[Reuters] U.S. junk bond sector ends rough week on calmer note
[NYT, Morgenson] After 20 Years of Financial Turmoil, a Columnist’s Last Shot
[WSJ] Declines in Stocks, Junk Bonds Reveal Cracks in Global Rally
[WSJ] Why Investors Should Get Nervous About Tax Cuts
[FT] How Germany got its gold back
[Reuters] North Korea says Trump begged for a war during his Asia trip
[Reuters] Exclusive: How Saudi Arabia turned on Lebanon's Hariri
[Reuters] Protesters flood Barcelona demanding release of separatist leaders
[Reuters] Italy's populist 5-Star strengthens lead after Sicily vote: poll
Saturday, November 11, 2017
Friday, November 10, 2017
Weekly Commentary: "Money" on the Move
It’s been awhile since I’ve used this terminology. But global markets this week recalled the old “Bubble in Search of a Pin.” It’s too early of course to call an end to the great global financial Bubble. But suddenly, right when everything looked so wonderful, there are indication of "Money" on the Move. And the issues appears to go beyond delays in implementing U.S. corporate tax cuts.
The S&P500 declined only 0.2%, ending eight consecutive weekly gains. But the more dramatic moves were elsewhere. Big European equities rallies reversed abruptly. Germany’s DAX index traded up to an all-time high 13,526 in early Tuesday trading before reversing course and sinking 2.9% to end the week at 13,127. France’s CAC40 index opened Tuesday at the high since January 2008, only to reverse and close the week down 2.5%. Italy’s MIB Index traded as high as 23,133 Tuesday before sinking 2.5% to end the week at 22,561. Similarly, Spain’s IBEX index rose to 10,376 and then dropped 2.7% to close Friday’s session at 10,093.
Having risen better than 20% since early September, Japanese equities have been in speculative blow-off mode. After trading to a 26-year high of 23,382 inter-day on Thursday, Japan’s Nikkei 225 index sank as much as 859 points, or 3.6%, in afternoon trading. The dollar/yen rose to an eight-month high 114.73 Monday and then ended the week lower at 113.53. From Tokyo to New York, banks were hammered this week.
Perhaps the more important developments of the week unfolded in fixed-income. Despite the selloff in the region’s equities markets, European sovereign debt experienced no safe haven bid. German bund yields traded at 0.31% on Wednesday, before a backup in rates saw yields close the week at 0.41%. Italian bond yields traded as low as 1.69% on Wednesday before closing the week at 1.84%. Spain’s yields ended the week up 10 bps to 1.56%.
November 9 – Bloomberg (Molly Smith): “The run-up in junk bonds is showing signs of returning to earth. After a spate of bad news triggered sell-offs of a few big speculative-grade borrowers, the pain has spread and even led NRG Energy Inc. to pull a $870 million bond offering on Thursday. Exchange-traded funds that buy high-yield debt have plunged the most since August, with $563 million of retail outflows since the start of this week alone. Three of the biggest junk-rated borrowers, IHeartMedia Inc., CenturyLink Inc. and Community Health Systems Inc., posted disappointing earnings that sent their bonds plunging.”
November 10 – Wall Street Journal (Ben Eisen and Sam Goldfarb): “A red-hot bond market is turning more frosty toward junk-rated issuers. Investors demanded a 3.79 percentage point premium, or spread, over going rates to own junk bonds, the highest in nearly two months on Thursday… That’s up from 3.38 percentage point on Oct. 24, near its lowest since the financial crisis. The market gyrations suggest a shift away from particularly easy conditions that were on full display just a few months ago.”
November 9 – Bloomberg (Dani Burger): “As U.S. markets swim in sea of red, trading in the largest high-yield exchange-traded funds has skyrocketed to dizzying levels. The iShares iBoxx High Yield Corporate Bond ETF, Blackrock Inc.’s $18.7 billion fund, saw volume spike over five times higher than its average level… At more than 23.8 million shares, trading in the largest junk-bond fund has already surpassed its one-day average of 11 million for the past year -- outpacing volume notched in August amid saber-rattling between the U.S. and North Korea.”
NRG’s large refinancing was the first junk deal pulled since June. Friday then saw Canyon Consolidated Resources cancel its junk bond sale. Interestingly, Tesla’s $1.8 billion junk bond issue sold back in August now trades near 94, with yields up 50 bps in two weeks to 6.26%. Netflix’s 2018 bond saw yields jump 27 bps this week to 5.18%.
This week’s junk selloff was most pronounced in the telecom and healthcare sectors, buffeted by earnings disappointments and the failed Sprint/T-Mobile merger. Sprint CDS surged 120 bps this week to an 11-month high 342 bps. It’s worth noting that the telecommunications sector – making up about 20% of most junk indices – has suffered a flurry of earnings disappointments this quarter. CenturyLink (2039) bond yields surged 42 bps this week to 9.46%.
There were notable jumps in (high-yield) communication-related company CDS prices this week. CDS prices spiked 542 bps for Windstream, 223 bps for Frontier Communications, 175 bps for CenturyLink, 163 bps for Qwest, 88 bps for Level 3 Communications and 25 bps for Dish Corp. In the investment-grade communications arena, CBS, Viacom, Expedia and Bell South all saw CDS prices rise to near six-month highs.
Monitoring U.S. junk spreads by sector, Tech, Consumer Discretionary, Telecommunications and Healthcare all traded to three-month wides this week. One could argue that the strong performance of Energy over recent months has helped mask deteriorating performance in key high-yield sectors.
Especially late in Bubble periods, the marginal (“junk”) borrower plays an increasingly instrumental role in both Financial and Real Economy booms. Loose financial conditions and intense speculation ensure abundant cheap finance. And so long as cheap “money” remains readily available, it will be borrowed (irrespective of the trend in fundamental factors).
A tech-heavy Nasdaq surged to record highs during the first quarter of 2000, seemingly oblivious to the rout that was unfolding in telecom debt. In all the exuberance, it’s easy to forget that “tech” Bubbles are fueled by infrastructure spending by scores of negative cash flow enterprises dependent on junk bonds, leveraged lending, speculative sector flows and loose finance more generally. Especially after securities prices have succumbed to speculative blow-off dynamics, few are prepared for how rapidly liquidity abundance can disappear.
Over the past year, enormous worldwide issuance of high-yield debt has been integral to the global Bubble. From Bloomberg Intelligence: “Emerging market primary market activity remains red-hot, with benchmark-eligible hard-currency debt issuance surpassing $500 billion this year for the first time on record.” China is currently enveloped in a (higher-yielding) corporate debt issuance boom. Europe has been enjoying a spectacular boom, with junk yields sinking all the way to a ridiculous 2%.
At this point, junk bond weakness is relatively confined. And in the recent past we’ve witnessed pullbacks that refreshed. Speculators were emboldened, as financial conditions loosened only further. Yet could sector concerns prove a harbinger of asset class issues and a problematic Risk Off backdrop?
When markets turn highly speculative – and especially when in “melt-up mode” – underlying fundamentals are not all that relevant to securities prices. News and analysis will invariably focus on the positive, while surging markets create their own liquidity and self-reinforcing bullish psychology (“greed”). It’s also true that markets can enjoy speculative blow-offs even in the face of underlying fundamental deterioration. The years 1999 and 2007 are not yet ancient history.
I’m beginning to think it might not take all that much to wake folks up to risk. And by the looks of Japanese and European equities (along with junk ETFs) this week, there may be some big players with fingers hovering over sell buttons. The Fed will likely raise rates next month, and I’ve already read some analysis that chairman Powell may not be the dovish pushover he’s been portrayed. There was also news out this week shedding further light on the growing split at the ECB. Meanwhile, the esteemed head of the People's Bank of China was publicly warning of ‘hidden, complex, sudden, contagious and hazardous’ risks within the Chinese financial system.
General financial conditions seemed to tighten marginally this week. And, curiously, as global risk markets were indicating some vulnerability, sovereign yields did something anomalous: they rose. A jump in yields concurrent with widening Credit spreads puts pressure on leveraged trades. It’s worth noting as well that the yen, euro and swissy all posted modest gains this week, perhaps putting pressure on global leveraged “carry trades.”
Recent highflyer EM equities markets fell under some pressure. Stocks were down 2.4% in Brazil and 2.1% in Turkey. Stocks retreated about 1% in India and Mexico. Geopolitical issues hammered markets in the Middle East. In general, Latin American equities were under notable selling pressure. There was also upward pressure on local currency EM bond markets. Yields were up 65 bps in Lebanon, 55 bps in Argentina and 19 bps in Brazil. Many EM yields traded to six-month highs this week. Most dollar-denominated EM yields moved to three-month highs.
From Bloomberg: “Mysterious Gold Trades of 4 Million Ounces Spur Price Plunge.” I haven’t a clue who might want to dump gold. But it was a week that saw losses in stocks, Treasuries and corporate debt. I would venture that it was not a particularly good performance week for the so-called “risk parity” crowd. Few groups have benefitted more from the float-all-boats, massive monetary stimulus of the past (going on) nine years. There are scores of investment models that have worked brilliantly during the most prolonged of bull markets. A tightening of financial conditions would expose a lot of genius swimming naked.
So how might we get from the recent “Risk On” to a problematic “Risk Off”?
Imagine a flurry of outflows from junk ETFs spurring illiquidity in the underlying securities holdings. This begins to spook some players leveraged in investment-grade corporate Credit. The more sophisticated players begin to take some risk off the table, as financial conditions tighten. Fears of outflows from the - now massive - passive investment-grade funds complex spur incipient risk aversion in equities. De-risking/de-leveraging dynamics begin to take hold – at home and abroad (spike in the yen pressuring global “carry”?). And with everyone now Crowded so nice and tight into the big tech names, an abrupt reversal of the leadership technology stocks would further rattle the leveraged lending market that has been operating in overdrive. Fears of a bursting “tech” Bubble overwhelm greed. Sinking tech would take down the indices, unleashing a bit of harsh reality upon the tsunami of “money” that has disregarded risk to participate in the passive index mania. The short volatility Crowd gets crushed.
For the Week:
The S&P500 dipped 0.2% (up 15.3% y-t-d), and the Dow declined 0.5% (up 18.5%). The Utilities gained 0.4% (up 13.9%). The Banks sank 4.4% (up 6.3%), while the Broker/Dealers added 0.3% (up 19.3%). The Transports dropped 2.6% (up 5.1%). The S&P 400 Midcaps declined 0.6% (up 9.9%), and the small cap Russell 2000 fell 1.3% (up 8.7%). The Nasdaq100 added 0.2% (up 29.7%). The Semiconductors increased 0.2% (up 43.8%). The Biotechs fell 2.8% (up 32.9%). With bullion up $6, the HUI gold index gained 0.5% (up 2.6%).
The S&P500 declined only 0.2%, ending eight consecutive weekly gains. But the more dramatic moves were elsewhere. Big European equities rallies reversed abruptly. Germany’s DAX index traded up to an all-time high 13,526 in early Tuesday trading before reversing course and sinking 2.9% to end the week at 13,127. France’s CAC40 index opened Tuesday at the high since January 2008, only to reverse and close the week down 2.5%. Italy’s MIB Index traded as high as 23,133 Tuesday before sinking 2.5% to end the week at 22,561. Similarly, Spain’s IBEX index rose to 10,376 and then dropped 2.7% to close Friday’s session at 10,093.
Having risen better than 20% since early September, Japanese equities have been in speculative blow-off mode. After trading to a 26-year high of 23,382 inter-day on Thursday, Japan’s Nikkei 225 index sank as much as 859 points, or 3.6%, in afternoon trading. The dollar/yen rose to an eight-month high 114.73 Monday and then ended the week lower at 113.53. From Tokyo to New York, banks were hammered this week.
Perhaps the more important developments of the week unfolded in fixed-income. Despite the selloff in the region’s equities markets, European sovereign debt experienced no safe haven bid. German bund yields traded at 0.31% on Wednesday, before a backup in rates saw yields close the week at 0.41%. Italian bond yields traded as low as 1.69% on Wednesday before closing the week at 1.84%. Spain’s yields ended the week up 10 bps to 1.56%.
November 9 – Bloomberg (Molly Smith): “The run-up in junk bonds is showing signs of returning to earth. After a spate of bad news triggered sell-offs of a few big speculative-grade borrowers, the pain has spread and even led NRG Energy Inc. to pull a $870 million bond offering on Thursday. Exchange-traded funds that buy high-yield debt have plunged the most since August, with $563 million of retail outflows since the start of this week alone. Three of the biggest junk-rated borrowers, IHeartMedia Inc., CenturyLink Inc. and Community Health Systems Inc., posted disappointing earnings that sent their bonds plunging.”
November 10 – Wall Street Journal (Ben Eisen and Sam Goldfarb): “A red-hot bond market is turning more frosty toward junk-rated issuers. Investors demanded a 3.79 percentage point premium, or spread, over going rates to own junk bonds, the highest in nearly two months on Thursday… That’s up from 3.38 percentage point on Oct. 24, near its lowest since the financial crisis. The market gyrations suggest a shift away from particularly easy conditions that were on full display just a few months ago.”
November 9 – Bloomberg (Dani Burger): “As U.S. markets swim in sea of red, trading in the largest high-yield exchange-traded funds has skyrocketed to dizzying levels. The iShares iBoxx High Yield Corporate Bond ETF, Blackrock Inc.’s $18.7 billion fund, saw volume spike over five times higher than its average level… At more than 23.8 million shares, trading in the largest junk-bond fund has already surpassed its one-day average of 11 million for the past year -- outpacing volume notched in August amid saber-rattling between the U.S. and North Korea.”
NRG’s large refinancing was the first junk deal pulled since June. Friday then saw Canyon Consolidated Resources cancel its junk bond sale. Interestingly, Tesla’s $1.8 billion junk bond issue sold back in August now trades near 94, with yields up 50 bps in two weeks to 6.26%. Netflix’s 2018 bond saw yields jump 27 bps this week to 5.18%.
This week’s junk selloff was most pronounced in the telecom and healthcare sectors, buffeted by earnings disappointments and the failed Sprint/T-Mobile merger. Sprint CDS surged 120 bps this week to an 11-month high 342 bps. It’s worth noting that the telecommunications sector – making up about 20% of most junk indices – has suffered a flurry of earnings disappointments this quarter. CenturyLink (2039) bond yields surged 42 bps this week to 9.46%.
There were notable jumps in (high-yield) communication-related company CDS prices this week. CDS prices spiked 542 bps for Windstream, 223 bps for Frontier Communications, 175 bps for CenturyLink, 163 bps for Qwest, 88 bps for Level 3 Communications and 25 bps for Dish Corp. In the investment-grade communications arena, CBS, Viacom, Expedia and Bell South all saw CDS prices rise to near six-month highs.
Monitoring U.S. junk spreads by sector, Tech, Consumer Discretionary, Telecommunications and Healthcare all traded to three-month wides this week. One could argue that the strong performance of Energy over recent months has helped mask deteriorating performance in key high-yield sectors.
Especially late in Bubble periods, the marginal (“junk”) borrower plays an increasingly instrumental role in both Financial and Real Economy booms. Loose financial conditions and intense speculation ensure abundant cheap finance. And so long as cheap “money” remains readily available, it will be borrowed (irrespective of the trend in fundamental factors).
A tech-heavy Nasdaq surged to record highs during the first quarter of 2000, seemingly oblivious to the rout that was unfolding in telecom debt. In all the exuberance, it’s easy to forget that “tech” Bubbles are fueled by infrastructure spending by scores of negative cash flow enterprises dependent on junk bonds, leveraged lending, speculative sector flows and loose finance more generally. Especially after securities prices have succumbed to speculative blow-off dynamics, few are prepared for how rapidly liquidity abundance can disappear.
Over the past year, enormous worldwide issuance of high-yield debt has been integral to the global Bubble. From Bloomberg Intelligence: “Emerging market primary market activity remains red-hot, with benchmark-eligible hard-currency debt issuance surpassing $500 billion this year for the first time on record.” China is currently enveloped in a (higher-yielding) corporate debt issuance boom. Europe has been enjoying a spectacular boom, with junk yields sinking all the way to a ridiculous 2%.
At this point, junk bond weakness is relatively confined. And in the recent past we’ve witnessed pullbacks that refreshed. Speculators were emboldened, as financial conditions loosened only further. Yet could sector concerns prove a harbinger of asset class issues and a problematic Risk Off backdrop?
When markets turn highly speculative – and especially when in “melt-up mode” – underlying fundamentals are not all that relevant to securities prices. News and analysis will invariably focus on the positive, while surging markets create their own liquidity and self-reinforcing bullish psychology (“greed”). It’s also true that markets can enjoy speculative blow-offs even in the face of underlying fundamental deterioration. The years 1999 and 2007 are not yet ancient history.
I’m beginning to think it might not take all that much to wake folks up to risk. And by the looks of Japanese and European equities (along with junk ETFs) this week, there may be some big players with fingers hovering over sell buttons. The Fed will likely raise rates next month, and I’ve already read some analysis that chairman Powell may not be the dovish pushover he’s been portrayed. There was also news out this week shedding further light on the growing split at the ECB. Meanwhile, the esteemed head of the People's Bank of China was publicly warning of ‘hidden, complex, sudden, contagious and hazardous’ risks within the Chinese financial system.
General financial conditions seemed to tighten marginally this week. And, curiously, as global risk markets were indicating some vulnerability, sovereign yields did something anomalous: they rose. A jump in yields concurrent with widening Credit spreads puts pressure on leveraged trades. It’s worth noting as well that the yen, euro and swissy all posted modest gains this week, perhaps putting pressure on global leveraged “carry trades.”
Recent highflyer EM equities markets fell under some pressure. Stocks were down 2.4% in Brazil and 2.1% in Turkey. Stocks retreated about 1% in India and Mexico. Geopolitical issues hammered markets in the Middle East. In general, Latin American equities were under notable selling pressure. There was also upward pressure on local currency EM bond markets. Yields were up 65 bps in Lebanon, 55 bps in Argentina and 19 bps in Brazil. Many EM yields traded to six-month highs this week. Most dollar-denominated EM yields moved to three-month highs.
From Bloomberg: “Mysterious Gold Trades of 4 Million Ounces Spur Price Plunge.” I haven’t a clue who might want to dump gold. But it was a week that saw losses in stocks, Treasuries and corporate debt. I would venture that it was not a particularly good performance week for the so-called “risk parity” crowd. Few groups have benefitted more from the float-all-boats, massive monetary stimulus of the past (going on) nine years. There are scores of investment models that have worked brilliantly during the most prolonged of bull markets. A tightening of financial conditions would expose a lot of genius swimming naked.
So how might we get from the recent “Risk On” to a problematic “Risk Off”?
Imagine a flurry of outflows from junk ETFs spurring illiquidity in the underlying securities holdings. This begins to spook some players leveraged in investment-grade corporate Credit. The more sophisticated players begin to take some risk off the table, as financial conditions tighten. Fears of outflows from the - now massive - passive investment-grade funds complex spur incipient risk aversion in equities. De-risking/de-leveraging dynamics begin to take hold – at home and abroad (spike in the yen pressuring global “carry”?). And with everyone now Crowded so nice and tight into the big tech names, an abrupt reversal of the leadership technology stocks would further rattle the leveraged lending market that has been operating in overdrive. Fears of a bursting “tech” Bubble overwhelm greed. Sinking tech would take down the indices, unleashing a bit of harsh reality upon the tsunami of “money” that has disregarded risk to participate in the passive index mania. The short volatility Crowd gets crushed.
For the Week:
The S&P500 dipped 0.2% (up 15.3% y-t-d), and the Dow declined 0.5% (up 18.5%). The Utilities gained 0.4% (up 13.9%). The Banks sank 4.4% (up 6.3%), while the Broker/Dealers added 0.3% (up 19.3%). The Transports dropped 2.6% (up 5.1%). The S&P 400 Midcaps declined 0.6% (up 9.9%), and the small cap Russell 2000 fell 1.3% (up 8.7%). The Nasdaq100 added 0.2% (up 29.7%). The Semiconductors increased 0.2% (up 43.8%). The Biotechs fell 2.8% (up 32.9%). With bullion up $6, the HUI gold index gained 0.5% (up 2.6%).
Three-month Treasury bill rates ended the week at 120 bps. Two-year government yields increased four bps to 1.66% (up 47bps y-t-d). Five-year T-note yields rose six bps to 2.05% (up 12bps). Ten-year Treasury yields gained seven bps to 2.40% (down 5bps). Long bond yields jumped nine bps to 2.88% (down 19bps).
Greek 10-year yields gained three bps to 5.12% (down 190bps y-t-d). Ten-year Portuguese yields slipped a basis point to 2.06% (down 169bps). Italian 10-year yields rose five bps to 1.85% (up 3bps). Spain's 10-year yields jumped 10 bps to 1.58% (up 20bps). German bund yields gained five bps to 0.41% (up 21bps). French yields increased three bps to 0.78% (up 10bps). The French to German 10-year bond spread narrowed two to 37 bps. U.K. 10-year gilt yields rose eight bps to 1.34% (up 11bps). U.K.'s FTSE equities dropped 1.7% (up 4.1%).
Japan's Nikkei 225 equities index added 0.6% to a 26-year high (up 18.7% y-t-d). Japanese 10-year "JGB" yields slipped a basis point to 0.04% (unchanged). France's CAC40 dropped 2.5% (up 10.7%). The German DAX equities index sank 2.6% (up 14.3%). Spain's IBEX 35 equities index fell 2.6% (up 7.9%). Italy's FTSE MIB index lost 2.0% (up 17.3%). EM markets were mostly lower. Brazil's Bovespa index dropped 2.4% (up 19.8%), and Mexico's Bolsa declined 1.0% (up 5.2%). India’s Sensex equities index fell 1.1% (up 25.1%). China’s Shanghai Exchange rose 1.8% (up 10.6%). Turkey's Borsa Istanbul National 100 index dropped 2.1% (up 39.4%). Russia's MICEX equities index surged 4.2% (down 2.8%).
Junk bond mutual funds saw outflows of $622 million (from Lipper).
Freddie Mac 30-year fixed mortgage rates fell four bps to 3.90% (up 33bps y-o-y). Fifteen-year rates declined three bps to 3.24% (up 35bps). Five-year hybrid ARM rates slipped a basis point to 3.22% (up 34bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down eight bps to 4.10% (up 37bps).
Federal Reserve Credit last week declined $2.6bn to $4.418 TN. Over the past year, Fed Credit increased $3.5bn. Fed Credit inflated $1.599 TN, or 57%, over the past 261 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt rose $7.6bn last week to $3.373 TN. "Custody holdings" were up $262bn y-o-y, or 8.4%.
M2 (narrow) "money" supply last week was little changed at $13.746 TN. "Narrow money" expanded $652bn, or 5.0%, over the past year. For the week, Currency increased $0.9bn. Total Checkable Deposits fell $43.7bn, while Savings Deposits jumped $40.1bn. Small Time Deposits were little changed. Retail Money Funds gained $1.4bn.
Total money market fund assets gained $10.6bn to $2.740 TN. Money Funds rose $57bn y-o-y, or 2.1%.
Total Commercial Paper added $3.9bn to $1.051 TN. CP gained $144bn y-o-y, or 15.8%.
Currency Watch:
The U.S. dollar index declined 0.6% 94.391 (down 7.8% y-t-d). For the week on the upside, the Swedish krona increased 1.0%, the Brazilian real 0.9%, the British pound 0.9%, the Canadian dollar 0.7%, the Mexican peso 0.5%, the Norwegian krone 0.5%, the euro 0.5%, the Japanese yen 0.5%, the Swiss franc 0.5%, the New Zealand dollar 0.4%, the Singapore dollar 0.4%, and the Australian dollar 0.1%. For the week on the downside, the South African rand declined 1.1% and the South Korean won dipped 0.3%. The Chinese renminbi was little changed versus the dollar this week (up 4.58% y-t-d).
Commodities Watch:
The Goldman Sachs Commodities Index jumped 1.9% (up 7.6% y-t-d). Spot Gold added 0.5% to $1,275 (up 10.7%). Silver added 0.2% to $16.871 (up 5.6%). Crude gained another $1.10 to $56.74 (up 5%). Gasoline rose 1.1% (up 9%), while Natural Gas slipped 0.6% (down 14%). Copper fell 1.3% (up 23%). Wheat gained 1.4% (up 5.8%). Corn fell 1.4% (down 2%).
Trump Administration Watch:
November 6 – Wall Street Journal (Richard Rubin and Siobhan Hughes): “A House committee began considering a bill Monday that would reduce taxes by $1.4 trillion over 10 years, but disagreements over key pieces of the measure could force the GOP to make changes and slow down plans to pass it by year’s end. House Republicans are at odds over plans to eliminate deductions for state and local taxes. Senate Republicans disagree on child tax credits and whether to accept significantly bigger budget deficits. Narrow margins in both chambers leave the party little room to maneuver.”
November 7 – CNBC (Jacob Pramuk): “The House Republican tax plan may have a deficit problem. The GOP bill including some changes would increase federal budget deficits by $1.7 trillion over 10 years, according to Joint Committee on Taxation estimates shared by the nonpartisan Congressional Budget Office. That includes money for additional debt service payments due to the bill. Under the plan, U.S. debt would rise to 97.1% of gross domestic product in 2027, up from 91.2% under current CBO projections.”
November 7 – Bloomberg (Lynnley Browning): “Multinational companies including Apple Inc., Pfizer Inc. and others would face a new tax on payments they make to offshore affiliates under the House Republicans’ tax bill -- a surprise provision that has stunned tax experts. The new 20% tax is ‘the atomic bomb in the draft’ legislation, said Ray Beeman, co-leader of Ernst & Young’s Washington Council advisory services group. ‘We’re trying to get our arms around the implications.’ So far, many big U.S. companies have kept quiet on the proposal. But already, House Ways and Means Chairman Kevin Brady has tweaked the provision to lessen its impact, part of a package of changes the tax-writing panel adopted Monday night.”
November 8 – Financial Times (Demetri Sevastopulo and Tom Mitchell): “Donald Trump blamed his predecessors for the US’s widening trade deficit with China, praising Xi Jinping and telling an audience in Beijing he did not ‘blame’ Chinese leaders for ‘taking advantage’ of Washington. In a striking change of tone from the US president…, Mr Trump appeared at pains to rekindle the bonhomie that characterised the leaders’ first meeting at his Florida compound in April, a tenor that quickly deteriorated over North Korea. Although Mr Trump has been welcomed with a state dinner and extensive pomp, Mr Trump’s personal warmth towards Mr Xi was not reciprocated, with the Chinese leader using far more restrained language in his own comments.”
November 6 – Financial Times (Demetri Sevastopulo and Robin Harding): “Donald Trump accused Japan of engaging in unfair trade practices on the first leg of his five-nation Asia tour, during which the American president will focus on improving the US trade balance and efforts to press North Korea to give up its nuclear weapons. Speaking in Tokyo on the second day of his visit to Japan, Mr Trump reprised some of the economic themes that dominated his presidential campaign by telling Japanese and US business executives that trade with Japan was ‘not free or reciprocal’. ‘We want fair and open trade. But right now, our trade with Japan is not fair and it’s not open,’ said Mr Trump. ‘The US has suffered massive trade deficits with Japan for many, many years. Many millions of cars are sold by Japan into the United States, whereas virtually no cars go from the US into Japan.”
November 7 – New York Times (Jane Perlez, Paul Mozur and Jonathan Ansfield): “When President Trump arrives in Beijing on Wednesday, he will most likely complain about traditional areas of dispute like steel and cars. But Washington officials and major global companies increasingly worry about a new generation of deals that could give China a firmer grip on the technology of tomorrow. Under an ambitious plan unveiled two years ago called Made in China 2025, Beijing has designs to dominate cutting-edge technologies like advanced microchips, artificial intelligence and electric cars, among many others, in a decade. And China is enlisting some of the world’s biggest technology players in its push. Sometimes it demands partnerships or intellectual property as the price of admission to the world’s second-largest economy. Sometimes it woos foreign giants with money and market access in ways that elude American and global trade rules.”
November 7 – Bloomberg (Michelle Jamrisko and Andrew Janes): “Trade tensions between the U.S. and China pose a greater worry to the global economy than a nuclear North Korea, said National Australia Bank Ltd. chief economist Alan Oster. The probability that the world’s two largest economies enter into a destructive trade war is around one-in-five, Oster said... It’s the biggest risk to global growth that’s otherwise chugging along at a decent rate and should rise to 3.6% in 2018 from 3.4% this year, he said. ‘It would kill Asia, and it would kill commodities,’ and have flow-through effects to the world, said Oster, a former senior adviser to Federal Treasury in Australia… ‘Overall, I think the world’s okay. Geopolitical risk is there a lot -- who knows about North Korea -- but I’m more worried about Trump and China.’”
Federal Reserve Watch:
November 8 – Bloomberg (Christopher Condon and Craig Torres): “Years before he was tapped to lead the Federal Reserve, Jerome Powell brought to the world’s most powerful central bank a lesson he learned in the business world: manage or be managed. On everything from the payments system to monetary policy, he noticed the Fed’s brainy staff of economists would hash out their differences among themselves and then present governors with a unified policy recommendation, expecting them mostly to follow their advice. That didn’t sit well with a lawyer who cut his teeth in private-equity investing. In that line of work, proposed deals must survive a gauntlet of scrutiny in front of top decision makers… So Powell the Fed governor pushed back. He insisted on some occasions that staff members debate policy ideas in front of him… He also pored over mountains of academic studies and asked questions. In his five-plus years at the Fed, he’s managed to gain the staff’s respect even as he challenged their ready-made recommendations.”
November 6 – CNBC (Jeff Cox): “The Federal Reserve will not only lose its three top-ranking officials in the months ahead but also the more than three decades of experience they brought to policymaking. In their place will be central bankers who could take quite a different approach to policy, a change the financial markets may not fully appreciate yet. New York Fed President William Dudley became the latest Fed official to say he'll be leaving soon… That comes just days after President Donald Trump said he will nominate Fed Governor Jerome Powell to take over the chairman's seat from Janet Yellen in February, and less than a month after the departure of Vice Chairman Stanley Fischer. That in effect takes out the ruling troika of monetary policy since early 2014, a group that holds some 35 years of monetary policy experience.”
U.S. Bubble Watch:
November 8 – Bloomberg: “Donald Trump touched down in China to news on one of his favorite topics: the trade deficit. But it mightn’t be the news he’s wanting. For the first 10 months of the year, China’s trade surplus with the U.S. was $223 billion… That pace should mean the full-year gap between China’s sales to the U.S. and its imports is about the same as in 2016, at around $250 billion… China’s trade data… showed: Exports increased 6.9% in dollar terms in October from a year earlier. Imports advanced 17.2% year-on-year. The total trade surplus was $38.2 billion.”
November 8 – CNBC (Diana Olick): “The steady rise in home prices is so far showing no boundaries, and that is turning up the heat on some already overheated housing markets. Home prices rose 7% nationally in September, compared with September 2016… according to CoreLogic, a real estate data firm. As a result, 48% of the nation's top 50 housing markets are now considered ‘overvalued,’ up from 46% in August. A market is considered overvalued when home prices are at least 10% higher than the long-term, sustainable level.”
November 8 – Wall Street Journal (Laura Kusisto): “California’s biggest housing markets figure to be among the losers if a Republican-sponsored tax overhaul becomes law, according to two analyses of local market data. The House bill would cap the size of mortgage loans for which taxpayers can deduct interest payments at $500,000. In most regions of the U.S., that represents a small fraction of properties. But in the priciest markets, concentrated in some of the nation’s largest coastal cities, the impact could be significant. In the San Jose, Calif., metropolitan area, 75% of new mortgage loans thus far in 2017 were for more than $500,000… The median home price there is more than $1 million, and even small starter homes can climb well above the proposed cap.”
November 7 – Wall Street Journal (Peter Grant and Laura Kusisto): “Rising homeownership is adding to the jitters in the residential rental market, which has slumped recently after a long stretch near the top of the commercial real-estate industry. For most of the current economic expansion, declining ownership rates have enabled landlords of apartments and single-family homes to raise rents far faster than the pace of inflation. Demand has been fueled by the millions of people who haven’t had the money, credit or desire to pursue the traditional American dream. But amid a hot housing market, the homeownership rate is now rising, in part because millennials are reaching the age when they’re forming families and settling down.”
November 8 – Wall Street Journal (Gordon Lubold): “U.S. wars in Afghanistan, Iraq, Syria and Pakistan have cost American taxpayers $5.6 trillion since they began in 2001, according to a new study, a figure more than three times that of the Pentagon’s own estimates. The Defense Department earlier this year estimated that the total cost of the conflicts since the 2001 attacks has amounted to about $1.5 trillion. The new study, by the Watson Institute of International and Public Affairs at Brown University, aims to reflect costs the Pentagon doesn’t include in its own calculations…”
November 6 – Bloomberg (Ben Steverman): “One of the hottest tickets in New York City this weekend was a discussion on whether to overthrow capitalism. The first run of tickets to ‘Capitalism: A Debate’ sold out in a day… The crowd waiting in a long line to get inside on Friday night was mostly young and mostly male. Asher Kaplan and Gabriel Gutierrez, both 24, hoped the event would be a real-life version of the humorous, anarchic political debates on social media. ‘So much of this stuff is a battle that’s waged online,’ said Gutierrez, who identifies, along with Kaplan, as a ‘leftist,’ if not quite a socialist. These days, among young people, socialism is ‘both a political identity and a culture,’ Kaplan said. And it looks increasingly attractive. Young Americans have soured on capitalism. In a Harvard University poll conducted last year, 51% of 18-to-29 year-olds in the U.S. said they opposed capitalism; only 42% expressed support… A poll released last month found American millennials closely split on the question of what type of society they would prefer to live in: 44% picked a socialist country, 42% a capitalist one.”
China Bubble Watch:
November 5 – Bloomberg: “China’s financial system is becoming significantly more vulnerable due to high leverage, according to central bank governor Zhou Xiaochuan, who has made a series of blunt warnings in recent weeks about debt levels… Latent risks are accumulating, including some that are ‘hidden, complex, sudden, contagious and hazardous,’ even as the overall health of the financial system remains good, Zhou wrote in a lengthy article published on the People’s Bank of China’s website… ‘High leverage is the ultimate origin of macro financial vulnerability,’ wrote Zhou, 69, who is widely expected to retire soon after a record 15-year tenure. ‘In sectors of the real economy, this is reflected as excessive debt, and in the financial system, this is reflected as credit that has been expanding too quickly.’”
November 5 – Bloomberg: “China’s financial system is becoming significantly more vulnerable due to high leverage, according to central bank governor Zhou Xiaochuan, who has made a series of blunt warnings in recent weeks about debt levels in the world’s second-largest economy. Latent risks are accumulating, including some that are ‘hidden, complex, sudden, contagious and hazardous,’ even as the overall health of the financial system remains good, Zhou wrote in a lengthy article published on the People’s Bank of China’s website… The nation should toughen regulation and let markets serve the real economy better, according to Zhou. The government should also open up markets by relaxing capital controls and reducing restrictions on non-Chinese financial institutions that want to operate on the mainland, he wrote.”
November 8 – Bloomberg: “China’s factory prices kept surging last month as authorities curb production in smokestack industries to combat pollution. The producer price index rose 6.9% in October from a year earlier, versus a projected 6.6% rise… and matching September’s pace. The consumer price index climbed 1.9%.”
November 8 – New York Times (Keith Bradsher): “China on Wednesday released fresh details about a new financial regulatory body intended to calm a financial system that in recent years has endured a stock market crash, a huge exodus of money outside the country and the rapid accumulation of debt. But the details may raise more questions than they answer, and could disappoint those looking for a strong hand to rein in the financial system underpinning the world’s second-largest economy. Official Chinese media reported… that a new Financial Stability and Development Committee had held its first meeting, nearly four months after President Xi Jinping ordered its creation. It said the meeting was led by Ma Kai, a 71-year-old vice premier. At the meeting, Mr. Ma stressed that China’s financial system should serve the real economy… namely, making money available to businesses that need it. He also stressed financial security, the report said.”
November 5 – Bloomberg: “China’s shadow banking sector, estimated by some analysts to be worth 122.8 trillion yuan ($18.5 trillion), stopped growing in the first half of the year as issuance of wealth management products declined, according to Moody’s… For the first time since 2012, China’s gross domestic product grew faster than shadow banking assets in the six-month period… Following last month’s Communist Party Congress, further regulation will continue to rein in shadow banking and address some of the key systemic imbalances, Moody’s said. While Moody’s assessment offers some evidence that China’s crackdown on shadow financing is starting to bite, authorities continue to sound the alarm on high debt levels.”
November 7 – Bloomberg: “Under pressure to trim borrowings, China’s companies have found a way to reduce their lofty debt burdens -- even if some of the risk remains. Sales of perpetual notes -- long-dated securities that can be listed as equity rather than debt on balance sheets given that in theory they could never mature -- have soared to a record this year as Beijing zeros in on leverage and the threat it poses to the financial system. The bonds are so popular that issuance by non-bank firms has jumped to the equivalent of 433 billion yuan ($65bn), more than seven times sales by companies in the U.S. ‘Chinese issuers love perpetual bonds because they are under great pressure to deleverage,’ said Wang Ying, a senior director at Fitch… ‘Sophisticated investors should do their homework and shouldn’t be misled by the numbers in accounting books.’”
November 5 – Financial Times (Charles Clover): “China has unveiled a ‘magical’ island-building ship on the eve of Donald Trump’s visit in a move likely to renew fears about its claims to territory in the South China Sea. At 140 metres the Tiankun is the biggest dredger in Asia, with cutters and pumps capable of smashing the equivalent of three Olympic pools of rock an hour from the sea floor and shooting it 15km away to create land. During the past five years, China has used similar vessels to create a string of strategic islands to support its claims to 85% of the sea.”
Central Banker Watch:
November 7 – Bloomberg (Alessandro Speciale and Piotr Skolimowski): “Three of the European Central Bank’s top policy makers pushed last month to alter a commitment to keep buying bonds until inflation improves, signaling challenges ahead for President Mario Draghi as the bank seeks to slow quantitative easing. Board member Benoit Coeure, Bundesbank President Jens Weidmann and Bank of France Governor Francois Villeroy de Galhau were the heavyweights who recommended tying the overall level of monetary stimulus -- rather than just asset purchases -- to the outlook for prices…”
Global Bubble Watch:
November 8 – Bloomberg (Luke Kawa): “The best way to crush the crowd in 2017? Buy the things everyone insisted would never keep going up. A portfolio stuffed with allegedly over-inflated assets would have returned more than 120% so far in 2017, trouncing the S&P 500 Index... The hypothetical ‘Bubblicious’ portfolio includes Chinese real estate and internet names, a pair of U.S. tech behemoths, a cryptocurrency fund, the ETF industry, bonds that mature decades from now, and a dash of short volatility bets just to make things more interesting. The out-performance is a testament to the momentum mania prevalent in today’s markets, a dynamic which has prompted the likes of Greenlight Capital’s David Einhorn, Goldman Sachs…, and Sanford C Bernstein… to mull whether value investing is in the midst of an existential crisis given ultra-low interest rates and abundant liquidity.”
November 6 – Bloomberg (Ian King): “Broadcom Ltd. offered about $105 billion for Qualcomm Inc., kicking off an ambitious attempt at the largest technology takeover ever in a deal that would rock the electronics industry. Broadcom made an offer of $70 a share in cash and stock for Qualcomm, the world’s largest maker of mobile phone chips. That’s a 28% premium over the stock’s closing price on Nov. 2… The proposed transaction is valued at approximately $130 billion on a pro forma basis, including $25 billion of net debt. Buying Qualcomm would make Broadcom the third-largest chipmaker, behind Intel Corp. and Samsung Electronics Co. The combined business would instantly become the default provider of a set of components needed to build each of the more than a billion smartphones sold every year. The deal would dwarf Dell Inc.’s $67 billion acquisition of EMC in 2015 -- then the biggest in the technology industry.”
Fixed Income Bubble Watch:
November 7 – Bloomberg (Cormac Mullen): “It’s one step forward, two steps back for bond volatility. Bank of America Merrill Lynch’s MOVE Index, a gauge of price swings in the U.S. Treasury market, fell to a record low on Monday, bucking last month’s uptrend. Renewed expectations that the Federal Reserve will stay the course on monetary policy in the midst of a leadership transition and the unveiling of the Republican tax plan have spurred an eight-day decline in the volatility of the world’s largest bond market.”
November 6 – Bloomberg (Lisa Lee and Adam Tempkin): “One of the last hurdles preventing riskier companies from slashing borrowing costs in an already red-hot leveraged loan market is crumbling. Managers of collateralized loan obligations, the biggest buyers of U.S. leveraged loans, have started to give in to an unprecedented surge of repricings of the debt they hold in their portfolios. More than $175 billion of CLOs have refinanced in the last 12 months, up from less than $10 billion in the prior one-year period… These refinancings could further strengthen the hands of borrowers, allowing them to demand even more rate cuts from their creditors who have little choice other than to say yes. Unlike junk bonds, loans are relatively easy to prepay, giving companies the option to refinance with a new group of investors. About $525 billion of loans have repriced during the last 12 months, compared to $130 billion in the prior one-year period…”
November 7 – Wall Street Journal (Paul J. Davies): “The hunt for yield is taking Wall Street and investors into exotic territory, and that means an appetite for credit assets that are private, not easily tradable and often complex. Putting together deals in what some dub ‘nonlinear finance’ is a growth business for investment banks’ big bond-trading arms and is helping clear unwanted assets off some balance sheets. However, such private deals, which aren’t publicly traded and don’t have public credit ratings, are a challenge for regulators keeping track of the growth of shadow banking and understanding whether such activity is driven by regulation or its avoidance. The business isn’t new, but it is heating up as banks hire specialists and commit balance-sheet capacity to feed investor demand.”
November 7 – Financial Times (Nicholas Megaw): “Record high prices combined with more risky corporate bond supply is creating ‘increasing uncertainty’ and raising the chances of a sharp turnround in the European high-yield credit market, Fitch… warned. Yields on the most popular benchmark for European junk bonds fell below 2% for the first time ever last week, but Fitch warned that recent market calm and the distorting impact of central bank monetary policy ‘obscure the true risk-return dynamics faced by investors’. The ratings agency said the proportion of newly-issued bonds with the lowest credit ratings – CCC+ or below – has risen to its highest level since 2013, when average yields were more than 5%.”
Europe Watch:
November 7 – Reuters (Thomas Escritt): “The German economy is at risk of overheating, according to a leaked advisory council report that follows pressure from the Bundesbank for a swifter end to the European Central Bank’s expansive monetary policy. In their annual report… the five ‘wise men’ who advise the German government on economic policy said the economy, which they expected to expand strongly this year and next, was moving gradually into a ‘boom phase’. ‘There are clear signs that economic capacity is over-utilised,’ read the report…”
November 8 – Bloomberg (Lorenzo Totaro): “Italy’s ratio of debt to economic output will rise slightly this year and won’t fall below 130% through 2019 as the pace of recovery slows, the European Commission said. The ratio will increase to 132.1% of gross domestic product from 132% in 2016, the Brussels-based EU executive arm said…”
Emerging Market Watch:
November 6 – Bloomberg (Daniel Cancel): “Venezuelan debt is teetering toward default with average prices near 30 cents on the dollar. As investors ponder an invite from the government to come to Caracas next week to discuss a restructuring…, they now demand a record 40.8 percentage points of extra yield over U.S. Treasury bills to hold the country’s bonds. No one really expects those yields to pay out as Venezuela seeks debt relief, but they do give an idea as to just how distressed the securities have become.”
Leveraged Speculation Watch:
November 7 – Bloomberg (Cecile Gutscher): “Hedge funds are headed for their best year since 2013 thanks to a gravity-defying stock market. Improving performance may go some way to assuaging criticism for fees that are hard to justify with mediocre returns, even though on average the funds underperformed equity benchmarks including the S&P 500 Index, which is up 15.7% year-to-date. 2017’s winning strategies were deployed by equity funds skewed toward health care and technology, according to… Hedge Fund Research Inc. through September. Over the same period, the S&P 500 Tech Index returned 26%...”
Geopolitical Watch:
November 7 – BBC (Suzy Waite and Nishant Kumar): “Saudi Arabia's Crown Prince Mohammed bin Salman has accused Iran of an act of ‘direct military aggression’ by supplying missiles to rebels in Yemen. This ‘may be considered an act of war’, state media quoted the prince as telling UK Foreign Secretary Boris Johnson…”
November 7 – Reuters (Tom Perry and Laila Bassam): “Saudi Arabia has opened a new front in its regional proxy war with Iran, threatening Tehran’s powerful ally Hezbollah and its home country Lebanon to try to regain the upper hand. With Iranian power winning out in Iraq and Syria, and Riyadh bogged down in a war with Iran-allied groups in Yemen, the new Saudi approach could bring lasting political and economic turmoil to a country where Tehran had appeared ascendant. The resignation on Saturday of the Saudi-allied Lebanese prime minister Saad al-Hariri, announced from Riyadh and blamed on Iran and Hezbollah, is seen by many as the first step in an unprecedented Saudi intervention in Lebanese politics.”
November 7 – Bloomberg (Suzy Waite and Nishant Kumar): “Cheap money may have buoyed emerging-market macro hedge funds toward their ninth straight annual advance, but that doesn’t mean investors are expecting an exodus as the world’s central bankers start turning off the taps. Demand for these funds remains so brisk, in fact, that some are turning new money away.”
November 7 – Financial Times (Erika Solomon): “A string of escalatory moves in the Gulf in recent days suggests the long-brewing cold war between Saudi Arabia and its regional arch-rival Iran could soon grow hot. It began with the surprise resignation of the Lebanese prime minister, Saad al-Hariri, announced on Saturday from Saudi Arabia. Riyadh is believed to have pressed him to step down in frustration that Mr Hariri, a long-time Saudi ally, had in effect given cover to the Lebanese Shia force Hizbollah, Iran’s top regional proxy, by sharing control of government with them. Hours later, in Yemen, a ballistic missile was fired by Iran-backed Houthi rebels towards Riyadh airport. Saudi Arabia accused Iran… of an ‘act of war’ over the incident; the same day King Salman of Saudi Arabia summoned Mahmoud Abbas, president of the Palestinian Territories, to a meeting. It raised suspicions that Mr Abbas too was coming under pressure from Riyadh after reaching a power-sharing deal with Hamas, the Iran-backed militant group.”
November 6 – AFP (Alison Tahmizian Meuse and Mohamed Hasni): “Saudi Arabia and Iran traded fierce accusations over Yemen…, with Riyadh saying a rebel missile attack ‘may amount to an act of war’ and Tehran accusing its rival of war crimes. Tensions have been rising between Sunni-ruled Saudi Arabia and predominantly Shiite Iran, which are opposed in disputes and conflicts across the Middle East from Yemen and Syria to Qatar and Lebanon. On Monday, a Saudi-led military coalition battling Tehran-backed rebels in Yemen said it reserved the ‘right to respond’ to the missile attack on Riyadh at the weekend, calling it a ‘blatant military aggression by the Iranian regime which may amount to an act of war’. Saudi Foreign Minister Adel al-Jubeir also warned Tehran. ‘Iranian interventions in the region are detrimental to the security of neighbouring countries and affect international peace and security. We will not allow any infringement on our national security,’ Jubeir tweeted.”
Greek 10-year yields gained three bps to 5.12% (down 190bps y-t-d). Ten-year Portuguese yields slipped a basis point to 2.06% (down 169bps). Italian 10-year yields rose five bps to 1.85% (up 3bps). Spain's 10-year yields jumped 10 bps to 1.58% (up 20bps). German bund yields gained five bps to 0.41% (up 21bps). French yields increased three bps to 0.78% (up 10bps). The French to German 10-year bond spread narrowed two to 37 bps. U.K. 10-year gilt yields rose eight bps to 1.34% (up 11bps). U.K.'s FTSE equities dropped 1.7% (up 4.1%).
Japan's Nikkei 225 equities index added 0.6% to a 26-year high (up 18.7% y-t-d). Japanese 10-year "JGB" yields slipped a basis point to 0.04% (unchanged). France's CAC40 dropped 2.5% (up 10.7%). The German DAX equities index sank 2.6% (up 14.3%). Spain's IBEX 35 equities index fell 2.6% (up 7.9%). Italy's FTSE MIB index lost 2.0% (up 17.3%). EM markets were mostly lower. Brazil's Bovespa index dropped 2.4% (up 19.8%), and Mexico's Bolsa declined 1.0% (up 5.2%). India’s Sensex equities index fell 1.1% (up 25.1%). China’s Shanghai Exchange rose 1.8% (up 10.6%). Turkey's Borsa Istanbul National 100 index dropped 2.1% (up 39.4%). Russia's MICEX equities index surged 4.2% (down 2.8%).
Junk bond mutual funds saw outflows of $622 million (from Lipper).
Freddie Mac 30-year fixed mortgage rates fell four bps to 3.90% (up 33bps y-o-y). Fifteen-year rates declined three bps to 3.24% (up 35bps). Five-year hybrid ARM rates slipped a basis point to 3.22% (up 34bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down eight bps to 4.10% (up 37bps).
Federal Reserve Credit last week declined $2.6bn to $4.418 TN. Over the past year, Fed Credit increased $3.5bn. Fed Credit inflated $1.599 TN, or 57%, over the past 261 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt rose $7.6bn last week to $3.373 TN. "Custody holdings" were up $262bn y-o-y, or 8.4%.
M2 (narrow) "money" supply last week was little changed at $13.746 TN. "Narrow money" expanded $652bn, or 5.0%, over the past year. For the week, Currency increased $0.9bn. Total Checkable Deposits fell $43.7bn, while Savings Deposits jumped $40.1bn. Small Time Deposits were little changed. Retail Money Funds gained $1.4bn.
Total money market fund assets gained $10.6bn to $2.740 TN. Money Funds rose $57bn y-o-y, or 2.1%.
Total Commercial Paper added $3.9bn to $1.051 TN. CP gained $144bn y-o-y, or 15.8%.
Currency Watch:
The U.S. dollar index declined 0.6% 94.391 (down 7.8% y-t-d). For the week on the upside, the Swedish krona increased 1.0%, the Brazilian real 0.9%, the British pound 0.9%, the Canadian dollar 0.7%, the Mexican peso 0.5%, the Norwegian krone 0.5%, the euro 0.5%, the Japanese yen 0.5%, the Swiss franc 0.5%, the New Zealand dollar 0.4%, the Singapore dollar 0.4%, and the Australian dollar 0.1%. For the week on the downside, the South African rand declined 1.1% and the South Korean won dipped 0.3%. The Chinese renminbi was little changed versus the dollar this week (up 4.58% y-t-d).
Commodities Watch:
The Goldman Sachs Commodities Index jumped 1.9% (up 7.6% y-t-d). Spot Gold added 0.5% to $1,275 (up 10.7%). Silver added 0.2% to $16.871 (up 5.6%). Crude gained another $1.10 to $56.74 (up 5%). Gasoline rose 1.1% (up 9%), while Natural Gas slipped 0.6% (down 14%). Copper fell 1.3% (up 23%). Wheat gained 1.4% (up 5.8%). Corn fell 1.4% (down 2%).
Trump Administration Watch:
November 6 – Wall Street Journal (Richard Rubin and Siobhan Hughes): “A House committee began considering a bill Monday that would reduce taxes by $1.4 trillion over 10 years, but disagreements over key pieces of the measure could force the GOP to make changes and slow down plans to pass it by year’s end. House Republicans are at odds over plans to eliminate deductions for state and local taxes. Senate Republicans disagree on child tax credits and whether to accept significantly bigger budget deficits. Narrow margins in both chambers leave the party little room to maneuver.”
November 7 – CNBC (Jacob Pramuk): “The House Republican tax plan may have a deficit problem. The GOP bill including some changes would increase federal budget deficits by $1.7 trillion over 10 years, according to Joint Committee on Taxation estimates shared by the nonpartisan Congressional Budget Office. That includes money for additional debt service payments due to the bill. Under the plan, U.S. debt would rise to 97.1% of gross domestic product in 2027, up from 91.2% under current CBO projections.”
November 7 – Bloomberg (Lynnley Browning): “Multinational companies including Apple Inc., Pfizer Inc. and others would face a new tax on payments they make to offshore affiliates under the House Republicans’ tax bill -- a surprise provision that has stunned tax experts. The new 20% tax is ‘the atomic bomb in the draft’ legislation, said Ray Beeman, co-leader of Ernst & Young’s Washington Council advisory services group. ‘We’re trying to get our arms around the implications.’ So far, many big U.S. companies have kept quiet on the proposal. But already, House Ways and Means Chairman Kevin Brady has tweaked the provision to lessen its impact, part of a package of changes the tax-writing panel adopted Monday night.”
November 8 – Financial Times (Demetri Sevastopulo and Tom Mitchell): “Donald Trump blamed his predecessors for the US’s widening trade deficit with China, praising Xi Jinping and telling an audience in Beijing he did not ‘blame’ Chinese leaders for ‘taking advantage’ of Washington. In a striking change of tone from the US president…, Mr Trump appeared at pains to rekindle the bonhomie that characterised the leaders’ first meeting at his Florida compound in April, a tenor that quickly deteriorated over North Korea. Although Mr Trump has been welcomed with a state dinner and extensive pomp, Mr Trump’s personal warmth towards Mr Xi was not reciprocated, with the Chinese leader using far more restrained language in his own comments.”
November 6 – Financial Times (Demetri Sevastopulo and Robin Harding): “Donald Trump accused Japan of engaging in unfair trade practices on the first leg of his five-nation Asia tour, during which the American president will focus on improving the US trade balance and efforts to press North Korea to give up its nuclear weapons. Speaking in Tokyo on the second day of his visit to Japan, Mr Trump reprised some of the economic themes that dominated his presidential campaign by telling Japanese and US business executives that trade with Japan was ‘not free or reciprocal’. ‘We want fair and open trade. But right now, our trade with Japan is not fair and it’s not open,’ said Mr Trump. ‘The US has suffered massive trade deficits with Japan for many, many years. Many millions of cars are sold by Japan into the United States, whereas virtually no cars go from the US into Japan.”
November 7 – New York Times (Jane Perlez, Paul Mozur and Jonathan Ansfield): “When President Trump arrives in Beijing on Wednesday, he will most likely complain about traditional areas of dispute like steel and cars. But Washington officials and major global companies increasingly worry about a new generation of deals that could give China a firmer grip on the technology of tomorrow. Under an ambitious plan unveiled two years ago called Made in China 2025, Beijing has designs to dominate cutting-edge technologies like advanced microchips, artificial intelligence and electric cars, among many others, in a decade. And China is enlisting some of the world’s biggest technology players in its push. Sometimes it demands partnerships or intellectual property as the price of admission to the world’s second-largest economy. Sometimes it woos foreign giants with money and market access in ways that elude American and global trade rules.”
November 7 – Bloomberg (Michelle Jamrisko and Andrew Janes): “Trade tensions between the U.S. and China pose a greater worry to the global economy than a nuclear North Korea, said National Australia Bank Ltd. chief economist Alan Oster. The probability that the world’s two largest economies enter into a destructive trade war is around one-in-five, Oster said... It’s the biggest risk to global growth that’s otherwise chugging along at a decent rate and should rise to 3.6% in 2018 from 3.4% this year, he said. ‘It would kill Asia, and it would kill commodities,’ and have flow-through effects to the world, said Oster, a former senior adviser to Federal Treasury in Australia… ‘Overall, I think the world’s okay. Geopolitical risk is there a lot -- who knows about North Korea -- but I’m more worried about Trump and China.’”
Federal Reserve Watch:
November 8 – Bloomberg (Christopher Condon and Craig Torres): “Years before he was tapped to lead the Federal Reserve, Jerome Powell brought to the world’s most powerful central bank a lesson he learned in the business world: manage or be managed. On everything from the payments system to monetary policy, he noticed the Fed’s brainy staff of economists would hash out their differences among themselves and then present governors with a unified policy recommendation, expecting them mostly to follow their advice. That didn’t sit well with a lawyer who cut his teeth in private-equity investing. In that line of work, proposed deals must survive a gauntlet of scrutiny in front of top decision makers… So Powell the Fed governor pushed back. He insisted on some occasions that staff members debate policy ideas in front of him… He also pored over mountains of academic studies and asked questions. In his five-plus years at the Fed, he’s managed to gain the staff’s respect even as he challenged their ready-made recommendations.”
November 6 – CNBC (Jeff Cox): “The Federal Reserve will not only lose its three top-ranking officials in the months ahead but also the more than three decades of experience they brought to policymaking. In their place will be central bankers who could take quite a different approach to policy, a change the financial markets may not fully appreciate yet. New York Fed President William Dudley became the latest Fed official to say he'll be leaving soon… That comes just days after President Donald Trump said he will nominate Fed Governor Jerome Powell to take over the chairman's seat from Janet Yellen in February, and less than a month after the departure of Vice Chairman Stanley Fischer. That in effect takes out the ruling troika of monetary policy since early 2014, a group that holds some 35 years of monetary policy experience.”
U.S. Bubble Watch:
November 8 – Bloomberg: “Donald Trump touched down in China to news on one of his favorite topics: the trade deficit. But it mightn’t be the news he’s wanting. For the first 10 months of the year, China’s trade surplus with the U.S. was $223 billion… That pace should mean the full-year gap between China’s sales to the U.S. and its imports is about the same as in 2016, at around $250 billion… China’s trade data… showed: Exports increased 6.9% in dollar terms in October from a year earlier. Imports advanced 17.2% year-on-year. The total trade surplus was $38.2 billion.”
November 8 – CNBC (Diana Olick): “The steady rise in home prices is so far showing no boundaries, and that is turning up the heat on some already overheated housing markets. Home prices rose 7% nationally in September, compared with September 2016… according to CoreLogic, a real estate data firm. As a result, 48% of the nation's top 50 housing markets are now considered ‘overvalued,’ up from 46% in August. A market is considered overvalued when home prices are at least 10% higher than the long-term, sustainable level.”
November 8 – Wall Street Journal (Laura Kusisto): “California’s biggest housing markets figure to be among the losers if a Republican-sponsored tax overhaul becomes law, according to two analyses of local market data. The House bill would cap the size of mortgage loans for which taxpayers can deduct interest payments at $500,000. In most regions of the U.S., that represents a small fraction of properties. But in the priciest markets, concentrated in some of the nation’s largest coastal cities, the impact could be significant. In the San Jose, Calif., metropolitan area, 75% of new mortgage loans thus far in 2017 were for more than $500,000… The median home price there is more than $1 million, and even small starter homes can climb well above the proposed cap.”
November 7 – Wall Street Journal (Peter Grant and Laura Kusisto): “Rising homeownership is adding to the jitters in the residential rental market, which has slumped recently after a long stretch near the top of the commercial real-estate industry. For most of the current economic expansion, declining ownership rates have enabled landlords of apartments and single-family homes to raise rents far faster than the pace of inflation. Demand has been fueled by the millions of people who haven’t had the money, credit or desire to pursue the traditional American dream. But amid a hot housing market, the homeownership rate is now rising, in part because millennials are reaching the age when they’re forming families and settling down.”
November 8 – Wall Street Journal (Gordon Lubold): “U.S. wars in Afghanistan, Iraq, Syria and Pakistan have cost American taxpayers $5.6 trillion since they began in 2001, according to a new study, a figure more than three times that of the Pentagon’s own estimates. The Defense Department earlier this year estimated that the total cost of the conflicts since the 2001 attacks has amounted to about $1.5 trillion. The new study, by the Watson Institute of International and Public Affairs at Brown University, aims to reflect costs the Pentagon doesn’t include in its own calculations…”
November 6 – Bloomberg (Ben Steverman): “One of the hottest tickets in New York City this weekend was a discussion on whether to overthrow capitalism. The first run of tickets to ‘Capitalism: A Debate’ sold out in a day… The crowd waiting in a long line to get inside on Friday night was mostly young and mostly male. Asher Kaplan and Gabriel Gutierrez, both 24, hoped the event would be a real-life version of the humorous, anarchic political debates on social media. ‘So much of this stuff is a battle that’s waged online,’ said Gutierrez, who identifies, along with Kaplan, as a ‘leftist,’ if not quite a socialist. These days, among young people, socialism is ‘both a political identity and a culture,’ Kaplan said. And it looks increasingly attractive. Young Americans have soured on capitalism. In a Harvard University poll conducted last year, 51% of 18-to-29 year-olds in the U.S. said they opposed capitalism; only 42% expressed support… A poll released last month found American millennials closely split on the question of what type of society they would prefer to live in: 44% picked a socialist country, 42% a capitalist one.”
China Bubble Watch:
November 5 – Bloomberg: “China’s financial system is becoming significantly more vulnerable due to high leverage, according to central bank governor Zhou Xiaochuan, who has made a series of blunt warnings in recent weeks about debt levels… Latent risks are accumulating, including some that are ‘hidden, complex, sudden, contagious and hazardous,’ even as the overall health of the financial system remains good, Zhou wrote in a lengthy article published on the People’s Bank of China’s website… ‘High leverage is the ultimate origin of macro financial vulnerability,’ wrote Zhou, 69, who is widely expected to retire soon after a record 15-year tenure. ‘In sectors of the real economy, this is reflected as excessive debt, and in the financial system, this is reflected as credit that has been expanding too quickly.’”
November 5 – Bloomberg: “China’s financial system is becoming significantly more vulnerable due to high leverage, according to central bank governor Zhou Xiaochuan, who has made a series of blunt warnings in recent weeks about debt levels in the world’s second-largest economy. Latent risks are accumulating, including some that are ‘hidden, complex, sudden, contagious and hazardous,’ even as the overall health of the financial system remains good, Zhou wrote in a lengthy article published on the People’s Bank of China’s website… The nation should toughen regulation and let markets serve the real economy better, according to Zhou. The government should also open up markets by relaxing capital controls and reducing restrictions on non-Chinese financial institutions that want to operate on the mainland, he wrote.”
November 8 – Bloomberg: “China’s factory prices kept surging last month as authorities curb production in smokestack industries to combat pollution. The producer price index rose 6.9% in October from a year earlier, versus a projected 6.6% rise… and matching September’s pace. The consumer price index climbed 1.9%.”
November 8 – New York Times (Keith Bradsher): “China on Wednesday released fresh details about a new financial regulatory body intended to calm a financial system that in recent years has endured a stock market crash, a huge exodus of money outside the country and the rapid accumulation of debt. But the details may raise more questions than they answer, and could disappoint those looking for a strong hand to rein in the financial system underpinning the world’s second-largest economy. Official Chinese media reported… that a new Financial Stability and Development Committee had held its first meeting, nearly four months after President Xi Jinping ordered its creation. It said the meeting was led by Ma Kai, a 71-year-old vice premier. At the meeting, Mr. Ma stressed that China’s financial system should serve the real economy… namely, making money available to businesses that need it. He also stressed financial security, the report said.”
November 5 – Bloomberg: “China’s shadow banking sector, estimated by some analysts to be worth 122.8 trillion yuan ($18.5 trillion), stopped growing in the first half of the year as issuance of wealth management products declined, according to Moody’s… For the first time since 2012, China’s gross domestic product grew faster than shadow banking assets in the six-month period… Following last month’s Communist Party Congress, further regulation will continue to rein in shadow banking and address some of the key systemic imbalances, Moody’s said. While Moody’s assessment offers some evidence that China’s crackdown on shadow financing is starting to bite, authorities continue to sound the alarm on high debt levels.”
November 7 – Bloomberg: “Under pressure to trim borrowings, China’s companies have found a way to reduce their lofty debt burdens -- even if some of the risk remains. Sales of perpetual notes -- long-dated securities that can be listed as equity rather than debt on balance sheets given that in theory they could never mature -- have soared to a record this year as Beijing zeros in on leverage and the threat it poses to the financial system. The bonds are so popular that issuance by non-bank firms has jumped to the equivalent of 433 billion yuan ($65bn), more than seven times sales by companies in the U.S. ‘Chinese issuers love perpetual bonds because they are under great pressure to deleverage,’ said Wang Ying, a senior director at Fitch… ‘Sophisticated investors should do their homework and shouldn’t be misled by the numbers in accounting books.’”
November 5 – Financial Times (Charles Clover): “China has unveiled a ‘magical’ island-building ship on the eve of Donald Trump’s visit in a move likely to renew fears about its claims to territory in the South China Sea. At 140 metres the Tiankun is the biggest dredger in Asia, with cutters and pumps capable of smashing the equivalent of three Olympic pools of rock an hour from the sea floor and shooting it 15km away to create land. During the past five years, China has used similar vessels to create a string of strategic islands to support its claims to 85% of the sea.”
Central Banker Watch:
November 7 – Bloomberg (Alessandro Speciale and Piotr Skolimowski): “Three of the European Central Bank’s top policy makers pushed last month to alter a commitment to keep buying bonds until inflation improves, signaling challenges ahead for President Mario Draghi as the bank seeks to slow quantitative easing. Board member Benoit Coeure, Bundesbank President Jens Weidmann and Bank of France Governor Francois Villeroy de Galhau were the heavyweights who recommended tying the overall level of monetary stimulus -- rather than just asset purchases -- to the outlook for prices…”
Global Bubble Watch:
November 8 – Bloomberg (Luke Kawa): “The best way to crush the crowd in 2017? Buy the things everyone insisted would never keep going up. A portfolio stuffed with allegedly over-inflated assets would have returned more than 120% so far in 2017, trouncing the S&P 500 Index... The hypothetical ‘Bubblicious’ portfolio includes Chinese real estate and internet names, a pair of U.S. tech behemoths, a cryptocurrency fund, the ETF industry, bonds that mature decades from now, and a dash of short volatility bets just to make things more interesting. The out-performance is a testament to the momentum mania prevalent in today’s markets, a dynamic which has prompted the likes of Greenlight Capital’s David Einhorn, Goldman Sachs…, and Sanford C Bernstein… to mull whether value investing is in the midst of an existential crisis given ultra-low interest rates and abundant liquidity.”
November 6 – Bloomberg (Ian King): “Broadcom Ltd. offered about $105 billion for Qualcomm Inc., kicking off an ambitious attempt at the largest technology takeover ever in a deal that would rock the electronics industry. Broadcom made an offer of $70 a share in cash and stock for Qualcomm, the world’s largest maker of mobile phone chips. That’s a 28% premium over the stock’s closing price on Nov. 2… The proposed transaction is valued at approximately $130 billion on a pro forma basis, including $25 billion of net debt. Buying Qualcomm would make Broadcom the third-largest chipmaker, behind Intel Corp. and Samsung Electronics Co. The combined business would instantly become the default provider of a set of components needed to build each of the more than a billion smartphones sold every year. The deal would dwarf Dell Inc.’s $67 billion acquisition of EMC in 2015 -- then the biggest in the technology industry.”
Fixed Income Bubble Watch:
November 7 – Bloomberg (Cormac Mullen): “It’s one step forward, two steps back for bond volatility. Bank of America Merrill Lynch’s MOVE Index, a gauge of price swings in the U.S. Treasury market, fell to a record low on Monday, bucking last month’s uptrend. Renewed expectations that the Federal Reserve will stay the course on monetary policy in the midst of a leadership transition and the unveiling of the Republican tax plan have spurred an eight-day decline in the volatility of the world’s largest bond market.”
November 6 – Bloomberg (Lisa Lee and Adam Tempkin): “One of the last hurdles preventing riskier companies from slashing borrowing costs in an already red-hot leveraged loan market is crumbling. Managers of collateralized loan obligations, the biggest buyers of U.S. leveraged loans, have started to give in to an unprecedented surge of repricings of the debt they hold in their portfolios. More than $175 billion of CLOs have refinanced in the last 12 months, up from less than $10 billion in the prior one-year period… These refinancings could further strengthen the hands of borrowers, allowing them to demand even more rate cuts from their creditors who have little choice other than to say yes. Unlike junk bonds, loans are relatively easy to prepay, giving companies the option to refinance with a new group of investors. About $525 billion of loans have repriced during the last 12 months, compared to $130 billion in the prior one-year period…”
November 7 – Wall Street Journal (Paul J. Davies): “The hunt for yield is taking Wall Street and investors into exotic territory, and that means an appetite for credit assets that are private, not easily tradable and often complex. Putting together deals in what some dub ‘nonlinear finance’ is a growth business for investment banks’ big bond-trading arms and is helping clear unwanted assets off some balance sheets. However, such private deals, which aren’t publicly traded and don’t have public credit ratings, are a challenge for regulators keeping track of the growth of shadow banking and understanding whether such activity is driven by regulation or its avoidance. The business isn’t new, but it is heating up as banks hire specialists and commit balance-sheet capacity to feed investor demand.”
November 7 – Financial Times (Nicholas Megaw): “Record high prices combined with more risky corporate bond supply is creating ‘increasing uncertainty’ and raising the chances of a sharp turnround in the European high-yield credit market, Fitch… warned. Yields on the most popular benchmark for European junk bonds fell below 2% for the first time ever last week, but Fitch warned that recent market calm and the distorting impact of central bank monetary policy ‘obscure the true risk-return dynamics faced by investors’. The ratings agency said the proportion of newly-issued bonds with the lowest credit ratings – CCC+ or below – has risen to its highest level since 2013, when average yields were more than 5%.”
Europe Watch:
November 7 – Reuters (Thomas Escritt): “The German economy is at risk of overheating, according to a leaked advisory council report that follows pressure from the Bundesbank for a swifter end to the European Central Bank’s expansive monetary policy. In their annual report… the five ‘wise men’ who advise the German government on economic policy said the economy, which they expected to expand strongly this year and next, was moving gradually into a ‘boom phase’. ‘There are clear signs that economic capacity is over-utilised,’ read the report…”
November 8 – Bloomberg (Lorenzo Totaro): “Italy’s ratio of debt to economic output will rise slightly this year and won’t fall below 130% through 2019 as the pace of recovery slows, the European Commission said. The ratio will increase to 132.1% of gross domestic product from 132% in 2016, the Brussels-based EU executive arm said…”
Emerging Market Watch:
November 6 – Bloomberg (Daniel Cancel): “Venezuelan debt is teetering toward default with average prices near 30 cents on the dollar. As investors ponder an invite from the government to come to Caracas next week to discuss a restructuring…, they now demand a record 40.8 percentage points of extra yield over U.S. Treasury bills to hold the country’s bonds. No one really expects those yields to pay out as Venezuela seeks debt relief, but they do give an idea as to just how distressed the securities have become.”
Leveraged Speculation Watch:
November 7 – Bloomberg (Cecile Gutscher): “Hedge funds are headed for their best year since 2013 thanks to a gravity-defying stock market. Improving performance may go some way to assuaging criticism for fees that are hard to justify with mediocre returns, even though on average the funds underperformed equity benchmarks including the S&P 500 Index, which is up 15.7% year-to-date. 2017’s winning strategies were deployed by equity funds skewed toward health care and technology, according to… Hedge Fund Research Inc. through September. Over the same period, the S&P 500 Tech Index returned 26%...”
Geopolitical Watch:
November 7 – BBC (Suzy Waite and Nishant Kumar): “Saudi Arabia's Crown Prince Mohammed bin Salman has accused Iran of an act of ‘direct military aggression’ by supplying missiles to rebels in Yemen. This ‘may be considered an act of war’, state media quoted the prince as telling UK Foreign Secretary Boris Johnson…”
November 7 – Reuters (Tom Perry and Laila Bassam): “Saudi Arabia has opened a new front in its regional proxy war with Iran, threatening Tehran’s powerful ally Hezbollah and its home country Lebanon to try to regain the upper hand. With Iranian power winning out in Iraq and Syria, and Riyadh bogged down in a war with Iran-allied groups in Yemen, the new Saudi approach could bring lasting political and economic turmoil to a country where Tehran had appeared ascendant. The resignation on Saturday of the Saudi-allied Lebanese prime minister Saad al-Hariri, announced from Riyadh and blamed on Iran and Hezbollah, is seen by many as the first step in an unprecedented Saudi intervention in Lebanese politics.”
November 7 – Bloomberg (Suzy Waite and Nishant Kumar): “Cheap money may have buoyed emerging-market macro hedge funds toward their ninth straight annual advance, but that doesn’t mean investors are expecting an exodus as the world’s central bankers start turning off the taps. Demand for these funds remains so brisk, in fact, that some are turning new money away.”
November 7 – Financial Times (Erika Solomon): “A string of escalatory moves in the Gulf in recent days suggests the long-brewing cold war between Saudi Arabia and its regional arch-rival Iran could soon grow hot. It began with the surprise resignation of the Lebanese prime minister, Saad al-Hariri, announced on Saturday from Saudi Arabia. Riyadh is believed to have pressed him to step down in frustration that Mr Hariri, a long-time Saudi ally, had in effect given cover to the Lebanese Shia force Hizbollah, Iran’s top regional proxy, by sharing control of government with them. Hours later, in Yemen, a ballistic missile was fired by Iran-backed Houthi rebels towards Riyadh airport. Saudi Arabia accused Iran… of an ‘act of war’ over the incident; the same day King Salman of Saudi Arabia summoned Mahmoud Abbas, president of the Palestinian Territories, to a meeting. It raised suspicions that Mr Abbas too was coming under pressure from Riyadh after reaching a power-sharing deal with Hamas, the Iran-backed militant group.”
November 6 – AFP (Alison Tahmizian Meuse and Mohamed Hasni): “Saudi Arabia and Iran traded fierce accusations over Yemen…, with Riyadh saying a rebel missile attack ‘may amount to an act of war’ and Tehran accusing its rival of war crimes. Tensions have been rising between Sunni-ruled Saudi Arabia and predominantly Shiite Iran, which are opposed in disputes and conflicts across the Middle East from Yemen and Syria to Qatar and Lebanon. On Monday, a Saudi-led military coalition battling Tehran-backed rebels in Yemen said it reserved the ‘right to respond’ to the missile attack on Riyadh at the weekend, calling it a ‘blatant military aggression by the Iranian regime which may amount to an act of war’. Saudi Foreign Minister Adel al-Jubeir also warned Tehran. ‘Iranian interventions in the region are detrimental to the security of neighbouring countries and affect international peace and security. We will not allow any infringement on our national security,’ Jubeir tweeted.”
Thursday, November 9, 2017
Friday's News Links
[Bloomberg] Stocks Extend Drop, Bonds Fall; Dollar Fluctuates: Markets Wrap
[Bloomberg] Oil Set for Best Weekly Run in Year as Saudi Tumult Roils Market
[Reuters] Dueling Republican tax plans advance in Congress
[Bloomberg] China Removes Foreign Ownership Limits on Banks, Fund Firms
[Bloomberg] EU Raises Prospect of No Deal in December as Brexit Talks Drag
[Reuters] ECB should have signaled intent to end asset buys, Nowotny says
[Bloomberg] ECB Warns of Complacency Risks in Surging Euro-Area Economy
[Bloomberg] Noble Group Tumbles as Trader's Cash Dwindles to Decade-Low
[Reuters] Bitcoin slides by over $1000 in less than 48 hours
[Reuters] Trump brings tough trade message in vision for Asia
[WSJ] Senate Tax Plan Differs From House on Individual Rates, Timing of Corporate Rate Cut
[FT] Investors shun active US equity funds
[WSJ] Trump Declares New World-Trade Order
[Bloomberg] Oil Set for Best Weekly Run in Year as Saudi Tumult Roils Market
[Reuters] Dueling Republican tax plans advance in Congress
[Bloomberg] China Removes Foreign Ownership Limits on Banks, Fund Firms
[Bloomberg] EU Raises Prospect of No Deal in December as Brexit Talks Drag
[Reuters] ECB should have signaled intent to end asset buys, Nowotny says
[Bloomberg] ECB Warns of Complacency Risks in Surging Euro-Area Economy
[Bloomberg] Noble Group Tumbles as Trader's Cash Dwindles to Decade-Low
[Reuters] Bitcoin slides by over $1000 in less than 48 hours
[Reuters] Trump brings tough trade message in vision for Asia
[WSJ] Senate Tax Plan Differs From House on Individual Rates, Timing of Corporate Rate Cut
[FT] Investors shun active US equity funds
[WSJ] Trump Declares New World-Trade Order
Thursday Evening Links
[Bloomberg] Stocks, Dollar Fall on Senate Tax Plan Concerns: Markets Wrap
[Politico] Senate tax bill expected to delay corporate rate cut until 2019
[Bloomberg] Here's what's in the Senate Republican tax plan
[Bloomberg] Junk-Bond Rally Unravels, One Bad Earnings Report at a Time
[Bloomberg] Major Stock Selloffs Just Aren't What They Used to Be
[Bloomberg] Crude Approaches 28-Month High as Saudi Crackdown Intensifies
[BBC] Saudi Arabia tells citizens to leave Lebanon at once
[Reuters] Exclusive: Lebanon believes Saudi holds Hariri, demands return
[Politico] Senate tax bill expected to delay corporate rate cut until 2019
[Bloomberg] Here's what's in the Senate Republican tax plan
[Bloomberg] Junk-Bond Rally Unravels, One Bad Earnings Report at a Time
[Bloomberg] Major Stock Selloffs Just Aren't What They Used to Be
[Bloomberg] Crude Approaches 28-Month High as Saudi Crackdown Intensifies
[BBC] Saudi Arabia tells citizens to leave Lebanon at once
[Reuters] Exclusive: Lebanon believes Saudi holds Hariri, demands return
Wednesday, November 8, 2017
Thursday's News Links
[Bloomberg] Stocks Drop as Miners Decline; Dollar Fluctuates: Markets Wrap
[Bloomberg] What Analysts Say About Nikkei's Mid-Afternoon Drop: Roundup
[Bloomberg] In 2017, Investors Can Either Buy Bubbles or Be Left Far Behind
[Reuters] Tax-cut debate in U.S. Congress swings to Senate bill
[Politico] House leaders race to round up tax votes
[Bloomberg] Fed Chair Nominee Powell Is No Ph.D., But No Pushover Either
[Bloomberg] China Factory Prices Surge Again as Pollution Drive Curbs Output
[Bloomberg] Here's Another Way China's Bond Market Is Walled Off From World
[Bloomberg] Italian Debt Load Up This Year, Above 130% in 2018, EU Says
[CNBC] Trump: 'I give China great credit' for taking advantage of the US — but that must change
[FT] Trump warns Xi over ‘out of kilter’ US-China trade tries
[WSJ] In China, Trump Cajoles Xi With Tough Talk, Flattery
[WSJ] Democrats, GOP Spar Over Who Is to Blame for Rising Health-Insurance Premiums
[Reuters] Trump tells China's Xi he believes North Korea solution can be found
[Reuters] Deep in Yemen war, Saudi fight against Iran falters
[FT] Middle East tensions rise as Iran and Saudi Arabia jostle for power
[Bloomberg] What Analysts Say About Nikkei's Mid-Afternoon Drop: Roundup
[Bloomberg] In 2017, Investors Can Either Buy Bubbles or Be Left Far Behind
[Reuters] Tax-cut debate in U.S. Congress swings to Senate bill
[Politico] House leaders race to round up tax votes
[Bloomberg] Fed Chair Nominee Powell Is No Ph.D., But No Pushover Either
[Bloomberg] China Factory Prices Surge Again as Pollution Drive Curbs Output
[Bloomberg] Here's Another Way China's Bond Market Is Walled Off From World
[Bloomberg] Italian Debt Load Up This Year, Above 130% in 2018, EU Says
[CNBC] Trump: 'I give China great credit' for taking advantage of the US — but that must change
[FT] Trump warns Xi over ‘out of kilter’ US-China trade tries
[WSJ] In China, Trump Cajoles Xi With Tough Talk, Flattery
[WSJ] Democrats, GOP Spar Over Who Is to Blame for Rising Health-Insurance Premiums
[Reuters] Trump tells China's Xi he believes North Korea solution can be found
[Reuters] Deep in Yemen war, Saudi fight against Iran falters
[FT] Middle East tensions rise as Iran and Saudi Arabia jostle for power
Wednesday Afternoon Links
[Bloomberg] Stocks Gain as Tech Strength Offsets Weak Banks: Markets Wrap
[Bloomberg] Bank Stocks Stumble on Triple Threat of Taxes, Election and Yields
[Reuters] Speaker Ryan opens door to delayed corporate tax cut
[CNBC] GOP tax cut plan would add $1.7 trillion to the deficit, CBO projects
[NYT] China’s New Effort to Tame Its Financial System May Disappoint
[Bloomberg] Bank Stocks Stumble on Triple Threat of Taxes, Election and Yields
[Reuters] Speaker Ryan opens door to delayed corporate tax cut
[CNBC] GOP tax cut plan would add $1.7 trillion to the deficit, CBO projects
[NYT] China’s New Effort to Tame Its Financial System May Disappoint
Tuesday, November 7, 2017
Wednesday's News Links
[Bloomberg] Stocks Slip on Banking Earnings; Dollar Declines: Markets Wrap
[Reuters] A year in: U.S. stock market under Trump's shadow
[Bloomberg] China Exports Hold Up as International Demand Remains Resilient
[Bloomberg] U.S.-China Trade War Still Biggest Global Risk, NAB's Oster Says
[Reuters] German 'wise men' sound alarm over 'overheating' economy
[Bloomberg] CTA Funds Are Back on Track After a Market-Beating October
[Bloomberg] Trump Asks China to Cut Ties With Kim and Calls North Korea ‘Hell’
[Reuters] Trump warns 'rogue regime' North Korea of grave danger
[Reuters] Saudi reopens Lebanon front in struggle with Iran
[NYT] China’s Technology Ambitions Could Upset the Global Trade Order
[WSJ] Fed’s New Regulatory Point Man: Everything Is on the Table
[WSJ] Republican Tax Plan Would Slam California Housing Market
[FT] Fitch warns of rising risks for European high-yield bond market
[WSJ] U.S. Spent $5.6 Trillion on Wars in Middle East and Asia: Study
[Reuters] A year in: U.S. stock market under Trump's shadow
[Bloomberg] China Exports Hold Up as International Demand Remains Resilient
[Bloomberg] U.S.-China Trade War Still Biggest Global Risk, NAB's Oster Says
[Reuters] German 'wise men' sound alarm over 'overheating' economy
[Bloomberg] CTA Funds Are Back on Track After a Market-Beating October
[Bloomberg] Trump Asks China to Cut Ties With Kim and Calls North Korea ‘Hell’
[Reuters] Trump warns 'rogue regime' North Korea of grave danger
[Reuters] Saudi reopens Lebanon front in struggle with Iran
[NYT] China’s Technology Ambitions Could Upset the Global Trade Order
[WSJ] Fed’s New Regulatory Point Man: Everything Is on the Table
[WSJ] Republican Tax Plan Would Slam California Housing Market
[FT] Fitch warns of rising risks for European high-yield bond market
[WSJ] U.S. Spent $5.6 Trillion on Wars in Middle East and Asia: Study
Tuesday Evening Links
[Bloomberg] Asian Stocks Set to Drop, Dollar Slips on Tax News: Markets Wrap
[Bloomberg] Stocks Slide, Dollar Gains as Taxes Take Focus: Markets Wrap
[Reuters] Republicans' tax plans gain speed; Fitch warns on deficit
[CNBC] More housing markets are overvalued, and consumers feel the pain
[Bloomberg] Credit Markets Ripe for Correction, $40 Billion Bond Chief Says
[Reuters] Lebanon's Hariri visits UAE as home crisis escalates
[WSJ] Saudi Crackdown Targets Up to $800 Billion in Assets
[WSJ] Millennial Home Buyers Send a Chill Through Rental Markets
[WSJ] Credit Trades Du Jour: Exotic, ‘Nonlinear’ and Private
[Bloomberg] Stocks Slide, Dollar Gains as Taxes Take Focus: Markets Wrap
[Reuters] Republicans' tax plans gain speed; Fitch warns on deficit
[CNBC] More housing markets are overvalued, and consumers feel the pain
[Bloomberg] Credit Markets Ripe for Correction, $40 Billion Bond Chief Says
[Reuters] Lebanon's Hariri visits UAE as home crisis escalates
[WSJ] Saudi Crackdown Targets Up to $800 Billion in Assets
[WSJ] Millennial Home Buyers Send a Chill Through Rental Markets
[WSJ] Credit Trades Du Jour: Exotic, ‘Nonlinear’ and Private
Monday, November 6, 2017
Tuesday's News Links
[Bloomberg] Stocks Rise as Trump Talks Asia Trade; Bonds Gain: Markets Wrap
[Bloomberg] Arab Stocks Sink Most in World as Rising Political Tension Bites
[Bloomberg] Here’s Where the GOP Tax Bill Stands Right Now
[Bloomberg] Multinationals Scurry to Defuse House Tax Bill’s ‘Atomic Bomb’
[Bloomberg] Saudi Crackdown Widens as More Bank Accounts Said Frozen
[Bloomberg] Key ECB Policy Makers Are Said to Have Challenged QE Pledge
[Bloomberg] The World's Biggest Bond Market Is More Calm Than Ever
[Bloomberg] China Firms Have Found a Way to Cut Debt, at Least on Paper
[Bloomberg] Hedge Funds Are Having Their Best Year Since 2013
[Bloomberg] Emerging-Market Hedge Funds Having to Turn New Clients Away
[Reuters] Trump lands in South Korea, frontlines of North Korean nuclear standoff
[BBC] Saudis accuse Iran of 'direct aggression' over Yemen missile
[NYT] Saudi Money Fuels the Tech Industry. It’s Time to Ask Why.
[WSJ] Tax Overhaul Faces Major Hurdles
[Bloomberg] Arab Stocks Sink Most in World as Rising Political Tension Bites
[Bloomberg] Here’s Where the GOP Tax Bill Stands Right Now
[Bloomberg] Multinationals Scurry to Defuse House Tax Bill’s ‘Atomic Bomb’
[Bloomberg] Saudi Crackdown Widens as More Bank Accounts Said Frozen
[Bloomberg] Key ECB Policy Makers Are Said to Have Challenged QE Pledge
[Bloomberg] The World's Biggest Bond Market Is More Calm Than Ever
[Bloomberg] China Firms Have Found a Way to Cut Debt, at Least on Paper
[Bloomberg] Hedge Funds Are Having Their Best Year Since 2013
[Bloomberg] Emerging-Market Hedge Funds Having to Turn New Clients Away
[Reuters] Trump lands in South Korea, frontlines of North Korean nuclear standoff
[BBC] Saudis accuse Iran of 'direct aggression' over Yemen missile
[NYT] Saudi Money Fuels the Tech Industry. It’s Time to Ask Why.
[WSJ] Tax Overhaul Faces Major Hurdles
Monday Evening Links
[Reuters] Wall Street hits record high as investors eye mergers
[CNBC] The Trump Fed: Fresher faces, bigger chance for market disruption
[Bloomberg] The Bottom Is About to Fall Out for This Credit Market
[Reuters] Saudi Arabia says Lebanon declares war, deepening crisis
[AFP] Blaming Iran, Saudi says Huthi strike may be 'act of war'
[NYT] Hedge Funds Push the Price of Bitcoin to New Highs
[NYT] Saudi Arabia Charges Iran With ‘Act of War,’ Raising Threat of Military Clash
[CNBC] The Trump Fed: Fresher faces, bigger chance for market disruption
[Bloomberg] The Bottom Is About to Fall Out for This Credit Market
[Reuters] Saudi Arabia says Lebanon declares war, deepening crisis
[AFP] Blaming Iran, Saudi says Huthi strike may be 'act of war'
[NYT] Hedge Funds Push the Price of Bitcoin to New Highs
[NYT] Saudi Arabia Charges Iran With ‘Act of War,’ Raising Threat of Military Clash
Sunday, November 5, 2017
Monday's News Links
[Bloomberg] Stocks Mixed as Banks Retreat; Bonds, Oil Climb: Markets Wrap
[Bloomberg] Oil Trades Near 2-Year High After Saudi Arabia Purges Officials
[Bloomberg] Why the Next Four Days Will Be Crucial for the GOP Tax Bill
[Reuters] House begins revising Republican tax bill to quell dissent
[Bloomberg] Broadcom Offers $105 Billion for Qualcomm in Landmark Deal
[Reuters] Departure of New York Fed's Dudley hangs another question over Fed leadership
[Bloomberg] Short-Volatility Funds Are Being Flooded With Cash
[Bloomberg] Greenwich Riches, Bridgeport Woes Tell Tale of Two Connecticuts
[Bloomberg] Venezuela Bonds Now Yield a Record 40 Points Over U.S. Treasuries
[Bloomberg] Get Rid of Capitalism? Millennials Are Ready to Talk About It
[Bloomberg] China's Central Bank Chief Warns of ‘Sudden, Contagious and Hazardous’ Financial Risks
[Bloomberg] China's Shadow Banking Halts as Regulation Bites, Moody's Says
[Bloomberg] Euro-Area Economic Boom Spurs Fastest Job Creation in a Decade
[Bloomberg] Spain’s Economy Wobbles as Catalonia Uncertainty Takes a Toll
[CNBC] North Korea is a ‘destabilizing, threatening force,' warns Yale's Stephen Roach who sees Trump Asia trip as potential make or break moment
[FT] Donald Trump accuses Japan of unfair trade practices
[FT] Yen unnerved by Trump’s trade rhetoric
[Bloomberg] Oil Trades Near 2-Year High After Saudi Arabia Purges Officials
[Bloomberg] Why the Next Four Days Will Be Crucial for the GOP Tax Bill
[Reuters] House begins revising Republican tax bill to quell dissent
[Bloomberg] Broadcom Offers $105 Billion for Qualcomm in Landmark Deal
[Reuters] Departure of New York Fed's Dudley hangs another question over Fed leadership
[Bloomberg] Short-Volatility Funds Are Being Flooded With Cash
[Bloomberg] Greenwich Riches, Bridgeport Woes Tell Tale of Two Connecticuts
[Bloomberg] Venezuela Bonds Now Yield a Record 40 Points Over U.S. Treasuries
[Bloomberg] Get Rid of Capitalism? Millennials Are Ready to Talk About It
[Bloomberg] China's Central Bank Chief Warns of ‘Sudden, Contagious and Hazardous’ Financial Risks
[Bloomberg] China's Shadow Banking Halts as Regulation Bites, Moody's Says
[Bloomberg] Euro-Area Economic Boom Spurs Fastest Job Creation in a Decade
[Bloomberg] Spain’s Economy Wobbles as Catalonia Uncertainty Takes a Toll
[CNBC] North Korea is a ‘destabilizing, threatening force,' warns Yale's Stephen Roach who sees Trump Asia trip as potential make or break moment
[FT] Donald Trump accuses Japan of unfair trade practices
[FT] Yen unnerved by Trump’s trade rhetoric
Sunday Evening Links
[Bloomberg] Asia Stocks Start Week Mixed as Trump Visit Begins: Markets Wrap
[Bloomberg] Crackdown on Billionaires and Other Top Officials Shakes Up Saudi Arabia
[CNBC] The Saudi purge will change how investors view the Kingdom
[FT] Saudi anti-corruption purge triggers investor uncertainty
[NYT] Slouching Toward War With North Korea
[Bloomberg] Crackdown on Billionaires and Other Top Officials Shakes Up Saudi Arabia
[CNBC] The Saudi purge will change how investors view the Kingdom
[FT] Saudi anti-corruption purge triggers investor uncertainty
[NYT] Slouching Toward War With North Korea
Sunday's News Links
[CNBC] New York Fed President William Dudley set to announce retirement: Sources
[Bloomberg] Catalan Leader Puigdemont Turns Himself In to Belgian Police
[Bloomberg] Pound to Follow Politics as Scandal-Hit U.K. Renews Brexit Talks
[Bloomberg] Billionaire Alwaleed Arrested in Saudi Corruption Crackdown
[FT] China launches ‘magical’ island-building ship on eve of Trump visit
[Bloomberg] Catalan Leader Puigdemont Turns Himself In to Belgian Police
[Bloomberg] Pound to Follow Politics as Scandal-Hit U.K. Renews Brexit Talks
[Bloomberg] Billionaire Alwaleed Arrested in Saudi Corruption Crackdown
[FT] China launches ‘magical’ island-building ship on eve of Trump visit
Saturday, November 4, 2017
Saturday's News Links
[Bloomberg] China's Zhou Warns on Rising Financial Risk in Blunt Article
[Reuters] Ousted Catalan leader calls for united front for independence
[Reuters] Unversed in debt details, Venezuelans desperate for any relief
[Reuters] China's central bank chief urges Beijing to promote equity, cut debt, eliminate 'zombie' companies
[Reuters] Trump heads to Japan with North Korea on his mind
[WSJ] Saudi Princes, Former Ministers Arrested in Apparent Power Consolidation
[Reuters] Ousted Catalan leader calls for united front for independence
[Reuters] Unversed in debt details, Venezuelans desperate for any relief
[Reuters] China's central bank chief urges Beijing to promote equity, cut debt, eliminate 'zombie' companies
[Reuters] Trump heads to Japan with North Korea on his mind
[WSJ] Saudi Princes, Former Ministers Arrested in Apparent Power Consolidation
Friday, November 3, 2017
Weekly Commentary: End of an Era
Of the diverse strains of inflation, asset inflation is by far the most dangerous. A bout of consumer price inflation would be generally recognized as problematic and rectified through a tightening of monetary conditions. On the other hand, asset price inflation is both celebrated and venerated. There is simply no constituency calling for a tightening of conditions to ward off the deleterious effects of rising asset prices, Bubbles and attendant economic maladjustment. And as we’ve witnessed, the bigger the Bubble the more powerful the constituencies that rationalize, justify and promote Bubble excess.
About one year ago, I was expecting a securities markets sell-off in the event of an unexpected Donald Trump win. A Trump presidency would create disruption, upheaval and major uncertainties – political, geopolitical, economic and social. Instead of a fall, the markets experienced a short squeeze and unwind of hedges. Over-liquefied markets and a powerful inflationary bias throughout global securities markets won the day – and the winning runs unabated.
We’ve come a long way since 1992 and James Carville’s “I used to think that if there was reincarnation, I wanted to come back as the president or the pope or as a .400 baseball hitter. But now I would like to come back as the bond market. You can intimidate everybody.” New age central banking has pacified bond markets and eradicated the vigilantes. These days it’s the great equities bull market as all-powerful intimidator.
The President admitted his surprise in winning the election. I suspect he and his team were astounded by the post-election market rally. I’ve always held the view that prolonged bull markets foster a portentous concentration of power – not only in the financial markets but within the financial system more generally.
That was certainly the case during the “Roaring Twenties,” just as it was in the late-nineties and throughout the mortgage finance Bubble period. A big market decline would have provided the new President the opportunity to blame the Bubble while moving forward aggressively with his reform agenda. Instead, a rally ensured that Team Trump would be held captive to the financial markets. As his administration struggled, President Trump could at least point to record stock prices.
I was hoping for reform-minded Kevin Warsh or John Taylor at the helm of the Federal Reserve. But I’ve somewhat warmed up to establishment-favored Jerome Powell, not so much because he will pursue needed changes in monetary management – but because Mr. Powell is likely about the best we could have hoped for in the current market environment. Apparently, the President was close to reappointing market darling chair Yellen. And if Yellen wasn’t dovish enough for the markets, Bill Gross stated his preference for either Paul McCulley or Neel Kashkari. I have McCulley and Kashkari far down the list - just above Ben Bernanke but below Charles Evans and Mark Zuckerberg.
Powell is viewed as the logical choice for continuity and stability at the Fed. He has a diverse background in law, government, the markets (with Carlyle Group), regulation and monetary policy. Powell will be the first Fed chairman without an economics Ph.D. since Paul Volcker. In many ways, it is a much welcomed End of an Era.
Janet Yellen is a widely respected economist – and by all accounts has been an able administrator of the Federal Reserve system. It has been noted that she will be the first Fed chair whose term ended without the experience of a recession. More importantly, she is surely the first leader of our central bank to have enjoyed a full term of uninterrupted extremely loose policy and financial conditions.
I’ll rain on the parade of accolades: The Yellen Fed failed to tighten policy in the face of increasingly conspicuous Bubble excess. Worse even than unforgivable past episodes, the Fed badly missed its timing. Today’s backdrop ensures an easy start to what will be an extremely challenging job for chairman Powell.
I’ve read numerous articles and listened to various commentaries. Leave it to esteemed former Minneapolis Fed President Gary Stern to offer the keenest insight:
Bloomberg’s Tom Keene: “Ellen Zentner at Morgan Stanley writes a detailed note about what we would expect from chairman Powell. She mentions that there’s a mystery here over chairman Powell and core economics, including NAIRU [non-accelerating inflation rate of unemployment]… Does it matter that chairman Powell maybe has a little fuzzy knowledge of NAIRU like mere mortals like me?”
Former Minneapolis Fed President Gary Stern: “No. And, in fact, I might view that as an advantage. Because that framework is frayed at best, it seems to me given our economic performance over the past “X” years – and “X” is not a small number. So, I think some open-mindedness on that framework is a distinct positive. And I think it would be worthwhile for a fair amount of resources to be devoted to a pretty thorough review of some of the critical macroeconomic issues and frameworks of the day, because they have not all served policymakers well; they have not all served commentators well; they have not all served the Street well. And I think it would be a good idea to open some of that up.”
Bloomberg’s Mike McKee: “Do you think we’ve come to the end, maybe, of the Bernanke era of making policy in terms of setting an inflation target at 2% and aiming for that as sort of the reason – the way you conduct policy. Could we see some sort of change?”
Stern: “I think you certainly could. But I can’t read the new chair’s mind – so I don’t know where he stands on that 2% number. To me, that number’s always been sort of an arbitrary number. My nickel on it is that if you’re running a little below your inflation target that’s hardly a big problem. I would once again urge review and maybe modification of that particular target because it’s not clear to me that there’s great virtue in it. There may be a better way to formulate the inflation objective.”
And from the Wall Street Journal: “‘He is remarkably undogmatic,’ says Jeremy Stein, a Harvard University economics professor, Democrat and former Fed governor whose office was adjacent to Mr. Powell’s. ‘He listens more than he talks.’”
With the suggestion of an End of an Era, I’m thinking of 30 years of ideologies dominating the Federal Reserve system. Alan Greenspan was the free-market ideologue that championed market-based finance, only to morph into “The Maestro” cunningly intervening in and manipulating increasingly unstable financial markets. Dr. Bernanke was summoned to the Federal Reserve in 2002 on the back of his radical theories of post-Bubble reflation. The powers that be later embraced Bernanke as Greenspan’s successor. By 2006, it was clear that reflationary measures had created an only more formidable Bubble for “helicopter Ben” to pilot. Janet Yellen, the pleasantly dovish intellectual of all things employment economics, was to ensure continuity in the implementation of the Bernanke Doctrine of radical monetary inflationism.
As Mr. Stern suggested above, it’s now time for a “pretty thorough review of some of the critical macroeconomic issues and frameworks of the day.” Long Overdue. I don’t envy Mr. Powell. His predecessors have left him, in the words of candidate Trump, “one big, fat, ugly Bubble.” Markets are comfortable that Powell will stick with the program of occasional little, harmless baby-step rate increases. Policies that actually tighten financial conditions remain unacceptable indefinitely. And it goes without saying that markets will be ready to throw a tizzy fit if the new chairman dares to even hint of a departure from market-friendly policymaking.
Powell has been referred to as a “loyal ally” of Janet Yellen, which endears him to the markets. He is by all accounts deferential and hard-working. Yet Powell is not an ideologue. He does not champion a doctrine that would have him wedded to specific econometric models or theoretical constructs.
It’s hard for me to believe he has the mindset to fixate on CPI measures slightly below target, while disregarding the markets. The Fed’s slim notion of “price stability” needs broadened and modernized. And I’m hopeful a Powell Fed’s “risk management approach” will focus more on the risks of promoting excess rather than measures to dampen market volatility and incentivize risk-taking. In such a complex world of extraordinary financial and economic developments, it’s hard to believe Powell will get bogged down in a debate on mythical “neutral” and “natural” interest rates. Ditto NAIRU.
So, trying to be constructive here, it’s a start. He may not be the bold reformer so needed at the Federal Reserve, but I’m hoping he’ll capably begin pulling the Fed away from radical inflationism. If he has been a keen observer and good listener, it would be rational to begin the process of extricating the Fed from such a dominant position in the markets. It’s not as if the Bubble is inconspicuous.
Perhaps Jerome Powell is even the type of individual driven to cultivate a sound analytical framework and philosophy – determined to learn, understand and adapt. That would be such a refreshing change from the Era of ideologues.
As someone with significant market experience, he surely recognizes the risks associated with financial excess. He must appreciate the dangers associated with Bubbles and pandering to speculative markets.
A lot will remain unknown until Powell is tested. How quickly does he come to the markets’ defense? Does he quietly abandon Bernanke’s - “the Fed will push back against a tightening of financial conditions” - over-the-top market inducement?
While he has not dissented on an FOMC vote, from his diverse real world experience, does he believe the Fed has been too reluctant in returning to traditional monetary management? Will he be a proponent of QE or instead view it with a healthier skepticism than the ideologues? I have no illusions that the Fed is about to eliminate QE from its toolkit. My view holds that, come the next serious de-risking/de-leveraging episode, central bankers will see few alternatives than creating more “money.”
Yet the key issue is how quickly in a crisis does the Powell Fed come to the markets’ rescue. As a pragmatic non-ideologue, he may appreciate the risks of coming too soon. And I have a crazy thought: maybe Powell even believes in the value of market discipline. By design or, more likely, by default – it’s the right time to move away from academic economists.
Depending on the President’s other Fed nominations, it could be quite a diverse group at the FOMC. Markets are today worry-free, but could chairman Powell be relegated to herding cats? It’s already a divided group – with divisions going much beyond traditional “hawk” and “dove.” Indeed, there are starkly divergent views as to how the world works. For starters, do economies drive the markets – or is it the securities markets these days that govern economic development? To what extent should central banks be dictating financial market behavior? Under what circumstances should central banks employ aggressive monetary stimulus? To what extent has Fed stimulus fueled deficit spending and big government? Should central bankers have complete discretion to rapidly expand central bank Credit?
Lots of momentous questions that somehow seems to matter so little at this juncture. The focus on interest rate policy and deregulation misses the larger issue: The Federal Reserve is soon under the command of a conventional and non-ideological individual with a distinguished career in the public and private sectors. I so hope Mr. Powell proves to be the distinguished statesman this country desperately needs running our central bank.
For the Week:
The S&P500 added 0.3% (up 15.6% y-t-d), and the Dow increased 0.4% (up 19.1%). The Utilities gained 0.2% (up 13.4%). The Banks were little changed (up 11.3%), while the Broker/Dealers declined 1.3% (up 18.9%). The Transports fell 1.8% (up 7.9%). The S&P 400 Midcaps slipped 0.2% (up 10.6%), and the small cap Russell 2000 declined 0.9% (up 10.2%). The Nasdaq100 jumped another 1.3% (up 29.4%).The Semiconductors surged 2.9% (up 43.4%). The Biotechs rose 2.2% (up 26.8%). With bullion down $4, the HUI gold index slipped 0.5% (up 2.0%).
Three-month Treasury bill rates ended the week at 115 bps. Two-year government yields increased three bps to 1.62% (up 43bps y-t-d). Five-year T-note yields fell four bps to 1.99% (up 6bps). Ten-year Treasury yields dropped seven bps to 2.33% (down 11bps). Long bond yields sank 10 bps to 2.81% (down 25bps).
Greek 10-year yields sank 40 bps to 5.09% (down 93bps y-t-d). Ten-year Portuguese yields dropped 13 bps to 2.07% (down 168bps). Italian 10-year yields fell 16 bps to 1.79% (down 2bps). Spain's 10-year yields declined 11 bps to 1.47% (up 9bps). German bund yields dipped two bps to 0.36% (up 16bps). French yields declined four bps to 0.75% (up 7bps). The French to German 10-year bond spread narrowed three to 39 bps. U.K. 10-year gilt yields fell nine bps to 1.26% (up 3bps). U.K.'s FTSE equities gained 0.7% (up 5.8%).
We’ve come a long way since 1992 and James Carville’s “I used to think that if there was reincarnation, I wanted to come back as the president or the pope or as a .400 baseball hitter. But now I would like to come back as the bond market. You can intimidate everybody.” New age central banking has pacified bond markets and eradicated the vigilantes. These days it’s the great equities bull market as all-powerful intimidator.
The President admitted his surprise in winning the election. I suspect he and his team were astounded by the post-election market rally. I’ve always held the view that prolonged bull markets foster a portentous concentration of power – not only in the financial markets but within the financial system more generally.
That was certainly the case during the “Roaring Twenties,” just as it was in the late-nineties and throughout the mortgage finance Bubble period. A big market decline would have provided the new President the opportunity to blame the Bubble while moving forward aggressively with his reform agenda. Instead, a rally ensured that Team Trump would be held captive to the financial markets. As his administration struggled, President Trump could at least point to record stock prices.
I was hoping for reform-minded Kevin Warsh or John Taylor at the helm of the Federal Reserve. But I’ve somewhat warmed up to establishment-favored Jerome Powell, not so much because he will pursue needed changes in monetary management – but because Mr. Powell is likely about the best we could have hoped for in the current market environment. Apparently, the President was close to reappointing market darling chair Yellen. And if Yellen wasn’t dovish enough for the markets, Bill Gross stated his preference for either Paul McCulley or Neel Kashkari. I have McCulley and Kashkari far down the list - just above Ben Bernanke but below Charles Evans and Mark Zuckerberg.
Powell is viewed as the logical choice for continuity and stability at the Fed. He has a diverse background in law, government, the markets (with Carlyle Group), regulation and monetary policy. Powell will be the first Fed chairman without an economics Ph.D. since Paul Volcker. In many ways, it is a much welcomed End of an Era.
Janet Yellen is a widely respected economist – and by all accounts has been an able administrator of the Federal Reserve system. It has been noted that she will be the first Fed chair whose term ended without the experience of a recession. More importantly, she is surely the first leader of our central bank to have enjoyed a full term of uninterrupted extremely loose policy and financial conditions.
I’ll rain on the parade of accolades: The Yellen Fed failed to tighten policy in the face of increasingly conspicuous Bubble excess. Worse even than unforgivable past episodes, the Fed badly missed its timing. Today’s backdrop ensures an easy start to what will be an extremely challenging job for chairman Powell.
I’ve read numerous articles and listened to various commentaries. Leave it to esteemed former Minneapolis Fed President Gary Stern to offer the keenest insight:
Bloomberg’s Tom Keene: “Ellen Zentner at Morgan Stanley writes a detailed note about what we would expect from chairman Powell. She mentions that there’s a mystery here over chairman Powell and core economics, including NAIRU [non-accelerating inflation rate of unemployment]… Does it matter that chairman Powell maybe has a little fuzzy knowledge of NAIRU like mere mortals like me?”
Former Minneapolis Fed President Gary Stern: “No. And, in fact, I might view that as an advantage. Because that framework is frayed at best, it seems to me given our economic performance over the past “X” years – and “X” is not a small number. So, I think some open-mindedness on that framework is a distinct positive. And I think it would be worthwhile for a fair amount of resources to be devoted to a pretty thorough review of some of the critical macroeconomic issues and frameworks of the day, because they have not all served policymakers well; they have not all served commentators well; they have not all served the Street well. And I think it would be a good idea to open some of that up.”
Bloomberg’s Mike McKee: “Do you think we’ve come to the end, maybe, of the Bernanke era of making policy in terms of setting an inflation target at 2% and aiming for that as sort of the reason – the way you conduct policy. Could we see some sort of change?”
Stern: “I think you certainly could. But I can’t read the new chair’s mind – so I don’t know where he stands on that 2% number. To me, that number’s always been sort of an arbitrary number. My nickel on it is that if you’re running a little below your inflation target that’s hardly a big problem. I would once again urge review and maybe modification of that particular target because it’s not clear to me that there’s great virtue in it. There may be a better way to formulate the inflation objective.”
And from the Wall Street Journal: “‘He is remarkably undogmatic,’ says Jeremy Stein, a Harvard University economics professor, Democrat and former Fed governor whose office was adjacent to Mr. Powell’s. ‘He listens more than he talks.’”
With the suggestion of an End of an Era, I’m thinking of 30 years of ideologies dominating the Federal Reserve system. Alan Greenspan was the free-market ideologue that championed market-based finance, only to morph into “The Maestro” cunningly intervening in and manipulating increasingly unstable financial markets. Dr. Bernanke was summoned to the Federal Reserve in 2002 on the back of his radical theories of post-Bubble reflation. The powers that be later embraced Bernanke as Greenspan’s successor. By 2006, it was clear that reflationary measures had created an only more formidable Bubble for “helicopter Ben” to pilot. Janet Yellen, the pleasantly dovish intellectual of all things employment economics, was to ensure continuity in the implementation of the Bernanke Doctrine of radical monetary inflationism.
As Mr. Stern suggested above, it’s now time for a “pretty thorough review of some of the critical macroeconomic issues and frameworks of the day.” Long Overdue. I don’t envy Mr. Powell. His predecessors have left him, in the words of candidate Trump, “one big, fat, ugly Bubble.” Markets are comfortable that Powell will stick with the program of occasional little, harmless baby-step rate increases. Policies that actually tighten financial conditions remain unacceptable indefinitely. And it goes without saying that markets will be ready to throw a tizzy fit if the new chairman dares to even hint of a departure from market-friendly policymaking.
Powell has been referred to as a “loyal ally” of Janet Yellen, which endears him to the markets. He is by all accounts deferential and hard-working. Yet Powell is not an ideologue. He does not champion a doctrine that would have him wedded to specific econometric models or theoretical constructs.
It’s hard for me to believe he has the mindset to fixate on CPI measures slightly below target, while disregarding the markets. The Fed’s slim notion of “price stability” needs broadened and modernized. And I’m hopeful a Powell Fed’s “risk management approach” will focus more on the risks of promoting excess rather than measures to dampen market volatility and incentivize risk-taking. In such a complex world of extraordinary financial and economic developments, it’s hard to believe Powell will get bogged down in a debate on mythical “neutral” and “natural” interest rates. Ditto NAIRU.
So, trying to be constructive here, it’s a start. He may not be the bold reformer so needed at the Federal Reserve, but I’m hoping he’ll capably begin pulling the Fed away from radical inflationism. If he has been a keen observer and good listener, it would be rational to begin the process of extricating the Fed from such a dominant position in the markets. It’s not as if the Bubble is inconspicuous.
Perhaps Jerome Powell is even the type of individual driven to cultivate a sound analytical framework and philosophy – determined to learn, understand and adapt. That would be such a refreshing change from the Era of ideologues.
As someone with significant market experience, he surely recognizes the risks associated with financial excess. He must appreciate the dangers associated with Bubbles and pandering to speculative markets.
A lot will remain unknown until Powell is tested. How quickly does he come to the markets’ defense? Does he quietly abandon Bernanke’s - “the Fed will push back against a tightening of financial conditions” - over-the-top market inducement?
While he has not dissented on an FOMC vote, from his diverse real world experience, does he believe the Fed has been too reluctant in returning to traditional monetary management? Will he be a proponent of QE or instead view it with a healthier skepticism than the ideologues? I have no illusions that the Fed is about to eliminate QE from its toolkit. My view holds that, come the next serious de-risking/de-leveraging episode, central bankers will see few alternatives than creating more “money.”
Yet the key issue is how quickly in a crisis does the Powell Fed come to the markets’ rescue. As a pragmatic non-ideologue, he may appreciate the risks of coming too soon. And I have a crazy thought: maybe Powell even believes in the value of market discipline. By design or, more likely, by default – it’s the right time to move away from academic economists.
Depending on the President’s other Fed nominations, it could be quite a diverse group at the FOMC. Markets are today worry-free, but could chairman Powell be relegated to herding cats? It’s already a divided group – with divisions going much beyond traditional “hawk” and “dove.” Indeed, there are starkly divergent views as to how the world works. For starters, do economies drive the markets – or is it the securities markets these days that govern economic development? To what extent should central banks be dictating financial market behavior? Under what circumstances should central banks employ aggressive monetary stimulus? To what extent has Fed stimulus fueled deficit spending and big government? Should central bankers have complete discretion to rapidly expand central bank Credit?
Lots of momentous questions that somehow seems to matter so little at this juncture. The focus on interest rate policy and deregulation misses the larger issue: The Federal Reserve is soon under the command of a conventional and non-ideological individual with a distinguished career in the public and private sectors. I so hope Mr. Powell proves to be the distinguished statesman this country desperately needs running our central bank.
For the Week:
The S&P500 added 0.3% (up 15.6% y-t-d), and the Dow increased 0.4% (up 19.1%). The Utilities gained 0.2% (up 13.4%). The Banks were little changed (up 11.3%), while the Broker/Dealers declined 1.3% (up 18.9%). The Transports fell 1.8% (up 7.9%). The S&P 400 Midcaps slipped 0.2% (up 10.6%), and the small cap Russell 2000 declined 0.9% (up 10.2%). The Nasdaq100 jumped another 1.3% (up 29.4%).The Semiconductors surged 2.9% (up 43.4%). The Biotechs rose 2.2% (up 26.8%). With bullion down $4, the HUI gold index slipped 0.5% (up 2.0%).
Three-month Treasury bill rates ended the week at 115 bps. Two-year government yields increased three bps to 1.62% (up 43bps y-t-d). Five-year T-note yields fell four bps to 1.99% (up 6bps). Ten-year Treasury yields dropped seven bps to 2.33% (down 11bps). Long bond yields sank 10 bps to 2.81% (down 25bps).
Greek 10-year yields sank 40 bps to 5.09% (down 93bps y-t-d). Ten-year Portuguese yields dropped 13 bps to 2.07% (down 168bps). Italian 10-year yields fell 16 bps to 1.79% (down 2bps). Spain's 10-year yields declined 11 bps to 1.47% (up 9bps). German bund yields dipped two bps to 0.36% (up 16bps). French yields declined four bps to 0.75% (up 7bps). The French to German 10-year bond spread narrowed three to 39 bps. U.K. 10-year gilt yields fell nine bps to 1.26% (up 3bps). U.K.'s FTSE equities gained 0.7% (up 5.8%).
Japan's Nikkei 225 equities index jumped 2.4% to a new 20-year high (up 17.9% y-t-d). Japanese 10-year "JGB" yields declined two bps to 0.05% (up 2bps). France's CAC40 added 0.4% (up 13.5%). The German DAX equities index jumped 2.0% (up 17.4%). Spain's IBEX 35 equities index gained 1.6% (up 10.8%). Italy's FTSE MIB index rose 1.5% (up 19.6%). For the most part, EM equities underperformed. Brazil's Bovespa index dropped 2.7% (up 22.7%), and Mexico's Bolsa fell 1.4% (up 6.3%). India’s Sensex equities index gained 1.6% (up 26.5%). China’s Shanghai Exchange fell 1.3% (up 8.6%). Turkey's Borsa Istanbul National 100 index surged 3.2% (up 42.4%). Russia's MICEX equities index increased 0.6% (down 6.8%).
Junk bond mutual funds saw inflows of $1.196 billion (from Lipper).
Freddie Mac 30-year fixed mortgage rates were unchanged at 3.94% (up 40bps y-o-y). Fifteen-year rates added two bps to 3.27% (up 43bps). Five-year hybrid ARM rates gained two bps to 3.23% (up 33bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down two bps to 4.18% (up 44bps).
Federal Reserve Credit last week declined $6.8bn to $4.421 TN. Over the past year, Fed Credit increased $8.1bn. Fed Credit inflated $1.601 TN, or 57%, over the past 260 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt gained $1.0bn last week to $3.366 TN. "Custody holdings" were up $245bn y-o-y, or 7.9%.
M2 (narrow) "money" supply last week gained $5.9bn to $13.746 TN. "Narrow money" expanded $672bn, or 5.1%, over the past year. For the week, Currency increased $2.6bn. Total Checkable Deposits jumped $28.8bn, while Savings Deposits fell $26.9bn. Small Time Deposits and Retail Money Funds were both little changed.
Total money market fund assets dropped $17.9bn to $2.730 TN. Money Funds rose $52bn y-o-y, or 2.0%.
Total Commercial Paper dropped $19.8bn to $1.048 TN. CP gained $140bn y-o-y, or 15.4%.
Currency Watch:
The U.S. dollar index was little changed at 94.94 (down 7.3% y-t-d). For the week on the upside, the South Korean won increased 1.5%, the New Zealand dollar 0.4% and the Canadian dollar 0.3%. For the week on the downside, the Brazilian real declined 2.4%, the South African rand 0.9%, the Swedish krona 0.7%, the British pound 0.4%, the Mexican peso 0.4%, the Australian dollar 0.4%, the Japanese yen 0.4%, the Norwegian krone 0.4%, and the Swiss franc 0.3%. The Chinese renminbi added 0.17% versus the dollar this week (up 4.61% y-t-d).
Commodities Watch:
The Goldman Sachs Commodities Index jumped 2.1% (up 5.6% y-t-d). Spot Gold slipped 0.3% to $1,270 (up 10.2%). Silver rallied 0.5% to $16.834 (up 5.3%). Crude jumped $1.74 to $55.64 (up 3%). Gasoline gained 1.4% (up 7%), while Natural Gas was about unchanged (down 20%). Copper added 0.5% (up 24%). Wheat slipped 0.4% (up 4%). Corn was little changed (down 1%).
Trump Administration Watch:
October 31 – Politico (Danny Vinik): “No president has ever had a chance to rewrite the course of the Federal Reserve as completely, and as quickly, as President Donald Trump. When Trump picks a new head of the Federal Reserve—a move expected to happen on Thursday—it will be just the midpoint of his reshaping of the nation’s most important financial body. He’s likely to fill three more critical positions at the Fed: the vice chair, and two spots on the Fed Board of Governors. Combined with Governor Randy Quarles, who was confirmed by the Senate in October, Trump has a chance to nominate five of seven Fed governors by early next year. But just what Trump will do with that power remains unclear.”
Federal Reserve Watch:
November 1 – Bloomberg (Christopher Condon): “Federal Reserve officials reinforced expectations for a December interest-rate increase by subtly upgrading their assessment of the U.S. economy… ‘Economic activity has been rising at a solid rate despite hurricane-related disruptions,’ the Federal Open Market Committee said… following a two-day meeting… at which they left rates unchanged as expected. After its meeting in September the FOMC said the economy was expanding ‘moderately.’ Wednesday’s statement marked the first time since January 2015 that the committee used the word ‘solid’ to describe growth. The Fed repeated its assessment that while inflation may remain ‘somewhat below 2% in the near term,’ it’s expected to stabilize around the central bank’s 2% objective ‘over the medium term.’”
U.S. Bubble Watch:
November 2 – Bloomberg (Charles Stein): “Vanguard Group collected as much from U.S. investors in the first 10 months of 2017 as it did in all of 2016. The firm attracted $303 billion into its U.S. mutual funds and exchange-traded funds through October, matching last year’s record total… Vanguard collected almost $30 billion in October. The company, the biggest provider of mutual funds, is benefiting from a flood of money pouring into low-cost products that track indexes. In the 12 months ended Sept. 30, passive mutual funds and ETFs in the U.S. attracted a net $714 billion…, while active funds suffered outflows of $187 billion.”
October 30 – Reuters (Lucia Mutikani): “U.S. consumer spending recorded its biggest increase in more than eight years in September, likely as households in Texas and Florida replaced flood-damaged motor vehicles, but underlying inflation remained muted. Households, however, dipped into their savings to fund purchases last month, pushing savings to their lowest level since 2008. Against the backdrop of lackluster wage growth, the drop in savings suggests that September’s robust pace of consumer spending is probably unsustainable.”
October 30 – CNBC (Jeff Cox): “Americans are saving at the lowest pace in nearly 10 years, a sign of growing confidence as money pours into risk. The savings rate in September fell to 3.1%... That's the weakest level since December 2007… The August savings rate was 3.6%. As the downturn's effects back then ate into economic activity, consumers pushed their money into mattresses and reduced debt, which hit a historic peak of 13.2% of disposable income in the fourth quarter of 2007… Over the years, savings hit its peak of 11% in December 2012 and has been tailing lower since.”
October 31 – Bloomberg (Vince Golle): “America’s factories cranked it up in October, according to the latest regional manufacturing indexes. From Milwaukee to Dallas to New York state, measures improved to multi-year highs, reflecting robust orders growth as the global economy shows some promise. The MNI Chicago Business Barometer unexpectedly advanced to 66.2, exceeding all forecasts in a Bloomberg survey and marking the strongest reading since March 2011… Down south in the Lone Star State, manufacturing business activity was the firmest in more than 11 years… The Kansas City Fed’s measure advanced to the strongest reading since March 2011, while the New York Fed’s Empire State factory index climbed to the highest since September 2014.”
October 31 – Bloomberg (Agnel Philip): “Home-price gains in 20 U.S. cities accelerated in August amid tight inventories and steady economic growth, figures from S&P CoreLogic Case-Shiller showed… 20-city property values index rose 5.9% y/y (matching est.) after 5.8%. National price gauge increased 6.1% y/y, most since June 2014.”
October 31 – Bloomberg (Frederik Balfour): “U.S. consumer confidence rose more than expected in October to the highest in almost 17 years as Americans grew more confident about the economy and job market, according to… the …Conference Board. Confidence index rose to 125.9 (est. 121.5), highest since Dec. 2000, from 120.6 in Sept. Present conditions measure increased to 151.1, highest since 2001, from 146.9.”
October 30 – Bloomberg (Patrick Clark): “Here’s more evidence that the defining characteristic of the U.S. housing market is a shortage of inventory for sale: Homes are sitting on the market for the shortest time in 30 years, according to… the National Association of Realtors. The typical home spent just three weeks on the market… That was down from four weeks in the year ending June 2016 and 11 weeks in 2012… It was the shortest time since the NAR report began including data on how long homes spend on the market, in 1987… Forty-two percent of buyers paid at least the listing price, the highest share since the NAR survey started keeping track in 2007.”
October 29 – Wall Street Journal (Laura Kusisto and Christina Rexrode): “Despite rising home prices and a growing economy, U.S. homeowners’ mobility rate is stuck at a 30-year low… The median duration of owners in their homes in 2017 was 10 years… That matched last year’s duration, which, along with 2014, was the highest level since the NAR started tracking the data in 1985. Americans aren’t moving in part because inventory levels have fallen near multidecade lows and home prices have risen to records. Many homeowners are choosing to stay and renovate… The lack of inventory ‘is like not having enough oil in your car and your gears slowly come to a grind,’ said Sam Khater, deputy chief economist at data company CoreLogic.”
China Bubble Watch:
October 30 – Bloomberg (Justina Lee): “After a four-day bond selloff in China that shocked at least one market player, the government took action and stepped in. Chinese sovereign notes rose on Tuesday after the central bank boosted cash injections in the financial system and China Development Bank, a key so-called policy lender, downsized its debt issuance. A manufacturing gauge that signaled slower expansion also gave the bonds some much-needed support.”
October 29 – Bloomberg (Enda Curran and Chris Anstey): “It used to be that when America sneezed, the world caught a cold. This time around, it’s the risk of a sickly China that poses a bigger threat. The world’s second-largest economy is now trying to ward off the sniffles. While output is still growing at a pace that sees gross domestic product double every decade, the problem remains that much of that has been fueled by a massive buildup of credit. Total borrowing climbed to about 260% of the economy’s size by the end of 2016, up from 162% in 2008, and will hit close to 320% by 2021 according to Bloomberg Intelligence estimates. Economy-wide debt levels are on track to rank among ‘the highest in the world,’ according to Tom Orlik, BI’s Chief Asia Economist.”
October 29 – Bloomberg: “Investors in Chinese company bonds have so far avoided the brunt of a debt selloff that’s driven 10-year sovereign yields to the highest in three years. Their luck may be about to run out. Now that the Communist Party Congress is over, China’s bond holders may be about to get hit by ‘daggers falling from the sky,’ said Huachuang Securities Co., referring to aggressive deleveraging policies. Plus, accelerating inflation and the risk that China’s central bank may follow the Federal Reserve in raising borrowing costs are casting a shadow over the entire bond market. That all means that the situation that’s existed for most of 2017 -- sovereign yields rising, and corporate debt remaining relatively resilient -- is at risk of cracking. As appetite for bonds of any kind dwindles and authorities roll out measures that target higher-risk investments, company securities are in the line of fire.”
November 2 – Bloomberg (Eric Lam): “China’s deleveraging campaign has foreign investors flocking to the nation’s short-term bank debt. A sell-off in the country’s onshore bonds last month -- triggered by signs that policy makers are determined to rein in speculative borrowing -- encouraged offshore investors to home in on a particular slice of the market that might insulate them from turmoil. They’re called negotiable certificates of deposit, securities based on a deposit by one bank into another. Mainly issued by small and medium-sized lenders, they’re short-dated, so bear less credit risk. Overseas holdings of NCDs jumped nearly six-fold in the two months through September, vastly outpacing the 18% gain for the overall onshore bond market… And the debt may only get more appealing through year-end, with rates likely to rise thanks to seasonal dynamics.”
October 27 – Reuters (Jemima Kelly): “China is stepping up its oversight of cash loans offered through the internet amid growing concerns over rapid growth in the lightly regulated industry… Caixin… quoted Ji Zhihong of the central bank’s financial markets department as saying it has developed with other authorities a special regulation for controlling online financial risk. …Ji told a seminar the regulation has already achieved some success. Caixin also quoted Ji as saying China will improve regulations for all online financing businesses, and all financing activity should be subject to a basic level of oversight.”
October 31 – Wall Street Journal (Chao Deng and James T. Areddy): “A debt-laden port management company in northeast China defaulted on $150 million in bonds, as highly leveraged businesses get squeezed by Beijing’s campaign to weed out risks in the financial system. Dandong Port Group Co., controlled by a Chinese construction magnate with political ties in the U.S., told bondholders this week that it is unable to repay part of 1 billion yuan in bonds due Monday. A company statement cited ‘heavy interest-bearing debt burdens and high short-term payment pressure’ and said it is working with underwriters to repay the investors. The port, located at the mouth of the Yalu River on the border with North Korea, has expanded energetically in recent years…”
October 31 – Bloomberg (Frederik Balfour): “A luxury home in Hong Kong’s exclusive Peak neighborhood sold for HK$1.16 billion ($149 million), Wheelock Properties Ltd. said. The four-bedroom, 9,178 square foot (853 square meter) house boasts a swimming pool, elevator, garden and unobstructed views of Hong Kong and Victoria Harbour. The price per square foot was HK$126,813, the most paid for a unit in the development, Wheelock said.”
Central Banker Watch:
November 2 – Bloomberg (Lucy Meakin): “Bank of England policy makers raised interest rates for the first time in a decade, yet expressed concern for Britain’s Brexit-dented economy by indicating that another increase isn’t imminent. Led by Governor Mark Carney, the Monetary Policy Committee voted 7-2 on Thursday to increase the benchmark rate to 0.5% from 0.25%. The minutes of their meeting underscored worries that the economy is fragile as the 2019 split with the European Union nears.”
October 29 – Financial Times (Merryn Somerset Webb): “It has been a good week for billionaires. The UBS/PwC Billionaires Report 2017 claimed the combined wealth of the world’s 1,542 billionaires rose by almost a fifth last year to $6tn: more than double the UK’s gross domestic product. It has not been a particularly good week for governments. They have to deal with the fallout from rising wealth inequality, and that fallout is getting increasingly nasty. This kind of report does not do much for central bankers, either: the rise of the billionaires is as much about financial globalisation as it is easy money, but every time a report lands on their desks, central bankers must stop to think about the economic, social and political havoc their policies have caused over the past 10 years. The desperate attempt to avoid deflation via quantitative easing and record-low interest rates has had horrible side effects, and this observation is hardly controversial. The rich have become much richer; corporate wealth has become more concentrated; soaring house prices have created intergenerational strife; low yields have made all but the super-rich paranoid that they will be entirely unable to finance their futures.”
October 29 – Wall Street Journal (Lev Borodovsky): “Central bankers are slowly unwinding the stimulus that has helped support the epic postcrisis rally in financial markets. Inflation has been quiet throughout, but there are signs it may soon be heard from. Inflation has tiptoed higher in major economies, and there are signs in smaller nations that prices are beginning to get traction as well. Some analysts see the development as the natural next step following a global reflation that began in earnest in mid-2016… Time will tell. Wholesale inflation is percolating globally with parallel trends in Europe and Asia, a reflection of integrated supply chains.”
Global Bubble Watch:
October 30 – Financial Times (Miles Johnson): “The International Monetary Fund has warned that the increasing use of exotic financial products tied to equity volatility by investors such as pension funds is creating unknown risks that could result in a severe shock to financial markets. …Tobias Adrian, director of the Monetary and Capital Markets Department of the IMF, said an increasing appetite for yield was driving investors to look for ways to boost income through complex instruments. ‘The combination of low yields and low volatility facilitates the use of leverage by investors to increase returns, and we have seen rapid growth in some types of products that do this,’ he said… The IMF estimates that assets invested in volatility targeting strategies have risen to about $500bn, with this amount increasing by more than half over the past three years.”
October 29 – Wall Street Journal (Chris Dieterich, Ben Eisen and Akane Otani): “Markets around the globe are surging to records, reflecting growing optimism about the world economy and fueling an increasing eagerness by investors to step in and buy assets whenever prices dip. In the U.S. stock market, declines have grown shallower over the past two years and are snapping back sooner. The S&P 500 has gone 246 trading days without trading more than 3% below its record high, the longest streak ever for the index… The index hasn’t had a decline of 10% or more from a recent peak since February 2016. The steady buying in the U.S. has lately spread to Europe, Japan and even developing markets… On Friday, the Dow Jones Industrial Average rose 0.1% to 23434.19, near its record from Tuesday, its 54th of the year. Japan’s Nikkei gained 2.6% this past week to its highest level since 1996, and share indexes in the U.K. and Germany have hit records this month.”
November 1 – Bloomberg (Cecile Gutscher and Paul Cohen): “Ultra-low interest rates and an expansionary European Central Bank have stoked a borrowing spree that’s already eclipsed all of 2016, two months before the end of the year. Syndicated bond sales in Europe are set to reach 1.13 trillion euros ($1.3 trillion) Wednesday… Treasurers from across the globe have flocked to the region’s markets, where the ECB has suppressed yields with an asset purchase program that’s even swept up debt issued by companies beyond its own borders.”
November 2 – Bloomberg (Eric Lam): “Bitcoin surged past $7,000 for the first time, breaching another milestone less than one month after it tore through the $5,000 mark. The digital currency got new impetus this week after CME Group Inc., the world’s largest exchange owner, said it plans to introduce bitcoin futures by the end of the year, citing pent-up demand from clients. Skeptics including Themis Trading say the rally is evidence that the software-created asset is a bubble that should not be given regulatory cover.”
October 31 – Bloomberg (Nick Baker and Matthew Leising): “The allure of bitcoin was too much for CME Group Inc. The world’s largest exchange owner reversed course today and said it plans to introduce bitcoin futures by the end of the year, only a month after dismissing such a plan. The largest cryptocurrency, which has surged more than sixfold this year, climbed to a record high after the announcement.”
October 31 – Wall Street Journal (Dominique Fong and Esther Fung): “China’s controls on capital outflow are putting a chill on some global commercial real-estate markets. Since late 2016, policy makers in Beijing have been tightening restrictions on overseas investments and scrutinizing some of the country’s most ambitious deal makers, voicing concerns that deals in certain sectors were disguises for capital flight into havens. In August, China’s powerful State Council announced that property investments abroad were ‘restricted,’ along with deals in hotels, movie studios and sports teams…. At the recent Communist Party congress, where President Xi Jinping solidified his control, officials reiterated concerns about systemic risks stemming from ill-considered purchases abroad.”
November 1 – Bloomberg (Peter Vercoe and Matthew Burgess): “The housing boom that has seen Australian home prices more than double since the turn of the century is ‘officially over,’ after data showed prices now flatlining, UBS Group AG said. National house prices were unchanged in October from September, while annual growth has slowed to 7% from more than 10% as recently as July… ‘There is now a persistent and sharp slowdown unfolding,’ UBS economists led by George Tharenou said… ‘This suggests a tightening of financial conditions is unfolding, which we expect to weigh on consumption growth via a fading household-wealth effect.’”
Fixed Income Bubble Watch:
October 29 – Financial Times (Joe Rennison and Eric Platt): “Wall Street banks are having a strong year underwriting and selling riskier loans, with the volume so far this year already surpassing the whole of 2016. The increase in issuance of leveraged loans, lent to borrowers with sub-investment grade ratings, has been driven by companies renegotiating debt at lower interest rates. Those rates are more attractive partly because of the burgeoning demand for the asset class, as well as the low level of market rates more generally. Nine of the 10 largest lenders in the business — including Bank of America Merrill Lynch, JPMorgan Chase, Goldman Sachs and Barclays — have already surpassed 2016 activity…”
Europe Watch:
October 27 – Wall Street Journal (Tom Fairless): “The European Central Bank’s reluctance to quickly phase out its bond-buying program has reopened a rift at the top of the world’s second-most powerful central bank, pitting ECB President Mario Draghi against German Bundesbank head Jens Weidmann —just as discussions begin about whether the German will succeed the Italian… Mr. Weidmann, widely seen as a leading contender for the ECB’s top job, has publicly opposed many of the bank’s stimulus policies in recent years, notably its large-scale purchases of government bonds, known as quantitative easing or QE. Although he toned down his criticism in recent months, Mr. Weidmann changed tack this week, publicly opposing a decision to extend QE through September 2018.”
October 29 – Wall Street Journal (Giovanni Legorano): “When European Central Bank President Mario Draghi embarked on a policy of buying government bonds, it was an especially welcome lifeline for Italy, then reeling from soaring interest rates and trapped in the country’s worst economic crisis since the war. Now, as the central bank unwinds the stimulus program known as quantitative easing 2½ years later, Italy is an important test case for the long-term success of Mr. Draghi’s policy. Years of cheap money and a robust recovery elsewhere in Europe is nudging Italy to its fastest economic growth in seven years. But while thriving on stimulus, Italy has failed to take big steps on changes such as cutting red tape and reducing the cost of labor.”
Japan Watch:
November 1 – Bloomberg (Isabel Reynolds and Emi Nobuhiro): “Prime Minister Shinzo Abe praised the Bank of Japan’s efforts to reach its inflation target, but stopped short of saying whether he’d reappoint Governor Haruhiko Kuroda to lead the central bank when his term expires next year. …Abe said ‘the slate is completely blank’ on his choice for governor. ‘We haven’t yet reached the 2% price stability target, but we expect the Bank of Japan to continue to make efforts to achieve it,’ he said… Kuroda is the top contender by a wide margin to lead the Bank of Japan again when his five-year term comes to an end in April…”
Emerging Market Watch:
November 1 – Wall Street Journal (Julie Wernau and Ana Rivas): “Venezuela has sunk into a deep recession as it grapples with the collapse of oil prices and the effects of years of economic mismanagement. Many analysts expect the country to default on its debt… Here’s a look at the state of Venezuela’s economy and finances. Venezuela has the world’s highest inflation, estimated by the International Monetary Fund to reach 653% this year. The country has been ravaged by shortages of food and medicine, and months of protests that cost more than 120 lives. As Mr. Maduro has consolidated power, the opposition has been weakened and divided.”
Leveraged Speculation Watch:
November 2 – Bloomberg (Dani Burger): “By some measures, equity quantitative funds should be thriving. But they’re not. Their fundamental counterparts are having a banner year. Stock correlations are at all time lows and clearer market trends are breathing life back into the momentum trade, a strategy among equity quants that bets the winners will keep winning. As those shares chart increasingly independent paths from the losers, equity fund managers are recording their strongest performance in five years… Yet for market-neutral quants who take advantage of patterns and dislocations, this year has been anything but a standout. Only 30% of those managers are beating their benchmark…”
Geopolitical Watch:
October 30 – Reuters (David Brunnstrom and Matt Spetalnick): “China’s ambassador to Washington said… U.S. President Donald Trump’s state visit to Beijing next week was a historic opportunity to boost cooperation between the world’s two largest economies, but warned against attempts to ‘contain’ Beijing. Cui Tiankai also stressed the urgency of efforts to find a negotiated solution to the crisis over North Korea’s nuclear and missile programs and warned of a ‘more dangerous’ situation if tensions between the United States and Pyongyang continued.”
October 31 – Reuters (Greg Torode and Ben Blanchard): “China has quietly undertaken more construction and reclamation in the South China Sea, recent satellite images show, and is likely to more powerfully reassert its claims over the waterway soon, regional diplomats and military officers say. With global attention focused on North Korea and Beijing engrossed in its Party Congress, tensions in the South China Sea have slipped from the headlines in recent months. But with none of the underlying disputes resolved and new images reviewed by Reuters showing China continuing to develop facilities on North and Tree islands in the contested Paracel islands, experts say the vital trade route remains a global flashpoint.”
October 30 – CNBC (Anmar Frangoul): “The amount of carbon dioxide in the atmosphere reached its highest level in 800,000 years in 2016, the World Meteorological Organization (WMO) said… Carbon dioxide levels ‘surged’ at record breaking speeds last year, with globally averaged concentrations of CO2 hitting 403.3 parts per million in 2016 compared to 400 parts per million in 2015…”
Freddie Mac 30-year fixed mortgage rates were unchanged at 3.94% (up 40bps y-o-y). Fifteen-year rates added two bps to 3.27% (up 43bps). Five-year hybrid ARM rates gained two bps to 3.23% (up 33bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down two bps to 4.18% (up 44bps).
Federal Reserve Credit last week declined $6.8bn to $4.421 TN. Over the past year, Fed Credit increased $8.1bn. Fed Credit inflated $1.601 TN, or 57%, over the past 260 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt gained $1.0bn last week to $3.366 TN. "Custody holdings" were up $245bn y-o-y, or 7.9%.
M2 (narrow) "money" supply last week gained $5.9bn to $13.746 TN. "Narrow money" expanded $672bn, or 5.1%, over the past year. For the week, Currency increased $2.6bn. Total Checkable Deposits jumped $28.8bn, while Savings Deposits fell $26.9bn. Small Time Deposits and Retail Money Funds were both little changed.
Total money market fund assets dropped $17.9bn to $2.730 TN. Money Funds rose $52bn y-o-y, or 2.0%.
Total Commercial Paper dropped $19.8bn to $1.048 TN. CP gained $140bn y-o-y, or 15.4%.
Currency Watch:
The U.S. dollar index was little changed at 94.94 (down 7.3% y-t-d). For the week on the upside, the South Korean won increased 1.5%, the New Zealand dollar 0.4% and the Canadian dollar 0.3%. For the week on the downside, the Brazilian real declined 2.4%, the South African rand 0.9%, the Swedish krona 0.7%, the British pound 0.4%, the Mexican peso 0.4%, the Australian dollar 0.4%, the Japanese yen 0.4%, the Norwegian krone 0.4%, and the Swiss franc 0.3%. The Chinese renminbi added 0.17% versus the dollar this week (up 4.61% y-t-d).
Commodities Watch:
The Goldman Sachs Commodities Index jumped 2.1% (up 5.6% y-t-d). Spot Gold slipped 0.3% to $1,270 (up 10.2%). Silver rallied 0.5% to $16.834 (up 5.3%). Crude jumped $1.74 to $55.64 (up 3%). Gasoline gained 1.4% (up 7%), while Natural Gas was about unchanged (down 20%). Copper added 0.5% (up 24%). Wheat slipped 0.4% (up 4%). Corn was little changed (down 1%).
Trump Administration Watch:
October 31 – Politico (Danny Vinik): “No president has ever had a chance to rewrite the course of the Federal Reserve as completely, and as quickly, as President Donald Trump. When Trump picks a new head of the Federal Reserve—a move expected to happen on Thursday—it will be just the midpoint of his reshaping of the nation’s most important financial body. He’s likely to fill three more critical positions at the Fed: the vice chair, and two spots on the Fed Board of Governors. Combined with Governor Randy Quarles, who was confirmed by the Senate in October, Trump has a chance to nominate five of seven Fed governors by early next year. But just what Trump will do with that power remains unclear.”
Federal Reserve Watch:
November 1 – Bloomberg (Christopher Condon): “Federal Reserve officials reinforced expectations for a December interest-rate increase by subtly upgrading their assessment of the U.S. economy… ‘Economic activity has been rising at a solid rate despite hurricane-related disruptions,’ the Federal Open Market Committee said… following a two-day meeting… at which they left rates unchanged as expected. After its meeting in September the FOMC said the economy was expanding ‘moderately.’ Wednesday’s statement marked the first time since January 2015 that the committee used the word ‘solid’ to describe growth. The Fed repeated its assessment that while inflation may remain ‘somewhat below 2% in the near term,’ it’s expected to stabilize around the central bank’s 2% objective ‘over the medium term.’”
U.S. Bubble Watch:
November 2 – Bloomberg (Charles Stein): “Vanguard Group collected as much from U.S. investors in the first 10 months of 2017 as it did in all of 2016. The firm attracted $303 billion into its U.S. mutual funds and exchange-traded funds through October, matching last year’s record total… Vanguard collected almost $30 billion in October. The company, the biggest provider of mutual funds, is benefiting from a flood of money pouring into low-cost products that track indexes. In the 12 months ended Sept. 30, passive mutual funds and ETFs in the U.S. attracted a net $714 billion…, while active funds suffered outflows of $187 billion.”
October 30 – Reuters (Lucia Mutikani): “U.S. consumer spending recorded its biggest increase in more than eight years in September, likely as households in Texas and Florida replaced flood-damaged motor vehicles, but underlying inflation remained muted. Households, however, dipped into their savings to fund purchases last month, pushing savings to their lowest level since 2008. Against the backdrop of lackluster wage growth, the drop in savings suggests that September’s robust pace of consumer spending is probably unsustainable.”
October 30 – CNBC (Jeff Cox): “Americans are saving at the lowest pace in nearly 10 years, a sign of growing confidence as money pours into risk. The savings rate in September fell to 3.1%... That's the weakest level since December 2007… The August savings rate was 3.6%. As the downturn's effects back then ate into economic activity, consumers pushed their money into mattresses and reduced debt, which hit a historic peak of 13.2% of disposable income in the fourth quarter of 2007… Over the years, savings hit its peak of 11% in December 2012 and has been tailing lower since.”
October 31 – Bloomberg (Vince Golle): “America’s factories cranked it up in October, according to the latest regional manufacturing indexes. From Milwaukee to Dallas to New York state, measures improved to multi-year highs, reflecting robust orders growth as the global economy shows some promise. The MNI Chicago Business Barometer unexpectedly advanced to 66.2, exceeding all forecasts in a Bloomberg survey and marking the strongest reading since March 2011… Down south in the Lone Star State, manufacturing business activity was the firmest in more than 11 years… The Kansas City Fed’s measure advanced to the strongest reading since March 2011, while the New York Fed’s Empire State factory index climbed to the highest since September 2014.”
October 31 – Bloomberg (Agnel Philip): “Home-price gains in 20 U.S. cities accelerated in August amid tight inventories and steady economic growth, figures from S&P CoreLogic Case-Shiller showed… 20-city property values index rose 5.9% y/y (matching est.) after 5.8%. National price gauge increased 6.1% y/y, most since June 2014.”
October 31 – Bloomberg (Frederik Balfour): “U.S. consumer confidence rose more than expected in October to the highest in almost 17 years as Americans grew more confident about the economy and job market, according to… the …Conference Board. Confidence index rose to 125.9 (est. 121.5), highest since Dec. 2000, from 120.6 in Sept. Present conditions measure increased to 151.1, highest since 2001, from 146.9.”
October 30 – Bloomberg (Patrick Clark): “Here’s more evidence that the defining characteristic of the U.S. housing market is a shortage of inventory for sale: Homes are sitting on the market for the shortest time in 30 years, according to… the National Association of Realtors. The typical home spent just three weeks on the market… That was down from four weeks in the year ending June 2016 and 11 weeks in 2012… It was the shortest time since the NAR report began including data on how long homes spend on the market, in 1987… Forty-two percent of buyers paid at least the listing price, the highest share since the NAR survey started keeping track in 2007.”
October 29 – Wall Street Journal (Laura Kusisto and Christina Rexrode): “Despite rising home prices and a growing economy, U.S. homeowners’ mobility rate is stuck at a 30-year low… The median duration of owners in their homes in 2017 was 10 years… That matched last year’s duration, which, along with 2014, was the highest level since the NAR started tracking the data in 1985. Americans aren’t moving in part because inventory levels have fallen near multidecade lows and home prices have risen to records. Many homeowners are choosing to stay and renovate… The lack of inventory ‘is like not having enough oil in your car and your gears slowly come to a grind,’ said Sam Khater, deputy chief economist at data company CoreLogic.”
China Bubble Watch:
October 30 – Bloomberg (Justina Lee): “After a four-day bond selloff in China that shocked at least one market player, the government took action and stepped in. Chinese sovereign notes rose on Tuesday after the central bank boosted cash injections in the financial system and China Development Bank, a key so-called policy lender, downsized its debt issuance. A manufacturing gauge that signaled slower expansion also gave the bonds some much-needed support.”
October 29 – Bloomberg (Enda Curran and Chris Anstey): “It used to be that when America sneezed, the world caught a cold. This time around, it’s the risk of a sickly China that poses a bigger threat. The world’s second-largest economy is now trying to ward off the sniffles. While output is still growing at a pace that sees gross domestic product double every decade, the problem remains that much of that has been fueled by a massive buildup of credit. Total borrowing climbed to about 260% of the economy’s size by the end of 2016, up from 162% in 2008, and will hit close to 320% by 2021 according to Bloomberg Intelligence estimates. Economy-wide debt levels are on track to rank among ‘the highest in the world,’ according to Tom Orlik, BI’s Chief Asia Economist.”
October 29 – Bloomberg: “Investors in Chinese company bonds have so far avoided the brunt of a debt selloff that’s driven 10-year sovereign yields to the highest in three years. Their luck may be about to run out. Now that the Communist Party Congress is over, China’s bond holders may be about to get hit by ‘daggers falling from the sky,’ said Huachuang Securities Co., referring to aggressive deleveraging policies. Plus, accelerating inflation and the risk that China’s central bank may follow the Federal Reserve in raising borrowing costs are casting a shadow over the entire bond market. That all means that the situation that’s existed for most of 2017 -- sovereign yields rising, and corporate debt remaining relatively resilient -- is at risk of cracking. As appetite for bonds of any kind dwindles and authorities roll out measures that target higher-risk investments, company securities are in the line of fire.”
November 2 – Bloomberg (Eric Lam): “China’s deleveraging campaign has foreign investors flocking to the nation’s short-term bank debt. A sell-off in the country’s onshore bonds last month -- triggered by signs that policy makers are determined to rein in speculative borrowing -- encouraged offshore investors to home in on a particular slice of the market that might insulate them from turmoil. They’re called negotiable certificates of deposit, securities based on a deposit by one bank into another. Mainly issued by small and medium-sized lenders, they’re short-dated, so bear less credit risk. Overseas holdings of NCDs jumped nearly six-fold in the two months through September, vastly outpacing the 18% gain for the overall onshore bond market… And the debt may only get more appealing through year-end, with rates likely to rise thanks to seasonal dynamics.”
October 27 – Reuters (Jemima Kelly): “China is stepping up its oversight of cash loans offered through the internet amid growing concerns over rapid growth in the lightly regulated industry… Caixin… quoted Ji Zhihong of the central bank’s financial markets department as saying it has developed with other authorities a special regulation for controlling online financial risk. …Ji told a seminar the regulation has already achieved some success. Caixin also quoted Ji as saying China will improve regulations for all online financing businesses, and all financing activity should be subject to a basic level of oversight.”
October 31 – Wall Street Journal (Chao Deng and James T. Areddy): “A debt-laden port management company in northeast China defaulted on $150 million in bonds, as highly leveraged businesses get squeezed by Beijing’s campaign to weed out risks in the financial system. Dandong Port Group Co., controlled by a Chinese construction magnate with political ties in the U.S., told bondholders this week that it is unable to repay part of 1 billion yuan in bonds due Monday. A company statement cited ‘heavy interest-bearing debt burdens and high short-term payment pressure’ and said it is working with underwriters to repay the investors. The port, located at the mouth of the Yalu River on the border with North Korea, has expanded energetically in recent years…”
October 31 – Bloomberg (Frederik Balfour): “A luxury home in Hong Kong’s exclusive Peak neighborhood sold for HK$1.16 billion ($149 million), Wheelock Properties Ltd. said. The four-bedroom, 9,178 square foot (853 square meter) house boasts a swimming pool, elevator, garden and unobstructed views of Hong Kong and Victoria Harbour. The price per square foot was HK$126,813, the most paid for a unit in the development, Wheelock said.”
Central Banker Watch:
November 2 – Bloomberg (Lucy Meakin): “Bank of England policy makers raised interest rates for the first time in a decade, yet expressed concern for Britain’s Brexit-dented economy by indicating that another increase isn’t imminent. Led by Governor Mark Carney, the Monetary Policy Committee voted 7-2 on Thursday to increase the benchmark rate to 0.5% from 0.25%. The minutes of their meeting underscored worries that the economy is fragile as the 2019 split with the European Union nears.”
October 29 – Financial Times (Merryn Somerset Webb): “It has been a good week for billionaires. The UBS/PwC Billionaires Report 2017 claimed the combined wealth of the world’s 1,542 billionaires rose by almost a fifth last year to $6tn: more than double the UK’s gross domestic product. It has not been a particularly good week for governments. They have to deal with the fallout from rising wealth inequality, and that fallout is getting increasingly nasty. This kind of report does not do much for central bankers, either: the rise of the billionaires is as much about financial globalisation as it is easy money, but every time a report lands on their desks, central bankers must stop to think about the economic, social and political havoc their policies have caused over the past 10 years. The desperate attempt to avoid deflation via quantitative easing and record-low interest rates has had horrible side effects, and this observation is hardly controversial. The rich have become much richer; corporate wealth has become more concentrated; soaring house prices have created intergenerational strife; low yields have made all but the super-rich paranoid that they will be entirely unable to finance their futures.”
October 29 – Wall Street Journal (Lev Borodovsky): “Central bankers are slowly unwinding the stimulus that has helped support the epic postcrisis rally in financial markets. Inflation has been quiet throughout, but there are signs it may soon be heard from. Inflation has tiptoed higher in major economies, and there are signs in smaller nations that prices are beginning to get traction as well. Some analysts see the development as the natural next step following a global reflation that began in earnest in mid-2016… Time will tell. Wholesale inflation is percolating globally with parallel trends in Europe and Asia, a reflection of integrated supply chains.”
Global Bubble Watch:
October 30 – Financial Times (Miles Johnson): “The International Monetary Fund has warned that the increasing use of exotic financial products tied to equity volatility by investors such as pension funds is creating unknown risks that could result in a severe shock to financial markets. …Tobias Adrian, director of the Monetary and Capital Markets Department of the IMF, said an increasing appetite for yield was driving investors to look for ways to boost income through complex instruments. ‘The combination of low yields and low volatility facilitates the use of leverage by investors to increase returns, and we have seen rapid growth in some types of products that do this,’ he said… The IMF estimates that assets invested in volatility targeting strategies have risen to about $500bn, with this amount increasing by more than half over the past three years.”
October 29 – Wall Street Journal (Chris Dieterich, Ben Eisen and Akane Otani): “Markets around the globe are surging to records, reflecting growing optimism about the world economy and fueling an increasing eagerness by investors to step in and buy assets whenever prices dip. In the U.S. stock market, declines have grown shallower over the past two years and are snapping back sooner. The S&P 500 has gone 246 trading days without trading more than 3% below its record high, the longest streak ever for the index… The index hasn’t had a decline of 10% or more from a recent peak since February 2016. The steady buying in the U.S. has lately spread to Europe, Japan and even developing markets… On Friday, the Dow Jones Industrial Average rose 0.1% to 23434.19, near its record from Tuesday, its 54th of the year. Japan’s Nikkei gained 2.6% this past week to its highest level since 1996, and share indexes in the U.K. and Germany have hit records this month.”
November 1 – Bloomberg (Cecile Gutscher and Paul Cohen): “Ultra-low interest rates and an expansionary European Central Bank have stoked a borrowing spree that’s already eclipsed all of 2016, two months before the end of the year. Syndicated bond sales in Europe are set to reach 1.13 trillion euros ($1.3 trillion) Wednesday… Treasurers from across the globe have flocked to the region’s markets, where the ECB has suppressed yields with an asset purchase program that’s even swept up debt issued by companies beyond its own borders.”
November 2 – Bloomberg (Eric Lam): “Bitcoin surged past $7,000 for the first time, breaching another milestone less than one month after it tore through the $5,000 mark. The digital currency got new impetus this week after CME Group Inc., the world’s largest exchange owner, said it plans to introduce bitcoin futures by the end of the year, citing pent-up demand from clients. Skeptics including Themis Trading say the rally is evidence that the software-created asset is a bubble that should not be given regulatory cover.”
October 31 – Bloomberg (Nick Baker and Matthew Leising): “The allure of bitcoin was too much for CME Group Inc. The world’s largest exchange owner reversed course today and said it plans to introduce bitcoin futures by the end of the year, only a month after dismissing such a plan. The largest cryptocurrency, which has surged more than sixfold this year, climbed to a record high after the announcement.”
October 31 – Wall Street Journal (Dominique Fong and Esther Fung): “China’s controls on capital outflow are putting a chill on some global commercial real-estate markets. Since late 2016, policy makers in Beijing have been tightening restrictions on overseas investments and scrutinizing some of the country’s most ambitious deal makers, voicing concerns that deals in certain sectors were disguises for capital flight into havens. In August, China’s powerful State Council announced that property investments abroad were ‘restricted,’ along with deals in hotels, movie studios and sports teams…. At the recent Communist Party congress, where President Xi Jinping solidified his control, officials reiterated concerns about systemic risks stemming from ill-considered purchases abroad.”
November 1 – Bloomberg (Peter Vercoe and Matthew Burgess): “The housing boom that has seen Australian home prices more than double since the turn of the century is ‘officially over,’ after data showed prices now flatlining, UBS Group AG said. National house prices were unchanged in October from September, while annual growth has slowed to 7% from more than 10% as recently as July… ‘There is now a persistent and sharp slowdown unfolding,’ UBS economists led by George Tharenou said… ‘This suggests a tightening of financial conditions is unfolding, which we expect to weigh on consumption growth via a fading household-wealth effect.’”
Fixed Income Bubble Watch:
October 29 – Financial Times (Joe Rennison and Eric Platt): “Wall Street banks are having a strong year underwriting and selling riskier loans, with the volume so far this year already surpassing the whole of 2016. The increase in issuance of leveraged loans, lent to borrowers with sub-investment grade ratings, has been driven by companies renegotiating debt at lower interest rates. Those rates are more attractive partly because of the burgeoning demand for the asset class, as well as the low level of market rates more generally. Nine of the 10 largest lenders in the business — including Bank of America Merrill Lynch, JPMorgan Chase, Goldman Sachs and Barclays — have already surpassed 2016 activity…”
Europe Watch:
October 27 – Wall Street Journal (Tom Fairless): “The European Central Bank’s reluctance to quickly phase out its bond-buying program has reopened a rift at the top of the world’s second-most powerful central bank, pitting ECB President Mario Draghi against German Bundesbank head Jens Weidmann —just as discussions begin about whether the German will succeed the Italian… Mr. Weidmann, widely seen as a leading contender for the ECB’s top job, has publicly opposed many of the bank’s stimulus policies in recent years, notably its large-scale purchases of government bonds, known as quantitative easing or QE. Although he toned down his criticism in recent months, Mr. Weidmann changed tack this week, publicly opposing a decision to extend QE through September 2018.”
October 29 – Wall Street Journal (Giovanni Legorano): “When European Central Bank President Mario Draghi embarked on a policy of buying government bonds, it was an especially welcome lifeline for Italy, then reeling from soaring interest rates and trapped in the country’s worst economic crisis since the war. Now, as the central bank unwinds the stimulus program known as quantitative easing 2½ years later, Italy is an important test case for the long-term success of Mr. Draghi’s policy. Years of cheap money and a robust recovery elsewhere in Europe is nudging Italy to its fastest economic growth in seven years. But while thriving on stimulus, Italy has failed to take big steps on changes such as cutting red tape and reducing the cost of labor.”
Japan Watch:
November 1 – Bloomberg (Isabel Reynolds and Emi Nobuhiro): “Prime Minister Shinzo Abe praised the Bank of Japan’s efforts to reach its inflation target, but stopped short of saying whether he’d reappoint Governor Haruhiko Kuroda to lead the central bank when his term expires next year. …Abe said ‘the slate is completely blank’ on his choice for governor. ‘We haven’t yet reached the 2% price stability target, but we expect the Bank of Japan to continue to make efforts to achieve it,’ he said… Kuroda is the top contender by a wide margin to lead the Bank of Japan again when his five-year term comes to an end in April…”
Emerging Market Watch:
November 1 – Wall Street Journal (Julie Wernau and Ana Rivas): “Venezuela has sunk into a deep recession as it grapples with the collapse of oil prices and the effects of years of economic mismanagement. Many analysts expect the country to default on its debt… Here’s a look at the state of Venezuela’s economy and finances. Venezuela has the world’s highest inflation, estimated by the International Monetary Fund to reach 653% this year. The country has been ravaged by shortages of food and medicine, and months of protests that cost more than 120 lives. As Mr. Maduro has consolidated power, the opposition has been weakened and divided.”
Leveraged Speculation Watch:
November 2 – Bloomberg (Dani Burger): “By some measures, equity quantitative funds should be thriving. But they’re not. Their fundamental counterparts are having a banner year. Stock correlations are at all time lows and clearer market trends are breathing life back into the momentum trade, a strategy among equity quants that bets the winners will keep winning. As those shares chart increasingly independent paths from the losers, equity fund managers are recording their strongest performance in five years… Yet for market-neutral quants who take advantage of patterns and dislocations, this year has been anything but a standout. Only 30% of those managers are beating their benchmark…”
Geopolitical Watch:
October 30 – Reuters (David Brunnstrom and Matt Spetalnick): “China’s ambassador to Washington said… U.S. President Donald Trump’s state visit to Beijing next week was a historic opportunity to boost cooperation between the world’s two largest economies, but warned against attempts to ‘contain’ Beijing. Cui Tiankai also stressed the urgency of efforts to find a negotiated solution to the crisis over North Korea’s nuclear and missile programs and warned of a ‘more dangerous’ situation if tensions between the United States and Pyongyang continued.”
October 31 – Reuters (Greg Torode and Ben Blanchard): “China has quietly undertaken more construction and reclamation in the South China Sea, recent satellite images show, and is likely to more powerfully reassert its claims over the waterway soon, regional diplomats and military officers say. With global attention focused on North Korea and Beijing engrossed in its Party Congress, tensions in the South China Sea have slipped from the headlines in recent months. But with none of the underlying disputes resolved and new images reviewed by Reuters showing China continuing to develop facilities on North and Tree islands in the contested Paracel islands, experts say the vital trade route remains a global flashpoint.”
October 30 – CNBC (Anmar Frangoul): “The amount of carbon dioxide in the atmosphere reached its highest level in 800,000 years in 2016, the World Meteorological Organization (WMO) said… Carbon dioxide levels ‘surged’ at record breaking speeds last year, with globally averaged concentrations of CO2 hitting 403.3 parts per million in 2016 compared to 400 parts per million in 2015…”
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