[Bloomberg] Oil Rally Lifts Stocks as Dollar Slips With Bonds: Markets Wrap
[Bloomberg] China Shares Gain on Spending Program; Crude Jumps: Markets Wrap
[Bloomberg] Trump Doctrine Confounds G-7 as Ministers Kick Can to Sicily
[Bloomberg] A $1 Trillion Pain Trade in Treasuries Divides Top Bond Dealers
[Bloomberg] Debt Island: How $74 Billion in Bonds Bankrupted Puerto Rico
[Bloomberg] China's Growth Dividend for World Economy Shows Signs of Fading
[Bloomberg] China Watchers Caught Off Guard as Bond Rout Just Won't End
[Bloomberg] China's Factory Output, Investment Slow as Growth Dials Back
[Reuters] Behind China's Silk Road vision: cheap funds, heavy debt, growing risk
[Bloomberg] Oil Jumps as Saudis, Russia Favor Extending Output Deal to 2018
[Bloomberg] Japan Megabanks Forecast a Fourth Straight Combined Profit Fall
[WSJ] Chinese Banks Rattled by Regulatory Blitz
[FT] Junk bonds’ risk-return profile has been permanently damaged
[FT] When stimulus fades, a recurring Chinese story
Sunday, May 14, 2017
Sunday Evening Links
[Bloomberg] Sentiment Takes Hit From Economic Data, Missiles: Markets Wrap
[CNBC] Microsoft criticizes governments for stockpiling cyber weapons, says attack is "wake-up call"
[FT] The consequences of shrinking the Fed’s balance sheet
[CNN] North Korea says missile could carry nuclear warhead
[Reuters] Victory in state vote shows Germany's Merkel on course to retain power
[WSJ] Inside North Korea’s Accelerated Plan to Build a Viable Missile
[CNBC] Microsoft criticizes governments for stockpiling cyber weapons, says attack is "wake-up call"
[FT] The consequences of shrinking the Fed’s balance sheet
[CNN] North Korea says missile could carry nuclear warhead
[Reuters] Victory in state vote shows Germany's Merkel on course to retain power
[WSJ] Inside North Korea’s Accelerated Plan to Build a Viable Missile
Sunday's News Links
[Bloomberg] Unprecedented Global Cyber-Attack Poised to Spread
[Reuters] France's Macron takes power, vows to overcome division
[NYT] Real Estate’s New Normal: Homeowners Staying Put
[WSJ] How Big Are Mutual Funds’ Puerto Rico Losses? $5.4 Billion
[WSJ] Apple’s New Headquarters Is a Sign of Tech’s Boom, Bravado
[Reuters] France's Macron takes power, vows to overcome division
[NYT] Real Estate’s New Normal: Homeowners Staying Put
[WSJ] How Big Are Mutual Funds’ Puerto Rico Losses? $5.4 Billion
[WSJ] Apple’s New Headquarters Is a Sign of Tech’s Boom, Bravado
Saturday, May 13, 2017
Saturday's News Links
[Reuters] Treasury's Mnuchin says U.S. reserves right to be protectionist
[Bloomberg] America First Divides G-7 Even as Ministers Warm to Mnuchin
[Reuters] Euro zone recovery, Macron win give ECB chance to consider unwinding policy
[Reuters] Global cyber attack hits hospitals and companies, threat seen fading for now
[Spiegel] Can Macron's Charisma Heal France and Europe?
[NYT] Behind China’s $1 Trillion Plan to Shake Up the Economic Order
[WSJ] Chinese, Western Banks’ Battle for Dominance Reaches Bond Market
[WSJ] A Populist Storm Stirs in Italy
[FT] Italian populism unnerves investors in the eurozone
[Bloomberg] America First Divides G-7 Even as Ministers Warm to Mnuchin
[Reuters] Euro zone recovery, Macron win give ECB chance to consider unwinding policy
[Reuters] Global cyber attack hits hospitals and companies, threat seen fading for now
[Spiegel] Can Macron's Charisma Heal France and Europe?
[NYT] Behind China’s $1 Trillion Plan to Shake Up the Economic Order
[WSJ] Chinese, Western Banks’ Battle for Dominance Reaches Bond Market
[WSJ] A Populist Storm Stirs in Italy
[FT] Italian populism unnerves investors in the eurozone
Friday, May 12, 2017
Weekly Commentary: The VIX and the Scheme
There was little market reaction to Emanuel Macron’s widely-anticipated big victory in the French presidential election. The euro actually retreated somewhat, in a “sell the news” dynamic. European equities ended the week mixed. European bonds were somewhat more interesting. Bund yields declined three bps, while Italian yields jumped nine bps.
“Risk On/Risk Off” analysis was rather inconclusive this week, though there were some indications of waning risk embracement. U.S. equites came under modest selling pressure. The S&P500 declined 0.3%, while the broader indices were weaker. The midcaps fell 1.1%, and the small cap Russell 2000 declined 1.0%. With Macy’s earnings badly missing estimates, retail stocks came under heavy selling pressure. This sector has given the bears a bit of life. Financial stocks were also under notable pressure. The banks (BKX) fell 1.3% and the broker/dealers (XBD) lost 1.5%. The Transports were hit 2.1%.
The general market was resilient in the face of ongoing Washington dysfunction. It’s not that surprising that President Trump’s firing of FBI Director Comey had a much greater impact within the media than in the markets. It’s my view that markets are more dominated by liquidity flows and speculative dynamics than by the Trump agenda.
As for speculative dynamics, the Nasdaq 100 (NDX) and Morgan Stanley High Tech Index (MSH) traded at record highs this week, while the Semiconductor index (SOX) is within striking distance. For the week, the NDX gained 0.7% (up 16.9% y-t-d), the MSH rose 0.6% (up 19.6%), and Semiconductors surged 3.4% (up 15.3%).
Financial stocks were at least somewhat weaker on modest downward yield pressure. Ten-year Treasury yields dipped two bps to 2.33%. One could see a faint bid to safe haven assets supporting the fledgling Risk Off thesis, although the yen (down 0.6%) this week didn’t indicate risk aversion. U.S. equities market leadership has clearly narrowed.
Monday from Bloomberg (Samuel Potter): “U.S. stocks ended virtually unchanged near all-time highs, while the dollar rose with Treasury yields as volatility drained from financial markets after a convincing defeat of populism in France’s presidential election. The CBOE Volatility Index slumped to its lowest closing price since 1993. The S&P 500 Index rose by less than one point to close at a fresh record.”
There were a number of articles discussing the VIX’s “lowest closing price since 1993.” There was the typical focus on a stable U.S. and global growth backdrop and buoyant corporate profits. What’s missing from the discussion is the reality that global markets have developed into a sophisticated financial Scheme.
Going back to early-CBBs, I’ve devoted a significant amount of analysis to contemporary finance and the proliferation of complex risk intermediation, derivatives and market “insurance.” It seems rather clear to me that the interplay between contemporary finance and New Age central banking has over years nurtured history’s greatest market distortions and asset Bubbles.
Past writings have attempted to differentiate actual insurance from market “insurance” such as put options on the S&P 500 (key factor in VIX levels). Actual insurance – i.e. auto and home casualty – provides protection against generally independent and random loss events. Actuaries are skilled at using vast historical databases for fairly accurate forecasts of future claims/losses. Policies are priced to ensure sufficient reserves for future losses along with a profit surplus.
Securities market “insurance” is an altogether different animal. Market losses are neither independent nor random, but instead tend to unfold in unpredictable waves. Future losses are unquantifiable. Markets generally grind higher only to break lower in episodes that catch most by surprise. As such, losses tend to be biggest when they were expected to be the smallest. With historical data so deceptive, pricing such “insurance” becomes more of a speculative endeavor. And the longer the history of low “claims” the more likely an ugly black swan lurks somewhere in the future.
“Risk On/Risk Off” analysis was rather inconclusive this week, though there were some indications of waning risk embracement. U.S. equites came under modest selling pressure. The S&P500 declined 0.3%, while the broader indices were weaker. The midcaps fell 1.1%, and the small cap Russell 2000 declined 1.0%. With Macy’s earnings badly missing estimates, retail stocks came under heavy selling pressure. This sector has given the bears a bit of life. Financial stocks were also under notable pressure. The banks (BKX) fell 1.3% and the broker/dealers (XBD) lost 1.5%. The Transports were hit 2.1%.
The general market was resilient in the face of ongoing Washington dysfunction. It’s not that surprising that President Trump’s firing of FBI Director Comey had a much greater impact within the media than in the markets. It’s my view that markets are more dominated by liquidity flows and speculative dynamics than by the Trump agenda.
As for speculative dynamics, the Nasdaq 100 (NDX) and Morgan Stanley High Tech Index (MSH) traded at record highs this week, while the Semiconductor index (SOX) is within striking distance. For the week, the NDX gained 0.7% (up 16.9% y-t-d), the MSH rose 0.6% (up 19.6%), and Semiconductors surged 3.4% (up 15.3%).
Financial stocks were at least somewhat weaker on modest downward yield pressure. Ten-year Treasury yields dipped two bps to 2.33%. One could see a faint bid to safe haven assets supporting the fledgling Risk Off thesis, although the yen (down 0.6%) this week didn’t indicate risk aversion. U.S. equities market leadership has clearly narrowed.
Monday from Bloomberg (Samuel Potter): “U.S. stocks ended virtually unchanged near all-time highs, while the dollar rose with Treasury yields as volatility drained from financial markets after a convincing defeat of populism in France’s presidential election. The CBOE Volatility Index slumped to its lowest closing price since 1993. The S&P 500 Index rose by less than one point to close at a fresh record.”
There were a number of articles discussing the VIX’s “lowest closing price since 1993.” There was the typical focus on a stable U.S. and global growth backdrop and buoyant corporate profits. What’s missing from the discussion is the reality that global markets have developed into a sophisticated financial Scheme.
Going back to early-CBBs, I’ve devoted a significant amount of analysis to contemporary finance and the proliferation of complex risk intermediation, derivatives and market “insurance.” It seems rather clear to me that the interplay between contemporary finance and New Age central banking has over years nurtured history’s greatest market distortions and asset Bubbles.
Past writings have attempted to differentiate actual insurance from market “insurance” such as put options on the S&P 500 (key factor in VIX levels). Actual insurance – i.e. auto and home casualty – provides protection against generally independent and random loss events. Actuaries are skilled at using vast historical databases for fairly accurate forecasts of future claims/losses. Policies are priced to ensure sufficient reserves for future losses along with a profit surplus.
Securities market “insurance” is an altogether different animal. Market losses are neither independent nor random, but instead tend to unfold in unpredictable waves. Future losses are unquantifiable. Markets generally grind higher only to break lower in episodes that catch most by surprise. As such, losses tend to be biggest when they were expected to be the smallest. With historical data so deceptive, pricing such “insurance” becomes more of a speculative endeavor. And the longer the history of low “claims” the more likely an ugly black swan lurks somewhere in the future.
Over the years, I’ve used the parable Writing Flood Insurance During a Drought. Such enticing returns attract a bevy of players keen to participate in the lucrative insurance business. And, importantly, cheap insurance distorts market activity, in the process spurring progressively risky behavior in the Financial and Real Economy Spheres. In the end, financial and economic Bubbles unfold with a distorted and colossal cheap “insurance” market at its putrid core.
Why is the VIX – and other market “insurance” - so extraordinarily cheap? First taking a global Bubble perspective, I would suggest that the foundation of cheap “insurance” rests upon the perception of a relatively stable global Credit backdrop. Financial Conditions remain loose throughout much of the world. Sovereign yields persist close to historic lows around the globe, while Corporate Credit conditions continue to be ultra-loose. Of course, such conditions have been largely dictated by “whatever it takes” central banking with its near-zero rates and massive QE liquidity operations. There is faith, as well, that the heavy hand of Beijing will ensure sufficient Credit to achieve 6.5% 2017 Chinese GDP growth. And, for China and the world, that’s become an enormous amount of Credit.
Many would counter that the Federal Reserve and others have commenced normalization, with the U.S. central bank even discussing reducing the size of its balance sheet holdings. Yet such measures do close to nothing to dissuade market participants from the now deeply ingrained notion that central banks will quickly resort to zero/negative rates and more big liquidity injections in response to incipient worries of illiquidity.
Bull markets create their own self-reinforcing liquidity. Bear markets are the inevitable market self-correction after a period speculation and excess. History teaches us that markets cycle through periods of perceived ebullience and abundant liquidity followed by bouts of fear, illiquidity, dislocation and the occasional crash. In the final analysis, market-based Credit and securities-based finance have inflated to such an incredible degree that policymakers can no longer tolerate even the thought of a market down cycle. At least that is the basis for market “insurance” pricing these days.
The greatest ongoing criticism I have with contemporary central banking is that it has essentially guaranteed Continuous and Liquid Markets. Markets (after witnessing 2008 policy responses and then five years of “whatever it takes”) perceive this guarantee to be stronger today than ever before. And it is this assurance of Liquid and Continuous Markets that has become the pillar of modern derivatives trading strategies and markets.
Derivatives markets – particularly for “insurance,” risk sharing/intermediation and speculative leveraging – are fundamental to contemporary finance. And much of this boils down to those that sell market “insurance” are dependent upon highly liquid markets that allow the easy offloading (“dynamic hedging”) of risk previously written. Derivative players must be able to sell securities and establish positions that will generate the cash-flows to pay “insurance” losses on contracts they’ve sold (but not reserved for). And it all works wonderfully until it doesn’t – until a market episode unfolds where selling begets selling into sinking markets, more hedging, illiquidity and, at some point, counterparty issues.
The VIX is low because markets assume that central bankers won’t allow any such market illiquidity episode. Yet I believe just such an outcome is likely because of the markets’ faith that it’s highly unlikely (with the VIX trading as low as 9.56 this week).
So let’s touch upon what has become a sophisticated global financial scheme. First of all, (securities and derivatives) markets have become Too Big to Fail on a scope so beyond the 2002-2008 period – on a global basis. With the perception that central bankers and policymakers will not tolerate a significant market correction or recession, writers of derivative market “insurance” need not factor in the possibility of significant losses into the pricing of their products. It’s become Moral Hazard on an unprecedented scale.
There’s a major Reflexivity component at work. Cheap market “insurance” spurs risk-taking. Why not push the envelope with risk and employ added leverage, confident that inexpensive protection is readily available? This ensures that loose financial conditions spur Credit expansion, asset inflation, spending, corporate profits, rising incomes and government receipts/spending. Perceived wealth inflates tremendously, if not equitably. Rising price levels throughout the economy support the view that the future is bright, encouraging reinforcing flows into financial assets - further depressing the price of market “insurance.” Moreover, a prolonged period of low market yields boosts the relative return appeal of myriad variations of writing market protection (selling flood insurance during a drought).
May 10 – Financial Times (Robin Wigglesworth): “The global exchange-traded fund industry smashed past the $4tn in assets mark last month, as the gingerly improving performance of active asset managers this year does little to dent investor appetite for cheaper, passive alternatives. The entire ecosystem now boasts 6,835 ETFs and exchange-traded products (a broader category), from 313 providers, and total assets of $4.002tn at the end of April… ETFs and ETPs gathered a record $37.94bn last month, which was the 39th consecutive month of net inflows and brought this year’s total so far to $235.2bn – smashing 2016’s inflows of $81bn at this point of the year.”
I’ll pose the question this way: Why shouldn’t the VIX be extraordinarily low with “money” now consistently flooding into the ETF complex? In contrast to previous boom periods where flows would swamp active managers (that may have been keen to build cash levels), “money” arriving at one of thousands of ETFs will be immediately and predictively used to purchase securities. Some might be alarmed by what would be viewed traditionally as rather conspicuous market speculative excess. Not these days, however, in the age of central bankers antsy to deploy liquidity backstops. And the more likely that an abrupt reversal of ETF flows risks disrupting the markets, the more confident market operators become that central bankers will act swiftly to thwart sell-offs before they attain momentum. All part of the Scheme.
And with rates so low, equities essentially win by default, especially when they have been so outperforming other asset classes. And while central bankers are not likely to resort to the liquidity spigot in the event of minor pullbacks, players have grown quite confident that corporations, with their enormous buyback programs, are anxious to buy on any weakness. CEOs clearly find it more attractive to support this financial Scheme with stock repurchases than to deploy their cash hoards for productive investment with unclear return prospects.
What could go wrong? Lots of things. It’s a basic premise of Credit Bubble Analysis that market distortions are problematic, cumulative and inevitably resolved. Sooner the better. Central bank liquidity backstops spur myriad excesses that in the end will expand beyond the capacity of central bankers to sustain system liquidity. There are accumulations of speculative positions, leverage and maladjustment that evolve into Credit and liquidity gluttons. Over time, market misperceptions and distortions become deeply embedded. And, as we’ve witnessed, the greater the excesses the more confident are the markets that central bankers will have no alternative than to provide liquidity backstops. So, market yields remain stubbornly low in the face of efforts to tighten monetary policy, exacerbating excesses throughout the risk markets and the overall global economy. No Conundrum.
Why is the VIX – and other market “insurance” - so extraordinarily cheap? First taking a global Bubble perspective, I would suggest that the foundation of cheap “insurance” rests upon the perception of a relatively stable global Credit backdrop. Financial Conditions remain loose throughout much of the world. Sovereign yields persist close to historic lows around the globe, while Corporate Credit conditions continue to be ultra-loose. Of course, such conditions have been largely dictated by “whatever it takes” central banking with its near-zero rates and massive QE liquidity operations. There is faith, as well, that the heavy hand of Beijing will ensure sufficient Credit to achieve 6.5% 2017 Chinese GDP growth. And, for China and the world, that’s become an enormous amount of Credit.
Many would counter that the Federal Reserve and others have commenced normalization, with the U.S. central bank even discussing reducing the size of its balance sheet holdings. Yet such measures do close to nothing to dissuade market participants from the now deeply ingrained notion that central banks will quickly resort to zero/negative rates and more big liquidity injections in response to incipient worries of illiquidity.
Bull markets create their own self-reinforcing liquidity. Bear markets are the inevitable market self-correction after a period speculation and excess. History teaches us that markets cycle through periods of perceived ebullience and abundant liquidity followed by bouts of fear, illiquidity, dislocation and the occasional crash. In the final analysis, market-based Credit and securities-based finance have inflated to such an incredible degree that policymakers can no longer tolerate even the thought of a market down cycle. At least that is the basis for market “insurance” pricing these days.
The greatest ongoing criticism I have with contemporary central banking is that it has essentially guaranteed Continuous and Liquid Markets. Markets (after witnessing 2008 policy responses and then five years of “whatever it takes”) perceive this guarantee to be stronger today than ever before. And it is this assurance of Liquid and Continuous Markets that has become the pillar of modern derivatives trading strategies and markets.
Derivatives markets – particularly for “insurance,” risk sharing/intermediation and speculative leveraging – are fundamental to contemporary finance. And much of this boils down to those that sell market “insurance” are dependent upon highly liquid markets that allow the easy offloading (“dynamic hedging”) of risk previously written. Derivative players must be able to sell securities and establish positions that will generate the cash-flows to pay “insurance” losses on contracts they’ve sold (but not reserved for). And it all works wonderfully until it doesn’t – until a market episode unfolds where selling begets selling into sinking markets, more hedging, illiquidity and, at some point, counterparty issues.
The VIX is low because markets assume that central bankers won’t allow any such market illiquidity episode. Yet I believe just such an outcome is likely because of the markets’ faith that it’s highly unlikely (with the VIX trading as low as 9.56 this week).
So let’s touch upon what has become a sophisticated global financial scheme. First of all, (securities and derivatives) markets have become Too Big to Fail on a scope so beyond the 2002-2008 period – on a global basis. With the perception that central bankers and policymakers will not tolerate a significant market correction or recession, writers of derivative market “insurance” need not factor in the possibility of significant losses into the pricing of their products. It’s become Moral Hazard on an unprecedented scale.
There’s a major Reflexivity component at work. Cheap market “insurance” spurs risk-taking. Why not push the envelope with risk and employ added leverage, confident that inexpensive protection is readily available? This ensures that loose financial conditions spur Credit expansion, asset inflation, spending, corporate profits, rising incomes and government receipts/spending. Perceived wealth inflates tremendously, if not equitably. Rising price levels throughout the economy support the view that the future is bright, encouraging reinforcing flows into financial assets - further depressing the price of market “insurance.” Moreover, a prolonged period of low market yields boosts the relative return appeal of myriad variations of writing market protection (selling flood insurance during a drought).
May 10 – Financial Times (Robin Wigglesworth): “The global exchange-traded fund industry smashed past the $4tn in assets mark last month, as the gingerly improving performance of active asset managers this year does little to dent investor appetite for cheaper, passive alternatives. The entire ecosystem now boasts 6,835 ETFs and exchange-traded products (a broader category), from 313 providers, and total assets of $4.002tn at the end of April… ETFs and ETPs gathered a record $37.94bn last month, which was the 39th consecutive month of net inflows and brought this year’s total so far to $235.2bn – smashing 2016’s inflows of $81bn at this point of the year.”
I’ll pose the question this way: Why shouldn’t the VIX be extraordinarily low with “money” now consistently flooding into the ETF complex? In contrast to previous boom periods where flows would swamp active managers (that may have been keen to build cash levels), “money” arriving at one of thousands of ETFs will be immediately and predictively used to purchase securities. Some might be alarmed by what would be viewed traditionally as rather conspicuous market speculative excess. Not these days, however, in the age of central bankers antsy to deploy liquidity backstops. And the more likely that an abrupt reversal of ETF flows risks disrupting the markets, the more confident market operators become that central bankers will act swiftly to thwart sell-offs before they attain momentum. All part of the Scheme.
And with rates so low, equities essentially win by default, especially when they have been so outperforming other asset classes. And while central bankers are not likely to resort to the liquidity spigot in the event of minor pullbacks, players have grown quite confident that corporations, with their enormous buyback programs, are anxious to buy on any weakness. CEOs clearly find it more attractive to support this financial Scheme with stock repurchases than to deploy their cash hoards for productive investment with unclear return prospects.
What could go wrong? Lots of things. It’s a basic premise of Credit Bubble Analysis that market distortions are problematic, cumulative and inevitably resolved. Sooner the better. Central bank liquidity backstops spur myriad excesses that in the end will expand beyond the capacity of central bankers to sustain system liquidity. There are accumulations of speculative positions, leverage and maladjustment that evolve into Credit and liquidity gluttons. Over time, market misperceptions and distortions become deeply embedded. And, as we’ve witnessed, the greater the excesses the more confident are the markets that central bankers will have no alternative than to provide liquidity backstops. So, market yields remain stubbornly low in the face of efforts to tighten monetary policy, exacerbating excesses throughout the risk markets and the overall global economy. No Conundrum.
I expect U.S. system Credit growth to surpass $2.2 TN this year, roughly broken down by the government sector ($850bn), Business ($750bn), Household Mortgage ($350bn) and Consumer Credit ($250bn). Another big federal deficit is expected, with the perception of a blank checkbook ensuring that deficits inflate until the markets decide otherwise. Rising home prices coupled with low mortgage rates ensure a 2017 expansion of mortgage borrowings. Loose financial conditions and record debt issuance would seem to ensure another big year of Business debt growth. And while there appears to be some tightening in subprime auto and Credit cards, I would be surprised to see Consumer Credit expand by much less than 2016. As such, the relatively stable outlook for U.S. Credit growth certainly supports the global liquidity and market backdrop.
The situation in Chinese Credit is altogether different. Credit growth (Total Social Financing and government borrowings) is on track to approach a record $3.5 TN this year. But I wouldn’t be stunned neither by $4.0 TN or a crisis-induced rapid Credit slowdown. April lending data was out Friday. Total Social Financing (TSF) expanded $201bn during April, down from March’s $307bn. New Loans expanded $159bn during the month, about a third greater than expected. Bank lending took up some of the slack from a sharp decline in various “shadow banking” components. Overall mortgage Credit growth slowed during April. TSF (which excludes government borrowings) expanded a record $1.205 TN during the first four months of the year.
From my analytical perspective, China has evolved into the key marginal source of global Credit. Why is the VIX – along with the price of other market “insurance” - so low? Because of the market perception that Beijing these days has everything under control. Notable complacency, yes. At the same time, and making things more intriguing, I don’t believe markets are all too confident in China prospects over the intermediate and longer-term. So, we’ll continue to monitor closely for indications of escalating Chinese instability. After an “inconclusive” past five days in the markets, Risk On/Risk Off will be monitored diligently once again next week.
The situation in Chinese Credit is altogether different. Credit growth (Total Social Financing and government borrowings) is on track to approach a record $3.5 TN this year. But I wouldn’t be stunned neither by $4.0 TN or a crisis-induced rapid Credit slowdown. April lending data was out Friday. Total Social Financing (TSF) expanded $201bn during April, down from March’s $307bn. New Loans expanded $159bn during the month, about a third greater than expected. Bank lending took up some of the slack from a sharp decline in various “shadow banking” components. Overall mortgage Credit growth slowed during April. TSF (which excludes government borrowings) expanded a record $1.205 TN during the first four months of the year.
From my analytical perspective, China has evolved into the key marginal source of global Credit. Why is the VIX – along with the price of other market “insurance” - so low? Because of the market perception that Beijing these days has everything under control. Notable complacency, yes. At the same time, and making things more intriguing, I don’t believe markets are all too confident in China prospects over the intermediate and longer-term. So, we’ll continue to monitor closely for indications of escalating Chinese instability. After an “inconclusive” past five days in the markets, Risk On/Risk Off will be monitored diligently once again next week.
For the Week:
The S&P500 slipped 0.3% (up 6.8% y-t-d), and the Dow declined 0.5% (up 5.7%). The Utilities dipped 0.2% (up 5.6%). The Banks fell 1.3% (down 0.4%), and the Broker/Dealers lost 1.5% (up 4.1%). The Transports were hit 2.1% (down 0.5%). The S&P 400 Midcaps declined 1.1% (up 3.5%), and the small cap Russell 2000 fell 1.0% (up 1.9%). The Nasdaq100 added 0.7% (up 16.9%), and the Morgan Stanley High Tech index gained 0.6% (up 19.6%). The Semiconductors surged 3.4% (up 15.3%). The Biotechs declined 0.8% (up 17.8%). With bullion recovering about $7, the HUI gold index rallied 6.0% (up 8.1%).
Three-month Treasury bill rates ended the week at 86 bps. Two-year government yields slipped two bps to 1.29% (up 10bps y-t-d). Five-year T-note yields declined three bps to 1.85% (down 8bps). Ten-year Treasury yields fell two bps to 2.33% (down 12bps). Long bond yields added a basis point to 2.99% (down 8bps).
Greek 10-year yields dropped 16 bps to 5.61% (down 141bps y-t-d). Ten-year Portuguese yields dipped two bps to 3.37% (down 37bps). Italian 10-year yields jumped nine bps to 2.25% (up 44bps). Spain's 10-year yields rose seven bps to 1.73% (up 25bps). German bund yields declined three bps to 0.39% (up 19bps). French yields were unchanged at 0.84% (up 16bps). The French to German 10-year bond spread widened three to 45 bps. U.K. 10-year gilt yields fell three bps to 1.09% (down 15bps). U.K.'s FTSE equities index rallied 1.9% (up 4.1%).
Japan's Nikkei 225 equities index jumped 2.3% (up 4.0% y-t-d). Japanese 10-year "JGB" yields rose three bps to 0.05% (up 1bp). France's CAC40 slipped 0.5% (up 11.2%). The German DAX equities index added 0.4% (up 11.2%). Spain's IBEX 35 equities index fell 2.1% (up 16.5%). Italy's FTSE MIB index increased 0.4% (up 12.2%). EM equities were mixed. Brazil's Bovespa index surged 3.8% (up 13.3%). Mexico's Bolsa was little changed (up 8.3%). South Korea's Kospi rose 2.0% (up 12.8%). India’s Sensex equities index gained 1.1% (up 13.4%). China’s Shanghai Exchange declined 0.6% (down 0.6%). Turkey's Borsa Istanbul National 100 index rose 1.1% (up 21.6%). Russia's MICEX equities index dipped 0.4% (down 10.7%).
Junk bond mutual funds saw outflows jump to $1.725 billion (from Lipper).
Freddie Mac 30-year fixed mortgage rates rose three bps to 4.05% (up 48bps y-o-y). Fifteen-year rates increased two bps to 3.29% (up 48bps). The five-year hybrid ARM rate added a basis point to 3.14% (up 36bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates up two bps to 4.16% (up 39bps).
Federal Reserve Credit last week expanded $2.1bn to $4.434 TN. Over the past year, Fed Credit declined $4.2bn (down 0.1%). Fed Credit inflated $1.623 TN, or 58%, over the past 235 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt gained $6.5bn last week to $3.222 TN. "Custody holdings" were up $2.2bn y-o-y, or 0.1%.
M2 (narrow) "money" supply last week jumped $35.5bn to a record $13.475 TN. "Narrow money" expanded $749bn, or 5.9%, over the past year. For the week, Currency increased $2.8bn. Total Checkable Deposits slipped $5.5bn, while Savings Deposits rose $36.8bn. Small Time Deposits and Retail Money Funds were little changed.
Total money market fund assets gained $6.2bn to $2.650 TN. Money Funds fell $65bn y-o-y (2.4%).
Total Commercial Paper fell $11.0bn to $981.6bn. CP declined $134bn y-o-y, or 12%.
Currency Watch:
The U.S. dollar index recovered 0.6% to 99.25 (down 3.1% y-t-d). For the week on the upside, the Brazilian real increased 1.7%, the Mexican peso 0.9%, the South Korean won 0.5%, the South African rand 0.4%, the Norwegian krone 0.4% and the Singapore dollar 0.1%. For the week on the downside, the Swiss franc declined 1.3%, the New Zealand dollar 0.8%, the British pound 0.7%, the euro 0.6%, the Japanese yen 0.6%, the Australian dollar 0.5%, the Canadian dollar 0.4% and the Swedish krona 0.4%. The Chinese renminbi added 0.05% versus the dollar this week (up 0.66% y-t-d).
Commodities Watch:
May 9 – Bloomberg (Mark Shenk): “U.S. crude production forecasts keep growing. The Energy Information Administration said domestic output will climb to a record 9.96 million barrels a day in 2018, up from 9.9 million barrels projected last month, according to the agency’s monthly Short-Term Energy Outlook… Production will average 9.31 million barrels a day in 2017, up from 9.22 million projected in April.”
The S&P500 slipped 0.3% (up 6.8% y-t-d), and the Dow declined 0.5% (up 5.7%). The Utilities dipped 0.2% (up 5.6%). The Banks fell 1.3% (down 0.4%), and the Broker/Dealers lost 1.5% (up 4.1%). The Transports were hit 2.1% (down 0.5%). The S&P 400 Midcaps declined 1.1% (up 3.5%), and the small cap Russell 2000 fell 1.0% (up 1.9%). The Nasdaq100 added 0.7% (up 16.9%), and the Morgan Stanley High Tech index gained 0.6% (up 19.6%). The Semiconductors surged 3.4% (up 15.3%). The Biotechs declined 0.8% (up 17.8%). With bullion recovering about $7, the HUI gold index rallied 6.0% (up 8.1%).
Three-month Treasury bill rates ended the week at 86 bps. Two-year government yields slipped two bps to 1.29% (up 10bps y-t-d). Five-year T-note yields declined three bps to 1.85% (down 8bps). Ten-year Treasury yields fell two bps to 2.33% (down 12bps). Long bond yields added a basis point to 2.99% (down 8bps).
Greek 10-year yields dropped 16 bps to 5.61% (down 141bps y-t-d). Ten-year Portuguese yields dipped two bps to 3.37% (down 37bps). Italian 10-year yields jumped nine bps to 2.25% (up 44bps). Spain's 10-year yields rose seven bps to 1.73% (up 25bps). German bund yields declined three bps to 0.39% (up 19bps). French yields were unchanged at 0.84% (up 16bps). The French to German 10-year bond spread widened three to 45 bps. U.K. 10-year gilt yields fell three bps to 1.09% (down 15bps). U.K.'s FTSE equities index rallied 1.9% (up 4.1%).
Japan's Nikkei 225 equities index jumped 2.3% (up 4.0% y-t-d). Japanese 10-year "JGB" yields rose three bps to 0.05% (up 1bp). France's CAC40 slipped 0.5% (up 11.2%). The German DAX equities index added 0.4% (up 11.2%). Spain's IBEX 35 equities index fell 2.1% (up 16.5%). Italy's FTSE MIB index increased 0.4% (up 12.2%). EM equities were mixed. Brazil's Bovespa index surged 3.8% (up 13.3%). Mexico's Bolsa was little changed (up 8.3%). South Korea's Kospi rose 2.0% (up 12.8%). India’s Sensex equities index gained 1.1% (up 13.4%). China’s Shanghai Exchange declined 0.6% (down 0.6%). Turkey's Borsa Istanbul National 100 index rose 1.1% (up 21.6%). Russia's MICEX equities index dipped 0.4% (down 10.7%).
Junk bond mutual funds saw outflows jump to $1.725 billion (from Lipper).
Freddie Mac 30-year fixed mortgage rates rose three bps to 4.05% (up 48bps y-o-y). Fifteen-year rates increased two bps to 3.29% (up 48bps). The five-year hybrid ARM rate added a basis point to 3.14% (up 36bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates up two bps to 4.16% (up 39bps).
Federal Reserve Credit last week expanded $2.1bn to $4.434 TN. Over the past year, Fed Credit declined $4.2bn (down 0.1%). Fed Credit inflated $1.623 TN, or 58%, over the past 235 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt gained $6.5bn last week to $3.222 TN. "Custody holdings" were up $2.2bn y-o-y, or 0.1%.
M2 (narrow) "money" supply last week jumped $35.5bn to a record $13.475 TN. "Narrow money" expanded $749bn, or 5.9%, over the past year. For the week, Currency increased $2.8bn. Total Checkable Deposits slipped $5.5bn, while Savings Deposits rose $36.8bn. Small Time Deposits and Retail Money Funds were little changed.
Total money market fund assets gained $6.2bn to $2.650 TN. Money Funds fell $65bn y-o-y (2.4%).
Total Commercial Paper fell $11.0bn to $981.6bn. CP declined $134bn y-o-y, or 12%.
Currency Watch:
The U.S. dollar index recovered 0.6% to 99.25 (down 3.1% y-t-d). For the week on the upside, the Brazilian real increased 1.7%, the Mexican peso 0.9%, the South Korean won 0.5%, the South African rand 0.4%, the Norwegian krone 0.4% and the Singapore dollar 0.1%. For the week on the downside, the Swiss franc declined 1.3%, the New Zealand dollar 0.8%, the British pound 0.7%, the euro 0.6%, the Japanese yen 0.6%, the Australian dollar 0.5%, the Canadian dollar 0.4% and the Swedish krona 0.4%. The Chinese renminbi added 0.05% versus the dollar this week (up 0.66% y-t-d).
Commodities Watch:
May 9 – Bloomberg (Mark Shenk): “U.S. crude production forecasts keep growing. The Energy Information Administration said domestic output will climb to a record 9.96 million barrels a day in 2018, up from 9.9 million barrels projected last month, according to the agency’s monthly Short-Term Energy Outlook… Production will average 9.31 million barrels a day in 2017, up from 9.22 million projected in April.”
The Goldman Sachs Commodities Index rallied 2.2% (down 4.8% y-t-d). Spot Gold recovered 0.5% to $1,228 (up 6.6%). Silver regained 1.1% to $16.46 (up 3.0%). Crude rallied $1.62 to $47.84 (down 11%). Gasoline recovered 5% (down 6%), and Natural Gas jumped 4.8% (down 8%). Copper slipped 0.2% (up 1%). Wheat fell 1.9% (up 6%). Corn was little changed (up 5%).
Trump Administration Watch:
May 11 – Reuters (Dan Burns and Megan Davies): “Not even a week after the Trump administration and Congress rekindled optimism that they could soon make progress on a pro-growth agenda including tax cuts, the unexpected firing of the head of the FBI late Tuesday presented investors with a fresh reason to second-guess their confidence in the ‘Trump trade.’ At the least, financial market participants viewed President Donald Trump's abrupt dismissal of FBI Director James Comey as an unwelcome distraction, while some fretted it could tie Washington in knots for months, potentially postponing already-delayed reforms. The takeaway for the stock markets: don’t bet on any quick legislation around trade, the budget, healthcare or infrastructure.”
May 10 – Bloomberg (Steven T. Dennis and Margaret Talev): “Donald Trump’s abrupt firing of FBI Director James Comey is threatening to quickly backfire on the president, who’s now facing intense scrutiny from Democrats and even some Republicans over why he dismissed the man in charge of investigating his campaign’s possible ties to Russia. Trump’s decision… jolted the multiple congressional inquiries into Russia’s role in the 2016 election, fueled calls for a special prosecutor and set the stage for a bruising battle to get Comey’s successor through Senate confirmation. Trump took to Twitter to defend the move -- and attack his foes.”
May 9 – Reuters (Olivia Oran and Pete Schroeder): “The U.S. government's review of a landmark 2010 financial reform law will not be complete by early June as originally targeted, and officials will now report findings piece-by-piece, with priority given to banking regulations, sources familiar with the matter said… President Donald Trump has pledged to do a ‘big number’ on the Dodd-Frank financial overhaul law, which raised banks' capital requirements, restricted their ability to make speculative bets with customers' money and created consumer protections in the wake of the financial crisis. In February, Trump ordered Treasury Secretary Steven Mnuchin to review the law and report back within 120 days, saying his administration expected to be cutting large parts of it.”
May 11 – Wall Street Journal (Andrew Ackerman): “The Trump administration and a bipartisan group of U.S. senators are working to address an issue that has gone unresolved for nearly a decade: how to overhaul Fannie Mae and Freddie Mac, the mortgage-finance giants the government took over in 2008. The Senate Banking Committee has begun behind-the-scenes work on the issue of how, exactly, to revamp the companies. The senators want to develop a framework to decrease the government’s outsize role backstopping the nation’s $10 trillion mortgage market.”
China Bubble Watch:
May 8 – Bloomberg (Sofia Horta E Costa): “How much pain can China’s leaders stomach? It’s becoming a key question for investors as the government’s clampdown on financial leverage ripples through markets. The tightening campaign has erased at least $453 billion from the value of Chinese stocks and bonds since mid-April, spurred $21 billion of canceled debt sales and compelled the People’s Bank of China to inject $48 billion into jittery money markets. Sales of asset-management products by lenders and trust companies have plunged by more than 30%, while domestic real estate transactions have slowed and metals prices have buckled.”
May 10 – Bloomberg: “China’s government bonds slumped across tenors, pushing the 10-year yield up by the most since February, on bets regulators’ deleveraging campaign still has a long way to go. The yield on 10-year government bonds spiked 7 bps to 3.7%..., while the cost on the five-year note jumped to the highest in more than two years. The selloff accelerated after the Ministry of Finance sold five-year debt at the highest cost since 2014. This suggests financial institutions are betting yields will climb even further, according to Guotai Junan Securities Co. ‘Bonds are plunging at a pace that’s faster than we expected,’ said David Qu, a Shanghai-based markets economist at Australia & New Zealand Banking… ‘Investors have expected the central bank to ease liquidity when strain appears, but they’ve been repeatedly disappointed. So some are being forced to sell their holdings, leading to a sharper slump in the security.’”
May 9 – Bloomberg (Chris Anstey, Isabella Cota, and Ben Bartenstein): “What may be shaping up as China’s most concerted effort yet to bring its credit boom under control is spurring investors to gauge any contagion to broader financial markets, a-la 2015, when Chinese turmoil caused global ructions. Policy makers’ moves to crack down on leverage have already wreaked about $500 billion of financial damage domestically, and… are dragging on industrial metals and iron-ore prices globally. The key metrics to watch now: the yuan’s exchange rate and cross-border capital flows.”
May 6 – Financial Times (Tom Mitchell and Gabriel Wildau): “The World Bank has warned that Chinese local governments remain addicted to off-budget borrowing, despite Beijing’s efforts to impose fiscal discipline on localities and curb ballooning debt. Runaway growth of local government debt is widely seen as a huge risk for China’s economy and financial system. Provinces, cities and counties borrowed heavily to spend on infrastructure to keep economic growth humming after the 2008 financial crisis. But the practice has continued and economists warn that returns on new investment are falling and white elephants are common. Many projects do not produce enough cash flow to service their debt.”
May 10 – Bloomberg (Jack Sidders and Vinicy Chan): “China’s biggest-ever foreign acquisition frenzy is ending almost as dramatically as it began. After stunning the world with a record $246 billion of announced outbound takeovers in 2016, Chinese dealmakers are now struggling to cope with tighter capital controls and increasingly wary counterparties. Cross-border purchases plunged 67% during the first four months of this year, the biggest drop for a comparable period since the depths of the global financial crisis in 2009…”
May 11 – Wall Street Journal (Scott Patterson): “Money from state-run Chinese companies was used to help finance the buildup of a massive aluminum stockpile that has crisscrossed the globe, depressed prices and sparked a criminal investigation in the U.S., according to business records, emails and people with direct knowledge… Any such involvement by these entities could further strain relations between China and the U.S., which says Beijing undercuts global competition by giving government assistance to its commodity companies… Financing through the deep pockets of Chinese state-run companies could explain how enormous aluminum stockpiles that have captivated the global metals industry were paid for.”
May 9 – New York Times (David Barboza): “During his first state visit to Britain, President Xi Jinping of China heralded the great economic opportunities between the two countries, in energy, infrastructure and finance. He finished off the late 2015 trip at Manchester Airport, unveiling a new direct flight to Beijing on the Chinese carrier Hainan Airlines. The political spotlight was a global coup for Chen Feng, chairman of the carrier’s parent, the HNA Group… In just over two decades, Mr. Chen, 63, has helped transform a small airline in southern China into one of the country’s few global powerhouses, with big stakes in Hilton Hotels, Swissport and Ingram Micro. This week, HNA said it was the largest investor in Germany’s Deutsche Bank, part of a broader push by Chinese players into global finance. As China’s financial might has grown, companies like HNA have embarked on ambitious expansions, spreading money around the world…”
May 10 – Bloomberg: “China’s producer price gains slowed more than expected in April, adding to signs of a potential easing of global reflation fueled by the world’s second-largest economy. Producer price index rose 6.4% from a year earlier…”
May 5 – New York Times (Keith Bradsher): “A Chinese regulator announced… that it had taken disciplinary measures against the Anbang Insurance Group, a financial behemoth that has tried to invest tens of billions of dollars overseas, for the improper sale of two investment products. The moves by the China Insurance Regulatory Commission come against a backdrop of broader worries about the country’s financial system, in addition to ones about the insurance industry. President Xi Jinping told Politburo members last month that China should place a strong emphasis on financial stability as a pillar of a strong economy…”
May 9 – Wall Street Journal (Dominique Fong): “Zheng Xiaohei, a marketer from Urumqi in western China, made his first overseas property investment without so much as a visit. Mr. Zheng, 29 years old, in March purchased a studio apartment in Thailand for about 650,000 yuan ($94,255) using his smartphone and an app called Uoolu that connects users to overseas property listings. ‘Investing in overseas real estate was mainly due to my good impression of Thailand,’ Mr. Zheng said. Founded two years ago, Beijing-based Uoolu is focused on tapping a specific group of home buyers: Chinese millennials looking for foreign properties. …The lure? A millennial’s desire to hedge against yuan depreciation and find affordable homes in cities with cleaner air for their children to live in when they study abroad. In the past year, home prices have soared to more than 30 times household income in major Chinese cities.”
May 9 – Reuters (Engen Tham): “China's lenders are swapping struggling corporates for more promising retail borrowers - restructuring branches, teams and even overhauling bankers' commissions in an unprecedented push that is fuelling a record jump in home loans. Yet the speed of the switch, the pressure to pull in more borrowers and soaring house prices are also worrying loan officers, analysts and regulators, with the central bank governor among those sounding a note of caution. Corporate lending has long made up the bulk of many Chinese banks' loan books: the deals are larger and loans have more attractive rates. But with firms faltering, economic growth slowing for key sectors and banks under pressure to deleverage, lenders are eyeing other options.”
May 9 – Reuters (Kevin Yao): “China will pay closer attention to the influence of non-bank financial institutions on financial stability, and the impact of local policy interventions on broader global markets, according to a central bank working paper… In recent years non-bank institutions such as trust and investment companies, or fund and asset management firms have expanded their activity - much of it a less regulated form of lending - even as policymakers have tried to rein in leverage in the Chinese economy. ‘Though banks still dominate China's financial system, non-bank financial institutions have considerable influence as well,’ the paper published on the People's Bank of China website said. ‘We believe that sufficient attention should be given to international spill-over effects of intervention policies, and the impact of non-bank financial institutions to financial stability,’…”
May 10 – Reuters (Saikat Chatterjee and Umesh Desai): “China's policymakers plan to open the doors wider than ever to foreign investment in the country's $3 trillion bond market, in part to help shore up the struggling yuan. But the currency is also proving to be a major barrier to the success of their plan. Foreigners own less than 2% of China's $3.3 trillion in outstanding bonds and say getting their cash out of China and recent weakness of the closely controlled currency are obstacles to investment. Foreign investors are also skeptical they can assess risk accurately when most of the $2.1 trillion in corporate bonds are rated investment grade by domestic rating agencies… ‘If investors wanted to have more exposure to Chinese bonds, we can do it tomorrow,’ said Andy Seaman, a partner and chief investment officer of… fund manager Stratton Street. ‘But unfortunately, they don't. It's very difficult to persuade people because of the currency. They don't want renminbi,’ he said.”
May 7 – Bloomberg: “China’s foreign-exchange reserves rose for a third month in April, exceeding estimates, as tighter capital controls kept money from flowing out of the country and the yuan held stable. Reserves climbed $20.4 billion to $3.03 trillion, …compared with a median estimate of $3.02 trillion…”
Europe Watch:
May 7 – CNBC (Karen Gilchrist): “Emmanuel Macron has fought off populist opponent Marine Le Pen and won the race to become France's next president. The centrist candidate secured approximately 65% of votes to far-right Le Pen's 35%... Macron's win signals a victory for both pro-Europeans and pollsters, who correctly predicted his lead… What happens now? Macron will be inaugurated on Sunday May 14. At this point he will replace the outgoing President Francois Hollande and attentions will turn to the upcoming parliamentary elections. On June 11 and 18, French citizens will once again head to the polls for two rounds of voting to elect the country's 577 members of parliament.”
May 9 – Reuters (Patrick Graham): “In December, one of the trades of 2017 for the big financial investors who play on global political and economic risk was the spread of populism in Europe and the threat that might pose to the future of the euro. Six months and two elections on, and with only a relatively traditional policy fight in prospect for Germany's vote in September, the risks have receded. Emmanuel Macron’s victory… follows defeat for Geert Wilders' Party for Freedom in the Netherlands and heads off Marine Le Pen’s promises to pull Paris out of the euro and potentially the European Union. Looking threatened six weeks ago by Martin Schulz’s reboot of Germany’s Social Democrats (SPD), Angela Merkel is again 6-8 points ahead in the polls…”
May 10 – Bloomberg (Alessandro Speciale and Corina Ruhe): “Mario Draghi said the European Central Bank’s stimulus hasn’t finished the job yet, even as he acknowledged that the region’s economy is getting stronger. ‘The economic recovery has evolved from being fragile and uneven into a firming, broad-based upswing,’ the ECB president said… ‘Nevertheless, it is too early to declare success.’ ECB policy makers are pondering whether and how to communicate a gradual removal of stimulus amid a steadily strengthening economy that has so far showed little signs of generating faster price growth.”
May 10 – Financial Times (Claire Jones and Mehreen Khan): “Mario Draghi faced a rare public grilling… that left the president of the European Central Bank rattled as he defended some of his unpopular policies to Dutch MPs. …The Dutch political establishment has been fiercely critical of the ECB’s stimulus measures, which have seen the central bank buy more than €1.8tn of assets over the past two years and cut interest rates to record lows. Mr Draghi faced accusations that he had raided Dutch pensioners’ wealth through ECB policies: many Dutch share the German view of blaming the central bank’s measures for eroding their savings… MPs finished the session with a gift of a solar-powered tulip for Mr Draghi, to remind him of the country’s famous Tulip Mania asset price bubble and financial crisis in the mid-17th century.”
Global Bubble Watch:
May 10 – Reuters (Jamie McGeever and Vikram Subhedar): “The current slump in expectations of market volatility is not just a stock market phenomenon -- it is the lowest it's been for years across fixed income, currency and commodity markets around the world. It shows little sign of reversing, which means market players are essentially not expecting much in the way of shocks or sharp movements any time soon. It's an environment in which asset prices can continue rising and bond spreads narrow further. The improving global economy, robust corporate profitability, ample central bank stimulus even as U.S. interest rates are rising, and some fading political risk from elections have all contributed to create a backdrop of relative calm. There is little evidence of investors hedging -- or seeking to protect themselves -- from adverse conditions.”
May 9 – CNBC (Fred Imbert): “The U.S. stock market may be a bit too calm right now, Goldman Sachs CEO Lloyd Blankfein said… ‘Every time I get accustomed to low volatility, like we were towards the end of the Greenspan era, and we think we have all the levers under the control ... something erupts to remind us that the idea that anybody is in control of everything is hubris,’ Blankfein told CNBC's ‘Power Lunch’… ‘I don't know what brings us out of the doldrums, but I do know this is not a normal resting state,’ he said.”
May 10 – Wall Street Journal (Spencer Jakab): “They have nothing to fear but the lack of fear itself. The low level of the market’s so-called fear gauge, formally known as the CBOE Volatility Index or VIX, is a divisive issue on Wall Street. Some assert that the lowest values in nearly a quarter-century signal investor complacency. They say that has almost always been a sign that a selloff is near. Others scoff that there is no cause-and-effect. Without wading into this debate, the VIX’s descent into the single digits—it touched 9.56 on Tuesday—is bad news for investors who bet on higher volatility. Now it is also bad news for more conservative investing strategies that profit directly from market choppiness.”
May 7 – Financial Times (Jennifer Hughes): “When two big international organisations highlight the same issue, investors should pay attention. When the issue is the risk of a scarcity of dollars outside the US, then arguably everyone should take note. The International Monetary Fund and the Bank for International Settlements both pointed to the potential danger in their most recent reports. Bank analysts and investors, too, are beginning to discuss the implications of fewer dollars, particularly for emerging markets… Fewer dollars would raise the cost of obtaining the currency from the pools that have developed outside the US since the Fed began flooding markets with money via quantitative easing in 2008.”
May 7 – Wall Street Journal (Gunjan Banerji): “Falling volumes and spiraling costs are pushing trading firms out of U.S. options, raising concerns about fragility in a market that investors rely on to protect portfolios. Trading has dwindled in most areas of the market, and investors and traders are grappling with increasing fragmentation. Liquidity, the crucial ability to do trades without significantly moving prices, has deteriorated, according to interviews with market participants… Options on key indexes, exchange-traded funds and high-volume stocks dominate trading. Meanwhile, there is less activity in the rest of the listed U.S. options world. The stresses prompted at least six prominent options market makers to exit from the business since 2012.”
May 8 – Bloomberg (Michael Heath): “Australian business confidence surged to the highest level since 2010 and firms’ conditions advanced further, signaling economic growth could accelerate.”
May 9 – Bloomberg (Emily Cadman): “Australia’s banking regulator will get new powers to curb property lending both in the shadow banking sector and in specific geographic areas. The additional powers and funding for the Australian Prudential Regulation Authority come after soaring house prices in the nation’s largest cities stoked concern… Treasurer Scott Morrison said the government will legislate to extend APRA’s ability to apply controls to the non-bank lending sector as well as ‘explicitly allow them to differentiate the application of loan controls by location.’ …Bringing non-bank lenders into APRA’s regulatory purview will strengthen oversight of a sector that has grown as the big four banks tighten their lending criteria.”
Fixed Income Bubble Watch:
May 11 – Bloomberg (Luke Kawa): “Call it a local bond market buffet. American buyers have been gorging on corporate debt after also stepping up their presence in the Treasury market. As such, investment grade credit spreads remain tight by historical standards largely thanks to a resurgence in U.S. retail enthusiasm as international demand wanes. ‘The real delta in terms of demand for U.S. investment grade credit this year is not any particular foreign buyer base, but instead the domestic mutual fund and exchange-traded fund segment, which is enjoying a banner year of inflows,’ wrote Wells Fargo Securities strategists led by Nathaniel Rosenbaum… ‘These funds have garnered over $100 billion in just four months, almost double the prior record for this point in the year.’”
May 5 – New York Times (Mary Williams Walsh): “It all goes back to 1917. Congress passed a law that year making Puerto Ricans United States citizens. That same law, still on the books today, empowered the island to raise money by issuing tax-exempt bonds. And not just federally tax-exempt bonds: Congress went on at length to bar anyone from taxing Puerto Rico’s bonds, presumably never dreaming how this would play out a century later — which, on Wednesday, led to the territory declaring a form of bankruptcy because it could not pay the $123 billion in bonds and unpaid pension debts it owes. The 100-year-old law stipulates that no one… can tax the interest that Puerto Rico pays its investors. This has spurred people with eyes on easy profits to dive in for decades.”
May 9 – Financial Times (Eric Platt): “Riskier US corporate debt regained some of its footing on Tuesday, with a number of bond sales expected over the coming days despite the weight of falling oil prices. At least 10 speculatively rated groups — companies deemed riskier than their investment-grade counterparts by the major rating agencies — borrowed through bond markets on Tuesday or were poised to complete marketing roadshows later this week for such sales. The uptick in activity follows a volatile week for junk bonds as oil prices decline.”
Federal Reserve Watch:
May 9 – Bloomberg (Craig Torres and Rich Miller): “Allan Meltzer, an economist and Federal Reserve historian who was critical of the central bank’s recent policies, died on Monday at the age of 89… A monetary policy expert who consulted with congressional committees and central banks, Meltzer brought historical perspective and a sharp knowledge of past policy foibles to his commentary.”
May 7 – Financial Times (Sam Fleming): “The Federal Reserve risks political interference and losing its independence if it maintains a large balance sheet in the longer term, former Fed officials have claimed, as debate intensifies over the central bank’s strategy for unwinding its interventions in financial markets. Kevin Warsh, a visiting fellow at the Hoover Institution at Stanford University and former Fed governor, said that permanently holding vast quantities of assets like treasuries was ‘fiscal policy in disguise’ and risked turning the central bank into a general purpose agency of the government. ‘A large balance sheet is a dangerous temptation for the rest of the political class,’ he said…”
May 8 – Bloomberg (Christopher Condon): “Federal Reserve Bank of Cleveland President Loretta Mester said the central bank should continue on its gradual path of raising interest rates to prevent the risk of overheating the U.S. economy. ‘It’s important for the FOMC to remain very vigilant against falling behind as we continue to make progress on our goals,’ Mester said… ‘If we delay too long in taking the next normalization step and then find ourselves in a situation where the labor market becomes unsustainably tight, price pressures become excessive and we have to move rates up steeply, we could risk a recession,’ she said.”
May 9 – Reuters (Jason Lange): “Kansas City Federal Reserve President Esther George… said she supported starting to wind down the Fed's massive trove of bonds this year. …George said the central bank's Federal Open Market Committee should move to stop reinvesting the maturing principal payments of its longer-term Treasuries and mortgage-backed securities. ‘The FOMC also must begin to adjust the size and composition of its securities holdings,’ George said…”
May 9 – Bloomberg (Matthew Boesler and Liz McCormick): “Tapering of the Federal Reserve’s balance sheet won’t sink the mortgage-backed securities market, said Boston Fed President Eric Rosengren, though prices may have to adjust to tempt investors into buying bonds currently being sucked up by the central bank. ‘Our capital markets are deep enough that I’m not as worried about the ability to be able to fund those mortgages,’ he told an audience… ‘Price will change, and I think market participants will step up as the price changes.’”
May 11 – Bloomberg (Anirban Nag and Matthew Boesler): “The Federal Reserve is on track to begin unwinding its balance sheet this year or next, although U.S. central bankers are not in a rush to tighten and will take care to ensure their actions don’t trigger disruptions that harm the global economy, Federal Reserve Bank of New York President William Dudley said. ‘We are pretty close to full employment,’ Dudley said… ‘Inflation is just a little bit below our target of 2% if you look at the underlying inflation trend, so clearly if the economy continues to grow above trend we are going to want to gradually remove monetary policy accommodation.”
May 10 – Bloomberg (Christopher Condon): “Federal Reserve Bank of Boston President Eric Rosengren urged his policy-making colleagues to raise interest rates three more times this year and consider starting to shrink the central bank’s balance sheet after their next hike to avoid creating an ‘over-hot economy.’”
Trump Administration Watch:
May 11 – Reuters (Dan Burns and Megan Davies): “Not even a week after the Trump administration and Congress rekindled optimism that they could soon make progress on a pro-growth agenda including tax cuts, the unexpected firing of the head of the FBI late Tuesday presented investors with a fresh reason to second-guess their confidence in the ‘Trump trade.’ At the least, financial market participants viewed President Donald Trump's abrupt dismissal of FBI Director James Comey as an unwelcome distraction, while some fretted it could tie Washington in knots for months, potentially postponing already-delayed reforms. The takeaway for the stock markets: don’t bet on any quick legislation around trade, the budget, healthcare or infrastructure.”
May 10 – Bloomberg (Steven T. Dennis and Margaret Talev): “Donald Trump’s abrupt firing of FBI Director James Comey is threatening to quickly backfire on the president, who’s now facing intense scrutiny from Democrats and even some Republicans over why he dismissed the man in charge of investigating his campaign’s possible ties to Russia. Trump’s decision… jolted the multiple congressional inquiries into Russia’s role in the 2016 election, fueled calls for a special prosecutor and set the stage for a bruising battle to get Comey’s successor through Senate confirmation. Trump took to Twitter to defend the move -- and attack his foes.”
May 9 – Reuters (Olivia Oran and Pete Schroeder): “The U.S. government's review of a landmark 2010 financial reform law will not be complete by early June as originally targeted, and officials will now report findings piece-by-piece, with priority given to banking regulations, sources familiar with the matter said… President Donald Trump has pledged to do a ‘big number’ on the Dodd-Frank financial overhaul law, which raised banks' capital requirements, restricted their ability to make speculative bets with customers' money and created consumer protections in the wake of the financial crisis. In February, Trump ordered Treasury Secretary Steven Mnuchin to review the law and report back within 120 days, saying his administration expected to be cutting large parts of it.”
May 11 – Wall Street Journal (Andrew Ackerman): “The Trump administration and a bipartisan group of U.S. senators are working to address an issue that has gone unresolved for nearly a decade: how to overhaul Fannie Mae and Freddie Mac, the mortgage-finance giants the government took over in 2008. The Senate Banking Committee has begun behind-the-scenes work on the issue of how, exactly, to revamp the companies. The senators want to develop a framework to decrease the government’s outsize role backstopping the nation’s $10 trillion mortgage market.”
China Bubble Watch:
May 8 – Bloomberg (Sofia Horta E Costa): “How much pain can China’s leaders stomach? It’s becoming a key question for investors as the government’s clampdown on financial leverage ripples through markets. The tightening campaign has erased at least $453 billion from the value of Chinese stocks and bonds since mid-April, spurred $21 billion of canceled debt sales and compelled the People’s Bank of China to inject $48 billion into jittery money markets. Sales of asset-management products by lenders and trust companies have plunged by more than 30%, while domestic real estate transactions have slowed and metals prices have buckled.”
May 10 – Bloomberg: “China’s government bonds slumped across tenors, pushing the 10-year yield up by the most since February, on bets regulators’ deleveraging campaign still has a long way to go. The yield on 10-year government bonds spiked 7 bps to 3.7%..., while the cost on the five-year note jumped to the highest in more than two years. The selloff accelerated after the Ministry of Finance sold five-year debt at the highest cost since 2014. This suggests financial institutions are betting yields will climb even further, according to Guotai Junan Securities Co. ‘Bonds are plunging at a pace that’s faster than we expected,’ said David Qu, a Shanghai-based markets economist at Australia & New Zealand Banking… ‘Investors have expected the central bank to ease liquidity when strain appears, but they’ve been repeatedly disappointed. So some are being forced to sell their holdings, leading to a sharper slump in the security.’”
May 9 – Bloomberg (Chris Anstey, Isabella Cota, and Ben Bartenstein): “What may be shaping up as China’s most concerted effort yet to bring its credit boom under control is spurring investors to gauge any contagion to broader financial markets, a-la 2015, when Chinese turmoil caused global ructions. Policy makers’ moves to crack down on leverage have already wreaked about $500 billion of financial damage domestically, and… are dragging on industrial metals and iron-ore prices globally. The key metrics to watch now: the yuan’s exchange rate and cross-border capital flows.”
May 6 – Financial Times (Tom Mitchell and Gabriel Wildau): “The World Bank has warned that Chinese local governments remain addicted to off-budget borrowing, despite Beijing’s efforts to impose fiscal discipline on localities and curb ballooning debt. Runaway growth of local government debt is widely seen as a huge risk for China’s economy and financial system. Provinces, cities and counties borrowed heavily to spend on infrastructure to keep economic growth humming after the 2008 financial crisis. But the practice has continued and economists warn that returns on new investment are falling and white elephants are common. Many projects do not produce enough cash flow to service their debt.”
May 10 – Bloomberg (Jack Sidders and Vinicy Chan): “China’s biggest-ever foreign acquisition frenzy is ending almost as dramatically as it began. After stunning the world with a record $246 billion of announced outbound takeovers in 2016, Chinese dealmakers are now struggling to cope with tighter capital controls and increasingly wary counterparties. Cross-border purchases plunged 67% during the first four months of this year, the biggest drop for a comparable period since the depths of the global financial crisis in 2009…”
May 11 – Wall Street Journal (Scott Patterson): “Money from state-run Chinese companies was used to help finance the buildup of a massive aluminum stockpile that has crisscrossed the globe, depressed prices and sparked a criminal investigation in the U.S., according to business records, emails and people with direct knowledge… Any such involvement by these entities could further strain relations between China and the U.S., which says Beijing undercuts global competition by giving government assistance to its commodity companies… Financing through the deep pockets of Chinese state-run companies could explain how enormous aluminum stockpiles that have captivated the global metals industry were paid for.”
May 9 – New York Times (David Barboza): “During his first state visit to Britain, President Xi Jinping of China heralded the great economic opportunities between the two countries, in energy, infrastructure and finance. He finished off the late 2015 trip at Manchester Airport, unveiling a new direct flight to Beijing on the Chinese carrier Hainan Airlines. The political spotlight was a global coup for Chen Feng, chairman of the carrier’s parent, the HNA Group… In just over two decades, Mr. Chen, 63, has helped transform a small airline in southern China into one of the country’s few global powerhouses, with big stakes in Hilton Hotels, Swissport and Ingram Micro. This week, HNA said it was the largest investor in Germany’s Deutsche Bank, part of a broader push by Chinese players into global finance. As China’s financial might has grown, companies like HNA have embarked on ambitious expansions, spreading money around the world…”
May 10 – Bloomberg: “China’s producer price gains slowed more than expected in April, adding to signs of a potential easing of global reflation fueled by the world’s second-largest economy. Producer price index rose 6.4% from a year earlier…”
May 5 – New York Times (Keith Bradsher): “A Chinese regulator announced… that it had taken disciplinary measures against the Anbang Insurance Group, a financial behemoth that has tried to invest tens of billions of dollars overseas, for the improper sale of two investment products. The moves by the China Insurance Regulatory Commission come against a backdrop of broader worries about the country’s financial system, in addition to ones about the insurance industry. President Xi Jinping told Politburo members last month that China should place a strong emphasis on financial stability as a pillar of a strong economy…”
May 9 – Wall Street Journal (Dominique Fong): “Zheng Xiaohei, a marketer from Urumqi in western China, made his first overseas property investment without so much as a visit. Mr. Zheng, 29 years old, in March purchased a studio apartment in Thailand for about 650,000 yuan ($94,255) using his smartphone and an app called Uoolu that connects users to overseas property listings. ‘Investing in overseas real estate was mainly due to my good impression of Thailand,’ Mr. Zheng said. Founded two years ago, Beijing-based Uoolu is focused on tapping a specific group of home buyers: Chinese millennials looking for foreign properties. …The lure? A millennial’s desire to hedge against yuan depreciation and find affordable homes in cities with cleaner air for their children to live in when they study abroad. In the past year, home prices have soared to more than 30 times household income in major Chinese cities.”
May 9 – Reuters (Engen Tham): “China's lenders are swapping struggling corporates for more promising retail borrowers - restructuring branches, teams and even overhauling bankers' commissions in an unprecedented push that is fuelling a record jump in home loans. Yet the speed of the switch, the pressure to pull in more borrowers and soaring house prices are also worrying loan officers, analysts and regulators, with the central bank governor among those sounding a note of caution. Corporate lending has long made up the bulk of many Chinese banks' loan books: the deals are larger and loans have more attractive rates. But with firms faltering, economic growth slowing for key sectors and banks under pressure to deleverage, lenders are eyeing other options.”
May 9 – Reuters (Kevin Yao): “China will pay closer attention to the influence of non-bank financial institutions on financial stability, and the impact of local policy interventions on broader global markets, according to a central bank working paper… In recent years non-bank institutions such as trust and investment companies, or fund and asset management firms have expanded their activity - much of it a less regulated form of lending - even as policymakers have tried to rein in leverage in the Chinese economy. ‘Though banks still dominate China's financial system, non-bank financial institutions have considerable influence as well,’ the paper published on the People's Bank of China website said. ‘We believe that sufficient attention should be given to international spill-over effects of intervention policies, and the impact of non-bank financial institutions to financial stability,’…”
May 10 – Reuters (Saikat Chatterjee and Umesh Desai): “China's policymakers plan to open the doors wider than ever to foreign investment in the country's $3 trillion bond market, in part to help shore up the struggling yuan. But the currency is also proving to be a major barrier to the success of their plan. Foreigners own less than 2% of China's $3.3 trillion in outstanding bonds and say getting their cash out of China and recent weakness of the closely controlled currency are obstacles to investment. Foreign investors are also skeptical they can assess risk accurately when most of the $2.1 trillion in corporate bonds are rated investment grade by domestic rating agencies… ‘If investors wanted to have more exposure to Chinese bonds, we can do it tomorrow,’ said Andy Seaman, a partner and chief investment officer of… fund manager Stratton Street. ‘But unfortunately, they don't. It's very difficult to persuade people because of the currency. They don't want renminbi,’ he said.”
May 7 – Bloomberg: “China’s foreign-exchange reserves rose for a third month in April, exceeding estimates, as tighter capital controls kept money from flowing out of the country and the yuan held stable. Reserves climbed $20.4 billion to $3.03 trillion, …compared with a median estimate of $3.02 trillion…”
Europe Watch:
May 7 – CNBC (Karen Gilchrist): “Emmanuel Macron has fought off populist opponent Marine Le Pen and won the race to become France's next president. The centrist candidate secured approximately 65% of votes to far-right Le Pen's 35%... Macron's win signals a victory for both pro-Europeans and pollsters, who correctly predicted his lead… What happens now? Macron will be inaugurated on Sunday May 14. At this point he will replace the outgoing President Francois Hollande and attentions will turn to the upcoming parliamentary elections. On June 11 and 18, French citizens will once again head to the polls for two rounds of voting to elect the country's 577 members of parliament.”
May 9 – Reuters (Patrick Graham): “In December, one of the trades of 2017 for the big financial investors who play on global political and economic risk was the spread of populism in Europe and the threat that might pose to the future of the euro. Six months and two elections on, and with only a relatively traditional policy fight in prospect for Germany's vote in September, the risks have receded. Emmanuel Macron’s victory… follows defeat for Geert Wilders' Party for Freedom in the Netherlands and heads off Marine Le Pen’s promises to pull Paris out of the euro and potentially the European Union. Looking threatened six weeks ago by Martin Schulz’s reboot of Germany’s Social Democrats (SPD), Angela Merkel is again 6-8 points ahead in the polls…”
May 10 – Bloomberg (Alessandro Speciale and Corina Ruhe): “Mario Draghi said the European Central Bank’s stimulus hasn’t finished the job yet, even as he acknowledged that the region’s economy is getting stronger. ‘The economic recovery has evolved from being fragile and uneven into a firming, broad-based upswing,’ the ECB president said… ‘Nevertheless, it is too early to declare success.’ ECB policy makers are pondering whether and how to communicate a gradual removal of stimulus amid a steadily strengthening economy that has so far showed little signs of generating faster price growth.”
May 10 – Financial Times (Claire Jones and Mehreen Khan): “Mario Draghi faced a rare public grilling… that left the president of the European Central Bank rattled as he defended some of his unpopular policies to Dutch MPs. …The Dutch political establishment has been fiercely critical of the ECB’s stimulus measures, which have seen the central bank buy more than €1.8tn of assets over the past two years and cut interest rates to record lows. Mr Draghi faced accusations that he had raided Dutch pensioners’ wealth through ECB policies: many Dutch share the German view of blaming the central bank’s measures for eroding their savings… MPs finished the session with a gift of a solar-powered tulip for Mr Draghi, to remind him of the country’s famous Tulip Mania asset price bubble and financial crisis in the mid-17th century.”
Global Bubble Watch:
May 10 – Reuters (Jamie McGeever and Vikram Subhedar): “The current slump in expectations of market volatility is not just a stock market phenomenon -- it is the lowest it's been for years across fixed income, currency and commodity markets around the world. It shows little sign of reversing, which means market players are essentially not expecting much in the way of shocks or sharp movements any time soon. It's an environment in which asset prices can continue rising and bond spreads narrow further. The improving global economy, robust corporate profitability, ample central bank stimulus even as U.S. interest rates are rising, and some fading political risk from elections have all contributed to create a backdrop of relative calm. There is little evidence of investors hedging -- or seeking to protect themselves -- from adverse conditions.”
May 9 – CNBC (Fred Imbert): “The U.S. stock market may be a bit too calm right now, Goldman Sachs CEO Lloyd Blankfein said… ‘Every time I get accustomed to low volatility, like we were towards the end of the Greenspan era, and we think we have all the levers under the control ... something erupts to remind us that the idea that anybody is in control of everything is hubris,’ Blankfein told CNBC's ‘Power Lunch’… ‘I don't know what brings us out of the doldrums, but I do know this is not a normal resting state,’ he said.”
May 10 – Wall Street Journal (Spencer Jakab): “They have nothing to fear but the lack of fear itself. The low level of the market’s so-called fear gauge, formally known as the CBOE Volatility Index or VIX, is a divisive issue on Wall Street. Some assert that the lowest values in nearly a quarter-century signal investor complacency. They say that has almost always been a sign that a selloff is near. Others scoff that there is no cause-and-effect. Without wading into this debate, the VIX’s descent into the single digits—it touched 9.56 on Tuesday—is bad news for investors who bet on higher volatility. Now it is also bad news for more conservative investing strategies that profit directly from market choppiness.”
May 7 – Financial Times (Jennifer Hughes): “When two big international organisations highlight the same issue, investors should pay attention. When the issue is the risk of a scarcity of dollars outside the US, then arguably everyone should take note. The International Monetary Fund and the Bank for International Settlements both pointed to the potential danger in their most recent reports. Bank analysts and investors, too, are beginning to discuss the implications of fewer dollars, particularly for emerging markets… Fewer dollars would raise the cost of obtaining the currency from the pools that have developed outside the US since the Fed began flooding markets with money via quantitative easing in 2008.”
May 7 – Wall Street Journal (Gunjan Banerji): “Falling volumes and spiraling costs are pushing trading firms out of U.S. options, raising concerns about fragility in a market that investors rely on to protect portfolios. Trading has dwindled in most areas of the market, and investors and traders are grappling with increasing fragmentation. Liquidity, the crucial ability to do trades without significantly moving prices, has deteriorated, according to interviews with market participants… Options on key indexes, exchange-traded funds and high-volume stocks dominate trading. Meanwhile, there is less activity in the rest of the listed U.S. options world. The stresses prompted at least six prominent options market makers to exit from the business since 2012.”
May 8 – Bloomberg (Michael Heath): “Australian business confidence surged to the highest level since 2010 and firms’ conditions advanced further, signaling economic growth could accelerate.”
May 9 – Bloomberg (Emily Cadman): “Australia’s banking regulator will get new powers to curb property lending both in the shadow banking sector and in specific geographic areas. The additional powers and funding for the Australian Prudential Regulation Authority come after soaring house prices in the nation’s largest cities stoked concern… Treasurer Scott Morrison said the government will legislate to extend APRA’s ability to apply controls to the non-bank lending sector as well as ‘explicitly allow them to differentiate the application of loan controls by location.’ …Bringing non-bank lenders into APRA’s regulatory purview will strengthen oversight of a sector that has grown as the big four banks tighten their lending criteria.”
Fixed Income Bubble Watch:
May 11 – Bloomberg (Luke Kawa): “Call it a local bond market buffet. American buyers have been gorging on corporate debt after also stepping up their presence in the Treasury market. As such, investment grade credit spreads remain tight by historical standards largely thanks to a resurgence in U.S. retail enthusiasm as international demand wanes. ‘The real delta in terms of demand for U.S. investment grade credit this year is not any particular foreign buyer base, but instead the domestic mutual fund and exchange-traded fund segment, which is enjoying a banner year of inflows,’ wrote Wells Fargo Securities strategists led by Nathaniel Rosenbaum… ‘These funds have garnered over $100 billion in just four months, almost double the prior record for this point in the year.’”
May 5 – New York Times (Mary Williams Walsh): “It all goes back to 1917. Congress passed a law that year making Puerto Ricans United States citizens. That same law, still on the books today, empowered the island to raise money by issuing tax-exempt bonds. And not just federally tax-exempt bonds: Congress went on at length to bar anyone from taxing Puerto Rico’s bonds, presumably never dreaming how this would play out a century later — which, on Wednesday, led to the territory declaring a form of bankruptcy because it could not pay the $123 billion in bonds and unpaid pension debts it owes. The 100-year-old law stipulates that no one… can tax the interest that Puerto Rico pays its investors. This has spurred people with eyes on easy profits to dive in for decades.”
May 9 – Financial Times (Eric Platt): “Riskier US corporate debt regained some of its footing on Tuesday, with a number of bond sales expected over the coming days despite the weight of falling oil prices. At least 10 speculatively rated groups — companies deemed riskier than their investment-grade counterparts by the major rating agencies — borrowed through bond markets on Tuesday or were poised to complete marketing roadshows later this week for such sales. The uptick in activity follows a volatile week for junk bonds as oil prices decline.”
Federal Reserve Watch:
May 9 – Bloomberg (Craig Torres and Rich Miller): “Allan Meltzer, an economist and Federal Reserve historian who was critical of the central bank’s recent policies, died on Monday at the age of 89… A monetary policy expert who consulted with congressional committees and central banks, Meltzer brought historical perspective and a sharp knowledge of past policy foibles to his commentary.”
May 7 – Financial Times (Sam Fleming): “The Federal Reserve risks political interference and losing its independence if it maintains a large balance sheet in the longer term, former Fed officials have claimed, as debate intensifies over the central bank’s strategy for unwinding its interventions in financial markets. Kevin Warsh, a visiting fellow at the Hoover Institution at Stanford University and former Fed governor, said that permanently holding vast quantities of assets like treasuries was ‘fiscal policy in disguise’ and risked turning the central bank into a general purpose agency of the government. ‘A large balance sheet is a dangerous temptation for the rest of the political class,’ he said…”
May 8 – Bloomberg (Christopher Condon): “Federal Reserve Bank of Cleveland President Loretta Mester said the central bank should continue on its gradual path of raising interest rates to prevent the risk of overheating the U.S. economy. ‘It’s important for the FOMC to remain very vigilant against falling behind as we continue to make progress on our goals,’ Mester said… ‘If we delay too long in taking the next normalization step and then find ourselves in a situation where the labor market becomes unsustainably tight, price pressures become excessive and we have to move rates up steeply, we could risk a recession,’ she said.”
May 9 – Reuters (Jason Lange): “Kansas City Federal Reserve President Esther George… said she supported starting to wind down the Fed's massive trove of bonds this year. …George said the central bank's Federal Open Market Committee should move to stop reinvesting the maturing principal payments of its longer-term Treasuries and mortgage-backed securities. ‘The FOMC also must begin to adjust the size and composition of its securities holdings,’ George said…”
May 9 – Bloomberg (Matthew Boesler and Liz McCormick): “Tapering of the Federal Reserve’s balance sheet won’t sink the mortgage-backed securities market, said Boston Fed President Eric Rosengren, though prices may have to adjust to tempt investors into buying bonds currently being sucked up by the central bank. ‘Our capital markets are deep enough that I’m not as worried about the ability to be able to fund those mortgages,’ he told an audience… ‘Price will change, and I think market participants will step up as the price changes.’”
May 11 – Bloomberg (Anirban Nag and Matthew Boesler): “The Federal Reserve is on track to begin unwinding its balance sheet this year or next, although U.S. central bankers are not in a rush to tighten and will take care to ensure their actions don’t trigger disruptions that harm the global economy, Federal Reserve Bank of New York President William Dudley said. ‘We are pretty close to full employment,’ Dudley said… ‘Inflation is just a little bit below our target of 2% if you look at the underlying inflation trend, so clearly if the economy continues to grow above trend we are going to want to gradually remove monetary policy accommodation.”
May 10 – Bloomberg (Christopher Condon): “Federal Reserve Bank of Boston President Eric Rosengren urged his policy-making colleagues to raise interest rates three more times this year and consider starting to shrink the central bank’s balance sheet after their next hike to avoid creating an ‘over-hot economy.’”
U.S. Bubble Watch:
May 11 – Bloomberg (Sho Chandra): “A decline in U.S. jobless-benefit rolls to a 28-year low adds to signs of a tight labor market, as initial unemployment claims also remained subdued… The decline in jobless-benefit rolls dovetails with a drop in the unemployment rate, signaling the labor market continues to strengthen. Initial claims have been below 300,000 since early 2015…”
May 11 – Bloomberg (Patricia Laya): “The bigger-than-forecast rebound in April wholesale prices indicates inflation pressures continue to build in the U.S. economy and that March’s decline was short-lived… Excluding volatile items of food, energy, and trade services, producer costs rose 0.7% after climbing 0.1% the previous month; up 2.1% from a year earlier…”
May 9 – Bloomberg (Joe Carroll): “U.S. shale explorers are boosting drilling budgets 10 times faster than the rest of the world to harvest fields that register fat profits even with the recent drop in oil prices. Flush with cash from a short-lived OPEC-led crude rally, North American drillers plan to lift their 2017 outlays by 32% to $84 billion, compared with just 3% for international projects, according to… Barclays Plc. Much of the increase in spending is flowing into the Permian Basin, a sprawling, mile-thick accumulation of crude beneath Texas and New Mexico, where producers have been reaping double-digit returns even with oil commanding less than half what it did in 2014. That’s bad news for OPEC and its partners in a global campaign to crimp supplies and elevate prices.”
May 6 – Wall Street Journal (Peter Grant): “A growing labor shortage in the commercial real-estate industry is driving up the costs of some projects and could complicate lawmakers’ plans for a $1 trillion infrastructure-spending program, contractors say. ‘Ever since we came out of the great recession, many folks in our industry have been saying: it’s coming, it’s coming, it’s coming,’ said George Nash Jr., director of preconstruction for Branch and Associates… ‘Today the problem is there.’ Construction businesses, excluding those building single-family homes, employed close to 4.2 million workers in April, up 3,000 from March, according to an analysis by the Associated Builders and Contractors… That was the highest employment level since November 2008…”
May 9 – Bloomberg (Alex Webb): “Apple Inc. became the first U.S. company with a market value of more $800 billion as investors bet the next iPhone will spur a resurgence in sales. The stock rose 1% Tuesday to close at $153.99…, giving it a market capitalization of about $803 billion. The shares have gained 33% since the start of the year…”
May 10 – Bloomberg (Matt Scully): “Borrower fraud in U.S. auto loans is surging, and may approach levels seen in mortgages during last decade’s housing bubble, according to a startup firm that helps lenders sniff out bogus borrowers. As many as 1% of U.S. car loan applications include some type of material misrepresentation, executives at… Point Predictive estimated based on reports from banks, finance companies and others. Lenders’ losses from deception may double this year to $6 billion from 2015, the firm forecast.”
Japan Watch:
May 10 – Reuters (Sumio Ito and Minami Funakoshi): “Bank of Japan Governor Haruhiko Kuroda said… the central bank will consider publicizing calculations on how a future withdrawal of massive monetary stimulus could affect its financial health. The remark was the first time that Kuroda, who until now had shrugged off as premature any debate over an exit strategy for the BOJ's radical stimulus program, has signaled the chance of offering such information to the public. ‘It is very important to explain in easy-to-understand terms how monetary policy could affect the BOJ's financial health,’ Kuroda told parliament…”
May 6 – Financial Times (Leika Kihara): “The Bank of Japan is facing big challenges as inflation holds well below its 2% target, underscoring the importance for Japan's central bank to maintain its massive stimulus program, BOJ Governor Haruhiko Kuroda said… Japan's economy has shown signs of life with a pick-up in global demand boosting exports and factory output. But inflation remains subdued despite four years of aggressive money printing since Kuroda became governor in 2013, as slow wage growth dampens household spending. ‘After four years ... our inflation rate is still close to zero. This is certainly a very challenging situation for central bank governors and central bankers in Japan,’ Kuroda told a seminar…”
EM Watch:
May 10 – Financial Times (Jonathan Wheatley): “Emerging markets have come roaring back into fashion. Cross-border flows to EM bonds and equities topped $20bn for the third consecutive month in April, making this their biggest three-month positive streak since 2014… Have emerging economies found a path back to growth after the breakdown in the commodities supercycle, which was so powerfully beneficial to their own citizens and to international investors for the first dozen years of this century? The answer must be no. Of the original Brics, Brazil and Russia are struggling out of deep recessions. The best that most analysts can say of China is that the government will kick a looming debt crisis down the road until after the Communist party congress at the end of this year.”
May 9 – Bloomberg (Fercan Yalinkilic and Kerim Karakaya): “Increased spending to bolster growth sent Turkey’s Treasury on a borrowing spree to plug a widening budget deficit, shaking one of the pillars of strength for the Middle East’s largest economy. Cash budget balances have deteriorated in the last 12 months as spending spiked after a July 15 coup attempt last year and before a referendum in April gave President Recep Tayyip Erdogan sweeping new powers. Defense also became a major expense item as the army expanded operations in Syria…”
Geopolitical Watch:
May 10 – Reuters (Tulay Karadeniz and Tuvan Gumrukcu): “Turkey warned the United States… that a decision to arm Kurdish forces fighting Islamic State in Syria could end up hurting Washington, and accused its NATO ally of siding with terrorists. The rebuke came a week before President Tayyip Erdogan is due in Washington for his first meeting with U.S. President Donald Trump, who approved the arms supply to support a campaign to retake the Syrian city of Raqqa from Islamic State. Turkey views the YPG as the Syrian extension of the outlawed Kurdistan Workers Party (PKK), which has fought an insurgency in southeast Turkey since 1984…”
May 11 – Bloomberg (Sho Chandra): “A decline in U.S. jobless-benefit rolls to a 28-year low adds to signs of a tight labor market, as initial unemployment claims also remained subdued… The decline in jobless-benefit rolls dovetails with a drop in the unemployment rate, signaling the labor market continues to strengthen. Initial claims have been below 300,000 since early 2015…”
May 11 – Bloomberg (Patricia Laya): “The bigger-than-forecast rebound in April wholesale prices indicates inflation pressures continue to build in the U.S. economy and that March’s decline was short-lived… Excluding volatile items of food, energy, and trade services, producer costs rose 0.7% after climbing 0.1% the previous month; up 2.1% from a year earlier…”
May 9 – Bloomberg (Joe Carroll): “U.S. shale explorers are boosting drilling budgets 10 times faster than the rest of the world to harvest fields that register fat profits even with the recent drop in oil prices. Flush with cash from a short-lived OPEC-led crude rally, North American drillers plan to lift their 2017 outlays by 32% to $84 billion, compared with just 3% for international projects, according to… Barclays Plc. Much of the increase in spending is flowing into the Permian Basin, a sprawling, mile-thick accumulation of crude beneath Texas and New Mexico, where producers have been reaping double-digit returns even with oil commanding less than half what it did in 2014. That’s bad news for OPEC and its partners in a global campaign to crimp supplies and elevate prices.”
May 6 – Wall Street Journal (Peter Grant): “A growing labor shortage in the commercial real-estate industry is driving up the costs of some projects and could complicate lawmakers’ plans for a $1 trillion infrastructure-spending program, contractors say. ‘Ever since we came out of the great recession, many folks in our industry have been saying: it’s coming, it’s coming, it’s coming,’ said George Nash Jr., director of preconstruction for Branch and Associates… ‘Today the problem is there.’ Construction businesses, excluding those building single-family homes, employed close to 4.2 million workers in April, up 3,000 from March, according to an analysis by the Associated Builders and Contractors… That was the highest employment level since November 2008…”
May 9 – Bloomberg (Alex Webb): “Apple Inc. became the first U.S. company with a market value of more $800 billion as investors bet the next iPhone will spur a resurgence in sales. The stock rose 1% Tuesday to close at $153.99…, giving it a market capitalization of about $803 billion. The shares have gained 33% since the start of the year…”
May 10 – Bloomberg (Matt Scully): “Borrower fraud in U.S. auto loans is surging, and may approach levels seen in mortgages during last decade’s housing bubble, according to a startup firm that helps lenders sniff out bogus borrowers. As many as 1% of U.S. car loan applications include some type of material misrepresentation, executives at… Point Predictive estimated based on reports from banks, finance companies and others. Lenders’ losses from deception may double this year to $6 billion from 2015, the firm forecast.”
Japan Watch:
May 10 – Reuters (Sumio Ito and Minami Funakoshi): “Bank of Japan Governor Haruhiko Kuroda said… the central bank will consider publicizing calculations on how a future withdrawal of massive monetary stimulus could affect its financial health. The remark was the first time that Kuroda, who until now had shrugged off as premature any debate over an exit strategy for the BOJ's radical stimulus program, has signaled the chance of offering such information to the public. ‘It is very important to explain in easy-to-understand terms how monetary policy could affect the BOJ's financial health,’ Kuroda told parliament…”
May 6 – Financial Times (Leika Kihara): “The Bank of Japan is facing big challenges as inflation holds well below its 2% target, underscoring the importance for Japan's central bank to maintain its massive stimulus program, BOJ Governor Haruhiko Kuroda said… Japan's economy has shown signs of life with a pick-up in global demand boosting exports and factory output. But inflation remains subdued despite four years of aggressive money printing since Kuroda became governor in 2013, as slow wage growth dampens household spending. ‘After four years ... our inflation rate is still close to zero. This is certainly a very challenging situation for central bank governors and central bankers in Japan,’ Kuroda told a seminar…”
EM Watch:
May 10 – Financial Times (Jonathan Wheatley): “Emerging markets have come roaring back into fashion. Cross-border flows to EM bonds and equities topped $20bn for the third consecutive month in April, making this their biggest three-month positive streak since 2014… Have emerging economies found a path back to growth after the breakdown in the commodities supercycle, which was so powerfully beneficial to their own citizens and to international investors for the first dozen years of this century? The answer must be no. Of the original Brics, Brazil and Russia are struggling out of deep recessions. The best that most analysts can say of China is that the government will kick a looming debt crisis down the road until after the Communist party congress at the end of this year.”
May 9 – Bloomberg (Fercan Yalinkilic and Kerim Karakaya): “Increased spending to bolster growth sent Turkey’s Treasury on a borrowing spree to plug a widening budget deficit, shaking one of the pillars of strength for the Middle East’s largest economy. Cash budget balances have deteriorated in the last 12 months as spending spiked after a July 15 coup attempt last year and before a referendum in April gave President Recep Tayyip Erdogan sweeping new powers. Defense also became a major expense item as the army expanded operations in Syria…”
Geopolitical Watch:
May 10 – Reuters (Tulay Karadeniz and Tuvan Gumrukcu): “Turkey warned the United States… that a decision to arm Kurdish forces fighting Islamic State in Syria could end up hurting Washington, and accused its NATO ally of siding with terrorists. The rebuke came a week before President Tayyip Erdogan is due in Washington for his first meeting with U.S. President Donald Trump, who approved the arms supply to support a campaign to retake the Syrian city of Raqqa from Islamic State. Turkey views the YPG as the Syrian extension of the outlawed Kurdistan Workers Party (PKK), which has fought an insurgency in southeast Turkey since 1984…”
Thursday, May 11, 2017
Friday's News Links
[Bloomberg] Dollar, Stocks Slip as Treasuries Rise Amid Data: Markets Wrap
[Bloomberg] U.S. Reaches Deal to Allow Exports of Natural Gas, Beef to China
[Bloomberg] Rebound in U.S. Consumer Prices Shows Inflation Stabilizing
[Bloomberg] Gain in U.S. Retail Sales Suggests Slowdown Was Temporary
[Bloomberg] Popular Low-Volatility Game Returning 4,000% May End in Tears
[Reuters] China's April loans growth highlights debt challenge
[Bloomberg] China's Bonds Extend Worst Streak of Weekly Declines Since 2013
[Bloomberg] China's Bond Market Dilemma: Where Are the Traders?
[Bloomberg] Hong Kong Dollar Selloff Risks Kneecapping the City's Stocks
[Bloomberg] Faster German Growth Buoys Draghi's Firming Euro-Area Pickup
[FT] China yield curve inverted as regulators target leverage risk
[FT] Eurozone bank and high-yield bond yields show striking divergence
[NYT] Singapore, a Rising Home for Quiet Money, Comes Under Pressure
[Bloomberg] U.S. Reaches Deal to Allow Exports of Natural Gas, Beef to China
[Bloomberg] Rebound in U.S. Consumer Prices Shows Inflation Stabilizing
[Bloomberg] Gain in U.S. Retail Sales Suggests Slowdown Was Temporary
[Bloomberg] Popular Low-Volatility Game Returning 4,000% May End in Tears
[Reuters] China's April loans growth highlights debt challenge
[Bloomberg] China's Bonds Extend Worst Streak of Weekly Declines Since 2013
[Bloomberg] China's Bond Market Dilemma: Where Are the Traders?
[Bloomberg] Hong Kong Dollar Selloff Risks Kneecapping the City's Stocks
[Bloomberg] Faster German Growth Buoys Draghi's Firming Euro-Area Pickup
[FT] China yield curve inverted as regulators target leverage risk
[FT] Eurozone bank and high-yield bond yields show striking divergence
[NYT] Singapore, a Rising Home for Quiet Money, Comes Under Pressure
Thursday Evening Links
[Bloomberg] U.S. Stocks Drop as Treasuries Rise, Crude Rallies: Markets Wrap
[Bloomberg] Four Charts That Show China's Equity Selloff Is Getting Ugly
[Bloomberg] Loonie, Bank Bonds Drop as Moody's Downgrades Canada Lenders
[Bloomberg] Fed Plan for Gradual Rate Hikes Is Starting to Look Complacent
[Bloomberg] Goldman Expects the Fed to Do More as Financial Conditions Prove Resilient
[Bloomberg] Hedge Funds Are Facing a U.S. Criminal Probe Over Bond Valuations
[FT, Tett] Crazy times and calm markets make odd bedfellows
[Bloomberg] Four Charts That Show China's Equity Selloff Is Getting Ugly
[Bloomberg] Loonie, Bank Bonds Drop as Moody's Downgrades Canada Lenders
[Bloomberg] Fed Plan for Gradual Rate Hikes Is Starting to Look Complacent
[Bloomberg] Goldman Expects the Fed to Do More as Financial Conditions Prove Resilient
[Bloomberg] Hedge Funds Are Facing a U.S. Criminal Probe Over Bond Valuations
[FT, Tett] Crazy times and calm markets make odd bedfellows
Wednesday, May 10, 2017
Thursday's News Links
[Bloomberg] U.S. Stocks Fall as Oil Leads Commodities Rebound: Markets Wrap
[Bloomberg] Rebound in U.S. Wholesale Prices Signals Inflation Pressures
[Bloomberg] Jobless-Benefit Rolls at 28-Year Low Show U.S. Labor Tightness
[Bloomberg] Dudley Says Fed May Begin Paring Balance Sheet This Year or Next
[Bloomberg] Domestic Retail Buyers Are Propping Up the U.S. Credit Market
[Reuters] China April vehicle sales notch steepest fall in 20-months on tax hike
[Bloomberg] Elusive Inflation Amid Faster Growth Makes ECB Task More Complex
[Reuters] ECB's Constancio Says Loose Policy for Longer Is Safer Bet
[WSJ] Money From Chinese State Giants Helped Fund Aluminum Stockpile
[FT] Peak emerging markets heave into view
[FT] Mario Draghi riled by Dutch MPs in public grilling
[WSJ] Trump Administration, Senators Put Fannie, Freddie Overhaul Back in Play
[NYT] How ‘Brexit’ Could Alter London, the World’s Banker
[Bloomberg] Rebound in U.S. Wholesale Prices Signals Inflation Pressures
[Bloomberg] Jobless-Benefit Rolls at 28-Year Low Show U.S. Labor Tightness
[Bloomberg] Dudley Says Fed May Begin Paring Balance Sheet This Year or Next
[Bloomberg] Domestic Retail Buyers Are Propping Up the U.S. Credit Market
[Reuters] China April vehicle sales notch steepest fall in 20-months on tax hike
[Bloomberg] Elusive Inflation Amid Faster Growth Makes ECB Task More Complex
[Reuters] ECB's Constancio Says Loose Policy for Longer Is Safer Bet
[WSJ] Money From Chinese State Giants Helped Fund Aluminum Stockpile
[FT] Peak emerging markets heave into view
[FT] Mario Draghi riled by Dutch MPs in public grilling
[WSJ] Trump Administration, Senators Put Fannie, Freddie Overhaul Back in Play
[NYT] How ‘Brexit’ Could Alter London, the World’s Banker
Wednesday Evening Links
[Bloomberg] U.S. Stocks Boosted by Oil Rally as Dollar Slips: Markets Wrap
[Bloomberg] Fed's Rosengren Favors Three More 2017 Hikes to Foil Overheating
[Reuters] Delay seen, again, on Trump growth agenda after Comey sacking
[Bloomberg] China's $246 Billion Foreign Buying Spree Is Unraveling
[Bloomberg] Bond Market Volatility Plunges to Lowest Since August '14: Chart
[WSJ] What Happens When Central Banks Stop Buying Bonds?
[NYT] Buying Into the Turmoil: Investors Embrace the Risks
[Bloomberg] Fed's Rosengren Favors Three More 2017 Hikes to Foil Overheating
[Reuters] Delay seen, again, on Trump growth agenda after Comey sacking
[Bloomberg] China's $246 Billion Foreign Buying Spree Is Unraveling
[Bloomberg] Bond Market Volatility Plunges to Lowest Since August '14: Chart
[WSJ] What Happens When Central Banks Stop Buying Bonds?
[NYT] Buying Into the Turmoil: Investors Embrace the Risks
Tuesday, May 9, 2017
Wednesday's News Links
[Bloomberg] U.S. Stocks Unperturbed by Comey, Dollar Slips: Markets Wrap
[Bloomberg] Comey Ouster Threatens to Backfire on Troubled White House
[Bloomberg] China Bond Yield Jumps by Most in Three Months as Rout Deepens
[Bloomberg] China’s Factory Prices Ease as Commodity Market Surge Abates
[Bloomberg] Draghi Says Too Early to Declare ECB Success as Growth Firms
[Reuters] BOJ's Kuroda: Not thinking now about how to change BOJ's policy mix
[Reuters] As China's banks swap corporates for retail borrowers, risks rise
[CNBC] Mortgage applications rise 2% as more buyers hit the spring market
[Reuters] It's not just the VIX - low volatility is everywhere
[Bloomberg] Auto Loan Fraud Is Soaring in a Parallel to the Housing Bubble
[Reuters] China opening up its bond markets, but currency seen as major barrier
[FT] ETF industry vaults past $4 trillion in assets mark
[FT] Appetite returns for riskier US corporate debt
[FT] Investors line up for spate of junk bond sales
[WSJ] The Surprising Losers From the VIX’s Decline
[WSJ] Rich, Young Chinese Are Buying Overseas Properties on Their Smartphones
[Reuters] U.S. decision to arm Syrian Kurds threatens Turkey: foreign minister
[Bloomberg] Comey Ouster Threatens to Backfire on Troubled White House
[Bloomberg] China Bond Yield Jumps by Most in Three Months as Rout Deepens
[Bloomberg] China’s Factory Prices Ease as Commodity Market Surge Abates
[Bloomberg] Draghi Says Too Early to Declare ECB Success as Growth Firms
[Reuters] BOJ's Kuroda: Not thinking now about how to change BOJ's policy mix
[Reuters] As China's banks swap corporates for retail borrowers, risks rise
[CNBC] Mortgage applications rise 2% as more buyers hit the spring market
[Reuters] It's not just the VIX - low volatility is everywhere
[Bloomberg] Auto Loan Fraud Is Soaring in a Parallel to the Housing Bubble
[Reuters] China opening up its bond markets, but currency seen as major barrier
[FT] ETF industry vaults past $4 trillion in assets mark
[FT] Appetite returns for riskier US corporate debt
[FT] Investors line up for spate of junk bond sales
[WSJ] The Surprising Losers From the VIX’s Decline
[WSJ] Rich, Young Chinese Are Buying Overseas Properties on Their Smartphones
[Reuters] U.S. decision to arm Syrian Kurds threatens Turkey: foreign minister
Tuesday Evening Links
[Politico] Trump fires Comey
[CNBC] Senate Democratic leader Schumer calls for special prosecutor in Trump-Russia probe
[Bloomberg] U.S. Stocks Mixed as Oil Slumps, Dollar Advances: Markets Wrap
[Reuters] Fed's George says balance sheet should be trimmed this year
[Bloomberg] Fed Won’t Sink MBS Market as Balance Sheet Slims, Rosengren Says
[Bloomberg] Shale Drillers Are Outspending the World With $84 Billion Spree
[Bloomberg] U.S. Oil Output to Hit a Record in 2018
[CNBC] Goldman Sachs CEO Lloyd Blankfein says the market's low volatility is worrisome
[Bloomberg] Apple Becomes First U.S. Company to Cross $800 Billion Valuation
[Bloomberg] Allan Meltzer, Who Wrote History of Federal Reserve, Dies at 89
[WSJ] Emmanuel Macron’s Economic Plans for France Draw Pushback
[CNBC] Senate Democratic leader Schumer calls for special prosecutor in Trump-Russia probe
[Bloomberg] U.S. Stocks Mixed as Oil Slumps, Dollar Advances: Markets Wrap
[Reuters] Fed's George says balance sheet should be trimmed this year
[Bloomberg] Fed Won’t Sink MBS Market as Balance Sheet Slims, Rosengren Says
[Bloomberg] Shale Drillers Are Outspending the World With $84 Billion Spree
[Bloomberg] U.S. Oil Output to Hit a Record in 2018
[CNBC] Goldman Sachs CEO Lloyd Blankfein says the market's low volatility is worrisome
[Bloomberg] Apple Becomes First U.S. Company to Cross $800 Billion Valuation
[Bloomberg] Allan Meltzer, Who Wrote History of Federal Reserve, Dies at 89
[WSJ] Emmanuel Macron’s Economic Plans for France Draw Pushback
Monday, May 8, 2017
Tuesday's News Links
[Bloomberg] U.S. Stocks Rise With Dollar as Crude Slumps Anew: Markets Wrap
[Bloomberg] Iron Ore Sags Again as Forced-Sale Speculation Gathers Momentum
[Reuters] Oil steadies but rattled by concern about OPEC's clout
[Bloomberg] China's Deleveraging Pain Puts Investors on Alert for Contagion
[Reuters] As China's battle with leverage begins to bite, risk bites back
[CNBC] Bejing's crackdown on risky debt is throwing Chinese investors for a loop
[Reuters] China's central bank to focus on impact on stability of non-bank financial institutions: working paper
[Bloomberg] The Big Risks in China's 'Tightrope' Monetary Policy
[Bloomberg] Italian Bonds May Be Traders' Next Obsession After French Vote
[Politico] Republicans war over taxes
[Bloomberg] Australia Boosts Housing Regulations Amid Property Bubble Fears
[Bloomberg] Worsening Budget Puts Turkey Treasury on Borrowing Spree: Charts
[Reuters] Liberal Moon Jae-in expected to win South Korea's presidency: exit polls
[NYT] Buying Spree Brings Attention to Opaque Chinese Company
[WSJ] Macron’s Brand New Party Shoots for Parliament Takeover
[WSJ] Tightened Belt: China Skimps on Its Grand Trade Plan
[Bloomberg] Iron Ore Sags Again as Forced-Sale Speculation Gathers Momentum
[Reuters] Oil steadies but rattled by concern about OPEC's clout
[Bloomberg] China's Deleveraging Pain Puts Investors on Alert for Contagion
[Reuters] As China's battle with leverage begins to bite, risk bites back
[CNBC] Bejing's crackdown on risky debt is throwing Chinese investors for a loop
[Reuters] China's central bank to focus on impact on stability of non-bank financial institutions: working paper
[Bloomberg] The Big Risks in China's 'Tightrope' Monetary Policy
[Bloomberg] Italian Bonds May Be Traders' Next Obsession After French Vote
[Politico] Republicans war over taxes
[Bloomberg] Australia Boosts Housing Regulations Amid Property Bubble Fears
[Bloomberg] Worsening Budget Puts Turkey Treasury on Borrowing Spree: Charts
[Reuters] Liberal Moon Jae-in expected to win South Korea's presidency: exit polls
[NYT] Buying Spree Brings Attention to Opaque Chinese Company
[WSJ] Macron’s Brand New Party Shoots for Parliament Takeover
[WSJ] Tightened Belt: China Skimps on Its Grand Trade Plan
Monday Evening Links
[Bloomberg] U.S. Stocks Mixed, VIX at 24-Yr Low as Bonds Drop: Markets Wrap
[Bloomberg] China's Stock Shakeout Creates Most Divided Market in 15 Years
[CNBC] China has now become the biggest fear for markets
[Reuters] Trump review of Wall Street rules to be done in stages: sources
[NYT] Forget Taxes, Warren Buffett Says. The Real Problem Is Health Care.
[Bloomberg] China's Stock Shakeout Creates Most Divided Market in 15 Years
[CNBC] China has now become the biggest fear for markets
[Reuters] Trump review of Wall Street rules to be done in stages: sources
[NYT] Forget Taxes, Warren Buffett Says. The Real Problem Is Health Care.
Sunday, May 7, 2017
Monday's News Links
[Bloomberg] U.S. Stocks Slip, Dollar Gains After French Vote: Markets Wrap
[Reuters] French vote quashes euro political risk trade
[CNBC] Macron is France's next president — here’s what happens next
[Bloomberg] What Analysts Are Saying About Macron's Victory
[Bloomberg] China’s Exports Remain Resilient as Global Demand Recovers
[Bloomberg] Iron Ore Revival Snuffed Out as ‘Weakest Commodity’ Drops Again
[Bloomberg] Fed's Mester Warns Against Falling Behind With Rate-Hike Pace
[Reuters] Fed's goals largely met, U.S. rate hikes on track: Mester
[Bloomberg] Australian Business Confidence Jumps to Highest in Seven Years
[FT] China credit squeeze dents global growth
[WSJ] French Election Victor Emmanuel Macron’s ‘New Deal’ for Europe Faces Old German Doubts
[FT] The ECB’s dilemma is when to trigger the turning point
[FT] Federal Reserve warned over maintaining big balance sheet
[FT] Italy’s bad debt problem refuses to go away
[FT] Risk of dollar shortage hits investors’ radar
[Reuters] French vote quashes euro political risk trade
[CNBC] Macron is France's next president — here’s what happens next
[Bloomberg] What Analysts Are Saying About Macron's Victory
[Bloomberg] China’s Exports Remain Resilient as Global Demand Recovers
[Bloomberg] Iron Ore Revival Snuffed Out as ‘Weakest Commodity’ Drops Again
[Bloomberg] Fed's Mester Warns Against Falling Behind With Rate-Hike Pace
[Reuters] Fed's goals largely met, U.S. rate hikes on track: Mester
[Bloomberg] Australian Business Confidence Jumps to Highest in Seven Years
[FT] China credit squeeze dents global growth
[WSJ] French Election Victor Emmanuel Macron’s ‘New Deal’ for Europe Faces Old German Doubts
[FT] The ECB’s dilemma is when to trigger the turning point
[FT] Federal Reserve warned over maintaining big balance sheet
[FT] Italy’s bad debt problem refuses to go away
[FT] Risk of dollar shortage hits investors’ radar
Sunday Evening Links
[Bloomberg] Reaction Muted to France Result After Macron Win: Markets Wrap
[Reuters] Macron wins French presidency by emphatic margin: projections
[Bloomberg] Euro Seen Advancing as Le Pen Concedes Defeat in French Election
[Bloomberg] China's Deleveraging Bill Tops $500 Billion
[The Hill] ObamaCare vote throws curve into tax reform
[WSJ] Trump’s Fiscal Plans, Fed’s Asset Unwinding Could Fuel Rate Rise
[WSJ] Traders Are Fleeing the Options Market
[FT] Wall Street’s hopes for deregulation switch from laws to watchdogs
[Reuters] Macron wins French presidency by emphatic margin: projections
[Bloomberg] Euro Seen Advancing as Le Pen Concedes Defeat in French Election
[Bloomberg] China's Deleveraging Bill Tops $500 Billion
[The Hill] ObamaCare vote throws curve into tax reform
[WSJ] Trump’s Fiscal Plans, Fed’s Asset Unwinding Could Fuel Rate Rise
[WSJ] Traders Are Fleeing the Options Market
[FT] Wall Street’s hopes for deregulation switch from laws to watchdogs
Saturday, May 6, 2017
Sunday's News Links
[Reuters] Macron favourite as France votes for new president, early turnout low
[Bloomberg] France to Choose Macron or Le Pen, Globalization or Populism
[Bloomberg] China Reserves Rise a Third Month Amid Tighter Capital Controls
[Bloomberg] Fed's Williams Stands by Hike Outlook as Unemployment Drops
[Bloomberg] FX Traders Losing Confidence in Dollar With Few Catalysts to Buy
[WSJ] Macron and Le Pen Face Off in French Election Pitting Vision of Globalization Against Nationalism
[WSJ] Labor Shortage Squeezes Builders
[FT] World Bank warns of China debt risk from backdoor local borrowing
[Bloomberg] France to Choose Macron or Le Pen, Globalization or Populism
[Bloomberg] China Reserves Rise a Third Month Amid Tighter Capital Controls
[Bloomberg] Fed's Williams Stands by Hike Outlook as Unemployment Drops
[Bloomberg] FX Traders Losing Confidence in Dollar With Few Catalysts to Buy
[WSJ] Macron and Le Pen Face Off in French Election Pitting Vision of Globalization Against Nationalism
[WSJ] Labor Shortage Squeezes Builders
[FT] World Bank warns of China debt risk from backdoor local borrowing
Friday, May 5, 2017
Weekly Commentary: Belly of the Beast
We’re at an important juncture for the global Bubble. There are growing divergences and anomalies. Market signals are increasingly conflicting and confounding: European equities in melt-up and U.S. markets at record highs, while China falters. Bond yields rising and commodities sinking. Talk of derivative issues and leveraged player struggles. Often discordant economic data providing fodder for bulls and bears alike.
Let’s begin at home. While recovering somewhat from March’s huge disappointment, at 16.81 million annualized (SAAR) units, April vehicles sales were significantly below estimates (17.1 million). This supports the view of tightened lending standards in auto finance. Also boosting the bear case, the ISM Manufacturing Index dropped to a weaker-than-expected 54.8, down from March’s 57.2 and February’s 57.7. March Personal Spending was reported flat versus estimates of up 0.2%. First quarter Non-farm Productivity was reported at a stinkball down 0.6% (est. down 0.1%).
At the same time, those anticipating stronger Q2 growth were this week heartened by a slew of data points (market now sees 100% probability of June rate increase). Most notably, the ISM Non-Manufacturing Index bounced back strongly from March weakness. At 57.5, the index almost recovered back to February’s 56.7, the high going back to October 2015. The ISM Manufacturing Price Paid Index remained elevated at 68.5, and New Orders were a strong 57.5. Durable Goods Orders were stronger-than-expected. And an indicator I’m monitoring closely these days, mortgage purchase applications, increased last week to approach the strongest level since 2009. And, of course, at 194,000, non-farm payrolls bounced back briskly from March’s (revised) 79,000. As a reminder of how services these days so dominate U.S. economic structure, April saw only 6,000 manufacturing jobs added.
Examining the data, it’s not difficult to explain this week’s upward trajectory in equities and downward pressure on bond prices. Ten-year Treasury yields increased six bps this week to 2.35%. Meanwhile, the S&P500 and Nasdaq Composite ended the week at all-time highs. Spanish stocks jumped 3.9%, and Italian equities surged 4.2%.
More intriguing, yields and equities rose as commodities came under heavy selling pressure. Crude sank $3.11 this week, trading below $45 for the first time since November. WTI ended the week at $46.22, after trading as low as $43.76 overnight. There was more to the sell-off than OPEC and American shale production. The week also saw nickel drop 2.1%, tin 1.3% and lead 1.1%. Shanghai Aluminum fell 1.9%. The Chinese iron ore collapse continued, while Shanghai steel sank 6%. Copper lost 3.0%, trading to a 2017 low. Silver sank 5.7% and Platinum fell 3.5%.
It’s not all that astounding that markets disregard troubling issues unfolding in Chinese finance. The bullish narrative is focused on Trump administration tax cuts, deregulation and infrastructure spending. Throw in a European recovery and hope for EM. Talk is clearly not of a historic global Bubble vulnerable to a massive and fragile Credit Bubble in China. That is an analytical perspective markets avoid like the plague.
Market apathy notwithstanding, there are important developments to monitor. Let’s start with China’s economy, where it appears the past year’s Credit-induced thrust in activity has begun to wane. China’s Caixin Manufacturing PMI dropped to a weaker-than-expected (and barely expanding) 50.3 in April, the low since last September’s 50.1. Perhaps more ominously, the month-on-month decline in the Caixin Services index was even steeper. It dropped to 51.5, the weakest reading in almost a year.
The Shanghai Composite dropped 1.6% this week, trading to the low since mid-January. China’s growth-oriented ChiNext index fell 1.8% (down 7.3% y-t-d) to near multi-year lows. Notably, Hong Kong’s Hang Seng Financial index sank 2.7%.
May 4 – Bloomberg: “Signs are emerging that the Chinese government’s renewed drive to curb financial leverage is starting to bite. The number of wealth-management products issued by Chinese banks slumped 39% in April from the previous month, while trust firms distributed 35% fewer products, according to data compilers PY Standard and Use Trust. Sales of negotiable certificates of deposit, a popular instrument of interbank lending known as NCDs, tumbled 38% from a record, figures compiled by Bloomberg show. The system-wide contraction is a result of a flurry of government measures over the past month that included ordering banks to bolster risk controls, stepping up scrutiny of shadow financing and cracking down on malfeasance among senior bureaucrats. While the moves have rocked China’s financial markets, the government is sending a clear signal of its determination to curb the estimated $28 trillion debt pile that poses a risk to economic stability.”
May 3 – Financial Times (Gabriel Wildau in Shanghai and Peter Wells): “A key Chinese money-market rate matched a two-year high on Wednesday after the central bank drained cash from the banking system, part of an ongoing effort to tame financial risks by squeezing liquidity. Authorities are facing the tricky task of increasing regulation of risky financial instruments without spooking investors or raising borrowing costs in the real economy. Short-term lending rates have climbed since President Xi Jinping told a politburo meeting last week that financial security was ‘strategically important’ for economic and social development. Investors interpreted his remarks as a sign that monetary policy will tighten. The benchmark seven-day repo rate hit a two-year high of 3.18%...”
May 1 – Reuters (Adam Jourdan): “China's level of leverage is rising at an ‘alarming pace’, particularly in the finance sector, a senior central bank official said in a commentary, amid growing concern by the country's senior leaders over financial security. The official Xinhua news agency… cited Xu Zhong, head of the People's Bank of China's (PBOC) research bureau, as saying the country needed to deleverage at a ‘proper pace’ to reduce financial sector debt and avoid systemic financial risk. ‘China's overall leverage level is reasonable but is rising at an alarming pace, especially in the financial sector,’ Xu said.”
Chinese policymakers appear determined to diminish the expansion of its booming financial sector. The apparent plan is to apply constraints in a manner so to not unduly risk economic weakening or financial instability. Over recent years, officials have attempted various measures to rein in overheated real estate markets as well as speculative commodities, equities and bond markets. A couple times policymakers even came close to bursting Bubbles, before abruptly reversing course. In the end, the overall timid approach ensured the ongoing ballooning of China’s now mammoth financial sector and Credit Bubble more generally.
The problem confronting Beijing – and global policymakers more generally – relates to the old “Austrian” analysis that Bubbles are sustained only by ever-increasing quantities of Credit creation. Inflate a Credit Bubble – with resulting elevated price structures throughout the real economy, asset markets and the financial sphere – and these various inflated price levels become progressively susceptible to any meaningful and sustained slowdown in Credit creation.
There remains this dangerous misperception that economies can simply grow/inflate their way out of debt problems. This is at odds with reality. Especially late in the cycle, liquidity is funneled into inflating asset markets rather than to the real economy (suffering from overcapacity and waning profit opportunities). It becomes easier to make returns in finance than in goods and services. Meanwhile, policy measures to sustain the unstable boom further incentivize leveraging and speculating.
To this point, Chinese officials have “succeeded” in ensuring ever-increasing amounts of Credit. The upshot has been only more outrageous real estate (largely apartment) Bubbles, rapid Credit deterioration and deeper structural maladjustment.
Beijing understands that it has a problem and appears to have a new approach: They’re going to the Belly of the Credit Beast – “shadow banking” and, more specifically, “wealth management products” (WMP). They’re also cracking down on “insurance” companies.
I often refer to a Credit Bubble’s “Terminal Phase.” Systemic risk rises exponentially at the end of the cycle – rapidly escalating quantities of increasingly risky Credit. And contemporary finance is replete with products and vehicles to transform high-risk Credit into perceived safe and liquid (money-like) financial instruments. We saw this dynamic in the U.S. at the late-stage of the mortgage finance Bubble, with “AAA” ABS/MBS, derivatives and the like. In China, frightening amounts of high-risk Credit have been intermediated through a labyrinth of WMP and shadow banking.
This week saw some justified fear that Chinese measures may cripple shadow bank risk intermediation, slow system Credit growth, spur speculative deleveraging and spark illiquidity. The notoriously leveraged and speculative Chinese commodities sector proved the weak link. And a bout of intense deleveraging in this space raised fears that an unwind of leverage and resulting Credit instability could turn its sights on the mighty and mighty vulnerable apartment Bubble. How vulnerable is Chinese mortgage Credit these days to a tightening of Credit Availability and a self-reinforcing decline in home prices?
Of course, everyone knows that Beijing will not tolerate things getting out of hand. Much like the end to the ECB’s QE program, speculative markets are content to downplay China risks perceived to be at least a number of months into the distant future.
Chinese stocks retreated in Shanghai and Hong Kong as concerns mounted over Beijing’s efforts to reduce financial system leverage - along with worries that a selloff in commodities and spillover into equities could negatively impact economic confidence.
Friday from Bloomberg: “The Hang Seng China Enterprises Index led declines in Asia, sliding 1.6% at the close local time. Back on the mainland, the Shanghai Composite Index slipped 0.8%, taking its drop in the week to 1.6% and briefly breaking a key support level of 3,100 points. The gauge has fallen for four straight weeks… Northeast Securities Co. and Sinolink Securities Co. fell at least 5.8%. Brokers in Shenzhen received notice from regulators that they must stop combining funds raised from various wealth-management products into a single pool and investing them as one portfolio… Investors worry the regulation on asset-management pooling in Shenzhen might expand to brokers nationwide, said Capital Securities analyst Liao Chenkai.”
Beijing’s intentions notwithstanding, there’s high risk that things do spiral out of control. Shadow Banking has been the marginal source of risk intermediation during the recent Credit onslaught. This Credit avenue appears to be tightening rapidly, which creates a serious dilemma for various groups of risky borrowers. Moreover, heightened stress in the “repo”/money markets impinges the small and medium sized banks that have aggressively borrowed short-term finance for high-risk lending and financial speculation (at home and abroad). Meanwhile, Chinese authorities have begun to target the insurance industry, most certainly a bastion of all things ugly late-stage Credit Bubble.
This amounts to an unfolding serious tightening of Credit and financial conditions. Sure, Beijing can, once again, lean on the enormous state banks to pick up the slack. Here’s where things turn fascinating – if not comforting. China’s big banks stepping up at this point to support the scope of system Credit growth necessary to hold bust at bay (say, to the tune of $3.5 TN annually) places these mammoth financial institutions in direct harm’s way. Waning confidence in China’s big banks would have major global market ramifications.
Returning to the “important juncture for the global Bubble:” The bulls are feeling “break out,” with the S&P500 to play catch-up to Nasdaq (Comp up 13.3% y-t-d), technology (MHS up 18.8%) and biotech (up 18.7%). Are things at the brink of turning even crazier, or does a bout of risk aversion catch everyone unprepared?
I’ll be on the lookout next week for indications of waning “Risk On.” Perhaps China worries spur some contagion effects in Asia. Weakness in Asian financials would offer a clue. As the biggest beneficiary of Chinese reflation over recent months, EM would seem susceptible to contagion.
Further energy and commodity price weakness would reawaken concerns for commodity-related Credit. The yen declined 1.1% during this week’s generally “Risk On” backdrop. Fledgling “Risk Off” would be expected to provide a yen boost, likely at the expense of Japanese equities. With Emanuel Macron poised to win big in Sunday’s French election, I expect market attention to pivot back to Asia. That said, an abrupt reversal to “Risk Off” would catch global markets by surprise, certainly including the speculative Bubbles that have inflated throughout European securities markets.
Let’s begin at home. While recovering somewhat from March’s huge disappointment, at 16.81 million annualized (SAAR) units, April vehicles sales were significantly below estimates (17.1 million). This supports the view of tightened lending standards in auto finance. Also boosting the bear case, the ISM Manufacturing Index dropped to a weaker-than-expected 54.8, down from March’s 57.2 and February’s 57.7. March Personal Spending was reported flat versus estimates of up 0.2%. First quarter Non-farm Productivity was reported at a stinkball down 0.6% (est. down 0.1%).
At the same time, those anticipating stronger Q2 growth were this week heartened by a slew of data points (market now sees 100% probability of June rate increase). Most notably, the ISM Non-Manufacturing Index bounced back strongly from March weakness. At 57.5, the index almost recovered back to February’s 56.7, the high going back to October 2015. The ISM Manufacturing Price Paid Index remained elevated at 68.5, and New Orders were a strong 57.5. Durable Goods Orders were stronger-than-expected. And an indicator I’m monitoring closely these days, mortgage purchase applications, increased last week to approach the strongest level since 2009. And, of course, at 194,000, non-farm payrolls bounced back briskly from March’s (revised) 79,000. As a reminder of how services these days so dominate U.S. economic structure, April saw only 6,000 manufacturing jobs added.
Examining the data, it’s not difficult to explain this week’s upward trajectory in equities and downward pressure on bond prices. Ten-year Treasury yields increased six bps this week to 2.35%. Meanwhile, the S&P500 and Nasdaq Composite ended the week at all-time highs. Spanish stocks jumped 3.9%, and Italian equities surged 4.2%.
More intriguing, yields and equities rose as commodities came under heavy selling pressure. Crude sank $3.11 this week, trading below $45 for the first time since November. WTI ended the week at $46.22, after trading as low as $43.76 overnight. There was more to the sell-off than OPEC and American shale production. The week also saw nickel drop 2.1%, tin 1.3% and lead 1.1%. Shanghai Aluminum fell 1.9%. The Chinese iron ore collapse continued, while Shanghai steel sank 6%. Copper lost 3.0%, trading to a 2017 low. Silver sank 5.7% and Platinum fell 3.5%.
It’s not all that astounding that markets disregard troubling issues unfolding in Chinese finance. The bullish narrative is focused on Trump administration tax cuts, deregulation and infrastructure spending. Throw in a European recovery and hope for EM. Talk is clearly not of a historic global Bubble vulnerable to a massive and fragile Credit Bubble in China. That is an analytical perspective markets avoid like the plague.
Market apathy notwithstanding, there are important developments to monitor. Let’s start with China’s economy, where it appears the past year’s Credit-induced thrust in activity has begun to wane. China’s Caixin Manufacturing PMI dropped to a weaker-than-expected (and barely expanding) 50.3 in April, the low since last September’s 50.1. Perhaps more ominously, the month-on-month decline in the Caixin Services index was even steeper. It dropped to 51.5, the weakest reading in almost a year.
The Shanghai Composite dropped 1.6% this week, trading to the low since mid-January. China’s growth-oriented ChiNext index fell 1.8% (down 7.3% y-t-d) to near multi-year lows. Notably, Hong Kong’s Hang Seng Financial index sank 2.7%.
May 4 – Bloomberg: “Signs are emerging that the Chinese government’s renewed drive to curb financial leverage is starting to bite. The number of wealth-management products issued by Chinese banks slumped 39% in April from the previous month, while trust firms distributed 35% fewer products, according to data compilers PY Standard and Use Trust. Sales of negotiable certificates of deposit, a popular instrument of interbank lending known as NCDs, tumbled 38% from a record, figures compiled by Bloomberg show. The system-wide contraction is a result of a flurry of government measures over the past month that included ordering banks to bolster risk controls, stepping up scrutiny of shadow financing and cracking down on malfeasance among senior bureaucrats. While the moves have rocked China’s financial markets, the government is sending a clear signal of its determination to curb the estimated $28 trillion debt pile that poses a risk to economic stability.”
May 3 – Financial Times (Gabriel Wildau in Shanghai and Peter Wells): “A key Chinese money-market rate matched a two-year high on Wednesday after the central bank drained cash from the banking system, part of an ongoing effort to tame financial risks by squeezing liquidity. Authorities are facing the tricky task of increasing regulation of risky financial instruments without spooking investors or raising borrowing costs in the real economy. Short-term lending rates have climbed since President Xi Jinping told a politburo meeting last week that financial security was ‘strategically important’ for economic and social development. Investors interpreted his remarks as a sign that monetary policy will tighten. The benchmark seven-day repo rate hit a two-year high of 3.18%...”
May 1 – Reuters (Adam Jourdan): “China's level of leverage is rising at an ‘alarming pace’, particularly in the finance sector, a senior central bank official said in a commentary, amid growing concern by the country's senior leaders over financial security. The official Xinhua news agency… cited Xu Zhong, head of the People's Bank of China's (PBOC) research bureau, as saying the country needed to deleverage at a ‘proper pace’ to reduce financial sector debt and avoid systemic financial risk. ‘China's overall leverage level is reasonable but is rising at an alarming pace, especially in the financial sector,’ Xu said.”
Chinese policymakers appear determined to diminish the expansion of its booming financial sector. The apparent plan is to apply constraints in a manner so to not unduly risk economic weakening or financial instability. Over recent years, officials have attempted various measures to rein in overheated real estate markets as well as speculative commodities, equities and bond markets. A couple times policymakers even came close to bursting Bubbles, before abruptly reversing course. In the end, the overall timid approach ensured the ongoing ballooning of China’s now mammoth financial sector and Credit Bubble more generally.
The problem confronting Beijing – and global policymakers more generally – relates to the old “Austrian” analysis that Bubbles are sustained only by ever-increasing quantities of Credit creation. Inflate a Credit Bubble – with resulting elevated price structures throughout the real economy, asset markets and the financial sphere – and these various inflated price levels become progressively susceptible to any meaningful and sustained slowdown in Credit creation.
There remains this dangerous misperception that economies can simply grow/inflate their way out of debt problems. This is at odds with reality. Especially late in the cycle, liquidity is funneled into inflating asset markets rather than to the real economy (suffering from overcapacity and waning profit opportunities). It becomes easier to make returns in finance than in goods and services. Meanwhile, policy measures to sustain the unstable boom further incentivize leveraging and speculating.
To this point, Chinese officials have “succeeded” in ensuring ever-increasing amounts of Credit. The upshot has been only more outrageous real estate (largely apartment) Bubbles, rapid Credit deterioration and deeper structural maladjustment.
Beijing understands that it has a problem and appears to have a new approach: They’re going to the Belly of the Credit Beast – “shadow banking” and, more specifically, “wealth management products” (WMP). They’re also cracking down on “insurance” companies.
I often refer to a Credit Bubble’s “Terminal Phase.” Systemic risk rises exponentially at the end of the cycle – rapidly escalating quantities of increasingly risky Credit. And contemporary finance is replete with products and vehicles to transform high-risk Credit into perceived safe and liquid (money-like) financial instruments. We saw this dynamic in the U.S. at the late-stage of the mortgage finance Bubble, with “AAA” ABS/MBS, derivatives and the like. In China, frightening amounts of high-risk Credit have been intermediated through a labyrinth of WMP and shadow banking.
This week saw some justified fear that Chinese measures may cripple shadow bank risk intermediation, slow system Credit growth, spur speculative deleveraging and spark illiquidity. The notoriously leveraged and speculative Chinese commodities sector proved the weak link. And a bout of intense deleveraging in this space raised fears that an unwind of leverage and resulting Credit instability could turn its sights on the mighty and mighty vulnerable apartment Bubble. How vulnerable is Chinese mortgage Credit these days to a tightening of Credit Availability and a self-reinforcing decline in home prices?
Of course, everyone knows that Beijing will not tolerate things getting out of hand. Much like the end to the ECB’s QE program, speculative markets are content to downplay China risks perceived to be at least a number of months into the distant future.
Chinese stocks retreated in Shanghai and Hong Kong as concerns mounted over Beijing’s efforts to reduce financial system leverage - along with worries that a selloff in commodities and spillover into equities could negatively impact economic confidence.
Friday from Bloomberg: “The Hang Seng China Enterprises Index led declines in Asia, sliding 1.6% at the close local time. Back on the mainland, the Shanghai Composite Index slipped 0.8%, taking its drop in the week to 1.6% and briefly breaking a key support level of 3,100 points. The gauge has fallen for four straight weeks… Northeast Securities Co. and Sinolink Securities Co. fell at least 5.8%. Brokers in Shenzhen received notice from regulators that they must stop combining funds raised from various wealth-management products into a single pool and investing them as one portfolio… Investors worry the regulation on asset-management pooling in Shenzhen might expand to brokers nationwide, said Capital Securities analyst Liao Chenkai.”
Beijing’s intentions notwithstanding, there’s high risk that things do spiral out of control. Shadow Banking has been the marginal source of risk intermediation during the recent Credit onslaught. This Credit avenue appears to be tightening rapidly, which creates a serious dilemma for various groups of risky borrowers. Moreover, heightened stress in the “repo”/money markets impinges the small and medium sized banks that have aggressively borrowed short-term finance for high-risk lending and financial speculation (at home and abroad). Meanwhile, Chinese authorities have begun to target the insurance industry, most certainly a bastion of all things ugly late-stage Credit Bubble.
This amounts to an unfolding serious tightening of Credit and financial conditions. Sure, Beijing can, once again, lean on the enormous state banks to pick up the slack. Here’s where things turn fascinating – if not comforting. China’s big banks stepping up at this point to support the scope of system Credit growth necessary to hold bust at bay (say, to the tune of $3.5 TN annually) places these mammoth financial institutions in direct harm’s way. Waning confidence in China’s big banks would have major global market ramifications.
Returning to the “important juncture for the global Bubble:” The bulls are feeling “break out,” with the S&P500 to play catch-up to Nasdaq (Comp up 13.3% y-t-d), technology (MHS up 18.8%) and biotech (up 18.7%). Are things at the brink of turning even crazier, or does a bout of risk aversion catch everyone unprepared?
I’ll be on the lookout next week for indications of waning “Risk On.” Perhaps China worries spur some contagion effects in Asia. Weakness in Asian financials would offer a clue. As the biggest beneficiary of Chinese reflation over recent months, EM would seem susceptible to contagion.
Further energy and commodity price weakness would reawaken concerns for commodity-related Credit. The yen declined 1.1% during this week’s generally “Risk On” backdrop. Fledgling “Risk Off” would be expected to provide a yen boost, likely at the expense of Japanese equities. With Emanuel Macron poised to win big in Sunday’s French election, I expect market attention to pivot back to Asia. That said, an abrupt reversal to “Risk Off” would catch global markets by surprise, certainly including the speculative Bubbles that have inflated throughout European securities markets.
For the Week:
The S&P500 added 0.6% (up 7.2% y-t-d), and the Dow gained 0.3% (up 6.3%). The Utilities were little changed (up 5.8%). The Banks jumped 1.5% (up 0.9%), and the Broker/Dealers added 0.4% (up 5.7%). The Transports gained 1.0% (up 1.6%). The S&P 400 Midcaps increased 0.3% (up 4.7%), while the small cap Russell 2000 slipped 0.2% (up 2.9%). The Nasdaq100 advanced 1.1% (up 16.1%), and the Morgan Stanley High Tech index jumped 1.5% (up 18.8%). The Semiconductors added 0.5% (up 11.5%). The Biotechs increased 0.4% (up 18.7%). With bullion sinking $47, the HUI gold index fell 3.1% (up 2.0%).
Three-month Treasury bill rates ended the week at 87 bps. Two-year government yields rose five bps to 1.31% (up 12bps y-t-d). Five-year T-note yields gained seven bps to 1.88% (down 5bps). Ten-year Treasury yields rose seven bps to 2.35% (down 10bps). Long bond yields added three bps to 2.98% (down 8bps).
Greek 10-year yields dropped 48 bps to 5.77% (down 125bps y-t-d). Ten-year Portuguese yields fell 16 bps to 3.5% (down 36bps). Italian 10-year yields dropped 12 bps to 2.17% (up 35bps). Spain's 10-year yields declined nine bps to 1.56% (up 18bps). German bund yields rose 10 bps to 0.42% (up 21bps). French yields added a basis point to 0.85% (up 17bps). The French to German 10-year bond spread narrowed nine to 43 bps. U.K. 10-year gilt yields increased three bps to 1.12% (down 12bps). U.K.'s FTSE equities index gained 1.3% (up 2.2%).
Japan's Nikkei 225 equities index advanced 1.3% (up 1.7% y-t-d). Japanese 10-year "JGB" yields were unchanged at 0.02% (down 2bps). France's CAC40 rose 3.1% (up 11.7%). The German DAX equities index gained 2.2% (up 10.8%). Spain's IBEX 35 equities index surged 3.9% (up 19.1%). Italy's FTSE MIB index jumped 4.2% (up 11.7%). EM equities were mixed. Brazil's Bovespa index added 0.5% (up 9.1%). Mexico's Bolsa increased 0.5% (up 8.4%). South Korea's Kospi rose 1.6% (up 10.6%). India’s Sensex equities index slipped 0.2% (up 12.1%). China’s Shanghai Exchange dropped 1.6% (unchanged). Turkey's Borsa Istanbul National 100 index declined 0.8% (up 20.2%). Russia's MICEX equities index declined 0.7% (down 10.3%).
Junk bond mutual funds saw outflows of $386 million (from Lipper).
Freddie Mac 30-year fixed mortgage rates slipped a basis point to 4.02% (up 41bps y-o-y). Fifteen-year rates were unchanged at 3.27% (up 41bps). The five-year hybrid ARM rate added a basis point to 3.13% (up 33bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates unchanged at 4.14% (up 38bps).
Federal Reserve Credit last week declined $7.9bn to $4.432 TN. Over the past year, Fed Credit declined $5.2bn (down 0.1%). Fed Credit inflated $1.621 TN, or 58%, over the past 234 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt rose $4.6bn last week to $3.215 TN. "Custody holdings" were down $13.1bn y-o-y, or 0.4%.
M2 (narrow) "money" supply last week was little changed at a record $13.440 TN. "Narrow money" expanded $752bn, or 5.9%, over the past year. For the week, Currency increased $3.9bn. Total Checkable Deposits declined $11bn, while Savings Deposits gained $6.7bn. Small Time Deposits and Retail Money Funds were about changed.
Total money market fund assets gained $1.6bn to $2.644 TN. Money Funds fell $67bn y-o-y (2.5%).
Total Commercial Paper rose $12.4bn to $993bn. CP declined $128bn y-o-y, or 11.4%.
Currency Watch:
The U.S. dollar index declined 0.4% to 98.65 (down 3.7% y-t-d). For the week on the upside, the euro increased 1.0%, the New Zealand dollar 0.8%, the Swiss franc 0.7%, the South Korean won 0.5% and the British pound 0.2%. For the week on the downside, the Japanese yen declined 1.1%, the Mexican peso 0.9%, the Australian dollar 0.9%, the Singapore dollar 0.6%, the South African rand 0.4% and the Norwegian dollar 0.1%. The Chinese renminbi declined 0.14% versus the dollar this week (up 0.61% y-t-d).
Commodities Watch:
The Goldman Sachs Commodities Index was hit 3.0% (down 6.8% y-t-d). Spot Gold dropped 3.7% to $1,222 (up 6.0%). Silver sank 5.7% to $16.27 (up 1.8%). Crude fell $3.11 to $46.22 (down 14%). Gasoline lost 2.8% (down 10%), while Natural Gas slipped 0.3% (down 13%). Copper dropped 3.0% (up 1%). Wheat gained 2.1% (up 8%). Corn rose 1.2% (up 5.3%).
Trump Administration Watch:
May 1 – New York Times (Andrew Ross Sorkin): “For a brief moment, Wall Street stopped on Monday, as if time was suspended in an alternative reality. President Trump, for the first time as resident of the White House, said aloud that he was considering breaking up the nation’s biggest banks. Of course, he had said it on the campaign trail, but this seemed different. ‘I’m looking at that right now,’ Mr. Trump told Bloomberg News… ‘There’s some people that want to go back to the old system, right? So we’re going to look at that.’”
May 1 – Wall Street Journal (Ryan Tracy): “The Trump administration, looking to make its first major imprint on U.S. banking regulators, is preparing to replace Comptroller of the Currency Thomas Curry as chief overseer of federally chartered banks, according to people familiar… President Donald Trump could soon replace Mr. Curry with an acting head of the agency, who would serve until a new comptroller is confirmed…”
China Bubble Watch:
May 3 – Bloomberg: “China is breaking out its mouthpieces -- and wallet -- as it seeks to soothe investors in the face of tighter financial market regulations. The central bank-run Financial News urged stock investors not to overreact to tougher regulations in front-page commentary… The monetary authority will prevent swings in liquidity from exceeding tolerable levels, the official Xinhua News Agency-owned China Securities Journal added in a separate front-page opinion piece. The People’s Bank of China then injected more cash into the financial system through open-market operations Wednesday than on any day since January as the benchmark government bond yield climbed to the highest level in two years.”
May 3 – Bloomberg: “China’s deleveraging campaign is providing a reality check to the fledgling municipal bond market. Set up in 2015 to bring transparency to local-government borrowing practices, the new market benefited from the perception that Beijing had the provinces’ backs, with yields largely on par with the sovereign despite some weak municipal balance sheets. Not anymore -- a clampdown on risk and record levels of debt in China’s financial system is spurring a reassessment of the market, with the premium demanded by investors on muni bonds over central government debt surging to a record as volumes in the secondary market slide. While the shift to pricing based on risk is a step toward a more mature, world-standard bond market, for now at least it poses a challenge given plans for a record year of issuance… Sales in the local-government debt market are set to reach an all-time high of 1.63 trillion yuan ($237bn) in 2017…”
May 5 – Reuters (Matthew Miller and Shu Zhang): “China's Anbang Life Insurance Co was punished by the country's insurance regulator which on Friday barred the firm from applying to issue new products for three months, the latest move in an industry-wide crackdown. Anbang Life, a key part of Anbang Insurance Group Co, was cited for ‘disrupting market order’ by designing a product that bypassed regulations aimed at curbing growth of short-term, risky universal life insurance products, the China Insurance Regulatory Commission (CIRC) said in an online public notice. CIRC's move against Anbang Life comes during a widespread regulatory crackdown on what is seen as the excessive use of universal life products by some insurers, and as China's central leadership moves to curb risk in the financial system.”
April 29 – Reuters (Sue-Lin Wong and Kevin Yao): “Growth in China's manufacturing sector slowed faster than expected in April…, as producer price inflation cooled and policymakers' efforts to reduce financial risks in the economy weighed on demand. The National Bureau of Statistics' official Purchasing Managers' Index (PMI) fell to a six-month low of 51.2 in April from March's near five-year high of 51.8.”
May 3 – Reuters (Yawen Chen and Nicholas Heath): “China's factory sector lost momentum in April, with growth slowing to its weakest pace in seven months as domestic and export demand faltered and commodity prices fell, a private survey showed… The Caixin/Markit Manufacturing Purchasing Managers' index (PMI) fell to 50.3 in April, missing economist forecasts' of 51.0 and a significant decline from March's 51.2.”
May 3 – Reuters (Yawen Chen and Nicholas Heath): “Growth in China's services sector cooled to its slowest in almost a year in April as fears of slower economic growth dented business confidence, even as cost pressures eased… The Caixin/Markit services purchasing managers' index (PMI) fell to 51.5 from March's 52.2, the fourth monthly decline in a row…”
May 3 – Reuters (Kevin Yao): “China will step up its crackdown on illegal foreign exchange deals this year as authorities boost authenticity and compliance checks on trade and investment, its forex regulator said… Beijing has announced a series of measures since November to tighten capital outflow curbs, including closer scrutiny of outbound investments and individual foreign exchange purchases, to support the yuan and preserve its foreign exchange reserves.”
May 1 – Wall Street Journal (Anjani Trivedi): “Beware global auto makers: China is getting ready to flood the world with its car exports. Last week, a number of Chinese ministries and the National Development and Reform Commission jointly announced long-term plans for the auto industry. Among the goals: Higher developed-market export sales and market share. Lofty goals for China’s car makers are understandable. The report said autos and related industries bring 10% of the nation’s tax revenue and account for 10% of all jobs. And the industry has capacity to spare. Utilization rates vary widely but range from 60% to 80%. Meanwhile, production continues to rise.”
May 2 – Bloomberg (Sabrina Willmer and Erik Schatzker): “Kyle Bass, founder of Hayman Capital Management, warned that ballooning assets in Chinese wealth management products are another sign of a looming credit crisis in the nation. ‘Some of the longer-term assets aren’t doing very well,’ Bass said… ‘As soon as liabilities have problems all hell breaks loose.’ The wealth management products, or WMPs, have swelled to $4 trillion in assets in the last few years, he said. Bass has been sounding the alarm for some time that debt-burdened Chinese banks need to be restructured.”
Europe Watch:
May 2 – Bloomberg (Ferdinando Giugliano): “Emmanuel Macron looks on course to become France's new president, ending the threat of a euroskeptic at the Elysee. Even if Macron wins, though, it'll be too soon to celebrate a new phase of stability in the euro zone. Across the Alps, an economic and political storm is brewing -- and there's no sign anyone can stop it. Italy's economic problems are in many ways worse than France's. Public debt stands at nearly 133% of gross domestic product; in France, it's 96%. The last time Italy grew faster than France was in 1995… Meanwhile Italian politics goes from bad to worse. The Five Star Movement, a populist force that wants to hold a referendum on Italy's membership of the euro system, is riding high in the polls…”
May 2 – Bloomberg (Alessandro Speciale): “Euro-area factories expanded output at the fastest pace since 2011 as the currency bloc’s economy continued to gather momentum. A gauge of manufacturing activity rose to 56.7 in April from 56.2 the previous month, IHS Markit reported…”
May 3 – Reuters (Renee Maltezou): “Promising to cut pensions and give taxpayers fewer breaks, Greece has paved the way for the disbursement of further rescue funds from international lenders and possibly opened the door to reworking its massive debt. Officials from both sides reached agreement… on a package of bailout-mandated reforms, ending six months of staff-level haggling. Greek Finance Minister Euclid Tsakalotos announced it with a term associated with papal elections. ‘There was white smoke,’ he told reporters.”
May 2 – Reuters (Francois Murphy and Shadia Nasralla): “The European Central Bank will have to hold a discussion next month about its strategy for 2018 and the eventual exit from its ultra easy monetary policy, ECB Governing Council member Ewald Nowotny said… The ECB last week said that prospects for the euro zone economy have improved but the time to withdraw support has not yet come, resisting pressure from countries like Germany to start winding down its 2.3 trillion euro asset-purchase program. ‘At the (ECB) meeting in June we will have to discuss the future strategy, the strategy for the beginning of 2018,’ Nowotny… told newspaper Die Presse.”
May 2 – Bloomberg (Tommaso Ebhardt, Chiara Albanese, and Deena Kamel): “Alitalia SpA started bankruptcy proceedings for the second time in a decade, throwing the survival of Italy’s flag carrier in doubt after the airline failed to fend off budget rivals. Shareholders voted unanimously to file for insolvency administration, the airline said…”
Brexit Watch:
April 29 – Financial Times (Alex Barker, Arthur Beesley and Rochelle Toplensky): “European leaders are warning Theresa May over her ‘completely unreal’ expectations of a swift trade deal, as they gathered in Brussels to agree a tough opening stance on Brexit talks. After sitting down for lunch on Saturday, European leaders took just a few minutes to adopt their formal guidelines for Brexit talks, prompting spontaneous applause around the table. Relishing the show of unity, Jean-Claude Juncker joked it was ‘the first and last time’ the bloc would take a decision so quickly.”
Global Bubble Watch:
April 29 – Financial Times (Christian Pfrang and Robin Wigglesworth): “The relief with which markets greeted the victory of centrist Emmanuel Macron in the first round of France’s election this week has only sharpened the appeal of a trade whose popularity is also raising fears of turbulence should it unravel. Selling insurance against the risk of sharp price movements across markets has been an easy and profitable trade in recent years, helping portfolios generate additional returns during the era of ultra-low bond yields and significant underperformance by many hedge funds and other active investors. As a result, a once niche strategy has become very popular… ‘These strategies seem to be gaining traction with investors across the world, in all channels,’ says Doug Kramer, co-head of quantitative investing at Neuberger Berman. Betting against bouts of market turbulence comes in many shapes.”
May 3 – Wall Street Journal (Nathaniel Taplin): “Credit equals steel. It is a simple equation that explains a lot about how China works. Iron-ore futures plunged Thursday morning, down 8%--as far as market regulators allow in a single day. Copper was down 3% Wednesday. A main culprit: Officials spouting tough language on curbing local-government debt, a key feedstock for commodity demand. Another factor: April’s weak readings on Chinese factory activity. Regulators are under intense pressure to demonstrate progress on ‘deleveraging’ following expressions of concern from President Xi Jinping and other top officials. Past attempts to rein in local debt have proven temporary and ineffectual in terms of actually reducing China’s debt as a proportion to the size of the economy.”
May 4 – Bloomberg (Susanne Barton and Mark Burton): “Copper headed for the biggest two-day loss since 2015 as industrial metals plunged amid concern over demand in China and speculation that the Federal Reserve will further raise U.S. interest rates this year. Mining shares also extended losses. Demand concerns are mounting just as copper stockpiles tracked by the London Metal Exchange jumped 25% in two days, the most since March… The Bloomberg World Mining Index of equities fell for a fourth day as iron ore tumbled in Dalian and steel plummeted in Shanghai.”
May 2 – New York Times (Landon Thomas Jr.): “It has become one of the knottier puzzles on Wall Street. As political risks have increased at home and abroad, complacency among investors has rarely been so widespread. This trend, which began soon after President Trump’s victory in November, culminated on Monday, when the VIX index, known widely as Wall Street’s fear gauge, dipped briefly below 10… At current levels, the VIX reflects a striking sense among investors that the persistent rise in stocks would continue, regardless of election fears in Europe and concerns here that Mr. Trump might not deliver on his ambitious economic agenda. ‘The pricing of risk is at near historic lows, and the pricing of the stock market is at near historic highs,’ said Julian Emanuel, a stock and derivatives specialist at the investment bank UBS. ‘And all of this at a time when political risk is very elevated — at home and abroad.’”
May 2 – Bloomberg (Kim Chipman and Erik Hertzberg): “Ripples from the downward spiral of mortgage lender Home Capital Group Inc. haven’t yet reached Vancouver. The cost of a benchmark home in the Pacific Coast city surged 11% to C$941,100 ($685,233) compared with a year earlier... Condominiums were the big gainers, climbing 17% to C$554,100. ‘Demand has been increasing for months and supply is not keeping pace,’ Jill Oudil, president of the board, said… ‘We’ll likely continue to see prices increase.’”
May 2 – Financial Times (John Plender): “Canada and Australia led a relatively charmed life through the great financial crisis of 2007-8, with their banking systems proving more robust than most. Yet it is possible that they may have a delayed reaction thanks to overheated property markets in some of their biggest cities. More specifically, the plight of Home Capital Group, Canada’s largest alternative mortgage lender, gives pause for thought. The company was rocked late last month when the Ontario Securities Commission alleged that executives broke Ontario securities laws and misled shareholders in their handling of a scandal involving falsified documentation for mortgages… The question is whether Home Capital, which is being propped up by a $2bn line of (very expensive) credit from a syndicate led by the Healthcare of Ontario Pension Plan, will turn out to be the proverbial canary in the coal mine.”
May 3 – Bloomberg (Kim Chipman and Erik Hertzberg): “Toronto home price gains slowed in April and new listings soared the most in seven years, signaling the red-hot market may be cooling after the Ontario government imposed new measures to curb runaway gains in Canada’s biggest city. Housing prices jumped 25% last month from a year earlier, down from the 33% annual increase in March. The average price of C$920,791 ($671,000) in April was just 0.5% higher than in March…”
May 1 – Wall Street Journal (Richard Teitelbaum): “Corporate deal-making has hit a rough patch despite robust stock and bond markets that in the past have led to a deluge of such activity. Mergers and acquisitions this year have slid to their lowest level globally in nearly 20 years because valuations as well as political and economic uncertainty are making potential buyers wary. The number of deals world-wide involving publicly traded targets this year fell to 793 as of April 28, according to Dealogic, down 20% from 991 in the comparable period last year and the lowest number since 1998. Meanwhile, companies are paying higher multiples… Buyers paid an average of 12.8 times the target’s earnings before interest, taxes, depreciation and amortization so far this year, up from 12.1 for the comparable period in 2016 and the highest year-to-date multiple since 1997. The value of deals globally, however, is up 13.9% year to date at $479.8 billion.”
May 3 – Bloomberg (Michael Heath): “Australia’s central bank chief had a reminder Thursday for borrowers that have helped send household debt to record levels: interest rates will one day rise. Reserve Bank of Australia Governor Philip Lowe used a speech… to reiterate his concerns about growth in private debt outpacing incomes. The risk is that heavily indebted households could slash their spending in response to any shock, meaning ‘an otherwise manageable downturn could be turned into something more serious,’ Lowe said. ‘My overall assessment is that the recent increase in household debt relative to our incomes has made the economy less resilient to future shocks,’ the governor said… ‘Double-digit growth in debt owed by investors at a time of weak income growth cannot be strengthening the resilience of our economy.’”
April 30 – Financial Times (Jamie Smyth): “A Sydney mansion has been sold for A$75m (US$56m), a record for a single house in Australia, as regulators fret about an emerging housing bubble. Scott Farquhar, co-founder of software group Atlassian, bought the 7,000 square metre harbourside estate from the Fairfax family…”
Fixed Income Bubble Watch:
May 3 – Bloomberg (Michelle Kaske, Jodi Xu Klein , and Andrew Dunn): “Puerto Rico has finally and officially filed for protection from its creditors in what amounts to the biggest municipal bankruptcy in U.S. history. Now comes the real reckoning. After years of wrangling in Washington, San Juan and on Wall Street -- a fight that has pitted hedge funds against some of the poorest U.S. citizens -- a federal judge may at last help decide who gets paid, and how much… The commonwealth is asking a federal court to force creditors to take losses on about $74 billion of debt.”
Federal Reserve Watch:
May 3 – Wall Street Journal (Nick Timiraos): “The Federal Reserve said it expected economic growth to rebound after a soft first quarter, signaling the central bank is likely to continue gradually raising short-term interest rates this year if it is right. Officials voted unanimously to hold their benchmark rate steady in a range between 0.75% and 1%, after a two-day policy meeting… The Fed’s postmeeting policy statement was fairly upbeat. It said slower growth in the January-to-March period was ‘likely to be transitory,’ echoing officials’ recent public comments suggesting the bar to knock the central bank off its policy path is higher now than in previous years.”
U.S. Bubble Watch:
May 1 – Wall Street Journal (Gunjan Banerji): “A measure of expected stock volatility, known as Wall Street’s fear gauge, slid Monday to its lowest level in more than a decade. The CBOE Volatility Index slumped 6.6% to 10.11, its lowest level since February 2007. In a rare occurrence, the gauge, called VIX, briefly fell Monday as low as 9.9 for the second time in 2017, after more than eight years without dipping below 10…”
May 3 – Bloomberg (Sho Chandra): “America’s service industries expanded more than projected in April as a measure of orders reached the highest level since 2005, a survey from the Institute for Supply Management showed… Non-manufacturing index rose to 57.5, the second-highest since October 2015 (forecast was 55.8) from 55.2 in March… Gauge of orders climbed to 63.2, the highest since August 2005, from 58.9. Measure of business activity increased to 62.4 from 58.9…”
May 4 – Bloomberg (Sho Chandra): “U.S. worker productivity declined in the first quarter by the most in a year as growth in the world’s largest economy weakened… The measure of employee output per hour decreased at a 0.6% annual rate (forecast was a 0.1% decline) after a revised 1.8% gain in the prior three months. Expenses per worker rose at a 3% pace…”
May 2 – Bloomberg (Jamie Butters and David Welch): “The slump in the U.S. auto industry is showing no signs of letting up. Sales at all six of the biggest automakers in the U.S. dropped again in April, with Ford Motor Co. and Honda Motor Co. posting the steepest declines -- about 7% each. To make matters worse, each company’s figures fell short of what analysts had estimated, sending the industry to its fourth straight down month after a record sales year in 2016.”
May 3 – Bloomberg (David Welch, Keith Naughton, and Jamie Butters): “Auto workers may be getting some extra time off around Independence Day, but they won’t be celebrating. They’ll know it means sales are weak and that profits -- and profit-sharing checks -- could be shrinking. Manufacturers used to shut plants for a week or two in July for maintenance and to keep inventories in check. As sales boomed in recent years, most factories cranked out cars without a break. This summer, widespread closures may be back, and for weeks longer than before. The reason: four straight months of declining sales and little expectation the trend will reverse anytime soon.”
May 1 – Financial Times (Adam Samson, Eric Platt and Robin Wigglesworth): “US corporate boardrooms’ approval of share buyback plans has fallen to its lowest level since 2012, signalling that the stock market’s surge to further highs this year is curbing a key source of demand for equities. Companies on the S&P 500 index have authorised $146bn in share buybacks this year, down 15% from a year ago… Executives have also been reluctant to pull the trigger on already-approved plans, with buyback executions 20% lower in 2017 compared with last year.”
May 3 – Bloomberg (Sho Chandra): “America’s service industries expanded more than projected in April as a measure of orders reached the highest level since 2005, a survey from the Institute for Supply Management showed… Non-manufacturing index rose to 57.5, the second-highest since October 2015 (forecast was 55.8) from 55.2 in March… Gauge of orders climbed to 63.2, the highest since August 2005… Measure of business activity increased to 62.4 from 58.9…”
May 4 – Reuters (Rodrigo Campos and Noel Randewich): “While some investors have been waiting for Apple's market capitalization to reach $1 trillion, those looking for big round numbers might be better off looking to the S&P 500 technology index as a whole, which is approaching the $5 trillion mark. The S&P 500 technology index… will hit $5 billion in about two months if its growth of 16% so far in 2017 continues at the same pace.”
Japan Watch:
May 1 – Financial Times (Leo Lewis): “Among casino operators there is no fixed classification of a ‘whale’, the sort of high-rolling gambler who wagers large amounts of money. Casinos just know a high roller when they walk in, and adjust, with a smile, accordingly. The Bank of Japan’s role in the Tokyo stock market is a similar test of taxonomy. Since the end of 2010, the BoJ has been buying exchange traded funds (ETFs) as part of its quantitative and qualitative easing programme. The biggest action began last July, when its annual acquisition target was doubled to ¥6tn. Since then, the whale designation has seemed pretty obvious: the central bank swallows a minimum of ¥1.2bn of ETFs every single trading day (tailored to support stocks that further ‘Abenomics’ policies), and lumbers in with buying bursts of ¥72bn roughly once every three sessions.”
Leveraged Speculation Watch:
May 2 – Bloomberg (Brian Chappatta): “The fast money in the $14 trillion Treasuries market may turn out to be too slow. For the first time since July, hedge funds and other large speculators are bullish on Treasuries across the yield curve, U.S. Commodity Futures Trading Commission data show. The shift in 10-year futures was particularly striking, with the group adding an unprecedented 255,942 net-long contracts as of the latest figures…”
Geopolitical Watch:
May 3 – Reuters (Ben Blanchard): “China… urged all parties in the Korean standoff to stay calm and ‘stop irritating each other,’ a day after North Korea said the United States was pushing the region to the brink of nuclear war. North Korea's state media published a rare, strong, criticism of China on Wednesday, saying Chinese state media commentaries calling for tougher sanctions over Pyongyang's nuclear program were undermining relations with Beijing and worsening tensions.”
May 1 – Reuters (Martin Petty and Manuel Mogato): “Across Asia, more and more countries are being pulled into Beijing's orbit, with the timid stance adopted by Southeast Asian nations on the South China Sea at a weekend summit a clear sign this fundamental geostrategic shift is gathering momentum. U.S. President Donald Trump's flurry of calls at the weekend to the leaders of the Philippines, Thailand and Singapore might cheer those who fear his predecessor Barack Obama's ‘pivot’ to Asia has been abandoned in favor of an ‘America First’ agenda.”
The S&P500 added 0.6% (up 7.2% y-t-d), and the Dow gained 0.3% (up 6.3%). The Utilities were little changed (up 5.8%). The Banks jumped 1.5% (up 0.9%), and the Broker/Dealers added 0.4% (up 5.7%). The Transports gained 1.0% (up 1.6%). The S&P 400 Midcaps increased 0.3% (up 4.7%), while the small cap Russell 2000 slipped 0.2% (up 2.9%). The Nasdaq100 advanced 1.1% (up 16.1%), and the Morgan Stanley High Tech index jumped 1.5% (up 18.8%). The Semiconductors added 0.5% (up 11.5%). The Biotechs increased 0.4% (up 18.7%). With bullion sinking $47, the HUI gold index fell 3.1% (up 2.0%).
Three-month Treasury bill rates ended the week at 87 bps. Two-year government yields rose five bps to 1.31% (up 12bps y-t-d). Five-year T-note yields gained seven bps to 1.88% (down 5bps). Ten-year Treasury yields rose seven bps to 2.35% (down 10bps). Long bond yields added three bps to 2.98% (down 8bps).
Greek 10-year yields dropped 48 bps to 5.77% (down 125bps y-t-d). Ten-year Portuguese yields fell 16 bps to 3.5% (down 36bps). Italian 10-year yields dropped 12 bps to 2.17% (up 35bps). Spain's 10-year yields declined nine bps to 1.56% (up 18bps). German bund yields rose 10 bps to 0.42% (up 21bps). French yields added a basis point to 0.85% (up 17bps). The French to German 10-year bond spread narrowed nine to 43 bps. U.K. 10-year gilt yields increased three bps to 1.12% (down 12bps). U.K.'s FTSE equities index gained 1.3% (up 2.2%).
Japan's Nikkei 225 equities index advanced 1.3% (up 1.7% y-t-d). Japanese 10-year "JGB" yields were unchanged at 0.02% (down 2bps). France's CAC40 rose 3.1% (up 11.7%). The German DAX equities index gained 2.2% (up 10.8%). Spain's IBEX 35 equities index surged 3.9% (up 19.1%). Italy's FTSE MIB index jumped 4.2% (up 11.7%). EM equities were mixed. Brazil's Bovespa index added 0.5% (up 9.1%). Mexico's Bolsa increased 0.5% (up 8.4%). South Korea's Kospi rose 1.6% (up 10.6%). India’s Sensex equities index slipped 0.2% (up 12.1%). China’s Shanghai Exchange dropped 1.6% (unchanged). Turkey's Borsa Istanbul National 100 index declined 0.8% (up 20.2%). Russia's MICEX equities index declined 0.7% (down 10.3%).
Junk bond mutual funds saw outflows of $386 million (from Lipper).
Freddie Mac 30-year fixed mortgage rates slipped a basis point to 4.02% (up 41bps y-o-y). Fifteen-year rates were unchanged at 3.27% (up 41bps). The five-year hybrid ARM rate added a basis point to 3.13% (up 33bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates unchanged at 4.14% (up 38bps).
Federal Reserve Credit last week declined $7.9bn to $4.432 TN. Over the past year, Fed Credit declined $5.2bn (down 0.1%). Fed Credit inflated $1.621 TN, or 58%, over the past 234 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt rose $4.6bn last week to $3.215 TN. "Custody holdings" were down $13.1bn y-o-y, or 0.4%.
M2 (narrow) "money" supply last week was little changed at a record $13.440 TN. "Narrow money" expanded $752bn, or 5.9%, over the past year. For the week, Currency increased $3.9bn. Total Checkable Deposits declined $11bn, while Savings Deposits gained $6.7bn. Small Time Deposits and Retail Money Funds were about changed.
Total money market fund assets gained $1.6bn to $2.644 TN. Money Funds fell $67bn y-o-y (2.5%).
Total Commercial Paper rose $12.4bn to $993bn. CP declined $128bn y-o-y, or 11.4%.
Currency Watch:
The U.S. dollar index declined 0.4% to 98.65 (down 3.7% y-t-d). For the week on the upside, the euro increased 1.0%, the New Zealand dollar 0.8%, the Swiss franc 0.7%, the South Korean won 0.5% and the British pound 0.2%. For the week on the downside, the Japanese yen declined 1.1%, the Mexican peso 0.9%, the Australian dollar 0.9%, the Singapore dollar 0.6%, the South African rand 0.4% and the Norwegian dollar 0.1%. The Chinese renminbi declined 0.14% versus the dollar this week (up 0.61% y-t-d).
Commodities Watch:
The Goldman Sachs Commodities Index was hit 3.0% (down 6.8% y-t-d). Spot Gold dropped 3.7% to $1,222 (up 6.0%). Silver sank 5.7% to $16.27 (up 1.8%). Crude fell $3.11 to $46.22 (down 14%). Gasoline lost 2.8% (down 10%), while Natural Gas slipped 0.3% (down 13%). Copper dropped 3.0% (up 1%). Wheat gained 2.1% (up 8%). Corn rose 1.2% (up 5.3%).
Trump Administration Watch:
May 1 – New York Times (Andrew Ross Sorkin): “For a brief moment, Wall Street stopped on Monday, as if time was suspended in an alternative reality. President Trump, for the first time as resident of the White House, said aloud that he was considering breaking up the nation’s biggest banks. Of course, he had said it on the campaign trail, but this seemed different. ‘I’m looking at that right now,’ Mr. Trump told Bloomberg News… ‘There’s some people that want to go back to the old system, right? So we’re going to look at that.’”
May 1 – Wall Street Journal (Ryan Tracy): “The Trump administration, looking to make its first major imprint on U.S. banking regulators, is preparing to replace Comptroller of the Currency Thomas Curry as chief overseer of federally chartered banks, according to people familiar… President Donald Trump could soon replace Mr. Curry with an acting head of the agency, who would serve until a new comptroller is confirmed…”
China Bubble Watch:
May 3 – Bloomberg: “China is breaking out its mouthpieces -- and wallet -- as it seeks to soothe investors in the face of tighter financial market regulations. The central bank-run Financial News urged stock investors not to overreact to tougher regulations in front-page commentary… The monetary authority will prevent swings in liquidity from exceeding tolerable levels, the official Xinhua News Agency-owned China Securities Journal added in a separate front-page opinion piece. The People’s Bank of China then injected more cash into the financial system through open-market operations Wednesday than on any day since January as the benchmark government bond yield climbed to the highest level in two years.”
May 3 – Bloomberg: “China’s deleveraging campaign is providing a reality check to the fledgling municipal bond market. Set up in 2015 to bring transparency to local-government borrowing practices, the new market benefited from the perception that Beijing had the provinces’ backs, with yields largely on par with the sovereign despite some weak municipal balance sheets. Not anymore -- a clampdown on risk and record levels of debt in China’s financial system is spurring a reassessment of the market, with the premium demanded by investors on muni bonds over central government debt surging to a record as volumes in the secondary market slide. While the shift to pricing based on risk is a step toward a more mature, world-standard bond market, for now at least it poses a challenge given plans for a record year of issuance… Sales in the local-government debt market are set to reach an all-time high of 1.63 trillion yuan ($237bn) in 2017…”
May 5 – Reuters (Matthew Miller and Shu Zhang): “China's Anbang Life Insurance Co was punished by the country's insurance regulator which on Friday barred the firm from applying to issue new products for three months, the latest move in an industry-wide crackdown. Anbang Life, a key part of Anbang Insurance Group Co, was cited for ‘disrupting market order’ by designing a product that bypassed regulations aimed at curbing growth of short-term, risky universal life insurance products, the China Insurance Regulatory Commission (CIRC) said in an online public notice. CIRC's move against Anbang Life comes during a widespread regulatory crackdown on what is seen as the excessive use of universal life products by some insurers, and as China's central leadership moves to curb risk in the financial system.”
April 29 – Reuters (Sue-Lin Wong and Kevin Yao): “Growth in China's manufacturing sector slowed faster than expected in April…, as producer price inflation cooled and policymakers' efforts to reduce financial risks in the economy weighed on demand. The National Bureau of Statistics' official Purchasing Managers' Index (PMI) fell to a six-month low of 51.2 in April from March's near five-year high of 51.8.”
May 3 – Reuters (Yawen Chen and Nicholas Heath): “China's factory sector lost momentum in April, with growth slowing to its weakest pace in seven months as domestic and export demand faltered and commodity prices fell, a private survey showed… The Caixin/Markit Manufacturing Purchasing Managers' index (PMI) fell to 50.3 in April, missing economist forecasts' of 51.0 and a significant decline from March's 51.2.”
May 3 – Reuters (Yawen Chen and Nicholas Heath): “Growth in China's services sector cooled to its slowest in almost a year in April as fears of slower economic growth dented business confidence, even as cost pressures eased… The Caixin/Markit services purchasing managers' index (PMI) fell to 51.5 from March's 52.2, the fourth monthly decline in a row…”
May 3 – Reuters (Kevin Yao): “China will step up its crackdown on illegal foreign exchange deals this year as authorities boost authenticity and compliance checks on trade and investment, its forex regulator said… Beijing has announced a series of measures since November to tighten capital outflow curbs, including closer scrutiny of outbound investments and individual foreign exchange purchases, to support the yuan and preserve its foreign exchange reserves.”
May 1 – Wall Street Journal (Anjani Trivedi): “Beware global auto makers: China is getting ready to flood the world with its car exports. Last week, a number of Chinese ministries and the National Development and Reform Commission jointly announced long-term plans for the auto industry. Among the goals: Higher developed-market export sales and market share. Lofty goals for China’s car makers are understandable. The report said autos and related industries bring 10% of the nation’s tax revenue and account for 10% of all jobs. And the industry has capacity to spare. Utilization rates vary widely but range from 60% to 80%. Meanwhile, production continues to rise.”
May 2 – Bloomberg (Sabrina Willmer and Erik Schatzker): “Kyle Bass, founder of Hayman Capital Management, warned that ballooning assets in Chinese wealth management products are another sign of a looming credit crisis in the nation. ‘Some of the longer-term assets aren’t doing very well,’ Bass said… ‘As soon as liabilities have problems all hell breaks loose.’ The wealth management products, or WMPs, have swelled to $4 trillion in assets in the last few years, he said. Bass has been sounding the alarm for some time that debt-burdened Chinese banks need to be restructured.”
Europe Watch:
May 2 – Bloomberg (Ferdinando Giugliano): “Emmanuel Macron looks on course to become France's new president, ending the threat of a euroskeptic at the Elysee. Even if Macron wins, though, it'll be too soon to celebrate a new phase of stability in the euro zone. Across the Alps, an economic and political storm is brewing -- and there's no sign anyone can stop it. Italy's economic problems are in many ways worse than France's. Public debt stands at nearly 133% of gross domestic product; in France, it's 96%. The last time Italy grew faster than France was in 1995… Meanwhile Italian politics goes from bad to worse. The Five Star Movement, a populist force that wants to hold a referendum on Italy's membership of the euro system, is riding high in the polls…”
May 2 – Bloomberg (Alessandro Speciale): “Euro-area factories expanded output at the fastest pace since 2011 as the currency bloc’s economy continued to gather momentum. A gauge of manufacturing activity rose to 56.7 in April from 56.2 the previous month, IHS Markit reported…”
May 3 – Reuters (Renee Maltezou): “Promising to cut pensions and give taxpayers fewer breaks, Greece has paved the way for the disbursement of further rescue funds from international lenders and possibly opened the door to reworking its massive debt. Officials from both sides reached agreement… on a package of bailout-mandated reforms, ending six months of staff-level haggling. Greek Finance Minister Euclid Tsakalotos announced it with a term associated with papal elections. ‘There was white smoke,’ he told reporters.”
May 2 – Reuters (Francois Murphy and Shadia Nasralla): “The European Central Bank will have to hold a discussion next month about its strategy for 2018 and the eventual exit from its ultra easy monetary policy, ECB Governing Council member Ewald Nowotny said… The ECB last week said that prospects for the euro zone economy have improved but the time to withdraw support has not yet come, resisting pressure from countries like Germany to start winding down its 2.3 trillion euro asset-purchase program. ‘At the (ECB) meeting in June we will have to discuss the future strategy, the strategy for the beginning of 2018,’ Nowotny… told newspaper Die Presse.”
May 2 – Bloomberg (Tommaso Ebhardt, Chiara Albanese, and Deena Kamel): “Alitalia SpA started bankruptcy proceedings for the second time in a decade, throwing the survival of Italy’s flag carrier in doubt after the airline failed to fend off budget rivals. Shareholders voted unanimously to file for insolvency administration, the airline said…”
Brexit Watch:
April 29 – Financial Times (Alex Barker, Arthur Beesley and Rochelle Toplensky): “European leaders are warning Theresa May over her ‘completely unreal’ expectations of a swift trade deal, as they gathered in Brussels to agree a tough opening stance on Brexit talks. After sitting down for lunch on Saturday, European leaders took just a few minutes to adopt their formal guidelines for Brexit talks, prompting spontaneous applause around the table. Relishing the show of unity, Jean-Claude Juncker joked it was ‘the first and last time’ the bloc would take a decision so quickly.”
Global Bubble Watch:
April 29 – Financial Times (Christian Pfrang and Robin Wigglesworth): “The relief with which markets greeted the victory of centrist Emmanuel Macron in the first round of France’s election this week has only sharpened the appeal of a trade whose popularity is also raising fears of turbulence should it unravel. Selling insurance against the risk of sharp price movements across markets has been an easy and profitable trade in recent years, helping portfolios generate additional returns during the era of ultra-low bond yields and significant underperformance by many hedge funds and other active investors. As a result, a once niche strategy has become very popular… ‘These strategies seem to be gaining traction with investors across the world, in all channels,’ says Doug Kramer, co-head of quantitative investing at Neuberger Berman. Betting against bouts of market turbulence comes in many shapes.”
May 3 – Wall Street Journal (Nathaniel Taplin): “Credit equals steel. It is a simple equation that explains a lot about how China works. Iron-ore futures plunged Thursday morning, down 8%--as far as market regulators allow in a single day. Copper was down 3% Wednesday. A main culprit: Officials spouting tough language on curbing local-government debt, a key feedstock for commodity demand. Another factor: April’s weak readings on Chinese factory activity. Regulators are under intense pressure to demonstrate progress on ‘deleveraging’ following expressions of concern from President Xi Jinping and other top officials. Past attempts to rein in local debt have proven temporary and ineffectual in terms of actually reducing China’s debt as a proportion to the size of the economy.”
May 4 – Bloomberg (Susanne Barton and Mark Burton): “Copper headed for the biggest two-day loss since 2015 as industrial metals plunged amid concern over demand in China and speculation that the Federal Reserve will further raise U.S. interest rates this year. Mining shares also extended losses. Demand concerns are mounting just as copper stockpiles tracked by the London Metal Exchange jumped 25% in two days, the most since March… The Bloomberg World Mining Index of equities fell for a fourth day as iron ore tumbled in Dalian and steel plummeted in Shanghai.”
May 2 – New York Times (Landon Thomas Jr.): “It has become one of the knottier puzzles on Wall Street. As political risks have increased at home and abroad, complacency among investors has rarely been so widespread. This trend, which began soon after President Trump’s victory in November, culminated on Monday, when the VIX index, known widely as Wall Street’s fear gauge, dipped briefly below 10… At current levels, the VIX reflects a striking sense among investors that the persistent rise in stocks would continue, regardless of election fears in Europe and concerns here that Mr. Trump might not deliver on his ambitious economic agenda. ‘The pricing of risk is at near historic lows, and the pricing of the stock market is at near historic highs,’ said Julian Emanuel, a stock and derivatives specialist at the investment bank UBS. ‘And all of this at a time when political risk is very elevated — at home and abroad.’”
May 2 – Bloomberg (Kim Chipman and Erik Hertzberg): “Ripples from the downward spiral of mortgage lender Home Capital Group Inc. haven’t yet reached Vancouver. The cost of a benchmark home in the Pacific Coast city surged 11% to C$941,100 ($685,233) compared with a year earlier... Condominiums were the big gainers, climbing 17% to C$554,100. ‘Demand has been increasing for months and supply is not keeping pace,’ Jill Oudil, president of the board, said… ‘We’ll likely continue to see prices increase.’”
May 2 – Financial Times (John Plender): “Canada and Australia led a relatively charmed life through the great financial crisis of 2007-8, with their banking systems proving more robust than most. Yet it is possible that they may have a delayed reaction thanks to overheated property markets in some of their biggest cities. More specifically, the plight of Home Capital Group, Canada’s largest alternative mortgage lender, gives pause for thought. The company was rocked late last month when the Ontario Securities Commission alleged that executives broke Ontario securities laws and misled shareholders in their handling of a scandal involving falsified documentation for mortgages… The question is whether Home Capital, which is being propped up by a $2bn line of (very expensive) credit from a syndicate led by the Healthcare of Ontario Pension Plan, will turn out to be the proverbial canary in the coal mine.”
May 3 – Bloomberg (Kim Chipman and Erik Hertzberg): “Toronto home price gains slowed in April and new listings soared the most in seven years, signaling the red-hot market may be cooling after the Ontario government imposed new measures to curb runaway gains in Canada’s biggest city. Housing prices jumped 25% last month from a year earlier, down from the 33% annual increase in March. The average price of C$920,791 ($671,000) in April was just 0.5% higher than in March…”
May 1 – Wall Street Journal (Richard Teitelbaum): “Corporate deal-making has hit a rough patch despite robust stock and bond markets that in the past have led to a deluge of such activity. Mergers and acquisitions this year have slid to their lowest level globally in nearly 20 years because valuations as well as political and economic uncertainty are making potential buyers wary. The number of deals world-wide involving publicly traded targets this year fell to 793 as of April 28, according to Dealogic, down 20% from 991 in the comparable period last year and the lowest number since 1998. Meanwhile, companies are paying higher multiples… Buyers paid an average of 12.8 times the target’s earnings before interest, taxes, depreciation and amortization so far this year, up from 12.1 for the comparable period in 2016 and the highest year-to-date multiple since 1997. The value of deals globally, however, is up 13.9% year to date at $479.8 billion.”
May 3 – Bloomberg (Michael Heath): “Australia’s central bank chief had a reminder Thursday for borrowers that have helped send household debt to record levels: interest rates will one day rise. Reserve Bank of Australia Governor Philip Lowe used a speech… to reiterate his concerns about growth in private debt outpacing incomes. The risk is that heavily indebted households could slash their spending in response to any shock, meaning ‘an otherwise manageable downturn could be turned into something more serious,’ Lowe said. ‘My overall assessment is that the recent increase in household debt relative to our incomes has made the economy less resilient to future shocks,’ the governor said… ‘Double-digit growth in debt owed by investors at a time of weak income growth cannot be strengthening the resilience of our economy.’”
April 30 – Financial Times (Jamie Smyth): “A Sydney mansion has been sold for A$75m (US$56m), a record for a single house in Australia, as regulators fret about an emerging housing bubble. Scott Farquhar, co-founder of software group Atlassian, bought the 7,000 square metre harbourside estate from the Fairfax family…”
Fixed Income Bubble Watch:
May 3 – Bloomberg (Michelle Kaske, Jodi Xu Klein , and Andrew Dunn): “Puerto Rico has finally and officially filed for protection from its creditors in what amounts to the biggest municipal bankruptcy in U.S. history. Now comes the real reckoning. After years of wrangling in Washington, San Juan and on Wall Street -- a fight that has pitted hedge funds against some of the poorest U.S. citizens -- a federal judge may at last help decide who gets paid, and how much… The commonwealth is asking a federal court to force creditors to take losses on about $74 billion of debt.”
Federal Reserve Watch:
May 3 – Wall Street Journal (Nick Timiraos): “The Federal Reserve said it expected economic growth to rebound after a soft first quarter, signaling the central bank is likely to continue gradually raising short-term interest rates this year if it is right. Officials voted unanimously to hold their benchmark rate steady in a range between 0.75% and 1%, after a two-day policy meeting… The Fed’s postmeeting policy statement was fairly upbeat. It said slower growth in the January-to-March period was ‘likely to be transitory,’ echoing officials’ recent public comments suggesting the bar to knock the central bank off its policy path is higher now than in previous years.”
U.S. Bubble Watch:
May 1 – Wall Street Journal (Gunjan Banerji): “A measure of expected stock volatility, known as Wall Street’s fear gauge, slid Monday to its lowest level in more than a decade. The CBOE Volatility Index slumped 6.6% to 10.11, its lowest level since February 2007. In a rare occurrence, the gauge, called VIX, briefly fell Monday as low as 9.9 for the second time in 2017, after more than eight years without dipping below 10…”
May 3 – Bloomberg (Sho Chandra): “America’s service industries expanded more than projected in April as a measure of orders reached the highest level since 2005, a survey from the Institute for Supply Management showed… Non-manufacturing index rose to 57.5, the second-highest since October 2015 (forecast was 55.8) from 55.2 in March… Gauge of orders climbed to 63.2, the highest since August 2005, from 58.9. Measure of business activity increased to 62.4 from 58.9…”
May 4 – Bloomberg (Sho Chandra): “U.S. worker productivity declined in the first quarter by the most in a year as growth in the world’s largest economy weakened… The measure of employee output per hour decreased at a 0.6% annual rate (forecast was a 0.1% decline) after a revised 1.8% gain in the prior three months. Expenses per worker rose at a 3% pace…”
May 2 – Bloomberg (Jamie Butters and David Welch): “The slump in the U.S. auto industry is showing no signs of letting up. Sales at all six of the biggest automakers in the U.S. dropped again in April, with Ford Motor Co. and Honda Motor Co. posting the steepest declines -- about 7% each. To make matters worse, each company’s figures fell short of what analysts had estimated, sending the industry to its fourth straight down month after a record sales year in 2016.”
May 3 – Bloomberg (David Welch, Keith Naughton, and Jamie Butters): “Auto workers may be getting some extra time off around Independence Day, but they won’t be celebrating. They’ll know it means sales are weak and that profits -- and profit-sharing checks -- could be shrinking. Manufacturers used to shut plants for a week or two in July for maintenance and to keep inventories in check. As sales boomed in recent years, most factories cranked out cars without a break. This summer, widespread closures may be back, and for weeks longer than before. The reason: four straight months of declining sales and little expectation the trend will reverse anytime soon.”
May 1 – Financial Times (Adam Samson, Eric Platt and Robin Wigglesworth): “US corporate boardrooms’ approval of share buyback plans has fallen to its lowest level since 2012, signalling that the stock market’s surge to further highs this year is curbing a key source of demand for equities. Companies on the S&P 500 index have authorised $146bn in share buybacks this year, down 15% from a year ago… Executives have also been reluctant to pull the trigger on already-approved plans, with buyback executions 20% lower in 2017 compared with last year.”
May 3 – Bloomberg (Sho Chandra): “America’s service industries expanded more than projected in April as a measure of orders reached the highest level since 2005, a survey from the Institute for Supply Management showed… Non-manufacturing index rose to 57.5, the second-highest since October 2015 (forecast was 55.8) from 55.2 in March… Gauge of orders climbed to 63.2, the highest since August 2005… Measure of business activity increased to 62.4 from 58.9…”
May 4 – Reuters (Rodrigo Campos and Noel Randewich): “While some investors have been waiting for Apple's market capitalization to reach $1 trillion, those looking for big round numbers might be better off looking to the S&P 500 technology index as a whole, which is approaching the $5 trillion mark. The S&P 500 technology index… will hit $5 billion in about two months if its growth of 16% so far in 2017 continues at the same pace.”
Japan Watch:
May 1 – Financial Times (Leo Lewis): “Among casino operators there is no fixed classification of a ‘whale’, the sort of high-rolling gambler who wagers large amounts of money. Casinos just know a high roller when they walk in, and adjust, with a smile, accordingly. The Bank of Japan’s role in the Tokyo stock market is a similar test of taxonomy. Since the end of 2010, the BoJ has been buying exchange traded funds (ETFs) as part of its quantitative and qualitative easing programme. The biggest action began last July, when its annual acquisition target was doubled to ¥6tn. Since then, the whale designation has seemed pretty obvious: the central bank swallows a minimum of ¥1.2bn of ETFs every single trading day (tailored to support stocks that further ‘Abenomics’ policies), and lumbers in with buying bursts of ¥72bn roughly once every three sessions.”
Leveraged Speculation Watch:
May 2 – Bloomberg (Brian Chappatta): “The fast money in the $14 trillion Treasuries market may turn out to be too slow. For the first time since July, hedge funds and other large speculators are bullish on Treasuries across the yield curve, U.S. Commodity Futures Trading Commission data show. The shift in 10-year futures was particularly striking, with the group adding an unprecedented 255,942 net-long contracts as of the latest figures…”
Geopolitical Watch:
May 3 – Reuters (Ben Blanchard): “China… urged all parties in the Korean standoff to stay calm and ‘stop irritating each other,’ a day after North Korea said the United States was pushing the region to the brink of nuclear war. North Korea's state media published a rare, strong, criticism of China on Wednesday, saying Chinese state media commentaries calling for tougher sanctions over Pyongyang's nuclear program were undermining relations with Beijing and worsening tensions.”
May 1 – Reuters (Martin Petty and Manuel Mogato): “Across Asia, more and more countries are being pulled into Beijing's orbit, with the timid stance adopted by Southeast Asian nations on the South China Sea at a weekend summit a clear sign this fundamental geostrategic shift is gathering momentum. U.S. President Donald Trump's flurry of calls at the weekend to the leaders of the Philippines, Thailand and Singapore might cheer those who fear his predecessor Barack Obama's ‘pivot’ to Asia has been abandoned in favor of an ‘America First’ agenda.”
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