the central bank. Barr, who was tapped to serve as the Fed's top regulatory official by President Joe Biden, has in recent weeks sought advice from law firm Arnold & Porter in his personal capacity…”
U.S. Economic Bubble Watch:
December 24 – Associated Press (Mae Anderson): “A recent survey shows small business owners are feeling more optimistic about the economy following the election. The National Federation of Independent Businesses’ Small Business Optimism Index rose by eight points in November to 101.7, its highest reading since June 2021. The Uncertainty Index declined 12 points in November to 98, following October’s pre-election record high of 110. NFIB Chief Economist Bill Dunkelberg said small business owners became more certain about future business conditions following the presidential election…”
December 23 – Yahoo Finance (Josh Schafer): “US consumer confidence tumbled in December from the previous month amid Americans' growing uncertainty over the economic outlook in the year ahead. The Conference Board's consumer confidence index declined by 8.1 points in December to 104.7, below the 113.2 expected by economists… The expectations index, which includes the short-term outlook for income, business, and labor market conditions, sank 12.6 points to 81.1 in December, its largest month-over-month decline since November 2020.”
December 26 – Reuters (Savyata Mishra and Siddharth Cavale): “Price-conscious holiday shoppers opened their wallets for last-minute online discounts on clothing and stocking stuffers… According to a Mastercard SpendingPulse report, online spending during the holiday shopping period from Nov. 1 to Dec. 24 grew by 6.7% over last year, compared to a 2.9% increase for in-store sales. This contributed to a total spending increase of 3.8% over 2023, surpassing the previously forecast rise of 3.2% and topping the 3.1% increase during the same period last year.”
December 26 – CNBC (Lorie Konish): “Many Americans are capping off the holidays with new debt balances. This season, 36% of American consumers took on holiday debt, according to… LendingTree. Those who racked up balances this season took on an average of $1,181 in debt, up from $1,028 in 2023. However, that is still down from $1,549 in 2022… Less than half — 44% — of the people who took on debt expected to acquire those balances, a sign that this holiday season is still financially challenging for many people, according to Matt Schulz, chief credit analyst at LendingTree.”
December 26 – Associated Press (Matt Ott): “The number of Americans applying for unemployment benefits held steady last week, though continuing claims rose to the highest level in three years. Jobless claim applications ticked down by 1,000 to 219,000 for the week of Dec. 21… That’s fewer than the 223,000 analysts forecast. Continuing claims, the total number of Americans collecting jobless benefits, climbed by 46,000 to 1.91 million for the week of Dec. 14.”
December 23 – Bloomberg (Michael Sasso): “New-home sales in the US rebounded last month as builders and consumers sealed deals that had been delayed by storms in the South, and buyers took advantage of heavy sales incentives. Sales of new single-family homes increased 5.9% last month to a 664,000 annualized rate… The median sale price of a new single-family home decreased 6.3% last month from a year ago, and is now $402,600.”
December 23 – Financial Times (Patrick Temple-West): “Chief executives of publicly traded US companies are leaving in record numbers despite historic pay bonuses as the booming stock market and fear of turmoil in 2025 has prompted executives to exit. In the year to November, 327 chief executives at US public companies announced they were leaving, exceeding the record 312 exits in 2019, according to Challenger Gray... The exits have contributed to a falling tenure for the role. In the third quarter, eight CEOs left after lasting less than three years in the position, the highest number of short-term appointments since 2019, according to… Russell Reynolds.”
China Watch:
December 27 – Bloomberg: “Chinese government bonds are primed for their best year in a decade, with local fund managers and strategists predicting more gains for 2025. They are set to reap a 9% total return in 2024, the highest since 2014, as measured by a Bloomberg Index which excludes currency moves. The nation’s 10-year yields have plummeted 84 bps since January, dropping to 1.71% on Thursday.”
December 24 – Bloomberg: “China’s policymakers plan to sell a record 3 trillion yuan ($411bn) of special treasury bonds in 2025…, a move aimed at bolstering the slowing economy. The plan would be a sharp increase from this year’s 1 trillion yuan and be used to support consumption and investments as well as recapitalizing large state banks… The reported fiscal measures come as China is mapping out its economic plans for next year, with top leaders hinting at bolder stimulus as Beijing faces tariff threats from the incoming Trump administration.”
December 23 – Bloomberg: “China’s finance ministry reaffirmed it will increase public spending with a greater focus on boosting consumption to support the economy next year, ahead of growth headwinds from looming US tariffs. China will ‘expand the magnitude of fiscal spending and accelerate the spending pace,’ according to a statement… following a two-day national conference held by the Ministry of Finance on fiscal work in 2025.”
December 23 – Reuters (Kevin Yao): “China will ramp up fiscal support for consumption next year by raising pensions and medical insurance subsidies for residents as well as expanding consumer goods trade-ins, its finance ministry said… The country will boost the basic pension for retirees and for urban and rural residents and raise financial subsidy standards for urban and rural residents' medical insurance to help ‘vigorously’ boost consumption, the ministry said after concluding a two-day national fiscal work conference.”
December 25 – Bloomberg: “China is allowing local officials to invest in more areas with a key government bond while also simplifying its approval process in a bid to make better use of an important source of public funding to drive the economy. Local governments can use their special bonds to invest in projects as long as they’re not on a special list published by the cabinet, the government said… That list includes projects that don’t generate any returns, government buildings, vanity constructions like giant sculptures and commercial property.”
December 26 – Bloomberg: “China’s latest measures to deal with the financial risks of local officials have centered on a massive debt-swap plan, but a companion step is now drawing attention as a possible new tool. Ever since China unleashed a massive wave of credit to stoke its domestic economy in the depths of the global financial crisis, policymakers have been dealing with the dangers posed by a structure on which that wave relied — the so-called local government financing vehicles (LGFVs). Now, economists see potential for ‘central government financing vehicles’ to displace some of that activity... China has given a green light for a total 500 billion yuan ($68.5bn) to be raised by two state-owned enterprises for the purpose of ‘stabilizing the economy and expanding investment.’”
December 24 – Bloomberg: “China refrained from cutting the interest rate and drained the most cash since 2014 with a one-year policy tool, keeping its powder dry ahead of possible escalation in trade tensions with the US next year. The People’s Bank of China held the interest rate on the one-year medium-term lending facility steady at 2%... The authorities also withdrew a net 1.15 trillion yuan ($158bn) from the financial system with the tool, the most since 2014. Earlier this month, policymakers pledged ‘moderately loose’ monetary policy — the first shift in stance in about 14 years — along with ‘more proactive’ fiscal tools to bolster the economy.”
December 23 – Wall Street Journal (Lingling Wei): “Some are calling it a ‘Lost Decade.’ More than 10 years into the Xi Jinping era, it has become clear that much of China’s growth under his watch was driven by unsustainable borrowing, real estate speculation and investments in factories and infrastructure the country didn’t really need. Difficult reforms that could have unlocked more durable growth… were neglected in favor of policies designed to bolster Communist Party control. Now, China is drowning in debt, reeling from a property bust that wiped out trillions of dollars of household wealth, and verging on a deflationary spiral. Growth has slowed, Western investment has collapsed and consumer confidence is near a record low. And yet, as China squares off with the U.S. for a second showdown over trade, Xi is digging in. He’s convinced that his top-down approach to managing China’s economy, with plans to make it an even bigger industrial power, offers the best path for China to eventually surpass the U.S. in economic might.”
December 21 – Bloomberg: “One of China’s leading developers is now on authorities’ radar for default risk. A major Hong Kong builder is asking lenders to extend loans. Another industry peer is selling an iconic but largely empty mall in Beijing. As China’s property debt crisis enters its fifth year, there’s little indication that distressed developers are finding it easier to repay debt as a slump in home sales continues. Their dollar bonds are still trading at deeply distressed levels, their debt issuance has nearly dried up, and the sector is a notable laggard in stock markets. Alarm bells went off again in recent weeks, when the banking regulator told top insurers to report their financial exposure to China Vanke Co. to assess how much support the country’s fourth-largest developer by sales needs to avoid default.”
December 23 – Financial Times (Kaye Wiggins and Thomas Hale): “The world’s biggest private equity groups have been unable to sell or list their China-based portfolio companies this year, as Beijing’s crackdown on initial public offerings and a slowing economy leave foreign investors’ capital trapped... Among the 10 largest global private equity groups with operations in China, there is no record of any having listed a Chinese company this year or fully sold their stake through an M&A deal… It is the first year for at least a decade where this has been the case, though the pace of exits has been slow since Beijing introduced restrictions on Chinese companies’ ability to list in 2021. Buyout groups rely on being able to sell or list companies, typically within three to five years of buying them…”
Europe Watch:
December 24 – Associated Press (Angela Charlton): “France’s president and prime minister managed to form a new government just in time for the holidays. Now comes the hard part. Crushing debt, intensifying pressure from the nationalist far right, wars in Europe and the Mideast: Challenges abound for President Emmanuel Macron and Prime Minister Francois Bayrou… The most urgent order of business is passing a 2025 budget. Financial markets, ratings agencies and the European Commission are pushing France to bring down its deficit, to comply with EU rules limiting debt and keep France’s borrowing costs from spiraling… France’s debt is currently estimated at a staggering 112% of gross domestic product.”
Japan Watch:
December 25 – Bloomberg (Toru Fujioka): “Bank of Japan Governor Kazuo Ueda avoided giving a clear signal that he might raise interest rates next month by reiterating the need to keep monitoring risks for the economy in comments that nudged down the yen. ‘The timing and pace of adjusting the degree of monetary accommodation will depend on developments in economic activity and prices as well as financial conditions going forward,’ Ueda said… ‘The bank needs to pay due attention to various risk factors at home and abroad, and to examine how these factors will affect the outlook and risks for Japan’s economic activity and prices and the likelihood of realizing the outlook,’ he said.”
December 24 – Reuters (Leika Kihara): “Bank of Japan policymakers agreed in October to keep raising interest rates if the economy moves in line with their forecast, but some stressed the need for caution on uncertainty over U.S. economic policy, minutes of the meeting showed… The debate highlights how overseas economic risks… While the Oct. 30-31 meeting was held before Donald Trump's victory in the Nov. 5 presidential election, BOJ board members warned of renewed market volatility and potential big changes to U.S. policy as key risks to the outlook… ‘We can spend time scrutinising U.S. developments, including those after the U.S. presidential election, as we had already been expecting to raise rates at a moderate pace,’ one of the members was quoted as saying in the minutes.”
December 26 – Bloomberg (Erica Yokoyama): “Inflation in Tokyo accelerated for a second month in December while the labor market remained tight, results that largely keep the Bank of Japan on track for an interest rate hike... Consumer prices excluding fresh food rose 2.4% in the capital, quickening from growth of 2.2% the previous month… Tokyo’s figures serve as a leading indicator for national trends. Separate data showed… the jobless rate unchanged at 2.5%, while factory output declined less-than-expected on a monthly basis after robust gains in September and October. Retail sales came in stronger than forecast.”
December 25 – Bloomberg (Takashi Umekawa and Erica Yokoyama): “Japanese Prime Minister Shigeru Ishiba’s cabinet is expected to approve a record initial budget Friday for the next fiscal year that will ramp up spending on defense and support for local economies. The budget for the year starting in April 2025 will total around ¥115.5 trillion ($735bn)… While the draft shows the government will still have to lean heavily on debt issuance to help fund the spending, record tax receipts will enable the cutting back of fresh bond issuance by almost a fifth to ¥28.6 trillion.”
December 22 – Bloomberg (Masaki Kondo and Saburo Funabiki): “Investors are set to face the largest supply of Japanese sovereign bonds in at least a decade as the central bank plans to shrink its balance sheet, adding to debtholders’ woes from rising interest rates. The Ministry of Finance typically releases a plan in late December on the amount of debt it will sell in the fiscal year starting April 1. Should it be roughly the same as the current year, supply will increase 64% to ¥61 trillion ($390bn) if redemptions and Bank of Japan purchases are taken into account…”
December 22 – Bloomberg (Ayai Tomisawa): “Personal debt is overwhelming an increasing number of Japanese as higher interest rates and the rising cost of living bite. Consumer loans are rising at the highest rate in 16 years. Household borrowing exceeded incomes for the first time last year. And government officials are worried that many people accustomed to rock-bottom rates will struggle with their mounting loans.”
Emerging Markets Watch:
December 23 – Bloomberg (Juan Pablo Spinetto): “Latin America and the Caribbean will experience another frenetic year in 2025. I could bend your ear about the impact of Donald Trump’s return to the White House on Mexico and Central America… In Venezuela, Nicolás Maduro will try to extend his reign of terror while leaders from left to right will move carefully not to be squeezed by the US-China competition. The year will start and end with two consequential presidential elections in Ecuador (Feb. 9) and Chile (Nov. 16); the risk of Bolivia becoming the next political basket case is growing. Insecurity, migration and poverty will loom large… I must single out Latin America’s inescapable fiscal problem as my top obsession. The region is living way beyond its means, with debt that has become a black hole for resources, a system of tax collection unfit for purpose and an even more flawed approach to spending. The consistent failure to defuse this fiscal time bomb will have profound political, economic, social and financial consequences throughout the region next year and beyond.”
December 27 – Financial Times (Song Jung-a): “South Korea’s opposition-controlled parliament has impeached the acting president, throwing the country into further political turmoil. Lawmakers… passed a motion to impeach Han Duck-soo, who is also the prime minister, after he resisted pressure to appoint three justices to fill vacancies on the Constitutional Court. It marks the first time an acting president has been impeached in South Korea and comes less than two weeks after President Yoon Suk Yeol was suspended from his duties… Finance minister Choi Sang-mok assumed the acting presidency — the country’s third leader in less than a month.”
December 26 – Bloomberg (Sam Kim): “South Korea’s business confidence deteriorated the most since the global outbreak of Covid-19, reflecting mounting concerns about an economy grappling with political turmoil and facing Donald Trump’s tariff threats.”
December 23 – Bloomberg (Alex Vasquez and Carolina Millan): “Mexico’s annual inflation slowed slightly less than expected in early December as services prices remained pressured, supporting the central bank’s cautious stance as it extends interest rate cuts… Consumer prices rose 4.44% in the first two weeks of December from a year prior… Services inflation was the main driver in the period.”
December 23 – Bloomberg (Maria Elena Vizcaino and Zijia Song): “A row developing between President-elect Donald Trump and Panama over one of the world’s most-important waterways is denting the nation’s assets. Panama’s bonds dipped across the curve Monday morning, the most in emerging markets after Trump threatened to reassert US control of the Panama Canal if the nation didn’t cut transit fees. President José Raúl Mulino was quick to rebuff the threat, but the developing spat added to traders’ concerns over Panama’s outlook.”
December 26 – Bloomberg (Kevin Simauchi and Ignacio Olivera Doll): “Argentina’s central bank on Thursday sold the most foreign reserves in one day since October 2019 after officials eliminated a key tax on imports, igniting corporate demand for dollars. The country sold $599 million in foreign exchange reserves, monetary authorities said…”
Social, Political, Environmental, Cybersecurity Instability Watch:
December 22 – Reuters (Mark John): “No sooner had the global economy started to put the aftermath of the COVID-19 pandemic behind it than a whole new set of challenges opened up for 2025. In 2024, the world's central banks were finally able to start lowering interest rates after largely winning the battle against inflation without sparking a global recession. Stocks hit record highs in the United States and Europe and Forbes declared a ‘banner year for the mega-wealthy’ as 141 new billionaires joined its list of the super-rich. But if this was supposed to be good news, someone forgot to tell voters. In a bumper election year, they punished incumbents from India to South Africa, Europe and the United States for the economic reality they were feeling: a merciless cost of living crisis brought on by cumulative post-pandemic price rises.”
December 23 – Financial Times (Gideon Rachman): “The G7 is the ‘steering committee of the free world’, according to Jake Sullivan, President Joe Biden’s national security adviser. If so, the free world has a problem. The majority of G7 governments are now so burdened with domestic political problems that they are incapable of steering their own countries — let alone the free world. Consider the political situations in France, Germany, Canada, Japan and South Korea… In France, the government recently fell after it was unable to pass a budget. A new prime minister is in place but will face the same problems. There is much speculation that Emmanuel Macron will resign as president before the scheduled end of his term in 2027. Germany is heading for elections after the collapse of the ‘traffic-light’ coalition led by Olaf Scholz. Recent elections in Japan saw the ruling Liberal Democratic party lose its majority for the first time since 2009… In Canada, Justin Trudeau’s near decade in power is coming to an undignified end.”
December 26 – Reuters (Puyaan Singh): “The U.S. Centers for Disease Control and Prevention said… its analysis of samples from the first severe case of bird flu in the country last week showed mutations not seen in samples from an infected backyard flock on the patient's property. The CDC said the patient's sample showed mutations in the hemagglutinin (HA) gene, the part of the virus that plays a key role in it attaching to host cells. The health body said the risk to the general public from the outbreak has not changed and remains low.”
Geopolitical Watch:
December 23 – Reuters (David Ljunggren): “Canadian Prime Minister Justin Trudeau, whose party looks set to lose power early next year, is under increasing pressure from his own legislators to step down and let someone else take over. The ruling Liberals face obliteration in the next election after more than nine years in office amid voter fatigue as well as anger over high prices and a housing crisis… More than 50 Liberal members of parliament from Ontario - the most populous of the 10 provinces and the party's main stronghold - held a call on Saturday and agreed Trudeau had to step down.”
