[Bloomberg] U.S. Stocks at Records as Dollar Gains, Bonds Fall: Markets Wrap
[Bloomberg] Wall Street's Rising Euphoria May Spell Trouble for Stock Market
[Politico] Republicans: Budget deal prospects are dimming
[Bloomberg] Yen's Spike Shows Taste of What Comes When BOJ Really Does Shift
[Reuters] Japan's central bank trims bond purchases, prompting taper talk
[Bloomberg] China Changes the Way It Manages Yuan After Currency's Jump
[Bloomberg] Gold Is Beating Everything Since the Fed Raised Rates
[Bloomberg] Euro-Area Unemployment Rate Drops to Lowest Level Since 2009
[Reuters] German industrial output surges, signaling a healthy 2018
[Bloomberg] Intel CEO Comments Indicate Chip Issue May Cause Bigger Slowdown
[NYT] As Economy Strengthens, Fed Ponders New Approach
[WSJ] Fed Officials Encourage Reassessment of Inflation Target
[WSJ] As Stocks Reach New Highs, Investors Abandon Hedges
[WSJ] Amid Signs of a Thaw in North Korea, Tensions Bubble Up
Monday, January 8, 2018
Monday Evening Links
[Bloomberg] Asia Stocks Build on Gains as Japan Traders Return: Markets Wrap
[Bloomberg] Oil Toys With $62 Amid Iranian Friction, U.S. Drilling Pullback
[Bloomberg] Bernanke Sees Powell's Fed Studying New Inflation-Target Regimes
[Bloomberg] U.S. Consumer Credit Jumped in November by Most Since 2001
[Bloomberg] Retail Investors Are on Their Longest Buying Spree of the Bull Market
[Bloomberg] Hedge Funds' Best Year Since 2013 Wasn't as Superb as It Sounds
[Bloomberg] Citi Had Greatest CLO Market Share in 2017
[CNBC] There's one market analyst on Wall Street who thinks a bear market is ahead
[Reuters] Fed's Bostic says three rate hikes in 2018 may be too much
[CNBC] US disaster costs shatter records in 2017, the third-warmest year on record
[Bloomberg] Jack Ma's Debt Giant Grinds to Halt as China Curbs Micro-Loans
[Bloomberg] Oil Toys With $62 Amid Iranian Friction, U.S. Drilling Pullback
[Bloomberg] Bernanke Sees Powell's Fed Studying New Inflation-Target Regimes
[Bloomberg] U.S. Consumer Credit Jumped in November by Most Since 2001
[Bloomberg] Retail Investors Are on Their Longest Buying Spree of the Bull Market
[Bloomberg] Hedge Funds' Best Year Since 2013 Wasn't as Superb as It Sounds
[Bloomberg] Citi Had Greatest CLO Market Share in 2017
[CNBC] There's one market analyst on Wall Street who thinks a bear market is ahead
[Reuters] Fed's Bostic says three rate hikes in 2018 may be too much
[CNBC] US disaster costs shatter records in 2017, the third-warmest year on record
[Bloomberg] Jack Ma's Debt Giant Grinds to Halt as China Curbs Micro-Loans
Sunday, January 7, 2018
Monday's News Links
[Bloomberg] U.S. Stocks Mixed as Dollar Gains With Crude Oil: Markets Wrap
[Bloomberg] Equity Euphoria Grips the Entire World
[Bloomberg] Fed Eyes Financial Conditions as Possible Source of Inflation
[Politico] White House preparing for trade crackdown
[Bloomberg] Fed’s Monetary Policy Cornerstone Attacked at Economists’ Gathering
[Bloomberg] Wall Street's Hot New Money Machine Starts With a Single Loan
[Bloomberg] ‘It Can’t Be True.’ Inside the Semiconductor Industry’s Meltdown
[Reuters] In possible boon for White House, Fed ready to lay low as tax plan kicks in
[Bloomberg] China Orders Banks to Limit Any Risk From Entrusted Loan Business
[CNBC] China won't be prioritizing growth this year, economist says
[Bloomberg] Euro-Area Economic Confidence Soars to Nearly Two-Decade High
[FT] Warning signs emerge for US Treasury market
[FT] PBoC researchers warm to interest rate rise “in the short term”: state media
[FT] Quant hedge funds set to surpass $1tn management mark
[FT] Global credit outlook brightest since financial crisis (for now) – Fitch
[Bloomberg] Equity Euphoria Grips the Entire World
[Bloomberg] Fed Eyes Financial Conditions as Possible Source of Inflation
[Politico] White House preparing for trade crackdown
[Bloomberg] Fed’s Monetary Policy Cornerstone Attacked at Economists’ Gathering
[Bloomberg] Wall Street's Hot New Money Machine Starts With a Single Loan
[Bloomberg] ‘It Can’t Be True.’ Inside the Semiconductor Industry’s Meltdown
[Reuters] In possible boon for White House, Fed ready to lay low as tax plan kicks in
[Bloomberg] China Orders Banks to Limit Any Risk From Entrusted Loan Business
[CNBC] China won't be prioritizing growth this year, economist says
[Bloomberg] Euro-Area Economic Confidence Soars to Nearly Two-Decade High
[FT] Warning signs emerge for US Treasury market
[FT] PBoC researchers warm to interest rate rise “in the short term”: state media
[FT] Quant hedge funds set to surpass $1tn management mark
[FT] Global credit outlook brightest since financial crisis (for now) – Fitch
Sunday's News Links
[Reuters] ECB should fix date to end bond purchases: Weidmann
[Reuters] Fed officials are already plotting how to combat the next downturn
[Bloomberg] White House Doesn't See Need for Faster Fed Hikes
[CNBC] By all measures, a construction boom is shaping up for 2018
[Bloomberg] Merkel Begins Make-or-Break Government Talks With Stability Plea
[Reuters] China December forex reserves rise to $3.14 trillion, highest since September 2016
[Reuters] China fruit, vegetable prices surge as blizzards cut off roads, damage crops
[FT] Are we seeing a peak in bullish equity sentiment at last?
[Reuters] Fed officials are already plotting how to combat the next downturn
[Bloomberg] White House Doesn't See Need for Faster Fed Hikes
[CNBC] By all measures, a construction boom is shaping up for 2018
[Bloomberg] Merkel Begins Make-or-Break Government Talks With Stability Plea
[Reuters] China December forex reserves rise to $3.14 trillion, highest since September 2016
[Reuters] China fruit, vegetable prices surge as blizzards cut off roads, damage crops
[FT] Are we seeing a peak in bullish equity sentiment at last?
Saturday, January 6, 2018
Saturday's News Links
[Reuters] Fed official says rates are last resort against financial risks
[Reuters] Williams paints benign picture of Fed rate hikes, strong U.S. economy
[Reuters] China tightens rules on commercial lender shareholders, entrusted loans
[Reuters] Businesses cautious in installing patches to fix chip flaw
[FT] Bull or bear? The big issues fund managers face in 2018
[Reuters] Williams paints benign picture of Fed rate hikes, strong U.S. economy
[Reuters] China tightens rules on commercial lender shareholders, entrusted loans
[Reuters] Businesses cautious in installing patches to fix chip flaw
[FT] Bull or bear? The big issues fund managers face in 2018
Friday, January 5, 2018
Weekly Commentary: Issue 2018: Market Structure
Financial conditions are much too loose. They remain too loose at home; they remain too loose abroad.
January 3 – ETF.com (Heather Bell): “…ETF flows really blew away previous records. Flows into exchange-traded funds were going full blast throughout the year and finished on a particularly strong note. A whopping $51 billion in new money came into U.S.-listed ETFs during December, pushing inflows for the year to $476.1 billion. Total assets now top $3.4 trillion. The data, which comes from FactSet, includes flows for every trading day of 2017. The $476.1 billion figure was far and away a record for annual inflows, blowing past the previous all-time high from last year of $287.5 billion.”
Think of this: 2017 ETF flows surpassed the previous year’s record flows by 66%. And while U.S. equities attracted the strongest flows at $180 billion, international equities were not far behind at $162 billion. There’s never been anything comparable to this Market Structure.
The Nasdaq100 jumped 4.0% in 2018’s initial four sessions. The Nasdaq Computer Index surged 4.2%. The Semiconductors jumped 5.8%. The Nasdaq Industrials gained 3.1%, the NYSE Healthcare Index 3.2%, the Philadelphia Stock Exchange Oil Services Sector Index 5.1% and the S&P500 Index 2.6%. The mania is global. Germany’s DAX jumped 3.1% in four sessions, France’s CAC 40 3.0%, Spain’s IBEX 3.7%, and Italy’s MIB 4.2%. Japan’s Nikkei jumped 4.2%, Hong Kong’s Hang Seng 3.0%, and the Shanghai Composite 2.6%. Notable EM gainers included Brazil (3.5%), Russia (4.6%), Argentina (7.1%), Poland (2.5%), Czech Republic (2.5%), Romania (3.0%), Philippines (2.5%) and Pakistan (5.1%). Portending a wild year in the currencies, a number of EM currencies went nuts this week.
Bubbles are self-reinforcing but inevitably unsustainable inflations. Asset Bubbles are fueled by some underlying source of unsound monetary inflation. Major speculative Bubbles and manias are always propelled by key misperceptions and resulting monetary disorder. Bubble flows intensified in 2017, as misperceptions became only more deeply embedded in the Structure of Securities Market Pricing. Loose finance is ensured indefinitely.
The U.S. (Bubble) economy is energized. Strong earnings will be further inflated by lower corporate tax rates. Meanwhile, there’s a stimulus-fueled synchronized global economic boom. European growth is the strongest in years. China has set another 6.5% GDP growth target. Throughout Asia and with scores of other EM economies, things are booming. Whether on a U.S. or global basis, there is a broad consensus view that “fundamentals” are exceptionally constructive. Lost in all the euphoria is the critical issue of finance: global finance is alarmingly unsound.
The 10-year anniversary of the 2008 crisis arrives this year. Amazingly, a decade has passed yet global central banks continue with quantitative easing and ultra-low rates. At the onset, central bankers believed they could employ QE to goose inflation and risk-taking. Then, with inflation dynamics having regained normal traction, central banks would simply wind down “money printing” operations. Everything would settle nicely back to normal.
But it was all flawed. Inflationist doctrine failed. And as archaic as it sounds, the world is today trapped in the Scourge of Unsound “Money.” Central banks inflated a global securities market Bubble and have been incapable of extricating themselves from market domination. Each year sees the Bubble inflate to only more precarious extremes.
2018 will likely see (in the neighborhood of) an additional $1.0 Trillion of global QE. This amount, however, will be down significantly from 2017. The ECB slashes its monthly purchases in half starting this month (to about $36bn). The Fed has plans to reduce balance sheet holdings, while the BOJ has of late scaled back purchases. Markets have been conditioned to believe QE reduction doesn’t matter. This complacency will be tested in 2018. Last year’s concern for waning central bank liquidity operations has been supplanted by this year’s heady confidence that it’s not an issue.
From my analytical perspective, the global market boom has been financed by two extraordinary (interrelated) sources. First, Trillions of QE have directly financed inflated and over-liquefied global markets. Second, I believe leveraged speculation has played a major role in exacerbating liquidity excess. Importantly, QE-related liquidity coupled with the perception that open-ended QE is available to backstop markets has fostered an environment conducive to speculative leveraging. In short, the leveraging of central bank balance sheets has incentivized the aggressive expansion of speculative securities and derivatives leverage globally. And the bigger the Bubble inflates the less willing central banks will be to tighten financial conditions. This only further incentivizes risk-taking and leveraging throughout global markets that have over years become progressively too comfortable pushing the risk envelope.
Central bankers confront a historic dilemma. They perpetuated a prolonged major Bubble inflation. Despite a strengthening global economy and conspicuously speculative markets, central banks in 2017 failed to move forward with “normalization.” Financial conditions further loosened when they needed to have tightened. At this point, when it comes to monetary tightening central bankers lack credibility. The view that central bankers will avoid any actual tightening of financial conditions has become deeply embedded in a extremely distorted marketplace.
At this phase in the cycle, markets would typically fret central banks “falling behind the curve.” These days, however, markets see zero possibility that the Fed (or any central bank) would resort to “slamming on the brakes.” At this point, it would appear only a significant change in the inflation backdrop would have the markets fretting the prospect of a true tightening cycle.
The general backdrop is increasingly supportive of U.S. headline CPI moving above the 2% threshold in 2018. Labor markets are tight, and the growth in manufacturing employment has attained decent momentum. With an increasing number of sectors overheated, companies will be forced to pay up for talent. And with sales strong and inventories slim, expect further acceleration in housing prices and construction. Crude prices have surpassed $61, with the weaker dollar stoking commodities prices generally.
It’s no coincidence that securities markets have succumbed to speculative Bubble Dynamics in the face of economic, financial, social, political and geopolitical unrest. For several decades now, unstable finance has fostered serial boom and bust dynamics. Central bank intervention has only increased the scope of Bubbles, their duration and the severity of consequences. Wealth inequality, disillusionment and anxiety reached a crisis stage. In the face of upheaval, decisions have been made to let the “money” flow.
Speculative markets welcome fragile underpinnings, confident that central banks will continue to goose the markets. Markets relished the Trump administration’s chaotic first year. The more unnerving the Washington backdrop the more likely it became that the President and the Republicans would throw all their energy into must-have tax legislation. One and done?
With all the tax reform hype and market euphoria, it’s easy to disregard longer-term ramifications for about the most partisan tax legislation imaginable. The powerless big “blue” states have taken one on the chin. And when all is said and done, I doubt Republicans will win the PR battle on this one. Taxes will be going up for many; an election promise broken to many. This will be seen as yet another gift to the wealthy and corporate America. Come November, the Republicans hope to receive credit for a booming economy. Expect Democrats to be the more energized party.
Exuberant markets are numb to political dysfunction. And with stock prices setting daily records, there’s no difficulty dismissing the Washington Spectacle. Tax legislation was likely an aberration. Republicans were desperate for a win, so they came together and passed legislation. The pendulum will now swing back. The dismal fiscal backdrop will have the so-called “deficit hawks” spooked. Attention will turn to reelection. Fixated on Tuesday, November 6th, Democrats have no incentive to play ball. Trump’s 2018 agenda could be DOA.
Pundits will trumpet earnings, earnings and more earnings. After receiving the gift of big corporate tax cuts to end 2017, talk will shift to “politics don’t matter.” Politics could matter greatly in 2018. There’s the ongoing Mueller investigation. An investigative shift to past financial issues (and potential money laundering) could spark a constitutional crisis. Many are raising questions as to the President’s mental fitness for the highest office. Some Democrats will look for an opportunity to move on impeachment proceedings. In summary, this is one big, ugly unfolding mess that doesn’t matter – until it does.
There are extraordinary political uncertainties, including the mid-terms. The Republicans could very well lose the power to push through legislation. And while bullish equities strategists extrapolate lower taxes and higher earnings years into the future, there’s a scenario where the repeal of Republican tax (among other) legislation commences in about three years.
Geopolitical risks are even more unnerving. Perhaps North Korea backs down. Trump and the U.S. military may not, arguing this problem has been left to fester to the point that action must be taken. On multiple fronts, relations with China have been cooling. The President has said, “I want tariffs. Bring me some tariffs!” It’s worth noting the U.S. November trade deficit surpassed $50 billion for the first time since March 2012. Especially if other agenda items face resistance, the President may lean more aggressively on administration trade policy. A tougher stance toward China will see little pushback – except from Beijing.
The prevailing view has inflation dead and buried. The current backdrop is ripe for an upside surprise. If focus turns to boom-time labor tightness, a manufacturing renaissance, and a fledgling housing construction boom and attendant bottlenecks - prospects for rising import costs could be enough to arouse a secular shift in inflation psychology.
2018 is set up for a Historic Year. Global Bubble markets are dominated by the dangerous misperception that central bankers have it all under control. I believe the extraordinary liquidity backdrop is acutely vulnerable to an unanticipated bout of de-risking/de-leveraging dynamics. The expectation is that 2018 will be a stable continuation of 2017: financial conditions will remain loose – or, why not, even looser. But unless global central bankers are completely reckless, there will be heightened pressure in 2018 to commence “normalization.” The Powell Fed will have its hands full.
Why do Bubbles burst? At some point, Bubble Finance turns unmanageable. On the upside, Bubbles create their own self-reinforcing liquidity and momentum. Things turn crazy near the end. It’s just so easy to make money. Everyone should be wealthy, and nothing causes angst like watching your neighbor get rich (thank you C.P. Kindleberger).
It’s the parabolic speculative blow-off that seals a Bubble’s fate. A “melt-up” in prices is sustained by only progressively larger speculative flows. The higher prices inflate the greater the amount of finance required sustain the Bubble. In the heart of the mania, these flows are sustained by extreme speculative leveraging. Finance becomes deranged. Such a Market Structure creates latent fragilities – manic speculative leveraging and the rapidly elevating risk of a bout of destabilizing “Risk Off.”
I see overwhelming support for my view that we are witnessing history’s greatest financial Bubble. Things turned crazy in 2017 and, if the first four sessions of 2018 are any indication, markets are taking “crazy” up a notch.
Can bond markets avoid trouble for yet another year – avoiding the comeuppance one would expect after years of loose finance? With fiscal deficits and inflation likely on the rise, when will bond holders finally demand a semblance of reasonable risk premiums? When will bond holders focus on long-term risk-adjusted real returns rather than short-term funding costs and rate differentials? Global bond markets are in the greatest Bubble in history, yet worry of Market Structure is nonexistent.
The ETF industry recently surpassed $3.4 Trillion. Do 2018 flows again surpass the previous year’s? Here again, Market Structure is a serious issue. “Money” has flooded into “the market” through perceived safe and liquid ETF instruments. A surprising bout of “Risk Off” would test market liquidity and perceptions.
Central bank liquidity; faith in central banker monetary management; seemingly unshakable global bond markets; and the bubbling ETF complex have been integral to the global collapse in market volatility/risk perceptions (i.e. VIX). Shorting “volatility” has for years now been a huge money-maker. Amazingly, selling market risk “insurance” during a central-banker ensured drought has become one massive Crowded Trade on a global scale. This is a huge accident in the making, and this Epic Structural Market Flaw could easily become a major Issue in 2018.
Forecasting a catalyst for a bursting Bubble is risky business. There are any number of potential accidents in this now tightly integrated global economy and financial Bubble. China’s Bubble is a historic accident in the making. Like global central bankers, Beijing appears for now to have everything under control. They also have no experience with the downside of an unparalleled Credit Cycle.
Massive 2017 financial flows gave EM Bubbles a further lease on life. The weak dollar in 2017 helped devalue their still mounting dollar-denominated debt problem. A global “Risk Off” would see an abrupt reversal in their liquidity position. One of these days – perhaps even in 2018 – there might be some worry about Chinese and EM financial institutions. It’s been such a long cycle. How much bigger did the fraud issue inflate during 2017’s Credit bonanza?
I expect the cryptocurrency Bubble to burst in 2018. Seems like we’re set up for major cyber security issues. Will there be even more damaging weather disasters?
There will be numerous surprises and unexpected developments. I just wish I could share in all the optimism. But Bubbles are just so destructive. Markets continue to grossly misprice risk. Resources – real and financial – are being poorly allocated. Too many uneconomic enterprises are lavishing in boom-time finance. Real economic wealth is being redistributed and destroyed, while asset price Bubbles ensure wealth illusion and a perilous lack of discipline. Speculation doesn’t matter; deficits don’t matter; excess doesn’t matter; and debt doesn’t matter. Market Structure doesn’t matter.
Because of the unprecedented globalization of Bubble Dynamics during this protracted cycle, I have special concern for geopolitical risks. Pondering what might unfold this year leaves me uncomfortable.
For the Week:
The S&P500 jumped 2.6% (up 20.5% y-o-y), and the Dow gained 2.3% (up 26.7%). The Utilities dropped 2.9% (up 5.4%). The Banks rose 2.1% (up 17.4%), and the Broker/Dealers jumped 2.5% (up 27%). The Transports gained 2.8% (up 19.9%). The S&P 400 Midcaps rose 1.9% (up 15.1%), and the small cap Russell 2000 gained 1.6% (up 14.1%). The Nasdaq100 surged 4.0% (up 32.9%). The Semiconductors jumped 5.8% (up 45.9%). The Biotechs advanced 2.6% (up 31.9%). With bullion up $16, the HUI gold index increased 3.0% (up 0.8%).
Three-month Treasury bill rates ended the week at 137 bps. Two-year government yields jumped eight bps to 1.96% (up 75bps y-o-y). Five-year T-note yields gained eight bps to 2.29% (up 37bps). Ten-year Treasury yields rose seven bps to 2.48% (up 6bps). Long bond yields gained seven bps to 2.81% (down 20bps).
Greek 10-year yields fell 34 bps 3.73% (down 305bps y-o-y). Ten-year Portuguese yields were unchanged at 1.94% (down 211bps). Italian 10-year yields slipped a basis point to 2.01% (up 4bps). Spain's 10-year yields fell four bps to 1.52% (down 2bps). German bund yields added a basis point to 0.44% (up 14bps). French yields added one basis point to 0.80% (down 3bps). The French to German 10-year bond spread was about unchanged at 36 bps. U.K. 10-year gilt yields rose five bps to 1.24% (down 14bps). U.K.'s FTSE equities index increased 0.5% (up 7.1%).
Japan's Nikkei 225 equities index surged 4.2% (up 21.9% y-o-y). Japanese 10-year "JGB" yields increased two bps 0.063% (unchanged). France's CAC40 jumped 3.0% (up 11.4%). The German DAX equities index rose 3.1% (up 14.8%). Spain's IBEX 35 equities index jumped 3.7% (up 9.4%). Italy's FTSE MIB index advanced 4.2% (up 15.6%). EM markets were mostly higher. Brazil's Bovespa index rose 3.5% (up 28.2%), and Mexico's Bolsa gained 1.1% (up 8.3%). South Korea's Kospi index increased 1.2% (up 21.9%). India’s Sensex equities index added 0.3% (up 27.6%). China’s Shanghai Exchange jumped 2.6% (up 7.5%). Turkey's Borsa Istanbul National 100 index gained 1.1% (up 51.3%). Russia's MICEX equities index surged 4.6% (down 0.3%).
Junk bond mutual funds saw inflows of $186 million (from Lipper).
Freddie Mac 30-year fixed mortgage rates fell four bps to 3.95% (down 25bps y-o-y). Fifteen-year rates declined six bps to 3.28% (down 6bps). Five-year hybrid ARM rates slipped two bps to 3.45% (up 12bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down two bps to 4.13% (down 15bps).
Federal Reserve Credit last week declined $10.1bn to $4.408 TN. Over the past year, Fed Credit slipped $6.8bn. Fed Credit inflated $1.597 TN, or 57%, over the past 270 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt fell $6.2bn last week to $3.356 TN. "Custody holdings" were up $174bn y-o-y, or 5.5%.
M2 (narrow) "money" supply fell $19.5bn last week to $13.844 TN. "Narrow money" expanded $657bn, or 5.0%, over the past year. For the week, Currency increased $1.5bn. Total Checkable Deposits dipped $4.0bn, and Savings Deposits declined $15.2bn. Small Time Deposits were little changed. Retail Money Funds fell $2.6bn.
Total money market fund assets declined $7.6bn to $2.838 TN. Money Funds gained $125bn y-o-y, or 4.6%.
Total Commercial Paper expanded $6.5bn to a 19-month high $1.086 TN. CP gained $136bn y-o-y, or 14.3%.
Currency Watch:
The U.S. dollar index slipped 0.2% to 91.949 (down 10.2% y-o-y). For the week on the upside, the Mexican peso increased 2.5%, the Brazilian real 2.5%, the Norwegian krone 1.9%, the New Zealand dollar 1.1%, the South Korean won 0.7%, the Singapore dollar 0.7%, the Australian dollar 0.7%, the South African rand 0.6%, the British pound 0.4%, the Swedish krona 0.3%, and the euro 0.2%. For the week on the downside, the Japanese yen declined 0.3%. The Chinese renminbi increased 0.28% versus the dollar this week (up 5.98% y-o-y).
Commodities Watch:
The Goldman Sachs Commodities Index increased 0.3% (up 11.4% y-o-y). Spot Gold rose another 1.3% to $1,319 (up 14.5%). Silver gained 0.8% to $17.285 (up 8.2%). Crude jumped $1.02 to $61.44 (up 14%). Gasoline slipped 0.6% (up 7%), while Natural Gas dropped 5.4% (down 25%). Copper fell 2.2% (up 29%). Wheat gained 0.9% (up 6%). Corn was little changed (unchanged).
Trump Administration Watch:
January 2 – CNBC (Tom DiChristopher): “The world is moving toward crisis and a state of ‘geopolitical depression’ as the presidency of Donald Trump accelerates divisions among citizens and the unraveling of the global order, risk consultancy Eurasia Group warns. Liberal democracies are suffering from a deficit of legitimacy not seen since World War II, and today's leaders have largely abandoned civil society and common values, Eurasia Group says… The breakdown in norms opens the door to a major event that could rock the global economy and markets. ‘In the 20 years since we started Eurasia Group, the global environment has had its ups and downs. But if we had to pick one year for a big unexpected crisis — the geopolitical equivalent of the 2008 financial meltdown — it feels like 2018,’ said Eurasia Group President Ian Bremmer and Chairman Cliff Kupchan.”
December 31 – Associated Press: “North Korean leader Kim Jong Un says the United States should be aware that his country's nuclear forces are now a reality, not a threat. Kim was speaking in his annual New Year's Day address. He said the country had achieved the historic feat of ‘completing’ its nuclear forces and added that the has a ‘nuclear button’ on his desk.”
January 1 – CNBC (Yen Nee Lee): “North Korea called itself a nuclear power on Monday, but the question now is whether U.S. President Donald Trump recognizes the rogue regime as one, a strategist told CNBC… That's an important development to watch as actions taken by Trump against North Korea will likely result in a cold war between the U.S. and China, said David Roche, president and global strategist at Independent Strategy. Such a turn of events between the two major powers would have global implications, he added, pointing to how it would affect worldwide trade and investment. Outlining the two likely scenarios that could play out, Roche said the U.S. may try to contain North Korea by having ‘rings of missiles throughout the Asia Pacific region pointing at Pyongyang’ or it could try to remove the hermit nation's leader Kim Jong Un through an attack. Both those scenarios undermine China's influence… and would lead to an ‘almost inevitable cold war’ between China and the U.S., he said.”
January 1 – Reuters (Rodrigo Campos and Christine Kim): “The U.S. ambassador to the United Nations, Nikki Haley, warned North Korea… against staging another missile test and said Washington would not take any talks between North and South Korea seriously if they did not do something to get Pyongyang to give up its nuclear weapons.”
January 2 – Reuters (Francesco Canepa): “Ant Financial’s plan to acquire U.S. money transfer company MoneyGram International Inc collapsed… after a U.S. government panel rejected it over national security concerns, the most high-profile Chinese deal to be torpedoed under the administration of U.S. President Donald Trump.”
January 3 – CNBC (Huileng Tan): “China warned of a ‘bumpy journey’ in trade with the U.S. and ‘retaliatory measures’ a day after Washington blocked MoneyGram's proposed sale to a financial services firm affiliated with Chinese tech giant Alibaba. ‘It is not surprising that a number of Chinese companies have hit the buffers in Washington as trade tensions between the two countries are flaring,’ state news agency Xinhua said in a commentary… On Tuesday, the U.S. government torpedoed MoneyGram's multi-million-dollar merger with Ant Financial, which is controlled by Alibaba founder Jack Ma.”
December 29 – Wall Street Journal (Josh Zumbrun): “One of the lingering questions about the overhaul of the U.S. tax code is what will happen to the U.S. national debt, already one of the world’s largest debt burdens. As of 2017, the general government gross debt of the U.S. stood at 108.1% of gross domestic product… Only four large countries have more debt for the size of their economies… Japan’s government carries debts at 240.3% of gross domestic product, far and away the world’s largest burden… Greece’s debt-to-GDP stands at 180.2% of GDP, Italy’s at 133% and Portugal’s at 125.7%.”
December 29 – Reuters (Kevin Drawbaugh and Roberta Rampton): “The head of a conservative Republican faction in the U.S. Congress, who voted this month for a huge expansion of the national debt to pay for tax cuts, called himself a ‘fiscal conservative’ on Sunday and urged budget restraint in 2018. In keeping with a sharp pivot under way among Republicans, U.S. Representative Mark Meadows… drew a hard line on federal spending, which lawmakers are bracing to do battle over in January. When they return from the holidays on Wednesday, lawmakers will begin trying to pass a federal budget in a fight likely to be linked to other issues…”
China Watch:
January 1 – Bloomberg: “China’s economy begins 2018 facing what its own leaders call three years of ‘critical battles.’ Those fights to tackle domestic debt, poverty and pollution pose a hat-trick of risks to the world’s No. 2 economy even before higher interest rates and trade war threats from the U.S. are taken into account. While the nation is starting from a position of strength, with full-year growth in 2017 poised for its first acceleration since 2010… As a result, the government of Xi Jinping is signaling that it’s sanguine about more modest economic performance, if progress on the top risk -- financial fragility -- can be made… ‘Significant economic imbalances continue to create downside risk to the outlook for 2018,’ said Rajiv Biswas, chief Asia-Pacific economist at IHS Markit… ‘Risks to the Chinese economy will remain among the key risks to the global growth outlook in 2018, with the Asia Pacific region particularly vulnerable to the shock waves from a slowdown.’”
December 31 – Bloomberg (Sungwoo Park): “China, the world’s biggest oil buyer, is on the verge of opening a domestic market to trade futures contracts. It’s been planning one for years, only to encounter delays. The Shanghai International Energy Exchange, a unit of Shanghai Futures Exchange, will be known by the acronym INE and will allow Chinese buyers to lock in oil prices and pay in local currency. Also, foreign traders will be allowed to invest -- a first for China’s commodities markets -- because the exchange is registered in Shanghai’s free trade zone. There are implications for the U.S. dollar’s well-established role as the global currency of the oil market.”
December 30 – Bloomberg: “China’s official factory gauge maintained momentum, signaling campaigns to reduce both pollution and debt risk haven’t curbed output. The manufacturing purchasing managers index edged down to 51.6 in December, in line with the forecast… The non-manufacturing PMI stood at 55, compared with a projected 54.7 reading and 54.8 in November…”
January 2 – Bloomberg: “China’s money market rates are set to grind higher and a bear market in bonds will worsen before it gets better, according to a survey of strategists and traders. The seven-day repurchase rate will average 2.99% in 2018, up from 2.88% in the fourth quarter, according to the median estimate in a Bloomberg survey. The yield on 10-year government debt is projected to rise as high as 4.20% before ending the year at 3.75%. The yield was little changed at 3.93% on Wednesday. China’s sovereign bonds have fallen for five quarters, the longest losing streak since Bloomberg started to compile the data in 2005, as the government stepped up a campaign to cut leverage in the financial sector and inflation picked up. The 10-year yield rose last year by the most since 2013.”
Federal Reserve Watch:
January 4 – Bloomberg (Craig Torres): “The Federal Reserve is getting ready to welcome a new chairman amid doubts and divisions among policy makers about how many times to raise interest rates this year. Jerome Powell will take over from Janet Yellen in early February… He will lead a policy-making committee that, judging by a record of its last meeting released on Wednesday, still thinks the gradual pace of tightening it followed last year is correct. But the debate also highlighted a split between officials concerned about low inflation and others pointing to robust growth about to get a further boost from tax cuts.”
U.S. Bubble Watch:
January 2 – CNBC (Diana Olick): “The temperature may be frigid across much of the nation, yet home prices are sizzling and sellers are in the hot seat. Sales prices jumped 7% annually in November, according to… CoreLogic. That is the third straight month at that pace, far higher than the price gains in the first half of 2017. Low supply and high demand are fueling the spurt and neither of those is expected to ease up anytime soon. Supply is actually falling even more now, and a strengthening economy is pushing demand. This will have potential buyers out early this year, trying to get a jump on the spring market. ‘Rising home prices are good news for home sellers, but add to the challenges that home buyers face,’ said Frank Nothaft, chief economist at CoreLogic… Nothaft said the limited supply is the worst at the lower end, and will hit the growing number of first-time buyers hardest.”
January 3 – Reuters (Lucia Mutikani): “In November, spending on private residential projects soared 1.0% to the highest level since February 2007 after rising 0.3% in October. The increase was in line with a recent jump in homebuilding and supported expectations that housing would boost economic growth in the fourth quarter after being a drag on GDP since the April-June period.”
January 3 – Bloomberg (Katia Dmitrieva): “U.S. manufacturing expanded in December at the fastest pace in three months, as gains in orders and production capped the strongest year for factories since 2004, the Institute for Supply Management said… Factory index climbed to 59.7 (est. 58.2) from 58.2 a month earlier… Gauge of new orders advanced to 69.4, the highest in nearly 14 years, from 64. Measure of production increased to 65.8, the strongest since May 2010, from 63.9.”
January 4 – Bloomberg (Jordan Yadoo): “American consumers last year were more upbeat on average than at any time since 2001, reflecting more favorable views of the economy, personal finances and the buying climate, according to the Bloomberg Consumer Comfort Index… Comfort measure averaged 50.0 in 2017, up from 43.6 a year earlier and the best reading since 51.8 in 2001…”
December 30 – Bloomberg (Katia Dmitrieva): “Payrolls at U.S. companies increased in December by the most in nine months, consistent with further progress in the labor market, according to… ADP… Private payrolls rose by 250k (190k est.), exceeding all estimates…”
January 4 – CNBC (Chloe Aiello): “U.S. employers announced plans to cut 32,423 jobs in December, bringing the year's total to a low not seen since 1990, global outplacement consultancy Challenger, Gray & Christmas reported… ‘The tight labor market, coupled with uncertainty surrounding health care and tax legislation, possibly kept employers from making any long-term staffing decisions this year,’ CEO John Challenger said…”
January 2 – Bloomberg (Mary Schlangenstein): “Two U.S. airlines -- American and Southwest -- joined the tide of companies offering employees $1,000 bonuses to mark the tax overhaul Congress put in place for 2018… AAON, U.S. Bancorp, Commerce Bancshares Inc. and Zions Bancorporation were among the companies touting similar moves.vBanks, insurers and airlines have led the way on the handouts -- all industries that have important regulatory issues pending with the Trump administration. The moves appear to be an effort to sway public opinion in favor of the unpopular tax bill. Republican legislators pushed to pass the overhaul in December as President Donald Trump’s crowning achievement of 2017.”
January 1 – Wall Street Journal (Shayndi Raice and Eric Morath): “In U.S. cities with the tightest labor markets, workers are finding something that’s long been missing from the broader economic expansion: faster-growing paychecks. Workers in metro areas with the lowest unemployment are experiencing among the strongest wage growth in the country. The labor market in places like Minneapolis, Denver and Fort Myers, Fla., where unemployment rates stand near or even below 3%, has now tightened to a point where businesses are raising pay to attract employees, often from competitors. It’s an outcome entirely expected in economic theory, but one that’s been largely absent until now in the upturn that began more than eight years ago.”
January 2 – CNBC (Lauren Thomas): “Land fit for future fulfillment centers for the likes of Amazon and Walmart saw huge spikes in prices last year, according to… CBRE. In a trend largely stemming from the growth of e-commerce players across the U.S., some plots of land now cost twice the amount they did a year ago, the group found. This is especially true in major markets, including Atlanta and Houston. In surveying 10 U.S. markets, CBRE found the average price for ‘large industrial parcels’ (50 to 100 acres) now sits at more than $100,000 per acre, up from about $50,000 a year ago. Industrial land plots of five to 10 acres, which typically house infill distribution centers for completing ‘last-mile’ deliveries, watched their prices soar to more than $250,000 per acre by the end of 2017, up from roughly $200,000 a year ago…”
January 2 – Wall Street Journal (Laura Kusisto): “The multifamily housing market turned in a lackluster performance in 2017 as demand failed to keep pace with a deluge of new apartment supply, according to a new report… U.S. apartment rents climbed 2.5% in 2017, according to RealPage Inc., RP -0.11% a real estate technology and data firm. That was in line with historical averages but down significantly from the 5.2% posted in 2015, the most recent peak.”
January 3 – ETF.com (Heather Bell): “…ETF flows really blew away previous records. Flows into exchange-traded funds were going full blast throughout the year and finished on a particularly strong note. A whopping $51 billion in new money came into U.S.-listed ETFs during December, pushing inflows for the year to $476.1 billion. Total assets now top $3.4 trillion. The data, which comes from FactSet, includes flows for every trading day of 2017. The $476.1 billion figure was far and away a record for annual inflows, blowing past the previous all-time high from last year of $287.5 billion.”
Think of this: 2017 ETF flows surpassed the previous year’s record flows by 66%. And while U.S. equities attracted the strongest flows at $180 billion, international equities were not far behind at $162 billion. There’s never been anything comparable to this Market Structure.
The Nasdaq100 jumped 4.0% in 2018’s initial four sessions. The Nasdaq Computer Index surged 4.2%. The Semiconductors jumped 5.8%. The Nasdaq Industrials gained 3.1%, the NYSE Healthcare Index 3.2%, the Philadelphia Stock Exchange Oil Services Sector Index 5.1% and the S&P500 Index 2.6%. The mania is global. Germany’s DAX jumped 3.1% in four sessions, France’s CAC 40 3.0%, Spain’s IBEX 3.7%, and Italy’s MIB 4.2%. Japan’s Nikkei jumped 4.2%, Hong Kong’s Hang Seng 3.0%, and the Shanghai Composite 2.6%. Notable EM gainers included Brazil (3.5%), Russia (4.6%), Argentina (7.1%), Poland (2.5%), Czech Republic (2.5%), Romania (3.0%), Philippines (2.5%) and Pakistan (5.1%). Portending a wild year in the currencies, a number of EM currencies went nuts this week.
Bubbles are self-reinforcing but inevitably unsustainable inflations. Asset Bubbles are fueled by some underlying source of unsound monetary inflation. Major speculative Bubbles and manias are always propelled by key misperceptions and resulting monetary disorder. Bubble flows intensified in 2017, as misperceptions became only more deeply embedded in the Structure of Securities Market Pricing. Loose finance is ensured indefinitely.
The U.S. (Bubble) economy is energized. Strong earnings will be further inflated by lower corporate tax rates. Meanwhile, there’s a stimulus-fueled synchronized global economic boom. European growth is the strongest in years. China has set another 6.5% GDP growth target. Throughout Asia and with scores of other EM economies, things are booming. Whether on a U.S. or global basis, there is a broad consensus view that “fundamentals” are exceptionally constructive. Lost in all the euphoria is the critical issue of finance: global finance is alarmingly unsound.
The 10-year anniversary of the 2008 crisis arrives this year. Amazingly, a decade has passed yet global central banks continue with quantitative easing and ultra-low rates. At the onset, central bankers believed they could employ QE to goose inflation and risk-taking. Then, with inflation dynamics having regained normal traction, central banks would simply wind down “money printing” operations. Everything would settle nicely back to normal.
But it was all flawed. Inflationist doctrine failed. And as archaic as it sounds, the world is today trapped in the Scourge of Unsound “Money.” Central banks inflated a global securities market Bubble and have been incapable of extricating themselves from market domination. Each year sees the Bubble inflate to only more precarious extremes.
2018 will likely see (in the neighborhood of) an additional $1.0 Trillion of global QE. This amount, however, will be down significantly from 2017. The ECB slashes its monthly purchases in half starting this month (to about $36bn). The Fed has plans to reduce balance sheet holdings, while the BOJ has of late scaled back purchases. Markets have been conditioned to believe QE reduction doesn’t matter. This complacency will be tested in 2018. Last year’s concern for waning central bank liquidity operations has been supplanted by this year’s heady confidence that it’s not an issue.
From my analytical perspective, the global market boom has been financed by two extraordinary (interrelated) sources. First, Trillions of QE have directly financed inflated and over-liquefied global markets. Second, I believe leveraged speculation has played a major role in exacerbating liquidity excess. Importantly, QE-related liquidity coupled with the perception that open-ended QE is available to backstop markets has fostered an environment conducive to speculative leveraging. In short, the leveraging of central bank balance sheets has incentivized the aggressive expansion of speculative securities and derivatives leverage globally. And the bigger the Bubble inflates the less willing central banks will be to tighten financial conditions. This only further incentivizes risk-taking and leveraging throughout global markets that have over years become progressively too comfortable pushing the risk envelope.
Central bankers confront a historic dilemma. They perpetuated a prolonged major Bubble inflation. Despite a strengthening global economy and conspicuously speculative markets, central banks in 2017 failed to move forward with “normalization.” Financial conditions further loosened when they needed to have tightened. At this point, when it comes to monetary tightening central bankers lack credibility. The view that central bankers will avoid any actual tightening of financial conditions has become deeply embedded in a extremely distorted marketplace.
At this phase in the cycle, markets would typically fret central banks “falling behind the curve.” These days, however, markets see zero possibility that the Fed (or any central bank) would resort to “slamming on the brakes.” At this point, it would appear only a significant change in the inflation backdrop would have the markets fretting the prospect of a true tightening cycle.
The general backdrop is increasingly supportive of U.S. headline CPI moving above the 2% threshold in 2018. Labor markets are tight, and the growth in manufacturing employment has attained decent momentum. With an increasing number of sectors overheated, companies will be forced to pay up for talent. And with sales strong and inventories slim, expect further acceleration in housing prices and construction. Crude prices have surpassed $61, with the weaker dollar stoking commodities prices generally.
It’s no coincidence that securities markets have succumbed to speculative Bubble Dynamics in the face of economic, financial, social, political and geopolitical unrest. For several decades now, unstable finance has fostered serial boom and bust dynamics. Central bank intervention has only increased the scope of Bubbles, their duration and the severity of consequences. Wealth inequality, disillusionment and anxiety reached a crisis stage. In the face of upheaval, decisions have been made to let the “money” flow.
Speculative markets welcome fragile underpinnings, confident that central banks will continue to goose the markets. Markets relished the Trump administration’s chaotic first year. The more unnerving the Washington backdrop the more likely it became that the President and the Republicans would throw all their energy into must-have tax legislation. One and done?
With all the tax reform hype and market euphoria, it’s easy to disregard longer-term ramifications for about the most partisan tax legislation imaginable. The powerless big “blue” states have taken one on the chin. And when all is said and done, I doubt Republicans will win the PR battle on this one. Taxes will be going up for many; an election promise broken to many. This will be seen as yet another gift to the wealthy and corporate America. Come November, the Republicans hope to receive credit for a booming economy. Expect Democrats to be the more energized party.
Exuberant markets are numb to political dysfunction. And with stock prices setting daily records, there’s no difficulty dismissing the Washington Spectacle. Tax legislation was likely an aberration. Republicans were desperate for a win, so they came together and passed legislation. The pendulum will now swing back. The dismal fiscal backdrop will have the so-called “deficit hawks” spooked. Attention will turn to reelection. Fixated on Tuesday, November 6th, Democrats have no incentive to play ball. Trump’s 2018 agenda could be DOA.
Pundits will trumpet earnings, earnings and more earnings. After receiving the gift of big corporate tax cuts to end 2017, talk will shift to “politics don’t matter.” Politics could matter greatly in 2018. There’s the ongoing Mueller investigation. An investigative shift to past financial issues (and potential money laundering) could spark a constitutional crisis. Many are raising questions as to the President’s mental fitness for the highest office. Some Democrats will look for an opportunity to move on impeachment proceedings. In summary, this is one big, ugly unfolding mess that doesn’t matter – until it does.
There are extraordinary political uncertainties, including the mid-terms. The Republicans could very well lose the power to push through legislation. And while bullish equities strategists extrapolate lower taxes and higher earnings years into the future, there’s a scenario where the repeal of Republican tax (among other) legislation commences in about three years.
Geopolitical risks are even more unnerving. Perhaps North Korea backs down. Trump and the U.S. military may not, arguing this problem has been left to fester to the point that action must be taken. On multiple fronts, relations with China have been cooling. The President has said, “I want tariffs. Bring me some tariffs!” It’s worth noting the U.S. November trade deficit surpassed $50 billion for the first time since March 2012. Especially if other agenda items face resistance, the President may lean more aggressively on administration trade policy. A tougher stance toward China will see little pushback – except from Beijing.
The prevailing view has inflation dead and buried. The current backdrop is ripe for an upside surprise. If focus turns to boom-time labor tightness, a manufacturing renaissance, and a fledgling housing construction boom and attendant bottlenecks - prospects for rising import costs could be enough to arouse a secular shift in inflation psychology.
2018 is set up for a Historic Year. Global Bubble markets are dominated by the dangerous misperception that central bankers have it all under control. I believe the extraordinary liquidity backdrop is acutely vulnerable to an unanticipated bout of de-risking/de-leveraging dynamics. The expectation is that 2018 will be a stable continuation of 2017: financial conditions will remain loose – or, why not, even looser. But unless global central bankers are completely reckless, there will be heightened pressure in 2018 to commence “normalization.” The Powell Fed will have its hands full.
Why do Bubbles burst? At some point, Bubble Finance turns unmanageable. On the upside, Bubbles create their own self-reinforcing liquidity and momentum. Things turn crazy near the end. It’s just so easy to make money. Everyone should be wealthy, and nothing causes angst like watching your neighbor get rich (thank you C.P. Kindleberger).
It’s the parabolic speculative blow-off that seals a Bubble’s fate. A “melt-up” in prices is sustained by only progressively larger speculative flows. The higher prices inflate the greater the amount of finance required sustain the Bubble. In the heart of the mania, these flows are sustained by extreme speculative leveraging. Finance becomes deranged. Such a Market Structure creates latent fragilities – manic speculative leveraging and the rapidly elevating risk of a bout of destabilizing “Risk Off.”
I see overwhelming support for my view that we are witnessing history’s greatest financial Bubble. Things turned crazy in 2017 and, if the first four sessions of 2018 are any indication, markets are taking “crazy” up a notch.
Can bond markets avoid trouble for yet another year – avoiding the comeuppance one would expect after years of loose finance? With fiscal deficits and inflation likely on the rise, when will bond holders finally demand a semblance of reasonable risk premiums? When will bond holders focus on long-term risk-adjusted real returns rather than short-term funding costs and rate differentials? Global bond markets are in the greatest Bubble in history, yet worry of Market Structure is nonexistent.
The ETF industry recently surpassed $3.4 Trillion. Do 2018 flows again surpass the previous year’s? Here again, Market Structure is a serious issue. “Money” has flooded into “the market” through perceived safe and liquid ETF instruments. A surprising bout of “Risk Off” would test market liquidity and perceptions.
Central bank liquidity; faith in central banker monetary management; seemingly unshakable global bond markets; and the bubbling ETF complex have been integral to the global collapse in market volatility/risk perceptions (i.e. VIX). Shorting “volatility” has for years now been a huge money-maker. Amazingly, selling market risk “insurance” during a central-banker ensured drought has become one massive Crowded Trade on a global scale. This is a huge accident in the making, and this Epic Structural Market Flaw could easily become a major Issue in 2018.
Forecasting a catalyst for a bursting Bubble is risky business. There are any number of potential accidents in this now tightly integrated global economy and financial Bubble. China’s Bubble is a historic accident in the making. Like global central bankers, Beijing appears for now to have everything under control. They also have no experience with the downside of an unparalleled Credit Cycle.
Massive 2017 financial flows gave EM Bubbles a further lease on life. The weak dollar in 2017 helped devalue their still mounting dollar-denominated debt problem. A global “Risk Off” would see an abrupt reversal in their liquidity position. One of these days – perhaps even in 2018 – there might be some worry about Chinese and EM financial institutions. It’s been such a long cycle. How much bigger did the fraud issue inflate during 2017’s Credit bonanza?
I expect the cryptocurrency Bubble to burst in 2018. Seems like we’re set up for major cyber security issues. Will there be even more damaging weather disasters?
There will be numerous surprises and unexpected developments. I just wish I could share in all the optimism. But Bubbles are just so destructive. Markets continue to grossly misprice risk. Resources – real and financial – are being poorly allocated. Too many uneconomic enterprises are lavishing in boom-time finance. Real economic wealth is being redistributed and destroyed, while asset price Bubbles ensure wealth illusion and a perilous lack of discipline. Speculation doesn’t matter; deficits don’t matter; excess doesn’t matter; and debt doesn’t matter. Market Structure doesn’t matter.
Because of the unprecedented globalization of Bubble Dynamics during this protracted cycle, I have special concern for geopolitical risks. Pondering what might unfold this year leaves me uncomfortable.
For the Week:
The S&P500 jumped 2.6% (up 20.5% y-o-y), and the Dow gained 2.3% (up 26.7%). The Utilities dropped 2.9% (up 5.4%). The Banks rose 2.1% (up 17.4%), and the Broker/Dealers jumped 2.5% (up 27%). The Transports gained 2.8% (up 19.9%). The S&P 400 Midcaps rose 1.9% (up 15.1%), and the small cap Russell 2000 gained 1.6% (up 14.1%). The Nasdaq100 surged 4.0% (up 32.9%). The Semiconductors jumped 5.8% (up 45.9%). The Biotechs advanced 2.6% (up 31.9%). With bullion up $16, the HUI gold index increased 3.0% (up 0.8%).
Three-month Treasury bill rates ended the week at 137 bps. Two-year government yields jumped eight bps to 1.96% (up 75bps y-o-y). Five-year T-note yields gained eight bps to 2.29% (up 37bps). Ten-year Treasury yields rose seven bps to 2.48% (up 6bps). Long bond yields gained seven bps to 2.81% (down 20bps).
Greek 10-year yields fell 34 bps 3.73% (down 305bps y-o-y). Ten-year Portuguese yields were unchanged at 1.94% (down 211bps). Italian 10-year yields slipped a basis point to 2.01% (up 4bps). Spain's 10-year yields fell four bps to 1.52% (down 2bps). German bund yields added a basis point to 0.44% (up 14bps). French yields added one basis point to 0.80% (down 3bps). The French to German 10-year bond spread was about unchanged at 36 bps. U.K. 10-year gilt yields rose five bps to 1.24% (down 14bps). U.K.'s FTSE equities index increased 0.5% (up 7.1%).
Japan's Nikkei 225 equities index surged 4.2% (up 21.9% y-o-y). Japanese 10-year "JGB" yields increased two bps 0.063% (unchanged). France's CAC40 jumped 3.0% (up 11.4%). The German DAX equities index rose 3.1% (up 14.8%). Spain's IBEX 35 equities index jumped 3.7% (up 9.4%). Italy's FTSE MIB index advanced 4.2% (up 15.6%). EM markets were mostly higher. Brazil's Bovespa index rose 3.5% (up 28.2%), and Mexico's Bolsa gained 1.1% (up 8.3%). South Korea's Kospi index increased 1.2% (up 21.9%). India’s Sensex equities index added 0.3% (up 27.6%). China’s Shanghai Exchange jumped 2.6% (up 7.5%). Turkey's Borsa Istanbul National 100 index gained 1.1% (up 51.3%). Russia's MICEX equities index surged 4.6% (down 0.3%).
Junk bond mutual funds saw inflows of $186 million (from Lipper).
Freddie Mac 30-year fixed mortgage rates fell four bps to 3.95% (down 25bps y-o-y). Fifteen-year rates declined six bps to 3.28% (down 6bps). Five-year hybrid ARM rates slipped two bps to 3.45% (up 12bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down two bps to 4.13% (down 15bps).
Federal Reserve Credit last week declined $10.1bn to $4.408 TN. Over the past year, Fed Credit slipped $6.8bn. Fed Credit inflated $1.597 TN, or 57%, over the past 270 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt fell $6.2bn last week to $3.356 TN. "Custody holdings" were up $174bn y-o-y, or 5.5%.
M2 (narrow) "money" supply fell $19.5bn last week to $13.844 TN. "Narrow money" expanded $657bn, or 5.0%, over the past year. For the week, Currency increased $1.5bn. Total Checkable Deposits dipped $4.0bn, and Savings Deposits declined $15.2bn. Small Time Deposits were little changed. Retail Money Funds fell $2.6bn.
Total money market fund assets declined $7.6bn to $2.838 TN. Money Funds gained $125bn y-o-y, or 4.6%.
Total Commercial Paper expanded $6.5bn to a 19-month high $1.086 TN. CP gained $136bn y-o-y, or 14.3%.
Currency Watch:
The U.S. dollar index slipped 0.2% to 91.949 (down 10.2% y-o-y). For the week on the upside, the Mexican peso increased 2.5%, the Brazilian real 2.5%, the Norwegian krone 1.9%, the New Zealand dollar 1.1%, the South Korean won 0.7%, the Singapore dollar 0.7%, the Australian dollar 0.7%, the South African rand 0.6%, the British pound 0.4%, the Swedish krona 0.3%, and the euro 0.2%. For the week on the downside, the Japanese yen declined 0.3%. The Chinese renminbi increased 0.28% versus the dollar this week (up 5.98% y-o-y).
Commodities Watch:
The Goldman Sachs Commodities Index increased 0.3% (up 11.4% y-o-y). Spot Gold rose another 1.3% to $1,319 (up 14.5%). Silver gained 0.8% to $17.285 (up 8.2%). Crude jumped $1.02 to $61.44 (up 14%). Gasoline slipped 0.6% (up 7%), while Natural Gas dropped 5.4% (down 25%). Copper fell 2.2% (up 29%). Wheat gained 0.9% (up 6%). Corn was little changed (unchanged).
Trump Administration Watch:
January 2 – CNBC (Tom DiChristopher): “The world is moving toward crisis and a state of ‘geopolitical depression’ as the presidency of Donald Trump accelerates divisions among citizens and the unraveling of the global order, risk consultancy Eurasia Group warns. Liberal democracies are suffering from a deficit of legitimacy not seen since World War II, and today's leaders have largely abandoned civil society and common values, Eurasia Group says… The breakdown in norms opens the door to a major event that could rock the global economy and markets. ‘In the 20 years since we started Eurasia Group, the global environment has had its ups and downs. But if we had to pick one year for a big unexpected crisis — the geopolitical equivalent of the 2008 financial meltdown — it feels like 2018,’ said Eurasia Group President Ian Bremmer and Chairman Cliff Kupchan.”
December 31 – Associated Press: “North Korean leader Kim Jong Un says the United States should be aware that his country's nuclear forces are now a reality, not a threat. Kim was speaking in his annual New Year's Day address. He said the country had achieved the historic feat of ‘completing’ its nuclear forces and added that the has a ‘nuclear button’ on his desk.”
January 1 – CNBC (Yen Nee Lee): “North Korea called itself a nuclear power on Monday, but the question now is whether U.S. President Donald Trump recognizes the rogue regime as one, a strategist told CNBC… That's an important development to watch as actions taken by Trump against North Korea will likely result in a cold war between the U.S. and China, said David Roche, president and global strategist at Independent Strategy. Such a turn of events between the two major powers would have global implications, he added, pointing to how it would affect worldwide trade and investment. Outlining the two likely scenarios that could play out, Roche said the U.S. may try to contain North Korea by having ‘rings of missiles throughout the Asia Pacific region pointing at Pyongyang’ or it could try to remove the hermit nation's leader Kim Jong Un through an attack. Both those scenarios undermine China's influence… and would lead to an ‘almost inevitable cold war’ between China and the U.S., he said.”
January 1 – Reuters (Rodrigo Campos and Christine Kim): “The U.S. ambassador to the United Nations, Nikki Haley, warned North Korea… against staging another missile test and said Washington would not take any talks between North and South Korea seriously if they did not do something to get Pyongyang to give up its nuclear weapons.”
January 2 – Reuters (Francesco Canepa): “Ant Financial’s plan to acquire U.S. money transfer company MoneyGram International Inc collapsed… after a U.S. government panel rejected it over national security concerns, the most high-profile Chinese deal to be torpedoed under the administration of U.S. President Donald Trump.”
January 3 – CNBC (Huileng Tan): “China warned of a ‘bumpy journey’ in trade with the U.S. and ‘retaliatory measures’ a day after Washington blocked MoneyGram's proposed sale to a financial services firm affiliated with Chinese tech giant Alibaba. ‘It is not surprising that a number of Chinese companies have hit the buffers in Washington as trade tensions between the two countries are flaring,’ state news agency Xinhua said in a commentary… On Tuesday, the U.S. government torpedoed MoneyGram's multi-million-dollar merger with Ant Financial, which is controlled by Alibaba founder Jack Ma.”
December 29 – Wall Street Journal (Josh Zumbrun): “One of the lingering questions about the overhaul of the U.S. tax code is what will happen to the U.S. national debt, already one of the world’s largest debt burdens. As of 2017, the general government gross debt of the U.S. stood at 108.1% of gross domestic product… Only four large countries have more debt for the size of their economies… Japan’s government carries debts at 240.3% of gross domestic product, far and away the world’s largest burden… Greece’s debt-to-GDP stands at 180.2% of GDP, Italy’s at 133% and Portugal’s at 125.7%.”
December 29 – Reuters (Kevin Drawbaugh and Roberta Rampton): “The head of a conservative Republican faction in the U.S. Congress, who voted this month for a huge expansion of the national debt to pay for tax cuts, called himself a ‘fiscal conservative’ on Sunday and urged budget restraint in 2018. In keeping with a sharp pivot under way among Republicans, U.S. Representative Mark Meadows… drew a hard line on federal spending, which lawmakers are bracing to do battle over in January. When they return from the holidays on Wednesday, lawmakers will begin trying to pass a federal budget in a fight likely to be linked to other issues…”
China Watch:
January 1 – Bloomberg: “China’s economy begins 2018 facing what its own leaders call three years of ‘critical battles.’ Those fights to tackle domestic debt, poverty and pollution pose a hat-trick of risks to the world’s No. 2 economy even before higher interest rates and trade war threats from the U.S. are taken into account. While the nation is starting from a position of strength, with full-year growth in 2017 poised for its first acceleration since 2010… As a result, the government of Xi Jinping is signaling that it’s sanguine about more modest economic performance, if progress on the top risk -- financial fragility -- can be made… ‘Significant economic imbalances continue to create downside risk to the outlook for 2018,’ said Rajiv Biswas, chief Asia-Pacific economist at IHS Markit… ‘Risks to the Chinese economy will remain among the key risks to the global growth outlook in 2018, with the Asia Pacific region particularly vulnerable to the shock waves from a slowdown.’”
December 31 – Bloomberg (Sungwoo Park): “China, the world’s biggest oil buyer, is on the verge of opening a domestic market to trade futures contracts. It’s been planning one for years, only to encounter delays. The Shanghai International Energy Exchange, a unit of Shanghai Futures Exchange, will be known by the acronym INE and will allow Chinese buyers to lock in oil prices and pay in local currency. Also, foreign traders will be allowed to invest -- a first for China’s commodities markets -- because the exchange is registered in Shanghai’s free trade zone. There are implications for the U.S. dollar’s well-established role as the global currency of the oil market.”
December 30 – Bloomberg: “China’s official factory gauge maintained momentum, signaling campaigns to reduce both pollution and debt risk haven’t curbed output. The manufacturing purchasing managers index edged down to 51.6 in December, in line with the forecast… The non-manufacturing PMI stood at 55, compared with a projected 54.7 reading and 54.8 in November…”
January 2 – Bloomberg: “China’s money market rates are set to grind higher and a bear market in bonds will worsen before it gets better, according to a survey of strategists and traders. The seven-day repurchase rate will average 2.99% in 2018, up from 2.88% in the fourth quarter, according to the median estimate in a Bloomberg survey. The yield on 10-year government debt is projected to rise as high as 4.20% before ending the year at 3.75%. The yield was little changed at 3.93% on Wednesday. China’s sovereign bonds have fallen for five quarters, the longest losing streak since Bloomberg started to compile the data in 2005, as the government stepped up a campaign to cut leverage in the financial sector and inflation picked up. The 10-year yield rose last year by the most since 2013.”
Federal Reserve Watch:
January 4 – Bloomberg (Craig Torres): “The Federal Reserve is getting ready to welcome a new chairman amid doubts and divisions among policy makers about how many times to raise interest rates this year. Jerome Powell will take over from Janet Yellen in early February… He will lead a policy-making committee that, judging by a record of its last meeting released on Wednesday, still thinks the gradual pace of tightening it followed last year is correct. But the debate also highlighted a split between officials concerned about low inflation and others pointing to robust growth about to get a further boost from tax cuts.”
U.S. Bubble Watch:
January 2 – CNBC (Diana Olick): “The temperature may be frigid across much of the nation, yet home prices are sizzling and sellers are in the hot seat. Sales prices jumped 7% annually in November, according to… CoreLogic. That is the third straight month at that pace, far higher than the price gains in the first half of 2017. Low supply and high demand are fueling the spurt and neither of those is expected to ease up anytime soon. Supply is actually falling even more now, and a strengthening economy is pushing demand. This will have potential buyers out early this year, trying to get a jump on the spring market. ‘Rising home prices are good news for home sellers, but add to the challenges that home buyers face,’ said Frank Nothaft, chief economist at CoreLogic… Nothaft said the limited supply is the worst at the lower end, and will hit the growing number of first-time buyers hardest.”
January 3 – Reuters (Lucia Mutikani): “In November, spending on private residential projects soared 1.0% to the highest level since February 2007 after rising 0.3% in October. The increase was in line with a recent jump in homebuilding and supported expectations that housing would boost economic growth in the fourth quarter after being a drag on GDP since the April-June period.”
January 3 – Bloomberg (Katia Dmitrieva): “U.S. manufacturing expanded in December at the fastest pace in three months, as gains in orders and production capped the strongest year for factories since 2004, the Institute for Supply Management said… Factory index climbed to 59.7 (est. 58.2) from 58.2 a month earlier… Gauge of new orders advanced to 69.4, the highest in nearly 14 years, from 64. Measure of production increased to 65.8, the strongest since May 2010, from 63.9.”
January 4 – Bloomberg (Jordan Yadoo): “American consumers last year were more upbeat on average than at any time since 2001, reflecting more favorable views of the economy, personal finances and the buying climate, according to the Bloomberg Consumer Comfort Index… Comfort measure averaged 50.0 in 2017, up from 43.6 a year earlier and the best reading since 51.8 in 2001…”
December 30 – Bloomberg (Katia Dmitrieva): “Payrolls at U.S. companies increased in December by the most in nine months, consistent with further progress in the labor market, according to… ADP… Private payrolls rose by 250k (190k est.), exceeding all estimates…”
January 4 – CNBC (Chloe Aiello): “U.S. employers announced plans to cut 32,423 jobs in December, bringing the year's total to a low not seen since 1990, global outplacement consultancy Challenger, Gray & Christmas reported… ‘The tight labor market, coupled with uncertainty surrounding health care and tax legislation, possibly kept employers from making any long-term staffing decisions this year,’ CEO John Challenger said…”
January 2 – Bloomberg (Mary Schlangenstein): “Two U.S. airlines -- American and Southwest -- joined the tide of companies offering employees $1,000 bonuses to mark the tax overhaul Congress put in place for 2018… AAON, U.S. Bancorp, Commerce Bancshares Inc. and Zions Bancorporation were among the companies touting similar moves.vBanks, insurers and airlines have led the way on the handouts -- all industries that have important regulatory issues pending with the Trump administration. The moves appear to be an effort to sway public opinion in favor of the unpopular tax bill. Republican legislators pushed to pass the overhaul in December as President Donald Trump’s crowning achievement of 2017.”
January 1 – Wall Street Journal (Shayndi Raice and Eric Morath): “In U.S. cities with the tightest labor markets, workers are finding something that’s long been missing from the broader economic expansion: faster-growing paychecks. Workers in metro areas with the lowest unemployment are experiencing among the strongest wage growth in the country. The labor market in places like Minneapolis, Denver and Fort Myers, Fla., where unemployment rates stand near or even below 3%, has now tightened to a point where businesses are raising pay to attract employees, often from competitors. It’s an outcome entirely expected in economic theory, but one that’s been largely absent until now in the upturn that began more than eight years ago.”
January 2 – CNBC (Lauren Thomas): “Land fit for future fulfillment centers for the likes of Amazon and Walmart saw huge spikes in prices last year, according to… CBRE. In a trend largely stemming from the growth of e-commerce players across the U.S., some plots of land now cost twice the amount they did a year ago, the group found. This is especially true in major markets, including Atlanta and Houston. In surveying 10 U.S. markets, CBRE found the average price for ‘large industrial parcels’ (50 to 100 acres) now sits at more than $100,000 per acre, up from about $50,000 a year ago. Industrial land plots of five to 10 acres, which typically house infill distribution centers for completing ‘last-mile’ deliveries, watched their prices soar to more than $250,000 per acre by the end of 2017, up from roughly $200,000 a year ago…”
January 2 – Wall Street Journal (Laura Kusisto): “The multifamily housing market turned in a lackluster performance in 2017 as demand failed to keep pace with a deluge of new apartment supply, according to a new report… U.S. apartment rents climbed 2.5% in 2017, according to RealPage Inc., RP -0.11% a real estate technology and data firm. That was in line with historical averages but down significantly from the 5.2% posted in 2015, the most recent peak.”
January 2 – Reuters (Ankit Ajmera): “U.S. office vacancy rate rose to 16.3% in the fourth quarter of 2017, from 16.1% a year earlier, rising for the first time in at least five years, according to… Reis Inc. Asking and effective rents increased 0.6% in the quarter, compared with the third quarter, registering the highest quarterly growth rate in six quarters. Rent growth was 1.8% for 2017. ‘The year-end numbers showed a consistent deceleration in occupancy but somewhat higher rent and employment growth than in previous quarters. We expect this trend to continue at the start of 2018 as more office construction is expected to come on line,’ Barbara Denham, senior economist at Reis, said…”
December 30 – Bloomberg (Joanna Ossinger): “Financial imbalances including those in credit markets and cryptocurrencies will shadow an otherwise robust 2018 U.S. economy, said Goldman Sachs… economist Jan Hatzius. Hatzius has already made some predictions for the new year: four Federal Reserve rate hikes, real U.S. gross-domestic product growth quickening to an average of 2.6%, the jobless rate dropping to about 3.5%, and the yield curve not inverting. In a new report, Hatzius reiterated his expectation for overall economic strength, while flagging some concerns. ‘Asset valuations in some areas -- especially credit -- have risen to high levels by historical standards,’ Hatzius said in the ‘10 Questions for 2018’ report… ‘While we have not seen the type of large credit expansions that would be most worrisome for Fed officials concerned about financial imbalances, there are now some signs of speculative behavior in financial markets, e.g. the cryptocurrency boom.’”
Central Bank Watch:
January 2 – Reuters (Francesco Canepa): “The European Central Bank may end its stimulus program this year if the euro zone economy continues to grow strongly, ECB rate-setter Ewald Nowotny told a German newspaper. The ECB has said it will buy bonds at least until September and it is widely expected to wind down the 2.55 trillion-euro scheme, the centerpiece of its efforts to revive inflation in the euro zone, after that. Nowotny’s comments, echoing those of board member Benoit Coeure at the weekend, are likely to help cement those expectations. ‘If the economy continues to do so well, we could let the program run out in 2018,’ Nowotny told Sueddeutsche Zeitung…”
January 3 – Reuters (Yoshifumi Takemoto): “Bank of Japan Governor Haruhiko Kuroda said… the central bank would ‘patiently’ maintain its ultra-easy monetary policy to beat deflation. ‘Unlike snow, Japan’s deflationary mindset won’t melt easily,’ Kuroda said in a speech at a gathering of bank executives.”
January 2 – Bloomberg (Katia Dmitrieva): “The European Central Bank is heading for a two-year leadership overhaul that peaks with the selection of a successor to President Mario Draghi, and it will be politics as much as ability that determines who get the jobs. Five of the ECB’s seven top posts will be vacated by the end of 2019, starting with Vice President Vitor Constancio this June. Among the criteria candidates should bear in mind: being a woman is a plus, and appointing a government minister would break with tradition… ‘A big game of musical chairs is going to play out over the next two years as a lot of high-profile positions come up for grabs in the European Union,” said Carsten Brzeski, chief economist at ING-Diba AG… What will emerge at the end of this process will have profound consequences for how the ECB goes about tightening its policy.’”
Global Bubble Watch:
December 30 – Bloomberg (Joanna Ossinger): “Financial imbalances including those in credit markets and cryptocurrencies will shadow an otherwise robust 2018 U.S. economy, said Goldman Sachs… economist Jan Hatzius. Hatzius has already made some predictions for the new year: four Federal Reserve rate hikes, real U.S. gross-domestic product growth quickening to an average of 2.6%, the jobless rate dropping to about 3.5%, and the yield curve not inverting. In a new report, Hatzius reiterated his expectation for overall economic strength, while flagging some concerns. ‘Asset valuations in some areas -- especially credit -- have risen to high levels by historical standards,’ Hatzius said in the ‘10 Questions for 2018’ report… ‘While we have not seen the type of large credit expansions that would be most worrisome for Fed officials concerned about financial imbalances, there are now some signs of speculative behavior in financial markets, e.g. the cryptocurrency boom.’”
Central Bank Watch:
January 2 – Reuters (Francesco Canepa): “The European Central Bank may end its stimulus program this year if the euro zone economy continues to grow strongly, ECB rate-setter Ewald Nowotny told a German newspaper. The ECB has said it will buy bonds at least until September and it is widely expected to wind down the 2.55 trillion-euro scheme, the centerpiece of its efforts to revive inflation in the euro zone, after that. Nowotny’s comments, echoing those of board member Benoit Coeure at the weekend, are likely to help cement those expectations. ‘If the economy continues to do so well, we could let the program run out in 2018,’ Nowotny told Sueddeutsche Zeitung…”
January 3 – Reuters (Yoshifumi Takemoto): “Bank of Japan Governor Haruhiko Kuroda said… the central bank would ‘patiently’ maintain its ultra-easy monetary policy to beat deflation. ‘Unlike snow, Japan’s deflationary mindset won’t melt easily,’ Kuroda said in a speech at a gathering of bank executives.”
January 2 – Bloomberg (Katia Dmitrieva): “The European Central Bank is heading for a two-year leadership overhaul that peaks with the selection of a successor to President Mario Draghi, and it will be politics as much as ability that determines who get the jobs. Five of the ECB’s seven top posts will be vacated by the end of 2019, starting with Vice President Vitor Constancio this June. Among the criteria candidates should bear in mind: being a woman is a plus, and appointing a government minister would break with tradition… ‘A big game of musical chairs is going to play out over the next two years as a lot of high-profile positions come up for grabs in the European Union,” said Carsten Brzeski, chief economist at ING-Diba AG… What will emerge at the end of this process will have profound consequences for how the ECB goes about tightening its policy.’”
Global Bubble Watch:
January 2 – Financial Times (Robin Wigglesworth): “Global monetary policy has been a multi-trillion dollar relay race over the past decade. But in 2018, there will be no one to pick up the baton, setting up a potentially anxious year for the world’s bond markets. That is a sharp contrast to recent years. When the Federal Reserve began to unwind its bond-buying programme, the Bank of Japan cranked up its even grander quantitative easing scheme. By the time the Fed started raising interest rates, the European Central Bank had unveiled its own monetary bazooka, quelling the ructions that many feared were inevitable. The coming year promises to be an inflection point for central banks. The Fed has started reducing the pile of the bonds it acquired after the financial crisis — a process that will accelerate. The ECB started to trim its QE programme in 2017 and is expected to end it altogether in 2018. Even the BoJ is expected to raise its bond yield target slightly this year.”
January 2 – Bloomberg (Fergal O'Brien): “Factories across the globe warned they are finding it increasingly hard to keep up with demand, potentially forcing them to raise prices as the world economy looks set to enjoy its strongest year since 2011. A slew of Purchasing Managers Indexes… from countries including China, Germany, France, Canada and the U.K. all pointed to deeper supply constraints. The U.S. reading from IHS Markit rose for the third month in the past four, reaching the highest since March 2015 amid ‘increased capacity pressures.’ Such strains on potential output may mean companies have to hire or invest more to avoid overheating, yet it could also force them to push up prices, propelling inflation enough to squeeze the expansion. JPMorgan… is among the banks predicting global growth will be around 4% this year…”
January 4 – Bloomberg (Charles Stein): “Vanguard Group, the world’s largest mutual fund company, attracted an estimated $368 billion in deposits from customers last year, topping the previous record of $323 billion in 2016. The company’s mutual funds gathered 61% of the haul, while its exchange-traded funds collected 39%... About 52% of the total went to stocks and 41% to bonds. More than half of the money sent to Vanguard came from financial advisers and other intermediaries… BlackRock reported almost $6 trillion in assets under management as of Sept. 30. At Vanguard, the total is approaching $5 trillion…”
January 3 – Reuters (Douglas Busvine and Stephen Nellis): “Security researchers… disclosed a set of security flaws that they said could let hackers steal sensitive information from nearly every modern computing device containing chips from Intel Corp, Advanced Micro Devices Inc and ARM Holdings. One of the bugs is specific to Intel but another affects laptops, desktop computers, smartphones, tablets and internet servers alike. Intel and ARM insisted that the issue was not a design flaw, but it will require users to download a patch and update their operating system to fix.”
January 2 – Bloomberg (Kanika Sood): “Australian home prices fell in the final three months of 2017, the first such decline in almost two years, as the nation’s biggest market Sydney continued to cool. Values nationally declined 0.3%... Prices in Sydney dropped 2.1% in the quarter, dragging the city’s annual growth rate to 3.1% from 17.1% just seven months ago. ‘Sydney’s housing market has become the most significant drag on the headline growth figures,’ said Tim Lawless, CoreLogic’s head of research.”
January 4 – Bloomberg (Natalie Wong and Erik Hertzberg): “Toronto’s housing market continues to cool as prices fell last month and the supply of homes for sale spiked ahead of new stress-test rules that went into effect this week. The benchmark home price index fell in December for the seventh consecutive month, down 0.2% from November… The index has fallen 8.9% since May…”
Fixed Income Watch:
January 4 – Bloomberg (Liz McCormick and Sid Verma): “Investors devoted to the idea that inflation will stay subdued should be worried. Worldwide data have recently made clear that producer-price increases have picked up steam. That’s led bond buyers to begin wagering that consumer inflation could be soon to follow, with U.S. breakeven rates above 2% in many tenors for the first time since March. The shift represents a sea change for investors who have grown complacent about the threat of rising prices over the past few years, when inflation was subdued by modest economic growth rates, suppressed wages and shifts in technology and demographics.”
Europe Watch:
January 2 – Financial Times (Nicholas Megaw): “European factories have reported their strongest month since before the creation of the euro, capping off a much better than expected year for businesses in the single currency area. The eurozone manufacturing purchasing managers’ index in December hit 60.6, its highest level since surveys began in mid-1997… Any figure above 50 indicates expansion over the month. The figures… suggested the sector had recorded its best annual performance on record, while new national-level data pointed to broad-based growth across the continent.”
Geopolitical Watch:
January 2 – Reuters (Ankit Ajmera): “Iran’s elite Revolutionary Guards have deployed forces to three provinces to put down anti-government unrest after six days of protests that have rattled the clerical leadership and left 21 people dead. The protests, which began last week over economic hardships suffered by the young and working class, have evolved into a rising against the powers and privileges of a remote elite, especially supreme leader Ayatollah Ali Khamenei. The unrest continued to draw sharply varied responses internationally, with Europeans expressing unease at the delighted reaction by U.S. and Israeli leaders to the display of opposition to Iran’s clerical establishment.”
January 3 – CNBC (Nyshka Chandran): “Just 24 hours after President Donald Trump took aim at Pakistan on Twitter, the South Asian nation already appears to be cozying up to the world's second-largest economy. A day after the U.S. leader slammed Islamabad for harboring terrorists in a New Year's Day tweet, Pakistan's central bank announced that it will be replacing the dollar with the yuan for bilateral trade and investment with Beijing. The same day, Chinese Foreign Ministry spokesman Geng Shuang defended Islamabad's counter-terrorism track record, saying the country ‘made great efforts and sacrifices for combating terrorism’ and urged the international community to ‘fully recognize this.’”
January 2 – Bloomberg (Fergal O'Brien): “Factories across the globe warned they are finding it increasingly hard to keep up with demand, potentially forcing them to raise prices as the world economy looks set to enjoy its strongest year since 2011. A slew of Purchasing Managers Indexes… from countries including China, Germany, France, Canada and the U.K. all pointed to deeper supply constraints. The U.S. reading from IHS Markit rose for the third month in the past four, reaching the highest since March 2015 amid ‘increased capacity pressures.’ Such strains on potential output may mean companies have to hire or invest more to avoid overheating, yet it could also force them to push up prices, propelling inflation enough to squeeze the expansion. JPMorgan… is among the banks predicting global growth will be around 4% this year…”
January 4 – Bloomberg (Charles Stein): “Vanguard Group, the world’s largest mutual fund company, attracted an estimated $368 billion in deposits from customers last year, topping the previous record of $323 billion in 2016. The company’s mutual funds gathered 61% of the haul, while its exchange-traded funds collected 39%... About 52% of the total went to stocks and 41% to bonds. More than half of the money sent to Vanguard came from financial advisers and other intermediaries… BlackRock reported almost $6 trillion in assets under management as of Sept. 30. At Vanguard, the total is approaching $5 trillion…”
January 3 – Reuters (Douglas Busvine and Stephen Nellis): “Security researchers… disclosed a set of security flaws that they said could let hackers steal sensitive information from nearly every modern computing device containing chips from Intel Corp, Advanced Micro Devices Inc and ARM Holdings. One of the bugs is specific to Intel but another affects laptops, desktop computers, smartphones, tablets and internet servers alike. Intel and ARM insisted that the issue was not a design flaw, but it will require users to download a patch and update their operating system to fix.”
January 2 – Bloomberg (Kanika Sood): “Australian home prices fell in the final three months of 2017, the first such decline in almost two years, as the nation’s biggest market Sydney continued to cool. Values nationally declined 0.3%... Prices in Sydney dropped 2.1% in the quarter, dragging the city’s annual growth rate to 3.1% from 17.1% just seven months ago. ‘Sydney’s housing market has become the most significant drag on the headline growth figures,’ said Tim Lawless, CoreLogic’s head of research.”
January 4 – Bloomberg (Natalie Wong and Erik Hertzberg): “Toronto’s housing market continues to cool as prices fell last month and the supply of homes for sale spiked ahead of new stress-test rules that went into effect this week. The benchmark home price index fell in December for the seventh consecutive month, down 0.2% from November… The index has fallen 8.9% since May…”
Fixed Income Watch:
January 4 – Bloomberg (Liz McCormick and Sid Verma): “Investors devoted to the idea that inflation will stay subdued should be worried. Worldwide data have recently made clear that producer-price increases have picked up steam. That’s led bond buyers to begin wagering that consumer inflation could be soon to follow, with U.S. breakeven rates above 2% in many tenors for the first time since March. The shift represents a sea change for investors who have grown complacent about the threat of rising prices over the past few years, when inflation was subdued by modest economic growth rates, suppressed wages and shifts in technology and demographics.”
Europe Watch:
January 2 – Financial Times (Nicholas Megaw): “European factories have reported their strongest month since before the creation of the euro, capping off a much better than expected year for businesses in the single currency area. The eurozone manufacturing purchasing managers’ index in December hit 60.6, its highest level since surveys began in mid-1997… Any figure above 50 indicates expansion over the month. The figures… suggested the sector had recorded its best annual performance on record, while new national-level data pointed to broad-based growth across the continent.”
Geopolitical Watch:
January 2 – Reuters (Ankit Ajmera): “Iran’s elite Revolutionary Guards have deployed forces to three provinces to put down anti-government unrest after six days of protests that have rattled the clerical leadership and left 21 people dead. The protests, which began last week over economic hardships suffered by the young and working class, have evolved into a rising against the powers and privileges of a remote elite, especially supreme leader Ayatollah Ali Khamenei. The unrest continued to draw sharply varied responses internationally, with Europeans expressing unease at the delighted reaction by U.S. and Israeli leaders to the display of opposition to Iran’s clerical establishment.”
January 3 – CNBC (Nyshka Chandran): “Just 24 hours after President Donald Trump took aim at Pakistan on Twitter, the South Asian nation already appears to be cozying up to the world's second-largest economy. A day after the U.S. leader slammed Islamabad for harboring terrorists in a New Year's Day tweet, Pakistan's central bank announced that it will be replacing the dollar with the yuan for bilateral trade and investment with Beijing. The same day, Chinese Foreign Ministry spokesman Geng Shuang defended Islamabad's counter-terrorism track record, saying the country ‘made great efforts and sacrifices for combating terrorism’ and urged the international community to ‘fully recognize this.’”
Friday Evening Links
[Reuters] S&P 500, Nasdaq post best week in more than a year
[Reuters] In test for Powell, internal groundswell grows to rethink Fed's inflation approach
[Reuters] Fed's Mester sees roughly four U.S. rate hikes in 2018
[Bloomberg] Powell Was a Wary Supporter of QE3 in 2012
[Bloomberg] Yellen's 2012 Worry Foretold Fed Taper Tantrum Five Months Later
[Bloomberg] Capital One CEO Becomes Billionaire After Stock Hits Record High
[WSJ] Powell Backed Fed’s Bond-Buying Plan With Reservations in 2012
[FT] Signs of euphoria suggest equity bulls are on borrowed time
[FT] Companies scramble to fix computer flaws
[Reuters] In test for Powell, internal groundswell grows to rethink Fed's inflation approach
[Reuters] Fed's Mester sees roughly four U.S. rate hikes in 2018
[Bloomberg] Powell Was a Wary Supporter of QE3 in 2012
[Bloomberg] Yellen's 2012 Worry Foretold Fed Taper Tantrum Five Months Later
[Bloomberg] Capital One CEO Becomes Billionaire After Stock Hits Record High
[WSJ] Powell Backed Fed’s Bond-Buying Plan With Reservations in 2012
[FT] Signs of euphoria suggest equity bulls are on borrowed time
[FT] Companies scramble to fix computer flaws
Thursday, January 4, 2018
Friday's News Links
[Bloomberg] Bond Pare Gains, Stocks Higher After Jobs Report: Markets Wrap
[Bloomberg] U.S. Added Fewer Jobs Than Expected in December
[Bloomberg] U.S. Trade Deficit Balloons to Widest in Almost Six Years
[Bloomberg] Global Debt Hits Record $233 Trillion
[ETF.com] Last Year Broke Closures, Flows Records
[Bloomberg] Fed's Bullard Says Tax Overhaul May Light Fire Under Investment
[Bloomberg] Weak Dollar Puzzle May Be Solved in Global Credit Merry-Go-Round
[Bloomberg] Canada's Unemployment Rate Declines to Lowest in Four Decades
[Bloomberg] China to Set Economic Growth Target ‘Around 6.5%’
[Bloomberg] HNA Units Are Said to Have Missed Payments to More Chinese Banks
[Bloomberg] HNA Said to Walk Away From Late-Stage Value Partners Deal Talks
[Bloomberg] Gold Imports Said to Rebound Amid Signs India's Tax Woes Fading
[CNBC] There's a battle of tax codes raging — the US and China just upped the arms race
[Bloomberg] Apple Says All Macs, iPhones and iPads Exposed to Chip Security Flaws
[Bloomberg] U.S. Added Fewer Jobs Than Expected in December
[Bloomberg] U.S. Trade Deficit Balloons to Widest in Almost Six Years
[Bloomberg] Global Debt Hits Record $233 Trillion
[ETF.com] Last Year Broke Closures, Flows Records
[Bloomberg] Fed's Bullard Says Tax Overhaul May Light Fire Under Investment
[Bloomberg] Weak Dollar Puzzle May Be Solved in Global Credit Merry-Go-Round
[Bloomberg] Canada's Unemployment Rate Declines to Lowest in Four Decades
[Bloomberg] China to Set Economic Growth Target ‘Around 6.5%’
[Bloomberg] HNA Units Are Said to Have Missed Payments to More Chinese Banks
[Bloomberg] HNA Said to Walk Away From Late-Stage Value Partners Deal Talks
[Bloomberg] Gold Imports Said to Rebound Amid Signs India's Tax Woes Fading
[CNBC] There's a battle of tax codes raging — the US and China just upped the arms race
[Bloomberg] Apple Says All Macs, iPhones and iPads Exposed to Chip Security Flaws
Thursday Evening Links
[Bloomberg] Asia Stocks Extend Strong 2018 Start; Dollar Slips: Markets Wrap
[Bloomberg] Blizzard Triggers a 60-Fold Surge in Prices for U.S. Natural Gas
[Bloomberg] Oil Jumps After U.S. Crude Stockpiles Shrink Most Since August
[Bloomberg] Global Warming Is Starving the World's Reefs Faster Than Ever
[Bloomberg] Blizzard Triggers a 60-Fold Surge in Prices for U.S. Natural Gas
[Bloomberg] Oil Jumps After U.S. Crude Stockpiles Shrink Most Since August
[Bloomberg] Global Warming Is Starving the World's Reefs Faster Than Ever
Wednesday, January 3, 2018
Thursday's News Links
[Bloomberg] Stocks Rise on Global Growth Outlook; Dollar Slips: Markets Wrap
[CNBC] Treasury yields climb after jobs data blows past estimates
[Reuters] Oil hits highest since 2015 as Iran unrest spooks market
[Bloomberg] Companies in U.S. Added 250,000 Jobs in December, ADP Data Show
[Bloomberg] Consumer Comfort in U.S. Advanced in 2017 to a 16-Year High
[Bloomberg] Powell Inherits Fed Rate-Hike Debate With Inflation Doubts Lingering
[Reuters] BOJ's Kuroda repeats vow to maintain ultra-easy policy
[CNBC] Job-cut announcements in 2017 see lowest level since 1990, Challenger report says
[Bloomberg] Inflation Risk May Shake Global Markets
[Reuters] Security flaws put virtually all phones, computers at risk
[Bloomberg] Toronto Home Prices Fall for Seventh Month as Lending Tightens
[Reuters] U.S. military warns against getting hopes up over North Korean overture
[CNBC] China and the US 'are about to ride a bumpy journey,' state news agency says
[CNBC] Pakistan is ditching the dollar for trade with China — 24 hours after Trump denounced the
country
[NYT] Researchers Discover Two Major Flaws in the World’s Computers
[WSJ] Tech Giants Race to Address Widespread Chip Flaws
[FT] Donald Trump unlikely to certify nuclear deal with Iran
[CNBC] Treasury yields climb after jobs data blows past estimates
[Reuters] Oil hits highest since 2015 as Iran unrest spooks market
[Bloomberg] Companies in U.S. Added 250,000 Jobs in December, ADP Data Show
[Bloomberg] Consumer Comfort in U.S. Advanced in 2017 to a 16-Year High
[Bloomberg] Powell Inherits Fed Rate-Hike Debate With Inflation Doubts Lingering
[Reuters] BOJ's Kuroda repeats vow to maintain ultra-easy policy
[CNBC] Job-cut announcements in 2017 see lowest level since 1990, Challenger report says
[Bloomberg] Inflation Risk May Shake Global Markets
[Reuters] Security flaws put virtually all phones, computers at risk
[Bloomberg] Toronto Home Prices Fall for Seventh Month as Lending Tightens
[Reuters] U.S. military warns against getting hopes up over North Korean overture
[CNBC] China and the US 'are about to ride a bumpy journey,' state news agency says
[CNBC] Pakistan is ditching the dollar for trade with China — 24 hours after Trump denounced the
country
[NYT] Researchers Discover Two Major Flaws in the World’s Computers
[WSJ] Tech Giants Race to Address Widespread Chip Flaws
[FT] Donald Trump unlikely to certify nuclear deal with Iran
Wednesday Evening Links
[Bloomberg] Asia Stocks Rise After U.S. Records, Dollar Firms: Markets Wrap
[Bloomberg] Most Fed Officials Backed Continued Gradual Rate Increases
[Bloomberg] Inside the Fed’s December Meeting: The Annotated Minutes
[CNBC] Fed minutes show 'last stand' by Yellen and the doves
[Bloomberg] Chip Stocks Roar Into 2018 With Gains Topping All S&P Sectors
[WSJ] Fed Minutes to Shed Light on Officials’ Outlook for 2018
[FT] Trump’s looming bust-up with China is bad news for 2018
[Bloomberg] Most Fed Officials Backed Continued Gradual Rate Increases
[Bloomberg] Inside the Fed’s December Meeting: The Annotated Minutes
[CNBC] Fed minutes show 'last stand' by Yellen and the doves
[Bloomberg] Chip Stocks Roar Into 2018 With Gains Topping All S&P Sectors
[WSJ] Fed Minutes to Shed Light on Officials’ Outlook for 2018
[FT] Trump’s looming bust-up with China is bad news for 2018
Tuesday, January 2, 2018
Wednesday's News Links
[Bloomberg] Dollar Halts Slide; U.S. Stocks at Record Highs: Markets Wrap
[Reuters] Oil hits new two-and-a-half year highs as higher output looms
[Bloomberg] Manufacturing in U.S. Accelerates to Cap Best Year Since '04
[Bloomberg] Ford, GM Sales Beat Estimates
[Reuters] U.S. construction spending rises to record high in November
[Bloomberg] All Change at Top of the ECB as Draghi Era Approaches the End
[Reuters] ECB may end bond buying in 2018 if economy stays strong: Nowotny
[Reuters] U.S. blocks MoneyGram sale to China's Ant Financial
[Bloomberg] China's Small Banks Dumped on Signs of More Policy Pain in 2018
[Reuters] U.S. office vacancy rate rises in fourth quarter: Reis
[Politico] Iran protests could move Trump to kill nuclear deal
[Reuters] Iran deploys Revolutionary Guards to quell 'sedition' in protest hotbeds
[WSJ] U.S. Apartment Market Softens as Supply Increases
[WSJ] Business-Loan Growth Fell Off a Cliff in 2017 and No One Can Figure Out Why
[Reuters] Oil hits new two-and-a-half year highs as higher output looms
[Bloomberg] Manufacturing in U.S. Accelerates to Cap Best Year Since '04
[Bloomberg] Ford, GM Sales Beat Estimates
[Reuters] U.S. construction spending rises to record high in November
[Bloomberg] All Change at Top of the ECB as Draghi Era Approaches the End
[Reuters] ECB may end bond buying in 2018 if economy stays strong: Nowotny
[Reuters] U.S. blocks MoneyGram sale to China's Ant Financial
[Bloomberg] China's Small Banks Dumped on Signs of More Policy Pain in 2018
[Reuters] U.S. office vacancy rate rises in fourth quarter: Reis
[Politico] Iran protests could move Trump to kill nuclear deal
[Reuters] Iran deploys Revolutionary Guards to quell 'sedition' in protest hotbeds
[WSJ] U.S. Apartment Market Softens as Supply Increases
[WSJ] Business-Loan Growth Fell Off a Cliff in 2017 and No One Can Figure Out Why
Tuesday Evening Links
[Bloomberg] Asia Stocks to Extend Gains After U.S. Tech Surge: Markets Wrap
[Reuters] Oil hits highest since mid-2015, then dips
[Bloomberg] Airlines Join Banks in Dishing Out $1,000 Tax Bill Bonuses
[Bloomberg] China’s Longest Bond Rout Has Further to Go
[Bloomberg] Record-Setting Cold Shakes Up America’s Commodities Markets
[CNBC] Internet giants fuel warehouse demand as land prices surge
[Bloomberg] China Seen Raising Money Market Rates Three Times This Year
[CNBC] 2018 will bring a disastrous geopolitical event that rivals the 2008 financial crisis, says foreign policy expert Ian Bremmer
[Reuters] U.S. warns North Korea against new missile test, plays down talks
[Reuters] Oil hits highest since mid-2015, then dips
[Bloomberg] Airlines Join Banks in Dishing Out $1,000 Tax Bill Bonuses
[Bloomberg] China’s Longest Bond Rout Has Further to Go
[Bloomberg] Record-Setting Cold Shakes Up America’s Commodities Markets
[CNBC] Internet giants fuel warehouse demand as land prices surge
[Bloomberg] China Seen Raising Money Market Rates Three Times This Year
[CNBC] 2018 will bring a disastrous geopolitical event that rivals the 2008 financial crisis, says foreign policy expert Ian Bremmer
[Reuters] U.S. warns North Korea against new missile test, plays down talks
Monday, January 1, 2018
Tuesday's News Links
[Bloomberg] European Stocks Slide; Dollar Extends Decline: Markets Wrap
[Reuters] Oil posts strongest year opening since 2014; Iran unrest pushes up crude
[Bloomberg] Global Manufacturers Strain to Keep Up With Faster Economy
[Reuters] Asian factories end 2017 on mixed note; central banks seen hiking slowly
[CNBC] As US budget fight looms, Republicans are suddenly worried about spending
[CNBC] Home prices are set to soar in 2018
[Bloomberg] Australian Home Prices Fell in December in Bellwether for 2018
[Bloomberg] Hundreds Detained in Iran as Trump Renews Attack on Regime
[CNBC] Look for an 'almost inevitable cold war' between the US and China, strategist says
[Bloomberg] Trump’s Strategy to Knock Out North Korean Missiles Carries Risk
[Bloomberg] 2018 Feels Ripe for ‘Big Unexpected Crisis,’ Eurasia Group Says
[Reuters] German parties at odds ahead of coalition talks
[WSJ] In Cities With Low Unemployment, Wages Finally Start to Get Bigger
[WSJ] Trump Backs Protesters in Iran
[FT] Central bank support set to be game-changer for bonds
[FT] Eurozone manufacturing sector growth hits record
[Reuters] Oil posts strongest year opening since 2014; Iran unrest pushes up crude
[Bloomberg] Global Manufacturers Strain to Keep Up With Faster Economy
[Reuters] Asian factories end 2017 on mixed note; central banks seen hiking slowly
[CNBC] As US budget fight looms, Republicans are suddenly worried about spending
[CNBC] Home prices are set to soar in 2018
[Bloomberg] Australian Home Prices Fell in December in Bellwether for 2018
[Bloomberg] Hundreds Detained in Iran as Trump Renews Attack on Regime
[CNBC] Look for an 'almost inevitable cold war' between the US and China, strategist says
[Bloomberg] Trump’s Strategy to Knock Out North Korean Missiles Carries Risk
[Bloomberg] 2018 Feels Ripe for ‘Big Unexpected Crisis,’ Eurasia Group Says
[Reuters] German parties at odds ahead of coalition talks
[WSJ] In Cities With Low Unemployment, Wages Finally Start to Get Bigger
[WSJ] Trump Backs Protesters in Iran
[FT] Central bank support set to be game-changer for bonds
[FT] Eurozone manufacturing sector growth hits record
Monday Evening Links
[Bloomberg] Asia Stocks Face Quiet Start to 2018, Yen Weakens: Markets Wrap
[Reuters] Dollar starts new year in doldrums, Asia stocks in good cheer
[Bloomberg] Emerging Markets Start 2018 With Politics Center Stage
[Bloomberg] The Biggest Threats to China’s Economy in 2018
[WSJ] Just Four Large Countries Have a Higher Debt Burden Than the U.S.
[Reuters] Dollar starts new year in doldrums, Asia stocks in good cheer
[Bloomberg] Emerging Markets Start 2018 With Politics Center Stage
[Bloomberg] The Biggest Threats to China’s Economy in 2018
[WSJ] Just Four Large Countries Have a Higher Debt Burden Than the U.S.
Sunday, December 31, 2017
Monday's News Links
[Reuters] As U.S. budget fight looms, Republicans flip their fiscal script
[CNBC] Here are three key global themes set to dominate markets in 2018
[Bloomberg] How China Will Shake Up the Oil Futures Market
[AP] Kim Jong Un declares North Korea is a nuclear power, says 'button' is on his desk
[Reuters] Ten killed in Iran protests and security forces repulse attacks: state TV
[NYT] Democrats in High-Tax States Plot to Blunt Impact of New Tax Law
[CNBC] Here are three key global themes set to dominate markets in 2018
[Bloomberg] How China Will Shake Up the Oil Futures Market
[AP] Kim Jong Un declares North Korea is a nuclear power, says 'button' is on his desk
[Reuters] Ten killed in Iran protests and security forces repulse attacks: state TV
[NYT] Democrats in High-Tax States Plot to Blunt Impact of New Tax Law
Saturday, December 30, 2017
Sunday's News Links
[Bloomberg] China Factory Momentum Remains Intact Amid Smog and Debt Curbs
[Bloomberg] China December official services PMI edges up to 55
[Bloomberg] Trump Says World Watching Iran as Hardliners Hold Counterrallies
[WSJ] China’s HNA Group Uses More Valuable Assets to Borrow Money
[WSJ] Iranian Government Warns Protesters ‘Must Pay the Price for Their Actions’
[FT] Forecasting the world in 2018
[Bloomberg] China December official services PMI edges up to 55
[Bloomberg] Trump Says World Watching Iran as Hardliners Hold Counterrallies
[WSJ] China’s HNA Group Uses More Valuable Assets to Borrow Money
[WSJ] Iranian Government Warns Protesters ‘Must Pay the Price for Their Actions’
[FT] Forecasting the world in 2018
Saturday's News Links
[Reuters] ECB's Coeure sees 'reasonable chance' bond buys will not be extended
[Bloomberg] Goldman Sees Crypto, Credit Shadowing Robust 2018 U.S. Economy
[Reuters] China to cap overseas withdrawals using domestic bank cards
[NYT] Why Are Mutual Fund Fees So High? This Billionaire Knows
[AP] New economic protests in Tehran challenge Iran’s government
[Bloomberg] Goldman Sees Crypto, Credit Shadowing Robust 2018 U.S. Economy
[Reuters] China to cap overseas withdrawals using domestic bank cards
[NYT] Why Are Mutual Fund Fees So High? This Billionaire Knows
[AP] New economic protests in Tehran challenge Iran’s government
Friday, December 29, 2017
Weekly Commentary: A Phenomenal Year
2017 was phenomenal in so many ways. The year will be remembered for a tumultuous first year of the Trump Presidency, the passage of major tax legislation and seemingly endless stock market records. It was a year of synchronized global growth and stock bull markets, along with record low market volatility. It was the year of parabolic moves in bitcoin and cryptocurrencies. “Blockchain the Future of Money.”
Yet none of the above is worthy of Story of the Year. For that, I turn to this era’s Masters of the Universe: global central bankers. 2017 was a fateful year of central bank failure to tighten financial conditions in the face of bubbling markets and economies. Fed funds ended the year below 1.5%, in what must be history’s most dovish “tightening” cycle. The Draghi ECB stuck to its massive open-ended QE program, though reluctantly reducing the scope of monthly purchases. In Japan, the Kuroda BOJ held the “money” spigot wide open despite surging asset markets and a 2.7% unemployment rate. As for China, the People’s Bank of China was an active accomplice in history’s greatest Credit expansion.
Loose global financial conditions fed and were fed by record Chinese Credit growth. After almost bursting in early 2016, the further energized Chinese Bubble attained overdrive “terminal” status in 2017. Importantly, another year passed with Beijing unwilling to forcefully rein in rampant excess. The situation becomes only more perilous, with global markets increasingly confident that Chinese officials dare not risk bursting the Bubble. Powerful Chinese and global Bubbles were instrumental in stoking Bubble excess throughout the EM “periphery.” In the face of mounting fragilities, “money” inundated the emerging markets. What is celebrated in 2017 will later be recognized as dysfunctional.
Coming into 2017, there was some concern for a tightening of financial conditions. U.S. unemployment was below 5% and consumer price inflation was on the rise. A U.S. tightening cycle was expected to support the dollar, while a strong greenback risked pressuring currencies and liquidity conditions in China and EM generally. As the year progressed, however, it became apparent that seemingly nothing would budge the Fed from their commitment to an ultra-dovish gradualist approach to rate “normalization”.
And with virtually all assets experiencing price inflation at multiples of financing costs (short-term rates and market yields), financial conditions only loosened further as the Yellen Fed hesitantly took three little baby-steps (boosting rates a mere 75 bps). A 70 bps 2017 jump in the two-year did not inhibit a four bps decline in 10-year Treasury yields. Of course, the flattening yield curve was interpreted as a warning against further Fed “tightening”. In reality, historically low global bond yields were an indication of extraordinarily loose financial conditions, along with perceptions that central bankers would ensure finance remained loose for years to come.
December 19 – Business Insider (Camilla Hodgson): “Corporate borrowing helped push global debt issuance to a record $6.8 trillion this year, according to… Dealogic. Borrowing by corporates — which accounted for more than 55% of the $6.8 trillion — and governments reached a new high in 2017… ’The debt issuance is pretty much off the charts everywhere,’ AJ Murphey, head of capital markets at Bank of America Merrill Lynch told the Financial Times. ‘Latin America had a good year. Asia had a great year. And yet we see money coming from other regions into the US and European markets,’ he said.”
December 20 – ETF.com (Drew Voros): “As of last Thursday, the amount of new assets flowing into U.S.-listed ETFs totaled $466 billion, putting the milestone of $500 billion in new assets for the year closer into view, which would be almost double the previous annual record of new ETF assets. What’s more, combined with performance, the asset inflows grew the ETF market to $3.4 trillion—almost $1 trillion bigger than where the market sat a short year ago.”
December 28 – Bloomberg (Patrick Clark): “Your home may not have made the same gains as stocks or bitcoin, but it still was a robust year for the U.S. housing market. The value of the entire U.S. housing stock increased by 6.5% -- or $2 trillion -- in 2017, according to… Zillow. All homes in the country are now worth a cumulative $31.8 trillion. The gain in home values was the fastest since 2013…”
December 26 – Bloomberg (Tom Metcalf and Jack Witzig): “It’s pretty simple: in three decades since the Cboe Volatility Index was invented, 2017 will go down as the least exciting year for stocks on record. There are three trading days left and the VIX’s average level has been 11.11, about 10% lower than the next-closest year. It’s tempting to say nobody thinks it will last, but that would be to ignore the walls of money that remain stacked up in bets that it will. Going just by the sliver represented by listed securities, about $2.4 billion is in the short volatility trade as of this month, the most on record. Hundreds of billions more are betting against beta in things like volatility futures.”
When the Fed initially adopted crisis-period QE to reliquefy financial markets, they were clearly on a slippery slope. After the Fed in 2011 revealed its “exit strategy,” I titled a CBB “No Exit.” What I did not anticipate was that the Fed would in a few years again more than double balance sheet holdings to $4.5 TN. In 2012, with Draghi proclaiming “whatever it takes,” I wrote that it was a “pretty good wallop of the can down the road.” I never thought it possible that the Germans would tolerate year-after-year of massive ECB monetary inflation. Yet when I ponder a historic failure of central bankers to tighten conditions in 2017, my thoughts return to chairman Bernanke’s 2013 “the Fed is prepared to push back against a tightening of financial conditions.”
The epic untold story of 2017: markets achieved high conviction that the Fed and the cadre of global central bankers would not tolerate even a modest tightening of financial conditions. No amount of stock market speculation would provoke tightening measures. Even as equities markets overheated, chair Yellen unequivocally communicated the Fed’s lack of concern. Greenspan’s old “asymmetrical” on steroids. To be sure, markets harbor no doubt that a 20% S&P500 decline would spark a robust Federal Reserve crisis response.
As such, booming equities put no pressure on bond prices. Market concern for a destabilizing fixed-income deleveraged episode disappeared. Indeed, the greater the risk asset Bubble the more certain the bond market became of an inevitable redeployment of QE measures. And with bond markets well under control and confidence in central bank market liquidity backstops running high, why wouldn’t the cost of market insurance sink to record lows? Writing flood insurance during a drought. Moreover, with cheap insurance so readily available, why not push the risk-taking envelope? Build lavishly along the beautiful coastline.
Throughout the markets, speculative forces became only more deeply entrenched and powerfully self-reinforcing. It was a veritable tsunami of “money” into passive equity index, corporate bond and EM ETFs. Why not? Markets are going up, while active managers might adjust to the risk backdrop and underperform index products. It was a year where it never seemed so patently rational to uphold faith in central banking and “invest” in “the market”.
Markets are dominated by Greed and Fear. When central banks banish the latter, one’s left with an overabundance of the former. I chuckle these days when thinking back to the late-eighties as “the decade of greed.” And when it comes to The Year of Greed, most would think of “still dancing” 2007 or “dotcom” 1999. But in terms of global excess across various asset classes, ’99 or ’07 Can’t Hold a Candle to 2017. Booming equities, strong returns in fixed income and still about $10 TN of global sovereign debt sporting negative yields. Phenomenal.
The S&P500 returned 21.8% (price and dividends). The DJIA surged 25.1%. The Nasdaq100 gained 31.5% and the Nasdaq Composite rose 28.2%. Facebook rose 53.4%, Amazon.com 56.0%, Apple 46.1%, Netflix 55.1%, Google/Alphabet 32.9% and Microsoft 37.7%. Tesla jumped 45.7%, Micron Technology 87.6%, and Nvidia 81.3%. The Nasdaq Computer Index gained 38.8%. The Semiconductors (SOX) rose 38.2%, and the Biotechs (BTK) jumped 37.2%. The Homebuilders (XHB) gained 32.7%. The Broker/Dealers (XBD) gained 29.2% and the Banks (BKX) rose 16.3%. Bank of America gained 33.6%, Citigroup 25.1% and JPMorgan 23.9%.
Globally, Japan’s Nikkei gained 19.1%. Asia bubbled. Major indices were up 21.8% in South Korea, 27.9% in India, 36% in Hong Kong, 20% in Indonesia, 48% in Vietnam, 18% in Singapore, 22% in China (CSI 300), 15% in Taiwan and 14% in Thailand. In Europe, Germany’s DAX gained 12.5%, Italy’s MIB 13.6%, and Franc’s CAC 40 9.3%. Notable EM gains included Turkey’s 47.6%, Poland’s 23.2%, Hungary’s 23.0%, Brazil’s 26.9%, Chile’s 34.0% and Argentina’s 77.7%,
This has been going on for so long now that it’s all accepted as normal. Three decades of financial innovation and evolution have witnessed virtually the entire world coming to be dominated by marketable finance. In the U.S., Total Securities (Debt and Equities) are approaching $90 TN, or about 450% of GDP. This compares to cycle peaks 379% in 2007 and 359% in early-2000. And the greater the inflation of this historic financial balloon, the more convinced the markets become that central bankers won’t dare take the punchbowl away. It was as if 2017 was the year that central banks convinced the markets the party doesn’t have to end. Let the good times roll. Roll the dice.
Not to be a party pooper, but it’s not a good idea to rouse a crowd of drunks with the idea that plentiful “hair of the dog” will be available to nurse through any potential hangover.
I miss former ECB President Jean-Claude Trichet’s “we never pre-commit.” Especially in a world dominated by marketable finance, central bank pre-commitments will be embedded in market perceptions, expectations and asset prices. Yet the world’s central bankers made the most outlandish pre-commitment ever – they committed to years of ultra-low rates, long-term yield control, liquidity abundance, and unwavering market backstops. Recessions and bear markets will no longer be tolerated. “Whatever it takes.” “Push back against a tightening of financial conditions.” Justify it all by fixating on (slightly) “below target” aggregate consumer price inflation – in a maladjusted globalized economic structure replete with extreme inequities and overcapacities.
Bull markets forever. Capitalism without downturns. Enlightened monetary management coupled with stupendous technological innovation. It all came together to ensure a Phenomenal 2017. Enjoy, but don’t for a minute allow yourself to be convinced it’s sustainable. The underlying finance is phenomenally unsound. Crazy late-cycle excess. Inflationist central bankers have actively promoted the greatest inflation and mispricing of financial assets in human history. Notions of endless cheap debt have manifested Wealth Illusion of unparalleled global dimensions.
Whether in U.S. equities, European fixed-income or Chinese apartment prices, Bubble psychology this deeply embedded is resolved only through pain, dislocation and crisis. I never bought into the comparisons of 2008 to 1929 - nor the “great recession” to the Great Depression. 2008 was for the most part a crisis in private Credit, with government debt and central bank Credit (fatefully) unscathed. In contrast, the bursting of the super-Bubble in 1929 unleashed a global systemic crisis of confidence in finance and policymaking more generally. In important respects, 2017 reminds me of reckless “caution to the wind” late-twenties excess in the face of darkening storm clouds both domestic and global.
And for those interested, please mark your calendars for January 18th, 4:30 pm Eastern (2:30 pm Mountain) for the Tactical Short Q4 Conference Call. Call details to follow.
For the Week:
The S&P500 declined 0.4% (2017 gain 19.4%), and the Dow slipped 0.1% (up 25.1%). The Utilities recovered 0.3% (up 9.0%). The Banks fell 1.1% (up 16.3%), and the Broker/Dealers declined 0.8% (up 29.2%). The Transports declined 0.6% (up 17.3%). The S&P 400 Midcaps slipped 0.2% (up 14.5%), and the small cap Russell 2000 declined 0.5% (up 13.1%). The Nasdaq100 fell 1.1% (up 31.5%).The Semiconductors dropped 1.4% (up 38.2%). The Biotechs added 0.5% (up 37.3%). With bullion surging $28, the HUI gold index gained 1.8% (up 5.5%).
Three-month Treasury bill rates ended the week at 135 bps. Two-year government yields dipped about a basis point to 1.89% (up 70bps y-t-d). Five-year T-note yields declined four bps to 2.21% (up 28bps). Ten-year Treasury yields fell eight bps to 2.41% (down 4bps). Long bond yields dropped nine bps to 2.74% (down 33bps).
Greek 10-year yields were little changed at 4.07% (down 295bps in 2017). Ten-year Portuguese yields jumped 11 bps to 1.94% (down 180bps). Italian 10-year yields rose 10 bps to 2.02% (up 20bps). Spain's 10-year yields gained 10 bps to 1.57% (up 19bps). German bund yields added a basis point to 0.43% (up 22bps). French yields rose four bps to 0.79% (up 11bps). The French to German 10-year bond spread widened three to 36 bps. U.K. 10-year gilt yields declined five bps to 1.19% (down 5bps). U.K.'s FTSE equities gained 1.3% (up 7.6%).
Japan's Nikkei 225 equities index declined 0.6% (up 19.1% y-t-d). Japanese 10-year "JGB" yields were unchanged at 0.048% (up 1bp). France's CAC40 fell 1.0% (up 9.3%). The German DAX equities index dropped 1.2% (up 12.5%). Spain's IBEX 35 equities index lost 1.4% (up 7.4%). Italy's FTSE MIB index dropped 1.6% (up 13.6%). EM markets were mostly higher. Brazil's Bovespa index rose 1.6% (up 26.8%), and Mexico's Bolsa jumped 2.0% (up 8.1%). South Korea's Kospi index gained 1.1% (up 21.8%). India’s Sensex equities index added 0.3% (up 27.9%). China’s Shanghai Exchange increased 0.3% (up 6.6%). Turkey's Borsa Istanbul National 100 index surged 3.8% (up 47.6%). Russia's MICEX equities index gained 0.3% (down 5.5%).
Junk bond mutual funds saw outflows of $240 million (from Lipper).
Freddie Mac 30-year fixed mortgage rates increased five bps to 3.99% (down 33bps y-o-y). Fifteen-year rates gained six bps to 3.44% (down 11bps). Five-year hybrid ARM rates rose eight bps to 3.47% (up 17bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates unchanged at 4.15% (down 22bps).
Federal Reserve Credit last week expanded $9.4bn to $4.418 TN. Over the past year, Fed Credit declined $9.5bn. Fed Credit inflated $1.607 TN, or 57%, over the past 268 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt dropped $10.7bn last week to $3.362 TN. "Custody holdings" were up $182bn y-o-y, or 5.7%.
M2 (narrow) "money" supply slipped $2.9bn last week to $13.863 TN. "Narrow money" expanded $686bn, or 5.2%, over the past year. For the week, Currency increased $1.8bn. Total Checkable Deposits dropped $56.4bn, while Savings Deposits jumped $50.4bn. Small Time Deposits were little changed. Retail Money Funds were about unchanged.
Total money market fund assets jumped $9.4bn to $2.842 TN. Money Funds gained $113bn y-o-y, or 4.1%.
Total Commercial Paper added $1.0bn to a 19-month high $1.080 TN. CP gained $93bn y-o-y, or 9.4%.
Currency Watch:
The U.S. dollar index declined 1.3% to 92.124 (down 10.0% y-t-d). For the week on the upside, the South African rand increased 1.9%, the Swedish krona 1.6%, the Swiss franc 1.4%, the Norwegian krone 1.4%, the Australian dollar 1.3%, the Canadian dollar 1.3%, the euro 1.2%, the British pound 1.1%, the New Zealand dollar 1.1%, the Brazilian real 0.9%, the South Korean won 0.9%, the Singapore dollar 0.6%, the Japanese yen 0.5% and the Mexican peso 0.5%. The Chinese renminbi gained 1.08% versus the dollar this week (up 6.73% y-t-d).
Commodities Watch:
The Goldman Sachs Commodities Index surged 3.1% (up 11.0% y-t-d). Spot Gold gained 2.2% to $1,303 (up 13.1%). Silver surged 4.3% to $17.145 (up 7.3%). Crude jumped $1.95 to $60.42 (up 12%). Gasoline advanced 1.9% (up 8%), and Natural Gas surged 10.7% (down 21%). Copper added 1.9% (up 32%). Wheat increased 0.5% (up 5%). Corn slipped 0.4% (unchanged).
Trump Administration Watch:
December 24 – Wall Street Journal (Kristina Peterson): “While many Republicans celebrated the recent passage of their tax overhaul, some worry the party’s year in control of Congress and the White House has done little to rein in federal spending. Fiscal restraint has been a watchword for the party for decades. But various actions this year, including the tax rewrite, are expected to add to the federal deficit, with spending likely to increase in 2018. ‘Most of the drive upward has not been on the Democratic side, which is disheartening,’ Sen. Bob Corker (R., Tenn.) said. ‘It’s been on the Republican side.’ The new tax law, which President Donald Trump signed Friday, will add just under $1.5 trillion to the federal budget deficit over 10 years, according to the nonpartisan Congressional Budget Office.”
December 28 – Reuters (David Brunnstrom and Susan Heavey): “U.S. President Donald Trump… said he had ‘been soft’ on China on trade issues and said he was not happy that China had allowed oil shipments to go into North Korea. ‘I have been soft on China because the only thing more important to me than trade is war,’ Trump said… Earlier on Thursday, Trump said on Twitter that China has been ‘caught’ allowing oil into North Korea and said such moves would prevent “a friendly solution” to the crisis over Pyongyang’s nuclear program.”
China Watch:
December 28 – Reuters (Li Zheng): “China’s banking regulator will further tighten the screws on the trust industry next year, two sources with direct knowledge of the matter said, as Beijing steps up a campaign to clampdown on the country’s shadow banking sector. Trusts have been a key part of China’s shadow banking sector, which helps channel deposits into risky investments via products often designed to dodge capital or investment regulations.”
December 28 – Bloomberg: “The last day of a bitter year for China’s non-bank borrowers is proving to be especially painful: they’re now paying a record premium for short-term funds. As interbank lending rates climbed on Friday due to banks hoarding cash for year-end regulatory checks, the increase was especially significant for non-bank financial institutions, such as securities and insurance companies. A measure of what they’re paying for seven-day funds relative to costs for big Chinese banks surged to the highest level ever. The funding cost gap is reflected in the spread between China’s seven-day repurchase rate fixing and the weighted average rate, which expanded to almost 3 percentage points…”
December 27 – Bloomberg: “Recent economic data offer a ‘warning for 2018’ now that Chinese leaders are less motivated to prop up growth in the wake of their Congress in October, according to the China Beige Book. ‘Incentives to ensure the economy was growing smartly at the time of the Communist Party Congress do not apply as next year wears on,’ CBB president Leland Miller and chief economist Derek Scissors said… Fourth-quarter results already show some signs of a transition to slower growth, according to a private survey by CBB International, which collects anecdotal accounts similar to those in the Federal Reserve’s Beige Book.”
December 26 – Financial Times (Emily Feng): “Felix Tao still remembers how thrilled he was to receive one of his biggest orders: a Rmb1.6m ($244,000) deal to supply phone parts to Le Mobile, the mobile phone subsidiary of tech conglomerate LeEco. Almost two years later, however, the young supplier from the coastal province of Shandong says he is still waiting to be paid… The unravelling of LeEco, the tech group that once aimed to be the Tesla and Netflix of China, has devolved into a chaotic scramble for cash, providing a case study case into the shakiness of the country’s nascent corporate bankruptcy regime. This has sweeping implications for the country’s ability to allocate and manage debt. A dysfunctional bankruptcy system has allowed China’s insolvent businesses to continue with little pressure to restructure. It has also discouraged investors and banks from properly pricing credit risk into their lending, which spells trouble for a country with $18tn in corporate debt, equal to 169% of gross domestic product..”
December 24 – Bloomberg: “A Chinese central bank official said China should allow local governments to go bankrupt to help rein in regional authorities’ excessive borrowing. A case like the bankruptcy of Detroit would convince investors that the central government is really determined to dispel beliefs of an implicit guarantee for regional authorities, Xu Zhong, head of research bureau at the People’s Bank of China, wrote... Just a couple of days ago, China’s finance ministry pledged to break the ‘illusion’ that Beijing would bail out local governments’ hidden debt. Their calls for limiting local borrowings are in line with central government’s financial policy for 2018. President Xi Jinping said earlier this month that a priority for next year is to ‘effectively’ control leverage and prevent major risks.”
December 26 – Financial Times (Gabriel Wildau and Yizhen Jia): “Chinese stockholders are ramping up borrowing against shares, driving revenue for securities houses but creating risk of a chain reaction in the event of a sharp market downturn. Shareholders in 317 Shanghai and Shenzhen-listed companies had pledged shares worth at least 40% of those companies by December 18, up from 224 companies on the same date a year earlier, according to Wind Info. Share-pledging is especially common for small and mid-cap companies, where a single shareholder often owns a large stake. Controlling shareholders sometimes reinvest the proceeds into company projects or buy additional company shares on the secondary market to boost the share price. ‘Companies use ‘market-value management’ to push up the share price, pledge the shares to brokers and then take the money and run,’ said Hao Hong, head of research at Bocom International in Hong Kong.”
December 27 – Financial Times (Emma Dunkley): “A record number of companies have listed in mainland China this year as the market prepares to open the floodgates to foreign investment in the next six months. More than 400 companies floated in 2017 on the Shenzhen and Shanghai stock exchanges to reach the milestone, according to data from EY. A flurry of small and medium-sized enterprises have listed in mainland China this year, assisted by a streamlined process as exchanges have attempted to work through a backlog of applications, EY said.”
Federal Reserve Watch:
December 28 – CNBC (Rebecca Ungarino): “As equity markets in the U.S. look to cap off a stunning year full of record winning streaks, all-time highs and strong returns across multiple asset classes, investors are left wondering: What will 2018 hold? The ‘single most important’ trade for the market next year will lie not in the stock market, but rather in Fed funds futures, said Boris Schlossberg, managing director of foreign exchange strategy at BK Asset Management. The strategist told CNBC's ‘Trading Nation’ …that the apparent divergence between the Federal Reserve's expectations for interest rates' direction and the market's expectations for its tightening path will be of the utmost importance as 2018 unfolds.”
U.S. Bubble Watch:
December 28 – Bloomberg (Alexandre Tanzi): “The total value of all homes in the United States rose 6.5% in 2017 to $31.8 trillion, according to Zillow. Renters paid a record $485.6 billion this year. The Los Angeles and New York markets each account for more than 8% of the overall value of U.S. housing stock, worth $2.7 trillion and $2.6 trillion, respectively. The San Francisco market follows at $1.4 trillion and the Washington D.C. housing market is valued at just under $1 trillion.”
December 28 – Bloomberg (Katia Dmitrieva): “The U.S. merchandise trade deficit reached a more than two-year high in November, while inventories at wholesalers and retailers increased, according to… the Commerce Department. Goods-trade gap grew to $69.7b (est. $67.9b), the widest since March 2015… Exports of goods rose 3% to $133.7b on increased shipments of automobiles and consumer and capital goods Imports increased 2.7% to a record $203.4b.”
December 28 – Wall Street Journal (Kenan Machado and Saumya Vaishampayan): “Being passive can leave you with too much of a good thing. Investors who loaded up on U.S. and Asian stock-index funds might be surprised to learn just what they own now: technology stocks—a lot of them. Led by Apple Inc., Facebook Inc. and their peers, the weighing of technology stocks in the S&P 500 index has climbed to 23.8% as of Dec. 26, from 20.8% at the end of last year, according to S&P Dow Jones Indices. Three years ago, tech stocks had a 19.7% weighting in the widely used U.S. stock market benchmark, which is currently tracked by funds with more than $2 trillion in assets.”
December 26 – Bloomberg (Katia Dmitrieva): “Housing prices in 20 U.S. cities accelerated more than forecast in October, rising by the most since mid-2014 as lean inventories continued to prop up values amid steady demand, S&P CoreLogic Case-Shiller data showed… 20-city property values index increased 6.4% y/y (est. 6.3%), the biggest gain since July 2014. National home-price gauge rose 6.2% y/y, the most since June 2014… All 20 cities in the index showed year-over-year gains, led by a 12.7% increase in Seattle and a 10.2% advance in Las Vegas.”
Yet none of the above is worthy of Story of the Year. For that, I turn to this era’s Masters of the Universe: global central bankers. 2017 was a fateful year of central bank failure to tighten financial conditions in the face of bubbling markets and economies. Fed funds ended the year below 1.5%, in what must be history’s most dovish “tightening” cycle. The Draghi ECB stuck to its massive open-ended QE program, though reluctantly reducing the scope of monthly purchases. In Japan, the Kuroda BOJ held the “money” spigot wide open despite surging asset markets and a 2.7% unemployment rate. As for China, the People’s Bank of China was an active accomplice in history’s greatest Credit expansion.
Loose global financial conditions fed and were fed by record Chinese Credit growth. After almost bursting in early 2016, the further energized Chinese Bubble attained overdrive “terminal” status in 2017. Importantly, another year passed with Beijing unwilling to forcefully rein in rampant excess. The situation becomes only more perilous, with global markets increasingly confident that Chinese officials dare not risk bursting the Bubble. Powerful Chinese and global Bubbles were instrumental in stoking Bubble excess throughout the EM “periphery.” In the face of mounting fragilities, “money” inundated the emerging markets. What is celebrated in 2017 will later be recognized as dysfunctional.
Coming into 2017, there was some concern for a tightening of financial conditions. U.S. unemployment was below 5% and consumer price inflation was on the rise. A U.S. tightening cycle was expected to support the dollar, while a strong greenback risked pressuring currencies and liquidity conditions in China and EM generally. As the year progressed, however, it became apparent that seemingly nothing would budge the Fed from their commitment to an ultra-dovish gradualist approach to rate “normalization”.
And with virtually all assets experiencing price inflation at multiples of financing costs (short-term rates and market yields), financial conditions only loosened further as the Yellen Fed hesitantly took three little baby-steps (boosting rates a mere 75 bps). A 70 bps 2017 jump in the two-year did not inhibit a four bps decline in 10-year Treasury yields. Of course, the flattening yield curve was interpreted as a warning against further Fed “tightening”. In reality, historically low global bond yields were an indication of extraordinarily loose financial conditions, along with perceptions that central bankers would ensure finance remained loose for years to come.
December 19 – Business Insider (Camilla Hodgson): “Corporate borrowing helped push global debt issuance to a record $6.8 trillion this year, according to… Dealogic. Borrowing by corporates — which accounted for more than 55% of the $6.8 trillion — and governments reached a new high in 2017… ’The debt issuance is pretty much off the charts everywhere,’ AJ Murphey, head of capital markets at Bank of America Merrill Lynch told the Financial Times. ‘Latin America had a good year. Asia had a great year. And yet we see money coming from other regions into the US and European markets,’ he said.”
December 20 – ETF.com (Drew Voros): “As of last Thursday, the amount of new assets flowing into U.S.-listed ETFs totaled $466 billion, putting the milestone of $500 billion in new assets for the year closer into view, which would be almost double the previous annual record of new ETF assets. What’s more, combined with performance, the asset inflows grew the ETF market to $3.4 trillion—almost $1 trillion bigger than where the market sat a short year ago.”
December 28 – Bloomberg (Patrick Clark): “Your home may not have made the same gains as stocks or bitcoin, but it still was a robust year for the U.S. housing market. The value of the entire U.S. housing stock increased by 6.5% -- or $2 trillion -- in 2017, according to… Zillow. All homes in the country are now worth a cumulative $31.8 trillion. The gain in home values was the fastest since 2013…”
December 26 – Bloomberg (Tom Metcalf and Jack Witzig): “It’s pretty simple: in three decades since the Cboe Volatility Index was invented, 2017 will go down as the least exciting year for stocks on record. There are three trading days left and the VIX’s average level has been 11.11, about 10% lower than the next-closest year. It’s tempting to say nobody thinks it will last, but that would be to ignore the walls of money that remain stacked up in bets that it will. Going just by the sliver represented by listed securities, about $2.4 billion is in the short volatility trade as of this month, the most on record. Hundreds of billions more are betting against beta in things like volatility futures.”
When the Fed initially adopted crisis-period QE to reliquefy financial markets, they were clearly on a slippery slope. After the Fed in 2011 revealed its “exit strategy,” I titled a CBB “No Exit.” What I did not anticipate was that the Fed would in a few years again more than double balance sheet holdings to $4.5 TN. In 2012, with Draghi proclaiming “whatever it takes,” I wrote that it was a “pretty good wallop of the can down the road.” I never thought it possible that the Germans would tolerate year-after-year of massive ECB monetary inflation. Yet when I ponder a historic failure of central bankers to tighten conditions in 2017, my thoughts return to chairman Bernanke’s 2013 “the Fed is prepared to push back against a tightening of financial conditions.”
The epic untold story of 2017: markets achieved high conviction that the Fed and the cadre of global central bankers would not tolerate even a modest tightening of financial conditions. No amount of stock market speculation would provoke tightening measures. Even as equities markets overheated, chair Yellen unequivocally communicated the Fed’s lack of concern. Greenspan’s old “asymmetrical” on steroids. To be sure, markets harbor no doubt that a 20% S&P500 decline would spark a robust Federal Reserve crisis response.
As such, booming equities put no pressure on bond prices. Market concern for a destabilizing fixed-income deleveraged episode disappeared. Indeed, the greater the risk asset Bubble the more certain the bond market became of an inevitable redeployment of QE measures. And with bond markets well under control and confidence in central bank market liquidity backstops running high, why wouldn’t the cost of market insurance sink to record lows? Writing flood insurance during a drought. Moreover, with cheap insurance so readily available, why not push the risk-taking envelope? Build lavishly along the beautiful coastline.
Throughout the markets, speculative forces became only more deeply entrenched and powerfully self-reinforcing. It was a veritable tsunami of “money” into passive equity index, corporate bond and EM ETFs. Why not? Markets are going up, while active managers might adjust to the risk backdrop and underperform index products. It was a year where it never seemed so patently rational to uphold faith in central banking and “invest” in “the market”.
Markets are dominated by Greed and Fear. When central banks banish the latter, one’s left with an overabundance of the former. I chuckle these days when thinking back to the late-eighties as “the decade of greed.” And when it comes to The Year of Greed, most would think of “still dancing” 2007 or “dotcom” 1999. But in terms of global excess across various asset classes, ’99 or ’07 Can’t Hold a Candle to 2017. Booming equities, strong returns in fixed income and still about $10 TN of global sovereign debt sporting negative yields. Phenomenal.
The S&P500 returned 21.8% (price and dividends). The DJIA surged 25.1%. The Nasdaq100 gained 31.5% and the Nasdaq Composite rose 28.2%. Facebook rose 53.4%, Amazon.com 56.0%, Apple 46.1%, Netflix 55.1%, Google/Alphabet 32.9% and Microsoft 37.7%. Tesla jumped 45.7%, Micron Technology 87.6%, and Nvidia 81.3%. The Nasdaq Computer Index gained 38.8%. The Semiconductors (SOX) rose 38.2%, and the Biotechs (BTK) jumped 37.2%. The Homebuilders (XHB) gained 32.7%. The Broker/Dealers (XBD) gained 29.2% and the Banks (BKX) rose 16.3%. Bank of America gained 33.6%, Citigroup 25.1% and JPMorgan 23.9%.
Globally, Japan’s Nikkei gained 19.1%. Asia bubbled. Major indices were up 21.8% in South Korea, 27.9% in India, 36% in Hong Kong, 20% in Indonesia, 48% in Vietnam, 18% in Singapore, 22% in China (CSI 300), 15% in Taiwan and 14% in Thailand. In Europe, Germany’s DAX gained 12.5%, Italy’s MIB 13.6%, and Franc’s CAC 40 9.3%. Notable EM gains included Turkey’s 47.6%, Poland’s 23.2%, Hungary’s 23.0%, Brazil’s 26.9%, Chile’s 34.0% and Argentina’s 77.7%,
This has been going on for so long now that it’s all accepted as normal. Three decades of financial innovation and evolution have witnessed virtually the entire world coming to be dominated by marketable finance. In the U.S., Total Securities (Debt and Equities) are approaching $90 TN, or about 450% of GDP. This compares to cycle peaks 379% in 2007 and 359% in early-2000. And the greater the inflation of this historic financial balloon, the more convinced the markets become that central bankers won’t dare take the punchbowl away. It was as if 2017 was the year that central banks convinced the markets the party doesn’t have to end. Let the good times roll. Roll the dice.
Not to be a party pooper, but it’s not a good idea to rouse a crowd of drunks with the idea that plentiful “hair of the dog” will be available to nurse through any potential hangover.
I miss former ECB President Jean-Claude Trichet’s “we never pre-commit.” Especially in a world dominated by marketable finance, central bank pre-commitments will be embedded in market perceptions, expectations and asset prices. Yet the world’s central bankers made the most outlandish pre-commitment ever – they committed to years of ultra-low rates, long-term yield control, liquidity abundance, and unwavering market backstops. Recessions and bear markets will no longer be tolerated. “Whatever it takes.” “Push back against a tightening of financial conditions.” Justify it all by fixating on (slightly) “below target” aggregate consumer price inflation – in a maladjusted globalized economic structure replete with extreme inequities and overcapacities.
Bull markets forever. Capitalism without downturns. Enlightened monetary management coupled with stupendous technological innovation. It all came together to ensure a Phenomenal 2017. Enjoy, but don’t for a minute allow yourself to be convinced it’s sustainable. The underlying finance is phenomenally unsound. Crazy late-cycle excess. Inflationist central bankers have actively promoted the greatest inflation and mispricing of financial assets in human history. Notions of endless cheap debt have manifested Wealth Illusion of unparalleled global dimensions.
Whether in U.S. equities, European fixed-income or Chinese apartment prices, Bubble psychology this deeply embedded is resolved only through pain, dislocation and crisis. I never bought into the comparisons of 2008 to 1929 - nor the “great recession” to the Great Depression. 2008 was for the most part a crisis in private Credit, with government debt and central bank Credit (fatefully) unscathed. In contrast, the bursting of the super-Bubble in 1929 unleashed a global systemic crisis of confidence in finance and policymaking more generally. In important respects, 2017 reminds me of reckless “caution to the wind” late-twenties excess in the face of darkening storm clouds both domestic and global.
And for those interested, please mark your calendars for January 18th, 4:30 pm Eastern (2:30 pm Mountain) for the Tactical Short Q4 Conference Call. Call details to follow.
For the Week:
The S&P500 declined 0.4% (2017 gain 19.4%), and the Dow slipped 0.1% (up 25.1%). The Utilities recovered 0.3% (up 9.0%). The Banks fell 1.1% (up 16.3%), and the Broker/Dealers declined 0.8% (up 29.2%). The Transports declined 0.6% (up 17.3%). The S&P 400 Midcaps slipped 0.2% (up 14.5%), and the small cap Russell 2000 declined 0.5% (up 13.1%). The Nasdaq100 fell 1.1% (up 31.5%).The Semiconductors dropped 1.4% (up 38.2%). The Biotechs added 0.5% (up 37.3%). With bullion surging $28, the HUI gold index gained 1.8% (up 5.5%).
Three-month Treasury bill rates ended the week at 135 bps. Two-year government yields dipped about a basis point to 1.89% (up 70bps y-t-d). Five-year T-note yields declined four bps to 2.21% (up 28bps). Ten-year Treasury yields fell eight bps to 2.41% (down 4bps). Long bond yields dropped nine bps to 2.74% (down 33bps).
Greek 10-year yields were little changed at 4.07% (down 295bps in 2017). Ten-year Portuguese yields jumped 11 bps to 1.94% (down 180bps). Italian 10-year yields rose 10 bps to 2.02% (up 20bps). Spain's 10-year yields gained 10 bps to 1.57% (up 19bps). German bund yields added a basis point to 0.43% (up 22bps). French yields rose four bps to 0.79% (up 11bps). The French to German 10-year bond spread widened three to 36 bps. U.K. 10-year gilt yields declined five bps to 1.19% (down 5bps). U.K.'s FTSE equities gained 1.3% (up 7.6%).
Japan's Nikkei 225 equities index declined 0.6% (up 19.1% y-t-d). Japanese 10-year "JGB" yields were unchanged at 0.048% (up 1bp). France's CAC40 fell 1.0% (up 9.3%). The German DAX equities index dropped 1.2% (up 12.5%). Spain's IBEX 35 equities index lost 1.4% (up 7.4%). Italy's FTSE MIB index dropped 1.6% (up 13.6%). EM markets were mostly higher. Brazil's Bovespa index rose 1.6% (up 26.8%), and Mexico's Bolsa jumped 2.0% (up 8.1%). South Korea's Kospi index gained 1.1% (up 21.8%). India’s Sensex equities index added 0.3% (up 27.9%). China’s Shanghai Exchange increased 0.3% (up 6.6%). Turkey's Borsa Istanbul National 100 index surged 3.8% (up 47.6%). Russia's MICEX equities index gained 0.3% (down 5.5%).
Junk bond mutual funds saw outflows of $240 million (from Lipper).
Freddie Mac 30-year fixed mortgage rates increased five bps to 3.99% (down 33bps y-o-y). Fifteen-year rates gained six bps to 3.44% (down 11bps). Five-year hybrid ARM rates rose eight bps to 3.47% (up 17bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates unchanged at 4.15% (down 22bps).
Federal Reserve Credit last week expanded $9.4bn to $4.418 TN. Over the past year, Fed Credit declined $9.5bn. Fed Credit inflated $1.607 TN, or 57%, over the past 268 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt dropped $10.7bn last week to $3.362 TN. "Custody holdings" were up $182bn y-o-y, or 5.7%.
M2 (narrow) "money" supply slipped $2.9bn last week to $13.863 TN. "Narrow money" expanded $686bn, or 5.2%, over the past year. For the week, Currency increased $1.8bn. Total Checkable Deposits dropped $56.4bn, while Savings Deposits jumped $50.4bn. Small Time Deposits were little changed. Retail Money Funds were about unchanged.
Total money market fund assets jumped $9.4bn to $2.842 TN. Money Funds gained $113bn y-o-y, or 4.1%.
Total Commercial Paper added $1.0bn to a 19-month high $1.080 TN. CP gained $93bn y-o-y, or 9.4%.
Currency Watch:
The U.S. dollar index declined 1.3% to 92.124 (down 10.0% y-t-d). For the week on the upside, the South African rand increased 1.9%, the Swedish krona 1.6%, the Swiss franc 1.4%, the Norwegian krone 1.4%, the Australian dollar 1.3%, the Canadian dollar 1.3%, the euro 1.2%, the British pound 1.1%, the New Zealand dollar 1.1%, the Brazilian real 0.9%, the South Korean won 0.9%, the Singapore dollar 0.6%, the Japanese yen 0.5% and the Mexican peso 0.5%. The Chinese renminbi gained 1.08% versus the dollar this week (up 6.73% y-t-d).
Commodities Watch:
The Goldman Sachs Commodities Index surged 3.1% (up 11.0% y-t-d). Spot Gold gained 2.2% to $1,303 (up 13.1%). Silver surged 4.3% to $17.145 (up 7.3%). Crude jumped $1.95 to $60.42 (up 12%). Gasoline advanced 1.9% (up 8%), and Natural Gas surged 10.7% (down 21%). Copper added 1.9% (up 32%). Wheat increased 0.5% (up 5%). Corn slipped 0.4% (unchanged).
Trump Administration Watch:
December 24 – Wall Street Journal (Kristina Peterson): “While many Republicans celebrated the recent passage of their tax overhaul, some worry the party’s year in control of Congress and the White House has done little to rein in federal spending. Fiscal restraint has been a watchword for the party for decades. But various actions this year, including the tax rewrite, are expected to add to the federal deficit, with spending likely to increase in 2018. ‘Most of the drive upward has not been on the Democratic side, which is disheartening,’ Sen. Bob Corker (R., Tenn.) said. ‘It’s been on the Republican side.’ The new tax law, which President Donald Trump signed Friday, will add just under $1.5 trillion to the federal budget deficit over 10 years, according to the nonpartisan Congressional Budget Office.”
December 28 – Reuters (David Brunnstrom and Susan Heavey): “U.S. President Donald Trump… said he had ‘been soft’ on China on trade issues and said he was not happy that China had allowed oil shipments to go into North Korea. ‘I have been soft on China because the only thing more important to me than trade is war,’ Trump said… Earlier on Thursday, Trump said on Twitter that China has been ‘caught’ allowing oil into North Korea and said such moves would prevent “a friendly solution” to the crisis over Pyongyang’s nuclear program.”
China Watch:
December 28 – Reuters (Li Zheng): “China’s banking regulator will further tighten the screws on the trust industry next year, two sources with direct knowledge of the matter said, as Beijing steps up a campaign to clampdown on the country’s shadow banking sector. Trusts have been a key part of China’s shadow banking sector, which helps channel deposits into risky investments via products often designed to dodge capital or investment regulations.”
December 28 – Bloomberg: “The last day of a bitter year for China’s non-bank borrowers is proving to be especially painful: they’re now paying a record premium for short-term funds. As interbank lending rates climbed on Friday due to banks hoarding cash for year-end regulatory checks, the increase was especially significant for non-bank financial institutions, such as securities and insurance companies. A measure of what they’re paying for seven-day funds relative to costs for big Chinese banks surged to the highest level ever. The funding cost gap is reflected in the spread between China’s seven-day repurchase rate fixing and the weighted average rate, which expanded to almost 3 percentage points…”
December 27 – Bloomberg: “Recent economic data offer a ‘warning for 2018’ now that Chinese leaders are less motivated to prop up growth in the wake of their Congress in October, according to the China Beige Book. ‘Incentives to ensure the economy was growing smartly at the time of the Communist Party Congress do not apply as next year wears on,’ CBB president Leland Miller and chief economist Derek Scissors said… Fourth-quarter results already show some signs of a transition to slower growth, according to a private survey by CBB International, which collects anecdotal accounts similar to those in the Federal Reserve’s Beige Book.”
December 26 – Financial Times (Emily Feng): “Felix Tao still remembers how thrilled he was to receive one of his biggest orders: a Rmb1.6m ($244,000) deal to supply phone parts to Le Mobile, the mobile phone subsidiary of tech conglomerate LeEco. Almost two years later, however, the young supplier from the coastal province of Shandong says he is still waiting to be paid… The unravelling of LeEco, the tech group that once aimed to be the Tesla and Netflix of China, has devolved into a chaotic scramble for cash, providing a case study case into the shakiness of the country’s nascent corporate bankruptcy regime. This has sweeping implications for the country’s ability to allocate and manage debt. A dysfunctional bankruptcy system has allowed China’s insolvent businesses to continue with little pressure to restructure. It has also discouraged investors and banks from properly pricing credit risk into their lending, which spells trouble for a country with $18tn in corporate debt, equal to 169% of gross domestic product..”
December 24 – Bloomberg: “A Chinese central bank official said China should allow local governments to go bankrupt to help rein in regional authorities’ excessive borrowing. A case like the bankruptcy of Detroit would convince investors that the central government is really determined to dispel beliefs of an implicit guarantee for regional authorities, Xu Zhong, head of research bureau at the People’s Bank of China, wrote... Just a couple of days ago, China’s finance ministry pledged to break the ‘illusion’ that Beijing would bail out local governments’ hidden debt. Their calls for limiting local borrowings are in line with central government’s financial policy for 2018. President Xi Jinping said earlier this month that a priority for next year is to ‘effectively’ control leverage and prevent major risks.”
December 26 – Financial Times (Gabriel Wildau and Yizhen Jia): “Chinese stockholders are ramping up borrowing against shares, driving revenue for securities houses but creating risk of a chain reaction in the event of a sharp market downturn. Shareholders in 317 Shanghai and Shenzhen-listed companies had pledged shares worth at least 40% of those companies by December 18, up from 224 companies on the same date a year earlier, according to Wind Info. Share-pledging is especially common for small and mid-cap companies, where a single shareholder often owns a large stake. Controlling shareholders sometimes reinvest the proceeds into company projects or buy additional company shares on the secondary market to boost the share price. ‘Companies use ‘market-value management’ to push up the share price, pledge the shares to brokers and then take the money and run,’ said Hao Hong, head of research at Bocom International in Hong Kong.”
December 27 – Financial Times (Emma Dunkley): “A record number of companies have listed in mainland China this year as the market prepares to open the floodgates to foreign investment in the next six months. More than 400 companies floated in 2017 on the Shenzhen and Shanghai stock exchanges to reach the milestone, according to data from EY. A flurry of small and medium-sized enterprises have listed in mainland China this year, assisted by a streamlined process as exchanges have attempted to work through a backlog of applications, EY said.”
Federal Reserve Watch:
December 28 – CNBC (Rebecca Ungarino): “As equity markets in the U.S. look to cap off a stunning year full of record winning streaks, all-time highs and strong returns across multiple asset classes, investors are left wondering: What will 2018 hold? The ‘single most important’ trade for the market next year will lie not in the stock market, but rather in Fed funds futures, said Boris Schlossberg, managing director of foreign exchange strategy at BK Asset Management. The strategist told CNBC's ‘Trading Nation’ …that the apparent divergence between the Federal Reserve's expectations for interest rates' direction and the market's expectations for its tightening path will be of the utmost importance as 2018 unfolds.”
U.S. Bubble Watch:
December 28 – Bloomberg (Alexandre Tanzi): “The total value of all homes in the United States rose 6.5% in 2017 to $31.8 trillion, according to Zillow. Renters paid a record $485.6 billion this year. The Los Angeles and New York markets each account for more than 8% of the overall value of U.S. housing stock, worth $2.7 trillion and $2.6 trillion, respectively. The San Francisco market follows at $1.4 trillion and the Washington D.C. housing market is valued at just under $1 trillion.”
December 28 – Bloomberg (Katia Dmitrieva): “The U.S. merchandise trade deficit reached a more than two-year high in November, while inventories at wholesalers and retailers increased, according to… the Commerce Department. Goods-trade gap grew to $69.7b (est. $67.9b), the widest since March 2015… Exports of goods rose 3% to $133.7b on increased shipments of automobiles and consumer and capital goods Imports increased 2.7% to a record $203.4b.”
December 28 – Wall Street Journal (Kenan Machado and Saumya Vaishampayan): “Being passive can leave you with too much of a good thing. Investors who loaded up on U.S. and Asian stock-index funds might be surprised to learn just what they own now: technology stocks—a lot of them. Led by Apple Inc., Facebook Inc. and their peers, the weighing of technology stocks in the S&P 500 index has climbed to 23.8% as of Dec. 26, from 20.8% at the end of last year, according to S&P Dow Jones Indices. Three years ago, tech stocks had a 19.7% weighting in the widely used U.S. stock market benchmark, which is currently tracked by funds with more than $2 trillion in assets.”
December 26 – Bloomberg (Katia Dmitrieva): “Housing prices in 20 U.S. cities accelerated more than forecast in October, rising by the most since mid-2014 as lean inventories continued to prop up values amid steady demand, S&P CoreLogic Case-Shiller data showed… 20-city property values index increased 6.4% y/y (est. 6.3%), the biggest gain since July 2014. National home-price gauge rose 6.2% y/y, the most since June 2014… All 20 cities in the index showed year-over-year gains, led by a 12.7% increase in Seattle and a 10.2% advance in Las Vegas.”
December 26 – Reuters (Eric M. Johnson, Richa Naidu): “The U.S. holiday shopping season is on track to break sales records on the back of surging consumer confidence and increased use of mobile devices, presenting an unexpected boon for retailers and the delivery companies they rely on. The holiday shopping season, a crucial period for retailers that can account for up to 40% of annual sales, brought record-breaking online and in-store spending this year of more than $800 billion, according to Mastercard Inc’s analytics arm. Stakes are particularly high this year for traditional retailers that have invested heavily in technology and free delivery and returns, determined to stay relevant in a market increasingly dominated by Amazon.com Inc.”
December 26 – Bloomberg (Alex Barinka): “IPO cheerleaders gave a collective sigh of relief in 2017 -- a comeback year for U.S. listings. Conditions were ripe for initial public offerings. Broader equity markets continued to rise, with the S&P 500 Index up almost 20% since the start of the year as December winds to a close. Meanwhile, the year’s volatility averaged less than the lowest point of all of 2016. Forty-nine percent more companies went public this year than last.”
December 27 – Financial Times (Jennifer Thompson): “Smart beta funds have hit the $1tn of assets milestone, testifying to the increasing popularity of the investment strategy. A hybrid between active and passive investment management, smart beta funds take a passive strategy but modify it according to one or more factors, such as favouring cheaper stocks or screening them according to dividend payouts, in order to generate better returns. Also known as strategic beta or factor investing, the funds’ growth has coincided with increasing criticism of the high fees charged by traditional active managers as well as heightened scrutiny of their performance.”
December 29 – Financial Times (Joe Rennison): “Securitisations of US car loans hit a post-financial crisis high in 2017, as investor demand for yield continued to provide favourable borrowing conditions across a range of credit markets. Wall Street sold more than $70bn worth of auto asset backed securities, which bundle up car loans into bond-like products, this year, the highest level since 2007… The boom in auto ABS comes as other structured credit products, such as deals backed by leveraged loans or credit card debt, have also seen a glut of issuance. Demand is being driven by investors who are seeking alternative assets as the premiums offered on corporate bonds and loans continue to decline. That investor appetite has helped push down the cost of funding for borrowers with less than pristine credit ratings.”
December 26 – Financial Times (Gregory Meyer): “Robots may one day steer trucks across America. But in winter 2017, US trucking companies are confronting a shortage of human drivers. Rates to hire long-distance trucks have soared as rising freight volumes and robust retail sales during the festive season drive up demand, just as a strong US jobs market makes drivers harder to come by… The ratio of loads in need of movement to trucks available is this month expected to be the highest on record, according to DAT, an online trucking bulletin board. There is ‘very little, if any, excess capacity in the system’, said Avery Vise of FTR, a consultancy. The situation could push up the cost of consumer goods.”
December 28 – Bloomberg (Brian K Sullivan and Jim Efstathiou Jr): “In the year that President Donald Trump pulled out of the Paris accord and downplayed global warming as a security threat, the U.S. received a harsh reminder of the perils of the rise in the planet’s temperature: a destructive rash of hurricanes, fires and floods. The country recorded 15 weather events costing $1 billion or more each through early October, one short of the record 16 in 2011, according to the federal government’s National Centers for Environmental Information in Asheville, North Carolina. And the tally doesn’t include the recent wildfires in southern California.”
Global Bubble Watch:
December 28 – Bloomberg Intelligence (Dragos Ailoae): “Global fixed-income ETF assets under management have climbed 380% since December 2010 to about $746 billion. That’s on net issuance of $567 billion of shares as of Dec. 20. By comparison, equities-focused ETF assets grew 250% to $3.2 trillion. Commodity ETF assets shrank over 10% to $127 billion during the period. Mark-to-market losses have taken a toll, despite $21 billion of inflows. Commodity prices have plunged almost 50% since December 2010, as gauged on the Bloomberg Commodity Index.”
December 27 – Financial Times (Kenan Machado and Saumya Vaishampayan): “Worldwide mergers and acquisitions activity has exceeded $3tn for the fourth consecutive year, extending an unprecedented wave of dealmaking that bankers say is set to accelerate in 2018. The final month of 2017 was capped by three blockbuster transactions sparked by companies taking action against the threat of disruption from the likes of Amazon, Facebook and Netflix, which are using their size and scale to push into new sectors. …The US’s biggest drugstore chain CVS Health agreed to acquire healthcare insurer Aetna for about $69bn. Meanwhile, Amazon’s effect on retail worldwide prompted Australia’s billionaire Lowy family to sell its global shopping centre business Westfield to France’s Unibail-Rodamco for $24.7bn.”
December 26 – Bloomberg (Tom Metcalf and Jack Witzig): “The richest people on earth became $1 trillion richer in 2017, more than four times last year’s gain, as stock markets shrugged off economic, social and political divisions to reach record highs. The 23% increase on the Bloomberg Billionaires Index, a daily ranking of the world’s 500 richest people, compares with an almost 20% increase for both the MSCI World Index and Standard & Poor’s 500 Index.”
December 27 – Wall Street Journal (Christopher Whittall): “Hellman & Friedman LLC and other investors sought last month to borrow money in the loan market to finance a takeover. The U.S. private-equity firm offered a yield of about 3%, but few of the protections once considered routine. Still, the investors bought. Rampant demand for leveraged loans is allowing private-equity firms to water down legal safeguards for investors. Many lawyers and bankers increasingly worry that such changes could result in higher losses for investors during the next downturn, as creditors find themselves with less protection… Investors are clamoring for leveraged loans as years of low interest rates and central banks’ bond buying have pushed down returns elsewhere. Trillions of dollars of sovereign debt, primarily in Europe, continue to sport negative yields… With ‘far too much cash trying to find too few homes,’ private-equity firms ‘can be more aggressive and lenders will take it,’ said Adam Freeman, a partner at Linklaters LLP.”
December 26 – Wall Street Journal (Sam Goldfarb and Nigel Chiwaya): “By almost any measure, corporate borrowers had it easy in 2017. Yields on corporate debt, which fall as prices rise, began the year at very low levels and ended the year even lower. Investors bought up pretty much every type of debt instrument, from investment-grade bonds to collateralized loan obligations. Many analysts expect more of the same in the early part of 2018. A test could come later in the year, as combined net bond-buying by the Federal Reserve and European Central Bank is expected to turn negative, removing a key support for fixed-income markets.”
December 27 – Financial Times (Nicole Bullock, Robert Smith and Emma Dunkley): “Global exchanges attracted the largest number of listings since the financial crisis this year, with a resurgence of activity in the US and a record number of Chinese deals belying concerns that companies are cooling to the idea of public ownership. Almost 1,700 companies floated in 2017, an increase of 44% over 2016 and the most initial public offerings since 2007, according to Dealogic. Proceeds rose 44% to $196bn, the largest amount since 2014, which had been boosted by Alibaba’s $25bn listing. In the US companies raised $49bn — double the $24bn of listings in 2016, which was the worst year for IPOs in more than a decade. European listings rose more than 40% and China marked a record number of deals, which helped to boost the global deal count.”
Fixed Income Watch:
December 27 – Bloomberg (Edward Bolingbroke and Brian Chappatta): “The U.S. yield curve is getting one final flattening push before calling it a year. The spread between the yields on 2-year and 10-year Treasuries narrowed to just 50.6 bps Wednesday, close to the decade low reached on Dec. 6. While a small part of the more than six-basis-point narrowing is a function of the market shifting to a new benchmark 2-year note, the move is nonetheless one of the biggest single-session shifts of 2017. The gap between 5-year and 30-year yields also contracted as long bonds staged their biggest advance since September.”
Europe Watch:
December 29 – Reuters (Joseph Nasr): “German inflation hit its highest level in five years in 2017, initial data showed on Friday, sowing the seeds of more discord among rate setters at the European Central Bank, where some policymakers want to stop pouring money into the euro zone. Consumer prices harmonized to make them compatible with inflation data in other European Union countries rose by 1.6% year-on-year in December, compared to the 1.4% forecast by analysts polled by Reuters.”
Japan Watch:
December 26 – Bloomberg (Leika Kihara): “Bank of Japan Governor Haruhiko Kuroda said… it was important to scrutinize whether economic expansion was leading to excessive risk-taking in financial markets. ‘In the current recovery phase, there are no signs of excessively bullish expectations in asset markets and financial institutions’ behavior. But financial developments warrant close attention,’ he said…”
December 25 – Bloomberg (Yuko Takeo): “Japanese inflation unexpectedly picked up in November but prices are still rising at less than half the rate targeted by the central bank. The tightest job market in decades got even tighter. Core consumer prices, which exclude fresh food, increased 0.9% in November from a year earlier (estimate 0.8%). The unemployment rate fell to 2.7%.”
Emerging Market Watch:
December 27 – New York Times (Kirk Semple and Clifford Krauss): “A general with no energy experience has been installed as the head of the state oil company. Arrests, firings and desperate emigration have gutted top talent. Oil facilities are crumbling, while production is plummeting. As the rest of the oil-producing world recovers on the back of stronger energy prices, Venezuela is getting worse, the result of dysfunctional management, rampant corruption and the country’s crippling economic crisis. The deepening troubles at the state oil company, the country’s economic mainstay, threaten to further destabilize a nation and government facing a dire recession, soaring inflation and unbridled crime, as well as food and medicine shortages.”
Leveraged Speculation Watch:
December 26 - CNBC (Tae Kim): “Greenlight Capital's David Einhorn, who is known for his prescient short bets against stocks like Lehman Brothers, shared the top reasons for his stellar hedge fund career. The billionaire hedge fund manager was asked what he believed is the most important factor for his investing success during an Oxford Union event last month. ‘If I had to pick one, I think it is critical thinking skill. It's the ability to look at a situation and see it for what it is, which isn't necessarily what is presented to you,’ Einhorn said. ‘And when something makes sense to figure out what makes sense. And when something doesn't make sense to question it, to challenge it, to look at it from a different way, to often come to the opposite conclusion.’”
Geopolitical Watch:
December 24 – Wall Street Journal (Michael R. Gordon): “President Donald Trump’s decision to provide Javelin antitank missiles to Ukraine reflects the broad assessment of his national security advisers that the shipment of defensive lethal arms is needed to raise the cost to Russia of its aggression in the conflict-ridden country and provide the West with fresh leverage in negotiations over its future. But the decision is also noteworthy for those trying to divine where the White House may be headed next year in its policy toward the Kremlin. While Mr. Trump has talked about improving relations with Russian President Vladimir Putin, he went along with aides who see Moscow as a revisionist power that is prepared to upend the post-Cold War order, and one that needs to be deterred.”
December 23 – Reuters (Ben Blanchard and Hyonhee Shin): “The latest U.N. sanctions against North Korea are an act of war and tantamount to a complete economic blockade against it, North Korea’s foreign ministry said on Sunday, threatening to punish those who supported the measure."
December 28 – Financial Times (Charles Clover): “With international attention this year diverted by North Korea, China has been quietly making geopolitical gains further south. Throughout 2017, Beijing has been equipping its artificial islands in the contested waters of the South China Sea for potential military use. Aerial photos published by the Center for Strategic and International Studies… show new construction on islands built by China, which now bristle with bunkers, aircraft hangars and shelters for radar, aircraft, warships and artillery. The new infrastructure leaves China in a position to station fighter jets and warships on the outcrops in 2018, and to make ambitious claims to territorial waters and airspace around them if Beijing chooses, say analysts.”
December 26 – Bloomberg (Alex Barinka): “IPO cheerleaders gave a collective sigh of relief in 2017 -- a comeback year for U.S. listings. Conditions were ripe for initial public offerings. Broader equity markets continued to rise, with the S&P 500 Index up almost 20% since the start of the year as December winds to a close. Meanwhile, the year’s volatility averaged less than the lowest point of all of 2016. Forty-nine percent more companies went public this year than last.”
December 27 – Financial Times (Jennifer Thompson): “Smart beta funds have hit the $1tn of assets milestone, testifying to the increasing popularity of the investment strategy. A hybrid between active and passive investment management, smart beta funds take a passive strategy but modify it according to one or more factors, such as favouring cheaper stocks or screening them according to dividend payouts, in order to generate better returns. Also known as strategic beta or factor investing, the funds’ growth has coincided with increasing criticism of the high fees charged by traditional active managers as well as heightened scrutiny of their performance.”
December 29 – Financial Times (Joe Rennison): “Securitisations of US car loans hit a post-financial crisis high in 2017, as investor demand for yield continued to provide favourable borrowing conditions across a range of credit markets. Wall Street sold more than $70bn worth of auto asset backed securities, which bundle up car loans into bond-like products, this year, the highest level since 2007… The boom in auto ABS comes as other structured credit products, such as deals backed by leveraged loans or credit card debt, have also seen a glut of issuance. Demand is being driven by investors who are seeking alternative assets as the premiums offered on corporate bonds and loans continue to decline. That investor appetite has helped push down the cost of funding for borrowers with less than pristine credit ratings.”
December 26 – Financial Times (Gregory Meyer): “Robots may one day steer trucks across America. But in winter 2017, US trucking companies are confronting a shortage of human drivers. Rates to hire long-distance trucks have soared as rising freight volumes and robust retail sales during the festive season drive up demand, just as a strong US jobs market makes drivers harder to come by… The ratio of loads in need of movement to trucks available is this month expected to be the highest on record, according to DAT, an online trucking bulletin board. There is ‘very little, if any, excess capacity in the system’, said Avery Vise of FTR, a consultancy. The situation could push up the cost of consumer goods.”
December 28 – Bloomberg (Brian K Sullivan and Jim Efstathiou Jr): “In the year that President Donald Trump pulled out of the Paris accord and downplayed global warming as a security threat, the U.S. received a harsh reminder of the perils of the rise in the planet’s temperature: a destructive rash of hurricanes, fires and floods. The country recorded 15 weather events costing $1 billion or more each through early October, one short of the record 16 in 2011, according to the federal government’s National Centers for Environmental Information in Asheville, North Carolina. And the tally doesn’t include the recent wildfires in southern California.”
Global Bubble Watch:
December 28 – Bloomberg Intelligence (Dragos Ailoae): “Global fixed-income ETF assets under management have climbed 380% since December 2010 to about $746 billion. That’s on net issuance of $567 billion of shares as of Dec. 20. By comparison, equities-focused ETF assets grew 250% to $3.2 trillion. Commodity ETF assets shrank over 10% to $127 billion during the period. Mark-to-market losses have taken a toll, despite $21 billion of inflows. Commodity prices have plunged almost 50% since December 2010, as gauged on the Bloomberg Commodity Index.”
December 27 – Financial Times (Kenan Machado and Saumya Vaishampayan): “Worldwide mergers and acquisitions activity has exceeded $3tn for the fourth consecutive year, extending an unprecedented wave of dealmaking that bankers say is set to accelerate in 2018. The final month of 2017 was capped by three blockbuster transactions sparked by companies taking action against the threat of disruption from the likes of Amazon, Facebook and Netflix, which are using their size and scale to push into new sectors. …The US’s biggest drugstore chain CVS Health agreed to acquire healthcare insurer Aetna for about $69bn. Meanwhile, Amazon’s effect on retail worldwide prompted Australia’s billionaire Lowy family to sell its global shopping centre business Westfield to France’s Unibail-Rodamco for $24.7bn.”
December 26 – Bloomberg (Tom Metcalf and Jack Witzig): “The richest people on earth became $1 trillion richer in 2017, more than four times last year’s gain, as stock markets shrugged off economic, social and political divisions to reach record highs. The 23% increase on the Bloomberg Billionaires Index, a daily ranking of the world’s 500 richest people, compares with an almost 20% increase for both the MSCI World Index and Standard & Poor’s 500 Index.”
December 27 – Wall Street Journal (Christopher Whittall): “Hellman & Friedman LLC and other investors sought last month to borrow money in the loan market to finance a takeover. The U.S. private-equity firm offered a yield of about 3%, but few of the protections once considered routine. Still, the investors bought. Rampant demand for leveraged loans is allowing private-equity firms to water down legal safeguards for investors. Many lawyers and bankers increasingly worry that such changes could result in higher losses for investors during the next downturn, as creditors find themselves with less protection… Investors are clamoring for leveraged loans as years of low interest rates and central banks’ bond buying have pushed down returns elsewhere. Trillions of dollars of sovereign debt, primarily in Europe, continue to sport negative yields… With ‘far too much cash trying to find too few homes,’ private-equity firms ‘can be more aggressive and lenders will take it,’ said Adam Freeman, a partner at Linklaters LLP.”
December 26 – Wall Street Journal (Sam Goldfarb and Nigel Chiwaya): “By almost any measure, corporate borrowers had it easy in 2017. Yields on corporate debt, which fall as prices rise, began the year at very low levels and ended the year even lower. Investors bought up pretty much every type of debt instrument, from investment-grade bonds to collateralized loan obligations. Many analysts expect more of the same in the early part of 2018. A test could come later in the year, as combined net bond-buying by the Federal Reserve and European Central Bank is expected to turn negative, removing a key support for fixed-income markets.”
December 27 – Financial Times (Nicole Bullock, Robert Smith and Emma Dunkley): “Global exchanges attracted the largest number of listings since the financial crisis this year, with a resurgence of activity in the US and a record number of Chinese deals belying concerns that companies are cooling to the idea of public ownership. Almost 1,700 companies floated in 2017, an increase of 44% over 2016 and the most initial public offerings since 2007, according to Dealogic. Proceeds rose 44% to $196bn, the largest amount since 2014, which had been boosted by Alibaba’s $25bn listing. In the US companies raised $49bn — double the $24bn of listings in 2016, which was the worst year for IPOs in more than a decade. European listings rose more than 40% and China marked a record number of deals, which helped to boost the global deal count.”
Fixed Income Watch:
December 27 – Bloomberg (Edward Bolingbroke and Brian Chappatta): “The U.S. yield curve is getting one final flattening push before calling it a year. The spread between the yields on 2-year and 10-year Treasuries narrowed to just 50.6 bps Wednesday, close to the decade low reached on Dec. 6. While a small part of the more than six-basis-point narrowing is a function of the market shifting to a new benchmark 2-year note, the move is nonetheless one of the biggest single-session shifts of 2017. The gap between 5-year and 30-year yields also contracted as long bonds staged their biggest advance since September.”
Europe Watch:
December 29 – Reuters (Joseph Nasr): “German inflation hit its highest level in five years in 2017, initial data showed on Friday, sowing the seeds of more discord among rate setters at the European Central Bank, where some policymakers want to stop pouring money into the euro zone. Consumer prices harmonized to make them compatible with inflation data in other European Union countries rose by 1.6% year-on-year in December, compared to the 1.4% forecast by analysts polled by Reuters.”
Japan Watch:
December 26 – Bloomberg (Leika Kihara): “Bank of Japan Governor Haruhiko Kuroda said… it was important to scrutinize whether economic expansion was leading to excessive risk-taking in financial markets. ‘In the current recovery phase, there are no signs of excessively bullish expectations in asset markets and financial institutions’ behavior. But financial developments warrant close attention,’ he said…”
December 25 – Bloomberg (Yuko Takeo): “Japanese inflation unexpectedly picked up in November but prices are still rising at less than half the rate targeted by the central bank. The tightest job market in decades got even tighter. Core consumer prices, which exclude fresh food, increased 0.9% in November from a year earlier (estimate 0.8%). The unemployment rate fell to 2.7%.”
Emerging Market Watch:
December 27 – New York Times (Kirk Semple and Clifford Krauss): “A general with no energy experience has been installed as the head of the state oil company. Arrests, firings and desperate emigration have gutted top talent. Oil facilities are crumbling, while production is plummeting. As the rest of the oil-producing world recovers on the back of stronger energy prices, Venezuela is getting worse, the result of dysfunctional management, rampant corruption and the country’s crippling economic crisis. The deepening troubles at the state oil company, the country’s economic mainstay, threaten to further destabilize a nation and government facing a dire recession, soaring inflation and unbridled crime, as well as food and medicine shortages.”
Leveraged Speculation Watch:
December 26 - CNBC (Tae Kim): “Greenlight Capital's David Einhorn, who is known for his prescient short bets against stocks like Lehman Brothers, shared the top reasons for his stellar hedge fund career. The billionaire hedge fund manager was asked what he believed is the most important factor for his investing success during an Oxford Union event last month. ‘If I had to pick one, I think it is critical thinking skill. It's the ability to look at a situation and see it for what it is, which isn't necessarily what is presented to you,’ Einhorn said. ‘And when something makes sense to figure out what makes sense. And when something doesn't make sense to question it, to challenge it, to look at it from a different way, to often come to the opposite conclusion.’”
Geopolitical Watch:
December 24 – Wall Street Journal (Michael R. Gordon): “President Donald Trump’s decision to provide Javelin antitank missiles to Ukraine reflects the broad assessment of his national security advisers that the shipment of defensive lethal arms is needed to raise the cost to Russia of its aggression in the conflict-ridden country and provide the West with fresh leverage in negotiations over its future. But the decision is also noteworthy for those trying to divine where the White House may be headed next year in its policy toward the Kremlin. While Mr. Trump has talked about improving relations with Russian President Vladimir Putin, he went along with aides who see Moscow as a revisionist power that is prepared to upend the post-Cold War order, and one that needs to be deterred.”
December 23 – Reuters (Ben Blanchard and Hyonhee Shin): “The latest U.N. sanctions against North Korea are an act of war and tantamount to a complete economic blockade against it, North Korea’s foreign ministry said on Sunday, threatening to punish those who supported the measure."
December 28 – Financial Times (Charles Clover): “With international attention this year diverted by North Korea, China has been quietly making geopolitical gains further south. Throughout 2017, Beijing has been equipping its artificial islands in the contested waters of the South China Sea for potential military use. Aerial photos published by the Center for Strategic and International Studies… show new construction on islands built by China, which now bristle with bunkers, aircraft hangars and shelters for radar, aircraft, warships and artillery. The new infrastructure leaves China in a position to station fighter jets and warships on the outcrops in 2018, and to make ambitious claims to territorial waters and airspace around them if Beijing chooses, say analysts.”
Subscribe to:
Posts (Atom)