[Reuters] China regulator urges Beijing banks not to force liquidation of pledged shares: Yicai
[Reuters] China's industrial profits growth slows for fifth month as orders wane
[CNBC] The 'unbeauty contest': All you need to know as Brazilian voters prepare for an election showdown
[Reuters] More violence feared as Brazil braces for far-right presidency
[CNBC] Populism and nationalism threaten the European project
[FT] Rising costs force consumer goods groups to raise prices
[FT] The regime change for global markets is just beginning
Saturday, October 27, 2018
Friday, October 26, 2018
Weekly Commentary: "Whatever They Want" Coming Home to Roost
Let's begin with global. China's yuan (CNY) traded to 6.9644 to the dollar in early-Friday trading, almost matching the low (vs. dollar) from December 2016 (6.9649). CNY is basically trading at lows going back to 2008 - and has neared the key psychological 7.0 level. CNY rallied in late-Friday trading to close the week at 6.9435. From Bloomberg (Tian Chen): "Three traders said at least one big Chinese bank sold the dollar, triggering stop-losses." Earlier, a PBOC governor "told a briefing that the central bank would continue taking measures to stabilize sentiment. 'We have dealt with short-sellers of the yuan a few years ago, and we are very familiar with each other. I think we both have vivid memories of the past.'"
The PBOC eventually won that 2016 skirmish with the CNY "shorts". In general, however, you don't want your central bank feeling compelled to do battle against the markets. It's no sign of strength. For "developing" central banks, in particular, it has too often in the past proved a perilous proposition. Threats and actions are taken, and a lot can ride on the market's response. In a brewing confrontation, the market will test the central bank. If the central bank's response appears ineffective, markets will instinctively pounce.
Often unobtrusively, the stakes can grow incredibly large. There's a dynamic that has been replayed in the past throughout the emerging markets. Bubbles are pierced and "hot money" heads for the exits. Central banks and government officials then work aggressively to bolster their faltering currencies. These efforts appear to stabilize the situation for a period of time, although the relative calm masks assertive market efforts to hedge against future currency devaluation in the derivatives markets.
If policymakers then lose control - market pressures prevail - those on the wrong side of (now outsized) derivative hedges are forced to aggressively sell/short the underlying currency. This type of self-reinforcing selling can too easily foment illiquidity, dislocation and currency collapse. As I highlighted last week, for a list of reasons such a scenario would have devastating consequences for China - and the world.
As I've noted in previous CBBs, the current global environment has some critical differences compared to China's last currency instability episode in early-2016. Global QE was ramped up to about a $2.0 TN annual pace back then, versus today's QE that will soon be only marginally positive. Buoyed by zero rates, sinking bond yields and rising equities prices, global speculative leverage was expanding - versus today's problematic contraction. China's Credit system and economy were significantly more robust in 2016. EM, in general, was still enveloped in powerful financial and economic expansion dynamics. Moreover, the global trade and geopolitical backdrops have deteriorated dramatically since 2016.
October 26 - Bloomberg: "Investors are turning up the temperature on Chinese policy makers, who were already feeling the heat. That may cause the government to resort to even tighter controls on money flowing in and out of the country, according to Citi economists. Net foreign exchange settlement by banks in China on behalf of their clients -- a proxy for capital flows -- was negative in September for a third straight month, according to… the State Administration of Foreign Exchange. At -110.3 billion yuan, purchase of foreign currencies was the most since December 2016. An escalating trade war with the U.S. has contributed to souring investor sentiment and put downward pressure on China's currency, which Friday came within striking distance of a 10-year low against the dollar. It's fallen 9% over the last six months. Measures taken by the People's Bank of China this month to support the economy as the outlook has darkened… haven't helped the exchange rate."
October 26 - Bloomberg (Alfred Liu and Benjamin Robertson): "China's finance ministry has warned the country's state-owned financial assets need further protection from mismanagement, following the release of new data on the size of their balance sheets. Total assets of state-owned financial enterprises amounted to 241 trillion yuan ($34.6 trillion) in 2017, according to a report published by China's Ministry of Finance… Their liabilities were 217.3 trillion yuan last year… 'While we are gradually upgrading the management of state financial assets, we have to be aware that there are still institutional and structural contradictions and problems,' said Liu Kun, China's finance minister… 'The mission of preventing massive risks remains tough.'"
A disorderly breakdown of the Chinese currency has the potential to be one of the most destabilizing developments for global finance and the world economy in decades. I am not confident that Chinese officials have the situation under control. At the same time, there is no doubt that Chinese finance and financial institutions have inflated to previously unimaginable dimensions. And it appears Beijing is increasingly cognizant of unfolding risks. This likely explains why officials appear less inclined than in the past to push through aggressive fiscal and monetary stimulus. A key aspect of the bullish global thesis (Chinese stimulus on demand) is due for reassessment.
The Shanghai Composite rallied 1.9% this week. It was difficult for global markets to sense anything more than fleeting relief, suspecting the "national team" was hard at work. Markets throughout Asia were under pressure. Hong Kong's Hang Seng index fell 3.3%. Major indices were down 6.0% in South Korea, 6.0% in Vietnam, 4.3% in Taiwan, 3.2% in Thailand, 2.8% in Malaysia, 2.8% in India and 1.2% in Philippines. Japan's Nikkei 225 index sank 6.0%, with the TOPIX Bank Index's 4.7% drop boosting y-t-d declines to 17.1%.
Asian bank weakness is a primary Systemic Contagion Link globally. Europe's STOXX 600 bank index fell 3.5% this week, increasing 2018 losses to 24.0%. Italian banks were down another 3.9% this week (down 28.2% y-t-d). Deutsche Bank dropped 11.4% this week (to an all-time low). Deutsche Bank (senior) credit-default swap (CDS) prices rose 11 bps this week to 156 bps, the high since early July. Many of the big global banks saw CDS prices rise this week to near one-year highs. Curiously, Goldman Sachs CDS rose seven this week to 79 bps, an almost 19-month high. The U.S. bank equities index (BKX) sank 5.0% this week, and the Broker/Dealers dropped 4.8%.
In a further indication of heightened global systemic risk, German bund yields sank 11 bps this week to 0.35%, the low since September 4th. With Italian yields declining only four bps (to 3.45%), the spread to bunds widened seven bps to 310 bps. Portuguese yields dropped 11 bps to 1.96%, and Spanish yields fell 17 bps to 1.57%. UK 10-year yields sank 19 bps to 1.38%, the low since August.
It certainly has all the appearance of bond markets beginning to discount ramification of the bursting of the global Bubble. WTI crude declined another $1.52 to $67.62, a two-month low. The dollar index increased 0.7% to 96.412, near a 16-month high. The British pound declined 1.9%, the Norwegian krone 1.6%, the Swedish krona 1.6%, the New Zealand dollar 1.4%, the South African ran 1.3% and the euro 1.0%.
October 26 - Bloomberg (Jacob Bourne): "Inflation expectations are tumbling in the U.S. bond market, suggesting traders are worried that the Federal Reserve's monetary policy is becoming too tight -- potentially by a quarter-point -- amid the slide in equities. The five-year breakeven rate, which represents bond investors' view on the annual inflation rate through 2023, dropped Friday to 1.88%, the lowest since January."
The headline for the above article was "Inflation Bets Are Tanking, Showing Bond Traders See a Tight Fed." Ten-year Treasury yields did drop 12 bps this week to 3.08%. But the overarching issue is escalating systemic risk associated with a faltering global Bubble - not a "tight Fed." The Fed would prefer to remain "data dependent." The early read on Q3 GDP came in at 3.5%, with Personal Consumption growing at a 4.0% rate (strongest since Q4 '14). A number of Fed officials this week downplayed U.S. stock market weakness.
I'm not at all sure Fed officials appreciate their predicament. The global Bubble is bursting, yet the U.S. economy at this point maintains a decent head of steam. Bond markets are quickly adjusting to the changing global backdrop. Treasuries have had more of a domestic focus but this has begun to shift. And having shown resilience until recently, junk bonds (HYG) declined 1.1% over the past two weeks. With yields jumping this week to a two-year high, junk bond funds suffered net outflows of $2.364 billion.
October 26 - Bloomberg (Adam Tempkin): "One of Wall Street's go-to shelters in times of trouble is showing cracks as broad concerns pile up. Bouts of selling have hit bonds backed by mortgages, auto loans and credit card payments -- typically havens during periods of stress -- amid the carnage in financial markets this month. Certain sectors of so-called securitized loans are 'experiencing some headwinds,' said Neil Aggarwal, senior portfolio manager and head of trading at Semper Capital. 'A combination of rates, earnings, and global concerns are having an ongoing impact.' The debt class usually does better than corporate bonds during market turmoil because the securities are linked to consumer payments, rather than company performance, and typically have cash cushions to absorb initial losses. But recent weakness highlights how the sector may be unable to shrug off the chaos enveloping other assets."
Financial conditions have now begun to meaningfully tighten at the "Core." I suspect de-risking/de-leveraging dynamics have begun to unfold throughout U.S. corporate Credit. There are also indications of tightening liquidity conditions in securitized Credit. These are important developments.
October 26 - Bloomberg (Suzy Waite and Nishant Kumar): "Hedge funds using computer-driven models to follow big market trends have been whiplashed as volatility has spiked, among the biggest casualties of a stock rout that has accelerated worldwide. Funds known as commodity trading advisers, or CTAs, have traditionally shielded investors during market selloffs such as the global financial crisis, especially when mathematical models show a clear or pronounced trend. But this time, they've been unable to navigate sharp reversals in asset prices… 'It's a bloodbath out there across almost every strategy with very few exceptions,' said Vaqar Zuberi, head of hedge funds at Mirabaud Asset Management… 'CTAs have been caught by a double-whammy with rising rates and equities plummeting,' said Zuberi. 'There's only one exit and everyone is trying to exit now because the models are telling them to do so.' Computer-driven hedge funds were already headed for their worst year ever before this month's volatility…"
As an industry, hedge funds were already struggling for performance prior to the recent bout of "Risk Off." Many funds have seen 2018 gains quickly morph into losses. There is now the distinct risk of escalating losses into year-end spurring significant industry outflows. This dynamic elevates the odds of a destabilizing de-risking/deleveraging dynamic.
Treasuries provided somewhat of a hedge against equities losses this week. Yet, overall, markets have been particularly uncooperative to popular "risk parity" hedge fund strategies. Leveraged portfolios of stocks, government securities and fixed-income are not experiencing the diversification benefits they've enjoyed for most of the past decade (or two). Losses and general performance volatility will force these strategies to deleverage, with negative consequences for liquidity across various markets.
With de-risking/deleveraging gaining momentum globally - and some of the big global "banks" under pressure - it's reasonable to begin contemplating counter-party risk. And anytime markets start indicating waning liquidity and dislocation risk, my fears return to the derivatives markets. How much market "risk insurance" has been sold by strategies that plan on hedging this risk by selling into declining markets? Stated differently, what is the risk that derivatives "insurance" "dynamically (delta) hedged" by quant models could erupt into self-reinforcing sell programs, illiquidity and market dislocation?
October 26 - Financial Times (Alfred Liu and Benjamin Robertson): "Mario Draghi has pushed back against the wave of political attacks on the world's central banks, warning that the rising pressure could lead to lower growth and undermine a vital line of defence against future financial crises. Speaking just hours after he was criticised by Italy's deputy prime minister as 'poisoning the climate' against Rome, the European Central Bank president called on legislators around the world to instead 'protect the independence' of rate-setters. 'The central bank should not be subject to . . . political dominance and should be free to choose the instruments that are most appropriate to deliver its mandate,' Mr Draghi said in a thinly-veiled rebuke to his native country."
I see things similarly to the great statesman, the ailing Paul Volcker: "A hell of a mess in every direction." The stock market is only a few weeks past all-time highs, yet the finger-pointing has already begun in earnest. The Powell Fed cautiously raising rates just past 2.0% is certainly not responsible for the world's problems. A decade of central bank-induced monetary inflation, well that's a different story. More than a couple decades of central bank experimentation and inflationism, now you're on to something. It was always going to Come Home to Roost. That's the harsh reality that no one was willing to contemplate.
Draghi: "The central bank should not be subject to… political dominance and should be free to choose the instruments that are most appropriate to deliver its mandate."
It's ridiculous to bestow a small group of global central bankers the power to do Whatever They Want in the name of delivering on some arbitrary index level of consumer price inflation. To create $14 TN of "money" and unleash it upon global securities markets is undoubtedly history's most reckless monetary mismanagement.
Inevitable Blowback has commenced. "The dog ate my homework." "The inflation mandate made us do it." With a full year remaining in his term, Draghi won't be sharing Bernanke's good fortune. This whole historic monetary experiment will be unraveling while he's still on watch. But, then again, the Trump administration already has its scapegoat. Perhaps the whole world will blame Chairman Powell - or the man that appointed him.
Following a terrifying trajectory, things somehow turn more disturbing by the week. Political travesty has degenerated into a surreal quagmire. And to see this degree of division and hostility at this cycle's boom phase should have us all thinking carefully about what the future holds. As a nation, we are alarmingly unprepared. And it's back to this same issue that's troubled me for a number of years now:
Bubbles are always mechanisms of wealth redistribution and destruction. Akin to central banking, they can inflict immeasurable harm and somehow deflect culpability. As we've already witnessed as a society, they wreak subtle - and, later, more overt - havoc. And the current astounding Bubble has been on such an unprecedented global scale. Harsh geopolitical fallout is unavoidable. For me, it's been scary for a while. It's just more palpable now. We'll see if the midterms can provide an impetus for a market rally. If not, this has all the appearances of something that could turn sour quickly.
The PBOC eventually won that 2016 skirmish with the CNY "shorts". In general, however, you don't want your central bank feeling compelled to do battle against the markets. It's no sign of strength. For "developing" central banks, in particular, it has too often in the past proved a perilous proposition. Threats and actions are taken, and a lot can ride on the market's response. In a brewing confrontation, the market will test the central bank. If the central bank's response appears ineffective, markets will instinctively pounce.
Often unobtrusively, the stakes can grow incredibly large. There's a dynamic that has been replayed in the past throughout the emerging markets. Bubbles are pierced and "hot money" heads for the exits. Central banks and government officials then work aggressively to bolster their faltering currencies. These efforts appear to stabilize the situation for a period of time, although the relative calm masks assertive market efforts to hedge against future currency devaluation in the derivatives markets.
If policymakers then lose control - market pressures prevail - those on the wrong side of (now outsized) derivative hedges are forced to aggressively sell/short the underlying currency. This type of self-reinforcing selling can too easily foment illiquidity, dislocation and currency collapse. As I highlighted last week, for a list of reasons such a scenario would have devastating consequences for China - and the world.
As I've noted in previous CBBs, the current global environment has some critical differences compared to China's last currency instability episode in early-2016. Global QE was ramped up to about a $2.0 TN annual pace back then, versus today's QE that will soon be only marginally positive. Buoyed by zero rates, sinking bond yields and rising equities prices, global speculative leverage was expanding - versus today's problematic contraction. China's Credit system and economy were significantly more robust in 2016. EM, in general, was still enveloped in powerful financial and economic expansion dynamics. Moreover, the global trade and geopolitical backdrops have deteriorated dramatically since 2016.
October 26 - Bloomberg: "Investors are turning up the temperature on Chinese policy makers, who were already feeling the heat. That may cause the government to resort to even tighter controls on money flowing in and out of the country, according to Citi economists. Net foreign exchange settlement by banks in China on behalf of their clients -- a proxy for capital flows -- was negative in September for a third straight month, according to… the State Administration of Foreign Exchange. At -110.3 billion yuan, purchase of foreign currencies was the most since December 2016. An escalating trade war with the U.S. has contributed to souring investor sentiment and put downward pressure on China's currency, which Friday came within striking distance of a 10-year low against the dollar. It's fallen 9% over the last six months. Measures taken by the People's Bank of China this month to support the economy as the outlook has darkened… haven't helped the exchange rate."
October 26 - Bloomberg (Alfred Liu and Benjamin Robertson): "China's finance ministry has warned the country's state-owned financial assets need further protection from mismanagement, following the release of new data on the size of their balance sheets. Total assets of state-owned financial enterprises amounted to 241 trillion yuan ($34.6 trillion) in 2017, according to a report published by China's Ministry of Finance… Their liabilities were 217.3 trillion yuan last year… 'While we are gradually upgrading the management of state financial assets, we have to be aware that there are still institutional and structural contradictions and problems,' said Liu Kun, China's finance minister… 'The mission of preventing massive risks remains tough.'"
A disorderly breakdown of the Chinese currency has the potential to be one of the most destabilizing developments for global finance and the world economy in decades. I am not confident that Chinese officials have the situation under control. At the same time, there is no doubt that Chinese finance and financial institutions have inflated to previously unimaginable dimensions. And it appears Beijing is increasingly cognizant of unfolding risks. This likely explains why officials appear less inclined than in the past to push through aggressive fiscal and monetary stimulus. A key aspect of the bullish global thesis (Chinese stimulus on demand) is due for reassessment.
The Shanghai Composite rallied 1.9% this week. It was difficult for global markets to sense anything more than fleeting relief, suspecting the "national team" was hard at work. Markets throughout Asia were under pressure. Hong Kong's Hang Seng index fell 3.3%. Major indices were down 6.0% in South Korea, 6.0% in Vietnam, 4.3% in Taiwan, 3.2% in Thailand, 2.8% in Malaysia, 2.8% in India and 1.2% in Philippines. Japan's Nikkei 225 index sank 6.0%, with the TOPIX Bank Index's 4.7% drop boosting y-t-d declines to 17.1%.
Asian bank weakness is a primary Systemic Contagion Link globally. Europe's STOXX 600 bank index fell 3.5% this week, increasing 2018 losses to 24.0%. Italian banks were down another 3.9% this week (down 28.2% y-t-d). Deutsche Bank dropped 11.4% this week (to an all-time low). Deutsche Bank (senior) credit-default swap (CDS) prices rose 11 bps this week to 156 bps, the high since early July. Many of the big global banks saw CDS prices rise this week to near one-year highs. Curiously, Goldman Sachs CDS rose seven this week to 79 bps, an almost 19-month high. The U.S. bank equities index (BKX) sank 5.0% this week, and the Broker/Dealers dropped 4.8%.
In a further indication of heightened global systemic risk, German bund yields sank 11 bps this week to 0.35%, the low since September 4th. With Italian yields declining only four bps (to 3.45%), the spread to bunds widened seven bps to 310 bps. Portuguese yields dropped 11 bps to 1.96%, and Spanish yields fell 17 bps to 1.57%. UK 10-year yields sank 19 bps to 1.38%, the low since August.
It certainly has all the appearance of bond markets beginning to discount ramification of the bursting of the global Bubble. WTI crude declined another $1.52 to $67.62, a two-month low. The dollar index increased 0.7% to 96.412, near a 16-month high. The British pound declined 1.9%, the Norwegian krone 1.6%, the Swedish krona 1.6%, the New Zealand dollar 1.4%, the South African ran 1.3% and the euro 1.0%.
October 26 - Bloomberg (Jacob Bourne): "Inflation expectations are tumbling in the U.S. bond market, suggesting traders are worried that the Federal Reserve's monetary policy is becoming too tight -- potentially by a quarter-point -- amid the slide in equities. The five-year breakeven rate, which represents bond investors' view on the annual inflation rate through 2023, dropped Friday to 1.88%, the lowest since January."
The headline for the above article was "Inflation Bets Are Tanking, Showing Bond Traders See a Tight Fed." Ten-year Treasury yields did drop 12 bps this week to 3.08%. But the overarching issue is escalating systemic risk associated with a faltering global Bubble - not a "tight Fed." The Fed would prefer to remain "data dependent." The early read on Q3 GDP came in at 3.5%, with Personal Consumption growing at a 4.0% rate (strongest since Q4 '14). A number of Fed officials this week downplayed U.S. stock market weakness.
I'm not at all sure Fed officials appreciate their predicament. The global Bubble is bursting, yet the U.S. economy at this point maintains a decent head of steam. Bond markets are quickly adjusting to the changing global backdrop. Treasuries have had more of a domestic focus but this has begun to shift. And having shown resilience until recently, junk bonds (HYG) declined 1.1% over the past two weeks. With yields jumping this week to a two-year high, junk bond funds suffered net outflows of $2.364 billion.
October 26 - Bloomberg (Adam Tempkin): "One of Wall Street's go-to shelters in times of trouble is showing cracks as broad concerns pile up. Bouts of selling have hit bonds backed by mortgages, auto loans and credit card payments -- typically havens during periods of stress -- amid the carnage in financial markets this month. Certain sectors of so-called securitized loans are 'experiencing some headwinds,' said Neil Aggarwal, senior portfolio manager and head of trading at Semper Capital. 'A combination of rates, earnings, and global concerns are having an ongoing impact.' The debt class usually does better than corporate bonds during market turmoil because the securities are linked to consumer payments, rather than company performance, and typically have cash cushions to absorb initial losses. But recent weakness highlights how the sector may be unable to shrug off the chaos enveloping other assets."
Financial conditions have now begun to meaningfully tighten at the "Core." I suspect de-risking/de-leveraging dynamics have begun to unfold throughout U.S. corporate Credit. There are also indications of tightening liquidity conditions in securitized Credit. These are important developments.
October 26 - Bloomberg (Suzy Waite and Nishant Kumar): "Hedge funds using computer-driven models to follow big market trends have been whiplashed as volatility has spiked, among the biggest casualties of a stock rout that has accelerated worldwide. Funds known as commodity trading advisers, or CTAs, have traditionally shielded investors during market selloffs such as the global financial crisis, especially when mathematical models show a clear or pronounced trend. But this time, they've been unable to navigate sharp reversals in asset prices… 'It's a bloodbath out there across almost every strategy with very few exceptions,' said Vaqar Zuberi, head of hedge funds at Mirabaud Asset Management… 'CTAs have been caught by a double-whammy with rising rates and equities plummeting,' said Zuberi. 'There's only one exit and everyone is trying to exit now because the models are telling them to do so.' Computer-driven hedge funds were already headed for their worst year ever before this month's volatility…"
As an industry, hedge funds were already struggling for performance prior to the recent bout of "Risk Off." Many funds have seen 2018 gains quickly morph into losses. There is now the distinct risk of escalating losses into year-end spurring significant industry outflows. This dynamic elevates the odds of a destabilizing de-risking/deleveraging dynamic.
Treasuries provided somewhat of a hedge against equities losses this week. Yet, overall, markets have been particularly uncooperative to popular "risk parity" hedge fund strategies. Leveraged portfolios of stocks, government securities and fixed-income are not experiencing the diversification benefits they've enjoyed for most of the past decade (or two). Losses and general performance volatility will force these strategies to deleverage, with negative consequences for liquidity across various markets.
With de-risking/deleveraging gaining momentum globally - and some of the big global "banks" under pressure - it's reasonable to begin contemplating counter-party risk. And anytime markets start indicating waning liquidity and dislocation risk, my fears return to the derivatives markets. How much market "risk insurance" has been sold by strategies that plan on hedging this risk by selling into declining markets? Stated differently, what is the risk that derivatives "insurance" "dynamically (delta) hedged" by quant models could erupt into self-reinforcing sell programs, illiquidity and market dislocation?
October 26 - Financial Times (Alfred Liu and Benjamin Robertson): "Mario Draghi has pushed back against the wave of political attacks on the world's central banks, warning that the rising pressure could lead to lower growth and undermine a vital line of defence against future financial crises. Speaking just hours after he was criticised by Italy's deputy prime minister as 'poisoning the climate' against Rome, the European Central Bank president called on legislators around the world to instead 'protect the independence' of rate-setters. 'The central bank should not be subject to . . . political dominance and should be free to choose the instruments that are most appropriate to deliver its mandate,' Mr Draghi said in a thinly-veiled rebuke to his native country."
I see things similarly to the great statesman, the ailing Paul Volcker: "A hell of a mess in every direction." The stock market is only a few weeks past all-time highs, yet the finger-pointing has already begun in earnest. The Powell Fed cautiously raising rates just past 2.0% is certainly not responsible for the world's problems. A decade of central bank-induced monetary inflation, well that's a different story. More than a couple decades of central bank experimentation and inflationism, now you're on to something. It was always going to Come Home to Roost. That's the harsh reality that no one was willing to contemplate.
Draghi: "The central bank should not be subject to… political dominance and should be free to choose the instruments that are most appropriate to deliver its mandate."
It's ridiculous to bestow a small group of global central bankers the power to do Whatever They Want in the name of delivering on some arbitrary index level of consumer price inflation. To create $14 TN of "money" and unleash it upon global securities markets is undoubtedly history's most reckless monetary mismanagement.
Inevitable Blowback has commenced. "The dog ate my homework." "The inflation mandate made us do it." With a full year remaining in his term, Draghi won't be sharing Bernanke's good fortune. This whole historic monetary experiment will be unraveling while he's still on watch. But, then again, the Trump administration already has its scapegoat. Perhaps the whole world will blame Chairman Powell - or the man that appointed him.
Following a terrifying trajectory, things somehow turn more disturbing by the week. Political travesty has degenerated into a surreal quagmire. And to see this degree of division and hostility at this cycle's boom phase should have us all thinking carefully about what the future holds. As a nation, we are alarmingly unprepared. And it's back to this same issue that's troubled me for a number of years now:
Bubbles are always mechanisms of wealth redistribution and destruction. Akin to central banking, they can inflict immeasurable harm and somehow deflect culpability. As we've already witnessed as a society, they wreak subtle - and, later, more overt - havoc. And the current astounding Bubble has been on such an unprecedented global scale. Harsh geopolitical fallout is unavoidable. For me, it's been scary for a while. It's just more palpable now. We'll see if the midterms can provide an impetus for a market rally. If not, this has all the appearances of something that could turn sour quickly.
For the Week:
The S&P500 dropped 3.9% (down 0.6% y-t-d), and the Dow fell 3.0% (down 0.1%). The Utilities declined 1.9% (up 1.2%). The Banks sank 5.0% (down 11.1%), and the Broker/Dealers fell 4.8% (down 5.7%). The Transports dropped 4.5% (down 6.1%). The S&P 400 Midcaps dropped 4.1% (up down 5.5%), and the small cap Russell 2000 fell 3.8% (down 3.4%). The Nasdaq100 declined 3.6% (up 7.1%). The Semiconductors sank 5.9% (down 8.0%). The Biotechs were slammed 7.1% (up 7.5%). Although bullion gained $6, the HUI gold index sank 7.0% (down 24.8%).
Three-month Treasury bill rates ended the week at 2.28%. Two-year government yields dropped 10 bps to 2.81% (up 92bps y-t-d). Five-year T-note yields fell 14 bps to 2.91% (up 70bps). Ten-year Treasury yields dropped 12 bps to 3.08% (up 67bps). Long bond yields declined seven bps to 3.31% (up 57bps). Benchmark Fannie Mae MBS yields fell eight bps to 3.93% (up 93bps).
Greek 10-year yields declined five bps to 4.28% (up 20bps y-t-d). Ten-year Portuguese yields fell 11 bps to 1.91% (down 4bps). Italian 10-year yields declined four bps to 3.45% (up 143bps). Spain's 10-year yields sank 17 bps to 1.57% (unchanged). German bund yields dropped 11 bps to 0.35% (down 8bps). French yields fell 10 bps to 0.74% (down 5bps). The French to German 10-year bond spread widened one to 39 bps. U.K. 10-year gilt yields sank 19 bps to 1.38% (up 19bps). U.K.'s FTSE equities index declined 1.6% (down 9.7%).
Japan's Nikkei 225 equities index sank 6.0% (down 6.9% y-t-d). Japanese 10-year "JGB" yields declined four bps to 0.11% (up 7bps). France's CAC40 declined 2.3% (down 6.5%). The German DAX equities index lost 3.1% (down 13.3%). Spain's IBEX 35 equities index fell 1.8% (down 13.1%). Italy's FTSE MIB index declined 2.1% (down 14.5%). EM equities were mostly lower. Brazil's Bovespa index gained 1.6% (up 12.0%), while Mexico's Bolsa fell 3.3% (down 7.0%). South Korea's Kospi index sank 6.0% (down 17.8%). India's Sensex equities index fell 2.8% (down 2.1%). China's Shanghai Exchange rose 1.9% (down 21.4%). Turkey's Borsa Istanbul National 100 index sank 6.1% (down 21.5%). Russia's MICEX equities index fell 2.2% (up 8.7%).
Investment-grade bond funds saw inflows of $415 million, while junk bond funds saw outflows jump to $2.364 billion (from Lipper).
Freddie Mac 30-year fixed mortgage rates added a basis point to 4.86% (up 92bps y-o-y). Fifteen-year rates gained three bps to 4.29% (up 104bps). Five-year hybrid ARM rates increased four bps to 4.14% (up 93bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down two bps to 4.82% (up 62bps).
Federal Reserve Credit last week declined $2.6bn to $4.137 TN. Over the past year, Fed Credit contracted $291bn, or 6.6%. Fed Credit inflated $1.328 TN, or 47%, over the past 312 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt increased $0.9bn last week to $3.434 TN. "Custody holdings" were up $69bn y-o-y, or 2.1%.
M2 (narrow) "money" supply jumped $25.9bn last week to $14.262 TN. "Narrow money" gained $520bn, or 3.8%, over the past year. For the week, Currency increased $1.4bn. Total Checkable Deposits surged $38.3bn, while Savings Deposits fell $23.3bn. Small Time Deposits added $4.6bn. Retail Money Funds gained $5.1bn.
Total money market fund assets rose $9.7bn to $2.882 TN. Money Funds gained $134bn y-o-y, or 4.9%.
Total Commercial Paper increased $5.2bn to $1.088 TN. CP gained $21bn y-o-y, or 1.9%.
Currency Watch:
October 23 - Bloomberg (Emma Dai): "Dollar-yuan trading volume surpassed the frenzied levels seen during the 2015 devaluation on Wednesday, amid signs China is trying to prevent its currency from weakening too fast. Volume was up 27% at $66 billion…, the most since Bloomberg began compiling the data in 2014… 'Authorities may have offered dollar liquidity to yuan sellers in the market, so the yuan wouldn't depreciate too fast amid selling pressures,' said Li Liuyang, a financial market analyst at China Merchants Bank Co. The Chinese currency may face a lot more pressure if it easily breaks past the 6.95 per dollar level, Li said."
The U.S. dollar index gained 0.7% to 96.412 (up 4.7% y-t-d). For the week on the upside, the Brazilian real increased 2.0% and the Japanese yen gained 0.6%. For the week on the downside, the British pound declined 1.9%, the Norwegian krone 1.6%, the Swedish krona 1.6%, the New Zealand dollar 1.4%, the South African rand 1.3%, the euro 1.0%, the South African rand 0.9%, the Australian dollar 0.4%, the Mexican peso 0.4%, the Singapore dollar 0.2% and the Swiss franc 0.1%. The Chinese renminbi declined 0.21% versus the dollar this week (down 6.29% y-t-d).
Commodities Watch:
The Goldman Sachs Commodities Index declined 2.0% (up 5.1% y-t-d). Spot Gold increased 0.5% to $1,233 (down 5.4%). Silver gained 0.5% to $14.725 (down 14.1%). Crude fell $1.52 to $67.60 (up 12%). Gasoline sank 5.1% (up 1%), and Natural Gas declined 1.5% (up 8%). Copper fell 1.0% (down 17%). Wheat added 0.2% (up 18%). Corn increased 0.3% (up 5%).
Market Dislocation Watch:
October 24 - Financial Times (Isabelle Mateos y Lago): "The European Commission has rejected Italy's draft budget. Valdis Dombrovskis, the commission's vice-president responsible for the euro, said this week that Rome's arguments for increasing its fiscal deficit were 'not convincing'. The Italians had been warned. But the Five Star/League coalition government nevertheless decided to pursue a fiscal expansion instead of the adjustment prescribed by European rules. The budget aims for a fiscal deficit of 2.4% - not enormous in itself, but it is three times as large as the previous government's commitment… The bond market's reaction suggests concern, but not outright alarm. This may not last. The episode brings back memories of the confrontation that took place in 2015 between the freshly elected Greek government and European officials."
October 24 - Bloomberg (Joe Easton): "When the next downturn occurs, beware passive investors. That's the warning from JPMorgan…, which says $7.4 trillion of assets managed by passive funds around the world -- concentrated in large-cap and U.S. small- and mid-cap stocks -- will exacerbate a rout during the next recession. 'This is something worth noting at this late stage of a cycle given that passive investing seems to be trend following, with inflows pushing equities higher during bull markets, and outflows likely to magnify their fall during corrections,' analysts Eduardo Lecubarri and Nishchay Dayal wrote… Passive investing wasn't a big driver of equity returns in the last recession, they say. Back in 2007, the strategy's overall size amounted to about 26% of actively managed large and all-cap funds' assets under management (AUM) in the U.S., and about 15% outside of the U.S. Eleven years later, those figures have jumped to 83% and 53%..."
Trump Administration Watch:
October 23 - Bloomberg (Mike Dorning): "President Donald Trump stepped up his attacks on Federal Reserve Chairman Jerome Powell, saying he 'maybe' regrets appointing him and demurring when asked under what circumstances he would fire the central bank chief. Almost a year since nominating Powell to the post, Trump told the Wall Street Journal… that he was intentionally sending a direct message that he wanted lower interest rates, even as he acknowledged that the central bank is an independent entity. Trump said in the interview that Powell 'almost looks like he's happy raising interest rates' and that it's 'too early to tell, but maybe' he regrets appointing him."
October 23 - Financial Times (Ted Kemp and Joanna Tan): "President Donald Trump directly accused Federal Reserve Chairman Jerome Powell of endangering the U.S. economy by raising interest rates, according to The Wall Street Journal. 'I'm just saying this: I'm very unhappy with the Fed because Obama had zero interest rates,' Trump told the Journal… 'Every time we do something great, he raises the interest rates.'"
October 25 - Wall Street Journal (Bob Davis and Lingling Wei): "The U.S. is refusing to resume trade negotiations with China until Beijing comes up with a concrete proposal to address Washington's complaints about forced technology transfers and other economic issues, said officials on both sides… The impasse threatens to undermine a meeting between Presidents Trump and Xi Jinping scheduled for the end of November at the Group of 20 leaders summit… U.S. businesses have been counting on sufficient progress at the meeting for the Trump administration to suspend its plan to increase tariffs on $200 billion of Chinese imports to 25% on Jan. 1, from the current 10%. Such a move would be a blow to U.S. importers and consumers."
October 21 - Axios (Jonathan Swan): "President Trump has no intention of easing his tariffs on China, according to three sources with knowledge of his private conversations. Instead, these sources say he wants Chinese leaders to feel more pain from his tariffs - which he believes need more time to fully kick in. What we're hearing: 'He wants them to suffer more' from tariffs on $200 billion of Chinese goods, said a source with direct knowledge of Trump's thinking, and the president believes the longer his tariffs last, the more leverage he'll have."
October 23 - CNBC (Liz Moyer): "President Donald Trump will meet with China's president, Xi Jinping, next month at the G-20 summit in Buenos Aires, Argentina, according to Larry Kudlow… Kudlow told reporters… that the two leaders 'will meet for a bit' but didn't have other details. Any meeting between the two comes at a time of escalating tensions over trade. Most recently, the Trump administration put tariffs on some $200 billion of Chinese imports, and Beijing retaliated with tariffs on U.S. goods. The two nations have struggled to come to the negotiating table over trade, as the U.S. raises concerns about intellectual property and a widening trade deficit. 'Our asks are on the table, I'd love to see them respond,' Kudlow said… 'Thus far they haven't.'"
October 22 - Bloomberg: "U.S. President Donald Trump's top economic adviser accused China of refusing to engage on trade issues in a Financial Times interview, while a separate report said Trump believes it will take more time for tariffs to bite. 'We gave them a detailed list of asks, regarding technology for example, [which] basically hasn't changed for five or six months. The problem with the story is that they don't respond. Nothing. Nada,' National Economic Council Director Larry Kudlow told the Financial Times… 'It's really the president and the Chinese Communist party, they have to make a decision, and so far they have not, or they have made a decision not to do anything, nothing. I've never seen anything like it.'"
October 22 - Reuters (Jeff Mason): "U.S. President Donald Trump, speaking to reporters at the White House as he left on a campaign trip to Texas, said… his administration planned to produce a resolution within two weeks calling for a 10% tax cut for middle-income people. 'We're putting in a resolution sometime in the next week or week-and-a-half, two weeks… We're giving a middle-income tax reduction of about 10%. We're doing it now for middle-income people.'"
October 21 - Reuters (Lesley Wroughton): "U.S. Treasury Secretary Steven Mnuchin dismissed concerns that China's weakest economic growth since the global financial crisis could spill into other emerging markets and destabilize U.S. financial markets… 'I am not concerned about that destabilizing our markets,' Mnuchin said… 'Broadly, right now, I don't see a contagion risk,' he added."
Federal Reserve Watch:
October 24 - Bloomberg (Erik Wasson): "The chairman of the Senate Finance Committee stood by Federal Reserve Chairman Jerome Powell after President Donald Trump said he 'maybe' regrets appointing him because the Fed has increased interest rates. Asked whether Powell and the Fed are doing a good job, Senator Orrin Hatch said…:'I think so. I think they all are, to be honest with you. I don't agree with everything they do but they are still pretty good people.' Hatch of Utah… stood by the Fed's independence. 'They have a right to act the way they do,' Hatch said."
October 24 - Reuters (Kristen Haunss): "Regulators are concerned about a material loosening of terms and weaknesses in the risk management of the US$1.1trn US leveraged loan market, a Federal Reserve official said… Covenant-lite loans, incremental facilities and so-called addbacks to earnings before interest, tax, depreciation and amoritization (Ebitda) are three areas regulators are focusing their attention, according to… Todd Vermilyea, senior associate director at the Federal Reserve… 'The presence of these practices, especially without the appropriate controls, may lead to safety and soundness concerns,' he said. The leveraged loan market, which finances companies… has recently been flooded with aggressive deals featuring high debt levels and loose terms."
October 24 - Reuters (Jonathan Spicer): "A 'prolonged' fall in U.S. stock markets could eventually begin to weigh on the U.S. economy, though there are no signs of pinched credit or a pending recession so far, Cleveland Federal Reserve President Loretta Mester said… 'If there was a prolonged downturn in the market and a pullback in risk across the board with a lowering of credit extension, then of course you'll have' an effect on the data, Mester… told the Forecasters Club…"
October 23 - CNBC (Steve Matthews): "Federal Reserve Bank of Atlanta President Raphael Bostic said he supports further gradual interest rate hikes and warned that running the economy 'hot' with too much stimulus could end in a recession hurting lower-income Americans. 'Unless the data talk me out of it, I view a continued, gradual removal of policy accommodation as appropriate until we get to a neutral policy rate,' Bostic said... While there's uncertainty about neutral -- the level of rates that neither speed up nor slow down economic activity -- he said 'my assessment is that we are still a few rate hikes away.'"
October 23 - CNBC (Jeff Cox): "The risk of a powerful economy overheating is the reason the Fed should stick to its schedule of interest rate increases, Atlanta Federal Reserve President Raphael Bostic said… With the jobless rate running at 3.7% and considerably below what is considered full employment, the Fed has to weigh the risks of tightening too quickly and choking off what has been a robust economic run, and waiting too long and risking runaway price pressures. 'And while I wrestle with that choice, one thing seems clear: there is little reason to keep our foot on the gas pedal,' Bostic said…"
October 24 - Reuters (Ann Saphir): "The U.S. Federal Reserve should continue raising interest rates at least two but probably three more times before assessing whether further rate hikes to restrain growth are warranted, Dallas Federal Reserve Bank President Robert Kaplan said… 'My base case for 2019 is to gradually and patiently raise the federal funds rate into a range of 2.5 to 2.75% or, more likely, into a range of 2.75 to 3%,' Kaplan said…"
U.S. Bubble Watch:
October 23 - CNBC (Jeff Cox): "Former Federal Reserve Chairman Paul Volcker, who has reached legend status in the world of central banking, isn't optimistic about current conditions. When Volcker looks around now, he sees 'a hell of a mess in every direction,' including a lack of basic respect for government institutions, a current Fed that seems to be following a completely arbitrary benchmark and a 'swamp' in Washington run by plutocrats. 'At least the military still has all the respect. But I don't know, how can you run a democracy when nobody believes in the leadership of the country?'"
October 25 - Bloomberg (Jenny Leonard, Sarah Foster and Katia Dmitrieva): "The U.S. merchandise-trade deficit widened to a record in September while orders for business equipment declined for a second month, adding to signs that an escalating tariff war is starting to constrain economic growth. The gap in goods trade rose to $76 billion from $75.5 billion as gains in imports outpaced exports…"
October 25 - Wall Street Journal (Kate Davidson): "A stark pickup in government spending, particularly in defense, has helped fuel a broad acceleration in U.S. economic growth in the past year and a half, according to a Wall Street Journal analysis… The U.S. economy has expanded at a 2.9% annual rate since April of 2017… That growth rate is faster than the 2.2% annual growth rate between mid-2009-when the expansion started-and April 2017. Faster government spending accounted for nearly half of the acceleration, according to The Wall Street Journal analysis."
October 25 - Bloomberg (Lisa Lee, Jesse Hamilton, Sally Bakewell and Craig Torres): "In the Trump era, Wall Street banks have been testing the limits of what they can get away with in piling risky loans onto highly indebted companies. They may have finally crossed a line. A top Federal Reserve official fired a rare public warning Wednesday, saying that banks appear to be chasing increasingly dangerous deals and foregoing protections against borrowers going bust. 'There may be a material loosening of terms and weaknesses in risk management,' Todd Vermilyea, the Fed's head of risk surveillance and data, told bankers… 'Some institutions could be taking on risk without the appropriate mitigating controls.' The warnings come after watchdogs have spent most of the year expressing confidence about the health of the $1.3 trillion market for leveraged loans."
October 24 - Reuters (Jason Lange): "U.S. factories have raised their prices because of tariffs, although inflation has appeared modest or moderate in most parts of the country, the Federal Reserve said… The U.S. central bank also said in its latest 'Beige Book' report that the economy appeared to be growing modestly to moderately and that businesses across a number of industries had reported labor shortages."
October 24 - Reuters (Lucia Mutikani): "Sales of new U.S. single-family homes fell to a near two-year low in September and data for the prior three months was revised lower, the latest indications that rising mortgage rates and higher prices were undercutting the housing market. …New home sales dropped 5.5% to a seasonally adjusted annual rate of 553,000 units last month. That was the lowest level since December 2016. August's sales pace was revised down to 585,000 units from the previously reported 629,000 units."
October 24 - Reuters (Diana Olick): "Builders warned of a slowdown in home sales. And they were right - except the numbers are even worse than expected. Sales of newly built homes dropped 5.5% in September compared with August, and were 13% lower compared with a year ago, according to the U.S. Census. This was well below predictions, even with higher rates factored in."
October 23 - CNBC (David Randall): "The easy money may be over. U.S. company earnings growth is slowing after a bumper start to the year, and the reality of an escalating trade war between two of the world's largest economies is starting to weigh on companies ranging from Caterpillar Inc to Ford Motor Co. While earnings growth is still high at 22% so far this quarter, the amount by which S&P 500 index companies are beating analyst estimates is nearly half of what it was during the first quarter, according to Refinitiv data."
October 22 - Wall Street Journal (Rachel Louise Ensign): "There's less free money to go around for banks. After nearly three years of rate increases from the Federal Reserve, customers are pulling billions of dollars out of accounts that don't earn interest and putting their money into higher-yielding alternatives. That will crimp banks' ability to grow profits going forward. The four largest U.S. banks... reported a combined 5% drop in U.S. deposits that earn no interest in the third quarter compared with a year ago."
October 26 - Bloomberg (Romy Varghese): "The fiscal contrast between California Governor Jerry Brown and Gavin Newsom, the frontrunner to replace him, may best be shown through a decades-old program to fight blight. Facing a $25 billion budget deficit, Brown entered office in 2011 with a cost-cutting plan that included killing hundreds of redevelopment agencies. Eight years later, Newsom is poised to inherit an almost $9 billion surplus. One of his campaign planks: bring the agencies back. That kind of divergence is making bond investors in boom-and-bust California nervous. Newsom, a Democrat who is seen as coasting to victory over a Republican businessman, would have to balance campaign promises against the threat of a return to massive deficits."
China Watch:
October 22 - CNBC (Brian Schwartz): "Chinese government leaders have a message for American investors: They're not afraid of a trade war with the United States. On Monday in Beijing, Zhang Qingli, a leading member of a Chinese committee tasked with forging alliances with other nations, told a small group of U.S. business leaders, lobbyists and public relations executives that China refuses to be intimidated by an ongoing trade war with the Trump administration. 'China never wants a trade war with anybody, not to mention the U.S., who has been a long term strategic partner, but we also do not fear such a war,' Zhang… 'The U.S. side has disregarded a consensus with China after multiple rounds of consultations, insisting on waging a trade war against China and continuing to escalate it. In response, China is left with no other option but to make necessary counter actions,' Zhang said…"
October 21 - Bloomberg: "Chinese stocks jumped the most since March 2016 after top officials moved to shore up the economy and offer support to the struggling private sector. The Shanghai Composite Index surged 4.1% on Monday and extending Friday's 2.6% gain… President Xi Jinping vowed 'unwavering' support for non-state firms over the weekend, the country's stock exchanges committed to help manage share-pledge risks, and the government released a plan to cut personal income taxes. That follows a rare coordinated effort from top financial officials on Friday to support what's been the world's worst performing equity market."
October 24 - Wall Street Journal (Mike Bird): "Chinese stocks are widely used as collateral for loans. That introduces extra vulnerabilities to a falling market, so authorities are now attempting to contain the risks. Nearly 10% of shares in mainland China are used as collateral for loans by large shareholders. The practice has boomed even as margin lending, another form of share-backed borrowing, has decreased. Margin lending helped fuel a market selloff in 2015, as retail investors were forced to dump shares to cover their losses. 'Users of financial leverage in equities have shifted from retail investors in the 2015 episode to major shareholders in the form of stock-pledged loans,' Goldman Sachs analysts said…"
October 22 - Bloomberg: "China's central bank plans to give 10 billion yuan ($1.4bn) to China Bond Insurance Co. to provide credit support for debt sales by private enterprises, according to people familiar with the situation. The money is part of the plan the People's Bank of China announced… to support private firms issuing debt. The central bank didn't provide any details on how the plan would work, its size, or when it would begin. Officials also hadn't responded to multiple requests for comment. China's announcements… of fresh measures to ease the funding strains of private companies came after top officials commented repeatedly in an attempt to restore confidence in the world's second-largest economy. The central bank reiterated President Xi Jinping's vows to offer 'unwavering' support for the private sector, which has been most affected by the government's campaign to curb debt and cut shadow banking."
October 21 - Bloomberg (Connor Cislo): "As China braces for the full impact of President Donald Trump's trade war, it's seeking to learn from Japan's economic battles with the U.S. during the Reagan years. Chinese officials, business people and academics have been pressing Japanese counterparts to share experiences from the 1980s, when Tokyo found itself in Washington's crosshairs as its huge trade surplus and increasing industrial might sparked alarm in America. While there are differences between Japan's ascent as a commercial power a generation ago and China's emergence today as a potential superpower, Japan also has lessons for its neighbor in dealing with rising debt, asset-price bubbles and an aging population."
October 19 - Bloomberg: "China's home-price gains slowed in September, breaking a half-year streak of accelerating inflation in the housing market. New-home prices gained 1% from the previous month… That compared with a 1.5% increase in August. The Chinese government is likely to keep a tight grip on the property market at least until next year, despite a shift in policy focus from deleveraging to supporting slower growth under rising trade tensions, according to economists including Capital Economics… 'A market correction has started, as sales have undoubtedly cooled,' Yang Kewei, Shanghai-based research director at China Real Estate Information Corp., said... 'A bottleneck in residential purchasing power has been seen in some cities, especially those in second tiers.'"
October 21 - Bloomberg: "China's burst of local bond issuance is supposed to fund roads, affordable homes and other infrastructure developments that will help support its flagging economy. But there don't seem to be enough projects around to spend the money on. Provincial authorities had by the end of September already raised 92% of the 1.35 trillion yuan ($195bn) worth of special infrastructure bonds that the central government has targeted for the entire year. The bonds… are part of an attempt to counter the economic slowdown by financing projects from railwys to environmental facilities and affordable homes."
October 24 - Financial Times (Blake Schmidt and Frederik Balfour): "China Evergrande Group, the country's most indebted developer, has a lot more work to do as it tries to win over investors with plans to reduce leverage and diversify its business. One key concern as Evergrande's stock slides toward a 15-month low and its dollar bonds tumble: the company's continued reliance on China's shadow banking system. The… developer… cut its 671 billion yuan ($97bn) debt load by 8.4% in the first half… But the company has had less success reducing its exposure to high-cost trust financing: it accounted for about 45% of Evergrande's total borrowing at the end of June, the largest portion since at least 2010."
October 23 - Bloomberg: "Corporate debt investors navigating an expanding minefield of bond delinquencies in China are reaching for a hedging tool similar to credit-default swaps that was last used more than two years ago. Since September, China Bond Insurance Co. and Bank of Hangzhou Co. have sold four instruments called credit risk mitigation warrants, which insure creditors against defaults of the underlying debt. These risk hedging instruments are set to become increasingly popular as bond failures pile up, according to Golden Credit Rating International Co. Defaults have spiraled to a record 66.1 billion yuan ($9.5bn) this year as China's deleveraging campaign bites and economic headwinds batter investor confidence. That's made raising funds without resorting to credit protection tougher for some companies. Last week, the biggest state bank threw a lifeline to cash-strapped private firms by expanding a debt-to-equity swap program."
EM Watch:
October 26 - Bloomberg (Rachel Gamarski and Mario Sergio Lima): "The winner of Brazil's presidential election this Sunday will inherit a near-record stockpile of public debt. The Brazilian government's liabilities totaled 3.8 trillion reais ($1 trillion) in September, the Treasury reported… While that's down a notch from the previous month, it's still roughly twice what is was only 5 years ago."
October 26 - Bloomberg (Kartik Goyal): "India's foreign-exchange reserves are shrinking fast and may soon reach a level that could hamper the central bank's ability to defend the rupee, according to Bank of America Merrill Lynch… From a record $426 billion in mid-April, reserves have fallen by $32 billion as the Reserve Bank of India sold dollars to stem losses in Asia's worst-performing currency."
Central Bank Watch:
October 24 - Financial Times (Claire Jones): "The European Central Bank is facing serious challenges: rising tensions between Brussels and Rome, doubts about monetary policy and worries about Britain crashing out of the EU without a deal. A closely watched poll of purchasing managers… also showed that the region's businesses are struggling to come to terms with increased global trade tensions - and that the export-led slowdown is beginning to affect the much larger services sector… The ECB still insists it will halt its €2.5tn quantitative easing programme - which played a vital role in fuelling the eurozone recovery - by the end of the year. It argues that growth is still sufficiently strong and broad-based to forge ahead with its plans to phase out QE - the product of arduous negotiations within the ECB itself."
October 24 - Reuters (David Ljunggren and Steve Scherer): "The Bank of Canada… raised interest rates as expected and said it might speed up the pace of future hikes given the economy was running at almost full capacity and did not need any stimulus. The central bank, which has now lifted rates five times since July 2017, also hailed the signing of a new North American trade pact…"
October 24 - Bloomberg (Rupert Rowling): "Central banks are set to increase their purchases of gold in 2018 for the first time in five years as eastern European and Asian countries seek to diversify their reserves. Net purchases of gold by central banks are forecast to rise to 450 metric tons this year, up from 375 tons in 2017, according to consultancy Metals Focus Ltd. That will be the first increase since 2013, when banks boosted their holdings by 646 tons, the most for several decades."
Italy Watch:
October 23 - The Guardian (Daniel Boffey): "The European commission is at loggerheads with Rome after taking the unprecedented step of rejecting the Italian government's draft budget in a move designed to force the country's populist government to rein in its spending. Italy was presented with a three-week deadline to provide a revised financial plan… The commissioner, a former prime minister of Latvia, threatened to begin a procedure that could lead to the EU imposing fines on Italy unless the new government reconsiders. Dombrovskis accused Rome of 'openly and consciously going against commitments made'. 'Today, for the first time, the commission is obliged to request a euro area country to revise its draft budgetary plan… But we see no alternative … Breaking rules can be tempting on a first look. It can provide the illusion of breaking free. It can be tempting to try to cure debt with more debt. But, at some point, the debt weights too heavy and you end up having no freedom at all.'"
October 23 - Financial Times (Robert Smith): "Matteo Salvini, the leader of Italy's hard-right League party, has borrowed bond market language to create an ingenious new spin on the classic "enemies of the people" trope: the 'lords of the spread'. The spread in question is, of course, the difference between the yield on the Italian 10-year government bond and its German equivalent. This gap has soared to levels last seen half a decade ago as the budget stand-off between Rome and Brussels escalates. Italy's populist government has leapt on the bond market's obsession with this risk measure to conjure up images of shadowy and hostile external forces. With his talk of not bending to the will of the 'lords of the spread', Mr Salvini is invoking the image of faceless bond traders trying to break the government."
October 23 - Financial Times (Miles Johnson and Michael Peel): "Giuseppe Conte, Italy's prime minister, hailed Russia as a 'strategic partner' as he met Vladimir Putin in Moscow on Wednesday - the culmination of a month of diplomatic overtures by Rome's populist coalition, which has ramped up its pro-Russia rhetoric since taking power. In doing so, Italy is setting up a possible battle with fellow EU states around the bloc's painstakingly agreed rolling sanctions on Russia over its 2014 annexation of Crimea… Speaking to Italian business leader in Moscow before meeting Mr Putin, Mr Conte said Russia was a 'strategic partner'."
Europe Watch:
October 23 - CNBC (Tasos Vossos): "The days of quantitative easing in the euro area are long gone, according to signals from the region's $3 trillion corporate bond market. Investors are demanding ever-higher premiums for companies lower down the ratings spectrum over high-quality peers -- a turning point for a market long distorted by the European Central Bank juggernaut. The gap between triple B and single A spreads -- the lowest and second-lowest in the high-grade tier -- is now the widest since the start of the ECB's corporate bond purchase program…"
Global Bubble Watch:
October 24 - Reuters (Tom Miles): "The World Trade Organization is scrambling to develop a plan for the biggest reform in its 23-year history after U.S. President Donald Trump brought the world's top trade court to the brink of collapse by blocking appointments of its judges and threatening to pull the United States out of the organization. Trump's administration has targeted the WTO, the watchdog of global commerce, as part of his wider campaign against trade arrangements he contends have cost hundreds of thousands of U.S. jobs."
Japan Watch:
October 22 - Bloomberg (Issei Hazama): "It's an oddity of Japan's corporate bond market: many debt sales that bankers said were successful actually weren't. The secret may be getting harder to keep. Underwriters failed to fully sell at least 29% of company note offerings in September, twice the average over the past six months, according to information… based on more than 400 interviews with investors, underwriters and issuers."
Fixed Income Bubble Watch:
October 23 - Wall Street Journal (Daniel Kruger and Ira Iosebashvili): "Overseas investors, traders and central bankers are buying fewer Treasurys, a potential turning point for a $15 trillion market at the center of global finance and economics. Foreigners increased their holdings of Treasurys by $78 billion in the first eight months of 2018. That is just over half of what they bought during the same period last year and accounts for a much smaller share of Treasury issuance, as the government steps up the size of regular bond auctions to fill a growing U.S. budget gap. Foreign buyers now hold 41% of outstanding Treasury debt, their lowest share in 15 years, down from 50% as recently as 2013…"
October 24 - Wall Street Journal (Miriam Gottfried and Ryan Tracy): "Four years after a government crackdown on the leveraged-buyout market, risky loans are making a comeback-and few seem worried about it. Nearly 13% of LBOs in the first nine months of 2018 were financed with debt equating to at least seven times the target company's earnings before interest, taxes, depreciation and amortization, or Ebitda… That is more than double the level in all of last year and is on track to be the highest since 2014, when 13.5% of deals crossed that threshold and regulators began to crack down on leverage exceeding six times Ebitda. In another sign of growing risk, the amount of cash private-equity firms are putting into buyouts is falling. Their average equity contribution was 39.6% in the first nine months, also the lowest since 2014."
October 22 - Bloomberg (Misyrlena Egkolfopoulou and Claire Boston): "Netflix Inc. is once again turning to the junk-bond market to fund new programming as the streaming-video giant seeks to maintain its torrid subscriber growth. The $2 billion bond offering… comes just a week after the company reported a bigger jump in subscribers than Wall Street analysts expected. The bonds would push the cash-burning company's debt load above $10 billion for the first time. Netflix's market value has soared almost 70% this year to about $140 billion."
Leveraged Speculation Watch:
October 25 - Wall Street Journal (Rachael Levy): "Hedge funds tout their ability to do well during periods of market stress. But many aren't doing well during the current October rout. On Wednesday, a large group of hedge funds that bet for and against stocks had their worst day in almost seven years, according to… Goldman Sachs… The so-called fundamental long-short equity hedge funds tracked by Goldman dropped 1.44% on Wednesday… Goldman said it was the deepest one-day drop since the bank began tracking the data in January 2012. These funds are down 8.68% this month through Wednesday, bringing returns to minus-6.21% for the year, the report said."
Geopolitics Watch:
October 25 - Reuters (Ben Blanchard): "China's military will take action 'at any cost' to foil any attempt to separate the self-ruled island of Taiwan, which Beijing claims as its own, the country's defense minister said… China has been infuriated by recent U.S. sanctions on its military, one of a growing number of flashpoints in Sino-U.S. ties that include a bitter trade war, the issue of Taiwan, and China's increasingly muscular military posture in the South China Sea… 'The Taiwan issue is related to China's sovereignty and territorial integrity and touches upon China's core interests,' Chinese Defence Minister Wei Fenghe said…"
October 23 - Reuters (Ben Blanchard): "China's Foreign Ministry… said it has expressed deep concern to the United States after Washington sent two warships through the Taiwan Strait in the second such operation this year."
October 22 - Reuters (Adam Jourdan): "Chinese state media sharply criticized U.S. Secretary of State Mike Pompeo… after he made comments in Latin America warning about the hidden risks of seeking Chinese investment amid a growing battle for influence in the region… In an editorial…, the state-run China Daily newspaper said Pompeo's comments were 'ignorant and maliciou' and criticism that its ambitions Belt and Road infrastructure initiative was creating debt traps in other countries was false."
October 20 - Reuters (Jeff Mason, Idrees Ali, Polina Devitt and Michael Martina): "President Donald Trump said Washington would withdraw from a landmark Cold War-era treaty that eliminated nuclear missiles from Europe because Russia was violating the pact, triggering a warning of retaliatory measures from Moscow. The Intermediate-Range Nuclear Forces Treaty, negotiated by then-President Ronald Reagan and Soviet leader Mikhail Gorbachev in 1987, required elimination of short-range and intermediate-range nuclear and conventional missiles by both countries. 'Russia has not, unfortunately, honored the agreement so we're going to terminate the agreement and we're going to pull out,' Trump told reporters…"
The S&P500 dropped 3.9% (down 0.6% y-t-d), and the Dow fell 3.0% (down 0.1%). The Utilities declined 1.9% (up 1.2%). The Banks sank 5.0% (down 11.1%), and the Broker/Dealers fell 4.8% (down 5.7%). The Transports dropped 4.5% (down 6.1%). The S&P 400 Midcaps dropped 4.1% (up down 5.5%), and the small cap Russell 2000 fell 3.8% (down 3.4%). The Nasdaq100 declined 3.6% (up 7.1%). The Semiconductors sank 5.9% (down 8.0%). The Biotechs were slammed 7.1% (up 7.5%). Although bullion gained $6, the HUI gold index sank 7.0% (down 24.8%).
Three-month Treasury bill rates ended the week at 2.28%. Two-year government yields dropped 10 bps to 2.81% (up 92bps y-t-d). Five-year T-note yields fell 14 bps to 2.91% (up 70bps). Ten-year Treasury yields dropped 12 bps to 3.08% (up 67bps). Long bond yields declined seven bps to 3.31% (up 57bps). Benchmark Fannie Mae MBS yields fell eight bps to 3.93% (up 93bps).
Greek 10-year yields declined five bps to 4.28% (up 20bps y-t-d). Ten-year Portuguese yields fell 11 bps to 1.91% (down 4bps). Italian 10-year yields declined four bps to 3.45% (up 143bps). Spain's 10-year yields sank 17 bps to 1.57% (unchanged). German bund yields dropped 11 bps to 0.35% (down 8bps). French yields fell 10 bps to 0.74% (down 5bps). The French to German 10-year bond spread widened one to 39 bps. U.K. 10-year gilt yields sank 19 bps to 1.38% (up 19bps). U.K.'s FTSE equities index declined 1.6% (down 9.7%).
Japan's Nikkei 225 equities index sank 6.0% (down 6.9% y-t-d). Japanese 10-year "JGB" yields declined four bps to 0.11% (up 7bps). France's CAC40 declined 2.3% (down 6.5%). The German DAX equities index lost 3.1% (down 13.3%). Spain's IBEX 35 equities index fell 1.8% (down 13.1%). Italy's FTSE MIB index declined 2.1% (down 14.5%). EM equities were mostly lower. Brazil's Bovespa index gained 1.6% (up 12.0%), while Mexico's Bolsa fell 3.3% (down 7.0%). South Korea's Kospi index sank 6.0% (down 17.8%). India's Sensex equities index fell 2.8% (down 2.1%). China's Shanghai Exchange rose 1.9% (down 21.4%). Turkey's Borsa Istanbul National 100 index sank 6.1% (down 21.5%). Russia's MICEX equities index fell 2.2% (up 8.7%).
Investment-grade bond funds saw inflows of $415 million, while junk bond funds saw outflows jump to $2.364 billion (from Lipper).
Freddie Mac 30-year fixed mortgage rates added a basis point to 4.86% (up 92bps y-o-y). Fifteen-year rates gained three bps to 4.29% (up 104bps). Five-year hybrid ARM rates increased four bps to 4.14% (up 93bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down two bps to 4.82% (up 62bps).
Federal Reserve Credit last week declined $2.6bn to $4.137 TN. Over the past year, Fed Credit contracted $291bn, or 6.6%. Fed Credit inflated $1.328 TN, or 47%, over the past 312 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt increased $0.9bn last week to $3.434 TN. "Custody holdings" were up $69bn y-o-y, or 2.1%.
M2 (narrow) "money" supply jumped $25.9bn last week to $14.262 TN. "Narrow money" gained $520bn, or 3.8%, over the past year. For the week, Currency increased $1.4bn. Total Checkable Deposits surged $38.3bn, while Savings Deposits fell $23.3bn. Small Time Deposits added $4.6bn. Retail Money Funds gained $5.1bn.
Total money market fund assets rose $9.7bn to $2.882 TN. Money Funds gained $134bn y-o-y, or 4.9%.
Total Commercial Paper increased $5.2bn to $1.088 TN. CP gained $21bn y-o-y, or 1.9%.
Currency Watch:
October 23 - Bloomberg (Emma Dai): "Dollar-yuan trading volume surpassed the frenzied levels seen during the 2015 devaluation on Wednesday, amid signs China is trying to prevent its currency from weakening too fast. Volume was up 27% at $66 billion…, the most since Bloomberg began compiling the data in 2014… 'Authorities may have offered dollar liquidity to yuan sellers in the market, so the yuan wouldn't depreciate too fast amid selling pressures,' said Li Liuyang, a financial market analyst at China Merchants Bank Co. The Chinese currency may face a lot more pressure if it easily breaks past the 6.95 per dollar level, Li said."
The U.S. dollar index gained 0.7% to 96.412 (up 4.7% y-t-d). For the week on the upside, the Brazilian real increased 2.0% and the Japanese yen gained 0.6%. For the week on the downside, the British pound declined 1.9%, the Norwegian krone 1.6%, the Swedish krona 1.6%, the New Zealand dollar 1.4%, the South African rand 1.3%, the euro 1.0%, the South African rand 0.9%, the Australian dollar 0.4%, the Mexican peso 0.4%, the Singapore dollar 0.2% and the Swiss franc 0.1%. The Chinese renminbi declined 0.21% versus the dollar this week (down 6.29% y-t-d).
Commodities Watch:
The Goldman Sachs Commodities Index declined 2.0% (up 5.1% y-t-d). Spot Gold increased 0.5% to $1,233 (down 5.4%). Silver gained 0.5% to $14.725 (down 14.1%). Crude fell $1.52 to $67.60 (up 12%). Gasoline sank 5.1% (up 1%), and Natural Gas declined 1.5% (up 8%). Copper fell 1.0% (down 17%). Wheat added 0.2% (up 18%). Corn increased 0.3% (up 5%).
Market Dislocation Watch:
October 24 - Financial Times (Isabelle Mateos y Lago): "The European Commission has rejected Italy's draft budget. Valdis Dombrovskis, the commission's vice-president responsible for the euro, said this week that Rome's arguments for increasing its fiscal deficit were 'not convincing'. The Italians had been warned. But the Five Star/League coalition government nevertheless decided to pursue a fiscal expansion instead of the adjustment prescribed by European rules. The budget aims for a fiscal deficit of 2.4% - not enormous in itself, but it is three times as large as the previous government's commitment… The bond market's reaction suggests concern, but not outright alarm. This may not last. The episode brings back memories of the confrontation that took place in 2015 between the freshly elected Greek government and European officials."
October 24 - Bloomberg (Joe Easton): "When the next downturn occurs, beware passive investors. That's the warning from JPMorgan…, which says $7.4 trillion of assets managed by passive funds around the world -- concentrated in large-cap and U.S. small- and mid-cap stocks -- will exacerbate a rout during the next recession. 'This is something worth noting at this late stage of a cycle given that passive investing seems to be trend following, with inflows pushing equities higher during bull markets, and outflows likely to magnify their fall during corrections,' analysts Eduardo Lecubarri and Nishchay Dayal wrote… Passive investing wasn't a big driver of equity returns in the last recession, they say. Back in 2007, the strategy's overall size amounted to about 26% of actively managed large and all-cap funds' assets under management (AUM) in the U.S., and about 15% outside of the U.S. Eleven years later, those figures have jumped to 83% and 53%..."
Trump Administration Watch:
October 23 - Bloomberg (Mike Dorning): "President Donald Trump stepped up his attacks on Federal Reserve Chairman Jerome Powell, saying he 'maybe' regrets appointing him and demurring when asked under what circumstances he would fire the central bank chief. Almost a year since nominating Powell to the post, Trump told the Wall Street Journal… that he was intentionally sending a direct message that he wanted lower interest rates, even as he acknowledged that the central bank is an independent entity. Trump said in the interview that Powell 'almost looks like he's happy raising interest rates' and that it's 'too early to tell, but maybe' he regrets appointing him."
October 23 - Financial Times (Ted Kemp and Joanna Tan): "President Donald Trump directly accused Federal Reserve Chairman Jerome Powell of endangering the U.S. economy by raising interest rates, according to The Wall Street Journal. 'I'm just saying this: I'm very unhappy with the Fed because Obama had zero interest rates,' Trump told the Journal… 'Every time we do something great, he raises the interest rates.'"
October 25 - Wall Street Journal (Bob Davis and Lingling Wei): "The U.S. is refusing to resume trade negotiations with China until Beijing comes up with a concrete proposal to address Washington's complaints about forced technology transfers and other economic issues, said officials on both sides… The impasse threatens to undermine a meeting between Presidents Trump and Xi Jinping scheduled for the end of November at the Group of 20 leaders summit… U.S. businesses have been counting on sufficient progress at the meeting for the Trump administration to suspend its plan to increase tariffs on $200 billion of Chinese imports to 25% on Jan. 1, from the current 10%. Such a move would be a blow to U.S. importers and consumers."
October 21 - Axios (Jonathan Swan): "President Trump has no intention of easing his tariffs on China, according to three sources with knowledge of his private conversations. Instead, these sources say he wants Chinese leaders to feel more pain from his tariffs - which he believes need more time to fully kick in. What we're hearing: 'He wants them to suffer more' from tariffs on $200 billion of Chinese goods, said a source with direct knowledge of Trump's thinking, and the president believes the longer his tariffs last, the more leverage he'll have."
October 23 - CNBC (Liz Moyer): "President Donald Trump will meet with China's president, Xi Jinping, next month at the G-20 summit in Buenos Aires, Argentina, according to Larry Kudlow… Kudlow told reporters… that the two leaders 'will meet for a bit' but didn't have other details. Any meeting between the two comes at a time of escalating tensions over trade. Most recently, the Trump administration put tariffs on some $200 billion of Chinese imports, and Beijing retaliated with tariffs on U.S. goods. The two nations have struggled to come to the negotiating table over trade, as the U.S. raises concerns about intellectual property and a widening trade deficit. 'Our asks are on the table, I'd love to see them respond,' Kudlow said… 'Thus far they haven't.'"
October 22 - Bloomberg: "U.S. President Donald Trump's top economic adviser accused China of refusing to engage on trade issues in a Financial Times interview, while a separate report said Trump believes it will take more time for tariffs to bite. 'We gave them a detailed list of asks, regarding technology for example, [which] basically hasn't changed for five or six months. The problem with the story is that they don't respond. Nothing. Nada,' National Economic Council Director Larry Kudlow told the Financial Times… 'It's really the president and the Chinese Communist party, they have to make a decision, and so far they have not, or they have made a decision not to do anything, nothing. I've never seen anything like it.'"
October 22 - Reuters (Jeff Mason): "U.S. President Donald Trump, speaking to reporters at the White House as he left on a campaign trip to Texas, said… his administration planned to produce a resolution within two weeks calling for a 10% tax cut for middle-income people. 'We're putting in a resolution sometime in the next week or week-and-a-half, two weeks… We're giving a middle-income tax reduction of about 10%. We're doing it now for middle-income people.'"
October 21 - Reuters (Lesley Wroughton): "U.S. Treasury Secretary Steven Mnuchin dismissed concerns that China's weakest economic growth since the global financial crisis could spill into other emerging markets and destabilize U.S. financial markets… 'I am not concerned about that destabilizing our markets,' Mnuchin said… 'Broadly, right now, I don't see a contagion risk,' he added."
Federal Reserve Watch:
October 24 - Bloomberg (Erik Wasson): "The chairman of the Senate Finance Committee stood by Federal Reserve Chairman Jerome Powell after President Donald Trump said he 'maybe' regrets appointing him because the Fed has increased interest rates. Asked whether Powell and the Fed are doing a good job, Senator Orrin Hatch said…:'I think so. I think they all are, to be honest with you. I don't agree with everything they do but they are still pretty good people.' Hatch of Utah… stood by the Fed's independence. 'They have a right to act the way they do,' Hatch said."
October 24 - Reuters (Kristen Haunss): "Regulators are concerned about a material loosening of terms and weaknesses in the risk management of the US$1.1trn US leveraged loan market, a Federal Reserve official said… Covenant-lite loans, incremental facilities and so-called addbacks to earnings before interest, tax, depreciation and amoritization (Ebitda) are three areas regulators are focusing their attention, according to… Todd Vermilyea, senior associate director at the Federal Reserve… 'The presence of these practices, especially without the appropriate controls, may lead to safety and soundness concerns,' he said. The leveraged loan market, which finances companies… has recently been flooded with aggressive deals featuring high debt levels and loose terms."
October 24 - Reuters (Jonathan Spicer): "A 'prolonged' fall in U.S. stock markets could eventually begin to weigh on the U.S. economy, though there are no signs of pinched credit or a pending recession so far, Cleveland Federal Reserve President Loretta Mester said… 'If there was a prolonged downturn in the market and a pullback in risk across the board with a lowering of credit extension, then of course you'll have' an effect on the data, Mester… told the Forecasters Club…"
October 23 - CNBC (Steve Matthews): "Federal Reserve Bank of Atlanta President Raphael Bostic said he supports further gradual interest rate hikes and warned that running the economy 'hot' with too much stimulus could end in a recession hurting lower-income Americans. 'Unless the data talk me out of it, I view a continued, gradual removal of policy accommodation as appropriate until we get to a neutral policy rate,' Bostic said... While there's uncertainty about neutral -- the level of rates that neither speed up nor slow down economic activity -- he said 'my assessment is that we are still a few rate hikes away.'"
October 23 - CNBC (Jeff Cox): "The risk of a powerful economy overheating is the reason the Fed should stick to its schedule of interest rate increases, Atlanta Federal Reserve President Raphael Bostic said… With the jobless rate running at 3.7% and considerably below what is considered full employment, the Fed has to weigh the risks of tightening too quickly and choking off what has been a robust economic run, and waiting too long and risking runaway price pressures. 'And while I wrestle with that choice, one thing seems clear: there is little reason to keep our foot on the gas pedal,' Bostic said…"
October 24 - Reuters (Ann Saphir): "The U.S. Federal Reserve should continue raising interest rates at least two but probably three more times before assessing whether further rate hikes to restrain growth are warranted, Dallas Federal Reserve Bank President Robert Kaplan said… 'My base case for 2019 is to gradually and patiently raise the federal funds rate into a range of 2.5 to 2.75% or, more likely, into a range of 2.75 to 3%,' Kaplan said…"
U.S. Bubble Watch:
October 23 - CNBC (Jeff Cox): "Former Federal Reserve Chairman Paul Volcker, who has reached legend status in the world of central banking, isn't optimistic about current conditions. When Volcker looks around now, he sees 'a hell of a mess in every direction,' including a lack of basic respect for government institutions, a current Fed that seems to be following a completely arbitrary benchmark and a 'swamp' in Washington run by plutocrats. 'At least the military still has all the respect. But I don't know, how can you run a democracy when nobody believes in the leadership of the country?'"
October 25 - Bloomberg (Jenny Leonard, Sarah Foster and Katia Dmitrieva): "The U.S. merchandise-trade deficit widened to a record in September while orders for business equipment declined for a second month, adding to signs that an escalating tariff war is starting to constrain economic growth. The gap in goods trade rose to $76 billion from $75.5 billion as gains in imports outpaced exports…"
October 25 - Wall Street Journal (Kate Davidson): "A stark pickup in government spending, particularly in defense, has helped fuel a broad acceleration in U.S. economic growth in the past year and a half, according to a Wall Street Journal analysis… The U.S. economy has expanded at a 2.9% annual rate since April of 2017… That growth rate is faster than the 2.2% annual growth rate between mid-2009-when the expansion started-and April 2017. Faster government spending accounted for nearly half of the acceleration, according to The Wall Street Journal analysis."
October 25 - Bloomberg (Lisa Lee, Jesse Hamilton, Sally Bakewell and Craig Torres): "In the Trump era, Wall Street banks have been testing the limits of what they can get away with in piling risky loans onto highly indebted companies. They may have finally crossed a line. A top Federal Reserve official fired a rare public warning Wednesday, saying that banks appear to be chasing increasingly dangerous deals and foregoing protections against borrowers going bust. 'There may be a material loosening of terms and weaknesses in risk management,' Todd Vermilyea, the Fed's head of risk surveillance and data, told bankers… 'Some institutions could be taking on risk without the appropriate mitigating controls.' The warnings come after watchdogs have spent most of the year expressing confidence about the health of the $1.3 trillion market for leveraged loans."
October 24 - Reuters (Jason Lange): "U.S. factories have raised their prices because of tariffs, although inflation has appeared modest or moderate in most parts of the country, the Federal Reserve said… The U.S. central bank also said in its latest 'Beige Book' report that the economy appeared to be growing modestly to moderately and that businesses across a number of industries had reported labor shortages."
October 24 - Reuters (Lucia Mutikani): "Sales of new U.S. single-family homes fell to a near two-year low in September and data for the prior three months was revised lower, the latest indications that rising mortgage rates and higher prices were undercutting the housing market. …New home sales dropped 5.5% to a seasonally adjusted annual rate of 553,000 units last month. That was the lowest level since December 2016. August's sales pace was revised down to 585,000 units from the previously reported 629,000 units."
October 24 - Reuters (Diana Olick): "Builders warned of a slowdown in home sales. And they were right - except the numbers are even worse than expected. Sales of newly built homes dropped 5.5% in September compared with August, and were 13% lower compared with a year ago, according to the U.S. Census. This was well below predictions, even with higher rates factored in."
October 23 - CNBC (David Randall): "The easy money may be over. U.S. company earnings growth is slowing after a bumper start to the year, and the reality of an escalating trade war between two of the world's largest economies is starting to weigh on companies ranging from Caterpillar Inc to Ford Motor Co. While earnings growth is still high at 22% so far this quarter, the amount by which S&P 500 index companies are beating analyst estimates is nearly half of what it was during the first quarter, according to Refinitiv data."
October 22 - Wall Street Journal (Rachel Louise Ensign): "There's less free money to go around for banks. After nearly three years of rate increases from the Federal Reserve, customers are pulling billions of dollars out of accounts that don't earn interest and putting their money into higher-yielding alternatives. That will crimp banks' ability to grow profits going forward. The four largest U.S. banks... reported a combined 5% drop in U.S. deposits that earn no interest in the third quarter compared with a year ago."
October 26 - Bloomberg (Romy Varghese): "The fiscal contrast between California Governor Jerry Brown and Gavin Newsom, the frontrunner to replace him, may best be shown through a decades-old program to fight blight. Facing a $25 billion budget deficit, Brown entered office in 2011 with a cost-cutting plan that included killing hundreds of redevelopment agencies. Eight years later, Newsom is poised to inherit an almost $9 billion surplus. One of his campaign planks: bring the agencies back. That kind of divergence is making bond investors in boom-and-bust California nervous. Newsom, a Democrat who is seen as coasting to victory over a Republican businessman, would have to balance campaign promises against the threat of a return to massive deficits."
China Watch:
October 22 - CNBC (Brian Schwartz): "Chinese government leaders have a message for American investors: They're not afraid of a trade war with the United States. On Monday in Beijing, Zhang Qingli, a leading member of a Chinese committee tasked with forging alliances with other nations, told a small group of U.S. business leaders, lobbyists and public relations executives that China refuses to be intimidated by an ongoing trade war with the Trump administration. 'China never wants a trade war with anybody, not to mention the U.S., who has been a long term strategic partner, but we also do not fear such a war,' Zhang… 'The U.S. side has disregarded a consensus with China after multiple rounds of consultations, insisting on waging a trade war against China and continuing to escalate it. In response, China is left with no other option but to make necessary counter actions,' Zhang said…"
October 21 - Bloomberg: "Chinese stocks jumped the most since March 2016 after top officials moved to shore up the economy and offer support to the struggling private sector. The Shanghai Composite Index surged 4.1% on Monday and extending Friday's 2.6% gain… President Xi Jinping vowed 'unwavering' support for non-state firms over the weekend, the country's stock exchanges committed to help manage share-pledge risks, and the government released a plan to cut personal income taxes. That follows a rare coordinated effort from top financial officials on Friday to support what's been the world's worst performing equity market."
October 24 - Wall Street Journal (Mike Bird): "Chinese stocks are widely used as collateral for loans. That introduces extra vulnerabilities to a falling market, so authorities are now attempting to contain the risks. Nearly 10% of shares in mainland China are used as collateral for loans by large shareholders. The practice has boomed even as margin lending, another form of share-backed borrowing, has decreased. Margin lending helped fuel a market selloff in 2015, as retail investors were forced to dump shares to cover their losses. 'Users of financial leverage in equities have shifted from retail investors in the 2015 episode to major shareholders in the form of stock-pledged loans,' Goldman Sachs analysts said…"
October 22 - Bloomberg: "China's central bank plans to give 10 billion yuan ($1.4bn) to China Bond Insurance Co. to provide credit support for debt sales by private enterprises, according to people familiar with the situation. The money is part of the plan the People's Bank of China announced… to support private firms issuing debt. The central bank didn't provide any details on how the plan would work, its size, or when it would begin. Officials also hadn't responded to multiple requests for comment. China's announcements… of fresh measures to ease the funding strains of private companies came after top officials commented repeatedly in an attempt to restore confidence in the world's second-largest economy. The central bank reiterated President Xi Jinping's vows to offer 'unwavering' support for the private sector, which has been most affected by the government's campaign to curb debt and cut shadow banking."
October 21 - Bloomberg (Connor Cislo): "As China braces for the full impact of President Donald Trump's trade war, it's seeking to learn from Japan's economic battles with the U.S. during the Reagan years. Chinese officials, business people and academics have been pressing Japanese counterparts to share experiences from the 1980s, when Tokyo found itself in Washington's crosshairs as its huge trade surplus and increasing industrial might sparked alarm in America. While there are differences between Japan's ascent as a commercial power a generation ago and China's emergence today as a potential superpower, Japan also has lessons for its neighbor in dealing with rising debt, asset-price bubbles and an aging population."
October 19 - Bloomberg: "China's home-price gains slowed in September, breaking a half-year streak of accelerating inflation in the housing market. New-home prices gained 1% from the previous month… That compared with a 1.5% increase in August. The Chinese government is likely to keep a tight grip on the property market at least until next year, despite a shift in policy focus from deleveraging to supporting slower growth under rising trade tensions, according to economists including Capital Economics… 'A market correction has started, as sales have undoubtedly cooled,' Yang Kewei, Shanghai-based research director at China Real Estate Information Corp., said... 'A bottleneck in residential purchasing power has been seen in some cities, especially those in second tiers.'"
October 21 - Bloomberg: "China's burst of local bond issuance is supposed to fund roads, affordable homes and other infrastructure developments that will help support its flagging economy. But there don't seem to be enough projects around to spend the money on. Provincial authorities had by the end of September already raised 92% of the 1.35 trillion yuan ($195bn) worth of special infrastructure bonds that the central government has targeted for the entire year. The bonds… are part of an attempt to counter the economic slowdown by financing projects from railwys to environmental facilities and affordable homes."
October 24 - Financial Times (Blake Schmidt and Frederik Balfour): "China Evergrande Group, the country's most indebted developer, has a lot more work to do as it tries to win over investors with plans to reduce leverage and diversify its business. One key concern as Evergrande's stock slides toward a 15-month low and its dollar bonds tumble: the company's continued reliance on China's shadow banking system. The… developer… cut its 671 billion yuan ($97bn) debt load by 8.4% in the first half… But the company has had less success reducing its exposure to high-cost trust financing: it accounted for about 45% of Evergrande's total borrowing at the end of June, the largest portion since at least 2010."
October 23 - Bloomberg: "Corporate debt investors navigating an expanding minefield of bond delinquencies in China are reaching for a hedging tool similar to credit-default swaps that was last used more than two years ago. Since September, China Bond Insurance Co. and Bank of Hangzhou Co. have sold four instruments called credit risk mitigation warrants, which insure creditors against defaults of the underlying debt. These risk hedging instruments are set to become increasingly popular as bond failures pile up, according to Golden Credit Rating International Co. Defaults have spiraled to a record 66.1 billion yuan ($9.5bn) this year as China's deleveraging campaign bites and economic headwinds batter investor confidence. That's made raising funds without resorting to credit protection tougher for some companies. Last week, the biggest state bank threw a lifeline to cash-strapped private firms by expanding a debt-to-equity swap program."
EM Watch:
October 26 - Bloomberg (Rachel Gamarski and Mario Sergio Lima): "The winner of Brazil's presidential election this Sunday will inherit a near-record stockpile of public debt. The Brazilian government's liabilities totaled 3.8 trillion reais ($1 trillion) in September, the Treasury reported… While that's down a notch from the previous month, it's still roughly twice what is was only 5 years ago."
October 26 - Bloomberg (Kartik Goyal): "India's foreign-exchange reserves are shrinking fast and may soon reach a level that could hamper the central bank's ability to defend the rupee, according to Bank of America Merrill Lynch… From a record $426 billion in mid-April, reserves have fallen by $32 billion as the Reserve Bank of India sold dollars to stem losses in Asia's worst-performing currency."
Central Bank Watch:
October 24 - Financial Times (Claire Jones): "The European Central Bank is facing serious challenges: rising tensions between Brussels and Rome, doubts about monetary policy and worries about Britain crashing out of the EU without a deal. A closely watched poll of purchasing managers… also showed that the region's businesses are struggling to come to terms with increased global trade tensions - and that the export-led slowdown is beginning to affect the much larger services sector… The ECB still insists it will halt its €2.5tn quantitative easing programme - which played a vital role in fuelling the eurozone recovery - by the end of the year. It argues that growth is still sufficiently strong and broad-based to forge ahead with its plans to phase out QE - the product of arduous negotiations within the ECB itself."
October 24 - Reuters (David Ljunggren and Steve Scherer): "The Bank of Canada… raised interest rates as expected and said it might speed up the pace of future hikes given the economy was running at almost full capacity and did not need any stimulus. The central bank, which has now lifted rates five times since July 2017, also hailed the signing of a new North American trade pact…"
October 24 - Bloomberg (Rupert Rowling): "Central banks are set to increase their purchases of gold in 2018 for the first time in five years as eastern European and Asian countries seek to diversify their reserves. Net purchases of gold by central banks are forecast to rise to 450 metric tons this year, up from 375 tons in 2017, according to consultancy Metals Focus Ltd. That will be the first increase since 2013, when banks boosted their holdings by 646 tons, the most for several decades."
Italy Watch:
October 23 - The Guardian (Daniel Boffey): "The European commission is at loggerheads with Rome after taking the unprecedented step of rejecting the Italian government's draft budget in a move designed to force the country's populist government to rein in its spending. Italy was presented with a three-week deadline to provide a revised financial plan… The commissioner, a former prime minister of Latvia, threatened to begin a procedure that could lead to the EU imposing fines on Italy unless the new government reconsiders. Dombrovskis accused Rome of 'openly and consciously going against commitments made'. 'Today, for the first time, the commission is obliged to request a euro area country to revise its draft budgetary plan… But we see no alternative … Breaking rules can be tempting on a first look. It can provide the illusion of breaking free. It can be tempting to try to cure debt with more debt. But, at some point, the debt weights too heavy and you end up having no freedom at all.'"
October 23 - Financial Times (Robert Smith): "Matteo Salvini, the leader of Italy's hard-right League party, has borrowed bond market language to create an ingenious new spin on the classic "enemies of the people" trope: the 'lords of the spread'. The spread in question is, of course, the difference between the yield on the Italian 10-year government bond and its German equivalent. This gap has soared to levels last seen half a decade ago as the budget stand-off between Rome and Brussels escalates. Italy's populist government has leapt on the bond market's obsession with this risk measure to conjure up images of shadowy and hostile external forces. With his talk of not bending to the will of the 'lords of the spread', Mr Salvini is invoking the image of faceless bond traders trying to break the government."
October 23 - Financial Times (Miles Johnson and Michael Peel): "Giuseppe Conte, Italy's prime minister, hailed Russia as a 'strategic partner' as he met Vladimir Putin in Moscow on Wednesday - the culmination of a month of diplomatic overtures by Rome's populist coalition, which has ramped up its pro-Russia rhetoric since taking power. In doing so, Italy is setting up a possible battle with fellow EU states around the bloc's painstakingly agreed rolling sanctions on Russia over its 2014 annexation of Crimea… Speaking to Italian business leader in Moscow before meeting Mr Putin, Mr Conte said Russia was a 'strategic partner'."
Europe Watch:
October 23 - CNBC (Tasos Vossos): "The days of quantitative easing in the euro area are long gone, according to signals from the region's $3 trillion corporate bond market. Investors are demanding ever-higher premiums for companies lower down the ratings spectrum over high-quality peers -- a turning point for a market long distorted by the European Central Bank juggernaut. The gap between triple B and single A spreads -- the lowest and second-lowest in the high-grade tier -- is now the widest since the start of the ECB's corporate bond purchase program…"
Global Bubble Watch:
October 24 - Reuters (Tom Miles): "The World Trade Organization is scrambling to develop a plan for the biggest reform in its 23-year history after U.S. President Donald Trump brought the world's top trade court to the brink of collapse by blocking appointments of its judges and threatening to pull the United States out of the organization. Trump's administration has targeted the WTO, the watchdog of global commerce, as part of his wider campaign against trade arrangements he contends have cost hundreds of thousands of U.S. jobs."
Japan Watch:
October 22 - Bloomberg (Issei Hazama): "It's an oddity of Japan's corporate bond market: many debt sales that bankers said were successful actually weren't. The secret may be getting harder to keep. Underwriters failed to fully sell at least 29% of company note offerings in September, twice the average over the past six months, according to information… based on more than 400 interviews with investors, underwriters and issuers."
Fixed Income Bubble Watch:
October 23 - Wall Street Journal (Daniel Kruger and Ira Iosebashvili): "Overseas investors, traders and central bankers are buying fewer Treasurys, a potential turning point for a $15 trillion market at the center of global finance and economics. Foreigners increased their holdings of Treasurys by $78 billion in the first eight months of 2018. That is just over half of what they bought during the same period last year and accounts for a much smaller share of Treasury issuance, as the government steps up the size of regular bond auctions to fill a growing U.S. budget gap. Foreign buyers now hold 41% of outstanding Treasury debt, their lowest share in 15 years, down from 50% as recently as 2013…"
October 24 - Wall Street Journal (Miriam Gottfried and Ryan Tracy): "Four years after a government crackdown on the leveraged-buyout market, risky loans are making a comeback-and few seem worried about it. Nearly 13% of LBOs in the first nine months of 2018 were financed with debt equating to at least seven times the target company's earnings before interest, taxes, depreciation and amortization, or Ebitda… That is more than double the level in all of last year and is on track to be the highest since 2014, when 13.5% of deals crossed that threshold and regulators began to crack down on leverage exceeding six times Ebitda. In another sign of growing risk, the amount of cash private-equity firms are putting into buyouts is falling. Their average equity contribution was 39.6% in the first nine months, also the lowest since 2014."
October 22 - Bloomberg (Misyrlena Egkolfopoulou and Claire Boston): "Netflix Inc. is once again turning to the junk-bond market to fund new programming as the streaming-video giant seeks to maintain its torrid subscriber growth. The $2 billion bond offering… comes just a week after the company reported a bigger jump in subscribers than Wall Street analysts expected. The bonds would push the cash-burning company's debt load above $10 billion for the first time. Netflix's market value has soared almost 70% this year to about $140 billion."
Leveraged Speculation Watch:
October 25 - Wall Street Journal (Rachael Levy): "Hedge funds tout their ability to do well during periods of market stress. But many aren't doing well during the current October rout. On Wednesday, a large group of hedge funds that bet for and against stocks had their worst day in almost seven years, according to… Goldman Sachs… The so-called fundamental long-short equity hedge funds tracked by Goldman dropped 1.44% on Wednesday… Goldman said it was the deepest one-day drop since the bank began tracking the data in January 2012. These funds are down 8.68% this month through Wednesday, bringing returns to minus-6.21% for the year, the report said."
Geopolitics Watch:
October 25 - Reuters (Ben Blanchard): "China's military will take action 'at any cost' to foil any attempt to separate the self-ruled island of Taiwan, which Beijing claims as its own, the country's defense minister said… China has been infuriated by recent U.S. sanctions on its military, one of a growing number of flashpoints in Sino-U.S. ties that include a bitter trade war, the issue of Taiwan, and China's increasingly muscular military posture in the South China Sea… 'The Taiwan issue is related to China's sovereignty and territorial integrity and touches upon China's core interests,' Chinese Defence Minister Wei Fenghe said…"
October 23 - Reuters (Ben Blanchard): "China's Foreign Ministry… said it has expressed deep concern to the United States after Washington sent two warships through the Taiwan Strait in the second such operation this year."
October 22 - Reuters (Adam Jourdan): "Chinese state media sharply criticized U.S. Secretary of State Mike Pompeo… after he made comments in Latin America warning about the hidden risks of seeking Chinese investment amid a growing battle for influence in the region… In an editorial…, the state-run China Daily newspaper said Pompeo's comments were 'ignorant and maliciou' and criticism that its ambitions Belt and Road infrastructure initiative was creating debt traps in other countries was false."
October 20 - Reuters (Jeff Mason, Idrees Ali, Polina Devitt and Michael Martina): "President Donald Trump said Washington would withdraw from a landmark Cold War-era treaty that eliminated nuclear missiles from Europe because Russia was violating the pact, triggering a warning of retaliatory measures from Moscow. The Intermediate-Range Nuclear Forces Treaty, negotiated by then-President Ronald Reagan and Soviet leader Mikhail Gorbachev in 1987, required elimination of short-range and intermediate-range nuclear and conventional missiles by both countries. 'Russia has not, unfortunately, honored the agreement so we're going to terminate the agreement and we're going to pull out,' Trump told reporters…"
Friday Afternoon Links
[Reuters] S&P 500 ends at lowest since May as tech, internet stocks tumble
[Reuters] Weak Amazon, Alphabet results ignite growth worries
[Reuters] Soothing words from Fed as rate hits ceiling for first time
[CNBC] Fed's Mester: Rate hikes are based on economic data not preconceived notions on where they should be
[Reuters] Turkey demands extradition of 18 Saudis in Khashoggi case
[FT] Draghi launches defence of central banks over political heat
[FT] No hiding place for investors in markets wobble
[Reuters] Weak Amazon, Alphabet results ignite growth worries
[Reuters] Soothing words from Fed as rate hits ceiling for first time
[CNBC] Fed's Mester: Rate hikes are based on economic data not preconceived notions on where they should be
[Reuters] Turkey demands extradition of 18 Saudis in Khashoggi case
[FT] Draghi launches defence of central banks over political heat
[FT] No hiding place for investors in markets wobble
Thursday, October 25, 2018
Friday's News Links
[BloombergQ] Equities Rout Resumes; Dollar, Bonds Push Higher: Markets Wrap
[Reuters] Amazon shares sink 10 percent on growth worries
[CNBC] The US economy grew at a 3.5% pace in the third quarter, faster than expected
[BloombergQ] Tech stocks battered after disappointing Amazon and Alphabet results
[Reuters] Still accommodative, Fed must keep hiking U.S. rates -Mester
[Reuters] Market drop nowhere near harming U.S. economy: Fed's Mester
[BloombergQ] The R Word Resurfaces: Is Italy Heading for Another Recession?
[SCMP] Chinese Defence Minister Wei Fenghe demands US retract allegations of interference
[WSJ] The Shale Boom Calmed Oil Markets, but for How Much Longer?
[WSJ] China Puts Yuan Skeptics on Notice as Currency Nears Decade Low
[FT] Janet Yellen on Trump, Fed politics and nurturing recovery
[FT] Renminbi falls to weakest level since 2008
[FT] China sees explosive growth of billionaires
[BloombergSub] China's $35 Trillion Problem: Managing Financial Assets Is Hard
[Reuters] Amazon shares sink 10 percent on growth worries
[CNBC] The US economy grew at a 3.5% pace in the third quarter, faster than expected
[BloombergQ] Tech stocks battered after disappointing Amazon and Alphabet results
[Reuters] Still accommodative, Fed must keep hiking U.S. rates -Mester
[Reuters] Market drop nowhere near harming U.S. economy: Fed's Mester
[BloombergQ] The R Word Resurfaces: Is Italy Heading for Another Recession?
[SCMP] Chinese Defence Minister Wei Fenghe demands US retract allegations of interference
[WSJ] The Shale Boom Calmed Oil Markets, but for How Much Longer?
[WSJ] China Puts Yuan Skeptics on Notice as Currency Nears Decade Low
[FT] Janet Yellen on Trump, Fed politics and nurturing recovery
[FT] Renminbi falls to weakest level since 2008
[FT] China sees explosive growth of billionaires
[BloombergSub] China's $35 Trillion Problem: Managing Financial Assets Is Hard
Thursday Evening Links
[BloombergQ] Tech Leads Stock Recovery; Dollar Hits Year High: Markets Wrap
[CNBC] Amazon drops on revenue and guidance miss
[Reuters] Fed vice chair Clarida: 'Some further' rate increases warranted
[Reuters] Five things to know about Trump's war (of words) on the Fed
[CNBC] Fed's new Vice Chair Clarida backs more rate hikes in first major policy speech
[BloombergQ] Draghi Says Stimulus Withdrawal on Track Despite Growth Wobble
[WSJ] ECB to Press Ahead With QE Taper, Holds Rates
[WSJ] A Top Chinese Oilman Vanishes, and a Manhattan Buying Binge Ends
[WSJ] Goldman: Wednesday Was One of the Worst Days in Years for Stock-Picking Hedge Funds
[FT] Paul Volcker sets a challenge for the next generation
[CNBC] Amazon drops on revenue and guidance miss
[Reuters] Fed vice chair Clarida: 'Some further' rate increases warranted
[Reuters] Five things to know about Trump's war (of words) on the Fed
[CNBC] Fed's new Vice Chair Clarida backs more rate hikes in first major policy speech
[BloombergQ] Draghi Says Stimulus Withdrawal on Track Despite Growth Wobble
[WSJ] ECB to Press Ahead With QE Taper, Holds Rates
[WSJ] A Top Chinese Oilman Vanishes, and a Manhattan Buying Binge Ends
[WSJ] Goldman: Wednesday Was One of the Worst Days in Years for Stock-Picking Hedge Funds
[FT] Paul Volcker sets a challenge for the next generation
Wednesday, October 24, 2018
Thursday's News Links
[Reuters] Wall Street rises as technology stocks gain
[Reuters] Oil prices fall one percent amid global stock market slump
[CNBC] US trade deficit in goods widens for fourth straight month, hits $76 billion
[Reuters] U.S. core capital goods orders decline for second straight month
[Reuters] U.S. won't talk to China on trade until it gets specific plan to halt tech theft
[Reuters] ECB sticks to stimulus exit plans despite darker outlook
[Reuters] U.S. dairy farmers get little help from Canada trade deal
[Reuters] China says army will act 'at any cost' to prevent Taiwan split
[WSJ] Government and Military Spending Fuel U.S. Growth
[WSJ] Editorial Board: Trump Flunks Fed Politics
[FT] ECB reiterates plans to halt bond purchases in December
[FT] ECB faces challenges over Italy, Brexit — and its own strategy
[BloombergSub] China's Most-Indebted Developer Has a Risky Shadow Loan Habit
[Reuters] Oil prices fall one percent amid global stock market slump
[CNBC] US trade deficit in goods widens for fourth straight month, hits $76 billion
[Reuters] U.S. core capital goods orders decline for second straight month
[Reuters] U.S. won't talk to China on trade until it gets specific plan to halt tech theft
[Reuters] ECB sticks to stimulus exit plans despite darker outlook
[Reuters] U.S. dairy farmers get little help from Canada trade deal
[Reuters] China says army will act 'at any cost' to prevent Taiwan split
[WSJ] Government and Military Spending Fuel U.S. Growth
[WSJ] Editorial Board: Trump Flunks Fed Politics
[FT] ECB reiterates plans to halt bond purchases in December
[FT] ECB faces challenges over Italy, Brexit — and its own strategy
[BloombergSub] China's Most-Indebted Developer Has a Risky Shadow Loan Habit
Wednesday Evening Links
[CNBC] Dow erases gains for the year, tumbles more than 600 points as stocks extend October swoon
[BloombergQ] Dollar Climbs to One-Year High as Europe’s Currencies Crushed
[Reuters] U.S. manufacturers say tariffs pushing prices higher: Fed
[BloombergQ] JPMorgan Sees $7.4 Trillion Passive Selling Pressure in Downturn
[Reuters] Regulators concerned about material loosening in leveraged loan market
[Reuters] Bank of Canada raises rates, might speed up pace of future hikes
[Reuters] Prolonged market slump could bruise U.S. economy: Fed's Mester
[CNBC] Buyers 'hibernating' as spiking mortgage rates hit housing harder than expected
[BloombergQ] Central Banks to Increase Gold Buying for First Time Since 2013
[BloombergQ] Senate Finance Chairman Backs Powell After Trump Faults Fed Chief
[FT] Italy’s face-off with Brussels has echoes of the Greek debt crisis
[BloombergQ] Dollar Climbs to One-Year High as Europe’s Currencies Crushed
[Reuters] U.S. manufacturers say tariffs pushing prices higher: Fed
[BloombergQ] JPMorgan Sees $7.4 Trillion Passive Selling Pressure in Downturn
[Reuters] Regulators concerned about material loosening in leveraged loan market
[Reuters] Bank of Canada raises rates, might speed up pace of future hikes
[Reuters] Prolonged market slump could bruise U.S. economy: Fed's Mester
[CNBC] Buyers 'hibernating' as spiking mortgage rates hit housing harder than expected
[BloombergQ] Central Banks to Increase Gold Buying for First Time Since 2013
[BloombergQ] Senate Finance Chairman Backs Powell After Trump Faults Fed Chief
[FT] Italy’s face-off with Brussels has echoes of the Greek debt crisis
Tuesday, October 23, 2018
Wednesday's News Links
[Reuters] Fears for growth, company profits keep stocks under pressure after five days in red
[Reuters] U.S. new home sales drop to near two-year low in September
[Reuters] Fed's Kaplan sees three more interest rate hikes 'likely'
[BloombergQ] Trump Says He ‘Maybe’ Regrets Picking Fed's Powell, WSJ Reports
[CNBC] China talks up the stock market amid lurking concerns about share-backed loans
[MarketNews] Here are the early signs China’s stock-market woes are starting to infect the rest of the world
[CNBC] Mortgage applications weaken further as interest rates rise
[MarketWatch] China investors fear too much stock is being used as collateral, a big market drag
[BloombergQ] Record China Bond Failures Breathe Life Into CDS-Like Tool
[BloombergQ] Yuan Trading Volume Exceeds 2015 Peak as Currency Stays Rooted
[Reuters] Trump threats, demands spark 'existential crisis' at WTO
[NYT] Italy Is in Trouble. Here’s Why the World Should Care.
[WSJ] Chinese Stocks Pledged to Lenders Raise ‘Doom Loop’ Fears
[WSJ] Risk Returns to Leveraged-Buyout Market
[WSJ] Stock Market Whiplash Rattles Investors
[WSJ] U.S. Manufacturers See Signs of New Risks
[FT] China’s rising share pledges pose market risk
[FT] Capital key risks an Italy dilemma for the ECB
[FT] Italian banks’ fate tied to ‘lords of the spread’
[FT] Italy’s populist coalition ramps up pro-Russia rhetoric
[Reuters] U.S. new home sales drop to near two-year low in September
[Reuters] Fed's Kaplan sees three more interest rate hikes 'likely'
[BloombergQ] Trump Says He ‘Maybe’ Regrets Picking Fed's Powell, WSJ Reports
[CNBC] China talks up the stock market amid lurking concerns about share-backed loans
[MarketNews] Here are the early signs China’s stock-market woes are starting to infect the rest of the world
[CNBC] Mortgage applications weaken further as interest rates rise
[MarketWatch] China investors fear too much stock is being used as collateral, a big market drag
[BloombergQ] Record China Bond Failures Breathe Life Into CDS-Like Tool
[BloombergQ] Yuan Trading Volume Exceeds 2015 Peak as Currency Stays Rooted
[Reuters] Trump threats, demands spark 'existential crisis' at WTO
[NYT] Italy Is in Trouble. Here’s Why the World Should Care.
[WSJ] Chinese Stocks Pledged to Lenders Raise ‘Doom Loop’ Fears
[WSJ] Risk Returns to Leveraged-Buyout Market
[WSJ] Stock Market Whiplash Rattles Investors
[WSJ] U.S. Manufacturers See Signs of New Risks
[FT] China’s rising share pledges pose market risk
[FT] Capital key risks an Italy dilemma for the ECB
[FT] Italian banks’ fate tied to ‘lords of the spread’
[FT] Italy’s populist coalition ramps up pro-Russia rhetoric
Tuesday Evening Links
[CNBC] Trump directly attacks Fed Chairman Powell, saying 'Obama had zero' interest rates: report
[BloombergQ] Stocks End Lower as Late Rally Falters; Bonds Gain: Markets Wrap
[Reuters] Italian yields rise as EU gives Rome three weeks to revise budget
[CNBC] Oil prices plunge more than 4 percent as stock market tumbles
[CNBC] Trump and China's Xi to meet at G-20: Kudlow
[CNBC] EU rejects Italy's budget plan for 2019, sending bond yields higher
[UK Guardian] EU and Italy face off over populist government's budget
[Reuters] Tariffs begin to take bite out of U.S. corporate earnings growth
[CNBC] The Federal Reserve doesn't need to 'keep our foot on the gas pedal' anymore, Fed's Bostic says
[BloombergQ] Fed's Bostic Supports More Hikes, Warns of Running Economy Hot
[CNBC] Kudlow says stocks are falling on fear Democrats will win midterms and end 'pro-growth policies'
[NYT] Italy’s Populists Dig in After E.U. Rejects Their Budget as a Danger
[WSJ] Trump Steps Up Attacks on Fed Chairman Jerome Powell
[WSJ] Foreign Buying of U.S. Treasurys Softens, Unsettling Financial Markets
[WSJ] Rising costs at US manufacturers unnerve investors
[FT] EU rejects Italian budget in unprecedented rebuke
[FT] Haven assets in demand as investors seek refuge from stock sell-off
[BloombergQ] Stocks End Lower as Late Rally Falters; Bonds Gain: Markets Wrap
[Reuters] Italian yields rise as EU gives Rome three weeks to revise budget
[CNBC] Oil prices plunge more than 4 percent as stock market tumbles
[CNBC] Trump and China's Xi to meet at G-20: Kudlow
[CNBC] EU rejects Italy's budget plan for 2019, sending bond yields higher
[UK Guardian] EU and Italy face off over populist government's budget
[Reuters] Tariffs begin to take bite out of U.S. corporate earnings growth
[CNBC] The Federal Reserve doesn't need to 'keep our foot on the gas pedal' anymore, Fed's Bostic says
[BloombergQ] Fed's Bostic Supports More Hikes, Warns of Running Economy Hot
[CNBC] Kudlow says stocks are falling on fear Democrats will win midterms and end 'pro-growth policies'
[NYT] Italy’s Populists Dig in After E.U. Rejects Their Budget as a Danger
[WSJ] Trump Steps Up Attacks on Fed Chairman Jerome Powell
[WSJ] Foreign Buying of U.S. Treasurys Softens, Unsettling Financial Markets
[WSJ] Rising costs at US manufacturers unnerve investors
[FT] EU rejects Italian budget in unprecedented rebuke
[FT] Haven assets in demand as investors seek refuge from stock sell-off
Monday, October 22, 2018
Tuesday's News Links
[Reuters] Wall Street tumbles as weak industrials add to dour mood
[BloombergQ] Oil prices fall as Saudi Arabia pledges to play 'responsible role' in market
[Reuters] This week's earnings shine spotlight on China growth risk
[CNBC] Former Fed Chairman Paul Volcker thinks 'we're in a hell of a mess'
[BloombergQ] Europe’s Moment of Truth as Credit Investors Bid QE Farewell
[AP] China-US ties sinking amid acrimony over trade, politics
[CNBC] Turkey's Erdogan says there's strong evidence to show that the Khashoggi killing was planned
[Reuters] China expresses concern to U.S. over Taiwan Strait warship operation
[NYT] Paul Volcker, at 91, Sees ‘a Hell of a Mess in Every Direction’
[WSJ] Global Stocks Drop on Political Tensions, Worries Over Chinese Growth
[FT] Emerging markets face mounting geopolitical stress
[BloombergQ] Oil prices fall as Saudi Arabia pledges to play 'responsible role' in market
[Reuters] This week's earnings shine spotlight on China growth risk
[CNBC] Former Fed Chairman Paul Volcker thinks 'we're in a hell of a mess'
[BloombergQ] Europe’s Moment of Truth as Credit Investors Bid QE Farewell
[AP] China-US ties sinking amid acrimony over trade, politics
[CNBC] Turkey's Erdogan says there's strong evidence to show that the Khashoggi killing was planned
[Reuters] China expresses concern to U.S. over Taiwan Strait warship operation
[NYT] Paul Volcker, at 91, Sees ‘a Hell of a Mess in Every Direction’
[WSJ] Global Stocks Drop on Political Tensions, Worries Over Chinese Growth
[FT] Emerging markets face mounting geopolitical stress
Monday Evening Links
[Reuters] Energy and financials weigh on S&P and Dow
[BloombergQ] Oil Closes Below $70 for Fourth Session as Stockpiles Accumulate
[Reuters] Trump eyeing a 10 percent middle-income tax cut plan
[Reuters] Chinese official tells American investors at a meeting: We don't fear a trade war with the US
[BloombergQ] China's Central Bank to Offer More Funds to Private Companies
[BloombergQ] El-Erian: Emerging Markets Need More Fixes to Maintain Calm
[Reuters] U.S. warships pass through Taiwan Strait amid China tensions
[WSJ] Italy’s Debt Predicament, in Seven Charts
[BloombergQ] Oil Closes Below $70 for Fourth Session as Stockpiles Accumulate
[Reuters] Trump eyeing a 10 percent middle-income tax cut plan
[Reuters] Chinese official tells American investors at a meeting: We don't fear a trade war with the US
[BloombergQ] China's Central Bank to Offer More Funds to Private Companies
[BloombergQ] El-Erian: Emerging Markets Need More Fixes to Maintain Calm
[Reuters] U.S. warships pass through Taiwan Strait amid China tensions
[WSJ] Italy’s Debt Predicament, in Seven Charts
Sunday, October 21, 2018
Monday's News Links
[BloombergQ] Stocks Fluctuate Ahead of Earnings; Dollar Gains: Markets Wrap
[Reuters] Stock futures rise after China rally, Italy's budget relief
[BloombergQ] Chinese Stocks Rally Most Since 2016 as State Steps Up Support
[BloombergQ] Kudlow Blames China for Not Engaging Ahead of Trump-Xi Meeting
[Reuters] Italy tells EU it is sticking to budget plans, keeps eye on debt, deficit
[Axios] "He wants them to suffer more": Inside Trump's China bet
[BloombergQ] Inflation Creep Is Real, Morgan Stanley Says
[BloombergQ] China Breaks Six-Month Streak of Accelerating Home-Price Gains
[Reuters] China slams Pompeo's 'malicious' Latam comments amid influence battle
[BloombergQ] China's $195 Billion Debt Splurge Has Less Bang Than You Might Think
[Reuters] Chaotic Brazil presidential campaign careens into final week
[WSJ] Banks’ Golden Deposits Are Heading Out the Door
[FT] Chinese equities rally after government support signals
[FT] Larry Kudlow accuses China of refusing to engage on trade
[Reuters] Stock futures rise after China rally, Italy's budget relief
[BloombergQ] Chinese Stocks Rally Most Since 2016 as State Steps Up Support
[BloombergQ] Kudlow Blames China for Not Engaging Ahead of Trump-Xi Meeting
[Reuters] Italy tells EU it is sticking to budget plans, keeps eye on debt, deficit
[Axios] "He wants them to suffer more": Inside Trump's China bet
[BloombergQ] Inflation Creep Is Real, Morgan Stanley Says
[BloombergQ] China Breaks Six-Month Streak of Accelerating Home-Price Gains
[Reuters] China slams Pompeo's 'malicious' Latam comments amid influence battle
[BloombergQ] China's $195 Billion Debt Splurge Has Less Bang Than You Might Think
[Reuters] Chaotic Brazil presidential campaign careens into final week
[WSJ] Banks’ Golden Deposits Are Heading Out the Door
[FT] Chinese equities rally after government support signals
[FT] Larry Kudlow accuses China of refusing to engage on trade
Sunday's News Links
Mideast Stock-Saudi stocks close up slightly after account of Khashoggi death
[BloombergQ] Italy's Banks at Risk From Widening Spread, League Official Says
[Reuters] China says must balance stable growth and risk prevention
[Reuters] Trump says U.S. to exit nuclear treaty, Russia warns of retaliation
[Reuters] UBS warns staff over China travel after banker held in Beijing: source
[FT] Italy vows to stay in euro but stick with spending plan
[FT] Germany’s political centre cannot hold
[BloombergQ] Italy's Banks at Risk From Widening Spread, League Official Says
[Reuters] China says must balance stable growth and risk prevention
[Reuters] Trump says U.S. to exit nuclear treaty, Russia warns of retaliation
[Reuters] UBS warns staff over China travel after banker held in Beijing: source
[FT] Italy vows to stay in euro but stick with spending plan
[FT] Germany’s political centre cannot hold
Saturday, October 20, 2018
Saturday's News Links
[BloombergQ] Major WTO Showdown Looks Harder to Avoid as U.S., China, EU Spar
[Reuters] Italian deputy PM says government will not lower 2019 deficit goal
[Reuters] China's September new home price gains led by smaller cities
[Reuters] Exclusive: U.S. weighs new warship passage through Taiwan Strait
[BloombergQ] Run For The Exits. China’s Talking Up Stocks Again
[WSJ] Italian Credit Downgrade Likely to Add to Pressure on Europe’s Markets
[WSJ] The Crisis in U.S.-China Relations
[FT] BlackRock: a vast money machine splutters
[FT] Taiwanese protesters step up calls for independence
[Reuters] Italian deputy PM says government will not lower 2019 deficit goal
[Reuters] China's September new home price gains led by smaller cities
[Reuters] Exclusive: U.S. weighs new warship passage through Taiwan Strait
[BloombergQ] Run For The Exits. China’s Talking Up Stocks Again
[WSJ] Italian Credit Downgrade Likely to Add to Pressure on Europe’s Markets
[WSJ] The Crisis in U.S.-China Relations
[FT] BlackRock: a vast money machine splutters
[FT] Taiwanese protesters step up calls for independence
Friday, October 19, 2018
Weekly Commentary: Moscovici and the National Team
From the perspective of monitoring an unfolding global crisis, things turned only more concerning this week. The Shanghai Composite declined to 2,450 in early Friday trading, the low since November 2014 - and down almost 26% y-t-d. Across the globe in Europe, Italian 10-year yields jumped to 3.80% in early-Friday trading, the high going back to January 2014. The spread between Italian and German 10-year sovereign yields surged to as high as 340bps, the widest spread since March 2013.
October 19 - Reuters (Samuel Shen, Andrew Galbraith and Noah Sin): "China's regulators lined up to rally market confidence on Friday with new rules, measures and words of comfort… Vice Premier Liu He, who oversees the economy and the financial sector, supplemented regulators' moves by saying the recent stock market slump 'provides good investment opportunity…' Earlier in the day, the securities regulator, central bank and banking and insurance regulator all pledged steps to bolster market sentiment… Friday's announcements were largely aimed at putting a floor under the tumbling stock market."
"With pressure mounting and anxiety setting in, China's stock markets are anticipating the comeback of the 'national team,'" read the opening sentence of an early-Friday morning article from Beijing-based business media group Caixin. Sure enough, the Shanghai Composite rallied 4.1% off morning lows to close the session up 2.6%. The ChiNext growth index surged 5.6% from its opening level to gain 3.7% for the day. Friday's afternoon rally, however, couldn't erase the week's losses. The Shanghai Composite ended this week down another 2.2%. ChiNext's Friday melt-up reduced the week's losses to 1.5%.
October 19 - Reuters (Massimiliano Di Giorgio): "European Economics Commissioner Pierre Moscovici said on Friday he wanted to reduce tensions with Italy over its 2019 budget, adding it was important to see how Rome responded to the Commission's objections to the fiscal plan. Speaking at a news conference after a two-day visit to Rome, Moscovici said Brussels shared Italy's declared goals of boosting growth and cutting debt, and reiterated that no decision had yet been taken over the budget. He said he wanted to 'reduce tensions and maintain a constructive dialogue' with Italian authorities…"
At least for a few hours, Commissioner Moscovici's comments quelled tensions in the Italian (and European) bond market. After trading as high as 3.80% early in Friday's session, yields then sank 32 bps to end the week at 3.48%. Italy's bank index rallied almost 5% off intraday lows to end the session down 0.4% - and the week down 2.9%. Italy's MIB equities index rallied 2.0% to end the day little changed (down 0.9% for the week).
It's worth noting that Spain's 10-year yields ended the week up six bps to 1.73%, trading this week to the highest yields since March 2017. Things were looking dicey early Friday, as Spanish yields jumped to 1.82%. This briefly pushed the Spanish to German sovereign yield spread to 140 bps, the wide since March 2017. Portuguese yields traded as high as 2.11% Friday morning, with the spread to bunds widening to 170 bps (widest since May). Portuguese yields ended the week at 2.01%.
European debt markets dodged a bullet. After trading down to about 39 bps early Friday, German bund yields ended the week four bps lower at 0.46%. Friday afternoon's bond rally pushed Italian yields down nine bps for the week to 3.47%. Portuguese yields ended the week two bps lower and French yields three bps lower. Moscovici saved the day, reversing what appeared to have the makings of a problematic de-leveraging episode and blowout in European periphery yield spreads.
October 17 - Bloomberg: "China's broadest measure of new credit jumped in September, exceeding all estimates, as officials changed the dataset to reflect surging bond issuance amid steps to encourage investment in infrastructure. Aggregate financing stood at 2.21 trillion yuan ($319bn) in September… That compares with an estimated 1.55 trillion yuan… The central bank revised the calculation for aggregate financing for a second time this year, adding in local government special bond issuance. That took the total in August to 1.93 trillion yuan, from 1.52 trillion yuan previously. New yuan loans stood at 1.38 trillion yuan, versus a projected 1.36 trillion yuan and 1.28 trillion yuan the previous month. Broad M2 money supply increased 8.3%, from 8.2% in August. China's policy makers have stepped up their efforts to increase credit supply…"
It is not only the Europeans galvanized to quash intensifying Crisis Dynamics. China's September Credit data was an eye-opener. "Aggregate financing" jumped to 2.210 TN RMB, or $319 billion, with system Credit continuing its ongoing double-digit annual expansion (10.6%). September growth was about 40% above estimates and a 45% jump from August (growth is typically stronger in September). This puts system Credit growth (excluding national government borrowings) for the first nine months of 2018 at $2.087 TN, down about 10% from comparable 2017. After a huge September, Q3 Credit growth ran slightly ahead of Q3 2017.
Chinese officials again adjusted the composition of aggregate financing data, which now includes local government bond issuance. According to Bloomberg (Chang Shu and Justin Jimenez) "netting out the new sub-component…, the figure comes in… lower than the consensus forecast." September saw enormous issuance of "special local government bonds" (apparently for infrastructure spending), more than offsetting the ongoing contraction of "shadow" lending. Barely positive for the month, net Corporate Bond Issuance slowed notably.
New bank loans came in at about $200bn, only somewhat above estimates. Year-to-date, new loans are running 18% above comparable 2017. Consumer (chiefly mortgage) borrowings remained quite strong, at $108bn in September. This puts y-t-d consumer borrowings 18.2% above comparable '17.
October 15 - Bloomberg (Chris Anstey): "China's moves to boost liquidity in an effort to safeguard economic growth are eroding the country's yield premium over the U.S., putting 'renewed pressure' on the yuan, according to Citigroup... 'Going by its latest policy moves, China has likely halted or even abandoned its financial-deleveraging program' amid the trade war with the U.S., Liu Li-Gang, chief China economist at Citigroup…, wrote... The People's Bank of China has pumped 3.4 trillion yuan ($492bn) into the banking system so far this year through regular open-market operations and cuts in lenders' required reserve ratios, Citigroup estimates."
Beijing these days faces a very serious dilemma managing system Credit. As has over the years become quite the pernicious habit, officials are responding to heightened Bubble Fragility by aggressively stimulating system Credit. They would surely favor the expansion of productive Credit, but increasingly it appears they'll take lending growth wherever they can get it. Portends trouble.
A few of the more obvious problems: 1) Especially with the crackdown on "shadow" finance, Beijing now pushes enormous quantities of risky late-cycle Credit into an already bloated and vulnerable banking system. 2) Stimulus measures are prolonging late-cycle excess throughout increasingly fragile mortgage and apartment Bubbles. 3) China risks stirring further consumer price inflation momentum. September's 2.5% y-o-y CPI rise was exceeded only one month going back to 2013. 4) The size and characteristics of China's runaway Credit expansion pose escalating risk to their already vulnerable currency.
October 14 - Reuters (Clare Jim): "China's property developers usually look forward to the months dubbed 'Golden September and Silver October' as the high season for new home sales. This year is proving to be different. Instead, they are feeling a chill and one major realtor has warned that 'winter' is coming as developers struggle to maintain sales momentum despite gimmicky promotions and discounts. After almost two years of local and central government measures to calm the red-hot market, more signs are emerging that the property sector, a major pillar of China's economic health, is finally slowing down… 'There's downward pressure on home prices especially in third and fourth-tier cities,' said Nomura chief China economist Ting Lu. 'They have been previously rising on stimulus policies for two to three years and now they have reached a peak.'"
October 16 - Financial Times (Tom Hancock): "A wave of protests by Chinese homeowners against falling property prices in several cities has raised fears of a downturn in the country's real estate market, adding to pressure on Beijing to stimulate the economy. Homeowners in Shanghai and other large cities took to the streets this month to demand refunds on their homes after property developers cut prices on new properties to stimulate sales. In Shanghai, dozens of angry homeowners descended on the sales office of a complex that offered 25% discounts to demand refunds, causing clashes that damaged the sales office, according to online reports that were quickly removed by censors. Similar protests have been reported in the large cities of Xiamen and Guiyang as well as several smaller cities."
Keep in mind that these are China's inaugural mortgage and housing Bubbles. Borrowers have never experienced a nationwide downturn. Neither have bankers; same for regulators. A housing bust would pose risk to social stability, not to mention the banking system and economy. Chinese officials over the years have tried about everything to rein in the Bubble. They were just never willing to inflict the degree of pain necessary to break inflationary psychology. They mistakenly cultivated the perception apartment prices only rise, and Beijing will always act to support the market. Now they face a gargantuan Bubble with limited options.
The easy bet is that Beijing will see few alternatives than to adopt only more aggressive reflationary measures (they "worked," after all, in the U.S. and elsewhere!). But will China enjoy the latitude to pull it off? There's a question well worth pondering: "Is China 'emerging' or 'developed'?" Emerging economies invariably lose the flexibility for aggressive Credit expansion and system reflation. Over recent months, we've watched Argentina hike rates to 60% and Turkey to 24%. Other EM central banks raised rates more moderately, all measures to stem the risk of disorderly currency collapse.
Will China retain the flexibility to set low interest rates, to aggressively expand Credit along with adopting other reflationary measures? Or is China, the "King of EM," facing the prospect of a destabilizing currency crisis? A scenario where China is forced to hike rates to support the renminbi would be so destabilizing for its apartment Bubble and banking system that it's difficult to contemplate. That leaves international reserve holdings, capital controls and a rather pressing question: How much "hot money" (and leverage) has gravitated to China's high-yielding instruments?
When I ponder China's incredibly bloated banking sector, its historic apartment Bubble, its local government debt issues, massive future national government borrowings - and likely one of the most maladjusted economies ever - unfortunately I don't see a stable currency in China's future.
October 16 - Financial Times (Don Weinland): "China could be facing a 'debt iceberg with titanic credit risks' following a boom in infrastructure projects by local governments around the country, S&P Global has warned. Local governments may have accrued a debt pile hidden off their balance sheet as high as Rmb30tn to Rmb40tn ($4.3tn to $5.8tn) following 'rampant' growth in borrowings, the rating agency estimated. The mounting debt in so-called local government financing vehicles, or LGFVs, hit an 'alarming' 60% of China's gross domestic product at the end of last year and was expected to lead to increasing defaults at companies connected to regional authorities… Richard Langberg, an analyst at S&P, said there are Chinese cities with 'hundreds' of the local financing vehicles across the country. While defaults at a handful of smaller LGFVs could be handled by the financial sector, 'if they start to let the bigger ones go then we are getting into uncharted territory,' he said."
October 16 - Bloomberg: "The rout in Chinese equities is throwing the spotlight on $613 billion of shares pledged as collateral for loans. Loans extended to company founders and other major investors who pledged their shareholdings as collateral emerged as a popular financing channel in recent years. But given the losses in equities -- Shenzhen's stock benchmark is down 33% in 2018 -- there's a growing risk that brokerages will be forced to sell the shares, accelerating the downturn. At least 36 companies have seen pledged shares liquidated by brokerages since the start of June, more than triple the 10 in the first five months of the year… At least two firms announced after Monday's close that their shares were at risk of forced selling… 'There's a liquidity crisis in the stock market, and pledged shares are again starting to sound the alarm,' said Yang Hai, analyst at Kaiyuan Securities Co. 'If there are no real policies to cure the array of problems and ailments in our market, no one will be willing to take the risk.'"
Reports say a meeting is being arranged between President Trump and Chinese President Xi Jinping at the coming G20 meeting, tentatively for November 29th. Much could unfold by then. The mid-terms are now just two weeks from Tuesday. And it is especially challenging to look out six weeks and contemplate the status of global markets. "Risk off" has gained significant momentum around the globe.
With their stock market in a tailspin, one might expect the Chinese to be rather motivated to adopt conciliatory language and work toward progress on the trade front. Yet there's another scenario that is not as obvious - and certainly not comforting: Mr. Xi and Chinese leadership may feel they have been betrayed and mocked. They distrust the Trump administration, now recognizing their true objective is not trade as much as it is containing China's ascending financial, economic, technological, military and geopolitical power. They are livid that the administration would adopt such a belligerent approach and relish in China's financial distress. A new Cold War has commenced. It would be a zero-sum battle of rival superpowers.
The administration clearly believes they have the Chinese right where they want them. President Trump is quick to note the big decline in China's stock market. For a number of years now, I've feared a major consequence of a bursting Bubble would be the Chinese blaming "foreigners" (chiefly the U.S. and Japan) for their hardship. I just never imagined it would be so straightforward for Beijing to directly link a cause and effect.
The Chinese Bubble is again at the precipice. The last comparable episode, back in late-2015/early-2016, unfolded in a different global backdrop. China implemented additional stimulus measures, while the ECB and BOJ boosted QE and the Fed postponed "normalization". For the most part, rates were near zero globally and bond yields were declining. Pricing pressures were still leaning disinflationary. Global risk markets were neither as inflated nor as fragile as now.
That crisis episode saw the PBOC employ $100s of billions of reserves to stabilize the Chinese currency, in a global backdrop approaching $2.0 TN of annualized central bank liquidity injections. Back then, China was facing a relatively stronger economy and a booming apartment Bubble inclined for "Terminal Phase" excess.
The Chinese have considerably less flexibility today. The burst EM Bubble poses major financial and economic risks for a much more fragile Chinese system. At about $3.0 TN, China's international reserves are down a (mere) trillion from 2014 highs. And pushing more Credit, investment and speculation into Chinese housing at this "Terminal Phase" is a perilous proposition.
For too long China needed to rein in Credit growth. They made an attempt. Not surprisingly, the results have been unsatisfying. The risk of Bubble implosion has now incited yet another round of stimulus measures. But Bubble risk is indomitable, risk that expands parabolically during the "Terminal Phase." I believe there are a number of important factors - domestic and international, economic and financial - working against Beijing's current stabilization efforts. Chinese officials might be at the cusp of finally losing control. The Trump administration provides a most convenient scapegoat.
For the Week:
The S&P500 was about unchanged (up 3.5% y-t-d), and the Dow recovered 0.4% (up 2.9%). The Utilities surged 3.0% (up 3.2%). The Banks declined 0.7% (down 6.5%), while the Broker/Dealers gained 0.9% (down 1.0%). The Transports slipped 0.5% (down 1.6%). The S&P 400 Midcaps were unchanged (down 1.5%), while the small cap Russell 2000 slipped 0.3% (up 0.4%). The Nasdaq100 declined 0.7% (up 11.1%). The Semiconductors fell 2.2% (down 2.2%). The Biotechs dipped 0.6% (up 15.7%). With bullion rising $9, the HUI gold index gained 1.5% (down 19.1%).
Three-month Treasury bill rates ended the week at 2.26%. Two-year government yields gained five bps to 2.91% (up 102bps y-t-d). Five-year T-note yields rose three bps to 3.05% (up 84bps). Ten-year Treasury yields added three bps to 3.19% (up 79bps). Long bond yields rose four bps to 3.38% (up 64bps). Benchmark Fannie Mae MBS yields gained five bps to 4.01% (up 101bps).
Greek 10-year yields declined five bps to 4.33% (up 26bps y-t-d). Ten-year Portuguese yields slipped two bps to 2.02% (up 8bps). Italian 10-year yields fell nine bps to 3.48% (up 147bps). Spain's 10-year yields rose six bps to 1.74% (up 17bps). German bund yields fell four bps to 0.46% (up 3bps). French yields declined three bps to 0.84% (up 5bps). The French to German 10-year bond spread widened a basis point to 38 bps. U.K. 10-year gilt yields fell six bps to 1.58% (up 39bps). U.K.'s FTSE equities index recovered 0.8% (down 8.3%).
Japan's Nikkei 225 equities index declined 0.7% (down 1.0% y-t-d). Japanese 10-year "JGB" yields were unchanged at 0.15% (up 10bps). France's CAC40 slipped 0.2% (down 4.3%). The German DAX equities index increased 0.3% (down 10.6%). Spain's IBEX 35 equities index was little changed (down 11.5%). Italy's FTSE MIB index declined 0.9% (down 12.7%). EM equities were mixed. Brazil's Bovespa index gained another 1.6% (up 10.2%), while Mexico's Bolsa was unchanged (down 3.9%). South Korea's Kospi index slipped 0.3% (down 12.6%). India's Sensex equities index fell 1.2% (up 0.8%). China's Shanghai Exchange dropped 2.2% (down 22.9%). Turkey's Borsa Istanbul National 100 index slipped 0.2% (down 16.4%). Russia's MICEX equities index fell 2.4% (up 11.1%).
Investment-grade bond funds saw outflows of $54 million, while junk bond funds saw inflows of $447 million (from Lipper).
Freddie Mac 30-year fixed mortgage rates declined five bps to 4.85% (up 97bps y-o-y). Fifteen-year rates slipped three bps to 4.26% (up 107bps). Five-year hybrid ARM rates increased three bps to 4.10% (up 93bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down four bps to 4.84% (up 73bps).
Federal Reserve Credit last week increased $2.2bn to $4.139 TN. Over the past year, Fed Credit contracted $278bn, or 6.6%. Fed Credit inflated $1.328 TN, or 47%, over the past 311 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt dropped $11.0bn last week to $3.433 TN. "Custody holdings" were up $71bn y-o-y, or 2.0%.
M2 (narrow) "money" supply dropped $33.2bn last week to $14.237 TN. "Narrow money" gained $473bn, or 3.4%, over the past year. For the week, Currency was little changed. Total Checkable Deposits rose $16bn, while Savings Deposits sank $58.4bn. Small Time Deposits added $1.7bn. Retail Money Funds gained $4.1bn.
Total money market fund assets declined $14.9bn to $2.873 TN. Money Funds gained $129bn y-o-y, or 4.7%.
Total Commercial Paper dropped $19.5bn to $1.083 TN. CP gained $21bn y-o-y, or 2.0%.
Currency Watch:
October 18 - Bloomberg: "Positions for foreign-exchange purchases on the Chinese central bank's balance sheet last month fell the most since January 2017, reflecting faster capital outflows and more intense official intervention as the yuan weakened. The stockpile shrank 119.4 billion yuan ($17.2bn) to 21.4 trillion yuan… The yuan depreciated more than 8% in the six months through September, and hit its lowest since January 2017 on Thursday after the U.S. Treasury stopped short of naming China a currency manipulator in a report overnight."
October 16 - Bloomberg (Eric Lam): "The drop in the dollar's share of global central-bank reserves in the latest reading was probably influenced by the Trump administration's moves against Russia, according to Goldman Sachs… The Central Bank of Russia probably sold about $85 billion of its $150 billion of U.S. assets during the second quarter after America imposed sanctions… in April, said Zach Pandl, co-head of global FX and emerging-market strategy… President Donald Trump has emphasized the use of unilateral tariff hikes and sanctions in international diplomacy, affecting countries from China to Iran. While the second-quarter shift may end up being a blip, it does showcase risks to the degree of dominance that the greenback continues to command in global reserves stemming from sanctions, the Goldman analysis suggests."
The U.S. dollar index added 0.5% to 95.713 (up 3.9% y-t-d). For the week on the upside, the Brazilian real increased 1.8%, the New Zealand dollar 1.3%, the South African rand 0.7% and the Australian dollar 0.1%. For the week on the downside, the Mexican peso declined 2.2%, the Canadian dollar 0.6%, the British pound 0.6%, the Norwegian krone 0.6%, the euro 0.4%, the Swedish krona 0.3%, the Japanese yen 0.3% and the South Korean won 0.1%. The Chinese renminbi declined 0.10% versus the dollar this week (down 6.09% y-t-d).
Commodities Watch:
The Goldman Sachs Commodities Index declined 0.9% (up 7.3% y-t-d). Spot Gold gained 0.7% to $1,227 (down 5.8%). Silver was little changed at $14.65 (down 14.6%). Crude dropped $2.39 to $69.12 (up 14%). Gasoline fell 1.7% (up 7%), while Natural Gas jumped 3.3% (up 10%). Copper declined 1.2% (down 16%). Wheat dipped 0.5% (up 21%). Corn fell 1.8% (up 5%).
Market Dislocation Watch:
October 18 - Financial Times (Mehreen Khan): "Brussels responded to Italy's rule-busting budget plan in record time and it packs a punch. It took the European Commission just over 48 hours to formally warn Rome that its spending plans for 2019 represented a break with previous budget promises on a scale that was 'unprecedented in the history of the Stability and Growth Pact'. The letter was hand-delivered… to finance minister Giovanni Tria after a meeting in Rome on Thursday. The commission's rebuke is the first formal warning in a process that could end up with Italy facing financial punishment - from Brussels and the markets - if Rome's populists don't back down. Matteo Salvini and Luigi Di Maio's coalition has until noon on Monday to reply."
October 17 - Bloomberg (Katherine Greifeld): "There's never been a more profitable time for U.S. investors to ditch Treasuries and go abroad. By now, everyone knows Treasuries have been a lousy bet. But because of a quirk in the way currency markets work, there's even less reason for investors to park their money in U.S. government bonds. Those with dollars to spare can lock in historically high returns in Europe and Japan, even though yields in the two markets are among the lowest in the developed world. In fact, dollar investors are getting paid more than ever to enter a trade that takes the currency risk out of their euro-based returns. As a result, they can earn what amounts to 3.8% a year from ultra low-yielding 10-year German bunds… Aside from Italy, hedged U.S. investors would have done better putting their money into the bonds of any developed nation this year rather than Treasuries."
October 18 - Reuters (Richard Leong): "Several measures of U.S. short-term borrowing costs rose sharply on Thursday, suggesting money markets may see more volatility as the Federal Reserve signals interest rates have further to climb in a robust economy. The sudden jump in the benchmark London interbank offered rate, or LIBOR, and a price drop in a futures contract connected to it caught many market participants by surprise. 'What a mess at the front end of the rates market today,' said Guy LeBas, chief fixed income strategist at Janney Montgomery Scott… 'It may be related to the plumbing in financial markets that is not readily apparent.'"
October 14 - Financial Times (Chris Flood): "New business growth has slowed markedly for most of the leading providers of exchange traded funds this year even before the sell-off across global equity markets gathered pace last week. Net inflows for BlackRock have fallen by half to $85.8bn in the first nine months of 2018, compared with the same period last year… New ETF business growth for Vanguard… has dropped by about a third to $68bn. State Street, the third largest ETF manager, is on track for another disappointing year after a lacklustre showing in 2017, which was only saved by a stampede by investors into US equities in the fourth quarter."
October 18 - CNBC (Thomas Franck): "Goldman Sachs CEO David Solomon said… he believes part of October's steep stock sell-off was the result of programmatic trading. 'There's no question when you look at last week, some of the selling is the result of programmatic selling because as volatility goes up, some of these algorithms force people to sell,' Solomon told CNBC's Wilfred Frost. 'Market structure can, at times, contribute to volatility and one of the things that we're spending a bunch of time thinking about at the firm is how changes in market structure over the course of the last 10 years will affect market activity.'"
Trump Administration Watch:
October 12 - Wall Street Journal (Michael C. Bender, Gordon Lubold, Kate O'Keeffe and Jeremy Page): "The Trump administration is moving deliberately to counter what the White House views as years of unbridled Chinese aggression, taking aim at military, political and economic targets in Beijing and signaling a new and potentially much colder era in U.S.-China relations. In the first 18 months of the administration, ties between the world's two biggest powers were defined by negotiations over how to restrain North Korea and ways to rebalance trade. Those high-profile endeavors masked White House preparations for a more hard-nosed stance with Beijing… Interviews with senior White House officials and others in government make clear that recent volleys in what appears a new Cold War aren't the exception to President Trump's China policy. They are exactly what the administration wants…"
October 15 - Bloomberg (Jennifer Epstein): "President Donald Trump threatened to impose another round of tariffs on China and warned that Chinese meddling in U.S. politics is a 'bigger problem' than Russian involvement in the 2016 election. Asked in an interview with CBS's '60 Minutes' whether he wants to push China's economy into a depression, Trump said 'no' before comparing the country's stock-market losses since the tariffs first launched to those in 1929, the start of the Great Depression in the U.S."
October 18 - CNBC (Fred Imbert): "Larry Kudlow, the director of the National Economic Council, went after China… for digging in its heels in trade talks with the U.S. 'They are unfair traders. They are illegal traders. They have stolen our intellectual property,' Kudlow said at the Detroit Economic Club… 'China has not responded positively to any of our asks.' 'America has the greatest technology in the world; it is the backbone of our economy,' he said. 'China can't seem to do that, so they steal it. We can't allow that.'"
October 17 - New York Times (Alan Rappeport and Keith Bradsher): "Fresh off securing trade agreements with South Korea, Canada and Mexico, President Trump is embarking on a new plan: refashioning the Trans-Pacific Partnership to his liking through a flurry of bilateral trade deals. Mr. Trump, who pulled the United States out of the trade pact with 11 other countries that he has called a 'rape of our country,' is now looking to forge deeper trade ties with several of the nations in the alliance, as well as the European Union and the United Kingdom. But while the Trans-Pacific Partnership was aimed at encouraging China to make the extensive economic and structural overhauls that would someday win it a place in the trade pact, Mr. Trump views these new bilateral agreements as a way to contain Beijing's growing economic, geopolitical and territorial ambitions."
October 17 - Wall Street Journal (Kate Davidson): "President Trump reiterated his complaints that the Federal Reserve is raising short-term interest rates too fast, calling the U.S. central bank 'my biggest threat.' 'It's independent so I don't speak to him, but I'm not happy with what he's doing, because it's going too fast," Mr. Trump said in an interview with the Fox Business Network, referring to Fed Chairman Jerome Powell, whom he nominated last year. 'You looked at the last inflation numbers, they're very low,' he said while arguing for a slower increase in interest rates."
October 17 - Reuters (Jonathan Spicer): "White House economic advisor Larry Kudlow said… that U.S. President Trump was not demanding a policy change at the Federal Reserve after Trump heaped more criticism on the Fed on Tuesday, calling rising U.S. interest rates his 'biggest threat.' In what has emerged as a pattern recently, the administration official sought the day after Trump's comments to tamp down the unusual presidential criticism of the U.S. central bank, saying that Trump actually largely agreed with the Fed. 'He is not interfering with their independence,' Kudlow said…"
October 14 - Reuters (Arshad Mohammed): "White House economic adviser Larry Kudlow… played down the U.S. stock market drop as a normal correction and said President Donald Trump had some concern the Federal Reserve may be raising interest rates too fast but respected its independence. 'I think the background is very positive for the stock market and I think, as I said, corrections come and go and people should ... stay very calm over these things, they are quite normal,' Kudlow told the 'Fox News Sunday with Chris Wallace' program…"
Federal Reserve Watch:
October 17 - Bloomberg (Christopher Condon): "Federal Reserve officials stepped deeper into a debate over how high to push interest rates, as a majority favored an eventual and temporary move above the level they deem neutral for the economy in the long run. The clearest summary of policy makers' views, unusually, appeared not in the minutes to the Sept. 25-26 policy meeting… but in the accompanying notes to officials' most recent economic projections. 'A substantial majority of participants expected that the year-end 2020 and 2021 federal funds rate would be above their estimates of the longer-run rate,' according to the document."
October 17 - Reuters (Jason Lange and Pete Schroeder): "Federal Reserve policymakers are largely united on the need to raise borrowing costs further, minutes from their most recent policy meeting show, despite U.S. President Donald Trump's view that interest rate hikes have already gone too far. Every Fed policymaker backed the central bank's September decision to raise the target policy rate to between 2% and 2.25%... Participants in the Fed's rate-setting committee also 'generally anticipated that further gradual increases' in short-term borrowing costs 'would most likely be consistent' with the kind of continued economic expansion, labor market strength, and firm inflation that most of them are anticipating…"
October 18 - Reuters (Jonathan Spicer): "The Federal Reserve should continue with its gradual rate hikes but must be prepared to slow the tightening if U.S. productivity breaks out of a several-year lull, as it may be poised to do, an influential Fed governor said… Randal Quarles, who rarely discusses monetary policy, painted a somewhat more optimistic picture than his colleagues on the economy's longer-term capacity, and said he favored a bit more dovish path than most others at the U.S. central bank."
October 17 - Wall Street Journal (Alan S. Blinder): "When comedian Steve Martin spoke about 'wild and crazy guys,' I'm pretty sure he was not referring to members of the Federal Open Market Committee. In fact, no one-to my knowledge-has ever called FOMC members 'wild' or 'crazy.' Until now. On Oct. 10 President Trump announced, 'I think the Fed has gone crazy.' The president's rant was based on his belief that 'the Fed is making a mistake. They are so tight.' Of course the Federal Reserve makes mistakes. What institution doesn't? Maybe it is making one now, though I don't think so. But can any sensible person call current monetary policy 'tight'? The unemployment rate stands at 3.7%, the lowest in almost 50 years. Under such circumstances, most economists would predict that inflation, which is now around the Fed's 2% target, should be rising."
October 18 - Reuters (Jennifer Ablan): "Goldman Sachs economists… said the firm remained 'comfortable' with its call for five more interest rate hikes - two more than priced in financial markets - through the end of 2019. In a note to clients, Goldman said it feels the Federal Reserve needs to generate a significant tightening in financial conditions to slow the economy to its potential growth pace sooner rather than later, and 'that this will require delivering significantly more hikes than priced in the curve.'"
October 17 - Bloomberg (Brian Chappatta): "Federal Reserve officials have finally caught on to the leveraged-loan boom. In minutes of the Federal Open Market Committee's September meeting, policy makers made explicit for the first time that they're watching for any hint of risks to financial stability stemming from the more than $1 trillion market for U.S. leveraged loans. They're late to pile on. There's been no shortage of warnings from fixed-income traders and credit analysts who track investor protections."
U.S. Bubble Watch:
October 15 - CNBC (Jacob Pramuk): "The U.S. federal budget deficit rose in fiscal 2018 to the highest level in six years as spending climbed… The deficit jumped to $779 billion, $113 billion or 17% higher than the previous fiscal period… It was larger than any year since 2012, when it topped $1 trillion. The budget shortfall rose to 3.9% of U.S. gross domestic product… Federal revenue rose only slightly, by $14 billion after Republicans chopped tax rates for corporations and most individuals. Outlays climbed by $127 billion, or 3.2%. A spike in defense spending, as well as increases for Medicaid, Social Security and disaster relief, contributed to the increase."
October 16 - CNBC (Jeff Cox): "Job openings hit a record in August, indicating companies could face more inflationary pressures ahead with a tight labor market. The vacancies level hit 7.14 million for the month, according to the Job Openings and Labor Turnover Survey, a report Federal Reserve officials watch closely… The total number of hires also reached a record of 5.78 million. Openings dwarfed the total level of workers looking for jobs, which stood at 6.23 million for that month and fell to 5.96 million in September…"
October 17 - Reuters (Aishwarya Venugopal): "Holiday hiring of more than 700,000 workers by U.S. retailers would be the largest since 2014, according to a report by a global outplacement firm, underscoring a robust economy that has seen consumer confidence at its highest in nearly two decades. Retailers have said they would add 704,000 jobs in total to their rosters ahead of the important holiday shopping season…"
October 16 - Wall Street Journal (Eliot Brown and Greg Bensinger): "As international backlash grows over Saudi Arabia's alleged involvement in the possible murder of a journalist, Silicon Valley faces a potentially unsettling fact: The kingdom is now the largest single funding source for U.S. startups. Crown Prince Mohammed bin Salman has directed at least $11 billion of Saudi money into U.S. startups since mid-2016, either directly or through SoftBank Group Corp.'s $92 billion tech-focused Vision Fund, to which the Saudis committed $45 billion… The total invested by the kingdom so far in U.S. startups is far bigger than the total raised by any single venture-capital fund. Some of tech's most prominent young companies have welcomed Saudi money, including Uber Technologies Inc., office-sharing company WeWork Cos. and augmented-reality device maker Magic Leap Inc."
October 17 - Bloomberg (Riley Griffin, Suborna Panja and Kristina D'Alessio): "While Wall Street and U.S. President Donald Trump tout news of a booming stock market and low unemployment, college students may be quick to roll their eyes. The improved economy has yet to mean higher wages for graduates already struggling to pay down massive debt… Federal student loans are the only consumer debt segment with continuous cumulative growth since the Great Recession. As the costs of tuition and borrowing continue to rise, the result is a widening default crisis… Student loans have seen almost 157% in cumulative growth over the last 11 years. By comparison, auto loan debt has grown 52% while mortgage and credit-card debt actually fell by about 1%... All told, there's a whopping $1.5 trillion in student loans out there (through the second quarter of 2018)…"
October 16 - Wall Street Journal (Laura Kusisto): "More than three-quarters of Americans now view renting as more affordable than owning a home, the latest sign that rising mortgage rates and higher home prices will continue to pressure home sales. Some 78% of people now say that renting is more affordable than owning, according to survey data to be released… by… Freddie Mac . That is up 11 percentage points from only six months ago. The survey also indicates that demand for for-sale housing could remain soft in the coming months. Some 58% of renters now say they don't currently have plans to buy a home-up from 54% in February…"
October 18 - Bloomberg (Katia Dmitrieva): "It looks like U.S. apartment and condominium builders are reacting to rising costs and a supply glut the same way: slowing down. Multifamily housing permits -- - those for buildings with two or more units -- dropped last month to the lowest level since March 2016, government figures showed Wednesday. That follows signs of an oversupply of apartments in some U.S. markets, but higher costs are also having an impact. 'The biggest issue is construction cost and within that, labor costs. Because of that, some deals just don't pencil out,' Jeanette Rice, Americas head of multifamily research at brokerage CBRE Group Inc., said…"
October 16 - CNET (Marrian Zhou): "Uber's initial public offering may be worth well over a hundred billion. The ride-hailing company has received proposals from Wall Street banks that value the company at as much as $120 billion in an IPO, according to The Wall Street Journal, which said the offering could take place early next year."
October 15 - CNBC (Lauren Hirsch): "Sears Holdings filed for bankruptcy protection early Monday after years of staying afloat through financial maneuvering and relying on billions of CEO Eddie Lampert's own money. Lampert, who has served as CEO for the past five years, will step down from that post… but remain chairman. The 125-year-old retailer, once the nation's largest, said… it was appointing Mohsin Meghji, managing partner of M-III Partners, as its chief restructuring officer. As part of the bankruptcy, Sears will shutter 142 stores toward the end of the year."
China Watch:
October 18 - Reuters (Kevin Yao and Elias Glenn): "China's economic growth cooled to its weakest quarterly pace since the global financial crisis… The economy grew 6.5% in the third quarter from a year earlier, below an expected 6.6% rate, and slower than 6.7% in the second quarter… It marked the weakest year-on-year quarterly gross domestic product growth since the first quarter of 2009 at the height of the global financial crisis."
October 18 - Bloomberg: "There's nothing like margin calls to make a bad stock-market selloff even worse. It's a risk at the top of investors' minds in China after the nation's $3 trillion equity rout deepened on Thursday, driving the Shanghai Composite Index to a nearly four-year low. With more than $600 billion of Chinese shares pledged as collateral for loans, or about 11% of the country's market capitalization, the worry is that falling stock prices will trigger a downward spiral of forced selling. The country's top financial regulators sought to reassure investors on Friday that they're able to keep risks under control. But some stocks are more vulnerable than others. At least 144 Chinese companies have more than half their shares pledged…"
October 18 - Bloomberg: "China's top financial officials moved to shore up confidence in the country's tumbling stock market, marshaling a rare show of coordinated verbal support as the government tries to prevent a $3 trillion equity rout from infecting the world's second-largest economy. The reassuring words from leaders of China's central bank, securities watchdog, and banking and insurance regulator -- including promises of financial support for local businesses -- followed a bout of investor panic this week that sent the Shanghai Composite Index to a four-year low."
October 18 - Bloomberg: "In China's manufacturing heartland around the Pearl River Delta, Donald Trump's 10% tariffs are causing little concern. The 25% duties that loom next year are another matter. Ben Yang, a furniture maker producing contemporary designs out of his facility in Dongguan -- about 30 miles from Hong Kong -- says that if those higher charges materialize from January as planned, the U.S. share of exports from his Sunrise Furniture Co. could plunge from 90% to less than a third. 'Our major rival is Vietnam and 10 percent tariffs aren't enough to make the difference,' said Yang, 48, who supplies retailers including Rooms To Go Inc. But 25% tariffs are a worry. There will definitely be a short-term impact; Americans may have to accept higher prices.'"
October 17 - Financial Times (Lucy Hornby): "China's private entrepreneurs are shifting away from investments in favour of paying down dollar debt and keeping cash at hand to brace for an economic downturn exacerbated by the Trump administration's trade tariffs… Clients in China 'are concerned about the ongoing slowdown in the economy', 'pessimistic about the outlook for the yuan' and 'pessimistic that an increase in US tariffs from 10% to 25% in January can be averted', Mansoor Mohi-uddin, NatWest Markets' head of forex strategy, wrote after a visit to Beijing last week. Mr Mohi-uddin added that private exporters would focus their cash on repaying dollar debt, as China's loosening policy and the US Federal Reserve's tightening contributed to a weaker renminbi. Data from Refinitiv show that China's private groups are pulling back from issuing fresh dollar debt…"
October 16 - South China Morning Post (Orange Wang): "China's local governments may have accumulated 40 trillion yuan (US$6 trillion) worth of 'hidden debts' that are not reflected in official figures, which is 'a debt iceberg with titanic credit risks' to the world's second biggest economy, S&P Global Ratings said… If all that off-the-books debt - mostly borrowed by local government financing vehicles, known as LGFVs - were included in China's debt figures, the ratio of all government debt to GDP could have reached 'an alarming level' of 60% in 2017, the ratings agency said… According to official figures released by the Chinese Ministry of Finance, local governments had combined outstanding debts of 17.7 trillion yuan (US$2.5 trillion) at the end of August, although Beijing has admitted the existence of 'hidden debts' and attempted to curb unauthorised borrowing by local authorities."
October 16 - Bloomberg: "Chinese consumer inflation accelerated for a fourth month in September, with food prices jumping by the most since February, while the rise in households' non-food costs slowed. The consumer price index rose 2.5% from a year earlier… That was the same as forecast… and faster than the 2.3% report in August. The producer price index climbed 3.6%, compared with a 3.5% estimate and a 4.1% gain the previous month. There has been increasing concern about the effect of rising prices in China since the summer, with floods and animal disease forcing food prices up as rents in major cities rise."
October 18 - Reuters (Yawen Chen and Kevin Yao): "Growth in China's real estate investment eased in September and home sales fell for the first time since April, as developers dialed back expansion plans amid economic uncertainties and as additional curbs on speculative investment kicked in… Growth in real estate investment, which mainly focuses on residential but also includes commercial and office space, rose 8.9% in September from a year earlier, compared with a 9.2% rise in August…"
October 18 - Bloomberg: "China may be in an easing mode to combat slower growth, but financing conditions aren't improving for lower rated firms and they face a 'chilly winter' ahead, according to China Securities Co. Government liquidity injections haven't found its way to weaker firms as investors are still risk averse amid record defaults, said Huang Ling, managing director of China Securities, the top corporate bond underwriter in China since 2015… 'People can't buy enough of AAA bonds but it has been a tough sale for their AA peers this year,' said Huang. 'As a result of market preference, we see a higher proportion of issuance from firms rated AA+ and above, and weaker companies have to tap into all funding options to survive.'"
October 18 - Bloomberg (Carrie Hong and Denise Wee): "A Chinese solar firm has missed a debt deadline, adding to signs of strain in an industry grappling with overcapacity and tariffs. China Singyes Solar Technologies Holdings Ltd. failed to make a payment on $160 million of bonds due on Oct. 17…"
October 13 - Reuters (James Pomfret and Greg Torode): "As Hong Kong's government hews closer to Beijing, officials are taking a tough line on perceived national security threats, even deploying an elite police unit for political monitoring and surveillance - a sharp escalation in rhetoric and action. In just the last few months, the special administrative region has banned the Hong Kong National Party, which espouses separation from China, and barred some activists from standing in local elections. The Education Bureau sent all secondary schools in the Special Administrative Region letters on Sept 24 saying they must prohibit 'the penetration' of the National Party or risk prosecution."
EM Watch:
October 15 - Wall Street Journal (Saumya Vaishampayan and Josh Zumbrun): "Emerging markets worried about their falling currencies and investors rushing to the exits are raising interest rates and keeping a lid on spending, even though doing so is likely to hurt their long-term prospects. Central banks in developing countries including Indonesia and the Philippines have raised their official borrowing costs multiple times this year to keep up with rising rates in the U.S. Economic growth has already slowed in the Philippines from earlier in 2018. While the Indonesian economy grew at the fastest pace in more than four years in the latest quarter, the worry is that higher rates there could start to drag. Countries are making these trade-offs for fear the turmoil that has gripped emerging markets such as Turkey and Argentina could spread more broadly."
Central Bank Watch:
October 13 - Bloomberg (Jessica Shankleman and Alessandro Speciale): "Bank of England Governor Mark Carney warned against the 'weaponization' of assets in the global financial system as central bank chiefs fretted about the impact of a trade war. Speaking at the Group of 30 conference…, Carney stressed the need for investment flows to remain open, alluding to previous warnings that U.S. protectionism affects the real economy through direct channels like reduced trade flows, disrupted supply chains and higher import costs. The use of secondary sanctions in the U.S. can effectively force European firms to stop doing business with third-country parties... 'From the United Kingdom's perspective -- as the second-largest asset management home -- the commitment to openness, an open resilient platform, there's no weaponization of finance,' he told delegates."
Italy Watch:
October 18 - Bloomberg (Viktoria Dendrinou and John Follain): "European Union leaders voiced concerns over Italy's spending plans, putting pressure on the populist government in Rome to rethink its budget and avert a potential standoff with Brussels…. With Italian bond yields close to a four-year high, the prospects for the country's public finances have become a prime focus in the bloc. Prime Minister Mark Rutte said… he expressed Dutch 'concerns regarding Italy's budget plans for 2019' to his Italian counterpart Giuseppe Conte in a bilateral meeting ahead of the summit. Following that discussion, Conte said he wouldn't accept 'prejudices' regarding the Italian budget."
October 17 - Reuters (Francesco Guarascio): "Italian Prime Minister Giuseppe Conte said… he believed there was no room for changing the Italian draft budget for 2019, which the European Union worries would breach the bloc's fiscal rules and increase Italy's debt. 'We have prepared (the budget) very carefully. Therefore I think there is no room for change,' Conte told reporters on arriving to talks with his fellow EU leaders in Brussels."
Europe Watch:
October 15 - Reuters (Joseph Nasr): "German Chancellor Angela Merkel vowed… to restore trust in her government after her conservative allies suffered heavy losses in a regional election, which their far-right foes hailed as 'an earthquake' that would rock the ruling coalition. The Christian Social Union (CSU), the sister party of Merkel's own Christian Democrats (CDU), slumped to its worst result in almost 70 years in Sunday's election in Bavaria. The chancellor's other coalition partner, the centre-left Social Democrats (SPD), saw its support halved."
October 15 - Financial Times (Jim Brunsden): "Donald Tusk, the president of the European Council has warned that a no-deal Brexit 'is more likely than ever before', after negotiators hit an impasse over the weekend, but he urged 'every effort' to salvage the talks. In a letter to EU leaders ahead of a summit meeting in Brussels this week, Mr Tusk said recent negotiations with the UK have 'proven to be more complicated than some may have expected.' 'We should nevertheless remain hopeful and determined, as there is goodwill to continue these talks on both sides'."
October 17 - Reuters (Gabriela Baczynska and Daphne Psaledakis): "British Prime Minister Theresa May assured EU leaders in Brussels… that she can still reach a Brexit deal, avoiding a showdown over stalled talks as Brussels stepped up planning for a failure of negotiations… But three days after talks stalled over the Irish border "backstop", thwarting hopes of a deal at the summit, May arrived determined to stress that an accord was still on the cards."
Global Bubble Watch:
October 15 - Bloomberg (Stefania Spezzati and Sonali Basak): "The world is still full of risks for the banking industry, despite reforms put in place since the financial crisis 10 years ago. That was the main subject of discussions this weekend in Bali, where bankers gathered for the annual meeting of the Institute of International Finance. From market turmoil and trade tensions to rising leverage and the implications of Italy's rule-busting budget, challenges abound -- and, bosses said, banks need to do more to protect themselves. 'The recurring theme is that finance has been strengthened, but not quite fixed,' Fabrizio Saccomanni, chairman of UniCredit SpA and a former deputy governor of the Bank of Italy, said on one of the panels. While a lot has been done to strengthen banks' balance sheets, 'the global factors of crisis are not really under control.'"
October 15 - Reuters (Tom Miles): "Global foreign direct investment (FDI) fell by 41% to $470 billion in the first six months of this year, the lowest since 2005, preliminary figures from the United Nations trade and development agency UNCTAD showed… President Donald Trump's U.S. tax reforms were the main cause of the slump, which followed a 23% fall in 2017, as American firms repatriated a net $217 billion from foreign affiliates, UNCTAD investment chief James Zhan said. 'The investment flows are more policy-driven and less economic cycle-driven,' Zhan told a news conference… 'Overall the picture is gloomy and the prospect is not so optimistic.'"
October 18 - Wall Street Journal (Saabira Chaudhuri): "Two of the world's largest consumer-goods companies, Unilever PLC and Nestlé SA, reported stronger sales as a wave of inflation in many markets emboldened them to raise prices. The new pricing power gives a boost of confidence to the entire industry, which has struggled in recent years with fierce competition and rapidly changing consumer tastes."
October 16 - Wall Street Journal (Edward White and Christian Pfrang): "In July 2017 an analyst at Wells Fargo described Taiwan's booming foreign currency bonds as a 'match made in heaven', representing a 'meeting of the minds for issuers, investors and regulators'. Fifteen months later and those regulators, spooked by currency risks linked to the now $177bn market, will snap shut a loophole that enabled a splurge of purchases by the country's insurance companies over the past five years. 'It is a major blow,' one Taiwan banking executive involved in the previously blossoming bond deals said of the looming regulation. 'The market will become smaller.'"
Fixed Income Bubble Watch:
October 16 - CNBC (Patti Domm): "China trimmed its holdings of U.S. Treasurys in August by about $6 billion, to the lowest level since June 2017. China's holdings of Treasury bills, notes and bonds fell to $1.165 trillion, from $1.171 trillion in July, according to U.S. Treasury data. It is the third month of decline, and well below the recent high of $1.2 trillion a year earlier."
Leveraged Speculation Watch:
October 19 - New York Times (Matt Phillips): "A financial assembly line that went haywire a decade ago and contributed to an economic crisis is gearing up again on Wall Street. Back then, one of the products the banks churned out - bondlike investments based on thousands of mortgages - proved far riskier than most had understood when it turned out that the borrowers couldn't pay. The banking system froze, a financial panic ensued, and the country experienced its worst recession in decades. This time around, a similar kind of investment, called C.L.O.s, are at the heart of the boom. And that's not the only parallel: The loans are being made to risky borrowers, lending standards are dropping fast, and regulators are easing the rules."
Geopolitics Watch:
October 16 - Bloomberg (Bryce Baschuk): "U.S. and Chinese officials clashed in Geneva on Tuesday as the world's two largest economies disagreed over how to reform the global trading system. Deputy U.S. Trade Representative Dennis Shea said the World Trade Organization must confront China's trade abuses while rethinking its preferential rights as a developing nation. Chinese Ambassador Zhang Xiangchen countered that 'no one can be singled out' and that Beijing will not back any effort to undermine the WTO's basic principles. The dispute illustrates the difficulty China and the U.S. face in overcoming escalating tensions that have prompted Washington to impose tariffs on Chinese imports totaling $250 billion and similar retaliatory actions from Beijing…. 'Adequately responding to the challenges of non-market economies is nothing less than an existential matter for this institution,' Shea said… in comments delivered at the WTO."
October 14 - Reuters (Andrew Torchia and Arshad Mohammed): "Saudi Arabia on Sunday warned against threats to punish it over last week's disappearance of journalist Jamal Khashoggi, as European leaders piled on pressure and two more U.S. executives scrapped plans to attend a Saudi investor conference."
October 16 - Financial Times (Henny Sender): "A glance at the foreign-exchange markets suggests that the US dollar looks as powerful and dominant as ever. However, taking a much longer-term view suggests that this impregnable position - and the economic heft that comes with it - will come under assault. One consequence of the America First policies of US President Donald Trump will be to create a bipolar financial world, with China at one end and the US at the other. That will mean smaller financial flows between the two, and a much more robust effort from Beijing to eventually challenge the dollar's status as the world's reserve currency. That, in turn, potentially has implications for everything from the status of US Treasury securities as the safest assets in the world to how oil is priced. 'The Trump administration's 'America First' policy will encourage a long-term move away from the US dollar,' according to Christopher Wood of CLSA, the arm of Beijing-based Citic Securities, pointing to 'the growing American practice of using the dollar as a weapon via the implementation of sanctions and the like.'"
October 19 - Reuters (Samuel Shen, Andrew Galbraith and Noah Sin): "China's regulators lined up to rally market confidence on Friday with new rules, measures and words of comfort… Vice Premier Liu He, who oversees the economy and the financial sector, supplemented regulators' moves by saying the recent stock market slump 'provides good investment opportunity…' Earlier in the day, the securities regulator, central bank and banking and insurance regulator all pledged steps to bolster market sentiment… Friday's announcements were largely aimed at putting a floor under the tumbling stock market."
"With pressure mounting and anxiety setting in, China's stock markets are anticipating the comeback of the 'national team,'" read the opening sentence of an early-Friday morning article from Beijing-based business media group Caixin. Sure enough, the Shanghai Composite rallied 4.1% off morning lows to close the session up 2.6%. The ChiNext growth index surged 5.6% from its opening level to gain 3.7% for the day. Friday's afternoon rally, however, couldn't erase the week's losses. The Shanghai Composite ended this week down another 2.2%. ChiNext's Friday melt-up reduced the week's losses to 1.5%.
October 19 - Reuters (Massimiliano Di Giorgio): "European Economics Commissioner Pierre Moscovici said on Friday he wanted to reduce tensions with Italy over its 2019 budget, adding it was important to see how Rome responded to the Commission's objections to the fiscal plan. Speaking at a news conference after a two-day visit to Rome, Moscovici said Brussels shared Italy's declared goals of boosting growth and cutting debt, and reiterated that no decision had yet been taken over the budget. He said he wanted to 'reduce tensions and maintain a constructive dialogue' with Italian authorities…"
At least for a few hours, Commissioner Moscovici's comments quelled tensions in the Italian (and European) bond market. After trading as high as 3.80% early in Friday's session, yields then sank 32 bps to end the week at 3.48%. Italy's bank index rallied almost 5% off intraday lows to end the session down 0.4% - and the week down 2.9%. Italy's MIB equities index rallied 2.0% to end the day little changed (down 0.9% for the week).
It's worth noting that Spain's 10-year yields ended the week up six bps to 1.73%, trading this week to the highest yields since March 2017. Things were looking dicey early Friday, as Spanish yields jumped to 1.82%. This briefly pushed the Spanish to German sovereign yield spread to 140 bps, the wide since March 2017. Portuguese yields traded as high as 2.11% Friday morning, with the spread to bunds widening to 170 bps (widest since May). Portuguese yields ended the week at 2.01%.
European debt markets dodged a bullet. After trading down to about 39 bps early Friday, German bund yields ended the week four bps lower at 0.46%. Friday afternoon's bond rally pushed Italian yields down nine bps for the week to 3.47%. Portuguese yields ended the week two bps lower and French yields three bps lower. Moscovici saved the day, reversing what appeared to have the makings of a problematic de-leveraging episode and blowout in European periphery yield spreads.
October 17 - Bloomberg: "China's broadest measure of new credit jumped in September, exceeding all estimates, as officials changed the dataset to reflect surging bond issuance amid steps to encourage investment in infrastructure. Aggregate financing stood at 2.21 trillion yuan ($319bn) in September… That compares with an estimated 1.55 trillion yuan… The central bank revised the calculation for aggregate financing for a second time this year, adding in local government special bond issuance. That took the total in August to 1.93 trillion yuan, from 1.52 trillion yuan previously. New yuan loans stood at 1.38 trillion yuan, versus a projected 1.36 trillion yuan and 1.28 trillion yuan the previous month. Broad M2 money supply increased 8.3%, from 8.2% in August. China's policy makers have stepped up their efforts to increase credit supply…"
It is not only the Europeans galvanized to quash intensifying Crisis Dynamics. China's September Credit data was an eye-opener. "Aggregate financing" jumped to 2.210 TN RMB, or $319 billion, with system Credit continuing its ongoing double-digit annual expansion (10.6%). September growth was about 40% above estimates and a 45% jump from August (growth is typically stronger in September). This puts system Credit growth (excluding national government borrowings) for the first nine months of 2018 at $2.087 TN, down about 10% from comparable 2017. After a huge September, Q3 Credit growth ran slightly ahead of Q3 2017.
Chinese officials again adjusted the composition of aggregate financing data, which now includes local government bond issuance. According to Bloomberg (Chang Shu and Justin Jimenez) "netting out the new sub-component…, the figure comes in… lower than the consensus forecast." September saw enormous issuance of "special local government bonds" (apparently for infrastructure spending), more than offsetting the ongoing contraction of "shadow" lending. Barely positive for the month, net Corporate Bond Issuance slowed notably.
New bank loans came in at about $200bn, only somewhat above estimates. Year-to-date, new loans are running 18% above comparable 2017. Consumer (chiefly mortgage) borrowings remained quite strong, at $108bn in September. This puts y-t-d consumer borrowings 18.2% above comparable '17.
October 15 - Bloomberg (Chris Anstey): "China's moves to boost liquidity in an effort to safeguard economic growth are eroding the country's yield premium over the U.S., putting 'renewed pressure' on the yuan, according to Citigroup... 'Going by its latest policy moves, China has likely halted or even abandoned its financial-deleveraging program' amid the trade war with the U.S., Liu Li-Gang, chief China economist at Citigroup…, wrote... The People's Bank of China has pumped 3.4 trillion yuan ($492bn) into the banking system so far this year through regular open-market operations and cuts in lenders' required reserve ratios, Citigroup estimates."
Beijing these days faces a very serious dilemma managing system Credit. As has over the years become quite the pernicious habit, officials are responding to heightened Bubble Fragility by aggressively stimulating system Credit. They would surely favor the expansion of productive Credit, but increasingly it appears they'll take lending growth wherever they can get it. Portends trouble.
A few of the more obvious problems: 1) Especially with the crackdown on "shadow" finance, Beijing now pushes enormous quantities of risky late-cycle Credit into an already bloated and vulnerable banking system. 2) Stimulus measures are prolonging late-cycle excess throughout increasingly fragile mortgage and apartment Bubbles. 3) China risks stirring further consumer price inflation momentum. September's 2.5% y-o-y CPI rise was exceeded only one month going back to 2013. 4) The size and characteristics of China's runaway Credit expansion pose escalating risk to their already vulnerable currency.
October 14 - Reuters (Clare Jim): "China's property developers usually look forward to the months dubbed 'Golden September and Silver October' as the high season for new home sales. This year is proving to be different. Instead, they are feeling a chill and one major realtor has warned that 'winter' is coming as developers struggle to maintain sales momentum despite gimmicky promotions and discounts. After almost two years of local and central government measures to calm the red-hot market, more signs are emerging that the property sector, a major pillar of China's economic health, is finally slowing down… 'There's downward pressure on home prices especially in third and fourth-tier cities,' said Nomura chief China economist Ting Lu. 'They have been previously rising on stimulus policies for two to three years and now they have reached a peak.'"
October 16 - Financial Times (Tom Hancock): "A wave of protests by Chinese homeowners against falling property prices in several cities has raised fears of a downturn in the country's real estate market, adding to pressure on Beijing to stimulate the economy. Homeowners in Shanghai and other large cities took to the streets this month to demand refunds on their homes after property developers cut prices on new properties to stimulate sales. In Shanghai, dozens of angry homeowners descended on the sales office of a complex that offered 25% discounts to demand refunds, causing clashes that damaged the sales office, according to online reports that were quickly removed by censors. Similar protests have been reported in the large cities of Xiamen and Guiyang as well as several smaller cities."
Keep in mind that these are China's inaugural mortgage and housing Bubbles. Borrowers have never experienced a nationwide downturn. Neither have bankers; same for regulators. A housing bust would pose risk to social stability, not to mention the banking system and economy. Chinese officials over the years have tried about everything to rein in the Bubble. They were just never willing to inflict the degree of pain necessary to break inflationary psychology. They mistakenly cultivated the perception apartment prices only rise, and Beijing will always act to support the market. Now they face a gargantuan Bubble with limited options.
The easy bet is that Beijing will see few alternatives than to adopt only more aggressive reflationary measures (they "worked," after all, in the U.S. and elsewhere!). But will China enjoy the latitude to pull it off? There's a question well worth pondering: "Is China 'emerging' or 'developed'?" Emerging economies invariably lose the flexibility for aggressive Credit expansion and system reflation. Over recent months, we've watched Argentina hike rates to 60% and Turkey to 24%. Other EM central banks raised rates more moderately, all measures to stem the risk of disorderly currency collapse.
Will China retain the flexibility to set low interest rates, to aggressively expand Credit along with adopting other reflationary measures? Or is China, the "King of EM," facing the prospect of a destabilizing currency crisis? A scenario where China is forced to hike rates to support the renminbi would be so destabilizing for its apartment Bubble and banking system that it's difficult to contemplate. That leaves international reserve holdings, capital controls and a rather pressing question: How much "hot money" (and leverage) has gravitated to China's high-yielding instruments?
When I ponder China's incredibly bloated banking sector, its historic apartment Bubble, its local government debt issues, massive future national government borrowings - and likely one of the most maladjusted economies ever - unfortunately I don't see a stable currency in China's future.
October 16 - Financial Times (Don Weinland): "China could be facing a 'debt iceberg with titanic credit risks' following a boom in infrastructure projects by local governments around the country, S&P Global has warned. Local governments may have accrued a debt pile hidden off their balance sheet as high as Rmb30tn to Rmb40tn ($4.3tn to $5.8tn) following 'rampant' growth in borrowings, the rating agency estimated. The mounting debt in so-called local government financing vehicles, or LGFVs, hit an 'alarming' 60% of China's gross domestic product at the end of last year and was expected to lead to increasing defaults at companies connected to regional authorities… Richard Langberg, an analyst at S&P, said there are Chinese cities with 'hundreds' of the local financing vehicles across the country. While defaults at a handful of smaller LGFVs could be handled by the financial sector, 'if they start to let the bigger ones go then we are getting into uncharted territory,' he said."
October 16 - Bloomberg: "The rout in Chinese equities is throwing the spotlight on $613 billion of shares pledged as collateral for loans. Loans extended to company founders and other major investors who pledged their shareholdings as collateral emerged as a popular financing channel in recent years. But given the losses in equities -- Shenzhen's stock benchmark is down 33% in 2018 -- there's a growing risk that brokerages will be forced to sell the shares, accelerating the downturn. At least 36 companies have seen pledged shares liquidated by brokerages since the start of June, more than triple the 10 in the first five months of the year… At least two firms announced after Monday's close that their shares were at risk of forced selling… 'There's a liquidity crisis in the stock market, and pledged shares are again starting to sound the alarm,' said Yang Hai, analyst at Kaiyuan Securities Co. 'If there are no real policies to cure the array of problems and ailments in our market, no one will be willing to take the risk.'"
Reports say a meeting is being arranged between President Trump and Chinese President Xi Jinping at the coming G20 meeting, tentatively for November 29th. Much could unfold by then. The mid-terms are now just two weeks from Tuesday. And it is especially challenging to look out six weeks and contemplate the status of global markets. "Risk off" has gained significant momentum around the globe.
With their stock market in a tailspin, one might expect the Chinese to be rather motivated to adopt conciliatory language and work toward progress on the trade front. Yet there's another scenario that is not as obvious - and certainly not comforting: Mr. Xi and Chinese leadership may feel they have been betrayed and mocked. They distrust the Trump administration, now recognizing their true objective is not trade as much as it is containing China's ascending financial, economic, technological, military and geopolitical power. They are livid that the administration would adopt such a belligerent approach and relish in China's financial distress. A new Cold War has commenced. It would be a zero-sum battle of rival superpowers.
The administration clearly believes they have the Chinese right where they want them. President Trump is quick to note the big decline in China's stock market. For a number of years now, I've feared a major consequence of a bursting Bubble would be the Chinese blaming "foreigners" (chiefly the U.S. and Japan) for their hardship. I just never imagined it would be so straightforward for Beijing to directly link a cause and effect.
The Chinese Bubble is again at the precipice. The last comparable episode, back in late-2015/early-2016, unfolded in a different global backdrop. China implemented additional stimulus measures, while the ECB and BOJ boosted QE and the Fed postponed "normalization". For the most part, rates were near zero globally and bond yields were declining. Pricing pressures were still leaning disinflationary. Global risk markets were neither as inflated nor as fragile as now.
That crisis episode saw the PBOC employ $100s of billions of reserves to stabilize the Chinese currency, in a global backdrop approaching $2.0 TN of annualized central bank liquidity injections. Back then, China was facing a relatively stronger economy and a booming apartment Bubble inclined for "Terminal Phase" excess.
The Chinese have considerably less flexibility today. The burst EM Bubble poses major financial and economic risks for a much more fragile Chinese system. At about $3.0 TN, China's international reserves are down a (mere) trillion from 2014 highs. And pushing more Credit, investment and speculation into Chinese housing at this "Terminal Phase" is a perilous proposition.
For too long China needed to rein in Credit growth. They made an attempt. Not surprisingly, the results have been unsatisfying. The risk of Bubble implosion has now incited yet another round of stimulus measures. But Bubble risk is indomitable, risk that expands parabolically during the "Terminal Phase." I believe there are a number of important factors - domestic and international, economic and financial - working against Beijing's current stabilization efforts. Chinese officials might be at the cusp of finally losing control. The Trump administration provides a most convenient scapegoat.
For the Week:
The S&P500 was about unchanged (up 3.5% y-t-d), and the Dow recovered 0.4% (up 2.9%). The Utilities surged 3.0% (up 3.2%). The Banks declined 0.7% (down 6.5%), while the Broker/Dealers gained 0.9% (down 1.0%). The Transports slipped 0.5% (down 1.6%). The S&P 400 Midcaps were unchanged (down 1.5%), while the small cap Russell 2000 slipped 0.3% (up 0.4%). The Nasdaq100 declined 0.7% (up 11.1%). The Semiconductors fell 2.2% (down 2.2%). The Biotechs dipped 0.6% (up 15.7%). With bullion rising $9, the HUI gold index gained 1.5% (down 19.1%).
Three-month Treasury bill rates ended the week at 2.26%. Two-year government yields gained five bps to 2.91% (up 102bps y-t-d). Five-year T-note yields rose three bps to 3.05% (up 84bps). Ten-year Treasury yields added three bps to 3.19% (up 79bps). Long bond yields rose four bps to 3.38% (up 64bps). Benchmark Fannie Mae MBS yields gained five bps to 4.01% (up 101bps).
Greek 10-year yields declined five bps to 4.33% (up 26bps y-t-d). Ten-year Portuguese yields slipped two bps to 2.02% (up 8bps). Italian 10-year yields fell nine bps to 3.48% (up 147bps). Spain's 10-year yields rose six bps to 1.74% (up 17bps). German bund yields fell four bps to 0.46% (up 3bps). French yields declined three bps to 0.84% (up 5bps). The French to German 10-year bond spread widened a basis point to 38 bps. U.K. 10-year gilt yields fell six bps to 1.58% (up 39bps). U.K.'s FTSE equities index recovered 0.8% (down 8.3%).
Japan's Nikkei 225 equities index declined 0.7% (down 1.0% y-t-d). Japanese 10-year "JGB" yields were unchanged at 0.15% (up 10bps). France's CAC40 slipped 0.2% (down 4.3%). The German DAX equities index increased 0.3% (down 10.6%). Spain's IBEX 35 equities index was little changed (down 11.5%). Italy's FTSE MIB index declined 0.9% (down 12.7%). EM equities were mixed. Brazil's Bovespa index gained another 1.6% (up 10.2%), while Mexico's Bolsa was unchanged (down 3.9%). South Korea's Kospi index slipped 0.3% (down 12.6%). India's Sensex equities index fell 1.2% (up 0.8%). China's Shanghai Exchange dropped 2.2% (down 22.9%). Turkey's Borsa Istanbul National 100 index slipped 0.2% (down 16.4%). Russia's MICEX equities index fell 2.4% (up 11.1%).
Investment-grade bond funds saw outflows of $54 million, while junk bond funds saw inflows of $447 million (from Lipper).
Freddie Mac 30-year fixed mortgage rates declined five bps to 4.85% (up 97bps y-o-y). Fifteen-year rates slipped three bps to 4.26% (up 107bps). Five-year hybrid ARM rates increased three bps to 4.10% (up 93bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down four bps to 4.84% (up 73bps).
Federal Reserve Credit last week increased $2.2bn to $4.139 TN. Over the past year, Fed Credit contracted $278bn, or 6.6%. Fed Credit inflated $1.328 TN, or 47%, over the past 311 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt dropped $11.0bn last week to $3.433 TN. "Custody holdings" were up $71bn y-o-y, or 2.0%.
M2 (narrow) "money" supply dropped $33.2bn last week to $14.237 TN. "Narrow money" gained $473bn, or 3.4%, over the past year. For the week, Currency was little changed. Total Checkable Deposits rose $16bn, while Savings Deposits sank $58.4bn. Small Time Deposits added $1.7bn. Retail Money Funds gained $4.1bn.
Total money market fund assets declined $14.9bn to $2.873 TN. Money Funds gained $129bn y-o-y, or 4.7%.
Total Commercial Paper dropped $19.5bn to $1.083 TN. CP gained $21bn y-o-y, or 2.0%.
Currency Watch:
October 18 - Bloomberg: "Positions for foreign-exchange purchases on the Chinese central bank's balance sheet last month fell the most since January 2017, reflecting faster capital outflows and more intense official intervention as the yuan weakened. The stockpile shrank 119.4 billion yuan ($17.2bn) to 21.4 trillion yuan… The yuan depreciated more than 8% in the six months through September, and hit its lowest since January 2017 on Thursday after the U.S. Treasury stopped short of naming China a currency manipulator in a report overnight."
October 16 - Bloomberg (Eric Lam): "The drop in the dollar's share of global central-bank reserves in the latest reading was probably influenced by the Trump administration's moves against Russia, according to Goldman Sachs… The Central Bank of Russia probably sold about $85 billion of its $150 billion of U.S. assets during the second quarter after America imposed sanctions… in April, said Zach Pandl, co-head of global FX and emerging-market strategy… President Donald Trump has emphasized the use of unilateral tariff hikes and sanctions in international diplomacy, affecting countries from China to Iran. While the second-quarter shift may end up being a blip, it does showcase risks to the degree of dominance that the greenback continues to command in global reserves stemming from sanctions, the Goldman analysis suggests."
The U.S. dollar index added 0.5% to 95.713 (up 3.9% y-t-d). For the week on the upside, the Brazilian real increased 1.8%, the New Zealand dollar 1.3%, the South African rand 0.7% and the Australian dollar 0.1%. For the week on the downside, the Mexican peso declined 2.2%, the Canadian dollar 0.6%, the British pound 0.6%, the Norwegian krone 0.6%, the euro 0.4%, the Swedish krona 0.3%, the Japanese yen 0.3% and the South Korean won 0.1%. The Chinese renminbi declined 0.10% versus the dollar this week (down 6.09% y-t-d).
Commodities Watch:
The Goldman Sachs Commodities Index declined 0.9% (up 7.3% y-t-d). Spot Gold gained 0.7% to $1,227 (down 5.8%). Silver was little changed at $14.65 (down 14.6%). Crude dropped $2.39 to $69.12 (up 14%). Gasoline fell 1.7% (up 7%), while Natural Gas jumped 3.3% (up 10%). Copper declined 1.2% (down 16%). Wheat dipped 0.5% (up 21%). Corn fell 1.8% (up 5%).
Market Dislocation Watch:
October 18 - Financial Times (Mehreen Khan): "Brussels responded to Italy's rule-busting budget plan in record time and it packs a punch. It took the European Commission just over 48 hours to formally warn Rome that its spending plans for 2019 represented a break with previous budget promises on a scale that was 'unprecedented in the history of the Stability and Growth Pact'. The letter was hand-delivered… to finance minister Giovanni Tria after a meeting in Rome on Thursday. The commission's rebuke is the first formal warning in a process that could end up with Italy facing financial punishment - from Brussels and the markets - if Rome's populists don't back down. Matteo Salvini and Luigi Di Maio's coalition has until noon on Monday to reply."
October 17 - Bloomberg (Katherine Greifeld): "There's never been a more profitable time for U.S. investors to ditch Treasuries and go abroad. By now, everyone knows Treasuries have been a lousy bet. But because of a quirk in the way currency markets work, there's even less reason for investors to park their money in U.S. government bonds. Those with dollars to spare can lock in historically high returns in Europe and Japan, even though yields in the two markets are among the lowest in the developed world. In fact, dollar investors are getting paid more than ever to enter a trade that takes the currency risk out of their euro-based returns. As a result, they can earn what amounts to 3.8% a year from ultra low-yielding 10-year German bunds… Aside from Italy, hedged U.S. investors would have done better putting their money into the bonds of any developed nation this year rather than Treasuries."
October 18 - Reuters (Richard Leong): "Several measures of U.S. short-term borrowing costs rose sharply on Thursday, suggesting money markets may see more volatility as the Federal Reserve signals interest rates have further to climb in a robust economy. The sudden jump in the benchmark London interbank offered rate, or LIBOR, and a price drop in a futures contract connected to it caught many market participants by surprise. 'What a mess at the front end of the rates market today,' said Guy LeBas, chief fixed income strategist at Janney Montgomery Scott… 'It may be related to the plumbing in financial markets that is not readily apparent.'"
October 14 - Financial Times (Chris Flood): "New business growth has slowed markedly for most of the leading providers of exchange traded funds this year even before the sell-off across global equity markets gathered pace last week. Net inflows for BlackRock have fallen by half to $85.8bn in the first nine months of 2018, compared with the same period last year… New ETF business growth for Vanguard… has dropped by about a third to $68bn. State Street, the third largest ETF manager, is on track for another disappointing year after a lacklustre showing in 2017, which was only saved by a stampede by investors into US equities in the fourth quarter."
October 18 - CNBC (Thomas Franck): "Goldman Sachs CEO David Solomon said… he believes part of October's steep stock sell-off was the result of programmatic trading. 'There's no question when you look at last week, some of the selling is the result of programmatic selling because as volatility goes up, some of these algorithms force people to sell,' Solomon told CNBC's Wilfred Frost. 'Market structure can, at times, contribute to volatility and one of the things that we're spending a bunch of time thinking about at the firm is how changes in market structure over the course of the last 10 years will affect market activity.'"
Trump Administration Watch:
October 12 - Wall Street Journal (Michael C. Bender, Gordon Lubold, Kate O'Keeffe and Jeremy Page): "The Trump administration is moving deliberately to counter what the White House views as years of unbridled Chinese aggression, taking aim at military, political and economic targets in Beijing and signaling a new and potentially much colder era in U.S.-China relations. In the first 18 months of the administration, ties between the world's two biggest powers were defined by negotiations over how to restrain North Korea and ways to rebalance trade. Those high-profile endeavors masked White House preparations for a more hard-nosed stance with Beijing… Interviews with senior White House officials and others in government make clear that recent volleys in what appears a new Cold War aren't the exception to President Trump's China policy. They are exactly what the administration wants…"
October 15 - Bloomberg (Jennifer Epstein): "President Donald Trump threatened to impose another round of tariffs on China and warned that Chinese meddling in U.S. politics is a 'bigger problem' than Russian involvement in the 2016 election. Asked in an interview with CBS's '60 Minutes' whether he wants to push China's economy into a depression, Trump said 'no' before comparing the country's stock-market losses since the tariffs first launched to those in 1929, the start of the Great Depression in the U.S."
October 18 - CNBC (Fred Imbert): "Larry Kudlow, the director of the National Economic Council, went after China… for digging in its heels in trade talks with the U.S. 'They are unfair traders. They are illegal traders. They have stolen our intellectual property,' Kudlow said at the Detroit Economic Club… 'China has not responded positively to any of our asks.' 'America has the greatest technology in the world; it is the backbone of our economy,' he said. 'China can't seem to do that, so they steal it. We can't allow that.'"
October 17 - New York Times (Alan Rappeport and Keith Bradsher): "Fresh off securing trade agreements with South Korea, Canada and Mexico, President Trump is embarking on a new plan: refashioning the Trans-Pacific Partnership to his liking through a flurry of bilateral trade deals. Mr. Trump, who pulled the United States out of the trade pact with 11 other countries that he has called a 'rape of our country,' is now looking to forge deeper trade ties with several of the nations in the alliance, as well as the European Union and the United Kingdom. But while the Trans-Pacific Partnership was aimed at encouraging China to make the extensive economic and structural overhauls that would someday win it a place in the trade pact, Mr. Trump views these new bilateral agreements as a way to contain Beijing's growing economic, geopolitical and territorial ambitions."
October 17 - Wall Street Journal (Kate Davidson): "President Trump reiterated his complaints that the Federal Reserve is raising short-term interest rates too fast, calling the U.S. central bank 'my biggest threat.' 'It's independent so I don't speak to him, but I'm not happy with what he's doing, because it's going too fast," Mr. Trump said in an interview with the Fox Business Network, referring to Fed Chairman Jerome Powell, whom he nominated last year. 'You looked at the last inflation numbers, they're very low,' he said while arguing for a slower increase in interest rates."
October 17 - Reuters (Jonathan Spicer): "White House economic advisor Larry Kudlow said… that U.S. President Trump was not demanding a policy change at the Federal Reserve after Trump heaped more criticism on the Fed on Tuesday, calling rising U.S. interest rates his 'biggest threat.' In what has emerged as a pattern recently, the administration official sought the day after Trump's comments to tamp down the unusual presidential criticism of the U.S. central bank, saying that Trump actually largely agreed with the Fed. 'He is not interfering with their independence,' Kudlow said…"
October 14 - Reuters (Arshad Mohammed): "White House economic adviser Larry Kudlow… played down the U.S. stock market drop as a normal correction and said President Donald Trump had some concern the Federal Reserve may be raising interest rates too fast but respected its independence. 'I think the background is very positive for the stock market and I think, as I said, corrections come and go and people should ... stay very calm over these things, they are quite normal,' Kudlow told the 'Fox News Sunday with Chris Wallace' program…"
Federal Reserve Watch:
October 17 - Bloomberg (Christopher Condon): "Federal Reserve officials stepped deeper into a debate over how high to push interest rates, as a majority favored an eventual and temporary move above the level they deem neutral for the economy in the long run. The clearest summary of policy makers' views, unusually, appeared not in the minutes to the Sept. 25-26 policy meeting… but in the accompanying notes to officials' most recent economic projections. 'A substantial majority of participants expected that the year-end 2020 and 2021 federal funds rate would be above their estimates of the longer-run rate,' according to the document."
October 17 - Reuters (Jason Lange and Pete Schroeder): "Federal Reserve policymakers are largely united on the need to raise borrowing costs further, minutes from their most recent policy meeting show, despite U.S. President Donald Trump's view that interest rate hikes have already gone too far. Every Fed policymaker backed the central bank's September decision to raise the target policy rate to between 2% and 2.25%... Participants in the Fed's rate-setting committee also 'generally anticipated that further gradual increases' in short-term borrowing costs 'would most likely be consistent' with the kind of continued economic expansion, labor market strength, and firm inflation that most of them are anticipating…"
October 18 - Reuters (Jonathan Spicer): "The Federal Reserve should continue with its gradual rate hikes but must be prepared to slow the tightening if U.S. productivity breaks out of a several-year lull, as it may be poised to do, an influential Fed governor said… Randal Quarles, who rarely discusses monetary policy, painted a somewhat more optimistic picture than his colleagues on the economy's longer-term capacity, and said he favored a bit more dovish path than most others at the U.S. central bank."
October 17 - Wall Street Journal (Alan S. Blinder): "When comedian Steve Martin spoke about 'wild and crazy guys,' I'm pretty sure he was not referring to members of the Federal Open Market Committee. In fact, no one-to my knowledge-has ever called FOMC members 'wild' or 'crazy.' Until now. On Oct. 10 President Trump announced, 'I think the Fed has gone crazy.' The president's rant was based on his belief that 'the Fed is making a mistake. They are so tight.' Of course the Federal Reserve makes mistakes. What institution doesn't? Maybe it is making one now, though I don't think so. But can any sensible person call current monetary policy 'tight'? The unemployment rate stands at 3.7%, the lowest in almost 50 years. Under such circumstances, most economists would predict that inflation, which is now around the Fed's 2% target, should be rising."
October 18 - Reuters (Jennifer Ablan): "Goldman Sachs economists… said the firm remained 'comfortable' with its call for five more interest rate hikes - two more than priced in financial markets - through the end of 2019. In a note to clients, Goldman said it feels the Federal Reserve needs to generate a significant tightening in financial conditions to slow the economy to its potential growth pace sooner rather than later, and 'that this will require delivering significantly more hikes than priced in the curve.'"
October 17 - Bloomberg (Brian Chappatta): "Federal Reserve officials have finally caught on to the leveraged-loan boom. In minutes of the Federal Open Market Committee's September meeting, policy makers made explicit for the first time that they're watching for any hint of risks to financial stability stemming from the more than $1 trillion market for U.S. leveraged loans. They're late to pile on. There's been no shortage of warnings from fixed-income traders and credit analysts who track investor protections."
U.S. Bubble Watch:
October 15 - CNBC (Jacob Pramuk): "The U.S. federal budget deficit rose in fiscal 2018 to the highest level in six years as spending climbed… The deficit jumped to $779 billion, $113 billion or 17% higher than the previous fiscal period… It was larger than any year since 2012, when it topped $1 trillion. The budget shortfall rose to 3.9% of U.S. gross domestic product… Federal revenue rose only slightly, by $14 billion after Republicans chopped tax rates for corporations and most individuals. Outlays climbed by $127 billion, or 3.2%. A spike in defense spending, as well as increases for Medicaid, Social Security and disaster relief, contributed to the increase."
October 16 - CNBC (Jeff Cox): "Job openings hit a record in August, indicating companies could face more inflationary pressures ahead with a tight labor market. The vacancies level hit 7.14 million for the month, according to the Job Openings and Labor Turnover Survey, a report Federal Reserve officials watch closely… The total number of hires also reached a record of 5.78 million. Openings dwarfed the total level of workers looking for jobs, which stood at 6.23 million for that month and fell to 5.96 million in September…"
October 17 - Reuters (Aishwarya Venugopal): "Holiday hiring of more than 700,000 workers by U.S. retailers would be the largest since 2014, according to a report by a global outplacement firm, underscoring a robust economy that has seen consumer confidence at its highest in nearly two decades. Retailers have said they would add 704,000 jobs in total to their rosters ahead of the important holiday shopping season…"
October 16 - Wall Street Journal (Eliot Brown and Greg Bensinger): "As international backlash grows over Saudi Arabia's alleged involvement in the possible murder of a journalist, Silicon Valley faces a potentially unsettling fact: The kingdom is now the largest single funding source for U.S. startups. Crown Prince Mohammed bin Salman has directed at least $11 billion of Saudi money into U.S. startups since mid-2016, either directly or through SoftBank Group Corp.'s $92 billion tech-focused Vision Fund, to which the Saudis committed $45 billion… The total invested by the kingdom so far in U.S. startups is far bigger than the total raised by any single venture-capital fund. Some of tech's most prominent young companies have welcomed Saudi money, including Uber Technologies Inc., office-sharing company WeWork Cos. and augmented-reality device maker Magic Leap Inc."
October 17 - Bloomberg (Riley Griffin, Suborna Panja and Kristina D'Alessio): "While Wall Street and U.S. President Donald Trump tout news of a booming stock market and low unemployment, college students may be quick to roll their eyes. The improved economy has yet to mean higher wages for graduates already struggling to pay down massive debt… Federal student loans are the only consumer debt segment with continuous cumulative growth since the Great Recession. As the costs of tuition and borrowing continue to rise, the result is a widening default crisis… Student loans have seen almost 157% in cumulative growth over the last 11 years. By comparison, auto loan debt has grown 52% while mortgage and credit-card debt actually fell by about 1%... All told, there's a whopping $1.5 trillion in student loans out there (through the second quarter of 2018)…"
October 16 - Wall Street Journal (Laura Kusisto): "More than three-quarters of Americans now view renting as more affordable than owning a home, the latest sign that rising mortgage rates and higher home prices will continue to pressure home sales. Some 78% of people now say that renting is more affordable than owning, according to survey data to be released… by… Freddie Mac . That is up 11 percentage points from only six months ago. The survey also indicates that demand for for-sale housing could remain soft in the coming months. Some 58% of renters now say they don't currently have plans to buy a home-up from 54% in February…"
October 18 - Bloomberg (Katia Dmitrieva): "It looks like U.S. apartment and condominium builders are reacting to rising costs and a supply glut the same way: slowing down. Multifamily housing permits -- - those for buildings with two or more units -- dropped last month to the lowest level since March 2016, government figures showed Wednesday. That follows signs of an oversupply of apartments in some U.S. markets, but higher costs are also having an impact. 'The biggest issue is construction cost and within that, labor costs. Because of that, some deals just don't pencil out,' Jeanette Rice, Americas head of multifamily research at brokerage CBRE Group Inc., said…"
October 16 - CNET (Marrian Zhou): "Uber's initial public offering may be worth well over a hundred billion. The ride-hailing company has received proposals from Wall Street banks that value the company at as much as $120 billion in an IPO, according to The Wall Street Journal, which said the offering could take place early next year."
October 15 - CNBC (Lauren Hirsch): "Sears Holdings filed for bankruptcy protection early Monday after years of staying afloat through financial maneuvering and relying on billions of CEO Eddie Lampert's own money. Lampert, who has served as CEO for the past five years, will step down from that post… but remain chairman. The 125-year-old retailer, once the nation's largest, said… it was appointing Mohsin Meghji, managing partner of M-III Partners, as its chief restructuring officer. As part of the bankruptcy, Sears will shutter 142 stores toward the end of the year."
China Watch:
October 18 - Reuters (Kevin Yao and Elias Glenn): "China's economic growth cooled to its weakest quarterly pace since the global financial crisis… The economy grew 6.5% in the third quarter from a year earlier, below an expected 6.6% rate, and slower than 6.7% in the second quarter… It marked the weakest year-on-year quarterly gross domestic product growth since the first quarter of 2009 at the height of the global financial crisis."
October 18 - Bloomberg: "There's nothing like margin calls to make a bad stock-market selloff even worse. It's a risk at the top of investors' minds in China after the nation's $3 trillion equity rout deepened on Thursday, driving the Shanghai Composite Index to a nearly four-year low. With more than $600 billion of Chinese shares pledged as collateral for loans, or about 11% of the country's market capitalization, the worry is that falling stock prices will trigger a downward spiral of forced selling. The country's top financial regulators sought to reassure investors on Friday that they're able to keep risks under control. But some stocks are more vulnerable than others. At least 144 Chinese companies have more than half their shares pledged…"
October 18 - Bloomberg: "China's top financial officials moved to shore up confidence in the country's tumbling stock market, marshaling a rare show of coordinated verbal support as the government tries to prevent a $3 trillion equity rout from infecting the world's second-largest economy. The reassuring words from leaders of China's central bank, securities watchdog, and banking and insurance regulator -- including promises of financial support for local businesses -- followed a bout of investor panic this week that sent the Shanghai Composite Index to a four-year low."
October 18 - Bloomberg: "In China's manufacturing heartland around the Pearl River Delta, Donald Trump's 10% tariffs are causing little concern. The 25% duties that loom next year are another matter. Ben Yang, a furniture maker producing contemporary designs out of his facility in Dongguan -- about 30 miles from Hong Kong -- says that if those higher charges materialize from January as planned, the U.S. share of exports from his Sunrise Furniture Co. could plunge from 90% to less than a third. 'Our major rival is Vietnam and 10 percent tariffs aren't enough to make the difference,' said Yang, 48, who supplies retailers including Rooms To Go Inc. But 25% tariffs are a worry. There will definitely be a short-term impact; Americans may have to accept higher prices.'"
October 17 - Financial Times (Lucy Hornby): "China's private entrepreneurs are shifting away from investments in favour of paying down dollar debt and keeping cash at hand to brace for an economic downturn exacerbated by the Trump administration's trade tariffs… Clients in China 'are concerned about the ongoing slowdown in the economy', 'pessimistic about the outlook for the yuan' and 'pessimistic that an increase in US tariffs from 10% to 25% in January can be averted', Mansoor Mohi-uddin, NatWest Markets' head of forex strategy, wrote after a visit to Beijing last week. Mr Mohi-uddin added that private exporters would focus their cash on repaying dollar debt, as China's loosening policy and the US Federal Reserve's tightening contributed to a weaker renminbi. Data from Refinitiv show that China's private groups are pulling back from issuing fresh dollar debt…"
October 16 - South China Morning Post (Orange Wang): "China's local governments may have accumulated 40 trillion yuan (US$6 trillion) worth of 'hidden debts' that are not reflected in official figures, which is 'a debt iceberg with titanic credit risks' to the world's second biggest economy, S&P Global Ratings said… If all that off-the-books debt - mostly borrowed by local government financing vehicles, known as LGFVs - were included in China's debt figures, the ratio of all government debt to GDP could have reached 'an alarming level' of 60% in 2017, the ratings agency said… According to official figures released by the Chinese Ministry of Finance, local governments had combined outstanding debts of 17.7 trillion yuan (US$2.5 trillion) at the end of August, although Beijing has admitted the existence of 'hidden debts' and attempted to curb unauthorised borrowing by local authorities."
October 16 - Bloomberg: "Chinese consumer inflation accelerated for a fourth month in September, with food prices jumping by the most since February, while the rise in households' non-food costs slowed. The consumer price index rose 2.5% from a year earlier… That was the same as forecast… and faster than the 2.3% report in August. The producer price index climbed 3.6%, compared with a 3.5% estimate and a 4.1% gain the previous month. There has been increasing concern about the effect of rising prices in China since the summer, with floods and animal disease forcing food prices up as rents in major cities rise."
October 18 - Reuters (Yawen Chen and Kevin Yao): "Growth in China's real estate investment eased in September and home sales fell for the first time since April, as developers dialed back expansion plans amid economic uncertainties and as additional curbs on speculative investment kicked in… Growth in real estate investment, which mainly focuses on residential but also includes commercial and office space, rose 8.9% in September from a year earlier, compared with a 9.2% rise in August…"
October 18 - Bloomberg: "China may be in an easing mode to combat slower growth, but financing conditions aren't improving for lower rated firms and they face a 'chilly winter' ahead, according to China Securities Co. Government liquidity injections haven't found its way to weaker firms as investors are still risk averse amid record defaults, said Huang Ling, managing director of China Securities, the top corporate bond underwriter in China since 2015… 'People can't buy enough of AAA bonds but it has been a tough sale for their AA peers this year,' said Huang. 'As a result of market preference, we see a higher proportion of issuance from firms rated AA+ and above, and weaker companies have to tap into all funding options to survive.'"
October 18 - Bloomberg (Carrie Hong and Denise Wee): "A Chinese solar firm has missed a debt deadline, adding to signs of strain in an industry grappling with overcapacity and tariffs. China Singyes Solar Technologies Holdings Ltd. failed to make a payment on $160 million of bonds due on Oct. 17…"
October 13 - Reuters (James Pomfret and Greg Torode): "As Hong Kong's government hews closer to Beijing, officials are taking a tough line on perceived national security threats, even deploying an elite police unit for political monitoring and surveillance - a sharp escalation in rhetoric and action. In just the last few months, the special administrative region has banned the Hong Kong National Party, which espouses separation from China, and barred some activists from standing in local elections. The Education Bureau sent all secondary schools in the Special Administrative Region letters on Sept 24 saying they must prohibit 'the penetration' of the National Party or risk prosecution."
EM Watch:
October 15 - Wall Street Journal (Saumya Vaishampayan and Josh Zumbrun): "Emerging markets worried about their falling currencies and investors rushing to the exits are raising interest rates and keeping a lid on spending, even though doing so is likely to hurt their long-term prospects. Central banks in developing countries including Indonesia and the Philippines have raised their official borrowing costs multiple times this year to keep up with rising rates in the U.S. Economic growth has already slowed in the Philippines from earlier in 2018. While the Indonesian economy grew at the fastest pace in more than four years in the latest quarter, the worry is that higher rates there could start to drag. Countries are making these trade-offs for fear the turmoil that has gripped emerging markets such as Turkey and Argentina could spread more broadly."
Central Bank Watch:
October 13 - Bloomberg (Jessica Shankleman and Alessandro Speciale): "Bank of England Governor Mark Carney warned against the 'weaponization' of assets in the global financial system as central bank chiefs fretted about the impact of a trade war. Speaking at the Group of 30 conference…, Carney stressed the need for investment flows to remain open, alluding to previous warnings that U.S. protectionism affects the real economy through direct channels like reduced trade flows, disrupted supply chains and higher import costs. The use of secondary sanctions in the U.S. can effectively force European firms to stop doing business with third-country parties... 'From the United Kingdom's perspective -- as the second-largest asset management home -- the commitment to openness, an open resilient platform, there's no weaponization of finance,' he told delegates."
Italy Watch:
October 18 - Bloomberg (Viktoria Dendrinou and John Follain): "European Union leaders voiced concerns over Italy's spending plans, putting pressure on the populist government in Rome to rethink its budget and avert a potential standoff with Brussels…. With Italian bond yields close to a four-year high, the prospects for the country's public finances have become a prime focus in the bloc. Prime Minister Mark Rutte said… he expressed Dutch 'concerns regarding Italy's budget plans for 2019' to his Italian counterpart Giuseppe Conte in a bilateral meeting ahead of the summit. Following that discussion, Conte said he wouldn't accept 'prejudices' regarding the Italian budget."
October 17 - Reuters (Francesco Guarascio): "Italian Prime Minister Giuseppe Conte said… he believed there was no room for changing the Italian draft budget for 2019, which the European Union worries would breach the bloc's fiscal rules and increase Italy's debt. 'We have prepared (the budget) very carefully. Therefore I think there is no room for change,' Conte told reporters on arriving to talks with his fellow EU leaders in Brussels."
Europe Watch:
October 15 - Reuters (Joseph Nasr): "German Chancellor Angela Merkel vowed… to restore trust in her government after her conservative allies suffered heavy losses in a regional election, which their far-right foes hailed as 'an earthquake' that would rock the ruling coalition. The Christian Social Union (CSU), the sister party of Merkel's own Christian Democrats (CDU), slumped to its worst result in almost 70 years in Sunday's election in Bavaria. The chancellor's other coalition partner, the centre-left Social Democrats (SPD), saw its support halved."
October 15 - Financial Times (Jim Brunsden): "Donald Tusk, the president of the European Council has warned that a no-deal Brexit 'is more likely than ever before', after negotiators hit an impasse over the weekend, but he urged 'every effort' to salvage the talks. In a letter to EU leaders ahead of a summit meeting in Brussels this week, Mr Tusk said recent negotiations with the UK have 'proven to be more complicated than some may have expected.' 'We should nevertheless remain hopeful and determined, as there is goodwill to continue these talks on both sides'."
October 17 - Reuters (Gabriela Baczynska and Daphne Psaledakis): "British Prime Minister Theresa May assured EU leaders in Brussels… that she can still reach a Brexit deal, avoiding a showdown over stalled talks as Brussels stepped up planning for a failure of negotiations… But three days after talks stalled over the Irish border "backstop", thwarting hopes of a deal at the summit, May arrived determined to stress that an accord was still on the cards."
Global Bubble Watch:
October 15 - Bloomberg (Stefania Spezzati and Sonali Basak): "The world is still full of risks for the banking industry, despite reforms put in place since the financial crisis 10 years ago. That was the main subject of discussions this weekend in Bali, where bankers gathered for the annual meeting of the Institute of International Finance. From market turmoil and trade tensions to rising leverage and the implications of Italy's rule-busting budget, challenges abound -- and, bosses said, banks need to do more to protect themselves. 'The recurring theme is that finance has been strengthened, but not quite fixed,' Fabrizio Saccomanni, chairman of UniCredit SpA and a former deputy governor of the Bank of Italy, said on one of the panels. While a lot has been done to strengthen banks' balance sheets, 'the global factors of crisis are not really under control.'"
October 15 - Reuters (Tom Miles): "Global foreign direct investment (FDI) fell by 41% to $470 billion in the first six months of this year, the lowest since 2005, preliminary figures from the United Nations trade and development agency UNCTAD showed… President Donald Trump's U.S. tax reforms were the main cause of the slump, which followed a 23% fall in 2017, as American firms repatriated a net $217 billion from foreign affiliates, UNCTAD investment chief James Zhan said. 'The investment flows are more policy-driven and less economic cycle-driven,' Zhan told a news conference… 'Overall the picture is gloomy and the prospect is not so optimistic.'"
October 18 - Wall Street Journal (Saabira Chaudhuri): "Two of the world's largest consumer-goods companies, Unilever PLC and Nestlé SA, reported stronger sales as a wave of inflation in many markets emboldened them to raise prices. The new pricing power gives a boost of confidence to the entire industry, which has struggled in recent years with fierce competition and rapidly changing consumer tastes."
October 16 - Wall Street Journal (Edward White and Christian Pfrang): "In July 2017 an analyst at Wells Fargo described Taiwan's booming foreign currency bonds as a 'match made in heaven', representing a 'meeting of the minds for issuers, investors and regulators'. Fifteen months later and those regulators, spooked by currency risks linked to the now $177bn market, will snap shut a loophole that enabled a splurge of purchases by the country's insurance companies over the past five years. 'It is a major blow,' one Taiwan banking executive involved in the previously blossoming bond deals said of the looming regulation. 'The market will become smaller.'"
Fixed Income Bubble Watch:
October 16 - CNBC (Patti Domm): "China trimmed its holdings of U.S. Treasurys in August by about $6 billion, to the lowest level since June 2017. China's holdings of Treasury bills, notes and bonds fell to $1.165 trillion, from $1.171 trillion in July, according to U.S. Treasury data. It is the third month of decline, and well below the recent high of $1.2 trillion a year earlier."
Leveraged Speculation Watch:
October 19 - New York Times (Matt Phillips): "A financial assembly line that went haywire a decade ago and contributed to an economic crisis is gearing up again on Wall Street. Back then, one of the products the banks churned out - bondlike investments based on thousands of mortgages - proved far riskier than most had understood when it turned out that the borrowers couldn't pay. The banking system froze, a financial panic ensued, and the country experienced its worst recession in decades. This time around, a similar kind of investment, called C.L.O.s, are at the heart of the boom. And that's not the only parallel: The loans are being made to risky borrowers, lending standards are dropping fast, and regulators are easing the rules."
Geopolitics Watch:
October 16 - Bloomberg (Bryce Baschuk): "U.S. and Chinese officials clashed in Geneva on Tuesday as the world's two largest economies disagreed over how to reform the global trading system. Deputy U.S. Trade Representative Dennis Shea said the World Trade Organization must confront China's trade abuses while rethinking its preferential rights as a developing nation. Chinese Ambassador Zhang Xiangchen countered that 'no one can be singled out' and that Beijing will not back any effort to undermine the WTO's basic principles. The dispute illustrates the difficulty China and the U.S. face in overcoming escalating tensions that have prompted Washington to impose tariffs on Chinese imports totaling $250 billion and similar retaliatory actions from Beijing…. 'Adequately responding to the challenges of non-market economies is nothing less than an existential matter for this institution,' Shea said… in comments delivered at the WTO."
October 14 - Reuters (Andrew Torchia and Arshad Mohammed): "Saudi Arabia on Sunday warned against threats to punish it over last week's disappearance of journalist Jamal Khashoggi, as European leaders piled on pressure and two more U.S. executives scrapped plans to attend a Saudi investor conference."
October 16 - Financial Times (Henny Sender): "A glance at the foreign-exchange markets suggests that the US dollar looks as powerful and dominant as ever. However, taking a much longer-term view suggests that this impregnable position - and the economic heft that comes with it - will come under assault. One consequence of the America First policies of US President Donald Trump will be to create a bipolar financial world, with China at one end and the US at the other. That will mean smaller financial flows between the two, and a much more robust effort from Beijing to eventually challenge the dollar's status as the world's reserve currency. That, in turn, potentially has implications for everything from the status of US Treasury securities as the safest assets in the world to how oil is priced. 'The Trump administration's 'America First' policy will encourage a long-term move away from the US dollar,' according to Christopher Wood of CLSA, the arm of Beijing-based Citic Securities, pointing to 'the growing American practice of using the dollar as a weapon via the implementation of sanctions and the like.'"
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