[Reuters] Italy votes in referendum with PM Renzi's future at stake
[Bloomberg] Europe’s Populists Target Landmark Victories in Italy, Austria
[BBC] Italy referendum: PM Renzi's future in the balance
[AFR] Populist revolt leaves Italy on the brink ahead of refendum
[Bloomberg] What Italy’s Referendum Means for Monte Paschi: QuickTake Q&A
[AP] Trump threatens payback for US companies that move abroad
[Bloomberg] Draghi Seen Ready for One More QE Sprint in ECB Stimulus Finale
[Reuters] Greece needs reforms, not debt relief: Germany's Schaeuble
[AP] Trump's call inspires hope in Taiwan, concern in Beijing
[FT] Italy and Austria vote in crucial tests for European centre ground
[FT] ECB treads carefully to avoid taper tantrum
[WSJ] Dispensing With Tip-Toeing, Trump Puts Taiwan in Play
Saturday, December 3, 2016
Saturday's News Links
[Dow Jones] Irrational Exuberance: Alan Greenspan's Call, 20 Years Later
[Reuters] India's Modi defends clampdown on cash economy
[Bloomberg] Erdogan Says Turkey Faces ‘Economic Sabotage’ as Lira Plunges
[Washington Post] Amid global anti-establishment anger, Italy may be next in line for upheaval
[Reuters] China lodges protest after Trump call with Taiwan president
[Washington Post] A far-right Italian leader wants to take a Trump upset to Italy on Sunday
[Reuters] India's Modi defends clampdown on cash economy
[Bloomberg] Erdogan Says Turkey Faces ‘Economic Sabotage’ as Lira Plunges
[Washington Post] Amid global anti-establishment anger, Italy may be next in line for upheaval
[Reuters] China lodges protest after Trump call with Taiwan president
[Washington Post] A far-right Italian leader wants to take a Trump upset to Italy on Sunday
Friday, December 2, 2016
Weekly Commentary: Trump, Bonds, Peripheries, China and Italy
The trading week saw WTI crude surge 12.2%. The GSCI commodities index jumped 5.8%. Wheat dropped 3.6% and corn fell 3.1%. Italian 10-year yields fell 18 bps, and Greek yields dropped 37 bps. Meanwhile, Portuguese yields jumped 13 bps. In U.S. equities, Bank stocks (BKX) jumped 1.5%, while the Morgan Stanley High Tech index dropped 3.4%. The Biotechs (BTK) sank 6.4%. The DJIA was little changed, while the small caps fell 2.4%. Just another week for unstable global markets.
Pre-election trepidation morphed into post-election market exuberance, in only the latest demonstration of the power of an over-liquefied market backdrop. Here in the U.S., the bullish imagination has been captivated by the Trump administration’s pro-growth agenda, with its focus on tax and health-care reform, deregulation and infrastructure spending. The DJIA this week added slightly to record highs.
Meanwhile, a decidedly less halcyon reality seems to be coming into somewhat clearer focus: Trump’s victory likely marks a major inflection point for global markets. Bond yields have shot higher, while inflation expectations are being reset. The U.S. dollar has surged, while the emerging markets have come under pressure. From U.S. equity and bond ETFs to international financial flows, “money” is sloshing about chaotically.
There’s an extraordinary amount of confusion throughout the markets. For over a year I’ve posited that the global Bubble has been pierced. This view was in response to faltering EM, mounting Chinese instability, the collapse in crude and energy-related debt problems (from U.S. junk to global corporates and sovereigns). Especially in response to early-2016 global market instability, the Fed froze its baby-step “tightening” cycle, while the Bank of Japan and European Central Bank (and others) ratcheted up what were already desperate QE measures. In China, officials threw up their hands and set the Credit floodgates wide open.
It’s worth noting that the S&P500 rallied 22% from February 2016 lows. U.S. bank stocks (BKX) have surged a stunning 60%. From January lows to November highs, Brazilian stocks jumped 75%. Emerging Market equities (EEM) rallied almost 40%. Chinese stocks recovered 25%. Basically, EM stocks, bonds and currencies rallied sharply from Asia to Eastern Europe to Latin America.
Waning badly early in the year, confidence in central banking was rejuvenated by an audacious display of concerted “whatever it takes.” I believe history will view ECB and BOJ QE moves as dangerously misguided, while the Fed (again) failed to heed the lessons of leaving policy way too loose for too long. Forces that central bankers set in motion early in the year may have largely run their course.
These days it’s important to appreciate that the primary effects of monetary stimulus can change profoundly depending on prevailing market dynamics. Recall that the first (2009) QE basically accommodated speculative de-leveraging and the transfer of securities from troubled holders onto the Federal Reserve’s balance sheet. General inflationary impacts – within the securities markets as well as throughout the real economy – were muted. QE2 (late-2010 into 2011) stoked the powerful inflationary (“bullish”) bias that had evolved in bond prices and throughout the emerging markets. Concerted “whatever it takes” “QE3 and beyond” that unfolded in the second-half of 2012 threw fuel both on Bubbling global securities markets as well as China’s “Terminal Phase” of excess. The upshot has been only greater over-investment, over-capacity, asset inflation, inequitable wealth distribution and social tension. In many real economies around the world (notably Japan, Europe and the U.S.), consumer price inflation trended even lower.
Importantly, the predominant consequence from the 2016 QE bonanza was to spur global bond Bubbles to precarious speculative “melt-up” dynamics. Yields around the world collapsed indiscriminately to record lows. Japanese 10-year yields sank to negative 30 bps. German bund yields dropped to negative 19 bps and Swiss yields to negative 63 bps. Having issued bonds going back to 1693, UK Gilt yields dropped to a record low 52 bps. Few, however, benefited more than Europe’s troubled periphery. In one of history’s more spectacular asset mispricings, Italian bond yields sank to an incredible 1.05% and Spanish yields fell to 88 bps. In the U.S., Treasury yields dropped to 1.36%. Brazil (dollar) yields sank to about 4%, with Mexican (dollar) yields below 3%.
There’s a major problem associated with destabilizing speculative “blow-offs:” They notoriously conclude with sharp reversals, catching everyone by surprise and unearthing all kinds of excesses and associated maladjustment. Coming in conjunction with mounting global anti-establishment fervor, political instability and President-elect Donald Trump, the current bond market reversal ensures uncertainty even more acute than normal: A historic bond market Bubble meets historic social, political and geopolitical uncertainty – not to mention uncharted territory with respect to global monetary policy and economic structure.
Trump policies notwithstanding, global economic prospects remain murky at best. Record stock prices more reflect expectations of winning the money game than an indication of a brightening future. And with air now being released from the Bubble, the best days for bond prices have passed. Especially in the era of king dollar, “money” is now fully expected to deluge the world’s premier asset class - U.S. equities.
Let’s ponder for a moment The Other Side of the Story. Surging global bond yields will entail enormous amounts of speculative de-leveraging. This has yet to become a major issue for the markets only because of the ongoing $2.0 TN of global QE. Yet in this post-Bond Bubble and Trump to the White House backdrop, QE is rather suddenly no longer the bond market’s best friend. QE instead only exacerbates flows into stocks and king dollar – and perhaps even real economies where a shift in inflation trends is already indicated.
So, it’s this confluence of surging bond yields, de-leveraging, unwieldy flows and the potential for inflationary pressures to take root that is now rocking Peripheries around the globe. Importantly, policy confusion and uncertainty are poised to become a pressing market issue. With central bank liquidity inflating Bubbles and exacerbating instability more generally (rather than propping up bond prices), will this speed up rate “normalization” in the U.S. and QE “tapering” especially from the ECB and BOJ? Inquiring markets will want to know.
U.S. Treasury yields closed the week up another eight bps to a 16-month high 2.39%, after trading up to 2.49% on Thursday. Higher global yields again weighed on EM. This week’s trading action saw the Argentine peso drop 2.4% and the Brazilian real and Turkish lira fall 1.8%. All three of these Periphery economies have serious issues that will be aggravated by a tightening of global finance. Stocks were down 2.0% in Brazil, 2.5% in Argentina and 1.8% in Mexico this week. More noteworthy, EM yields made another leg higher. Local yields jumped 36 bps in Brazil, 27 bps in Turkey, 19 bps in Argentina, 15 bps in South Africa, 32 bps in Poland, 19 bps in Hungary, 11 bps in South Korea and 14 bps in China.
Pursuing the theme of tightening global liquidity and associated effects on EM, (King of EM) China instability appears poised to reemerge as a market concern. A few headlines from the week: “China Limits Gold Imports and Renminbi Outflows” (FT); “Beijing Plan to Curb Outflows Fuels Fears Over Foreign Deals” (FT); “China Capital Curbs Sow Doubt Over Renminbi Ambitions” (FT); “Bank of China Sharply Limits Forex Sales to Companies in Shanghai” (Reuters); “PBOC Headache Worsens as New $50,000 Conversion Quota Looms” (Bloomberg); “Foreign Companies Face New Clampdown for Getting Money out of China” (WSJ); “China has Quietly Hiked Borrowing Costs Through PBOC Operations” (Bloomberg).
December 1 – Wall Street Journal (James T. Areddy and Lingling Wei): “Multinational companies are suddenly finding themselves in the crosshairs as China dials back its effort to turn the yuan into a global currency, alarmed that it has accelerated the flight of capital from its shores. In recent days, according to bankers and officials familiar with the situation, China’s foreign-exchange regulator has instructed banks to sharply limit how much companies move out of the country and into their other operations around the world. Until this week, it was possible for big companies to ‘sweep’ $50 million worth of yuan or dollars in or out of China with minimal documentation. Now, these people say, the cap is the equivalent of $5 million, a pittance for the largest corporations. Beijing is fighting an increasingly vicious cycle of capital outflows that weaken the yuan.”
December 2 – Reuters (Samuel Shen and Engen Tham): “Bank of China, one of the country's ‘Big Four’ state banks, has begun to sharply limit corporate customers' ability to purchase foreign currency in Shanghai, in what sources said on Friday was a bid to help stem capital outflows and ease depreciation pressure on the yuan. Under the unwritten new policy, described by two sources familiar with the details, bankers at China's fourth-biggest lender began this week to discourage companies wishing to change yuan into dollars. Those firms which insisted on doing so were told they would be restricted to exchanging a maximum of $1 million… The policy comes as China's government adopts increasingly aggressive measures to control movements of yuan out of the country and snuff out expectations that the currency would continue to spiral lower.”
November 30 – Bloomberg: “China added new restrictions on pulling yuan out of the country as authorities seek to prevent a flood of capital outflows from destabilizing the financial system. Officials won’t approve requests to bring the yuan overseas for the purpose of converting into foreign currencies unless applicants provide a valid business reason… The monetary authority has noticed funds are increasingly leaving the country as yuan payments… The equivalent of $275 billion exited the country via yuan payments this year through October, versus a $101.5 billion inflow in the same period of 2015…”
Keep in mind that Chinese international reserves ended October at a more than five-year low $3.12 TN, this after peaking in June, 2014 at $3.99 TN. Policymakers are surely responding to what must be a surge of outbound flows. So-called “disorderly capital flight” is invariably a risk to an EM economy combating a faltering Bubble with loose finance and monetary inflation. Unprecedented annual Credit expansion of about $3.0 TN has thus far stabilized China’s faltering Bubble. But the issue then becomes an unstable currency as copious amounts of liquidity seek an exit. I would expect this week’s measures meant to slow outflows will heighten anxiety to get “money” out of China before more draconian controls are deemed necessary. King dollar and Trump uncertainty seriously complicate China’s financial and economic dilemmas.
And speaking of serious dilemmas, let’s not forget Europe. Italy’s political referendum will take place Sunday. Prime Minister Matteo Renzi has threatened to resign if voters don’t approve his plan for political reform. Between political opposition and a spirited anti-establishment movement, the vote is not projected to go Renzi’s way. But after sailing through Brexit and Trump’s win, there’s not a great deal of trepidation heading into Sunday. It is true that Italy is well-accustomed to political instability. Perhaps it’s complacency’s turn to be surprised.
The Italian banking system is a mess, and prospects for the Italian economy remain poor. Years of QE have done little to promote reform but a lot to inflate a Bubble in Italian debt (much of it held by Italian banks). It might be at least a year until Italian voters have the opportunity for voicing opinions on remaining in the euro. Yet in this unfolding uncertain global liquidity backdrop, it would not be surprising if the markets again begin pondering the long-term viability of the euro monetary experiment. The Germans and Italians sharing a currency forever? The Trump win has both emboldened Italy’s powerful anti-establishment movements and heightened Italy’s vulnerability to a deteriorating global financial backdrop.
Global financial conditions have begun to tighten – ominously, even in the face of $2.0 TN of ongoing global QE. While pretty clear in the near-term, intermediate and long-term QE prospects are really fuzzy. Heightened uncertainty now has “money” on the move, with associated instability an immediate issue for the fragile Periphery. Europe remains a global weak link, with their banking system at the heart of the continent’s fragility. Italian banks are the European banking system’s weak link. In this context, Italy’s Sunday referendum should not be taken lightly. In the event of a no vote and Renzi resignation, will political uncertainty (and capital flight) push Italy’s fragile banks over the edge? Recall 2012: Fears surrounding Italian banks and Italy’s long-term commitment to the euro over time escalated into fear of euro disintegration.
Pre-election trepidation morphed into post-election market exuberance, in only the latest demonstration of the power of an over-liquefied market backdrop. Here in the U.S., the bullish imagination has been captivated by the Trump administration’s pro-growth agenda, with its focus on tax and health-care reform, deregulation and infrastructure spending. The DJIA this week added slightly to record highs.
Meanwhile, a decidedly less halcyon reality seems to be coming into somewhat clearer focus: Trump’s victory likely marks a major inflection point for global markets. Bond yields have shot higher, while inflation expectations are being reset. The U.S. dollar has surged, while the emerging markets have come under pressure. From U.S. equity and bond ETFs to international financial flows, “money” is sloshing about chaotically.
There’s an extraordinary amount of confusion throughout the markets. For over a year I’ve posited that the global Bubble has been pierced. This view was in response to faltering EM, mounting Chinese instability, the collapse in crude and energy-related debt problems (from U.S. junk to global corporates and sovereigns). Especially in response to early-2016 global market instability, the Fed froze its baby-step “tightening” cycle, while the Bank of Japan and European Central Bank (and others) ratcheted up what were already desperate QE measures. In China, officials threw up their hands and set the Credit floodgates wide open.
It’s worth noting that the S&P500 rallied 22% from February 2016 lows. U.S. bank stocks (BKX) have surged a stunning 60%. From January lows to November highs, Brazilian stocks jumped 75%. Emerging Market equities (EEM) rallied almost 40%. Chinese stocks recovered 25%. Basically, EM stocks, bonds and currencies rallied sharply from Asia to Eastern Europe to Latin America.
Waning badly early in the year, confidence in central banking was rejuvenated by an audacious display of concerted “whatever it takes.” I believe history will view ECB and BOJ QE moves as dangerously misguided, while the Fed (again) failed to heed the lessons of leaving policy way too loose for too long. Forces that central bankers set in motion early in the year may have largely run their course.
These days it’s important to appreciate that the primary effects of monetary stimulus can change profoundly depending on prevailing market dynamics. Recall that the first (2009) QE basically accommodated speculative de-leveraging and the transfer of securities from troubled holders onto the Federal Reserve’s balance sheet. General inflationary impacts – within the securities markets as well as throughout the real economy – were muted. QE2 (late-2010 into 2011) stoked the powerful inflationary (“bullish”) bias that had evolved in bond prices and throughout the emerging markets. Concerted “whatever it takes” “QE3 and beyond” that unfolded in the second-half of 2012 threw fuel both on Bubbling global securities markets as well as China’s “Terminal Phase” of excess. The upshot has been only greater over-investment, over-capacity, asset inflation, inequitable wealth distribution and social tension. In many real economies around the world (notably Japan, Europe and the U.S.), consumer price inflation trended even lower.
Importantly, the predominant consequence from the 2016 QE bonanza was to spur global bond Bubbles to precarious speculative “melt-up” dynamics. Yields around the world collapsed indiscriminately to record lows. Japanese 10-year yields sank to negative 30 bps. German bund yields dropped to negative 19 bps and Swiss yields to negative 63 bps. Having issued bonds going back to 1693, UK Gilt yields dropped to a record low 52 bps. Few, however, benefited more than Europe’s troubled periphery. In one of history’s more spectacular asset mispricings, Italian bond yields sank to an incredible 1.05% and Spanish yields fell to 88 bps. In the U.S., Treasury yields dropped to 1.36%. Brazil (dollar) yields sank to about 4%, with Mexican (dollar) yields below 3%.
There’s a major problem associated with destabilizing speculative “blow-offs:” They notoriously conclude with sharp reversals, catching everyone by surprise and unearthing all kinds of excesses and associated maladjustment. Coming in conjunction with mounting global anti-establishment fervor, political instability and President-elect Donald Trump, the current bond market reversal ensures uncertainty even more acute than normal: A historic bond market Bubble meets historic social, political and geopolitical uncertainty – not to mention uncharted territory with respect to global monetary policy and economic structure.
Trump policies notwithstanding, global economic prospects remain murky at best. Record stock prices more reflect expectations of winning the money game than an indication of a brightening future. And with air now being released from the Bubble, the best days for bond prices have passed. Especially in the era of king dollar, “money” is now fully expected to deluge the world’s premier asset class - U.S. equities.
Let’s ponder for a moment The Other Side of the Story. Surging global bond yields will entail enormous amounts of speculative de-leveraging. This has yet to become a major issue for the markets only because of the ongoing $2.0 TN of global QE. Yet in this post-Bond Bubble and Trump to the White House backdrop, QE is rather suddenly no longer the bond market’s best friend. QE instead only exacerbates flows into stocks and king dollar – and perhaps even real economies where a shift in inflation trends is already indicated.
So, it’s this confluence of surging bond yields, de-leveraging, unwieldy flows and the potential for inflationary pressures to take root that is now rocking Peripheries around the globe. Importantly, policy confusion and uncertainty are poised to become a pressing market issue. With central bank liquidity inflating Bubbles and exacerbating instability more generally (rather than propping up bond prices), will this speed up rate “normalization” in the U.S. and QE “tapering” especially from the ECB and BOJ? Inquiring markets will want to know.
U.S. Treasury yields closed the week up another eight bps to a 16-month high 2.39%, after trading up to 2.49% on Thursday. Higher global yields again weighed on EM. This week’s trading action saw the Argentine peso drop 2.4% and the Brazilian real and Turkish lira fall 1.8%. All three of these Periphery economies have serious issues that will be aggravated by a tightening of global finance. Stocks were down 2.0% in Brazil, 2.5% in Argentina and 1.8% in Mexico this week. More noteworthy, EM yields made another leg higher. Local yields jumped 36 bps in Brazil, 27 bps in Turkey, 19 bps in Argentina, 15 bps in South Africa, 32 bps in Poland, 19 bps in Hungary, 11 bps in South Korea and 14 bps in China.
Pursuing the theme of tightening global liquidity and associated effects on EM, (King of EM) China instability appears poised to reemerge as a market concern. A few headlines from the week: “China Limits Gold Imports and Renminbi Outflows” (FT); “Beijing Plan to Curb Outflows Fuels Fears Over Foreign Deals” (FT); “China Capital Curbs Sow Doubt Over Renminbi Ambitions” (FT); “Bank of China Sharply Limits Forex Sales to Companies in Shanghai” (Reuters); “PBOC Headache Worsens as New $50,000 Conversion Quota Looms” (Bloomberg); “Foreign Companies Face New Clampdown for Getting Money out of China” (WSJ); “China has Quietly Hiked Borrowing Costs Through PBOC Operations” (Bloomberg).
December 1 – Wall Street Journal (James T. Areddy and Lingling Wei): “Multinational companies are suddenly finding themselves in the crosshairs as China dials back its effort to turn the yuan into a global currency, alarmed that it has accelerated the flight of capital from its shores. In recent days, according to bankers and officials familiar with the situation, China’s foreign-exchange regulator has instructed banks to sharply limit how much companies move out of the country and into their other operations around the world. Until this week, it was possible for big companies to ‘sweep’ $50 million worth of yuan or dollars in or out of China with minimal documentation. Now, these people say, the cap is the equivalent of $5 million, a pittance for the largest corporations. Beijing is fighting an increasingly vicious cycle of capital outflows that weaken the yuan.”
December 2 – Reuters (Samuel Shen and Engen Tham): “Bank of China, one of the country's ‘Big Four’ state banks, has begun to sharply limit corporate customers' ability to purchase foreign currency in Shanghai, in what sources said on Friday was a bid to help stem capital outflows and ease depreciation pressure on the yuan. Under the unwritten new policy, described by two sources familiar with the details, bankers at China's fourth-biggest lender began this week to discourage companies wishing to change yuan into dollars. Those firms which insisted on doing so were told they would be restricted to exchanging a maximum of $1 million… The policy comes as China's government adopts increasingly aggressive measures to control movements of yuan out of the country and snuff out expectations that the currency would continue to spiral lower.”
November 30 – Bloomberg: “China added new restrictions on pulling yuan out of the country as authorities seek to prevent a flood of capital outflows from destabilizing the financial system. Officials won’t approve requests to bring the yuan overseas for the purpose of converting into foreign currencies unless applicants provide a valid business reason… The monetary authority has noticed funds are increasingly leaving the country as yuan payments… The equivalent of $275 billion exited the country via yuan payments this year through October, versus a $101.5 billion inflow in the same period of 2015…”
Keep in mind that Chinese international reserves ended October at a more than five-year low $3.12 TN, this after peaking in June, 2014 at $3.99 TN. Policymakers are surely responding to what must be a surge of outbound flows. So-called “disorderly capital flight” is invariably a risk to an EM economy combating a faltering Bubble with loose finance and monetary inflation. Unprecedented annual Credit expansion of about $3.0 TN has thus far stabilized China’s faltering Bubble. But the issue then becomes an unstable currency as copious amounts of liquidity seek an exit. I would expect this week’s measures meant to slow outflows will heighten anxiety to get “money” out of China before more draconian controls are deemed necessary. King dollar and Trump uncertainty seriously complicate China’s financial and economic dilemmas.
And speaking of serious dilemmas, let’s not forget Europe. Italy’s political referendum will take place Sunday. Prime Minister Matteo Renzi has threatened to resign if voters don’t approve his plan for political reform. Between political opposition and a spirited anti-establishment movement, the vote is not projected to go Renzi’s way. But after sailing through Brexit and Trump’s win, there’s not a great deal of trepidation heading into Sunday. It is true that Italy is well-accustomed to political instability. Perhaps it’s complacency’s turn to be surprised.
The Italian banking system is a mess, and prospects for the Italian economy remain poor. Years of QE have done little to promote reform but a lot to inflate a Bubble in Italian debt (much of it held by Italian banks). It might be at least a year until Italian voters have the opportunity for voicing opinions on remaining in the euro. Yet in this unfolding uncertain global liquidity backdrop, it would not be surprising if the markets again begin pondering the long-term viability of the euro monetary experiment. The Germans and Italians sharing a currency forever? The Trump win has both emboldened Italy’s powerful anti-establishment movements and heightened Italy’s vulnerability to a deteriorating global financial backdrop.
Global financial conditions have begun to tighten – ominously, even in the face of $2.0 TN of ongoing global QE. While pretty clear in the near-term, intermediate and long-term QE prospects are really fuzzy. Heightened uncertainty now has “money” on the move, with associated instability an immediate issue for the fragile Periphery. Europe remains a global weak link, with their banking system at the heart of the continent’s fragility. Italian banks are the European banking system’s weak link. In this context, Italy’s Sunday referendum should not be taken lightly. In the event of a no vote and Renzi resignation, will political uncertainty (and capital flight) push Italy’s fragile banks over the edge? Recall 2012: Fears surrounding Italian banks and Italy’s long-term commitment to the euro over time escalated into fear of euro disintegration.
For the Week:
The S&P500 declined 1.0% (up 7.2% y-t-d), while the Dow added 0.1% (up 10%). The Utilities declined 1.0% (up 7.8%). The Banks gained another 1.5% (up 20.7%), and the Broker/Dealers added 0.2% (up 14.6%). The Transports were little changed (up 20.5%). The S&P 400 Midcaps fell back 1.0% (up 16.2%), and the small cap Russell 2000 dropped 2.4% (up 15.7%). The Nasdaq100 fell 2.7% (up 3.2%), and the Morgan Stanley High Tech index sank 3.4% (up 9.3%). The Semiconductors dropped 4.7% (up 27.9%). The Biotechs were clobbered 6.4% (down 17.4%). Although bullion was down $6, the HUI gold index rallied 4.3% (up 65%).
Three-month Treasury bill rates ended the week at 46 bps. Two-year government yields slipped two bps to 1.10% (up 5bps y-t-d). Five-year T-note yields declined two bps to 1.82% (up 7bps). Ten-year Treasury yields added two bps to 2.38% (up 13bps). Long bond yields rose six bps to 3.06% (up 4bps).
Greek 10-year yields fell 37 bps to 6.44% (down 88bps y-t-d). Ten-year Portuguese yields jumped 13 bps to 3.70% (up 118bps). Italian 10-year yields fell 18 bps to 1.90% (up 31bps). Spain's 10-year yields slipped three bps to 1.54% (down 23bps). German bund yields gained four bps to 0.28% (down 34bps). French yields fell five bps to 0.72% (down 27bps). The French to German 10-year bond spread narrowed nine to 44 bps. U.K. 10-year gilt yields slipped three bps to 1.38% (down 58bps). U.K.'s FTSE equities index dropped 1.6% (up 7.8%).
Japan's Nikkei 225 equities index added 0.2% (down 3.2% y-t-d). Japanese 10-year "JGB" yields increased a basis point to 0.04% (down 22bps y-t-d). The German DAX equities index dropped 1.7% (down 2.1%). Spain's IBEX 35 equities index declined 0.8% (down 9.8%). Italy's FTSE MIB index rallied 3.5% (down 20.2%). EM equities were mostly lower. Brazil's Bovespa index fell 2.0% (up 39%). Mexico's Bolsa lost 1.8% (up 3.7%). South Korea's Kospi slipped 0.2% (up 0.5%). India’s Sensex equities index dipped 0.3% (up 0.4%). China’s Shanghai Exchange declined 0.6% (down 8.3%). Turkey's Borsa Istanbul National 100 index fell 1.3% (up 2.3%). Russia's MICEX equities index gained 1.5% (up 21%).
Junk bond mutual funds saw inflows of $342 million (from Lipper).
Freddie Mac 30-year fixed mortgage rates gained five bps to a 16-month high 4.08% (up 15bps y-o-y). Fifteen-year rates rose nine bps to 3.34% (up 18bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates up a basis point to 4.09% (up 20bps).
Federal Reserve Credit last week declined $11.2bn to $4.411 TN. Over the past year, Fed Credit contracted $29.2bn (down 0.7%). Fed Credit inflated $1.600 TN, or 57%, over the past 212 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt gained $6.4bn last week to $3.127 TN. "Custody holdings" were down $198bn y-o-y, or 6.0%.
M2 (narrow) "money" supply last week jumped $46.5bn to a record $13.262 TN. "Narrow money" expanded $990bn, or 8.1%, over the past year. For the week, Currency increased $2.6bn. Total Checkable Deposits gained $19.0bn, and Savings Deposits rose $19.7bn. Small Time Deposits were little changed. Retail Money Funds expanded $6.0bn.
Total money market fund assets increased $13.9bn to a 13-week high $2.719 TN. Money Funds declined $22.3bn y-o-y (0.8%).
Total Commercial Paper added $1.8bn to $924bn. CP declined $119bn y-o-y, or 11.4%.
Currency Watch:
The U.S. dollar index declined 0.7% to 100.77 (up 2.1% y-t-d). For the week on the upside, the South African rand increased 2.2%, the British pound 2.0%, the Norwegian krone 1.9%, the Canadian dollar 1.7%, the New Zealand dollar 1.4%, the euro 0.7%, the Danish krone 0.7%, the Singapore dollar 0.6%, the South Korean won 0.4%, the Swedish krona 0.4%, the Swiss franc 0.3%, the Australian dollar 0.2% and the Mexican peso 0.1%. For the week on the downside, the Japanese yen declined 0.3% and the Brazilian real fell 1.8%. The Chinese yuan rallied 0.6% versus the dollar (down 5.6%).
Commodities Watch:
November 30 – Reuters (Rania El Gamal, Alex Lawler and Ahmad Ghaddar): “OPEC has agreed its first oil output cuts since 2008 after Saudi Arabia accepted ‘a big hit’ on its production and dropped its demand on arch-rival Iran to slash output, pushing up crude prices by around 10%. Fast-growing producer Iraq also agreed to curtail its booming output, while non-OPEC Russia will join output cuts for the first time in 15 years to help the Organization of the Petroleum Exporting Countries prop up oil prices. ‘OPEC has proved to the skeptics that it is not dead. The move will speed up market rebalancing and erosion of the global oil glut,’ said OPEC watcher Amrita Sen from consultancy Energy Aspects.”
November 27 – Bloomberg (Narae Kim): “In China, money flow is tightly controlled and capital markets are relatively underdeveloped, meaning the economy works like squeezing a balloon. You press it in one place, and it bulges in another. Policy-maker moves to cool one expansion only serve to inflate another. Now that ‘gyration of bubbles,’ according to Société Générale SA’s chief China economist Wei Yao, has been heating up the commodities market again. Earlier this month, thermal and coking coal futures hit a record high since their debut in 2013 while zinc soared to the highest since 2011. Steel rebar, nickel, tin, iron ore and rubber futures also climbed to multi-year highs.
The Goldman Sachs Commodities Index jumped 5.8% (up 24% y-t-d). Spot Gold declined 0.5% to $1,178 (up 11%). Silver rallied 1.5% to $16.80 (up 22%). Crude surged $5.62 to $51.68 (up 40%). Gasoline jumped 13.3% (up 22%), and Natural Gas surged 12.1% (up 47%). Copper declined 2.1% (up 23%). Wheat sank 3.6% (down 14%). Corn fell 3.1% (down 3.2%).
Italy Watch:
November 27 – Financial Times (Rachel Sanderson): “Up to eight of Italy’s troubled banks risk failing if prime minister Matteo Renzi loses a constitutional referendum next weekend and ensuing market turbulence deters investors from recapitalising them, officials and senior bankers say. Mr Renzi, who says he will quit if he loses the referendum, had championed a market solution to solve the problems of Italy’s €4tn banking system and avoid a vote-losing ‘resolution’ of Italian banks under new EU rules. Resolution, a new regulatory mechanism, restructures and, if necessary, winds up a bank by imposing losses on both equity and debt investors, particularly controversial in Italy, where millions of individual investors have bought bank bonds. The situation is being closely watched by financiers and policymakers across Europe and beyond, who worry that a mass failure of Italian banks could trigger panic across the eurozone banking system.”
November 29 – Wall Street Journal (Giovanni Legorano): “The day of reckoning for Banca Monte dei Paschi di Siena SpA, Italy’s No. 3 lender by assets and one of Europe’s most troubled, is drawing near. Long-simmering political, financial and market tensions promise to come to a head next week when it becomes clear whether Monte dei Paschi will be able to succeed in executing a make-or-break plan to bring itself back to health. This weekend will be decisive, when Italians vote on a referendum that could open the door to political instability and unnerve investors, threatening to derail Monte dei Paschi’s rescue plan. That in turn could force a state bailout of the lender, perhaps by year-end—deeply complicating Italy’s efforts to clean up its banking sector. Nervous investors have pummeled Italian banking stocks ahead of Sunday’s vote, sending the FTSE Italia All-Share Banks Index down 12% in the past month…”
December 1 – Reuters (John Geddie): “Speculators convinced the euro zone faces fresh instability have zeroed in on Italy's constitutional reform referendum on Sunday, amassing huge bets on a slump in Italian banks and bonds should Prime Minister Matteo Renzi lose the vote. Blindsided by skewed bookmakers' odds and equivocal opinion polls, financial markets ended up on the wrong side of Britain's vote to leave the European Union in June and Donald Trump's surprise U.S. election win last month… ‘There are colossal short positions on Italy from the U.S. and other countries where big investors are based,’ Raffaele Jerusalmi, the CEO of the Italian stock exchange said this week.”
November 30 – CNBC (Silvia Amaro and Julia Chatterley): “As political uncertainty looms in Italy, the populist Five Star Movement said it would renegotiate the country's membership of the euro if it came into power. Luigi Di Maio, a member of the Five Star Movement, wants to ‘re-discuss the EU and euro parameters’ to address poverty and investment issues in Italy. If such negotiations failed, Italy would have a referendum on a new kind of relationship with the euro area. ‘If (the EU) won't listen to us, we will propose a referendum on the euro to ask the Italian citizens what they want to do,’ Maio told CNBC… ‘Those who brought us in the euro never asked us if we did want to join it. Now we ask the citizens if they want to stay in the common currency or begin to address a two-tier euro scenario or a return to monetary sovereignty,’ Maio said.”
November 29 – Wall Street Journal (Manuela Mesco and Deborah Ball): “The founder of Italy’s populist 5 Star Movement showed off his growing confidence in a video posted ahead of Sunday’s pivotal national referendum. ‘An era is going up in flames,’ Beppe Grillo said as Donald Trump’s Election Night acceptance speech played in the background. ‘It’s the risk-takers, the stubborn, the barbarians who will carry the world forward…We will end up in government, and they will be asking, ‘How did they do it?’ Italian voters will decide Sunday on a constitutional change that would effectively strip the Senate of most of its powers. It is a gamble by Prime Minister Matteo Renzi—for Italy and abroad—and a centerpiece of his efforts to more quickly revamp Italy’s sickly economy.”
November 28 – Bloomberg (Sonia Sirletti, Tom Beardsworth and Chiara Albanese): “Banca Monte dei Paschi di Siena SpA started the first crucial stage of its turnaround plan on Monday as fresh worries about the future of Italy’s government rattled financial markets. The Italian lender is asking bondholders to swap 4.3 billion euros ($4.6bn) subordinated bonds for equity, a step that would allow the bank to proceed with a share sale by the end of the year. Bond investors have five days from Nov. 28 to sign up. The board of directors at Assicurazioni Generali SpA, Italy’s biggest insurer and an investor in the bonds, voted in favor of a conversion.”
Europe Watch:
November 30 – Bloomberg (Joao Lima): “Portugal’s string of good news is getting little attention from investors. Its Prime Minister Antonio Costa just got his second budget through parliament, its economy is picking up and the country stands out as a beacon of stability in the midst of the turmoil set off by Brexit, a referendum in Italy that might bring down the government and rising populism. For all that, investors aren’t showing Portugal’s bonds any love… Portugal’s 10-year bonds yield 3.7%, up from 2.4% at the start of January 2015, the month when ECB President Mario Draghi unveiled his quantitative easing program. It peaked at 18% in 2012 at the height of the euro region’s debt crisis.”
November 28 – Reuters (Ingrid Melander and Michel Rose): “Hardline reformist Francois Fillon scored a resounding win in France's conservative primaries on Sunday, making him favorite to win a presidential election five months from now against the popular far-right and a deeply divided left. Fillon, a former prime minister who wants to raise the retirement age, cut back social security and scrap the 35-hour working week, would easily beat National Front leader Marine Le Pen in a run-off second round, a flash opinion poll said right after his primaries victory.”
ECB Watch:
November 29 – Financial Times (Dan McCrum): “The calendar is not kind to the European Central Bank. A week on Thursday, its governing council will deliberate, just days after Italy’s vote on constitutional reform, and a week before the bank’s US counterpart holds a meeting which could move the world’s bond and currency markets. Temporal pressure of another kind is also building, as the ECB buys €80bn of bonds each month in a programme that runs until March. Extending it could create a new problem, as there may not be enough German Bund’s available next year to keep the ECB’s spending on the eurozone member country’s debt in line with a carefully agreed formula. So Mario Draghi, head of the bank, must somehow ensure stability following a referendum many expect the Italian government to lose, without unduly favouring that country’s sovereign bonds. He must try to keep borrowing costs suppressed across a continental economy where inflation is absent, while also keeping banks healthy and profitable so they lend to businesses and consumers.”
November 29 – Reuters (Balazs Koranyi and Frank Siebelt): “The European Central Bank is ready to temporarily step up purchases of Italian government bonds if the result of a crucial referendum on Sunday sharply drives up borrowing costs for the euro zone's largest debtor, central bank sources told Reuters. Italian government debt and bank shares have sold off ahead of the Dec. 4 referendum on constitutional reforms because of the risk of political turmoil. Opinion polls suggest the 'No' camp is heading for victory, which could force out Prime Minister Matteo Renzi in the latest upheaval against the ruling establishment sweeping the developed world. The ECB could use its 80-billion-euro ($84.8bn) monthly bond-buying programme to counter any immediate, further spike in bond yields after the vote, smoothing market moves and supporting bonds, according to four euro zone central bank sources…”
November 28 – Wall Street Journal (Tom Fairless and Todd Buell): “European Central Bank President Mario Draghi issued a blunt warning over the risks that low interest rates pose to the eurozone’s €10 trillion ($10.6 trillion) economy—just as the ECB prepares to decide whether to hold rates down for longer. The warning underlines the dearth of policy choices central banks face as they seek to further stimulate their economies after years of aggressive easy-money policies. Speaking at the European Parliament in Brussels…, Mr. Draghi said a lengthy period of low rates had created ‘fertile terrain’ for financial-market risks, including a buildup of debt and excessive risk-taking. In an unusual move, the ECB chief also flagged ‘significant vulnerabilities’ in eight European real-estate markets, as a result of rising debt levels or excessive valuations.”
November 30 – Reuters (Paul Day): “Populism and waning national appetite for vital reforms threaten European integration, putting at risk the continent's prosperity and raising the specter of falling incomes, European Central Bank President Mario Draghi said… The ECB has bought governments time with its super-easy monetary policy, yet reform efforts looks to be softening, a major worry as productivity growth is already weak, innovation is low and aging populations will be a huge drag, Draghi said. ‘Monetary policy is providing support and space for governments to carry out necessary structural reforms,’ Draghi said… ‘It is a window of opportunity they should seize.’”
China Bubble Watch:
November 29 – Financial Times (Gabriel Wildau, Don Weinland and Tom Mitchell): “China is readying new restrictions on outbound foreign investment in an effort to curb capital outflows that are putting downward pressure on the renminbi and draining foreign exchange reserves... The State Council is most concerned about outbound mergers and acquisitions worth more than $10bn, said two people familiar with the government’s deliberations. They added that Chinese officials would scrutinise purchases of more than $1bn if they were outside the investor’s core business. Meanwhile, state-owned enterprises will not be allowed to invest more than $1bn on a single overseas real estate transaction. News of the stricter measures worried many company executives, investment bankers and M&A lawyers… as they tried to assess the impact on their pending transactions… According to commerce ministry data, Chinese companies’ overseas purchases have surged past last year’s record of $121bn for non-financial outbound investments, reaching $146bn over the first 10 months of 2016.”
December 1 – Bloomberg: “People’s Bank of China Governor Zhou Xiaochuan already has one policy headache with the currency falling to near an eight-year low. He could have an even bigger one next month. That’s when a $50,000 cap on how much foreign currency individuals are allowed to convert each year resets, potentially aggravating capital outflow pressures that are already on the rise. If just 1% of China’s almost 1.4 billion people max out those limits, that’s an outflow of about $700 billion -- more than the estimated $620 billion that Bloomberg Intelligence estimates indicate has already flowed out in the first 10 months of this year.”
November 29 – Financial Times (Don Weinland, Tom Mitchell and Gabriel Wildau): “The days when a Chinese iron ore miner could buy a UK video game developer are drawing to a close as Beijing tightens up on cross-border investment by its companies. Investment banks in Asia have worked overtime this year on bringing an expansive range of acquisition targets to aggressive Chinese groups, many of which have strayed far beyond the acquirers’ original scope of business. …Overseas purchases by Chinese companies have surged past last year’s record of $121bn for non-financial outbound investments, reaching $146bn over the first 10 months of 2016.”
November 27 – Bloomberg (Lianting Tu): “Without a policy announcement, China’s central bank has effectively tightened monetary conditions in recent weeks, an analysis of its transactions shows. The People’s Bank of China has cut back on seven-day open-market operations and is instead injecting more funds through 14-day and 28-day contracts. That’s had the effect of raising short-term borrowing costs and pressing up bond yields. It’s another sign of selective tightening by the PBOC that’s reinforced the views of many economists that China has turned the corner away from monetary stimulus.”
November 29 – Bloomberg: “China’s government is stepping up efforts to contain runaway property prices, with the central bank clamping down further on mortgage lending in areas deemed overheated, people with knowledge of the matter said. Some lenders in those cities have been asked to suspend distributing new home loans…”
November 27 – Bloomberg (Chisaki Watanabe): “China risks wasting $490 billion by building more coal power plants than it needs as slower power demand growth and less polluting energy sources squeeze coal generation out of the power mix, according to a study from an environmental think tank. As of July, the country had 895 gigawatts of operating coal capacity being utilized less than half the time, with another 205 gigawatts under construction, …Carbon Tracker Initiative said…”
Fixed-Income Bubble Watch:
November 30 – Bloomberg (Eliza Ronalds-Hannon and Charlotte Ryan): “Treasuries wrapped up their worst month since 2009 as investors pulled money from the U.S. bond market on speculation Donald Trump’s victory in the presidential election will pave the way for increased fiscal stimulus. A Bloomberg Barclays index tracking the Treasuries market lost 2.4% this month through Nov. 29. U.S. government debt extended declines Wednesday as OPEC reached a deal to cut oil output, while Trump’s pick for Treasury secretary said he’ll consider adding longer maturities. As U.S. 10-year yields held close to the highest levels this year, the difference over German bunds, Europe’s benchmark sovereign securities, approached the widest on record, according to closing-price data going back to 1990.”
November 30 – Bloomberg (Scott Lanman and Liz McCormick): “Steven Mnuchin, President-elect Donald Trump’s pick for U.S. Treasury secretary, said he’ll explore issuing debt maturing in more than 30 years to cushion the effect of rising interest rates, signaling incoming officials may be open to ideas that the current administration has been unwilling to implement. ‘Interest rates are going to stay relatively low for the next couple of years,’ Mnuchin said… Among other initiatives, ‘we’ll look at potentially extending the maturity of the debt, because eventually we are going to have higher interest rates, and that’s something that this country is going to need to deal with.’”
November 30 – Bloomberg (Joe Light): “Steven Mnuchin, president-elect Donald Trump’s nominee to be U.S. Treasury Secretary, said Fannie Mae and Freddie Mac should leave government control and that the incoming administration ‘will get it done reasonably fast.’ The comments… sent shares of the mortgage-finance giants soaring Wednesday. Fannie Mae and Freddie Mac each jumped 46%, the most since March 2013. The fight over the future of the mortgage companies has been raging since they were bailed out in 2008 for an eventual cost of $187.5 billion.”
December 1 – Reuters (Trevor Hunnicutt): “Investors pulled $4.1 billion from U.S.-based taxable-bond mutual funds, the most since June, as a bond selloff forced interest rates higher and rattled investors, Lipper… showed… ‘Investors are pulling the trigger and are starting, maybe, the rotation out of bond funds," said Tom Roseen, head of research services for Thomson Reuters Lipper. Municipal bond funds continued to be punished as well, losing $2.1 billion to redemptions. Investment-grade corporate bonds posted $1.3 billion in outflows during the seven days through Nov. 30.”
November 30 – Financial Times (Eric Platt): “Investors are buying up riskier corporate debt in a bet that US economic expansion will accelerate due to the boost of government stimulus and tax cuts proposed by president-elect Donald Trump. Despite a $1.6tn hit to fixed-income portfolios in the wake of the global bond market rout, losses concentrated within the sovereign debt sphere, investors have warmed to the idea that a burst of stimulus at the start of Mr Trump’s first term in January will buoy the sales of US companies while tax cuts bolster margins and earnings.”
Global Bubble Watch:
December 1 – Bloomberg (Garfield Clinton Reynolds and Anooja Debnath): “The 30-year-old bull market in bonds looks to be ending with a bang. The Bloomberg Barclays Global Aggregate Total Return Index lost 4% in November, the deepest slump since the gauge’s inception in 1990. Bonds in Europe extended declines with their U.S. peers as OPEC’s agreement on Wednesday to cut oil production added to prospects of higher inflation. The reflation trade has been driving markets since Donald Trump’s presidential election win due to promises of tax cuts and $1 trillion in infrastructure spending… November’s rout wiped a record $1.7 trillion from the global index’s value in a month that saw world equity markets’ capitalization climb $635 billion. The yield on 10-year U.S. notes rose 56 bps in November, the biggest jump since 2009…”
December 1 – Reuters (Leika Kihara): “Bank of Japan board member Makoto Sakurai said the central bank will continue to buy massive amounts of government bonds even under a new policy framework targeting interest rates, shrugging off the view that its bond-buying programme was nearing a limit. But the former academic urged the government and companies to do more to help the BOJ beat subdued inflation and growth in Japan by raising wages and promoting innovation.”
November 27 – Bloomberg: “There’s a Chinese saying that stems from the philosophy in Sun Tzu’s ancient text ‘The Art of War’: You can kill 1,000 enemies, but you would also lose 800 soldiers. Centuries later, the proverb is suddenly apt again, being mentioned frequently in discussions around Beijing. Now, it highlights the potential damage U.S. President-elect Donald Trump could inflict if he makes good on his threat to start a trade war with China, the world’s second-biggest economy. Having backed off some other campaign pledges, it’s unclear if Trump will end up slapping punitive tariffs on China... Still, the message from China is that any move to tax Chinese imports would bring retaliation: The U.S. economy would take a hit and America would damage its longstanding ties with Asia.”
U.S. Bubble Watch:
November 29 – Bloomberg (Michelle Jamrisko): “The U.S. economy expanded more than previously reported last quarter on a sunnier picture of household spending, the primary growth engine. Gross domestic product rose at a 3.2% annualized rate in the three months ended in September, the fastest in two years…”
November 29 – Wall Street Journal (Laura Kusisto): “U.S. home prices have climbed back above the record reached more than a decade ago, bringing to a close the worst period for the housing market since the Great Depression and stoking optimism for a more sustainable expansion. The average home price for September was 0.1% above the July 2006 peak, according to the S&P CoreLogic Case-Shiller U.S. National Home Price index... Adjusted for inflation, the index still is about 16% below the 2006 high. Home prices jumped 5.5% over the past year.”
November 29 – Bloomberg (Patricia Laya): “Consumer confidence rose in November to the highest level since July 2007 on increased optimism about the U.S. labor market and economy, according to… the Conference Board. Confidence index increased to 107.1 (forecast was 101.5) from a revised 100.8. Present conditions gauge rose to 130.3, also the highest since July 2007, from 123.1…”
November 30 – CNBC (Elizabeth Gurdus): “In line with President-elect Donald Trump's proposals, Steve Mnuchin told CNBC… his focus as Treasury secretary will be stimulating economic growth and creating jobs through tax reform. ‘By cutting corporate taxes, we're going to create huge economic growth and we'll have huge personal income,’ Mnuchin told ‘Squawk Box’… Reducing the corporate tax rate from 30% to 15% will be a major goal for the Trump administration, the former Wall Street executive said.”
November 29 – Wall Street Journal (Aaron Back): “After a yearslong boom in lending, signs of trouble are popping up in auto loans. In the past few weeks, some auto lenders have warned that default rates are creeping up. Used-car prices are also falling faster than many anticipated, leading to lower recovery amounts when borrowers do default. The latest stress signal comes from auto research firm Edmunds.com, which said in a recent report that record numbers of shoppers are trading in old cars for new ones when they still have substantial amounts due on their existing car loans.”
December 1 – New York Times (Michael Corkery): “Regulators are airing ‘significant concern’ about the millions of Americans who are falling behind on their car loans, even as auto lending continues to boom at a near record pace. …The Federal Reserve Bank of New York noted increasing distress among auto borrowers with shaky credit, as subprime delinquencies rose in the third quarter. In the third quarter, 2% of subprime auto loan balances became at least 90 days delinquent, up from 1.6% in the third quarter of 2014.”
November 30 – Wall Street Journal (Josh Mitchell): “The federal government is on track to forgive at least $108 billion in student debt in coming years, as more and more borrowers seek help in paying down their loans, leading to lower revenues for the country’s wider program to finance higher education. The Government Accountability Office disclosed that sum… in a report to Congress that for the first time projected the full costs of plans that set borrowers’ monthly payments as a share of their earnings and which eventually forgive portions of their debt. The GAO report also sharply criticized the government’s accounting methods for its $1.26 trillion student-loan portfolio, pointing to flaws that have led it to alter projected revenues widely over the years.”
Federal Reserve Watch:
November 28 – The Hill (Peter Schroeder): “The Federal Reserve could be in for a bumpy ride as resurgent Republicans led by President-elect Donald Trump look to make a big mark on the central bank. The right has grown increasingly irritated by the central bank’s policies since the financial crisis and may now be poised to finally push through long-stalled changes to overhaul its operations. ‘We knew there was going to be limited progress under Barack Obama’s administration,’ said Rep. Bill Huizenga (R-Mich.), who authored a broad Fed reform bill in the last Congress. ‘Now, with a partner at 1600 Pennsylvania Avenue that’s interested in moving the needle, frankly we’d be dumb not to try to pursue this.’ For years, GOP-led efforts to impose new rules and restrictions on the Fed ran aground amid substantial Democratic opposition…”
Central Banker Watch:
November 30 – Reuters (David Milliken and Huw Jones): “Donald Trump's victory in the U.S. presidential election has increased the threats to the world economy from higher interest rates and less trade, the Bank of England said… The BoE also pointed to potential dangers from rapid Chinese credit growth or a disorganized British departure from the European Union in a half-yearly assessment of risks to Britain's financial system. BoE Governor Mark Carney highlighted a big rise in U.S. market interest rates since Trump's victory, which the Bank said could be a precursor to a destabilizing sharp move higher in global government borrowing costs from previous record lows.”
Japan Watch:
November 28 – Bloomberg (Keiko Ujikane): “Japan’s household spending dropped for an eighth straight month and retail sales fell slightly in October, even as the unemployment rate remained at the lowest in two decades. Household spending fell 0.4% from a year earlier, following a 2.1% decline in September. Retail sales fell 0.1% from a year ago…”
November 28 – Reuters (Osamu Tsukimori): “Japan's trade ministry has almost doubled the estimated cost of compensation for the 2011 Fukushima nuclear disaster and decommissioning of the damaged Fukushima-Daiichi nuclear plant to more than 20 trillion yen ($177.51bn), the Nikkei business daily reported…”
EM Watch:
November 27 – Financial Times (Kiran Stacey and David Keohane): “Indian banks will have to deposit as cash all the extra money they have been given as a result of demonetisation with the Reserve Bank of India, the central bank announced… The RBI made its sudden move after the country’s banks, flush with cash, went on a bond-buying spree, bringing down interest rates and triggering fears of both inflation and even a shortage of bonds. The central bank said on Saturday evening it was putting in place the temporary restrictions on bond buying to tackle ‘large excess liquidity in the system’. Since Narendra Modi, India’s prime minister, announced the withdrawal of 86% of the country’s banknotes on November 8, Indians have rushed to their banks to deposit the old notes. In that time, around 6tn rupees have been put into the banks. In response, banks have bought up around 4.3tn rupees’ worth of government bonds…, causing prices to jump and the yield on a 10-year bond yield fall more than 50 bps to its lowest in more than seven years.”
November 27 – Reuters (Suvashree Choudhury and Rajendra Jadhav): “Life was good for Mitharam Patil, a wealthy money lender from a small village in the Indian state of Maharashtra. Small-time financiers like Patil would typically lend cash to farmers and traders every day, providing a vital source of funding for a rural economy largely shut out of the banking sector, albeit at interest rates of about 24%. All that came crashing down on Nov. 8, when Prime Minister Narendra Modi banned 500 and 1,000 rupee ($7.30-$14.60) banknotes… The action was intended to target wealthy tax evaders and end India's ‘shadow economy’, but it has also exposed the dependency of poor farmers and small businesses on informal credit systems in a country where half the population has no access to formal banking.”
December 1 – AFP: “President Recep Tayyip Erdogan urged Turks on Friday to convert their foreign currencies into gold and lira to stimulate the country's economy as the lira continued its slide against the dollar. ‘For those who have foreign currencies under the pillow, come change this to gold, come change this to TL (Turkish lira). Let the lira win greater value. Let gold win greater value,’ he said… ‘What necessity is there to let foreign currency have greater value?’ he asked.”
November 29 – Bloomberg (Sid Verma): “For Asian markets, 2017 could be the year of the dollar crunch. Foreign portfolio flows have taken a sharp downturn since Donald Trump's election victory, with $15 billion fleeing Asian bonds and stocks this month alone — close to 30% of year-to-date inflows to the region, according to Deutsche Bank AG… Lending spreads, domestic demand and the resolve of domestic central banks to offset liquidity shortages will be tested next year, analysts warn, as key sources of dollar flows to the region — trade and portfolio inflows — may unravel if Trump makes good on his key campaign proposals.”
November 30 – Bloomberg (Kanga Kong and Jaehyun Eom): “The most vulnerable holders of more than $1 trillion in household debt could spark a financial crisis in South Korea that rivals the one seen during the Asian crisis two decades earlier, according to a former Bank of Korea monetary policy board member. ‘It evokes memories of the late 1990s when Korea was bailed out by the International Monetary Fund,’ said Choi Woon Youl, now a lawmaker with the main opposition Democratic Party of Korea… ‘If it was corporate debt that drove the crisis 20 years ago, it is household debt that would take the lead this time."
Geopolitical Watch:
December 2 – Reuters (Jennifer Jacobs and Nick Wadhams): “President-elect Donald Trump spoke Friday by phone with Taiwan President Tsai Ing-Wen in an unprecedented move that’s sure to provoke China, which regards the country as a renegade province. Trump’s transition team sent a statement saying that Taiwan’s president congratulated Trump on his victory and the two ‘noted the close economic, political and security ties” between the nations. The statement didn’t indicate if the call presaged a shift in longstanding U.S. policy against recognizing Taiwan’s sovereignty or allowing direct communication between top leaders.”
The S&P500 declined 1.0% (up 7.2% y-t-d), while the Dow added 0.1% (up 10%). The Utilities declined 1.0% (up 7.8%). The Banks gained another 1.5% (up 20.7%), and the Broker/Dealers added 0.2% (up 14.6%). The Transports were little changed (up 20.5%). The S&P 400 Midcaps fell back 1.0% (up 16.2%), and the small cap Russell 2000 dropped 2.4% (up 15.7%). The Nasdaq100 fell 2.7% (up 3.2%), and the Morgan Stanley High Tech index sank 3.4% (up 9.3%). The Semiconductors dropped 4.7% (up 27.9%). The Biotechs were clobbered 6.4% (down 17.4%). Although bullion was down $6, the HUI gold index rallied 4.3% (up 65%).
Three-month Treasury bill rates ended the week at 46 bps. Two-year government yields slipped two bps to 1.10% (up 5bps y-t-d). Five-year T-note yields declined two bps to 1.82% (up 7bps). Ten-year Treasury yields added two bps to 2.38% (up 13bps). Long bond yields rose six bps to 3.06% (up 4bps).
Greek 10-year yields fell 37 bps to 6.44% (down 88bps y-t-d). Ten-year Portuguese yields jumped 13 bps to 3.70% (up 118bps). Italian 10-year yields fell 18 bps to 1.90% (up 31bps). Spain's 10-year yields slipped three bps to 1.54% (down 23bps). German bund yields gained four bps to 0.28% (down 34bps). French yields fell five bps to 0.72% (down 27bps). The French to German 10-year bond spread narrowed nine to 44 bps. U.K. 10-year gilt yields slipped three bps to 1.38% (down 58bps). U.K.'s FTSE equities index dropped 1.6% (up 7.8%).
Japan's Nikkei 225 equities index added 0.2% (down 3.2% y-t-d). Japanese 10-year "JGB" yields increased a basis point to 0.04% (down 22bps y-t-d). The German DAX equities index dropped 1.7% (down 2.1%). Spain's IBEX 35 equities index declined 0.8% (down 9.8%). Italy's FTSE MIB index rallied 3.5% (down 20.2%). EM equities were mostly lower. Brazil's Bovespa index fell 2.0% (up 39%). Mexico's Bolsa lost 1.8% (up 3.7%). South Korea's Kospi slipped 0.2% (up 0.5%). India’s Sensex equities index dipped 0.3% (up 0.4%). China’s Shanghai Exchange declined 0.6% (down 8.3%). Turkey's Borsa Istanbul National 100 index fell 1.3% (up 2.3%). Russia's MICEX equities index gained 1.5% (up 21%).
Junk bond mutual funds saw inflows of $342 million (from Lipper).
Freddie Mac 30-year fixed mortgage rates gained five bps to a 16-month high 4.08% (up 15bps y-o-y). Fifteen-year rates rose nine bps to 3.34% (up 18bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates up a basis point to 4.09% (up 20bps).
Federal Reserve Credit last week declined $11.2bn to $4.411 TN. Over the past year, Fed Credit contracted $29.2bn (down 0.7%). Fed Credit inflated $1.600 TN, or 57%, over the past 212 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt gained $6.4bn last week to $3.127 TN. "Custody holdings" were down $198bn y-o-y, or 6.0%.
M2 (narrow) "money" supply last week jumped $46.5bn to a record $13.262 TN. "Narrow money" expanded $990bn, or 8.1%, over the past year. For the week, Currency increased $2.6bn. Total Checkable Deposits gained $19.0bn, and Savings Deposits rose $19.7bn. Small Time Deposits were little changed. Retail Money Funds expanded $6.0bn.
Total money market fund assets increased $13.9bn to a 13-week high $2.719 TN. Money Funds declined $22.3bn y-o-y (0.8%).
Total Commercial Paper added $1.8bn to $924bn. CP declined $119bn y-o-y, or 11.4%.
Currency Watch:
The U.S. dollar index declined 0.7% to 100.77 (up 2.1% y-t-d). For the week on the upside, the South African rand increased 2.2%, the British pound 2.0%, the Norwegian krone 1.9%, the Canadian dollar 1.7%, the New Zealand dollar 1.4%, the euro 0.7%, the Danish krone 0.7%, the Singapore dollar 0.6%, the South Korean won 0.4%, the Swedish krona 0.4%, the Swiss franc 0.3%, the Australian dollar 0.2% and the Mexican peso 0.1%. For the week on the downside, the Japanese yen declined 0.3% and the Brazilian real fell 1.8%. The Chinese yuan rallied 0.6% versus the dollar (down 5.6%).
Commodities Watch:
November 30 – Reuters (Rania El Gamal, Alex Lawler and Ahmad Ghaddar): “OPEC has agreed its first oil output cuts since 2008 after Saudi Arabia accepted ‘a big hit’ on its production and dropped its demand on arch-rival Iran to slash output, pushing up crude prices by around 10%. Fast-growing producer Iraq also agreed to curtail its booming output, while non-OPEC Russia will join output cuts for the first time in 15 years to help the Organization of the Petroleum Exporting Countries prop up oil prices. ‘OPEC has proved to the skeptics that it is not dead. The move will speed up market rebalancing and erosion of the global oil glut,’ said OPEC watcher Amrita Sen from consultancy Energy Aspects.”
November 27 – Bloomberg (Narae Kim): “In China, money flow is tightly controlled and capital markets are relatively underdeveloped, meaning the economy works like squeezing a balloon. You press it in one place, and it bulges in another. Policy-maker moves to cool one expansion only serve to inflate another. Now that ‘gyration of bubbles,’ according to Société Générale SA’s chief China economist Wei Yao, has been heating up the commodities market again. Earlier this month, thermal and coking coal futures hit a record high since their debut in 2013 while zinc soared to the highest since 2011. Steel rebar, nickel, tin, iron ore and rubber futures also climbed to multi-year highs.
The Goldman Sachs Commodities Index jumped 5.8% (up 24% y-t-d). Spot Gold declined 0.5% to $1,178 (up 11%). Silver rallied 1.5% to $16.80 (up 22%). Crude surged $5.62 to $51.68 (up 40%). Gasoline jumped 13.3% (up 22%), and Natural Gas surged 12.1% (up 47%). Copper declined 2.1% (up 23%). Wheat sank 3.6% (down 14%). Corn fell 3.1% (down 3.2%).
Italy Watch:
November 27 – Financial Times (Rachel Sanderson): “Up to eight of Italy’s troubled banks risk failing if prime minister Matteo Renzi loses a constitutional referendum next weekend and ensuing market turbulence deters investors from recapitalising them, officials and senior bankers say. Mr Renzi, who says he will quit if he loses the referendum, had championed a market solution to solve the problems of Italy’s €4tn banking system and avoid a vote-losing ‘resolution’ of Italian banks under new EU rules. Resolution, a new regulatory mechanism, restructures and, if necessary, winds up a bank by imposing losses on both equity and debt investors, particularly controversial in Italy, where millions of individual investors have bought bank bonds. The situation is being closely watched by financiers and policymakers across Europe and beyond, who worry that a mass failure of Italian banks could trigger panic across the eurozone banking system.”
November 29 – Wall Street Journal (Giovanni Legorano): “The day of reckoning for Banca Monte dei Paschi di Siena SpA, Italy’s No. 3 lender by assets and one of Europe’s most troubled, is drawing near. Long-simmering political, financial and market tensions promise to come to a head next week when it becomes clear whether Monte dei Paschi will be able to succeed in executing a make-or-break plan to bring itself back to health. This weekend will be decisive, when Italians vote on a referendum that could open the door to political instability and unnerve investors, threatening to derail Monte dei Paschi’s rescue plan. That in turn could force a state bailout of the lender, perhaps by year-end—deeply complicating Italy’s efforts to clean up its banking sector. Nervous investors have pummeled Italian banking stocks ahead of Sunday’s vote, sending the FTSE Italia All-Share Banks Index down 12% in the past month…”
December 1 – Reuters (John Geddie): “Speculators convinced the euro zone faces fresh instability have zeroed in on Italy's constitutional reform referendum on Sunday, amassing huge bets on a slump in Italian banks and bonds should Prime Minister Matteo Renzi lose the vote. Blindsided by skewed bookmakers' odds and equivocal opinion polls, financial markets ended up on the wrong side of Britain's vote to leave the European Union in June and Donald Trump's surprise U.S. election win last month… ‘There are colossal short positions on Italy from the U.S. and other countries where big investors are based,’ Raffaele Jerusalmi, the CEO of the Italian stock exchange said this week.”
November 30 – CNBC (Silvia Amaro and Julia Chatterley): “As political uncertainty looms in Italy, the populist Five Star Movement said it would renegotiate the country's membership of the euro if it came into power. Luigi Di Maio, a member of the Five Star Movement, wants to ‘re-discuss the EU and euro parameters’ to address poverty and investment issues in Italy. If such negotiations failed, Italy would have a referendum on a new kind of relationship with the euro area. ‘If (the EU) won't listen to us, we will propose a referendum on the euro to ask the Italian citizens what they want to do,’ Maio told CNBC… ‘Those who brought us in the euro never asked us if we did want to join it. Now we ask the citizens if they want to stay in the common currency or begin to address a two-tier euro scenario or a return to monetary sovereignty,’ Maio said.”
November 29 – Wall Street Journal (Manuela Mesco and Deborah Ball): “The founder of Italy’s populist 5 Star Movement showed off his growing confidence in a video posted ahead of Sunday’s pivotal national referendum. ‘An era is going up in flames,’ Beppe Grillo said as Donald Trump’s Election Night acceptance speech played in the background. ‘It’s the risk-takers, the stubborn, the barbarians who will carry the world forward…We will end up in government, and they will be asking, ‘How did they do it?’ Italian voters will decide Sunday on a constitutional change that would effectively strip the Senate of most of its powers. It is a gamble by Prime Minister Matteo Renzi—for Italy and abroad—and a centerpiece of his efforts to more quickly revamp Italy’s sickly economy.”
November 28 – Bloomberg (Sonia Sirletti, Tom Beardsworth and Chiara Albanese): “Banca Monte dei Paschi di Siena SpA started the first crucial stage of its turnaround plan on Monday as fresh worries about the future of Italy’s government rattled financial markets. The Italian lender is asking bondholders to swap 4.3 billion euros ($4.6bn) subordinated bonds for equity, a step that would allow the bank to proceed with a share sale by the end of the year. Bond investors have five days from Nov. 28 to sign up. The board of directors at Assicurazioni Generali SpA, Italy’s biggest insurer and an investor in the bonds, voted in favor of a conversion.”
Europe Watch:
November 30 – Bloomberg (Joao Lima): “Portugal’s string of good news is getting little attention from investors. Its Prime Minister Antonio Costa just got his second budget through parliament, its economy is picking up and the country stands out as a beacon of stability in the midst of the turmoil set off by Brexit, a referendum in Italy that might bring down the government and rising populism. For all that, investors aren’t showing Portugal’s bonds any love… Portugal’s 10-year bonds yield 3.7%, up from 2.4% at the start of January 2015, the month when ECB President Mario Draghi unveiled his quantitative easing program. It peaked at 18% in 2012 at the height of the euro region’s debt crisis.”
November 28 – Reuters (Ingrid Melander and Michel Rose): “Hardline reformist Francois Fillon scored a resounding win in France's conservative primaries on Sunday, making him favorite to win a presidential election five months from now against the popular far-right and a deeply divided left. Fillon, a former prime minister who wants to raise the retirement age, cut back social security and scrap the 35-hour working week, would easily beat National Front leader Marine Le Pen in a run-off second round, a flash opinion poll said right after his primaries victory.”
ECB Watch:
November 29 – Financial Times (Dan McCrum): “The calendar is not kind to the European Central Bank. A week on Thursday, its governing council will deliberate, just days after Italy’s vote on constitutional reform, and a week before the bank’s US counterpart holds a meeting which could move the world’s bond and currency markets. Temporal pressure of another kind is also building, as the ECB buys €80bn of bonds each month in a programme that runs until March. Extending it could create a new problem, as there may not be enough German Bund’s available next year to keep the ECB’s spending on the eurozone member country’s debt in line with a carefully agreed formula. So Mario Draghi, head of the bank, must somehow ensure stability following a referendum many expect the Italian government to lose, without unduly favouring that country’s sovereign bonds. He must try to keep borrowing costs suppressed across a continental economy where inflation is absent, while also keeping banks healthy and profitable so they lend to businesses and consumers.”
November 29 – Reuters (Balazs Koranyi and Frank Siebelt): “The European Central Bank is ready to temporarily step up purchases of Italian government bonds if the result of a crucial referendum on Sunday sharply drives up borrowing costs for the euro zone's largest debtor, central bank sources told Reuters. Italian government debt and bank shares have sold off ahead of the Dec. 4 referendum on constitutional reforms because of the risk of political turmoil. Opinion polls suggest the 'No' camp is heading for victory, which could force out Prime Minister Matteo Renzi in the latest upheaval against the ruling establishment sweeping the developed world. The ECB could use its 80-billion-euro ($84.8bn) monthly bond-buying programme to counter any immediate, further spike in bond yields after the vote, smoothing market moves and supporting bonds, according to four euro zone central bank sources…”
November 28 – Wall Street Journal (Tom Fairless and Todd Buell): “European Central Bank President Mario Draghi issued a blunt warning over the risks that low interest rates pose to the eurozone’s €10 trillion ($10.6 trillion) economy—just as the ECB prepares to decide whether to hold rates down for longer. The warning underlines the dearth of policy choices central banks face as they seek to further stimulate their economies after years of aggressive easy-money policies. Speaking at the European Parliament in Brussels…, Mr. Draghi said a lengthy period of low rates had created ‘fertile terrain’ for financial-market risks, including a buildup of debt and excessive risk-taking. In an unusual move, the ECB chief also flagged ‘significant vulnerabilities’ in eight European real-estate markets, as a result of rising debt levels or excessive valuations.”
November 30 – Reuters (Paul Day): “Populism and waning national appetite for vital reforms threaten European integration, putting at risk the continent's prosperity and raising the specter of falling incomes, European Central Bank President Mario Draghi said… The ECB has bought governments time with its super-easy monetary policy, yet reform efforts looks to be softening, a major worry as productivity growth is already weak, innovation is low and aging populations will be a huge drag, Draghi said. ‘Monetary policy is providing support and space for governments to carry out necessary structural reforms,’ Draghi said… ‘It is a window of opportunity they should seize.’”
China Bubble Watch:
November 29 – Financial Times (Gabriel Wildau, Don Weinland and Tom Mitchell): “China is readying new restrictions on outbound foreign investment in an effort to curb capital outflows that are putting downward pressure on the renminbi and draining foreign exchange reserves... The State Council is most concerned about outbound mergers and acquisitions worth more than $10bn, said two people familiar with the government’s deliberations. They added that Chinese officials would scrutinise purchases of more than $1bn if they were outside the investor’s core business. Meanwhile, state-owned enterprises will not be allowed to invest more than $1bn on a single overseas real estate transaction. News of the stricter measures worried many company executives, investment bankers and M&A lawyers… as they tried to assess the impact on their pending transactions… According to commerce ministry data, Chinese companies’ overseas purchases have surged past last year’s record of $121bn for non-financial outbound investments, reaching $146bn over the first 10 months of 2016.”
December 1 – Bloomberg: “People’s Bank of China Governor Zhou Xiaochuan already has one policy headache with the currency falling to near an eight-year low. He could have an even bigger one next month. That’s when a $50,000 cap on how much foreign currency individuals are allowed to convert each year resets, potentially aggravating capital outflow pressures that are already on the rise. If just 1% of China’s almost 1.4 billion people max out those limits, that’s an outflow of about $700 billion -- more than the estimated $620 billion that Bloomberg Intelligence estimates indicate has already flowed out in the first 10 months of this year.”
November 29 – Financial Times (Don Weinland, Tom Mitchell and Gabriel Wildau): “The days when a Chinese iron ore miner could buy a UK video game developer are drawing to a close as Beijing tightens up on cross-border investment by its companies. Investment banks in Asia have worked overtime this year on bringing an expansive range of acquisition targets to aggressive Chinese groups, many of which have strayed far beyond the acquirers’ original scope of business. …Overseas purchases by Chinese companies have surged past last year’s record of $121bn for non-financial outbound investments, reaching $146bn over the first 10 months of 2016.”
November 27 – Bloomberg (Lianting Tu): “Without a policy announcement, China’s central bank has effectively tightened monetary conditions in recent weeks, an analysis of its transactions shows. The People’s Bank of China has cut back on seven-day open-market operations and is instead injecting more funds through 14-day and 28-day contracts. That’s had the effect of raising short-term borrowing costs and pressing up bond yields. It’s another sign of selective tightening by the PBOC that’s reinforced the views of many economists that China has turned the corner away from monetary stimulus.”
November 29 – Bloomberg: “China’s government is stepping up efforts to contain runaway property prices, with the central bank clamping down further on mortgage lending in areas deemed overheated, people with knowledge of the matter said. Some lenders in those cities have been asked to suspend distributing new home loans…”
November 27 – Bloomberg (Chisaki Watanabe): “China risks wasting $490 billion by building more coal power plants than it needs as slower power demand growth and less polluting energy sources squeeze coal generation out of the power mix, according to a study from an environmental think tank. As of July, the country had 895 gigawatts of operating coal capacity being utilized less than half the time, with another 205 gigawatts under construction, …Carbon Tracker Initiative said…”
Fixed-Income Bubble Watch:
November 30 – Bloomberg (Eliza Ronalds-Hannon and Charlotte Ryan): “Treasuries wrapped up their worst month since 2009 as investors pulled money from the U.S. bond market on speculation Donald Trump’s victory in the presidential election will pave the way for increased fiscal stimulus. A Bloomberg Barclays index tracking the Treasuries market lost 2.4% this month through Nov. 29. U.S. government debt extended declines Wednesday as OPEC reached a deal to cut oil output, while Trump’s pick for Treasury secretary said he’ll consider adding longer maturities. As U.S. 10-year yields held close to the highest levels this year, the difference over German bunds, Europe’s benchmark sovereign securities, approached the widest on record, according to closing-price data going back to 1990.”
November 30 – Bloomberg (Scott Lanman and Liz McCormick): “Steven Mnuchin, President-elect Donald Trump’s pick for U.S. Treasury secretary, said he’ll explore issuing debt maturing in more than 30 years to cushion the effect of rising interest rates, signaling incoming officials may be open to ideas that the current administration has been unwilling to implement. ‘Interest rates are going to stay relatively low for the next couple of years,’ Mnuchin said… Among other initiatives, ‘we’ll look at potentially extending the maturity of the debt, because eventually we are going to have higher interest rates, and that’s something that this country is going to need to deal with.’”
November 30 – Bloomberg (Joe Light): “Steven Mnuchin, president-elect Donald Trump’s nominee to be U.S. Treasury Secretary, said Fannie Mae and Freddie Mac should leave government control and that the incoming administration ‘will get it done reasonably fast.’ The comments… sent shares of the mortgage-finance giants soaring Wednesday. Fannie Mae and Freddie Mac each jumped 46%, the most since March 2013. The fight over the future of the mortgage companies has been raging since they were bailed out in 2008 for an eventual cost of $187.5 billion.”
December 1 – Reuters (Trevor Hunnicutt): “Investors pulled $4.1 billion from U.S.-based taxable-bond mutual funds, the most since June, as a bond selloff forced interest rates higher and rattled investors, Lipper… showed… ‘Investors are pulling the trigger and are starting, maybe, the rotation out of bond funds," said Tom Roseen, head of research services for Thomson Reuters Lipper. Municipal bond funds continued to be punished as well, losing $2.1 billion to redemptions. Investment-grade corporate bonds posted $1.3 billion in outflows during the seven days through Nov. 30.”
November 30 – Financial Times (Eric Platt): “Investors are buying up riskier corporate debt in a bet that US economic expansion will accelerate due to the boost of government stimulus and tax cuts proposed by president-elect Donald Trump. Despite a $1.6tn hit to fixed-income portfolios in the wake of the global bond market rout, losses concentrated within the sovereign debt sphere, investors have warmed to the idea that a burst of stimulus at the start of Mr Trump’s first term in January will buoy the sales of US companies while tax cuts bolster margins and earnings.”
Global Bubble Watch:
December 1 – Bloomberg (Garfield Clinton Reynolds and Anooja Debnath): “The 30-year-old bull market in bonds looks to be ending with a bang. The Bloomberg Barclays Global Aggregate Total Return Index lost 4% in November, the deepest slump since the gauge’s inception in 1990. Bonds in Europe extended declines with their U.S. peers as OPEC’s agreement on Wednesday to cut oil production added to prospects of higher inflation. The reflation trade has been driving markets since Donald Trump’s presidential election win due to promises of tax cuts and $1 trillion in infrastructure spending… November’s rout wiped a record $1.7 trillion from the global index’s value in a month that saw world equity markets’ capitalization climb $635 billion. The yield on 10-year U.S. notes rose 56 bps in November, the biggest jump since 2009…”
December 1 – Reuters (Leika Kihara): “Bank of Japan board member Makoto Sakurai said the central bank will continue to buy massive amounts of government bonds even under a new policy framework targeting interest rates, shrugging off the view that its bond-buying programme was nearing a limit. But the former academic urged the government and companies to do more to help the BOJ beat subdued inflation and growth in Japan by raising wages and promoting innovation.”
November 27 – Bloomberg: “There’s a Chinese saying that stems from the philosophy in Sun Tzu’s ancient text ‘The Art of War’: You can kill 1,000 enemies, but you would also lose 800 soldiers. Centuries later, the proverb is suddenly apt again, being mentioned frequently in discussions around Beijing. Now, it highlights the potential damage U.S. President-elect Donald Trump could inflict if he makes good on his threat to start a trade war with China, the world’s second-biggest economy. Having backed off some other campaign pledges, it’s unclear if Trump will end up slapping punitive tariffs on China... Still, the message from China is that any move to tax Chinese imports would bring retaliation: The U.S. economy would take a hit and America would damage its longstanding ties with Asia.”
U.S. Bubble Watch:
November 29 – Bloomberg (Michelle Jamrisko): “The U.S. economy expanded more than previously reported last quarter on a sunnier picture of household spending, the primary growth engine. Gross domestic product rose at a 3.2% annualized rate in the three months ended in September, the fastest in two years…”
November 29 – Wall Street Journal (Laura Kusisto): “U.S. home prices have climbed back above the record reached more than a decade ago, bringing to a close the worst period for the housing market since the Great Depression and stoking optimism for a more sustainable expansion. The average home price for September was 0.1% above the July 2006 peak, according to the S&P CoreLogic Case-Shiller U.S. National Home Price index... Adjusted for inflation, the index still is about 16% below the 2006 high. Home prices jumped 5.5% over the past year.”
November 29 – Bloomberg (Patricia Laya): “Consumer confidence rose in November to the highest level since July 2007 on increased optimism about the U.S. labor market and economy, according to… the Conference Board. Confidence index increased to 107.1 (forecast was 101.5) from a revised 100.8. Present conditions gauge rose to 130.3, also the highest since July 2007, from 123.1…”
November 30 – CNBC (Elizabeth Gurdus): “In line with President-elect Donald Trump's proposals, Steve Mnuchin told CNBC… his focus as Treasury secretary will be stimulating economic growth and creating jobs through tax reform. ‘By cutting corporate taxes, we're going to create huge economic growth and we'll have huge personal income,’ Mnuchin told ‘Squawk Box’… Reducing the corporate tax rate from 30% to 15% will be a major goal for the Trump administration, the former Wall Street executive said.”
November 29 – Wall Street Journal (Aaron Back): “After a yearslong boom in lending, signs of trouble are popping up in auto loans. In the past few weeks, some auto lenders have warned that default rates are creeping up. Used-car prices are also falling faster than many anticipated, leading to lower recovery amounts when borrowers do default. The latest stress signal comes from auto research firm Edmunds.com, which said in a recent report that record numbers of shoppers are trading in old cars for new ones when they still have substantial amounts due on their existing car loans.”
December 1 – New York Times (Michael Corkery): “Regulators are airing ‘significant concern’ about the millions of Americans who are falling behind on their car loans, even as auto lending continues to boom at a near record pace. …The Federal Reserve Bank of New York noted increasing distress among auto borrowers with shaky credit, as subprime delinquencies rose in the third quarter. In the third quarter, 2% of subprime auto loan balances became at least 90 days delinquent, up from 1.6% in the third quarter of 2014.”
November 30 – Wall Street Journal (Josh Mitchell): “The federal government is on track to forgive at least $108 billion in student debt in coming years, as more and more borrowers seek help in paying down their loans, leading to lower revenues for the country’s wider program to finance higher education. The Government Accountability Office disclosed that sum… in a report to Congress that for the first time projected the full costs of plans that set borrowers’ monthly payments as a share of their earnings and which eventually forgive portions of their debt. The GAO report also sharply criticized the government’s accounting methods for its $1.26 trillion student-loan portfolio, pointing to flaws that have led it to alter projected revenues widely over the years.”
Federal Reserve Watch:
November 28 – The Hill (Peter Schroeder): “The Federal Reserve could be in for a bumpy ride as resurgent Republicans led by President-elect Donald Trump look to make a big mark on the central bank. The right has grown increasingly irritated by the central bank’s policies since the financial crisis and may now be poised to finally push through long-stalled changes to overhaul its operations. ‘We knew there was going to be limited progress under Barack Obama’s administration,’ said Rep. Bill Huizenga (R-Mich.), who authored a broad Fed reform bill in the last Congress. ‘Now, with a partner at 1600 Pennsylvania Avenue that’s interested in moving the needle, frankly we’d be dumb not to try to pursue this.’ For years, GOP-led efforts to impose new rules and restrictions on the Fed ran aground amid substantial Democratic opposition…”
Central Banker Watch:
November 30 – Reuters (David Milliken and Huw Jones): “Donald Trump's victory in the U.S. presidential election has increased the threats to the world economy from higher interest rates and less trade, the Bank of England said… The BoE also pointed to potential dangers from rapid Chinese credit growth or a disorganized British departure from the European Union in a half-yearly assessment of risks to Britain's financial system. BoE Governor Mark Carney highlighted a big rise in U.S. market interest rates since Trump's victory, which the Bank said could be a precursor to a destabilizing sharp move higher in global government borrowing costs from previous record lows.”
Japan Watch:
November 28 – Bloomberg (Keiko Ujikane): “Japan’s household spending dropped for an eighth straight month and retail sales fell slightly in October, even as the unemployment rate remained at the lowest in two decades. Household spending fell 0.4% from a year earlier, following a 2.1% decline in September. Retail sales fell 0.1% from a year ago…”
November 28 – Reuters (Osamu Tsukimori): “Japan's trade ministry has almost doubled the estimated cost of compensation for the 2011 Fukushima nuclear disaster and decommissioning of the damaged Fukushima-Daiichi nuclear plant to more than 20 trillion yen ($177.51bn), the Nikkei business daily reported…”
EM Watch:
November 27 – Financial Times (Kiran Stacey and David Keohane): “Indian banks will have to deposit as cash all the extra money they have been given as a result of demonetisation with the Reserve Bank of India, the central bank announced… The RBI made its sudden move after the country’s banks, flush with cash, went on a bond-buying spree, bringing down interest rates and triggering fears of both inflation and even a shortage of bonds. The central bank said on Saturday evening it was putting in place the temporary restrictions on bond buying to tackle ‘large excess liquidity in the system’. Since Narendra Modi, India’s prime minister, announced the withdrawal of 86% of the country’s banknotes on November 8, Indians have rushed to their banks to deposit the old notes. In that time, around 6tn rupees have been put into the banks. In response, banks have bought up around 4.3tn rupees’ worth of government bonds…, causing prices to jump and the yield on a 10-year bond yield fall more than 50 bps to its lowest in more than seven years.”
November 27 – Reuters (Suvashree Choudhury and Rajendra Jadhav): “Life was good for Mitharam Patil, a wealthy money lender from a small village in the Indian state of Maharashtra. Small-time financiers like Patil would typically lend cash to farmers and traders every day, providing a vital source of funding for a rural economy largely shut out of the banking sector, albeit at interest rates of about 24%. All that came crashing down on Nov. 8, when Prime Minister Narendra Modi banned 500 and 1,000 rupee ($7.30-$14.60) banknotes… The action was intended to target wealthy tax evaders and end India's ‘shadow economy’, but it has also exposed the dependency of poor farmers and small businesses on informal credit systems in a country where half the population has no access to formal banking.”
December 1 – AFP: “President Recep Tayyip Erdogan urged Turks on Friday to convert their foreign currencies into gold and lira to stimulate the country's economy as the lira continued its slide against the dollar. ‘For those who have foreign currencies under the pillow, come change this to gold, come change this to TL (Turkish lira). Let the lira win greater value. Let gold win greater value,’ he said… ‘What necessity is there to let foreign currency have greater value?’ he asked.”
November 29 – Bloomberg (Sid Verma): “For Asian markets, 2017 could be the year of the dollar crunch. Foreign portfolio flows have taken a sharp downturn since Donald Trump's election victory, with $15 billion fleeing Asian bonds and stocks this month alone — close to 30% of year-to-date inflows to the region, according to Deutsche Bank AG… Lending spreads, domestic demand and the resolve of domestic central banks to offset liquidity shortages will be tested next year, analysts warn, as key sources of dollar flows to the region — trade and portfolio inflows — may unravel if Trump makes good on his key campaign proposals.”
November 30 – Bloomberg (Kanga Kong and Jaehyun Eom): “The most vulnerable holders of more than $1 trillion in household debt could spark a financial crisis in South Korea that rivals the one seen during the Asian crisis two decades earlier, according to a former Bank of Korea monetary policy board member. ‘It evokes memories of the late 1990s when Korea was bailed out by the International Monetary Fund,’ said Choi Woon Youl, now a lawmaker with the main opposition Democratic Party of Korea… ‘If it was corporate debt that drove the crisis 20 years ago, it is household debt that would take the lead this time."
Geopolitical Watch:
December 2 – Reuters (Jennifer Jacobs and Nick Wadhams): “President-elect Donald Trump spoke Friday by phone with Taiwan President Tsai Ing-Wen in an unprecedented move that’s sure to provoke China, which regards the country as a renegade province. Trump’s transition team sent a statement saying that Taiwan’s president congratulated Trump on his victory and the two ‘noted the close economic, political and security ties” between the nations. The statement didn’t indicate if the call presaged a shift in longstanding U.S. policy against recognizing Taiwan’s sovereignty or allowing direct communication between top leaders.”
Friday Evening Links
[Bloomberg] Treasuries Rise With Stocks After U.S. Jobs Report; Dollar Falls
[Bloomberg] Italy Referendum: What to Watch Into the Night on Sunday
[Bloomberg] Austrians Fearing Worse Future May Decide Too-Close-to-Call Vote
[Bloomberg] Trump Calls Taiwan Leader in Move Likely to Offend China
[FT] China capital curbs sow doubt over renminbi ambitions
[AFP] Erdogan urges Turks to convert foreign currency to lira
[Bloomberg] Italy Referendum: What to Watch Into the Night on Sunday
[Bloomberg] Austrians Fearing Worse Future May Decide Too-Close-to-Call Vote
[Bloomberg] Trump Calls Taiwan Leader in Move Likely to Offend China
[FT] China capital curbs sow doubt over renminbi ambitions
[AFP] Erdogan urges Turks to convert foreign currency to lira
Thursday, December 1, 2016
Friday's News Links
[Bloomberg] Payrolls in U.S. Rise; Jobless Rate Falls to 4.6%
[Bloomberg] Emerging-Market Stocks Set for Biggest Decline in Three Weeks
[Bloomberg] Brent Heads for Biggest Weekly Advance Since 2009 on OPEC Pact
[Reuters] Asia shares pare gains; Treasury yields, oil off highs
[Reuters] Italy's Renzi launches last day of frantic referendum campaign
[Bloomberg] Italian Banks Flirt With Disaster Again as Renzi Teeters
[Reuters] ECB likely to announce six-month extension of QE program next week: Reuters poll
[Reuters] Bank of China sharply limits forex sales to companies in Shanghai: sources
[Bloomberg] China's Central Bank Is Facing a Major New Headache
[Bloomberg] Global Banks Rein in Lending to Turkey as Erdogan Roils Markets
[Bloomberg] OPEC's Surprise Move Spurred a Gigantic Inflow Into an Oil Stock ETF
[Economist] Why a strengthening dollar is bad for the world economy
[Reuters] U.S. state budgets to face low energy prices for years to come: Fitch
[CNN] 6 million borrowers are 90 days late on their car loans
[FT] Italy’s referendum casts shadow over banks’ bad loans
[NYT] With Populist Anger Rising, Italy May Be Next Domino to Fall
[WSJ] China Warns U.S. Against Blocking Aixtron Takeover
[Bloomberg] Emerging-Market Stocks Set for Biggest Decline in Three Weeks
[Bloomberg] Brent Heads for Biggest Weekly Advance Since 2009 on OPEC Pact
[Reuters] Asia shares pare gains; Treasury yields, oil off highs
[Reuters] Italy's Renzi launches last day of frantic referendum campaign
[Bloomberg] Italian Banks Flirt With Disaster Again as Renzi Teeters
[Reuters] ECB likely to announce six-month extension of QE program next week: Reuters poll
[Reuters] Bank of China sharply limits forex sales to companies in Shanghai: sources
[Bloomberg] China's Central Bank Is Facing a Major New Headache
[Bloomberg] Global Banks Rein in Lending to Turkey as Erdogan Roils Markets
[Bloomberg] OPEC's Surprise Move Spurred a Gigantic Inflow Into an Oil Stock ETF
[Economist] Why a strengthening dollar is bad for the world economy
[Reuters] U.S. state budgets to face low energy prices for years to come: Fitch
[CNN] 6 million borrowers are 90 days late on their car loans
[FT] Italy’s referendum casts shadow over banks’ bad loans
[NYT] With Populist Anger Rising, Italy May Be Next Domino to Fall
[WSJ] China Warns U.S. Against Blocking Aixtron Takeover
Thursday Evening Links
[Bloomberg] Treasuries Drop Before Jobs Data as Oil Gains; Tech Shares Sink
[Reuters] Fed may face unnerving shake-up under Trump administration
[Reuters] $4.1 billion pulled from U.S.-based taxable mutual bond funds during week: Lipper
[Bloomberg] Yields on Treasury-Backed Muni Bonds Soar to Highest Since 2009
[Bloomberg] Chipmakers Tumble Most Since June on Report Apple Cut Orders
[Reuters] Exclusive: How Putin, Khamenei and Saudi prince got OPEC deal done
[Bloomberg] Mexico Loses Central Bank Chief to BIS as Trump Risk Looms
[Bloomberg] Junk Rating for South Africa Might Be Hours Away and Last Years
[UK Telegraph, Evans-Pritchard] The greatest danger for Italy is the looming loss of the ECB shield
[NYT] The Guys From ‘Government Sachs’
[WSJ] Bond Market Slide Intensifies
[Dow Jones] Donald Trump Warns of Penalties If U.S. Firms Take Jobs Abroad
[WSJ] Foreign Companies Face New Clampdown for Getting Money out of China
[Reuters] Fed may face unnerving shake-up under Trump administration
[Reuters] $4.1 billion pulled from U.S.-based taxable mutual bond funds during week: Lipper
[Bloomberg] Yields on Treasury-Backed Muni Bonds Soar to Highest Since 2009
[Bloomberg] Chipmakers Tumble Most Since June on Report Apple Cut Orders
[Reuters] Exclusive: How Putin, Khamenei and Saudi prince got OPEC deal done
[Bloomberg] Mexico Loses Central Bank Chief to BIS as Trump Risk Looms
[Bloomberg] Junk Rating for South Africa Might Be Hours Away and Last Years
[UK Telegraph, Evans-Pritchard] The greatest danger for Italy is the looming loss of the ECB shield
[NYT] The Guys From ‘Government Sachs’
[WSJ] Bond Market Slide Intensifies
[Dow Jones] Donald Trump Warns of Penalties If U.S. Firms Take Jobs Abroad
[WSJ] Foreign Companies Face New Clampdown for Getting Money out of China
Wednesday, November 30, 2016
Thursday's News Links
[Bloomberg] Treasuries Drop Before Jobs Data as Oil Gains; Dollar Declines
[Bloomberg] Dollar Slips Before Jobs Data as Oil Trades Near $50; Bonds Drop
[Bloomberg] Oil Trades Near $50 After OPEC Deal as Focus Moves to Execution
[Bloomberg] Asian Stocks Rise Most in Three Weeks on Oil Deal as Bonds Drop
[Bloomberg] Global Bonds Suffer Worst Monthly Meltdown as $1.7 Trillion Lost
[Bloomberg] Why November Was a Massive Month for Markets Around the World
[Bloomberg] Traders Are Betting that Volatility Is About to Spread
[Reuters] Markets swing violently against Italy without clear idea of outcome
[Bloomberg] Bonds Vulnerable Whether the News From Europe Is Good or Bad
[Bloomberg] China Factory Gauge Matches Post-2012 High as Large Firms Lead
[CNBC/NYT] As Auto Lending Rises, So Do Delinquencies
[CNBC] Layoffs fall to lowest level of 2016 — and only just above 16-year bottom, Challenger report shows
[Reuters] BOJ policymaker pledges to maintain huge bond buying
[CNBC] Italy’s populist party wants to renegotiate euro membership
[FT] Investors favour corporate debt on US stimulus hopes
[FT] Yen edges out Mexican peso as November’s worst-performing currency
[FT] November’s record-breaking highlights — in numbers
[Bloomberg] Dollar Slips Before Jobs Data as Oil Trades Near $50; Bonds Drop
[Bloomberg] Oil Trades Near $50 After OPEC Deal as Focus Moves to Execution
[Bloomberg] Asian Stocks Rise Most in Three Weeks on Oil Deal as Bonds Drop
[Bloomberg] Global Bonds Suffer Worst Monthly Meltdown as $1.7 Trillion Lost
[Bloomberg] Why November Was a Massive Month for Markets Around the World
[Bloomberg] Traders Are Betting that Volatility Is About to Spread
[Reuters] Markets swing violently against Italy without clear idea of outcome
[Bloomberg] Bonds Vulnerable Whether the News From Europe Is Good or Bad
[Bloomberg] China Factory Gauge Matches Post-2012 High as Large Firms Lead
[CNBC/NYT] As Auto Lending Rises, So Do Delinquencies
[CNBC] Layoffs fall to lowest level of 2016 — and only just above 16-year bottom, Challenger report shows
[Reuters] BOJ policymaker pledges to maintain huge bond buying
[CNBC] Italy’s populist party wants to renegotiate euro membership
[FT] Investors favour corporate debt on US stimulus hopes
[FT] Yen edges out Mexican peso as November’s worst-performing currency
[FT] November’s record-breaking highlights — in numbers
Wednesday Evening Links
[Bloomberg] Asian Shares Set for Gains Amid Oil Deal as Bond Selloff Deepens
[Reuters] Oil jumps over 8 percent as OPEC finalizes output cut deal
[Reuters] Treasuries -Yields rise as oil deal boosts inflation expectations
[Bloomberg] Fed Says U.S. Economy Continued to Expand Across Most Regions
[Reuters] OPEC in first joint oil cut with Russia since 2001, Saudis take "big hit"
[Reuters] U.S. municipal bond yields up sharply
[Bloomberg] Korea Household Debt Evokes 1997 Crisis, Says Ex-BOK Member
[Washington Post] Trump Treasury pick vows to curtail Wall Street regulations
[NYT] Steven Mnuchin Is More Pragmatist Than Ideologue
[Reuters] Oil jumps over 8 percent as OPEC finalizes output cut deal
[Reuters] Treasuries -Yields rise as oil deal boosts inflation expectations
[Bloomberg] Fed Says U.S. Economy Continued to Expand Across Most Regions
[Reuters] OPEC in first joint oil cut with Russia since 2001, Saudis take "big hit"
[Reuters] U.S. municipal bond yields up sharply
[Bloomberg] Korea Household Debt Evokes 1997 Crisis, Says Ex-BOK Member
[Washington Post] Trump Treasury pick vows to curtail Wall Street regulations
[NYT] Steven Mnuchin Is More Pragmatist Than Ideologue
Tuesday, November 29, 2016
Wednesday's News Links
[Bloomberg] Oil Rallies on OPEC Optimism, Spurring Gains in Energy Producers
[MarketWatch] Treasury yields soar on OPEC optimism
[Reuters] OPEC agrees first oil output cuts since 2008: source
[Bloomberg] U.S. Consumer Spending Rises at More Moderate Pace, Incomes Jump
[Bloomberg] Treasuries Having Worst Month Since 2009 on Trump Ripple Effect
[CNBC] Exclusive: Trump's Treasury pick says he wants to slash taxes across the board
[Bloomberg] Fannie and Freddie Should Exit Government Grip, Mnuchin Says
[Bloomberg] Mnuchin Says He’ll Consider Longer Maturities as Treasury Chief
[Reuters] Much more than constitutional reform at stake in Italian ballot
[Reuters] ECB's Draghi: populism has weakened European integration
[Reuters] Bank of England sees global financial risks after Trump victory
[Bloomberg] Euro-Area Inflation Accelerates Before Key ECB Decision on QE
[Bloomberg] No Love for Portugal Bonds as Debt-Burden Woes Eclipse Stability
[Bloomberg] China Adds Curbs on Pulling Money Out of the Country
[Bloomberg Video] China's Banks' Surging Cost of Funds
[Bloomberg] GM’s Ready to Lose $9,000 a Pop and Chase the Electric Car Boom
[Bloomberg] Mnuchin Said to Be Trump’s Treasury Pick as Economic Team Forms
[Reuters] Trump expected to name billionaire Wilbur Ross commerce secretary
[Reuters] Plaza memories may unnerve Trump-fueled dollar bulls
[Bloomberg] India’s Economy Grows Less Than Estimated Before RBI Rate Review
[NYT] Steven Mnuchin, Expected Treasury Pick, Is an Outsider to Public Policy
[WSJ] Why Italian Stability Is in the Hands of One Bank’s Bondholders
[WSJ] Auto Loans Get Even Dicier
[WSJ] U.S. to Forgive at Least $108 Billion in Student Debt in Coming Years
[FT] China capital curbs reflect buyer’s remorse over market reforms
[WSJ] Chinese Developers Reassess U.S. Projects
[MarketWatch] Treasury yields soar on OPEC optimism
[Reuters] OPEC agrees first oil output cuts since 2008: source
[Bloomberg] U.S. Consumer Spending Rises at More Moderate Pace, Incomes Jump
[Bloomberg] Treasuries Having Worst Month Since 2009 on Trump Ripple Effect
[CNBC] Exclusive: Trump's Treasury pick says he wants to slash taxes across the board
[Bloomberg] Fannie and Freddie Should Exit Government Grip, Mnuchin Says
[Bloomberg] Mnuchin Says He’ll Consider Longer Maturities as Treasury Chief
[Reuters] Much more than constitutional reform at stake in Italian ballot
[Reuters] ECB's Draghi: populism has weakened European integration
[Reuters] Bank of England sees global financial risks after Trump victory
[Bloomberg] Euro-Area Inflation Accelerates Before Key ECB Decision on QE
[Bloomberg] No Love for Portugal Bonds as Debt-Burden Woes Eclipse Stability
[Bloomberg] China Adds Curbs on Pulling Money Out of the Country
[Bloomberg Video] China's Banks' Surging Cost of Funds
[Bloomberg] GM’s Ready to Lose $9,000 a Pop and Chase the Electric Car Boom
[Bloomberg] Mnuchin Said to Be Trump’s Treasury Pick as Economic Team Forms
[Reuters] Trump expected to name billionaire Wilbur Ross commerce secretary
[Reuters] Plaza memories may unnerve Trump-fueled dollar bulls
[Bloomberg] India’s Economy Grows Less Than Estimated Before RBI Rate Review
[NYT] Steven Mnuchin, Expected Treasury Pick, Is an Outsider to Public Policy
[WSJ] Why Italian Stability Is in the Hands of One Bank’s Bondholders
[WSJ] Auto Loans Get Even Dicier
[WSJ] U.S. to Forgive at Least $108 Billion in Student Debt in Coming Years
[FT] China capital curbs reflect buyer’s remorse over market reforms
[WSJ] Chinese Developers Reassess U.S. Projects
Tuesday Evening Links
[Reuters] Asia stocks edge up on U.S. growth data cues; dollar steady
[Bloomberg] Oil Slides Amid Uncertainty Over OPEC Deal as U.S. Stocks Climb
[Bloomberg] Asia Is About to Face a Significant Dollar Stress Test
[WSJ] Italy: The Next Stop on Populism’s Global March
[WSJ] Home Prices Recover Ground Lost During Bust
[FT] Mario Draghi’s difficult juggling act
[Bloomberg] Oil Slides Amid Uncertainty Over OPEC Deal as U.S. Stocks Climb
[Bloomberg] Asia Is About to Face a Significant Dollar Stress Test
[WSJ] Italy: The Next Stop on Populism’s Global March
[WSJ] Home Prices Recover Ground Lost During Bust
[FT] Mario Draghi’s difficult juggling act
Monday, November 28, 2016
Tuesday's News Links
[Bloomberg] Oil Retreats Below $46 Before OPEC Meeting; Global Stocks Fall
[Bloomberg] Iran Says It Won’t Cut Oil Production as Talks Remain Deadlocked
[Dow Jones] Treasury Yields Near Highest Levels Of The Year
[Bloomberg] Yen Set for Worst Month Since 2009 as Hedge Funds Trim Bull Bets
[Bloomberg] U.S. Third-Quarter Growth Revised Upward on Consumer Spending
[Bloomberg] Consumer Confidence in U.S. Increases to a Nine-Year High
[Reuters] Iran, Iraq at loggerheads with Saudis ahead of OPEC meeting
[Bloomberg] China Steps Up Mortgage Controls in Some Property Markets
[Reuters] Exclusive: ECB ready to buy more Italian bonds if referendum rocks market - sources
[Bloomberg] Renzi’s Office Denies He’ll Quit Even on Italian Referendum Win
[CNBC] US home prices hit new peak, up 5.5% in September: S&P CoreLogic Case-Shiller
[FT] China poised to impose curbs on capital outflows
[FT] Four ways Renzi’s referendum could change Italy
[WSJ] Monte dei Paschi’s Future Hangs on Sunday Vote
[FT] The buying spree behind Beijing’s crackdown
[Bloomberg] Iran Says It Won’t Cut Oil Production as Talks Remain Deadlocked
[Dow Jones] Treasury Yields Near Highest Levels Of The Year
[Bloomberg] Yen Set for Worst Month Since 2009 as Hedge Funds Trim Bull Bets
[Bloomberg] U.S. Third-Quarter Growth Revised Upward on Consumer Spending
[Bloomberg] Consumer Confidence in U.S. Increases to a Nine-Year High
[Reuters] Iran, Iraq at loggerheads with Saudis ahead of OPEC meeting
[Bloomberg] China Steps Up Mortgage Controls in Some Property Markets
[Reuters] Exclusive: ECB ready to buy more Italian bonds if referendum rocks market - sources
[Bloomberg] Renzi’s Office Denies He’ll Quit Even on Italian Referendum Win
[CNBC] US home prices hit new peak, up 5.5% in September: S&P CoreLogic Case-Shiller
[FT] China poised to impose curbs on capital outflows
[FT] Four ways Renzi’s referendum could change Italy
[WSJ] Monte dei Paschi’s Future Hangs on Sunday Vote
[FT] The buying spree behind Beijing’s crackdown
Monday Evening Links
[CNBC] Asia markets open mixed; Nikkei down 0.41%, Kospi and ASX trade flat
[Reuters] Wall St. slips as banks, discretionary stocks drag
[Bloomberg] Japan’s Household Spending, Retail Sales Decline in October
[WSJ] ECB’s Mario Draghi Warns of Risks of Prolonged Low Interest Rates
[WSJ] China’s New Tool for Social Control: A Credit Rating for Everything
[Reuters] Wall St. slips as banks, discretionary stocks drag
[Bloomberg] Japan’s Household Spending, Retail Sales Decline in October
[WSJ] ECB’s Mario Draghi Warns of Risks of Prolonged Low Interest Rates
[WSJ] China’s New Tool for Social Control: A Credit Rating for Everything
Sunday, November 27, 2016
Monday's News Links
[Bloomberg] Trump Trades Falter as Stocks Fall; Treasuries Rally With Gold
[Bloomberg] Italian Lenders Slide on Vote Worries to Drag Down Europe Stocks
[Bloomberg] Best Emerging-Market Bonds Jolted as India’s RBI Drains Cash
[Bloomberg] Dollar Extends Retreat as Metals Advance With Asian Equities
[Reuters] Gold rises from multi-month lows as dollar weakens
[Bloomberg] Yuan Rises Most in Three Months as PBOC Official Vows Stability
[Reuters] OPEC makes last-ditch bid to save oil deal as tensions grow
[Bloomberg] What Will Italy’s Referendum Mean for the Euro?
[Bloomberg] Monte Paschi Starts Crucial $4.6 Billion Bonds-to-Equity Swap
[The Hill] Fed braces for Trump administration shake-up
[Bloomberg] China to Curb Megadeals as Regulators Tame Record Overseas Spree
[Bloomberg] China May Waste $490 Billion on Unneeded Coal Plants, Study Says
[Bloomberg] China Turns to ‘The Art of War’ as Trump Signals Battle on Trade
[Washington Post] As Trump prepares for office, concerns about China trade intensify
[Reuters] Exclusive: Chinese government money backs buyout firm’s deal for U.S. chip maker
[AP] Thousands protest across India against currency policy
[Bloomberg] BOJ Has First Loss in Four Years on Hit From FX and Bonds
[Reuters] Fukushima nuclear decommission, compensation costs to almost double: media
[FT] Italian banks fall fast on referendum jitters
[FT] Mexico warns US on Nafta renegotiation risks
[Bloomberg] Italian Lenders Slide on Vote Worries to Drag Down Europe Stocks
[Bloomberg] Best Emerging-Market Bonds Jolted as India’s RBI Drains Cash
[Bloomberg] Dollar Extends Retreat as Metals Advance With Asian Equities
[Reuters] Gold rises from multi-month lows as dollar weakens
[Bloomberg] Yuan Rises Most in Three Months as PBOC Official Vows Stability
[Reuters] OPEC makes last-ditch bid to save oil deal as tensions grow
[Bloomberg] What Will Italy’s Referendum Mean for the Euro?
[Bloomberg] Monte Paschi Starts Crucial $4.6 Billion Bonds-to-Equity Swap
[The Hill] Fed braces for Trump administration shake-up
[Bloomberg] China to Curb Megadeals as Regulators Tame Record Overseas Spree
[Bloomberg] China May Waste $490 Billion on Unneeded Coal Plants, Study Says
[Bloomberg] China Turns to ‘The Art of War’ as Trump Signals Battle on Trade
[Washington Post] As Trump prepares for office, concerns about China trade intensify
[Reuters] Exclusive: Chinese government money backs buyout firm’s deal for U.S. chip maker
[AP] Thousands protest across India against currency policy
[Bloomberg] BOJ Has First Loss in Four Years on Hit From FX and Bonds
[Reuters] Fukushima nuclear decommission, compensation costs to almost double: media
[FT] Italian banks fall fast on referendum jitters
[FT] Mexico warns US on Nafta renegotiation risks
Sunday Evening Links
[Bloomberg] Oil Slump Sinks Asian Stocks Before OPEC as Yen Takes on Dollar
[Bloomberg] Dollar Pulls Back Amid Yen Gains as Stocks Diverge; Crude Sinks
[Reuters] U.S. shoppers spend less over holiday weekend amid discounting
[Reuters] Fillon scores huge win in French conservative presidential primaries
[Bloomberg] Modi's Rural Supporters May Not Hang On Much Longer
[FT] Fears mount of multiple bank failures if Renzi loses referendum
[Bloomberg] Dollar Pulls Back Amid Yen Gains as Stocks Diverge; Crude Sinks
[Reuters] U.S. shoppers spend less over holiday weekend amid discounting
[Reuters] Fillon scores huge win in French conservative presidential primaries
[Bloomberg] Modi's Rural Supporters May Not Hang On Much Longer
[FT] Fears mount of multiple bank failures if Renzi loses referendum
Sunday's News Links
[Bloomberg] Gulf Stocks Advance as Investors Await Outcome of OPEC Gathering
[Bloomberg] OPEC Push for Deal Sends Algeria, Venezuela Ministers to Moscow
[Reuters] High turnout as French conservatives choose candidate to battle far-right for presidency
[Bloomberg] Even If OPEC Gets a Deal, It Risks Reviving Battered Oil Rivals
[Bloomberg] India's rural economy hit hard as informal lending breaks down
[Bloomberg] China’s Ball of Money Is Rolling Back to Commodities
[Bloomberg] China Has Quietly Hiked Borrowing Costs Through PBOC Operations
[WSJ] Oil Industry Anticipates Day of Reckoning
[FT] Indian lenders forced to deposit cash deluge at central bank
[Bloomberg] OPEC Push for Deal Sends Algeria, Venezuela Ministers to Moscow
[Reuters] High turnout as French conservatives choose candidate to battle far-right for presidency
[Bloomberg] Even If OPEC Gets a Deal, It Risks Reviving Battered Oil Rivals
[Bloomberg] India's rural economy hit hard as informal lending breaks down
[Bloomberg] China’s Ball of Money Is Rolling Back to Commodities
[Bloomberg] China Has Quietly Hiked Borrowing Costs Through PBOC Operations
[WSJ] Oil Industry Anticipates Day of Reckoning
[FT] Indian lenders forced to deposit cash deluge at central bank
Saturday, November 26, 2016
Friday, November 25, 2016
Weekly Commentary: Revisiting the Global Savings Glut Thesis
“Why is the United States, with the world's largest economy, borrowing heavily on international capital markets--rather than lending, as would seem more natural? What implications do the U.S. current account deficit and our consequent reliance on foreign credit have for economic performance in the United States and in our trading partners? What policies, if any, should be used to address this situation? In my remarks today I will offer some tentative answers to these questions. My answers will be somewhat unconventional in that I will take issue with the common view that the recent deterioration in the U.S. current account primarily reflects economic policies and other economic developments within the United States itself. Although domestic developments have certainly played a role, I will argue that a satisfying explanation of the recent upward climb of the U.S. current account deficit requires a global perspective that more fully takes into account events outside the United States. To be more specific, I will argue that over the past decade a combination of diverse forces has created a significant increase in the global supply of saving--a global saving glut--which helps to explain both the increase in the U.S. current account deficit and the relatively low level of long-term real interest rates in the world today. …As I will discuss, an important source of the global saving glut has been a remarkable reversal in the flows of credit to developing and emerging-market economies, a shift that has transformed those economies from borrowers on international capital markets to large net lenders. To be clear, in locating the principal causes of the U.S. current account deficit outside the country's borders, I am not making a value judgment about the behavior of either U.S. or foreign residents or their governments.” Federal Reserve governor Ben Bernanke, “The Global Saving Glut and the U.S. Current Account Deficit,” April 14, 2005
I was flabbergasted back in 2005 with Dr. Bernanke’s “global savings glut” thesis. At that time mortgage Credit was in the process of expanding a still all-time annual record $1.436 TN. National home prices (Case-Shiller) were up better than 14% year-over-year. The California housing Bubble was coming completely unhinged. Nationally, household mortgage Credit was expanding at double-digit rates for the fifth straight year, as a powerful inflationary psychology took hold in U.S. housing markets and throughout mortgage finance. Moreover, overall system Credit continued to expand rapidly following 2004’s 9.2% growth (strongest since 1988). At 2.75%, the Fed funds rate was ridiculously low in comparison to rapidly inflating home prices and generally rising securities and asset prices.
I had a difficult time accepting that Bernanke actually believed that emerging markets were playing such a primary financing role in the U.S. markets and economy. The Fed was in the midst of experimental reflationary policies, and I just assumed the “global savings glut” thesis was sophisticated rationalization and justification (reminiscent of Greenspan’s new paradigm productivity and rising speed limit rationale). Clearly, the Fed was headstrong to avoid tightening Credit even in the face of conspicuous mortgage excess, fearing that it might pull the rug out from under system reflation.
For a long time now, I’ve viewed the unique backdrop in the context of a historic multifaceted Experiment in: 1) Unconstrained global “money” and (market-based) Credit; 2) Unconventional economic structure; and 3) Activist/inflationist monetary management on a coordinated global basis.
There was no doubt in my mind that unfettered finance would foment market and economic instability. Indeed, evidence of global financial dysfunction has been on full display now for well over two decades. As custodian of the world’s reserve currency and champion of financial innovation, the U.S. has all along been the global leader with respect to Credit excess, speculation and monetary management. The financialization of the global economy has been integral to the U.S.’s unique capacity to run persistently large trade and Current Account Deficits.
Why not de-industrialize and instead use new financial claims in exchange for imported manufactured goods? The experiment in a services and consumption economic structure then took on a life of its own, fueled first by Wall Street finance and then by government debt and central bank Credit.
Unfettered global “money” and Credit coupled with a world flooded with U.S. financial claims (largely IOUs) was a recipe for extreme financial instability. Never did I imagine such an experiment could be sustained for so long. I simply did not contemplate the extent to which central bankers would be willing to underpin unsound global finance.
It’s not as if this great Experiment hasn’t been at the brink a few times: 1997, 1998, 2002, 2008, 2012 and early-2016. At this point, markets are understandably convinced that central bankers have no alternative than to always come immediately to the rescue.
Granted, QE retains the capacity to incite speculation and levitate markets. Yet monetary inflation’s myriad effects on societies and democracies are at this point progressively – and openly - corrosive. Rising anti-establishment sentiment and anti-globalization movements reflect mounting frustration with the existing world order. I believe the Brexit and Trump movements are indicative of the unfolding failure of this Global Experiment. I had assumed that the Experiment’s downfall would be marked by a crisis of unstable markets. At this time, the world is at monumental crossroads in terms of social, political, market and economic instability.
November 21 – Wall Street Journal (William Mauldin and David Luhnow): “Rather than kill Nafta, Donald Trump and his advisers appear set to push for substantial changes to the treaty governing U.S. trade with Mexico and Canada, an effort that could prove difficult to negotiate and perilous to the regional economy. The president-elect vilified the North American Free Trade Agreement during the campaign and threatened to pull the U.S. out of the trade deal—but only if Mexico doesn’t agree to substantial modifications. The U.S. trade deficit with Mexico rose 9.5% in 2015 to $60.7 billion, while the deficit with Canada fell 57% to $15.5 billion. Mr. Trump hasn’t released a blueprint for his new vision of Nafta, but his comments and those of his advisers suggest they want big changes. Among the likeliest would be special tariffs or other barriers to reduce the U.S. trade deficit with Mexico and new taxes that would hit U.S. firms that moved production there, according to Trump advisers.”
The Trump campaign was built upon a platform of economic nationalism and the imperative of major change. Trade deals must be canceled or significantly revamped. Jobs and manufacturing must be brought back to the U.S. America must come first to be great again. In the view of Trump and his advisors, The Experiment has clearly failed. Donald Trump often referred to the “Bubble.” He lashed out at Federal Reserve policymaking and the massive U.S. debt. With indices sprinting to record highs, it’s the nature of markets to forget why the Trump campaign received scant support from the business community and was viewed with contempt by Wall Street (and global markets).
James Carville famously quipped back in 1993: “I used to think that if there was reincarnation, I wanted to come back as the president or the pope or as a .400 baseball hitter. But now I would like to come back as the bond market. You can intimidate everybody.”
In his acceptance speech, President-elect Trump avoided slamming Yellen, the Federal Reserve or deficit spending. Bypassing confrontation, he chose instead to trumpet a revitalizing $1.0 TN infrastructure spending program. Such a priority undertaking would require close cooperation, both from the Federal Reserve and the financial markets. Détente. Wasting no time, markets immediately relegated Trump’s focus on trade and the displaced American worker to the realm of campaign bluster. No need for antipathy or fear – not with markets retaining firm control. Better yet, if the Trump administration seeks a successful Presidency, all roads must pass through all-powerful Wall Street. Incredibly, surging U.S. markets stirred the imagery of Ronald Reagan.
The general election presented an epic battle between deeply conflicting perceptions of reality. One sect held a more constructive view of a generally sound economic backdrop. With Washington’s assistance and commanding oversight, things were under control and on a definite uptrend. The opposing view held that it was all largely a mirage: the economy and markets were a Bubble illusion. Underpinnings (financial, economic, social and geopolitical) were disturbingly unsound, a product of years of gross Washington mismanagement. Only radical change would reverse our nation’s accelerating downfall.
U.S. markets have thus far been content to focus on prospects for financial deregulation, lower corporate taxes and infrastructure spending. Comforting and not so radical, no doubt. Yet the bedrock of the Trump movement is about putting American jobs and manufacturing first. And only radical change in trade relationships (and global finance?) will reverse the (experimental) course that has placed our economy, finances and society in peril. Begin immediately with TPP and NAFTA – then move on to China and Asia.
There’s a huge issue: The world – economy as well as financial “system” – is addicted to enormous U.S. Current Account Deficits. America has for two decades simultaneously flooded the global economy with purchasing power and international markets with cheap liquidity. Over years the upshot has been massive overinvestment in manufacturing capacity and incessant global financial instability. Central banks then moved to mitigate this troubling backdrop with a now protracted period of unprecedented reflationary measures. This only accommodated greater economic maladjustment and financial excess – while deepening global addictions.
From my analytical framework, it was never “the chicken or the egg” issue. It was loose monetary policies, financial excesses and associated U.S. Current Account Deficits that were the core of the so-called “global savings glut.” U.S. trade deficits ensured massive financial flows abroad, especially to rapidly growing China, Asia and EM. These dollar balances were then recycled right back to U.S. securities markets, in large part through EM central bank purchases of Treasuries and agency securities.
Moreover, EM, flush with dollar reserves and booming economies, enjoyed a self-reinforcing and destabilizing boom in “hot money” inflows (which could also be recycled into U.S. securities). This dynamic went into overdrive after the 2008 crisis and the introduction of QE. Virtually unlimited cheap liquidity on a global basis incentivized “carry trades” and all varieties of leveraged speculation. So long as yields continued their historic decline, central banker, the leveraged hedge fund operator, sovereign wealth fund manager, derivative player and Joe Public could all just keep buying debt and relishing the spectacular windfall.
A rapidly changing trade backdrop now risks significantly altering the global financial landscape. A focus on making America great again will ensure a radically different view of trade and “globalization.” I’ve always believed in the important distinction of trading goods for goods– as opposed to creating endless quantities of new financial claims to pay for boundless cheap imports. Fiat for goods may have appeared miraculous – with central bankers happy to Credit themselves for whipping inflation. But at the end of the day the world is left with destabilizing economic imbalances and unstable finance. In short, too much finance, overcapacity and inequality. And, as we’ve witnessed of late, there’s an alarming amount of angst and social division, along with a democratic majority demanding an end to the status quo.
Understandably, global bond markets are on edge. Already beginning to percolate, the combination of trade frictions and fiscal stimulus potentially creates the most nurturing inflationary backdrop in years. EM is under pressure, with fears of shrinking trade surpluses, weaker currencies, declining reserves and the specter of self-reinforcing “hot money” outflows. Instead of reliable buyers of U.S. Treasuries and other securities, EM appears more likely persistent sellers. And a faltering EM only fuels a powerful self-reinforcing king dollar dynamic. If EM central bankers are no longer backstopping Treasuries and bonds more generally, these instruments become a lot less attractive instruments for leveraged speculation. So will central bankers – and others – keep buying even as previous windfalls morph into mounting losses?
The S&P500 gained 1.4% this week to join the small caps, midcaps and DJIA at all-time highs. How is it possible that U.S. equities surge to record highs in the face of such a troubling unfolding backdrop? Right now, the U.S. “Core” is winning big at the expense of the faltering “periphery.” And with global QE continuing at an astounding $2.0 TN annualized pace, today’s prevailing market worry is missing out on “Risk On” flows rather than fretting some nebulous brewing “Risk Off.” Moreover, markets by now have become well-conditioned to see heightened risk as ensuring that central banks keep liquidity spigots wide open.
The “fiat for goods”, services/consumption economic structure, activist central banking, and accommodate financial innovation/leveraged speculation experimental regime created the illusion of a golden era of low inflation, booming securities markets and unending economic growth. Central bankers enjoyed the luxury of easy decisions. Inflation was trending down, while bond prices trended up – seemingly forever. Central banks saw no pressing reason to tighten policies, irrespective of booming securities markets and/or Bubbles.
Going forward, the world could experience a new paradigm of inflation trending higher and bond prices lower. This would entail great uncertainty, including who will step up and fund rising deficits in a new era of declining bond prices. There is today as well great uncertainty as to how U.S. economic nationalism will play out globally. Trade and currency wars are a very real possibility.
In the near-term, central banking is about to turn a lot more difficult. All this QE in the face of rising bond yields and general uncertainty will stoke inflation fears. Already, the surge of liquidity into equities is drawing funds from fixed income, while exacerbating general flow instability. Liquidity flooding into king dollar exacerbates EM fragilities. Increasingly apparent EM trouble then spurs more flows into hot “Core” securities. “Melt-up” stuff. Do central banks come to view QE as destabilizing for inflation expectations and overall market speculation and flows? Or do they see the backdrop as too risky to begin reining in global monetary stimulus, again turning their backs on increasingly dangerous speculative excess? Might views begin to diverge, a likely scenario that would usher in a less straightforward – and less market-comforting - policymaking paradigm.
A few weeks back I argued the case for Peak Monetary Stimulus. This week it’s Past Peak “Global Savings Glut.” I suspect liquidity conditions worldwide will react poorly to any retreat from global QE.
For the Week:
The S&P500 gained 1.4% (up 8.3% y-t-d), and the Dow rose 1.5% (up 9.9%). The Utilities rallied 2.0% (up 9.0%). The Banks increased 1.4% (up 18.9%), and the Broker/Dealers added 1.1% (up 14.4%). The Transports advanced 2.1% (up 20.4%). The broader market outperformed again. The S&P 400 Midcaps jumped 2.2% (up 17.3%), and the small cap Russell 2000 rose 2.4% (up 18.6%). The Nasdaq100 gained 1.3% (up 6.0%), and the Morgan Stanley High Tech index increased 1.0% (up 13.1%). The Semiconductors rose 2.1% (up 34.3%). The Biotechs were little changed (down 11.7%). With bullion down $24, the HUI gold index dropped 3.5% (up 58.1%).
Three-month Treasury bill rates ended the week at 49 bps. Two-year government yields rose five bps to 1.12% (up 7bps y-t-d). Five-year T-note yields gained four bps to 1.84% (up 9bps). Ten-year Treasury yields added a basis point to 2.36% (up 11bps). Long bond yields declined three bps to 3.00% (down 2bps).
Greek 10-year yields fell 12 bps to 6.81% (down 51bps y-t-d). Ten-year Portuguese yields dropped 25 bps to 3.57% (up 105bps). Italian 10-year yields declined a basis point to 2.08% (up 49bps). Spain's 10-year yields slipped two bps to 1.57% (down 20bps). German bund yields declined three bps to 0.24% (down 38bps). French yields added two bps to 0.77% (down 22bps). The French to German 10-year bond spread widened five to 53 bps. U.K. 10-year gilt yields fell four bps to 1.41% (down 55bps). U.K.'s FTSE equities index added 1.0% (up 9.6%).
Japan's Nikkei 225 equities index jumped 2.2% (down 3.4% y-t-d). Japanese 10-year "JGB" yields added a basis point to 0.03% (down 23bps y-t-d). The German DAX equities index increased 0.3% (down 0.4%). Spain's IBEX 35 equities index rose 0.6% (down 9.1%). Italy's FTSE MIB index rallied 1.5% (down 22.9%). EM equities were mixed. Brazil's Bovespa index rallied 2.7% (up 42%). Mexico's Bolsa recovered 2.2% (up 5.5%). South Korea's Kospi was unchanged (up 0.7%). India’s Sensex equities index increased 0.6% (up 0.8%). China’s Shanghai Exchange advanced 2.2% (down 7.8%). Turkey's Borsa Istanbul National 100 index fell 1.7% (up 3.7%). Russia's MICEX equities index surged 2.9% (up 19.1%).
Junk bond mutual funds saw inflows of $598 million (from Lipper).
Freddie Mac 30-year fixed mortgage rates jumped nine bps to a 16-month high 4.03% (up 8bps y-o-y). Fifteen-year rates rose 11 bps to 3.25% (up 7bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates up seven bps to 4.08% (up 14bps).
Federal Reserve Credit last week expanded $2.4bn to $4.422 TN. Over the past year, Fed Credit contracted $29.4bn (down 0.7%). Fed Credit inflated $1.611 TN, or 57%, over the past 211 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt increased $1.0bn last week to near a six-year low $3.120 TN. "Custody holdings" were down $199bn y-o-y, or 6.0%.
M2 (narrow) "money" supply last week surged $51.1bn to a record $13.214 TN. "Narrow money" expanded $955bn, or 7.8%, over the past year. For the week, Currency increased $1.7bn. Total Checkable Deposits surged $93.5bn, while Savings Deposits fell $53.2bn. Small Time Deposits declined $1.2bn. Retail Money Funds jumped $10.4bn.
Total money market fund assets rose $18.8bn to a 12-week high $2.705 TN. Money Funds declined $18.3bn y-o-y (0.7%).
Total Commercial Paper jumped $9.6bn to $922bn. CP declined $135bn y-o-y, or 12.8%.
Currency Watch:
November 24 – Financial Times: “The relentless rise of the dollar scorched emerging market currencies on Thursday, sending China’s renminbi to its weakest level in eight years, while India’s rupee plumbed a record low. Broad currency weakness against the dollar came as the bond market fully expects policy tightening by the Federal Reserve at its December meeting.”
November 24 – Financial Times (Peter Wells): “The Philippine peso has hit 50 per dollar for the first time since the financial crisis… It was the first time the currency traded through the 50 level since November 24, 2008, precisely eight years ago.”
November 24 – Financial Times (Peter Wells): “Malaysia’s ringgit has hit its weakest point since the Asian financial crisis, as the US dollar continues to strengthen and push down on currencies the world over… Yesterday, Malaysia’s central bank kept benchmark lending rates unchanged. Many analysts expected the decision, reasoning the weakening currency would prompt Bank Negara Malaysia to stand pat.”
The U.S. dollar index added 0.3% to 101.21 (up 2.6% y-t-d). For the week on the upside, the South African rand increased 2.2%, the Australian dollar 1.4%, the British pound 1.1%, the Swedish krona 0.5%, the South Korean won 0.5%, the New Zealand dollar 0.5%, the Taiwanese dollar 0.2%, and the Norwegian krone 0.2%. For the week on the downside, the Japanese yen declined 2.0%, the Brazilian real 0.9%, the Swiss franc 0.4%, and the Singapore dollar 0.1%. The Chinese yuan declined 0.5% versus the dollar (down 6.15%).
Commodities Watch:
The Goldman Sachs Commodities Index gained 1.5% (up 17.2% y-t-d). Spot Gold fell 2.0% to $1,184 (up 11.5%). Silver slipped 0.6% to $1 (up 20%). Crude added 37 cents to $46.06 (up 24%). Gasoline rose 2.5% (up 8%), and Natural Gas jumped 7.8% (up 31%). Copper surged 8.2% (up 26%). Wheat declined 1.4% (down 11%). Corn gained 1.3% (unchanged).
China Bubble Watch:
November 25 – Wall Street Journal (Lingling Wei): “China plans to clamp tighter controls on Chinese companies seeking to invest overseas, intensifying efforts to slow a surge in capital fleeing offshore amid tepid growth and an uncertain economic outlook. The State Council, China’s cabinet, will soon announce new measures that subject many overseas deals to reviews of “strict control,” according to people with direct knowledge… Targeted for particular scrutiny by the pending measure are ‘extra-large’ foreign acquisitions valued at $10 billion or more per deal, property investments by state-owned firms above $1 billion and investments of $1 billion or more by any Chinese company in an overseas entity unrelated to the investor’s core business.”
November 21 – Bloomberg: “Dollar strength and rising U.S. interest rates under President-elect Donald Trump would intensify pressure on capital outflows from China, forcing its policy makers to choose between tightening capital controls or a drastic floating of the currency in coming months. That’s according to Victor Shih, a University of California at San Diego professor who studies China’s government and finance and specializes in tracking politics at the most elite level. ‘Given the Chinese government’s consistent preference for control, we may see much more Draconian capital controls before a decision to float the currency can be made,’ Shih said… ‘The main objective is to avoid a panicky float.’”
November 21 – Bloomberg (Pooja Thakur Mahrotri and En Han Choong): “The landscaped lawns and flowering shrubs of Country Garden Holdings Co.’s huge property showroom in southern Malaysia end abruptly at a small wire fence. Beyond, a desert of dirt stretches into the distance, filled with cranes and piling towers that the Chinese developer is using to build a $100 billion city in the sea. While Chinese home buyers have sent prices soaring from Vancouver to Sydney, in this corner of Southeast Asia it’s China’s developers that are swamping the market, pushing prices lower with a glut of hundreds of thousands of new homes. They’re betting that the city of Johor Bahru, bordering Singapore, will eventually become the next Shenzhen. ‘These Chinese players build by the thousands at one go, and they scare the hell out of everybody,’ said Siva Shanker, head of investments at Axis-REIT Managers Bhd… ‘God only knows who is going to buy all these units, and when it’s completed, the bigger question is, who is going to stay in them?’”
Europe Watch:
November 21 – Reuters (Andreas Rinke and Madeline Chambers): “Angela Merkel announced… she wants to run for a fourth term as German chancellor in next year's election… The 62-year old conservative, facing a voter backlash over her open-door migrant policy, said she had thought long and hard before eventually deciding to stand again in the September election, ending months of speculation over her decision.”
November 24 – Reuters (Michael Nienaber): “Growth in leading euro zone economies slowed over the summer months and an expected German-led rebound at the end of the year may prove too short-lived for the European Central Bank to unwind its monetary stimulus. Germany's quarterly growth rate halved to 0.2% in the three months to September even though private consumption and state spending rose, as weak foreign trade slowed overall activity in Europe's biggest economy.”
November 24 – Financial Times (Claire Jones, Dan McCrum, Thomas Hale and Elaine Moore): “Hopes of a fix to the collateral squeeze facing the eurozone’s €5tn short-term funding markets were boosted this week after reports emerged the European Central Bank will consider ways to ease rules on how it lends its stockpile of sovereign debt. A lack of good quality collateral, which market participants use to secure loans, has crippled the single currency area’s short-term funding (‘repo’) markets. One big reason for the shortage is that the eurozone’s central bankers have spent the past year-and-a-half buying €1.1tn in government bonds… as part of their quantitative easing programme to boost growth.”
ECB Watch:
November 21 – Reuters (Gernot Heller and Joseph Nasr): “German Finance Minister Wolfgang Schaeuble called on the European Central Bank… to start unwinding it expansive monetary policy, adding that such a reversal should be done cautiously. ‘I will not get tired of saying that I would prefer it if we started as soon as possible,’ Schaeuble said. ‘Exiting this unusual monetary policy should be done with immense caution,’ he added, warning of possible shock reactions to such steps.”
November 24 – Bloomberg (Alessandro Speciale, Piotr Skolimowski and Catherine Bosley): “The European Central Bank is confident it will be able to continue shielding the euro area from the risk of a sudden correction in asset prices, after political events such as the election of Donald Trump threaten to increase volatility in coming months. ‘We are certainly seeing a correction coming from the U.S.,’ ECB Vice President Vitor Constancio said… ‘The ECB will continue to exert its stabilizing role, so I don’t think there will be significant contagion to Europe.’”
November 24 – CNBC (Silvia Amaro): “The increasing political uncertainty across advanced economies is risking the stability of the euro zone, the region's central bank warned in a new biannual report… The uncertainty surrounding upcoming key referendums and elections across the 19-member euro zone bloc, along with expected policy changes in the U.S. raise inflation and growth challenges for euro area countries, the European Central Bank (ECB) said. Such uncertainty could lead to a global asset market corrections, it stated. ‘The financial stability implications for the euro area stemming from changes in U.S. economic policies are highly uncertain at this point in time,’ the bank said.”
November 22 – Wall Street Journal (Christopher Whittall and Mike Bird): “The European Central Bank began buying billions of euros worth of corporate bonds earlier this year in a high-profile experiment aimed at spurring private investment. So far, the spending hasn’t materialized. Since June, the ECB has bought €44.3 billion (around $46.9bn) in corporate debt… The ECB buys bonds to stimulate tame growth with corporate spending. However, companies aren’t spending, executives say and data suggest, because they see few opportunities amid feeble growth and because credit was already cheap.”
Fixed-Income Bubble Watch:
November 23 – Financial Times (Thomas Hale): “Eurozone corporate bond risk premiums have jumped to their highest level since July, as Donald Trump’s victory in the US election effectively erases gains generated by the European Central Bank’s policy of buying companies’ debt. A sharp rise in global bond yields since Mr Trump’s triumph has also spurred an underperformance of European credit relative to the US corporate debt market. Higher corporate credit spreads in euros, which measure the risk of company debt compared to a benchmark rate, come despite ongoing purchases by the ECB… The ECB has purchased €44bn of corporate bonds so far.”
Global Bubble Watch:
November 21 – Reuters (Jamie McGeever): “Next year will be the first since 2006 that there will be no big monetary policy easing across the world's leading industrialized nations, signifying the end of the 35-year bull market in bonds, Bank of America Merrill Lynch said… Having driven interest rates to their lowest ever levels and lifted purchases of financial assets to over $25 trillion this year, central banks are finally maxed out, BAML said in its 2017 outlook. Any stimulus to the world economy will now come from governments, who will use fiscal policy to wage a ‘war on inequality’, according to BAML. ‘The era of excess central bank liquidity is ending. In 2017 markets likely will not benefit from a big monetary easing for the first time since 2006,’ BAML's investment strategy team led by Michael Hartnett… said…”
November 22 – Bloomberg (David Finnerty and Yumi Teso): “Global funds sold about $11 billion of equities and bonds in Asia’s emerging markets after Donald Trump’s victory in the U.S. presidential election as expectations for his economic policies sent Treasury yields higher and sparked the dollar’s strongest rally in eight years. India suffered the biggest outflows between Nov. 9 and Nov. 18, followed by Thailand… The capital flight trims the year-to-date inflow into India, Indonesia, the Philippines, South Korea, Taiwan and Thailand to around $55 billion.”
November 21 – Wall Street Journal (Rachel Rosenthal and Carol Chan): “Asian companies are starting to feel the ‘Trump effect,’ as a rise in global borrowing costs forces them to reconsider their debt-raising plans. Corporate-bond issuance in Asia has already slowed since the U.S. election, with companies from China to India pulling or postponing planned deals. The sudden stalling in debt markets could threaten a model of growth that has taken root in Asia in recent years. Firms across the region have taken advantage of low global interest rates to pile up trillions of dollars worth of debt, often denominated in greenbacks… Asian companies have already raised $1.1 trillion in bonds so far this year, compared with $260.8 billion for all of 2008, according to Dealogic.”
November 21 – Reuters (Abhinav Ramnarayan and Helen Reid): “Euro zone governments are increasingly relying on hedge funds to help them meet their borrowing needs, which risks leaving them vulnerable to a debt market sell-off driven by a class of investors dubbed ‘fast money’ for their speculative approach. With banks playing a less active part in the sovereign debt market because of pressures on their balance sheets, several countries have turned to hedge funds to sell their targeted amount of bonds… Hedge funds tend to look for quick returns on investments, which could increase the volatility of government bond markets as they face several tests of sentiment in coming months. A populist revolt that propelled Donald Trump and the Brexit vote is sweeping the developed world and threatens to unseat established leaders in an Italian referendum next month, and Dutch, French and German elections in 2017.”
November 19 – New York Times (Peter S. Goodman): “Among policy makers alert for signs of the next financial disaster, Italy's mountain of uncollectable bank debt is a subject discussed in tones ordinarily reserved for piles of plutonium. Its banks seem at once too big to fail and eminently capable of doing so… For years, Italian lenders have muddled through, hoping time would cure their afflictions. But Italy's economy has been terminally weak, not growing at all over a recent 13-year stretch… Nearly one-fifth of all loans in the Italian banking system are classified as troubled, a toll worth 360 billion euros, or nearly $400 billion, at the end of last represents roughly 40% of all the bad loans within the countries sharing the euro. In recent weeks, the world's focus has shifted to Germany's largest lender, Deutsche Bank... But if Deutsche has become the crisis of the moment, Italy is the perpetual threat that could, at any moment, present the world with an unpleasant surprise…”
November 21 – Financial Times (Alex Barker, Jim Brunsden and Martin Arnold): “Brussels is proposing to tighten its grip over overseas banks operating in the EU in a tit-for-tat step against the US that will raise costs for big foreign lenders and potentially hurt the City of London after Brexit. The European Commission will unveil provisions on Wednesday that mirror controversial US ‘intermediate holding company’ rules that ringfence foreign bank capital.”
November 21 – Reuters (Huw Jones): “Citi has joined JPMorgan at the top of global regulators' list of systemically important banks, replacing HSBC and meaning the U.S. bank will have to hold extra capital from 2019 to help preserve financial stability. The group of 20 economies (G20) agreed after the 2007-09 financial crisis that top banks, whose size and complexity mean a collapse could wreak havoc in markets, should hold extra capital, according to the level of risk they present.”
U.S. Bubble Watch:
November 23 – Wall Street Journal (Gunjan Banerji): “Sectors and styles in the S&P 500 index have started to move independently after seven years of depressed volatility and tighter correlations. The catalyst is the U.S. presidential election… Among the sharpest collapses is the link between financial stocks in the S&P 500 and the broader gauge. The correlation between the two over the last month has fallen to 0.59, compared with 0.89, where it was on Nov.7... Shares of banks, asset managers and insurance companies as a group have jumped 11% since election day as investors bet on lighter regulation for the sector under the Trump administration. The financial sector’s performance trounced other groups, such as utilities and consumer staples, each of which are down more than 3%.”
November 23 – Wall Street Journal (Chris Dieterich): “Money is pouring out of municipal bond funds at the fastest pace since the 2013 ‘taper tantrum’ as investors slash bond holdings and wonder about potential changes to the tax code. Investors pulled $3 billion from muni bond mutual and exchange-traded funds the week after the presidential election, the largest such withdrawal since June 2013… The $7.3 billion iShares National AMT-Free Muni Bond ETF, ticker MUB, has fallen 3.4% this month and is on pace for its sharpest monthly drop since Sept. 2008.”
November 20 – New York Times (Mary Williams Walsh): “Picture the next major American city to go bankrupt. What springs to mind? Probably not the swagger and sprawl of Dallas. But there was Dallas’s mayor, Michael S. Rawlings, testifying this month to a state oversight board that his city appeared to be ‘walking into the fan blades’ of municipal bankruptcy… But under its glittering surface, Dallas has a problem that could bring it to its knees, and that could be an early test of America’s postelection commitment to safe streets and tax relief: The city’s pension fund for its police officers and firefighters is near collapse and seeking an immense bailout.”
November 23 – New York Times (Patricia Cohen and Conor Dougherty): “When Jared Rutledge called his mortgage broker one morning last week after putting in an offer on a home in Glendale, Ariz…, he discovered that the 3.8% rate he had been quoted a couple of months ago had already gone up to 4.125%. That afternoon, it had inched up to 4.25, and by evening, when he finally called back to finalize the deal, it was 4.375%. ‘I was kind of frustrated,’ Mr. Rutledge said. But with a third child on the way, and a buyer for their current home, he and his wife felt they had little choice. ‘Instead of holding out and waiting, we locked it in,’ he said. Since the election, mortgage rates have climbed roughly half a percentage point to a 16-month high…
November 24 – Bloomberg (Joe Light and Prashant Gopal): “The definition of a jumbo mortgage is changing for the first time in more than a decade. Fannie Mae and Freddie Mac in 2017 will back mortgages of up to $424,100 in most of the U.S., an increase from $417,000… The change, which will increase the limit for areas with the most expensive homes to $636,150 from $625,500, comes after home prices in the third quarter pushed past their level of a decade ago.”
November 22 – Bloomberg (Sho Chandra): “Sales of previously owned U.S. homes unexpectedly climbed in October to the highest level since February 2007, a sign of momentum in the housing market a month before a jump in borrowing costs… Contract closings rose 2% to a 5.60 million annual rate (forecast was 5.44 million)… Median sales price rose 6% from October 2015 to $232,200. Inventory of available properties fell 4.3% from October 2015 to 2.02 million, marking the 17th straight year-over-year decline…”
Federal Reserve Watch:
November 23 – New York Times (Binyamin Appelbaum): “When Federal Reserve officials convened just before the presidential election, they talked like people who were ready to raise interest rates, although they decided to wait a little longer. They fretted about the growing risks of keeping borrowing costs at a historically low level… They also expressed confidence, albeit with some reservations, that the economy was ready for higher rates. The exuberant reaction of financial markets to Donald J. Trump’s victory has strengthened the case for higher rates, and solidified expectations that the Fed will act at its next meeting in December.”
November 22 – Bloomberg (Kevin Cirilli): “Donald Trump is looking to reshape the Federal Reserve -- very quickly. Two transition team sources said that the president-elect will move within his first three months in office to fill two vacant seats on the Fed’s Board of Governors in Washington, which have been vacant recently. Earlier Tuesday, Trump announced that Ralph Ferrara would lead the so-called ‘landing team’ designed at looking at the central bank to see ways it could be improved to Trump’s liking.”
Japan Watch:
November 21 – Bloomberg (Connor Cislo): “Japan posted a trade surplus for a second straight month in October… Exports fell 10.3% in October from a year earlier… Shipments have also dropped in every month for more than a year. Imports decreased 16.5% during the same period…”
EM Watch:
November 24 – Bloomberg (Yumi Teso and Lilian Karunungan): “Asian currencies’ drop to the weakest this decade will probably deter regional central banks from easing monetary policies as the prospects of higher U.S. rates spurred capital outflows. Indeed, they are more likely to be stepping in to smooth declines in their currencies -- the rupee’s drop on Thursday reportedly prompted intervention from the Reserve Bank of India. The Bloomberg-JPMorgan Asia Dollar Index has tumbled to the weakest since 2009, the Philippine peso cracked 50 per dollar for the first time since the global financial crisis and forwards traders are expecting Malaysia’s ringgit will drop within a week to levels last seen in 1998.”
November 24 – Bloomberg (Selcan Hacaoglu and Onur Ant): “Turkey’s central bank unexpectedly raised its one-week repurchase and overnight lending rates for the first time in almost three years, after the lira’s plunge to a record low and its impact on inflation trumped political demands for lower borrowing costs. The bank raised the one-week repo and overnight lending rates by 50 and 25 basis points to 8% and 8.5%...”
November 21 – Reuters (Anthony Boadle): “Brazilian President Michel Temer warned… that the national debt could swell to the size of the country's gross domestic product within eight years should public spending not be brought under control and fiscal reforms not enacted… The nature of Brazil's crisis is fiscal. For too long, governments have spent more than they earned,’ said Temer…”
November 23 – Bloomberg (Jiyeun Lee): “South Korea’s household debt swelled to a record in the third quarter, prompting the government to release another set of measures to slow its rise. Household debt including credit purchases rose to 1,295.8 trillion won ($1.1 trillion) as of end-September, an 11% jump from the previous year… The financial regulator said Thursday that it will seek stricter loan screening by banks on some type of mortgages and lending from so-called mutual finance institutions that had been loosely scrutinized, adding to measures announced in August.”
Leveraged Speculator Watch:
November 21 – Opalesque: “The breadth of hedge fund asset outflows in October was the industries’ largest in 2016, with 61% of reporting funds seeing net outflows for the month, according to… eVestment… October’s -$14.2 billion outflow marked the fourth month of redemptions in the last five, with year to date (YTD) hedge fund assets down -$77 billion. Overall industry AUM is getting dangerously close to dropping below $3 trillion. Industry assets now stand at $3.03 trillion now following this string of disappointing months for hedge funds.”
November 22 – Bloomberg (Julie Verhage): “Those looking to explain what's set to be another bad year for hedge funds could do worse than blame their passion for tech stocks. The funds have averaged a 4% gain year-to-date, but that pales next to a 9% rally in the S&P 500. Barring a sharp turnaround before December 31, this will be the eighth year since 2008 that hedge funds have underperformed, according to Goldman Sachs Group… ‘Most hedge funds have improved performance following first quarter struggles but continue to lag the broad S&P 500 index as well as the average mutual fund,’ the analysts wrote…”
Geopolitical Watch:
November 24 – Bloomberg: “American military vessels and aircraft carried out more than 700 patrols in the South China Sea region during 2015, making China the U.S.’s No. 1 surveillance target, according to a report by China’s only state-backed institution dedicated to research of the waters. The patrols pose a threat to China’s sovereignty and security interests, said the report by the National Institute for South China Sea Studies, which is headquartered in Hainan island. The document, the first of its kind released by China, warned that continued targeted operations by U.S. patrols would lead to militarization of the waters.”
November 20 – Reuters (Daren Butler and Nick Tattersall): “President Tayyip Erdogan was quoted on Sunday as saying that Turkey did not need to join the European Union ‘at all costs’ and could instead become part of a security bloc dominated by China, Russia and Central Asian nations. NATO member Turkey's prospects of joining the EU look more remote than ever after 11 years of negotiations.”
November 25 – Reuters (Tulay Karadeniz and Nick Tattersall): “Turkish President Tayyip Erdogan threatened on Friday to unleash a new wave of migrants on Europe after lawmakers there voted for a temporary halt to Turkey's EU membership negotiations, but behind the fighting talk, neither side wants a collapse in ties. Europe's deteriorating relations with Turkey, a buffer against the conflicts in Syria and Iraq, are endangering a deal which has helped to significantly reduce a migrant influx which saw more than 1.3 million people arrive in Europe last year.”
I was flabbergasted back in 2005 with Dr. Bernanke’s “global savings glut” thesis. At that time mortgage Credit was in the process of expanding a still all-time annual record $1.436 TN. National home prices (Case-Shiller) were up better than 14% year-over-year. The California housing Bubble was coming completely unhinged. Nationally, household mortgage Credit was expanding at double-digit rates for the fifth straight year, as a powerful inflationary psychology took hold in U.S. housing markets and throughout mortgage finance. Moreover, overall system Credit continued to expand rapidly following 2004’s 9.2% growth (strongest since 1988). At 2.75%, the Fed funds rate was ridiculously low in comparison to rapidly inflating home prices and generally rising securities and asset prices.
I had a difficult time accepting that Bernanke actually believed that emerging markets were playing such a primary financing role in the U.S. markets and economy. The Fed was in the midst of experimental reflationary policies, and I just assumed the “global savings glut” thesis was sophisticated rationalization and justification (reminiscent of Greenspan’s new paradigm productivity and rising speed limit rationale). Clearly, the Fed was headstrong to avoid tightening Credit even in the face of conspicuous mortgage excess, fearing that it might pull the rug out from under system reflation.
For a long time now, I’ve viewed the unique backdrop in the context of a historic multifaceted Experiment in: 1) Unconstrained global “money” and (market-based) Credit; 2) Unconventional economic structure; and 3) Activist/inflationist monetary management on a coordinated global basis.
There was no doubt in my mind that unfettered finance would foment market and economic instability. Indeed, evidence of global financial dysfunction has been on full display now for well over two decades. As custodian of the world’s reserve currency and champion of financial innovation, the U.S. has all along been the global leader with respect to Credit excess, speculation and monetary management. The financialization of the global economy has been integral to the U.S.’s unique capacity to run persistently large trade and Current Account Deficits.
Why not de-industrialize and instead use new financial claims in exchange for imported manufactured goods? The experiment in a services and consumption economic structure then took on a life of its own, fueled first by Wall Street finance and then by government debt and central bank Credit.
Unfettered global “money” and Credit coupled with a world flooded with U.S. financial claims (largely IOUs) was a recipe for extreme financial instability. Never did I imagine such an experiment could be sustained for so long. I simply did not contemplate the extent to which central bankers would be willing to underpin unsound global finance.
It’s not as if this great Experiment hasn’t been at the brink a few times: 1997, 1998, 2002, 2008, 2012 and early-2016. At this point, markets are understandably convinced that central bankers have no alternative than to always come immediately to the rescue.
Granted, QE retains the capacity to incite speculation and levitate markets. Yet monetary inflation’s myriad effects on societies and democracies are at this point progressively – and openly - corrosive. Rising anti-establishment sentiment and anti-globalization movements reflect mounting frustration with the existing world order. I believe the Brexit and Trump movements are indicative of the unfolding failure of this Global Experiment. I had assumed that the Experiment’s downfall would be marked by a crisis of unstable markets. At this time, the world is at monumental crossroads in terms of social, political, market and economic instability.
November 21 – Wall Street Journal (William Mauldin and David Luhnow): “Rather than kill Nafta, Donald Trump and his advisers appear set to push for substantial changes to the treaty governing U.S. trade with Mexico and Canada, an effort that could prove difficult to negotiate and perilous to the regional economy. The president-elect vilified the North American Free Trade Agreement during the campaign and threatened to pull the U.S. out of the trade deal—but only if Mexico doesn’t agree to substantial modifications. The U.S. trade deficit with Mexico rose 9.5% in 2015 to $60.7 billion, while the deficit with Canada fell 57% to $15.5 billion. Mr. Trump hasn’t released a blueprint for his new vision of Nafta, but his comments and those of his advisers suggest they want big changes. Among the likeliest would be special tariffs or other barriers to reduce the U.S. trade deficit with Mexico and new taxes that would hit U.S. firms that moved production there, according to Trump advisers.”
The Trump campaign was built upon a platform of economic nationalism and the imperative of major change. Trade deals must be canceled or significantly revamped. Jobs and manufacturing must be brought back to the U.S. America must come first to be great again. In the view of Trump and his advisors, The Experiment has clearly failed. Donald Trump often referred to the “Bubble.” He lashed out at Federal Reserve policymaking and the massive U.S. debt. With indices sprinting to record highs, it’s the nature of markets to forget why the Trump campaign received scant support from the business community and was viewed with contempt by Wall Street (and global markets).
James Carville famously quipped back in 1993: “I used to think that if there was reincarnation, I wanted to come back as the president or the pope or as a .400 baseball hitter. But now I would like to come back as the bond market. You can intimidate everybody.”
In his acceptance speech, President-elect Trump avoided slamming Yellen, the Federal Reserve or deficit spending. Bypassing confrontation, he chose instead to trumpet a revitalizing $1.0 TN infrastructure spending program. Such a priority undertaking would require close cooperation, both from the Federal Reserve and the financial markets. Détente. Wasting no time, markets immediately relegated Trump’s focus on trade and the displaced American worker to the realm of campaign bluster. No need for antipathy or fear – not with markets retaining firm control. Better yet, if the Trump administration seeks a successful Presidency, all roads must pass through all-powerful Wall Street. Incredibly, surging U.S. markets stirred the imagery of Ronald Reagan.
The general election presented an epic battle between deeply conflicting perceptions of reality. One sect held a more constructive view of a generally sound economic backdrop. With Washington’s assistance and commanding oversight, things were under control and on a definite uptrend. The opposing view held that it was all largely a mirage: the economy and markets were a Bubble illusion. Underpinnings (financial, economic, social and geopolitical) were disturbingly unsound, a product of years of gross Washington mismanagement. Only radical change would reverse our nation’s accelerating downfall.
U.S. markets have thus far been content to focus on prospects for financial deregulation, lower corporate taxes and infrastructure spending. Comforting and not so radical, no doubt. Yet the bedrock of the Trump movement is about putting American jobs and manufacturing first. And only radical change in trade relationships (and global finance?) will reverse the (experimental) course that has placed our economy, finances and society in peril. Begin immediately with TPP and NAFTA – then move on to China and Asia.
There’s a huge issue: The world – economy as well as financial “system” – is addicted to enormous U.S. Current Account Deficits. America has for two decades simultaneously flooded the global economy with purchasing power and international markets with cheap liquidity. Over years the upshot has been massive overinvestment in manufacturing capacity and incessant global financial instability. Central banks then moved to mitigate this troubling backdrop with a now protracted period of unprecedented reflationary measures. This only accommodated greater economic maladjustment and financial excess – while deepening global addictions.
From my analytical framework, it was never “the chicken or the egg” issue. It was loose monetary policies, financial excesses and associated U.S. Current Account Deficits that were the core of the so-called “global savings glut.” U.S. trade deficits ensured massive financial flows abroad, especially to rapidly growing China, Asia and EM. These dollar balances were then recycled right back to U.S. securities markets, in large part through EM central bank purchases of Treasuries and agency securities.
Moreover, EM, flush with dollar reserves and booming economies, enjoyed a self-reinforcing and destabilizing boom in “hot money” inflows (which could also be recycled into U.S. securities). This dynamic went into overdrive after the 2008 crisis and the introduction of QE. Virtually unlimited cheap liquidity on a global basis incentivized “carry trades” and all varieties of leveraged speculation. So long as yields continued their historic decline, central banker, the leveraged hedge fund operator, sovereign wealth fund manager, derivative player and Joe Public could all just keep buying debt and relishing the spectacular windfall.
A rapidly changing trade backdrop now risks significantly altering the global financial landscape. A focus on making America great again will ensure a radically different view of trade and “globalization.” I’ve always believed in the important distinction of trading goods for goods– as opposed to creating endless quantities of new financial claims to pay for boundless cheap imports. Fiat for goods may have appeared miraculous – with central bankers happy to Credit themselves for whipping inflation. But at the end of the day the world is left with destabilizing economic imbalances and unstable finance. In short, too much finance, overcapacity and inequality. And, as we’ve witnessed of late, there’s an alarming amount of angst and social division, along with a democratic majority demanding an end to the status quo.
Understandably, global bond markets are on edge. Already beginning to percolate, the combination of trade frictions and fiscal stimulus potentially creates the most nurturing inflationary backdrop in years. EM is under pressure, with fears of shrinking trade surpluses, weaker currencies, declining reserves and the specter of self-reinforcing “hot money” outflows. Instead of reliable buyers of U.S. Treasuries and other securities, EM appears more likely persistent sellers. And a faltering EM only fuels a powerful self-reinforcing king dollar dynamic. If EM central bankers are no longer backstopping Treasuries and bonds more generally, these instruments become a lot less attractive instruments for leveraged speculation. So will central bankers – and others – keep buying even as previous windfalls morph into mounting losses?
The S&P500 gained 1.4% this week to join the small caps, midcaps and DJIA at all-time highs. How is it possible that U.S. equities surge to record highs in the face of such a troubling unfolding backdrop? Right now, the U.S. “Core” is winning big at the expense of the faltering “periphery.” And with global QE continuing at an astounding $2.0 TN annualized pace, today’s prevailing market worry is missing out on “Risk On” flows rather than fretting some nebulous brewing “Risk Off.” Moreover, markets by now have become well-conditioned to see heightened risk as ensuring that central banks keep liquidity spigots wide open.
The “fiat for goods”, services/consumption economic structure, activist central banking, and accommodate financial innovation/leveraged speculation experimental regime created the illusion of a golden era of low inflation, booming securities markets and unending economic growth. Central bankers enjoyed the luxury of easy decisions. Inflation was trending down, while bond prices trended up – seemingly forever. Central banks saw no pressing reason to tighten policies, irrespective of booming securities markets and/or Bubbles.
Going forward, the world could experience a new paradigm of inflation trending higher and bond prices lower. This would entail great uncertainty, including who will step up and fund rising deficits in a new era of declining bond prices. There is today as well great uncertainty as to how U.S. economic nationalism will play out globally. Trade and currency wars are a very real possibility.
In the near-term, central banking is about to turn a lot more difficult. All this QE in the face of rising bond yields and general uncertainty will stoke inflation fears. Already, the surge of liquidity into equities is drawing funds from fixed income, while exacerbating general flow instability. Liquidity flooding into king dollar exacerbates EM fragilities. Increasingly apparent EM trouble then spurs more flows into hot “Core” securities. “Melt-up” stuff. Do central banks come to view QE as destabilizing for inflation expectations and overall market speculation and flows? Or do they see the backdrop as too risky to begin reining in global monetary stimulus, again turning their backs on increasingly dangerous speculative excess? Might views begin to diverge, a likely scenario that would usher in a less straightforward – and less market-comforting - policymaking paradigm.
A few weeks back I argued the case for Peak Monetary Stimulus. This week it’s Past Peak “Global Savings Glut.” I suspect liquidity conditions worldwide will react poorly to any retreat from global QE.
For the Week:
The S&P500 gained 1.4% (up 8.3% y-t-d), and the Dow rose 1.5% (up 9.9%). The Utilities rallied 2.0% (up 9.0%). The Banks increased 1.4% (up 18.9%), and the Broker/Dealers added 1.1% (up 14.4%). The Transports advanced 2.1% (up 20.4%). The broader market outperformed again. The S&P 400 Midcaps jumped 2.2% (up 17.3%), and the small cap Russell 2000 rose 2.4% (up 18.6%). The Nasdaq100 gained 1.3% (up 6.0%), and the Morgan Stanley High Tech index increased 1.0% (up 13.1%). The Semiconductors rose 2.1% (up 34.3%). The Biotechs were little changed (down 11.7%). With bullion down $24, the HUI gold index dropped 3.5% (up 58.1%).
Three-month Treasury bill rates ended the week at 49 bps. Two-year government yields rose five bps to 1.12% (up 7bps y-t-d). Five-year T-note yields gained four bps to 1.84% (up 9bps). Ten-year Treasury yields added a basis point to 2.36% (up 11bps). Long bond yields declined three bps to 3.00% (down 2bps).
Greek 10-year yields fell 12 bps to 6.81% (down 51bps y-t-d). Ten-year Portuguese yields dropped 25 bps to 3.57% (up 105bps). Italian 10-year yields declined a basis point to 2.08% (up 49bps). Spain's 10-year yields slipped two bps to 1.57% (down 20bps). German bund yields declined three bps to 0.24% (down 38bps). French yields added two bps to 0.77% (down 22bps). The French to German 10-year bond spread widened five to 53 bps. U.K. 10-year gilt yields fell four bps to 1.41% (down 55bps). U.K.'s FTSE equities index added 1.0% (up 9.6%).
Japan's Nikkei 225 equities index jumped 2.2% (down 3.4% y-t-d). Japanese 10-year "JGB" yields added a basis point to 0.03% (down 23bps y-t-d). The German DAX equities index increased 0.3% (down 0.4%). Spain's IBEX 35 equities index rose 0.6% (down 9.1%). Italy's FTSE MIB index rallied 1.5% (down 22.9%). EM equities were mixed. Brazil's Bovespa index rallied 2.7% (up 42%). Mexico's Bolsa recovered 2.2% (up 5.5%). South Korea's Kospi was unchanged (up 0.7%). India’s Sensex equities index increased 0.6% (up 0.8%). China’s Shanghai Exchange advanced 2.2% (down 7.8%). Turkey's Borsa Istanbul National 100 index fell 1.7% (up 3.7%). Russia's MICEX equities index surged 2.9% (up 19.1%).
Junk bond mutual funds saw inflows of $598 million (from Lipper).
Freddie Mac 30-year fixed mortgage rates jumped nine bps to a 16-month high 4.03% (up 8bps y-o-y). Fifteen-year rates rose 11 bps to 3.25% (up 7bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates up seven bps to 4.08% (up 14bps).
Federal Reserve Credit last week expanded $2.4bn to $4.422 TN. Over the past year, Fed Credit contracted $29.4bn (down 0.7%). Fed Credit inflated $1.611 TN, or 57%, over the past 211 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt increased $1.0bn last week to near a six-year low $3.120 TN. "Custody holdings" were down $199bn y-o-y, or 6.0%.
M2 (narrow) "money" supply last week surged $51.1bn to a record $13.214 TN. "Narrow money" expanded $955bn, or 7.8%, over the past year. For the week, Currency increased $1.7bn. Total Checkable Deposits surged $93.5bn, while Savings Deposits fell $53.2bn. Small Time Deposits declined $1.2bn. Retail Money Funds jumped $10.4bn.
Total money market fund assets rose $18.8bn to a 12-week high $2.705 TN. Money Funds declined $18.3bn y-o-y (0.7%).
Total Commercial Paper jumped $9.6bn to $922bn. CP declined $135bn y-o-y, or 12.8%.
Currency Watch:
November 24 – Financial Times: “The relentless rise of the dollar scorched emerging market currencies on Thursday, sending China’s renminbi to its weakest level in eight years, while India’s rupee plumbed a record low. Broad currency weakness against the dollar came as the bond market fully expects policy tightening by the Federal Reserve at its December meeting.”
November 24 – Financial Times (Peter Wells): “The Philippine peso has hit 50 per dollar for the first time since the financial crisis… It was the first time the currency traded through the 50 level since November 24, 2008, precisely eight years ago.”
November 24 – Financial Times (Peter Wells): “Malaysia’s ringgit has hit its weakest point since the Asian financial crisis, as the US dollar continues to strengthen and push down on currencies the world over… Yesterday, Malaysia’s central bank kept benchmark lending rates unchanged. Many analysts expected the decision, reasoning the weakening currency would prompt Bank Negara Malaysia to stand pat.”
The U.S. dollar index added 0.3% to 101.21 (up 2.6% y-t-d). For the week on the upside, the South African rand increased 2.2%, the Australian dollar 1.4%, the British pound 1.1%, the Swedish krona 0.5%, the South Korean won 0.5%, the New Zealand dollar 0.5%, the Taiwanese dollar 0.2%, and the Norwegian krone 0.2%. For the week on the downside, the Japanese yen declined 2.0%, the Brazilian real 0.9%, the Swiss franc 0.4%, and the Singapore dollar 0.1%. The Chinese yuan declined 0.5% versus the dollar (down 6.15%).
Commodities Watch:
The Goldman Sachs Commodities Index gained 1.5% (up 17.2% y-t-d). Spot Gold fell 2.0% to $1,184 (up 11.5%). Silver slipped 0.6% to $1 (up 20%). Crude added 37 cents to $46.06 (up 24%). Gasoline rose 2.5% (up 8%), and Natural Gas jumped 7.8% (up 31%). Copper surged 8.2% (up 26%). Wheat declined 1.4% (down 11%). Corn gained 1.3% (unchanged).
China Bubble Watch:
November 25 – Wall Street Journal (Lingling Wei): “China plans to clamp tighter controls on Chinese companies seeking to invest overseas, intensifying efforts to slow a surge in capital fleeing offshore amid tepid growth and an uncertain economic outlook. The State Council, China’s cabinet, will soon announce new measures that subject many overseas deals to reviews of “strict control,” according to people with direct knowledge… Targeted for particular scrutiny by the pending measure are ‘extra-large’ foreign acquisitions valued at $10 billion or more per deal, property investments by state-owned firms above $1 billion and investments of $1 billion or more by any Chinese company in an overseas entity unrelated to the investor’s core business.”
November 21 – Bloomberg: “Dollar strength and rising U.S. interest rates under President-elect Donald Trump would intensify pressure on capital outflows from China, forcing its policy makers to choose between tightening capital controls or a drastic floating of the currency in coming months. That’s according to Victor Shih, a University of California at San Diego professor who studies China’s government and finance and specializes in tracking politics at the most elite level. ‘Given the Chinese government’s consistent preference for control, we may see much more Draconian capital controls before a decision to float the currency can be made,’ Shih said… ‘The main objective is to avoid a panicky float.’”
November 21 – Bloomberg (Pooja Thakur Mahrotri and En Han Choong): “The landscaped lawns and flowering shrubs of Country Garden Holdings Co.’s huge property showroom in southern Malaysia end abruptly at a small wire fence. Beyond, a desert of dirt stretches into the distance, filled with cranes and piling towers that the Chinese developer is using to build a $100 billion city in the sea. While Chinese home buyers have sent prices soaring from Vancouver to Sydney, in this corner of Southeast Asia it’s China’s developers that are swamping the market, pushing prices lower with a glut of hundreds of thousands of new homes. They’re betting that the city of Johor Bahru, bordering Singapore, will eventually become the next Shenzhen. ‘These Chinese players build by the thousands at one go, and they scare the hell out of everybody,’ said Siva Shanker, head of investments at Axis-REIT Managers Bhd… ‘God only knows who is going to buy all these units, and when it’s completed, the bigger question is, who is going to stay in them?’”
Europe Watch:
November 21 – Reuters (Andreas Rinke and Madeline Chambers): “Angela Merkel announced… she wants to run for a fourth term as German chancellor in next year's election… The 62-year old conservative, facing a voter backlash over her open-door migrant policy, said she had thought long and hard before eventually deciding to stand again in the September election, ending months of speculation over her decision.”
November 24 – Reuters (Michael Nienaber): “Growth in leading euro zone economies slowed over the summer months and an expected German-led rebound at the end of the year may prove too short-lived for the European Central Bank to unwind its monetary stimulus. Germany's quarterly growth rate halved to 0.2% in the three months to September even though private consumption and state spending rose, as weak foreign trade slowed overall activity in Europe's biggest economy.”
November 24 – Financial Times (Claire Jones, Dan McCrum, Thomas Hale and Elaine Moore): “Hopes of a fix to the collateral squeeze facing the eurozone’s €5tn short-term funding markets were boosted this week after reports emerged the European Central Bank will consider ways to ease rules on how it lends its stockpile of sovereign debt. A lack of good quality collateral, which market participants use to secure loans, has crippled the single currency area’s short-term funding (‘repo’) markets. One big reason for the shortage is that the eurozone’s central bankers have spent the past year-and-a-half buying €1.1tn in government bonds… as part of their quantitative easing programme to boost growth.”
ECB Watch:
November 21 – Reuters (Gernot Heller and Joseph Nasr): “German Finance Minister Wolfgang Schaeuble called on the European Central Bank… to start unwinding it expansive monetary policy, adding that such a reversal should be done cautiously. ‘I will not get tired of saying that I would prefer it if we started as soon as possible,’ Schaeuble said. ‘Exiting this unusual monetary policy should be done with immense caution,’ he added, warning of possible shock reactions to such steps.”
November 24 – Bloomberg (Alessandro Speciale, Piotr Skolimowski and Catherine Bosley): “The European Central Bank is confident it will be able to continue shielding the euro area from the risk of a sudden correction in asset prices, after political events such as the election of Donald Trump threaten to increase volatility in coming months. ‘We are certainly seeing a correction coming from the U.S.,’ ECB Vice President Vitor Constancio said… ‘The ECB will continue to exert its stabilizing role, so I don’t think there will be significant contagion to Europe.’”
November 24 – CNBC (Silvia Amaro): “The increasing political uncertainty across advanced economies is risking the stability of the euro zone, the region's central bank warned in a new biannual report… The uncertainty surrounding upcoming key referendums and elections across the 19-member euro zone bloc, along with expected policy changes in the U.S. raise inflation and growth challenges for euro area countries, the European Central Bank (ECB) said. Such uncertainty could lead to a global asset market corrections, it stated. ‘The financial stability implications for the euro area stemming from changes in U.S. economic policies are highly uncertain at this point in time,’ the bank said.”
November 22 – Wall Street Journal (Christopher Whittall and Mike Bird): “The European Central Bank began buying billions of euros worth of corporate bonds earlier this year in a high-profile experiment aimed at spurring private investment. So far, the spending hasn’t materialized. Since June, the ECB has bought €44.3 billion (around $46.9bn) in corporate debt… The ECB buys bonds to stimulate tame growth with corporate spending. However, companies aren’t spending, executives say and data suggest, because they see few opportunities amid feeble growth and because credit was already cheap.”
Fixed-Income Bubble Watch:
November 23 – Financial Times (Thomas Hale): “Eurozone corporate bond risk premiums have jumped to their highest level since July, as Donald Trump’s victory in the US election effectively erases gains generated by the European Central Bank’s policy of buying companies’ debt. A sharp rise in global bond yields since Mr Trump’s triumph has also spurred an underperformance of European credit relative to the US corporate debt market. Higher corporate credit spreads in euros, which measure the risk of company debt compared to a benchmark rate, come despite ongoing purchases by the ECB… The ECB has purchased €44bn of corporate bonds so far.”
Global Bubble Watch:
November 21 – Reuters (Jamie McGeever): “Next year will be the first since 2006 that there will be no big monetary policy easing across the world's leading industrialized nations, signifying the end of the 35-year bull market in bonds, Bank of America Merrill Lynch said… Having driven interest rates to their lowest ever levels and lifted purchases of financial assets to over $25 trillion this year, central banks are finally maxed out, BAML said in its 2017 outlook. Any stimulus to the world economy will now come from governments, who will use fiscal policy to wage a ‘war on inequality’, according to BAML. ‘The era of excess central bank liquidity is ending. In 2017 markets likely will not benefit from a big monetary easing for the first time since 2006,’ BAML's investment strategy team led by Michael Hartnett… said…”
November 22 – Bloomberg (David Finnerty and Yumi Teso): “Global funds sold about $11 billion of equities and bonds in Asia’s emerging markets after Donald Trump’s victory in the U.S. presidential election as expectations for his economic policies sent Treasury yields higher and sparked the dollar’s strongest rally in eight years. India suffered the biggest outflows between Nov. 9 and Nov. 18, followed by Thailand… The capital flight trims the year-to-date inflow into India, Indonesia, the Philippines, South Korea, Taiwan and Thailand to around $55 billion.”
November 21 – Wall Street Journal (Rachel Rosenthal and Carol Chan): “Asian companies are starting to feel the ‘Trump effect,’ as a rise in global borrowing costs forces them to reconsider their debt-raising plans. Corporate-bond issuance in Asia has already slowed since the U.S. election, with companies from China to India pulling or postponing planned deals. The sudden stalling in debt markets could threaten a model of growth that has taken root in Asia in recent years. Firms across the region have taken advantage of low global interest rates to pile up trillions of dollars worth of debt, often denominated in greenbacks… Asian companies have already raised $1.1 trillion in bonds so far this year, compared with $260.8 billion for all of 2008, according to Dealogic.”
November 21 – Reuters (Abhinav Ramnarayan and Helen Reid): “Euro zone governments are increasingly relying on hedge funds to help them meet their borrowing needs, which risks leaving them vulnerable to a debt market sell-off driven by a class of investors dubbed ‘fast money’ for their speculative approach. With banks playing a less active part in the sovereign debt market because of pressures on their balance sheets, several countries have turned to hedge funds to sell their targeted amount of bonds… Hedge funds tend to look for quick returns on investments, which could increase the volatility of government bond markets as they face several tests of sentiment in coming months. A populist revolt that propelled Donald Trump and the Brexit vote is sweeping the developed world and threatens to unseat established leaders in an Italian referendum next month, and Dutch, French and German elections in 2017.”
November 19 – New York Times (Peter S. Goodman): “Among policy makers alert for signs of the next financial disaster, Italy's mountain of uncollectable bank debt is a subject discussed in tones ordinarily reserved for piles of plutonium. Its banks seem at once too big to fail and eminently capable of doing so… For years, Italian lenders have muddled through, hoping time would cure their afflictions. But Italy's economy has been terminally weak, not growing at all over a recent 13-year stretch… Nearly one-fifth of all loans in the Italian banking system are classified as troubled, a toll worth 360 billion euros, or nearly $400 billion, at the end of last represents roughly 40% of all the bad loans within the countries sharing the euro. In recent weeks, the world's focus has shifted to Germany's largest lender, Deutsche Bank... But if Deutsche has become the crisis of the moment, Italy is the perpetual threat that could, at any moment, present the world with an unpleasant surprise…”
November 21 – Financial Times (Alex Barker, Jim Brunsden and Martin Arnold): “Brussels is proposing to tighten its grip over overseas banks operating in the EU in a tit-for-tat step against the US that will raise costs for big foreign lenders and potentially hurt the City of London after Brexit. The European Commission will unveil provisions on Wednesday that mirror controversial US ‘intermediate holding company’ rules that ringfence foreign bank capital.”
November 21 – Reuters (Huw Jones): “Citi has joined JPMorgan at the top of global regulators' list of systemically important banks, replacing HSBC and meaning the U.S. bank will have to hold extra capital from 2019 to help preserve financial stability. The group of 20 economies (G20) agreed after the 2007-09 financial crisis that top banks, whose size and complexity mean a collapse could wreak havoc in markets, should hold extra capital, according to the level of risk they present.”
U.S. Bubble Watch:
November 23 – Wall Street Journal (Gunjan Banerji): “Sectors and styles in the S&P 500 index have started to move independently after seven years of depressed volatility and tighter correlations. The catalyst is the U.S. presidential election… Among the sharpest collapses is the link between financial stocks in the S&P 500 and the broader gauge. The correlation between the two over the last month has fallen to 0.59, compared with 0.89, where it was on Nov.7... Shares of banks, asset managers and insurance companies as a group have jumped 11% since election day as investors bet on lighter regulation for the sector under the Trump administration. The financial sector’s performance trounced other groups, such as utilities and consumer staples, each of which are down more than 3%.”
November 23 – Wall Street Journal (Chris Dieterich): “Money is pouring out of municipal bond funds at the fastest pace since the 2013 ‘taper tantrum’ as investors slash bond holdings and wonder about potential changes to the tax code. Investors pulled $3 billion from muni bond mutual and exchange-traded funds the week after the presidential election, the largest such withdrawal since June 2013… The $7.3 billion iShares National AMT-Free Muni Bond ETF, ticker MUB, has fallen 3.4% this month and is on pace for its sharpest monthly drop since Sept. 2008.”
November 20 – New York Times (Mary Williams Walsh): “Picture the next major American city to go bankrupt. What springs to mind? Probably not the swagger and sprawl of Dallas. But there was Dallas’s mayor, Michael S. Rawlings, testifying this month to a state oversight board that his city appeared to be ‘walking into the fan blades’ of municipal bankruptcy… But under its glittering surface, Dallas has a problem that could bring it to its knees, and that could be an early test of America’s postelection commitment to safe streets and tax relief: The city’s pension fund for its police officers and firefighters is near collapse and seeking an immense bailout.”
November 23 – New York Times (Patricia Cohen and Conor Dougherty): “When Jared Rutledge called his mortgage broker one morning last week after putting in an offer on a home in Glendale, Ariz…, he discovered that the 3.8% rate he had been quoted a couple of months ago had already gone up to 4.125%. That afternoon, it had inched up to 4.25, and by evening, when he finally called back to finalize the deal, it was 4.375%. ‘I was kind of frustrated,’ Mr. Rutledge said. But with a third child on the way, and a buyer for their current home, he and his wife felt they had little choice. ‘Instead of holding out and waiting, we locked it in,’ he said. Since the election, mortgage rates have climbed roughly half a percentage point to a 16-month high…
November 24 – Bloomberg (Joe Light and Prashant Gopal): “The definition of a jumbo mortgage is changing for the first time in more than a decade. Fannie Mae and Freddie Mac in 2017 will back mortgages of up to $424,100 in most of the U.S., an increase from $417,000… The change, which will increase the limit for areas with the most expensive homes to $636,150 from $625,500, comes after home prices in the third quarter pushed past their level of a decade ago.”
November 22 – Bloomberg (Sho Chandra): “Sales of previously owned U.S. homes unexpectedly climbed in October to the highest level since February 2007, a sign of momentum in the housing market a month before a jump in borrowing costs… Contract closings rose 2% to a 5.60 million annual rate (forecast was 5.44 million)… Median sales price rose 6% from October 2015 to $232,200. Inventory of available properties fell 4.3% from October 2015 to 2.02 million, marking the 17th straight year-over-year decline…”
Federal Reserve Watch:
November 23 – New York Times (Binyamin Appelbaum): “When Federal Reserve officials convened just before the presidential election, they talked like people who were ready to raise interest rates, although they decided to wait a little longer. They fretted about the growing risks of keeping borrowing costs at a historically low level… They also expressed confidence, albeit with some reservations, that the economy was ready for higher rates. The exuberant reaction of financial markets to Donald J. Trump’s victory has strengthened the case for higher rates, and solidified expectations that the Fed will act at its next meeting in December.”
November 22 – Bloomberg (Kevin Cirilli): “Donald Trump is looking to reshape the Federal Reserve -- very quickly. Two transition team sources said that the president-elect will move within his first three months in office to fill two vacant seats on the Fed’s Board of Governors in Washington, which have been vacant recently. Earlier Tuesday, Trump announced that Ralph Ferrara would lead the so-called ‘landing team’ designed at looking at the central bank to see ways it could be improved to Trump’s liking.”
Japan Watch:
November 21 – Bloomberg (Connor Cislo): “Japan posted a trade surplus for a second straight month in October… Exports fell 10.3% in October from a year earlier… Shipments have also dropped in every month for more than a year. Imports decreased 16.5% during the same period…”
EM Watch:
November 24 – Bloomberg (Yumi Teso and Lilian Karunungan): “Asian currencies’ drop to the weakest this decade will probably deter regional central banks from easing monetary policies as the prospects of higher U.S. rates spurred capital outflows. Indeed, they are more likely to be stepping in to smooth declines in their currencies -- the rupee’s drop on Thursday reportedly prompted intervention from the Reserve Bank of India. The Bloomberg-JPMorgan Asia Dollar Index has tumbled to the weakest since 2009, the Philippine peso cracked 50 per dollar for the first time since the global financial crisis and forwards traders are expecting Malaysia’s ringgit will drop within a week to levels last seen in 1998.”
November 24 – Bloomberg (Selcan Hacaoglu and Onur Ant): “Turkey’s central bank unexpectedly raised its one-week repurchase and overnight lending rates for the first time in almost three years, after the lira’s plunge to a record low and its impact on inflation trumped political demands for lower borrowing costs. The bank raised the one-week repo and overnight lending rates by 50 and 25 basis points to 8% and 8.5%...”
November 21 – Reuters (Anthony Boadle): “Brazilian President Michel Temer warned… that the national debt could swell to the size of the country's gross domestic product within eight years should public spending not be brought under control and fiscal reforms not enacted… The nature of Brazil's crisis is fiscal. For too long, governments have spent more than they earned,’ said Temer…”
November 23 – Bloomberg (Jiyeun Lee): “South Korea’s household debt swelled to a record in the third quarter, prompting the government to release another set of measures to slow its rise. Household debt including credit purchases rose to 1,295.8 trillion won ($1.1 trillion) as of end-September, an 11% jump from the previous year… The financial regulator said Thursday that it will seek stricter loan screening by banks on some type of mortgages and lending from so-called mutual finance institutions that had been loosely scrutinized, adding to measures announced in August.”
Leveraged Speculator Watch:
November 21 – Opalesque: “The breadth of hedge fund asset outflows in October was the industries’ largest in 2016, with 61% of reporting funds seeing net outflows for the month, according to… eVestment… October’s -$14.2 billion outflow marked the fourth month of redemptions in the last five, with year to date (YTD) hedge fund assets down -$77 billion. Overall industry AUM is getting dangerously close to dropping below $3 trillion. Industry assets now stand at $3.03 trillion now following this string of disappointing months for hedge funds.”
November 22 – Bloomberg (Julie Verhage): “Those looking to explain what's set to be another bad year for hedge funds could do worse than blame their passion for tech stocks. The funds have averaged a 4% gain year-to-date, but that pales next to a 9% rally in the S&P 500. Barring a sharp turnaround before December 31, this will be the eighth year since 2008 that hedge funds have underperformed, according to Goldman Sachs Group… ‘Most hedge funds have improved performance following first quarter struggles but continue to lag the broad S&P 500 index as well as the average mutual fund,’ the analysts wrote…”
Geopolitical Watch:
November 24 – Bloomberg: “American military vessels and aircraft carried out more than 700 patrols in the South China Sea region during 2015, making China the U.S.’s No. 1 surveillance target, according to a report by China’s only state-backed institution dedicated to research of the waters. The patrols pose a threat to China’s sovereignty and security interests, said the report by the National Institute for South China Sea Studies, which is headquartered in Hainan island. The document, the first of its kind released by China, warned that continued targeted operations by U.S. patrols would lead to militarization of the waters.”
November 20 – Reuters (Daren Butler and Nick Tattersall): “President Tayyip Erdogan was quoted on Sunday as saying that Turkey did not need to join the European Union ‘at all costs’ and could instead become part of a security bloc dominated by China, Russia and Central Asian nations. NATO member Turkey's prospects of joining the EU look more remote than ever after 11 years of negotiations.”
November 25 – Reuters (Tulay Karadeniz and Nick Tattersall): “Turkish President Tayyip Erdogan threatened on Friday to unleash a new wave of migrants on Europe after lawmakers there voted for a temporary halt to Turkey's EU membership negotiations, but behind the fighting talk, neither side wants a collapse in ties. Europe's deteriorating relations with Turkey, a buffer against the conflicts in Syria and Iraq, are endangering a deal which has helped to significantly reduce a migrant influx which saw more than 1.3 million people arrive in Europe last year.”
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